STRONGCO CORPORATION 2018 ANNUAL REPORT 1

Transcription

1 2018ANNUAL REPORT STRONGCO CORPORATION 2018 ANNUAL REPORT 1

2 WE ARE STRONGCO is a major multiline mobile equipment dealer with operations across Canada. Strongco sells, rents and services equipment used in diverse sectors such as construction, infrastructure, mining, oil and gas, utilities, municipalities, waste management and forestry. The Company has approximately 500 employees serving customers from 25 branches in Canada. Strongco represents leading equipment manufacturers with globally recognized brands, including Volvo Construction Equipment, Case Construction, Manitowoc Crane, including National and Grove, Terex Trucks, Fassi, Sennebogen, Konecranes and SDLG. Strongco is listed on the Toronto Stock Exchange under the symbol SQP. 1 LETTER TO OUR SHAREHOLDERS 3 MANAGEMENT S DISCUSSION AND ANALYSIS 4 Company Overview 4 Financial and Operating Highlights for the Year 5 Summary of Operating Results Continuing Operations 6 Outlook 6 Financial Results Annual 13 Financial Highlights Fourth Quarter 13 Summary of Operating Results Fourth Quarter 17 Summary of Quarterly Data 18 Contractual Obligations 18 Shareholder Capital 18 Non-IFRS Measures 19 Significant Accounting Policies and Critical Accounting Estimates 20 Risks and Uncertainties 22 Disclosure Controls and Internal Controls Over Financial Reporting 22 Forward-Looking Statements 25 CONSOLIDATED FINANCIAL STATEMENTS 26 Management s Responsibility for Financial Reporting 27 Independent Auditor s Report 30 Consolidated Statements of Financial Position 31 Consolidated Statements of Earnings (Loss) 32 Consolidated Statements of Comprehensive Loss 33 Consolidated Statements of Changes in Shareholders Equity 34 Consolidated Statements of Cash Flows 35 Notes to Consolidated Financial Statements STRONGCO CORPORATION 2018 ANNUAL REPORT 2

3 TO OUR SHAREHOLDERS 2018 marked another year of steady progress for Strongco, in our ongoing objective to build a more sustainable and profitable future for the business. We re pleased with the financial performance to-date, which resulted in both top- and bottom-line growth, driven largely by strong equipment sales, and notable upturns in rentals and product support revenues. In addition, better margins and lower expenses led to a significant year-overyear increase in operating income, despite the large restructuring cost taken in the third quarter of last year for the lease termination of our Fort McMurray branch and relocation to a smaller facility nearby. Inventory levels rose in 2018 to facilitate the growth in sales and rental activity in our key markets, and included the purchase of a large quantity of select products in the fourth quarter at lower purchase prices to help mitigate the longer lead times associated with stronger demand. Turning to our regional outlook, the ongoing, yet moderate, economic recovery across the country has resulted in renewed confidence in the markets for construction, leading to increased demand for heavy equipment, which is expected to continue for the remainder of Economic conditions in Alberta should continue to improve over the course of this year, leading to greater construction activity and the resulting demand for heavy equipment, although the market for cranes remains weak. At the same time, with the anticipation of a provincial election in the second quarter, there is a sense of optimism for continued economic growth post-election, but a wait-and-see attitude has developed, which has affected demand for equipment in the first quarter of Overall, an air of caution remains in Alberta, signaled by an ongoing preference for used equipment and rentals. In Ontario, extremely cold winter weather conditions have led to reduced demand for heavy equipment in the first quarter; however, the outlook for modest growth has bolstered confidence, and the expectation is for increased demand over the balance of the year. The market for cranes remained soft throughout 2018, and while there was some uptick in activity towards year-end, overall demand for cranes is expected to remain weak in The steady pace of growth in Quebec is expected to continue; however, the lack of new government infrastructure spending in the province could hinder demand for heavy equipment over the near term. Mining activity in the northern regions remains active, given the strength of gold and iron ore, which could lead to increased demand for equipment. At the same time, the near-term outlook for cranes is for continued weakness. Demand for heavy equipment in Atlantic Canada was soft throughout 2018 and is expected to remain relatively unchanged in Management is encouraged by the positive trends in the business, and the increase in market share for general purpose equipment (GPE) in all regions of the country in While the strong performance last year was due, in part, to increased activity in key markets, we are particularly proud of the accomplishments of the entire team at Strongco for their ongoing commitment and hard work, and disciplined execution on our operational goals and organizational values. Given the current conditions, we see a meaningful opportunity for the expansion of our rental business in select markets where certain products may not otherwise be available. We continue to judiciously source excellent people, adding technicians and territory sales managers (TMs), according to market demand. And on the product support side, we re diligently working to have a wider selection of parts available to our customers with minimal wait time. Rental activity remains strong across the country with income from equipment in the field on RPO and rent-to-rent contracts up approximately 9% year-over-year a preference among our customers that has continued into As a result, Strongco has ramped up its rental business in select regions. For example, we have a significant fleet of rock trucks on lease in the northern regions of Ontario and Alberta for several major projects, and we continue to explore new prospects in all regions of the country. In terms of new product, there is an overall feeling of momentum across the country so far this year, with more units on the ground, as we actively pursue opportunities with the help of our key OEM account teams, STRONGCO CORPORATION 2018 ANNUAL REPORT 1

4 including Strongco s largest partner, Volvo Construction Equipment, CASE in Ontario, as well as niche product lines, such as Konecranes and Sennebogen. We are taking a more focused approach on the part of our TMs to increase windshield time, by staying on top of the business at hand and following up on new opportunities. Strongco and our loyal customers are extremely pleased to see the 181,000-square-foot Volvo Distribution Centre in Milton, Ontario operating on a limited trial basis, with the official ribbon-cutting ceremony scheduled for March 26, The central location of this facility will allow Strongco branches across the country much quicker restocking of both common and business-critical parts previously sourced from the U.S. We anticipate this facility will have an important impact on our overall customer experience with improved access to essential inventory, in addition to next-day express delivery capabilities. Notwithstanding the positive performance in 2018, our optimism is tempered somewhat by persistent economic and political uncertainties in key markets. Of course, we hope for the best, and in the meantime, Strongco is benefiting from more financial stability and increased market share both of which will continue to be management s priorities in the months to come. This, along with a front-line focus on exceptional customer service and world-class brands, has the organization in the strongest position we have held in some time, which bodes well for future value creation over the longer term. On behalf of the directors, we d like to welcome Eudora LeBlanc, who brings a wealth of experience and expertise to her new role as a director at Strongco. She is currently a Principal at ELE Consulting, experts in performance improvement, process change and change management, and a former VP of Special Projects at IKO Industries, a Canadian-based roofing, waterproofing, and insulation manufacturer. In addition, we would like to thank our two departing directors, John Bell and Yedidia Koschitzky, for their contributions to the board over the past several years. Robert J. Beutel Executive Chairman J. David Wood, CPA Vice President, Chief Financial Officer and Corporate Secretary March STRONGCO CORPORATION 2018 ANNUAL REPORT 2

5 MANAGEMENT S DISCUSSION & ANALYSIS STRONGCO CORPORATION 2018 ANNUAL REPORT 3

6 Management s Discussion and Analysis The following management s discussion and analysis ( MD&A ) provides a review of the consolidated financial condition and results of operations of, Strongco GP Inc. and Strongco Limited Partnership, collectively referred to as Strongco or the Company, as at and for the year ended December 31, 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, For additional information and details, readers are referred to the Company s quarterly unaudited consolidated financial statements and quarterly MD&A for fiscal 2018 and fiscal 2017 as well as the Company s Annual Information Form ( AIF ) dated March 19, 2019, all of which are published separately and are available on SEDAR at Unless otherwise indicated, all financial information within this discussion and analysis is in millions of Canadian dollars except per share amounts. The information in this MD&A is current to March 19, COMPANY OVERVIEW Strongco is one of the largest multiline mobile equipment distributors in Canada. Strongco sells and rents new and used equipment and provides after-sale product support (parts, service and warranty recovery from the OEM) to customers who 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: i. 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; ii. Case Corporation ( Case ), for which Strongco has a distribution agreement for a substantial portion of Ontario; and iii. Manitowoc Crane Group ( Manitowoc ), for which Strongco has distribution agreements for the Manitowoc, Grove and National brands, covering much of Canada. The distribution agreements with Volvo and Case provide Strongco 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 equipment lines and attachments which are complementary to its primary lines, including Allied Construction, Dressta, ESCO, Fassi, Konecranes, Sennebogen, SDLG and Terex Trucks. Strongco is listed on the Toronto Stock Exchange under the symbol SQP. FINANCIAL AND OPERATING HIGHLIGHTS FOR THE YEAR Lease Termination Fort McMurray In management s continuing efforts to streamline the business and reduce costs, effective July 1, 2018, the Company terminated the lease of its branch at 205 McAlpine Crescent in Fort McMurray, Alberta, and entered into a new lease agreement to sublet a smaller building at 310 MacKenzie Boulevard as its new branch in Fort McMurray. The total cost for termination of the existing lease and relocation to the new facility amounted to approximately $3.4 million and has been recorded as a restructuring cost in the third quarter of These costs include a termination fee of approximately $2.7 million plus real estate fees, legal fees, relocation costs and impairment of property and equipment. The termination fee of $2.7 million was satisfied by the issue of 150,000 common shares (with an approximate value of $0.3 million) and cash payment of $0.2 million on closing, followed by 22 equal monthly payments of $0.1 million plus interest at 6% to May Management estimates the net savings after the lease termination costs from exiting the current leased facility in favour of the smaller sublet facility will exceed $5.6 million over the remaining 11 years of the terminated lease. From a cash flow perspective, after the initial cash payments on closing, management anticipates the impact on the Company s cash flow from this transaction to be relatively neutral over the period of monthly payments after which the cash flow impact will be positive. Income Statement Strongco generated revenue of $412.1 million, compared to $376.1 million in 2017, an increase of $36.0 million from a year ago. Revenue in the year were affected by the following factors: o Higher sales of construction equipment across the country o Higher sales of used equipment, especially in Western Canada o Lower crane sales particularly in Western Canada due to ongoing weak markets o Increased rental revenue across the country, particularly in Western Canada o Higher product support sales (parts and service) across the country, particularly in Central Canada Gross profit of $73.4 million (17.8% of revenue) up from $68.1 million (18.1% of revenue). Operating income, before restructuring costs, of $11.8 million compared to $4.7 million from higher gross profit and lower operating expenses. EBITDA increased to $30.0 million from $21.0 due to improved operating income. Interest expense was $8.2 million compared to $6.2 million in 2017 due to higher equipment financing and higher interest rates. STRONGCO CORPORATION 2018 ANNUAL REPORT 4

7 Pre-tax loss before restructuring charges $3.6 million, improved from a loss of $1.6 million Net income of $0.2 million ($0.01 per share) compared to net loss of $2.2 million (loss of $0.17 per share). Balance Sheet Equipment inventory of $167.5 million, up from $153.3 million at December 31, The increase was mainly to support growth in equipment sales and increased rental activity and the purchase of a large quantity of certain products in the fourth quarter to secure product availability for 2019 and take advantage of lower purchase prices. Equipment notes payable of $141.4 million, compared to $131.0 million at December 31, Trade and other payables of $40.3 million, down slightly from $40.5 million at December 31, Bank Indebtedness improved at $28.5 million from $29.0 million at December 31, SUMMARY OF OPERATING RESULTS CONTINUING OPERATIONS Year Ended December / /2016 ($ thousands, except per share amounts) $ Change % Chg $ Change % Chg Revenue $ 412,108 $ 376,141 $ 390,736 $ 35,967 10% $ (14,595) -4% Cost of sales 338, , ,277 30,715 10% (18,244) -6% Gross margin 73,360 68,108 64,459 5,252 8% 3,649 6% Selling and administrative expenses 61,531 64,432 72,650 (2,901) -5% (8,218) -11% Other (income) expense 14 (1,008) (1,339) 1, % % Operating income (loss) 11,815 4,684 (6,852) 7, % 11, % Restructuring costs 3, ,605 2,765 (2,927) Impairment of intangible asset ,499 - (16,499) Interest expense 8,215 6,239 6,648 1,976 32% (409) -6% Earnings (loss) before income taxes 157 (2,233) (33,604) 2, % 31,371 93% Provision for (recovery of) income taxes - - 4,745 - (4,745) -100% Net income (loss) from continuing operations 157 (2,233) (38,349) 2, % 36,116-94% Net income from discontinued operations - - 1,036 - (1,036) -100% Net income (loss) $ 157 $ (2,233) $ (37,313) $ 2, % $ 35,080-94% Basic and diluted earnings (loss) per share - continuing operations $ 0.01 $ (0.17) $ (2.90) $ % $ % - net income (loss) 0.01 (0.17) (2.82) % % Weighted average number of shares - Basic and diluted 13,297,335 13,221,719 13,221,719 Key financial measures Gross margin as a percentage of revenues 17.8% 18.1% 16.5% Selling and administrative expenses as a percentage 14.9% 17.1% 18.6% Operating income (loss) as a percentage of revenues 2.9% 1.2% -1.8% EBITDA (Note 1) $ 29,992 $ 21,047 $ 6,623 $ 8,945 43% $ 14, % Balance Sheet Highlights December 31, December 31, December 31, ($ millions) Trade and other receivables Total equipment inventory Parts and Work-in-process Trade and other payables Equipment notes payable Other working capital amounts (1.9) (0.8) (2.5) Working capital (Note 1) (excl bank indebtedness) Property and equipment Funded debt (Note 1 ) (Note 1 see Non-IFRS Measures ) Strongco s revenues were up in 2018 due in part to improving market conditions but also due to strong sales performance and improving market shares across the country. Strongco s market share for general purpose construction equipment ( GPE ) was up overall in Canada and up in all regions of the country. Sales of construction equipment were up 18% over the prior year with increase in all regions of the country. However, cranes sales were down 11% due primarily to lower sales in Western Canada due to continuing weak market conditions. In addition, with improving construction markets, rental activity remained strong across the country resulting in a 9% increase in rental revenue. Product support activity across the country also remained strong which led STRONGCO CORPORATION 2018 ANNUAL REPORT 5

8 to a 5% increase in product support revenues in the year. With higher revenues gross profit was up in 2018 and at the same time operating expenses were lower resulting in a significant increase in operating income to $11.8 million from $4.7 million last year. While interest expense was higher as a result of higher levels of equipment inventory and related financing and higher interest rates, earnings before restructuring charges showed a substantial improvement over the prior year to $3.6 million from a loss before restructuring costs $1.6 million in After restructuring charges of $3.4 million related to the Fort McMurray lease termination, there was a small net profit of $0.2 million compared to a net loss of $2.2 million in As noted equipment inventory levels have increased to support the increase in equipment sales and rental activity and the purchase of a large quantity of certain products in the fourth quarter to secure product for 2019 and take advantage of lower purchase prices. Total equipment inventory at December 31, 2018 was $167.5 million compared to $153.3 million at the same time last year. OUTLOOK The Canadian economy is expected to continue at its current pace of moderate growth in With the modest economic recovery there has been renewed confidence in construction markets which has led to increased demand for heavy equipment. This trend is expected to continue into Economic conditions in Alberta are expected to continue to improve in 2019 and lead to increasing construction activity and demand for heavy equipment. With a provincial election expected in the second quarter, there is optimism for improved economic conditions post-election, however, a wait and see attitude has developed which is curtailing demand in the first quarter. In addition, while market conditions have improved in Alberta, an air of caution remains which has resulted in a shift more towards used equipment and rentals as markets continue to slowly recover, a trend that is expected to continue in The near-term outlook for cranes is for continuing weak markets in the province. While the price of oil has risen, it is not yet at a level to stimulate significant new development in Northern Alberta. As a result, demand for cranes, especially large hydraulic and rough terrain cranes, is expected to remain depressed. The economy in Ontario has been growing modestly throughout 2018 and there is an expectation of continued economic improvement in A cold and snowy winter in the province has somewhat curtailed demand for equipment in the first quarter of 2019 but improving economic conditions has increased confidence in construction markets and higher demand for heavy equipment in the balance of the year. Construction activity is expected to pick up in the second quarter as the summer season approaches and demand for construction equipment and rentals is expected to improve as the year progresses. The market for cranes in Ontario has been soft in 2018 and while there was some improvement towards the end of the year, demand for cranes, especially large cranes, is expected to remain weak in In Quebec, overall demand for heavy equipment increased modestly in 2018 and the pace of growth is expected to continue in With no plans for significant new government infrastructure spending, construction activity in the province is not expected to be robust in the near term which could restrain demand for heavy equipment. However, with strength in the price of gold and some improvement in iron ore prices, mining activity in northern regions of Quebec is expected to remain active and lead to demand for associated heavy equipment. Demand for cranes in the province was lower in 2018 and while there was modest improvement in the third and fourth quarters, the outlook for the near term in 2019 is for a continued weak crane market in Quebec. In the Atlantic region, overall demand for heavy equipment was soft in 2018 and is expected to remain weak throughout With no significant new government infrastructure spending and no meaningful uptick in housing, construction activity in the region is expected to remain soft in the near term. As the majority of heavy equipment is priced in US dollars, the weaker Canadian dollar has resulted in rising costs for new equipment to Canadian dealers and in the current competitive landscape it has become more difficult for dealers to pass on these higher costs. This is expected to continue to put pressure on sales and margins and cause customers to look to used equipment and rentals to meet their needs. Competition is expected to remain strong especially from dealers carrying lower cost tier 3 product, which will continue to impact sales and margins in With this economic backdrop, the overall markets for heavy equipment across Canada are expected to show continued but modest improvement in 2019 while the market for large cranes is expected to remain weak. While encouraged by the improvement in the Company s results in 2018, management remains cautiously optimistic regarding the outlook for FINANCIAL RESULTS ANNUAL Market Overview Strongco participates in a number of geographic regions and in a wide range of end-use markets that utilize heavy equipment and cranes and which may have differing economic cycles. Construction markets generally follow the cycles of the broader economy, but typically lag by periods ranging up to 12 months. When construction markets are robust, demand for heavy equipment is normally strongest. In addition, as the financial resources of heavy equipment customers strengthen, they have historically replenished and upgraded their fleets after a period of restrained capital expenditures. Demand in oil and gas and mining markets STRONGCO CORPORATION 2018 ANNUAL REPORT 6

9 is affected by the economy but also tends to be driven by the global demand and pricing of the relevant commodities. Activity 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. Cranes are also extensively utilized in the oil and gas sector. Rental of heavy equipment is typically greater following periods of recession until confidence is restored and financial resources of customers improve. However, over the last several years rental activity has remained strong even when markets were robust and is expected to continue to grow. Economic conditions in Canada continued to show signs of improvement in Construction activity was stronger in many regions of the country and with strength in the price of gold and some improvement in iron ore prices, mining activity was also stronger in 2018.This contributed to increased demand for construction equipment in most regions of the country. The market for general purpose equipment ( GPE ) was estimated to be up overall by approximately 10% and up in all regions of the country. Rental activity remained strong across the country as more customers continued to show a preference to rent or rent with an option to purchase. Alberta continued to show signs of recovery, although an air of caution remained which continued to impact customer purchase decisions and result in more customers choosing to rent equipment or purchase used machines. While demand for construction equipment was stronger, the market for cranes remained weak, especially demand for larger cranes. The crane market was particularly weak in Alberta. Revenues A breakdown of revenue for the years ended December 31, 2018, 2017 and 2016 is as follows: 2018/ /2016 ($ millions) % Chg % Chg Eastern Canada (Atlantic and Quebec) Equipment Sales $ 78.1 $ 66.9 $ % -23% Equipment Rentals % -17% Product Support % 8% Total Eastern Canada $ $ $ % -12% Central Canada (Ontario) Equipment Sales $ $ $ % -1% Equipment Rentals % 12% Product Support % -7% Total Central Canada $ $ $ % -3% Western Canada (Manitoba to British Columbia) Equipment Sales $ 63.0 $ 57.1 $ % 17% Equipment Rentals % 63% Product Support % -8% Total Western Canada $ $ 93.9 $ % 9% Total Revenue Years Ended December 31 Equipment Sales $ $ $ % -6% Equipment Rentals % 10% Product Support % -2% Total $ $ $ % -4% For the year ended December 31, 2018, total revenues were $412.1 million compared to $376.1 million in 2017, up $36.0 million or 10%. The following factors affected revenues in 2018: Total equipment sales were up by $28.2 million or 12%. Sales of construction equipment were up $32.8 million or 18% year over year with increases in each region of the country, but crane sales were down $4.6 million or 11% due primarily to lower crane sales in Alberta. Strongco s sales of construction equipment were up significantly in Alberta due in particular to strong sales of articulated trucks from RPO conversions and construction equipment sales were up in other regions of the country from strong sales of excavators and loaders. The market for GPE in Canada was estimated to be up 10% in total and was up in all regions across the country as improving economic conditions led to increasing demand for equipment. Strongco outperformed the market with GPE market share gains in all regions of the country due to strong growth in excavators, articulated trucks and loaders. STRONGCO CORPORATION 2018 ANNUAL REPORT 7

10 Rental revenues were up 9% over last year due to higher rentals of construction equipment in all regions of the country. Demand for rentals has been strong across the country but particularly so in Alberta. As the Alberta economy and construction markets in the province continued to recover, demand for equipment has improved but an air of caution has remained which has led more customers choosing to rent to meet their equipment needs. Product support revenues were up overall by 5% from last year. Sales of parts and service outside of warranty were up year over year by 8% but revenue from warranty recovery from the OEM was lower due to reduced warranty activity principally in Alberta where there was a high volume of warranty service jobs in the first quarter of Gross Profit ($ millions) Year Ended December / /2016 Gross Profit GM% GM% GM% $ Change % Chg $ Change % Chg Equipment Sales $ % $ % $ % $ 0.4 2% $ % Equipment Rentals % % % 0.2 9% - 0% Product Support % % % % (1.8) -4% Total Gross Profit $ % $ % $ % $ 5.3 8% $ 3.6 6% Strongco s overall gross profit was $73.4 million or 17.8% of revenue in 2018, up from $68.1 million or 18.1% last year. Higher revenues, especially equipment sales, contributed to an increase in gross profit in the year. As a percent of revenue, gross margin was lower due primarily to the higher proportion of equipment sales and lower gross margins on equipment sales. The gross margin on equipment sales was slightly lower due primarily to lower crane sales which typically command higher margins than construction equipment. The gross margin on product support was higher due primarily to a higher proportion of service sales relative to parts sales. Selling and Administrative Expense Administrative, distribution and selling expense in 2018 were $61.5 million or 14.9% of revenue, down from $64.4 million or 17.1% of revenue in Expenses continue to be managed closely following the restructuring initiatives undertaken in 2016 and 2017 and while certain variable expenses and headcounts have increased slightly with the rising revenues, improved efficiencies and other lower operating expenses contributed to the year over year decline in expenses. Occupancy costs, in particular, were lower primarily due to lower rent in Alberta as a result of termination of the Company s facility lease in Fort McMurray. Other Income and Expense Other income is primarily comprised of foreign exchange gains or losses, gains or losses on disposition of fixed assets, service fees received by Strongco as compensation for sales of new equipment by other third parties in 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 and expense in 2018 was nominal compared to other income of $1.0 million in 2017 which was primarily foreign exchange gains. Operating Income Higher revenues and gross profit resulted in operating income of $11.8 million in 2018, before lease termination costs, which compared to $4.7 million in Restructuring Costs As noted above, effective July 1, 2018, Strongco terminated the lease of its branch at 205 McAlpine Crescent in Fort McMurray, Alberta, and entered into a new lease agreement to sublet a smaller building at 310 MacKenzie Boulevard as its new branch in Fort McMurray. The total cost for termination of the existing lease and relocation to the new facility amounted to approximately $3.4 million and has been recorded as a restructuring cost in the third quarter of Interest Expense Strongco s interest-bearing debt comprises interest-bearing equipment notes and an operating line with the Company s bank. Strongco typically finances equipment inventory under lines of credit available from various finance companies, many of which are the captive finance affiliate of the OEM supplier. Most equipment financing has interest-free periods of up to 6 months from the date of financing, after which the equipment notes become interest-bearing. The rate of interest on the Company s bank operating lines and interest-bearing equipment notes payable vary with bank prime rates and Bankers Acceptance rates ( BA STRONGCO CORPORATION 2018 ANNUAL REPORT 8

11 rates ). (See discussion under Cash Flow, Financial Resources and Liquidity. ) Prime rates and BA rates have increased by 125 bps since March 2017 which has contributed to higher total interest expense. Primarily as a result of a higher level of interest-bearing equipment notes and the increase in prime lending rates, interest expense for 2018 was $8.2 million, up from $6.2 million a year ago. The Company has been building equipment inventory levels to support revenue growth and the increase in rental activity which has resulted in an increase in the level of interest-bearing equipment notes. Earnings / Loss Before Income Taxes Before restructuring costs, the earnings before tax was $3.6 million which was improved significantly from a pre-tax loss before restructuring costs of $1.6 million in After restructuring costs, the pre-tax earnings were $0.2 million in 2018 compared to a loss of $2.2 million in Provision for / Recovery of Income Taxes Tax loss carry forwards were used to offset the net income in 2018 resulting in no tax provision being recognized. Given the Company s history of losses, there is uncertainty that available cumulative tax losses would be recovered in the future. As a result, no additional recovery of income taxes has been recorded in 2018 or Strongco currently has non-capital losses of approximately $36 million with a value of approximately $13 million at current tax rates, which have not been recognized on the Company s balance sheet at December 31, Net Income / Loss Strongco s net income in 2018 was $0.2 million ($0.01 per share) compared to a net loss of $2.2 million ($0.17 per share) in EBITDA EBITDA in 2018 was $30.0 million (7.3% of revenue) which was up from $21.0 million (5.6% of revenue) in 2017 and $6.6 million (1.7% of revenue) in EBITDA was calculated as follows: Year Ended December 31 Change EBITDA ($ millions) / /2016 Net earnings (loss) from continuing operations $ 0.2 $ (2.2) $ (38.3) $ 2.4 $ 36.1 Add back: Interest (0.4) Income taxes (4.7) Impairment of intangible asset (16.5) Lease termination costs Depreciation of capital assets (0.3) (1.0) Depreciation of equipment inventory on rent Depreciation of rental fleet (0.4) (0.1) Amortization of computer system (0.9) EBITDA (see non-ifrs Measures) $ 30.0 $ 21.0 $ 6.6 $ 9.0 $ 14.4 Cash Flow, Financial Resources and Liquidity Cash Flow Provided By (Used In) Operating Activities: In 2018, cash of $32.1 million was provided by operating activities before changes in working capital. By comparison, in 2017, operating activities provided $22.5 million of cash before changes in working capital. After changes in working capital, payment of interest and funding of future benefits obligations, cash provided by operating activities was $4.3 million compared to $3.1 million of cash provided by operating activities in The components of the cash provided by operating activities were as follows: STRONGCO CORPORATION 2018 ANNUAL REPORT 9

12 Year Ended December 31 ($ millions) Net income (loss) $ 0.2 $ (2.2) Non-cash items: Depreciation equipment inventory on rent Depreciation capital assets Depreciation rental fleet Lease termination costs Gain on sale of rental fleet - (0.2) Share-based payment expense Interest expense Employee future benefit expense Changes in non-cash working capital balances (18.5) (12.7) Purchase of rental fleet - (0.1) Proceeds from sale of rental fleet Employee future benefit funding (1.2) (1.9) Interest paid (8.1) (6.3) Income tax receovery received Cash provided by operating activities $ 4.3 $ 3.1 Non-cash items include depreciation of equipment inventory on rent of $15.5 million, which compared to $13.7 million in During 2018, there was a net increase in non-cash working capital of $18.5 million resulting primarily from an increase in inventories in the year, largely to support growth in sales and the increase in rental activity, but this was partially offset by an increase in equipment notes payable. By comparison, during 2017, there was a net increase in non-cash working capital of $12.7 million. Components of cash flow from the net change in non-cash working capital for 2018 and 2017 were as follows: ($ millions) Year Ended December 31 (Increase) Decrease Trade and other receivables $ 1.6 $ (2.4) Inventories (30.8) (29.6) Prepaids and other assets $ (28.9) $ (31.6) Increase (Decrease) Trade and other payables 0.3 (9.4) Deferred revenue and customer deposits (0.3) (0.3) Equipment notes payable $ 10.4 $ 18.9 Net (increase) decrease in non-cash working capital $ (18.5) $ (12.7) Trade and other receivables at December 31, 2018 were $37.9 million, down slightly from $39.5 million at December 31, The average age of receivables at end of the year has improved compared to the end of Equipment inventory at the end of 2018 was $167.5 million, up from $153.3 million a year earlier. The increase was mainly to support growth in equipment sales, increased rental activity and the purchase of approximately $15 million of certain products in the fourth quarter to secure product availability for 2019 and take advantage of lower purchase prices. At December 31, 2018, Strongco had $52.8 million of equipment on rent, both short-term rental contracts and contracts with purchase options, down from $61.8 million at the same time last year due to the conversion to sale of several RPO contracts in the fourth quarter and the discontinuance of a large seasonal rental contract from A breakdown of equipment inventory at December 31, 2018 compared to prior quarters is as follows: ($ millions) December 31, 2018 September 30, 2018 June 30, 2018 March 31, 2018 December 31, 2017 Equipment in-stock $ $ $ $ $ 88.0 Equipment on rental contract with a purchase option Equipment on a short-term rental contract Equipment with customer return option Equipment inventory - total $ $ $ $ $ STRONGCO CORPORATION 2018 ANNUAL REPORT 10

13 With the increase in equipment inventory, equipment notes payable have increased. Equipment notes payable at December 31, 2018 was $141.4 million up from $131.0 million at the end of A breakdown of equipment notes payable at December 31, 2018 and the change throughout the year is as follows: ($ millions) December 31, 2018 September 30, 2018 June 30, 2018 March 31, 2018 December 31, 2017 Non-interest-bearing $ 48.7 $ 58.8 $ 45.2 $ 38.4 $ 38.9 Interest-bearing Equipment notes - total $ $ $ $ $ Trade and other payables at December 31, 2018 were $40.3 million down slightly from $40.5 million at December 31, Cash Provided By (Used In) Investing Activities: Net cash used in investing activities amounted to $1.0 million in 2018 related to the purchase capital assets related to branch upgrades and miscellaneous shop equipment purchases. Net cash provided by investing activities in prior year was $1.2m ($1.6 provided from funds released from escrow and $0.4 used related to the purchase of capital assets) Cash Provided By (Used in) Financing Activities: For the twelve months ended December 31, 2018, $3.2 million of cash was used in financing activities to reduce bank indebtedness, repay finance leases and pay the lease termination obligation. During 2017, cash of $4.3 million was used in financing activities to service debt obligations and reduce bank debt. The components of cash used in financing activities are summarized as follows: Year Ended December 31 ($ millions) Decrease in bank indebtedness $ (0.4) $ (1.7) Repayment of finance lease obligations (1.7) (2.6) Repayment of lease termination obligation (1.1) - Cash used in financing activities (3.2) (4.3) Bank Credit Facilities The Company has credit facilities with a bank in Canada. Operating Lines The Canadian bank credit facility includes a revolving demand facility which provides an operating line totaling $30 million. Borrowings under the operating line are limited by standard borrowing base calculations based on the balance of accounts receivable and inventory, which are typical of such bank credit facilities. As collateral, the Company has provided a security interest in accounts receivable, inventories (subordinated to the collateral provided to the equipment inventory lenders), capital assets (subordinated to collateral provided to lessors), owned real estate and other assets. The bank operating line bears interest at rates that vary with bank prime rates or Bankers Acceptances Rates ( BA rates ). Interest rates range between bank prime rate plus 2.00% and bank prime rate plus 4.00% or between the one-month Canadian BA rate plus 3.00% and the one-month Canadian BA rate plus 5.00%, depending on the Company s ratio of debt to tangible net worth. Under its bank credit facilities, the Company is able to issue letters of credit up to a maximum of $5 million. Outstanding letters of credit reduce availability under the Company s 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. At December 31, 2018, there were outstanding letters of credit totaling $0.05 million. In addition to its operating lines of credit, Strongco has a line of approximately US$18.4 million for foreign exchange forward contracts as part of its bank credit facilities ( FX Line ) available to hedge foreign currency exposure. Under this FX Line, the Company can purchase foreign exchange forward contracts up to a maximum of US$18.4 million. As at December 31, 2018, the Company had outstanding foreign exchange forward contracts under this facility totaling US$3.4 million at an average exchange rate of $ Canadian for each US$1.00 with settlement dates between January 2019 and June STRONGCO CORPORATION 2018 ANNUAL REPORT 11

14 Bank Financial Covenants The bank credit facilities in Canada contain financial covenants typical of such credit facilities that require the Company to maintain certain financial ratios and meet certain financial thresholds. In August of 2018, the bank credit agreement was amended to allow for the impact of IFRS 16, the new accounting standard for leases, which becomes effective in Under IFRS 16 all of the company s finance leases (which includes all of its property leases) will now be reflected as an asset and corresponding liability. The increase in the reported liabilities, which is estimated will be in the range of $45 million to $50 million, will increase funded debt per the bank financial covenants. Accordingly, the Debt to Tangible Net Worth covenant was amended to increase the maximum ratio of funded debt to tangible net worth to 10.0 to 1. In addition, the Interest Coverage Ratio was also amended to reduce the minimum ratio of EBITDA to total interest to 2.75 to 1. A summary of the financial covenants under the bank credit facilities at December 31, 2018 is as follows: Minimum ratio of total current assets to current liabilities ( Current Ratio covenant ) of 1.0:1, Minimum tangible net worth ( TNW covenant ) of $20 million, Maximum ratio of funded debt to tangible net worth ( Debt to TNW Ratio covenant ) of 10.0:1, and Minimum ratio of EBITDA to total interest ( Interest Coverage Ratio covenant ) of 2.75:1. In addition to these financial covenants, the Company s bank credit facility requires the Company to remain in compliance with the financial covenants under all of its other lending agreements ( cross default provisions ). The Company was in compliance with the financial covenants under its bank credit facilities and all other lending agreements at December 31, Equipment Notes In addition to its bank credit facilities, the Company has lines of credit available totaling approximately $188 million from various non-bank equipment lenders in Canada that are used to finance equipment inventory and rental fleet. At December 31, 2018, there was approximately $141 million borrowed on these equipment finance lines. Typically, these equipment notes are interest-free for periods of up to 6 months from the date of financing, after which they bear interest in Canada at variable rates based upon 30-day and 90-day Bankers Acceptance rates ( BA ), the prime rate of a Canadian chartered bank, and 30-day and 90-day LIBOR rates plus the financing company s margin. As at December 31, 2018, the rates ranged from 6.45% to 8.45% with a weighted average effective rate of 7.10%. As collateral for these equipment notes, the Company has provided liens on the specific inventory financed and any related accounts receivable. In the normal course of business, these liens cover substantially all of the equipment inventories. Monthly principal repayments equal to 3.00% 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 or 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. Any remaining balance after 24 months, which is due in full, 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. Equipment Notes Financial Covenants Two of the Company s equipment finance credit agreements contain restrictive financial covenants, similar to the bank credit facility, that require the Company to remain in compliance with certain financial covenants, including requiring the Company to remain in compliance with the financial covenants under all of its other lending agreements ( cross default provisions ). Under the equipment finance agreements, the covenants are identical to those under the Company s bank agreement and the Company was in compliance with those covenants at December 31, Summary of Outstanding Debt The balance outstanding under Strongco s debt facilities at December 31, 2018 and 2017 consisted of the following: Funded Debt As at December 31 ($ millions) Bank indebtedness (including outstanding cheques) $ 28.5 $ 29.0 Equipment notes payable non-interest-bearing Equipment notes payable interest-bearing Finance lease Total Funded Debt (see "Non-IFRS Measures") $ $ STRONGCO CORPORATION 2018 ANNUAL REPORT 12

15 Total borrowing under the Company s debt facilities was $177.0 million at December 31, 2018 compared to $166.2 million a year ago. The increase of $10.8 million was due to the increase in equipment notes payable to finance a higher level of equipment inventory. As at December 31, 2018, there was $5 million of unused credit available under the Company s bank credit lines. While availability under the bank lines fluctuates daily depending on the amount of cash received and cheques and other disbursements clearing the bank, availability normally ranges between $1 million and $8 million. The Company also had approximately $47 million available under its equipment finance facilities at December 31, FINANCIAL HIGHLIGHTS FOURTH QUARTER Income Statement Strongco generated revenue of $102.1 million, compared to $97.6 million in the fourth quarter of Revenue in the quarter was affected by the following factors: o Higher sales of construction equipment in Eastern and Western Canada o o Slightly lower rental revenue from construction equipment partially offset by slightly higher crane rental revenue Higher product support revenue from sales of parts and service for construction equipment offset slightly by lower sales of crane parts and service Gross profit of $18.1 million (17.7% of revenue) up slightly from $18.0 million (18.4% of revenue). Operating expenses of $14.9 million, down from $17.2 million in 2017 Operating income of $2.9 million up from $0.8 million due primarily to lower operating expenses. EBITDA increased to $7.9 million from $6.1 million due to improved operating income. Interest expense of $2.1 million, compared to $1.7 million in 2017 due to increased interest-bearing equipment finance debt and higher prime lending rates. Earnings before tax for the quarter increased to $0.8 million from a loss of $0.9 million in Net income of $0.8 million ($0.06 per share) compared to net loss of $0.9 million (loss of $0.07 per share). SUMMARY OF OPERATING RESULTS FOURTH QUARTER Three Months Ended December /2017 ($ thousands, except per share amounts) $ Change % Change Revenue $ 102,115 $ 97,637 $ 4,478 5% Cost of sales 84,023 79,632 4,391 6% Gross margin 18,092 18, % Selling and administrative expenses 14,932 17,231 (2,299) -13% Other (income) expense 264 (47) 311 n/a Operating income 2, , % Interest expense 2,113 1, % Earnings (loss) before income taxes 783 (901) 1, % Provision for income taxes Net income (loss) $ 783 $ (901) $ 1, % Basic and diluted earnings (loss) per share - net income (loss) $ 0.06 $ (0.07) $ % Weighted average number of shares - Basic and diluted 13,371,719 13,221,719 Key financial measures Gross margin as a percentage of revenues 17.7% 18.4% Selling and administrative expenses as a percentage of revenues 14.6% 17.6% Operating income as a percentage of revenues 2.8% 0.8% EBITDA (see non-ifrs Measures) $ 7,876 $ 6,145 $ 1,731 28% Strongco s revenue in the final quarter of 2018 was up 5% from the same quarter in 2017 due to higher sales of construction equipment and cranes and higher sales of parts and service, which were partially offset by slightly lower rental revenue. The higher revenue contributed to higher gross profit, and combined with lower operating expenses, resulted in an operating profit of $2.9 million in the fourth quarter which was substantially improved from of $0.8 million last year. Interest expenses were slightly higher in the quarter from higher equipment financing but the earnings before tax of $0.8 million was substantially improved from the pretax loss of $0.9 million in the fourth quarter of STRONGCO CORPORATION 2018 ANNUAL REPORT 13

16 Revenues A breakdown of revenue for the three months ended December 31, 2018 and 2017 is as follows: Three Months Ended December /17 ($ millions) % Chg Eastern Canada (Atlantic and Quebec) Equipment Sales $ 22.7 $ % Equipment Rentals % Product Support % Total Eastern Canada $ 37.6 $ % Central Canada (Ontario) Equipment Sales $ 27.9 $ % Equipment Rentals % Product Support % Total Central Canada $ 42.4 $ % Western Canada (Manitoba to British Columbia) Equipment Sales $ 13.7 $ % Equipment Rentals % Product Support % Total Western Canada $ 22.1 $ % Total Equipment Distribution Equipment Sales $ 64.3 $ % Equipment Rentals % Product Support % Total Equipment Distribution $ $ % For the three months ended December 31, 2018, total revenues were $102.1 million compared to $97.6 million in the same period of 2017, up $4.5 million or 5%, due primarily to higher sales of construction equipment and parts and service. Gross Margin ($ millions) Three Months Ended December /2017 Gross Margin GM% GM% $ Change % Change Equipment Sales $ % $ % $ (0.7) -12% Equipment Rentals % % (0.1) -14% Product Support % % 0.9 8% Total Gross Margin $ % $ % $ 0.1 1% Strongco s overall gross profit was $18.1 million in the fourth quarter of 2018, up from $18.0 million in the same period last year. As a percentage of revenue, gross margin declined to 17.7% from 18.4% in the fourth quarter of 2017 due to a higher proportion of equipment sales and lower margins on equipment sales. Gross margin on equipment sales was down from the fourth quarter of 2017 which included the sale of several large cranes to a power station in Northern Ontario at high margins. A higher proportion of service sales contributed to the increase in product support margins. Selling and Administrative Expense Administrative, distribution and selling expense in the fourth quarter of 2018 were $14.9 million, or 14.6% of revenue, compared to $17.2 million, or 17.6% of revenue in the fourth quarter of The Company has made significant progress in reducing expenses in response to the challenging market conditions, especially in Alberta. Occupancy costs, in particular, were lower primarily due to lower rent in Alberta as a result of termination of the Company s facility lease in Fort McMurray. Other Income and Expense Other income and expense is primarily comprised of foreign exchange gains or losses, mark to market adjustments on foreign exchange contracts, gains or losses on disposition of fixed assets, service fees received by Strongco as compensation for sales STRONGCO CORPORATION 2018 ANNUAL REPORT 14

17 of new equipment by other third parties in 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 and expense in the fourth quarter of 2018 was an expenses of $0.3 million primarily from foreign exchange losses. By comparison, in the fourth quarter of 2017, other income and expense was nominal. Operating Income Stable gross margin and lower operating expenses resulted in operating income of $2.9 million in the fourth quarter of 2018, compared to $0.8 million in the same quarter last year. Interest Expense Strongco s interest expense was $2.1 million in the fourth quarter of 2018, compared to $1.7 million in the fourth quarter of 2017 as a result of a higher level of interest-bearing equipment notes financing the increase in equipment inventory. Earnings (Loss) Before Income Taxes After interest, pre-tax earnings were $0.8 million in the fourth quarter of 2018 compared to a loss before taxes of $0.9 million in the same period in Provision for Income Tax Due to the uncertainty of recovering available cumulative tax losses, no recovery of income taxes has been recorded during 2018 and Net Income (Loss) Strongco s net income in the fourth quarter of 2018 was $0.8 million ($0.06 per share), which compared to net loss of $0.9 million ($0.07 per share) in the same quarter of the prior year. EBITDA EBITDA in the fourth quarter of 2018 was $7.9 million (7.7% of revenues), compared to $6.1 million (6.3% of revenue) in the fourth quarter of EBITDA is calculated as follows: Three Months Ended December 31 Change EBITDA ($ millions) /2017 Net income (loss) $ 0.8 $ (0.9) $ 1.7 Add back: Interest Income taxes Depreciation of capital assets Depreciation of equipment inventory on rent (0.2) Depreciation of rental fleet (0.1) EBITDA (see non-ifrs Measures) $ 7.9 $ 6.1 $ 1.8 Cash Flow, Financial Resources and Liquidity Cash Flow Provided By (Used In) Operating Activities: During the fourth quarter of 2018, Strongco provided $8.4 million of cash from operating activities before changes in working capital, which compared to $6.5 million in the same quarter last year. After changes in working capital, payment of interest and funding of future benefits obligations, cash of $0.9 million was provided by operating activities. By comparison, in the fourth quarter of 2017, net cash of $1.5 million was used in operating activities. STRONGCO CORPORATION 2018 ANNUAL REPORT 15

18 The components of the cash used in operating activities from continuing operations were as follows: Three Months Ended December 31 ($ millions) Net income (loss) $ 0.8 $ (0.9) Non-cash items: Depreciation equipment inventory on rent Depreciation capital assets Share-based payment expense Interest expense Income tax expense - - Employee future benefit expense Changes in non-cash working capital balances (5.0) (5.7) Employee future benefit funding (0.4) (0.5) Interest paid (2.1) (1.8) Cash provided by (used in) operating activities $ 0.9 $ (1.5) Non-cash items in the quarter include depreciation of equipment inventory on rent of $4.3 million, compared to $4.7 million in the fourth quarter of During the fourth quarter of 2018, non-cash working capital increased by $5.0 million due primarily to decreases in trade and other payables and equipment notes payable, and an increase in inventories offset partially by a reduction in trade receivables, as shown in the table below. By comparison, during the fourth quarter of 2017, net working capital increased by $5.7 million due to a large reduction in trade and other payables offset partially by reductions in trade and other receivables and inventories. Components of cash flow from the net change in non-cash working capital for 2018 and 2017 are as follows: ($ millions) Three Months Ended December 31 (Increase) Decrease Trade and other receivables $ 9.3 $ 3.7 Inventories (6.6) 5.0 Prepaids and other assets $ 3.0 $ 9.1 Increase (Decrease) Trade and other payables (4.0) (14.9) Deferred revenue and customer deposits Equipment notes payable (4.1) (0.2) $ (8.0) $ (14.8) Net (increase) decrease in non-cash working capital $ (5.0) $ (5.7) Equipment inventory at the end of the fourth quarter was $167.5 million increasing slightly from $165.0 million at September 30, The increase was mainly to support growth in equipment sales and the purchase of approximately $15 million of certain products in the fourth quarter to secure product availability for 2019 and take advantage of lower purchase prices. Equipment notes at December 31, 2018 was $141.4 million compared to $145.5 million at September 30, Cash Provided By (Used In) Investing Activities: Cash used in investing activities in the fourth quarter of 2018 totalled $0.1 million and related to the purchase of miscellaneous shop equipment. This compared to $0.1 million cash used in investing activities in the fourth quarter of Cash Provided By (Used In) Financing Activities: In the fourth quarter of 2018, cash of $0.8 million was used in financing activities, to pay for finance leases and the obligation from termination of the facility lease in Fort McMurray. By comparison, net cash of $1.6 million was provided by financing activities in the fourth quarter of 2017 primarily from increasing in bank indebtedness. STRONGCO CORPORATION 2018 ANNUAL REPORT 16

19 The components of cash provided by financing activities in the fourth quarter are summarized as follows: 13 Three Months Ended December 31 ($ millions) Increase (decrease) in bank indebtedness $ - $ 2.1 Repayment of finance lease obligations (0.5) (0.5) Repayment of lease termination obligation (0.3) - Cash provided by (used in) financing activities (0.8) 1.6 SUMMARY OF QUARTERLY DATA In general, business activity follows a weather-related pattern of seasonality. Typically, the first quarter is the weakest of the year 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 RPOs. In addition, purchases of snow removal equipment are typically made in the fourth quarter. A summary of quarterly results for the current and previous two years is as follows: 2018 ($ millions, except per share amounts) Q4 Q3 Q2 Q1 Revenue $ $ 99.0 $ $ 89.0 Earnings (loss) before income taxes 0.8 (2.4) Net income (loss) 0.8 (2.4) Basic and diluted earnings (loss) per share $ 0.06 $ (0.18) $ 0.13 $ ($ millions, except per share amounts) Q4 Q3 Q2 Q1 Revenue $ 97.6 $ 87.9 $ $ 90.0 Earnings (loss) before income taxes (0.9) 0.2 (0.5) (1.1) Net income (loss) (0.9) 0.2 (0.5) (1.1) Basic and diluted earnings (loss) per share $ (0.07) $ 0.02 $ (0.04) $ (0.08) 2016 ($ millions, except per share amounts) Q4 Q3 Q2 Q1 Revenue $ 87.6 $ 93.6 $ $ Income (loss) before income taxes from continuing operations (6.2) (19.1) (7.3) (1.1) Net income (loss) from continuing operations (6.1) (26.1) (5.3) (0.9) Net income (loss) (6.3) (25.5) (4.8) (0.7) Basic and diluted earnings per share - income (loss) from continuing operations $ (0.46) $ (1.97) $ (0.40) $ (0.07) - net income (loss) $ (0.47) $ (1.75) $ (0.37) $ (0.05) A discussion of the Company s previous quarterly results can be found in the quarterly Management s Discussion and Analysis reports available on SEDAR at STRONGCO CORPORATION 2018 ANNUAL REPORT 17

20 CONTRACTUAL OBLIGATIONS The Company has contractual obligations for operating lease commitments totaling $50.1 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 3 to 10 years. The Company s maximum potential losses pursuant to the majority of these buyback contracts are limited, under an agreement with a third party, 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, 2018, outstanding buyback contracts totalled $2.9 million, which compared to $3.5 million at December 31, A reserve of $0.1 million has been accrued in the Company s accounts as at December 31, 2018 with respect to these commitments, compared to a reserve of $0.1 million a year ago. Contractual obligations are set out in the following tables. Management believes that the Company will generate sufficient cash flow from operations to meet its contractual obligations. Payment due by period Less than 1 to 3 4 to 5 After 5 ($ millions) Total 1 Year years years years Operating leases $50.1 $9.1 $16.4 $12.2 $12.4 Contingent obligation by period Less than 1 to 3 4 to 5 After 5 ($ millions) Total 1 Year years years years Buy-back contracts $2.9 $1.6 $0.8 $0.5 $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. In partial settlement of the lease termination obligation 150,000 shares were issued on July 1, There have been no changes in issued and outstanding shares during 2019 to the date of this MD&A. Common Shares Issued and Outstanding Shares Common shares outstanding as at December 31, ,221,719 Common shares issued on termination of Fort McMurray lease 150,000 Common shares redeemed - Common shares outstanding as at December 31, ,371,719 The Company granted 225,000 options to purchase common shares to certain members of senior management during NON-IFRS MEASURES The Company s management believes that providing certain non-ifrs measures are important supplemental measures in evaluating the Company s performance and in determining whether to invest in shares. These non-ifrs measures are not a measure of financial performance or earnings recognized under International Financial Reporting Standards ( IFRS ) and therefore has no standardized meaning prescribed by IFRS and may not be comparable to similar terms and measures presented by other similar issuers. Accordingly, these measures should not be construed as alternatives to net income (loss) determined in accordance with IFRS 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. EBITDA refers to earnings before interest, income taxes, impairment of intangible assets, amortization of capital assets, amortization of equipment inventory on rent, amortization of rental fleet and lease termination costs. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. Funded Debt refers to bank indebtedness, equipment notes payable and obligations under finance leases, net of cash. Funded Debt is a term defined by the Company s bank and equipment note lenders to measure the Company s leverage relative to net shareholders equity. Working Capital (excluding bank indebtedness) refers to total current assets (excluding cash) less total current liabilities (excluding bank indebtedness). Working capital (excluding bank indebtedness) is presented as a measure for investors to assess the Company s overall liquidity. STRONGCO CORPORATION 2018 ANNUAL REPORT 18

21 SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with IFRS 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, 2018 with changes from December 31, 2017 is as follows: Provision for Inventory Obsolescence ($ millions) Provision for inventory obsolescence as at December 31, 2017 $ 4.1 Provision related to inventory disposed of during the year (0.8) Additional provisions made during the year 1.2 Provision for inventory obsolescence as at December 31, 2018 $ 4.5 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, 2018 with changes from December 31, 2017 is as follows: Allowance for Doubtful Accounts ($ millions) Allowance for doubtful accounts as at December 31, 2017 $ 0.6 Accounts written off during the year (0.4) Amounts unused and reversed - Additional provisions made during the year 0.1 Allowance for doubtful accounts as at December 31, 2018 $ 0.3 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 management expects 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. In accordance with IAS 19, the assumed return on pension plan assets is based on the same discount rate used to determine the present value of future cash flows as described above. 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 STRONGCO CORPORATION 2018 ANNUAL REPORT 19

22 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. Additional information regarding the Company s significant accounting policies, estimates and assumptions are described in notes 2 and 3 of the notes to the consolidated financial statements. Changes in Accounting Policies Effective January 1, 2018, the Company adopted IFRS 15 Revenue from Contracts with Customers, IFRS 9 Financial instruments and amendments to IFRS 2 Share-based Payment. The impact upon adoption of these standards and amendments are described in full in note 2 of the notes to the consolidated financial statements. Pending Accounting Changes A new standard (IFRS 16 - Leases) and an interpretation (IFRIC 23 Uncertainty over Income Tax Treatments) have been issued but were not yet effective for the financial year ending December 31, 2018, and accordingly, have not yet been applied in preparing the consolidated financial statements. The effect of this new standard and interpretation, together with effective dates are discussed in note 1 of the notes to the consolidated financial statements. RISKS 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 it currently considers immaterial, may also impair operations of the Company. If any such risks actually occur, the business, financial condition, or liquidity and results of operations of the Company, its ability 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 endeavoured to minimize this risk by: (i) operating in various geographic territories across Canada and in the United States 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. OIL PRICES The Company operates in the province of Alberta and a portion of its business is tied directly to activity in the oil sands area in northern Alberta. The level of activity in northern Alberta and to a degree, the entire economy in the province, is impacted by changes in oil prices. In particular, a decline in the price of oil could have an impact on the exploration and development activities and capital expenditure plans of oil companies in northern Alberta, as well as construction and infrastructure spending throughout the province, which could in turn reduce the demand for the Company s products and services. The Company believes an element of this risk is mitigated by its diverse customer base and broad offering of products used in various applications not directly impacted by oil prices. COMPETITION Strongco faces strong competition from various distributors of products that compete with the products it sells. The Company 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 its products. In most product lines in the majority of the geographic areas in which Strongco operates, its main competitors are dealers who distribute or rent products manufactured by Caterpillar, John Deere, Komatsu, 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. STRONGCO CORPORATION 2018 ANNUAL REPORT 20

23 Most of Strongco s equipment distribution business is governed by distribution agreements with the original equipment manufacturers ( OEMs ), including Volvo, Case and Manitowoc. These agreements grant the right to distribute the manufacturer s 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 for the majority of the distribution arrangements entered into by Strongco. Most distribution agreements are cancellable upon 60 to 90 days notice by either party. Some of 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. Floor plan arrangements include an interest-free period of up to twelve months. The termination of one or more of Strongco's distribution agreements with its OEMs, 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 OEMs. 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 cancellable 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 continues to strive for increased market share for their products which management believes has minimized the 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. As at December 31, 2018, there are no amounts accrued for contingent liabilities. 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 upon its ability to attract and retain experienced management. FOREIGN EXCHANGE While the majority of the Company s sales are in Canadian dollars, significant portions of its purchases are in US 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 STRONGCO CORPORATION 2018 ANNUAL REPORT 21

24 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 pay 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 Cash Flow, 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, 2018 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 IFRS. 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, 2018 to provide reasonable assurance that the financial information being reported is materially accurate. During the fourth quarter ended December 31, 2018, 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. 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 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 STRONGCO CORPORATION 2018 ANNUAL REPORT 22

25 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 STRONGCO CORPORATION 2018 ANNUAL REPORT 23

26 STRONGCO CORPORATION 2018 ANNUAL REPORT 24

27 CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2018 STRONGCO CORPORATION 2018 ANNUAL REPORT 25

28 Management s Responsibility for Financial Reporting The accompanying audited consolidated financial statements of ( the Company ) were prepared by management in accordance with International Financial Reporting Standards. 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 with 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, financial performance and cash flows of the Company, as of the date of and for the years presented in 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, applicable laws and regulations, and for maintaining proper standards of conduct for its activities. [Signed] [Signed] Robert Beutel Executive Chairman J. David Wood Vice President and Chief Financial Officer March 19, 2019 March 19, 2019 STRONGCO CORPORATION 2018 ANNUAL REPORT 26

29 INDEPENDENT AUDITOR S REPORT To the Shareholders of : Opinion We have audited the consolidated financial statements of and its subsidiaries ( the Company ), which comprise the consolidated statements of financial position as at December 31, 2018 and 2017 and the consolidated statements of earnings (loss), comprehensive loss, consolidated changes in shareholders equity and cash flow for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements, present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2018 and 2017, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Information Other than the Consolidated Financial Statements and Auditor s Report Thereon Management is responsible for the other information. The other information comprises the Management s Discussion and Analysis and the Annual Report but does not include the consolidated financial statements and our auditors report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. We obtained the Management s Discussion and Analysis prior to the date of this auditor s report. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. The Annual Report is expected to be made available to us after the date of this auditor s report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. STRONGCO CORPORATION 2018 ANNUAL REPORT 27

30 Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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. In preparing the consolidated financial statements, management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company s financial reporting process. Auditors responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our audit opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Company s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. STRONGCO CORPORATION 2018 ANNUAL REPORT 28

31 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor s report is Jeremy Jagt. Toronto, Canada March 19, 2019 [signed] Grant Thornton LLP Chartered Professional Accountants Licensed Public Accountants STRONGCO CORPORATION 2018 ANNUAL REPORT 29

32 Consolidated Statements of Financial Position As at December 31 Assets [restated - note 2] Current assets Cash $ - $ - Trade and other receivables [note 4] 37,860 39,479 Income taxes receivable Inventories [note 5] 199, ,007 Prepaid expenses and other deposits 1,245 1,501 Total current assets 238, ,458 Non-current assets Property and equipment [note 6] 12,287 11,075 Other assets 208 1,445 Total non-current assets 12,495 12,520 Total assets $ 251,324 $ 237,978 Liabilities and shareholders' equity Current liabilities Bank indebtedness [note 8 (a)] $ 28,509 $ 28,988 Trade and other payables [note 9] 40,267 40,520 Deferred revenue and customer deposits Equipment notes payable - non-interest-bearing [note 10] 48,708 38,881 - interest-bearing [note 10] 92,727 92,147 Current portion of finance lease obligations [note 8 (b)] 2,129 2,268 Current portion of lease termination obligation [note 8 (c)] 1,200 - Total current liabilities 213, ,316 Non-current liabilities Finance lease obligations [note 8 (b)] 4,970 3,901 Lease termination obligation [note 8 (c)] Employee future benefit obligations [note 11] 6,434 3,788 Total non-current liabilities 11,904 7,689 Total liabilities $ 225,615 $ 211,005 Contingencies, commitments and guarantees [note 20] Shareholders' equity Shareholders' capital [note 12] 65,797 65,497 Accumulated other comprehensive income 1,147 1,147 Contributed surplus 1,071 1,006 Deficit (42,306) (40,677) Total shareholders' equity 25,709 26,973 Total liabilities and shareholders' equity $ 251,324 $ 237,978 The accompanying notes are an integral part of these consolidated financial statements. Approved by the Board of Directors Director Director STRONGCO CORPORATION 2018 ANNUAL REPORT 30

33 Consolidated Statements of Earnings (Loss) For the years ended December 31 (in thousands of Canadian dollars, unless otherwise indicated, except share and per share amounts) [restated - note 2] Revenue [note 14] $ 412,108 $ 376,141 Cost of sales [notes 5 and 16] 338, ,033 Gross profit 73,360 68,108 Expenses Selling and administrative expenses [notes 4, 11 and 16] 61,531 64,432 Other expense (income) [note 15] 14 (1,008) Operating income 11,815 4,684 Restructuring costs [note 25] 3, Interest expense [note 17] 8,215 6,239 Earnings (loss) before income taxes 157 (2,233) Provision for income taxes [note 7] - - Net earnings (loss) attributable to shareholders for the year $ 157 $ (2,233) Earnings (loss) per share - Basic and diluted [note 18] Net earnings (loss) attributable to shareholders $ 0.01 $ (0.17) Weighted average number of shares [note 18] Basic and diluted 13,297,335 13,221,719 The accompanying notes are an integral part of these consolidated financial statements. STRONGCO CORPORATION 2018 ANNUAL REPORT 31

34 Consolidated Statements of Comprehensive Loss For the years ended December Net earnings (loss) attributable to shareholders for the year $ 157 $ (2,233) Other comprehensive income (loss) Items that will not be reclassified subsequently to net income: Actuarial loss on post-employment benefit obligations (1,786) - (net of tax $nil) Total other comprehensive loss (1,786) - Comprehensive loss attributable to shareholders for the year $ (1,629) $ (2,233) The accompanying notes are an integral part of these consolidated financial statements. STRONGCO CORPORATION 2018 ANNUAL REPORT 32

35 Consolidated Statements of Changes in Shareholders Equity For the years ended December 31 ACCUMULATED OTHER NUMBER OF SHAREHOLDERS' COMPREHENSIVE CONTRIBUTED SHARES CAPITAL INCOME SURPLUS DEFICIT TOTAL Balance December 31, ,221,719 $ 65,497 $ 1,147 $ 983 $ (38,444) $ 29,183 Net loss and comprehensive loss for the year (2,233) (2,233) Share-based compensation expense Balance December 31, ,221,719 $ 65,497 $ 1,147 $ 1,006 $ (40,677) $ 26,973 NUMBER OF SHARES ACCUMULATED OTHER SHAREHOLDERS' COMPREHENSIVE CAPITAL INCOME CONTRIBUTED SURPLUS DEFICIT TOTAL Balance December 31, ,221,719 $ 65,497 $ 1,147 $ 1,006 $ (40,677) $ 26,973 Net earnings for the year Other comprehensive income (loss) Post-employment benefit obligations (net of tax) (1,786) (1,786) Total other comprehensive income (loss) (1,786) (1,786) Issuance of shares [note 25] 150, Share-based compensation expense Balance December 31, ,371,719 $ 65,797 $ 1,147 $ 1,071 $ (42,306) $ 25,709 The accompanying notes are an integral part of these consolidated financial statements. STRONGCO CORPORATION 2018 ANNUAL REPORT 33

36 Consolidated Statements of Cash Flows For the years ended December 31 (in thousands of Canadian dollars) [restated - note 2] Cash flows from operating activities Net income (loss) for the year $ 157 $ (2,233) Adjustments for Depreciation property and equipment 2,635 2,964 Depreciation equipment inventory on rent 15,519 13,678 Depreciation rental fleet Gain on sale of rental fleet - (188) Share-based payment expense Interest expense 8,215 6,239 Lease termination costs 3,443 - Employee future benefit expense 2,072 1,683 Changes in non-cash working capital [note 13] (18,519) (12,657) Purchases of rental fleet - (80) Proceeds from sale of rental fleet Funding of employee future benefit obligations (1,213) (1,921) Interest paid (8,168) (6,272) Income tax recovery received 30 1,060 Net cash provided by operating activities $ 4,259 $ 3,146 Cash flows from investing activities Purchases of property and equipment (1,015) (380) Funds released from escrow - 1,564 Net cash provided by (used in) investing activities $ (1,015) $ 1,184 Cash flows from financing activities Increase (decrease) in bank indebtedness (479) (1,713) Repayment of finance lease obligations [note 13] (1,663) (2,617) Repayment of lease termination obligation (1,102) - Net cash used in financing activities $ (3,244) $ (4,330) Change in cash and cash equivalents during year $ - $ - Cash and cash equivalents Beginning of year - - Cash and cash equivalents End of year $ - $ - The accompanying notes are an integral part of these consolidated financial statements. STRONGCO CORPORATION 2018 ANNUAL REPORT 34

37 Notes to Consolidated Financial Statements December 31, 2018 and General information ( Strongco or the Company ) sells and rents new and used equipment and provides aftersale product support (parts and service) to customers who operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets in Canada. The Company is a public entity, incorporated and domiciled in Canada and listed on the Toronto Stock Exchange under the symbol SQP. The address of its registered office is 1640 Enterprise Road, Mississauga, Ontario L4W 4L4. 2 Summary of significant accounting policies Statement of compliance and basis of presentation The consolidated financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and are in compliance therewith. The consolidated financial statements have been prepared on a going concern basis and the historical cost convention, as modified by the revaluation of financial assets and liabilities at fair value. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. The consolidated financial statements were approved and authorized for issue by the Board of Directors on March 19, Basis of consolidation The consolidated financial statements include the financial statements of Strongco, Strongco Limited Partnership and Strongco GP Inc., subsidiaries over which it has control. The Company controls an investee when the Company is exposed to, or has rights to, variable returns from its relationship with the investee and has the ability to affect those returns through its power over the investee. The Company considers all relevant facts and circumstances in assessing whether or not the Company s voting rights in an investee are sufficient to give it power. These facts and circumstances include: the size of the Company s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; potential voting rights held by the Company, other vote holders or other parties; and rights arising from other contractual arrangements. The financial statements of subsidiaries are included in the consolidated financial statements from the date control commences and are deconsolidated on the date when control ceases. Intra-group balances and transactions are eliminated on consolidation. Unrealized gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Company s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. STRONGCO CORPORATION 2018 ANNUAL REPORT 35

38 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Segment reporting Reportable segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker, with appropriate aggregation. The chief operating decision maker is the Executive Chairman who is responsible for allocating resources, assessing performance of the reportable segment and making key strategic decisions. The Company has determined that it has one reportable segment, Equipment Distribution, which is located in Canada. Segment performance is evaluated based on profit or loss and is measured consistently with profit or loss in the consolidated financial statements. 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, ultimate collection of the revenue is reasonably assured and when specific criteria have been met for each of the Company s activities as described below. a. Revenue from equipment sales is recognized when control of the equipment and significant risks of ownership pass to the customer, which is generally at the time when the equipment is delivered to or picked up by the customer. Payment is typically due at the time of delivery, as such a receivable is recognized as the consideration is unconditional and only the passage of time is required before payment is due. 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. These transactions are accounted for as a sale. In certain instances, control transfers to the customer through a bill and hold arrangement when the following criteria are met: (i) there is substantive reason for the arrangement; (ii) the equipment is separately identified as belonging to the customer; (iii) the Company is no longer able to use the equipment or direct it to another customer; and (iv) the equipment is currently ready for physical transfer 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. Payment is typically due at the beginning of the monthly rental period. 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, revenue is recognized when the part is shipped to the customer. For servicing of equipment, revenue related to the service performed and parts consumed is recognized when the service work is completed. Payment terms are typically 30 days from invoicing. Foreign currency translation The Company s consolidated financial statements are presented in Canadian dollars, which is also the Company s functional currency. STRONGCO CORPORATION 2018 ANNUAL REPORT 36

39 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than an operation s functional currency are recognized as other income in the consolidated statements of earnings (loss). Employee benefit obligations a) Pension obligations Employees of the Company have entitlements under Company pension plans, which are either defined contribution or defined benefit plans. The liability recognized in the consolidated statements of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is updated annually by management with key input assumptions provided by independent actuaries using the projected unit credit method. Actuarial valuations for defined benefit plans are carried out every three years. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. Net interest is determined by multiplying the net defined benefit liability or asset by the discount rate used to determine the defined benefit obligation (at the beginning of the year) and is included in the employee future benefit expense. Changes in actuarial gains and losses that arise in calculating the present value of the defined benefit obligation and fair value of plan assets are recognized in OCI in the period in which they arise and charged or credited to retained earnings. On an interim basis, management estimates the changes in the actuarial gains and losses. These estimates are adjusted when the annual valuation or estimate is completed by the independent actuaries. Past-service costs are recognized immediately within operating expenses in the consolidated statements of earnings. For defined contribution plans, contributions are recognized as post-employment benefit expense when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available. b) Other employee future obligations The Company also has other employee future obligations, including an unfunded retirement allowance plan and a non-contributory dental and health-care plan. The expected costs of these benefits are accrued over the period of employment using the same accounting methodology as used for defined benefit pension plans. These obligations are valued annually by independent qualified actuaries. STRONGCO CORPORATION 2018 ANNUAL REPORT 37

40 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Share based compensation Strongco operates an equity-settled, share-based compensation plan, under which the Company receives services from employees as consideration for equity instruments (options) of the Company. The options vest over a period of time. The fair value of the services received in exchange for the grant of the options is recognized as an expense. Awards under the share-based compensation plan are made in tranches. Each tranche is considered a separate award with its own vesting period and grant date value. The fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. The expense is recognized over the tranche s vesting period, based on the number of awards expected to vest, by increasing contributed surplus, a component within shareholders equity. The number of awards expected to vest is reviewed at least annually, with any impact being recognized immediately. For expired and cancelled options, contributed surplus expense is not reversed and the related credit remains in contributed surplus. When options are exercised, the Company issues new shares. The proceeds received are credited to shareholders capital, together with the related amounts previously added to contributed surplus. Shareholders capital Shareholders capital is classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from proceeds. Inventories Inventories are recorded at the lower of cost and net realizable value. The cost of equipment inventory is determined on a specific-item basis. The cost of parts is determined on a weighted average cost basis. Net realizable value is the estimated selling price in the ordinary course of business, less applicable selling expenses. Equipment inventory on rent, but primarily held for sale, is amortized using a units of production method, which approximates the usage. Property and equipment Property and equipment are stated at cost less accumulated depreciation and any impairment. Cost includes expenditures that are directly attributable to the acquisition of the assets. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment and each component is depreciated separately. Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. Repairs and maintenance costs are charged to operating expenses in the consolidated statements of earnings during the period in which they are incurred. The assets residual values, useful lives and methods of depreciation are reviewed, and adjusted, if appropriate, at each financial period end. Land is not depreciated. STRONGCO CORPORATION 2018 ANNUAL REPORT 38

41 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Depreciation is provided on property and equipment at rates that approximate the estimated useful life on a diminishing balance method as follows: Buildings and leasehold improvements 3% to 5% Machinery and equipment 10% to 30% Vehicles 25% to 30% Computer equipment 30% Computer equipment under finance lease and leasehold improvements are amortized on a straight-line basis over the remaining term of the lease. Rental fleet assets include specifically identified equipment that is not held for sale and is only available for rent. It is amortized using a units of production method, which approximates the usage. An asset s carrying amount is immediately written down to its recoverable amount if the asset s carrying amount is greater than its estimated fair value. Gains and losses on disposal are determined by comparing the proceeds with the carrying amount and are recognized within operating expenses in the consolidated statement of earnings. Intangible Asset The intangible asset is comprised of business enterprise software used to perform most business operations in Canada. The intangible asset is amortized on a straight line basis over 10 years which is management s estimate of its expected useful life. During 2016, the Company determined that there were indicators of long-term asset impairment and performed a long-term asset impairment assessment which resulted in the full impairment of the carrying value of the intangible asset. As at December 31, 2018 and 2017 the cost of the intangible asset is $17,822 and the accumulated amortization and impairment is $17,822. Borrowing costs Borrowing costs attributable to the acquisition, construction or production of qualifying assets are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognized as interest expense in the consolidated statements of earnings in the period in which they are incurred. Income taxes The provision for (recovery of) income taxes for the period comprises current and deferred income taxes. Income taxes are recognized as an expense in the consolidated statements of earnings, except to the extent that they relate to items recognized in other comprehensive income or directly in equity. For items recognized in other comprehensive income or directly in equity, any applicable income taxes are also recognized in other comprehensive income or directly in equity. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the consolidated statements of financial position date. Management periodically evaluates positions taken in tax returns with respect to situations in which the applicable tax regulation is subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities. STRONGCO CORPORATION 2018 ANNUAL REPORT 39

42 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that, at the time of the transaction, affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted as at the consolidated statements of financial position dates and that are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Deferred income tax assets and liabilities are presented as non-current. Provisions Provisions for restructuring costs, legal claims and certain other obligations are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Equipment notes payable Equipment notes payable are used to finance the purchase of equipment inventory. The equipment notes payable are recognized initially at fair value and are subsequently measured at amortized cost; any difference between the fair value and redemption value is recognized as interest expense in the consolidated statements of earnings over the term of the equipment notes payable using the effective interest rate method. Debt Debt comprises bank indebtedness under the Company s operating line of credit, finance lease obligations and notes payable. Debt is recognized initially at fair value, net of transaction costs incurred. Debt is subsequently measured at amortized cost. Any difference between the proceeds and redemption value is recognized as interest expense in the consolidated statements of earnings over the term of the borrowings using the effective interest rate method. STRONGCO CORPORATION 2018 ANNUAL REPORT 40

43 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Impairment of non-financial assets Property and equipment, rental fleet and intangible asset are tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped into the lowest levels for which there are separately identifiable cash inflows ( cash-generating units or CGUs ). The recoverable amount is the higher of an asset s fair value less costs to sell and value in use (being the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The Company evaluates potential reversals on previously recorded impairment losses when events or circumstances warrant such consideration. Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to operating expenses in the consolidated statements of earnings on a straight-line basis over the period of the lease. Leases of property and equipment, in which the Company is the lessee and has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalized at the lease commencement date at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Finance lease payments are allocated between their liability and finance components so as to achieve a constant rate on their outstanding obligations. The interest element of the finance cost is charged to the consolidated statements of earnings over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset and the lease term. Financial instruments Financial instruments are measured on initial recognition at fair value when the Company becomes a party to the contractual provisions of the instrument. The Company determines the classification of its financial instruments at initial recognition or when reclassified on the consolidated statements of financial position. Financial instruments are classified in the following measurement categories: i) amortized cost; ii) fair value through other comprehensive income ( FVOCI ); or iii) fair value through profit and loss ( FVPL ). Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all the risks and rewards of ownership. Financial assets and liabilities are offset and the net amount reported in the consolidated statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. STRONGCO CORPORATION 2018 ANNUAL REPORT 41

44 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Financial Assets Subsequent measurement of financial assets depends on the classification. The Company has made the following classifications: Trade and other receivables are classified as loans and receivables and are recorded at amortized cost using the effective interest rate method, less provisions for doubtful accounts. The Company assesses at each consolidated statements of financial position date, whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Financial Liabilities All financial liabilities are subsequently measured at amortized cost using the effective interest method or a t fair value through profit or loss ( FVTPL ). Financial liabilities are classified as FVTPL when the financial liability is: (i) held for trading; (ii) contingent consideration of an acquirer in a business combination; or (iii) it is designated as FVTPL. For financial liabilities that are designated as FVTPL, the amount of change in fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognized in other comprehensive income ( OCI )., unless the recognition of the effects of changes in the liability s credit risk in OCI would create or enlarge an accounting mismatch in the consolidated statements of earnings (loss). The remaining amount of change in the fair value of the liability is recognized in the consolidated statements of earnings (loss). Changes in fair value attributable to a financial liability s credit risk that are recognized in OCI are not subsequently reclassified to the consolidated statements of earnings (loss); instead, they are transferred to retained earnings upon derecognition of the financial liability. Financial liabilities that are not: (i) held for trading; (ii) contingent consideration of an acquirer in a business combination; or (iii) designated as FVTPL, are subsequently measured at amortized cost using the effective interest method. Financial liabilities at amortized cost include bank indebtedness, trade and other payables, provisions, income taxes payable, interest-bearing and non-interest-bearing equipment notes payable, finance lease obligations and notes payable. Derivatives Derivative instruments are classified as held for trading and are measured at fair value with changes in fair value being included in profit and loss, unless they are designated as hedging instruments, in which case changes in fair value are included in other comprehensive income. The Company uses derivatives in the form of foreign currency forward contracts to reduce the impact of currency fluctuations on the cost of equipment ordered for future delivery to customers and interest rate swaps to reduce the impact of interest rate fluctuations on their borrowings. Derivatives are included in trade and other payables. STRONGCO CORPORATION 2018 ANNUAL REPORT 42

45 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Fair value estimation The Company applies the following fair value measurement hierarchy to assets and liabilities in the consolidated statements of financial position that are carried at fair value: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities Level 2: other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly Level 3: techniques that use inputs that have a significant effect on the recorded fair value that are not based on observable market data Impairment of financial assets An allowance for expected credit losses ( ECL ) is recognized for all debt instruments not held at fair value through profit and loss. The amount of ECL is updated at each reporting period to reflect changes in credit risk of the respective financial instrument. As the Company s financial assets are substantially comprised of trade and other receivables, a simplified approach is used for measuring the loss allowance at an amount equal to lifetime ECL. The simplified approach does not require the tracking of changes in credit risk, but instead requires the recognition of lifetime ECLs at all times. Lifetime ECL represents the ECL that would result from all possible default events over the expected life of a financial instrument. The Company considers the following as constituting an event of default for internal credit risk management purposes, as historical experience indicates that receivables that meet either of the following criteria are generally not recoverable: i. When there is a breach of financial covenants by the customer; or ii. Information developed internally or obtained from external sources indicates that the debtor is unlikely to pay its creditors, including the Company, in full. A financial asset is credit-impaired when one of or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired includes observable data about the following events: i. Significant financial difficulty of the customer; ii. A breach of contract, such as a default discussed above; or iii. It is becoming probable that the borrower will enter bankruptcy or other financial reorganization. A financial asset is considered in default when contractual payments are 90 days past due. A financial asset may also be considered to be in default if internal or external information indicates that the Company is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows. STRONGCO CORPORATION 2018 ANNUAL REPORT 43

46 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Earnings (loss) per share Basic earnings (loss) per share ( EPS ) is calculated by dividing the net income for the period attributable to shareholders of Strongco by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of shares included with respect to options, warrants and similar instruments is computed using the treasury stock method. The Company s potentially dilutive common shares comprise options granted to employees. New accounting standards adopted during the year The following amendments have been adopted by the Company effective January 1, 2018: IFRS 15 Revenues from Contracts with Customers IFRS 15 applies a single, principles-based five-step model for the recognition of revenue to be applied to goods and services transferred to customers, and requires additional disclosures. The Company elected to apply the retrospective approach, pursuant to which the required comparative reporting periods have been restated. Application of the standard did not change the net earnings of the Company; however certain amounts have been reclassified in the consolidated statement of earnings. Previously, warranty recoveries and costs were recognized as a net amount in selling and administrative expenses. The standard has resulted in the reclassification of warranty recoveries from the OEM to revenues and warranty costs to cost of sales (for the year ended December 31, $20,155 and $15,811 respectively). Additionally, in some cases the Company provides a guarantee to repurchase equipment at a predetermined residual value at the option of the customer. The standard requires these sales to be recorded as a sale with a right of return. Accordingly, the comparative prior periods of consolidated statement of financial position have been restated to reflect the aggregate value of the predetermined residual values in inventories [note 5] and trade and other payables. The adoption of the standard did not result in a transitional adjustment through equity at the start of the comparative reporting periods. IFRS 9 Financial Instruments IFRS 9 defines new requirements for the classification and measurement of financial assets and financial liabilities, the impairment of financial assets and the application of hedge accounting. As permitted by the transitional provision of IFRS 9, the Company elected not to restate comparative amounts or note disclosures. Any adjustments to carrying amounts of financial assets and liabilities at the transition date are to be recognized in the opening retained earnings of the current period, however, the Company assessed that no adjustments to the carrying amounts of financial assets and liabilities were required upon adoption of IFRS 9. IFRS 9 eliminates the financial asset categories of held to maturity, loans and receivables and available for sale previously allowed under IAS 39. Trade and other receivables that were previously classified as loans and receivables under IAS 39 are classified as financial assets at amortized costs under IFRS 9. The change in classification under IFRS 9 has not resulted in changes in the carrying amounts. STRONGCO CORPORATION 2018 ANNUAL REPORT 44

47 Notes to Consolidated Financial Statements December 31, 2018 and 2017 The new standard also includes a new expected credit loss model for calculating impairment on financial assets. Due to risk management practices that the Company has in place, this change did not impact the consolidated financial statements. IFRS 9 also introduces new hedge accounting requirements. Since the Company does not apply hedge accounting, there was no impact on the consolidated financial statements. Amendments to IFRS 2 Share-based Payment In 2016, the IASB issued the final amendments to IFRS 2 Share-based Payment ( IFRS 2 ) in relation to the classification and measurement of share-based payment transactions. The amendments are intended to eliminate diversity in practice in three main areas: the effects of vesting conditions on the measurement of cashsettled share-based payments; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and the accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-settled. The amendments are to be applied prospectively. However, retrospective application is permitted if elected for all three amendments and other criteria are met. The adoption of this amendment did not have any impact on the audited financial statements of the Company. Future changes in accounting standards The following amendments to accounting standards will be effective for the Company subsequent to 2018: IFRS 16 Leases In 2016, the IASB issued IFRS 16 replacing IAS 17 Leases and related interpretations. The standard introduces a single on-balance sheet recognition and measurement model for lessees, eliminating the distinction between operating and finance leases. Lessors continue to classify leases as finance and operating leases. IFRS 16 becomes effective for annual periods beginning on or after January 1, The Company has completed the assessment of its building and vehicle rentals and therefore will recognize additional right of use assets and lease liabilities as well as a decrease in operating lease expenses and a corresponding increase in depreciation expense and finance costs. The Company expects to adopt IFRS 16 using the modified retrospective approach, using practical expedients, which do not require the restatement of prior period financial information. The cumulative financial effect of the adoption will be recognized as an adjustment to opening deficit, with the standard applied prospectively. The quantitative impact of adopting IFRS 16 will be provided in the Company s 2019 first quarter report. IFRIC 23 Uncertainty over Income Tax Treatments On June 7, 2017, the IASB issued IFRIC Interpretation 23 which provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation is applicable for annual periods beginning on or after January 1, The Company is currently assessing the impact of the new interpretation on its consolidated financial statements. STRONGCO CORPORATION 2018 ANNUAL REPORT 45

48 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Comparative figures Certain comparatives figures have been reclassified to conform to the current year s presentation. 3 Critical accounting estimates and judgments The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities in the consolidated 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: 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 trade receivables and maintains provisions for possible credit losses based upon historical experience and known circumstances. The allowance for doubtful accounts as at December 31, 2018 with changes from January 1, 2018 is disclosed in note 4. Inventory valuation The value of the Company s new and used equipment is evaluated by management throughout each period. 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. Refer to note 6 for details regarding obsolescence provisions. The Company takes advantage of supplier programs that allow for the return of eligible parts for credit within specified time periods. Impairment of intangible and long-lived assets An impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs to sell ( FVLCS ) and its value in use. In its assessment of the recoverable amount the Company considers the FVLCS approach and calculates the recoverable amount using a forward multiple of forecasted adjusted forward EBITDA. The FVLCS calculation uses projections for a one year period and a forward multiple. The key assumptions in FVLCS calculations are: Earnings before interest, taxes and depreciation and amortization and impairment charges ( EBITDA ). The projections are based on the most recent financial budgets approved by the Company s Board of Directors. Forward multiples which are based on public market data including information from analysts covering the Company as well as competition data. STRONGCO CORPORATION 2018 ANNUAL REPORT 46

49 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Deferred income taxes At each year end, the Company evaluates the value and timing of its temporary differences. Deferred 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 deferred income tax balance in the consolidated statements of financial position and 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 provisions for deferred income taxes and deferred income taxes payable are adjusted to reflect management s best estimate of the Company s income tax accounts. Judgment is also required in determining whether deferred income tax assets are recognized in the consolidated statements of financial position. Deferred income tax assets, including those arising from unutilized tax losses, require management to assess the likelihood that the Company will generate taxable earnings in future periods, in order to utilize recognized deferred income tax assets. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred income tax assets recorded at the reporting date could be impacted. Additional information is disclosed in note 7. Employee future benefit obligations The present value of the employee future benefit obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost (income) for these obligations include the discount rate. The Company determines the appropriate discount rate at the end of each period. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the obligations. In determining the appropriate discount rate, the Company considers the interest rates of highquality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related employee future benefit liability. Other key assumptions for employee future benefit obligations are based in part on current market conditions. Additional information is disclosed in note 11. Any changes in these assumptions will impact the carrying amount of the employee future benefit obligations. Share-based payment transactions The Company measures the cost of share-based transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. STRONGCO CORPORATION 2018 ANNUAL REPORT 47

50 Notes to Consolidated Financial Statements December 31, 2018 and 2017 The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in note Trade and other receivables As at December Trade receivables $ 30,464 $ 33,069 Less: Provision for impairment of trade receivables Trade receivables, net $ 30,133 $ 32,488 Other receivables, net 7,727 6,991 Total trade and other receivables $ 37,860 $ 39,479 Due to their short-term nature, the fair value of trade and other receivables is not materially different from their carrying value. As at December 31, 2018, trade receivables of $11,801 (December 31, 2017 $13,064) were past due but not impaired. These relate to a number of customers for whom there is no recent history of default. The aging of these receivables is as follows: As at December Up to 3 months $ 11,075 $ 11,776 3 to 6 months Over 6 months $ 11,801 $ 13,064 Movements in the Company s provision for impairment of trade receivables are as follows: As at January 1 $ 581 $ 355 Provisions for impairment Amounts written off as uncollectible (376) (103) Amounts unused and reversed - - As at December 31 $ 331 $ 581 The provision for impaired receivables is recognized in the consolidated statements of earnings within administrative expenses in the period of provision. When a balance is considered uncollectible, it is written off STRONGCO CORPORATION 2018 ANNUAL REPORT 48

51 Notes to Consolidated Financial Statements December 31, 2018 and 2017 against the provision. Subsequent recoveries of amounts previously written off are credited to administrative expenses in the consolidated statements of earnings. Other receivables within trade and other receivables represent amounts receivable from equipment manufacturers and warranty providers which are recorded net of an allowance for doubtful accounts of $2,658 ( $2,633). The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Company does not hold any collateral as security. 5 Inventories Inventory components as at December 31 (net of write-downs and provisions) are as follows: As at December Equipment in-stock $ 111,983 $ 88,049 Equipment on rental contract with a purchase option 32,594 33,436 Equipment on a short-term rental contract 20,170 28,397 Equipment with customer return option 2,748 3,463 Equipment $ 167,495 $ 153,345 Parts 26,468 24,934 Work-in-process 5,320 5,728 Total inventories $ 199,283 $ 184,007 Inventory costs recognized as an expense and reflected in cost of sales in the consolidated statements of loss amounted to $295,951 (December 31, 2017 $266,311). Cost of sales also includes depreciation of equipment inventory on rent of $15,542 (December 31, 2017 $13,678). The carrying value of equipment inventory on rent as at December 31, 2018 was $51,772 (December 31, 2017 $61,833). The Company has agreed to buy back equipment from certain customers at the option of the customer for a specified price at a future date ( buy-back contracts ). These contracts are subject to certain conditions being met by the customer and range in term from three to 10 years. As at December 31, 2018, the total obligation under these contracts was $2,882 (December 31, 2017 $3,505) which is recorded as inventories and as accrued liabilities. 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 provision of $134 (December 31, 2017 $42) has been recorded to reduce the book value of equipment with customer return option. 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, 2018, the Company recorded $587 of equipment write-downs (December 31, 2017 $32) which are recorded in cost of sales. There were no reversals of equipment write-downs for units sold during 2018 or STRONGCO CORPORATION 2018 ANNUAL REPORT 49

52 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Throughout the year, management identifies slow-moving or obsolete inventories and estimates appropriate obsolescence provisions through specific identification of equipment inventory and by aging parts inventory. The changes in the inventory provision as at December 31 are as follows: Inventory obsolescence as at January 1 $ 4,099 $ 4,582 Inventory disposed of during the year (822) (1,009) Additional provision made during the year 1, Inventory obsolescence as at December 31 $ 4,501 $ 4,099 6 Property and equipment Buildings and leasehold improvements Machinery, equipment and vehicles Computers and equipment under finance lease Total property and equipment Land Rental fleet Year ended December 31, 2017 Opening net book value $ 101 1,074 4,647 5, $ 11,749 Additions , ,998 Disposals - (5) (90) (951) (262) (1,308) Depreciation - (100) (572) (2,292) (400) (3,364) Closing net book value ,365 5, ,075 As at December 31, 2017 Cost 101 5,028 18,857 8, ,036 Accumulated depreciation - (4,059) (14,492) (3,353) (57) (21,961) Net book value ,365 5, ,075 Year ended December 31, 2018 Opening net book value ,365 5, ,075 Additions ,505-4,520 Disposals - (29) (66) (555) - (650) Depreciation - (119) (541) (1,975) (23) (2,658) Closing net book value 101 1,194 4,400 6, ,287 As at December 31, 2018 Cost 101 5,367 19,401 9, ,510 Accumulated depreciation - (4,173) (15,001) (2,969) (80) (22,223) Net book value $ 101 $ 1,194 $ 4,400 $ 6,567 $ 25 $ 12,287 The Company leases various computers and equipment under non-cancellable finance lease agreements. STRONGCO CORPORATION 2018 ANNUAL REPORT 50

53 Notes to Consolidated Financial Statements December 31, 2018 and Income taxes Significant components of the provision for (recovery of) income taxes are as follows: As at December Components of current income tax expense: Relating to current year income taxes $ - $ - Relating to prior year income taxes - - Total current income tax expense (recovery) - - Components of deferred income tax expense: Origination and reversal of temporary differences 128 (255) Derecognition of deferred tax asset (128) 255 Total deferred income tax expense - - Total income tax expense $ - $ - The tax on the profit before tax differs from that which would be obtained by applying the statutory tax rate as a result of the following: For the year ended December Income (loss) before income taxes $ 157 $ (2,233) Statutory tax rate 26.91% 26.94% Provision for income taxes at statutory tax rate $ 42 $ (601) Adjustments thereon for the effect of: Derecognition of deferred tax asset (128) 255 Adjustment with respect to prior years (60) 266 Permanent and other Total income tax expense $ - $ - The movement in deferred income tax assets and liabilities recognized in OCI during the year is as follows: As at January 1 $ - $ 1,032 Employee benefit obligation 480 (1,032) Derecognition of deferred tax asset (480) - As at December 31 $ - $ - STRONGCO CORPORATION 2018 ANNUAL REPORT 51

54 Notes to Consolidated Financial Statements December 31, 2018 and 2017 The analysis of deferred income tax assets and liabilities is as follows: Deferred income tax assets and liabilities As at December Eligible capital expenditures and other reserves $ 3,456 $ 2,846 Pension 1, Capital and other assets (45) - Partnership income taxable in future years (1,201) - Loss carryforward 9,608 9,338 Deferred income tax assets 13,115 12,762 Derecognition of deferred tax asset (13,115) (12,762) Net deferred income tax asset $ - $ - Due to the uncertainty of recovery of losses, total deferred tax assets of $13,115 (December 31, $12,762) have been derecognized resulting in a charge to the consolidated statements of earnings of $(1,326) (year ended December 31, $255), net of $480 recognized in the consolidated statements of comprehensive loss. As of December 31, 2018, the Company has $35,706 of non-capital losses that begin to expire in The above is presented on the consolidated statements of financial position as follows: As at December Deferred income tax asset $ - $ - Deferred income tax liability $ - $ - The recognition of deductible temporary differences represented by the deferred income tax asset above is dependent on taxable profits in the future that arise in the same taxation periods and jurisdictions in which those deductible temporary differences are to be utilized. The gross movement on deferred tax is as follows: As at January 1 $ $ - Income statement charge (deferred tax) (128) 255 Tax charges relating to components of other comprehensive income Derecognition of deferred tax asset (352) (255) As at December 31 $ - $ - STRONGCO CORPORATION 2018 ANNUAL REPORT 52

55 Notes to Consolidated Financial Statements December 31, 2018 and Debt As at December Current Bank indebtedness (a) $ 28,509 $ 28,988 Finance lease obligations (b) 2,129 2,268 Lease termination obligation (c) 1,200 - $ 31,838 $ 31,256 Non-current Finance lease obligations (b) $ 4,970 $ 3,901 Lease termination obligation (c) Total Debt $ 37,308 $ 35,157 a. Bank indebtedness The Company has credit facilities with a bank in Canada that provides a revolving demand facility totalling $30 million. Borrowings under the operating line of credit are limited by standard borrowing base calculations based on accounts receivable and inventories, which are typical of such bank credit facilities. As collateral, the Company has provided a security interest in accounts receivable, inventories (subordinated to the collateral provided to the equipment note lenders), capital assets (subordinated to collateral provided by lessors), real estate and intangible and other assets. The Canadian bank operating line bears interest at rates that vary with bank prime rates or Bankers Acceptance rates ( BA rates ). Interest rates under the Canadian bank facility range between bank prime rate plus 2.00% and bank prime rate plus 4.00%, and between the onemonth Canadian BA rates plus 3.00% and BA rates plus 5.00% depending on the ratio of total debt to tangible net worth. At December 31, 2018, the effective interest rate of the operating lines was 7.95% ( %). The increase is primarily due to an increase in the bank prime rate. Under its bank credit facilities, 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 lines 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, 2018, there were outstanding letters of credit of $50 ( $10). The bank credit facilities contain financial covenants that require the Company to maintain certain financial ratios and meet certain financial thresholds. As at December 31, 2018, the Company was in compliance with all of the banking covenants. STRONGCO CORPORATION 2018 ANNUAL REPORT 53

56 Notes to Consolidated Financial Statements December 31, 2018 and 2017 b. Finance lease obligations As at December 31, 2018, the Company had vehicles and computer equipment under finance leases. The weighted average effective interest rate is 7.5% (December 31, %). The future minimum annual payments, interest and balance of obligations are as follows: As at December No later than 1 year $ 2,129 $ 2,268 Later than 1 year but no later than 5 years 5,689 4,538 Later than 5 years - - Total minimum lease payments $ 7,818 $ 6,806 Future finance charges on finance leases (719) (637) Present value of finance lease liabilities $ 7,099 $ 6,169 The present value of financial lease liabilities is as follows: As at December No later than 1 year $ 2,129 $ 2,268 Later than 1 year but no later than 5 years 4,970 3,901 Later than 5 years - - $ 7,099 $ 6,169 c. Lease termination obligation On July 1, 2018, the Company terminated the lease of its branch at 205 McAlpine Crescent in Fort McMurray, Alberta consisting of an obligation to pay $100 per month to May 2020 plus interest at 6% per annum [note 25]. As at December Lease termination obligation $ 1,700 $ - Current portion Long-term portion $ 1,200 $ - STRONGCO CORPORATION 2018 ANNUAL REPORT 54

57 Notes to Consolidated Financial Statements December 31, 2018 and 2017 d) The carrying amount and fair value of the debt are as follows: As at December 31 Carrying amount Bank indebtedness $ 28,509 $ 28,988 Finance lease obligations 7,099 6,169 Lease termination obligation 1,700 - $ 37,308 $ 35,157 As at December 31 Fair Value Bank indebtedness $ 28,509 $ 28,988 Finance lease obligations 7,099 6,169 Lease termination obligation 1,649 - $ 37,257 $ 35,157 The fair values were determined using a discount rate equivalent to the interest charged against the relevant debt item. The fair values of finance lease obligations do not differ materially from their carrying values. 9 Trade and other payables As at December Trade payables $ 12,379 $ 15,184 Accrued liabilities 27,888 25,336 $ 40,267 $ 40,520 During 2016, the Company sold certain pieces of equipment to Oakwest Corporation Limited (Oakwest), a large shareholder and related party, for proceeds of $2.8 million. The sale agreement with Oakwest provided that the equipment may be returned by Oakwest at its option at any time provided the equipment has not been used, with a full refund of proceeds plus interest at 7.5%. As at December 31, 2018, $2.8 million (December 31, $2.8 million) and accrued interest of $53 (December 31, $105) are owing to Oakwest and have been classified as accrued liabilities. The amount is unsecured, due on demand and bears interest at a rate of 7.5% per annum. 10 Equipment notes payable The Company has lines of credit available totalling approximately $188 million from various non-bank equipment lenders in Canada and the United States, which are used to finance equipment inventory (December 31, 2017 $168 million). As at December 31, 2018, there was approximately $141 million borrowed on these equipment finance lines (December 31, 2017 $131 million). STRONGCO CORPORATION 2018 ANNUAL REPORT 55

58 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Typically, these equipment notes are interest-free for periods of up to 6 months from the date of financing, after which they bear interest at variable rates based upon 30-day and 90-day Bankers Acceptance rates ( BA ), the prime rate of a Canadian chartered bank, and 30-day and 90-day LIBOR rates plus the financing company s margin. As at December 31, 2018, the rates ranged from 6.45% to 8.45% with an effective weighted average rate of 7.10% ( %). As collateral for these equipment notes, the Company has provided liens on the specific inventory financed and any related accounts receivable. In the normal course of business, these liens cover substantially all of the equipment inventories. Monthly principal repayments equal to 3.00% 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 or 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. Any remaining balance after 24 months, which is due in full, is normally refinanced with the lender over an additional period of up to 24 months. All of the Company s equipment note facilities are renewable annually. The equipment notes are payable on demand and therefore have been classified as current liabilities. The carrying amount of equipment notes payable is as follows: As at December Equipment notes payable non-interest-bearing $ 48,708 $ 38,881 Equipment notes payable interest-bearing 92,727 92,147 $ 141,435 $ 131,028 Due to the short-term nature of equipment notes payable, management has determined that the fair value does not differ materially from the carrying value. 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 ). As at December 31, 2018, the Company was in compliance with all of the covenants under the agreements. 11 Employee benefit obligations As at December Obligations in the consolidated statements of financial position for: Pension benefits $ 4,820 $ 2,150 Dental, health and other post-employment benefits 1,614 1,638 $ 6,434 $ 3,788 Charges to the consolidated statements of income for: Pension benefits $ 3,006 $ 2,649 Dental, health and other post-employment benefits $ 3,054 $ 2,697 STRONGCO CORPORATION 2018 ANNUAL REPORT 56

59 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Total cash payments for employee future benefits for 2018, consisting of cash contributed by the Company to its funded defined benefit plans, cash payments directly to beneficiaries for its unfunded other benefit plans and cash contributed to its funded defined contribution plan, were $2,190 (2017 $2,955). The history and experience adjustments in respect of post-employment benefit obligations are as follows: As at December Fair value of plan assets $ 47,104 $ 50,465 Present value of benefit obligations 53,538 54,253 Accrued benefit liability $ 6,434 $ 3,788 Experience adjustments in plan liabilities gains (losses) Plan experience $ ,218 $ Changes in demographic assumptions - - Changes in financial assumptions (2,519) 2,279 Experience adjustments in plan assets gains (losses) $ (3,139) $ 490 a. Pension benefits 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. a. Defined contribution plans The Company maintains a defined contribution plan available only to certain employees (approximately 32% of the workforce ( %)). In 2018, the Company s contributions were $464 (2017 $375). The Company also maintains a group retirement savings plan (RSP/LIRA) available only to certain employees (approximately 13% of the workforce ( %)) under the terms of a collective bargaining agreement. In 2018, the Company s contributions were $357 (2017 $334). The Company maintains a defined contribution retirement savings program available only to certain executive officers ( DCRSP plan), which has been in effect since January The expense related to the DCRSP plan for the year ended December 31, 2018 was $116 (2017 $231). The Company maintains a defined contribution retirement savings program available only to certain management employees ( DCRSP GM plan), which has been in effect since June The expense related to the DCRSP GM plan for the year ended December 31, 2018 was $45 ( $73). b. Defined benefit pension plans Risks associated with these plans are similar to those typical of benefit plans including market risk, interest rate risk, liquidity risk, credit risk, longevity risk, etc. There are no significant risks associated with this plan that could be deemed unusual or require special disclosure. STRONGCO CORPORATION 2018 ANNUAL REPORT 57

60 Notes to Consolidated Financial Statements December 31, 2018 and 2017 The amounts recognized in the consolidated statements of financial position are determined as follows: As at December Employee Executive Employee Executive plan plan plan plan Fair value of plan assets $ 45,966 $ 1,138 $ 49,228 $ 1,237 Present value of funded obligations 50,411 1,513 51,000 1,615 Accrued benefit liability $ 4,445 $ 375 $ 1,772 $ 378 The movement in the defined benefit obligation over the year is as follows: Year ended December Employee Executive Employee Executive plan plan plan plan Accrued benefit obligation as at January 1 $ 51,000 $ 1,615 $ 46,931 $ 1,646 Current service cost 2,283-1,908 - Interest cost 1, , Benefits paid (3,347) (170) (2,387) (170) Actuarial (gain) loss Plan experience 1, Changes in demographic assumptions Changes in financial assumptions (2,458) (20) 2, Accrued benefit obligation as at December 31 $ 50,411 $ 1,513 $ 51,000 $ 1,615 The movement in the fair value of plan assets over the year is as follows: Year ended December Employee Executive Employee Executive plan plan plan plan Fair value of plan assets as at January 1 $ 49,228 $ 1,237 $ 45,030 $ 1,185 Actual return on plan assets (1,334) (29) 4, Employer contributions 1, , Employee contributions Benefits paid (3,347) (170) (2,387) (170) Administration costs (194) (26) (199) (40) Fair value of plan assets as at December 31 $ 45,966 $ 1,138 $ 49,228 $ 1,237 STRONGCO CORPORATION 2018 ANNUAL REPORT 58

61 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Plan assets consist of: As at December Employee Executive Employee Executive plan plan plan plan Asset category % % % % Canadian equity Non-domestic equity Bonds REITs/infrastructure/utilities Mortgages Cash and money market The amounts recognized in the consolidated statements of earnings (loss) and comprehensive income (loss) are as follows: Consolidated statements of income (loss) Year ended December Employee Executive Employee Executive plan plan plan plan Employer current service costs $ (1,684) $ - $ (1,275) $ - Interest cost on net defined benefit liability (111) (10) (110) (11) Administration costs (194) (26) (199) (40) Sub-total $ (1,989) $ (36) $ (1,584) $ (51) Consolidated statements of comprehensive income (loss) Gain (loss) for the year on obligations $ 1,278 $ (26) $ (2,822) $ (104) Gain (loss) for the year on assets (3,077) (62) 2, Sub-total (1,799) (88) 109 (6) Total $ (3,788) $ (124) $ (1,475) $ (57) Expected employer contributions to the defined benefit employee pension plan for the year ending December 31, 2019 are $528 (2018 $1,740). Expected employer contributions to the defined benefit executive pension plan for the year ending December 31, 2019 are $79 (2018 $127). The Company moved most of the employees participating in the defined benefit employee pension plan to the defined contribution plan effective January 1, 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 pension plan, the most recent actuarial STRONGCO CORPORATION 2018 ANNUAL REPORT 59

62 Notes to Consolidated Financial Statements December 31, 2018 and 2017 valuation for funding purposes was performed as at December 31, 2017 and the next valuation is required to be performed as at December 31, For the executive pension plan, the most recent actuarial valuation for funding purposes was performed as at December 31, 2017 and the next valuation is required to be performed as at December 31, The principal actuarial assumptions used are as follows: As at December Employee Executive Employee Executive plan plan plan plan Discount rate 3.80% 3.50% 3.50% 3.20% Average life expectancy > Male aged N/A 40.2 N/A > Female aged N/A 43.5 N/A > Male aged > Female aged Duration of plan in years The sensitivity of the overall pension liability to changes in assumptions is as follows: Employee plan Valuation 1% Change Change in overall assumption liability Discount rate 3.80% 4.80% (6,700) Salary growth rate 2.90% 3.90% 25 Executive plan Discount rate 3.40% 4.40% (91) b) Post-employment health and dental benefits and retirement allowance The Company has other post-employment benefit obligations, which include an unfunded retirement allowance and a non-contributory dental and health-care plan. The amounts recognized in the consolidated statements of financial position are determined as follows: As at December Present value of obligation $ 1,614 $ 1,638 Accrued benefit liability $ 1,614 $ 1,638 STRONGCO CORPORATION 2018 ANNUAL REPORT 60

63 Notes to Consolidated Financial Statements December 31, 2018 and 2017 The movement in the accrued benefit obligation over the year is as follows: As at December Accrued benefit obligations as at January 1 $ 1,638 $ 1,664 Current service cost - - Interest cost Benefits paid (90) (80) Actuarial (gain) loss - Plan experience (4) 5 - Changes in demographic assumptions Changes in financial assumptions 22 1 Accrued benefit obligations as at December 31 $ 1,614 $ 1,638 The assumed initial health-care cost trend rate is 6.50%, declining by 0.25% per annum to 4.75% per annum in 2025 and thereafter. The assumed dental cost trend rate is 3.75% per annum. Assumed health-care and dental-care cost trend rates have a significant effect on the amounts reported for the health-care and dental-care plans. A 1% change in assumed health and dental care cost trend rates would have the following effects for 2018: Increase Decrease Accrued benefit obligations as at December 31, 2018 (at 3.7%) $ 212 $ (181) 12 Shareholders equity Authorized: Unlimited number of shares Issued: As at December 31, 2018, a total of 13,371,719 shares (December 31, ,221,719 shares) with a stated value of $65,797 (December 31, 2017 $65,497) were issued and outstanding. STRONGCO CORPORATION 2018 ANNUAL REPORT 61

64 Notes to Consolidated Financial Statements December 31, 2018 and Changes in non-cash working capital and financing arrangements The components of the changes in non-cash working capital are detailed below: Year ended December Changes in non-cash working capital Assets (increase) decrease: Trade and other receivables $ 1,619 $ (2,455) Inventories (30,795) (29,575) Prepaid expenses and other deposits Other assets Liabilities increase (decrease): Trade and other payables 334 (9,426) Deferred revenue and customer deposits (341) (258) Equipment notes payable 10,407 28,565 $ (18,519) $ (12,752) The changes in liabilities arising from financing activities are detailed below: Equipment Notes Payable Finance Lease Obligations Lease Termination Obligation Total financing activities Opening, January 1, 2017 $ 102,463 $ 6,215 $ - $ 108,678 Proceeds 223,244 3, ,981 Repayment (194,679) (2,617) - (197,296) Disposals - (1,166) - (1,166) Closing, December 31, 2017 $ 131,028 $ 6,169 $ - $ 137,197 Proceeds 236,569 3,505 2, ,774 Repayment (226,162) (1,663) (700) (228,525) Disposals - (912) - (912) Common shares issued - - (300) (300) Closing, December 31, 2018 $ 141,435 $ 7,099 $ 1,700 $ 150,234 STRONGCO CORPORATION 2018 ANNUAL REPORT 62

65 Notes to Consolidated Financial Statements December 31, 2018 and Segment information Management has determined that the Company has one reportable segment, Equipment Distribution based on reports reviewed by the Executive Chairman, with appropriate aggregation. This business sells and rents new and used equipment and provides after-sale product support (parts and service) to customers who operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets. A breakdown of revenue from the Equipment Distribution segment is as follows: Year ended December Analysis of revenue by category: Equipment sales $ 254,069 $ 225,878 Equipment rental 18,503 16,858 Product support 139, ,405 Total revenue $ 412,108 $ 376,141 All revenues and assets are located in Canada. 15 Other (income) expense Other expense for the year ended December 31, 2018 of $14 (December 31, 2017 income of $1,008) included foreign currency translation gains, mark-to-market adjustments for foreign currency forward contracts and miscellaneous commission income from suppliers. 16 Expenses by nature Year ended December Changes in inventories of equipment, parts and work-in-process $ 324,241 $ 295,756 Raw materials and consumables used 1,401 1,354 Depreciation 2,635 2,964 Occupancy costs other than rent 5,885 5,978 Operating lease expenses 8,495 9,100 Transportation expenses 1,639 2,882 Salaries, wages and commissions 52,685 52,160 Telephone, fax and office supplies 1,635 2,129 Other 1, Total cost of sales, administration and selling expenses $ 400,279 $ 372,465 STRONGCO CORPORATION 2018 ANNUAL REPORT 63

66 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Salaries, wages and commission expense comprises the following: Year ended December Salaries and wages $ 49,887 $ 49,704 Commissions Employee future benefits 2,072 1,683 $ 52,685 $ 52,160 Year ended December Total cost of sales, selling and administration is comprised of: Cost of sales $ 338,748 $ 308,033 Selling and administrative expenses 61,531 64,432 $ 400,279 $ 372, Interest expense Year ended December Bank indebtedness and finance lease obligations $ 2,364 $ 1,892 Equipment notes payable interest-bearing 5,851 4,347 $ 8,215 $ 6, Earnings (loss) per share Basic earnings (loss) per share is calculated by dividing the income attributable to shareholders of the Company by the weighted average number of shares outstanding during the year. Diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding to assume conversion of all potentially dilutive shares. As at December Weighted average number of shares for basic earnings per share calculation Effect of dilutive options outstanding Weighted average number of shares for dilutive earnings per share calculation 13,297,335 13,221, ,297,335 13,221,719 The computation of dilutive options outstanding only includes those options having exercise prices below the average market price of the shares during the period. At December 31, 2018, dilutive options totalled nil shares (December 31, 2017 nil shares) and anti-dilutive options totalled 347,667 shares (December 31, ,667 shares). STRONGCO CORPORATION 2018 ANNUAL REPORT 64

67 Notes to Consolidated Financial Statements December 31, 2018 and Share-based compensation The Company has a stock option plan under which common shares may be acquired by employees and officers of the Company. The following table summarizes the changes to the number of stock options outstanding during the year: As at December Number of options Weighted average exercise price Number of options Weighted average exercise price Options outstanding beginning of year 138,502 $ ,141 $ 4.90 Granted 225, Exercised Forfeited (15,835) 5.47 (70,639) 5.49 Options outstanding end of year 347,667 $ ,502 $ 4.90 Options vested and exercisable end of year 101,000 $ ,387 $ 4.93 The following table summarizes the exercise prices of outstanding stock options: As at December 31, 2018 Options outstanding Options exercisable Weighted Range of exercise prices Number of options outstanding average remaining contractual life Weighted average exercise price Number of options Weighted average exercise price $2.00 $ , months $ ,333 $ 3.67 $4.01 $ , months , $2.00 $ , months $ ,000 $ 4.66 The Company uses the Black-Scholes option pricing model to estimate the fair value of the options at their grant date. The following assumptions were used in determining the fair value of the options issued in June 2018 using the Black-Scholes model. Expected volatility 66% Risk-free interest rate 2.18% Expected term (years) 10 Expected forfeiture rate 0.0% Expected annual dividend nil Fair value price per option $1.87 STRONGCO CORPORATION 2018 ANNUAL REPORT 65

68 Notes to Consolidated Financial Statements December 31, 2018 and 2017 The expected volatility reflects the assumption that the historical volatility of the Company s common shares over a period similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome. The risk-free interest rate is based on Government of Canada bond yields for terms that match the expected term of the stock option grants. The expected term of each option tranche is estimated at the time of the option grant. The expected dividend rate considers historical dividend payments and the Company s expectations for future periods. No options were granted during Stock-based compensation expense resulting from the stock options is $65 (2017 $23). 20 Contingencies, commitments and guarantees a. In the ordinary course of business, the Company may be contingently liable for litigation. On an ongoing basis, the Company assesses the likelihood of any adverse judgments 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 matter. 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 Court of Queen s 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 plus interest. Management believes that the Company has a strong defence against this claim and that it is without merit. The Company s insurer has provided conditional coverage for this claim. b. The Company has entered into various operating leases for its premises, certain vehicles, furniture and fixtures, and equipment. The lease terms are between one and eight years, and the majority of lease agreements are renewable at the end of the lease period at market rates. Approximate future minimum annual payments under these operating leases are as follows: As at December No later than 1 year $ 9,073 Later than 1 year but no later than 5 years 28,625 Later than 5 years 12,398 $ 50,096 STRONGCO CORPORATION 2018 ANNUAL REPORT 66

69 Notes to Consolidated Financial Statements December 31, 2018 and Classification and measurement of financial assets and liabilities The following table summarizes the carrying amounts and classifications of the Company s financial assets and liabilities: As at December Financial Assets at amortized cost: Trade and othe receivables 37,860 39,479 Financial liabilities at amortized cost: Equipment notes payable $ 141,435 $ 131,028 Derivative financial instruments assets (liabilities): Foreign exchange forward contracts 203 (83) The following table summarizes the Company s financial assets and liabilities measured at fair value within the fair value hierarchy. All valuations are classified as level 2. As at December Equipment notes payable $ 141,435 $ 130,980 Foreign exchange forward contracts gain (loss) 203 (83) The fair value of trade and other receivables, bank indebtedness, trade and other payables approximate their carrying value due to their short term nature. The fair value of the Company s equipment notes payable, finance leases and lease termination obligation are approximated by their carrying value. The fair value of derivative financial instruments measurement hierarchy applies to the Company s derivative instruments, consisting of foreign exchange forward contracts and interest rate swap contracts, which are all considered Level 2 inputs. The Company enters into derivative financial instruments with various counterparties, principally financial institutions with investment grade credit ratings. Derivatives valued using valuation techniques with market observable inputs are interest rate swaps and foreign exchange forward contracts. The most frequently applied valuation techniques include forward pricing and swap models using present value calculations. The models incorporate various inputs, including the credit quality of counterparties, foreign exchange spot and forward rates, interest rate curves and forward rate curves of the underlying commodity. 22 Financial risk management The Company s activities expose it to a variety of financial risks: market risk (including foreign exchange and interest rate risk), 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. Financial 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. STRONGCO CORPORATION 2018 ANNUAL REPORT 67

70 Notes to Consolidated Financial Statements December 31, 2018 and 2017 Market risk a. Foreign exchange risk The Company operates in Canada. Foreign exchange risk arises because of varying currency exposure, primarily to the US dollar, and impacts receivables or payables on transactions denominated in foreign currencies, which vary due to changes in exchange rates (transaction exposures). The consolidated statements of financial position include US dollar-denominated trade payables and trade receivables. These amounts are translated into Canadian dollars at each year end, with resulting gains and losses recorded in the consolidated statements of 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. A substantial portion of the Company s equipment inventory and parts purchases are denominated in US dollars and translated into Canadian dollars at the date of receipt. As at December 31, 2018, the Company carried $11,078 in US dollar denominated liabilities net of US dollar denominated trade receivables (December 31, 2017 $4,570). A $0.01 change in the exchange rate between the Canadian and US currencies would have an effect of approximately $111 on net income for the year ended December 31, 2018 (December 31, 2017 $46). Foreign exchange forward contracts On a transaction-specific basis, the Company utilizes financial instruments to manage the risk associated with fluctuations in foreign exchange. The Company enters into foreign exchange forward contracts to reduce the impact of currency fluctuations on the cost of certain pieces of equipment ordered for future delivery to customers. The Company has a line for foreign exchange forward contracts ( FX line ), totalling US$18.4 million, as part of its Canadian facility, available to hedge foreign currency exposure. Under the FX Line, Strongco can purchase foreign exchange forward contracts up to a maximum of approximately US$18.4 million with terms not to expire beyond the remaining term of the operating line of credit. As at December 31, 2018, the Company had outstanding foreign exchange forward contracts under this facility totalling US$3.4 million at an average exchange rate of $ Canadian for each US$1.00 with settlement dates between January 2019 and June 2019 (December 31, 2017 US$10.2 million). Foreign currency forward contracts are classified as a derivative financial instrument and are recorded at fair value using observable inputs. The fair values of foreign currency forward contracts are based on the settlement rates on those contracts compared to the current forward exchange rate. Strongco has not adopted hedge accounting for these foreign currency forward contracts and, accordingly, the change in the fair values of the contracts is recorded in Other Income. As at December 31, 2018, the unrealized gain associated with foreign currency forward contracts is $203 (December 31, 2017 unrealized loss of $83). b) Interest rate risk Strongco 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, 2018, a portion of the Company s interest-bearing debt is subject to movements in floating interest rates. STRONGCO CORPORATION 2018 ANNUAL REPORT 68

71 Notes to Consolidated Financial Statements December 31, 2018 and 2017 The Company analyzes its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. Based on these scenarios, the Company calculates the impact on the consolidated statements of earnings of a defined interest rate shift. As at December 31, 2018, the Company had $122,935 in interest-bearing floating rate debt (December 31, 2017 $121,135). A 1.0% change in interest rates would have an effect of approximately $1,229 on net income for the year ended December 31, 2018 (December 31, 2017 $1,211). Credit risk Credit risk arises from cash and cash equivalents held with banks and financial institutions, derivative financial instruments (foreign exchange forward contracts and interest rate swap contracts), as well as credit exposure to customers, including outstanding trade receivables. 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 trade receivables 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, 2018, the Company held customer deposits of $109 (December 31, 2017 $17). Liquidity risk Liquidity risk arises through an 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, 2018, the Company had undrawn lines of credit available to it of $5.3 million (December 31, 2017 $6.9 million). The maturity of the carrying value of the Company s non-derivative debt and contractual obligations relating to outstanding derivative instruments as at December 31, 2018 is as follows: Less than 1 year Between 1 and 5 years Total Non-derivatives Bank indebtedness $ 28,509 $ - $ 28,509 Equipment notes 141, ,435 Lease termination obligation 1, ,700 Derivatives Foreign exchange forward contracts settlement value $ 4,450 $ - $ 4,450 STRONGCO CORPORATION 2018 ANNUAL REPORT 69

72 Notes to Consolidated Financial Statements December 31, 2018 and 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 non-interest-bearing) and other interest-bearing debt. The Company s objectives when managing capital are to ensure that the Company has adequate financial resources to maintain the 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 are dependent upon multiple factors including: availability of supply from manufacturers, seasonal market conditions, local market conditions and date of receipt of inventories from the manufacturer. 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 a specific threshold. During 2018 the Company revised the target ratio to not exceed 10.0 to be consistent with one of the bank and equipment note facility covenants. As at December 31, 2018 and 2017, the above capital management criteria can be illustrated as follows: As at December Interest-bearing debt $ 28,508 $ 28,988 Equipment notes payable 141, ,028 Finance lease obligations 7,099 6,170 Lease termination obligation 1,700 - Total managed debt instruments $ 178,742 $ 166,186 Shareholders' equity $ 23,491 $ 26,973 Ratio of total managed debt instruments to shareholders' equity The Company has credit facilities with a Canadian bank which provides an operating line of credit (refer to note 8). The Company s bank credit facilities contain 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 1.0:1, a minimum tangible net worth (TNW covenant) of $20 million, a maximum ratio of total debt to tangible net worth ( Debt to TNW Ratio ) covenant of 10.00:1 and a minimum ratio of earnings before interest, taxes, depreciation and amortization to total interest ( Interest Coverage Ratio ) covenant of 2.75:1. For the purposes of calculating covenants under the credit facility, debt is defined as total liabilities less future income tax amounts, subordinated debt, trade payables, customer deposits, employee future benefit obligation, less cash and cash equivalents. The Interest Coverage Ratio is measured at the end of each quarter on a trailing 12-month basis. Other covenants are measured as at the end of each quarter. STRONGCO CORPORATION 2018 ANNUAL REPORT 70

73 Notes to Consolidated Financial Statements December 31, 2018 and 2017 As at December 31, 2018, the Company was in compliance with its bank and equipment note lenders. 24 Key management compensation Key management comprises the Executive Chairman, Chief Financial Officer, vice-presidents and external directors of the Company. The compensation paid or payable to key management for employee services is shown below: Year ended December Salaries and short-term benefits $ 1,912 $ 2,111 Employee future benefits Share-based payments $ 2,086 $ 2, Restructuring costs Effective July 1, 2018, the Company and the landlord of its Fort McMurray branch terminated the existing lease agreement. The total cost for termination of the existing lease amounted to approximately $3.4 million including a termination fee of approximately $2.7 million plus real estate fees, legal fees, relocation costs and impairment of property and equipment. The termination fee of $2.7 million was satisfied by the issue of 150,000 common shares (with an approximate value of $0.3 million) and cash payment of $0.2 million on closing, followed by 22 equal monthly payments of $0.1 million plus interest at 6%. The Company has moved its sales and product support activities to a smaller and less costly facility in Fort McMurray. As at December 31, 2018, remaining termination fees of $1.7 million are recorded as obligations. During the year ended December 31, 2017, the Company recorded a restructuring provision of $0.7 million for severance and other termination costs of senior executives and other employees, and facility closure costs in response to ongoing weak economic conditions. As at December 31, 2017, an accrual for restructuring costs of $0.2 million is included in accrued liabilities. 26 Economic relationship The Company sells and services 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. and The Manitowoc Company Inc. The distribution and servicing of Volvo and Manitowoc products account for a substantial portion of the Company s operations. The Company has had an ongoing relationship with Volvo since 1991 and with the Manitowoc group of companies since 1965 collectively representing approximately 70% of revenues. STRONGCO CORPORATION 2018 ANNUAL REPORT 71

74 STRONGCO CORPORATION 2018 ANNUAL REPORT 72

75 CORPORATE AND SHAREHOLDER INFORMATION CORPORATE ADDRESS 1640 Enterprise Road Mississauga, Ontario Canada L4W 4L4 Telephone: Fax: Website: strongco.com INVESTOR RELATIONS J. David Wood, CPA Vice President and Chief Financial Officer Telephone: DIRECTORS John A. Anhang 1 Corporate Director Robert J. Beutel Executive Chairman Anne Brace 1, 2 Corporate Director Ian C.B. Currie, Q.C. 1, 2 Corporate Director Eudora A. LeBlanc 2 Corporate Director 1. Member of Audit Committee 2. Member of Corporate Governance, Nominating, Compensation and Pension Committee AUDITORS Grant Thornton LLP Mississauga, Ontario TRANSFER AGENT AND REGISTRAR Inquiries regarding change of address, registered shareholdings, share transfers, lost certificates and duplicate mailings should be directed to the transfer agent: Computershare Investor Services Inc. 100 University Avenue Toronto, Ontario M5J 2Y1 Telephone: Fax: service@computershare.com STOCK EXCHANGE LISTING Toronto Stock Exchange Stock symbol: SQP OFFICERS AND SENIOR MANAGEMENT Robert J. Beutel Executive Chairman J. David Wood, CPA Vice President, Chief Financial Officer and Corporate Secretary Peter Rayner, CPA Director, Finance OPERATIONS Construction Equipment Oliver Nachevski Vice President and Chief Operating Officer Steve Di Loreto Regional Vice President, Alberta Stephen George Regional Vice President, Eastern Canada Cranes and Material Handling William J. Ostrander Vice President, Crane Rick Ziegler Regional Vice President, Alberta STRONGCO CORPORATION 2018 ANNUAL REPORT 3

76 1640 Enterprise Road Mississauga, Ontario Canada L4W 4L4 Telephone: Fax: strongco.com