Strongco Corporation
TSX : SQP

Strongco Corporation

March 30, 2011 06:00 ET

Strongco Announces Fourth Quarter and Full Year 2010 Results

Summary of Results for Fourth Quarter 2010(i)

- Revenues increased to $91.8 million, up 36% from $67.5 million

- National market share improved year over year

- Gross margin increased to $16.4 million from $13.1 million

- EBITDA increased to $9.3 million from $2.9 million

- Net earnings totalled $1.5 million vs net loss of $2.1 million

(i) Comparisons are between fourth quarter 2010 and fourth quarter 2009.

MISSISSAUGA, ONTARIO--(Marketwire - March 30, 2011) - Strongco Corporation (TSX:SQP) today released financial results for the fourth quarter ended December 31, 2010.

"Revenues in the fourth quarter, once again, improved over the preceding quarter and were substantially ahead of the fourth quarter last year," said Robert Dryburgh, President and Chief Executive Officer. "Importantly, we improved our national market share over both the third quarter this year and the fourth quarter of 2009. Equipment sales were up 47% over the fourth quarter of 2009, benefitting from our commitment to rental product and the resultant large volume of rental purchase option conversions in the quarter. Our order intake level is being sustained after steadily increasing through the first half of the year and we enter 2011 with this encouraging indication of strong demand."

"The substantial increase in revenues resulted in stronger margin dollars this year," added Mr. Dryburgh. "These increases, combined with operational improvements and cost reductions that we put in place during 2009, generated EBITDA of $9.3 million in the fourth quarter, up from $2.9 million last year. As a result, we ended the quarter with net earnings of $1.5 million, compared to a loss of $2.1 million in the same period in 2009."

Financial Highlights *
($ millions except per share amounts)
 
Period ended December 31 3 months   12 months  
  2010 2009   2010   2009  
Revenues $ 91.8 $ 67.6   $ 294.7   $ 291.8  
Earnings (loss) from continuing operations   1.5   (2.1 )   (0.4 )   0.7  
Loss from discontinued operations   -   -     -     (0.7 )
Net income (loss)   1.5   (2.1 )   (0.4 )   -  
EBITDA   9.3   2.9     22.5     18.0  
Basic and diluted earnings (loss) from continuing operations per share $ 0.14 $ (0.20 ) $ (0.04 ) $ 0.07  
Basic and diluted net income (loss) per share $ 0.14 $ (0.20 ) $ (0.04 ) $ (0.0 )
Total assets   -   -   $ 219.4   $ 195.6  
Total debt   -   -   $ 164.8   $ 140.9  
 
* Strongco's Engineered Systems division was sold during the second quarter of 2009 and is considered a Discontinued Operation.

Fourth Quarter 2010 Review

Total revenues in the three months ended December 31, 2010 were $91.8 million, an increase of 36% from the fourth quarter of 2009. "As expected, Strongco's revenues in the first quarter were soft following the recession, but increased each quarter thereafter and finished the year with a very strong fourth quarter in all regions and revenue categories," said David Wood, Vice President and Chief Financial Officer. "While the markets Strongco serves improved by approximately 15% from the fourth quarter of 2009, Strongco outperformed the market with total unit growth of greater than 45%."

Equipment sales increased by 47% from the fourth quarter of 2009 to $62.1 million. The gain was fuelled by a significant volume of rental purchase option ("RPO") contracts being converted to sales in the quarter, especially in Alberta and Quebec. Rental activity, which has been strong all year as construction markets recovered from the recession, remained high in the fourth quarter. Strongco's rental revenues in the fourth quarter were $7.3 million, up 74% from fourth quarter of 2009. Product support revenues in the fourth quarter gained 7% from a year ago to $22.4 million.

Gross margin increased to $16.4 million from $13.1 million during the fourth quarter. As a percentage of revenue, gross margin declined slightly to 17.8% from 19.4% in the same period of 2009. This was primarily due to the large increase and resulting higher proportion of equipment sales, which offer lower margins than product support and rentals.

Administrative, distribution and selling expenses during the fourth quarter were $13.5 million, which compared favourably to $14.4 million in the final quarter of 2009. Operating expenses reflected cost reductions implemented during 2009. As a result of the strong revenue performance, Strongco's net income in the fourth quarter of 2010 was $1.5 million ($0.14 per share), a significant improvement from a net loss of $2.1 million (loss of $0.20 per unit) in the fourth quarter of 2009.

EBITDA for the fourth quarter increased to $9.3 million from $2.9 million a year earlier.

Fiscal 2010 Financial Review

Total revenues for 2010 were $294.7 million compared to $291.8 million in 2009. While this was modest annual growth of 1%, revenues increased each quarter through the year as construction markets and demand for heavy equipment recovered following the recession. As a result, revenues in the first and second quarters were below 2009, while sales in the latter half of 2010 were well ahead of the prior year.

Strongco's equipment sales were flat compared to 2009 at $183.7 million but increased each quarter through the year. Rental revenues in 2010 were $22.2 million, an increase of 55% from 2009. Rental activity was higher as markets recovered from the recession, especially rentals under RPO contracts. For the year, Strongco's product support revenues, comprising business from parts and service, totalled $88.8 million. This was 5% less than in 2009 but it increased each quarter through the year.

Gross margin in 2010 was $56.7 million, which was down $3.2 million from 2009. The decline was due to slightly lower margins on equipment sales, which increased in volume during the year at the expense of product support sales, which feature broader margins. The smaller proportion of product support sales resulted in a lower overall gross margin percentage of 19.2%, compared to 20.5% in 2009.

Administrative, distribution and selling expenses in 2010 moved down by 4% to $53.6 million as the full year impact of the cost reduction initiatives implemented in the prior year were realized.

Effective July 1, 2010, Strongco Income Fund converted from a trust to a corporation. The changed involved one-time legal and other regulatory costs totalling $0.5 million.

As a result of the lower gross margin for the year and the one-time conversion costs, Strongco incurred a net loss for the year of $0.4 million, compared to earnings from continuing operations totalling $0.7 million in 2009. After discontinued operations, 2009 was at breakeven.

EBITDA from continuing operations was $22.5 million compared to $18.0 million in 2009.

Financial Position

Strongco continues to have access to a $20.0 million operating line of bank credit, of which $12.4 million was drawn at December 31, 2010. In addition, Strongco makes use of lines of credit from equipment manufacturers and other third party lenders on an as-needed basis to finance its equipment purchases. A total of $200 million is available under these lines, of which Strongco had drawn $118 million at December 31, 2010.

Outlook

The economy and construction markets across Canada are expected to continue to improve throughout 2011 which, in turn, will lead to increased demand for heavy equipment and increased willingness of customers to purchase. Strongco's order intake level, which rose during the first half of 2010 from the very low levels that existed at the end of 2009, remained strong through the balance of the year and into 2011, a positive sign that demand for heavy equipment is improving.

An important contribution to the anticipated growth in 2011 is expected from Alberta. Oil prices have continued to show strength and stability and with that, the economy in Alberta has continued to improve. In addition, there has been an increase in construction activity in general throughout the province, especially in the latter half of 2010 and Strongco's sales backlogs have increased. There has also been an increase in equipment rental activity in Alberta. Consequently, management is cautiously optimistic that heavy equipment markets in Alberta will continue to improve in 2011.

During 2009 and 2010, most original equipment manufacturers (OEMs) scaled back production and reduced capacity in response to the weak North American economy. This resulted in increased delivery times and shortages of certain types of equipment. A welcome upturn in the sales of equipment in the United States in the fourth quarter of 2010 has OEMs striving to increase production capacity and improve lead time and availability. There are indications of improvement but the transition to the new tier 4 engine technology in 2011 is an added complication that may lead to longer lead times and reduced supply. Management is optimistic that Strongco's significant position with its OEMs will offset the impact of equipment shortages.

Management remains cautiously optimistic that the improving economy in Canada in the latter half of 2010 will continue in 2011 and expects demand for heavy equipment will lead to increased revenues in 2011. In addition, the acquisition of Chadwick- BaRoss, effective February 1, 2011 will contribute to improved sales levels for Strongco in 2011. Chadwick-BaRoss services a broad range of market sectors in Maine, New Hampshire and Massachusetts, similar to Strongco in Canada. Management expects the demand for equipment in these regions will show a modest increase from recent depressed levels at which Chadwick-BaRoss has been profitable.

Conference Call Details

Strongco will hold a conference call on Wednesday, March 30, 2011 at 10 am ET to discuss fourth quarter and year end results. Analysts and investors can participate by dialing 416-644-3417 or toll free 1-866-250-4877. An archived audio recording will be available until midnight on April 13, 2011. To access it, dial 416-640-1917 and enter passcode 4429332#.

About Strongco Corporation

Strongco Corporation is one of Canada's largest multiline mobile equipment dealers and operates in the northeastern U.S. through Chadwick-BaRoss, Inc. Strongco sells, rents and services equipment used in sectors such as construction, infrastructure, mining, oil and gas, utilities, municipalities, waste management and forestry. Strongco has approximately 600 employees servicing customers from 24 branches in Canada and five in the U.S. Strongco represents leading equipment manufacturers with globally recognized brands, including Volvo Construction Equipment, Case Construction, Manitowoc Crane, Terex Cedarapids, Ponsse, Powerscreen, Skyjack, Fassi, Allied, Taylor, ESCO, Dressta, Sennebogen, Takeuchi, Link-Belt and Kawasaki. Strongco is listed on the Toronto Stock Exchange under the symbol SQP.

Forward-Looking Statements

This news release contains "forward-looking" statements 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 Strongco or industry results, to be materially different from any future results, events, expectations, performance or achievements expressed or implied by such forward-looking statements. All such forward-looking statements are made pursuant to the "safe harbour" provisions of applicable Canadian securities legislation. Forward-looking statements typically contain words or phrases such as "may", "outlook", "objective", "intend", "estimate", "anticipate", "should", "could", "would", "will", "expect", "believe", "plan" and other similar terminology suggesting future outcomes or events. This news release contains forward-looking statements relating to the expected trading of common shares of Strongco on the TSX, and such statements are based upon the expectations of management.

Forward-looking statements 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. You should not unduly rely on forward-looking statements as a number of factors, many of which are beyond the control of Strongco, could cause actual performance or results to differ materially from the performance or results discussed in the forward-looking statements, including, inability to obtain requisite approvals; general economic conditions; business cyclicality, relationships with manufacturers; access to products; competition with existing business; reliance on key personnel; litigation and product liability claims; inventory obsolescence; sufficiency of credit availability; credit risks of customers; warranty claims; technology interpretations; and labour relations. Although the forward-looking statements contained in this news release are based upon what management of Strongco believes are reasonable assumptions, Strongco cannot assure investors that actual performance or results will be consistent with these forward-looking statements. These statements reflect current expectations regarding future events and operating performance and are based on information currently available to Strongco's management. There can be no assurance that the plans, intentions or expectations upon which these forward-looking statements are based will occur. All forward-looking statements in this news release are qualified by these cautionary statements. These forward-looking statements and outlook are made as of the date of this news release and, except as required by applicable law, Strongco assumes no obligation to update or revise them to reflect new events or circumstances.

Information Contact
 
J. David Wood
Vice-President and Chief Financial Officer
Telephone: 905.565.3808
Email: jdwood@strongco.com

www.strongco.com

Strongco Corporation

Management's Discussion and Analysis

The following management discussion and analysis ("MD&A") provides a review of the consolidated financial condition and results of operations of Strongco Corporation, formerly Strongco Income Fund ("the Fund"), Strongco GP Inc. and Strongco Limited Partnership collectively referred to as "Strongco" or "the Company", as at and for the year ended December 31, 2010. This discussion and analysis should be read in conjunction with the accompanying audited consolidated financial statements as at and for the year ended December 31, 2010. For additional information and details, readers are referred to the Company's quarterly financial statements and quarterly MD&A for fiscal 2010 and fiscal 2009 as well as the Company's Notice of Annual Meeting of Unitholders and Information Circular ("IC") dated April 6, 2010, and the Company's Annual Information Form ("AIF") dated March 30, 2010, all of which are published separately and are available on SEDAR at www.sedar.com.

Unless otherwise indicated, all financial information within this discussion and analysis is in millions of Canadian dollars except per share/unit amounts. The information in this MD&A is current to March 29, 2011.

CONVERSION TO A CORPORATION

The Fund was an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated March 21, 2005 as amended and restated on April 28, 2005 and September 1, 2006.

On October 31, 2006, the Minister of Finance of Canada ("the Minister") announced the Federal government's proposal to change the tax treatment of publicly traded income funds such as the Fund ("SIFT Rules"). The SIFT Rules were subsequently enacted in the Income Tax Act. The SIFT Rules result in a tax being applied at the trust level on distributions of certain income from publicly traded mutual fund trusts at rates of tax comparable to the combined federal and provincial corporate tax and to treat such distributions as dividends to unitholders. Publicly traded income funds which were in existence on October 31, 2006 have a four year transition period and generally are not subject to the SIFT Rules until 2011, provided such trusts experienced only "normal growth" and no "undue expansion" before then.

As a result of the changes in tax legislation and after consideration of the benefits of conversion, the Board of Trustees of the Fund decided to recommend to the unitholders conversion of the Fund from an income fund to a corporation. A plan of arrangement for conversion was approved by the unitholders at the Fund's Annual General Meeting on May 14, 2010, and the Fund was converted to a corporation effective July 1, 2010. The conversion involved the incorporation of Strongco Corporation, which issued shares to the unitholders in exchange for the units of the Fund on a one for one basis so that the unitholders became shareholders in Strongco Corporation, after which the Fund was wound up into Strongco Corporation.

Following the conversion on July 1, 2010, Strongco Corporation has carried on the business of the Fund unchanged except that Strongco Corporation is subject to taxation as a corporation. The results of operations, balance sheet and cash flow figures presented in the following MD&A for comparative periods prior to July 1, 2010 reflect those of the Fund. References in this MD&A to shares and shareholders of the Company are comparable to units and unitholders previously under the Fund.

Details of the conversion, including its benefits, were outlined in the Fund's Management Information Circular dated April 6, 2010, which contains the Plan of Arrangement, and was provided to the unitholders prior to Annual General Meeting on May 14, 2010 and is available on SEDAR at www.sedar.com.

FINANCIAL HIGHLIGHTS

  • Strongco's total revenues were $294.7 million, up slightly from $291.8 million in 2009.
  • Net loss for the year of $0.4 million, compared to income from continuing operations of $0.7 million in 2009.
  • Before Plan of Arrangement costs of converting to a corporation, net income for the year was at break even.
  • EBITDA from continuing operations for the year increased to $22.5 million from $18.0 million in 2009.
     
Income Statement Highlights Year ended December 31,  
($ millions, except per share/unit amounts) 2010   2009   2008  
Revenues $ 294.7   $ 291.8   $ 398.3  
Earnings from continuing operations $ (0.4 ) $ 0.7   $ (0.4 )
Earnings (loss) from discontinued operations $ -   $ (0.7 ) $ -  
Net income (loss) $ (0.4 ) $ -   $ (0.4 )
                   
Basic and diluted earnings (loss) per share/unit from continuing operations $ (0.04 ) $ 0.07   $ (0.04 )
Basic and diluted earnings (loss) per share/unit $ (0.04 ) $ -   $ (0.04 )
Distributions per share/unit $ -   $ -   $ 0.70  
EBITDA (note 1) $ 22.5   $ 18.0   $ 20.5  
Balance Sheet Highlights                  
Equipment inventory $ 142.1   $ 124.5   $ 137.8  
Total assets $ 219.4   $ 195.6   $ 240.9  
Debt (bank debt and other notes payable) $ 13.6   $ 12.3   $ 15.1  
Equipment notes payable $ 118.2   $ 104.8   $ 118.9  
Total liabilities $ 164.8   $ 140.9   $ 186.3  
 
Note 1 – "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of intangible assets, amortization of equipment inventory on rent, and goodwill impairment. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance under Canadian Generally Accepted Accounting Principles ("GAAP") and therefore has no standardized meaning prescribed by GAAP and may not be comparable to similar terms and measures presented by other similar issuers. EBITDA is intended to provide additional information on the Company's performance and should not be considered in isolation, seen as a measure of cash flow from operations or as a substitute for measures of performance prepared in accordance with GAAP.

COMPANY OVERVIEW

In May of 2009, Strongco disposed of the net assets of its Engineered Systems business and now operates in one business segment, Equipment Distribution. The comparative figures for 2009 have been restated to reflect the Engineered Systems business as a discontinued operation. The results of operations discussed in this MD&A refers to the Equipment Distribution business only.

Strongco is one of the largest multi-line mobile equipment distributors in Canada. This business sells and rents new and used equipment and provides after-sale product support (parts and service) to customers that operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets. This business distributes numerous equipment lines in various geographic territories. The primary lines distributed include those manufactured by:

  1. Volvo Construction Equipment North America Inc. ("Volvo"), for which Strongco has distribution agreements in each of Alberta, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland;
  2. Case Corporation ("Case"), for which Strongco has a distribution agreement for a substantial portion of Ontario; and
  3. Manitowoc Crane Group ("Manitowoc"), for which Strongco has distribution agreements for the Manitowoc, Grove and National brands, covering much of Canada, excluding Nova Scotia, New Brunswick and Prince Edward Island.

The distribution agreements with Volvo and Case provide exclusive rights to distribute the products manufactured by these manufacturers in specific regions and/or provinces.

In addition to the above noted primary lines, Strongco also distributes several other secondary or ancillary equipment lines and attachments.

FINANCIAL RESULTS - ANNUAL

Consolidated Results of Operations

  Year ended December 31,   2010/2009   2009/2008  
($ thousands, except per unit amounts) 2010   2009   2008   $ Change   % Change   $ Change   % Change  
Revenues $ 294,657   $ 291,795   $ 398,289   $ 2,862   1.0 % $ (106,494 ) -26.7 %
Cost of sales   237,971     231,847     332,463     6,124   2.6 %   -100,616   -30.3 %
Gross Margin   56,686     59,948     65,826     -3,262   -5.4 %   -5,878   -8.9 %
Admin, distribution and selling expenses   53,604     55,822     61,062     -2,218   -4.0 %   -5,240   -8.6 %
Goodwill impairment   -     -     848     -   -     -848   -100.0 %
Amortization of intangible assets   -     -     544     -   -     -544   -100.0 %
Plan of Arrangement   463     -     -     463   -     -   -  
Other income   (740 )   (1,816 )   (690 )   1,076   -59.3 %   -1,126   163.2 %
Operating income   3,359     5,942     4,062     -2,583   -43.5 %   1,880   46.3 %
Interest expense   4,816     4,433     4,143     383   8.6 %   290   7.0 %
Earnings (loss) from continuing operations before income taxes   (1,457 )   1,509     (81 )   -2,966   196.6 %   1,590   -1963.0 %
Provision for income taxes   (1,040 )   775     276     -1,815   -234.2 %   499   180.8 %
Earnings (loss) from continuing operations   (417 )   734     (357 )   -1,151   156.8 %   1,091   -305.6 %
Earnings (loss) from discontinued operations   -     (716 )   (41 )   716   -100.0 %   -675   1646.3 %
Net income (loss) and comprehensive income (loss)   (417 )   18     (398 )   -435   2416.7 %   416   -104.5 %
Basic and diluted earnings (loss) per share/unit from continuing operations   (0.04 )   0.07     (0.04 )   (0.11 )       0.11      
Basic and diluted earnings (loss) per share/unit   (0.04 )   -     (0.04 )   (0.04 )       0.04      
Number of shares/units issued   10,508,719     10,508,719     10,508,719                      
Key financial measures:                                      
Gross margin as a percentage of revenues   19.2 %   20.5 %   16.5 %                    
Admin, distribution and selling expenses as percentage of revenues   18.2 %   19.1 %   15.3 %                    
Operating income as a percentage of revenues   1.1 %   2.0 %   1.0 %                    
EBITDA (note 1)   22,500     18,017     20,520                      
Note 1 – "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of intangible assets, amortization of equipment inventory on rent, and goodwill impairment. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance under Canadian Generally Accepted Accounting Principles ("GAAP") and therefore has no standardized meaning prescribed by GAAP and may not be comparable to similar terms and measures presented by other similar issuers. EBITDA is intended to provide additional information on the Company's performance and should not be considered in isolation, seen as a measure of cash flow from operations or as a substitute for measures of performance prepared in accordance with GAAP.

Market Overview

Economic activity in North America slowed considerably in the second half of 2008 as a result of the crisis in global financial markets, brought on by the sub-prime mortgage collapse, which culminated in the near collapse of the U.S. banking system in September 2008. This was followed by a rapid and substantial decline in oil prices which led to the Canadian economy and the value of the Canadian dollar falling sharply in the fourth quarter of 2008. This weakness continued into 2009 with the economy slipping into a recession early in the year. The recession in Canada lasted throughout most of 2009, but with improving confidence, fueled in part by government stimulus spending, improving demand for resource commodities and a strengthening Canadian dollar, economic growth, although modest, resumed late in the year. The Canadian economy continued to recover from the recession throughout 2010, although the economy in the United States was much slower to recover. Improving oil and other resource prices, combined with a weakening U.S. dollar, contributed to continued strengthening of the Canadian dollar in 2010.

Construction markets generally follow the cycles of the broader economy, but typically lag. As construction markets recover following a recession, demand for heavy equipment normally improves as construction activity and confidence in construction markets build. In addition, as the financial resources of customers in that sector strengthen, they have historically replenished and upgraded their equipment fleets after a period of restrained capital expenditures. Recovery in equipment markets is normally first evident in equipment used in earth moving applications and followed by cranes, which are typically utilized in later phases of construction. Rental of heavy equipment is typically stronger following a recession until confidence in construction markets is restored and financial resources of customers improve.

While the economic recession that persisted throughout most of 2009 was officially over in 2010 in Canada, construction markets remained weak in the first quarter of 2010. With the onset of warmer spring weather and spurred by government stimulus spending for infrastructure projects, construction activity began to show signs of improvement in the second quarter. This improvement continued in the third quarter as confidence in the economy increased. Similarly, demand for new heavy equipment was soft in the first quarter but started to improve late in the second quarter and continued to strengthen in the third and fourth quarters of the year. While construction markets and demand for heavy equipment were improving, many customers remained reluctant or lacked the financial resources following the recession to commit to purchase new construction equipment and instead rented to meet their equipment needs in the first half of the year. That trend continued in the second half of the year, but with confidence in the economy continuing to rise and construction activity increasing, customers were more willing to purchase equipment and exercise purchase options under rental contracts in the fourth quarter. Recovery was first evident in the markets for compact and smaller, lower priced equipment while demand for higher priced equipment was slower to recover. In particular, the market for cranes remained weak in the first and second quarters of the year but started to show improvement in the latter half of the year. Sales backlogs for all categories of equipment, including cranes, improved steadily throughout the first and second quarters and remained strong throughout the balance of 2010 and into 2011, a positive indication of the recovery of construction markets and increase in demand for heavy equipment.

As construction markets in Canada strengthened, demand for heavy equipment increased. The markets for heavy equipment in which Strongco operates were estimated to be up on average between 15% and 25% across the country in 2010 with the largest increases in Alberta. Demand for heavy equipment varied significantly from region to region and between product categories but in most of the markets Strongco serves, total unit volume for general purpose equipment (GPPE) and compact equipment was up over the prior year while unit volume for road equipment was up in certain regions and down in others. While the continued recovery in heavy equipment markets was positive, volumes in 2010 remained below pre-recession levels.

While demand picked up in 2010, the recession in 2009 left many dealers holding higher levels of aging inventories and equipment coming off of rent entering 2010 which led to aggressive price competition in the market. In addition, there has been aggressive pricing in particular markets and product categories in an apparent attempt by certain dealers to gain market share and increase equipment population. Most dealer inventory is purchased from equipment manufacturers in US dollars and the strengthening of the Canadian dollar to near parity with the US dollar in the latter part of 2009, put additional pressure on selling prices of equipment. The Canadian dollar remained strong relative to the US dollar throughout 2010, resulting in continued pricing and margin pressure on equipment.

During the recession period of 2009, significant volumes of new and used equipment went to auction at prices that were depressed from traditional auction pricing. As demand improved throughout 2010, and excess inventories were reduced, the volume of equipment sold at auction declined and auction prices increased. Used equipment pricing has generally improved through 2010 while availability of used equipment became tighter.

As a consequence of the weak economy in 2009, particularly in the United States, Original Equipment Manufacturers ("OEM's") scaled back production capacity. While the economy and construction markets in Canada have been improving, OEM's have struggled to bring production back on line at the same pace resulting in the lengthening of delivery lead times and the reduced availability of new equipment. This situation benefitted certain dealers in the first quarter which were carrying higher levels of equipment inventories or with available equipment coming off rent entering 2010. While the supply of new equipment improved as capacity at OEM's increased throughout the year, the conversion to Tier 4 engines from Tier 3, to meet new environmental standards in the United States, has also resulted in some shortages of equipment.

Revenues

A breakdown of revenue within the Equipment Distribution business for the years ended December 31, 2010, 2009 and 2008 is as follows:

  Year Ended December 31, 2010/09   2009/08  
[$ millions] 2010 2009 2008 % Var   % Var  
Eastern Canada (Atlantic and Quebec)                    
Equipment Sales $ 71.2 $ 71.9 $ 79.6 -1 % -10 %
Equipment Rentals $ 8.3 $ 4.7 $ 5.3 78 % -12 %
Product Support $ 36.6 $ 38.0 $ 35.7 -4 % 6 %
Total Eastern Canada $ 116.1 $ 114.6 $ 120.6 1 % -5 %
                     
Central Canada (Ontario)                    
Equipment Sales $ 70.7 $ 79.9 $ 124.2 -12 % -36 %
Equipment Rentals $ 6.0 $ 5.9 $ 4.0 1 % 51 %
Product Support $ 32.0 $ 36.3 $ 38.5 -12 % -6 %
Total Central Canada $ 108.7 $ 122.2 $ 166.6 -11 % -27 %
                     
Western Canada (Manitoba to BC)                    
Equipment Sales $ 41.8 $ 31.9 $ 78.2 31 % -59 %
Equipment Rentals $ 7.9 $ 3.7 $ 8.5 112 % -56 %
Product Support $ 20.2 $ 19.4 $ 24.4 4 % -21 %
Total Western Canada $ 69.9 $ 55.1 $ 111.1 27 % -50 %
                     
TOTAL Equipment Distribution                    
Equipment Sales $ 183.7 $ 183.7 $ 282.0 0 % -35 %
Equipment Rentals $ 22.2 $ 14.3 $ 17.7 55 % -19 %
Product Support $ 88.8 $ 93.7 $ 98.6 -5 % -5 %
TOTAL Equipment Distribution $ 294.7 $ 291.8 $ 398.3 1 % -27 %

Equipment Sales

To view the graph of equipment sales, please visit the following link: http://media3.marketwire.com/docs/sqp0330equipmentsales.pdf.

Equipment sales throughout 2008 were robust despite the sudden and significant weakening of the economy in October 2008. Existing backlogs partially sustained weakening sales in the first quarter of 2009 as the economy slipped into recession which lasted for most of the year. Construction markets in Canada declined significantly during the recession and equipment sales fell in all regions of the country in 2009. Total unit volumes in the markets Strongco serves were estimated to be down on average approximately 50% in 2009 with some regions experiencing decline of close to 80%. By comparison, Strongco's unit volume across Canada was down only 40% in 2009 which resulted in a decline in total equipment sales of $98.3 million or 35%.

With the recession over, construction markets slowly began to recover in Canada in 2010. However, backlogs coming out of the recession were low and demand for heavy equipment remained weak until late in the second quarter as many customers remained reluctant or lacked financial resources following the recession to make significant equipment purchases. Recovery in demand for compact equipment was much faster than for larger, more expensive units. Strongco's sales pattern in 2010 followed the same recovery trend. For the full year, Strongco's equipment sales were flat compared to 2009 at $183.7 million, however, sales increased each quarter throughout the year as construction markets and demand for heavy equipment recovered following the recession. While sales in the first and second quarters fell short of 2009, sales in the latter half of 2010 were well ahead of the prior year.

As anticipated, Strongco's equipment sales in the first quarter of 2010 remained weak at $29.9 million, down 32% compared to the first quarter of 2009. Sales increased in the second quarter to $41.7 million as heavy equipment markets showed the first real signs of improvement late in the quarter, but remained below 2009 levels. In the third quarter, despite the normal seasonal decline in the market, Strongco's equipment sales increased to $49.9 million and exceeded third quarter sales in 2009 by 5%. Equipment sales in the fourth quarter increased further to $62.3 million, a 47% increase over the fourth quarter of 2009 due to continued strong demand for heavy equipment and a high level of rental purchase option conversions in December, particularly in Alberta.

While the Canadian economy was showing modest recovery in the first quarter of 2010, construction markets were still feeling the effects of the recession. In addition to weak demand for new equipment, in the aftermath of the recession, many customers remained reluctant or did not have the financial resources to purchase larger, higher price equipment (e.g. cranes, articulated trucks and large loaders). As construction markets improved throughout the year, demand for heavy equipment increased. Strongco's sales backlog followed the same trend. While the economy had slipped into recession, sales backlogs entering 2009 remained quite high, especially for cranes, reflecting the stronger pre-recession market in 2008. Sales backlog declined throughout the recession of 2009 and were very low entering 2010.Strongco's sales backlogs began to improve in February of 2010 and continued to improve each month through June when they stood at greater than $50 million, and remained at that higher level through the balance of the year and into 2011.

Price competition was aggressive in the first and second quarters of 2010 as many equipment dealers were carrying excess levels of aging inventory and large amounts of equipment coming off rent following the recession. This contributed to a decline in Strongco's market share in the first half of the year. As market demand for equipment increased, excess inventory levels were reduced, and with improved sales execution, Strongco's market share improved throughout the latter half of 2010 and at year end had recovered to levels consistent with the prior year.

Average selling prices vary from period to period depending on sales mix between product categories, model mix within product categories and features and attachments included in equipment being sold. While average selling prices remained below pre- recession levels in 2010, Strongco's average selling prices increased throughout the year across most product categories. In the first half of the year, many customers were reluctant or lacked the financial resources in the aftermath of the recession to purchase new equipment, preferring instead to rent or purchase used equipment. With continued strength in construction markets, the situation improved in the third quarter but many customers remained reluctant to purchase larger, higher price equipment (e.g. cranes, articulated trucks and large loaders), preferring instead to rent, most often with an option to purchase. As a result, the mix of equipment sales revenue remained more heavily weighted to smaller, lower priced equipment and used equipment throughout the first three quarters of the year, which contributed to lower average selling prices. In the fourth quarter, average selling prices increased due to a higher proportion of sales of larger equipment (loaders and articulated trucks) many of which had been on rental contracts with purchase options. In addition, the ongoing strength of the Canadian dollar and increased price competition also contributed to lower average selling prices in 2010.

On a regional basis, equipment sales in Eastern Canada (Quebec and Atlantic) were essentially flat year over year at $71.2 million. After a disappointing first quarter, sales for the balance of the year improved each quarter. Fourth quarter sales were particularly strong due in part to the conversion to sale of several rental purchase option contracts in December. After some erosion of market share in the first quarter, market shares recovered through the balance of the year and increased significantly in the last quarter of the year. Most of the sales improvement has been in rock crushing equipment, loaders and articulated trucks. The crane market in Eastern Canada has generally remained weak following the recession of 2009, but there has been some ongoing demand for cranes for large hydroelectric projects in Quebec. For the year, sales of cranes were down more than 50% from the prior year in Eastern Canada.

Strongco's equipment sales in Central Canada (Ontario) were down 12% in 2010 following a 36% reduction in 2009. Construction markets in Ontario were significantly impacted by the recession of 2009 and recovery has been slow, particularly in general purpose equipment ("GPPE"). Government stimulus spending has had some positive effect on construction activity and the markets for GPPE started to show recovery in the latter half of 2010. Strongco's sales performance followed much the same trend with an improving sales performance in the second half of the year, especially in the fourth quarter where equipment sales were up 35% over the fourth quarter of 2009. As expected, the market for compact equipment in Ontario has recovered much faster following the recession. This was evident within Strongco's Case construction equipment business, which has a stronger position in the compact end of the market. Sales of Case equipment were up 30% from 2009 levels due to the market recovery and market share gains. Price competition in Ontario remained aggressive in 2010, especially from certain dealers attempting to capture market share in particular product categories and markets and Strongco's market share in its Volvo business has suffered. Personnel changes made within the sales organization of Strongco's Volvo business unit early in the year also affected sales performance in Ontario but the positive results of those actions began to be realized in the latter part of the year with increased sales and market share gains in the fourth quarter. The market for cranes in Ontario remained weak in 2010. While construction activity in the province increased, demand for cranes which are typically used in later phases of construction, remained soft. Strongco's sales of cranes in Ontario improved in the fourth quarter of the year due the sales of a few large cranes but for the full year were down 30% compared to 2009.

Equipment sales in Western Canada were up 31% over 2009 to $41.8 million. Strongco's product lines in Alberta serve the oil sector, primarily in the site preparation phase, as well as natural gas production, both of which have been significantly impacted by weakness in the energy sector. In addition, Strongco serves construction and infrastructure segments in the region, which were also severely impacted by the recession. With the upward trend and sustainability in oil prices, economic conditions in Alberta have been improving. Construction activity and demand for heavy equipment began to show signs of improvement in the second quarter and continued to improve in the third and fourth quarters and into 2011. With confidence in the economy improving, Strongco's equipment sales increased substantially in the latter half of the year, particularly in Northern Alberta, where customers exercised purchase options on rental contracts entered into earlier in the year. The markets served by Strongco in Alberta, excluding cranes, were down relative to the first quarter of 2009 but grew significantly in each quarter thereafter. For the year Strongco's markets in Alberta were estimated to be up 22% for GPPE and up overall by 11%. After a decline in the first half of the year, Strongco's market share in Alberta, excluding cranes, improved substantially in the third and fourth quarters. Sales of cranes in the second half of the year were more than double the level from a year ago and ended the year ahead by 60%, further evidence markets are recovering. A sense of optimism has developed in Alberta as oil prices have continued to strengthen. Sales backlogs are continuing to build and the expectation is for continued strength in 2011.

Equipment Rentals

It is common industry practice for certain customers to rent to meet their heavy equipment needs rather than commit to a purchase. In some cases this is in response to the seasonal demands of the customer, as in the case of municipal snow removal contracts, or to meet the customers' needs for specific projects. In other cases, certain customers prefer to enter into short-term rental contracts with an option to purchase after a period of time or hours of machine usage. This latter type of contract is referred to as a rental purchase option contract ("RPO"). Under an RPO, a portion of the rental revenue is applied toward the purchase price of the equipment should the customer exercise the purchase option. This provides flexibility to the customer and results in a more affordable purchase price after the rental period. Normally, the significant majority of RPO's are converted to sales within a six month period and this market practice is a method of building sales revenues and the field population of equipment.

Rental activity was stronger in 2009 compared to 2008, as customers were more inclined to rent equipment rather than purchase in the uncertain, recessionary environment. In 2010, following the recession, customers remained reluctant or lacked the financial resources to purchase equipment. Consequently, Strongco decided to commit a higher level of inventory available for RPO's and, as a result, rental activity remained strong in 2010. While construction markets were recovering, many customers opted to rent equipment under RPO contracts. Rentals under RPO contracts were particularly strong in Alberta as the economy recovered and activity in the oil sands increased, and in Quebec. A large number of these RPO contracts were converted to sale in the fourth quarter, many in the last month of the year, which contributed to Strongco's strong sales performance in the fourth quarter.

While the loss of certain rental contracts for snow removal in Ontario reduced rentals in the first quarter of 2010, Strongco's rental revenues were above 2009 levels and increased in each quarter thereafter during the balance of the year. The majority of the rental revenue was from RPO activity reflecting the preference of many customers to rent equipment following the recession. Rental revenues in 2010 were $22.2 million, which was up 55% from $14.3 million in 2009. Rental activity was higher generally across all product categories and in all regions of the country, but was particularly strong with larger, more expensive equipment, including cranes in Alberta and Quebec. While the market for cranes continued to show signs of improvement, many customers remained reluctant to commit to purchase cranes at this time of the recovery cycle and continued to prefer to rent. Strongco's crane rentals were up in all regions of the country, and rentals of cranes under RPO remained strong, a positive sign that construction markets are improving.

In Eastern Canada, which has traditionally not been a big rental market, equipment rentals were $8.3 million in 2010, which was up 78% from 2009. Rental revenues in Ontario were $6.0 million compared to $5.9 million in 2009. In Alberta, which has traditionally been a strong rental market, rental revenues in 2010 were $7.9 million, which was more than double the prior year.

Product Support

Sales of new equipment usually carry the warranty from the manufacturer for a defined term. Product support revenues from the sales of parts and service are therefore not impacted until the warranty period expires. Warranty periods vary from manufacturer to manufacturer and depending on customer purchases of extended warranties. Product support activities (sales of parts and service outside of warranty), therefore, tend to increase at a slower rate and lag equipment sales by three to five years. The increasing equipment population in the field leads to increased product support activities over time.

Product support revenues declined in 2009 as a result of the recession but represented a larger proportion of total revenues as many customers chose to repair and refurbish existing machines, rather than buy new equipment. That was particularly true in Eastern and Central Canada while in Alberta, where significant amounts of equipment in customers' hands were sitting idle, product support revenues declined further. That trend was expected to continue into 2010, but the mild winter and lack of snow in the first quarter of the year, particularly in Eastern and Central Canada, resulted in significantly reduced use of snow removal equipment through the winter season, which in turn resulted in reduced parts and service activity. With the mild winter and early onset of spring, construction activity in 2010 commenced earlier in the season, which resulted in increased sales of parts and service in the second quarter, but many customers, particularly in Ontario, continued to only make critical repairs necessary to keep their equipment in service. The situation in Central and Eastern Canada was much the same in the third quarter, but in the fourth quarter, parts and service activity increased relative to the fourth quarter of 2009. In Alberta, as customers began using equipment that had sat idle through the recession in 2009, product support revenues increased throughout the year.

For the year, Strongco's product support revenues were $88.8 million, which was down by 5% from 2009. Product support revenues were mixed on a regional basis. In Alberta, where product support activity was particularly weak in 2009, parts and service revenues were up 4%. In Central and Eastern Canada, parts and service sales were down 12% and 4%, respectively.

Gross Margin
 
  Year Ended December 31,                  
  2010     2009     2008     2010/2009   2009/2008  
Gross Margin $ millions GM%   $ millions GM%   $ millions GM%   $ Variance   % Var   $ Variance   % Var  
Equipment Sales $ 17.7 9.6 % $ 19.0 10.3 % $ 21.7 7.7 %   (1.3 ) -7 %   (2.7 ) -12 %
Equipment Rentals $ 3.3 14.9 % $ 2.4 16.8 % $ 2.6 14.7 %   0.9   39 %   (0.2 ) -8 %
Product Support $ 35.7 40.2 % $ 38.5 41.1 % $ 41.5 42.1 %   (2.8 ) -7 %   (3.0 ) -7 %
Total Gross Margin $ 56.7 19.2 % $ 59.9 20.5 % $ 65.8 16.5 % $ (3.2 ) -5 % $ (5.9 ) -9 %

With lower revenues in 2009, Strongco's gross margin declined by $5.9 million or 9% from 2008, to $59.9 million. However, as a percentage of revenue, gross margin improved in 2009 to 20.5% from 16.5% in 2008 due primarily to the higher proportion of product support revenue in 2009. Equipment sales typically generate a lower gross margin percentage than rental revenues and product support activities. During the recession in 2009, many customers preferred to rent equipment to meet their equipment needs or to repair/refurbish existing equipment which resulted in rentals and sales of parts and service being a higher proportion of total revenues and contributed to an improvement in Strongco's overall gross margin percentage in 2009. In addition, the gross margin percentage in 2008 was negatively impacted by the unusual inventory reserves of $2.6 million primarily related to forestry equipment recorded in the latter half of 2008.

Gross margin in 2010 was $56.7 million, which was down $3.2 million from 2009. The decline was due primarily to sales mix which resulted in a lower overall gross margin percentage of 19.2% compared to 20.5% in 2009. As construction markets and demand for heavy equipment improved, equipment sales increased and represented a higher proportion of revenues in 2010. This contributed most to the decline in the overall gross margin percentage in 2010.

In 2009, the gross margin percentage on equipment sales was 10.3%, which was up from 7.7% in 2008 due mainly to the unusual inventory reserves of $2.6 million recorded in latter half of 2008, and in part to a slightly higher proportion of used equipment sales. Sales of used equipment and equipment that has come off rental typically generate higher margins than sales of new equipment. The gross margin percentage on equipment sales declined slightly in 2010 to 9.6% due primarily to price competition. In the first half of 2010, following the recession, certain equipment dealers priced aggressively to sell aging equipment inventories and equipment coming off rent. This put pressure on selling prices and compressed margins. In addition, dealers of a particular brand of equipment have been pricing very aggressively in an attempt to gain market share, which has compressed selling prices and margin for certain product lines. The continued strength of the Canadian dollar has also put pressure on selling prices and resulted in lower gross margins on sales of inventory purchased when the Canadian dollar was weaker.

The gross margin percentage on rental contracts without purchase options is typically higher than the margin percentage on equipment sales. Gross margins on rentals under RPO contracts are recorded at margin percentages consistent with the margin on the anticipated sale under the purchase option which are lower than margins on straight rental contracts. During the recession, the volume of RPO rentals was down which resulted in a slightly higher overall rental margin in 2009 of 16.8% compared to 14.7% in 2008. Following the recession, rental activity under RPO contracts increased in 2010, particularly in Alberta and Quebec, which resulted in a lower overall rental gross margin percentage of 14.9%.

Gross margin percentage on product support activities was 40.2% in 2010, which was down slightly from 41.1% in 2009 and 42.1% in 2008 due primarily to a higher proportion of parts sales which offer lower margins compared to service revenue and price competition for parts.

Administrative, Distribution and Selling Expense

In 2009, in response to the weak recession environment, Strongco implemented cost controls and reengineered its cost structure to reduce costs, which resulted in substantial savings in 2009 and established a lower cost base from which to operate going forward. Administrative, distribution and selling expenses in 2009 were down 9% from 2008 to $55.8 million. While heavy equipment markets have been improving and revenues growing throughout 2010, expense levels have been generally held at the new operating level established in 2009. Realizing the full year impact of the cost reduction initiatives implemented in the prior year, administrative, distribution and selling expenses were down a further 4% in 2010 to $53.6 million.

Strongco's administration, distribution and selling expenses would have been even lower in 2010 were it not for a lower net recovery on warranty work. Strongco performs warranty repairs/replacements on behalf of the OEM suppliers of the equipment it distributes and recovers its costs of warranty from the OEM. The warranty recovery rates from the OEM typically provide Strongco a small net recovery or profit from the performance of the warranty work. Following the recession, OEM's have been more restrictive in reimbursing for warranty work and warranty recovery rates have been reduced. In addition, the volume of warranty work being carried out in 2010 was lower than in 2009. The lower volume of warranty work, combined with the lower recovery rates has resulted in the net warranty recovery amount being $1.3 million lower in 2010 compared to 2009.

While most expense categories were lower in 2010, additional expenses were incurred in certain areas. Additional costs were incurred for a program to provide increased training for its sales and customer support employees totaling $0.2 million, and additional costs of $0.2 million were incurred for recruiting and severance related to replacement of certain employees.

In addition, Strongco incurred some additional unusual costs in 2010 related to its conversion to International Financial Reporting Standards (IFRS) totaling approximately $0.2 million.

Plan of Arrangement Costs

Effective July 1, 2010, Strongco Income Fund converted from a trust to a corporation (see discussion under the heading "Conversion to a Corporation"). Certain one-time legal and other regulatory costs totaling $0.5 million were incurred to affect this conversion.

Other Income

Other income and expense is primarily comprised of gains or losses on disposition of fixed assets, foreign exchange gains or losses, service fees received by Strongco as compensation for sales of new equipment by other third parties into the regions where Strongco has distribution rights for that equipment, commissions received from third party financing companies for customer purchase financing Strongco places with such finance companies and royalties fees received on sales of parts from certain OEM's.

Other income in 2009 was $1.8 million compared to $0.7 million in 2008. In 2008, Strongco incurred a net foreign exchange loss of $1.5 million as a result of the sharp decline in the value of the Canadian dollar in the fourth quarter of the year. In 2009, Strongco incurred a net foreign exchange gain of $0.3 million due to the strengthening of the Canadian dollar during the year. In addition, other income in 2009 included the receipt of a recovery from Volvo Construction Equipment of $0.4 million as an adjustment to the purchase price related to the acquisition in 2008 of Champion Road Machinery. Commissions received from finance companies were less in 2009 than in 2008 as a result of the lower sales volumes in 2009.

Other income in 2010 declined to $0.7 million due primarily to the termination of a royalty fee on parts distribution as the parts supplier changed to direct distribution and the one-time recovery from Volvo in 2009 related to the Champion acquisition. Other income in 2010 also included net unrealized losses of $0.2 million on forward foreign exchange contracts due the continued strength of the Canadian dollar relative to the U.S. dollar. The Company purchases future foreign currency contracts as a hedge to protect the margin of certain equipment inventory being purchased in U.S. dollars for a committed sale in the future. The unrealized foreign exchange losses arose as a result of the strengthening of the Canadian dollar relative to the exchange rate in the forward currency contract. This unrealized foreign exchange loss will be offset by a realized gain in gross margin at the time of the sale of the related equipment.

Interest Expense

Strongco's interest expense was $4.8 million in 2010 compared to $4.4 million in 2009 and $4.1 million in 2008.

Strongco's interest bearing debt comprises bank indebtedness and interest bearing equipment notes. Strongco typically finances equipment inventory under lines of credit available from various non-bank finance companies. Most equipment financing has interest free periods up to twelve months from the date of financing, after which the equipment notes become interest bearing. The rate of interest on the Company's bank indebtedness and interest bearing equipment notes varies with Canadian chartered bank prime rate ("prime rate") and Canadian Bankers Acceptances Rates ("BA rates"). (See discussion under "Financial Condition and Liquidity"). Prime rates and BA rates declined during the recession in 2009 but have increased in 2010.

During 2009, in response to the recession, Strongco reduced equipment inventories and correspondingly reduced equipment notes payable. However, as most of the reduction occurred in the latter half of 2009, the average balance of interest bearing equipment notes outstanding was slightly higher in 2009 compared to 2008. In response to the credit crisis in financial markets and the weak economy during 2009, Strongco's equipment note lenders increased the interest rates charged on the Company's equipment notes in 2009. The higher interest rates combined with a slightly higher average balance of interest bearing equipment notes outstanding in 2009, resulted in a higher interest expense in the 2009 compared to 2008.

As demand for heavy equipment and equipment sales have increased throughout 2010, Strongco has increased inventory levels in support of this growth as well as the commitment to inventory for the purposes of RPO's. Consequently, equipment notes have increased correspondingly. As a result, the average balance of interest bearing equipment notes outstanding was slightly higher in 2010 compared to 2009. Strongco's average bank debt levels were also higher in 2010 than in 2009. Prime lending rates have been increasing in 2010 following the recession, which has resulted in higher rates of interest being charged on the Company's bank debt and equipment notes in the year. The effective average interest rate charged on Strongco's equipment notes was 5.4% in 2010 compared to 4.9% in 2009 and the effective average interest rate charged the Company's bank indebtedness in 2010 was 3.7% compared to 3.0% in 2009. The higher effective interest rates, combined with the slightly higher average balance of interest bearing equipment notes and average bank debt levels in 2010, resulted in a higher interest expense in the year.

Earnings (Loss) Before Income Taxes

In 2010, Strongco incurred a loss before taxes of $1.5 million which compares to a profit before tax from continuing operations in 2009 of $1.5 million and loss in 2008 of $0.1 million. The lower gross margin combined with higher interest expenses and the costs for conversion to a corporation contributed to the loss.

Net Income (Loss)

Following conversion to a corporation on July 1, 2010, Strongco is now subject to income tax at corporate tax rates, whereas previously, as an income trust, the Fund was not subject to corporate tax. In addition, as a consequence of conversion, Strongco is now able to utilize tax losses, including tax losses previously unrecognized from the Fund. Strongco has tax affected the losses since becoming a corporation and unrecognized losses carried forward from the Fund prior to conversion, which resulted in a deferred recovery of income tax of $1.0 million in 2010.

After this tax recovery, Strongco's net loss in 2010 was $0.4 million compared to earnings from continuing operations in 2009 of $0.7 million and net loss of $0.4 million in 2008. After the loss from discontinued operations, net income was essentially at break even in 2009 and net loss of$0.4 million in 2008.

EBITDA From Continuing Operations

EBITDA (see note 1 below) from continuing operations in 2010 was $22.5 million which compares to $18.0 million in 2009 and $20.5 in 2008. EBITDA was calculated as follows:

  Year Ended December 31,          
  2010   2009 2008   2010/2009   2009/2008  
  $ millions   $ millions $ millions   $ Variance   $ Variance  
Earnings (loss) from continuing operations $ (0.4 ) $ 0.7 $ (0.4 ) $ (1.1 ) $ 1.1  
Add Back:                            
  Interest   4.8     4.4   4.1     0.4     0.3  
  Income taxes   (1.0 )   0.8   0.3     (1.8 )   0.5  
  Amortization of capital assets   0.9     0.9   0.8     -     0.1  
  Amortization of intangible assets   -     -   0.5     -     (0.5 )
  Amortization of equipment inventory on rent   18.2     11.2   14.3     7.0     (3.1 )
  Goodwill impairment   -     -   0.8     -     (0.8 )
EBITDA (note 1) - from continuing operations $ 22.5   $ 18.0 $ 20.5   $ 4.5   $ (2.5 )
 
Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of intangible assets, amortization of equipment inventory on rent, and goodwill impairment. EBITDA is a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not an earnings measure recognized by GAAP, does not have standardized meanings prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. The Company's management believes that EBITDA is an important supplemental measure in evaluating the Company's performance and in determining whether to invest in Shares. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with GAAP as indicators of the Company's performance or to cash flows from operating, investing and financing activities as measures of the Company's liquidity and cash flows. The Company's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, the Company's EBITDA may not be comparable to similar measures presented by other issuers.

Discontinued Operations

In May 2009, Strongco sold the net assets of its Engineered Systems business allowing Strongco to focus its resources and management efforts on growing its core Equipment Distribution business. In accordance with the CICA Handbook section 3475 – Disposal of Long-Lived Assets and Discontinued Operations, the results of operations of the Engineered Systems business, together with the loss on sale have been reported as discontinued operations in 2009 and 2008.

Cash Flow, Financial Resources and Liquidity

Cash Flow Used In Operating Activities:

During 2010, Strongco used $0.5 million of cash in operating activities of continuing operations compared to $3.2 million of cash used in operating activities of continuing operations in 2009. Before changes in working capital, operating activities in 2010 provided cash of $18.7 million. However, this was more than offset by $19.2 million of cash used to increase net working capital. By comparison, in 2009, operating activities from continuing operations, before changes in working capital, provided cash of $12.0 million and working capital increases used $15.2 million of cash.

The components of the cash used in operating activities were as follows:

  Year Ended December 31,  
[$ millions] 2010   2009  
Earnings (loss) from continuing operations $ (0.4 ) $ 0.7  
Add (deduct) items not involving an outlay (inflow) of cash            
  Amortization of capital assets   0.9     0.9  
  Amortization of equipment on rent   18.2     11.2  
  Loss (gain) on disposal of capital assets   -     0.1  
  Stock based compensation   0.3     0.1  
  Future income taxes (recovery)   (1.0 )   0.1  
  Other   0.8     (1.1 )
  $ 18.7   $ 12.0  
Changes in non-cash working capital balances   (19.2 )   (15.2 )
Cash used in operating activities of continuing operations   (0.5 )   (3.2 )
Cash used in operating activities of discontinued operations   -     (0.4 )
Cash used in operating activities $ (0.5 ) $ (3.6 )

Items not involving an outlay of cash includes amortization of equipment inventory on rent of $18.2 million in 2010 and $11.2 million in 2009. Higher volumes of equipment rentals in 2010 resulted in the higher amortization of equipment inventory on rent.

The components of the (increase)/decrease in non-cash working capital was as follows:

Net (Increase)/Decrease in Non-cash Working Capital Changes in Non-Cash Working Capital  
(millions) Year ended December 31,  
(increase)/decrease 2010   2009  
Accounts receivable $ (8.8 ) $ 13.1  
Inventories   (33.7 )   8.4  
Prepaids   (0.2 )   -  
Income & other taxes receivable   -     0.8  
  $ (42.7 ) $ 22.3  
increase/(decrease)            
Accounts payable and accrued liabilities   9.4     (21.2 )
Deferred revenue & customer deposits   0.8     (2.1 )
Equipment notes payable - non-interest bearing   11.4     (6.9 )
Equipment notes payable - interest bearing   1.9     (7.1 )
  $ 23.5   $ (37.4 )
Net Increase in Non-cash Working Capital $ (19.2 ) $ (15.1 )

As construction markets began to recover in 2010 from the recession, Strongco's revenues have increased through the year and in the fourth quarter, in particular. As a result, as revenues increased, accounts receivable increased and at December 31, 2010 were at $35.9 million compared to $27.1 million a year earlier. In addition, Strongco made further investment in inventory and other assets in 2010 in support of the increasing revenues. Equipment inventories at December 31, 2010 were $142.1 million compared to $124.5 million at December 31, 2009. Accounts payable and equipment notes have increased in 2010 in support of the increase level of business activities and to finance the increased investment in inventories and other assets. Non-interest equipment notes at December 31, 2010 were $40.1 million compared to $28.7 million at December 31, 2009 and interest bearing equipment notes were $78.1 million at December 31, 2010 compared to $76.2 million at December 31, 2009.

By comparison, in 2009 the recession resulted in a weakening of markets for heavy equipment throughout the year and reduced business and revenues for Strongco. As a result, accounts receivable in 2009 declined. During this period Strongco, scaled back its purchases of inventory, reducing the amount of inventory it was carrying and the related equipment notes financing the inventory. As business slowed during 2009, accounts payable declined and cost reduction initiatives implemented in 2009 resulted in a reduction in expenses and a further decline in accounts payable during the year.

Cash Provided By (Used In) Investing Activities:

During 2009 and 2010, Strongco restricted spending for fixed assets and other investing activities in response to the weak construction markets and lower revenues in the year. Net cash used in investing activities of continuing operations in 2010 amounted to $0.6 million for capital expenditures related to the upgrade of facilities and purchase of miscellaneous shop equipment. Capital expenditures in 2009 for the upgrade of facilities and purchase of miscellaneous shop equipment amounted to $0.7 million. Cash of $0.9 million was generated in 2009 on the sale of the Company's branch in Timmins, Ontario.

Cash flow from investing activities of discontinued operations in 2009 includes the net proceeds received on the sale of Strongco Engineered Systems of $6.2 million.

The components of the cash used in operating activities were as follows:

  Year Ended December 31,  
[$ millions] 2010   2009  
Purchase of capital assets $ (0.6 ) $ (0.7 )
Proceeds from disposition of capital assets   0.1     0.9  
Capital lease repayments   (0.1 )   -  
Cash provided by (used in) investing activities of continuing operations   (0.6 )   0.2  
Cash provided by investing activities of discontinued operations   -     6.2  
Cash provided by (used in) investing activities $ (0.6 ) $ 6.4  

Cash Provided By (Used In) Financing Activities:

During 2010, Strongco made a scheduled $1.2 million partial repayment of note taken back by Volvo Construction Equipment on the acquisition of Champion in 2008. The final repayment of this note of $1.2 million is due March 2011. In addition, bank borrowing increased to support Strongco's increase in business throughout 2010. In total, bank indebtedness increased by $2.4 million during 2010.

By comparison, during 2009, Strongco reduced its bank debt by $2.8 million primarily as a result of the $6.2 million of cash received on the sale of Strongco Engineered Systems and $0.9 million of proceeds on the sale of the Timmins facility which were partially offset by cash used in operating activities and capital expenditures in the year. Bank debt at December 31, 2010 was $12.4 million compared to $10.0 million at December 31, 2009. No distributions were paid in 2009 or in 2010 prior to conversion to a corporation (see discussion under "Conversion to a Corporation") following suspension of distributions in August 2008.

Cash Provided By (Used In) Financing Activities Year Ended December 31,  
[$ millions] 2010   2009  
   
Increase (decrease) in bank indebtedness 2.4   (2.8 )
Repayment of term debt (1.2 ) -  
Cash (used in) provided by financing activities 1.2   (2.8 )

Bank Credit Facilities

The Company has a credit facility with a Canadian Chartered Bank which provides a $20 million 364-Day committed operating line of credit which is renewable annually. Borrowings under the line of credit are limited by a standard borrowing base calculation based on accounts receivable and inventory, typical of such lines of credit. As collateral the Company has provided a $50 million debenture and a security interest in accounts receivables, inventories (subordinated to the collateral provided to the equipment inventory lenders), capital assets (subordinated to collateral provided to lessors), real estate and on intangible and other assets. Interest rates on the operating line ranges between bank prime rate plus 0.50% and bank prime rate plus 1.50% and between the one month Canadian Bankers' Acceptance Rates ("BA rates") plus 1.75% and BA rates plus 2.75%, depending on the Company's ratio of debt to tangible net worth ("TNW"). Under its operating facility, the Company is able to issue letters of credit up to a maximum of $5 million. Outstanding letters of credit reduce the Company's availability under its operating line of credit. For certain customers, Strongco issues letters of credit as a guarantee of Strongco's performance on the sale of equipment to the customer. As at December 31, 2010, there were outstanding letters of credit of $0.1 million.

In addition to its operating line of credit, the Company has a $15 million line for foreign exchange forward contracts as part of its bank credit facilities ("FX Line") available to hedge foreign currency exposure. Under this FX Line, Strongco can purchase foreign exchange forward contracts up to a maximum of $15 million. As at December 31, 2010, the Company had outstanding foreign exchange forward contracts under this facility totaling US$7.5 million at an average exchange rate of $1.0227 Canadian for each US $1.00 with settlement dates between January and May 2011. At December 31, 2009 there were foreign exchange forward contracts outstanding of US$2.4 million at an average exchange rate of $1.07 Canadian for each US $1.00.

The Company's bank credit facility contains financial covenants that require the Company to maintain certain financial ratios and meet certain financial thresholds. In particular, the facility contains covenants that require the Company to maintain a minimum ratio of total current assets to current liabilities ("Current Ratio covenant") of 1.1: 1, a minimum tangible net worth ("TNW covenant") of $54 million ($50 million at December 31, 2010 as outlined below), a maximum ratio of total debt to tangible net worth ("Debt to TNW Ratio covenant") of 3.5 : 1 and a minimum ratio of EBITDA minus capital expenditures to total interest ("Debt Service Coverage Ratio covenant") of 1.3 : 1. For the purposes of calculating covenants under the credit facility, debt is defined as total liabilities less future income tax amounts and subordinated debt. The Debt Service Coverage Ratio is measured at the end of each quarter on a trailing twelve month basis. Other covenants are measured as at the end of each quarter.

On March 29, 2010, the bank renewed the credit facility and the $20 million operating line of credit, and the $10 million foreign exchange line ("FX Line"). In conjunction with this renewal, the bank amended the covenants to reduce the minimum tangible net worth requirement to $52 million as at March 31, 2010, increasing to $54 million as at June 30, 2010. All other terms and conditions of the credit facility remained unchanged.

As at June 30, 2010 actual tangible net worth was $52 million. On August 6, 2010 the bank issued a waiver for the shortfall in the covenant and amended the minimum tangible net worth requirement to $50 million as at September 30, 2010, increasing to $54 million as at December 31, 2010. In addition, the bank increased the FX Line to $15 million. The bank charged a fee of $25 thousand for these amendments.

On December 30, 2010 the bank amended the minimum tangible net worth requirement to $50 million as at December 31, 2010, increasing to $54 million as at March 31, 2011.

The Company was in compliance with all covenants under its bank credit facility as at December 31, 2010.

In addition to the covenants, the bank's prior written consent is required for the Company to declare or pay any cash dividends, repurchase or redeem any of its shares or reduce its capital in any way whatsoever, or repay any Shareholder advance.

Equipment Notes

In addition to its bank operating line of credit, the Company has lines of credit available totaling $200 million from various non- bank equipment lenders, which are used to finance equipment inventory. The available credit was increased from $155 million as one of the Company's equipment lenders increased the credit line by $45 million in September 2010. At December 31, 2010, there was $118.0 million borrowed on the equipment finance lines compared to $104.8 million borrowed at December 31, 2009.

Typically, these equipment notes are interest free for periods up to 12 months from the date of financing, after which they bear interest at rates ranging from 4.25% to 5.85% over the one month BA rate or 3.25% to 4.9% over the prime rate of a Canadian chartered bank. As collateral for these equipment notes, the Company has provided liens on specific inventories and accounts receivable. Monthly principal repayments or "curtailments" equal to 3% of the original principal balance of the note commence 12 months from the date of financing and the remaining balance is due in full at the earlier of 24 months after financing and when the financed equipment is sold. While financed equipment is out on rent, monthly curtailments are required equal to the greater of 70% of the rental revenue, and 2.5% of the original value of the note. While any remaining balance after 24 months is due in full, any remaining balance is normally refinanced with the lender over an additional period of up to 24 months. All of the Company's equipment notes facilities are renewable annually.

Certain of the Company's equipment note credit agreements contain restrictive financial covenants, including requiring the Company to remain in compliance with the financial covenants under all of its other lending agreements ("cross default provisions"). The company obtained waivers for the cross default that arose as a result of the violation under the Company's bank covenants at June 30, 2010 from all of its equipment note lenders. The Company was in compliance with all financial covenants under these equipment notes at December 31, 2010.

The balance outstanding under the Company's debt facilities at December 31, 2010 and 2009 was as follows:

Debt Facilities    
As at December 31 [$ millions] 2010 2009
Bank indebtedness (including outstanding cheques) $ 12.4 $ 10.0
Equipment notes payable - non interest bearing   40.1   28.7
Equipment notes payable - interest bearing   78.1   76.2
Other notes payable   1.2   2.3
  $ 131.8 $ 117.2

As at December 31, 2010 there was $7.6 million of unused credit available under the bank credit line. While availability under the bank line fluctuates daily depending on the amount of cash received and cheques and other disbursements clearing the bank, availability generally ranged between $7 million and $15 million throughout 2010. The Company also had availability under its equipment finance facilities of $81.8 million at December 31, 2010.

Management expects the Canadian economy will continue to strengthen in 2011 and construction markets will improve, which in turn will lead to increased spending for heavy construction equipment (see Outlook section). As a result, management anticipates Strongco's cash flows from operations, before changes in working capital, will improve throughout 2011. While management anticipates increased purchases of equipment to support the expected increased level of activity in construction markets, inventory levels will continue to be managed closely relative to sales activity. Management does not expect significant growth in working capital as any increased investment in equipment inventory will be financed through the availability under the Company's equipment finance facilities. With the level of funds available under the Company's bank credit line, the current availability under the equipment finance facilities and anticipated improvement in cash flows from operations, management believes the Company will have adequate financial resources to fund its operations and make the necessary investment in equipment inventory and fixed assets to support its operations in the future.

Management plans to upgrade or replace certain of the Company's branch locations in 2011 and to add branches in select regions to increase market presence and better service customers. Management intends to finance these branch expansions with either new real property leases, in many cases replacing existing leases, or from new term mortgage financing secured against the properties to be financed which management believes can be obtained from the Company's current bank or other third party lenders.

Subsequent Events

Rights Issue

On January 17, 2011, subsequent to its year end, the Company completed a rights offering, under which 2.6 million additional shares were issued to existing shareholders for gross proceeds of $7.9 million (refer to the Company's Rights Offering Circular filed on SEDAR for details). The total shares outstanding following completion of the rights offering was 13,128,629. Proceeds from the rights offering will be used for Strongco's future growth.

Acquisition of Chadwick-BaRoss, Inc.

On February 17, 2011, subsequent to its year end, the Company completed the acquisition of 100% of the shares of Chadwick- BaRoss, Inc. for US$11.5 million. The transaction value was satisfied with cash of US$9.6 million and notes issued to the major shareholders of Chadwick-BaRoss totalling US$1.9 million. Chadwick-BaRoss is a heavy equipment dealer headquartered in Westbrook, Maine, with three branches in Maine and one in each of New Hampshire and Massachusetts. In the fiscal year ended January 31, 2011, Chadwick-BaRoss was profitable on sales of approximately US$44 million and generated EBITDA of approximately US$3.6 million. As at January 31, 2011, Chadwick-BaRoss, Inc. had total assets of approximately $33,216 and total liabilities of approximately $21,821, included bank indebtedness and term loan of $4,047.

FINANCIAL RESULTS – FOURTH QUARTER
Consolidated Results of Operations for the Three Months Ended December 31
 
  Three month ending
December 31,
  2010/2009  
($ thousands, except per unit amounts) 2010   2009   $ Change % Change  
Revenues $ 91,798   $ 67,494   $ 24,304 36.0 %
Cost of sales   75,431     54,405     21,026 38.6 %
Gross Margin   16,367     13,089     3,278 25.0 %
Admin, distribution and selling expenses   13,524     14,374     -850 -5.9 %
Other income   (273 )   (590 )   317 -53.7 %
Operating income   3,116     (695 )   3,811 -548.3 %
Interest expense   1,354     1,135     219 19.3 %
Earnings (loss) before income taxes   1,762     (1,830 )   3,592 196.3 %
Provision for income taxes   277     270     7 2.6 %
Net income (loss) and comprehensive income (loss) $ 1,485   $ (2,100 ) $ 3,585 170.7 %
   
Basic and diluted earnings (loss) per unit   0.14     (0.20 )   0.34 170.7 %
Number of units issued   10,508,719     10,508,719          
   
   
Key financial measures:                    
Gross margin as a percentage of revenues   17.8 %   19.4 %        
Admin, distribution and selling expenses as percentage of revenues   14.7 %   21.3 %        
Operating income as a percentage of revenues   3.4 %   -1.0 %        
EBITDA (note1) $ 9,256   $ 2,867   $ 6,389 222.8 %
 
Note 1 – "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of intangible assets, amortization of equipment inventory on rent, and goodwill impairment. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance under Canadian Generally Accepted Accounting Principles ("GAAP") and therefore has no standardized meaning prescribed by GAAP and may not be comparable to similar terms and measures presented by other similar issuers. EBITDA is intended to provide additional information on the Company's performance and should not be considered in isolation, seen as a measure of cash flow from operations or as a substitute for measures of performance prepared in accordance with GAAP.

Market Overview

While the Canadian economy started to emerge from recession in the latter part of 2009, construction activity remained very slow in the fourth quarter of 2009 resulting in continued weak markets for heavy equipment. With the recession over, construction markets slowly began to recover in Canada in 2010, although demand for heavy equipment remained weak until late in the second quarter as many customers remained reluctant or lacked financial resources following the recession to make significant equipment purchases. While the third quarter experienced the normal seasonal decline, demand for equipment increased throughout the balance of the year. In Strongco's markets total unit volume in the fourth quarter was estimated to be up 6% from the level in third quarter and compared to the fourth quarter of 2009, total unit volume was estimated to be up 15%.

Regionally recovery was most pronounced in Alberta, where the economy has been significantly impacted by weakness in the energy sector. In addition, Strongco serves construction and infrastructure segments in the region, which were also severely impacted by the recession. With the upward trend and sustainability in oil prices, economic conditions in Alberta have been improving. Construction activity and demand for heavy equipment began to show signs of improvement in the second quarter and continued to improve in the third and fourth quarters and into 2011. With confidence in the economy improving, Strongco's equipment sales increased substantially in the latter half of the year, particularly in Northern Alberta, where customers exercised purchase options on rental contracts entered into earlier in the year.

Recovery in demand for compact equipment was much faster than for larger, more expensive units. The market for cranes remained particularly weak in the first and second quarters of the year but started to show improvement in the latter half of the year and finished with a strong fourth quarter.

Rental activity was also strong throughout 2010, especially rentals under RPO contracts, as customer remained reluctant or lacked financial resources to purchase equipment. Customers' willingness to purchase equipment increased as construction markets improved and their backlog of business grew. This was particularly evident with larger, more expensive equipment (articulated trucks, large loaders and cranes), many of which were rented under RPO contracts. As a result of a high level of rental purchase option conversions in December, particularly in Alberta, equipment sales in the fourth quarter were very strong.

After a slow first quarter, as construction activity picked up, product support activity also slowly started to increase in 2010, however, many customers, particularly in Ontario, continued to only make critical repairs necessary to keep their equipment in service. The situation improved further in the fourth quarter and parts and service activity increased relative to the fourth quarter of 2009. In Alberta, as customers began using equipment that had sat idle through the recession in 2009, product support revenues increased throughout the year and remained strong into the fourth quarter.

Revenues

Strongco's revenues generally followed this market trend throughout 2010. First quarter revenues remained depressed but increased each quarter thereafter and finished the year with a strong fourth quarter 15% over the third quarter and 36% higher than in the fourth quarter of 2009. Revenues increased in all categories, (sales, rentals and product support) were up in the quarter and in all regions of the country.

A breakdown of revenue for the three months ended December 31, 2010, 2009 and 2008 were as follows:

  Three Months Ended December 31, 2010/09  
[$ millions] 2010 2009 % Var  
Eastern Canada (Atlantic and Quebec)            
Equipment Sales $ 23.4 $ 18.8 24 %
Equipment Rentals $ 2.7 $ 1.5 80 %
Product Support $ 8.8 $ 8.7 1 %
Total Eastern Canada $ 34.9 $ 29.0 20 %
   
Central Canada (Ontario)            
Equipment Sales $ 23.6 $ 17.4 36 %
Equipment Rentals $ 1.7 $ 1.7 0 %
Product Support $ 8.5 $ 8.1 5 %
Total Central Canada $ 33.8 $ 27.2 24 %
   
Western Canada (Manitoba to BC)            
Equipment Sales $ 15.1 $ 6.1 148 %
Equipment Rentals $ 2.9 $ 1.0 192 %
Product Support $ 5.1 $ 4.2 23 %
Total Western Canada $ 23.1 $ 11.3 104 %
   
TOTAL Equipment Distribution            
Equipment Sales $ 62.1 $ 42.3 47 %
Equipment Rentals $ 7.3 $ 4.2 74 %
Product Support $ 22.4 $ 21.0 7 %
TOTAL Equipment Distribution $ 91.8 $ 67.5 36 %

Equipment Sales

Strongco's equipment sales grew by 24% over the third quarter to $62.1 million and were up 47% from sales in the fourth quarter of 2009. Sales were up across all of Strongco's major brands, including cranes, and in all regions of the country, with the largest increases in Alberta.

As construction markets in Canada continued to recover from the recession of 2009, the markets for heavy equipment in which Strongco operates showed further improvement in the fourth quarter. In the markets Strongco serves, total unit volumes were up an estimated 6% over the third quarter and 15% over the fourth quarter of 2009, with the largest market increase within GPPE which grew by 26% over both the third quarter of 2010 and the fourth quarter of 2009.

Strongco outperformed its market with total unit growth of greater than 30% over the third quarter and more than 45% from the fourth quarter of 2009, and realized substantial market share gains. Strongco's performance was strongest within GPPE with unit volume increasing by more than 95% from the third quarter and more than 57% from the fourth quarter of 2009. The strong GPPE performance was fueled by a significant volume of RPO contracts being converted to sale in the quarter, especially in Alberta and Quebec.

On a regional basis, sales in Western Canada were up 148% over the fourth quarter of 2009. As indicated, sales growth was strongest in Alberta where economic growth has been fueled by recovery in the oil sands. Sales in Northern Alberta benefitted from a large volume of conversions of RPO contracts for articulated trucks entered into earlier in the year, with most conversions occurring in December. Crane sales in Western Canada were also stronger in the fourth quarter compared to the fourth quarter of 2009.

Equipment Sales in Eastern Canada were also stronger in the fourth quarter with an increase of 24% from the fourth quarter of 2009. Sales were especially strong in Quebec, which benefitted from a high volume of RPO conversions and large sales to customers involved in hydro electric projects in the province.

Sales in Central Canada were up 36% from the fourth quarter of 2009 due mainly to a strong sales performance within the Company's Case product line.

Equipment Rentals

As expected, rental activity was higher in 2010 following the recession, as construction markets and customer confidence and financial resources grew. In particular, many customers opted to rent equipment under RPO contracts as construction markets recovered. RPO contracts were particularly high in Alberta and Quebec. While the loss of certain rental contracts for snow removal in Ontario reduced rentals in the first quarter of 2010, Strongco's rental revenues increased each quarter thereafter reflecting customers' preference to rent equipment following the recession. Rental revenues in the fourth quarter were $7.3 million, which was up 6% from the third quarter and up 74% from fourth quarter of 2009. Rental activity was higher generally across all product categories, including cranes, and in all regions of the country.

In Eastern Canada, which has traditionally not been a big rental market, equipment rentals were $2.7 million in the fourth quarter of 2010, which compared to $1.5 million in the same quarter in 2009. Rental revenues in Ontario were $1.7 million, unchanged from a year ago. In Western Canada, which has traditionally been a strong rental market, especially in Alberta, rental revenues in the fourth quarter were $2.9 million, which was almost triple that of a year ago. A large volume of the rentals in Alberta and Quebec were RPO contracts, most of which converted to sale in December which contributed to the stronger sales in the quarter.

Product Support

Relative to the decline in heavy equipment markets that occurred during the recession in 2009, product support activity remained fairly strong as customers opted to repair/refurbish their existing equipment rather than buy new. However, in light of the weak economic conditions, many customers chose to make only critical repairs to the equipment they were working, and as a result parts and service revenues, while representing a higher proportion of total revenues, declined in 2009. While the recession was officially over in 2010, that trend continued through the first half of the year until construction activity and confidence in construction markets improved. As construction markets gained momentum throughout 2010, product support activity and revenues slowly increased.

Strongco's product support revenues in the fourth quarter were $22.4 million, which was up 7% from a year ago. Strongco's operations in Alberta, which experienced a significant drop in product support revenues in 2009, have seen a steady increase in product support activities in 2010 as customers began working their equipment. Parts and service revenues were up 23% in Western Canada in the fourth quarter of 2010 compared to 2009. In Eastern Canada (Quebec and Atlantic), which was least affected by the recession in 2009, product support revenues in the fourth quarter were flat compared to last year. Recovery in construction markets was slowest in Ontario. As a consequence customers in that province continued to curtail servicing their equipment, only making critical repairs when necessary. Some improvement was evident in the fourth quarter and Strongco's operations in Central Canada achieved a 5% increase in product support revenues from a year ago, the first quarterly increase in 2010. Strongco's shops in Ontario have continued to be busier into the first quarter of 2011 which should lead to higher product support revenues.

Gross Margin
 
  Three Months Ended December 31,        
  2010     2009     2010/2009  
Gross Margin $ millions GM%   $ millions GM%   $ Variance % Var  
Equipment Sales $ 6.3 10.1 % $ 3.8 9.0 % $ 2.5 66 %
Equipment Rentals $ 1.1 15.1 % $ 0.6 14.3 % $ 0.5 83 %
Product Support $ 9.0 40.1 % $ 8.7 41.4 % $ 0.3 3 %
Total Gross Margin $ 16.4 17.8 % $ 13.1 19.4 % $ 3.3 25 %

As a result of the higher revenues in the fourth quarter of 2010 compared to the fourth quarter of 2009, Strongco's gross margin increased by $3.3 million, or 25%. As a percentage of revenue, total gross margin in the fourth quarter of 2010 was 17.8%, which was down from 19.4% in the fourth quarter of 2009 due mainly to sales mix.

The majority of the margin increase came from equipment sales which we up 47% in the quarter. Equipment sales in the fourth quarter of 2010 represented a larger proportion of revenues in 2010 which contributed to the decline in the overall gross margin percentage. Equipment sales represented 68% of total revenues in the fourth quarter of 2010, while product support represented only 24%. This compared to 63% equipment sales and 31% product support revenues in the fourth quarter of 2009.

The gross margin on equipment sales was up $2.5 million dollars, or 66%, compared to the fourth quarter of 2009. As a percentage of sales, gross margin on equipment sales was 10.1%, up from 9.0% in 2009 due primarily to the mix of equipment being sold. There was a higher proportion of cranes and larger equipment, which command higher margins, sold in the fourth quarter of 2010.

The gross margin on rentals in the fourth quarter was $1.1 million, which was almost double that of a year ago. The gross margin percentage on rentals improved in the fourth quarter of 2010 to 15.1% compared to 14.3% in the same period in 2009 due primarily to the mix of equipment rented.

The gross margin on product support activities improved to $9.0 million from $8.7 million in the fourth quarter of 2009. As a percentage of revenue, the gross margin on product support activities was 40.1%, which was down slightly from 41.4% in the fourth quarter of 2009 due to a higher proportion of parts sales which command lower margins compared to service revenue and ongoing price competition for parts.

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses in the fourth quarter of 2010 were $13.5 million, which was down from $13.6 million in the third quarter and down from $14.4 million in the fourth quarter of 2009.

In 2009, Strongco implemented cost controls and reengineered its cost structure to reduce costs, which resulted in substantial savings in 2009 and established a lower cost base from which to operate going forward. Realizing the full year impact of the cost reduction initiatives implemented in the prior year, administrative, distribution and selling expenses were down $0.9 million or 6% in the fourth quarter of 2010 compared to the fourth quarter of 2009.

Bad debts and collection costs, which were high in earlier quarters of the year as a result of the bankruptcy and insolvency of certain customers, primarily in Alberta, were minimal in the fourth quarter. Bad debts in the fourth quarter were $0.1 million.

Strongco performs warranty repairs/replacements on behalf of the OEM suppliers of the equipment it distributes and recovers its costs of warranty from the OEM. The warranty recovery rates from the OEM typically provide Strongco a small net recovery or profit from the performance of the warranty work. The volume of warranty work was particularly low in the fourth quarter of 2009 but has been increasing as the economy has been improving and equipment sales increasing and was higher in the fourth quarter of 2010. As a result of the higher volume of warranty work being carried out, the net warranty recovery amount was slightly higher in the fourth quarter of 2010 compared to 2009. Net warranty recovery was higher in the fourth quarter of 2010 by $0.2 million compared to the fourth quarter of 2009.

In the fourth quarter of 2010, Strongco incurred additional costs for recruiting and severance related to replacement of certain employees totaling $0.1 million. In addition, Strongco incurred some additional costs in 2010 related to its conversion to International Financial Reporting Standards (IFRS) totaling approximately $0.1 million in the fourth quarter.

Other Income

Other income and expense is primarily comprised of gains or losses on disposition of fixed assets, foreign exchange gains or losses, service fees received by Strongco as compensation for sales of new equipment by other third parties into the regions where Strongco has distribution rights for that equipment and commissions received from third party financing companies for customer purchase financing Strongco places with such finance companies.

Other income in the fourth quarter of 2010 was $0.3 million compared to income of $0.6 million in the fourth quarter of 2009. In the fourth quarter of 2010, Strongco incurred an unrealized net foreign exchange loss of $0.2 million on forward foreign currency contracts due the continued strength of the Canadian dollar relative to the U.S. dollar in the quarter, while in the fourth quarter of 2009 Strongco incurred a small net foreign gain of $0.3 million.

Interest Expense

Strongco's interest expense was $1.4 million in the fourth quarter of 2010 compared to $1.1 million in fourth quarter of 2009. The increase is due mainly to a higher average balance of interest bearing debt in the fourth quarter of 2010 compared to the fourth quarter of 2009.

Strongco's interest bearing debt comprises bank indebtedness and interest bearing equipment notes. Strongco typically finances equipment inventory under lines of credit available from various non-bank finance companies. Most equipment financing has interest free periods up to twelve months from the date of financing, after which the equipment notes become interest bearing. The rate of interest on the Company's bank indebtedness and interest bearing equipment notes varies with Canadian chartered bank prime rate ("prime rate") and Canadian Bankers Acceptances Rates ("BA rates"). (See discussion under "Financial Condition and Liquidity"). Prime rates and BA rates declined during the recession in 2009 but have increased in 2010.

During 2009, in response to the recession, Strongco reduced equipment inventories and correspondingly reduced equipment notes payable. As demand for heavy equipment and equipment sales have increased throughout 2010, Strongco has increased inventory levels in support of the growth and equipment notes have increased correspondingly. As a result, the average balance of interest bearing equipment notes outstanding was higher in the fourth quarter of 2010 compared to the fourth quarter of 2009. Strongco's average bank debt levels were also higher in the fourth quarter of 2010 than in the fourth quarter of 2009.

Prime lending rates have been increasing in 2010 following the recession, which has resulted in higher rates of interest being charged on the Company's bank debt and equipment notes in the year. The effective average interest rate charged on Strongco's equipment notes was 5.7% in the fourth quarter of 2010 compared to 5.4% in the fourth quarter of 2009 and the effective average interest rate charged the Company's bank indebtedness in the fourth quarter of 2010 was 5.0% compared to 2.8 in the fourth quarter of 2009. The higher effective interest rates, combined with the higher average balance of interest bearing equipment notes and average bank debt levels in fourth quarter of 2010, resulted in a higher interest expense in the quarter.

Net Income (Loss)

Following conversion to a corporation on July 1, 2010, Strongco is now subject to income tax at corporate tax rates, whereas previously, as an income trust, the Fund was not subject to corporate tax. In addition, as a consequence of conversion, Strongco is now able to utilize tax losses, including tax losses previously unrecognized from the Fund. This resulted in a provision for income tax in the fourth quarter of 2010 of $0.3 million.

As a result of the strong revenue performance in the quarter, Strongco's net income in the fourth quarter of 2010 of $1.5 million ($0.14 per share), which was significantly improved from a net loss of $2.1 million (loss of $0.20 per unit) in the fourth quarter of 2009.

EBITDA

EBITDA in the fourth quarter of 2010 was $9.3 million which compares to $2.9 million in the fourth quarter of 2009. EBITDA was calculated as follows:

  Three Months Ended December 31,    
  2010 2009   2010/2009
  $ millions $ millions   $ Variance
Net Income $ 1.5 $ (2.1 ) $ 3.6
Add Back:              
  Interest   1.4   1.1     0.2
  Income taxes   0.3   0.3     -
  Amortization of capital assets   0.2   0.3     -
  Amortization of equipment inventory on rent   5.9   3.3     2.6
EBITDA (note 1) $ 9.3 $ 2.9   $ 6.4
 
Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of intangible assets, amortization of equipment inventory on rent, and goodwill impairment. EBITDA is a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not an earnings measure recognized by GAAP, does not have standardized meanings prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. The Company's management believes that EBITDA is an important supplemental measure in evaluating the Company's performance and in determining whether to invest in Shares. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with GAAP as indicators of the Company's performance or to cash flows from operating, investing and financing activities as measures of the Company's liquidity and cash flows. The Company's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, the Company's EBITDA may not be comparable to similar measures presented by other issuers.

Cash Flow

Cash Flow Used In Operating Activities:

As a result of the strong revenues and earnings in the fourth quarter of 2010, Strongco generated $8.0 million of cash before changes in working capital. This was offset by cash used in building working capital of $8.0 million resulting in no cash being provided from operating activities. By comparison, Strongco generated only $0.5 million of cash before changes in working capital in the fourth quarter of 2009, and used cash of $1.8 million to increase working capital which resulted in a use of cash from operating activities of continuing operations $1.3 million in the fourth quarter of 2009.

The components of the cash used in and provided by operating activities were as follows:

  Three Months Ended December 31,  
($ millions) 2010   2009  
Earnings (loss) from continuing operations $ 1.5   $ (2.1 )
Add (deduct) items not involving an outlay (inflow) of cash            
  Amortization of equipment inventory on rent   5.9     3.3  
  Amortization of capital assets   0.2     0.3  
  Stock based compensation   (0.1 )   0.1  
  Future income taxes (recovery)   0.3     0.2  
  Other   0.2     (1.3 )
  $ 8.0   $ 0.5  
Changes in non-cash working capital balances   (8.0 )   (1.8 )
Cash used in operating activities of continuing operations   -     (1.3 )
Cash provided by operating activities of discontinued operations   -     0.1  
Cash used in operating activities $ -   $ (1.2 )

Items not involving the outlay of cash includes amortization of equipment inventory on rent of $5.9 million in the fourth quarter of 2010 which compares to $3.3 million in the fourth quarter of 2009. Higher volumes of equipment rentals in the fourth quarter of 2010 resulted in the higher amortization of equipment inventory on rent.

The components of the (increase)/decrease in non-cash working capital was as follows:

Net (Increase)/Decrease in Non-cash Working Capital Changes in Non-Cash Working Capital  
(millions) Three months ended December 31,  
(increase)/decrease 2010   2009  
Accounts receivable $ (3.4 ) $ 6.3  
Inventories   11.8     17.0  
Depreciation of equipment inventory on rent   (5.9 )   (3.3 )
Prepaids   0.7     -  
Income & other taxes receivable   -     (0.5 )
  $ 3.2   $ 19.5  
increase/(decrease)            
Accounts payable and accrued liabilities   (4.3 )   (8.8 )
Deferred revenue & customer deposits   0.4     0.2  
Equipment notes payable - non-interest bearing   (5.2 )   (12.6 )
Equipment notes payable - interest bearing   (2.1 )   (0.1 )
  $ (11.2 ) $ (21.3 )
Net Increase in Non-cash Working Capital $ (8.0 ) $ (1.8 )

Revenues increased in the fourth quarter of 2010 which resulted in an increase in accounts receivable in the quarter of $3.4 million. By comparison, revenues were lower in the fourth quarter of 2009 which resulted in a decrease in accounts receivable of $6.3 million in the final quarter of 2009. The average age of receivables outstanding at the end of the year was unchanged from September 2010 at approximately 38 days, slightly improved from 40 days a year ago.

While following the recession, inventories had grown in support of the increase in business through 2010, inventories declined in the fourth quarter of the year due to the strong sales and in particular, the high level of RPO conversions. In 2009, in response to ongoing weakness in the markets for heavy equipment, Strongco management significantly curtailed the amount of equipment and parts inventory purchased and as a result, in the fourth quarter of 2009 inventory levels dropped significantly.

Accounts payable and accrued liabilities were down on the fourth quarter of 2010 due primarily to the timing of payments and also due to lower purchases of parts inventory in the last quarter. In 2009, Strongco managed expenses and reduced spending levels throughout the year in response to the weak markets, which in turn resulted in a reduction of accounts payable in the final quarter of 2009.

As a result of the strong sales of equipment, including RPO conversions, equipment notes were reduced during the fourth quarter of 2010. While sales were lower in the fourth quarter of 2009, reduced purchases of equipment inventory resulted in a reduction of equipment notes in the final quarter of the prior year 2009.

Cash Provided By (Used In) Investing Activities:

Net cash used in investing activities of continuing operations amounted to $0.1 million in the fourth quarter of 2010 primarily related to the upgrade of facilities and purchase of miscellaneous shop equipment. This compared to capital expenditures of $0.3 million in the fourth quarter of 2009 related mainly facilities upgrades and miscellaneous shop equipment.

The release of the portion of the purchase price on the sale of Strongco Engineered Systems that had been held in escrow provided cash of $0.5 million from investing activities of discontinued operations in the fourth quarter of 2009.

The components of the cash used in operating activities were as follows:

  Three Months Ended
December 31,
 
[$ millions] 2010   2009  
   
Purchase of capital assets $ (0.1 ) $ (0.3 )
Cash used in investing activities of continuing operations   (0.1 )   (0.3 )
Cash provided by investing activities of discontinued operations   -     0.5  
Cash used in investing activities $ (0.1 ) $ 0.2  

Cash Provided By Financing Activities:

Financing activities generated $0.2 million of cash in the fourth quarter of 2010 from an increase in bank debt used to fund operating and investing activities. By comparison, in the fourth quarter 2009, borrowing under the Company's bank facility increased by $1.0 million.

Cash Provided By Financing Activities Three Months Ended
December 31,
[$ millions] 2010 2009
         
Increase in bank indebtedness $ 0.2 $ 1.0
Cash provided by financing activities $ 0.2 $ 1.0

SUMMARY OF QUARTERLY DATA

In general, business activity in the Equipment Distribution segment follows a weather related pattern of seasonality. Typically, the first quarter is the weakest quarter as construction and infrastructure activity is constrained in the winter months. This is followed by a strong gain in the second quarter as construction and other contracts begin to be tendered and companies begin to prepare for summer activity. The third quarter generally tends to be slightly slower from an equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support activities. Fourth quarter activity generally strengthens as customers make year-end capital spending decisions and exercise purchase options on equipment which has previously gone out on RPO's. In addition, purchases of snow removal equipment are typically made in the fourth quarter. However, as a result of weak economic conditions and significantly reduced construction activity in Canada, the markets for heavy equipment in 2009 were extremely weak throughout the year. Construction markets and demand for heavy equipment have improved in 2010 but volumes remained below historic pre-recession levels.

A summary of quarterly results for the current and previous two years is as follows:

              2010  
($ millions, except per share/unit amounts) Q4   Q3   Q2   Q1  
   
Revenue $ 91.8   $ 79.6   $ 69.6   $ 53.7  
Earnings (loss) from continuing operations before income taxes   1.5     0.7     (0.5 )   (2.1 )
Net income (loss)   1.5     0.7     (0.5 )   (2.1 )
                         
Basic and diluted earnings (loss) per share/unit $ 0.14   $ 0.07   $ (0.05 ) $ (0.20 )
   
   
              2009  
($ millions, except per unit amounts) Q4   Q3   Q2   Q1  
   
Revenue $ 67.5   $ 74.6   $ 76.7   $ 73.0  
Earnings (loss) from continuing operations before income taxes   (1.8 )   0.1     2.0     1.2  
Net income (loss)   (2.1 )   (0.5 )   1.4     1.2  
   
Basic and diluted earnings (loss) per unit $ (0.20 ) $ (0.05 ) $ 0.14   $ 0.11  
   
              2008  
($ millions, except per unit amounts) Q4   Q3   Q2   Q1  
   
Revenue $ 103.7   $ 98.7   $ 119.2   $ 76.9  
Earnings (loss) from continuing operations before income taxes   (2.4 )   (0.2 )   3.1     (0.6 )
Net income (loss)   (2.6 )   (0.1 )   2.9     (0.6 )
   
Basic and diluted earnings (loss) per unit $ (0.25 ) $ (0.01 ) $ 0.27   $ (0.05 )

A discussion of the Company's previous quarterly results can be found in the Company's quarterly Management's Discussion and Analysis reports available on SEDAR at www.sedar.com.

CONTRACTUAL OBLIGATIONS

The Company has contractual obligations for operating lease commitments totaling $24.1 million. In addition, the Company has contingent contractual obligations where it has agreed to buy back equipment from customers at the option of the customer for a specified price at future dates ("buy back contracts"). These buy back contracts are subject to certain conditions being met by the customer and range in term from three to ten years. The Company's maximum potential losses pursuant to the majority of these buy back contracts are limited, under an agreement with the original equipment manufacturer, to 10% of the original sale amounts. In addition, this agreement provides a financing arrangement in order to facilitate the buy back of equipment. As at December 31, 2010, the total buy back contracts outstanding were $10.3 million, which compared to $9.8 million outstanding at December 31, 2009. A reserve of $0.9 million has been accrued in the Company's accounts as at December 31, 2010 with respect to these commitments, compared to a reserve of $0.7 million a year ago.

The Company has provided a guarantee of lease payments under the assignment of a property lease which expires January 31, 2014. Total lease payments from January 1, 2011 to January 31, 2014 are $0.5 million.

Contractual obligations are set out in the following tables. Management believes that the Company will generate sufficient cash flow from operations to meet its contractual obligations.

  Payment due by period
($ millions) Total Less Than
1 Year
1 to 3
Years
4 to 5
Years
After
5 Years
Operating leases $ 24.1 $ 6.2 $ 11.4 $ 4.4 $ 2.1
 
  Contingent obligation by period
($ millions) Total Less Than
1 Year
1 to 3
Years
4 to 5
Years
After
5 Years
Buy back contracts $ 10.3 $ 1.4 $ 6.6 $ 2.3 $ 0.0

SHAREHOLDER CAPITAL

The Company is authorized to issue an unlimited number of shares. All shares are of the same class of common shares with equal rights and privileges. Effective July 1, 2010 Strongco converted from a trust to a corporation and all outstanding trust units of the Fund were exchanged for shares of Strongco Corporation on a one for one basis after which the Fund was wound up into Strongco Corporation (see discussion under heading "Conversion to a Corporation")

Common Shares/Trust Units Issued and Outstanding Shares Shares/Units  
   
Units as at December 31, 2009 10,508,719  
Units Issued January 1, 2009 to June 30, 2010 -  
Units exchanged for common shares on conversion to a corporation July 1, 2010 (10,508,719 )
Common shares issued in exchange for units on conversion to a corporation July 1, 2010 10,508,719  
Common shares issued July 2, 2010 to December 31, 2010 -  
Common shares outstanding as at December 31, 2010 10,508,719  

OUTLOOK

Construction markets began to show signs of recovery toward the end of the second quarter of the last year and continued to pick up through the balance of 2010 and into 2011. With that, demand for equipment has increased. The economy and construction markets across Canada are expected to continue to improve throughout 2011, which in turn, will lead to increased demand for heavy equipment, and increased willingness of customers to purchase equipment. Strongco's equipment sales backlogs, which rose during the first half of 2010 from the very low levels that existed at the end of 2009, remained strong through the balance of the year and into 2011, a positive sign that demand for heavy equipment is improving.

As expected following a recession, recovery has been more evident in the markets for earth moving equipment. The markets for cranes, which are typically utilized in latter stages of construction, have been slower to recover, but demand for cranes started to show improvement towards the end of 2010 and is expected to increase in 2011 as construction activity continues to grow. Strongco's sales backlog for cranes has also risen, which is a sign that demand is improving.

An important contribution to the anticipated growth in 2011 is expected from Alberta. Oil prices have continued to show strength and stability and with that, the economy in Alberta has continued to improve. Activity in the oil sands has accelerated and which has led to increase spending for heavy equipment in northern Alberta. That improvement was particularly evident late in 2010. In addition, there has been an increase in construction activity in general throughout the province, especially in the latter half of 2010 and sales backlogs have increased. There has also been an increase in equipment rental activity in Alberta. Consequently, management is cautiously optimistic that heavy equipment markets in Alberta will continue to improve in 2011.

Most OEM's have scaled back production and reduced capacity in response to the weak North American economy in 2009 and 2010. This resulted in increased delivery times and shortages of certain types of equipment. A welcome upturn in the sales of equipment in the United States in Q4 2010 has OEM's struggling to increase production capacity and improve lead time and availability. There are indications of improvement but the transition to the new tier 4 engine technology in 2011 is an added complication which may lead to longer lead times and reduced supply. Management is optimistic that Strongco's significant position with its OEMs will offset any possibility of equipment shortages.

Management remains cautiously optimistic that the improving trend evidenced in Canada in the latter half of 2010 will continue in 2011 and expects demand for heavy equipment will grow which will leads to increased revenues in 2011. In addition, the acquisition of Chadwick-BaRoss, effective February 1, 2011 will contribute to improved sales levels for Strongco in 2011. Chadwick-BaRoss services a broad range of market sectors in Maine, New Hampshire and Massachusetts, similar to Strongco in Canada, and the expectation is that the demand for equipment in these geographies will show a modest increase from recent depressed levels at which Chadwick-BaRoss has been profitable.

NON-GAAP MEASURES

"EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of intangible assets, amortization of equipment inventory on rent, and goodwill impairment. EBITDA is a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not an earnings measure recognized by GAAP, does not have standardized meanings prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. The Company's management believes that EBITDA is an important supplemental measure in evaluating the Company's performance and in determining whether to invest in Shares. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with GAAP as indicators of the Company's performance or to cash flows from operating, investing and financing activities as measures of the Company's liquidity and cash flows. The Company's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, the Company's EBITDA may not be comparable to similar measures presented by other issuers.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the financial statements. The Company bases its estimates and assumptions on past experience and various other assumptions that are believed to be reasonable in the circumstances. This involves varying degrees of judgment and uncertainty which may result in a difference in actual results from these estimates. The more significant estimates are as follows:

Inventory Valuation

The value of the Company's new and used equipment is evaluated by management throughout each year. Where appropriate, a provision is recorded against the book value of specific pieces of equipment to ensure that inventory values reflect the lower of cost and estimated net realizable value. The Company identifies slow moving or obsolete parts inventory and estimates appropriate obsolescence provisions by aging the inventory. The Company takes advantage of supplier programs that allow for the return of eligible parts for credit within specified time periods. The inventory provision as at December 31, 2010 with changes from December 31, 2009 is as follows:

Provision for Inventory Obsolescence [$ millions]  
Provision for inventory obsolescence as at December 31, 2009 $ 3.1  
Inventory disposed of during the year   (1.0 )
Additional provisions made during the year   0.9  
Provision for inventory obsolescence as at December 31, 2010 $ 3.0  

Allowance for Doubtful Accounts

The Company performs credit evaluations of customers and limits the amount of credit extended to customers as appropriate. The Company is however exposed to credit risk with respect to accounts receivable and maintains provisions for possible credit losses based upon historical experience and known circumstances. The allowance for doubtful accounts as at December 31, 2010 with changes from December 31, 2009 is as follows:

Allowance for Doubtful Accounts    
Allowance for doubtful accounts as at December 31, 2009 $ 1.4
Accounts written off during the year   (0.5)
Additional provisions made during the year   0.3
Allowance for doubtful accounts as at December 31, 2010 $ 1.2

Post Retirement Obligations

Strongco performs a valuation at least every three years to determine the actuarial present value of the accrued pension and other non-pension post retirement obligations. Pension costs are accounted for and disclosed in the notes to the financial statements on an accrual basis. Strongco records employee future benefit costs other than pensions on an accrual basis. The accrual costs are determined by independent actuaries using the projected benefit method prorated on service and based on assumptions that reflect management's best estimates. The assumptions were determined by management recognizing the recommendations of Strongco's actuaries. These key assumptions include the rate used to discount obligations, the expected rate of return on plan assets, the rate of compensation increase and the growth rate of per capita health care costs.

The discount rate is used to determine the present value of future cash flows that we expect will be required to pay employee benefit obligations. Management's assumptions of the discount rate are based on current interest rates on long-term debt of high quality corporate issuers.

The assumed return on pension plan assets of 6.5% per annum is based on expectations of long-term rates of return at the beginning of the fiscal year and reflects a pension asset mix consistent with the Company's investment policy.

The costs of employee future benefits other than pension are determined at the beginning of the year and are based on assumptions for expected claims experience and future health care cost inflation.

Changes in assumptions will affect the accrued benefit obligation of Strongco's employee future benefits and the future years' amounts that will be charged to results of operations.

Future Income Taxes

At each quarter end the Company evaluates the value and timing of the Company's temporary differences. Future income tax assets and liabilities, measured at substantively enacted tax rates, are recognized for all temporary differences caused when the tax bases of assets and liabilities differ from those reported in the consolidated financial statements.

Changes or differences in these estimates or assumptions may result in changes to the current or future tax balances on the consolidated balance sheet, a charge or credit to income tax expense in the consolidated statements of earnings and may result in cash payments or receipts. Where appropriate, the provision for future income taxes and future income taxes payable are adjusted to reflect management's best estimate of the Company's future income tax accounts.

RISK AND UNCERTAINTIES

Strongco's financial performance is subject to certain risk factors which may affect any or all of its business sectors. The following is a summary of risk factors which are felt to be the most relevant. These risks and uncertainties are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or which the Company currently considers immaterial, may also impair the operations of the Company. If any such risks actually occur, the business, financial condition, or liquidity and results of operations of the Company, the ability of the Company to make cash dividends to shareholders and the trading price of the Company's shares could be adversely affected.

BUSINESS AND ECONOMIC CYCLES

Strongco operates in a capital intensive environment. Strongco's customer base consists of companies operating in the construction and urban infrastructure, aggregates, forestry, mining, municipal, utility, industrial and resource sectors which are all affected by trends in general economic conditions within their respective markets. Changes in interest rates, commodity prices, exchange rates, availability of capital and general economic prospects may all impact their businesses by affecting levels of consumer, corporate and government spending. Strongco's business and financial performance is largely affected by the impact of such business cycle factors on its customer base. The Company has endeavored to minimize this risk by: (i) operating in various geographic territories across Canada with the belief that not all regions are subject to the same economic factors at the same time, (ii) serving a variety of industries which respond differently at different points in time to business cycles and (iii) seeking to increase the Company's focus on customer support (parts and service) activities which are less subject to changes in the economic cycle.

COMPETITION

The Company faces strong competition from various distributors of products which compete with the products it sells. Strongco competes with regional and local distributors of competing product lines. Strongco competes on the basis of: (i) relationships maintained with customers over many years of service; (ii) prompt customer service through a network of sales and service facilities in key locations; (iii) access to products; and (iv) the quality and price of their products. In most product lines in most geographic areas in which Strongco operates, their main competitors are distributors of products manufactured by Caterpillar, John Deere, Komatsu and Hitachi, and other smaller brands.

MANUFACTURER RISK

Most of Strongco's equipment distribution business consists of selling and servicing mobile equipment products manufactured by others. As such, Strongco's financial results may be directly impacted by: (i) the ability of the manufacturers it represents to provide high quality, innovative and widely accepted products on a timely and cost effective basis and (ii) the continued independence and financial viability of such manufacturers.

Most of Strongco's equipment distribution business is governed by distribution agreements with the original equipment manufacturers, including Volvo, Case and Manitowoc. These agreements grant the right to distribute the manufacturers' products within defined territories which typically cover an entire province. It is an industry practice that, within a defined territory, a manufacturer grants distribution rights to only one distributor. This is true of all the distribution arrangements entered into by Strongco. Most distribution agreements are cancelable upon 60 to 90 days notice by either party.

Some of the Strongco's equipment suppliers provide floor plan financing to assist with the purchase of equipment inventory. In some cases this is done by the manufacturer, and in other cases the manufacturer engages a third party lender to provide the financing. Most floor plan arrangements include an interest-free period of up to seven months.

The termination of one or more of Strongco's distribution agreements with its original equipment manufacturers, as a result of a change in control of the manufacturer or otherwise, may have a negative impact on the operations of Strongco.

In addition, availability of products for sale is dependent upon the absence of significant constraints on supply of products from original equipment manufacturers. During times of intense demand or during any disruption of the production of such equipment, Strongco's equipment manufacturers may find it necessary to allocate their limited supply of particular products among their distributors.

The ability of Strongco to maintain and expand its customer base is dependent upon the ability of Strongco's suppliers to continuously improve and sustain the high quality of their products at a reasonable cost. The quality and reputation of their products is not within Strongco's control and there can be no assurance that Strongco's suppliers will be successful in improving and sustaining the quality of their products. The failure of Strongco's suppliers to maintain a market presence could have a material impact upon the earnings of the Company.

The Company believes that this element of risk has been mitigated through the representation of its equipment manufacturers with demonstrated ability to produce a competitive, well accepted, high quality product range and by distributing products of multiple manufacturers.

In addition, distribution agreements with these manufacturers are cancelable by either party within a relatively short notice period as specified in the relevant distribution agreement. However, Strongco believes that it has established strong relationships with its key manufacturers and maintains significant market share for their product and as a result is at little risk of distribution agreements being cancelled.

CONTINGENCIES

In the ordinary course of business, the Company may be exposed to contingent liabilities in varying amounts and for which provisions have been made in the consolidated financial statements as appropriate. These liabilities could arise from litigation, environmental matters or other sources.

A statement of claim has been filed naming a division of the Company as one of several defendants in proceedings under the Superior Court of Quebec. The action claims errors and omissions in the contractual execution of work entrusted to the defendants and names the Company as jointly and severally liable for damages of approximately $5.9 million. The Company's counsel has filed a statement of defense and discoveries are underway. A trial date has not yet been set. Although it is impossible to predict the outcome at this time, based on the opinion of external legal counsel, the Company believes that they have a strong defense against the claim and that it is without merit.

A statement of claim has been filed naming a former division of the Company as one of several defendants in proceedings under the Queens Bench of Manitoba. The action claims errors and omissions in the contractual execution of work entrusted to the defendants and names the Company as jointly and severally liable for damages of approximately $4.9 million. Although the outcome is indeterminable at this early stage of the proceedings, the Company believes that they have a strong defence against the claim and that it is without merit. The Company's insurer has provided conditional coverage for this claim.

DEPENDENCE ON KEY PERSONNEL

The expertise and experience of its senior management is an important factor in Strongco's success. Strongco's continued success is thus dependent on its ability to attract and retain experienced management.

INFORMATION SYSTEMS

The Company utilizes a legacy business system which has been successfully in operation for over 15 years. As with any business system, it is necessary to evaluate its adequacy and support of current and future business demands. The system was written and was supported by the Company's Information Systems Manager who retired on December 31, 2006. The Company is utilizing an outside consultant to support its current system and is currently evaluating alternative systems as potential replacements for its current system.

FOREIGN EXCHANGE

While the majority of the Company's sales are in Canadian dollars, significant portions of its purchases are in U.S. dollars. While the Company believes that it can maintain margins over the long term, short, sharp fluctuations in exchange rates may have a short term impact on earnings. In order to minimize the exposure to fluctuations in exchange rates, the Company enters into foreign exchange forward contracts on a transaction specific basis.

INTEREST RATE

Interest rate risk arises from potential changes in interest rates which impacts the cost of borrowing. The majority of the Company's debt is floating rate debt which exposes the Company to fluctuations in short term interest rates. See discussion under "Cash Flow, Financial Resources and Liquidity" above.

RISKS RELATING TO THE SHARES

Unpredictability and Volatility of Share Price

A publicly-traded company will not necessarily trade at values determined by reference to the underlying value of its business. The prices at which the shares will trade cannot be predicted. The market price of the shares could be subject to significant fluctuations in response to variations in quarterly operating results and other factors. The annual yield on the shares as compared to the annual yield on other financial instruments may also influence the price of shares in the public trading markets. In addition, the securities markets have experienced significant price and volume fluctuations from time to time in recent years that often have been unrelated or disproportionate to the operating performance of particular issuers. These broad fluctuations may adversely affect the market price of the shares.

LEVERAGE AND RESTRICTIVE COVENANTS

The existing credit facilities contain restrictive covenants that limit the discretion of Strongco's management with respect to certain business matters and may, in certain circumstances, restrict the Company's ability to declare dividends, which could adversely impact cash dividends on the shares. These covenants place restrictions on, among other things, the ability of the Company to incur additional indebtedness, to create other security interests, to complete amalgamations and acquisitions, make capital expenditures, to pay dividends or make certain other payments and guarantees and to sell or otherwise dispose of assets. The existing credit facilities also contain financial covenants requiring the Company to satisfy financial ratios and tests, (see discussion under 'Financial Condition and Liquidity' above). A failure of the Company to comply with its obligations under the existing credit facilities could result in an event of default which, if not cured or waived, could permit the acceleration of the relevant indebtedness. The existing credit facilities are secured by customary security for transactions of this type, including first ranking security over all present and future personal property of the Company, a mortgage over the Company's central real property and an assignment of insurance. If the Company is not able to meet its debt service obligations, it risks the loss of some or all of its assets to foreclosure or sale. There can be no assurance that, at any particular time, if the indebtedness under the existing credit facilities were to be accelerated, the Company's assets would be sufficient to repay in full that indebtedness.

The existing credit facilities are payable on demand following an event of default and are renewable annually. If the existing credit facilities are replaced by new debt that has less favourable terms or if the Company cannot refinance its debt, funds available for operations may be adversely impacted.

RESTRICTIONS ON POTENTIAL GROWTH

The payout by the Company of a significant portion of its operating cash flow will make additional capital and operating expenditures dependent on increased cash flow or additional financing in the future. Lack of those funds could limit the future growth of the Company and its cash flow.

DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

Disclosure Controls

Management is responsible for establishing and maintaining disclosure controls and procedures in order to provide reasonable assurance that material information relating to the Company is made known to them in a timely manner and that information required to be disclosed is reported within time periods prescribed by applicable securities legislation. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on management's evaluation of the design and effectiveness of the Company's disclosure controls and procedures, the Company's Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed and operating effectively as of December 31, 2010 to provide reasonable assurance that the information being disclosed is recorded, summarized and reported as required.

Internal Controls Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles. Internal control systems, no matter how well designed, have inherent limitations and therefore can only provide reasonable assurance as to the effectiveness of internal controls over financial reporting, including the possibility of human error and the circumvention or overriding of the controls and procedures. Management used the Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as the control framework in designing its internal controls over financial reporting. Based on management's design and testing of the effectiveness of the Company's internal controls over financial reporting, the Company's Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed and operating effectively as of December 31, 2010 to provide reasonable assurance that the financial information being reported is materially accurate. During the fourth quarter ended December 31, 2010, there have been no changes in the design of the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Business Combinations

In January 2009, the AcSB issued the new the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1582 Business Combinations, Section 1601 Consolidated Financial Statements, and Section 1602 Non-controlling Interests. Section 1582 specifies a number of changes, including an expanded definition of a business, a requirement to measure all business acquisitions at fair value, a requirement to measure non-controlling interests at fair value, and a requirement to recognize acquisition-related costs as expenses. Section 1601 establishes the standards for preparing consolidated financial statements. Section 1602 specifies that non-controlling interests be treated as a separate component of equity, not as a liability or other item outside of equity. These new standards are harmonized with International Financial Reporting Standards (IFRS). The new standards will become effective in 2011, however early adoption is permitted. The Company has not yet determined the impact of these standards on the consolidated statements.

International Financial Reporting Standards ("IFRS")

Publicly accountable enterprises are required to adopt International Financial Reporting Standards ("IFRS") for fiscal years beginning on or after January 1, 2011. Accordingly, the first annual consolidated financial statements in accordance with IFRS will be for the year ending December 31, 2011 and will include the comparative period of 2010 and the opening balance sheet as at January 1, 2010. Starting in the first quarter of 2011, the Company will provide unaudited consolidated financial statements in accordance with IFRS including comparative figures for 2010.

The Company has established a three phased changeover methodology and an internal IFRS project team that is led by executive management and includes key participants from various areas of the Company as necessary to achieve a smooth transition to IFRS. Regular progress reporting to the audit committee on the status of the IFRS implementation has been ongoing since 2009.

Impact of IFRS conversion

A number of differences have been identified which include: the initial adoption of IFRS; employee benefits, property, plant and equipment, impairment of assets, the classification of trust units, share-based payments, provisions and income taxes.

The information below is provided to allow investors and others to obtain an understanding of the unaudited effects on the Company's consolidated financial statements. The Company is in the process of finalizing the financial reporting impacts of adopting IFRS. The full impacts of adoption on the financial position and results of operations of the Company have not been fully assessed and approved by the Board of Directors, and have not been audited. Accordingly, the items described below should not be regarded as a complete description of the changes resulting from the transition to IFRS. Readers are cautioned that it may not be appropriate to use such information for any other purpose and the information is subject to change.

To date, the Company has made decisions relating to certain IFRS policies as discussed below. The following information is contingent on the standards that will be effective as at December 31, 2011, the date of the Company's first audited annual consolidated financial statements prepared in accordance with IFRS.

The table below reconciles shareholders' equity from the audited consolidated financial statements of the Company under Canadian GAAP as at December 31, 2009 to shareholders' equity under IFRS at January 1, 2010, based on the analysis, elections and exemptions completed to date as further discussed below. As the Company is still in the process of finalizing its assessment of the full impacts of adoption of IFRS on the financial position and results of operations of the Company, these adjustments must be considered preliminary and subject to change. These adjustments are unaudited and have not been approved by the Board of Directors.

     
As at January 1, 2010 (in $ millions)  
   
Shareholders' equity under Canadian GAAP (audited) 54,648  
   
IFRS Adjustments: (unaudited)    
   
Re-measurement of deferred tax liability using the tax rate applicable to undistributed profits (1,247 )
   
Stock-based compensation in accordance with IFRS 2 (148 )
   
IFRS 1 election - Recognition of unamortized actuarial losses (4,711 )
   
Record additional provisions in accordance with IAS 37 (83 )
Record employee benefit liability in accordance with IFRIC 14 (805 )
   
Shareholders' equity under IFRS (unaudited) 47,654  
     
  • First-time adoption of IFRS ("IFRS 1")

    IFRS 1 provides the framework for the first-time adoption of IFRS and outlines that, in general, an entity shall apply the principles under IFRS retrospectively and that adjustments arising on conversion from Canadian GAAP to IFRS shall be directly recognized in retained earnings. However, IFRS 1 also provides a number of optional exemptions from retrospective application of certain IFRS requirements as well as mandatory exceptions which prohibit retrospective application of standards.

    The Company will apply the following optional exemptions on transition to IFRS to:
    • not restate the accounting of past business combinations in accordance with IFRS 3R, Business Combinations that have occurred prior to January 1, 2010;
    • not apply the accounting for share based payments under IFRS 2 to awards that were granted after November 7, 2002 that vested before the later of (a) the date of transition to IFRSs and (b) January 1, 2005; and
    • recognize actuarial losses as at January 1, 2010, totaling $8,789 ($4,711 after tax), in retained earnings.

  • Employee Benefits

    IAS 19, Employee Benefits ("IAS 19") requires the past service cost element of defined benefit plans to be expensed on an accelerated basis, with vested past service costs being expensed immediately and unvested past service costs being recognized on a straight-line basis until the benefits become vested. Under Canadian GAAP, past service costs are generally amortized on a straight-line basis over the expected average remaining service period of active employees in the defined benefit plan. In addition, actuarial gains and losses are permitted under IAS 19 to be recognized directly in equity, rather than through earnings, as required under Canadian GAAP. Further, IFRS provides for an "asset ceiling" test under which the recoverability of a pension asset needs to be assessed. Canadian GAAP also limits the carrying amount of the accrued benefit asset but the calculation is different than under IFRS.

    The Company will follow the method of recognizing actuarial gains and losses directly in equity. In addition, the Company completed the calculation with respect to the limitation of the defined benefit asset under IFRIC 14 and will record a liability of approximately $1,503 ($805 after tax) at January 1, 2010.

  • Property, plant and equipment

    While IAS 16 – Property, Plant and Equipment ("IAS 16") and Canadian GAAP contain the same basic principles; differences in application of the standards exist. For instance, consideration needs to be given to whether there are individually significant components of an item of property, plant and equipment that need to be identified and depreciated based on their specific useful lives. In addition, unlike Canadian GAAP, IFRS permits property, plant and equipment to be measured using the cost model or the revaluation model.

    The Company will continue to account for property, plant and equipment using the cost model. Management has completed their review of the significant components of property, plant and equipment and does not expect any significant changes with respect to componentization and the useful lives of property, plant and equipment.

  • Impairment of assets

    The GAAP impairment analysis for long-lived assets involves a two step process, the first of which compares the asset carrying values with undiscounted future cash flows to determine whether impairment exists. If the carrying value exceeds the amount recoverable on an undiscounted basis, then the cash flows are discounted to calculate the amount of the impairment and the carrying values are written down to estimated fair value.

    IAS 36, Impairment of Assets, uses a one-step approach for both testing for, and measurement of impairment, with asset carrying values being compared to the higher of its value in use and fair value less costs to sell. This may result in more frequent write-downs where carrying values of assets were previously accepted under GAAP on an undiscounted cash flow basis, but could not be supported on a discounted cash flow basis.

    As the market capitalization of the Company was less than the carrying value of equity, the Company has completed an impairment test on its long-lived assets at January 1, 2010 and determined that no impairment exists. In addition, the Company completed an impairment test on the indefinite life intangible asset at January 1, 2010 and determined that no impairment exists. For the purposes of the impairment testing, the Company determined the following five cash generating units: Ontario region, Quebec region, Atlantic region and Western Canada region.
  • Trust units

    The Company reviewed their trust indenture and concluded that the Fund units, which were outstanding during the period the Company operated as an income trust, have met the requirements of a puttable financial instrument in accordance with IAS 32 and, accordingly the Fund units will continue to be classified as equity under IFRS.

  • Income Taxes

    As at January 1, 2010 and for the six month period ended June 30, 2010, Strongco operated as an income trust that qualified for special tax treatment permitting a tax deduction by the trust for distributions paid to the trust's unitholders. The change in tax legislation in 2007 effectively imposed an income tax for income trusts for taxation years beginning in 2011, As a result, Strongco has recorded future income taxes under Canadian GAAP during this period using the enacted (or substantively enacted) income tax rates that, at the balance sheet date, are expected to apply when the temporary differences reverse in years 2011 and beyond.

    Although IFRS recognizes that in some jurisdictions income taxes may be payable at a higher or lower rate or be refundable or payable if part, or all, of the net profit or retained earnings is paid out as a dividend to shareholders of the entity, there is a general requirement that income taxes be measured at the tax rate applicable to undistributed profits. As a result, deferred income taxes will be re-measured at the tax rate of approximately 46.4% applicable to undistributed profits which will result in an increase of $1,247 to the Company's deferred tax liability as at January 1, 2010. The deferred taxes will subsequently be re-measured at the applicable corporate rates on July 1, 2010, the date Strongco converted to a corporation.

  • Provisions

    The threshold for recognition of provisions under IFRS is lower than that under Canadian GAAP. Under IFRS, a provision must be recorded where the required payment is "probable", which is a lower threshold than "likely" under Canadian GAAP. This could result in additional provisions being required on transition to IFRS. The measurement of those provisions may also be adjusted, with IFRS requiring the mid-point in a range of potential outcomes to be used, whereas Canadian GAAP permits use of an amount at the low end of the range where no amount within the range is indicated as a better estimate than any other. Measurement of provisions may also be affected by differences in the required calculation, such as the determination of the discount rate to be used.

    The Company has reviewed their provisions considering the IFRS recognition and measurement criteria and expects to record an additional liability of $155 ($83 after tax) at January 1, 2010.

  • Share-based payments

    IFRS 2, Share-based Payments, requires options that vest over various periods (tranches) to be accounted for as separate arrangements which results in the recognition of the expense on an accelerated basis. In addition, under IFRS the recognition of compensation expense can occur prior to the grant date when services have commenced whereas under Canadian GAAP recognition of compensation expense cannot occur prior to the grant date. Further, the Company currently adjusts for forfeitures as they occur and treats the options as a pool and determines the fair value using the average life of the options. IFRS requires an estimate of forfeitures on initial recognition and the useful life of each tranche to be considered separately.

    The Company has assessed the impact of the recognition and measurement criteria under IFRS 2 on the Company's share based payment arrangements and will record an additional liability of $68 at January 1, 2010.

    In addition, since the Fund units are only allowed to be classified as equity for the purpose of assessing the classification under IAS 32, it was determined that the options issued under the Company's equity incentive plan are not to be accounted for under IFRS 2. As a result, the Company will reclassify prior year stock based compensation expense totalling $80 from contributed surplus to liabilities.

  • Internal Controls over Financial Reporting and Disclosure

    In accordance with the Company's approach to the certification of internal controls required under Canadian Securities Administrators' National Instrument 52-109, the Company's entity level, information technology, disclosure and business process controls are in the process of being updated and tested to reflect changes arising from the Company's conversion to IFRS.

The Company determined that the transition to IFRS will not have a significant impact on its information systems or internal controls.

Covenants contained in the existing agreements with the Company's lenders are determined in accordance with Canadian GAAP. The Company has had preliminary discussions with its financing institutions and will ensure that the lending agreements, and if necessary the covenants, are amended to reflect the transition of IFRS with due consideration of any impacts arising from the transition.

The Company's incentive compensation is largely based upon attaining and exceeding certain financial targets. These targets are determined on an annual basis and may need to be re-evaluated in 2011 when the impacts of changes brought about by the transition to IFRS are finalized.

IFRS training for key members of the finance staff is completed which included attending various technical courses, conferences, webinars and discussions with external IFRS consultants.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis contains forward-looking statements that involve assumptions and estimates that may not be realized and other risks and uncertainties. These statements relate to future events or future performance and reflect management's current expectations and assumptions which are based on information currently available to the Company's management. The forward-looking statements include but are not limited to: (i) the ability of the Company to meet contractual obligations through cash flow generated from operations, (ii) the expectation that customer support revenues will grow following the warranty period on new machine sales and (iii) the outlook for 2011. There is significant risk that forward-looking statements will not prove to be accurate. These statements are based on a number of assumptions, including, but not limited to, continued demand for Strongco's products and services. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward looking statements. The inclusion of this information should not be regarded as a representation of the Company or any other person that the anticipated results will be achieved and investors are cautioned not to place undue reliance on such information. These forward-looking statements are made as of the date of this MD&A, or as otherwise stated and the Company does not assume any obligation to update or revise them to reflect new events or circumstances.

Additional information, including the Company's Annual Information Form, may be found on SEDAR at www.sedar.com.

Management's Responsibility for Financial Reporting

The accompanying audited consolidated financial statements of Strongco Corporation (the "Company") were prepared by management in accordance with Canadian generally accepted accounting principles. Management acknowledges responsibility for the preparation and presentation of the audited consolidated financial statements, including responsibility for significant accounting judgments and estimates and the choice of accounting principles and methods that are appropriate to the Company's circumstances. The significant accounting policies of the Company are summarized in note 2 to the audited consolidated financial statements.

Management has established processes, which are in place to provide them sufficient knowledge to support management representations that they have exercised reasonable diligence that: (i) the audited consolidated financial statements do not contain any untrue statement of material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it is made, as of the date of and for the years presented by the audited consolidated financial statements; and (ii) the audited consolidated financial statements present fairly in all material respects the financial position, results of operations and cash flows of the Company, as of the date of and for the years presented by the audited consolidated financial statements.

The Board of Directors is responsible for reviewing and approving the audited consolidated financial statements together with other financial information of the Company and for ensuring that management fulfills its financial reporting responsibilities. An Audit Committee assists the Board of Directors in fulfilling this responsibility. The Audit Committee meets with management to review the financial reporting process and the audited consolidated financial statements together with other financial information of the Company. The Audit Committee reports its findings to the Board of Directors for its consideration in approving the audited consolidated financial statements together with other financial information of the Company for issuance to the shareholders.

Management recognizes its responsibility for conducting the Company's affairs in compliance with established financial standards, and applicable laws and regulations, and for maintaining proper standards of conduct for its activities.

[Signed] [Signed]
Robert H.R. Dryburgh J. David Wood
President and Chief Executive Officer Chief Financial Officer

Independent auditors' report

To the Shareholders of Strongco Corporation

We have audited the accompanying consolidated financial statements of Strongco Corporation which comprise the consolidated balance sheets as at December 31, 2010 and 2009 and the consolidated statements of operations and retained earnings (deficit) and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.

Management's responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient in our audits and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Strongco Corporation as at December 31, 2010 and 2009 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

  [Signed]
   
  Ernst & Young LLP
Toronto, Canada, Chartered Accountants
March 29, 2011 Licensed Public Accountants

Consolidated Balance Sheets


As at December 31 [in thousands of dollars]
2010   2009  
   
ASSETS            
Current            
Accounts receivable [note 18] $ 35,884   $ 27,088  
Inventories [note 5]   159,988     144,461  
Prepaid expenses and deposits   1,452     1,255  
Total current assets   197,324     172,804  
   
Capital assets, net [note 6]   13,768     14,133  
Other assets   188     243  
Accrued benefit asset [note 15]   6,275     6,607  
Intangibles [note 3]   1,800     1,800  
  $ 219,355   $ 195,587  
   
LIABILITIES AND SHAREHOLDERS' EQUITY            
Current            
Bank indebtedness [notes 7, 18 and 19] $ 12,370   $ 10,014  
Accounts payable and accrued liabilities [note 18]   30,265     20,866  
Deferred revenue and customer deposits   1,321     515  
Equipment notes payable - non-interest bearing [note 8]   40,097     28,671  
Equipment notes payable - interest bearing [note 8]   78,063     76,172  
Current portion of capital lease obligations [note 9]   173     92  
Current portion of notes payable [note 3]   1,233     1,094  
Total current liabilities   163,522     137,424  
   
Future income taxes [note 12]   389     1,424  
Notes payable [note 3]   -     1,218  
Capital lease obligations [note 9]   114     104  
Accrued benefit liability [note 15]   819     769  
Total liabilities   164,844     140,939  
Commitments and Contingencies [note 14 and 16]            
   
Shareholders' equity            
Shareholder capital [note 10]   57,089     57,089  
Deferred compensation [note 11]   360     80  
Deficit   (2,938 )   (2,521 )
Total shareholders' equity   54,511     54,648  
  $ 219,355   $ 195,587  
   
See accompanying notes            
   
On behalf of the Board:
 
 
 
[Signed] [Signed]    
Robert J. Beutel Ian Sutherland
Director Director
 
 
Consolidated Statement of Operations and Retained Earnings (Deficit)
 
Years ended December 31        
[in thousands of dollars, except units / shares and per unit / share data] 2010   2009  
   
Revenue $ 294,657   $ 291,795  
Cost of sales   237,971     231,847  
Gross margin   56,686     59,948  
   
Expenses            
Administration, distribution and selling   53,604     55,822  
Plan of Arrangement [note 1]   463     -  
Other income   (740 )   (1,816 )
Income before the following   3,359     5,942  
Interest   4,816     4,433  
Earnings (loss) from continuing operations before income taxes   (1,457 )   1,509  
Provision (recovery) for income taxes [note 12]   (1,040 )   775  
Earnings (loss) from continuing operations   (417 )   734  
Loss from discontinued operations [note 4]   -     (716 )
Net income (loss) and comprehensive income (loss) $ (417 ) $ 18  
   
Retained deficit, beginning of year   (2,521 )   (2,539 )
Deficit, end of year $ (2,938 ) $ (2,521 )
   
Earnings (loss) per unit / share            
Continuing operations - basic and diluted   (0.04 )   0.07  
Discontinued operations - basic and diluted [note 4]   -     (0.07 )
Earnings (loss) per unit / share - basic and diluted $ (0.04 ) $ 0.00  
   
   
Weighted average number of units / shares issued   10,508,719     10,508,719  
   
See accompanying notes  

Consolidated Statement of Cash Flows

Years ended December 31        
[in thousands of dollars, except units / shares and per unit / share data] 2010   2009  
   
OPERATING ACTIVITIES            
Income from continuing operations $ (417 ) $ 734  
Add (deduct) items not involving a current outlay (inflow) of cash            
    Amortization of capital assets   788     824  
    Amortization of equipment inventory on rent   18,211     11,209  
    Amortization of capital leases   136     42  
    Loss (gain) on disposal of capital assets   (3 )   82  
    Increase in capital leases   223     44  
    Stock based compensation   280     80  
    Interest accretion on note payable [note 3]   84     135  
    Future income taxes (recovery)   (1,035 )   82  
  Accrued benefit (asset) liability and other   437     (1,223 )
    18,704     12,009  
Net change in non-cash working capital balances related to operations [note 20]   (19,209 )   (15,158 )
Cash used in operating activities of continuing operations   (505 )   (3,149 )
Cash used in operating activities of discontinued operations   -     (391 )
Cash used in operating activities $ (505 ) $ (3,540 )
   
INVESTING ACTIVITIES            
Purchase of capital assets   (631 )   (696 )
Capital lease repayments   (131 )   (44 )
Proceeds on disposal of capital assets   74     882  
Cash used in investing activities of continuing operations   (688 )   142  
Cash provided by investing activities of discontinued operations   -     6,228  
Cash provided by (used in) investing activities $ (688 ) $ 6,370  
   
FINANCING ACTIVITIES            
Increase (decrease) in bank indebtedness   2,356     (2,830 )
Repayment of term debt   (1,163 )   -  
Cash provided by (used in) financing activities $ 1,193   $ (2,830 )
   
Net increase in cash and cash equivalents during the year   -     -  
Cash and cash equivalents, beginning of year   -     -  
Cash and cash equivalents, end of year $ -   $ -  
   
Supplemental cash flow information            
Interest paid   4,732   $ 4,358  
Income taxes recovered   (1 ) $ (79 )
   
See accompanying notes  

Strongco Corporation

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2010 and 2009 (unless otherwise indicated in thousands of dollars, except per share amounts)

1. ORGANIZATION

Prior to July 1, 2010, Strongco Income Fund (the "Fund") was an unincorporated, open-ended, limited purpose trust established under the laws of Ontario pursuant to a declaration of trust dated March 21, 2005, as amended and restated on April 28, 2005 and September 1, 2006.

On July 1, 2010, the Fund completed the conversion (the "Conversion") from an income trust to a corporation through the incorporation of Strongco Corporation (the "Company" or "Strongco"). Pursuant to a plan of arrangement under the Business Corporations Act (Ontario), the Company issued shares to the unitholders of the Fund in exchange for units of the Fund on a one-for-one basis (see note 10b). The Company's Board of Directors and management team are the former Board of Trustees and management team of the Fund. Immediately subsequent to the Conversion, the Fund was wound up into the Company. The Company has carried on the business of the Fund unchanged except that the Company is subject to tax as a corporation. References to the Company in these financial statements for periods prior to June 30, 2010, refer to the Fund and for periods on or after July 1, 2010, refer to the Company. Additionally, references to shares and shareholders of the Company are comparable to units and unitholders previously under the Fund.

The conversion was accounted for as a continuity of interests. Transaction costs of $463 related to the conversion were expensed on conversion.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The audited consolidated financial statements of Strongco have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP") within the framework of the significant accounting policies summarized below:

Basis of consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All transactions and balances between the Company and its subsidiaries have been eliminated.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue recognition

Revenue is recognized when there is a written arrangement in the form of a contract or purchase order with the customer, a fixed or determinable sales price is established with the customer, performance requirements are achieved, and ultimate collection of the revenue is reasonably assured.

  a) Revenue from sales of equipment is recognized at the time title to the equipment and significant risks of ownership passes to the customer, which is generally at the time of shipment of the product to the customer. From time to time, the Company agrees to buy back equipment from certain customers at the option of the customer for a specified price at future dates. The Company's maximum potential losses pursuant to the majority of these buy back contracts are limited, under an agreement with a third party, to 10% of the original sale amounts. Revenues for these sales are recognized at the time significant risks and rewards of ownership passes to the customer.
     
     
  b) Revenue from equipment rentals is recognized in accordance with the terms of the relevant agreement with the customer, either evenly over the term of that agreement or on a usage basis such as the number of hours that the equipment is used. Certain rental contracts contain an option for the customer to purchase the equipment at the end of the rental period. Should the customer exercise this option to purchase, revenue from the sale of the equipment is recognized as in a) above;
     
     
  c) Product support services include sales of parts and servicing of equipment. For the sale of parts, revenues are recognized when the part is shipped to the customer. For servicing of equipment, revenues are recognized when the service work is completed, including recognition of revenue from parts installed as part of the service.

Foreign currency translation

Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate prevailing at the consolidated balance sheet date. Revenue and expenses are effectively recorded at the rate of exchange in effect on the transaction dates. Exchange gains or losses are included in the determination of earnings for the year.

Financial instruments

The fair market values of the Company's current financial assets and liabilities approximate carrying values due to their short-term nature. The Company enters into foreign currency forward contracts to reduce the impact of currency fluctuations on the cost of certain pieces of equipment ordered for future delivery to customers. These contracts are recorded at their fair value with gains and losses recorded in income (loss).

Employee future benefit plans

The Company accrues its obligations under employee future benefit plans and the related costs, net of plan assets. The Company has adopted the following policies:

The actuarial determination of the accrued benefit obligations for pensions and other retirement benefits uses the projected benefit method prorated on service (which incorporates management's best estimate of future salary levels, other cost escalation, retirement ages of employees and other actuarial factors).

For the purpose of calculating the expected return on plan assets, those assets are valued at fair value.

Actuarial gains (losses) arise from the difference between actual long-term rate of return on plan assets for a period and the expected long-term rate of return on plan assets for that period and from changes in actuarial assumptions used to determine the accrued benefit obligation. The excess of the net accumulated actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the average remaining service period of active employees. The average remaining service period of the active employees covered by the employee pension plan is 16 years for 2010 and 16 years for 2009. For the executive pension plan, the period used to amortize gains and losses is based on the average expected remaining lifetime of the retirees (14 years for 2010 and 14 years for 2009).

Past service costs arising from plan amendments are deferred and amortized on a straight-line basis over the average remaining service period of the employees active at the date of the amendment.

On January 1, 2000, the Company adopted the new accounting standard on employee future benefits using the prospective application method. The Company is amortizing the transitional obligation on a straight-line basis over 16 years, which was the average remaining service period of employees expected to receive benefits as of January 1, 2000.

When the restructuring of a future benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement.

Stock-based compensation plan

The Company accounts for stock options using the fair value method. Under the fair value method, compensation expense for options is measured at the grant date using an option pricing model and recognized in income on a graded method basis over the vesting period.

Earnings per share

Basic earnings per share is calculated by dividing the net earnings available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated using the treasury stock method, which assumes that all outstanding stock option grants are exercised, if dilutive, and the assumed proceeds are used to purchase the Company's common shares at the average market price during the year.

Cash and cash equivalents

Cash and cash equivalents consist of all bank balances and short-term investments with remaining maturities of less than 90 days at the date of acquisition.

Inventories

Inventories are recorded at the lower of cost and net realizable value. The cost of equipment inventories is determined on a specific item basis. The cost of repair and distribution parts is determined on a weighted average cost basis. Equipment inventory while on rent is amortized based upon expected usage while on rent.

Capital assets

Capital assets are initially recorded at cost. Amortization is provided on a declining balance basis using the following annual rates:

Buildings 3% to 5%
Machinery and equipment 10% to 30%
Computer software 30%
Vehicles 30%

Computer equipment under capital leases and leasehold improvements are amortized on a straight-line basis over the remaining term of the lease.

Leases

Leases entered into by the Company, in which substantially all of the benefits and risks of ownership are transferred to the Company, are recorded as obligations under capital leases. Obligations under capital leases reflect the present value of future minimum lease payments, discounted at an appropriate interest rate, are reduced by rental payments net of imputed interest. Equipment under capital leases are depreciated based on the useful life of the asset. All other leases are classified as operating leases. Payments for these leases are charged to income on a straight-line basis over the life of the assets.

Discontinued operations

The results of discontinued operations are presented net of tax on a one-line basis in the consolidated statement of operations. Refer to note 4 for details of discontinued operations.

Income taxes

The Company follows the liability method of tax allocation to account for income taxes. Under this method of tax allocation, future income tax assets and liabilities are determined based upon the differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Impairment of long-lived assets

The Company reviews whether there are any indicators that the carrying amount of its capital assets and identifiable intangible assets with definite lives ("long-lived depreciable assets") may not be recoverable. If such indicators are present, the Company assesses the recoverability of the assets or group of assets by determining whether the carrying value of such assets can be recovered through undiscounted future cash flows expected to arise as a direct result of the use of the assets over their remaining useful lives and eventual disposition. If the sum of the undiscounted future cash flows is less than the carrying amount, then the fair value of the assets is determined and any excess of the carrying amount of the assets over their estimated fair value is recorded as a charge to earnings.

Intangible assets with indefinite lives

Identifiable intangible assets with indefinite lives acquired are not subject to amortization but are subject to an annual review for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The review for impairment compares the fair value of the intangible asset to its carrying value. Where the carrying value of the intangible asset exceeds its fair value an impairment loss equal to the excess is recorded as a charge to earnings.

Future accounting changes

Business Combinations

In January 2009, the AcSB issued the new the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1582 Business Combinations, Section 1601 Consolidated Financial Statements, and Section 1602 Non-controlling Interests. Section 1582 specifies a number of changes, including an expanded definition of a business, a requirement to measure all business acquisitions at fair value, a requirement to measure non-controlling interests at fair value, and a requirement to recognize acquisition-related costs as expenses. Section 1601 establishes the standards for preparing consolidated financial statements. Section 1602 specifies that non- controlling interests be treated as a separate component of equity, not as a liability or other item outside of equity. These new standards are harmonized with International Financial Reporting Standards (IFRS). The new standards will become effective in 2011, however early adoption is permitted. The Company has not yet determined the impact of these standards on the consolidated statements.

International Financial Reporting Standards ("IFRS")

In March 2009, the Canadian Accounting Standards Board ("AcSB") issued its exposure draft, "Adopting IFRS in Canada, II", which reconfirmed that publicly accountable enterprises are required to adopt IFRS for fiscal years beginning on or after January 1, 2011. Accordingly, the first annual consolidated financial statements in accordance with IFRS will be for the year ending December 31, 2011 and will include the comparative period of 2010. Starting in the first quarter of 2011, the Company will provide unaudited consolidated financial statements in accordance with IFRS including comparative figures for 2010.

3. NOTES PAYABLE

On March 20, 2008, the Fund purchased substantially all of the assets (excluding real property) of the Champion Road Machinery division ("Champion") of Volvo Group Canada Inc. for a total consideration of $24,984 including deal-related costs of $190. Included in the acquisition was distribution rights valued at $1,800. These distribution rights are accounted for as identifiable intangible assets with an indefinite life, subject to impairment review.

The consideration was comprised of cash of $22,830 and non-interest bearing note payable in favour of Volvo Group Canada Inc. of $2,500 with installment payments of $1,250 due in March 2010 and March 2011. The note is secured with certain assets of Champion. The note has been discounted at 6.0% using the effective interest rate method, resulting in a discount of $346 that will be amortized as expense to continuing operations over the three-year period to March 2011. The original note was reduced by Volvo in 2009 by $88 with the reduction in the first installment payment. The first installment payment was paid during 2010. As at December 31, 2010, the remaining balance of the $1,233 non-interest bearing note has been classified as short-term debt.

4. DISCONTINUED OPERATIONS

On May 26, 2009, the Company completed the sale of the assets and liabilities of its Engineered Systems segment, allowing Strongco to focus its resources and management efforts on growing its core Equipment Distribution business. Proceeds of $6,284 resulted in a loss on sale, after deal costs, of $556. Initial proceeds of $5,962 on the sale were settled in cash with an additional $500 deposited in trust with working capital adjustments to be completed by August 11, 2009. Claims under the indemnification provisions totaling $178 were settled out of the funds held in trust and the remaining trust deposit of $322 was released to Strongco in November 2009.

There was no activity from discontinued operations for the year ended December 31, 2010. The results from discontinued operations for the year ended December 31, 2009, including the loss on sale, were as follows:

($ thousands, except per unit amounts) 2009  
Revenues $ 8,982  
Cost of sales   7,435  
Gross Margin   1,547  
   
Administration, distribution and selling expenses   2,484  
Other (income)/expense   110  
Operating income (loss) $ (1,047 )
Interest expense   60  
Loss on sale of business   556  
Loss before income taxes   (1,663 )
Provision for income taxes   (947 )
Loss from discontinued operations after tax $ (716 )
Basic and diluted loss per unit from discontinued operations $ (0.07 )

The loss on sale of $556 was calculated as follows:

($ thousands)    
Accounts receivable $ 3,754  
Prepaids and other assets   553  
Inventory   2,519  
Legal and exit costs   450  
Capital assets, net   2,929  
Other assets   67  
Accounts payable and accrued liabilities   (3,432 )
    6,840  
Cash Proceeds   6,284  
Loss on Sale $ 556  

5. INVENTORIES

Inventories are recorded at the lower of cost and net realizable value. The cost of purchased equipment inventories is determined on a specific item basis. The cost of purchased repair and distribution parts is determined on a weighted average cost basis. Spare parts and stand-by equipment used in the Company's operations are not included in inventory.

The value of the Company's new and used equipment is evaluated by management throughout each year. Where appropriate, a write down is recorded against the book value of specific pieces of equipment to ensure that inventory values reflect the lower of cost or estimated net realizable value. For the year ended December 31, 2010, the Company recorded $442 of equipment write- downs (2009 - $390).

Throughout the year, Company management identifies slow moving or obsolete parts inventory and estimates appropriate obsolescence provisions by aging the inventory. For the year ended December 31, 2010, the Company expensed $440 (2009 - $191) in additional obsolescence and scrap provisions.

During the year ended December 31, 2010, there were reversals of write-downs recognized in prior periods of $230 (2009 - nil). In fiscal 2010, an improvement in the economic environment triggered the assessment of the recoverable amount on certain pieces of equipment.

Inventory costs of $207,268 (2009 - $205,604) recognized as an expense during the year are reported as cost of sales in the consolidated statements of operations. Cost of sales also includes amortization of equipment inventory on rent of $18,211 (2009 - $11,209). Equipment inventory on rent as at December 31, 2010 was $49,784 (2009 - $33,919).

As at December 31
2010
2009
         
Equipment $ 142,080 $ 124,518
Parts   15,401   17,679
Work in process   2,507   2,264
  $ 159,988 $ 144,461

As at December 31, 2010, the Company held $8,378 (2009 - $5,036) of inventory against which a provision has been recorded.

6. CAPITAL ASSETS

Capital assets consist of the following:

  2010
 
  Cost Accumulated amortization Net book value
 
Land $ 2,883 $ - $ 2,883
Buildings and leasehold improvements   13,071   5,817   7,254
Machinery, equipment and vehicles   14,400   11,051   3,349
Computer equipment under capital leases   460   178   282
  $ 30,814 $ 17,046 $ 13,768
 
 
  2009
 
  Cost Accumulated amortization Net book value
 
Land $ 2,883 $ - $ 2,883
Buildings and leasehold improvements   13,052   5,481   7,571
Machinery, equipment and vehicles   14,154   10,669   3,485
Computer equipment under capital leases   236   42   194
  $ 30,325 $ 16,192 $ 14,133

Amortization expense for the year ended December 31, 2010 totalled $924 (2009 - $866).

7. BANK CREDIT FACILITY AND BANK INDEBTEDNESS

The Company has a credit facility with a Canadian Chartered Bank which provides a $20 million 364-Day committed operating line of credit which is renewable annually (see note 18). Borrowings under the line of credit are limited by a standard borrowing base calculation based on accounts receivable and inventory typical of such lines of credit. As collateral the Company has provided a $50 million debenture and a security interest in accounts receivables, inventories subordinated to the collateral provided to the equipment inventory lenders), capital assets (subordinated to collateral provided to lessors), real estate and on intangible and other assets. Interest rate on the operating line ranges between bank prime rate plus 0.50% and bank prime rate plus 1.50% and between the one month Canadian Bankers' Acceptance Rates ("BA rates") plus 1.75% and BA rates plus 2.75%, depending on the Company's ratio of debt to tangible net worth ("TNW"). Under its operating facility the Company is able to issue letters of credit up to a maximum of $5 million. Outstanding letters of credit reduce the Company's availability under its operating line of credit. For certain customers, Strongco issues letters of credit as a guarantee of Strongco's performance on the sale of equipment to the customer. As at December 31, 2010, there were outstanding letters of credit of $74 (2009 - $74).

In addition to its operating line of credit, the Company has a $15 million line for foreign exchange forward contracts as part of its bank credit facilities ("FX Line") available to hedge foreign currency exposure. Under this FX Line, Strongco can purchase foreign exchange forward contracts up to a maximum of $15 million. As at December 31, 2010, the Company had outstanding foreign exchange forward contracts under this facility totaling US$7,447 at an average exchange rate of $1.0227 Canadian for each US $1.00 with settlement dates between January and May 2011 (December 31, 2009 - US$2,438 at an average exchange rate of $1.07 Canadian for each US $1.00).

8. EQUIPMENT NOTES PAYABLE

Various non-bank lenders provide secured wholesale financing on equipment inventory ("equipment notes payable"), some of which is interest free for periods up to twelve months from the date of financing. Thereafter, the equipment notes payable bear interest at rates ranging from 4.25% to 5.85% over the one month Canadian Bankers' Acceptance Rate and 3.25% to 4.90% over the prime rate of Canadian chartered banks. The effective interest rates on these notes payable as at December 31, 2010 ranged from 5.37% to 7.90% (2009 – 4.56% to 8.25%). Monthly principal repayments equal to 3% of the original face value of the notes commence twelve months from the date of financing and the remaining balance is due in full twenty-four months after the date of financing or when the financed equipment is sold. As collateral, the Company has provided liens on specific inventories and accounts receivable with an approximate book value of $139,270 (2009 - $117,000). The equipment notes are payable on demand and therefore have been classified as current liabilities (see note 19).

9. CAPITAL LEASE OBLIGATIONS

At December 31, 2010, the Company had computers under capital leases of $287 at an interest rate of 4.2%. The capital leases expire over a 12 to 33 month term through to July 2013. The future minimum annual payments, interest and balance of obligations were as follows:

For the years ending December 31
2010
2009
2010 $ - $ 92
2011   180   89
2012   108   28
2013   13   -
Total minimum lease payments   301   209
Less amount representing interest   14   13
Present value of minimum lease payments   287   196
Current portion of obligations under capital leases   173   92
Long term portion of obligations under capital leases $ 114 $ 104

10. SHAREHOLDERS' EQUITY

(a) Authorized

Unlimited number of shares.

(b) Issued

As at December 31, 2010, a total of 10,508,719 shares, valued at $57,089 were issued and outstanding. There was no activity, other than the conversion noted below and in note 1, in shareholders' capital during the year ended December 31, 2010. As at December 31, 2010, a total of 445,000 stock options were outstanding (see note 11).

Unitholders' / Shareholders' capital 2010   2009
  Unit / Share (#)   Amount   Unit (#) Amount
Units, beginning of year 10,508,719   $ 57,089   10,508,719 $ 57,089
Units cancelled on conversion [note 1] (10,508,719 )   (57,089 ) -   -
Shares issued on conversion [note 1]
10,508,719
    57,089
  -
  -
Shares, end of year 10,508,719   $ 57,089   10,508,719 $ 57,089

11. STOCK BASED COMPENSATION

On August 11, 2008, the Company issued irrevocable options to the then newly appointed Chief Executive Officer to purchase 100,000 units in the capital of the Company. The options have an exercise price of $2.98 per unit which is equal to the average trading price of the Company's units over the five days immediately following August 11, 2008. Fifty percent of the options vested and became exercisable 12 months from the grant date and the balance vested and became exercisable 24 months from the grant date. The options expire five years from the issue date on August 11, 2013. The options were approved by the shareholders at the annual meeting of the unitholders on April 30, 2009. The stock-based compensation expense of these options is based upon the estimated fair value of the options at the grant date, which was determined using the Black-Scholes option pricing model, amortized on a straight line basis over the two year vesting period of the options. The following assumptions were used in determining the fair value of the options using the Black-Scholes model:

Risk-free rate of return 3%
Option Life 5 years
Expected volatility 60%
Expected dividends nil

On October 28, 2009, the Company issued irrevocable options to certain members of senior management to purchase 375,000 units of the Company. The options have an exercise price of $4.50 per unit which is equal to the average trading price of the Company's units over the five days immediately preceding October 28, 2009. A third of the options vest and become exercisable after 36 months from the grant date, a third of the options vest and become exercisable after 48 months from the grant date and the balance vest and become exercisable after 60 months from the grant date. The options expire seven years from the issue date on October 28, 2016. The options were approved by the shareholders at the annual meeting of the shareholders on May 14, 2010. The stock-based compensation expense of these options is based upon the estimated fair value of the options at the grant date, which was determined using the Black-Scholes option pricing model, amortized over the three year vesting period of the options. The following assumptions were used in determining the fair value of the options using the Black-Scholes model:

Risk-free rate of return 3%
Option Life 7 years
Expected volatility 64%
Expected dividends nil

The stock based compensation expense related to stock options for 2010 was $280 (2009 – $80).

As at December 31, 2010, a total of 445,000 stock options were outstanding, at a weighted average strike price of $4.16, with 100,000 vested, at a weighted average strike price of $2.98.

As at December 31 2010   2009
  Number of Options   Weighted Average Exercise Price Number of Options Weighted Average Exercise Price
Options outstanding, beginning of year 100,000   $ 2.98 100,000 $ 2.98
               
Granted 375,000     4.50 -   -
Exercised -     - -   -
Forfeited   (30,000    4.50  -    -
               
Options outstanding, end of year 445,000   $ 4.16 100,000 $ 2.98
               
Options vested, end of year 100,000   $ 2.98 50,000 $ 2.98

12. INCOME TAXES

Significant components of the provision for (recovery of) income taxes are as follows:

  2010   2009
Current income tax expense (recovery) $ (6 ) $ 693
Future income tax expense (recovery)   (1,034 )   82
  $ (1,040 ) $ 775

The provision for income taxes differs from that which would be obtained by applying the statutory tax rate as a result of the following:

  2010   2009  
Earnings (loss) before taxes $ (1,457 ) $ 1,509  
Statutory tax rate   30.07 %   46.40 %
   
Provision for (recovery of) income taxes at statutory tax rate   (438 )   700  
  Adjustments thereon for the effect of:            
  Permanent & other differences   191     234  
  Rate change   156     -  
  Recovery resulting from plan of arrangement   (674 )   -  
  Benefit of Fund losses previously unrecognized   (246 )   -  
  Income of the Fund not subject to tax   -     (79 )
  Other   (29 )   (80 )
  $ (1,040 ) $ 775  

The net future income tax liability is represented by the following:

  2010 2009
Eligible capital expenditures and other reserves $ 1,688 $ 1,017
Future income tax assets   1,688   1,017
         
Capital and other assets   479   475
Accrued benefit asset   1,598   1,966
Future income tax liabilities   2,077   2,441
Net future income tax liability $ 389 $ 1,424

Following conversion to a corporation on July 1, 2010 Strongco became subject to income tax at corporate tax rates, whereas previously the Fund was subject to tax rates applicable to trusts. In addition, as a consequence of conversion to a corporation, Strongco is now able to utilize tax losses, including tax losses previously unrecognized from the Fund. The non-capital loss carryforwards expire as follows:

2029: $952
2031: $582
Total: $1,534

13. LONG-TERM INCENTIVE PLAN

When Strongco operated as an income fund, key senior management of the Fund and its affiliates were eligible to participate in the Strongco Long-Term Incentive Plan (the "LTIP"). Pursuant to the LTIP, Strongco set aside a pool of funds based upon the amount by which the Company's distributions per unit exceed cash distribution threshold amounts. The Board of Directors would then purchase units in the market with such pool of funds and would hold such units until such time as ownership vests to each participant, generally over three years. No awards have been made under the LTIP since 2006 and as of December 31, 2009, all units awarded in prior years pursuant to the plan have vested and been released to the applicable participants. In 2010 and 2009, $nil was transferred into the LTIP pool relating to the excess of cash distributions over threshold amounts. The LTIP compensation expense was $nil in 2010 (2009 - $nil). In 2009, the Board of Directors have determined that no further awards will be made under the LTIP and the LTIP was terminated effective June 30, 2010.

14. OPERATING LEASE COMMITMENTS

The Company has entered into various operating leases for its premises, certain vehicles, furniture and fixtures and equipment. Approximate future minimum annual payments under these operating leases are as follows:

2011 $ 6,214
2012   4,582
2013   3,883
2014   2,959
2015   2,234
Thereafter   4,291
Total $ 24,163

15. POST RETIREMENT OBLIGATIONS

The Company has a number of funded and unfunded benefit plans that provide pension, as well as other retirement benefits to some of its employees. One of its defined benefit plans is based on years of service and final average salary, while another one is a career average plan. The Company also has other post retirement benefit obligations which include an unfunded retiring allowance plan and a non-contributory dental and health care plan. Under these plans, the cost of benefits is determined using the projected benefit method prorated on services.

Effective May 29, 2009, Strongco sold its Engineered Systems segment (note 4). Employees of the Engineered Systems segment were transferred to the purchaser. Benefits earned by the transferred employees were frozen in the Strongco Employees' Pension Plan on that date. This transaction constitutes a curtailment under CICA 3461 accounting. Remeasurement of the value of the affected members' benefits resulted in an actuarial gain of $360. This amount was used to reduce the Plan's net unamortized actuarial losses. In addition, a pro rata portion of the outstanding transitional obligation was reflected as a curtailment loss and increased the 2009 Plan expense by $19.

Defined benefit pension plan for employees

Information about the Company's defined benefit pension plans for employees ("Employee Plan") and executive employees ("Executive Plan") is as follows:

  2010
  2009
 
 
Accrued benefit obligation, beginning of year $ 27,492   $ 23,012  
Current service cost:            
  - employer contribution   723     426  
  - employee contribution   696     797  
Interest cost   1,713     1,724  
Benefits paid   (2,329 )   (2,579 )
Actuarial loss   2,959     4,472  
Corporate restructuring giving rise to:            
  - curtailments   -     (360 )
Accrued benefit obligation, end of year   31,254     27,492  
 
Fair value of plan assets, beginning of year   26,088     21,599  
Actual return on plan assets   2,831     4,118  
Employer contributions   799     2,153  
Employee contributions   696     797  
Benefits paid   (2,329 )   (2,579 )
Fair value of plan assets, end of year $ 28,085   $ 26,088  

Plan assets consist of:                    

  2010
  2009
 
Asset category            
Equity securities   68.5 %   67.3 %
Debt securities   30.9 %   29.3 %
Other   0.6 %   3.4 %
Total   100.0 %   100.0 %
 
Fair value of plan assets $ 28,085   $ 26,088  
Accrued benefit obligation   31,254     27,492  
Funded status of plan – deficit   (3,169 )   (1,404 )
Unamortized net actuarial loss   9,359     7,908  
Unamortized transitional obligation   85     103  
Accrued benefit asset $ 6,275   $ 6,607  

Elements of defined benefit costs recognized in the year:

  2010
  2009
 
 
Current service cost, net of employee contributions $ 723   $ 426  
Interest on accrued benefits   1,713     1,724  
Actual return on plan assets   (2,831 )   (4,118 )
Actuarial loss   2,959     4,472  
Curtailment losses   -     19  
Elements of defined benefit costs before adjustments recognized:   2,564     2,523  
  Adjustments to recognize the long term nature of benefit costs:            
    - loss on assets (expected vs actual in year)   1,179     2,575  
    - actuarial gains (recognized vs actual in year)   (2,629 )   (4,157 )
    - transitional obligation   18     19  
  Defined benefit costs recognized $ 1,132   $ 960  

The Company measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as of December 31 of each year. For the Employee Plan, the most recent actuarial valuation for funding purposes was performed as of August 31, 2010 and the next required valuation will be due no later than August 31, 2011. For the Executive Plan, the most recent funding valuation was performed as of June 30, 2009 and the next required valuation will be due no later than June 30, 2012.

Accrued benefit asset is comprised as follows:

  2010
2009
 
 
Employee Plan $ 5,743 $ 6,016
Executive Plan   532   591
  $ 6,275 $ 6,607

Information about the Company's other post retirement benefit obligations, in aggregate, is as follows:

    2010
    2009
 
   
Accrued benefit obligation, beginning of year $ 1,547   $ 1,432  
Interest cost   82     96  
Benefits paid   (94 )   (98 )
Actuarial (gain) loss   (427 )   117  
Accrued benefit obligation, end of year   1,108     1,547  
   
Fair value of plan assets   -     -  
Accrued benefit obligation   1,108     1,547  
Funded status of plan – deficit   (1,108 )   (1,547 )
Unamortized net actuarial loss   146     607  
Unamortized transitional obligation   143     171  
Accrued benefit liability $ (819 ) $ (769 )

Elements of defined benefit costs recognized in the year:

             
    2010
    2009
 
   
   
Current service cost, net of employee contributions $ -   $ -  
Interest on accrued benefits   82     96  
Actuarial (gain) loss   (427 )   117  
Elements of defined benefit costs before adjustments recognized:   (345 )   213  
  Adjustments to recognize the long term nature of benefit costs:            
    - actuarial loss (gain) (recognized vs actual in year)   461     (87 )
    - transitional obligation (amortization)   29     29  
  Defined benefit costs recognized $ 145   $ 155  

The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations are as follows:

Accrued benefit obligation as of the end of the year:

  2010
  2009
 
         
Discount rate 5.50 % 6.25 %
Rate of compensation increase 3.00 % 3.00 %

Benefit cost for the year:

  2010
  2009
 
   
Discount rate 6.25 % 7.50 %
Expected long-term rate of return on plan assets 6.50 % 7.00 %
Rate of compensation increase 3.00 % 3.00 %

The actual claims cost for 2010 was used to project the 2011 expense. The assumed health care cost trend rate is 7.5% in 2011, declining by 0.5% per annum to 5.0% per annum in 2016 and thereafter. The assumed dental cost rate is 4.0% per annum.

Assumed health and dental care cost trend rates have a significant effect on the amounts reported for the health and dental care plans. A one percentage point change in assumed health and dental care cost trend rates would have the following effects for 2010:

  Increase
Decrease
 
   
Total of service and interest cost $ 8 $ (7 )
Accrued benefit obligation as of December 31, 2010 $ 108 $ (87 )

In February 2006, the Company established a new defined benefit retirement savings program for executive officers, the ("DPRSP") with retroactive effect to January 1, 2006. The expense related to the DPRSP for the year ended December 31, 2010 was $192 (2009 - $227). Interest is accrued monthly, based on the Bank of Canada's five year conventional mortgage rate.

Defined contribution pension plans

In addition, the Company maintains a defined contribution plan available only to certain employees (approximately 11.3% of the workforce [2009 – 12.0%]) who were existing members of the plan following a previous acquisition and members of a defined contribution plan of a business acquired in 2008. In 2010, the Company's contributions were $172 (2009 - $176). The Company also maintains a group RSP/LIRA available only to certain employees (approximately 11.8% of the workforce [2009 – 13.4%]) covered under a collective bargaining agreement. In accordance with the terms of the collective bargaining agreement in 2010, the Company's contributions were $192 (2009 - $191).

In June 2007, Strongco established a new defined contribution retirement savings program for designated senior management, the ("DCRSP-GM"). The expense related to the DCRSP-GM for the year ended December 31, 2010 was $49 (2009 - $59).

Total cash payments for employee future benefits for 2010 consisting of cash contributed by the Company to its funded pension plans, cash payments directly to beneficiaries for its unfunded other benefit plans and cash contributed to its defined contribution plan were $1,499 (2009 - $2,858).

16. CONTINGENCIES

(a) The Company has agreed to buy back equipment from certain customers at the option of the customer for a specified price at future dates ("buy back contracts"). These contracts are subject to certain conditions being met by the customer and range in term from three to ten years. At December 31, 2010, the total obligation under these contracts was $10,279 (2009 - $9,769). The Company's maximum potential losses pursuant to the majority of these buy back contracts are limited, under an agreement with a third party, to 10% of the original sale amounts. A reserve of $860 (2009 - $699) has been accrued in the Company's accounts with respect to these commitments.
   
   
(b) The Company has provided a guarantee of lease payments under the assignment of a property lease which expires January 31, 2014. Total lease payments from January 1, 2011 to January 31, 2014 are $461 (2009 - $610).
   
   
(c) In the ordinary course of business activities, the Company may be contingently liable for litigation. On an ongoing basis, the Company assesses the likelihood of any adverse judgements or outcomes, as well as potential ranges of probable costs or losses. A determination of the provision required, if any, is made after analysis of each individual issue. The required provision may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy dealing with these matters.
   
  A statement of claim has been filed naming a former division of the Company as one of several defendants in proceedings under the Superior Court of Quebec. The action claims errors and omissions in the contractual execution of work entrusted to the defendants and names the Company as jointly and severally liable for damages of approximately $5.9 million. Although the Company cannot predict the outcome at this time, the Company believes that they have a strong defence against the claim and that it is without merit. The Company's insurer has provided conditional coverage for this claim. 
   
  A statement of claim has been filed naming a former division of the Company as one of several defendants in proceedings under the Queens Bench of Manitoba. The action claims errors and omissions in the contractual execution of work entrusted to the defendants and names the Company as jointly and severally liable for damages of approximately $4.8 million. Although the outcome is indeterminable at this early stage of the proceedings, the Company believes that they have a strong defence against the claim and that it is without merit. The Company's insurer has provided conditional coverage for this claim.  

17. SEGMENTED INFORMATION

As a result of the divestiture of the Engineered Systems segment in 2009 (see note 4), the Company operates in one reportable segment, Equipment Distribution. Strongco is one of the largest multi-line mobile equipment distributors in Canada. This business sells and rents new and used equipment and provides after-sale product support (parts and service) to customers that operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets.

A breakdown of revenue within the Equipment Distribution segment is as follows:

  2010
2009
Equipment Sales $ 183,744 $ 183,751
Equipment Rentals   22,093   14,321
Product Support   88,820   93,723
Total Equipment Distribution $ 294,657 $ 291,795

18. FINANCIAL INSTRUMENTS

Categories of financial assets and liabilities

Under GAAP, financial instruments are classified into one of the five categories: held-for-trading, held to maturity investments, loans and receivables, available-for-sale financial assets and other financial liabilities. The carrying values of the Company's financial instruments, including those held for sale on the consolidated balance sheet are classified into the following categories:

  2010 2009
Loans and receivables (1) $ 35,884 $ 27,088
Liabilities (2) $ 162,588 $ 138,550
   
(1) Includes accounts receivable.
(2) Includes bank indebtedness, accounts payable and accrued liabilities, equipment and other notes payable.

The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. The fair values of the Company's financial assets are not materially different from their carrying value, due to the short-term nature of balances. The fair values of the Company's financial liabilities were approximately $158,000 as at December 31, 2010. These fair values were determined using a discounted cash flow model with the Company's current risk adjusted rate of 6.5%.

The amendment to Section 3862 is applied to financial assets and liabilities, such as derivative instruments consisting of foreign exchange forward contracts (Level 2 – inputs, other than quoted prices in active markets, that are observable, either directly or indirectly). Total realized and unrealized losses of $456K were included in Other Income for the year ended December 31, 2010.

The anticipated maturities of the Company's financial liabilities are as follows:

Maturities of Financial Liabilities

  As at December 31, 2010
   
Financial Liability Less than
  3 months
Bank indebtedness (1) $ 12,370
Accounts payable and accrued liabilities   30,265
Customer deposits   560
Equipment notes payable - non- interest bearing (2)   40,097
Equipment notes payable - interest bearing (2)   78,063
Notes payable (3)   1,250
  $ 162,605
   
(1) Bank operating line of credit is due on demand and therefore the maturity is reflected as due currently.
(2) Equipment notes are due on demand and therefore the maturity is reflected as due currently. Principal repayments commence over the period from the date of financing to twelve months thereafter and are due in full when the related equipment is sold or within twenty-four months from the date of financing if the related equipment is not sold (see note 8).
(3) Notes payable is due in March 2011. It is related to the Champion Road Machinery acquisition in 2008.

Foreign exchange forward contracts, interest rate swaps and other hedging arrangements

On a transaction specific basis, the Company utilizes financial instruments to manage the risk associated with fluctuations in foreign exchange. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions.

The Company enters into foreign currency forward contracts to reduce the impact of currency fluctuations on the cost of certain pieces of equipment ordered for future delivery to customers. As at December 31, 2010, the Company had outstanding foreign exchange forward contracts totalling US$7,447 at an average exchange rate of $1.0227 Canadian for each US$1.00 with maturities between January and the end of May 2011. These foreign currency forward contracts are not considered hedges for accounting purposes and as a result any gain or loss resulting from the fair valuation of these contracts at each month end prior to their settlement is charged to earnings from continuing operations. The outstanding foreign exchange contracts are reported as accrued liabilities in the consolidated balance sheets and changes in the outstanding amount are reported as changes in non-cash working capital balances related to operations on the consolidated statements of cash flows. The fair valuation of these contracts at December 31, 2010 was $239.

Risks arising from financial instruments and risk management

The Company's activities expose it to a variety of financial risks: market risk (including foreign exchange and interest rate), credit risk and liquidity risk. The Company's overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company's financial performance. The Company does not purchase any derivative financial instruments for speculative purposes.

Risk management is the responsibility of the corporate finance function. The Company's operations along with the corporate finance function, identify, evaluate and, where appropriate, hedge financial risks. Material risks are monitored and are regularly discussed with the audit committee of the board of directors.

Foreign exchange risk

The Company operates in Canada. The functional and reporting currency of the Company is Canadian dollars. Foreign exchange risk arises because the amount of Canadian dollars receivable or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates ("transaction exposures"). The balance sheet of the Company includes U.S. dollar denominated accounts payable and accounts receivable. These amounts are translated into Canadian dollars at each period end, with resulting gains and losses recorded in earnings. The objective of the Company's foreign exchange risk management activities is to minimize transaction exposures. The Company manages this risk by entering into foreign exchange forward contracts on a transaction specific basis. The Company does not currently hedge translation exposures. Substantially all of the Company's purchases are translated into Canadian dollars at the date of receipt.

As at December 31, 2010, the Company carried $3,836 in U.S. dollar denominated liabilities net of U.S. dollar denominated cash and accounts receivable. A +/- $0.10 change in foreign exchange rate between Canadian and U.S. currencies would have an effect of approximately $384 on earnings from continuing operations for the year ended December 31, 2010.

Total foreign exchange gains for the year ended December 31, 2010 were $64 (foreign exchange gains for the year ended December 31, 2009 were $211).

Interest rate risk

The Company's interest rate risk primarily arises from its floating rate debt, in particular its bank operating line of credit and its interest-bearing equipment notes payable. As at December 31, 2010, all of the Company's interest-bearing debt is subject to movements in floating interest rates.

As at December 31, 2010, the Company had $90,433 in interest bearing floating rate debt. A +/- 1.0% change in interest rates would have an effect of approximately $904 on earnings from continuing operations for the year ended December 31, 2010.

Credit risk

Effective January 1, 2009, the Company adopted the recommendations of the CICA guidance under EIC 173 "Credit Risk and the Fair Value of Financial Assets and Financial Liabilities". This guidance clarified that an entity's own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities including derivative instruments. The adoption of the above described standard did not have a material impact on the Company's consolidated financial statements.

Credit risk arises from cash and cash equivalents held with banks and financial institutions, derivative financial instruments (foreign exchange forward contracts), as well as credit exposure to customers, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets.

The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company's management continuously performs credit evaluations of customers and limits the amount of credit extended to customers as appropriate. The Company is, however, exposed to credit risk with respect to accounts receivable and maintains provisions for possible credit losses based upon historical experience and known circumstances. In certain circumstances, the Company registers liens, priority agreements and other security documents to further reduce the risk of credit losses. From time to time the Company requires deposits before certain services are provided or contracts undertaken. As at December 31, 2010, the Company held customer deposits of $560.

The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts. The provision of the allowance for doubtful accounts is recognized in the income statement within operating expenses in the period of provision. When a receivable balance is considered uncollectible, it is written off against the allowance for doubtful accounts. Subsequent recoveries of amounts previously written off are credited against operating expenses in the income statement.

The following table sets forth details of the age of receivables that are not overdue as well as an analysis of overdue amounts and related allowance for the doubtful accounts:

  As at December 31, 2010  
   
Total accounts receivable $ 37,081  
Less: Allowance for doubtful accounts   (1,196 )
Total accounts receivable, net   35,884  
   
Of which:      
Current   25,267  
1-30 Days Past Due   7,767  
31-60 Days Past Due   1,898  
Greater than 60 Days Past Due   2,150  
    37,081  
  Less: Allowance for doubtful accounts as at December 31, 2009   (1,362 )
    Decrease in allowance for the year ended December 31, 2010   166  
    Allowance for doubtful accounts as at December 31, 2010   (1,196 )
Total accounts receivable, net $ 35,884  

There were no significant balances outstanding with individual customers as of December 31, 2010.

Liquidity risk

Effective October 1, 2009, the Company adopted the recommendations of the CICA on the amended accounting standard, Section 3862, "Fair Value and Liquidity Risk Disclosure". The amendment is effective for fiscal years ending on or after October 1, 2009 and now requires that all financial instruments measured at fair value be categorized into one of the following three hierarchy levels for disclosure purposes:

  • Level 1 – Using quoted prices in active markets for identical instruments that are observable;
  • Level 2 – Using quoted prices for similar instruments and inputs other than quoted prices that are observable and derived from or corroborated market data; or
  • Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

The three levels distinguish between the levels of observable inputs when measuring fair value. The amendment only affects the Company's fair value disclosure in the notes to the audited consolidated statements and did not have an impact on the results of operations and financial condition of the Company.

Liquidity risk arises through excess of financial obligations over available financial assets due at any point in time. The Company's objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time. The Company achieves this by maintaining sufficient availability of funding from committed credit facilities. As at December 31, 2010, the Company had undrawn lines of credit available to it of $7.6 million.

19. MANAGEMENT OF CAPITAL

The Company defines capital that it manages as shareholders' equity and total managed debt instruments consisting of equipment notes payable (both interest-bearing and interest-free) and other interest-bearing debt. The Company's objectives when managing capital are to ensure that it has adequate financial resources to maintain liquidity necessary to fund its operations and provide returns to its shareholders.

Equipment notes payable comprise a significant portion of the Company's capital. Increases and decreases in equipment notes payable can be significant from period to period and depend upon multiple factors, including availability of supply from manufacturers, seasonal market conditions, local market conditions and date of receipt of inventories from the manufacturer. Refer to note 8 for details of the equipment note facility.

The Company manages its capital structure in a manner to ensure that its ratio of total managed debt instruments to shareholders' equity does not exceed 3.5:1.

As at December 31, 2010 and December 31, 2009, the above capital management criteria can be illustrated as follows:

  2010
2009
 
Interest bearing debt $ 12,370 $ 10,014
Equipment notes payable   118,160   104,843
Notes payable   1,233   2,312
Total managed debt instruments $ 131,763 $ 117,169
Unitholders' equity $ 54,511 $ 54,648
Ratio of total managed debt instruments to shareholders' equity   2.4   2.1

The Company has a credit facility with a Canadian chartered bank which provides a $20 million 364-Day committed operating line of credit which is renewable annually. Refer to note 7 for details of the credit facility.

The Company's bank credit facility contains financial covenants that require the Company to maintain certain financial ratios and meet certain financial thresholds. In particular, the facility contains covenants that require the Company to maintain a minimum ratio of total current assets to current liabilities ("Current Ratio covenant") of 1.1: 1, a minimum tangible net worth ("TNW covenant") of $54 million, a maximum ratio of total debt to tangible net worth ("Debt to TNW Ratio covenant") of 3.5 : 1 and a minimum ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") minus capital expenditures to total interest ("Debt Service Coverage Ratio covenant") of 1.3 : 1. For the purposes of calculating covenants under the credit facility, debt is defined as total liabilities less future income tax amounts and subordinated debt. The Debt Service Coverage Ratio is measured at the end of each quarter on a trailing twelve month basis. Other covenants are measured as at the end of each quarter.

On March 29, 2010, the bank renewed the credit facility and the $20 million operating line of credit, and the $10 million foreign exchange line ("FX Line"). In conjunction with this renewal, the bank amended the covenants to reduce the minimum tangible net worth requirement to $52 million as at March 31, 2010, increasing to $54 million as at June 30, 2010. All other terms and conditions of the credit facility remained unchanged.

As at June 30, 2010 actual tangible net worth was $52 million. On August 6, 2010 the bank issued a waiver for the shortfall in the covenant and amended the minimum tangible net worth requirement to $50 million as at September 30, 2010, increasing to $54 million as at December 31, 2010. In addition, the bank increased the FX Line to $15 million. The bank charged a fee of $25 for these amendments. The Company's equipment note lenders provided a waiver of the cross default resulting from the covenant violation under the bank agreement.

On December 30, 2010 the bank amended the minimum tangible net worth requirement to $50 million as at December 31, 2010, increasing to $54 million as at March 31, 2011.

Certain of the Company's equipment finance credit agreements contain restrictive financial covenants, including requiring the Company to remain in compliance with the financial covenants under all of its other lending agreements ("cross default provisions"). The equipment finance credit agreements contain other restrictive financial covenants that are similar but less restrictive than those of the bank.

The Company was in compliance with all covenants under its bank credit facility and all equipment finance lines as at December 31, 2010.

20. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES

The net changes in non-cash working capital balances related to continuing operations are as follows:

  2010   2009  
Accounts receivable $ (8,796 ) $ 13,102  
Prepaids   (197 )   (23 )
Inventories   (33,738 )   8,421  
Income & other taxes receivable   -     772  
  $ (42,731 ) $ 22,272  
   
Accounts payable and accrued liabilities   9,399     (21,250 )
Deferred revenue & customer deposits   806     (2,139 )
Equipment notes payable - non-interest bearing   11,426     (6,906 )
Equipment notes payable - interest bearing   1,891     (7,135 )
    23,522     (37,430 )
  $ (19,209 ) $ (15,158 )

21. ECONOMIC RELATIONSHIP

The Company, through its Equipment Distribution segment, sells and services heavy equipment and related parts. Distribution agreements are maintained with several equipment manufacturers, of which the most significant are with Volvo Construction Equipment North America, Inc. The distribution and servicing of Volvo products account for a substantial portion of the Equipment Distribution segments operations. The Company has had an ongoing relationship with Volvo since 1991.

22. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2010 consolidated financial statements.

23. SUBSEQUENT EVENTS

On January 17, 2011, the Company completed a rights offering for aggregate gross proceeds of $7.86 million. The offering was virtually fully subscribed, with a total of 9,941,964 rights being exercised for 2,485,491 common shares and 134,419 common shares being issued pursuant to the additional subscription privilege. Under the offering, each registered holder of the Corporation's Common Shares as of December 17, 2010 received one Right for each Common Share held. Four Rights plus the sum of $3.00 were required to subscribe for one Common Share. Each common share was issued at a price of $3.00. Expenses of $105 related to the rights offering were expensed as a period cost. As of January 17, 2011, the Corporation has 13,128,629 common shares issued and outstanding.

On February 18, 2011, the Company completed the acquisition of 100% of the shares of Chadwick-BaRoss, Inc., a US corporation for US$11.5 million. Chadwick-BaRoss, Inc. is a heavy equipment dealer headquartered in Westbrook, Maine, with three branches in Maine and one in each of New Hampshire and Massachusetts. The transaction value was satisfied with cash of US$9.6 million and notes issued to the major shareholders of Chadwick-BaRoss totalling US$1.9 million.

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