ANNUAL REPORT STRONGCO CORPORATION 2017 ANNUAL REPORT 1

Transcription

1 2017 ANNUAL REPORT STRONGCO CORPORATION 2017 ANNUAL REPORT 1

2 WE ARE STRONGCO Strongco Corporation 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 26 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 Cedarapids, Terex Trucks, Fassi, Sennebogen, Konecranes and SDLG. Strongco is listed on the Toronto Stock Exchange under the symbol SQP. MANAGEMENT S DISCUSSION AND ANALYSIS 4 Company Overview 4 Financial and Operating Highlights for the Year 5 Summary of Operating Results Continuing Operations 5 Outlook 6 Financial Results Annual 14 Financial Results Fourth Quarter 18 Summary of Quarterly Data 19 Contractual Obligations 20 Shareholder Capital 20 Non-IFRS Measures 21 Critical Accounting Estimates 22 Risks and Uncertainties 24 Disclosure Controls and Internal Controls Over Financial Reporting 24 Forward-Looking Statements FINANCIAL STATEMENTS 26 Management s Responsibility for Financial Reporting 27 Independent Auditors Report 28 Consolidated Statements of Financial Position 29 Consolidated Statements of Loss 30 Consolidated Statements of Comprehensive Loss 31 Consolidated Statements of Changes in Shareholders Equity 32 Consolidated Statements of Cash Flows 33 STRONGCO CORPORATION 2017 ANNUAL REPORT 4

3 TO OUR SHAREHOLDERS 2017 was a successful transitional year for Strongco, following the difficult, yet transformative, restructuring and streamlining process initiated in The overriding objectives have been sustainability and consistent profitability and we are pleased to report financial results that have Strongco moving towards both of these goals. Circumstances required some tough decisions along the way; but the desired results are becoming evident on the balance sheet, and with improved margins, increased operating income and positive cash flow all driven by sales and product support for our core brands. In Ontario, smaller-scale construction activity remains relatively strong; however, the lack of government infrastructure spending and fewer largescale projects scheduled for the near-term has resulted in more customers choosing to rent equipment or purchase used machines. The forecast for Quebec and Atlantic Canada remains relatively unchanged over the short term, although the outlook over the longer term indicates some modest improvement. Stronger gold and iron ore prices have led to increased mining activity in the northern regions of Quebec, and a rising demand for heavy construction equipment. Although inventory levels increased in 2017 to support growth in rental activity across the country, interest expense declined on a year-over-year basis, the result of Strongco s ongoing efforts to improve inventory management by reducing aged equipment and non-core brands, and the associated debt. We commend our team from east to west, as this has not been an easy transition, particularly given the continued headwinds in the marketplace. While we are seeing positive signs in key markets, progress remains slow and uncertainty persists, given the ongoing challenges in many markets for heavy equipment, heightened competition and a weaker Canadian dollar. Nevertheless, the changes we have made internally are fortifying in the current environment, and position Strongco well for the inevitable recoveries. Turning to the regional outlook, while key heavy equipment markets experienced small year-over-year improvement, conditions across Canada continue to pose challenges. Economic conditions in Alberta are continuing to improve and with the increase in oil prices, a sense of optimism has emerged and there are definite signs of recovery. Construction activity has increased, leading to greater demand for heavy equipment. However, an air of caution remains, signaled by a shift toward sales of used equipment and rentals. Against the current economic backdrop, Management anticipates continued recovery in the overall markets for heavy equipment in 2018, while remaining cautiously optimistic in the context of an ever-present, competitive landscape. At the same time, from an operational standpoint, we re encouraged by the early signs of momentum in many of our key regions, which has resulted in higher demand in all of our equipment categories. While market-share numbers were largely unchanged last year within the business units, we re extremely pleased with the performance of our Volvo and Case wheel loader business, and a gradual recovery in the sale of our haulers. Strongco s excavator sales in 2017 were negatively affected by strong competition, particularly from dealers carrying tier-3 product. However, the tier-4 compliance requirements coming into full effect by the end of 2018 should create a more-level playing field across the related product lines. Improved demand, combined with customers opting to lease equipment as markets recover, has resulted in Strongco s growing focus on and participation in the rental business. At the end of the fourth quarter of 2017, year-over-year rental income for equipment in the field on RPO and rent-to-rent was up approximately 22%, and the trend is continuing into the early months of STRONGCO CORPORATION 2017 ANNUAL REPORT 1

4 Across all regions and OEMs, Strongco is experiencing improved customer commitments, the direct result of this increased demand. Product on order is at a significantly higher level than at this time last year, with approximately 25% of those items already pre-sold. Manufacturer lead times are being stretched to lengths that we haven t seen in several years, given the indications of better markets for sales and rentals. One of the most significant aspects of Strongco s restructuring initiatives was the decision to solely concentrate on the world-class brands for which we are best known. This strategy not only strengthens our commitment to our core manufacturers, it also allows our salesforce to focus on our top sellers. At the same time, we re conservatively growing our customer-facing team, complementing our mature group of sales representatives with parts specialists, skilled service technicians and young apprentices in training, to better service and meet the growing demand, particularly as we approach the prime summer selling season. Looking ahead, we continue to be cautiously optimistic regarding the outlook for Strongco over the balance of 2018 and the longer term, supported by our commitment to industry leadership, quality of service and, most important, our reputation and relationships with customers, employees and investors. We continue to have great success in the growth of the Sennebogen line of material handling equipment, primarily in the scrap-metal and forestry sectors. Strongco is the exclusive dealer for Sennebogen in Alberta, Atlantic Canada, northern and central Ontario, and much of the province of Quebec, a region where we continue make significant inroads with this product. Robert J. Beutel Executive Chairman As previously announced, our largest OEM partner, Volvo Construction Equipment, is set to open its centralized, Canadian parts distribution warehouse in the GTA by mid-year, which we anticipate will dramatically enhance Strongco s ability to optimize the customer experience in terms of service and product support. J. David Wood, CPA Vice President and Chief Financial Officer March 21, 2018 STRONGCO CORPORATION 2017 ANNUAL REPORT 2

5 MANAGEMENT S DISCUSSION & ANALYSIS STRONGCO CORPORATION 2017 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 Corporation, 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 2017 and fiscal 2016 as well as the Company s Annual Information Form ( AIF ) dated March 21, 2018, 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 21, 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 and service) 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, Jekko, Konecranes, Sennebogen, SDLG, Terex Trucks and Terex Cedarapids. Strongco is listed on the Toronto Stock Exchange under the symbol SQP. FINANCIAL AND OPERATING HIGHLIGHTS FOR THE YEAR Income Statement Strongco generated revenue of $356.0 million, compared to $361.3 million in Excluding large non-recurring sales of cranes to the Champlain Bridge project in Quebec in 2016, revenues increased $22.5 million from a year ago. Revenue in the year were impacted 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 due to non-recurring sales to the Champlain Bridge project in Quebec in 2016 and weaker markets for cranes in Ontario o Increased rental revenue, particularly in Western and Central Canada o Higher product support sales (parts and service) in Western and Eastern Canada Gross profit of $63.8 million (17.9% of revenue) up from $57.0 million (15.8% of revenue). Operating income, before restructuring costs, of $3.7 million compared to a loss of $7.7 million from higher margins and lower operating expenses. EBITDA increased to $20.0 million from $5.8 due to improved operating income. Interest expense was lower due to reduced interest-bearing debt. Pre-tax loss before intangible impairment and restructuring charges $1.5 million, improved from a loss of $13.5 million Net loss of $2.2 million ($0.17 per share) compared to net loss from continuing operations of $33.6 million (loss of $2.90 per share). Balance Sheet Equipment inventory of $149.8 million, up from $129.2 million at December 31, The increase is largely to support increased rental activity. Equipment notes payable of $131.0 million, compared to $101.2 million at December 31, Trade and other payables of $37.1 million, down from $46.5 million at December 31, Bank Indebtedness improved at $29.0 million from $30.7 million at December 31, STRONGCO CORPORATION 2017 ANNUAL REPORT 4

7 SUMMARY OF OPERATING RESULTS CONTINUING OPERATIONS Year Ended December / /2015 ($ thousands, except per share amounts) $ Change % Chg $ Change % Chg Revenue $ 355,986 $ 361,301 $ 385,002 $ (5,315) -1% $ (23,701) -6% Cost of sales 292, , ,845 (12,116) -4% (15,507) -5% Gross margin 63,764 56,963 65,157 6,801 12% (8,194) -13% Selling and administrative expenses 61,096 66,007 68,115 (4,911) -7% (2,108) -3% Other (income) expense (1,008) (1,339) 1, % (3,158) -174% Operating income (loss) 3,676 (7,705) (4,777) 11, % (2,928) 61% Restructuring costs 678 3,605 - (2,927) 3,605 Impairment of intangible asset - 16,499 - (16,499) 16,499 Interest expense 5,231 5,795 7,403 (564) -10% (1,608) -22% Earnings before income taxes (2,233) (33,604) (12,180) 31,371-93% (21,424) -176% Provision for (recovery of) income taxes - 4,745 (3,236) (4,745) -100% 7, % Net income (loss) from continuing operations (2,233) (38,349) (8,944) 36,116-94% (29,405) 329% Net income (loss) from discontinued operations - 1,036 1,576 (1,036) -100% (540) -34% Net income (loss) $ (2,233) $ (37,313) $ (7,368) $ 35,080-94% $ (29,945) 406% Basic and diluted earnings (loss) per share - continuing operations $ (0.17) $ (2.90) $ (0.68) $ % $ (2.22) 328% - net income (loss) (0.17) (2.82) (0.56) % (2.26) 405% Weighted average number of shares - Basic and diluted 13,221,719 13,221,719 13,184,278 Key financial measures Gross margin as a percentage of revenues 17.9% 15.8% 16.9% Selling and administrative expenses as a percentage 17.2% 18.3% 17.7% Operating income (loss) as a percentage of revenues 1.0% -2.1% -1.2% EBITDA (see Non-IFRS Measures) $ 20,039 $ 5,770 $ 16,217 $ 14, % $ (10,447) -64% 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 (0.8) (2.5) (8.5) Working capital Property and equipment Funded debt (see "Non-IFRS Measures") Strongco s sales of construction equipment, rentals and parts and service were higher in 2017 but lower crane sales resulted in a small overall decline in revenues. Despite the lower revenues, operating profit improved substantially to $3.7 million from a loss of $7.7 million last year due to improved margins and lower expenses, the direct result of the actions taken in 2016 to refocus, simplify and streamline the business. In addition, interest expenses were down from the prior year as a result of reduced aged equipment inventory and the associated interest-bearing debt despite a slight increase in interest rates. Rental activity continued to grow across the country, particularly in Alberta where markets are continuing to recover. In response, Strongco has increased its level of equipment inventory to support the increasing rental activity. The level of equipment inventory on rent at December 31, 2017 was $61.8 million which was up from $39.2 million at the beginning of the year. OUTLOOK While most markets for heavy equipment across Canada experienced modest year over year improvement in 2017, conditions continue to be challenging. Economic conditions in Alberta are continuing to improve and with increased oil prices, a sense of optimism has emerged and there are definite signs of recovery. Construction activity has picked up in the province which has led to increased demand for STRONGCO CORPORATION 2017 ANNUAL REPORT 5

8 equipment. However, an air of caution remains which has resulted in a shift more towards used equipment and rentals as markets continue to slowly recover. Similarly, in Ontario, while construction activity is more buoyant, most activity is of a smaller scale and there remains an overall air of caution which is affecting the purchase decisions for heavy equipment. With no new infrastructure spending announced by the Ontario government and few large projects underway or planned for the near term, larger scale construction activity is expected to remain low and demand for heavy equipment, especially GPE, and cranes is not expected to increase significantly. In this uncertain environment, as customers are more reticent to purchase new equipment, demand for rentals and used equipment in Ontario has increased. In Quebec and the Atlantic regions of the country, overall demand for heavy equipment is expected to remain unchanged in the near term, although the longer-term outlook is for continued modest improvement. With no plans for significant new government infrastructure spending and no meaningful uptick in housing, construction activity in these regions is expected to remain weak in the near term. With strength in the price of gold and some improvement in iron ore prices, mining activity in northern regions of Quebec has picked up which has led to increasing demand for associated heavy equipment. 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 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 customer 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. With this economic backdrop, the overall markets for heavy equipment across Canada are expected to show continued improvement in While encouraged by the improvement in the Company s results in 2017, management remains cautiously optimistic regarding the outlook for The strategic actions initiated in 2016 and 2017 to simplify and streamline the business, reduce expenses and increase operational efficiencies have resulted in an improved cost structure and balance sheet and positioned Strongco to generate improved profitability in the future as markets continue to recover. 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 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 showed signs of improvement in Construction activity increased during the year but most of the activity has been in and around major urban centers and mainly related to high-rise office and condominium construction and other smaller scale infrastructure projects which utilize types of equipment not offered by Strongco. By comparison, Strongco s products are typically used more extensively in larger scale infrastructure projects, mining and low-rise housing development all of which continued to be negatively impacted by ongoing weak oil prices, soft commodity prices and lack of government spending which dampened demand for heavy equipment and cranes. In this environment, competition has intensified, especially from dealers carrying tier 3 product and offering discounted financing and margins continued to be under pressure. but continued to be impacted While Strongco s markets overall remain soft, modest recovery has been evident in certain sectors and regions of the country resulting in increased demand for construction equipment. However, the market for cranes, especially larger cranes, remained soft across the country. Alberta in particular has begun to show signs of recovery, although demand for heavy equipment remained well below historic averages. Rental activity continued to increase across the country as more customers are choosing to rent or rent with an option to purchase. In addition, an air of caution exists in Alberta and other regions of the country which continues to impact customer purchase decisions and result in more customers choosing to rent equipment or purchase used machines. Rental activity and sales of used equipment were stronger in STRONGCO CORPORATION 2017 ANNUAL REPORT 6

9 Revenues A breakdown of revenue for the years ended December 31, 2017, 2016 and 2015 is as follows: Years Ended December / /2015 ($ millions) % Chg % Chg Eastern Canada (Atlantic and Quebec) Equipment Sales $ 66.9 $ 87.4 $ % 6% Equipment Rentals % 14% Product Support % 6% Total Eastern Canada $ $ $ % 6% Central Canada (Ontario) Equipment Sales $ $ $ % -5% Equipment Rentals % -17% Product Support % -4% Total Central Canada $ $ $ % -5% Western Canada (Manitoba to British Columbia) Equipment Sales $ 57.1 $ 48.9 $ % -21% Equipment Rentals % -50% Product Support % -27% Total Western Canada $ 86.8 $ 72.6 $ % -25% Total Revenue Equipment Sales $ $ $ % -5% Equipment Rentals % -18% Product Support % -6% Total $ $ $ % -6% For the year ended December 31, 2017, total revenues were $356.0 million compared to $361.3 million in 2016, down $5.3 million or 1%. Most of the decline was in Quebec due to fewer sales of cranes to the Champlain Bridge project. Excluding the large sales to the Champlain Bridge project in 2016, revenues for the year were up by $22.5 million or 7% from 2016 with growth in all revenue categories. The following factors affected revenues in 2017: Total equipment sales were down by $13.6 million or 6% due primarily to sales to the Champlain Bridge project in Quebec in 2016 and lower crane sales in Ontario. Excluding the crane sales to the Champlain Bridge project, equipment sales were up $14.2 million or 7% year over year. Sales were particularly strong in Western Canada due to greater sales of excavators, loaders and cranes, combined with higher sales of used equipment. Rental revenues were higher in Central and Western regions of the country as demand for equipment increased and more customers chose to rent as markets continued to recover. Product support revenues were particularly strong in Quebec and Alberta due to higher customer fleet utilization generally as construction activity increased and a few large jobs to refurbish customers equipment early in the year. Gross Profit ($ millions) Year Ended December / /2015 Gross Profit GM% GM% GM% $ Change % Chg $ Change % Chg Equipment Sales $ % $ % $ % $ % $ (2.8) -19% Equipment Rentals % % % - 0% (1.1) -32% Product Support % % % 1.4 3% (4.3) -9% Total Gross Profit $ % $ % $ % $ % $ (8.2) -13% STRONGCO CORPORATION 2017 ANNUAL REPORT 7

10 Strongco s overall gross profit was $63.8 million or 17.9% of revenue in 2017, up from $57.0 million or 15.8% last year. Despite the lower revenues, gross profit was higher in the year due to an improved overall gross margin as a percent of revenue. The improvement in the overall gross margin was due primarily to higher rental and product support revenues and stronger margins on equipment sales. By revenue category gross margin was impacted by the following: Gross margin on equipment sales was higher in 2017 as in 2016, large quantities of aged and non-core equipment inventory was sold at auction at lower margins and losses as part of the Company s strategy to reduce aged inventory and focus on its core brands. Gross margin on rentals was lower due to a higher proportion of rentals with purchase options which typically have lower margins than rentals without purchase options. The gross margins on parts and service in the year were slightly lower than the prior year resulting from lower service margins on a few large jobs to refurbish customers equipment in Alberta and Quebec in the first quarter. Selling and Administrative Expense Administrative, distribution and selling expense in 2017 were $61.1 million or 17.2% of revenue, down from $66.0 million or 18.3% of revenue in The decrease was primarily the result of the actions taken in 2016 and first quarter of 2017 to restructure the business and reduce headcounts and other cash expenses. In addition, depreciation was lower related to the SAP computer system, which was fully impaired in the third quarter Headcount at December 31, 2017 stood at 500, which was down 32 employees from the beginning of the year. Net warranty recovery was lower in the year as a result of a lower level of warranty work and reduced recoveries, which partially offset the overall expense reduction. In addition, given the improved operating performance in 2017, bonuses were higher than in the prior year. 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. Strongco typically carries US dollar liabilities related to the purchase of equipment inventory and parts. With the significant volatility that has occurred from one period to the next in the value of the Canadian dollar relative to the US dollar, foreign exchange gains and losses have arisen on the translation of US dollar liabilities. Other income and expense in 2017 was net income of $1.0 million, composed primarily of foreign exchange gains that arose on the translation of US dollar liabilities. This compared to net income, mainly foreign exchange gains, of $1.3 million in Operating Income Despite lower revenues, improved gross profit and lower selling and administrative expenses resulted in operating income, before restructuring costs, of $3.7 million in 2017, which was significantly improved from an operating loss of $7.7 million, before restructuring costs and the impairment of intangible asset, in After restructuring costs, operating income was $3.0 million in 2017, compared to an operating loss of $11.3 million in Restructuring Costs In response to ongoing weak economic conditions during 2016, particularly in Alberta, management restructured the business to reduce costs, streamline the business and improve the balance sheet. As part of this restructuring headcount was reduced by 59 employees or 10% in 2016, resulting in a restructuring provision of $3.6 million for severance and other termination costs. Headcount was reduced by an additional 32 people during In addition, in the first quarter of 2017, the Company closed its branch in Orillia, Ontario and terminated the lease. As a result of these actions, a restructuring provision of $0.7 million for severance and other termination costs of employees and lease termination costs of the Orillia facility was recorded. While the Company has exited the Orillia branch, it is still servicing customers in the region through sales and service personnel covering the territory as well as providing service and parts from its Mississauga and Sudbury, Ontario locations. 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 12 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 2017 ANNUAL REPORT 8

11 rates ). (See discussion under Cash Flow, Financial Resources and Liquidity. ) The Bank of Canada overnight lending rate increased by 50 bps in 2017 with a corresponding increase in prime rates and BA rates. This did not have a significant impact on Strongco s total interest expense in As part of the Company s restructuring efforts in 2016, there was a significant reduction in aged and non-core equipment inventory and the related interest-bearing debt. This resulted in in lower interest expense in Interest expense was $5.2 million in 2017, compared to $5.8 million in Loss Before Income Taxes Before restructuring costs, the loss before tax was $1.5 million which compared to a pre-tax loss before the non-cash impairment charge and restructuring costs of $13.5 million in After restructuring costs, the pre-tax loss was $2.2 million in Provision for / Recovery of Income Taxes Given the Company s history of losses, there was uncertainty whether the tax losses incurred during 2017 and 2016 would be recovered in the future. As a result, no recovery of income taxes has been recorded against the losses in the year. During 2016, management reassessed the recoverability of deferred tax assets recorded against losses from prior periods and determined a provision was warranted to reflect the uncertainty of recoverability resulting a net income tax expense of $4.7 million in Net Loss from continuing operations Strongco s net loss in 2017 was $2.2 million ($0.17 per share) compared to a net loss from continuing operations of $38.3 million ($2.90 per share). EBITDA EBITDA in 2017 was $20.0 million (5.6% of revenue) which compared to $5.8 million (1.6% of revenue) in 2016 and $16.2 million (4.2% of revenue) in EBITDA was calculated as follows: Year Ended December 31 Change EBITDA ($ millions) / /2015 Net loss from continuing operations $ (2.2) $ (38.3) $ (8.9) $ 36.1 $ (29.4) Add back: Interest (0.6) (1.6) Income taxes (3.2) (4.7) 7.9 Impairment of intangible asset (16.5) 16.5 Depreciation of capital assets (1.0) (1.7) Depreciation of equipment inventory on rent (1.8) Depreciation of rental fleet (0.1) (0.8) Amortization of computer system (0.9) 0.5 EBITDA (see non-ifrs Measures) $ 20.0 $ 5.8 $ 16.2 $ 14.2 $ (10.4) Cash Flow, Financial Resources and Liquidity Cash Flow Provided By (Used In) Operating Activities from Continuing Operations: In 2017, cash of $21.5 million was provided by operating activities from continuing operations before changes in working capital. By comparison, in 2016, operating activities from continuing operations provided $7.8 million of cash before changes in working capital. After changes in working capital, cash provided by operating activities was $4.5 million compared to $4.9 million of cash used in operating activities from continuing operations in STRONGCO CORPORATION 2017 ANNUAL REPORT 9

12 The components of the cash provided by/(used in) operating activities were as follows: Year Ended December 31 ($ millions) Net income (loss) for the period (2.2) (37.3) Net income from discontinued operations - (1.0) Net income from continuing operations $ (2.2) $ (38.3) Non-cash items: Depreciation equipment inventory on rent Depreciation capital assets Depreciation rental fleet Amortization of computer system Impairment of computer system Gain on sale of rental fleet (0.2) - Share-based payment expense Interest expense Income tax expense Employee future benefit expense Changes in non-cash working capital balances (11.4) (4.4) Purchase of rental fleet (0.1) 0.0 Proceeds from sale of rental fleet Employee future benefit funding (1.9) (2.0) Interest paid (5.3) (6.3) Income tax receovery received Cash provided by (used in) operating activities - continuing operations 4.4 (4.9) - discontinued operations Cash provided by (used in) operating activities $ 4.4 $ (2.9) Non-cash items include depreciation of equipment inventory on rent of $13.7 million, which compared to $11.8 million in During 2017, there was a net increase in non-cash working capital from continuing operations of $11.4 million resulting primarily from a decrease in trade and other payables. Inventories increased in the year, largely to support the increase in rental activity, but this was offset by an increase in equipment notes payable. By comparison, during 2016, there was a net increase in non-cash working capital from continuing operations of $4.4 million. Components of cash flow from the net change in non-cash working capital from continuing operations for 2017 and 2016 were as follows: ($ millions) Year Ended December 31 (Increase) Decrease Trade and other receivables $ (2.4) $ 9.3 Income taxes receivable - (1.5) Inventories (29.6) 40.5 Prepaids and other assets $ (31.6) $ 48.9 Increase (Decrease) Trade and other payables (9.3) 7.4 Deferred revenue and customer deposits (0.3) (5.2) Equipment notes payable 29.8 (55.5) $ 20.2 $ (53.3) Net increase in non-cash working capital from continuing operations $ (11.4) $ (4.4) Trade and other receivables at December 31, 2017 were $39.5 million, up from $37.0 million at December 31, 2016 due to higher revenues in the last quarter. The average age of receivables at end of the year has improved compared to the end of Equipment inventory at the end of 2017 was $149.9 million, up from $129.2 million a year earlier. While equipment inventory levels declined in 2016 as a result of management s actions to reduce aged and non-core machines, new inventory was purchased in 2017 to support the increasing demand in the market, especially increasing demand for equipment for rent as markets continued to recover. At December 31, 2017, Strongco had $61.8 million of equipment on rent, both short-term rental contracts and contracts with purchase options, which was up from $39.2 million at the same time last year. STRONGCO CORPORATION 2017 ANNUAL REPORT 10

13 A breakdown of equipment inventory at December 31, 2017 compared to prior quarters is as follows: ($ millions) December 31, 2017 September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 Equipment in-stock $ 88.1 $ 99.5 $ 88.5 $ 90.5 $ 90.0 Equipment on RPO Equipment on a short-term rental contract Equipment inventory - total $ $ $ $ $ Equipment notes payable at December 31, 2017 was $131.0 million up from $101.2 million at the end of With the increase in equipment inventory, equipment notes payable have increased. A breakdown of equipment notes payable at December 31, 2017 and the change throughout the year is as follows: ($ millions) December 31, 2017 September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 Non-interest-bearing $ 38.9 $ 58.5 $ 54.7 $ 33.7 $ 26.7 Interest-bearing Equipment notes - total $ $ $ $ $ Trade and other payables at December 31, 2017 were $37.1 million down from $46.4 million at December 31, 2016, primarily as a result of the timing of receipts of equipment and parts inventory and timing in payment of amounts owing to suppliers. Cash Provided By (Used In) Investing Activities of Continuing Operations: Net cash provided by investing activities of continuing operations amounted to $1.2 million in 2017, primarily funds released from escrow related to the sale of the Company s U.S. subsidiary, Chadwick-BaRoss Inc., in By comparison, in 2016 cash of $8.7 million was provided by investing activities of continuing operations, most of which are related to the proceeds from the sale of Chadwick-BaRoss Inc. The components of cash provided by investing activities from continuing operations were as follows: Year Ended December 31 ($ millions) Proceeds from sale of Chadwick-BaRoss Inc. $ - $ 15.7 Repayment of amounts owing to related party - (5.3) Released from (deposited to) escrow 1.6 (1.6) Net proceeds from sale of Chadwick-BaRoss Inc Purchase of capital assets (0.4) (0.1) Cash provided by (used in) investing activities - continuing operations discontinued operations - (0.1) Cash provided by investing activities $ 1.2 $ 8.6 Cash Provided By (Used in) Financing Activities in Continuing Operations: For the twelve months ended December 31, 2016, $5.6 million of cash was used in financing activities in continuing operations, reducing bank indebtedness and long-term equipment notes, and repaying finance leases. During the 2016, cash of $3.7 million was used in financing activities to service debt obligations. STRONGCO CORPORATION 2017 ANNUAL REPORT 11

14 The components of cash used in financing activities from continuing operations are summarized as follows: Year Ended December 31 ($ millions) Increase (decrease) in bank indebtedness $ (1.7) $ (2.1) Repayment of finance lease obligations (2.6) (3.0) Repayment of notes payable (1.3) (0.5) Advances from disposed operations Loans repaid to disposed operations - (0.4) Trade activities with disposed operations Dividends from disposed operations Cash provided by (used in) financing activities - continuing operations (5.6) (3.7) - discontinued operations - (2.5) Cash provided by (used in) financing activities (5.6) (6.2) Bank Credit Facilities The Company has credit facilities with a bank in Canada. Operating Lines The Canadian bank credit facility is a revolving demand facility which provides an operating line $30 million. Borrowings under the operating line is limited by standard borrowing base calculations based on 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), 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 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. At December 31, 2017, there were outstanding letters of credit totaling $0.01 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, 2017, the Company had outstanding foreign exchange forward contracts under this facility totaling US$10.2 million at an average exchange rate of $ Canadian for each US$1.00 with settlement dates between January 2018 and September 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. A summary of the financial covenants under the bank credit facilities at December 31, 2017 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 debt to tangible net worth ( Debt to TNW Ratio covenant ) of 7.00:1, and Minimum ratio of EBITDA to total interest ( Interest Coverage Ratio covenant ) of 2.50:1. 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 at December 31, Equipment Notes In addition to its bank credit facilities, the Company has lines of credit available totaling approximately $168 million from various non-bank equipment lenders in Canada that are used to finance equipment inventory and rental fleet. At December 31, 2017, there was approximately $131 million borrowed on these equipment finance lines. STRONGCO CORPORATION 2017 ANNUAL REPORT 12

15 Typically, these equipment notes are interest-free for periods of up to 12 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, 2017, the rates ranged from 5.20% to 7.88% with a weighted average effective rate of 6.29%. 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 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 consisted of the following: Debt Facilities As at December 31 ($ millions) Bank indebtedness (including outstanding cheques) $ 29.0 $ 30.7 Equipment notes payable non-interest-bearing Equipment notes payable interest-bearing Rental fleet equipment notes payable Debt facilities - total $ $ Total borrowing under the Company s debt facilities was $160.0 million at December 31, 2017 compared to $133.1 million a year ago. The increase of $26.9 million was due to the increase in equipment notes payable supporting increased equipment inventories, primarily as a result of increased rental activity. As at December 31, 2017, there was $7 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 $37 million available under its equipment finance facilities at December 31, STRONGCO CORPORATION 2017 ANNUAL REPORT 13

16 FINANCIAL HIGHLIGHTS FOURTH QUARTER Income Statement Strongco generated revenue of $93.6 million, compared to $81.2 million in the fourth quarter of Revenue in the quarter was impacted by the following factors: o Higher construction equipment sales in Eastern and Central Canada o Sale of several large cranes to a power station in Northern Ontario o Increased rental revenue, particularly in Western Canada o Higher product support sales (parts and service) in Western and Eastern Canada Gross profit of $17.3 million (18.5% of revenue) up from $11.9 million (14.7% of revenue). Operating income of $0.6 million compared to a loss of $4.4 million, before restructuring costs, from higher margins and lower operating expenses. EBITDA increased to $6.0 million from a loss of $0.2 million due to improved operating income. Interest expense was slightly higher due to increased interest-bearing equipment finance debt. As a result of improved operating earnings, loss before tax for the quarter decreased to $0.9 million from a loss of $5.8 million before restructuring charges. Net loss of $0.9 million ($0.07 per share) compared to net loss from continuing operations of $6.1 million (loss of $0.46 per share). SUMMARY OF OPERATING RESULTS FOURTH QUARTER Three Months Ended December /2016 ($ thousands, except per share amounts) $ Change % Change Revenue $ 93,572 $ 81,206 $ 12,366 15% Cost of sales 76,270 69,305 6,965 10% Gross margin 17,302 11,901 5,401 45% Selling and administrative expenses 16,735 16,830 (95) -1% Other income (47) (572) 525 n/a Operating income (loss) 614 (4,357) 4, % Restructuring costs (418) n/a Interest expense 1,515 1, % Loss before income taxes (901) (6,176) 5,275-85% Recovery of income taxes - (126) % Net income (loss) from continuing operations (901) (6,050) 5, % Net income (loss) from discontinued operations - (214) 214 n/a Net loss $ (901) $ (6,264) $ 5,363-86% Basic and diluted earnings (loss) per share - continuing operations $ (0.07) $ (0.46) $ ,085% - net loss $ (0.07) $ (0.47) $ ,086% Weighted average number of shares - Basic and diluted 13,221,719 13,221,719 Key financial measures Gross margin as a percentage of revenues 18.5% 14.7% Selling and administrative expenses as a percentage of revenues 17.9% 20.7% Operating income as a percentage of revenues 0.7% -5.4% EBITDA (see non-ifrs Measures) $ 5,938 $ (203) $ 6, % Strongco s sales of construction equipment and cranes, equipment rentals and parts and service were all higher in the final quarter of The higher revenue and improved margins on sales contributed to significantly higher gross profit, and combined with lower operating expenses, resulted in an operating profit of $0.6 million in the fourth quarter which was substantially improved from a loss of $4.4 million last year. Interest expenses were slightly higher in the quarter from higher equipment financing but the loss before tax of $0.9 million was substantially improved from the pretax loss of $5.8 million, before restructuring costs, in the fourth quarter of STRONGCO CORPORATION 2017 ANNUAL REPORT 14

17 Revenues A breakdown of revenue for the three months ended is as follows: Three Months Ended December /16 ($ millions) % Chg Eastern Canada (Atlantic and Quebec) Equipment Sales $ 20.9 $ % Equipment Rentals % Product Support % Total Eastern Canada $ 34.7 $ % Central Canada (Ontario) Equipment Sales $ 28.9 $ % Equipment Rentals % Product Support % Total Central Canada $ 40.9 $ % Western Canada (Manitoba to British Columbia) Equipment Sales $ 10.5 $ % Equipment Rentals % Product Support % Total Western Canada $ 18.0 $ % Total Equipment Distribution Equipment Sales $ 60.3 $ % Equipment Rentals % Product Support % Total Equipment Distribution $ 93.6 $ % For the three months ended December 31, 2017, total revenues were $93.6 million compared to $81.2 million in the same period of 2016, up $12.4 million or 15%. Total revenues were up year over year in all revenue streams. Gross Margin ($ millions) Three Months Ended December /2016 Gross Margin GM% GM% $ Change % Change Equipment Sales $ % $ % $ % Equipment Rentals % % % Product Support % % % Total Gross Margin $ % $ % $ % Strongco s overall gross profit was $17.3 million or 18.5% of revenue in the fourth quarter of 2017, up from $11.9 million or 14.7% in the same period last year. Gross profit was higher in the quarter due to higher revenues and an improved overall gross margin as a percent of revenue. The improvement in the overall gross margin was due improved margins on all revenue streams, particularly equipment sales which were impacted by a reserve for aged inventory in the fourth quarter By revenue category, gross margin was impacted by the following: Gross margin on equipment sales was higher as in 2016 a large quantity of aged and non-core equipment inventory was sold at auction at lower margins and in some cases losses as part of the Company s strategy to reduce aged inventory. Gross margin on rentals was higher in the fourth quarter of 2017 due to higher proportion of rentals without purchase options which typically have higher margins than rentals under RPO contracts. The gross margins on parts and service in the quarter increased from the prior year resulting from improved margins on parts sales. STRONGCO CORPORATION 2017 ANNUAL REPORT 15

18 Selling and Administrative Expense Administrative, distribution and selling expense in the fourth quarter of 2017 were $16.7 million, or 17.9% of revenue, compared to $16.8 million, or 20.7% 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. In particular, headcount and other people related costs were down significantly year over year. While operating expenses were down in the fourth quarter as a result of these actions, a provision against aged warranty claims receivable where there is some uncertainty of recoverability and accruals for management bonus resulted in total operating expenses being flat year over year. Other Income and Expense Other income 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 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 in the fourth quarter of 2017 netted to $nil as foreign exchange gains were offset by mark to market adjustments on foreign exchange contracts. By comparison, in the fourth quarter of 2016, other income was $0.6 million comprised mainly of foreign exchange gains. Operating Loss Higher gross profit and essentially stable operating expenses, resulted in operating income of $0.6 million in the fourth quarter of 2017, compared to an operating loss, before restructuring costs, of $4.4 million in the same quarter last year. Interest Expense Strongco s interest expense was $1.5 million in the fourth quarter of 2017, compared to $1.4 million in the fourth quarter of 2016 as a result of a higher level of interest-bearing equipment notes financing the increase in equipment inventory on rent. Loss Before Income Taxes After interest, the pre-tax loss was $0.9 million in the fourth quarter of 2017 compared to an operating loss after interest and restructuring costs of $6.2 million in the same period in Provision for Income Tax Due to the uncertainty of recovering losses, no recovery of income taxes has been recorded against the loss in the fourth quarter. The provision for income tax recovery in the fourth quarter of 2016 was $0.2 million adjusting the deferred tax asset to the expected net recoverable amount. Net Loss from continuing operations Strongco s net loss in the fourth quarter of 2017 was $0.9 million ($0.07 per share), which compared to net loss of $6.3 million ($0.47 per share) in the same quarter of the prior year. EBITDA EBITDA in the fourth quarter of 2017 was $5.9 million (6.3% of revenues), compared to a loss of $0.2 million (0.2% of revenue) in the fourth quarter of EBITDA is calculated as follows: Three Months Ended December 31 Change EBITDA ($ millions) /2016 Net earnings from continuing operations $ (0.9) $ (6.1) $ 5.2 Add back: Interest Income taxes - (0.1) 0.1 Depreciation of capital assets (0.4) Depreciation of equipment inventory on rent Depreciation of rental fleet EBITDA (see non-ifrs Measures) $ 5.9 $ (0.2) $ 6.1 STRONGCO CORPORATION 2017 ANNUAL REPORT 16

19 Cash Flow, Financial Resources and Liquidity Cash Flow Provided By (Used In) Operating Activities from Continuing Operations: During the fourth quarter of 2017, Strongco provided $6.3 million of cash from operating activities from continuing operations before changes in working capital, which compared to $0.4 million in the same quarter last year. An increase in non-cash working capital used $6.8 million of cash in the quarter. After funding future employee benefits of $0.5 million, paying interest of $1.5 million and receiving income refunds for loss carry backs of $1.1 million, cash used in operating activities of continuing operations was $1.4 million. By comparison, in the fourth quarter of 2016, the decrease in non-cash working capital provided $2.7 million of cash, $0.5 million was used to fund future employee benefits and $1.5 million to pay interest, resulting in net cash provided by operating activities from continuing operations of $1.1 million. The components of the cash used in operating activities from continuing operations were as follows: Three Months Ended December 31 ($ millions) Net loss for the period (0.9) (6.2) Net (income) loss from discontinued operations Net loss from continuing operations $ (0.9) $ (6.0) Non-cash items: Depreciation equipment inventory on rent Depreciation capital assets Depreciation rental fleet Interest expense Income tax expense - (0.1) Employee future benefit expense Changes in non-cash working capital balances (6.8) 2.7 Employee future benefit funding (0.5) (0.5) Interest paid (1.5) (1.5) Income tax recovery received Cash provided by (used in) operating activities - continuing operations (1.4) discontinued operations Cash provided by (used in) operating activities $ (1.4) $ 1.2 Non-cash items in the quarter include depreciation of equipment inventory on rent of $4.7 million, compared to $3.5 million in the fourth quarter of During the fourth quarter of 2017, non-cash working capital from continuing operations increased by $6.8 million due primarily to decreases in trade payables offset partially by a reduction in trade receivables, as shown in the table below. By comparison, during the fourth quarter of 2016, net working capital decreased by $2.7 million due to a large reduction in trade receivables and inventories substantially offset partially by repayments of equipment notes payable. Components of cash flow from the net change in non-cash working capital from continuing operations for 2017 and 2016 are as follows: ($ millions) Three Months Ended December 31 (Increase) Decrease Trade and other receivables $ 3.7 $ 12.8 Income tax receivable - (1.5) Inventories Prepaids and other assets $ 5.6 $ 27.1 Increase (Decrease) Trade and other payables (11.4) 2.2 Deferred revenue and customer deposits Equipment notes payable (1.3) (26.7) $ (12.4) $ (24.4) Net decrease in non-cash working capital from continuing operations $ (6.8) $ 2.7 As noted above, equipment inventory and floor plan debt decreased in the last quarter of Equipment inventory at the end of the fourth quarter was $149.8 million, declining from $154.4 million at September 30, 2017, and compared to $129.1 million at the STRONGCO CORPORATION 2017 ANNUAL REPORT 17

20 previous year end. Consistent with the reduction in equipment inventory, equipment notes declined from $132.4 million at September 30, 2017 to $131.0 million at December 31, 2017, and compared to $101.2 million at December 31, Cash Provided By (Used In) Investing Activities from Continuing Operations: Cash used in investing activities from continuing operations in the fourth quarter of 2017 totalled $0.1 million relating to the purchase of miscellaneous shop equipment. This compared to $0.1 million cash used in investing activities in the fourth quarter of 2016 for transactions costs for the sale of Chadwick-BaRoss Inc. The components of the cash used in investing activities from continuing operations are as follows: Three Months Ended December 31 ($ millions) Proceeds from sale of Chadwick-BaRoss Inc. $ - $ (0.1) Purchase of capital assets (0.1) - Cash used in investing activities - continuing operations (0.1) (0.1) - discontinued operations - (0.1) Cash used in investing activities $ (0.1) $ (0.2) Cash Provided By (Used In) Financing Activities in Continuing Operations: In the fourth quarter of 2017, net cash of $1.5 million was provided by financing activities in continuing operations, which compared to net cash of $1.0 million used in financing activities in continuing operations in the fourth quarter of During the quarter, the Company increased its bank borrowing by $2.1 million, paid $0.6 million for finance leases and repaid longterm equipment notes by $0.1 million. The components of cash provided by financing activities in continuing operations in the fourth quarter are summarized as follows: Three Months Ended December 31 ($ millions) Increase (decrease) in bank indebtedness $ 2.1 $ (0.2) Repayment of finance lease obligations (0.5) (0.6) Repayment of notes payable (0.1) (0.2) Cash provided by (used in) financing activities - continuing operations 1.5 (1.0) - discontinued operations - - Cash provided by (used in) financing activities 1.5 (1.0) 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. STRONGCO CORPORATION 2017 ANNUAL REPORT 18

21 A summary of quarterly results for the current and previous two years is as follows: 2017 ($ millions, except per share amounts) Q4 Q3 Q2 Q1 Revenue $ 93.6 $ 83.3 $ 95.9 $ 83.2 Loss before income taxes from continuing operations (0.9) 0.2 (0.5) (1.1) Net loss from continuing operations (0.9) 0.2 (0.5) (1.1) Net loss (0.9) 0.2 (0.5) (1.1) Basic and diluted earnings (loss) per share - loss from continuing operations $ (0.07) $ 0.02 $ (0.04) $ (0.08) - net loss $ (0.07) $ 0.02 $ (0.04) $ (0.08) 2016 ($ millions, except per share amounts) Q4 Q3 Q2 Q1 Revenue $ 81.2 $ 86.7 $ $ 91.2 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) (23.1) (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) 2015 ($ millions, except per share amounts) Q4 Q3 Q2 Q1 Revenue $ $ 87.3 $ $ 94.1 Income (loss) before income taxes from continuing operations (7.4) (3.4) 0.3 (1.7) Net income (loss) from continuing operations (5.5) (2.5) 0.3 (1.3) Net income (loss) (5.3) (2.1) 0.9 (0.8) Basic and diluted earnings per share - income (loss) from continuing operations $ (0.41) $ (0.19) $ 0.02 $ (0.09) - net income (loss) $ (0.40) $ (0.16) $ 0.06 $ (0.06) 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 CONTRACTUAL OBLIGATIONS The Company has contractual obligations for operating lease commitments totaling $60.1 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, 2017, outstanding buyback contracts totalled $3.5 million, which compared to $5.6 million at December 31, A reserve of $0.1 million has been accrued in the Company s accounts as at December 31, 2017 with respect to these commitments, compared to a reserve of $0.1 million a year ago. STRONGCO CORPORATION 2017 ANNUAL REPORT 19

22 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 $60.1 $9.0 $14.9 $12.8 $23.4 Less than 1 to 3 4 to 5 After 5 ($ millions) Total 1 Year years years years Buy-back contracts $3.5 $1.2 $1.6 $0.7 $0.0 SHAREHOLDER CAPITAL Contingent obligation by period 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. There were no changes in issued and outstanding shares during 2017 nor during 2018 as at the date of this MD&A. Common Shares Issued and Outstanding Shares Common shares outstanding as at December 31, ,221,719 Common shares issued - Common shares redeemed - Common shares outstanding as at December 31, ,221,719 The Company did not grant any options during NON-IFRS MEASURES EBITDA refers to earnings before interest, income taxes, impairment of intangible assets, amortization of capital assets, amortization of equipment inventory on rent, and amortization of rental fleet. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance 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. The Company s management believes that EBITDA is an important supplemental measure in evaluating the Company s performance and in determining whether to invest in shares. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with 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. Funded Debt refers to bank indebtedness, equipment notes payable, 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. Funded Debt is not a measure 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. The Company s management believes that Funded Debt is an important supplemental measure in evaluating the Company s ability to raise debt. Readers of this information are cautioned that Funded Debt should not be construed as an alternative to liabilities determined in accordance with IFRS or to cash flows from operating, investing and financing activities. 17 STRONGCO CORPORATION 2017 ANNUAL REPORT 20

23 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, 2017 with changes from December 31, 2016 is as follows: Provision for Inventory Obsolescence ($ millions) Provision for inventory obsolescence as at December 31, 2016 $ 4.6 Provision related to inventory disposed of during the year (1.0) Additional provisions made during the year 0.5 Provision for inventory obsolescence as at December 31, 2017 $ 4.1 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, 2017 with changes from December 31, 2016 is as follows: Allowance for Doubtful Accounts ($ millions) Allowance for doubtful accounts as at December 31, 2016 $ 0.4 Accounts written off during the year (0.1) Amounts unused and reversed - Additional provisions made during the year 0.3 Allowance for doubtful accounts as at December 31, 2017 $ 0.6 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 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. 18 STRONGCO CORPORATION 2017 ANNUAL REPORT 21

24 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. 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. STRONGCO CORPORATION 2017 ANNUAL REPORT 22

25 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, 2017, 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 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. STRONGCO CORPORATION 2017 ANNUAL REPORT 23

26 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, 2017 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, 2017 to provide reasonable assurance that the financial information being reported is materially accurate. During the year ended December 31, 2017, 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 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 2017 ANNUAL REPORT 24

27 CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017 STRONGCO CORPORATION 2017 ANNUAL REPORT 25

28 Management s Responsibility for Financial Reporting The accompanying audited consolidated financial statements of Strongco Corporation ( 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 21, 2018 March 21, 2018 STRONGCO CORPORATION 2017 ANNUAL REPORT 26

29 INDEPENDENT AUDITOR S REPORT To the Shareholders of Strongco Corporation: We have audited the accompanying consolidated financial statements of Strongco Corporation, which comprise the consolidated statements of financial position as at December 31, 2017 and the consolidated statements of loss, comprehensive loss, changes in shareholders equity and cash flow for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Strongco Corporation as at December 31, 2017 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Other matter The consolidated financial statements of Strongco Corporation for the year ended December 31, 2016 were audited by another auditor who expressed an unmodified opinion on those consolidated financial statements on March 23, Mississauga, Canada March 21, 2018 [signed] Grant Thornton, LLP Chartered Professional Accountants Licensed Public Accountants STRONGCO CORPORATION 2017 ANNUAL REPORT 27

30 Consolidated Statements of Financial Position As at December 31 Assets Current assets Cash $ - $ - Trade and other receivables [note 4] 39,479 37,024 Income taxes receivable [note 7] 471 1,508 Inventories [note 5] 180, ,664 Prepaid expenses and other deposits 1,501 1,586 Total current assets 221, ,782 Non-current assets Property and equipment [note 6] 11,075 11,749 Other assets 1,445 3,321 Total non-current assets 12,520 15,070 Total assets $ 234,515 $ 219,852 Liabilities and shareholders' equity Current liabilities Bank indebtedness [note 8 (a)] $ 28,988 $ 30,701 Trade and other payables [note 9] 37,057 46,493 Deferred revenue and customer deposits Equipment notes payable - non-interest-bearing [note 10] 38,881 26,722 - interest-bearing [note 10] 92,099 74,487 Current portion of finance lease obligations [note 8 (b)] 2,268 3,494 Notes payable [note 8 (c)] 48 1,254 Total current liabilities 199, ,921 Non-current liabilities Finance lease obligations [note 8 (b)] 3,901 2,722 Employee future benefit obligations [note 11] 3,788 4,026 Total non-current liabilities 7,689 6,748 Total liabilities $ 207,542 $ 190,669 Contingencies, commitments and guarantees [note 22] Shareholders' equity Shareholders' capital [note 12] 65,497 65,497 Accumulated other comprehensive income 1,147 1,147 Contributed surplus 1, Deficit (40,677) (38,444) Total shareholders' equity 26,973 29,183 Total liabilities and shareholders' equity $ 234,515 $ 219,852 The accompanying notes are an integral part of these consolidated financial statements. Approved by the Board of Directors Director Director STRONGCO CORPORATION 2017 ANNUAL REPORT 28

31 Consolidated Statements of Loss For the years ended December 31 (in thousands of Canadian dollars, unless otherwise indicated, except share and per share amounts) Revenue (note 14) $ 355,986 $ 361,301 Cost of sales [notes 5 and 16] 292, ,338 Gross profit 63,764 56,963 Expenses Selling and administrative expenses [notes 4, 11 and 16] 61,096 66,007 Other (income) expense [note 15] (1,008) (1,339) Operating income (loss) 3,676 (7,705) Restructuring costs [note 19] 678 3,605 Impairment of intangible asset [note 20] - 16,499 Interest expense [note 17] 5,231 5,795 Loss before income taxes (2,233) (33,604) Provision for income taxes [note 7] - 4,745 Net loss from continuing operations (2,233) (38,349) Net income from discontinued operations [note 21] - 1,036 Net loss attributable to shareholders for the year $ (2,233) $ (37,313) Loss per share - Basic and diluted [note 18] Continuing operations $ (0.17) $ (2.90) Net loss attributable to shareholders $ (0.17) $ (2.82) Weighted average number of shares [note 18] Basic and diluted 13,221,719 13,221,719 The accompanying notes are an integral part of these consolidated financial statements. STRONGCO CORPORATION 2017 ANNUAL REPORT 29

32 Consolidated Statements of Comprehensive Loss For the years ended December Net loss attributable to shareholders for the year $ (2,233) $ (37,313) Other comprehensive income (loss) Items that will not be reclassified subsequently to net income: Actuarial (loss) gain on post-employment benefit obligations - (499) (net of tax $183) Decognition of deferred tax asset - employee benefit obligation - 1,032 Total other comprehensive income (loss) Comprehensive loss attributable to shareholders for the year $ (2,233) $ (36,780) The accompanying notes are an integral part of these consolidated financial statements. STRONGCO CORPORATION 2017 ANNUAL REPORT 30

33 Consolidated Statements of Changes in Shareholders Equity For the years ended December 31 NUMBER OF SHARES ACCUMULATED OTHER SHAREHOLDERS' COMPREHENSIVE CAPITAL INCOME CONTRIBUTED SURPLUS RETAINED EARNINGS (DEFICIT) TOTAL Balance December 31, ,221,719 $ 65,417 $ 5,747 $ 1,073 $ (632) $ 71,605 Net loss for the year (37,313) (37,313) Other comprehensive income Post-employment benefit obligations (net of tax) (499) (499) Derecognition of deferred tax asset - employee benefit obligation - 1, ,032 Release of currrency translation adjustment on disposal of business - (5,632) - - (5,632) Total other comprehensive income - (4,600) - (499) (5,099) Purchase of common shares for RSU obligation (23,785) (50) (50) Settlement of RSU obligation: - in common shares 23, (130) in cash - - (20) - (20) Share-based compensation expense Balance December 31, ,221,719 $ 65,497 $ 1,147 $ 983 $ (38,444) $ 29,183 NUMBER OF SHARES ACCUMULATED OTHER SHAREHOLDERS' COMPREHENSIVE CAPITAL INCOME CONTRIBUTED SURPLUS RETAINED EARNINGS TOTAL Balance December 31, ,221,719 $ 65,497 $ 1,147 $ 983 $ (38,444) $ 29,183 Net 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 The accompanying notes are an integral part of these consolidated financial statements. STRONGCO CORPORATION 2017 ANNUAL REPORT 31

34 Consolidated Statements of Cash Flows For the years ended December 31 (in thousands of Canadian dollars) Cash flows from operating activities Net loss for the year $ (2,233) $ (37,313) Net income from discontinued operations [note 21] - (1,036) Adjustments for Depreciation property and equipment 2,964 3,904 Depreciation equipment inventory on rent 13,678 11,790 Depreciation rental fleet Amortization intangible asset Impairment of intangible asset - 16,499 Gain on sale of rental fleet (188) - Share-based payment expense Interest expense 5,231 5,795 Income tax expense - 4,745 Employee future benefit expense 1,683 1,921 Changes in non-cash working capital [note 13] (11,451) (4,371) Purchases of rental fleet (80) - Proceeds from sale of rental fleet Funding of employee future benefit obligations (1,921) (2,069) Interest paid (5,264) (6,287) Income tax recovery received 1,060 - Cash provided by discontinued operations - 2,045 Net cash provided by (used in) operating activities $ 4,352 $ (2,933) Cash flows from investing activities Purchases of property and equipment (380) (103) Proceeds from sale of business [note 21] - 15,723 Repayment of balances owing to disposed operations [note 21] - (5,283) Released from (deposited to) escrow [note 21] 1,564 (1,626) Cash used in discontinued operations - (159) Net cash provided by (used in) investing activities $ 1,184 $ 8,552 Cash flows from financing activities Increase (decrease) in bank indebtedness [note 13] (1,713) (2,097) Increase (decrease) in notes payable [note 13] (1,206) (466) Advances from disposed operations Loans repaid to disposed operations - (364) Trade activities with disposed operations - 1,053 Dividend income from disposed operations Repayment of finance lease obligations [note 13] (2,617) (3,040) Purchase of common shares for equity-settled RSU obligation - (50) Cash used in discontinued operations - (2,494) Net cash used in financing activities $ (5,536) $ (6,227) Foreign exchange on cash balances - (36) Change in cash and cash equivalents during year $ - $ (644) Cash and cash equivalents Beginning of year - continuing operations discontinued operations Cash and cash equivalents End of year $ - $ - Cash and cash equivalents End of year - continuing operations $ - $ - - discontinued operations $ - $ - The accompanying notes are an integral part of these consolidated financial statements. STRONGCO CORPORATION 2017 ANNUAL REPORT 32

35 1 General information Strongco Corporation ( 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. 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 22, Basis of consolidation The consolidated financial statements include the financial statements of Strongco and subsidiaries over which it has control, as follows: Strongco Limited Partnership and Strongco GP Inc. for the twelve months ended December 31, 2017 and 2016 Chadwick-BaRoss Inc and Strongco USA Inc. for the nine months ended September 30, 2016 The company deconsolidated the results of Chadwick-BaRoss Inc on September 30, 2016 and restated its operating results as a discontinued operation when it sold all of the outstanding shares of Strongco USA Inc. (note 21). 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. STRONGCO CORPORATION 2017 ANNUAL REPORT 33

36 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. 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 at the time title to the equipment and significant risks of ownership pass to the customer, which is generally at the time of shipment of the product to the customer. From time to time, the Company agrees to buy back equipment from certain customers at the option of the customer for a specified price at future dates. The Company s maximum potential losses pursuant to the majority of these buy-back contracts are limited, under an agreement with a third party, to 10% of the original sale amounts. These transactions are accounted for as a sale. b. Revenue from equipment rentals is recognized in accordance with the terms of the relevant agreement with the customer, either evenly over the term of that agreement or on a usage basis such as the number of hours that the equipment is used. Certain rental contracts contain an option for the customer to purchase the equipment at the end of the rental period. Should the customer exercise this option to purchase, revenue from the sale of the equipment is recognized as in (a) above. c. Product support services include sales of parts and servicing of equipment. For the sale of parts, 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 as the service work is completed. STRONGCO CORPORATION 2017 ANNUAL REPORT 34

37 Foreign currency translation The Company s consolidated financial statements are presented in Canadian dollars, which is also the Company s functional currency. 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 income (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 income. 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. STRONGCO CORPORATION 2017 ANNUAL REPORT 35

38 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. 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 income STRONGCO CORPORATION 2017 ANNUAL REPORT 36

39 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. 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 includes 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 income. 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 the third quarter 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. 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 income 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 income, 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. STRONGCO CORPORATION 2017 ANNUAL REPORT 37

40 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. 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, equipment buy backs 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 income 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 STRONGCO CORPORATION 2017 ANNUAL REPORT 38

41 expense in the consolidated statements of income over the term of the borrowings using the effective interest rate method. 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 income 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 income 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 assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. 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 2017 ANNUAL REPORT 39

42 At initial recognition, the Company classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired: a. Financial assets and liabilities at fair value through profit or loss: a financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short term. Derivatives are also included in this category unless they are designated as hedges. The only instruments held by the Company classified in this category are foreign currency forward contracts and interest rate swaps. Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are recorded as an expense in the consolidated statements of income. Gains and losses arising from changes in fair value are presented in the consolidated statements of income within other income in the period in which they arise. Financial assets and liabilities at fair value through profit or loss are classified as current except for the portion expected to be realized or paid beyond 12 months of the consolidated statements of financial position dates, which is classified as non-current. b. Loans and receivables: loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company s loans and receivables are comprised of trade and other receivables, and are included in current assets due to their short-term nature. Loans and receivables are initially recognized at the amount expected to be received less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment. c. Financial liabilities at amortized cost: 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. d. Derivative financial instruments: 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. The Company also uses interest rate swaps to reduce the impact of interest rate fluctuations on their borrowings. Derivatives that have been classified as held-for-trading are included in the balance within trade and other payables. Impairment of financial assets The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the asset, and this loss event, or events, has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows, excluding future credit losses that have not been incurred, discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized within operating expenses in the consolidated statements of income. STRONGCO CORPORATION 2017 ANNUAL REPORT 40

43 If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, such as an improvement in a customer s credit rating, the reversal of the previously recognized impairment loss is recognized as a reduction in expense in the consolidated statements of income. 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. Strongco 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, 2017: Disclosure Initiative Amendments to IAS 7 Statement of Cash Flows In 2016, the ISAB issued amendments to IAS 7 Statement of Cash Flows ( IAS 7 ). The amendments are intended to enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendments require entities to provide disclosures that enable investors to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash changes (note 13). Future changes in accounting standards The following amendments to accounting standards will be effective for the Company subsequent to 2017: IFRS 9 Financial Instruments In July 2015, the IASB issued IFRS 9 to replace IFRS 39 Financial Instruments: Recognition and Measurement. The new standard defines new requirements for the recognition and measurement of financial assets and financial liabilities, the impairment of financial assets and the application of hedge accounting. The new standard becomes effective January 1, The Company is in the process of reviewing the standard to determine its impact on the consolidated financial statements. IFRS 15 Revenues from Contracts with Customers In May 2015, the IASB issued IFRS 15 which outlines a single comprehensive model for the recognition and measurement of revenue arising from contracts with customers. The new standard applies a five-step model that permits the recognition of revenue after the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to in exchange for those goods or services. IFRS 15 requires numerous disclosures, such as the disaggregation of total revenue, disclosures about performance obligations, changes in contract asset and liability account balances, and key judgments and STRONGCO CORPORATION 2017 ANNUAL REPORT 41

44 estimates. The standard is effective January 1, 2018 and may be applied using a full retrospective or modified retrospective approach. The Company is in the process of reviewing the standard to determine its impact on the consolidated financial statements. The Company intends to adopt the standard on a modified retrospective approach and does not anticipate it having a material impact on the consolidated financial statements. 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, 2019, and is to be applied retrospectively. Early adoption is permitted if IFRS 15, Revenue from Contracts with Customers ( IFRS 15 ) has been adopted. The Company is in the process of reviewing the standard to determine its 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 effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The amendments are to be applied prospectively. However, retrospective application is permitted if elected for all three amendments and other criteria are met. The Company is in the process of reviewing the standard to determine its impact on the consolidated financial statements. 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 STRONGCO CORPORATION 2017 ANNUAL REPORT 42

45 provisions for possible credit losses based upon historical experience and known circumstances. The allowance for doubtful accounts as at December 31, 2017 with changes from January 1, 2017 is disclosed in note 5. 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 the 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. 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 income, 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 STRONGCO CORPORATION 2017 ANNUAL REPORT 43

46 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 8. 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. 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 $ 33,069 $ 26,832 Less: Provision for impairment of trade receivables Trade receivables, net $ 32,488 $ 26,477 Other receivables, net 6,991 10,547 Total trade and other receivables $ 39,479 $ 37,024 Due to their short-term nature, the fair value of trade and other receivables is not materially different from their carrying value. STRONGCO CORPORATION 2017 ANNUAL REPORT 44

47 As at December 31, 2017, trade receivables of $13,064 (December 31, 2016 $11,095) 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 $ 11,776 $ 7,562 3 to 6 months Over 6 months 729 2,556 $ 13,064 $ 11,095 Movements in the Company s provision for impairment of trade receivables are as follows: As at January 1 $ 355 $ 1,989 Discontinued operations - (639) Provisions for impairment Amounts written off as uncollectible (103) (995) Amounts unused and reversed - - As at December 31 $ 581 $ 355 The provision for impaired receivables is recognized in the consolidated statements of income within administrative expenses in the period of provision. When a balance is considered uncollectible, it is written off against the provision. Subsequent recoveries of amounts previously written off are credited to administrative expenses in the consolidated statements of income. 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 $2,633 ( $2,200). 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. STRONGCO CORPORATION 2017 ANNUAL REPORT 45

48 5 Inventories Inventory components as at December 31 (net of write-downs and provisions) are as follows: As at December Equipment in-stock $ 88,049 $ 89,977 Equipment on rental contract with a purchase option 33,436 14,779 Equipment on a short-term rental contract 28,397 24,423 Equipment $ 149,882 $ 129,179 Parts 24,934 29,109 Work-in-process 5,728 6,376 Total inventories $ 180,544 $ 164,664 Inventory costs recognized as an expense and reflected in cost of sales in the consolidated statements of loss amounted to $266,311 (December 31, 2016 $276,145). Cost of sales also includes depreciation of equipment inventory on rent of $13,678 (December 31, 2016 $11,790). The carrying value of equipment inventory on rent as at December 31, 2017 was $61,833 (December 31, 2016 $39,202). 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, 2017, the Company s continuing operations recorded $32 of equipment write-downs (December 31, 2016 $5,366) which are recorded in cost of sales. There were no reversals of equipment write-downs for units sold during 2017 or 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: STRONGCO CORPORATION 2017 ANNUAL REPORT 46

49 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, 2016 Opening net book value $ 524 $ 5,453 5,979 6,246 $ 30,338 $ 48,540 Discontinued operations (423) (4,481) (561) (145) (29,193) (34,803) Additions , ,580 Disposals - - (154) - - (154) Depreciation - (40) (728) (3,129) (517) (4,414) Closing net book value 101 1,074 4,647 5, ,749 As at December 31, 2016 Cost 101 5,033 18,640 15,674 2,724 42,172 Accumulated depreciation - (3,959) (13,993) (10,377) (2,094) (30,423) Net book value 101 1,074 4,647 5, ,749 Year ended December 31, 2017 Opening net book value 101 1,074 4,647 5, ,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 $ 101 $ 969 $ 4,365 $ 5,592 $ 48 $ 11,075 The Company leases various computers and equipment under non-cancellable finance lease agreements. STRONGCO CORPORATION 2017 ANNUAL REPORT 47

50 7 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 - (1,338) Total current income tax expense (recovery) - (1,338) Components of deferred income tax expense: Origination and reversal of temporary differences (255) (7,457) Derecognition of deferred tax asset ,540 Total deferred income tax expense - 6,083 Total income tax expense $ - $ 4,745 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 Loss before income taxes $ (2,232) $ (33,604) Statutory tax rate 26.94% 26.86% Provision for income taxes at statutory tax rate $ (601) $ (9,026) Adjustments thereon for the effect of: Derecognition of deferred tax asset ,540 Adjustment with respect to prior years Permanent and other Total income tax expense $ - $ 4,745 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 - (1,032) As at December 31 $ - $ - STRONGCO CORPORATION 2017 ANNUAL REPORT 48

51 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 $ 2,846 $ 1,741 Pension Capital and other assets Loss carryforward 9,338 10,232 Deferred income tax assets 12,762 12,750 Derecognition of deferred tax asset (12,762) (12,750) Net deferred income tax asset $ - $ - Due to the uncertainty of recovery of losses, total deferred tax assets of $12,762 (December 31, $12,750) have been derecognized resulting in a charge to the consolidated statements of income of $255 (Year ended December 31, $13,540 charged to the consolidated statements of income, net of $1,032 recognized in the consolidated statement of comprehensive income. As of December 31, 2017, the Company has $34,762 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 $ - $ (95) Discontinued operations - 5,205 Income statement charge (deferred tax) 255 7,457 Tax charges relating to components of other comprehensive income Derecognition of deferred tax asset (255) (12,750) As at December 31 $ - $ - STRONGCO CORPORATION 2017 ANNUAL REPORT 49

52 8 Debt As at December Current Bank indebtedness (a) $ 28,988 $ 30,701 Finance lease obligations (b) 2,268 3,494 Notes payable (c) 48 1,254 $ 31,304 $ 35,449 Non-current Finance lease obligations (b) $ 3,901 $ 2,722 Total Debt $ 35,205 $ 38,171 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, 2017, the effective interest rate of the operating lines was 7.20% ( %). 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, there were outstanding letters of credit of $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, 2017, the Company was in compliance with all of the banking covenants. STRONGCO CORPORATION 2017 ANNUAL REPORT 50

53 b. Finance lease obligations As at December 31, 2017, the Company had vehicles and computer equipment under finance leases. The weighted average effective interest rate is 7.3% (December 31, %). The future minimum annual payments, interest and balance of obligations are as follows: As at December No later than 1 year $ 2,268 $ 3,494 Later than 1 year but no later than 5 years 4,538 3,281 Later than 5 years - - Total minimum lease payments $ 6,806 $ 6,775 Future finance charges on finance leases (637) (559) Present value of finance lease liabilities $ 6,169 $ 6,216 The present value of financial lease liabilities is as follows: As at December No later than 1 year $ 2,268 $ 3,494 Later than 1 year but no later than 5 years 3,901 2,722 Later than 5 years - - $ 6,169 $ 6,216 c. Notes payable Notes payable are comprised of the following: As at December Notes payable rental fleet $ 48 $ 1,254 Current portion 48 1,254 Long-term portion $ - $ - In addition to equipment notes payable as described in note 10, the Company utilizes floor plan notes payable to finance its rental fleet. Payment is required at the earlier of the sale of items and per contractual schedules ranging from 12 to 24 months. Effective interest rates range from 5.08% to 6.18% with various maturity dates. 19 STRONGCO CORPORATION 2017 ANNUAL REPORT 51

54 d) The carrying amount and fair value of the debt are as follows: As at December 31 Carrying amount Bank indebtedness $ 28,988 $ 30,701 Notes payable 48 1,254 Finance lease obligations 6,169 6,216 $ 35,205 $ 38,171 As at December 31 Fair Value Bank indebtedness $ 28,988 $ 30,701 Notes payable 48 1,254 Finance lease obligations 6,169 6,216 $ 35,205 $ 38,171 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 $ 15,184 $ 20,182 Accrued liabilities 21,873 26,311 $ 37,057 $ 46,493 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 within twelve months following the sale, provided the equipment has not been used, with a full refund of proceeds plus interest at 7.5%. Consequently, the sale transaction was not recorded through the consolidated statements of loss. As at December 31, 2017, $2.8 million (December 31, $2.8 million) and accrued interest of $105 (December 31, $53) 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. During the year ended December 31, 2017, the Company recorded a restructuring provision of $0.7 million (year ended December 31, $3.6 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 (December 31, $1.6 million) is included in accrued liabilities. 20 STRONGCO CORPORATION 2017 ANNUAL REPORT 52

55 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, 2017, the total obligation under these contracts was $3,463 (December 31, 2016 $5,588). The Company s maximum potential losses pursuant to the majority of these buy-back contracts are limited, under an agreement with a third party, to 10% of the original sale amounts. A reserve of $42 (December 31, 2016 $69) has been accrued in the Company s accounts with respect to these commitments and is recorded as accrued liabilities. 10 Equipment notes payable The Company has lines of credit available totalling approximately $168 million from various non-bank equipment lenders in Canada and the United States, which are used to finance equipment inventory (December 31, 2016 $182 million). As at December 31, 2017, there was approximately $131 million borrowed on these equipment finance lines (December 31, 2016 $101 million). Typically, these equipment notes are interest-free for periods of up to 12 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, 2017, the rates ranged from 5.8% to 7.88% with an effective weighted average rate of 6.29% ( %). 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 $ 38,881 $ 26,722 Equipment notes payable interest-bearing 92,099 74,487 $ 130,980 $ 101,209 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, 2017, the Company was in compliance with all of the covenants under the agreements. STRONGCO CORPORATION 2017 ANNUAL REPORT 53

56 11 Employee benefit obligations As at December Obligations in the consolidated statements of financial position for: Pension benefits $ 2,150 $ 2,362 Dental, health and other post-employment benefits 1,638 1,664 $ 3,788 $ 4,026 Charges to the consolidated statements of income for: Pension benefits $ 2,649 $ 2,944 Dental, health and other post-employment benefits $ 2,697 $ 2,992 Total cash payments for employee future benefits for 2017, 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 $2,955 (2016 $3,023). The history and experience adjustments in respect of post-employment benefit obligations are as follows: As at December Fair value of plan assets $ 50,465 $ 46,215 Present value of benefit obligations 54,253 50,241 Accrued benefit liability $ 3,788 $ 4,026 Experience adjustments in plan liabilities gains (losses) Plan experience $ 2017 (653) $ 2016 (5) Changes in demographic assumptions - - Changes in financial assumptions 2,279 (1,151) Experience adjustments in plan assets gains $ 3,029 $ 490 STRONGCO CORPORATION 2017 ANNUAL REPORT 54

57 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 28% of the workforce ( %)). In 2017, the Company s contributions were $375 (2016 $390). The Company also maintains a group retirement savings plan (RSP/LIRA) available only to certain employees (approximately 30% of the workforce ( %)) under the terms of a collective bargaining agreement. In 2017, the Company s contributions were $334 (2016 $380). 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, 2017 was $231 (2016 $223). 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, 2017 was $73 ( $79). 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. 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 $ 49,228 $ 1,237 $ 45,030 $ 1,185 Present value of funded obligations 51,000 1,615 46,931 1,646 Accrued benefit liability $ 1,772 $ 378 $ 1,901 $ 461 STRONGCO CORPORATION 2017 ANNUAL REPORT 55

58 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 $ 46,931 $ 1,646 $ 44,363 $ 1,760 Current service cost 1,908-2,250 - Interest cost 1, , Benefits paid (2,387) (170) (2,136) (171) Actuarial (gain) loss Plan experience Changes in demographic assumptions Changes in financial assumptions 2, , Accrued benefit obligation as at December 31 $ 51,000 $ 1,615 $ 46,931 $ 1,646 The movement in the fair value of plan assets over the year is as follows: Year ended December Employee plan Executive plan Employee plan Executive plan Fair value of plan assets as at January 1 $ 45,030 $ 1,185 $ 43,003 $ 1,213 Actual return on plan assets 4, , Employer contributions 1, , Employee contributions Benefits paid (2,387) (170) (2,136) (171) Administration costs (199) (40) (117) (43) Fair value of plan assets as at December 31 $ 49,228 $ 1,237 $ 45,030 $ 1,185 Plan assets consist of: As at December Employee plan Executive plan Employee plan Executive plan Asset category % % % % Canadian equity Non-domestic equity Bonds REITs/infrastructure/utilities Mortgages Cash and money market STRONGCO CORPORATION 2017 ANNUAL REPORT 56

59 The amounts recognized in the consolidated statements of income (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 $ (1,275) $ - $ (1,608) $ - Interest on net defined benefit asset (liability) (110) (11) (92) (13) Administration costs (199) (40) (117) (43) Sub-total $ (1,584) $ (51) $ (1,817) $ (56) Consolidated statements of comprehensive income (loss) Loss for the year on obligations $ (2,822) $ (104) $ (1,112) $ (13) Gain for the year on assets 2, Sub-total 109 (6) (655) 33 Total $ (1,475) $ (57) $ (2,472) $ (23) Expected employer contributions to the defined benefit employee pension plan for the year ending December 31, 2018 are $1,740 (2017 $1,466). Expected employer contributions to the defined benefit executive pension plan for the year ending December 31, 2018 are $127 (2017 $134). The Company is planning to move 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 valuation for funding purposes was performed as at March 31, 2017 and the next valuation is required to be performed as at March 31, For the executive pension plan, the most recent actuarial valuation for funding purposes was performed as at June 30, 2015 and the next required valuation is due no later than as at June 30, STRONGCO CORPORATION 2017 ANNUAL REPORT 57

60 The principal actuarial assumptions used are as follows: As at December Employee Executive Employee Executive plan plan plan plan Discount rate 3.50% 3.20% 3.90% 3.30% Average life expectancy > Male aged N/A 40.3 N/A > Female aged N/A 43.6 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: Valuation 1% Change Change in overall assumption liability Employee plan Discount rate 3.50% 4.50% (7,031) Salary growth rate 2.90% 3.90% 154 Executive plan Discount rate 3.20% 4.20% (102) 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 $ 1,638 $ 1,664 Accrued benefit liability $ 1,638 $ 1,664 STRONGCO CORPORATION 2017 ANNUAL REPORT 58

61 The movement in the accrued benefit obligation over the year is as follows: As at December Accrued benefit obligations as at January 1 $ 1,664 $ 1,592 Current service cost - - Interest cost Benefits paid (80) (70) Actuarial (gain) loss - Plan experience Changes in demographic assumptions Changes in financial assumptions 1 (5) Accrued benefit obligations as at December 31 $ 1,638 $ 1,664 The assumed initial health-care cost trend rate is 6.50%, declining by 0.25% per annum to 4.75% per annum in 2022 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 2017: Increase Decrease Accrued benefit obligations as at December 31, 2017 (at 3.4%) $ 216 $ (181) 12 Shareholders equity Authorized: Unlimited number of shares Issued: As at December 31, 2017, a total of 13,221,719 shares (December 31, ,221,719 shares) with a stated value of $65,497 (December 31, 2016 $65,497) were issued and outstanding. STRONGCO CORPORATION 2017 ANNUAL REPORT 59

62 13 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 $ (2,455) $ 9,311 Inventories (29,575) 40,540 Income tax recoverable - (1,508) Prepaid expenses and other deposits Other assets Liabilities increase (decrease): Trade and other payables (9,331) 7,367 Deferred revenue and customer deposits (258) (5,196) Equipment notes payable 29,771 (55,481) $ (11,451) $ (4,371) The changes in liabilities arising from financing activities are detailed below: Equipment Notes Payable Notes Payable Finance Lease Obligations Total financing activities Opening, January 1, 2016 $ 180,271 $ 21,681 $ 7,534 $ 209,486 Discontinued operations (23,582) (19,987) (604) (44,173) Proceeds 139,933-2, ,258 Repayment (195,413) (440) (3,040) (198,893) Closing, December 31, 2016 $ 101,209 $ 1,254 $ 6,215 $ 108,678 Proceeds 223,244-3, ,981 Repayment (193,473) (1,206) (3,783) (198,462) Closing, December 31, 2017 $ 130,980 $ 48 $ 6,169 $ 137,197 STRONGCO CORPORATION 2017 ANNUAL REPORT 60

63 14 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 $ 225,878 $ 239,504 Equipment rental 16,858 15,179 Product support 113, ,618 Total revenue $ 355,986 $ 361,301 All revenues and assets are located in Canada. 15 Other (income) expense Other income for the year ended December 31, 2017 of $1,008 (December 31, 2016 income of $1,339) included foreign currency translation gains, mark-to-market adjustments for foreign currency swaps and miscellaneous commission income from suppliers. 16 Expenses by nature Year ended December Changes in inventories of equipment, parts and work-in-process $ 279,945 $ 287,240 Raw materials and consumables used 1,354 1,311 Depreciation 796 1,944 Utilities 1,230 1,248 Operating lease expenses 11,268 11,438 Transportation expenses 2,882 2,793 Advertising expenses Salaries, wages and commissions 52,160 55,048 Telephone, fax and office supplies 2,129 2,067 Other 2,291 6,854 Total cost of sales, administration and selling expenses $ 354,380 $ 370,345 STRONGCO CORPORATION 2017 ANNUAL REPORT 61

64 Salaries, wages and commission expense comprises the following: Year ended December Salaries and wages $ 49,704 $ 51,925 Commissions 773 1,202 Employee future benefits 1,683 1,921 $ 52,160 $ 55, Interest expense Year ended December Bank indebtedness $ 879 $ 1,141 Equipment notes payable interest-bearing 4,343 4,557 Notes payable 4 86 Finance lease obligations 5 11 $ 5,231 $ 5, 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 13,221,719 13,221, ,221,719 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, 2017, dilutive options totalled nil shares (December 31, 2016 nil shares) and anti-dilutive options totalled 122,667 shares (December 31, ,141 shares). STRONGCO CORPORATION 2017 ANNUAL REPORT 62

65 19 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 209,141 $ ,141 $ 4.69 Granted Exercised Forfeited (70,639) 5.49 (230,000) 4.50 Options outstanding end of year 138,502 $ ,141 $ 4.90 Options vested and exercisable end of year 67,387 $ ,732 $ 5.56 The following table summarizes the exercise prices of outstanding stock options: As at December 31, 2017 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 $3.50 $ , months $ ,667 $ 3.67 $4.50 $ , months , $6.00 $ , months , $3.50 $ , months $ ,387 $ 4.93 The Company uses the Black-Scholes option pricing model to estimate the fair value of the options at their grant date. No options were granted during 2017 or STRONGCO CORPORATION 2017 ANNUAL REPORT 63

66 The Company also has a restricted share units ( RSUs ) plan which can be settled by the Company either through the purchase of common shares on the open market, or in cash. RSUs vest fully on the third anniversary of date of grant. The Company uses the Black-Scholes option pricing model to estimate the fair value of the RSUs at their grant date. No RSUs were granted during 2017 or The following table summarizes outstanding RSUs: As at December Weighted Weighted Number of RSUs average unit value Number of RSUs average unit value RSUs outstanding beginning of year - $ - 44,491 $ 4.92 Granted Exercised - - (44,491) (4.92) Forfeited RSUs outstanding end of year - $ - - $ - Stock-based compensation expense resulting from the stock options and RSUs is $23 (2016 $60). 20 Impairment of intangible asset An impairment exists when the carrying value of an asset or Cash Generating Unit ( CGU ) exceeds its recoverable amount, which is the higher of its fair value less costs to sell ( FVLCS ) and its value in use. During the third quarter of 2016, the Company determined that there were indicators of impairment triggered by a history of operating losses due to the continued downturn in the market, a decline in net cash flows, the carrying amount of the Company s net assets exceeding its market capitalization and the sale of Chadwick-BaRoss Inc. The Company considered the FVLCS approach and calculated the recoverable amount using a forward multiple of forecasted adjusted forward EBITDA. The FVLCS calculation uses projections for one year and a forward multiple. The key assumptions in the FVLCS calculations are: Earnings before interest, taxes and depreciation and amortization and impairment charges ( EBITDA ). The projections are based on the most recent financial forecasts prepared by the Company s management. Forward multiples which are based on public market data including information from analysts covering the Company as well as competitive data. For all CGUs, the carrying amount of individual assets did not exceed their recoverable amounts, except for the intangible asset. In the third quarter of 2016, an impairment charge for $16.5 million, representing the carrying value of the intangible asset, was recorded in the statements of loss. As at the cost of the intangible asset is $17,822 and the accumulated amortization and impairment is $17,822. STRONGCO CORPORATION 2017 ANNUAL REPORT 64

67 21 Sale of Chadwick-BaRoss Inc. Following approval by the independent directors, on September 30, 2016, the Company completed the sale of its wholly-owned subsidiary, Chadwick-BaRoss Inc., for cash proceeds of US$12.4 million to an affiliate of ISH Capital Inc., a shareholder of the Company and a related party. The transaction was effected by way of the Company selling all of the outstanding shares of Strongco USA Inc., the parent holding company of Chadwick BaRoss Inc. This resulted in an accounting gain of approximately $0.5 million. The following tables present the net income from discontinued operations: Nine months ended September 30, 2016 Revenue $ 62,976 Cost of sales 50,184 Selling and administrative expenses 11,124 Other (income) expense (120) Interest expense 1,058 Income before income tax 730 Income tax expense 199 Income from discontinued operations, net of tax 531 Gain on sale of Chadwick-BaRoss Inc. 505 Net income from discontinued operations $ 1,036 The sale price was paid in full in cash on closing. The proceeds were distributed as follows: $9,322 to Strongco, $5,283 for settlement of outstanding intercompany amounts owing to Chadwick-BaRoss Inc. and $1,626 (US$ - 1,242) deposited into escrow for a period of 18 months which has been classified as other assets. During 2017, all of the funds held in escrow were released to the Company. 22 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. STRONGCO CORPORATION 2017 ANNUAL REPORT 65

68 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 $ 8,991 $ 10,269 Later than 1 year but no later than 5 years 27,709 27,606 Later than 5 years 23,419 27,988 $ 60,119 $ 65, Categories of financial assets and liabilities Financial instruments are classified into one of five categories: assets and liabilities held at fair value through profit or loss, held-to-maturity investments, loans and receivables, available-for-sale financial assets, and other financial liabilities. The carrying values of the Company s financial instruments are classified into the following categories: As at December Derivatives held at fair value through profit or loss $ (83) $ (109) Loans and receivables (1) 40,541 37,024 Other financial liabilities (2) 203, ,803 (1) Includes trade and other receivables (2) Includes bank indebtedness, trade and other payables, finance lease obligations, equipment and other notes payable (excludes Provision) 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 This fair value 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 STRONGCO CORPORATION 2017 ANNUAL REPORT 66

69 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. The fair value of the Company s equipment notes payable, finance lease obligations, notes payable, foreign exchange forward contracts and interest rate swap contracts as at are as follows: December 31, Level 1 Level 2 Level Liabilities for which fair values are disclosed Equipment notes payable $ 130,980 $ - $ 130,980 $ - Finance lease obligations 6,169-6,169 - Notes payable (excludes Provision) Liabilities measured at fair value Foreign exchange forward contracts (83) - (83) - Interest rate swap contracts December 31, Level 1 Level 2 Level Liabilities for which fair values are disclosed Equipment notes payable $ 101,209 $ - $ 101,209 $ - Finance lease obligations 6,216-6,216 - Notes payable (excludes Provision) 1,254-1,254 - Liabilities measured at fair value Foreign exchange forward contracts Interest rate swap contracts (125) - (125) - 24 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 2017 ANNUAL REPORT 67

70 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 income. 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, 2017, the Company carried $4,570 in US dollar denominated liabilities net of US dollar denominated trade receivables (December 31, 2016 $7,814). A $0.10 change in the exchange rate between the Canadian and US currencies would have an effect of approximately $457 on net income for the year ended December 31, 2017 (December 31, 2016 $781). 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, 2017, the Company had outstanding foreign exchange forward contracts under this facility totalling US$10.2 million at an average exchange rate of $ Canadian for each US$1.00 with settlement dates between January 2018 and September 2018 (December 31, 2016 US$3.4 million and 0.8 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, 2017, the unrealized loss associated with foreign currency forward contracts is $83 (December 31, 2016 unrealized gain of $16). STRONGCO CORPORATION 2017 ANNUAL REPORT 68

71 Interest rate swap contracts In September 2012, the Company secured a Swap Facility with its bank which allows the Company to swap the floating interest rate component (the BA rate) on up to approximately $100 million of the Company s debt for a five-year fixed swap rate of interest. The nominal value relating to outstanding interest rate swaps at December 31, 2017 totalled $nil (December 31, $35.0 million). Interest rate swaps are classified as a derivative financial instrument and are recorded at fair value using observable market information. Interest rate swaps are valued using the notional amount of the interest rate swaps multiplied by the observable inputs of time to maturity, interest rates and credit spreads. Strongco has not adopted hedge accounting for the interest rate swap and, accordingly, the change in the fair value of the swap is recorded in interest expense. As at December 31, 2017, there are no unrealized gains or losses associated with interest rate swaps (December 31, 2016 loss of $125). 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, 2017, a portion of the Company s interest-bearing debt is subject to movements in floating interest rates. 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 income of a defined interest rate shift. As at December 31, 2017, the Company had $121,135 in interest-bearing floating rate debt (December 31, 2016 $71,443). A 1.0% change in interest rates would have an effect of approximately $1,211 on net income for the year ended December 31, 2017 (December 31, 2016 $714). 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, 2017, the Company held customer deposits of $17 (December 31, 2016 $256). STRONGCO CORPORATION 2017 ANNUAL REPORT 69

72 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, 2017, the Company had undrawn lines of credit available to it of $6.9 million (December 31, 2016 $3.0 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, 2017 is as follows: Less than 1 year Between 1 and 5 years Total Non-derivatives Bank indebtedness $ 28,988 $ - $ 28,988 Equipment notes 130, ,980 Notes payable Derivatives Foreign exchange forward contracts settlement value $ 12,884 $ - $ 12, 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 2017 the Company revised the target ratio to not exceed 7.0 to be consistent with one of the bank and equipment note facility covenants. STRONGCO CORPORATION 2017 ANNUAL REPORT 70

73 As at, the above capital management criteria can be illustrated as follows: As at December Interest-bearing debt $ 28,988 $ 30,701 Equipment notes payable 130, ,209 Other debt 48 1,254 Total managed debt instruments $ 160,016 $ 133,164 Shareholders' equity $ 26,973 $ 29,183 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 7.00:1 and a minimum ratio of earnings before interest, taxes, depreciation and amortization to total interest ( Interest Coverage Ratio ) covenant of 2.50:1. 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. As at December 31, 2017, the Company was in compliance its bank and equipment note lenders. 26 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 $ 2,111 $ 2,402 Employee future benefits Share-based payments $ 2,274 $ 2,625 STRONGCO CORPORATION 2017 ANNUAL REPORT 71

74 27 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 representing approximately 70% of revenues. STRONGCO CORPORATION 2017 ANNUAL REPORT 72

75 CORPORATE AND SHAREHOLDER INFORMATION CORPORATE ADDRESS Strongco Corporation 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 John K. Bell 1 Corporate Director Robert J. Beutel Executive Chairman Anne Brace 1, 2 Corporate Director Ian C.B. Currie, Q.C. 2 Corporate Director Yedidia S. Koschitzky 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 Jack Bradley Vice President, Supply Chain, Inventory Control and Logistics Peter Rayner, CPA Director, Finance OPERATIONS Construction Equipment Oliver Nachevski Vice President, Construction Equipment 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 2017 ANNUAL REPORT 73

76 1640 Enterprise Road Mississauga, Ontario Canada L4W 4L4 Telephone: Fax: strongco.com STRONGCO CORPORATION 2017 ANNUAL REPORT 88