Ag Growth International Inc. (TSX:AFN) ("Ag Growth" or the "Company") today
reported its financial results for the three and nine months ended September 30,
2011, and declared dividends for December 2011, January 2012 and February 2012.
Overview of Results
Ag Growth achieved record sales in the nine months ended September 30, 2011, due
largely to revenues from divisions acquired in 2010 and strength in commercial
grain handling. Sales for the quarter ended September 30, 2011 decreased from
2010 due to weather related weakness in western Canada, less than optimal
growing conditions in the United States and the impact of a stronger Canadian
dollar. EBITDA for the three and nine months ended September 30, 2011 was $12.7
million and $46.4 million, respectively (2010 - $25.6 million and $57.8 million)
and adjusted EBITDA was $14.8 million and $44.8 million, respectively, (2010 -
$22.9 million and $53.0 million) for the periods then ended. Diluted profit per
share for the three and nine months ended September 30, 2011 were $0.36 per
share and $1.69 per share, respectively (2010 - $1.12 and $2.35).
"Our commercial divisions continue to deliver solid results", said Gary
Anderson, President and Chief Executive Officer, "however, we also faced a
number of challenges in the third quarter. Sales of portable grain handling,
aeration and temporary storage equipment were negatively impacted by a fast and
dry harvest in western Canada and an unusual growing season and reduced crop
yields in the United States. In addition, our financial results were
significantly impacted by start-up challenges at our Twister greenfield plant,
while regional market issues, primarily the result of a 2010 drought in northern
Europe, negatively impacted our Finland-based Mepu division."
"While these factors negatively impacted 2011 results, we remain positive about
growth for 2012 and beyond. We are confident the start-up challenges at our
greenfield storage bin facility will have been largely addressed by the end of
2011, and as a result expect a significant contribution from this product line
in 2012. Mepu's regional market appears to have stabilized and requests for
preseason quotations have increased significantly over the prior year. Finally,
we remain enthusiastic about our international prospects, as positive
agricultural fundamentals are expected to continue to drive international sales,
as evidenced by recent successes in Ukraine and Latin America."
Summary of Results
Three Months Ended Nine Months Ended
(thousands of dollars) September 30 September 30
2011 2010 2011 2010
Trade sales (1)(2) $ 81,845 $ 86,875 $233,975 $212,891
Adjusted EBITDA (2) $ 14,828 $ 22,886 $ 44,830 $ 53,028
Net Profit $ 4,570 $ 15,159 $ 21,270 $ 31,140
Diluted profit per share $ 0.36 $ 1.12 $ 1.69 $ 2.35
Funds from operations (2) $ 13,346 $ 21,711 $ 35,997 $ 49,437
Dividends per share $ 0.60 $ 0.51 $ 1.80 $ 1.53
Payout ratio (2) 57% 29% 63% 40%
1. Sales excluding gains or losses on foreign exchange contracts.
2. See "Non-IFRS Measures".
Outlook
The fourth quarter of the fiscal year is typically a period of relatively low
demand for portable grain handling equipment as dealers begin building their
inventories subsequent to the completion of harvest. Based on current
information, dealer inventory levels and preseason order activity appears to be
consistent with historical patterns. Commercial sales in the fourth quarter are
expected to exceed the previous year due to strong domestic demand and
international sales to Russia, Ukraine and Latin America. Actual results in the
fourth quarter may be impacted by revenue recognition including the timing of
overseas shipments.
Looking ahead to 2012, demand for portable grain handling equipment in the first
and second quarters primarily relates to dealers building inventory in advance
of the harvest season. Current dealer inventory levels in both western Canada
and the U.S. appear to be at average historical levels. As 2012 progresses our
dealer networks will consider planting intentions and crop conditions when
determining the appropriate levels of inventory to carry into harvest. In the
U.S., based on early indicators including commodity prices and farmer net
income, management anticipates farmers will again plant a large number of acres
with an emphasis on corn acres which is supportive of demand for portable grain
handling equipment. In western Canada, farmer sentiment is positive for the
future period. Based on current conditions and assuming a return to more typical
weather patterns in 2012, management anticipates a return to historical sales
levels.
The rate of exchange between the Canadian and US dollars may impact results in
the fourth quarter of 2011 and in 2012 compared to prior years. Consistent with
prior years, demand in 2012, particularly in the second half, will be influenced
by crop and harvest conditions. Changes in global macro-economic factors also
may influence demand, primarily for commercial grain handling and storage
products.
Results in 2011 were negatively impacted by poor results from our Mepu division
which resulted from the carryover impact of the 2010 drought in northern Europe
and a spike in steel costs. Mepu has historically been very seasonal, with
negative EBITDA in the first and fourth quarters of the fiscal year, and this
trend is expected to continue in Q4 2011 and Q1 2012. Management expects results
at Mepu in fiscal 2012 to improve over 2011 due to improved market conditions,
largely the result of a favourable 2011 harvest, and improved steel cost
alignment.
Our commercial divisions delivered strong growth in North America and
internationally in 2011 and management expects another strong year in 2012.
Order backlogs at commercial divisions remain high as positive agricultural
macro-economic factors continue to drive demand. The geographic scope of
activity continues to expand beyond the original areas of focus of Russia,
Eastern Europe and Latin America to include increased activity in Southeast
Asia, the Middle East and Africa. Ag Growth has continued to invest in its
international development with additions to its sales team and recently opened
sales offices in Latin America and the Baltic region.
Results in 2011 were significantly impacted by start-up issues related to the
ambitious ramp up of our greenfield storage bin facility in Alberta. These
matters are currently being resolved, however less than optimal operating
efficiencies continued into the fourth quarter of 2011. Entering 2012,
management anticipates the start-up challenges will largely be resolved however
targeted gross margins may not be immediately achieved. Interest in our storage
bin product line remains strong both domestically and overseas and management
retains a very positive outlook for contributions from this plant in 2012 and
beyond. The new bins have been well received, based on feedback from domestic
and international customers.
Dividends
Ag Growth today announced the declaration of cash dividends of $0.20 per common
share for the months of December 2011, January 2012 and February 2012. The
dividends are eligible dividends for Canadian income tax purposes. Ag Growth's
current annualized cash dividend rate is $2.40 per share.
The table below sets forth the scheduled payable and record dates:
Monthly dividend Payable date Record date
December 2011 January 30, 2012 December 30, 2011
January 2012 February 28, 2012 January 31, 2012
February 2012 March 30, 2012 February 28, 2012
MD&A and Financial Statements
Ag Growth's financial statements and management's discussion and analysis for
the three and nine months ended September 30, 2011 will be available
electronically from SEDAR (www.sedar.com) or from Ag Growth's website
(www.aggrowth.com).
Conference Call
Ag Growth will hold a conference call at 1:00 p.m. EST today to discuss its
financial results. The call will begin with a short address by Gary Anderson,
President and Chief Executive Officer, followed by a question and answer period
for investment analysts, investors, and other interested parties.
To participate in the conference call, please dial 1-800-952-6845 or for local
access dial 416-695-6616. An audio replay of the call will be available for
seven days. To access the audio replay, please dial 1-800-408-3053 or for local
access dial 905-694-9451. Please quote confirmation code 4751527.
Company Profile
Ag Growth International Inc. is a leading manufacturer of portable and
stationary grain handling, storage and conditioning equipment, including augers,
belt conveyors, grain storage bins, grain handling accessories, grain aeration
equipment and grain drying systems. Ag Growth has eleven manufacturing
facilities in Canada, the United States, the United Kingdom and Finland, and its
sales, marketing, and distribution system distributes product in 48 states, nine
provinces, and internationally.
Non-IFRS Measures
References to "EBITDA" are to profit before income taxes, finance costs,
depreciation and amortization. References to "Adjusted EBITDA" are to EBITDA
before the Company's gain or loss on foreign exchange, gains or losses on the
sale of property, plant & equipment, expenses related to corporate acquisition
activity and other operating expenses. References to "trade sales" are to sales
excluding the gain on foreign exchange. References to "funds from operations"
are to cash flow from operating activities before the net change in non-cash
working capital balances related to operations and stock-based compensation,
less maintenance capital expenditures and adjusted for the gain or loss on the
sale of property, plant & equipment. Management believes that, in addition to
cash provided by (used in) operating activities, funds from operations provide a
useful supplemental measure in evaluating its performance. References to "payout
ratio" are to dividends declared as a percentage of funds from operations.
Management believes that, in addition to sales, profit or loss and cash flows
from operating, investing, and financing activities, trade sales, EBITDA,
Adjusted EBITDA and funds from operations are useful supplemental measures in
evaluating the Company's performance. Trade sales, EBITDA, Adjusted EBITDA,
funds from operations and payout ratio are not financial measures recognized by
IFRS and do not have a standardized meaning prescribed by IFRS. Management
cautions investors that trade sales, EBITDA, Adjusted EBITDA, funds from
operations and payout ratio should not replace sales or profit or loss as
indicators of performance, or cash flows from operating, investing, and
financing activities as a measure of the Company's liquidity and cash flows. Ag
Growth's method of calculating trade sales, EBITDA, Adjusted EBITDA, funds from
operations and payout ratio may differ from the methods used by other issuers.
Forward-Looking Statements
This press release contains forward-looking statements that reflect our
expectations regarding the future growth, results of operations, performance,
business prospects, and opportunities of the Company. Forward-looking statements
may contain such words as "anticipate", "believe", "continue", "could",
"expects", "intend", "plans", "will" or similar expressions suggesting future
conditions or events. In particular, the forward looking statements in this
press release include statements relating to the benefits of acquisitions, our
business and strategy, including our outlook for our financial and operating
performance through the balance of 2011 and in future years, growth in sales to
developing markets, the resolution of start-up issues at our Twister bin plant
and the future contribution of that plant to our operating and financial
performance, the impact of crop conditions in our market areas, the impact of
current economic conditions on the demand for our products, and the payment of
dividends. Such forward-looking statements reflect our current beliefs and are
based on information currently available to us, including certain key
expectations and assumptions concerning anticipated financial performance,
business prospects, strategies, product pricing, regulatory developments, tax
laws, the sufficiency of budgeted capital expenditures in carrying out planned
activities, foreign exchange rates and the cost of materials, labour and
services. Forward-looking statements involve significant risks and
uncertainties. A number of factors could cause actual results to differ
materially from results discussed in the forward-looking statements, including
changes in international, national and local business conditions, crop yields,
crop conditions, seasonality, industry cyclicality, volatility of production
costs, commodity prices, foreign exchange rates, and competition. In addition,
actual results may be materially impacted by the pace of recovery from the
global economic crisis in certain areas, including the cost and availability of
capital. These risks and uncertainties are described under "Risks and
Uncertainties" in our MD&A and in our most recently filed Annual Information
Form. We cannot assure readers that actual results will be consistent with these
forward-looking statements and we undertake no obligation to update such
statements except as expressly required by law.
AG GROWTH INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS, THIRD QUARTER 2011
Dated: November 14, 2011
This Management's Discussion and Analysis ("MD&A") should be read in conjunction
with the audited consolidated financial statements and accompanying notes of Ag
Growth International Inc. ("Ag Growth", the "Company", "we", "our" or "us") for
the year ended December 31, 2010, which were prepared in accordance with
previous Canadian generally accepted accounting principles ("CGAAP"), the
unaudited interim consolidated financial statements of the Company for the three
month period ended March 31, 2011, which were prepared in accordance with
International Financial Reporting Standards ("IFRS") and the unaudited interim
condensed consolidated financial statements of the Company for the three month
and nine month periods ended September 30, 2011, which were prepared in
accordance with IAS 34, Interim Financial Reporting. Results are reported in
Canadian dollars unless otherwise stated.
Throughout this MD&A references are made to "trade sales", "EBITDA", "adjusted
EBITDA", "gross margin", "funds from operations" and "payout ratio". A
description of these measures and their limitations are discussed below under
"Non-IFRS Measures".
This MD&A contains forward-looking statements. Please refer to the cautionary
language under the heading "Risks and Uncertainties" and "Forward-Looking
Statements" in this MD&A and in our most recently filed Annual Information Form.
SUMMARY OF RESULTS
Ag Growth achieved record sales in the nine months ended September 30, 2011, due
largely to revenues from divisions acquired in 2010 and strength in commercial
grain handling. Sales for the quarter ended September 30, 2011 decreased from
2010 due to weather related weakness in western Canada, less than optimal
growing conditions in the United States and the impact of a stronger Canadian
dollar. Adjusted EBITDA decreased primarily due to lower gross margins that
resulted from start-up challenges at the Company's Twister greenfield storage
bin plant and regional market issues at the Company's Finland based Mepu
division. These factors are discussed in more detail later in this MD&A. Net
profit and diluted profit per share for the three and nine months ended
September 30, 2011 decreased compared to the prior year due to the factors
discussed above, transaction costs of $1.7 million that related to the Airlanco
acquisition and a significant acquisition bid that was unsuccessful, and in the
three months ended September 30, 2011, the Company recorded a $1.1 million
non-cash loss (2010 - gain of $0.8 million) related to translating its U.S.
dollar denominated debt into Canadian dollars.
Three Months Ended Nine Months Ended
(thousands of dollars) September 30 September 30
2011 2010 2011 2010
Trade sales (1)(2) $ 81,845 $ 86,875 $233,975 $212,891
Adjusted EBITDA (2) $ 14,828 $ 22,886 $ 44,830 $ 53,028
Net Profit $ 4,570 $ 15,159 $ 21,270 $ 31,140
Diluted profit per share $ 0.36 $ 1.12 $ 1.69 $ 2.35
Funds from operations (2) $ 13,346 $ 21,711 $ 35,997 $ 49,437
Dividends per share $ 0.60 $ 0.51 $ 1.80 $ 1.53
Payout ratio (2) 57% 30% 63% 40%
(1) Sales excluding gains or losses on foreign exchange contracts.
(2) See "Non-IFRS Measures".
A brief summary of our operating results can be found below. A more detailed
narrative is included later in this MD&A under "Explanation of Operating
Results".
Trade Sales
-- Trade sales for the nine months ended September 30, 2011 increased
compared to 2010 primarily due to revenues from divisions acquired in
2010 and strength in commercial grain handling.
-- Trade sales for the quarter ended September 30, 2011 decreased compared
to 2010 due to:
-- A fast, dry and efficient harvest in western Canada negatively
impacted sales of portable grain handling and aeration equipment.
-- In the U.S., an unusual growing season and mixed crop conditions
decreased demand for portable grain handling and temporary storage
equipment.
-- A stronger Canadian dollar compared to the prior year lowered the
Canadian dollar equivalent of U.S. dollar denominated sales by
approximately $4.3 million.
Gross Margin
-- Divisional gross margin percentages approximated those achieved in 2010
with the exception of the Edwards/Twister and Mepu divisions.
-- Edwards/Twister - margin compression resulted from start-up
challenges at the Twister greenfield storage bin facility and a
decrease in higher margin aeration sales caused by unusual harvest
conditions in western Canada.
-- Mepu - margin pressure resulted from aggressive pricing by
competitors with excess inventories due to 2010 drought conditions,
combined with rising steel input costs that could not be passed
through in the current market environment.
Adjusted EBITDA
-- Compared to 2010, EBITDA at Edwards/Twister and Mepu for the three and
nine months ended September 30, 2011 decreased by a combined $3.7
million and $6.6 million, respectively, principally for the reasons
discussed above.
-- The impact of the stronger Canadian dollar negatively impacted EBITDA by
roughly $1.7 million and $4.2 million, respectively, in the three and
nine month periods in 2011 compared to 2010.
-- Trade sales of higher margin portable grain handling, aeration and
temporary storage equipment decreased compared to 2010, particularly in
the third quarter, for the reasons discussed earlier.
Diluted profit per share
-- In addition to the decrease in adjusted EBITDA, the comparison of profit
per share to 2010 was impacted by the following:
-- Third quarter 2011 transaction costs of $1.7 million, related to the
Airlanco acquisition and a significant acquisition bid that was
unsuccessful, decreased Q3 profit per share by $0.14/share.
-- A non-cash gain or loss results from translating the Company's U.S.
dollar denominated debt to Canadian dollars. In the third quarter of
2011 this translation resulted in a non-cash loss of $1.1 million
(2010 - gain of $0.8 million).
Payout Ratio
-- The Company's payout ratio remained relatively conservative despite the
above-noted issues impacting 2011.
-- The increase compared to 2010 is partially attributable to the increase
in the monthly dividend implemented in November 2010.
-- Third quarter 2011 transaction costs of $1.7 million related to the
Airlanco acquisition and an unsuccessful acquisition bid increased the
payout ratio from 50% to 57%.
CORPORATE OVERVIEW
We are a manufacturer of agricultural equipment with a focus on grain handling,
storage and conditioning products. Our business is affected by regional and
global trends in grain volumes, on-farm and commercial grain storage and
handling practices, and crop prices. Our business is seasonal, with higher sales
occurring in the second and third calendar quarters compared with the first and
fourth quarters.
We sell portable versions of our products primarily to individual farmers,
mainly through a network of independent dealers and distributors. We sell
larger, commercial (sometimes referred to as stationary) versions of our
products primarily to corporate customers, mainly by bidding for contracts.
We manufacture in Canada, the US and Europe and we sell products globally, with
most of our sales in the US. The following table sets forth our geographic
concentration of sales for the first nine months of 2011 compared with a year
earlier.
Trade Sales (1)by Geographic Region
Nine Months Ended
(thousands of dollars) September 30
2011 2010
Canada $ 52,302 $ 47,060
US 141,172 136,534
Overseas 40,501 29,297
Total $233,975 $212,891
(1) Sales excluding gains or losses on foreign exchange contracts (See "Non-
IFRS Measures")
Our business is sensitive to fluctuations in the value of the Canadian and US
dollars as a result of our exports from Canada to the US and as a result of
earnings derived from our US based divisions. Fluctuations in currency impact
our results even though we engage in currency hedging with the objective of
partially mitigating our exposure to these fluctuations.
Our business is also sensitive to fluctuations in input costs, especially steel,
a principal raw material in our products. Steel represented approximately 29% of
production costs in fiscal 2010. Short-term fluctuations in the price of steel
impact our financial results even though we strive to partially mitigate our
exposure to such fluctuations through the use of long-term purchase contracts,
bidding commercial projects based on current input costs and passing input costs
on to customers through sales price increases.
Acquisitions in Fiscal 2010
The inclusion of the assets, liabilities and operating results of a number of
acquisitions completed in fiscal 2010 significantly impact comparisons with the
prior year. As such, these acquisitions are summarized briefly below.
Mepu - Ag Growth acquired 100% of the outstanding shares of Mepu Oy ("Mepu") on
April 29, 2010, for cash consideration of $11.3 million, plus costs related to
the acquisition of $0.6 million and the assumption of a $1.0 million operating
line. The acquisition was funded from cash on hand. Mepu is a Finland based
manufacturer of grain drying systems and other agricultural equipment. The
acquisition of Mepu provided the Company with a complementary product line,
distribution in a region where the Company previously had only limited
representation and a corporate footprint near the growth markets of Russia and
Eastern Europe. Mepu had average sales and EBITDA of approximately 14 million
Euros (CAD $19 million) and 1.5 million Euros (CAD $2 million), respectively, in
the three fiscal years prior to acquisition. The nature of Mepu's business is
very seasonal with a heavy weighting towards the second and third quarters.
Franklin Enterprises - Ag Growth acquired the assets of Winnipeg-based Franklin
Enterprises Ltd ("Franklin") effective October 1, 2010 for cash consideration of
$7.1 million, plus costs related to the acquisition of $0.4 million and a
working capital adjustment of $1.7 million. The acquisition was funded from cash
on hand. Franklin enhances Ag Growth's manufacturing capabilities and can
increase production capacity in periods of high in-season demand. Franklin has
played an integral role in the development of the new storage bin product line.
Franklin's custom manufacturing business is expected to generate monthly sales
of approximately $1 million and to roughly break-even on an EBITDA basis.
Tramco - Ag Growth acquired 100% of the outstanding shares of Wichita,
Kansas-based Tramco, Inc. ("Tramco"), on December 20, 2010, for cash
consideration of $21.5 million, less a working capital adjustment of $1.3
million. Costs related to the acquisition were $0.6 million. The acquisition was
funded from cash on hand. Tramco is a manufacturer of heavy duty chain conveyors
and related handling products, primarily for the grain processing sector. Tramco
is an industry leader with a premier brand name and strong market share and as
such provides the Company with an excellent entry point into a new segment of
the food supply chain. Tramco had average sales and EBITDA of approximately $30
million and $4 million, respectively, in the two fiscal years prior to
acquisition. Demand in the processing sector in 2011 remains strong,
particularly in overseas markets. Tramco manufactures in Wichita, Kansas, and in
Hull, England. It has a sales office in the Netherlands.
Acquisitions in Fiscal 2011
Airlanco - On October 3, 2011, the Company acquired the operating assets of
Airlanco, a manufacturer of aeration products and filtration systems that are
sold primarily into the commercial grain handling and processing sectors. The
purchase price of USD $11.0 million was financed primarily from Ag Growth's
acquisition line of credit while costs related to the acquisition of $0.2
million and a working capital adjustment will be financed by cash on hand. The
purchase price represents a valuation of approximately five times Airlanco's
normalized fiscal 2010 EBITDA. Airlanco is located in Falls City, Nebraska and
has traditionally served customers headquartered or located in North America.
The Company had sales of approximately $11 million in 2010, operating out of an
80,000 square foot facility with 65 employees.
OUTLOOK
The fourth quarter of the fiscal year is typically a period of relatively low
demand for portable grain handling equipment as dealers begin building their
inventories subsequent to the completion of harvest. Based on current
information, dealer inventory levels and preseason order activity appears to be
consistent with historical patterns. Commercial sales in the fourth quarter are
expected to exceed the previous year due to strong domestic demand and
international sales to Russia, Ukraine and Latin America. Actual results in the
fourth quarter may be impacted by revenue recognition including the timing of
overseas shipments.
Looking ahead to 2012, demand for portable grain handling equipment in the first
and second quarters primarily relates to dealers building inventory in advance
of the harvest season. Current dealer inventory levels in both western Canada
and the U.S. appear to be at average historical levels. As 2012 progresses our
dealer networks will consider planting intentions and crop conditions when
determining the appropriate levels of inventory to carry into harvest. In the
U.S., based on early indicators including commodity prices and farmer net
income, management anticipates farmers will again plant a large number of acres
with an emphasis on corn acres which is supportive of demand for portable grain
handling equipment. In western Canada, farmer sentiment is positive for the
future period. Based on current conditions and assuming a return to more typical
weather patterns in 2012, management anticipates a return to historical sales
levels.
The rate of exchange between the Canadian and US dollars may impact results in
the fourth quarter of 2011 and in 2012 compared to prior years. Consistent with
prior years, demand in 2012, particularly in the second half, will be influenced
by crop and harvest conditions. Changes in global macro-economic factors also
may influence demand, primarily for commercial grain handling and storage
products.
Results in 2011 were negatively impacted by poor results from our Mepu division
which resulted from the carryover impact of the 2010 drought in northern Europe
and a spike in steel costs. Mepu has historically been very seasonal, with
negative EBITDA in the first and fourth quarters of the fiscal year, and this
trend is expected to continue in Q4 2011 and Q1 2012. Management expects results
at Mepu in 2012 to improve over 2011 due to improved market conditions, largely
the result of favourable 2011 harvest conditions, and improved steel cost
alignment.
Our commercial divisions delivered strong growth in North America and
internationally in 2011 and management expects another strong year in 2012.
Order backlogs at commercial divisions remain high as positive agricultural
macro-economic factors continue to drive demand. The geographic scope of
activity continues to expand beyond the original areas of focus of Russia,
Eastern Europe and Latin America to include increased activity in Southeast
Asia, the Middle East and Africa. Ag Growth has continued to invest in its
international development with additions to its international sales team and
recently opened sales offices in Latin America and the Baltic region.
Results in 2011 were significantly impacted by start-up issues related to the
ambitious ramp up of our greenfield storage bin facility in Alberta. These
matters are currently being resolved, however less than optimal operating
efficiencies continued into the fourth quarter of 2011. Entering 2012,
management anticipates the start-up challenges should be resolved however
targeted gross margins may not be immediately achieved. Interest in our storage
bin product line remains strong both domestically and overseas and management
retains a very positive outlook for contributions from this plant in 2012 and
beyond. The new bins have been well received by our domestic and international
customers.
DETAILED OPERATING RESULTS
Three Months Ended Nine Months Ended
(thousands of dollars) September 30 September 30
2011 2010 2011 2010
Trade sales (1) $ 81,845 $ 86,875 $233,975 $212,891
Gain on foreign exchange (2) 1,496 1,831 4,542 4,970
----------------------------------------
Sales 83,341 88,706 238,517 217,861
Cost of inventories 55,008 52,654 153,717 128,566
Depreciation & amortization 1,417 921 4,121 2,441
----------------------------------------
Total cost of sales 56,425 53,575 157,838 131,007
----------------------------------------
Gross profit 26,916 35,131 80,679 86,854
----------------------------------------
General and administrative 12,055 11,459 35,765 31,892
Transaction expenses 1,721 40 1,721 733
Depreciation & amortization 800 860 2,616 2,492
Other operating expenses 19 (63) 92 (240)
----------------------------------------
Operating Profit 12,321 22,835 40,485 51,977
Finance costs 3,152 3,110 9,384 9,346
Finance loss (income) 1,857 (991) 870 (865)
----------------------------------------
Profit before income taxes 7,312 20,716 30,231 43,496
Current income taxes 1,155 2,108 4,029 3,829
Deferred income taxes 1,587 3,449 4,932 8,527
----------------------------------------
Profit for the period $ 4,570 $ 15,159 $ 21,270 $ 31,140
----------------------------------------
----------------------------------------
Net profit per share
Basic $ 0.37 $ 1.23 $ 1.71 $ 2.44
----------------------------------------
----------------------------------------
Diluted $ 0.36 $ 1.12 $ 1.69 $ 2.35
----------------------------------------
----------------------------------------
(1) See "Non-IFRS Measures".
(2) Primarily related to gains on foreign exchange contracts.
EBITDA RECONCILIATION
(thousands of dollars) Three Months Ended Nine Months Ended
September 30 September 30
2011 2010 2011 2010
Profit before income taxes $ 7,312 $ 20,716 $ 30,231 $ 43,496
Finance costs 3,152 3,110 9,384 9,346
Amortization in cost of sales 1,417 921 4,120 2,441
Amortization in G&A expenses 800 860 2,616 2,492
----------------------------------------
EBITDA (1) 12,681 25,607 46,351 57,775
Transaction costs 1,721 40 1,721 733
Gain on foreign exchange in sales(2) (1,496) (1,831) (4,542) (4,970)
Loss (gain) on foreign exchange in
finance income 1,865 (770) 1,107 (420)
Gain on sale of property, plant &
equipment 65 (40) 67 3
Other operating expense (8) (120) 126 (93)
----------------------------------------
Adjusted EBITDA (1) $ 14,828 $ 22,886 $ 44,830 $ 53,028
----------------------------------------
----------------------------------------
(1) See "Non-IFRS Measures".
(2) Primarily related to gains on foreign exchange contracts.
ASSETS AND LIABILITIES
(thousands of dollars) September 30 September 30
2011 2010
Total assets $ 396,482 $ 391,587
Total liabilities $ 188,259 $ 174,924
EXPLANATION OF OPERATING RESULTS
Trade sales
Three Months Ended Nine Months Ended
(thousands of dollars) September 30 September 30
2011 2010 2011 2010
Trade sales $ 81,845 $ 86,875 $233,975 $212,891
Trade sales excluding
acquisitions(1) $ 66,496 $ 81,700 $189,163 $204,312
(1) Trade sales excluding acquisitions completed in 2010.
Trade sales in 2011 benefited from continued strength in commercial grain
handling, increased storage bin sales and revenues from divisions acquired in
2010. Excluding acquisitions, trade sales for the three and nine month periods
ending September 30, 2011 decreased $15.2 million and $15.1 million,
respectively. The decrease in sales excluding acquisitions is primarily the
result of the following:
-- Canada - An exceptionally fast, dry and efficient harvest in western
Canada resulted in a shortened in-season selling period, minimal wear on
grain augers and reduced demand for aeration equipment. Compared to the
prior year, sales of portable grain handling and aeration equipment in
the three and nine month periods ended September 30, 2011 decreased $2.2
million and $4.8 million, respectively.
-- United States - A late planting season followed by extreme heat stress
over the summer resulted in lower crop yield expectations, reduced crop
production estimates and a reduction in demand for portable grain
handling and temporary storage equipment.
-- Foreign exchange - a stronger Canadian dollar negatively impacts the
reported amount of sales denominated in U.S. dollars. If the Canadian/US
exchange rates in 2011 had been the same as 2010, sales excluding
acquisitions for the three and nine months ended September 30, 2011
would have increased $4.3 million and $10.1 million, respectively.
-- International trade sales in the nine months ended September 30, 2011
were $40.5 million, up 38% from a year earlier, mainly due to our 2010
acquisitions of Mepu and Tramco. Excluding acquisitions, international
sales for the three and nine month periods in 2011 were $6.2 million and
$17.3 million, representing decreases compared to 2010 of $4.3 million
and $3.4 million, respectively. The Company's international sales order
backlog exceeds that of the prior year and quoting activity remains
robust, particularly in Eastern Europe and Latin America.
-- Comparative figures for 2010 reflect an IFRS adjustment related to
the timing of revenue recognition that increased international sales
for the three and nine months ended September 30, 2010 by $3.7
million and $5.7 million, respectively.
Gross Profit and Gross Margin
Three Months Ended Nine Months Ended
(thousands of dollars) September 30 September 30
2011 2010 2011 2010
Trade sales $ 81,845 $ 86,875 $233,975 $212,891
Cost of inventories (1) 55,008 52,654 153,717 128,566
----------------------------------------
Gross Margin (1) $ 26,837 $ 34,221 $ 80,258 $ 84,325
----------------------------------------
----------------------------------------
Gross Margin (1) (as a % of trade
sales) 32.8% 39.4% 34.3% 39.6%
Gross Margin (2) (excluding 2010
acquisitions) 35.2% 40.3% 37.3% 39.8%
(1) Excluding depreciation and amortization included in cost of sales.
(2) Gross margin without taking into effect the divisions acquired in 2010
so as to provide a comparison based only on the results of divisions
that were operating in both periods.
As expected the consolidated gross margin was negatively impacted by the
inclusion of Mepu, Franklin and Tramco as the gross margin percentages of these
newly acquired businesses are lower than Ag Growth's historical gross margin
percentage. Gross margin also declined due to significant start up issues at the
Company`s greenfield storage bin facility. To provide an indication of margin
performance on the remainder of the Company's businesses, gross margin has been
recalculated below to exclude 2010 acquisitions and Edwards:
Three Months Ended Nine Months Ended
September 30 September 30
2011 2010 2011 2010
Gross margin excluding acquisitions
and Edwards 40.2% 41.3% 40.6% 41.0%
Gross margin percentages in 2011 have also been adversely impacted by the strong
Canadian dollar and the higher cost of steel inputs. The factors noted above
were partially offset by the continued benefits of high throughput and
production efficiencies that resulted from the implementation of lean
manufacturing practices at several of the Company's divisions.
General and Administrative Expenses
(thousands of dollars) Three Months Ended Nine Months Ended
September 30 September 30
2011 2010 2011 2010
G&A (1) $ 12,055 $ 11,459 $ 35,765 $ 31,892
G&A (as a % of trade sales) 14.7% 13.2% 15.3% 15.0%
G&A excluding acquisitions $ 9,710 $ 10,918 $ 28,491 $ 30,969
(1) G&A excluding depreciation, amortization and transaction costs.
G&A expenses increased compared to 2011 largely due to acquisitions made in
2010. G&A expressed as a percentage of trade sales increased in the third
quarter of 2011 compared to the prior year primarily due to lower sales, and was
relatively consistent with 2010 for the nine month period. Excluding
acquisitions, compared to the same periods in 2010, G&A expenses decreased due
to lower stock-based compensation that resulted from a reduced number of share
awards outstanding and a lower expense related to the LTIP, offset by increased
professional fees which primarily resulted from expenditures of $0.6 million
related the Company's conversion to IFRS.
EBITDA and Adjusted EBITDA
(thousands of dollars) Three Months Ended Nine Months Ended
September 30 September 30
2011 2010 2011 2010
EBITDA (1) $ 12,497 $ 25,607 $ 46,168 $ 57,775
Adjusted EBITDA (1) $ 14,828 $ 22,886 $ 44,830 $ 53,028
(1) See the EBITDA reconciliation table above and "Non-IFRS Measures" later
in this MD&A.
EBITDA in the third quarter and nine-month period ended September 30, 2011 was
impacted by transaction costs related to the acquisition of Airlanco and other
M&A activity totalling $1.7 million. The decline in EBITDA and Adjusted EBITDA
in 2011 compared with a year earlier is largely due to the stronger Canadian
dollar, start-up challenges at the Company's new storage bin facility, weather
and crop related weakness in western Canada and the U.S. and the factors
affecting Mepu, as discussed under "Explanation of Operating results".
Finance Costs
The Company's bank indebtedness as at September 30, 2011 was $nil (2010 - $nil)
and its outstanding long-term debt and obligations under capital leases
including the current portion was $26.2 million (2010 - $25.5 million).
Long-term debt at September 30, 2011 is comprised of US $25.0 million aggregate
principal amount of non-amortizing secured notes that bear interest at 6.80% and
mature October 29, 2016 and $0.1 million of 0% GMAC financing, net of all
deferred financing costs of $0.4 million. The Company is also party to a credit
facility with three Canadian chartered banks that includes CAD $10.0 million and
US $2.0 million available for working capital purposes and provides for
non-amortizing long-term debt of up to CAD $38.0 million and US $20.5 million.
The facilities bear interest at rates of prime plus 0.50 % to prime plus 1.50%
based on performance calculations and matures on October 29, 2012. See
"Financial Instruments".
Obligations under capital lease of $0.2 million include a number of equipment
leases with an average interest rate of 6.5%. The lease end dates are in 2011
and 2012.
Finance costs for the three and nine month periods ended September 30, 2011 were
$3.2 million and $9.4 million, respectively (2010 - $3.1 million and $9.3
million). At September 30, 2011 the Company had outstanding $114.9 million
aggregate principal amount of convertible unsecured subordinated debentures
(2010 - $115.0 million). The Debentures bear interest at an annual rate of 7.0%
and mature December 31, 2014. See "Capital Resources".
In addition to interest on the instruments noted above, finance costs include
non-cash interest related to debenture accretion, the amortization of deferred
finance costs, stand-by fees and other sundry cash interest.
Finance Income
Finance income is comprised of interest earned on the Company's surplus cash
balances and gains or losses on translation of the Company's U.S. dollar
denominated long-term debt.
Depreciation and amortization
Under IFRS the depreciation of property, plant and equipment and the
amortization of intangible assets are categorized on the income statement in
accordance with the function to which the underlying asset is related.
Three Months Ended Nine Months Ended
(thousands of dollars) September 30 September 30
2011 2010 2011 2010
Depreciation in cost of sales $ 1,254 $ 717 $ 3,589 $ 2074
Depreciation in G&A 105 99 350 285
----------------------------------------
Total Depreciation $ 1,359 $ 816 $ 3,939 $ 2,359
----------------------------------------
----------------------------------------
Three Months Ended Nine Months Ended
(thousands of dollars) September 30 September 30
2011 2011 2011 2010
Amortization in cost of sales $ 163 $ 204 $ 532 $ 367
Amortization in G&A 695 761 2,266 2,207
----------------------------------------
Total Amortization $ 858 $ 965 $ 2,798 $ 2,574
----------------------------------------
----------------------------------------
Current income tax expense
For the three and nine months ended September 30, 2011, the Company recorded
current tax expense of $1.2 million and $4.0 million, respectively (2010 - $2.1
million and $3.8 million). Current tax expense relates primarily to certain
subsidiary corporations of Ag Growth, including its U.S. and Finland based
divisions.
Deferred income tax expense
For the three and nine months ended September 30, 2011, the Company recorded
deferred tax expense of $1.6 million and $4.9 million, respectively (2010 - $3.4
million and $8.5 million). The deferred tax expense in 2011 relates to the
utilization of deferred tax assets plus a decrease in deferred tax liabilities
that related to the application of corporate tax rates to reversals of temporary
differences between the accounting and tax treatment of depreciable assets,
intangibles, reserves, deferred compensation plans and deferred financing fees.
Effective tax rate
(thousands of dollars) Three Months Ended Nine Months Ended
September 30 September 30
Current tax expense $ 1,155 $ 2,108 $ 4,029 $ 3,829
Deferred tax expense 1,587 3,449 4,932 8,527
Total tax $ 2,742 $ 5,557 $ 8,961 $ 12,356
Profit before taxes $ 7,312 $ 20,716 $ 30,231 $ 43,496
Total tax % 38% 27% 30% 28%
The effective tax rate in the third quarter of 2011 exceeded that of year ago
largely due to the impact of non-cash foreign exchange translation.
Profit and profit per share
For the three and nine months ended September 30, 2011, the Company reported net
profit of $4.6 million and $21.3 million, respectively (2010 - $15.2 million and
$31.1 million), basic net profit per share of $0.37 and $1.71 (2010 - $1.23 and
$2.44), and fully diluted net profit per share of $0.36 and $1.69 (2010 - $1.12
and $2.35). Profit per share for the three and nine month periods ended
September 30, 2011 decreased compared to the prior year primarily due to lower
Adjusted EBITDA (see "Explanation of Operating Results") and transaction costs
of $1.7 million that related to the Airlanco acquisition and a significant
acquisition bid that was unsuccessful. In addition, for the quarter ended
September 30, 2011, the Company recorded a non-cash loss related to translating
its U.S. dollar denominated debt into Canadian dollars of $1.1 million (2010 -
gain of $0.8 million).
QUARTERLY FINANCIAL INFORMATION (thousands of dollars):
2011
Average
USD/CAD Basic Diluted
Exchange Profit Profit profit
Rate Sales (Loss) per Share per Share
Q1 $0.99 $67,065 $4,706 $0.38 $0.38
Q2 $0.96 $88,111 $11,994 $0.97 $0.91
Q3 $0.97 $83,341 $4,570 $0.37 $0.36
Q4
Fiscal 2011 $0.97 $238,517 $21,270 $1.71 $1.69
2010 (1)
Average
USD/CAD Basic Diluted
Exchange Profit Profit Profit
Rate Sales (Loss) per Share per Share
Q1 $1.05 $52,430 $4,351 $0.33 $0.33
Q2 $1.03 76,727 11,626 $0.90 $0.85
Q3 $1.05 88,703 15,164 $1.23 $1.12
Q4 $1.02 50,970 (817) $(0.07) $(0.07)
Fiscal 2010 $1.04 $268,830 $30,324 $2.39 $2.36
2009 (1)
Average
USD/CAD Basic Diluted
Exchange Profit Profit Profit
Rate Sales (Loss) per Share per Share
Q1 $1.25 $55,289 $10,127 $0.79 $0.79
Q2 $1.18 66,840 16,431 $1.29 1.27
Q3 $1.11 68,316 15,126 $1.17 1.16
Q4 $1.07 46,849 3,619 $0.28 0.27
Fiscal 2009 $1.15 $237,294 $45,303 $3.53 $3.45
(1) Quarterly results for 2010 have been restated in accordance with IFRS.
The Company was not required to apply IFRS to periods prior to 2010 and
accordingly 2009 comparative data is presented in accordance with CGAAP.
Interim period sales and profit historically reflect seasonality. The third
quarter is typically the strongest primarily due to the timing of construction
of commercial projects and high in-season demand at the farm level. Due to the
seasonality of Ag Growth's working capital movements, cash provided by
operations will typically be highest in the fourth quarter.
The following factors impact the comparison between periods in the table
above:
-- Sales, gain (loss) on foreign exchange, profit, and profit per share in
all periods are significantly impacted by the rate of exchange between
the Canadian and U.S. dollars.
-- Sales, net profit and profit per share are significantly impacted by the
acquisitions of Mepu (April 29, 2010), Franklin (October 1, 2010) and
Tramco (December 20, 2010).
-- Profit and profit per share in the first and second quarters of 2009
benefited from non-recurring deferred income tax recoveries related to
Ag Growth's conversion to a corporation (the "Conversion") and a change
in effective tax rates.
-- Profit and profit per share subsequent to October 27, 2009 are impacted
by interest expense related to the Debentures (see "Capital Resources").
CASH FLOW AND LIQUIDITY
Three Months Ended Nine Months Ended
(thousands of dollars) September 30 September 30
2011 2010 2011 2010
Profit before income taxes for the
period $ 7,312 $ 20,716 $ 30,231 $ 43,496
Add charges (deduct credits) to
operations not requiring a current
cash payment:
Depreciation and amortization 2,217 1,781 6,737 4,933
Translation loss (gain) on foreign
exchange 5,232 (331) 3,156 400
Non-cash interest expense 611 569 1,800 1,696
Stock based compensation 345 2,001 1,463 4,696
Loss (gain) on sale of assets 65 (40) 67 3
----------------------------------------
15,782 24,696 43,454 55,224
----------------------------------------
Net change in non-cash working
capital balances related to
operations:
Accounts receivable 809 (1,829) (21,730) (27,341)
Inventory (2,793) 5,038 (12,732) (163)
Prepaid expenses and other assets 528 322 2,927 (22)
Accounts payable and accruals (62) (8) 4,890 5,541
Customer deposits (652) (1,468) 241 (2,728)
Provisions 3 369 (10) 710
----------------------------------------
(2,167) 2,424 (26,414) (24,003)
----------------------------------------
Settlement of SAIP obligation 0 0 (1,998) 0
Income tax paid (1,818) (2,255) (4,707) (2,935)
----------------------------------------
Cash provided by operations $ 11,797 $ 24,865 $ 10,335 $ 28,286
----------------------------------------
----------------------------------------
For the three and nine months ended September 30, 2011, cash provided by
operations was $11.8 million and $10.3 million, respectively (2010 - $24.9
million and $28.3 million). The decrease in cash generated from operations
compared to 2010 is the result of a decrease in profit, inventory purchases
related to the Company's new storage bin operation and higher than expected
levels of inventory at Edwards/Twister and Mepu.
Working Capital Requirements
Interim period working capital requirements typically reflect the seasonality of
the business. Ag Growth's collections of accounts receivable are weighted
towards the third and fourth quarters. This collection pattern, combined with
historically high sales in the third quarter that result from seasonality,
typically lead to accounts receivable levels increasing throughout the year and
peaking in the third quarter. Inventory levels typically increase in the first
and second quarters and then begin to decline in the third or fourth quarter as
sales levels exceed production. As a result of these working capital movements,
historically, Ag Growth begins to draw on its operating lines in the first or
second quarter. The operating line balance typically peaks in the second or
third quarter and normally begins to decline later in the third quarter as
collections of accounts receivable increase. Ag Growth has typically fully
repaid its operating line balance by early in the fourth quarter.
Working capital requirements in 2011 have thus far been generally consistent
with historical patterns, however due to a larger than typical opening cash
balance the Company has not drawn on its operating lines to the same extent as
in prior years.
In addition, the Company's inventory levels increased in three months ending
September 30, 2011, as lower than anticipated sales (see "Explanation of
Operating Results") and the timing of shipment of certain international orders
resulted in less drawdown of inventory compared to historical patterns.
Acquisitions completed in 2010 are having a minor effect on seasonal working
capital requirements in 2011 as sales and EBITDA at Mepu and Tramco are weighted
to the second and third quarters.
Capital Expenditures
Ag Growth had maintenance capital expenditures of $0.6 million and $2.7 million
in the three and nine months ended September 30, 2011 (2010 - $0.8 and $2.8),
representing 0.7% and 1.1% of trade sales, respectively (2010 - 0.9% and 1.3%).
Maintenance capital expenditures in 2011 relate primarily to purchases of
manufacturing equipment, trucks, trailers, and forklifts and were funded through
cash on hand, cash from operations and bank indebtedness. Maintenance capital
expenditures in 2011 were expected to increase slightly over 2010 levels,
largely due to the addition of three new divisions in 2010, and were funded
through cash on hand, cash from operations and bank indebtedness.
Ag Growth defines maintenance capital expenditures as cash outlays required to
maintain plant and equipment at current operating capacity and efficiency
levels. Non-maintenance capital expenditures encompass other investments,
including cash outlays required to increase operating capacity or improve
operating efficiency. Ag Growth had non-maintenance capital expenditures in the
three and nine months ended September 30, 2011 of $1.0 million and $4.8 million,
respectively (2010 - $5.8 million and $16.6 million). As expected,
non-maintenance capital expenditures in 2011 have decreased significantly from
2010 largely due to the significant investment in 2010 related to the Company's
greenfield storage bin facility. Non-maintenance capital expenditures in 2011
were financed through cash on hand, cash from operations and bank indebtedness.
The following capital expenditures were classified as non-maintenance in 2011:
i. Grain storage bin capacity - in 2010 the Company invested $15.9 million
towards a grain storage bin manufacturing facility and automated
storage bin production equipment. The investment is expected to allow
the Company to capitalize on international sales opportunities and to
increase sales in North America. In the three and nine months ended
September 30, 2011, the Company invested $0.1 million and $3.2 million,
respectively, to complete the project. No additional significant
expenditures are anticipated.
ii. Manufacturing equipment - in the three and nine months ended September
30, 2011, the Company invested $0.3 million and $0.1 million,
respectively, to upgrade certain equipment to allow for increased
capacity.
iii. Union Iron - in the three and nine months ended September 30, 2011, the
Company invested $0.5 million and $0.6 million, respectively, to
upgrade the paint line and shipping/receiving area at Union Iron to
provide for increased capacity and improved manufacturing efficiencies.
Cash Balance
For the three months ended September 30, 2011 the Company's cash balance
increased $2.4 million (2010 - decrease $7.2 million) and for the nine month
period ended September 30, 2011, the Company's cash balance decreased $32.6
million (2010 - $61.5 million). The decrease in the cash balance in 2010 and
2011 resulted primarily from payments related to acquisitions, strategic capital
expenditures, seasonality, and a normal course issuer bid in 2010.
CONTRACTUAL OBLIGATIONS (thousands of dollars)
Total 2011 2012 2013 2014 2015+
Debentures $114,885 $ 0 $ 0 $ 0 $114,885 $ 0
Long-term debt 25,994 4 17 0 0 25,973
Capital leases 178 10 168 0 0 0
Operating leases 1,884 236 548 343 275 482
------------------------------------------------------------
Total
obligations $142,941 $ 250 $ 733 $ 343 $115,160 $ 26,455
Debentures relate to the aggregate principal amount of debentures issued by the
Company in October 2009 (see "Convertible Debentures"). Long-term debt at June
30, 2011 is comprised of US $25.0 million aggregate principal amount of secured
notes issued through a note purchase and private shelf agreement, net of
deferred financing costs, and GMAC financed vehicle loans. Capital lease
obligations relate to a number of leases for equipment. The operating leases
relate primarily to vehicle, equipment, warehousing, and facility leases and
were entered into in the normal course of business.
As at November 14, 2011, the Company had no outstanding commitments in relation
to capital expenditures for building and equipment.
CAPITAL RESOURCES
Cash
The Company had a cash balance of $2.4 million as at September 30, 2011 (2010 -
$47.6 million). The Company's cash balance at September 30, 2010 was higher than
is typical because it included a portion of the net proceeds received from an
October 2009 debenture offering (see "Convertible Debentures"). The remainder of
the debenture proceeds was deployed later in fiscal 2010.
Long-term debt
On October 29, 2009, the Company authorized the issue and sale of US $25.0
million aggregate principal amount of secured notes through a note purchase and
private shelf agreement. The notes are non-amortizing and bear interest at 6.80%
and mature October 29, 2016. The agreement also provides for a possible future
issuance and sale of notes of up to an additional US $75.0 million aggregate
principal amount, with maturity dates no longer than ten years from the date of
issuance. Ag Growth is subject to certain financial covenants, including a
maximum leverage ratio and a minimum debt service ratio. The Company is in
compliance with all financial covenants.
On October 29, 2009, the Company also entered a credit facility with three
Canadian chartered banks that includes CAD $10.0 million and US $2.0 million
available for working capital purposes, and provides for non-amortizing
long-term debt of up to CAD $38.0 million and US $20.5 million. No amounts were
drawn under these facilities as at September 30, 2011. The facilities bear
interest at rates of prime plus 0.50 % to prime plus 1.50% based on performance
calculations and matures on October 29, 2012. Ag Growth is subject to certain
financial covenants, including a maximum leverage ratio and a minimum debt
service ratio, and is in compliance with all financial covenants.
On October 3, 2011, the Company increased its non-amortizing long-term debt by
U.S. $10.5 million to finance its acquisition of Airlanco. See "Acquisitions in
Fiscal 2011".
Obligation under capital leases
Upon the acquisition of Franklin the Company assumed a number of capital leases
for manufacturing equipment. The leases bear interest at rates averaging 6.5%
and mature in 2011 and 2012. The Company expects to exercise the buyout option
upon maturity of the equipment leases.
Convertible Debentures
In the fourth quarter of 2009, the Company issued $115 million aggregate
principal amount of convertible unsecured subordinated debentures (the
"Debentures") at a price of $1,000 per Debenture. The Debentures bear interest
at an annual rate of 7.0% payable semi-annually on June 30 and December 31. Each
Debenture is convertible into common shares of the Company at the option of the
holder at a conversion price of $44.98 per common share. The maturity date of
the Debentures is December 31, 2014.
Net proceeds of the offering of approximately $109.9 million were used by Ag
Growth for general corporate purposes and to repay existing indebtedness of
approximately US $37.6 million and CAD $11.9 million under the Company's credit
facility. In 2010, the Company used proceeds from the Debentures to fund the
acquisitions of Mepu, Franklin and Tramco (see "Acquisitions in Fiscal 2010")
and to finance the expansion of the Company's storage bin product line (see
"capital expenditures").
The Debentures are not redeemable before December 31, 2012. On and after
December 31, 2012 and prior to December 31, 2013, the Debentures may be
redeemed, in whole or in part, at the option of the Company at a price equal to
their principal amount plus accrued and unpaid interest, provided that the
volume weighted average trading price of the common shares during the 20
consecutive trading days ending on the fifth trading day preceding the date on
which the notice of redemption is given is not less than 125% of the conversion
price. On and after December 31, 2013, the Debentures may be redeemed, in whole
or in part, at the option of the Company at a price equal to their principal
amount plus accrued and unpaid interest.
On redemption or at maturity, the Company may, at its option, subject to
regulatory approval and provided that no event of default has occurred, elect to
satisfy its obligation to pay the principal amount of the Debentures, in whole
or in part, by issuing and delivering for each $100 due that number of freely
tradeable common shares obtained by dividing $100 by 95% of the volume weighted
average trading price of the common shares on the Toronto Stock Exchange ("TSX")
for the 20 consecutive trading days ending on the fifth trading day preceding
the date fixed for redemption or the maturity date, as the case may be. Any
accrued and unpaid interest thereon will be paid in cash. The Company may also
elect, subject to any required regulatory approval and provided that no event of
default has occurred, to satisfy all or part of its obligation to pay interest
on the Debentures by delivering sufficient freely tradeable common shares to
satisfy its interest obligation.
The Debentures trade on the TSX under the symbol AFN.DB.
COMMON SHARES
The following common shares were issued and outstanding and participated pro
rata in dividends during the periods indicated:
# Common
Shares
December 31, 2009 13,078,040
Normal course issuer bid (674,600)
Share award incentive plan issuance 140,000
---------------
December 31, 2010 12,543,440
Conversion of subordinated debentures 2,556
---------------
September 30, 2011 and November 14, 2011 12,545,996
---------------
---------------
On December 10, 2009, Ag Growth commenced a normal course issuer bid for up to
1,272,423 common shares, representing 10% of the Company's public float at that
time. In the year ended December 31, 2010, the Company purchased 674,600 common
shares for $23.4 million under the normal course issuer bid. The normal course
issuer bid terminated on December 9, 2010.
During the nine month period ended September 30, 2011, 2,556 common shares were
issued on conversion of $115,000 principal amount of Debentures. Ag Growth has
reserved 2,554,136 common shares for issuance upon conversion of the Debentures
as at September 30, 2011.
Ag Growth has granted 220,000 share awards under its share award incentive plan.
Effective January 1, 2010, a total of 73,333 awards vested and the equivalent
number of common shares were issued to the participants. On October 15, 2010, an
additional 66,667 share awards vested and the equivalent number of common shares
were issued to the participant. Effective January 1, 2011, 40,000 share awards
vested however no common shares were issued as the participants were compensated
in cash rather than common shares. As at November 14, 2011, 40,000 share awards
remain outstanding and subject to vesting and payment of the exercise price are
each exercisable for one common share.
The administrator of the LTIP has acquired 317,304 common shares to satisfy its
obligations with respect to awards under the LTIP for fiscal 2007, 2008, 2009
and 2010. These common shares are not cancelled but rather are held by the
administrator until such time as they vest to the LTIP participants. As at
September 30, 2011, a total of 182,928 common shares related to the LTIP had
vested to the participants.
A total of 20,741 deferred grants of common shares are outstanding under the
Company's Director's Deferred Compensation Plan.
Ag Growth's common shares trade on the TSX under the symbol AFN.
DIVIDENDS
In the three and nine month periods ended September 30, 2011, Ag Growth declared
dividends to security holders of $7.5 million and $22.6 million, respectively
(2010 - $6.4 million and $19.7 million). Ag Growth increased its dividend rate
from $0.17 per common share to $0.20 per common share in November 2010. Ag
Growth's policy is to pay monthly dividends. The Company's Board of Directors
reviews financial performance and other factors when assessing dividend levels.
An adjustment to dividend levels may be made at such time as the Board
determines an adjustment to be in the best interest of the Company and its
shareholders.
FUNDS FROM OPERATIONS
Funds from operations, defined under "Non-IFRS Measures" is cash flow from
operating activities before the net change in non-cash working capital balances
related to operations and stock-based compensation, less maintenance capital
expenditures and adjusted for the gain or loss on the sale of property, plant &
equipment. The objective of presenting this measure is to provide a measure of
free cash flow. The definition excludes changes in working capital as they are
necessary to drive organic growth and have historically been financed by the
Company's operating facility (See "Capital Resources"). Funds from operations
should not be construed as an alternative to cash flows from operating,
investing, and financing activities as a measure of the Company's liquidity and
cash flows.
(thousands of dollars) Three Months Ended Nine months Ended
September 30 September 30
2011 2010 2011 2010
EBITDA $ 12,681 $ 25,607 $ 46,351 $ 57,775
Stock based compensation 345 2,001 1,463 4,696
Non-cash interest expense 611 569 1,800 1,696
Translation loss (gain) on foreign
exchange 5,232 (331) 3,156 400
Interest expense (3,152) (3,110) (9,384) (9,346)
Income taxes paid (1,818) (2,255) (4,707) (2,935)
Maintenance capital expenditures (553) (770) (2,682) (2,849)
----------------------------------------
Funds from operations (1) $ 13,346 $ 21,711 $ 35,997 $ 49,437
----------------------------------------
----------------------------------------
Funds from operations can be reconciled to cash provided by operating
activities as follows:
(thousands of dollars) Three Months Ended Nine Months Ended
September 30 September 30
2011 2010 2011 2010
Cash provided by (used in)
operating activities $11,797 $24,865 $10,335 $28,286
Change in non-cash working
capital 2,167 (2,424) 26,414 24,003
Settlement of SAIP option 0 0 1,998 0
Maintenance capital
expenditures (553) (770) (2,682) (2,849)
Gain (loss) on sale of
assets (65) 40 (67) (3)
------------------------------------------------
Funds from operations (1) $13,346 $21,711 $35,997 $49,437
------------------------------------------------
------------------------------------------------
Shares outstanding (2) 12,562,997 12,565,747 12,560,893 12,926,474
Funds from operations per
share $1.06 $1.73 $2.87 $3.82
Dividends declared per share $0.60 $0.51 $1.80 $1.53
Payout ratio (1) 57% 29% 63% 40%
(1) See "Non-IFRS Measures".
(2) Fully diluted weighted average, excluding the potential dilution of the
convertible debentures as the calculation includes the interest expense
related to the convertible debentures.
Dividends in a fiscal year are typically funded entirely through cash from
operations, although due to seasonality dividends may be funded on a short-term
basis by the Company's operating lines. Dividends in the nine months ended
September 30, 2011 were funded through cash on hand, cash from operations and
bank indebtedness. The Company expects dividends in the remainder of 2011 will
be funded through bank indebtedness and cash from operations.
Ag Growth's Board of Directors reviews financial performance and other factors
when assessing dividend levels. An adjustment to dividend levels may be made at
such time as the Board determines an adjustment to be in the best interest of
the Company and its shareholders. The Company increased its dividend from $2.04
per annum to $2.40 per annum in November 2010.
FINANCIAL INSTRUMENTS
Foreign exchange contracts
Risk from foreign exchange arises as a result of variations in exchange rates
between the Canadian and the U.S. dollar. Ag Growth has entered into foreign
exchange contracts with two Canadian chartered banks to partially hedge its
foreign currency exposure on anticipated U.S. dollar sales transactions and as
at November 14, 2011, had outstanding the following foreign exchange contracts:
Forward Foreign Exchange Contracts
Settlement Dates Face Amount Average Rate CAD Amount
USD (000's) CAD (000's)
Oct - Nov 2011 $ 12,000 $ 1.0723 $ 12,867
Jan - Dec 2012 $ 60,000 $ 0.9905 $ 59,430
The fair value of the outstanding forward foreign exchange contracts in place as
at September 30, 2011 was a loss of $3.3 million. Consistent with prior periods,
the Company has elected to apply hedge accounting for these contracts and the
unrealized loss has been recognized in other comprehensive income for the period
ended September 30, 2011.
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 and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the period. By their nature, these estimates are subject to a
degree of uncertainty and are based on historical experience and trends in the
industry. Management reviews these estimates on an ongoing basis. While
management has applied judgment based on assumptions believed to be reasonable
in the circumstances, actual results can vary from these assumptions. It is
possible that materially different results would be reported using different
assumptions.
Ag Growth believes the accounting policies that are critical to its business
relate to the use of estimates regarding the recoverability of accounts
receivable and the valuation of inventory, intangibles, goodwill, convertible
debentures and deferred income taxes. Ag Growth's accounting policies are
described in Note 3 to the unaudited financial statements for the three month
period ended March 31, 2011.
Allowance for Doubtful Accounts
Due to the nature of Ag Growth's business and the credit terms it provides to
its customers, estimates and judgments are inherent in the on-going assessment
of the recoverability of accounts receivable. Ag Growth maintains an allowance
for doubtful accounts to reflect expected credit losses. A considerable amount
of judgment is required to assess the ultimate realization of accounts
receivable and these judgments must be continuously evaluated and updated. Ag
Growth is not able to predict changes in the financial conditions of its
customers, and the Company's judgment related to the recoverability of accounts
receivable may be materially impacted if the financial condition of the
Company's customers deteriorates.
Valuation of Inventory
Assessments and judgments are inherent in the determination of the net
realizable value of inventories. The cost of inventories may not be fully
recoverable if they are slow moving, damaged, obsolete, or if the selling price
of the inventory is less than its cost. Ag Growth regularly reviews its
inventory quantities and reduces the cost attributed to inventory no longer
deemed to be fully recoverable. Judgment related to the determination of net
realizable value may be impacted by a number of factors including market
conditions.
Goodwill and Intangible Assets
Assessments and judgments are inherent in the determination of the fair value of
goodwill and intangible assets. Goodwill and indefinite life intangible assets
are recorded at cost and finite life intangibles are recorded at cost less
accumulated amortization. Goodwill and intangible assets are tested for
impairment at least annually. Assessing goodwill and intangible assets for
impairment requires considerable judgment and is based in part on current
expectations regarding future performance. Changes in circumstances including
market conditions may materially impact the assessment of the fair value of
goodwill and intangible assets.
Deferred Income Taxes
Deferred income taxes are calculated based on assumptions related to the future
interpretation of tax legislation, future income tax rates, and future operating
results, acquisitions and dispositions of assets and liabilities. Ag Growth
periodically reviews and adjusts its estimates and assumptions of income tax
assets and liabilities as circumstances warrant. A significant change in any of
the Company's assumptions could materially affect Ag Growth's estimate of
deferred tax assets and liabilities.
Future Benefit of Tax-loss Carryforwards
Ag Growth should only recognize the future benefit of tax-loss carryforwards
where it is more likely than not that sufficient future taxable income can be
generated in order to fully utilize such losses and deductions. We are required
to make significant estimates and assumptions regarding future revenues and
profit, and our ability to implement certain tax planning strategies, in order
to assess the likelihood of utilizing such losses and deductions. These
estimates and assumptions are subject to significant uncertainty and if changed
could materially affect our assessment of the ability to fully realize the
benefit of the deferred income tax assets. Deferred tax asset balances would be
reduced and additional income tax expense recorded in the applicable accounting
period in the event that circumstances change and we, based on revised estimates
and assumptions, determined that it was no longer more likely than not that
those deferred tax assets would be fully realized.
RISKS AND UNCERTAINTIES
The risks and uncertainties described below are not the only risks and
uncertainties we face. Additional risks and uncertainties not currently known to
us or that we currently consider immaterial also may impair operations. If any
of the following risks actually occur, our business, results of operations and
financial condition, and the amount of cash available for dividends could be
materially adversely affected.
Industry Cyclicality and General Economic Conditions
The performance of the agricultural industry is cyclical. To the extent that the
agricultural sector declines or experiences a downturn, this is likely to have a
negative impact on the grain handling, storage and conditioning industry, and
the business of Ag Growth. Among other things, the agricultural sector has
benefited from the expansion of the ethanol industry, and to the extent the
ethanol industry declines or experiences a downturn, this is likely to have a
negative impact on the grain handling, storage and conditioning industry, and
the business of Ag Growth.
Future developments in the domestic and global economies may negatively impact
the demand for our products. Management cannot estimate the level of growth or
contraction of the economy as a whole or of the economy of any particular region
or market that we serve. Adverse changes in our financial condition and results
of operations may occur as a result of negative economic conditions, declines in
stock markets, contraction of credit availability or other factors affecting
economic conditions generally.
Risk of Decreased Crop Yields
Decreased crop yields due to poor weather conditions and other factors are a
significant risk affecting Ag Growth. Both reduced crop volumes and the
accompanying decline in farm incomes can negatively affect demand for grain
handling, storage and conditioning equipment.
Potential Volatility of Production Costs
Various materials and components are purchased in connection with Ag Growth's
manufacturing process, some or all of which may be subject to wide price
variation. Consistent with past and current practices within the industry, Ag
Growth seeks to manage its exposure to material and component price volatility
by planning and negotiating significant purchases on an annual basis, and
endeavours to pass through to customers, most, if not all, of the price
volatility. There can be no assurance that industry dynamics will allow Ag
Growth to continue to reduce its exposure to volatility of production costs by
passing through price increases to its customers.
Foreign Exchange Risk
Ag Growth generates the majority of its sales in U.S. dollars, but a materially
smaller proportion of its expenses are denominated in U.S. dollars. In addition,
Ag Growth may denominate its long term borrowings in U.S. dollars. Accordingly,
fluctuations in the rate of exchange between the Canadian dollar and the U.S.
dollar may significantly impact the Company's financial results. Management has
implemented a foreign currency hedging strategy and the Company has entered into
a series of hedging arrangements to partially mitigate the potential effect of
fluctuating exchange rates. To the extent that Ag Growth does not adequately
hedge its foreign exchange risk, changes in the exchange rate between the
Canadian dollar and the U.S. dollar may have a material adverse effect on Ag
Growth's results of operations, business, prospects and financial condition.
Acquisition and Expansion Risk
Ag Growth may expand its operations by increasing the scope or changing the
nature of operations at existing facilities or by acquiring or developing
additional businesses, products or technologies. There can be no assurance that
the Company will be able to identify, acquire, develop or profitably manage
additional businesses, or successfully integrate any acquired business,
products, or technologies into the business, or increase the scope or change the
nature of operations at existing facilities without substantial expenses, delays
or other operational or financial difficulties. The Company's ability to
increase the scope or change the nature of its operations or acquire or develop
additional businesses may be impacted by its cost of capital and access to
credit. Acquisitions and expansions may involve a number of special risks
including diversion of management's attention, failure to retain key personnel,
unanticipated events or circumstances, and legal liabilities, some or all of
which could have a material adverse effect on Ag Growth's performance. In
addition, there can be no assurance that an increase in the scope or a change in
the nature of operations at existing facilities or that acquired or newly
developed businesses, products, or technologies will achieve anticipated
revenues and income. The failure of the Company to manage its acquisition or
expansion strategy successfully could have a material adverse effect on Ag
Growth's results of operations and financial condition.
Commodity Prices, International Trade and Political Uncertainty
Prices of commodities are influenced by a variety of unpredictable factors that
are beyond the control of Ag Growth, including weather, government (Canadian,
United States and other) farm programs and policies, and changes in global
demand or other economic factors. A decrease in commodity prices could
negatively impact the agricultural sector, and the business of Ag Growth. New
legislation or amendments to existing legislation, including the Energy
Independence and Security Act in the U.S., may ultimately impact demand for the
Company's products. The world grain market is subject to numerous risks and
uncertainties, including risks and uncertainties related to international trade
and global political conditions.
Competition
Ag Growth experiences competition in the markets in which it operates. Certain
of Ag Growth's competitors have greater financial and capital resources than Ag
Growth. Ag Growth could face increased competition from newly formed or emerging
entities, as well as from established entities that choose to focus (or increase
their existing focus) on Ag Growth's primary markets. As the grain handling,
storage and conditioning equipment sector is fragmented, there is also a risk
that a larger, formidable competitor may be created through a combination of one
or more smaller competitors. Ag Growth may also face potential competition from
the emergence of new products or technology.
Seasonality of Business
The seasonality of the demand for Ag Growth's products results in lower cash
flow in the first three quarters of each calendar year and may impact the
ability of the Company to make cash dividends to shareholders, or the quantum of
such dividends, if any. No assurance can be given that Ag Growth's credit
facility will be sufficient to offset the seasonal variations in Ag Growth's
cash flow.
Business Interruption
The operation of Ag Growth's manufacturing facilities are subject to a number of
business interruption risks, including delays in obtaining production materials,
plant shutdowns, labour disruptions and weather conditions/natural disasters. Ag
Growth may suffer damages associated with such events that it cannot insure
against or which it may elect not to insure against because of high premium
costs or other reasons. For instance, Ag Growth's Rosenort facility is located
in an area that is often subject to widespread flooding, and insurance coverage
for this type of business interruption is limited. Ag Growth is not able to
predict the occurrence of business interruptions.
Litigation
In the ordinary course of its business, Ag Growth may be party to various legal
actions, the outcome of which cannot be predicted with certainty. One category
of potential legal actions is product liability claims. Farming is an inherently
dangerous occupation. Grain handling, storage and conditioning equipment used on
farms or in commercial applications may result in product liability claims that
require insuring of risk and management of the legal process.
Dependence on Key Personnel
Ag Growth's future business, financial condition, and operating results depend
on the continued contributions of certain of Ag Growth's executive officers and
other key management and personnel, certain of whom would be difficult to
replace.
Labour Costs and Shortages and Labour Relations
The success of Ag Growth's business depends on a large number of both hourly and
salaried employees. Changes in the general conditions of the employment market
could affect the ability of Ag Growth to hire or retain staff at current wage
levels. The occurrence of either of these events could have an adverse effect on
the Company's results of operations. There is no assurance that some or all of
the employees of Ag Growth will not unionize in the future. If successful, such
an occurrence could increase labour costs and thereby have an adverse affect on
Ag Growth's results of operations.
Distribution, Sales Representative and Supply Contracts
Ag Growth typically does not enter into written agreements with its dealers,
distributors or suppliers. As a result, such parties may, without notice or
penalty, terminate their relationship with Ag Growth at any time. In addition,
even if such parties should decide to continue their relationship with Ag
Growth, there can be no guarantee that the consideration or other terms of such
contracts will continue on the same basis.
Availability of Credit
Ag Growth's credit facility expires October 29, 2012, and is renewable at the
option of the lenders. There can be no guarantee the Company will be able to
obtain alternate financing and no guarantee that future credit facilities will
have the same terms and conditions as the existing facility. This may have an
adverse effect on the Company, its ability to pay dividends and the market value
of its common shares. In addition, the business of the Company may be adversely
impacted in the event that the Company's customer base does not have access to
sufficient financing. Sales related to the construction of commercial grain
handling facilities, sales to developing markets, and sales to North American
farmers may be impacted.
Interest Rates
Ag Growth's term and operating credit facilities bear interest at rates that are
in part dependant on performance based financial ratios. The Company's cost of
borrowing may be impacted to the extent that the ratio calculation results in an
increase in the performance based component of the interest rate. To the extent
that the Company has term and operating loans where the fluctuations in the cost
of borrowing are not mitigated by interest rate swaps, the Company's cost of
borrowing may be impacted by fluctuations in market interest rates.
Uninsured and Underinsured Losses
Ag Growth uses its discretion in determining amounts, coverage limits and
deductibility provisions of insurance, with a view to maintaining appropriate
insurance coverage on its assets and operations at a commercially reasonable
cost and on suitable terms. This may result in insurance coverage that, in the
event of a substantial loss, would not be sufficient to pay the full current
market value or current replacement cost of its assets or cover the cost of a
particular claim.
Cash Dividends are not Guaranteed
Future dividend payments by Ag Growth and the level thereof is uncertain, as Ag
Growth's dividend policy and the funds available for the payment of dividends
from time to time are dependent upon, among other things, operating cash flow
generated by Ag Growth and its subsidiaries, financial requirements for Ag
Growth's operations and the execution of its growth strategy, fluctuations in
working capital and the timing and amount of capital expenditures, debt service
requirements and other factors beyond Ag Growth's control.
Income Tax Matters
Income tax provisions, including current and deferred income tax assets and
liabilities, and income tax filing positions require estimates and
interpretations of federal and provincial income tax rules and regulations, and
judgments as to their interpretation and application to Ag Growth's specific
situation. The amount and timing of reversals of temporary differences will also
depend on Ag Growth's future operating results, acquisitions and dispositions of
assets and liabilities. The business and operations of Ag Growth are complex and
Ag Growth has executed a number of significant financings, acquisitions,
reorganizations and business combinations over the course of its history
including the Conversion. The computation of income taxes payable as a result of
these transactions involves many complex factors as well as Ag Growth's
interpretation of and compliance with relevant tax legislation and regulations.
While Ag Growth believes that its existing and proposed tax filing positions are
more likely than not to be sustained, there are a number of existing and
proposed tax filing positions including in respect of the Conversion that are or
may be the subject of review by taxation authorities. Therefore, it is possible
that additional taxes could be payable by Ag Growth and the ultimate value of Ag
Growth's income tax assets and liabilities could change in the future and that
changes to these amounts could have a material effect on Ag Growth's
consolidated financial statements and financial position.
Ag Growth May Issue Additional Common Shares Diluting Existing Shareholders'
Interests
The Company is authorized to issue an unlimited number of common shares for such
consideration and on such terms and conditions as shall be established by the
Directors without the approval of any shareholders, except as required by the
TSX. In addition, the Company may, at its option, satisfy its obligations with
respect to the interest payable on the Debentures and the repayment of the face
value of the Debentures through the issuance of common shares.
Leverage, Restrictive Covenants
The degree to which Ag Growth is leveraged could have important consequences to
the shareholders, including: (i) the ability to obtain additional financing for
working capital, capital expenditures or acquisitions in the future may be
limited; (ii) a material portion of Ag Growth's cash flow from operations may
need to be dedicated to payment of the principal of and interest on
indebtedness, thereby reducing funds available for future operations and to pay
dividends; (iii) certain of the borrowings under the Company's credit facility
may be at variable rates of interest, which exposes Ag Growth to the risk of
increased interest rates; and (iv) Ag Growth may be more vulnerable to economic
downturns and be limited in its ability to withstand competitive pressures. Ag
Growth's ability to make scheduled payments of principal and interest on, or to
refinance, its indebtedness will depend on its future operating performance and
cash flow, which are subject to prevailing economic conditions, prevailing
interest rate levels, and financial, competitive, business and other factors,
many of which are beyond its control.
The ability of Ag Growth to pay dividends or make other payments or advances
will be subject to applicable laws and contractual restrictions contained in the
instruments governing its indebtedness, including the Company's credit facility
and note purchase agreement. Ag Growth's credit facility and note purchase
agreement contain restrictive covenants customary for agreements of this nature,
including covenants that limit the discretion of management with respect to
certain business matters. These covenants place restrictions on, among other
things, the ability of Ag Growth to incur additional indebtedness, to pay
dividends or make certain other payments and to sell or otherwise dispose of
material assets. In addition, the credit facility and note purchase agreement
contain a number of financial covenants that will require Ag Growth to meet
certain financial ratios and financial tests. A failure to comply with these
obligations could result in an event of default which, if not cured or waived,
could permit acceleration of the relevant indebtedness and trigger financial
penalties including a make-whole provision in the note purchase agreement. If
the indebtedness under the credit facility and note purchase agreement were to
be accelerated, there can be no assurance that the assets of Ag Growth would be
sufficient to repay in full that indebtedness. There can also be no assurance
that the credit facility or any other credit facility will be able to be
refinanced.
International Sales and Operations
A portion of Ag Growth's sales are generated in overseas markets and Ag Growth
anticipates increasing its offshore sales and operations in the future. Sales
and operations outside of North America, particularly in emerging markets, are
subject to various risks, including: currency exchange rate fluctuations;
foreign economic conditions; trade barriers; competition with domestic and
international manufacturers and suppliers; exchange controls; national and
regional labour strikes; political risks and risks of increases in duties; taxes
and changes in tax laws; expropriation of property, cancellation or modification
of contract rights, unfavourable legal climate for the collection of unpaid
accounts; changes in laws and policies governing operations of foreign-based
companies, as well as risks of loss due to civil strife and acts of war. There
is no guarantee that one or more of these factors will not materially adversely
affect Ag Growth's offshore sales and operations in the future.
RECENT ACCOUNTING CHANGES
For all periods up to and including the year ended December 31, 2010, Ag Growth
presented its consolidated financial statements in accordance with CGAAP. The
Company's financial statements for the three-month period ended March 31, 2011
and the three and nine month periods ended September 30, 2011, and this MD&A,
have been prepared in accordance with IFRS.
Transition to IFRS
For the majority of accounting policy choices, the Company did not change the
accounting policies it applied under CGAAP if it was not required to do so under
IFRS. In preparing its consolidated financial statements in accordance with IFRS
1 First-time Adoption of International Financial Reporting Standards ("IFRS 1"),
the Company availed itself of certain of the optional exemptions from full
retrospective application of IFRS. A comprehensive summary of the optional
exemptions applied by the Company is included in Note 23 in the Company's June
30, 2011 unaudited interim condensed consolidated financial statements.
The transition to IFRS did result in a number of changes to the Company's
Statements of Financial Position as at January 1, 2010, its IFRS transition
date, and to its Statements of Income, Comprehensive Income, Cash Flows and
Equity for its 2010 reporting periods. A comprehensive summary of all of the
significant changes including the various reconciliations of CGAAP financial
statements to those prepared under IFRS is included in Note 23 in the Company's
March 31, 2011 unaudited interim consolidated financial statements. Although the
adoption of IFRS resulted in adjustments to the Company's financial statements,
it did not materially impact the underlying cash flows or profitability trends
of the Company.
INCOME STATEMENT PRESENTATION
The Company has elected to categorize its income and expenses by their function
which is one of the two alternatives available under IFRS. Under this
methodology revenues and expenses are categorized according to their underlying
activity or asset. Accordingly, amortization and foreign-exchange gains
(losses), which were previously disclosed separately under CGAAP, have now been
allocated to sales, cost of sales or general and administrative expenses. The
most significant presentation differences impacting EBITDA, compared to the
Company's income statement presentation under CGAAP for the three and nine month
periods ended September 30, 2010 and year ended December 31, 2010, are as
follows:
1. Sales
Three Months Nine Months
Ended Ended Year Ended
September 30, September 30, December 31,
2010 2010 2010
Trade sales per CGAAP $ 83,112 $207,109 $262,077
Reclassify - gain on foreign
exchange 1,831 4,970 6,691
Adoption of IFRS - revenue
recognition 3,763 5,782 183
---------------------------------------------
Sales per IFRS $ 88,706 $217,861 $268,951
---------------------------------------------
---------------------------------------------
2. Cost of sales
Three Months Nine Months
Ended Ended Year Ended
September 30, September 30, December 31,
2010 2010 2010
Cost of sales per CGAAP $ 50,865 $125,849 $160,504
Adoption of IFRS - inventory
overhead 37 26 (8)
Adoption of IFRS - revenue
recognition 1,752 2,691 85
Reclassify - depreciation and
amortization 921 2,441 3,377
---------------------------------------------
Cost of sales per IFRS $ 53,575 $131,007 $163,958
---------------------------------------------
---------------------------------------------
3. General and administrative expenses
Three Months Nine Months
Ended Ended Year Ended
September 30, September 30, December 31,
2010 2010 2010
General and administrative per
CGAAP $ 9,011 $ 26,117 $ 35,505
Reclassify - stock based
compensation 2,009 4,620 6,394
Reclassify - research &
development 414 1,079 1,444
Adoption of IFRS - acquisition
costs (C) 40 733 1,696
Adoption of IFRS - other 25 76 117
Reclassify - depreciation and
amortization 860 2,492 3,353
---------------------------------------------
Total general and
administrative $ 12,359 $ 35,117 $ 48,509
---------------------------------------------
---------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
Presentation of Financial Statements (amendments to IAS 1)
On June 16, 2011, the International Accounting Standards Board ("IASB") issued
amendments to IAS 1, Presentation of Financial Statements. The amendments
enhance the presentation of other comprehensive income ("OCI") in the financial
statements, primarily by requiring the components of OCI to be presented
separately for items that may be reclassified to the statement of earnings from
those that remain in equity. The amendments are effective for annual periods
beginning on or after January 1, 2012. The Company is currently assessing the
impact of the amendments on its consolidated financial statements.
Financial Instruments: Classification and Measurement ("IFRS 9")
IFRS 9 as issued reflects the first phase of the IASB` work on the replacement
of the existing standard for financial instruments ("IAS 39") and applies to
classification and measurement of financial assets as defined in IAS 39. The
standard is effective for annual periods beginning on or after January 1, 2013.
In subsequent phases, the IASB will address classification and measurement of
hedge accounting. The adoption of the first phase of IFRS 9 will have an effect
on the classification and measurement of Ag Growth's financial assets. The
Company will quantify the effect in conjunction with the other phases, when
issued, to present a comprehensive picture.
Employee Benefits ("IAS 19")
On June 16, 2011, the IASB revised IAS 19, Employee Benefits. The revisions
include the elimination of the option to defer the recognition of gains and
losses, enhancing the guidance respecting measurement of plan assets and defined
benefit obligations, streamlining the presentation of changes in assets and
liabilities arising from defined benefit plans and introduction of enhanced
disclosures for defined benefit plans. The amendments are effective for annual
periods beginning on or after January 1, 2013. The Company is currently
assessing the impact of the amendments on its consolidated financial statements.
IFRS 10 Consolidated Financial Statements
IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial
Statements that addresses the accounting for consolidated financial statements.
It also includes the issues raised in SIC-12 Consolidation - Special Purpose
Entities. What remains in IAS 27 is limited to accounting for subsidiaries,
jointly controlled entities, and associates in separate financial statements.
IFRS 10 establishes a single control model that applies to all entities
(including 'special purpose entities,' or 'structured entity' as they are now
referred to in the new standards, or 'variable interest entities' as they are
referred to in US GAAP). The changes introduced by IFRS 10 will require
management to exercise significant judgment to determine which entities are
controlled, and therefore are required to be consolidated by a parent, compared
with the requirements that were in IAS 27. Under IFRS 10, an investor controls
an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns
through its power over the investee. This principle applies to all investees,
including structured entities.
IFRS 10 is effective for annual periods commencing on or after January 1, 2013.
The Company is currently in the process of evaluating the implications of this
new standard, if any.
IFRS 11 Joint Arrangements
IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13
Jointly-controlled Entities - Non-monetary Contributions by Venturers. IFRS 11
uses some of the terms that were used by IAS 31, but with different meanings.
Whereas IAS 31 identified three forms of joint ventures (i.e., jointly
controlled operations, jointly controlled assets and jointly controlled
entities), IFRS 11 addresses only two forms of joint arrangements (joint
operations and joint ventures) where there is joint control. IFRS 11 defines
joint control as the contractually agreed sharing of control of an arrangement
which exists only when the decisions about the relevant activities require the
unanimous consent of the parties sharing control.
Because IFRS 11 uses the principle of control in IFRS 10 to define joint
control, the determination of whether joint control exists may change. In
addition, IFRS 11 removes the option to account for jointly controlled entities
("JCEs") using proportionate consolidation. Instead, JCEs that meet the
definition of a joint venture must be accounted for using the equity method. For
joint operations (which includes former jointly controlled operations, jointly
controlled assets, and potentially some former JCEs), an entity recognizes its
assets, liabilities, revenues and expenses, and/or its relative share of those
items, if any. In addition, when specifying the appropriate accounting, IAS 31
focused on the legal form of the entity, whereas IFRS 11 focuses on the nature
of the rights and obligations arising from the arrangement.
IFRS 11 is effective for annual periods commencing on or after January 1, 2013.
The Company is currently in the process of evaluating the implications of this
new standard, if any.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 includes all of the disclosures that were previously in IAS 27 related
to consolidated financial statements, as well as all of the disclosures that
were previously included in IAS 31 and IAS 28 Investment in Associates. These
disclosures relate to an entity's interests in subsidiaries, joint arrangements,
associates and structured entities. A number of new disclosures are also
required. One of the most significant changes introduced by IFRS 12 is that an
entity is now required to disclose the judgments made to determine whether it
controls another entity.
IFRS 12 is effective for annual periods commencing on or after January 1, 2013.
The Company is currently in the process of evaluating the implications of this
new standard, which will be limited to disclosure requirements for the financial
statements.
IFRS 13 Fair Value Measurement
IFRS 13 does not change when an entity is required to use fair value, but
rather, provides guidance on how to measure the fair value of financial and
non-financial assets and liabilities when required or permitted by IFRS. While
many of the concepts in IFRS 13 are consistent with current practice, certain
principles, such as the prohibition on blockage discounts for all fair value
measurements, could have a significant effect. The disclosure requirements are
substantial and could present additional challenges.
IFRS 13 is effective for annual periods commencing on or after January 1, 2013
and will be applied prospectively. The Company is currently in the process of
evaluating the implications of this new standard.
Deferred Tax: Recovery of Underlying Assets (amendments to IAS 12)
On December 20, 2010, the IASB issued Deferred Tax: Recovery of Underlying
Assets (amendments to IAS 12) concerning the determination of deferred tax on
investment property measured at fair value. The amendments incorporate SIC-21
Income Taxes - Recovery of Revalued Non-Depreciable Assets into IAS 12 for
non-depreciable assets measured using the revaluation model in IAS 16 Property,
Plant and Equipment. The aim of the amendments is to provide a practical
solution for jurisdictions where entities currently find it difficult and
subjective to determine the expected manner of recovery for investment property
that is measured using the fair value model in IAS 40 Investment Property. IAS
12 has been updated to include:
-- A rebuttable presumption that deferred tax on investment property
measured using the fair value model in IAS 40 should be determined on
the basis that its carrying amount will be recovered through sale; and
-- A requirement that deferred tax on non-depreciable assets, measured
using the revaluation model in IAS 16, should always be measured on a
sale basis.
The amendments are mandatory for annual periods beginning on or after January 1,
2012, but earlier application is permitted. This amendment is not expected to
have an impact on the Company.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS
The Company acquired the assets of Franklin and the shares of Tramco in fiscal
2010 (see "Acquisitions"). Management has not completed its review of internal
controls over financial reporting or disclosure controls and procedures for
these newly acquired operations. Since the acquisitions occurred within the 365
days of the end of the reporting period, management has limited the scope of
design, and subsequent evaluation, of disclosure controls and procedures and
internal controls over financial reporting to exclude controls, policies and
procedures of these two 2010 acquisitions, as permitted under Section 3.3 of
National Instrument 52-109, Certification of Disclosure in Issuer's Annual and
Interim Filings. For the period covered by this MD&A, management has undertaken
specific procedures to satisfy itself with respect to the accuracy and
completeness of the acquired operations' financial information. The following is
the summary financial information pertaining to the acquisitions that were
included in Ag Growth's consolidated financial statements for the nine months
ended September30, 2011:
(thousands of dollars) Franklin(1) Tramco(1)
Revenue 9,583 22,942
Profit (loss) (1,008) 2,194
Current assets(2) 1,685 14,528
Non-current assets(2) 8,250 21,006
Current liabilities(2) 1,143 7,016
Non-current liabilities(2) 132 4,398
1 Results from January 1, 2011 to September 30, 2011
2 Balance sheets as at September 30, 2011
There have been no material changes in Ag Growth's internal controls over
financial reporting that occurred in the three month period ended September 30,
2011, that have materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial reporting. On October 3,
2011, subsequent to the end of the three month period, the Company acquired the
assets of Airlanco. As of the date of this MD&A, management has not completed
its review of internal controls over financial reporting for this newly acquired
operation or its impact, if any, on Ag Growth's internal controls over financial
reporting.
NON-IFRS MEASURES
In analyzing our results, we supplement our use of financial measures that are
calculated and presented in accordance with IFRS, with a number of non-IFRS
financial measures including "EBITDA", "Adjusted EBITDA", "gross margin", "funds
from operations", "payout ratio" and "trade sales". A non-IFRS financial measure
is a numerical measure of a company's historical performance, financial position
or cash flow that excludes (includes) amounts, or is subject to adjustments that
have the effect of excluding (including) amounts, that are included (excluded)
in most directly comparable measures calculated and presented in accordance with
IFRS. Non-IFRS financial measures are not standardized; therefore, it may not be
possible to compare these financial measures with other companies' non-IFRS
financial measures having the same or similar businesses. We strongly encourage
investors to review our consolidated financial statements and publicly filed
reports in their entirety and not to rely on any single financial measure.
We use these non-IFRS financial measures in addition to, and in conjunction
with, results presented in accordance with IFRS. These non-IFRS financial
measures reflect an additional way of viewing aspects of our operations that,
when viewed with our IFRS results and the accompanying reconciliations to
corresponding IFRS financial measures, may provide a more complete understanding
of factors and trends affecting our business.
In the MD&A, we discuss the non-IFRS financial measures, including the reasons
that we believe that these measures provide useful information regarding our
financial condition, results of operations, cash flows and financial position,
as applicable and, to the extent material, the additional purposes, if any, for
which these measures are used. Reconciliations of non-IFRS financial measures to
the most directly comparable IFRS financial measures are contained in the MD&A.
Management believes that the Company's financial results may provide a more
complete understanding of factors and trends affecting our business and be more
meaningful to management, investors, analysts and other interested parties when
certain aspects of our financial results are adjusted for the gain (loss) on
foreign exchange and other operating expenses and income. This measurement is a
non-IFRS measurement. Management uses the non-IFRS adjusted financial results
and non-IFRS financial measures to measure and evaluate the performance of the
business and when discussing results with the Board of Directors, analysts,
investors, banks and other interested parties.
References to "EBITDA" are to profit before income taxes, finance costs,
amortization and depreciation. References to "adjusted EBITDA" are to EBITDA
before the gain (loss) on foreign exchange, gains or losses on the sale of
property, plant & equipment, expenses related to corporate acquisition activity
and other operating expenses. Management believes that, in addition to profit or
loss, EBITDA and Adjusted EBITDA are useful supplemental measures in evaluating
the Company's performance. Management cautions investors that EBITDA and
Adjusted EBITDA should not replace profit or loss as indicators of performance,
or cash flows from operating, investing, and financing activities as a measure
of the Company's liquidity and cash flows.
References to "trade sales" are to sales net of the gain or loss on foreign
exchange. References to "gross margin" are to trade sales less cost of
inventories net of the depreciation and amortization included in cost of sales.
Management cautions investors that trade sales should not replace sales as an
indicator of performance.
References to "funds from operations" are to cash flow from operating activities
before the net change in non-cash working capital balances related to operations
and stock-based compensation, less maintenance capital expenditures and adjusted
for the gain or loss on the sale of property, plant & equipment. Management
believes that, in addition to cash provided by (used in) operating activities,
funds from operations provide a useful supplemental measure in evaluating its
performance.
References to "payout ratio" are to dividends declared as a percentage of funds
from operations.
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements that reflect our expectations
regarding the future growth, results of operations, performance, business
prospects, and opportunities of the Company. Forward-looking statements may
contain such words as "anticipate", "believe", "continue", "could", "expects",
"intend", "plans", "will" or similar expressions suggesting future conditions or
events. In particular, the forward looking statements in this MD&A include
statements relating to the benefits of the acquisitions of Mepu, Franklin and
Tramco (see "Acquisitions"), our business and strategy, including our outlook
for our financial and operating performance through the balance of 2011 and in
future years, growth in sales to developing markets, the benefits of the
expansion of the Company's grain storage product line including the anticipated
resolution of start up issues at our Twister bin plant and the future
contribution of that plant to our operating and financial performance, the
effect of crop conditions in our market areas, the effect of current economic
conditions and macroeconomic trends on the demand for our products, expectations
regarding pricing for agricultural commodities, our working capital and capital
expenditure requirements, capital resources and the payment of dividends. Such
forward-looking statements reflect our current beliefs and are based on
information currently available to us, including certain key expectations and
assumptions concerning anticipated financial performance, business prospects,
strategies, product pricing, regulatory developments, tax laws, the sufficiency
of budgeted capital expenditures in carrying out planned activities, foreign
exchange rates and the cost of materials, labour and services. Forward-looking
statements involve significant risks and uncertainties. A number of factors
could cause actual results to differ materially from results discussed in the
forward-looking statements, including changes in international, national and
local business conditions, crop yields, crop conditions, seasonality, industry
cyclicality, volatility of production costs, commodity prices, foreign exchange
rates, and competition. In addition, actual results may be materially affected
by the pace of recovery from the global economic crisis in 2008-2009 and
continuing economic uncertainty, including the cost and availability of capital.
These risks and uncertainties are described under "Risks and Uncertainties" in
this MD&A and in our most recently filed Annual Information Form. We cannot
assure readers that actual results will be consistent with these forward-looking
statements and we undertake no obligation to update such statements except as
expressly required by law.
ADDITIONAL INFORMATION
Additional information relating to Ag Growth, including Ag Growth's most recent
Annual Information Form, is available on SEDAR (www.sedar.com).
Unaudited Interim Condensed Consolidated Financial Statements
Ag Growth International Inc.
UNAUDITED INTERIM CONDENSED CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
(in thousands of Canadian dollars)
As at As at As at
September 30, December 31, January 1,
2011 2010 2010
$ $ $
---------------------------------------------
ASSETS(note 14)
Current assets
Cash and cash equivalents 2,352 34,981 109,094
Cash held in trust 1,499 1,817 -
Restricted cash 904 865 -
Accounts receivable (notes 11
and 17) 60,265 38,535 25,072
Inventory 65,306 52,574 39,621
Prepaid expenses and other
assets (note 6) 4,701 7,628 1,772
Income taxes recoverable 614 - 598
Derivative instruments - 4,200 7,652
---------------------------------------------
135,641 140,600 183,809
---------------------------------------------
Non-current assets
Property, plant and equipment,
net 82,246 79,022 37,873
Goodwill (note 9) 63,579 62,355 52,187
Intangible assets, net (note 8) 71,693 72,345 68,441
Available-for-sale investment 2,800 2,000 2,000
Derivative instruments - - 1,848
Deferred tax assets (note 16) 39,422 42,063 47,356
---------------------------------------------
259,740 257,785 209,705
---------------------------------------------
Assets held for sale 1,101 - -
--------------------------------------------
Total assets 396,482 398,385 393,514
--------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Accounts payable and accrued
liabilities 27,513 22,623 12,736
Customer deposits 6,814 6,573 8,340
Dividends payable (note 12(e)) 2,509 2,509 2,224
Acquisition price, transaction
and financing costs payable 3,180 11,994 1,028
Income taxes payable - 56 -
Current portion of long-term
debt (note 14) 16 128 16
Current portion of obligations
under finance leases (note 14) 41 432 -
Current portion of derivative
instruments (note 17) 2,169 - -
Current portion of share award
incentive plan (note 13(e)) 1,410 2,003 -
Provisions 1,932 1,942 1,194
---------------------------------------------
45,584 48,260 25,538
---------------------------------------------
Non-current liabilities
Long-term debt (note 14) 25,603 24,518 25,403
Obligations under finance
leases (note 14) 133 138 -
Convertible unsecured
subordinated debentures (note
15) 106,641 105,140 103,107
Deferred tax liabilities (note
16) 9,081 8,464 2,214
Derivative instruments (note
17) 1,217 - -
Share award incentive plan
(note 13(e)) - 1,571 5,857
---------------------------------------------
142,675 139,831 136,581
---------------------------------------------
Total liabilities 188,259 188,091 162,119
---------------------------------------------
Shareholders' equity (note 12)
Common shares 151,039 151,376 157,279
Accumulated other comprehensive
income (loss) 607 (6) 5,590
Equity component of convertible
debentures 5,105 5,105 5,105
Contributed surplus 5,086 6,121 3,859
Retained earnings 46,386 47,698 59,562
---------------------------------------------
Total shareholders' equity 208,223 210,294 231,395
---------------------------------------------
Total liabilities and
shareholders' equity 396,482 398,385 393,514
---------------------------------------------
Commitments and contingencies
(note 21)
See accompanying notes
On behalf of the Board of
Directors:
------------------------- -------------------------
(signed) (signed)
Bill Lambert John R. Brodie, FCA
Director Director
Ag Growth
International Inc.
UNAUDITED INTERIM CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(in thousands of Canadian dollars, except per share amounts)
Three-month period ended Nine-month period ended
--------------------------------------------------------
September 30, September 30, September 30, September 30,
2011 2010 2011 2010
$ $ $ $
--------------------------------------------------------
Sales 83,341 88,706 238,517 217,861
Cost of goods sold
(note 7(d)) 56,425 53,575 157,838 131,007
--------------------------------------------------------
Gross margin 26,916 35,131 80,679 86,854
--------------------------------------------------------
Expenses
Selling, general and
administrative
(note 7(e)) 14,576 12,359 40,102 35,117
Other operating
expenses (income)
(note 7(a)) 19 (63) 92 (240)
--------------------------------------------------------
14,595 12,296 40,194 34,877
--------------------------------------------------------
Operating profit 12,321 22,835 40,485 51,977
Finance costs (note
7(c)) 3,152 3,110 9,384 9,346
Finance income
(loss) (note 7(b)) (1,857) 991 (870) 865
--------------------------------------------------------
Profit before income
taxes 7,312 20,716 30,231 43,496
--------------------------------------------------------
Income tax expense
(recovery) (note
16)
Current 1,155 2,108 4,029 3,829
Deferred 1,587 3,449 4,932 8,527
--------------------------------------------------------
2,742 5,557 8,961 12,356
--------------------------------------------------------
Profit for the
period 4,570 15,159 21,270 31,140
--------------------------------------------------------
Profit per share -
basic(note 19) 0.37 1.23 1.71 2.44
Profit per share -
diluted(note 19) 0.36 1.12 1.69 2.35
--------------------------------------------------------
See accompanying notes
Ag Growth International Inc.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
Nine-month period ended
September 30, 2011
Equity
component of
Common convertible Contributed Retained
shares debentures surplus earnings
$ $ $ $
----------------------------------------------------
As at January 1, 2011 151,376 5,105 6,121 47,698
Profit for the period - - - 21,270
Other comprehensive
income (loss) - - - -
----------------------------------------------------
Total comprehensive
income 151,376 5,105 6,121 68,968
Conversion of
subordinated debentures
(note 12) 115 - - -
Share-based payment
transactions (note 12) (452) - (1,035) -
Dividends to
shareholders (note 12) - - - (22,582)
----------------------------------------------------
As at September 30, 2011 151,039 5,105 5,086 46,386
----------------------------------------------------
See accompanying notes
Ag Growth International
Inc.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
Nine-month period ended
September 30, 2011
Cash flow
hedge and
foreign Available-
currency for-sale
reserve reserve Total equity
$ $ $
----------------------------------------------------
As at January 1, 2011 (6) - 210,294
Profit for the period - - 21,270
Other comprehensive
income (loss) 25 588 613
----------------------------------------------------
Total comprehensive
income 19 588 232,177
Conversion of
subordinated debentures
(note 12) - - 115
Share-based payment
transactions (note 12) - - (1,487)
Dividends to
shareholders (note 12) - - (22,582)
----------------------------------------------------
As at September 30, 2011 19 588 208,223
----------------------------------------------------
See accompanying notes
Ag Growth International Inc.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
Nine-month period ended
September 30, 2010
Equity
component of
convertible Contributed
Common shares debentures surplus
$ $ $
---------------------------------------------
As at January 1, 2010 157,279 5,105 3,859
Profit for the period - - -
Other comprehensive loss - - -
---------------------------------------------
Total comprehensive income 157,279 5,105 3,859
Share-based payment
transactions (note 12) (2,628) - 2,412
Common shares purchased under
normal course
issuer bid (note 12) (8,057) - -
Dividends to shareholders (note
12) - - -
---------------------------------------------
As at September 30, 2010 (note
25) 146,594 5,105 6,271
---------------------------------------------
See accompanying notes
Ag Growth International Inc.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
Nine-month period ended
September 30, 2010
Cash flow
hedge and
foreign
Retained currency
earnings reserve Total equity
$ $ $
---------------------------------------------
As at January 1, 2010 59,562 5,590 231,395
Profit for the period 31,140 - 31,140
Other comprehensive loss - (2,562) (2,562)
---------------------------------------------
Total comprehensive income 90,702 3,028 259,973
Share-based payment
transactions (note 12) - - (216)
Common shares purchased under
normal course
issuer bid (note 12) (15,334) - (23,391)
Dividends to shareholders (note
12) (19,703) - (19,703)
---------------------------------------------
As at September 30, 2010 (note
25) 55,665 3,028 216,663
---------------------------------------------
See accompanying notes
Ag Growth International Inc.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
Year ended December 31, 2010
Equity
component of
convertible Contributed
Common shares debentures surplus
$ $ $
---------------------------------------------
As at January 1, 2010 157,279 5,105 3,859
Profit for the year - - -
Other comprehensive loss - - -
---------------------------------------------
Total comprehensive income 157,279 5,105 3,859
Share-based payment
transactions (note 12) 2,154 - 2,262
Common shares purchased under
normal
course issuer bid (note 12) (8,057) - -
Dividends to shareholders (note
12) - - -
---------------------------------------------
As at December 31, 2010 151,376 5,105 6,121
---------------------------------------------
See accompanying notes
Ag Growth International Inc.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
Year ended December 31, 2010
Cash flow
hedge and
foreign
Retained currency
earnings reserve Total equity
$ $ $
---------------------------------------------
As at January 1, 2010 59,562 5,590 231,395
Profit for the year 30,324 - 30,324
Other comprehensive loss - (5,596) (5,596)
---------------------------------------------
Total comprehensive income 89,886 (6) 256,123
Share-based payment
transactions (note 12) - - 4,416
Common shares purchased under
normal
course issuer bid (note 12) (15,334) - (23,391)
Dividends to shareholders (note
12) (26,854) - (26,854)
---------------------------------------------
As at December 31, 2010 47,698 (6) 210,294
---------------------------------------------
See accompanying notes
Ag Growth International Inc.
UNAUDITED INTERIM CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars)
Three-month period ended Nine-month period ended
--------------------------------------------------------
September 30, September 30, September 30, September 30,
2011 2010 2011 2010
$ $ $ $
--------------------------------------------------------
Profit for the
period 4,570 15,159 21,270 31,140
--------------------------------------------------------
Other comprehensive
income (loss)
Change in fair
value of
derivatives
designated as cash
flow hedges (4,829) 1,860 (3,404) 1,398
Income tax effect
on cash flow
hedges 1,663 (333) 1,990 1,014
Gain on derivatives
designated as cash
flow hedges
recognized in net
earnings in the
current period (1,651) (1,190) (4,185) (5,023)
Exchange
differences on
translation of
foreign operations 7,472 (1,115) 5,624 49
Gain on available-
for-sale financial
assets - - 800 -
Income tax effect
on available-for-
sale financial
assets - - (212) -
--------------------------------------------------------
Other comprehensive
income (loss) for
the period 2,655 (778) 613 (2,562)
--------------------------------------------------------
Total comprehensive
income for the
period 7,225 14,381 21,883 28,578
--------------------------------------------------------
See accompanying
notes
Ag Growth International Inc.
UNAUDITED INTERIM CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
Three-month period ended Nine-month period ended
--------------------------------------------------------
September 30, September 30, September 30, September 30,
2011 2010 2011 2010
$ $ $ $
--------------------------------------------------------
OPERATING ACTIVITIES
Profit before income
taxes 7,312 20,716 30,231 43,496
Add (deduct) items
not affecting cash
Depreciation and
impairment of
property, plant
and equipment 1,359 816 3,939 2,359
Amortization and
impairment of
intangible assets 858 965 2,798 2,574
Translation (gain)
loss on foreign
exchange 5,232 (331) 3,156 400
Non-cash component
of interest
expense 611 569 1,800 1,696
Stock-based
compensation (note
13(e)) 345 2,001 1,463 4,696
Loss (gain) on sale
of property, plant
and equipment 65 (40) 67 3
Net change in non-
cash working
capital balances
related to
operations (note
10) (2,167) 2,424 (26,414) (24,003)
Settlement of SAIP
obligation (note
13(b)) - - (1,998) -
Income taxes paid (1,818) (2,255) (4,707) (2,935)
--------------------------------------------------------
Cash provided by
operating
activities 11,797 24,865 10,335 28,286
--------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of
property, plant and
equipment (1,509) (6,290) (7,524) (19,178)
Acquisition of
shares of Tramco,
Inc., net of
cash acquired (note
6) - - (9,946) -
Acquisition of
shares of Mepu Oy,
including bank
indebtedness
assumed (note 6) - (4) - (12,952)
Transfer from (to)
cash held in trust - (7,529) 592 (8,180)
Proceeds from sale
of property, plant
and equipment 143 44 437 142
Development of
intangible assets (200) - (1,011) -
Transaction costs 1,965 (166) 1,130 (178)
--------------------------------------------------------
Cash provided by
(used in) investing
activities 399 (13,945) (16,322) (40,346)
--------------------------------------------------------
FINANCING ACTIVITIES
Decrease in bank
indebtedness (2,174) - - -
Repayment of long-
term debt (2) (33) (318) (56)
Repayment of
obligations under
finance leases (141) - (396) -
Dividends paid (7,527) (6,432) (22,582) (19,807)
Decrease in
financing costs
payable - - - (150)
Purchase of common
shares under the
normal course
issuer bid - (11,691) - (23,391)
Purchase of shares
in the market under
the
long-term incentive
plan (note 13(a)) - - (3,346) (6,032)
--------------------------------------------------------
Cash used in
financing
activities (9,844) (18,156) (26,642) (49,436)
--------------------------------------------------------
Net increase
(decrease) in cash
and cash
equivalents during
the period 2,352 (7,236) (32,629) (61,496)
Cash and cash
equivalents,
beginning of period - 54,834 34,981 109,094
--------------------------------------------------------
Cash and cash
equivalents, end of
period 2,352 47,598 2,352 47,598
--------------------------------------------------------
See accompanying
notes
Ag Growth International Inc.
September 30, 2011
1. ORGANIZATION
The interim condensed consolidated financial statements of Ag Growth
International Inc. ("Ag Growth Inc.") for the three-month and nine-month periods
ended September 30, 2011 were authorized for issuance in accordance with a
resolution of the directors on November 13, 2011. Ag Growth International Inc.
is a listed company incorporated and domiciled in Canada whose shares are
publicly traded at the Toronto Stock Exchange. The registered office is located
at 1301 Kenaston Blvd., Winnipeg, Manitoba, Canada.
2. OPERATIONS
Ag Growth Inc. conducts business in the grain handling, storage and conditioning
markets.
Included in these interim condensed consolidated financial statements are the
accounts of Ag Growth Inc. and all of its subsidiary partnerships and
incorporated companies; together, Ag Growth Inc. and its subsidiaries are
referred to as "Ag Growth" or the "Company".
3. BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE
The interim condensed consolidated financial statements for the three-month and
nine-month periods ended September 30, 2011 were prepared in accordance with IAS
34, Interim Financial Reporting. The same accounting policies and methods of
computation were followed in the preparation of these interim condensed
consolidated financial statements as were followed in the preparation of the
interim consolidated financial statements for the three-month period ended March
31, 2011. In addition, the interim consolidated financial statements for the
three-month period ended March 31, 2011 contain certain incremental annual IFRS
disclosures not included in the annual consolidated financial statements for the
year ended December 31, 2010 prepared in accordance with previous Canadian
generally accepted accounting principles ("GAAP"). Accordingly, these interim
condensed consolidated financial statements for the three-month and nine-month
periods ended September 30, 2011 should be read together with the annual
consolidated financial statements for the year ended December 31, 2010 prepared
in accordance with previous Canadian GAAP as well as the interim consolidated
financial statements for the three-month period ended March 31, 2011.
Accounting measurements at interim dates inherently involve a greater reliance
on estimates than at year end. In the opinion of management, the unaudited
interim condensed consolidated financial statements include all adjustments of a
normal recurring nature to present fairly the consolidated financial position of
the Company as at September 30, 2011.
4. SEASONALITY OF BUSINESS
Interim period sales and earnings historically reflect some seasonality. The
third quarter is typically the strongest primarily due to high in-season demand
at the farm level. Ag Growth's collections of accounts receivable are weighted
towards the third and fourth quarters. This collection pattern, combined with
seasonally high sales in the third quarter, result in accounts receivable levels
increasing throughout the year and normally peaking in the third quarter. As a
result of these working capital movements, historically, Ag Growth's use of its
bank revolver is typically highest in the first and second quarters, begins to
decline in the third quarter as collections of accounts receivable increase, and
is repaid in the third or fourth quarter of each year.
5. STANDARDS ISSUED BUT NOT YET EFFECTIVE
Standards issued but not yet effective up to the date of issuance of the
Company's financial statements are listed below. This listing is of standards
and interpretations issued which the Company reasonably expects to be applicable
at a future date. The Company intends to adopt those standards when they become
effective.
Presentation of Financial Statements (amendments to IAS 1)
On June 16, 2011, the IASB issued amendments to IAS 1, Presentation of Financial
Statements. The amendments enhance the presentation of other comprehensive
income ("OCI") in the financial statements, primarily by requiring the
components of OCI to be presented separately for items that may be reclassified
to the statement of earnings from those that remain in equity. The amendments
are effective for annual periods beginning on or after January 1, 2012. The
Company is currently assessing the impact of the amendments on its consolidated
financial statements.
Financial Instruments: Classification and Measurement ("IFRS 9")
IFRS 9 as issued reflects the first phase of the International Accounting
Standards Board's ("IASB") work on the replacement of the existing standard for
financial instruments ("IAS 39") and applies to classification and measurement
of financial assets and liabilities as defined in IAS 39. The standard is
effective for annual periods beginning on or after January 1, 2013. In
subsequent phases, the IASB will address classification and measurement of hedge
accounting. The adoption of the first phase of IFRS 9 will have an effect on the
classification and measurement of Ag Growth's financial assets. The Company will
quantify the effect in conjunction with the other phases, when issued, to
present a comprehensive picture.
Employee Benefits ("IAS 19")
On June 16, 2011, the IASB revised IAS 19, Employee Benefits. The revisions
include the elimination of the option to defer the recognition of gains and
losses, enhancing the guidance around measurement of plan assets and defined
benefit obligations, streamlining the presentation of changes in assets and
liabilities arising from defined benefit plans and introduction of enhanced
disclosures for defined benefit plans. The amendments are effective for annual
periods beginning on or after January 1, 2013. The Company is currently
assessing the impact of the amendments on its consolidated financial statements.
IFRS 10 Consolidated Financial Statements
IFRS 10 replaces the portion of IAS 27, Consolidated and Separate Financial
Statements that addresses the accounting for consolidated financial statements.
It also includes the issues raised in SIC-12, Consolidation - Special Purpose
Entities. What remains in IAS 27 is limited to accounting for subsidiaries,
jointly controlled entities, and associates in separate financial statements.
IFRS 10 establishes a single control model that applies to all entities
(including 'special purpose entities' or 'structured entity' as they are now
referred to in the new standards, or 'variable interest entities' as they are
referred to in US GAAP). The changes introduced by IFRS 10 will require
management to exercise significant judgment to determine which entities are
controlled, and therefore are required to be consolidated by a parent, compared
with the requirements that were in IAS 27. Under IFRS 10, an investor controls
an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns
through its power over the investee. This principle applies to all investees,
including structured entities.
IFRS 10 is effective for annual periods commencing on or after January 1, 2013.
The Company is currently in the process of evaluating the implications of this
new standard, if any.
IFRS 11 Joint Arrangements
IFRS 11 replaces IAS 31, Interests in Joint Ventures and SIC-13,
Jointly-controlled Entities - Non-monetary Contributions by Venturers. IFRS 11
uses some of the terms that were used by IAS 31, but with different meanings.
Whereas IAS 31 identified three forms of joint ventures (i.e., jointly
controlled operations, jointly controlled assets and jointly controlled
entities), IFRS 11 addresses only two forms of joint arrangements (joint
operations and joint ventures) where there is joint control. IFRS 11 defines
joint control as the contractually agreed sharing of control of an arrangement
which exists only when the decisions about the relevant activities require the
unanimous consent of the parties sharing control.
Because IFRS 11 uses the principle of control in IFRS 10 to define joint
control, the determination of whether joint control exists may change. In
addition, IFRS 11 removes the option to account for jointly controlled entities
("JCEs") using proportionate consolidation. Instead, JCEs that meet the
definition of a joint venture must be accounted for using the equity method. For
joint operations (which includes former jointly controlled operations, jointly
controlled assets, and potentially some former JCEs), an entity recognizes its
assets, liabilities, revenues and expenses, and/or its relative share of those
items, if any. In addition, when specifying the appropriate accounting, IAS 31
focused on the legal form of the entity, whereas IFRS 11 focuses on the nature
of the rights and obligations arising from the arrangement.
IFRS 11 is effective for annual periods commencing on or after January 1, 2013.
The Company is currently in the process of evaluating the implications of this
new standard, if any.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 includes all of the disclosures that were previously in IAS 27 related
to consolidated financial statements, as well as all of the disclosures that
were previously included in IAS 31 and IAS 28, Investment in Associates. These
disclosures relate to an entity's interests in subsidiaries, joint arrangements,
associates and structured entities. A number of new disclosures are also
required. One of the most significant changes introduced by IFRS 12 is that an
entity is now required to disclose the judgments made to determine whether it
controls another entity.
IFRS 12 is effective for annual periods commencing on or after January 1, 2013.
The Company is currently in the process of evaluating the implications of this
new standard, which will be limited to disclosure requirements for the financial
statements.
IFRS 13 Fair Value Measurement
IFRS 13 does not change when an entity is required to use fair value, but
rather, provides guidance on how to measure the fair value of financial and
non-financial assets and liabilities when required or permitted by IFRS. While
many of the concepts in IFRS 13 are consistent with current practice, certain
principles, such as the prohibition on blockage discounts for all fair value
measurements, could have a significant effect. The disclosure requirements are
substantial and could present additional challenges.
IFRS 13 is effective for annual periods commencing on or after January 1, 2013
and will be applied prospectively. The Company is currently in the process of
evaluating the implications of this new standard.
Deferred Tax: Recovery of Underlying Assets (amendments to IAS 12)
On December 20, 2010, the IASB issued Deferred Tax: Recovery of Underlying
Assets (amendments to IAS 12) concerning the determination of deferred tax on
investment property measured at fair value. The amendments incorporate SIC-21,
Income Taxes - Recovery of Revalued Non-Depreciable Assets into IAS 12, Income
Taxes for non-depreciable assets measured using the revaluation model in IAS 16
Property, Plant and Equipment. The aim of the amendments is to provide a
practical solution for jurisdictions where entities currently find it difficult
and subjective to determine the expected manner of recovery for investment
property that is measured using the fair value model in IAS 40, Investment
Property. IAS 12 has been updated to include:
-- A rebuttable presumption that deferred tax on investment property
measured using the fair value model in IAS 40 should be determined on
the basis that its carrying amount will be recovered through sale; and
-- A requirement that deferred tax on non-depreciable assets, measured
using the revaluation model in IAS 16, should always be measured on a
sale basis.
The amendments are mandatory for annual periods beginning on or after January 1,
2012, but earlier application is permitted. This amendment is not expected to
have an impact on the Company.
6. BUSINESS COMBINATIONS
Acquisitions in 2010
(a) Mepu Oy ("Mepu")
Effective April 29, 2010, the Company acquired 100% of the outstanding shares of
Mepu, a manufacturer of grain drying systems. The acquisition of Mepu provides
the Company with a complementary product line, distribution in a region where
the Company previously had only limited representation and a corporate footprint
near the growth markets of Russia and Eastern Europe.
The purchase has been accounted for by the acquisition method with the results
of Mepu's operations included in the Company's net earnings from the date of
acquisition. The assets and liabilities of Mepu as at the date of acquisition
have been recorded in the interim condensed consolidated financial statements at
their fair values as follows:
$
----------
Accounts receivable 1,208
Inventory 4,465
Prepaid expenses and other assets 396
Deferred tax asset 330
Property, plant and equipment 4,084
Intangible assets
Distribution network 1,562
Brand name 743
Order backlog 363
Goodwill 3,614
Bank indebtedness (1,035)
Long-term debt (382)
Accounts payable and accrued liabilities (2,752)
Customer deposits (134)
Deferred tax liability (1,188)
----------
Purchase consideration transferred 11,274
----------
----------
The goodwill of $3,614 comprises the value of expected synergies arising from
the acquisition and the values included in the workforce of the new subsidiary.
The goodwill balance is allocated to Mepu and certain North American divisions'
cash-generating units ("CGUs") because management is expecting sales synergies
from a wider product line and complementary distribution networks. None of the
goodwill recognized is expected to be deductible for income tax purposes.
From the date of acquisition, Mepu has contributed to the 2010 results $11,089
of revenue and $850 to the net profit before tax of the Company. If the
combination had taken place as at January 1, 2010, revenue from continuing
operations in 2010 would have increased by $2,378 and the profit from continuing
operations for the Company in 2010 would decrease by $1,631.
The purchase consideration in the amount of $11,274 was paid in cash. The
impacts on the cash flow on the acquisition of Mepu are as follows:
$
----------
Transaction costs of the acquisition 643
Purchase consideration transferred 11,274
----------
Net cash flow on acquisition 11,917
----------
----------
Transaction costs of the acquisition are included in cash flows from investing
activities. In the three-month period ended June 30, 2011, the conditions
related to the cash holdback were met and the Company transferred $592 from cash
held in trust to the vendors. As at September 30, 2011, there are no remaining
funds held in trust.
(b) Franklin Enterprises Ltd. ("Franklin")
Effective October 1, 2010, the Company acquired substantially all of the
operating assets of Franklin, a custom manufacturer. The Company acquired
Franklin to enhance its manufacturing capabilities and to increase production
capacity in periods of high in-season demand. The acquisition has been accounted
for by the acquisition method with the results of Franklin's operations included
in the Company's net earnings from the date of acquisition. As at September 30,
2011, the Company had cash held in trust of $250 relating to the acquisition of
Franklin.
(c) Tramco, Inc. ("Tramco")
Effective December 20, 2010, the Company acquired 100% of the outstanding shares
of Tramco, a manufacturer of chain conveyors. Tramco is an industry leader and
provides the Company with an entry point into the grain processing sector of the
food supply chain.
The purchase has been accounted for by the acquisition method with the results
of Tramco's operations included in the Company's net earnings from the date of
acquisition. The assets and liabilities of Tramco on the date of acquisition
have been recorded in the interim condensed consolidated financial statements at
their estimated fair values as follows:
$
----------
Accounts receivable 4,211
Inventory 4,162
Prepaid expenses and other assets 208
Deferred tax asset 340
Property, plant and equipment 8,495
Intangible assets
Distribution network 1,701
Brand name 2,361
Software 1,118
Order backlog 272
Goodwill 7,343
Accounts payable and accrued liabilities (4,458)
Customer deposits (967)
Income taxes payable (143)
Deferred tax liability (4,550)
----------
Purchase consideration transferred 20,093
----------
----------
The allocation of the consideration transferred to acquired assets and
liabilities and the calculation of the working capital adjustment are
preliminary, utilizing information available at the time the interim condensed
consolidated financial statements were prepared. The allocation of the
consideration transferred is preliminary. The final allocation of the
consideration transferred and the working capital adjustment may change when
more information becomes available.
Included in prepaid expenses and other assets in the interim condensed
consolidated statement of financial position as at September 30, 2011 is $1,340
(December 31, 2010 - $1,403) related to the working capital adjustment owing
from the vendor.
The goodwill of $7,335 comprises the value of expected synergies arising from
the acquisition and the values included in the workforce of the new subsidiary.
The goodwill balance is expected to be allocated to Tramco as a CGU and certain
other North American CGUs because management expects sales synergies to result
from complementary product lines and an enhanced distribution network. The
allocation has not been finalized as of the current reporting date. Under IFRS,
a one-year window is available subsequent to the acquisition date to finalize
the allocation.
Goodwill at the time of the transaction is not deductible for tax purposes.
From the date of acquisition of December 20, 2010, Tramco contributed $184 of
revenue and a net loss before income taxes of $78 to the 2010 results of the
Company. Tramco has operations in the U.S. and the U.K. and their results were
not consolidated on a regular basis. As a result, the Company is not able to
quantify the impact Tramco would have had on the Company's financial results if
the acquisition had been made on January 1, 2010.
The impacts on the cash flow on acquisition of Tramco are as follows:
$
----------
Purchase consideration paid in 2010 9,168
Purchase consideration paid in 2011 9,930
Transferred to cash held in trust 995
Transaction costs of the acquisition paid in 2010 339
Transaction costs of the acquisition paid in 2011 164
----------
Net cash flow on acquisition 20,596
----------
----------
Transaction costs of the acquisition are included in cash flows from investing
activities. At the request of the vendor, the purchase price was paid in two
installments. As at September 30, 2011, the Company had cash held in trust of
$1,039 relating to the acquisition of Tramco.
7. OTHER EXPENSES (INCOME)
Three-month period ended Nine-month period ended
---------------------------------------------------
September September September September
30, 30, 30, 30,
2011 2010 2011 2010
$ $ $ $
---------------------------------------------------
(a) Other operating
expense (income)
Net loss (gain) on
disposal of property,
plant and equipment 65 40 67 (3)
Other (38) 17 (101) (144)
Cash flow hedging (8) (120) 126 (93)
---------------------------------------------------
19 (63) 92 (240)
---------------------------------------------------
---------------------------------------------------
(b) Finance income
(loss)
Interest income from
banks 8 221 237 445
Gain (loss) on foreign
exchange (1,865) 770 (1,107) 420
---------------------------------------------------
(1,857) 991 (870) 865
---------------------------------------------------
---------------------------------------------------
(c) Finance costs
Interest on overdrafts
and other finance costs 18 21 40 45
Interest, including non-
cash interest, on debts
and borrowings 569 569 1,679 1,748
Interest, including non-
cash interest, on
convertible debentures
(note 15) 2,561 2,520 7,648 7,553
Finance charges payable
under finance lease
contracts 4 - 17 -
---------------------------------------------------
3,152 3,110 9,384 9,346
---------------------------------------------------
---------------------------------------------------
(d) Cost of goods sold
Depreciation 1,254 717 3,589 2,074
Amortization of
intangible assets 163 204 532 367
Warranty provision 57 368 3 710
Cost of inventories
recognized as an
expense 54,951 52,286 153,714 127,856
---------------------------------------------------
56,425 53,575 157,838 131,007
---------------------------------------------------
---------------------------------------------------
(e) Selling, general and
administrative expenses
Selling, general and
administrative 11,812 11,112 35,048 30,851
Amortization of
intangible assets 695 761 2,266 2,207
Depreciation 105 99 350 285
Minimum lease payments
recognized as an
operating lease expense 243 347 717 1,041
Transaction costs 1,721 40 1,721 733
---------------------------------------------------
14,576 12,359 40,102 35,117
---------------------------------------------------
---------------------------------------------------
(f) Employee benefits
expense
Wages and salaries 19,612 15,355 55,346 42,307
Share-based payment
transaction expense 345 2,001 1,517 4,696
Pension costs 534 510 1,460 1,064
---------------------------------------------------
20,491 17,866 58,323 48,067
---------------------------------------------------
---------------------------------------------------
Included in cost of
goods sold 14,356 11,195 40,597 30,630
Included in general and
administrative expenses 6,135 6,671 17,726 17,437
---------------------------------------------------
20,491 17,866 58,323 48,067
---------------------------------------------------
---------------------------------------------------
8. INTANGIBLE ASSETS
$
----------
Balance, January 1, 2010 68,441
Amortization for the nine-month period ended (2,574)
Effect of foreign exchange rates (598)
Acquisition of subsidiaries 2,668
----------
Balance, September 30, 2010 67,937
Amortization for the three-month period ended (844)
Effect of foreign currency exchange rates (242)
Acquisition of subsidiaries 5,494
----------
Balance, December 31, 2010 72,345
Amortization for the nine-month period ended (2,798)
Effect of foreign currency exchange rates 812
Additions of internally developed intangible assets 1,334
----------
Balance, September 30, 2011 71,693
----------
----------
9. GOODWILL
September 30, December 31,
2011 2010
$ $
-----------------------------------------
Balance, beginning of period 62,355 52,187
Acquisition of subsidiaries 99 11,073
Exchange differences 1,125 (905)
-----------------------------------------
Balance, end of period 63,579 62,355
-----------------------------------------
-----------------------------------------
10. CHANGES IN NON-CASH WORKING CAPITAL
The changes in the non-cash working capital balances are calculated as follows:
Three-month period ended Nine-month period ended
-------------------------------------------------------
September September September September
30, 30, 30, 30,
2011 2010 2011 2010
$ $ $ $
-------------------------------------------------------
Accounts receivable 809 (1,829) (21,730) (27,341)
Inventory (2,793) 5,038 (12,732) (163)
Prepaid expenses and
other assets 528 322 2,927 (22)
Accounts payable and
accrued liabilities (62) (8) 4,890 5,541
Customer deposits (652) (1,468) 241 (2,728)
Provisions 3 369 (10) 710
-------------------------------------------------------
(2,167) 2,424 (26,414) (24,003)
-------------------------------------------------------
-------------------------------------------------------
11. ACCOUNTS RECEIVABLE
As is typical in the agriculture sector, Ag Growth may offer extended terms on
its accounts receivable to match the cash flow cycle of its customer. The
following table sets forth details of the age of trade accounts receivable that
are not overdue as well as an analysis of overdue amounts and the related
allowance for doubtful accounts:
September 30, December 31, January 1,
2011 2010 2010
$ $ $
---------------------------------------------
Total accounts receivable 60,759 39,019 25,571
Less allowance for doubtful
accounts (494) (484) (499)
---------------------------------------------
Total accounts receivable, net 60,265 38,535 25,072
---------------------------------------------
---------------------------------------------
Of which
Neither impaired nor past due 44,551 17,661 17,552
Not impaired and past the due
date as follows:
Within 30 days 7,280 7,231 3,457
31 to 60 days 5,474 7,044 927
61 to 90 days 1,697 3,295 795
Over 90 days 1,757 3,788 2,840
Less allowance for doubtful
accounts (494) (484) (499)
---------------------------------------------
Total accounts receivable, net 60,265 38,535 25,072
---------------------------------------------
---------------------------------------------
12. SHAREHOLDERS' EQUITY
(a) Common shares
Authorized
Unlimited voting common shares without par value
Issued
12,411,620 common shares
Number Amount
# $
-------------------------
Balance, January 1, 2010 13,020,099 157,279
Purchase of common shares under LTIP (167,900) (6,032)
Purchase of common shares under normal course
issuer bid (674,600) (8,057)
Settlement of LTIP obligation - vested shares 27,136 818
Settlement of SAIP obligation - vested shares 73,333 2,586
-------------------------
Balance, September 30, 2010 12,278,068 146,594
Settlement of LTIP obligation 54,815 1,919
Settlement of SAIP obligation 66,667 2,863
-------------------------
Balance, December 31, 2010 12,399,550 151,376
Purchase of common shares under LTIP (note 13(a)) (67,996) (3,346)
Conversion of subordinated debentures (note 15) 2,556 115
Settlement of LTIP obligation - vested shares 77,510 2,894
-------------------------
Balance, September 30, 2011 12,411,620 151,039
-------------------------
-------------------------
The 12,411,620 common shares at September 30, 2011 are net of 134,376 common
shares with a stated value of $5,428 that are being held by the Company under
the terms of the LTIP until vesting conditions are met.
(b) Normal course issuer bid
On December 10, 2009, Ag Growth commenced a normal course issuer bid for up to
1,272,423 common shares, representing 10% of the Company's public float at that
time. The normal course issuer bid terminated on December 9, 2010. In the year
ended December 31, 2010, Ag Growth purchased and cancelled 674,600 common shares
under the normal course issuer bid for $23,391.
(c) Contributed surplus
Nine-month period Nine-month period
ended ended Year ended
September 30, September 30, December 31,
2011 2010 2010
$ $ $
--------------------------------------------------------
Balance, beginning
of period 6,121 3,859 3,859
Equity-settled
director
compensation 351 157 227
Obligation under
LTIP 1,327 3,074 4,279
Exercise price on
vested SAIP awards - - 18
Settlement of LTIP
obligation -
vested shares (2,713) (819) (2,262)
--------------------------------------------------------
Balance, end of
period 5,086 6,271 6,121
--------------------------------------------------------
--------------------------------------------------------
(d) Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) is comprised of the following:
Cash flow hedge reserve
The cash flow hedge reserve contains the effective portion of the cash flow
hedge relationships incurred as at the reporting date.
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange differences
arising from the translation of the financial statements of foreign
subsidiaries. It is also used to record the effect of hedging net investments in
foreign operations.
Available-for-sale reserve
The available-for-sale reserve contains the cumulative change in the fair value
of available-for-sale investments. Gains and losses are reclassified to the
interim consolidated statements of income when the available-for-sale
investments are impaired or derecognized.
(e) Dividends paid and proposed
In the three-month period ended September 30, 2011, the Company declared
dividends of $7.5 million or $0.20 per common share (2010 - $6.4 million or
$0.17 per common share). In the nine-month period ended September 30, 2011, the
Company declared dividends of $22.6 million or $0.20 per common share (2010 -
$19.8 million or $0.17 per common share). Ag Growth's dividend policy is to pay
cash dividends on or about the 30th day of each month to shareholders of record
on the last business day of the previous month and the Company's current monthly
dividend rate is $0.20 per common share. Subsequent to September 30, 2011, the
Company declared dividends of $0.20 per common share to shareholders of record
on October 28, 2011. Total dividends declared in the year ended December 31,
2010 were $26,854 or $2.12 per common share.
(f)Shareholder protection rights plan
On December 20, 2010, the Company's Board of Directors adopted a Shareholders'
Protection Rights Plan (the "Rights Plan"). Specifically, the Board of Directors
has implemented the Rights Plan by authorizing the issuance of one right (a
"Right") in respect of each common share (the "Common Shares") of the Company
outstanding at the close of business on December 20, 2010 (the "Record Time").
In addition, the Board of Directors authorized the issuance of one Right in
respect of each additional Common Share issued from treasury after the Record
Time.
If a person, or a company acting jointly or in concert, acquires (other than
pursuant to an exemption available under the Rights Plan) beneficial ownership
of 20 percent or more of the Common Shares, Rights (other than those held by
such acquiring person which will become void) will separate from the Common
Shares and permit the holder thereof to purchase that number of Common Shares
having an aggregate market price (as determined in accordance with the Rights
Plan) on the date of consummation or occurrence of such acquisition of Common
Shares equal to four times the exercise price of the Rights for an amount in
cash equal to the exercise price. The exercise price of the Rights pursuant to
the Rights Plan is $150.00 per Right.
13. SHARE-BASED COMPENSATION PLANS
(a) Long-term incentive plan ("LTIP")
The LTIP is a compensation plan that awards common shares to key management
based on the Company's operating performance. Pursuant to the LTIP, the Company
establishes the amount to be allocated to management based upon the amount by
which distributable cash, as defined in the LTIP, exceeds a predetermined
threshold. The service period commences January 1st of the year the award is
generated and ends at the end of the fiscal year. The award vests on a graded
scale over an additional three-year period from the end of the respective
performance year. The LTIP provides for immediate vesting in the event of
retirement, death, termination without cause or in the event the participant
becomes disabled. The cash awarded under the plan formula is used to purchase Ag
Growth common shares at market prices. All vested awards are settled with
participants in common shares purchased by the administrator of the plan and
there is no cash settlement alternative.
The amount owing to participants is recorded as an equity award in contributed
surplus as the award is settled with participants with treasury shares purchased
in the open market. The expense is recorded in the interim condensed
consolidated statement of income items by function depending on the role of the
respective management member. During the three-month and nine-month periods
ended September 30, 2011, $425 and $1,327 (2010 - $1,055 and $2,928) were
expensed in the LTIP.
During the nine-month period ended September 30, 2011, the administrator
purchased 67,996 common shares (2010 - 167,900 common shares) in the market for
$3,346 (2010 - $6,032). The fair value of this share-based payment equals the
share price as of the respective measurement date as dividends related to the
shares in the administrated fund are paid annually to the LTIP participants.
(b) Share award incentive plan ("SAIP")
The Company has a SAIP which authorizes the Directors to grant awards ("Share
Awards") to employees or officers of Ag Growth or any affiliates of the Company
or consultants or other service providers to the Company and its affiliates
("Service Providers"). Share Awards may not be granted to non-management
Directors.
Under the terms of the SAIP, any Service Provider may be granted Share Awards.
Each Share Award will entitle the holder to be issued the number of common
shares designated in the Share Award, upon payment of an exercise price of $0.10
per common share and the common shares will vest and may be issued as to
one-third on each of January 1, 2010, January 1, 2011 and January 1, 2012, or
such earlier or later dates as may be determined by the Directors. In lieu of
receiving common shares, the holder, with the consent of Ag Growth, may elect to
be paid cash for the market value of the common shares in excess of the exercise
price of the common shares. The SAIP provides for immediate vesting of the Share
Awards in the event of retirement, death, termination without cause or in the
event the Service Provider becomes disabled.
The shareholders reserved for issuance 220,000 common shares, subject to
adjustment in lieu of dividends, if applicable, and no additional awards may be
granted without shareholder approval. The aggregate number of Share Awards
granted to any single Service Provider shall not exceed 5% of the issued and
outstanding common shares of Ag Growth.
In addition:
(i) The number of common shares issuable to insiders at any time, under all
security-based compensation arrangements of the Company, shall not exceed 10% of
the issued and outstanding common shares of Ag Growth; and
(ii) The number of common shares issued to insiders within any one-year period,
under all security-based compensation arrangements of the Company, shall not
exceed 10% of the issued and outstanding common shares of Ag Growth.
As at September 30, 2011, 220,000 (December 31, 2010 - 220,000) Share Awards
have been granted and 40,000 (December 31, 2010 - 80,000) remain outstanding.
During the nine-month period ended September 30, 2011, 40,000 Share Awards
vested and were exercised, at which time the participants received a cash
payment of $1,998. On January 1, 2010, 73,333 Share Awards vested and were
exercised, at which time common shares of the Company were issued for $2,586. On
October 15, 2010, the Company announced the passing of its Chief Executive
Officer. Upon his passing, 66,667 Share Awards vested and were exercised, at
which time common shares of the Company were issued for $2,863 of which $2,411
had been expensed prior to October 15, 2010 and included in the SAIP liability.
For the three-month and nine-month periods ended September 30, 2011, Ag Growth
recorded income of $221 and $161 (2010 - expense of $928 and $1,616) for the
Share Awards, respectively.
(c) Directors' Deferred Compensation Plan ("DDCP")
On May 8, 2008, the shareholders of Ag Growth approved the adoption by the
Company of the DDCP, which provides that a minimum of 20% of the remuneration of
non-management Directors be payable in common shares of the Company. The
principal purpose of the DDCP is to encourage non-management Director ownership
of common shares. According to the DDCP, every Director receives a fixed base
retainer fee, an attendance fee for meetings and a committee chair fee, if
applicable, and a minimum of 20% of the total compensation must be taken in
common shares. A Director will not be entitled to receive the common shares he
or she has been granted until a period of three years has passed since the date
of grant or until the Director ceases to be a Director, whichever is earlier.
The Directors' common shares are fixed based on the fees eligible to him for the
respective period and his decision to elect for cash payments for dividends
related to the common shares; therefore, the Director's remuneration under the
DDCP vests directly in the respective service period. The three-year period (or
any shorter period until a Director ceases to be a Director) qualifies only as a
waiting period to receive the vested common shares.
For the periods ended September 30, 2011 and 2010, the Directors elected to
receive the majority of their remuneration in common shares. For the three-month
and nine-month periods ended September 30, 2011, an expense of $141 and $351
(2010 - $17 and $152) was recorded for the share grants, and a corresponding
amount has been recorded to contributed surplus. The share grants were measured
with the contractual agreed amount of service fees for the respective period.
The total number of common shares issuable pursuant to the DDCP shall not exceed
35,000, subject to adjustment in lieu of dividends, if applicable. For the
three-month and nine-month periods ended September 30, 2011, 3,781 and 6,758
common shares were granted under the DDCP and as at September 30, 2011, a total
of 20,741 common shares had been granted under the DDCP and no common shares had
been issued.
(d) Stock option plan
On June 3, 2009, the shareholders of Ag Growth approved a stock option plan (the
"Option Plan") under which options may be granted to officers, employees and
other eligible service providers in order to provide an opportunity for these
individuals to increase their proprietary interest in Ag Growth's long-term
success.
The Company's Board of Directors or a Committee thereof shall administer the
Option Plan and designate the individuals to whom options may be granted and the
number of common shares to be optioned to each. The maximum number of common
shares issuable on exercise of outstanding options at any time may not exceed
7.5% of the aggregate number of issued and outstanding common shares, less the
number of common shares issuable pursuant to all other security-based
compensation agreements. The number of common shares reserved for issuance to
any one individual may not exceed 5% of the issued and outstanding common
shares.
Options will vest and be exercisable as to one-third of the total number of
common shares subject to the options on each of the first, second and third
anniversaries of the date of the grant. The exercise price of the options shall
be fixed by the Board of Directors or a Committee thereof on the date of the
grant and may not be less than the market price of the common shares on the date
of the grant. The options must be exercised within five years of the date of the
grant.
As at September 30, 2011, a total of 935,325 options (December 31, 2010 -
970,319) are available for grant. No options have been granted as at September
30, 2011.
(e) Summary of expenses recognized under share-based payment plans
For the three-month and nine-month periods ended September 30, 2011, an expense
of $345 and $1,517 (2010 - $2,001 and $4,696) was recognized for employee and
Director services rendered.
The total carrying amount of the liability for the SAIP as at September 30, 2011
was $1,410 (December 31, 2010 - $3,574). There have been no cancellations or
modifications to any of the plans during the nine-month period ended September
30, 2011 or the year ended December 31, 2010.
A summary of the status of the options under the SAIP is presented below:
Nine-month
period ended Year ended
September 30, December 31,
2011 2010
-------------------------------
Shares Shares
# #
-------------------------------
Outstanding, beginning of period 80,000 220,000
Exercised (40,000) (140,000)
-------------------------------
Outstanding, end of period 40,000 80,000
-------------------------------
-------------------------------
The exercise price on all SAIP awards is $0.10 per common share. All outstanding
options under the SAIP as at September 30, 2011 have a remaining contractual
life until January 1, 2012.
A summary of the status of the shares under the LTIP is presented below:
Nine-month period
ended Year ended
September 30, December 31,
2011 2010
# #
-------------------------------------
Outstanding, beginning of period 143,890 57,941
Vested (77,510) (81,951)
Granted 67,996 167,900
-------------------------------------
Outstanding, end of period 134,376 143,890
-------------------------------------
-------------------------------------
14. LONG-TERM DEBT AND OBLIGATIONS UNDER FINANCE LEASES
Interest September 30, December 31, January 1,
rate Maturity 2011 2010 2010
% $ $ $
----------------------------------------------------------
Current portion
of interest-
bearing loans
and borrowings
Obligations under
finance leases 6.5 2011 - 2012 41 432 --
Nordea equipment
loan (Euro
denominated) 2.0 2013 -- 112 --
GMAC loans 0.0 2014 16 16 16
-------------------------------------
Total current
portion of
interest-bearing
loans and
borrowings 57 560 16
-------------------------------------
Non-current
interest-bearing
loans and
borrowings
Series A secured
notes (U.S.
dollar
denominated) 6.8 2016 25,973 24,865 26,165
Nordea equipment
loan (Euro
denominated) 2.0 2013 -- 196 --
GMAC loans 0.0 2014 5 15 31
Obligations under
finance leases 6.5 2011 - 2012 133 138 --
-------------------------------------
Total non-current
interest-bearing
loans and
borrowings 26,111 25,214 26,196
-------------------------------------
26,168 25,774 26,212
Less deferred
financing costs 375 558 793
-------------------------------------
Total interest-
bearing loans
and borrowings 25,793 25,216 25,419
-------------------------------------
-------------------------------------
(a) Bank indebtedness
Ag Growth has operating facilities of $10 million and U.S. $2.0 million. The
facilities bear interest at a rate of prime plus 0.5% to prime plus 1.5% per
annum based on performance calculations. The effective interest rate during the
nine-month period ended September 30, 2011 on Ag Growth's Canadian dollar
operating facility was 3.5% (2010 - 2.9%) and on its U.S. dollar operating
facility was 3.8% (2010 - 3.8%). As at September 30, 2011, there was nil (2010 -
nil) outstanding under these facilities. The facilities mature October 29, 2012.
Collateral for the operating facilities rank pari passu with the Series A
secured notes and include a general security agreement over all assets, first
position collateral mortgages on land and buildings, assignments of rents and
leases and security agreements for patents and trademarks.
(b) Long-term debt
The Series A secured notes were issued on October 29, 2009. The non-amortizing
notes bear interest at 6.8% payable quarterly and mature on October 29, 2016.
The Series A secured notes are denominated in U.S. dollars. Collateral for the
Series A secured notes and term loans rank pari passu and include a general
security agreement over all assets, first position collateral mortgages on land
and buildings, assignments of rents and leases and security agreements for
patents and trademarks.
Ag Growth's credit facility provides for term loans of up to $38,000 and U.S.
$20,500 and matures October 29, 2012. Term loans bear interest at rates of prime
plus 0.5% to prime plus 1.5% based on performance calculations. There were no
term loans outstanding at September 30, 2011 and December 31, 2010.
The Nordea equipment loan is denominated in Euros, bears interest at 2% and was
fully repaid during the three-month period ended March 31, 2011.
GMAC loans bear interest at 0% and mature in 2014. The vehicles financed are
pledged as collateral.
(c) Covenants
Ag Growth is subject to certain financial covenants in its credit facility
agreements which must be maintained to avoid acceleration of the termination of
the agreement. The financial covenants require Ag Growth to maintain a debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio
of less than 2.0 and to provide debt service coverage of a minimum of 1.0. As at
September 30, 2011 and December 31, 2010, Ag Growth was in compliance with all
financial covenants.
15. CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES
September 30, December 31,
2011 2010
$ $
-------------------------------
Principal amount 114,885 115,000
Equity component (7,475) (7,475)
Accretion 2,428 1,438
Financing fees, net of amortization (3,197) (3,823)
-------------------------------
Convertible unsecured subordinated
debentures 106,641 105,140
-------------------------------
-------------------------------
On October 27, 2009, the Company issued convertible unsecured subordinated
debentures in the aggregate principal amount of $100 million, and on November 6,
2009, the underwriters exercised in full their over-allotment option and the
Company issued an additional $15 million of debentures (the "Debentures"). The
net proceeds of the offering, after payment of the underwriters' fee of $4.6
million and expenses of the offering of $0.5 million, were approximately $109.9
million. The Debentures were issued at a price of $1,000 per Debenture and bear
interest at an annual rate of 7.0%, payable semi-annually on June 30 and
December 31 in each year commencing June 30, 2010. The maturity date of the
Debentures is December 31, 2014.
Each Debenture is convertible into common shares of the Company at the option of
the holder at any time on the earlier of the maturity date and the date of
redemption of the Debenture, at a conversion price of $44.98 per common share,
being a conversion rate of approximately 22.2321 common shares per $1,000
principal amount of Debentures. During the nine-month period ended September 30,
2011, holders of 115 Debentures exercised the conversion option and were issued
2,556 common shares. As at September 30, 2011, Ag Growth has reserved 2,554,136
common shares for issuance upon conversion of the Debentures.
The Debentures are not redeemable before December 31, 2012. On and after
December 31, 2012 and prior to December 31, 2013, the Debentures may be
redeemed, in whole or in part, at the option of the Company at a price equal to
their principal amount plus accrued and unpaid interest, provided that the
volume weighted average trading price of the common shares during the 20
consecutive trading days ending on the fifth trading day preceding the date on
which the notice of redemption is given is not less than 125% of the conversion
price. On and after December 31, 2013, the Debentures may be redeemed, in whole
or in part, at the option of the Company at a price equal to their principal
amount plus accrued and unpaid interest.
On redemption or at maturity, the Company may, at its option, elect to satisfy
its obligation to pay the principal amount of the Debentures by issuing and
delivering common shares. The Company may also elect to satisfy its obligations
to pay interest on the Debentures by delivering common shares. The Company does
not expect to exercise the option to satisfy its obligations to pay interest by
delivering common shares and as a result the potentially dilutive impact has
been excluded from the calculation of fully diluted earnings per share (note
19). The number of any shares issued will be determined based on market prices
at the time of issuance.
The Company presents and discloses its financial instruments in accordance with
the substance of its contractual arrangement. Accordingly, upon issuance of the
Debentures, the Company recorded a liability of $107,525, less related offering
costs of $4,735. The liability component has been accreted using the effective
interest rate method, and during the nine-month period ended September 30, 2011,
the Company recorded an accretion expense of $990 (2010 - $936), non-cash
interest expense related to financing costs of $626 (2010 - $579) and interest
expense on the 7% coupon of $6,030 (2010 - $6,038). The estimated fair value of
the holder's option to convert Debentures to common shares in the amount of
$7,475 has been separated from the fair value of the liability and is included
in shareholders' equity, net of its pro rata share of financing costs of $329.
16. INCOME TAXES
The major components of income tax expense for the nine-month periods ended
September 30, 2011 and September 30, 2010 are as follows:
Interim condensed consolidated statements of income
2011 2010
$ $
---------------------
Current tax expense
Current income tax charge 4,029 3,829
Deferred tax expense
Origination and reversal of temporary differences 4,932 8,527
---------------------
Income tax expense reported in the interim condensed
consolidated statements of income 8,961 12,356
---------------------
---------------------
Interim condensed consolidated statements of comprehensive income
2011 2010
$ $
---------------------
Deferred tax related to items charged or credited
directly to other comprehensive income during the
period
Unrealized gain on derivatives and available-for-sale
investment (1,778) (1,014)
Exchange differences on translation of foreign
operations 333 17
---------------------
Income tax charged directly to other comprehensive
income (1,445) (997)
---------------------
---------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
Consolidated statements of
financial position
-----------------------------------------------
As at As at As at
September 30, December 31, January 1,
2011 2010 2010
$ $ $
-----------------------------------------------
Gross temporary differences
Inventories - (192) (120)
Property, plant and
equipment and other assets 18,633 20,045 22,400
Intangible assets (13,080) (13,044) (10,154)
Deferred financing costs 281 21 165
Accruals and long-term
provisions 613 748 452
Tax loss carryforwards
expiring between 2026 and
2029 18,396 21,871 29,736
Investment tax credit
carryforwards expiring
between 2025 and 2029 4,763 4,763 4,710
Capitalized development
expenditures (354) -- --
Convertible debentures (1,370) (1,628) (1,984)
SAIP liability 354 977 1,690
Equity impact LTIP 1,153 1,253 989
Foreign exchange gains - 6 (487)
Other comprehensive income 952 (1,221) (2,255)
-----------------------------------------------
Net deferred tax assets 30,341 33,599 45,142
-----------------------------------------------
-----------------------------------------------
Reflected in the
consolidated statements of
financial position as
follows:
Deferred tax assets 39,422 42,063 47,356
Deferred tax liabilities (9,081) (8,464) (2,214)
-----------------------------------------------
Deferred tax assets, net 30,341 33,599 45,142
-----------------------------------------------
-----------------------------------------------
The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which these temporary
differences, loss carryforwards and investment tax credits become deductible.
Based on the analysis of taxable temporary differences and future taxable
income, the management of the Company is of the opinion that there is convincing
evidence available for the probable realization of all deductible temporary
differences of the Company's tax entities. Accordingly, the Company has recorded
a deferred tax asset for deductible temporary differences as of the reporting
date and as at December 31, 2010.
The Company offsets tax assets and liabilities if and only if it has a legally
enforceable right to offset current tax assets and current tax liabilities and
the deferred tax assets and deferred tax liabilities relate to income taxes
levied by the same tax authority.
At September 30, 2011, there was no recognized deferred tax liability (December
31, 2010 - nil; January 1, 2010 - nil) for taxes that would be payable on the
unremitted earnings of certain of the Company's subsidiaries. The Company has
determined that undistributed profits of its subsidiaries will not be
distributed in the foreseeable future. The temporary differences associated with
investments in subsidiaries for which a deferred tax liability has not been
recognized, aggregate to $622 (December 31, 2010 - $622; January 1, 2010 - nil).
Income tax provisions, including current and deferred income tax assets and
liabilities, and income tax filing positions require estimates and
interpretations of federal and provincial income tax rules and regulations, and
judgments as to their interpretation and application to Ag Growth's specific
situation. The amount and timing of reversals of temporary differences will also
depend on Ag Growth's future operating results, acquisitions and dispositions of
assets and liabilities. The business and operations of Ag Growth are complex and
Ag Growth has executed a number of significant financings, acquisitions,
reorganizations and business combinations over the course of its history
including the conversion to a corporate entity. The computation of income taxes
payable as a result of these transactions involves many complex factors as well
as Ag Growth's interpretation of and compliance with relevant tax legislation
and regulations. While Ag Growth believes that its existing and proposed tax
filing positions are more likely than not to be sustained, there are a number of
existing and proposed tax filing positions including in respect of the
conversion to a corporate entity that may be the subject of review by taxation
authorities. Therefore, it is possible that additional taxes could be payable by
Ag Growth and the ultimate value of Ag Growth's income tax assets and
liabilities could change in the future and that changes to these amounts could
have a material effect on these consolidated financial statements.
There are no income tax consequences attached to the payment of dividends in
either 2011 or 2010 by the Company to its shareholders.
17. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
(a) Management of risks arising from financial instruments
Ag Growth's principal financial liabilities, other than derivatives, comprise
loans and borrowings and trade and other payables. The main purpose of these
financial liabilities is to finance the Company's operations and to provide
guarantees to support its operations. The Company has deposits, trade and other
receivables and cash and short-term deposits that are derived directly from its
operations. The Company also holds an available-for-sale investment and enters
into derivative transactions.
The Company's activities expose it to a variety of financial risks: market risk
(including foreign exchange and interest rate), credit risk and liquidity risk.
The Company's overall risk management program focuses on the unpredictability of
financial markets and seeks to minimize potential adverse effects on the
Company's financial performance. The Company uses derivative financial
instruments to mitigate certain risk exposures. The Company does not purchase
any derivative financial instruments for speculative purposes. Risk management
is the responsibility of the corporate finance function, which has the
appropriate skills, experience and supervision. The Company's domestic and
foreign operations along with the corporate finance function identify, evaluate
and, where appropriate, mitigate financial risks. Material risks are monitored
and are regularly discussed with the Audit Committee of the Board of Directors.
The Audit Committee reviews and monitors the Company's financial risk-taking
activities and the policies and procedures that were implemented to ensure that
financial risks are identified, measured and managed in accordance with Company
policies.
The risks associated with the Company's financial instruments are as follows:
Market risk
Market risk is the risk that the fair value of future cash flows of a financial
instrument will fluctuate because of changes in market prices. Components of
market risk to which Ag Growth is exposed are discussed below. Financial
instruments affected by market risk include trade accounts receivable and
payable, available-for-sale investment and derivative financial instruments.
The sensitivity analyses in the following sections relate to the position as at
September 30, 2011, December 31, 2010 and January 1, 2010.
The sensitivity analyses have been prepared on the basis that the amount of net
debt, the ratio of fixed to floating interest rates of the debt and derivatives
and the proportion of financial instruments in foreign currencies are all
constant. The analyses exclude the impact of movements in market variables on
the carrying value of provisions and on the non-financial assets and liabilities
of foreign operations.
The following assumptions have been made in calculating the sensitivity analyses:
-- The interim condensed consolidated statements of financial position
sensitivity relates to derivatives.
-- The sensitivity of the relevant interim condensed consolidated
statements of income item is the effect of the assumed changes in
respective market risks. This is based on the financial assets and
financial liabilities held at September 30, 2011 and December 31, 2010,
including the effect of hedge accounting.
-- The sensitivity of equity is calculated by considering the effect of any
associated cash flow hedges at September 30, 2011 for the effects of the
assumed underlying changes.
Foreign currency risk
The objective of the Company's foreign exchange risk management activities is to
minimize transaction exposures and the resulting volatility of the Company's
earnings, subject to liquidity restrictions, by entering into foreign exchange
forward contracts. Foreign currency risk is created by fluctuations in the fair
value or cash flows of financial instruments due to changes in foreign exchange
rates and exposure.
A significant part of the Company's sales are transacted in U.S. dollars and as
a result fluctuations in the rate of exchange between the U.S. and Canadian
dollar can have a significant effect on the Company's cash flows and reported
results. To mitigate exposure to the fluctuating rate of exchange, Ag Growth
enters into foreign exchange forward contracts and denominates a portion of its
debt in U.S. dollars. As at September 30, 2011, Ag Growth's U.S. dollar
denominated debt totalled U.S. $25 million (2010 - U.S. $25 million) and the
Company has entered into the following foreign exchange forward contracts to
sell U.S. dollars in order to hedge its foreign exchange risk:
Settlement dates Face value Average rate
U.S. $ Cdn. $
----------------------------
October - November 2011 12,000 $1.07
January - December 2012 60,000 $0.99
----------------------------
----------------------------
The Company enters into foreign exchange forward contracts to mitigate foreign
currency risk relating to certain cash flow exposures. The hedged transactions
are expected to occur within a maximum 24-month period. The Company's foreign
exchange forward contracts reduce the Company's risk from exchange movements
because gains and losses on such contracts offset losses and gains on
transactions being hedged. The Company's exposure to foreign currency changes
for all other currencies is not material.
Ag Growth's sales denominated in U.S. dollars for the nine-month period ended
September 30, 2011 were U.S. $169 million, and the total of its cost of goods
sold and its selling, general and administrative expenses denominated in that
currency were U.S. $107 million. Accordingly, a 10% increase or decrease in the
value of the U.S. dollar relative to its Canadian counterpart would result in a
$16.9 million increase or decrease in sales and a total increase or decrease of
$10.7 million in its cost of goods sold and its selling, general and
administrative expenses. In relation to Ag Growth's foreign exchange hedging
contracts, a 10% increase or decrease in the value of the U.S. dollar relative
to its Canadian counterpart would result in an increase or decrease in the
foreign exchange gain of $3.2 million and an increase or decrease to other
comprehensive income of $7.5 million.
The counterparties to the contracts are multinational commercial banks and
therefore credit risk of counterparty non-performance is remote. Realized gains
or losses are included in net income for the period and for the three-month and
nine-month periods ended September 30, 2011, the Company realized a gain on its
foreign exchange contracts of $1,642 and $4,373 (2010 - $1,284 and $5,347),
respectively.
The open foreign exchange forward contracts as at September 30, 2011 are as follows:
Notional amount of
currency sold Contract amount Cdn $ equivalent Unrealized loss
U.S. $ $ $ $
----------------------------------------------------------------------------
72,000 1.0041 72,295 3,386
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The terms of the foreign exchange forward contracts have been negotiated to
match the terms of the commitments. There were no highly probable transactions
for which hedge accounting has been claimed that have not occurred and no
significant element of hedge ineffectiveness requiring recognition in the
unaudited interim condensed consolidated statements of income.
The cash flow hedges of the expected future sales were assessed to be highly
effective and a net unrealized loss of $3,386, with a deferred tax asset of $952
relating to the hedging instruments, is included in other comprehensive income
(loss).
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market interest rates.
Furthermore, as Ag Growth regularly reviews the denomination of its borrowings,
the Company is subject to changes in interest rates that are linked to the
currency of denomination of the debt. Ag Growth's Series A secured notes and
convertible unsecured subordinated debentures outstanding at September 30, 2011,
December 31, 2010 and January 1, 2010 are at a fixed rate of interest. As such,
the Company is not currently exposed to interest rate risk.
Credit risk
Credit risk is the risk that a customer will fail to perform an obligation or
fail to pay amounts due, causing a financial loss. A substantial portion of Ag
Growth's accounts receivable are with customers in the agriculture industry and
are subject to normal industry credit risks. This credit exposure is mitigated
through the use of credit practices that limit transactions according to the
customer's credit quality and due to the accounts receivable being spread over a
large number of customers. Ag Growth establishes a reasonable allowance for
non-collectible amounts with this allowance netted against the accounts
receivable on the interim condensed consolidated statements of financial
position.
Accounts receivable and long-term receivables are subject to credit risk
exposure and the carrying values reflect management's assessment of the
associated maximum exposure to such credit risk. The Company regularly monitors
customers for changes in credit risk. Trade receivables from international
customers are often insured for events of non-payment through third-party export
insurance. In cases where the credit quality of a customer does not meet the
Company's requirements, a cash deposit is received before goods are shipped.
At September 30, 2011, the Company had two customers (December 31, 2010 - two
customers, January 1, 2010 - four customers) that accounted for approximately
17% (December 31, 2010 - 30%, January 1, 2010 - 32%) of all receivables owing.
The requirement for an impairment is analyzed at each reporting date on an
individual basis for major customers. Additionally, a large number of minor
receivables are grouped into homogeneous groups and assessed for impairment
collectively. The calculation is based on actual incurred historical data. The
Company does not hold collateral as security.
The Company does not believe that any single customer group represents a
significant concentration of credit risk.
Liquidity risk
Liquidity risk is the risk that Ag Growth will encounter difficulties in meeting
its financial liability obligations. Ag Growth manages its liquidity risk
through cash and debt management. In managing liquidity risk, Ag Growth has
access to committed short and long-term debt facilities as well as to equity
markets, the availability of which is dependent on market conditions. Ag Growth
believes it has sufficient funding through the use of these facilities to meet
foreseeable borrowing requirements.
The table below summarizes the undiscounted contractual payments of the
Company's financial liabilities as at September 30, 2011:
0 to 6 6 - 12 12 - 24 2 - 4 After 4
Total months months months years years
$ $ $ $ $ $
----------------------------------------------------
Bank debt (includes
interest) 34,970 891 891 1,771 3,532 27,885
Trade and other payables 29,445 29,445 - - - -
Finance lease
obligations 174 21 20 133 - -
Dividend payable 2,509 2,509 - - - -
Convertible unsecured
subordinated debentures
(includes interest) 141,021 4,021 4,021 8,042 124,937 -
Acquisition price,
transaction and
financing costs payable 3,180 3,180 - - - -
----------------------------------------------------
----------------------------------------------------
(b) Fair value
Set out below is a comparison by class of the carrying amounts and fair values
of the Company's financial instruments that are carried in the interim condensed
consolidated financial statements:
September 30, 2011 December 31, 2010 January 1, 2010
--------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
$ $ $ $ $ $
--------------------------------------------------------
Financial assets
Held-for-trading
Cash and cash
equivalents 2,352 2,352 34,981 34,981 109,094 109,094
Cash held in trust 1,499 1,499 1,817 1,817 - -
Restricted cash 904 904 865 865 - -
Derivative
instruments - - 4,200 4,200 9,500 9,500
Available-for-sale
equity investment 2,800 2,800 2,000 2,000 2,000 2,000
Loans and
receivables
Accounts receivable 60,265 60,265 38,535 38,535 25,072 25,072
Financial
liabilities
Other financial
liabilities
Interest-bearing
loans and
borrowings 25,994 29,337 25,204 28,171 26,212 26,338
Trade and other
payables 29,445 29,445 24,565 24,565 13,930 13,930
Finance lease
obligations 174 174 570 570 - -
Dividends payable 2,509 2,509 2,509 2,509 2,224 2,224
Acquisition price,
transaction and
financing costs
payable 3,180 3,180 11,994 11,994 1,028 1,028
Derivative
instruments 3,386 3,386 - - - -
Convertible
unsecured
subordinated
debentures 106,641 109,477 105,140 116,231 103,107 106,400
--------------------------------------------------------
--------------------------------------------------------
The fair values of the financial assets and financial liabilities are included
at the amounts at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The following methods and assumptions were used to estimate the fair values:
-- Cash and cash equivalents, cash held in trust, restricted cash, accounts
receivable, accounts payable and other current liabilities approximate
their carrying amounts largely due to the short-term maturities of these
financial instruments.
-- Fair value of quoted notes and bonds is based on price quotations at the
reporting date. The fair value of unquoted instruments, loans from banks
and other financial liabilities, obligations under finance leases, as
well as other non-current financial liabilities is estimated by
discounting future cash flows using rates currently available for debt
on similar terms, credit risk and remaining maturities.
-- The fair value of the available-for-sale financial asset was estimated
using the common share price from recently traded market transactions.
-- The Company enters into derivative financial instruments with financial
institutions with investment grade credit ratings. Derivatives valued
using valuation techniques with market observable inputs are mainly
foreign exchange forward contracts. The valuation techniques applied
include forward pricing, using present value calculations. The models
incorporate various inputs including the credit quality of
counterparties and foreign exchange spot and forward rates.
(c) Fair value ("FV") hierarchy
Ag Growth uses the following hierarchy for determining and disclosing the fair
value of financial instruments by valuation technique:
Level 1
The fair value measurements are classified as Level 1 in the FV hierarchy if the
fair value is determined using quoted, unadjusted market prices for identical
assets or liabilities.
Level 2
Fair value measurements which require inputs other than quoted prices in Level
1, and for which all inputs which have a significant effect on the recorded fair
value are observable, either directly or indirectly, are classified as Level 2
in the FV hierarchy.
Level 3
Fair value measurements which require unobservable market data or use
statistical techniques to derive forward curves from observable market data and
unobservable inputs are classified as Level 3 in the FV hierarchy.
The FV hierarchy of financial instruments measured at fair value on the interim
condensed consolidated statements of financial position is as follows:
September 30, 2011 December 31, 2010
------------------------------------------------------
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
$ $ $ $ $ $
------------------------------------------------------
Financial assets
Cash and cash
equivalents 2,352 - - 34,981 - -
Cash held in trust 1,499 - - 1,817 - -
Derivative instruments - 3,386 - - 4,200 -
Restricted cash 904 - - 865 - -
Available-for-sale
equity investment - - 2,800 - - 2,000
------------------------------------------------------
------------------------------------------------------
During the reporting periods ended September 30, 2011 and December 31, 2010,
there were no transfers between Level 1 and Level 2 fair value measurements.
At September 30, 2011, Ag Growth has $904 of restricted cash which is classified
as a current asset. The restricted cash represents advances to Ag Growth as
collateral for a receivable from an end user of Ag Growth products. The funds
will be repaid when the related receivable is collected.
The Company's available-for-sale equity investment is carried at fair value. The
fair value is estimated using the common share price from recently traded market
transactions. During the current period, there were no traded market
transactions and as such no change in the fair value measurement of the
investment was recorded.
Interest from financial instruments is recognized in finance costs and finance
income. Foreign currency and impairment and impairment reversal impacts for
loans and receivables are reflected in other income (expense).
18. CAPITAL DISCLOSURE AND MANAGEMENT
Ag Growth's capital structure is comprised of shareholders' equity and long-term
debt. Ag Growth's objectives when managing its capital structure are to maintain
and preserve Ag Growth's access to capital markets, continue its ability to meet
its financial obligations, including the payment of dividends, and finance
organic growth and acquisitions.
The Company manages the capital structure and makes adjustments to it in light
of changes in economic conditions and the risk characteristics of the underlying
assets. The Company's capital management objectives have remained unchanged from
the prior year. The Company is not subject to any externally imposed capital
requirements other than financial covenants in its credit facilities and as at
September 30, 2011 and December 31, 2010, all of these covenants were complied
with.
Ag Growth monitors its capital structure using non-IFRS financial metrics
including net debt to EBITDA for the immediately preceding 12-month period and
net debt to shareholders' equity. Net debt includes long-term debt plus the
liability component of Debentures, cash and cash equivalents and bank
indebtedness.
Ag Growth's optimal capital structure targets to maintain its net debt to EBITDA
ratio at levels below 2.5, after taking into consideration the impacts of
industry cyclicality and acquisitions. The table below calculates the ratio
based on EBITDA achieved in the previous 12 months:
September 30, 2011 December 31, 2010 January 1, 2010
$ $ $
--------------------------------------------------------
Net debt 129,892 94,677 19,416
EBITDA 51,791 65,763 60,680
Ratio 2.5 times 1.4 times 0.32 times
--------------------------------------------------------
--------------------------------------------------------
Ag Growth's optimal capital structure targets to maintain its net debt to
shareholders' equity ratio at levels below 1.0, after taking into consideration
the impacts of industry cyclicality and acquisitions:
September 30, 2011 December 31, 2010 January 1, 2010
$ $ $
--------------------------------------------------------
Net debt 129,892 94,677 19,416
Shareholders' equity 208,223 210,294 231,395
Ratio 0.62 times 0.45 times 0.08 times
--------------------------------------------------------
--------------------------------------------------------
19. EARNINGS PER SHARE
Net earnings per share are based on the consolidated net earnings for the period
divided by the weighted average number of shares outstanding during the period.
Diluted earnings per share are computed in accordance with the treasury stock
method and based on the weighted average number of shares and dilutive share
equivalents.
The following reflects the income and share data used in the basic and diluted
earnings per share computations:
Three-month period ended Nine-month period ended
-------------------------------------------------
September September September September
30, 2011 30, 2010 30, 2011 30, 2010
$ $ $ $
-------------------------------------------------
Net profit attributable to
shareholders for basic and
diluted earnings per share 4,570 15,159 21,270 31,140
Add back: interest expense
on convertible debentures - 1,716 - 5,218
-------------------------------------------------
Numerator for diluted
earnings per share 4,570 16,875 21,270 36,358
-------------------------------------------------
-------------------------------------------------
Basic weighted average
number of shares 12,411,620 12,355,646 12,427,067 12,777,449
Dilutive effect of DDCP 134,376 198,705 118,448 139,136
Dilutive effect of LTIP 17,001 11,396 15,378 9,889
Dilutive effect of
convertible debentures - 2,556,692 - 2,556,692
-------------------------------------------------
Diluted weighted average
number of shares 12,562,997 15,122,439 12,560,893 15,483,166
-------------------------------------------------
-------------------------------------------------
Basic earnings per share 0.37 1.23 1.71 2.44
Diluted earnings per share 0.36 1.12 1.69 2.35
-------------------------------------------------
-------------------------------------------------
There have been no other transactions involving ordinary shares or potential
ordinary shares between the reporting date and the date of completion of these
interim condensed consolidated financial statements.
In the nine-month periods ended September 30, 2011 and 2010, the convertible
unsecured subordinated debentures were excluded from the calculation of the
above diluted net earnings per share because their effect was anti-dilutive.
20. REPORTABLE BUSINESS SEGMENT
The Company is managed as a single business segment that manufactures and
distributes grain handling, storage and conditioning equipment. The Company
determines and presents business segments based on the information that
internally is provided to the Chief Executive Officer ("CEO"), who is Ag
Growth's Chief Operating Decision Maker ("CODM"). When making resource
allocation decisions, the CODM evaluates the operating results of the
consolidated entity.
All segment revenue is derived wholly from external customers and as the Company
has a single reportable segment, inter-segment revenue is zero.
Property, plant and
equipment, goodwill
and intangible
Revenues assets
---------------------------------------------------------------
Three-month period Nine-month period
ended ended As at As at
-------------------------------------------
September September September September September December
30, 2011 30, 2010 30, 2011 30, 2010 30, 2011 31, 2010
$ $ $ $ $ $
---------------------------------------------------------------
Canada 17,129 13,713 52,302 47,060 139,068 146,108
United States 51,395 59,266 145,714 141,504 67,429 57,166
International 14,817 15,727 40,501 29,297 11,021 10,448
---------------------------------------------------------------
83,341 88,706 238,517 217,861 217,518 213,722
---------------------------------------------------------------
---------------------------------------------------------------
The revenue information above is based on the location of the customer. The
Company has no single customer that represents 10% or more of the Company's
revenues.
21. COMMITMENTS AND CONTINGENCIES
(a) Letters of credit
As at September 30, 2011, the Company has outstanding letters of credit in the
amount of $567 (December 31, 2010 - $642).
(b) Operating leases
The Company leases office and manufacturing equipment, warehouse facilities and
vehicles under operating leases with minimum aggregate rent payable in the
future as follows:
$
---------------
Within one year 647
After one year but not more than five years 1,178
More than five years 59
---------------
1,884
---------------
---------------
These leases have a life of between one and six years with no renewal options
included in the contracts.
During the three-month and nine-month periods ended September 30, 2011, the
Company recognized an expense of $243 and $717 (2010 - $347 and $1,041) for
leasing contracts. This amount relates only to minimum lease payments.
(c) Legal actions
The Company is involved in various legal matters arising in the ordinary course
of business. The resolution of these matters is not expected to have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
22. RELATED PARTY TRANSACTION
Burnet, Duckworth & Palmer LLP provides legal services to the Company and a
Director of Ag Growth is a partner of Burnet, Duckworth & Palmer LLP. The total
cost of these legal services related to a corporate acquisition activity and
general matters was $0.4 million for the nine-month period ended September 30,
2011 (September 30, 2010 - nil) and are included in accounts payable and accrued
liabilities. These transactions are measured at the exchange amount and were
incurred during the normal course of business on similar terms and conditions to
those entered into with unrelated parties.
23. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform to the
current period's presentation.
24. SUBSEQUENT EVENTS
Effective October 3, 2011, the Company acquired the operating assets of
Airlanco, a manufacturer of aeration products and filtration systems, for cash
consideration of U.S. $11.0 million plus a working capital adjustment. The
acquisition and related transaction costs were funded from long-term debt and
the Company's cash balance. Due to the timing of the acquisition, the allocation
of the purchase price and the amount of the working capital adjustment has not
yet been finalized.
25. EXPLANATION OF TRANSITION TO IFRS
For all periods to December 31, 2010, the Company prepared its consolidated
financial statements in accordance with Canadian GAAP. The interim consolidated
financial statements for the three-month period ended March 31, 2011 were the
first interim consolidated financial statements that complied with IFRS
standards in effect as at March 31, 2011. This note explains the principal
adjustments made by the Company in restating its previous Canadian GAAP
consolidated statement of shareholders' equity as at September 30, 2010 and its
previously published Canadian GAAP consolidated income statements and
comprehensive income for the three-month and nine-month periods ended September
30, 2010.
Elected exemptions from full retrospective application
In preparing the interim consolidated financial statements as at March 31, 2011
in accordance with IFRS 1 and the interim condensed consolidated financial
statements in accordance with IAS 34, the Company has applied certain of the
optional exemptions from full retrospective application of IFRS. The optional
exemptions applied by the Company are described below.
(a) Business combinations
The Company has applied the business combinations exemption in IFRS 1 to not
apply IFRS 3 retrospectively to past business combinations. Accordingly, the
Company has not restated business combinations that took place prior to the
transition date.
(b) Share-based payments
The Company has elected to retrospectively apply the provisions of IFRS 2,
Share-based Payments ("IFRS 2") only to (i) equity instruments granted after
November 7, 2002 that are unvested at the transition date, and (ii) liability
instruments arising from share-based payment transactions that are outstanding
at the date of transition.
(c) Foreign exchange
Cumulative currency translation differences for all foreign operations are
deemed to be zero as at January 1, 2010.
(d) Borrowing costs
The Company has elected only to capitalize borrowing costs relating to
qualifying assets for which the commencement date for capitalization is on or
after the date of transition.
Reconciliation of equity as reported under Canadian GAAP and IFRS
The following is a reconciliation of the Company's equity reported in accordance
with Canadian GAAP to its equity in accordance with IFRS at September 30, 2010:
Equity
component
Common of Contributed
shares debentures surplus
Note $ $ $
-------------------------------------
As reported under Canadian GAAP -
September 30, 2010 146,594 11,914
Reclassifications -- -- --
Long-term incentive plan liability 1 -- -- 1,258
Equity component of debenture 9 -- 7,146 (7,146)
Differences increasing (decreasing)
reported amounts: -- -- --
DDCP 1 -- -- 245
SAIP 1 -- -- --
Deferred income taxes - convertible
debentures 6b -- (2,041) --
Transaction costs 2 -- -- --
Translation of foreign operations 3 -- -- --
Deferred income taxes - deferred
credit 6a -- -- --
Deferred income taxes - temporary
differences 8 -- -- --
Revenue recognition 5 -- -- --
Hedge accounting 4 -- -- --
Property, plant and equipment 8 -- -- --
Inventory 7 -- -- --
---------------------------------
As reported under IFRS - September 30,
2010 146,594 5,105 6,271
---------------------------------
---------------------------------
Accumulated
other
Retained comprehensive
earnings income Total
$ $ $
-------------------------------------
As reported under Canadian GAAP -
September 30, 2010 4,517 2,013 165,038
Reclassifications -- -- --
Long-term incentive plan liability -- -- 1,258
Equity component of debenture -- -- --
Differences increasing (decreasing)
reported amounts: -- -- --
DDCP (245) -- --
SAIP 11 -- 11
Deferred income taxes - convertible
debentures 303 -- (1,738)
Transaction costs (819) -- (819)
Translation of foreign operations (427) 427 --
Deferred income taxes - deferred
credit 41,483 -- 41,483
Deferred income taxes - temporary
differences (3,183) (49) (3,232)
Revenue recognition 3,091 -- 3,091
Hedge accounting (437) 437 --
Property, plant and equipment 11,019 200 11,219
Inventory 352 -- 352
-------------------------------------
As reported under IFRS - September 30,
2010 55,665 3,028 216,663
-------------------------------------
-------------------------------------
Notes to the reconciliations:
1.Share-Based Payments
The Company elected to retrospectively apply the provisions of IFRS 2 only to
equity-settled awards that were unvested at the transition date and liability
awards outstanding at the transition date.
The differences impacting the interim condensed consolidated statement of
changes in shareholders' equity at September 30, 2010:
-- LTIP was classified under Canadian GAAP as a liability plan, whereas
under IFRS 2 due to the final settlement of the plan with treasury
shares acquired by the administrator for the benefit of the management
members, the plan qualifies as an equity-settled plan. Therefore, this
change resulted in a reclassification of the balances from liability
into shareholders' equity. As at September 30, 2010, the impact of this
adjustment was to decrease the long-term incentive plan liability and
increase contributed surplus by $1,258.
-- Awards with graded vesting provisions are treated as a single award for
both measurement and recognition purposes under Canadian GAAP. IFRS 2
requires such awards to be treated as a series of individual awards,
with compensation measured and recognized separately for each tranche of
options within a grant that has a different vesting date. This impacts
the LTIP and the SAIP of the Company. As at September 30, 2010, the
impact of this adjustment was to decrease the share award incentive plan
liability and increase retained earnings by $11.
-- For the DDCP, the share-based remuneration vests under IFRS 2 directly
in the respective service period, whereas under Canadian GAAP the
expense was allocated over the deferred compensation period of three
years. As at September 30, 2010, the impact of this adjustment was to
decrease retained earnings and increase contributed surplus by $245.
2. Transaction Costs
In accordance with IFRS 3 (revised in 2008), transaction costs incurred in the
process of acquiring a business cannot be capitalized, but have to be
immediately expensed. Under Canadian GAAP, these transaction costs were
capitalized by Ag Growth. There is no impact in the first quarter of 2010 on the
goodwill balance, as all business combinations in 2010 were completed subsequent
to March 31, 2010. Transaction costs related to business combinations in the
amount of $819 were recorded as an IFRS adjustment as at September 30, 2010,
resulting in a decrease to retained earnings and an offsetting decrease to
prepaid expenses of $178 and goodwill of $641.
3. Translation of Foreign Operations
Under Canadian GAAP, until December 31, 2009 the Company had classified all
business units as integrated operations and therefore used the Canadian dollar
as the functional currency for all foreign entities. As at January 1, 2010, the
Company determined that its foreign operations Hi Roller, Union Iron and
Applegate had more characteristics of self-sustaining operations than integrated
foreign operations. Accordingly, the Company adopted the current rate method of
foreign currency translation for these foreign operations, resulting in using
the local currency of these foreign operations as their functional currency
under Canadian GAAP, applied on a prospective basis. In accordance with IAS 21,
for IFRS purposes every entity of the Company has to be individually reviewed
for the determination of its functional currency and this has to be performed
retrospectively as of the IFRS transition date. Therefore, for IFRS purposes, Hi
Roller, Union Iron and Applegate were classified as U.S. dollar functional
currency entities as of the transition date of January 1, 2010, whereas under
Canadian GAAP they were still Canadian dollar functional currency entities. This
change in the functional currency had the following impacts on the Company's
assets, liabilities and retained earnings:
(1) Goodwill decrease of balance by $150
(2) Property, plant and equipment increase of balance by $177
(3) Intangible assets decrease of balance by $582
(4) Deferred tax liability decrease of balance by $128
(5) Retained earnings decrease of balance by $427
For the elective exemptions from the retrospective application of IFRS 1, the
Company elected to recognize the cumulative translation adjustment existing at
the transition date directly into retained earnings. Therefore, all the above
listed impacts were directly recorded in the Company's retained earnings.
4. Hedge Accounting
Upon the adoption of IFRS, the Company redesignated its foreign currency hedge
contracts. The adjustment had no impact as at the transition date. The
adjustment resulted in an increase to accumulated other comprehensive income and
a decrease to retained earnings at September 30, 2010 of $437.
5. Revenue Recognition
Under Canadian GAAP, all product deliveries were recorded when the risk of
ownership was transferred. Similarly, for IFRS purposes, the majority of the
revenues of Ag Growth are realized at the time of transfer of the risk of
ownership. However, the Company has classified certain of its customer contracts
as construction contracts resulting in the earlier recognition of revenues and
gross margin with the application of the percentage-of-completion method of
accounting.
6. Income Taxes
The accounting for income taxes under IAS 12 resulted in the following
differences for the Company:
a. In 2009, the Company converted from an income fund into a corporate
entity under a plan of arrangement with a previously unrelated company.
As a result of this transaction, the Company received tax attributes for
which deferred tax assets in the amount of $69,800 were recorded. The
difference between this deferred tax asset and the purchase price of
$13,500 for shares of the previously unrelated company was recorded
under Canadian GAAP as a deferred credit. This deferred credit had a
carrying amount under Canadian GAAP of $41,483 as at September 30, 2010.
For IFRS purposes, the difference between the tax benefits and the
purchase price cannot be deferred, but the benefit from the higher fair
value of the tax benefits has to be retrospectively recorded as of the
transition date. The adjustment results in an increase to retained
earnings.
b. IFRS requires the bifurcation of convertible debt instruments into a
liability and an equity component. IFRS further requires the recognition
of a temporary difference based on the difference between the carrying
amount of the liability at issuance and its underlying tax basis. All
changes in the initial temporary difference for the liability component
of the convertible debt are recognized in the consolidated statement of
income.
Under Canadian GAAP, the tax basis of the liability component of the convertible
debenture is considered to be the same as its carrying amount, and therefore the
recognition of a temporary difference is not required. This difference between
IFRS and Canadian GAAP results in a decrease to the equity component of the
convertible debenture of $2,041.
7. Inventories
Due to the remeasurement of property, plant and equipment and changes to the
depreciation expense, Ag Growth was required to adjust the overhead allocation
on the valuation of its inventory by $352.
8. Property, Plant and Equipment
For all items of property, plant and equipment, the provisions of IAS 16 were
retrospectively applied. The assessment and annual review criteria of useful
lives and depreciation methods are more explicit in IFRS, which required Ag
Growth to adjust certain carrying amounts of its assets. Furthermore, the
componentization requirements are more explicit in IFRS. Differences relating to
the level of componentization, depreciation methods and useful lives resulted in
the carrying value of these assets at September 30, 2010 to increase from the
recorded amount under Canadian GAAP by $11,219. The related tax impact of the
change in temporary differences resulted in additional deferred tax liability of
$3,232 at September 30, 2010.
9. Reclassifications
Certain balances have been reclassified between accounts to conform to IFRS.
Reconciliation of profit and loss for the three-month and nine-month periods
ended September 30, 2010.
Three-month period Nine-month period
ended September ended September
30, 2010 30, 2010
Note $ $
--------------------------------------
Net income reported under Canadian
GAAP
Differences increasing
(decreasing) net income 15,410 34,278
Depreciation expense 1 505 1,359
Cost of sales 1 (50) (46)
Deferred income tax
Deferred credit 2a (2,419) (6,422)
Convertible debentures 2b 67 246
Temporary differences 2c (28) (94)
Cost of sales 3 (39) (26)
General and administrative 4 (40) (733)
General and administrative 5 (18) (75)
Loss on foreign exchange 6 (240) (437)
Revenue recognition 7 2,011 3,090
--------------------------------------
Net profit recorded under IFRS 15,159 31,140
--------------------------------------
--------------------------------------
1. The componentization of property, plant, equipment and change in useful
lives and depreciation methods resulted in a decrease to depreciation
expense of $505 and $1,359, and a decrease to the gain on sale of
property, plant and equipment of $50 and $46, respectively.
2. a. The Company converted from an income fund into a corporate entity in
2009 under a plan of arrangement that resulted in the Company receiving
tax attributes and recording a deferred tax asset of $69,800 and a
related deferred credit of $56,300. Under IFRS, deferred credits are
generally not recognized, which ultimately results in an increase in the
Company's non-cash future tax expense of $2,419 for the three-month and
$6,422 for the nine-month periods ended September 30, 2010.
b. Under IFRS, a temporary difference is recorded related to the convertible
debenture resulting in the recognition of a deferred tax liability on
transition. Subsequent adjustments to the deferred tax liability resulted in a
decrease to deferred income tax expense of $67 for the three-month and $246 for
the nine-month periods ended September 30, 2010.
c. The temporary differences arising from changes in carrying values of
inventories and property, plant and equipment on transition to IFRS result in an
increase to deferred income tax expense of $28 for the three-month period and
$94 for the nine-month period ended September 30, 2010.
3. The change in the Company's depreciation method impacted the Company's
inventory overhead rate which resulted in a change in inventory values
and change in inventories expensed through cost of goods sold.
4. Under IFRS, transaction costs incurred in the process of acquiring a
business cannot be capitalized, but instead have to be immediately
expensed resulting in an increase to selling, general and administrative
expense of $40 for the three-month and $733 for the nine-month periods
ended September 30, 2010.
5. Under IFRS, the calculation of the expense related to equity-settled
compensation plans differs to reflect changes in the measurement and
recognition of equity-settled awards that were outstanding and unvested
at the transition date and those that were granted during the period.
The impact of this adjustment was to increase the DDCP expense by $18
for the three-month and $75 for the nine-month periods ended September
30, 2010 and to decrease the SAIP expense by $1K for the three-month and
$2K for the nine-month periods ended September 30, 2010.
6. Upon the adoption of IFRS, the Company redesignated its foreign currency
hedge contracts which resulted in a loss on foreign exchange of $240 for
the three-month and a loss of $437 for the nine-month periods ended
September 30, 2010.
7. Under IFRS, the Company has identified a limited number of contracts as
construction contracts and has recognized revenue based on the
percentage-of-completion methodology which typically results in earlier
recognition of revenues and costs. As a result, certain revenues and
costs denominated in foreign currencies were recognized in different
periods compared to Canadian GAAP and were translated to Canadian
dollars at different rates of foreign exchange.
Reconciliation of comprehensive income as reported under Canadian GAAP and IFRS
The following is a reconciliation of the Company's comprehensive income reported
in accordance with Canadian GAAP to its comprehensive income in accordance with
IFRS for the three-month and nine-month periods ended September 30, 2010:
Three-month period Nine-month period
ended September ended September
Note 30, 2010 30, 2010
$ $
--------------------------------------
Comprehensive income as reported
under Canadian GAAP 14,507 30,701
--------------------------------------
Differences (decreasing)
increasing reported amounts
Differences in net income (i) (251) (3,137)
Change in other comprehensive
income
Foreign currency translation (ii) 125 1,014
--------------------------------------
(126) (2,123)
--------------------------------------
Comprehensive income as reported
under IFRS 14,381 28,578
--------------------------------------
--------------------------------------
(i) Differences in net income
Reflects the differences in net income between Canadian GAAP and IFRS as
described in note 25.
(ii) Foreign currency translation
Assets and liabilities of foreign operations having a functional currency other
than the Canadian dollar are translated at the rate of exchange prevailing at
the reporting date and revenues and expenses at average rates during the period.
The increase in property, plant and equipment related to measurement at their
revalued amounts creates increased foreign currency translation adjustments
recorded in other comprehensive income (loss).
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