STRONGCO CORPORATION SECOND QUARTER REPORT THREE AND SIX MONTHS ENDED JUNE 30, STRONGCO corporation 2014 SECOND QUARTER REPORT 1

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1 STRONGCO CORPORATION SECOND QUARTER REPORT THREE AND SIX MONTHS ENDED JUNE 30, 2014 STRONGCO corporation 2014 SECOND QUARTER REPORT 1

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3 To Our Shareholders Construction activity in the second quarter was inhibited by the challenging weather conditions across the country that extended well into May. The impact of the weather also limited oil field activities in Alberta, constraining purchasing decisions by customers. The resulting slower market conditions in Canada were somewhat offset by signs of an improving economy in the United States. The result for the quarter was an overall revenue decline of 3% for Strongco, versus the same period in The difficult winter weather intensified the already weakened market situation in Eastern Canada, Quebec, in particular, causing a further market decline and affecting sales of construction equipment, as well as product support revenues, and cranes in that province. Crane sales for the second quarter were also down in Alberta, compared to a much stronger market in On a positive note, strong performance for other heavy equipment sales in Alberta and New England, together with good crane sales in Ontario, largely offset the short-term weakness in our markets. Revenue for the three months ended June 30, 2014 was $135.9 million, down $4.3 million over the second quarter of Equipment sales decreased by 4% to $93.5 million from the same period last year. Rental activity was mixed across the various regions, with rental revenue down $1.9 million for the quarter to $5.7 million. Product support activities remained strong, with revenues up by 5% to $36.7 million from the same period last year. Gross margin for the quarter was $24.1 million, a slight decrease from the same period in As a percentage of revenue, gross margin was up slightly to 17.7% from 17.4% in Year-to-date, our gross margins were negatively affected by additional reserves in the first quarter of approximately $1.3 million for losses on inventory sold at auction in the second quarter. Excluding these abnormal losses, year-to-date total gross margins would have been $44.2 million or 18.4% of sales. Expense levels were slightly higher in the quarter from the investments we ve made in new branches and additional sales and customer support people. After tax, our net income in the second quarter was $1.7 million, or 13 cents per share, compared to $2.9 million, or 22 cents per share in The net loss for the first six months of 2014 was $1.3 million, or 10 cents per share, compared to net income of $700,000, or 6 cents per share, in the first six months last year. In line with the normal seasonality, equipment inventory increased in the second quarter. As a result, equipment inventory at the end of the second quarter was up $15 million from the same time last year. This is a timing issue and will be readily corrected through adjustment of our buying patterns for the balance of the year. Management remains committed to our goal of reducing inventory and the associated equipment financing throughout the balance of this year. On a more positive note, interest bearing notes are down almost $40 million from the same time last year. During the quarter, we took actions to improve debt levels and more efficiently deploy capital. As previously announced, Strongco plans to monetize several real estate holdings through sale and leaseback transactions, in line with the Company s strategy of not committing capital to real estate assets over the long term. The anticipated gross proceeds from these transactions will be approximately $47 million, which will be used by Strongco to reduce debt. The proposed transactions involve three different purchasers and five properties including the two recently constructed branches in Fort McMurray, Alberta and Saint Augustin-de-Desmaures, Quebec, as well as our branches in Mississauga, Ontario, Val D Or, Quebec and Moncton, New Brunswick. The sale and leaseback of our new Fort McMurray branch was completed at the end of June and we anticipate completing the other transactions by the end of the third quarter of the year. Overall, our outlook for the year continues to be positive. With the onset of warmer and dryer conditions, we are seeing improved quoting activity and robust order backlogs, and we are anticipating some catch-up in the second half. With the rise in construction activity associated with more favourable weather conditions, we expect to see tangible return on these investments, and we were pleased to see a 5% increase in product support revenue during the second quarter, despite the Quebec market conditions. In summary, we are optimistic regarding the outlook for Strongco over the balance of the year and the long term. We remain committed to our advancement as an industry leader, in financial terms, the quality of our services, and most important, in our reputation and relationships with customers, employees and investors. Robert H.R. Dryburgh President and Chief Executive Officer July 30, 2014 STRONGCO corporation 2014 SECOND QUARTER REPORT 1

4 Strongco Corporation Management s Discussion and Analysis The following management discussion and analysis ( MD&A ) provides a review of the consolidated financial condition and results of operations of Strongco Corporation, Strongco GP Inc. and Strongco Limited Partnership, collectively referred to as Strongco or the Company, as at and for the three and six months ended June 30, This discussion and analysis should be read in conjunction with the accompanying unaudited interim condensed consolidated financial statements as at and for the three and six months ended June 30, For additional information and details, readers are referred to the Company s audited consolidated financial statements and accompanying MD&A as at and for the year ended December 31, 2013, contained in the Company s annual report for the year ended December 31, 2013, the Company s unaudited interim condensed consolidated financial statements and accompanying MD&A as at and for the three months ended March 31, 2014, the Company s Notice of Annual Meeting of Shareholders and Management Information Circular ( MIC ) dated March 26, 2014, and the Company s Annual Information Form ( AIF ) dated March 26, 2014, 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 July 30, FINANCIAL HIGHLIGHTS Winter conditions that extended well into the second quarter affected construction activity across the country and delayed purchasing decisions by customers. Oil site activity in Alberta was also impacted by the extremely cold temperatures leading to a marked drop off in crane sales in Alberta. The difficult weather exacerbated the already weak market situation in Quebec, resulting in further declines in heavy equipment sales from However, a strong performance by the Company in Alberta and New England largely offset these pauses in the market which management views as temporary. Revenue of $135.9 million, down from $140.2 million in 2013 Gross margin of $24.1 million compared to $24.4 million in 2013 Operating income of $5.3 million compared to $6.2 million in 2013 EBITDA of $11.4 million compared to $13.7 million in 2013 Net income totalled $1.7 million compared to net income of $2.9 million in 2013 Earnings per share of $0.13 compared to $0.22 per share Three months ended Six months ended Income Statement Highlights June 30 June 30 ($ millions, except per unit amounts) Revenues $ $ $ $ Operating income Income (Loss) before income taxes (1.7) 1.0 Net income (loss) $ 1.7 $ 2.9 $ (1.3) $ 0.7 Basic and diluted earnings (loss) per share $ 0.13 $ 0.22 $ (0.10) $ 0.06 EBITDA (note 1) Balance Sheet Highlights Equipment inventory $ $ Total assets Debt (bank debt and other notes payable) Equipment notes payable Total liabilities Total shareholders' equity $ 72.1 $ 67.8 Note 1 - EBITDA refers to earnings before interest, income taxes, 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. 2 STRONGCO corporation 2014 SECOND QUARTER REPORT

5 OUTLOOK The prolonged extreme cold winter weather conditions in the first quarter across Canada, extended well into the second quarter. This curtailed construction activity and affected customers buying decisions, often until weather conditions improved to allow them to get on job sites. In the case of cranes in Alberta, work was postponed until frost levels subsided allowing drilling to resume. Nevertheless, despite the slow start to the year, most economists are continuing to forecast modest growth for Canada overall in 2014 with construction markets, by and large, expected to remain active. Growth is expected to be strongest in Alberta led by robust activity in the oil sector and weakest in Quebec where activity continues to be stifled by the ongoing investigation of corruption in the construction industry by the Charbonneau Commission. As well, the recently elected provincial government is yet to commit substantial funds to rectify the infrastructure deficit in the province. Management anticipates that heavy equipment markets across Canada in 2014 will generally follow construction activity with the possibility of some catch up in the second half in some regions. Continued growth is expected in Alberta, flat markets in Ontario and ongoing weak demand in Eastern Canada. The northeastern United States was also plagued by difficult winter weather conditions. Despite a slow start to the year, heavy equipment markets in New England began to show improvement in the second quarter and are expected to show continued growth in the latter part of the year as a result of a gradual recovery in the housing market. In conjunction with the strengthening housing sector, demand for mill yard machines and forestry equipment is increasing. Also, greater demand in southern New England for scrap handling machinery in the first and second quarters is expected to continue throughout the balance of the year. While construction activity and demand for heavy equipment was curtailed by the challenging winter and early spring weather, the recent onset of warmer and dryer weather has created a more optimistic outlook for the construction season. This is reflected in the fact that quoting activity for heavy equipment has improved and order backlogs remain at robust levels. Over the past two years, Strongco has made significant investments in new branches to expand and improve the Company s presence in key markets. In 2012, new branches were opened in Acheson, Alberta, on the outskirts of Edmonton, in Baie Comeau, Quebec to replace the old branch and in Orillia, Ontario to further penetrate the aggregates market in the area. In 2013, new branches were built in Saint-Augustin-de-Desmaures, Quebec, to replace the old branch just outside Quebec City and in Fort McMurray, Alberta to better service customers in this key northern Alberta market. The new branch in Saint Augustin opened in December 2013 and construction of the new Fort McMurray branch was completed in March Over the same time frame as investments were being made in new branches, the Company was also building and improving its sales organization with additional territory managers, customer service representatives, product support specialists and an enhanced sales management structure, and has increased the number of skilled service technicians across all business units and regions to better service and meet customer demand. With the increase in construction activity associated with more conducive weather conditions, the benefits of these investments are now beginning to be realized. Although the new facilities and additional people have added to the Company s cost structure, management anticipates to further reap the benefits of these investments with continued revenue growth and improved market share performance in While there was the normal seasonal build-up of equipment inventories in the first half of the year, equipment debt levels were slightly reduced from a year ago, but with a substantial reduction in the interest bearing portion of equipment debt. Improved inventory management and debt reduction continues to be the Company s focus in 2014 with the goal to reduce balance sheet leverage and lower interest costs. In addition, and with the recent infrastructure improvements now in place, emphasis is being placed on further improving operating efficiency. Consistent with its strategy of not tying up capital in real estate, the Company entered into agreements or received letters of intent to sell and lease back its five remaining owned branch facilities in Canada. The sale and leaseback of the Company s newly constructed facility in Fort McMurray, Alberta was completed at the end of the second quarter. The net proceeds of $3.1 million from this sale, after repayment of construction financing and a small vendor take back loan, was used to reduce operating debt. The sale and leaseback of the Company s new Saint Augustin, Quebec branch as well as other owned facilities in Mississauga, Ontario, Val D Or, Quebec and Moncton New Brunswick are anticipated to close in the third quarter of Combined, these five sale and leaseback transactions are expected to generate total proceeds of $47 million and net cash of $19 million, after repayment of mortgage debt and a small vendor take back loan. The net cash will be used to support the Company s core business operations, reduce operating debt and improve balance sheet leverage. STRONGCO corporation 2014 SECOND QUARTER REPORT 3

6 COMPANY OVERVIEW Strongco is one of the largest multi-line mobile equipment distributors in Canada. In addition, through the acquisition of Chadwick-BaRoss, Inc. in February 2011, the Company is also a multi-line distributor of mobile construction equipment in the New England region of the United States. 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 in Canada and Maine and New Hampshire in the United States; ii. iii. Case Corporation ("Case"), for which Strongco has a distribution agreement for a substantial portion of Ontario; and 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 exclusive rights to distribute the products manufactured by these manufacturers in specific regions and/or provinces. In addition to the above noted primary lines, Strongco also distributes several other secondary or complementary equipment lines and attachments, including Terex Cedarapids, Terex Finlay, Ponsse, Fassi, Allied Construction, Taylor, ESCO, Dressta, Sennebogen, Jekko, Takeuchi, Link-Belt and Kawasaki. Strongco is listed on the Toronto Stock Exchange under the symbol SQP. FINANCIAL RESULTS THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013 Consolidated Results of Operations Three months ended June 30 Six months ended June 30 ($ thousands, except per share amounts) Revenues $ 135,937 $ 140,140 $ 240,308 $ 237,665 Cost of sales 111, , , ,551 Gross Margin 24,052 24,414 42,926 43,114 Administration, distribution and selling expenses 19,031 18,537 38,844 37,405 Other income (265) (302) (98) (337) Operating income 5,286 6,179 4,180 6,046 Interest expense 2,972 2,215 5,877 5,059 Earnings (Loss) before income taxes 2,314 3,964 (1,697) 987 Provision for income taxes 601 1,065 (429) 252 Net income (loss) $ 1,713 $ 2,899 $ (1,268) $ 735 Basic and diluted earnings (loss) per share $ 0.13 $ 0.22 $ (0.10) $ 0.06 Weighted average number of shares - Basic 13,221,719 13,128,719 13,221,719 13,128,719 - Diluted 13,221,719 13,158,552 13,221,719 13,169,560 Key financial measures: Gross margin as a percentage of revenues 17.7% 17.4% 17.9% 18.1% Administration, distribution and selling expenses as a percentage of revenues 14.0% 13.2% 16.2% 15.7% Operating income as a percentage of revenues 3.9% 4.4% 1.7% 2.5% EBITDA (note 1) $ 11,381 $ 13,658 $ 17,106 $ 20,201 Note 1 - EBITDA refers to earnings before interest, income taxes, 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. 4 STRONGCO corporation 2014 SECOND QUARTER REPORT

7 Market Overview Strongco participates in a number of geographic regions and in a wide range of end-use markets that utilize heavy equipment 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. As anticipated, rental activity, including rentals with an option to purchase ( RPO ), increased as markets recovered following the recession in However, rental activity has remained strong even after markets recovered and the number of customers choosing RPOs has continued to increase. Rental activity is expected to remain strong in the future. Spurred partially by government stimulus spending for infrastructure projects, construction activity in Canada increased over the last three years as economic recovery continued in Canada. Correspondingly, demand for new heavy equipment strengthened throughout this period. After two years of robust growth, the momentum in heavy equipment markets in Canada began to ease in 2013, particularly in Quebec as a result of the ongoing investigation into corruption in the construction industry by the Charbonneau Commission and the suspension of infrastructure spending and increased mining royalties imposed by the provincial government. Moving into 2014, challenging weather conditions that extended well into May, curtailed construction activity across Canada, which dampened demand for heavy equipment in the first quarter and early part of the second quarter. With the onset of warmer weather in June, construction activity increased and demand for equipment started to improve. While varying from region to region, overall demand for equipment in Canada in the first half of the year was essentially flat from a year ago. Strongco s markets were up slightly in Alberta, but were flat in Ontario and down in Quebec and the Atlantic region. In New England, construction activity and demand for equipment was also hampered by the extreme cold weather conditions that extended into the second quarter. However, a modest uptick in residential housing activity in the region resulted in a small increase in demand for equipment in the first half of the year. In addition, forestry markets have shown some improvement in 2014 and markets for scrap handling in the southern part of the region have been fairly robust. The improving markets and strong sales performance contributed to higher sales and improved market share for Strongco s operations in New England. STRONGCO corporation 2014 SECOND QUARTER REPORT 5

8 Revenues A breakdown of revenue for the quarter and six months ended June 30, 2014 and 2013 is as follows: Three months ended June 30 Six months ended June 30 [$ millions] Eastern Canada (Atlantic and Quebec) Equipment Sales $ 22.0 $ 23.6 $ 32.7 $ 40.6 Equipment Rentals Product Support Total Eastern Canada $ 33.7 $ 38.5 $ 55.7 $ 67.4 Central Canada (Ontario) Equipment Sales $ 33.9 $ 35.3 $ 50.7 $ 51.2 Equipment Rentals Product Support Total Central Canada $ 46.1 $ 47.3 $ 74.7 $ 74.4 Western Canada (Manitoba to BC) Equipment Sales $ 26.7 $ 30.8 $ 56.8 $ 53.7 Equipment Rentals Product Support Total Western Canada $ 38.4 $ 40.7 $ 79.5 $ 72.6 Northeastern United States Equipment Sales $ 10.9 $ $ 12.5 Equipment Rentals Product Support Total Northeastern United States $ 17.7 $ $ 23.3 Strongco Corporation Equipment Sales $ 93.5 $ 97.5 $ $ Equipment Rentals Product Support Total Strongco Corporation $ $ $ $ Equipment Sales Strongco s equipment sales in the three months ended June 30, 2014 were $93.5 million, down $4.0 million or 4% from $97.5 million in the second quarter of Sales in Canada were down $7.1 million or 8% in the quarter while equipment sales in the northeastern U.S. were up $3.1 million. For the six months ended June 30, 2014, total equipment sales were $158.3 million essentially unchanged from $158.0 million in the first six months of Sales in Canada during the first half of the year were down $5.3 million or 4% compared to the prior year and in the northeastern U.S. were up $5.6 million compared to the same period in Average selling prices vary from period to period depending on sales mix between product categories, model mix within product categories and features and attachments included in equipment being sold. Overall Strongco s average selling prices in the second quarter of 2014 remained high due to a higher proportion of sales of larger, more expensive equipment compared to the second quarter of Price competition continued strong in 2014, especially from dealers who are still offering product with less expensive tier 3 engines. On a regional basis, equipment sales in Eastern Canada (Quebec and Atlantic regions) were $22.0 million in the second quarter, down $1.6 million or 7% from the second quarter of For the six months to June, equipment sales in Eastern Canada totalled $32.7 million, down 19% from $40.6 million in the first six months of Most of the decline was in Quebec where construction and infrastructure markets remained weak as a result of the ongoing investigation of corruption in the construction industry by the Charbonneau Commission and continued lack of spending on the significant infrastructure deficit in the province by the Quebec government. Mining activity in northern Quebec has not recovered although there are currently indications of some early recovery in that sector. 6 STRONGCO corporation 2014 SECOND QUARTER REPORT

9 After declining in 2013, the market for heavy equipment other than cranes that Strongco serves in Quebec was estimated to be down by a further 4% in the first six months of The market for cranes in the region also remained weak as a result of the reduced construction activity in the province, leading to a substantial reduction in crane sales in the quarter. Strongco s equipment sales in the second quarter in Central Canada were $33.9 million, down $1.4 million or 4% from the second quarter of For the six months to June 30, 2014, total equipment sales in the region were $50.7 million, $0.5 million or 1% lower than the same period in Sales of cranes were up in the quarter and first half of the year, however, this was more than offset by lower sales of other heavy equipment. While construction markets in Ontario have shown recovery in recent years, there remains an overall lack of optimism and uncertainty over the economy. This has caused many of Strongco s customers to defer spending on heavy equipment, especially larger and more expensive equipment, and take a wait-and-see approach toward the marketplace in general. In addition, large amounts of snow and extremely cold winter weather in the first quarter followed by heavy rainfall in the early part of the second quarter curtailed construction and further dampened demand for heavy equipment in Ontario. The markets for heavy equipment, other than cranes, in Ontario where Strongco participates were up slightly in the second quarter and flat overall year to date. However, the weak demand for GPE resulted in a decline in Strongco s unit volumes and reduction in overall market share of heavy equipment in the region in While the market for cranes has been soft in Ontario, Strongco's crane sales were strong in the first half of 2014 due to conversion of cranes that had been on RPO contracts and stronger sales of hydraulic cranes. Equipment sales in Western Canada during the second quarter were $26.7 million, down $4.1 million or 13% from the second quarter of The decrease was due entirely to lower sales of cranes while sales of other heavy equipment were up in the quarter. For the six months to June 30, 2014, the total was $56.8 million, $3.1 million or 6% higher than the first six months of This was the result of very strong sales of general purpose construction equipment offset partially by lower sales of cranes in the region. Sales of articulated haulers and wheel loaders were strong in 2014 from customers exercising purchase options on RPO contracts. Economic conditions in Alberta have experienced steady improvement over the last several years following the recession, fueled to a large extent by robust activity in the oil sands, which resulted in strong demand for heavy equipment and cranes in the region. Demand for heavy equipment other than cranes in the markets that Strongco serves in Western Canada continued to grow in the first half of 2014 despite large amounts of snow and prolonged periods of very cold winter temperatures followed by heavy spring rains which curtailed and/or delayed customer buying decisions. The delay in the thaw cycle in Northern Alberta also affected crane customer activity and thus their buying decisions. Demand for smaller truck mounted cranes remains strong in Western Canada, while the market for larger boom cranes was weaker in Crane sales in Western Canada were lower in the first half of 2014 as conversions to sale of larger cranes that had been on RPOs were high in Strongco s equipment sales in the northeastern United States improved in the second quarter to $10.9 million, which were up 40% from $7.8 million in the same quarter last year. For the first six months of 2014, equipment sales in this region were $18.1 million, up from $12.5 million in Heavy snowfall and cold winter weather contributed to the softness but the traditional heavy equipment markets in the first quarter of the year, however, increased activity in residential construction, forestry and infrastructure in the region resulted in higher demand for equipment in the second quarter. While overall demand for heavy equipment in the markets that Strongco serves in New England, were estimated to be up slightly year to date, strong sales of general purpose equipment resulted in an increase in Strongco s GPE market share and contributed to higher sales in In addition, Strongco s sales of forestry and crushing products were also strong in the second quarter. Equipment Rentals It is common industry practice for certain customers to rent to meet their heavy equipment needs rather than commit to a purchase. In some cases, this is in response to the seasonal demands of the customer, as in the case of municipal snow removal contracts, or to meet the customers needs for a specific project. In other cases, certain customers prefer to enter into short-term rental contracts with an option to purchase after a period of time or hours of machine usage. This latter type of contract is referred to as a rental purchase option contract ( RPO ). Under an RPO, a portion of the rental revenue is applied toward the purchase price of the equipment should the customer exercise the purchase option. This provides flexibility to the customer and results in a more affordable purchase price after the rental period. Normally, the significant majority of RPO s are converted to sales within a six-month period and this market practice is a method of building sales revenues and the field population of equipment. STRONGCO corporation 2014 SECOND QUARTER REPORT 7

10 Rental activity tends to be more robust in periods when the economy and construction markets are soft or recovering from recession, as customers generally lack the confidence or financial resources to commit to purchase equipment and prefer instead to rent to meet their equipment needs. Traditionally, when construction markets and demand for heavy equipment are strong, more customers are willing to purchase equipment and rental activity normally subsides. Rental activity, including RPOs, increased as anticipated following the recession in However, rental activity has remained strong even after markets recovered and the number of customers choosing RPOs has continued to increase. Rental activity is expected to remain strong in the future. Strongco s rental revenue in the second quarter of 2014 was $5.7 million, down $1.9 million, or 25%, from the second quarter of For the six months to date, rental revenues totalled $12.6 million, down from $14.2 million in the same period in On a regional basis in Canada, rental activity was mixed across the various regions of the country. In Western Canada, rental revenues were up as a result of the stronger markets in Alberta and a high level of rentals on RPO contracts. Rentals dipped slightly in Central Canada but rental activity generally remained robust in the province. In Eastern Canada, equipment rentals fell due mainly to the weak market conditions in Quebec as explained above under Equipment Sales. Rental revenue from Chadwick-BaRoss was up in the quarter and first quarter of the year due to increased activity in residential construction, forestry and infrastructure in the region which has resulted in higher demand for equipment. Product Support Sales of new equipment usually carry the warranty from the manufacturer for a defined term. Product support revenues from the sales of parts and service are therefore not realized until the warranty period expires. Warranty periods vary from manufacturer to manufacturer and depending on customer purchases of extended warranties. Product support activities (sales of parts and service outside of warranty), therefore, tend to increase at a slower rate and lag equipment sales by three to five years. The increasing equipment population in the field leads to increased product support activities over time. Product support activities are normally strong in the first quarter due to increased use of equipment for snow removal in the winter and during the third quarter in the height of the construction season as equipment is being utilized in the field. Strongco s product support revenues in the second quarter of 2014 were $36.7 million, up 5% from $35.1 million in the second quarter of For the six months to the end of June, product support revenues totalled $69.4 million, up 6% from $65.5 million in the first six months of Product support activities were up across all regions in Canada, with the exception of Quebec, and were higher in New England. Higher amounts of snow during the winter months compared to the prior year, particularly in Western Canada, resulted in higher utilization of equipment for snow removal and contributed to higher levels of parts and service. In addition, as the new Fort McMurray branch comes on stream, product support activity in Northern Alberta is building. Product support activities in Eastern Canada have been impacted by the general reduction in construction activity in Quebec which resulted in lower utilization of equipment and lower sales of parts and service in The Company s after-market sales in New England were higher in 2014 due in part to the increased snow removal in the winter months as well as increased activity in its traditional markets for residential construction and forestry. Gross Margin Three months ended June 30 Six months ended June Gross Margin $ millions GM% $ millions GM% $ millions GM% $ millions GM% Equipment Sales $ % $ % $ % $ % Equipment Rentals % % % % Product Support % % % % Total Gross Margin $ % $ % $ % $ % Strongco s overall gross margin was $24.1 million or 17.7% of revenue in the second quarter of 2014, compared to $24.4 million or 17.4% of revenue in the same period in For the six months ended June 30, 2014, gross margin was $42.9 million or 17.9% of revenue compared to $43.1 million or 18.1% in the first six months of Gross margins for the first half of 2014 were negatively impacted by additional reserves in the first quarter of approximately $1.3 million for losses on inventory that was sold at auction in the second quarter. Excluding these abnormal losses, year to date total gross margins would have been $44.2 million or 18.4% of sales. 8 STRONGCO corporation 2014 SECOND QUARTER REPORT

11 For the second quarter, the gross margin on equipment sales was lower than the same quarter in 2013 due to the combined effect of lower sales of equipment and competitive pricing which reduced the gross margin percentage. For the six months to June the gross margin on equipment sales was also lower compared to the prior year due to additional reserves in the first quarter of approximately $1.3 million for losses on inventory that was sold at auction in the second quarter. Rental volumes were also lower in the second quarter and first half of 2014 compared to the prior year which resulted in a lower gross margin from rentals, but a lower proportion of rentals from RPO contracts in 2014 resulted in a higher gross margin percentage from rentals. Gross margins from product support sales were higher in the second quarter and first six months of the year reflecting the increase in product support sales across all regions of Canada, with the exception of Quebec and in New England. The margin percentage for the quarter and the six months ended June was relatively consistent with prior year. Administrative, Distribution and Selling Expense Administrative, distribution and selling expenses in the second quarter of 2014 were $19.0 million or 14.0% of revenue, compared to $18.5 million or 13.2% of revenues in the second quarter of For the six months ended June 30, 2014, administrative, distribution and selling expenses were $38.8 million or 16.2% of revenue, compared to $37.4 million or 15.7% of revenues in the first six months of Most of the expense increase relates to the investments made in 2013 in new branches in Fort McMurray, Alberta and Saint-Augustin-de-Desmaures, Quebec, and additional people to support growth and better service our customers. Annual salary and wage increases also contributed to the increase. Other Income Other income and expense is primarily comprised of gains or losses on disposition of fixed assets, foreign exchange gains or losses, service fees received by Strongco as compensation for sales of new equipment by other third party dealers into the regions where Strongco has distribution rights for that equipment and commissions received from third party financing companies for customer retail financing Strongco places with such finance companies. Other income in the second quarter of 2014 was $0.3 million compared to $0.3 million in the second quarter of For the first six months of 2014, other income was $0.1 million compared to $0.3 million in the first six months of During the second quarter the Company completed a sale and leaseback of its new Fort McMurray, Alberta branch. Proceeds on the sale were $19.4 million which were used to repay the outstanding construction loan on the branch and other bank debt. The sale resulted in a gain of $0.02 million which was included in other income. Interest Expense Strongco s interest expense in the second quarter and first six months of 2014 was $3.0 million and $5.9 million, respectively, compared to $2.2 million and $5.1 million, respectively, in the same periods in Interest expense was higher in 2014 as a result of higher interest-bearing debt levels, while interest rates were relatively unchanged. Strongco s interest-bearing debt comprises interest-bearing equipment notes, operating lines and various term loans with the Company s banks, and other notes payable. Strongco typically finances equipment inventory under lines of credit available from various finance companies. Most equipment financing for the Company s main brands of equipment have interest free periods up to 12 months from the date of financing, after which the equipment notes become interest-bearing. In addition, bank term loans were used to finance construction of new branches and mortgage loans are in place to finance other Company owned branch facilities. The rate of interest on the Company s bank operating lines and term loans, interest-bearing equipment notes and other notes payable vary with bank prime rates and Bankers Acceptances Rates ( BA rates ). (See discussion under Cash Flow, Financial Resources and Liquidity ). Prime rates and BA rates have remained fairly stable compared to Interest-bearing debt levels were higher in the second quarter and first six months of 2014 compared to the same periods in 2013, in part, due to a higher average level of interest-bearing equipment notes but also higher financing related to the newly completed branches in Fort McMurray, Alberta and Saint-Augustin-de-Desmaures, Quebec. STRONGCO corporation 2014 SECOND QUARTER REPORT 9

12 Earnings (Loss) before Income Taxes Strongco s earnings before income taxes in the second quarter of 2014 were $2.3 million, which compared to earnings before income taxes of $4.0 million in the second quarter of Strongco s loss before income taxes in the first six months of 2014 was $1.7 million, which compared to earnings before income taxes of $1.0 million in the first half of Provision for Income Taxes In the second quarter and first six months of 2014, the Company had an income tax expense of $0.6 million and income tax recovery of $0.4 million, respectively, which reflects a combined average effective tax rate on the Company s income in Canada and the United States of 26.0% for the quarter and 25.3% for the six-month period, respectively. Net Income Strongco s net income in the second quarter was $1.7 million ($0.13 per share), which compared to net income of $2.9 million (earnings of $0.22 per share) in the second quarter of Net loss for the first six months of 2014 was $1.3 million ($0.10 per share), compared to net income of $0.7 million ($0.06 per share) in the first six months of EBITDA EBITDA in the second quarter of 2014 was $11.4 million (8.4% of revenue), down from $13.7 million (9.7% of revenue) in the second quarter of For the six months to date, EBITDA was $17.1 million (7.1% of revenue), compared to $20.2 million (8.5% of revenue) in the first six months of EBITDA was calculated as follows: Three months ended June 30 Six months ended June 30 ($ millions) Net earnings (loss) $ 1.7 $ 2.9 $ (1.3) $ 0.7 Add Back: Interest Income taxes (0.4) 0.3 Amortization of capital assets Amortization of equipment inventory on rent Amortization of rental fleet EBITDA (note 1) $ 11.4 $ 13.7 $ 17.1 $ 20.2 Note 1 - EBITDA refers to earnings before interest, income taxes, 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. Cash Flow, Financial Resources and Liquidity Cash Provided By (Used In) Operating Activities: During the second quarter of 2014, cash provided by earnings amounted to $11.4 million, as shown below. This compares to $13.5 million of cash provided by earnings in the second quarter of After working capital changes, payments of interest and income taxes, and pension funding there was net cash of $5.8 million provided in operating activities in the second quarter of 2014, which compared to $8.8 million of cash provided by operating activities in the second quarter of The lower cash from operating activities resulted primarily from lower earnings in STRONGCO corporation 2014 SECOND QUARTER REPORT

13 For the six months ended June 30, 2014, cash provided from earnings amounted to $18.1 million, as shown below. By comparison, in the first six months of 2013, $20.4 million of cash was provided from earnings. After working capital changes and payments of interest, income taxes and pension funding, cash provided by operating activities amounted to $0.4 million, compared to cash provided by operating activities of $6.6 million in the first six months of The lower cash from operating activities resulted primarily from lower earnings in 2014 and an increase in working capital. The components of the cash provided by (used in) operating activities were as follows: Three months ended June 30 Six months ended June 30 [$ millions] Net earnings (loss) $ 1.7 $ 2.9 $ (1.3) $ 0.7 Non-cash items: Depreciation - capital assets Depreciation - equipment inventory on rent Depreciation - rental fleet (Gain) loss on sale of property and equipment (Gain) loss on sale of rental fleet (0.5) (0.3) - (0.5) Deferred compensation Interest expense Income tax expense (recovery) (0.4) 0.3 Employee future benefit expense Cash provided from earnings Changes in non-cash working capital balances (1.7) (1.4) (9.7) (5.8) Employee future benefit funding (0.9) (0.6) (1.9) (1.0) Interest paid (2.9) (2.7) (6.0) (5.3) Income taxes paid (0.1) - (0.1) (1.7) Cash provided by (used in) operating activities $ 5.8 $ 8.8 $ 0.4 $ 6.6 Non-cash items include amortization of equipment inventory on rent of $3.7 million and $7.7 million in the three and six months ended June 30, 2014, which compares to $5.4 million and $10.3 million in the second quarter and the first six months of The volume of equipment on rent and rental revenue was lower in the second quarter and first six months of 2014 resulting in a lower amortization of equipment inventory on rent. During the second quarter of 2014, the increase in non-cash working capital resulted in a use of cash of $1.7 million. During the first six months of 2014, the increase in non-cash working capital resulted in a use of cash of $9.7 million, which compares to a use of cash from an increase in non-cash working capital of $1.4 million and $5.8 million, respectively, in the same periods of Components of the net cash used in the net change in non-cash working capital for the three month and six month periods ending June 30, 2014 and 2013 were as follows: Three months ended June 30 Six months ended June 30 [$ millions] (Increase) / Decrease Trade and other receivables $ (9.4) $ (19.5) $ (8.2) $ (15.8) Inventories (35.3) (0.4) (77.2) (26.6) Prepaids 0.3 (0.1) - (0.9) $ (44.4) $ (20.0) $ (85.4) $ (43.3) Trade and other payables Deferred revenue & customer deposits (0.4) - Equipment notes payable $ 42.7 $ 18.6 $ 75.7 $ 37.5 Net change in non-cash working capital $ (1.7) $ (1.4) $ (9.7) $ (5.8) STRONGCO corporation 2014 SECOND QUARTER REPORT 11

14 As noted in the table above, the $1.7 million increase in non-cash working capital in the second quarter of the year was primarily due to an increase in inventories and trade and other receivables, which was partially offset by an increase in trade and other payables and equipment notes payable. Receivables increased by $9.4 million as a result of the sales occurring in the end of June. Trade and other payables rose in the quarter by $22.4 million as a result of accruals for equipment inventory received near the end of the quarter that had not yet been financed on the Company s floor plan lines. Most of the increase in inventories of $35.3 million in the quarter related to equipment received right at the end of June that did not get on the floor plan lines until July. Equipment notes increased in the quarter by $19.9 million reflecting the seasonal increase in inventories. Non-cash working capital increased by $9.7 million in the first half of 2014 due to an increase in inventories and trade and other receivables, which was partially offset by an increase in trade and other payables and equipment notes. A higher proportion of sales towards the end of June contributed to the increase in receivables of $8.2 million. Given the seasonality of construction and the buying patterns of customers, the majority of Strongco s inventory purchases are ordered for delivery in the first half of the year to support the anticipated sales level of equipment and parts during the prime spring and summer selling seasons. Inventory increased by $77.2 in the first six months of 2014, the majority of which was equipment inventory. To finance the increase in equipment inventory, equipment notes payable increased by $36.4 million in the first six months of The significant increase in accounts receivable in the second quarter and first six months of the year was a result of the timing of sales, which were particularly strong in the month of June. While accounts receivable have increased, the average age of receivable at June 30 th was essentially unchanged from March at approximately 34 days and has decreased since December 31, Trade and other payables rose in the quarter by $22.4 million and in the six months by $39.7 million primarily as a result of the timing in receipts of parts and equipment inventory and timing in payment of amounts owing to suppliers. Equipment notes increased by $19.9 million in the quarter and by $36.4 million in the six months reflecting the increase in equipment inventory levels in advance of the prime summer selling season. The timing of receipts of equipment inventory and when such equipment gets put on the equipment finance lines at the end of June resulted in the increase in equipment notes being less than the increase in inventories. A breakdown of equipment inventory at June 30, 2014 compared to prior quarters is as follows: ($millions) June 30, 2014 March, 2014 December 31, 2013 September 30, 2013 June 30, 2013 Equipment in-stock $ $ $ $ $ Equipment on RPO Equipment on a short-term rental contract Equipment Inventory $ $ $ $ $ As noted above, the Company s current equipment notes payable have increased to finance the increase in equipment inventory in the first half of the year. Current equipment notes payable as at June 30, 2014 was $229.2 million compared to $212.0 million at the end of the first quarter and improved from $233.1 million at the same point in A breakdown of equipment notes payable at June 30, 2014 compared to prior quarters is as follows: ($millions) June 30, 2014 March, 2014 December 31, 2013 September 30, 2013 June 30, 2013 Non-interest bearing $ 99.5 $ 60.0 $ 29.1 $ 53.9 $ 63.8 Interest bearing Equipment notes $ $ $ $ $ STRONGCO corporation 2014 SECOND QUARTER REPORT

15 While the amount of equipment notes increased from the level at the beginning of the year, the amount of interest bearing notes payable has decreased significantly due to the purchase of new equipment inventory in the second quarter of 2014 which at June 30 th was still financed by non-interest bearing debt, a high level of sales of older inventory in the first half of 2014, which had been financed by interest bearing debt and a high level of curtailment payments (principal repayments) on interest bearing debt in the first half of the year. Cash Provided By (Used In) Investing Activities: Net cash provided by investing activities amounted to $13.1 million in the second quarter of 2014, which compared to $8.9 million used in investing activities in the second quarter of In the first six months of 2014, net cash provided by investing activities amounted to $11.2 million compared to $20.3 million used in the first six months of The proceeds from the sale of the Company s new branch facility in Fort McMurray in June as well as lower capital expenditures in 2014 accounts for most of the improvement in cash provided by investing activities as explained below. The components of the cash provided by (used in) investing activities were as follows: Three months ended June 30 Six months ended June 30 [$ millions] Purchase of rental fleet assets $ (6.7) $ (7.3) $ (7.6) $ (7.6) Proceeds from sale of rental fleet assets Purchase of land for new branches in Alberta and Quebec - (0.1) - (10.9) Other purchase of capital assets (1.9) (4.8) (5.5) (7.1) Proceeds from sale of property and equipment Other Cash used in (provide by) investing activities $ 13.1 $ (8.9) $ 11.2 $ (20.3) The Company purchased rental fleet assets of $6.7 million during the quarter and $7.6 million in the first six months of the year and sold rental fleet assets for proceeds of $4.8 million and $7.4 million in the quarter and first six months of the year, respectively. Capital expenditures in the second quarter and first six months of the year totalled $1.9 million and $5.5 million, respectively, and primarily related to implementation of the new Dealer Management System, completion of the construction of the new branch facility in Fort McMurray, Alberta in the first quarter, as well as branch upgrades and miscellaneous shop equipment purchases. Capital expenditures in the second quarter and first six months of 2013 amounted to $4.9 million and $18.0 million, respectively, primarily related to the construction of the new branches in Fort McMurray, Alberta and Saint-Augustin-de-Desmaures, Quebec, and the implementation of the new Dealer Management System, as well as facilities upgrades and miscellaneous shop equipment purchases. During the quarter, the Company completed a sale and leaseback of its new Fort McMurray, Alberta branch for cash proceeds of $16.9 million and a vendor take-back mortgage of $2.0 million to be paid over 10 years. The cash proceeds were used to repay the outstanding construction term loan and bank indebtedness. Cash Provided By (Used In) Financing Activities: In the second quarter of 2014, net cash of $18.3 million was used by financing activities primarily to repay the term loan of $13.9 million financing the Fort McMurray facility which was sold in June. Additionally, long-term equipment notes decreased $2.9 million, repayments of the Canadian term loan amounted to $0.4 million and repayments of finance leases were $1.0 million. For the six months ended June 30, 2014, $10.8 million of cash was used by financing activities, including $13.9 for the repayment of the Fort McMurray term loan. During the period, an increase in the bank operating line provided $7.2 million of cash and $3.1 million of cash was provided by draws on the construction loan facilities to complete the Fort McMurray and Saint-Augustin-de-Desmaures facilities. Repayments of finance leases amounted to $2.0 million, long-term equipment notes decreased $4.3 million and the Canadian Term Loan repayments totaled $0.8 million in the first six months of the year. STRONGCO corporation 2014 SECOND QUARTER REPORT 13

16 The components of the cash provided by (used in) financing activities were as follows: [$ millions] Repayment of Canadian Term Loan $ (0.4) $ (0.7) $ (0.8) $ (1.1) Repayment of Fort McMurray Term Loan (13.9) - (13.9) - Repayment of Saint Augustin Term Loan (0.1) - (0.1) - Repayment of acquisition promissory notes (0.5) Construction loan - new Fort McMurray branch Construction loan - new Saint Augustin branch Increase (decrease) in bank indebtedness - (1.8) Increase (decrease) in long-term equipment notes (2.9) (0.2) (4.3) 0.2 Repayment of finance lease obligations (1.0) (0.9) (2.0) (1.8) Cash provided by financing activities $ (18.3) $ 0.5 $ (10.8) $ 12.6 Bank Credit Facilities Three months ended June 30 Six months ended June 30 The Company has credit facilities with banks in Canada and the United States which provide various operating lines and term loan facilities as described below. Operating Lines The Canadian bank credit facility is a three-year committed facility expiring in September The Canadian facility includes an operating line of $30 million. During the first quarter of 2014 the Company s bank provided a temporary increase in the operating line to $35 million to the end of June During the second quarter 2014 the Company s bank extended the temporary increase until the earlier of October 1, 2014 and the completion of the sale leaseback of the Company s owned branch facilities in Mississauga, Ontario, Moncton, New Brunswick, Saint- Augustin-de-Desmaures, Quebec and Val D Or, Quebec. At that time the operating line reduces back to $30.0 million. The U.S. bank credit facility provides an operating line of credit of U.S. $3.0 million expiring in June Borrowings under the operating lines of credit of both the Canadian and U.S. credit facilities are limited by standard borrowing base calculations based on accounts receivable and inventory, which are typical of such bank credit facilities. In addition, to support the temporary increase in the Canadian operating line as described above, certain properties owned by the Company were added to the borrowing base. As collateral, the Company has provided a $50 million debenture and 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 intangible and other assets. The Canadian bank operating line bears interest at rates that vary with bank prime rates or Bankers Acceptances 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 one-month Canadian BA rates plus 3.00% and BA rates plus 5.00%. The bank operating line in the United States bears interest at LIBOR plus 2.75%. Under its Canadian 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. At June 30, 2014, there were $0.01 million worth of outstanding letters of credit. In addition to its operating lines of credit, Strongco has a line of approximately $20 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 $20 million. As at June 30, 2014, the Company had outstanding foreign exchange forward contracts under this facility totaling U.S. $2.5 million at an average rate of Cdn$ for each U.S. $1.00 with settlement dates between July 2014 and November STRONGCO corporation 2014 SECOND QUARTER REPORT

17 Term Loans The Company s bank credit facilities in Canada include a term note secured by real estate and cross-collateralized with the Company s revolving line of credit in Canada. The term note matures in June 2017 and bears interest at the bank s one-month Bankers Acceptance (BA) rate plus 4%. The monthly principal payment of $0.1 million commenced in September 2013 for a 46-month term. The Company has interest rate swap agreements in place that have converted the variable rate on this term note to an effective fixed rate of approximately 5.55%. As at June 30, 2014, there was $4.3 million owing on the Canadian term note. In addition, Strongco had a construction loan facility with its bank to finance the construction of a new branch in Saint-Augustin-de-Desmaures, Quebec. Under this construction loan, the Company was able to borrow 70% of the cost of the land and building construction costs to a maximum limit of $6.0 million. Interest on this term loan was at the bank s prime lending rate plus 3.0%. Construction of the facility was completed in December 2013 and in March 2014 the construction loan was converted to a term loan for a term of 15 years at the same rate of interest. As at June 30, 2014, $5.9 million was outstanding on the term loan. The Company has previously announced that it intends to sell through sale leaseback transactions its branch facilities in Mississauga, Ontario, Moncton, New Brunswick, Saint-Augustin-des-Desmaures, Quebec and Val D Or, Quebec. The Company has negotiated and signed a sale purchase agreement or letter of intent to sell these properties subject to due diligence and normal commercial conditions. These assets have been classified as assets held for sale totalling $17.1 million in the Company`s financial statements. Similarly, the corresponding term loans have been classified as liabilities associated with assets held for sale totalling $10.2 million in the Company`s financial statements. Strongco had a construction loan facility with its bank to finance the construction of a new branch in Fort McMurray, Alberta. Under this construction loan, the Company was able to borrow 70% of the cost of the land and building construction costs to a maximum limit of $13.9 million. Interest on this term loan was at the bank s prime lending rate plus 3.0%. Construction of the new branch was completed in March 2014 and the construction loan was converted to a demand, non-revolving term loan for a term of fifteen years at the same rate of interest. In June 2014, the Company completed the sale and leaseback of this branch. Cash proceeds of $16.9 million and a $2.0 million 10-year vendor take-back mortgage were received on the sale, $13.7 million of which was used to repay the outstanding term loan in full and the remainder was used to reduce the Company s Canadian operating line. The Company s U.S. bank credit facilities also include term loans secured by real estate in the United States. These loans require monthly principal payments of U.S. $0.01 million plus accrued interest. These term loans bear interest at LIBOR plus 2.75% and mature in May 2017, at which point a balloon payment for the balance of the loans is due. The Company has interest rate swap agreements in place that have converted the variable rate on the term loans to a fixed rate. In September 2013, the swap agreements were also renegotiated to reduce the effective fixed swap rate to 4.14%. The new swap agreements are set to expire in May 2017, coincident with the term loan. It is management s intention to renew the term loans and interest rate swap agreement prior to their expiry. At June 30, 2014, the outstanding balance on these term loans was U.S. $1.8 million. 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 June 30, 2014 was as follows: Minimum ratio of total current assets to current liabilities ( Current Ratio covenant ) of 1.10:1, Minimum tangible net worth ( TNW covenant ) of $54 million, Maximum ratio of debt to tangible net worth ( Debt to TNW Ratio covenant ) of 4.50:1, and Minimum ratio of EBITDA minus cash taxes paid and capital expenditures to total interest ( Debt Service Coverage Ratio covenant ) of 1.30:1. The Debt to TNW Ratio covenant under the Company s lending agreements was to decline from a maximum limit of 4.5 to 1 at March 31, 2014 to 4.0 to 1 at June 30, During the quarter, the lenders amended the covenant to keep the maximum limit at 4.5 to 1 at June 30, 2014 and declining to 4.0 to 1 at September 30, The Company was in compliance with all financial covenants under its bank credit facilities at June 30, STRONGCO corporation 2014 SECOND QUARTER REPORT 15

18 Equipment Notes In addition to its bank credit facilities, the Company has lines of credit available totalling approximately $290 million from various non-bank equipment lenders in Canada and the United States that are used to finance equipment inventory and rental fleet. At June 30, 2014, there was approximately $240 million borrowed on these equipment finance lines. Typically, these equipment notes are interest-free for periods 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 June 30, 2014, the rates ranged from 2.81% to 7.25% with a weighted average effective rate of 5.15%. 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. As indicated above, the interest bearing equipment notes in Canada bear interest at floating BA rates plus a fixed component or premium over BA rates. Strongco put interest rate swaps in place that have effectively fixed the variable rate of interest on $50.0 million of its interest bearing equipment notes at approximately 5.94% until September (See discussion under Interest Rate Swaps below). Certain of the Company s equipment finance credit agreements contain restrictive financial covenants, including requiring the Company to remain in compliance with the financial covenants under all of its other lending agreements ( cross default provisions ). The Company was in compliance with financial covenants under its equipment finance facilities at June 30, Interest Rate Swaps Strongco has a Swap Facility in Canada with its bank that allows the Company to swap the floating interest rate component (BA rate) on up to $100 million of its floating interest rate debt to a five-year fixed swap rate of interest. On September 8, 2011, the Company entered into an interest rate swap agreement under this facility to fix the floating BA rate on $15.0 million of interest bearing debt at a fixed interest rate equal to 1.615% for a period of five years to September 8, On June 8, 2012, the Company entered into an additional interest rate swap agreement under this facility to fix the floating BA rate on an additional $10.0 million of interest bearing debt at a fixed interest rate equal to 1.58% for a period of five years to June 8, On May 6, 2014, the Company entered into an additional interest rate swap agreement under this facility to fix the floating BA rate on an additional $25.0 million of interest bearing debt at a fixed interest rate equal to 1.78% for a period of three years to May 6, The Company has put these swaps in place to effectively fix the interest rate on $50.0 million of its interest-bearing equipment notes at approximately 5.94%. In addition, in September of 2012, the Company entered into interest rate swap agreements that converted the variable interest rate components on the Canadian Term Loan to a fixed rate of 1.55%. The effective fixed rate of interest on this loan is 5.55%. The Company also has interest rate swap agreements in place in the U.S. that have converted the variable rate on its U.S. term loans to a fixed rate of 4.13%. The term loan and swap agreements expire in May 2017 at which point a balloon payment from the balance of the loans is due. It is management s intention to renew the term loans and interest rate swap agreement prior to their expiry. 16 STRONGCO corporation 2014 SECOND QUARTER REPORT

19 Summary of Outstanding Debt The balance outstanding under Strongco s debt facilities at June 30, 2014 and 2013 consisted of the following: Debt Facilities As at June 30 ($ millions) Bank indebtedness (including outstanding cheques) $ 32.6 $ 21.1 Equipment notes payable - non interest bearing Equipment notes payable - interest bearing Rental fleet equipment notes payable Term notes - Canadian real estate Term notes - US real estate Liabilities associated with assets held for sale Construction loan - Fort McMurray, Alberta Construction loan - Saint-Augustin-de-Desmaures, Quebec $ $ Total borrowing under the Company s debt facilities was $288.3 million at June 30, 2014 compared to $287.5 million a year ago. Total equipment notes payable decreased by $3.9 million from a year ago. While the reduction in total was small, the interest bearing portion of equipment notes decreased more substantially by $39.6 million. Management remains focused on reducing equipment inventories and the corresponding equipment note financing and is confident that with the ongoing level of demand for heavy equipment in its markets and the actions taken and being taken to better manage ordering of new equipment and reduce the amount of incoming inventory, a substantial reduction in inventory and floor plan debt will be achieved by the end of As at June 30, 2014, there was approximately $5.6 million of unused credit available under the Company s bank credit lines, respectively. 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 $5.0 million and $15.0 million. The Company also had approximately $50 million available under its equipment finance facilities at June 30, With the level of funds available under the Company s bank credit lines, the current availability under the equipment finance facilities and anticipated improvement in cash flows from operations, management believes the Company will have adequate financial resources to fund its operations and make the necessary investment in equipment inventory and fixed assets to support its operations in the future. STRONGCO corporation 2014 SECOND QUARTER REPORT 17

20 SUMMARY OF QUARTERLY DATA In general, business activity follows a weather related pattern of seasonality. Typically, the first quarter is the weakest quarter as construction and infrastructure activity is constrained in the winter months. This is followed by a strong gain in the second quarter as construction and other contracts begin to be tendered and companies prepare for summer activity. The third quarter generally tends to be slightly slower from an equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support activities. Fourth quarter activity generally strengthens as customers make year-end capital spending decisions and exercise purchase options on equipment which has previously gone out on RPO s. In addition, purchases of snow removal equipment are typically made in the fourth quarter. A summary of quarterly results for the current and previous two years is as follows: 2014 ($ millions, except per share amounts) Q2 Q1 Revenue $ $ Income (Loss) before income taxes 2.3 (4.0) Net income (loss) 1.7 (3.0) Basic and diluted loss per share $ 0.13 $ (0.23) 2013 ($ millions, except per share amounts) Q4 Q3 Q2 Q1 Revenue $ $ $ $ 97.5 Income (loss) before income taxes (0.2) (3.0) Net income (loss) (2.2) Basic and diluted earnings (loss) per share $ 0.02 $ 0.15 $ 0.22 $ (0.16) 2012 Restated - See Note 1 ($ millions, except per share amounts) Q4 Q3 Q2 Q1 Revenue $ $ $ $ 96.8 Income before income taxes Net income Basic and diluted earnings per share $ 0.04 $ 0.18 $ 0.23 $ 0.08 A discussion of the Company s previous quarterly results can be found in the Company s quarterly Management s Discussion and Analysis reports available on SEDAR at CONTRACTUAL OBLIGATIONS The Company has contractual obligations for operating lease commitments totalling $38.7 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 terms from three to 10 years. The Company s maximum potential losses pursuant to the majority of these buy-back contracts are limited, under an agreement with the OEM, to 10% of the original sale amounts. In addition, this agreement provides a financing arrangement in order to facilitate the buyback of equipment. As at June 30, 2014, the total buy back contracts outstanding were $11.3 million. Contractual obligations are set out in the following tables. Management believes that the Company will generate sufficient cash flow from operations to meet its contractual obligations. 18 STRONGCO corporation 2014 SECOND QUARTER REPORT

21 Payment due by period Less Than 1 to 3 4 to 5 After 5 ($ millions) Total 1 Year years years years Operating leases $38.7 $6.6 $12.0 $6.5 $13.6 Contingent obligation by period Less Than 1 to 3 4 to 5 After 5 ($ millions) Total 1 Year years years years Buy back contracts $11.3 $1.0 $7.7 $2.2 $ 0.4 SHAREHOLDER CAPITAL The Company is authorized to issue an unlimited number of shares. All shares are of the same class of common shares with equal rights and privileges. Common Shares Issued and Outstanding Shares Number of Shares Common shares outstanding as at December 31, ,221,719 Common shares issued (redeemed) - Common shares outstanding as at June 30, ,221,719 NON-IFRS MEASURES EBITDA refers to earnings before interest, income taxes, 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. 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 June 30, 2014 with changes from March 31, 2014 is as follows: Provision for Inventory Obsolescence ($ millions) Provision for inventory obsolescence as at March 31, 2014 $ 5.7 Provision related to inventory disposed of during the quarter (1.8) Additional provisions made during the quarter 0.1 Provision for inventory obsolescence as at June 30, 2014 $ 4.0 STRONGCO corporation 2014 SECOND QUARTER REPORT 19

22 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 June 30, 2014 with changes from March 31, 2014 is as follows: Allowance for Doubtful Accounts ($ millions) Allowance for doubtful accounts as at March 31, 2014 $ 1.1 Allowance related to accounts written off during the quarter (0.2) Additional allowances made during the quarter 0.1 Allowance for doubtful accounts as at June 30, 2014 $ 1.0 Employee Future Benefit 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 pro-rated on service and based on assumptions that reflect management's best estimates. The assumptions were determined by management recognizing the recommendations of Strongco s actuaries. These key assumptions include the rate used to discount obligations, the expected rate of return on plan assets, the rate of compensation increase and the growth rate of per capita health care costs. The discount rate is used to determine the present value of future cash flows that we expect will be required to pay employee benefit obligations. Management s assumptions of the discount rate are based on current interest rates on long-term debt of high quality corporate issuers. The assumed return on pension plan assets of 6.5% per annum is based on expectations of long-term rates of return at the beginning of the fiscal year and reflects a pension asset mix consistent with the Company s investment policy. The costs of employee future benefits other than pension are determined at the beginning of the year and are based on assumptions for expected claims experience and future health care cost inflation. Changes in assumptions will affect the accrued benefit obligation of Strongco s employee future benefits and the future years amounts that will be charged to results of operations. Future Income Taxes At each quarter end the Company evaluates the value and timing of the Company s temporary differences. Future income tax assets and liabilities, measured at substantively enacted tax rates, are recognized for all temporary differences caused when the tax bases of assets and liabilities differ from those reported in the consolidated financial statements. Changes or differences in these estimates or assumptions may result in changes to the current or future tax balances on the consolidated balance sheet, a charge or credit to income tax expense in the consolidated statements of earnings and may result in cash payments or receipts. Where appropriate, the provision for future income taxes and future income taxes payable are adjusted to reflect management s best estimate of the Company s future income tax accounts. 20 STRONGCO corporation 2014 SECOND QUARTER REPORT

23 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 2014 SECOND QUARTER REPORT 21

24 22 STRONGCO corporation 2014 SECOND QUARTER REPORT

25 Strongco Corporation Unaudited Interim Condensed Consolidated Financial Statements June 30, 2014 and 2013 Notice required under National Instrument , Continuous Disclosure Obligations, Part 4.3 (3) (a). The accompanying unaudited condensed interim financial statements for Strongco Corporation as at and for the six-month and three-month periods ended June 30, 2014, together with the accompanying notes have not been reviewed by the Company s auditors STRONGCO corporation 2014 SECOND QUARTER REPORT 23

26 Strongco Corporation Unaudited Interim Consolidated Statement of Financial Position (in thousands of Canadian dollars, unless otherwise indicated) Assets As at June 30, 2014 As at December 31, 2013 As at June 30, 2013 Current assets Cash $ 945 $ 57 $ 333 Trade and other receivables 57,055 48,762 60,493 Inventories [note 3] 311, , ,538 Prepaid expenses and other deposits 2,208 2,017 2,923 Assets classified as held for sale [note 4] 17, , , ,287 Non-current assets Property and equipment [note 5] 29,380 61,385 56,279 Rental fleet 28,739 29,844 22,769 Deferred income tax asset [note 10] Intangible asset 1,800 1,800 1,800 Other assets 1, ,047 93,184 81,983 Total assets $ 451,119 $ 386,599 $ 438,270 Liabilities and shareholders' equity Current liabilities Bank indebtedness $ 32,577 $ 25,402 $ 21,099 Trade and other payables 72,270 32,725 60,522 Deferred revenue and customer deposits 1,015 1,396 1,224 Equipment notes payable - non-interest bearing [note 8] 99,511 29,079 63,807 - interest bearing [note 8] 129, , ,258 Current portion of finance lease obligations 4,780 4,612 3,857 Current portion of notes payable [note 9] 171 4,958 4,590 Current portion of provisions for other liabilities [note 7] Liabilities associated with assets classified as held for sale [note 9] 10, , , ,784 Non-current liabilities Deferred income tax liability [note 10] 3,102 3,365 2,991 Finance lease obligations 5,744 6,479 5,322 Notes payable and other liabilities [note 9] 16,119 36,166 28,702 Long-term portion of provisions for other liabilities [note 7] Employee future benefit obligations 3,483 4,405 7,860 28,788 51,221 45,675 Total liabilities 379, , ,459 Contingencies, commitments and guarantees [note 11] Shareholders' equity Shareholders' capital [note 12] 65,324 65,324 64,898 Accumulated other comprehensive income 1, Contributed surplus Retained earnings 4,713 5,981 1,270 Total shareholders' equity 72,083 73,130 67,811 Total liabilities and shareholders' equity $ 451,119 $ 386,599 $ 438,270 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. 24 STRONGCO corporation 2014 SECOND QUARTER REPORT

27 Strongco Corporation Unaudited Interim Consolidated Statement of Income For the three and six month periods ended June 30 (in thousands of Canadian dollars, unless otherwise indicated, except share and per share amounts) Three-month period ended Six-month period ended June 30 June Revenue [note 14] $ 135,937 $ 140,140 $ 240,308 $ 237,665 Cost of sales 111, , , ,551 Gross profit 24,052 24,414 42,926 43,114 Expenses Administration 9,277 8,731 18,685 17,598 Distribution 5,875 6,050 12,396 12,495 Selling 3,879 3,756 7,763 7,312 Other income (265) (302) (98) (337) Operating income 5,286 6,179 4,180 6,046 Interest expense 2,972 2,215 5,877 5,059 Income (loss) before income taxes 2,314 3,964 (1,697) 987 Provision for (recovery of) income taxes [note 10] 601 1,065 (429) 252 Net income (loss) attributable to shareholders for the period $ 1,713 $ 2,899 $ (1,268) $ 735 Earnings (loss) per share Basic and diluted $ 0.13 $ 0.22 $ (0.10) $ 0.06 Weighted average number of shares [note 13] - basic 13,221,719 13,128,719 13,221,719 - diluted 13,221,719 13,158,552 13,221,719 13,128,719 13,169,560 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. STRONGCO corporation 2014 SECOND QUARTER REPORT 25

28 Strongco Corporation Unaudited Interim Consolidated Statement of Comprehensive Income For the three and six month periods ended June 30 (in thousands of Canadian dollars, unless otherwise indicated) Three-month period ended Six-month period ended June 30 June Net income (loss) attributable to shareholders for the period $ 1,713 $ 2,899 $ (1,268) $ 735 Items that will not be reclassified to net earnings: Actuarial gain on post-employment benefit obligations (net of tax of $523) - 1,468-1,468 Adjustment to employee benefit obligation due to tax rate change (3) Items that may be reclassified to net earnings: Currency translation adjustment (470) Comprehensive income (loss) attributable to shareholders for the period $ 1,240 $ 4,849 $ (1,171) $ 2,952 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. 26 STRONGCO corporation 2014 SECOND QUARTER REPORT

29 Strongco Corporation Unaudited Interim Consolidated Statement of Changes in Shareholders Equity For the six month periods ended June 30 (in thousands of dollars, unless otherwise indicated) Number of shares Shareholders' capital Accumulated other comprehensive income Contributed surplus Retained earnings (deficit) Total Balance - December 31, ,128,719 $ 64,898 $ 29 $ 707 $ (933) $ 64,701 Net income for the period Other comprehensive income: Currency translation adjustment Adjustment to employee benefit obligation due to change in discount rate ,468 1,468 Total comprehensive income 64, ,270 67,653 Share-based compensation expense Balance - June 30, ,128,719 $ 64,898 $ 778 $ 865 $ 1,270 $ 67,811 Number of shares Shareholders' capital Accumulated other comprehensive income Contributed surplus Retained earnings Total Balance - December 31, ,128,719 $ 65,324 $ 950 $ 875 $ 5,981 $ 73,130 Net loss for the period (1,268) (1,268) Other comprehensive income Currency translation adjustment Adjustment to employee benefit obligation due to tax rate change Total comprehensive income 65,324 1, ,713 71,959 Share-based compensation expense Balance - June 30, ,128,719 $ 65,324 $ 1,047 $ 999 $ 4,713 $ 72,083 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. STRONGCO corporation 2014 SECOND QUARTER REPORT 27

30 Strongco Corporation Unaudited Interim Consolidated Statement of Cash Flows For the six month periods ended June 30 (in thousands of Canadian dollars, unless otherwise indicated) Cash flows from operating activities Net income (loss) for the period $ (1,268) $ 735 Adjustments for Depreciation - property and equipment 3,010 2,533 Depreciation - equipment inventory on rent 7,702 10,309 Depreciation - rental fleet 2,214 1,314 Gain on disposal of property and equipment [note 5] (20) - Gain on sale of rental fleet (33) (525) Share-based payment expense Interest expense 5,877 5,059 Income tax expense (recovery) (429) 252 Employee future benefit expense Foreign exchange gain (10) (10) Changes in non-cash working capital [note 15] (9,716) (5,769) Funding of employee future benefit obligations (1,812) (965) Interest paid (6,006) (5,332) Income taxes paid (139) (1,694) Net cash provided by operating activities $ 384 $ 6,557 Cash flows from investing activities Purchases of rental fleet (7,560) (7,574) Proceeds from sale of rental fleet 7,418 5,196 Purchases of property and equipment (5,488) (17,955) Proceeds from sale of property and equipment [note 5] 16, Net cash provided by (used in) investing activities $ 11,289 $ (20,266) Cash flows from financing activities Increase in bank indebtedness 7,174 5,741 Increase (decrease) in long-term debt (1,157) 10,183 Repayment of long-term debt (14,804) (1,050) Repayment of finance lease obligations (1,990) (1,754) Repayment of business acquisition purchase financing - (514) Net cash provided by (used in) financing activities $ (10,777) $ 12,606 Foreign exchange on cash balances (8) 41 Change in cash and cash equivalents during the period $ 888 $ (1,062) Cash and cash equivalents - Beginning of period 57 1,395 Cash and cash equivalents - End of period $ 945 $ 333 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. 28 STRONGCO corporation 2014 SECOND QUARTER REPORT

31 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and six month periods ended June 30, 2014 and June 30, 2013 (in thousands of dollars, unless otherwise indicated) 1 General information Strongco Corporation ( Strongco or the Company ) sells and rents new and used equipment and provides after-sale product support (parts and service) to customers that operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets in Canada and the United States. 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 Basis of presentation These interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standards ( IAS ) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ( IASB ). These interim condensed consolidated financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the Company s annual financial statements for the year ended December 31, 2013, which are available at and on the Company s website at The timely preparation of the interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies, if any, as at the date of the financial statements and the reported amounts of revenue and expenses during the period. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future years could require a material change in the interim condensed consolidated financial statements. These interim condensed consolidated financial statements were authorized for issuance by the Board of Directors of the Company on July 30, The accounting policies followed in these interim condensed consolidated financial statements are the same as those applied in the Company s consolidated financial statements for the year ended December 31, 2013, except the following interpretation and amendments that were adopted, as required, on January 1, 2014: IAS 32 Financial Instruments: Presentation In December 2011, the IASB amended IAS 32 to clarify certain requirements for offsetting financial assets and liabilities. The amendment addresses the meaning and application of the concepts of legally enforceable right of set-off and simultaneous realization and settlement. The amendment affects presentation and disclosures but does not have an impact on financial results. IAS 36 Impairment of Assets The amendment reverses the unintended requirement in IFRS 13 Fair Value Measurement, to disclose the recoverable amount of every cash-generating unit to which significant goodwill or indefinite-lived intangible assets have been allocated. Under the amendment, the recoverable amount is required to be disclosed only when an impairment loss has been recognized or reversed. The amendment affects presentation and disclosures but does not have an impact on financial results. STRONGCO corporation 2014 SECOND QUARTER REPORT 29

32 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and six month periods ended June 30, 2014 and June 30, 2013 (in thousands of dollars, unless otherwise indicated) International Financial Reporting Interpretations Committee ( IFRIC ) 21 - Levies IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. The adoption of these standards and amendments had no impact on the unaudited interim condensed consolidated financial statements. Accounting standard adopted during the period The Company has adopted the following standard effective June 30, IFRS 5 Non-current assets held for sale and discontinued operations Non-current assets and disposal groups are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its immediate condition. Management must be committed to the sale, and it should be expected to qualify for recognition as a completed sale within one year from the date of classification. Assets (and disposal groups) classified as held for sale are measured at the lower of the carrying amount or fair value less costs to sell. Comparative amounts Certain comparative amounts have been reclassified to conform to current period s unaudited interim condensed consolidated financial statements presentation. 3 Inventories Inventory components, net of write-downs and provisions are as follows: As at June 30, 2014 December 31, 2013 June 30, 2013 Equipment in-stock $ 230,218 $ 156,817 $ 196,611 Equipment on rental contract with a purchase option 35,940 38,909 40,127 Equipment on a short-term rental contract 10,733 16,278 24,632 Equipment 276, , ,370 Parts 28,315 26,369 25,180 Work-in-process 6,549 4,206 5,988 Total inventory $ 311,755 $ 242,579 $ 292,538 As at June 30, 2014, provisions against inventory totalled $3,991 (December 31, $4,365; June 30, $4,657). During the period, the Company recorded inventory write-downs of $104 ( $491). 30 STRONGCO corporation 2014 SECOND QUARTER REPORT

33 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and six month periods ended June 30, 2014 and June 30, 2013 (in thousands of dollars, unless otherwise indicated) 4 Assets classified as held for sale Land and building are transferred to assets classified as assets held for sale from property and equipment when they meet the criteria to be assets classified as held for sale. Land and buildings previously included in assets classified as held for sale are transferred to property and equipment when it is determined that they no longer meet the criteria to be assets classified as held for sale. The fair value measurement of assets held for sale is categorized within Level 2 of the fair value hierarchy. Land and buildings classified as assets held for sale are facilities which the Company has previously announced that it intends to sell through sale leaseback transactions. The Company has entered into agreements or received letters of intent to sell certain properties in Canada subject to due diligence and normal commercial conditions. 5 Property and equipment During the six months ended June 30, 2014, the Company acquired property and equipment, excluding new branch construction, of $5,201 (six months ended June 30, $3,773). During the six months ended June 30, 2014, the Company incurred expenditures of $1,793 to complete the construction of the facilities in Fort McMurray, Alberta and Saint-Augustin-de-Desmaures, Quebec ( $13,781). During the second quarter, the Company completed a sale and leaseback transaction for its Fort McMurray, Alberta branch. Proceeds from the sale were $19.4 million, including a $2.0 million vendor take-back mortgage to be paid over 10 years recorded in prepaid expenses and other deposits ($0.2 million) and other assets ($1.8 million). The sale resulted in a gain of $nil. In addition, during the second quarter, the Company entered into agreements or received letters of intent to sell its Mississauga, Ontario branch and head office, its Moncton, New Brunswick facility and its Saint- Augustin-de-Desmaures and Val D Or facilities in Quebec. The carrying value of these properties has been reclassified to assets held for sale (land - $3,882 and buildings - $13,227). 6 Bank indebtedness The Company has credit facilities with banks in Canada and the United States that provide committed operating lines of credit totalling approximately $38.2 million. The Canadian bank credit facility is a three-year committed facility expiring in September 2015 and provides an operating line of credit for a maximum of $30.0 million. During the first quarter 2014 the Company s bank provided a temporary increase in the operating line to $35.0 million to the end of June During the second quarter 2014 the Company s bank extended the temporary increase until the earlier of October 1, 2014 and the completion of the sale leaseback of certain properties owned by the Company in Canada. At that time the line reduces back to $30.0 million. The U.S. bank operating line of credit is renewable annually in June of each year with the next renewal extended to June 2015, at the option of both the lender and the Company. The U.S. bank credit facility provides a maximum operating line of credit of U.S. $3.0 million. STRONGCO corporation 2014 SECOND QUARTER REPORT 31

34 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and six month periods ended June 30, 2014 and June 30, 2013 (in thousands of dollars, unless otherwise indicated) 7 Provisions for other liabilities The Company has agreed to buy back equipment from certain customers at the option of the customer for a specified price at future dates ("buy back contracts"). These contracts are subject to certain conditions being met by the customer and range in term from three to 10 years. As at June 30, 2014, the total obligation under these contracts was $11,314 (December 31, $11,638; June 30, $14,608). The Company's maximum potential losses pursuant to the majority of these buy back contracts are limited, under an agreement with a third party, to 10% of the original sale amounts. A provision of $399 (December 31, $982; June 30, $1,227) has been accrued in the Company's accounts with respect to these potential losses. The long-term portion of the provision of $340 (December 31, $805; June 30, $800) is classified as long-term liabilities. 8 Equipment notes payable In addition to its bank credit facilities, the Company has lines of credit available totalling approximately $290 million from various non-bank equipment lenders in Canada and the United States, which are used to finance equipment inventory. As at June 30, 2014, there was approximately $240 million borrowed on these equipment finance lines (December 31, 2013 approximately $193 million; June 30, 2013 approximately $233 million). Typically, these equipment notes are interest-free for periods 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 June 30, 2014, the rates ranged from 2.81% to 7.25% with an effective weighted average rate of 5.15%. 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. On May 6, 2014, the Company entered into an interest rate swap agreement available under the credit facility with its bank to fix the floating BA rate on $25 million of interest bearing debt at a fixed interest rate equal to 1.78% for a period of three years to May 6, As at June 30, 2014, the Company has total outstanding swaps in place to fix the interest rate on $50 million of interest bearing debt at approximately 5.94%. Certain of the Company s bank and 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 June 30, 2014, the Company was in compliance with all financial covenants. 32 STRONGCO corporation 2014 SECOND QUARTER REPORT

35 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and six month periods ended June 30, 2014 and June 30, 2013 (in thousands of dollars, unless otherwise indicated) 9 Notes payable and other liabilities Notes payable and other liabilities comprise of the following: June 30, 2014 December 31, 2013 June 30, 2013 Equipment plan notes payable - rental fleet (i) $ 12,830 $ 15,808 $ 10,994 Term note - United States (ii) 3,460 3,531 3,574 Term note - Canada (iii) - 5,021 8,715 Construction facility - Fort McMurray (iv) - 11,461 7,756 Construction facility - Saint-Augustin-de-Desmaures (v) - 5,303 2,253 16,290 41,124 33,292 Current portion 171 4,958 4,590 Long-term portion $ 16,119 $ 36,166 $ 28,702 (i) (ii) (iii) (iv) In addition to equipment notes payable as described in note 8, the Company utilizes floor plan notes payable to finance its rental fleet. Payment is required at the earlier of the sale of the item and per contractual schedule ranging from 12 to 24 months. Effective interest rates range from 2.81% to 6.25% with various maturity dates. The Company s bank credit facilities in the United States include a term note secured by real estate and cross-collateralized with the Company s revolving line of credit in the United States. The term note matures in May 2017 and bears interest at a rate of LIBOR plus 2.75%. Monthly payments of principal of US$13 plus accrued interest are required under the terms of the note. The Company has interest rate swap agreements in place related to the term note, which have converted the variable rate on the term loans to a fixed rate of 4.14%. The term loans and swap agreements expire in May 2017, at which point a balloon payment for the balance of the loans is due. The Company s bank credit facilities in Canada include a term note secured by the Mississauga, Ontario property and cross-collateralized with the Company s revolving line of credit in Canada ( Term note Canada ). The term note matures in June 2017 and bears interest at the bank s one-month Bankers Acceptance (BA) rate plus 4%. Monthly principal payments of $120 plus accrued interest are required under the terms of the note. The term note is payable in full upon the sale of the Mississauga, Ontario property and has been reclassified as a liability associated with assets classified as held for sale. As at June 30, 2014, the principal balance payable is $4,304. In September 2011, the Company secured a construction loan facility with its bank to finance the construction of a new Fort McMurray, Alberta branch ( Construction Facility Fort McMurray ). Under this facility, the Company was able to borrow 70% of the cost of the land and building construction costs to a maximum of $13.9 million. Interest on this construction loan was at the bank s prime lending rate plus 3.0%. During March 2014, this construction loan was converted to a term loan which was to mature in March 2029 and bore interest at the bank s prime lending rate plus 3.0%. Monthly principal payments of $77 plus accrued interest were required under the terms of the note. On June 30, 2014, the Company completed the sale leaseback of this facility and the outstanding balance of the term loan was repaid in full. STRONGCO corporation 2014 SECOND QUARTER REPORT 33

36 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and six month periods ended June 30, 2014 and June 30, 2013 (in thousands of dollars, unless otherwise indicated) (v) In March 2013, the Company secured a construction loan facility with its bank to finance the construction of a new Saint-Augustin-de-Desmaures branch, outside of Quebec City, Quebec. Under this facility, the Company was able to borrow 70% of the cost of the land and building construction costs to a maximum of $6.0 million. Interest on this construction loan was at the bank s prime lending rate plus 3.0%. During March 2014, this construction loan was converted to a term loan which matures in March 2029 and bears interest at the bank s prime lending rate plus 3.0%. Monthly principal payments of $33 plus accrued interest are required under the terms of the note. The term loan is payable is full upon the sale of the Saint-Augustin-de-Desmaures property and has been reclassified as a liability associated with assets classified as held for sale. As at June 30, 2014, the principal balance payable is $5, Income taxes The major components of the income tax expense in the interim consolidated statement of income are: Three months ended Six months ended June 30 June Current income tax expense $ 488 $ 877 $ 33 $ 684 Deferred tax expense (recovery) related to origination and reversal of deferred taxes (462) (432) $ 601 $ 1,065 $ (429) $ Contingencies, commitments and guarantees In the ordinary course of business activities, the Company may be contingently liable for litigation. On an ongoing basis, the Company assesses the likelihood of any adverse 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. As at June 30, 2014, management has determined that there is no pending or actual litigation requiring a provision. 12 Shareholders capital Authorized: Unlimited number of shares Issued: As at June 30, 2014, a total of 13,221,719 shares (December 31, ,221,719; June 30, ,128,719) with a stated valued of $65,324 (December 31, $65,324; June 30, $64,898) were issued and outstanding. On April 30, 2014, the Company granted irrevocable options to certain members of senior management to purchase 95,000 shares of the Company. These options have an exercise price of $3.67 per share, which is equal to the average trading price of the Company s units over the five days immediately following April 30, A third of the options vest and become exercisable after 36 months from the grant date, a third of the options vest and become exercisable after 48 months from the grant date and the balance vest and become exercisable after 60 months from the grant 34 STRONGCO corporation 2014 SECOND QUARTER REPORT

37 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and six month periods ended June 30, 2014 and June 30, 2013 (in thousands of dollars, unless otherwise indicated) date. The options expire seven years from the issue date, on April 30, The stock-based compensation expense of these options is based on the estimated fair value of the options at the grant date, which was determined using the Black-Scholes option pricing model, amortized over the vesting period of the options. The following assumptions were used in determining the fair value of the options using the Black-Scholes model: Risk-free interest rate 1.43% Option life 7 years Expected volatility 38% Estimated forfeiture rate 8.5% The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome. Other assumptions have been based on the Company s historical experience. The dividend rate assumption used in the Black-Scholes option pricing model is nil% for all stock option grants. As at June 30, 2014, stock options totalling 469,141 (December 31, ,141; June 30, ,141) had been granted and were outstanding with a weighted average remaining contractual life of 50.6 months (December 31, ; June 30, ) and the weighted average exercise price was $4.63 (December 31, $4.87; June 30, $4.47). No stock options were cancelled or forfeited during the period. As at June 30, 2014, restricted share units totalling 80,965 had been granted and were outstanding (December 31, ,965; June 30, ,539) with a weighted average unit value of $5.50 (December 31, 2013 $5.50; June 30, 2013 $5.48). Stock-based compensation expense resulting from the stock options and RSUs for the period ended June 30, 2014 is $124 ( $158). 13 Earnings per share Three-month period ended Six-month period ended June 30 June Weighted average number of shares for basic earnings per share calculation 13,221,719 13,128,719 13,221,719 13,128,719 Effect of dilutive options outstanding - 29,833-40,841 Weighted average number of shares for diluted earnings per share calculation 13,221,719 13,158,552 13,221,719 13,169,560 The computation of dilutive options outstanding only includes those options having exercise prices below the average market price of the shares during the period. 14 Segment information Management has determined that the Company has one reportable segment, Equipment Distribution, based on reports reviewed by the President and Chief Executive Officer. This business sells and rents new and used equipment and provides after-sale product support (parts and service) to customers that operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets. STRONGCO corporation 2014 SECOND QUARTER REPORT 35

38 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and six month periods ended June 30, 2014 and June 30, 2013 (in thousands of dollars, unless otherwise indicated) A breakdown of revenue from the Equipment Distribution segment is as follows: Three-month period ended Six-month period ended June 30 June Equipment sales $ 93,433 $ 97,357 $ 158,343 $ 157,971 Equipment rentals 5,735 7,527 12,570 14,192 Product support 36,769 35,256 69,395 65,502 Total Equipment Distribution $ 135,937 $ 140,140 $ 240,308 $ 237, Changes in non-cash working capital The components of the changes in non-cash working capital are detailed below: For the six-month period ended June Changes in non-cash working capital Trade and other receivables $ (8,235) $ (15,798) Inventories (77,194) (26,644) Prepaid expenses and other deposits (6) (920) Other assets Trade and other payables 39,800 14,693 Provision for other liabilities (118) 93 Deferred revenue and customer deposits (391) (44) Equipment notes payable 36,404 22,823 $ (9,716) $ (5,769) 16 Seasonality The Company s interim period revenues and earnings historically follow a weather-related pattern of seasonality. Typically, the first quarter is the weakest quarter as construction and infrastructure activity is constrained in the winter months. This is followed by a strong increase in the second quarter as construction and other contracts begin to be put out for bid and companies begin to prepare for summer activity. The third quarter generally tends to be slower from an equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support (parts and service) activities. Fourth quarter activity generally strengthens as companies make year-end capital spending decisions in addition to the exercise of purchase options on equipment that has previously gone out on rental contracts. 17 Economic relationship The Company sells, rents and services heavy equipment and related parts. Distribution agreements are maintained with several equipment manufacturers, of which the most significant are with Volvo Construction Equipment North America Inc. The distribution and servicing of Volvo products account for a substantial portion of overall operations. The Company has had an ongoing relationship with Volvo since STRONGCO corporation 2014 SECOND QUARTER REPORT

39 CORPORATE AND SHAREHOLDER INFORMATION Corporate Address Strongco Corporation 1640 Enterprise Road Mississauga, Ontario Canada L4W 4L4 Telephone: Fax: Website: Investor Relations J. David Wood, C.A. Vice President and Chief Financial Officer Telephone: Auditors Ernst & Young LLP Toronto, 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: Stock Exchange Listing Toronto Stock Exchange Stock symbol: SQP Directors John K. Bell 1 Chairman, BSM Wireless Incorporated Robert J. Beutel 1, 2 President, Oakwest Corporation Limited Anne Brace 1 Corporate Director Ian C.B. Currie, Q.C. 2 Corporate Director Robert H.R. Dryburgh President and Chief Executive Officer Strongco Corporation Colin Osborne, P.Eng. 2 President and Chief Executive Officer Vicwest Inc. 1. Member of Audit Committee 2. Member of Corporate Governance, Nominating, Compensation and Pension Committee Officers and Senior Management Robert J. Beutel Chairman of the Board Robert H.R. Dryburgh President and Chief Executive Officer Christopher D. Forbes Vice President, Human Resources William J. Ostrander Vice President, Crane Thomas J. Perks Vice President, Corporate Development Leonard V. Phillips, C.A. Vice President, Administration and Secretary Stephen Slama Vice President, Multiline J. David Wood, C.A. Vice President and Chief Financial Officer Stuart E. Welch President, Chadwick-BaRoss, Inc. Peter Duperrouzel Director, Information Services Oliver Nachevski Regional Vice President, Case STRONGCO corporation 2014 SECOND QUARTER REPORT 37

40 Strong People Strong Brands Strong Commitments