Strongco Income Fund
TSX : SQP.UN

Strongco Income Fund

July 30, 2009 20:08 ET

Strongco Announces Second Quarter 2009 Results

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

Summary (1)

- Markets for new equipment in Strongco's market areas declined by approximately 50% from the first six months of 2008

- Total revenues in the second quarter decreased 36% from 2008 to $76.7 million; year to date decrease was 24%

- Gross margin as percent of revenue improved to 21% from 16% in the second quarter of 2008; increased to 22% from 17% for the six-month period

- Expenses decreased 13% to $13.7 million in the quarter; 7.7% year to date

- Earnings per unit from continuing operations for second quarter decreased to $0.19 from $0.29; for six-month period increased to $0.32 from $0.21 in 2008

- Consolidated three Ontario branches into one with estimated annualized savings of $0.8 million

- Further headcount reductions in the quarter brings total headcount reduction year to date to 49 or 7% with estimated annualized savings of $2.8 million

- Sold Engineered Systems division for proceeds of $6.5 million

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

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

"In continuing, very difficult market conditions, for the first six months of 2009, we have maintained market share, improved margins, reduced expenses and improved profitability over last year," said Robert Dryburgh, President and Chief Executive Officer of the Fund. "The economic downturn, particularly in the construction sector, led to lower business volumes during the second quarter. Most of the markets serviced by Strongco for new equipment declined from first quarter levels and, compared to last year, Ontario declined by more than 50% in the quarter and Alberta by approximately 70%. Being profitable in this environment is testament to the strength of the Strongco team."

Strongco sold the Engineered Systems division during the second quarter, for proceeds of $6.5 million. The segment contributed 7% of 12-month revenues in 2008 and was not profitable. "Our strategy for Strongco is to build on our position as a leading distributor of construction equipment," noted Mr. Dryburgh. "This divestiture allows Strongco to concentrate our resources and efforts on the core businesses where we see opportunities for growth."

Second Quarter 2009 Review

During the second quarter, heavy equipment sales in the markets in which Strongco operates declined further from the decline experienced in the first three months of 2009. The overall market deterioration for the first six months of the year is estimated to be from 50% to 60% compared to 2008.

"The recession has led many customers to delay or reduce equipment purchases until they see clear signs of an improving economy," said David Wood, Vice President and Chief Financial Officer. "As a result, there has been an increased market preference to purchase used machinery or repair and refurbish existing equipment and this is reflected in Strongco's revenue mix for the second quarter."

Financial Highlights (i)
($ millions except per unit amounts)



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Period ended June 30 3 months 6 months
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2009 2008 2009 2008
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Revenues $ 76.7 $ 119.2 $ 149.7 $ 196.0
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Earnings from continuing
operations $ 2.0 $ 3.0 $ 3.4 $ 2.2
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Earnings (loss) from discontinued
operations ($0.6) ($0.1) ($0.7) $ 0.1
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Net income $ 1.4 $ 2.9 $ 2.6 $ 2.3
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Basic and diluted earnings from
continuing operations per unit $ 0.19 $ 0.29 $ 0.32 $ 0.21
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Basic and diluted net income
per unit $ 0.14 $ 0.27 $ 0.25 $ 0.22
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Distributions per unit $ 0.0 $ 0.30 $ 0.0 $ 0.60
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Total assets $ 224.3 $ 253.0
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Total debt $ 133.1 $ 152.9
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(i) Strongco's Engineered Systems division was sold during the second
quarter of 2009 and is considered a Discontinued Operation in the
current period. Results for 2008 have been restated accordingly.


Total revenues during the three-month period decreased by 36% from the same period in 2008 to $76.7 million. Equipment sales declined by 44% to $49.6 million. Product support revenues eased by only 8%, while rentals moved down by 33%. For the first six months of 2009, revenues decreased by 24% to $149.7 million.

Gross margin decreased by 16% to $16.4 million during the second quarter. That equates to a gross margin percentage of 21%, up from 16% in the second quarter of 2008. The increase reflects higher margins earned on equipment sales compared to last year as well as higher margins offered by product support activities compared to sales of new equipment. During the second quarter, product support revenues again constituted a higher proportion of total revenues than last year. For the six months, gross margins were 21% compared to 17% in 2008.

Administrative, distribution and selling expenses decreased by 13% to $13.7 million during the second quarter. The acquisition of the Champion Road Machinery division of Volvo Group Canada Inc. in March 2008, plus new and expanded facilities in key markets across Canada in the first half of 2008 added to expense levels. However, these outlays have been more than offset by cost control measures implemented in late 2008. In addition, since the beginning of 2009, headcount has been reduced by 7% and three branches in Ontario have been consolidated into other branches to reduce the cost structure of servicing those markets. During the first half of 2009, expenses declined by 8% to $27.9 million.

Earnings from continuing operations for the quarter totalled $2.0 million, compared to $3.0 million in 2008, equating to $0.19, versus $0.29 last year. For the six month period, earnings from continuing operations were $3.4 million in 2009 compared to $2.2 million in 2008, equating to $0.32 per unit compared to $0.21 last year.

The Fund ended the second quarter with net income of $1.4 million compared to $2.9 million in 2008, equivalent to $0.14 per unit versus $0.27 in 2008. For the first six months, net income was $2.6 million or $0.25 per unit, up from $2.3 million or $0.22 per unit last year.

Financial Position

The Fund continues to have access to a $20.0 million operating line of bank credit and $10.0 million foreign exchange facility. In addition, Strongco makes use of additional lines of credit from equipment manufacturers and other third party lenders on an as-needed basis to facilitate equipment purchases. These lines total $145.0 million, of which Strongco has drawn $117.0 million.

The Fund's total indebtedness, comprising bank debt plus equipment notes and other notes payable, totalled $133.1 million at June 30, 2009. At the same time last year the total was $152.9 million.

Outlook

The economic outlook for Canada for the balance of 2009 remains uncertain, particularly the prospects for oil and gas production in Alberta. In addition, there is little evidence, as yet, of government economic stimulus programs seriously impacting the construction marketplace. In disposing of the Engineered Systems division, Strongco management has focused efforts on the equipment business as well as improving Strongco's financial condition. Strongco has adjusted to the market conditions in the core business to be profitable for the first six months and is poised to benefit from any upswing in market conditions. In the meantime, management will focus on improving market share, controlling costs and working capital management.

Conference Call Details

Strongco will hold a conference call on Friday, July 31, 2009 at 10 am ET to discuss second quarter results. Analysts and investors can participate by dialing 416-644-3426 or toll free 1-800-732-0232. An archived audio recording will be available until midnight on August 14, 2009. To access it, dial 416-640-1917 or 1-877-289-8525 and enter passcode 21311813#.

About Strongco

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

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



Information Contact

J. David Wood
Vice President and Chief Financial Officer
Phone: 905 565 3808
E-mail: jdwood@strongco.com


Forward-Looking Statements

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



CONSOLIDATED BALANCE SHEETS

As at As at
June 30 December 31
(unaudited - in thousands of dollars) 2009 2008
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ASSETS
Current
Accounts receivable $ 33,238 $ 40,190
Inventories 166,953 164,091
Prepaid expenses and deposits 1,742 1,232
Assets held for sale 9,675
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Total current assets 201,933 215,188

Capital assets, net 14,948 15,073
Other assets 242 241
Accrued benefit asset 5,414 5,415
Intangibles 1,800 1,800
-
Assets held for sale 3,166
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$ 224,337 $ 240,883
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LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness $ 13,663 $ 12,844
Accounts payable and accrued liabilities 31,558 42,116
Distributions payable to unitholders - -
Deferred revenue and customer deposits 541 2,654
Equipment notes payable - non-interest bearing 42,719 35,577
Equipment notes payable - interest bearing 74,391 83,307
Current portion of capital lease obligations - -
Current portion of notes payable 1,181
Liabilities related to assets held for sale 5,342
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Total current liabilities 164,053 181,840

Future income taxes 1,222 1,517
Other liabilities - -
Notes payable 1,150 2,264
Capital lease obligations - -
Accrued benefit liability 715 712

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Total liabilities 167,140 186,333
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Unitholders' equity
Unitholder capital 57,089 57,089
Retained Earnings (deficit) 108 (2,539)
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Total unitholders' equity 57,197 54,550
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$ 224,337 $ 240,883
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CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS

(unaudited - in
thousands of
dollars, except Three months Six months
units and per ended June 30 ended June 30
unit amounts) 2009 2008 2009 2008
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Revenue $ 76,653 $ 119,229 $ 149,663 $ 195,958
Cost of sales 60,234 99,678 117,318 162,029
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Gross margin 16,419 19,551 32,345 33,929

Expenses
Administration,
distribution and
selling 13,650 15,774 27,905 30,245
Amortization of
intangibles - order
backlog - 93 - 217
Other income (271) (533) (953) (930)

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Income before the
following 3,040 4,217 5,393 4,397
Interest 1,024 1,107 2,144 2,018

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Earnings from
continuing
operations before
income taxes 2,016 3,110 3,249 2,379
Provision for income
taxes (21) 113 (108) 162
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Earnings from
continuing
operations 2,037 2,997 3,357 2,217
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Income (loss) from
discontinued
operations (601) (110) (710) 116

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Net income and
comprehensive income $ 1,436 $ 2,887 $ 2,647 $ 2,333
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Retained (deficit)
earnings, beginning
of period (1,328) 1,914 (2,539) 4,979
Unitholder
distributions - (3,053) - (5,564)
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Retained earnings,
end of period $ 108 $ 1,748 $ 108 $ 1,748
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Earnings (loss)
per unit
Continuing
operations - basic
and diluted 0.19 0.29 0.32 0.21
Discontinued
operations - basic
and diluted (0.06) (0.01) (0.07) 0.01
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Earnings per unit $ 0.14 $ 0.27 $ 0.25 $ 0.22
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Number of units
issued and to be
issued 10,508,719 10,508,719 10,508,719 10,508,719
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CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited - in Three months Six months
thousands of ended June 30 ended June 30
dollars) 2009 2008 2009 2008
---------------------------------------------------------------------------

OPERATING ACTIVITIES
Income from continuing
operations $ 2,037 $ 2,997 $ 3,357 $ 2,217
Add (deduct) items not
involving a current outlay
(inflow) of cash
Amortization of capital assets 214 201 425 378
Amortization of intangible
assets - 93 - 217
Gain on disposal of capital
assets (10) - (15) (14)
Stock based compensation - 10 20
Future income taxes (recovery) (21) 155 (120) 200
Interest accretion on note
payable 33 34 67 34
Other 6 (38) 3 188
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2,259 3,452 3,717 3,240
Net change in non-cash working
capital balances
related to operations (12,577) (6,194) (10,365) (1,006)
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Cash (used in) provided by
operating activities of
continuing operations (10,318) (2,742) (6,648) 2,234
Cash (used in) provided by
operating activities of
discontinued operations (34) (1,187) 208 (656)
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Cash (used in) provided by
operating activities (10,352) (3,929) (6,440) 1,578
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INVESTING ACTIVITIES
Purchase of capital assets (60) (666) (305) (777)
Acquisition (23) - (7,169)
Proceeds on disposal of
capital assets 10 - 20 14
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Cash used in investing
activities of continuing
operations (50) (689) (285) (7,932)
Cash provided by (used in)
investing activities of
discontinued operations 5,952 (293) 5,906 (523)
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Cash provided by (used in)
investing activities 5,902 (982) 5,621 (8,455)
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FINANCING ACTIVITIES
Increase in bank indebtedness 4,450 6,432 819 11,411
Increase in term debt - -
Unitholder distributions (1,521) - (4,534)

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Cash provided by financing
activities 4,450 4,911 819 6,877
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Net increase in cash and cash
equivalents during the period $ - $ - $ - $ -
Cash and cash equivalents,
beginning of period - - - -
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Cash and cash equivalents, end
of period $ - $ - $ - $ -
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Contact Information