Ag Growth International Inc. (TSX:AFN) ("Ag Growth" or the "Company") today
reported its financial results for the three and twelve months ended December
31, 2011, and declared dividends for March, April and May 2012.
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Three Months Ended Twelve Months Ended
(thousands of dollars) December 31 December 31
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2011 2010 2011 2010
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Trade sales (1) $ 67,039 $ 49,369 $ 301,014 $ 262,260
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Adjusted EBITDA (1) $ 8,444 $ 6,702 $ 53,274 $ 59,730
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Net profit $ 3,253 $ (379) $ 24,523 $ 30,761
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Basic Profit per Share $ 0.26 $ (0.03) $ 1.97 $ 2.43
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Fully Diluted Profit per Share $ 0.26 $ (0.03) $ 1.95 $ 2.40
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(1) See non-IFRS measures.
Overview of Results
Ag Growth achieved record sales and EBITDA in the fourth quarter of 2011 as
strong preseason activity throughout the Company's North American distribution
network drove post-harvest demand for portable handling equipment. Sales of
commercial handling equipment in the period increased over the same quarter in
the prior year due primarily to continued strength in the domestic market.
Adjusted EBITDA, net profit and profit per share all increased significantly
over the same period in the prior year.
Adjusted EBITDA in fiscal 2011 benefited from high levels of domestic demand for
commercial equipment, strong post-harvest demand for portable grain augers and
lower expenses related to stock based compensation and performance related
bonuses. Adjusted EBITDA for the fiscal year decreased compared to 2010 due to
the impact of foreign exchange, start-up challenges at the Company's greenfield
storage bin plant and regional market issues at the Company's Finland-based Mepu
division. These three items negatively impacted adjusted EBITDA by approximately
$13.5 million compared to the prior year.
"We are very pleased with our fourth quarter results", said Gary Anderson,
President and Chief Executive Officer. "Strong preseason sales of portable
equipment in both Canada and the U.S. provide an indication that our dealer
network is looking to 2012 with optimism. Strong demand for commercial equipment
continued into the fourth quarter and as result we achieved record domestic
commercial sales in 2011. The positive results from Q4 were not enough, however,
to offset the negative impacts of foreign exchange, poor regional conditions at
Mepu and the start-up issues at Twister experienced throughout the year."
"Entering 2012 we believe the challenges at Mepu and Twister have largely been
resolved. Conditions in Mepu's regional market in northern Europe appear to have
normalized due largely to a favourable 2011 harvest. 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,
although targeted gross margins may not be immediately achieved."
"We enter 2012 on a positive footing and look forward to the upcoming year with
excitement on a number of fronts. The USDA is forecasting U.S. farmers will
plant 94 million acres of corn in 2012 and a U.S. corn crop of over 14 billion
bushels for the first time. Large volumes of grain positively impact all of our
businesses, particularly the demand for portable handling equipment. Demand for
commercial equipment in North America remains strong, and overseas we expect
growth in commercial storage and handling due to positive agricultural
fundamentals and the further development of our international infrastructure. We
remain very positive with respect to our prospects internationally and have
recently established a sales and support team based in northern Europe and have
opened two new sales offices in South America. Our continued focus in new
international markets has contributed to increasing sales quoting activity and
an international order backlog well above 2011 levels.
Outlook
Management expects demand for portable grain handling equipment in 2012 will
benefit from positive on-farm economics, the potential for a large number of
corn acres in the U.S. and a return to normalized conditions in western Canada.
The USDA is currently forecasting that U.S. farmers in 2012 will plant 94
million acres of corn (2011 - 92 million acres), the highest planting level
since 1944. Based on the USDA yield estimate this may result in a corn crop in
excess of 14 billion bushels (2011 - 12.4 billion bushels). In western Canada,
management anticipates that seeded acres will more closely approximate
traditional levels as current conditions are not indicative of the excessive
spring flooding that resulted in 4 million acres of farmland going unseeded in
2011.
Sales of commercial equipment in North America were at record levels in 2011 due
to positive agricultural economics and a commercial infrastructure which is
expanding its capacity to accommodate the growing number of total bushels of
grain in the system. Based on current conditions management anticipates
continued high levels of domestic demand in 2012, however domestic sales may
fall below the record sales achieved in 2011. International commercial grain
handling sales are expected to increase compared to 2011 as the Company remains
very encouraged with respect to the outlook for developing markets and the
potential of product bundling with storage bins and other Ag Growth products.
Entering 2012, management believes the start-up challenges at our greenfield
storage bin facility at Twister are largely 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.
Management expects earnings from Mepu in 2012 to improve significantly compared
to 2011 due to improved market conditions, largely the result of a favourable
2011 harvest, and improved steel cost alignment. Mepu has historically been very
seasonal, with negative EBITDA in the first and fourth quarters, and this trend
is expected to continue in 2012.
Ag Growth remains very optimistic with respect to its international potential.
The Company has continued to invest in its international development with
additions to its sales team and has recently opened sales offices in Columbia,
Argentina and Latvia. Ag Growth's international sales backlog for 2012 is
significantly higher compared to the backlog at this time in 2011. The Company's
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.
Management expects gross margins in portable and commercial handling equipment
to remain strong in 2012 and expects margin improvements at the Mepu and Twister
divisions. The Company's gross margin expectations for storage products in 2012
are significantly higher than those achieved in 2011. However, storage sales are
expected to comprise a higher proportion of total sales in 2012 and this change
in sales mix is expected to reduce gross margin on a consolidated basis. As a
result of these offsetting factors, Ag Growth's consolidated gross margin
percentage in 2012 is expected to remain relatively consistent with 2011.
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, including the availability of credit in new markets,
also may influence demand, primarily for commercial grain handling and storage
products. Results may be also be impacted by changes in steel costs and other
material inputs. The rate of exchange between the Canadian and US dollars may
impact the comparison of results between 2012 and 2011. The Company's average
rate of exchange in 2011 was $1 USD = CAD $0.97.
Dividends
Ag Growth today announced the declaration of cash dividends of $0.20 per common
share for the months of March 2012, April 2012 and May 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
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March 2012 April 30, 2012 March 30, 2012
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April 2012 May 30, 2012 April 30, 2012
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May 2012 June 29, 2012 May 31, 2012
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MD&A and Financial Statements
Ag Growth's financial statements and management's discussion and analysis for
the three and twelve months ended December 31, 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 2:00 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,
accelerated vesting and death benefits, 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 or loss 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 and the non-cash portion of accelerated
vesting and death benefit,, 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, 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
Dated: March 14, 2012
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, 2011. Results are reported in Canadian dollars
unless otherwise stated.
The financial information contained in this MD&A has been prepared in accordance
with International Financial Reporting Standards ("IFRS"). All dollar amounts
are expressed in Canadian currency, unless otherwise noted.
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 for the year ended December 31, 2011, due
largely to revenues from divisions acquired in 2010 and 2011. The Company ended
the year with a strong fourth quarter due to robust preseason sales of portable
equipment and continued domestic strength in commercial grain handling. Adjusted
EBITDA for the fiscal year decreased compared to 2010 due to the impact of
foreign exchange, 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 three items negatively impacted adjusted EBITDA by approximately
$13.5 million compared to the prior year.
Net profit and diluted profit per share for the year ended December 31, 2011
decreased compared to the prior year due to the factors discussed above and a
decrease of $4.3 million in the Company's gain on foreign exchange. The decrease
in the foreign exchange gain was in part the result of $0.3 million non-cash
loss (2010 - gain of $1.3 million) related to the translation of its U.S. dollar
denominated debt into Canadian dollars at the year-end exchange rate.
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Year Ended
(thousands of dollars) December 31
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2011 2010
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Trade sales (1)(2) $ 301,014 $ 262,260
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Adjusted EBITDA (2) $ 53,274 $ 59,730
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Net Profit $ 24,523 $ 30,761
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Diluted profit per share $ 1.95 $ 2.40
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Funds from operations (2) $ 40,471 $ 53,067
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Dividends per share $ 2.40 $ 2.07
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Payout ratio (2) 75% 50%
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(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".
Acquisitions in 2010 and 2011
To enhance the comparison of results between 2011 and 2010, we often refer to
results "excluding acquisitions" so the analysis is comparing only the divisions
that were owned for the full twelve months in both periods. When comparing
results "excluding acquisitions" for the twelve month periods, the comparison
excludes Mepu, Franklin, Tramco and Airlanco.
Trade Sales (see non-IFRS Measures)
Trade sales in 2011 increased compared to 2010 due to revenues from divisions
acquired in 2010 and 2011, continued strength in commercial grain handling and
an increase in storage bin sales. Portable grain handling sales as measured in
base currencies ended 2011 roughly flat compared to 2010, despite less than
optimal harvest conditions that reduced in-season third quarter sales, due to
strong preseason demand as dealers began building inventory levels in advance of
the 2012 season.
Trade sales for the year ended December 31, 2011 were significantly impacted by
the rate of exchange between the Canadian and U.S. dollars. Ag Growth's average
rate of foreign exchange in 2011 was $0.97 CAD per one U.S. dollar (2010 - $1.04
CAD per one U.S. dollar). Had the foreign exchange rates experienced in 2010
been in effect in 2011, trade sales in 2011, excluding acquisitions, would have
increased by approximately an additional $12.6 million.
Gross Margin (see non-IFRS Measures)
The gross margin percentages at divisions owned for a full twelve months in both
2010 and 2011 were relatively consistent year over year, with the exception of
the Edwards/Twister division, despite significant foreign exchange headwinds.
Excluding acquisitions and Edwards/Twister, the Company's gross margin
percentage was 41% in both 2010 and 2011. The Company was able to maintain these
strong margins due to high throughput levels and continued investment in
manufacturing through capital expenditures and lean manufacturing practices.
The Company's consolidated gross margin percentage decreased from 39% in 2010 to
34% in 2011 due to the impact of foreign exchange, sales mix and challenges at
the Company's Edwards/Twister and Mepu divisions. The factors that impacted
gross margins at these divisions are discussed in more detail later in this
MD&A.
Adjusted EBITDA (see non-IFRS Measures)
Adjusted EBITDA in 2011 benefited from high levels of domestic demand for
commercial equipment, strong post-harvest demand for portable grain augers and
lower expenses related to stock based compensation and performance related
bonuses.
The stronger Canadian dollar in 2011 negatively impacted adjusted EBITDA by
approximately $5.7 million compared to 2010. Challenges experienced at the
Edwards/Twister and Mepu divisions, which are discussed in more detail later in
this MD&A, contributed to a decrease in adjusted EBITDA of $7.7 million compared
to 2010.
Diluted profit per share
The decrease in diluted profit per share compared to 2010 is primarily the
result of the decrease in adjusted EBITDA discussed above. In addition, the
Company's gain on foreign exchange decreased $4.3 million compared to 2010 due
to a $0.3 million non-cash loss on the translation of the Company's U.S. dollar
denominated debt to Canadian dollars (2010 - gain of $1.3 million) and less
favourable foreign exchange hedging rates.
Payout Ratio (see non-IFRS Measures)
The Company's payout ratio increased to 75% (2010 - 50%) due largely to the
factors that impacted adjusted EBITDA as discussed above. The increase compared
to 2010 is partially attributable to the increase in Ag Growth's monthly
dividend rate implemented in November 2010. Ag Growth's payout ratio in 2010
would have been 58% based on the current dividend rate of $2.40 per annum.
CORPORATE OVERVIEW
We are a manufacturer of agricultural equipment with a focus on grain handling,
storage and conditioning products. Our products service most agricultural
markets including the individual farmer, corporate farms and commercial
operations. 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 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 periods indicated.
Trade Sales by Geographic Region
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Year Ended
(thousands of dollars) December 31
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2011 2010
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Canada $ 63,746 $ 57,971
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US 182,727 167,482
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Overseas 54,541 36,807
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Total $ 301,014 $ 262,260
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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 30% of
production costs in fiscal 2011 (2010 - 29%). 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.
The inclusion of the assets, liabilities and operating results of a number of
acquisitions significantly impact comparisons between 2011 and 2010. These
acquisitions are summarized briefly below.
Acquisitions in Fiscal 2011
Airlanco - On October 4, 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 $11.5 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 of $0.4 million were 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.
Acquisitions in Fiscal 2010
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 - 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 Ag Growth's new storage bin product line.
Franklin's custom manufacturing business generates monthly sales of
approximately $1 million and roughly breaks even on an EBITDA basis.
Tramco - Ag Growth acquired 100% of the outstanding shares of 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 $0.5 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. Tramco manufactures
in Wichita, Kansas, and in Hull, England and has a sales office in the
Netherlands.
OUTLOOK
Management expects demand for portable grain handling equipment in 2012 will
benefit from positive on-farm economics, the potential for a large number of
corn acres in the U.S. and a return to normalized conditions in western Canada.
The USDA is currently forecasting that U.S. farmers in 2012 will plant 94
million acres of corn (2011 - 92 million acres), the highest planting level
since 1944. Based on the USDA yield estimate this may result in a corn crop in
excess of 14 billion bushels (2011 - 12.4 billion bushels). In western Canada,
management anticipates that seeded acres will more closely approximate
traditional levels as current conditions are not indicative of the excessive
spring flooding that resulted in 4 million acres of farmland going unseeded in
2011.
Sales of commercial equipment in North America were at record levels in 2011 due
to positive agricultural economics and a commercial infrastructure which is
expanding its capacity to accommodate the growing number of total bushels of
grain in the system. Based on current conditions management anticipates
continued high levels of domestic demand in 2012, however domestic sales may
fall below the record sales achieved in 2011. International commercial grain
handling sales are expected to increase compared to 2011 as the Company remains
very encouraged with respect to the outlook for developing markets and the
potential of product bundling with storage bins and other Ag Growth products.
Entering 2012, management believes the start-up challenges at our greenfield
storage bin facility at Twister are largely 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.
Management expects earnings from Mepu in 2012 to improve significantly compared
to 2011 due to improved market conditions, largely the result of a favourable
2011 harvest, and improved steel cost alignment. Mepu has historically been very
seasonal, with negative EBITDA in the first and fourth quarters, and this trend
is expected to continue in 2012.
Ag Growth remains very optimistic with respect to its international potential.
The Company has continued to invest in its international development with
additions to its sales team and has recently opened sales offices in Columbia,
Argentina and Latvia. Ag Growth's international sales backlog for 2012 is
significantly higher compared to the backlog at this time in 2011. The Company's
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.
Management expects gross margins in portable and commercial handling equipment
to remain strong in 2012 and expects margin improvements at the Mepu and Twister
divisions. The Company's gross margin expectations for storage products in 2012
are significantly higher than those achieved in 2011. However, storage sales are
expected to comprise a higher proportion of total sales in 2012 and this change
in sales mix is expected to reduce gross margin on a consolidated basis. As a
result of these offsetting factors, Ag Growth's consolidated gross margin
percentage in 2012 is expected to remain relatively consistent with 2011.
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, including the availability of credit in new markets,
also may influence demand, primarily for commercial grain handling and storage
products. Results may be also be impacted by changes in steel costs and other
material inputs. The rate of exchange between the Canadian and US dollars may
impact the comparison of results between 2012 and 2011. The Company's average
rate of exchange in 2011 was $1 USD = CAD $0.97.
DETAILED OPERATING RESULTS
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Year Ended
(thousands of dollars) December 31
----------------------------------------------------------------------------
2011 2010
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Trade sales (1) $ 301,014 $ 262,260
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Gain on foreign exchange (2) 4,918 7,007
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Sales 305,932 269,267
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Cost of inventories 198,767 160,581
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Depreciation & amortization 5,436 3,377
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Cost of sales 204,203 163,958
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General and administrative 49,392 46,009
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Transaction expenses 1,676 1,696
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Depreciation & amortization 3,758 3,353
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Other operating income (100) (605)
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Finance costs 12,668 12,484
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Finance loss (income) 159 (2,065)
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Profit before income taxes 34,176 44,437
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Current income taxes 3,910 5,627
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Deferred income taxes 5,743 8,049
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Profit for the period $ 24,523 $ 30,761
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Net profit per share
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Basic $ 1.97 $ 2.43
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Diluted $ 1.95 $ 2.40
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(1) See "Non-IFRS Measures".
(2) Primarily related to gains on foreign exchange contracts.
EBITDA RECONCILIATION
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Year Ended
(thousands of dollars) December 31
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2011 2010
----------------------------------------------------------------------------
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Profit before income taxes $ 34,176 $ 44,437
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Finance costs 12,668 12,484
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Depreciation in cost of sales and G&A expenses 5,418 3,312
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Amortization in cost of sales and G&A expenses 3,776 3,418
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Accelerated vesting and death benefits 0 2,549
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EBITDA (1) 56,038 66,200
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Transaction costs 1,676 1,696
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Gain on foreign exchange in sales (2) (4,918) (7,007)
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Loss (gain) on foreign exchange in finance income 276 (1,300)
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Loss on sale of property, plant & equipment 76 262
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Other operating expense 126 (121)
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Adjusted EBITDA (1) $ 53,274 $ 59,730
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(1) See "Non-IFRS Measures".
(2) Primarily related to gains on foreign exchange contracts.
ASSETS AND LIABILITIES
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(thousands of dollars) December 31 December 31
2011 2010
----------------------------------------------------------------------------
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Total assets $ 394,566 $ 398,385
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Total liabilities $ 192,407 $ 188,091
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EXPLANATION OF OPERATING RESULTS
Trade sales
----------------------------------------------------------------------------
Year Ended
(thousands of dollars) December 31
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Trade sales $ 301,014 $ 262,260
----------------------------------------------------------------------------
Trade sales excluding acquisitions (1) $ 238,478 $ 247,727
----------------------------------------------------------------------------
Trade sales excluding acquisitions, adjusted for
FX (2) $ 251,141 $ 247,727
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(1) Trade sales excluding acquisitions completed in 2010 and 2011.
(2) Trade sales excluding acquisitions and adjusted to assume the 2011 FX rate
was identical to the rate in 2010.
Trade sales were negatively impacted by a stronger Canadian dollar compared to
2010. If the Canadian/US dollar exchange rates in 2011 had been the same as in
2010, trade sales excluding acquisitions for the year ended December 31, 2011
would have been $12.6 million higher and exceeded the levels achieved in 2010.
Trade sales in 2011 benefited from continued strength in commercial grain
handling, increased storage bin sales and revenues from acquisitions completed
in 2010 and 2011. Portable grain handling sales as measured in base currencies
ended 2011 roughly flat compared to 2010, despite less than optimal growing
conditions that reduced in-season third quarter sales, due to strong preseason
demand as dealers began building inventory levels in advance of 2012.
International trade sales in the year ended December 31, 2011 were $54.5 million
(2010 - $36.8 million). The increase of 42% from a year earlier was primarily
due to our 2010 acquisitions of Mepu and Tramco. Excluding acquisitions,
international trade sales in 2011 were $23.2 million, compared to $27.4 million
in 2010. The year over year decrease is largely due to the inclusion of a single
$10 million sale to Russia in 2010.
Gross Profit and Gross Margin
----------------------------------------------------------------------------
Year Ended
(thousands of dollars) December 31
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Trade sales $ 301,014 $ 262,260
----------------------------------------------------------------------------
Cost of inventories (1) 198,767 160,581
----------------------------------------------------------------------------
Gross Margin $ 102,247 $ 101,678
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross Margin (1) (as a % of trade sales) 34% 39%
----------------------------------------------------------------------------
Gross Margin (2) (excluding 2010 acquisitions) 37% 39%
----------------------------------------------------------------------------
(1) Excluding depreciation and amortization included in cost of sales.
(2) Gross margin without taking into effect the divisions acquired in 2010 and
2011 so as to provide a comparison based only on the results of divisions that
were operating in both periods.
The gross margin percentages at divisions owned for a full twelve months in both
2010 and 2011 were relatively consistent year over year, with the exception of
Edwards/Twister, despite significant foreign exchange headwinds. Excluding
acquisitions and Edwards/Twister, the Company's gross margin was 41% in both
2010 and 2011. The Company was able to maintain these strong margins due to high
throughput levels and continued investment in manufacturing through capital
expenditures and lean manufacturing practices.
The Company's consolidated gross margin percentage decreased compared to 2010
due in part to the impact of foreign exchange and product sales mix. Also of
significance were challenges experienced at the Company's Edwards/Twister and
Mepu divisions:
-- Edwards/Twister - Ag Growth embarked on an ambitious greenfield storage
bin manufacturing project in 2010 and anticipated the new equipment it
had purchased would be commissioned early in 2011. The equipment was not
commissioned until June 2011 and as a result the Company had to commence
production with limited time to prototype the new designs and to
establish production processes and engineering support. As a result, the
Company experienced production inefficiencies and incurred significant
expenditures in order to properly service its customers. Entering 2012,
management believes these start-up challenges are largely resolved.
-- Mepu - Results at Finland-based Mepu in 2011 were significantly impacted
by regional market challenges. A major drought in northern Europe in
2010 led to a very poor harvest, resulting in surplus inventory
throughout the region as the Company entered 2011. In early 2011, the
region experienced a significant spike in steel costs which, due to the
unusual competitive situation, Mepu was unable to pass through to
customers. As a result, Mepu experienced significant margin compression
and reported negative EBITDA in 2011. Gross margin and EBITDA at Mepu in
2012 are expected to increase compared to 2011 due to improved market
conditions, largely the result of a favourable 2011 harvest, and
improved steel cost alignment.
General and Administrative Expenses
----------------------------------------------------------------------------
Year Ended
(thousands of dollars) December 31
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
G&A (1) $ 49,392 $ 43,460
----------------------------------------------------------------------------
G&A (as a % of trade sales) 16% 17%
----------------------------------------------------------------------------
G&A excluding acquisitions $ 38,723 $ 41,222
----------------------------------------------------------------------------
(1) G&A excluding depreciation, amortization, transaction costs and accelerated
vesting and death benefits.
G&A expenses increased compared to 2010 largely due to new acquisitions. As a
percentage of trade sales, G&A was 16% in 2011 (2010 - 17%). Compared to 2010,
G&A expenses net of acquisitions decreased $2.5 million mainly due to lower
stock-based compensation and short-term bonuses, which were partially offset by
increased professional fees related the Company's conversion to IFRS and a
continued investment in international sales development.
EBITDA and Adjusted EBITDA
----------------------------------------------------------------------------
Year Ended
(thousands of dollars) December 31
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
EBITDA (1) $ 56,038 $ 66,200
----------------------------------------------------------------------------
Adjusted EBITDA (1) $ 53,274 $ 59,730
----------------------------------------------------------------------------
(1) See the EBITDA reconciliation table above and "Non-IFRS Measures" later in
this MD&A.
The decline in EBITDA and adjusted EBITDA in 2011 compared with a year earlier
is largely due to the stronger Canadian dollar in 2011, start-up challenges at
the Company's new storage bin facility and the factors affecting Mepu, as
discussed under "Explanation of Operating results".
Finance Costs
The Company's bank indebtedness as at December 31, 2011 was $nil (2010 - $nil)
and its outstanding long-term debt and obligations under capital leases
including the current portion was $36.0 million (2010 - $25.2 million).
Long-term debt at December 31, 2011 is primarily 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 US $10.5 million of non-amortizing term
debt, net of all deferred financing costs of $0.3 million. See "Capital
Resources" for a description of the Company's credit facilities.
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 2012.
Finance costs for the year ended December 31, 2011 were $12.7 million (2010 -
$12.5 million). At December 31, 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 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.
----------------------------------------------------------------------------
Depreciation Year Ended
(thousands of dollars) December 31
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Depreciation in cost of sales $ 4,933 $ 2,927
----------------------------------------------------------------------------
Depreciation in G&A 485 385
----------------------------------------------------------------------------
Total Depreciation $ 5,418 $ 3,312
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amortization Year Ended
(thousands of dollars) December 31
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Amortization in cost of sales $ 503 $ 450
----------------------------------------------------------------------------
Amortization in G&A 3,273 2,968
----------------------------------------------------------------------------
Total Amortization $ 3,776 $ 3,418
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Effective tax rate Year Ended
(thousands of dollars) December 31
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Current tax expense $ 3,910 $ 5,627
----------------------------------------------------------------------------
Deferred tax expense 5,743 8,049
----------------------------------------------------------------------------
Total tax $ 9,653 $ 13,676
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Profit before taxes $ 34,176 $ 44,437
----------------------------------------------------------------------------
Total tax % 28.2% 30.8%
----------------------------------------------------------------------------
Current income tax expense
For the year ended December 31, 2011, the Company recorded current tax expense
of $3.9 million (2010 - $5.6 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 year ended December 31, 2011, the Company recorded deferred tax expense
of $5.7 million (2010 - $8.0 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.
Profit and profit per share
For the year ended December 31, 2011, the Company reported net profit of $24.5
million (2010 - $30.8 million), basic net profit per share of $1.97 (2010 -
$2.43), and fully diluted net profit per share of $1.95 (2010 - $2.40). Profit
per share for the year ended December 31, 2011 decreased compared to the prior
year primarily due to lower adjusted EBITDA (see "Explanation of Operating
Results") and a lower gain on foreign exchange.
Selected Annual Information (thousands of dollars, other than per share data)
----------------------------------------------------------------------------
Twelve Months Ended December 31
----------------------------------------------------------------------------
2011 2010 2009 (1)
$ $ $
----------------------------------------------------------------------------
Trade sales 301,014 262,260 237,294
----------------------------------------------------------------------------
EBITDA 56,038 66,200 60,680
----------------------------------------------------------------------------
Adjusted EBITDA 53,274 59,730 59,277
----------------------------------------------------------------------------
Net income 24,523 30,761 45,303
----------------------------------------------------------------------------
Earnings per share - basic 1.97 2.43 3.53
----------------------------------------------------------------------------
Earnings per share - fully diluted 1.95 2.40 3.45
----------------------------------------------------------------------------
Funds from operations 40,471 53,067 52,165
----------------------------------------------------------------------------
Payout ratio 75% 50% 51%
----------------------------------------------------------------------------
Dividends declared per share (2)
----------------------------------------------------------------------------
Fund trust units N/A N/A 0.85
----------------------------------------------------------------------------
Class B units N/A N/A 0.85
----------------------------------------------------------------------------
Common shares 2.40 2.07 1.19
----------------------------------------------------------------------------
Total assets 394,566 398,385 387,850
----------------------------------------------------------------------------
Total long-term liabilities 151,986 139,831 174,024
----------------------------------------------------------------------------
(1) 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.
(2) Effective June 3, 2009, the Company converted from an open-ended limited
purpose trust to a publicly listed corporation (see "Conversion to a
Corporation"). Accordingly, Fund trust units and Class B units received
distributions for the first five months of 2009, and common shareholders of the
publicly listed corporation received dividends thereafter.
The following factors impact comparability between years in the table above:
-- Sales, gain (loss) on foreign exchange, net earnings, and net earnings
per share are significantly impacted by the rate of exchange between the
Canadian and U.S. dollars.
-- On June 3, 2009, the Company converted from an income trust to a
corporation. In conjunction with the conversion transaction all Trust
Units and Class B units of the Fund were exchanged for common shares of
the corporation (see "Conversion to a Corporation").
-- Total assets and long-term liabilities were impacted by financing
activities in 2009 as the Company issued $115 million face value of
convertible debentures, repaid its long-term debt, and issued new long-
term debt.
-- The inclusion of the assets, liabilities and operating results of the
following acquisitions significantly impacts comparisons in the table
above:
-- April 29, 2010 - Mepu
-- October 1, 2010 - Franklin
-- December 20, 2010 - Tramco
-- October 4, 2011 - Airlanco
QUARTERLY FINANCIAL INFORMATION (thousands of dollars):
----------------------------------------------------------------------------
2011
----------------------------------------------------------------------------
Average
USD/CAD Diluted
Exchange Basic Profit Profit
Rate Sales Profit 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 $ 0.96 $ 67,415 $ 3,253 $ 0.26 $ 0.26
----------------------------------------------------------------------------
Fiscal 2011 $ 0.97 $ 305,932 $ 24,523 $ 1.97 $ 1.95
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010
----------------------------------------------------------------------------
Average Diluted
USD/CAD Basic Profit Profit
Exchange Profit (Loss) (Loss)
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 51,407 (380) $ (0.03) $ (0.03)
----------------------------------------------------------------------------
Fiscal 2010 $ 1.04 $ 269,267 $ 30,761 $ 2.43 $ 2.40
----------------------------------------------------------------------------
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),
Tramco (December 20, 2010) and Airlanco (October 2011).
FOURTH QUARTER
Sales and EBITDA in the fourth quarter of 2011 exceeded the record levels
achieved in 2010, despite the negative impact of foreign exchange, due to
strength in both portable and commercial grain handling sales.
Acquisitions in 2010 and 2011
In the fourth quarter narrative below the comparisons to 2010 most often include
a comparison of consolidated results and a comparison that includes only the
divisions that were owned for the full three month period in both 2010 and 2011.
The "excluding acquisitions" comparison below excludes Tramco (acquired December
2010) and Airlanco (acquired October 2011).
Trade sales
Trade sales for the three months ended December 31, 2011 were $67.0 million
(2010 - $49.4 million). Excluding acquisitions, trade sales in the fourth
quarter of 2011 were $56.1 million, an increase of $6.9 million or 14% over
2010. The increase in trade sales is largely due to increased demand for
portable grain handling equipment, as the Company's dealer network replenished
their inventory levels in advance of the 2012 season, higher domestic sales of
commercial handling equipment and an increase in storage bin sales
internationally.
Gross Margin
Gross margin as a percentage of sales for the three months ended December 31,
2011 was 33%, and excluding acquisitions the gross margin in the fourth quarter
of 2011 was 36% (2010 - 35%). Gross margin percentages in the fourth quarter of
2011 benefited from sales mix, manufacturing efficiencies realized through the
impact of lean manufacturing and the advantages of high production volumes,
partially offset by the negative impact of the stronger Canadian dollar and
quarter-over-quarter gross margin percentage decreases at the Edwards/Twister
and Mepu divisions.
Expenses
For the three months ended December 31, 2011, general and administrative
expenses were $13.6 million or 20% of sales. Excluding acquisitions, selling,
general and administrative expenses were $10.0 million or 20% of sales (2010 -
$10.4 million or 24%). The decrease of $0.4 million from 2010 was primarily the
result of a lower expense related to stock based compensation and a reduction in
short term bonuses, partially offset by increased sales and marketing expenses
as the Company continued to expand its international sales infrastructure. G&A
expenses as a percentage of sales are typically high in the fourth quarter as
the Company's trade sales are lower due to seasonality.
Adjusted EBITDA, EBITDA and Net Earnings
Adjusted EBITDA for the three months ended December 31, 2011 was $8.4 million
(2010 - $6.7 million). Excluding acquisitions, adjusted EBITDA in the fourth
quarter of 2011 was $8.2 million (2010 - $6.5 million). The increase resulted
primarily from higher sales of portable and commercial grain handling as
discussed above.
EBITDA for the three months ended December 31, 2011 was $9.7 million, compared
to $8.4 million in 2010. The increase in EBITDA is the result of the factors
above partially offset by a decrease in the Company's gain on foreign exchange
from $2.9 million in 2010 to $1.2 million in 2011.
For the three months ended December 31, 2011, the Company reported net earnings
of $3.3 million (2010 - loss of $0.4 million), basic net earnings per share of
$0.26 (2010 - loss per share of $0.03), and fully diluted net earnings per share
of $0.26 (2010 - loss per share of $0.03).
CASH FLOW AND LIQUIDITY
----------------------------------------------------------------------------
Year Ended
(thousands of dollars) December 31
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Profit before income taxes for the period $ 34,176 $ 44,437
----------------------------------------------------------------------------
Add charges (deduct credits) to operations not
requiring a current cash payment:
----------------------------------------------------------------------------
Depreciation and amortization 9,194 6,731
----------------------------------------------------------------------------
Translation loss (gain) on foreign exchange 1,793 (1,022)
----------------------------------------------------------------------------
Non-cash interest expense 2,422 2,274
----------------------------------------------------------------------------
Stock based compensation 2,038 8,214
----------------------------------------------------------------------------
Loss on sale of assets (76) (263)
----------------------------------------------------------------------------
49,547 60,371
----------------------------------------------------------------------------
Net change in non-cash working capital balances
related to operations:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accounts receivable (9,607) (9,664)
----------------------------------------------------------------------------
Inventory (9,850) (1,321)
----------------------------------------------------------------------------
Prepaid expenses and other assets 5,034 (5,248)
----------------------------------------------------------------------------
Accounts payable and accruals (1,755) 2,046
----------------------------------------------------------------------------
Customer deposits 1,445 (2,868)
----------------------------------------------------------------------------
Provisions 280 748
----------------------------------------------------------------------------
(14,453) (16,307)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Settlement of SAIP obligation (1,998) 0
----------------------------------------------------------------------------
Income tax paid (5,217) (5,063)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash provided by operations $ 27,879 $ 39,001
----------------------------------------------------------------------------
For the year ended December 31, 2011, cash provided by operations was $27.9
million (2010 - $39.0 million). The decrease in cash generated from operations
compared to 2010 is the result of a decrease in EBITDA and net earnings which
resulted primarily from the impact of foreign exchange and challenges at the
company's Edwards/Twister and Mepu divisions (see "Explanation of Operating
Results" above).
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 higher 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 2012 are expected to be generally consistent
with historical patterns, however growth in the Company's storage bin sales and
increasing international sales with extended payment terms may result in higher
than historical inventory levels and an increase in the number of days accounts
receivable remain outstanding. In addition, payment terms related to certain
preseason ordering programs have changed compared to prior years which is
expected to result in higher levels of accounts receivable in the first two
quarters of 2012.
Capital Expenditures
Ag Growth had maintenance capital expenditures of $3.9 million in the year ended
December 31, 2011 (2010 - $3.3 million), representing 1.3% of trade sales (2010
- 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.
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
year ended December 31, 2011 of $5.3 million (2010 - $21.7 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 year ended December 31, 2011,
the Company invested $3.4 million to complete the project. No additional
significant expenditures are anticipated.
ii. Manufacturing equipment - $1.3 million was invested to upgrade certain
equipment to allow for increased capacity and operating efficiency.
iii.Union Iron -$0.6 million was invested to upgrade the paint line and
shipping/receiving area to provide for increased capacity and improved
manufacturing efficiencies.
Capital expenditures in 2012 are expected to decrease modestly compared to 2011
and are expected to be financed through a combination of cash on hand, bank
indebtedness and term debt.
Cash Balance
The Company's cash balance in 2011 decreased $28 million (2010 - $74 million) as
growth in working capital and payments related to acquisitions offset cash
generated from operations net of dividend payments and capital expenditures. The
decrease was more significant in 2010 due to higher capital expenditures,
primarily due to the greenfield bin plant in Alberta, and outlays related to the
Company's normal course issuer bid.
CONTRACTUAL OBLIGATIONS (thousands of dollars)
----------------------------------------------------------------------------
Total 2012 2013 2014 2015 2016+
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Debentures 114,885 0 0 114,885 0 0
----------------------------------------------------------------------------
Long-term debt 36,134 0 0 10,709 0 25,425
----------------------------------------------------------------------------
Capital leases 131 131 0 0 0 0
----------------------------------------------------------------------------
Operating leases 2,514 657 533 513 468 343
----------------------------------------------------------------------------
Total
obligations $ 153,664 $ 788 $ 533 $ 126,107 $ 468 $ 25,768
----------------------------------------------------------------------------
Debentures relate to the aggregate principal amount of debentures issued by the
Company in October 2009 (see "Convertible Debentures" below). Long-term debt at
December 31, 2011 is comprised of US $25.0 million aggregate principal amount of
secured notes issued through a note purchase and private shelf agreement and US
$10.5 million non-amortizing term debt, net of deferred financing costs. 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 March 14, 2012, the Company had outstanding commitments of $1.5 million in
relation to capital expenditures for property, plant and equipment.
CAPITAL RESOURCES
Cash
The Company had a cash balance of $6.8 million as at December 31, 2011 (2010 -
$35.0 million). The Company's cash balance at December 31, 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 in fiscal 2011.
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 note purchase 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. Under the note purchased agreement, 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. As at December
31, 2011, US $10.5 million was drawn under this facility (2010 - $nil). The
facilities bear interest at rates of prime plus 0.50 % to prime plus 1.50% based
on performance calculations and were to mature on October 29, 2012.
Subsequent to December 31, 2011, the Company renewed its credit facility on
substantially the same terms with its existing lenders. The renewed credit
includes lender approval to expand the facility by an additional $25 million,
bears interest at rates of prime plus 0.0% to prime plus 1.0% based on
performance calculations and matures on the earlier of March 8, 2016 or three
months prior to maturity date of the Debentures, unless refinanced on terms
acceptable to the lenders. 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.
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 2012. The Company expects to exercise the buyout option upon
maturity of the equipment leases.
Convertible Debentures
In October 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 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 Debentures 2,556
---------------------------------------------------
December 31, 2011 and March 14, 2012 12,545,996
---------------------------------------------------
On November 17, 2011, Ag Growth commenced a normal course issuer bid for up to
994,508 common shares, representing 10% of the Company's public float at that
time. In the year ended December 31, 2011, no common shares were purchased under
the 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. 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 was terminated on December 9, 2010.
In the year ended December 31, 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
December 31, 2011.
Ag Growth has granted 220,000 share awards under its share award incentive plan.
In fiscal 2010 a total of 140,000 share awards vested and the equivalent number
of common shares was issued to the participants. In 2011 an additional 40,000
share awards vested however no common shares were issued as the participants
were compensated in cash rather than common shares. As at December 31, 2011, a
total of 40,000 share awards were outstanding. These vested on January 1, 2012,
however no common shares were issued as the participants were compensated in
cash rather than common shares.
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 held by the administrator until such time as
they vest to the LTIP participants. As at December 31, 2011, a total of 182,928
common shares related to the LTIP had vested to the participants.
A total of 23,144 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 year ended December 31, 2011, Ag Growth declared dividends to
shareholders of $30.1 million (2010 - $26.9 million). Ag Growth increased its
monthly 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.
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 year ended December 31,
2011 were funded through cash on hand, cash from operations and bank
indebtedness. The Company expects dividends in 2012 will be funded through bank
indebtedness and cash from operations.
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) Year Ended
December 31
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EBITDA $ 56,038 $ 66,200
----------------------------------------------------------------------------
Stock based compensation 2,038 6,511
----------------------------------------------------------------------------
Non-cash interest expense 2,422 2,274
----------------------------------------------------------------------------
Translation loss (gain) on foreign exchange 1,793 (1,022)
----------------------------------------------------------------------------
Interest expense (12,668) (12,484)
----------------------------------------------------------------------------
Income taxes paid (5,217) (5,063)
----------------------------------------------------------------------------
Maintenance capital expenditures (3,935) (3,349)
----------------------------------------------------------------------------
Funds from operations (1) $ 40,471 $ 53,067
----------------------------------------------------------------------------
Funds from operations can be reconciled to cash provided by operating activities
as follows:
----------------------------------------------------------------------------
(thousands of dollars) Year Ended
December 31
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash provided by operating activities $ 27,879 $ 39,001
----------------------------------------------------------------------------
Change in non-cash working capital 14,453 16,307
----------------------------------------------------------------------------
Settlement of SAIP option 1,998 0
----------------------------------------------------------------------------
Cash portion of death benefits (3) 0 845
----------------------------------------------------------------------------
Maintenance capital expenditures (3,935) (3,349)
----------------------------------------------------------------------------
Loss on sale of assets 76 263
----------------------------------------------------------------------------
Funds from operations (1) $ 40,471 $ 53,067
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shares outstanding (2) 12,562,335 12,828,372
----------------------------------------------------------------------------
Funds from operations per share $ 3.22 $ 4.14
----------------------------------------------------------------------------
Dividends declared per share $ 2.40 $ 2.07
----------------------------------------------------------------------------
Payout ratio (1) 75% 50%
----------------------------------------------------------------------------
(1) See "Non-IFRS Measures".
(2) Fully diluted weighted average, excluding the potential dilution of the
Debentures as the calculation includes the interest expense related to the
Debentures.
(3) Accelerated vesting and death benefits expense of $2,549 has been excluded
from EBITDA in 2010. The non-cash portion of this expense was $1,704.
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 three Canadian chartered banks to partially hedge its
foreign currency exposure on anticipated U.S. dollar sales transactions and as
at December 31, 2011, had outstanding the following foreign exchange contracts:
----------------------------------------------------------------------------
Forward Foreign Exchange Contracts
----------------------------------------------------------------------------
Face Amount Average Rate CAD Amount
Settlement Dates USD (000's) CAD (000's)
----------------------------------------------------------------------------
Jan - Dec 2012 $ 60,000 $ 0.9905 $ 59,430
----------------------------------------------------------------------------
The fair value of the outstanding forward foreign exchange contracts in place as
at December 31, 2011 was a loss of $1.8 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 December 31, 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 the notes to its December 31, 2011 audited financial statements.
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 probable 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 probable 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.
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.
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 matures on the earlier of March 8, 2016 or three
months prior to the maturity of the Debentures 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 negatively impacted.
Interest Rates
Ag Growth's term and operating credit facilities bear interest at rates that are
in part dependent 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
probable 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.
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 previous
Canadian generally accepted accounting principles ("CGAAP"). The Company's
financial statements for the quarterly reporting periods beginning March 31,
2011 and the year ending December 31, 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 33 in the Company's
December 31, 2011 audited 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 33 in the Company's
December 31, 2011 audited 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.
Presentation differences under IFRS, compared to the Company's income statement
presentation under CGAAP, include the following:
1. Sales
----------------------------------------------------------------------------
Year Ended
December 31, 2010
----------------------------------------------------------------------------
Trade sales per CGAAP $ 262,077
----------------------------------------------------------------------------
Reclassify - gain on foreign exchange 7,007
----------------------------------------------------------------------------
Adoption of IFRS - revenue recognition 183
----------------------------------------------------------------------------
Sales per IFRS $ 269,267
----------------------------------------------------------------------------
2. Cost of sales
----------------------------------------------------------------------------
Year Ended
December 31, 2010
----------------------------------------------------------------------------
Cost of sales per CGAAP $ 160,504
----------------------------------------------------------------------------
Adoption of IFRS - inventory overhead (8)
----------------------------------------------------------------------------
Adoption of IFRS - revenue recognition 85
----------------------------------------------------------------------------
Reclassify - depreciation and amortization 3,377
----------------------------------------------------------------------------
Cost of sales per IFRS $ 163,958
----------------------------------------------------------------------------
3. General and administrative expenses
----------------------------------------------------------------------------
Year Ended
December 31, 2010
----------------------------------------------------------------------------
General and administrative per CGAAP $ 35,505
----------------------------------------------------------------------------
Reclassify - stock based compensation 6,394
----------------------------------------------------------------------------
Reclassify - research & development 1,444
----------------------------------------------------------------------------
Reclassify - accelerated vesting and death benefits 2,549
----------------------------------------------------------------------------
Adoption of IFRS - acquisition costs 1,696
----------------------------------------------------------------------------
Adoption of IFRS - other 117
----------------------------------------------------------------------------
Reclassify - depreciation and amortization 3,353
----------------------------------------------------------------------------
Total general and administrative $ 51,058
----------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
Presentation of financial statements (amendments to IAS 1)
On June 16, 2011, the International Accounting Standards Board's ("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's 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, 2015. 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.
Offsetting Financial Assets and Liabilities
In December 2011, the IASB issued amendments to IAS 32 Financial Instruments:
Presentation. The amendments are intended to clarify certain aspects of the
existing guidance on offsetting financial assets and financial liabilities due
to the diversity in application of the requirements on offsetting. The IASB also
amended IFRS 7 to require information about all recognized financial instruments
that are set off in accordance with IAS 32. The amendments also require
disclosure of information about recognized financial instruments subject to
enforceable master netting arrangements and similar agreements even if they are
not set off under IAS 32.
The amendments to IAS 32 are effective for annual periods beginning on or after
January 1, 2012. However, the new offsetting disclosure requirements are
effective for annual periods beginning on or after January 1, 2013 and interim
periods within those annual periods. The amendments need to be provided
retrospectively to all comparative periods. The Company is currently assessing
the impact of adopting these amendments on the 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 of 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 3l, 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
that 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.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS
Disclosure controls and procedures are designed to provide reasonable assurance
that all relevant information is gathered and reported to senior management,
including Ag Growth's Chief Executive Officer and Chief Financial Officer, on a
timely basis so that appropriate decisions can be made regarding public
disclosure.
Management of Ag Growth is responsible for designing internal controls over
financial reporting for the Company as defined under National Instrument 52-109
issued by the Canadian Securities Administrators. Management has designed such
internal controls over financial reporting, or caused them to be designed under
their supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the financial statements for external
purposes in accordance with IFRS.
The Company acquired the assets of Airlanco in fiscal 2011 (see "Acquisitions").
Management has not completed its review of internal controls over financial
reporting or disclosure controls and procedures for this newly acquired
operation. Since the acquisition occurred within 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 this
acquisition, 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 acquisition that was included in Ag Growth's
consolidated financial statements for the twelve months ended December 31, 2011:
----------------------------------------------------------------------------
(thousands of dollars) Airlanco (1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue 2,701
----------------------------------------------------------------------------
Profit (loss) (92)
----------------------------------------------------------------------------
Current assets(2) 3,125
----------------------------------------------------------------------------
Non-current assets(2) 9,353
----------------------------------------------------------------------------
Current liabilities(2) 1,039
----------------------------------------------------------------------------
Non-current liabilities(2) 0
----------------------------------------------------------------------------
(1) Results from October 4, 2011 to December 31, 2011
(2) Balance sheets as at December 31, 2011
There have been no material changes in Ag Growth's internal controls over
financial reporting that occurred in the three month period ended December 31,
2011, that have materially affected, or are reasonably likely to materially
affect, the Company'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,
accelerated vesting and death benefits, 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 sales 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, stock-based compensation and the non-cash portion of accelerated
vesting and death benefits, 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,
Tramco and Airlanco (see "Acquisitions"), our business and strategy, including
our outlook for our financial and operating performance, 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, the cost and availability of capital,
foreign exchange rates, and competition. 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).
Ag Growth International Inc.
Consolidated Financial Statements
Ag Growth International Inc.
December 31, 2011
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Ag Growth International Inc.
We have audited the accompanying consolidated financial statements of Ag Growth
International Inc., which comprise the consolidated statements of financial
position as at December 31, 2011 and 2010 and January 1, 2010, and the
consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for the years ended December 31, 2011 and
2010, and a summary of significant accounting policies and other explanatory
information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these
consolidated financial statements in accordance with International Financial
Reporting Standards, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
Auditors' responsibility
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with
Canadian generally accepted auditing standards. Those standards require that we
comply with ethical requirements and plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditors' judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditors consider
internal control relevant to the entity's preparation and fair presentation of
the consolidated financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity's internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Ag Growth International Inc. as at
December 31, 2011 and 2010 and January 1, 2010, and its financial performance
and its cash flows for the years ended December 31, 2011 and 2010 in accordance
with International Financial Reporting Standards.
Winnipeg, Canada,
March 13, 2012. Chartered Accountants
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of Canadian dollars)
As at December As at December As at January
31,2011 31,2010 1, 2010
$ $ $
-----------------------------------------------
ASSETS (note 22)
Current assets
Cash and cash equivalents
(note 15) 6,839 34,981 109,094
Cash held in trust (note 7) - 822 -
Restricted cash (notes 6, 7,
16 and 21) 2,439 1,860 -
Accounts receivable (note 17) 49,691 38,535 25,072
Inventory (note 18) 64,558 52,574 39,621
Prepaid expenses and other
assets (note 21(f)) 2,720 7,628 1,772
Income taxes recoverable 1,506 - 598
Derivative instruments (note
27) - 4,200 7,652
-----------------------------------------------
127,753 140,600 183,809
-----------------------------------------------
Non-current assets
Property, plant and
equipment, net (note 9) 83,434 79,022 37,873
Goodwill (note 11) 65,876 62,355 52,187
Intangible assets, net (note
10) 75,510 72,345 68,441
Available-for-sale investment
(note 14) 2,800 2,000 2,000
Derivative instruments (note
27) - - 1,848
Deferred tax asset (note 25) 38,092 42,063 47,356
-----------------------------------------------
265,712 257,785 209,705
-----------------------------------------------
Assets held for sale (notes 9
and 13) 1,101 - -
-----------------------------------------------
Total assets 394,566 398,385 393,514
-----------------------------------------------
-----------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Accounts payable and accrued
liabilities (note 24 and 29) 22,264 22,623 12,736
Customer deposits 8,018 6,573 8,340
Dividends payable 2,509 2,509 2,224
Acquisition price,
transaction and financing
costs payable (notes 6 and
7) 1,938 11,994 1,028
Income taxes payable - 56 -
Current portion of long-term
debt (note 22) 16 128 16
Current portion of
obligations under finance
leases (note 22) 131 432 -
Current portion of derivative
instruments (note 27) 1,828 - -
Current portion of share
award incentive plan (note
21) 1,495 2,003 -
Provisions (note 19) 2,222 1,942 1,194
-----------------------------------------------
40,421 48,260 25,538
-----------------------------------------------
Non-current liabilities
Long-term debt (note 22) 35,824 24,518 25,403
Obligations under finance
leases (note 22) - 138 -
Convertible unsecured
subordinated debentures
(note 23) 107,202 105,140 103,107
Deferred tax liability (note
25) 8,960 8,464 2,214
Share award incentive plan
(note 21) - 1,571 5,857
-----------------------------------------------
151,986 139,831 136,581
-----------------------------------------------
Total liabilities 192,407 188,091 162,119
-----------------------------------------------
Shareholders' equity (note
20)
Common shares 151,039 151,376 157,279
Accumulated other
comprehensive income (loss) (1,875) (443) 5,590
Equity component of
convertible debentures 5,105 5,105 5,105
Contributed surplus 5,341 6,121 3,859
Retained earnings 42,549 48,135 59,562
-----------------------------------------------
Total shareholders' equity 202,159 210,294 231,395
-----------------------------------------------
Total liabilities and
shareholders' equity 394,566 398,385 393,514
-----------------------------------------------
-----------------------------------------------
Commitments and contingencies
(note 32)
See accompanying notes
On behalf of the Board of
Directors:
---------------- ---------------
(signed) Bill
Lambert (signed) John R. Brodie, FCA
Director Director
Ag Growth International Inc.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of Canadian dollars, except per share amounts)
Years ended December 31
2011 2010
$ $
--------------------------------
Sales 305,932 269,267
Cost of goods sold (note 8(d)) 204,203 163,958
--------------------------------
Gross profit 101,729 105,309
--------------------------------
Expenses
Selling, general and administrative (note
8(e)) 54,826 51,058
Other operating income (note 8(a)) (100) (605)
Finance costs (note 8(c)) 12,668 12,484
Finance expense (income) (note 8(b)) 159 (2,065)
--------------------------------
67,553 60,872
--------------------------------
Profit before income taxes 34,176 44,437
--------------------------------
Income tax expense (note 25)
Current 3,910 5,627
Deferred 5,743 8,049
--------------------------------
9,653 13,676
--------------------------------
Profit for the year 24,523 30,761
--------------------------------
--------------------------------
Profit per share - basic (note 30) 1.97 2.43
Profit per share - diluted (note 30) 1.95 2.40
--------------------------------
--------------------------------
See accompanying notes
Ag Growth International Inc.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
Year ended December
31, 2011
Equity
component of
convertible Contributed Retained
Common shares debentures surplus earnings
$ $ $ $
-------------------------------------------------------
As at January 1,
2011 151,376 5,105 6,121 48,135
Profit for the year - - - 24,523
Other comprehensive
income (loss) - - - -
Conversion of
subordinated
debentures
(note 20) 115 - - -
Share-based payment
transactions (note
21) (452) - (780) -
Dividends to
shareholders (note
20) - - - (30,109)
-------------------------------------------------------
As at December 31,
2011 151,039 5,105 5,341 42,549
-------------------------------------------------------
-------------------------------------------------------
See accompanying
notes
Ag Growth International Inc.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
Year ended December
31, 2011
Foreign Available-
Cash flow currency for-sale
hedge reserve reserve reserve Total equity
$ $ $ $
---------------------------------------------------------
As at January 1,
2011 2,966 (3,409) - 210,294
Profit for the year - - - 24,523
Other comprehensive
income (loss) (4,306) 2,286 588 (1,432)
Conversion of
subordinated
debentures
(note 20) - - - 115
Share-based payment
transactions (note
21) - - - (1,232)
Dividends to
shareholders (note
20) - - - (30,109)
---------------------------------------------------------
As at December 31,
2011 (1,340) (1,123) 588 202,159
---------------------------------------------------------
---------------------------------------------------------
See accompanying
notes
Ag Growth International Inc.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
Year ended December 31, 2010
Equity
component of
convertible Contributed Retained
Common shares debentures surplus earnings
$ $ $ $
------------------------------------------------------
As at January 1, 2010 157,279 5,105 3,859 59,562
Profit for the year - - - 30,761
Other comprehensive
loss - - - -
Share-based payment
transactions 2,154 - 2,262 -
Common shares
purchased under
normal course issuer
bid (8,057) - - (15,334)
Dividends to
shareholders - - - (26,854)
------------------------------------------------------
As at December 31,
2010 151,376 5,105 6,121 48,135
------------------------------------------------------
------------------------------------------------------
See accompanying notes
Ag Growth
International Inc.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of
Canadian dollars)
Year ended December
31, 2010
Cash flow hedge Foreign
reserve currency reserve Total equity
$ $ $
------------------------------------------------------
As at January 1, 2010 5,590 - 231,395
Profit for the year - - 30,761
Other comprehensive
loss (2,624) (3,409) (6,033)
Share-based payment
transactions - - 4,416
Common shares
purchased under
normal course issuer
bid - - (23,391)
Dividends to
shareholders - - (26,854)
------------------------------------------------------
As at December 31,
2010 2,966 (3,409) 210,294
------------------------------------------------------
------------------------------------------------------
See accompanying notes
Ag Growth International Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars)
Years ended December 31
2011 2010
$ $
--------------------------------
Profit for the year 24,523 30,761
--------------------------------
Other comprehensive loss
Change in fair value of derivatives
designated as cash flow hedges (1,556) 3,034
Gains on derivatives designated as cash
flow hedges recognized in net earnings in
the current period (4,452) (6,692)
Income tax effect on cash flow hedges 1,702 1,034
Exchange differences on translation of
foreign operations 2,286 (3,409)
Gain on available-for-sale financial assets 800 -
Income tax effect on available-for-sale
financial assets (212) -
--------------------------------
Other comprehensive loss for the year (1,432) (6,033)
--------------------------------
Total comprehensive income for the year 23,091 24,728
--------------------------------
--------------------------------
See accompanying notes
Ag Growth International Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars, except per share
amounts)
Years ended December 31
2011 2010
$ $
--------------------------------
OPERATING ACTIVITIES
Profit before income taxes for the year 34,176 44,437
Add (deduct) items not affecting cash
Depreciation of property, plant and
equipment 5,418 3,313
Amortization of intangible assets 3,776 3,418
Translation loss (gain) on foreign exchange 1,793 (1,022)
Non-cash component of interest expense 2,422 2,274
Accelerated vesting - 1,703
Stock-based compensation 2,038 6,511
Loss on sale of property, plant and
equipment (76) (263)
--------------------------------
49,547 60,371
Net change in non-cash working capital
balances related to operations (note 15) (14,453) (16,307)
Settlement of SAIP obligation (1,998) -
Income tax paid (5,217) (5,063)
--------------------------------
Cash provided by operating activities 27,879 39,001
--------------------------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (9,254) (25,021)
Acquisition of shares of Tramco, Inc. (note
7), net of cash acquired (9,930) (10,163)
Acquisition of shares of Mepu Oy, including
bank indebtedness assumed (note 7) - (12,309)
Acquisition of assets of Franklin
Enterprises Ltd. (note 7) - (8,856)
Acquisition of assets of Airlanco Inc. (note
6) (11,970) -
Transfer to cash held in trust (243) (2,682)
Proceeds from sale of property, plant and
equipment 500 648
Development of intangible assets (1,471) -
Transaction and financing costs payable (433) 1,484
--------------------------------
Cash used in investing activities (32,801) (56,899)
--------------------------------
FINANCING ACTIVITIES
Repayment of long-term debt (319) (89)
Repayment of obligations under finance
leases (439) (135)
Issuance of long-term debt 10,993 -
Dividends paid (30,109) (26,568)
Purchase of common shares under the normal
course issuer bid - (23,391)
Purchase of shares in the market under the
long-term incentive plan (3,346) (6,032)
--------------------------------
Cash used in financing activities (23,220) (56,215)
--------------------------------
Net decrease in cash and cash
equivalentsduring the year (28,142) (74,113)
Cash and cash equivalents, beginning of year 34,981 109,094
--------------------------------
Cash and cash equivalents, end of year 6,839 34,981
--------------------------------
--------------------------------
Interest expense paid 10,259 11,694
--------------------------------
--------------------------------
See accompanying notes
1. ORGANIZATION
The consolidated financial statements of Ag Growth International Inc. ("Ag
Growth Inc.") for the years ended December 31, 2011 and 2010 were authorized for
issuance in accordance with a resolution of the directors on March 13, 2012. 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 conducts business in the grain handling, storage and conditioning market.
Included in these 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance
These consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") as issued by the
International Accounting Standards Board ("IASB").
The first date at which IFRS was applied was January 1, 2010 (the "Transition
Date"). Note 33 contains reconciliations and descriptions of the effect of the
Company's transition from Canadian generally accepted accounting principles
("GAAP") to IFRS. It also includes reconciliations of: the consolidated
statements of financial position as at January 1, 2010 and December 31, 2010;
the change in equity as at January 1, 2010 and December 31, 2010; and the
changes in net income and comprehensive income for the year ended December 31,
2010.
Basis of preparation
The consolidated financial statements are presented in Canadian dollars, which
is also the functional currency of the parent company Ag Growth International
Inc. All values are rounded to the nearest thousand. They are prepared on the
historical cost basis, except for derivative financial instruments, which are
measured at fair value.
The accounting policies set out below have been applied consistently to all
periods presented in these consolidated financial statements and in preparing an
opening IFRS consolidated statement of financial position at January 1, 2010,
for the purposes of the transition, except for elected exemptions as described
in note 33.
Principles of consolidation
The consolidated financial statements include the accounts of Ag Growth
International Inc. and its wholly owned subsidiaries, Ag Growth Industries
Partnership, AGX Holdings Inc., Ag Growth Holdings Corp., Westfield Distributing
(North Dakota) Inc., Hansen Manufacturing Corp. ("Hi Roller"), Union Iron Inc.
("Union Iron"), Applegate Trucking Inc., Applegate Livestock Equipment, Inc.
("Applegate"), Airlanco Inc. ("Airlanco"), Tramco, Inc. ("Tramco"), Tramco
Europe Ltd., Euro-Tramco B.V., Ag Growth Suomi Oy and Mepu Oy ("Mepu") as at
December 31, 2011. Subsidiaries are fully consolidated from the date of
acquisition, it being the date on which Ag Growth obtains control, and continue
to be consolidated until the date that such control ceases. The financial
statements of the subsidiaries are prepared for the same reporting period as the
Company, using consistent accounting policies. All intra-company balances,
income and expenses and unrealized gains and losses resulting from intra-company
transactions are eliminated in full.
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost
of an acquisition is measured as the fair value of the assets given, equity
instruments and liabilities incurred or assumed at the date of exchange.
Acquisition costs for business combinations are expensed and included in
selling, general and administrative expenses. Identifiable assets acquired and
liabilities and contingent liabilities assumed in a business combination are
measured initially at fair values at the date of acquisition.
Goodwill is initially measured at cost, being the excess of the cost of the
business combination over Ag Growth's share in the net fair value of the
acquiree's identifiable assets, liabilities and contingent liabilities. Any
negative difference is recognized directly in the statement of income. If the
fair values of the assets, liabilities and contingent liabilities can only be
calculated on a provisional basis, the business combination is recognized using
provisional values. Any adjustments resulting from the completion of the
measurement process are recognized within 12 months of the date of acquisition
("measurement period").
After initial recognition, goodwill is measured at cost less any accumulated
impairment losses. For the purpose of impairment testing, goodwill acquired in a
business combination is, from the acquisition date, allocated to each of Ag
Growth's cash-generating units ("CGU") that are expected to benefit from the
synergies of the combination, irrespective of whether other assets and
liabilities of the acquiree are assigned to those CGUs. Where goodwill forms
part of a CGU and part of the operating unit is disposed of, the goodwill
associated with the operation disposed of is included in the carrying amount of
the operation when determining the gain or loss on disposal of operation. If the
Company reorganizes its reporting structure in a way that changes the
composition of one or more CGUs to which goodwill has been allocated, the
goodwill is reallocated to the units affected. Goodwill disposed of or
reallocated in these cases is measured based on the relative values of the
operation disposed of and the portion of the CGU retained, or the relative fair
value of the part of a CGU allocated to a new CGU compared to the part remaining
in the old organizational structure.
On first-time adoption of IFRS, Ag Growth elected not to apply IFRS 3, Business
Combinations retrospectively to acquisitions carried out before January 1, 2010.
Accordingly, the goodwill associated with acquisitions carried out prior to the
IFRS transition date of January 1, 2010 is carried at the amount reported in the
consolidated financial statements prepared under Canadian GAAP as of December
31, 2009.
Foreign currency translation
Each entity in Ag Growth determines its own functional currency and items
included in the financial statements of each entity are measured using that
functional currency.
Transactions in foreign currencies are initially recorded by Ag Growth entities
at their respective functional currency rates prevailing at the date of the
transaction.
Monetary items are translated at the functional currency spot rate as of the
reporting date. Exchange differences from monetary items are recognized in the
statement of income. Non-monetary items that are not carried at fair value are
translated using the exchange rates as at the dates of the initial transaction.
Non-monetary items measured at fair value in a foreign currency are translated
using the exchange rates at the date when the fair value is determined.
The assets and liabilities of foreign operations are translated into Canadian
dollars at the rate of exchange prevailing at the reporting date and their
statements of income are translated at the monthly rates of exchange. The
exchange differences arising on the translation are recognized in other
comprehensive income. On disposal of a foreign operation, the component of other
comprehensive income relating to that particular foreign operation is recognized
in the consolidated statement of income.
Any goodwill arising on the acquisition of a foreign operation and any fair
value adjustments to the carrying amounts of assets and liabilities arising on
the acquisition are treated as assets and liabilities of the foreign operation
and translated at the rate of exchange prevailing at the reporting date.
Property, plant and equipment
Property, plant and equipment is stated at cost, net of any accumulated
depreciation and any impairment losses determined. Cost includes the purchase
price, any costs directly attributable to bringing the asset to the location and
condition necessary and, where relevant, the present value of all dismantling
and removal costs. Where major components of property, plant and equipment have
different useful lives, the components are recognized and depreciated
separately. Ag Growth recognizes in the carrying amount of an item of property,
plant and equipment the cost of replacing part of such an item when the cost is
incurred and if it is probable that the future economic benefits embodied with
the item can be reliably measured. All other repair and maintenance costs are
recognized in the consolidated statement of income as an expense when incurred.
Depreciation is calculated on a straight-line basis over the estimated useful
lives of the assets as follows:
Buildings and building components 20 to 60 years
Manufacturing equipment 10 to 20 years
Computer hardware 5 years
Leasehold improvements Over the lease period
Equipment under finance leases 10 years
Furniture and fixtures 5 to 10 years
Vehicles 4 to 16 years
An item of property, plant and equipment and any significant part initially
recognized is derecognized upon disposal or when no future economic benefits are
expected from its use or disposal. Any gain or loss arising on derecognition of
the asset is included in the consolidated statement of income when the asset is
derecognized.
The assets' useful lives and methods of depreciation of assets are reviewed at
each financial year-end, and adjusted prospectively, if appropriate. No
depreciation is taken on construction in progress until the asset is placed in
use. Amounts representing direct costs incurred for major overhauls are
capitalized and depreciated over the estimated useful life of the different
components replaced.
Leases
The determination of whether an arrangement is, or contains, a lease is based on
whether fulfillment of the arrangement is dependent on the use of a specific
asset or assets or the arrangement conveys a right to use the asset.
Finance leases, which transfer to Ag Growth substantially all the risks and
benefits incidental to ownership of the leased item, are capitalized at the
commencement of the lease at the fair value of the leased property or, if lower,
at the present value of the minimum lease payments. Lease payments are
apportioned between finance charges and reduction of the lease liability so as
to achieve a constant rate of interest on the remaining balance of the
liability. Finance charges are recognized in finance costs in the consolidated
statement of income.
Leased assets are depreciated over the useful life of the asset. However, if
there is no reasonable certainty that Ag Growth will obtain ownership by the end
of the lease term, the asset is depreciated over the shorter of the estimated
useful life of the asset and the lease term.
Operating lease payments are recognized as an expense in the consolidated
statement of income on a straight-line basis over the lease term.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or
production of an asset that necessarily takes a substantial period of time,
which Ag Growth considers to be 12 months or more, to get ready for its intended
use or sale, are capitalized as part of the cost of the respective assets. All
other borrowing costs are expensed in the period they occur.
Intangible assets
Intangible assets acquired separately are measured on initial recognition at
cost. The cost of intangible assets acquired in a business combination is its
fair value at the date of acquisition. Following initial recognition, intangible
assets are carried at cost less any accumulated amortization and any accumulated
impairment losses. The useful lives of intangible assets are assessed as either
finite or indefinite. Intangible assets with finite useful lives are amortized
over the useful economic life and assessed for impairment whenever there is an
indication that the intangible asset may be impaired. The amortization method
and amortization period of an intangible asset with a finite useful life is
reviewed at least annually. Changes in the expected useful life or the expected
pattern of consumption of future economic benefits embodied in the asset are
accounted for by changing the amortization period or method, as appropriate, and
are treated as changes in accounting estimates. The amortization expense on
intangible assets with finite lives is recognized in the consolidated statement
of income in the expense category consistent with the function of the intangible
assets.
Intangible assets with indefinite useful lives, which include brand names, are
not amortized, but are tested for impairment annually, either individually or at
the CGU level. The assessment of indefinite life is reviewed annually to
determine whether the indefinite life continues to be supportable. If not, the
change in useful life from indefinite to finite is made on a prospective basis.
Internally generated intangible assets are capitalized when the product or
process is technically and commercially feasible and Ag Growth has sufficient
resources to complete development. The cost of an internally generated
intangible asset comprises all directly attributable costs necessary to create,
produce and prepare the asset to be capable of operating in the manner intended
by management. Expenditures incurred to develop new demos and prototypes are
recorded at cost as internally generated intangible assets. Amortization of the
internally generated intangible assets begins when the development is complete
and the asset is available for use and it is amortized over the period of
expected future benefit. Amortization is recorded in cost of goods sold. During
the period of development, the asset is tested for impairment at least annually.
Finite life intangible assets are amortized on a straight-line basis over the
estimated useful lives of the related assets as follows:
Patents 8 years
Distribution networks 8-25 years
Demos and prototypes 3-10 years
Inventory order backlog 3-6 months
Software 8 years
Gains or losses arising from derecognition of an intangible asset are measured
as the difference between the net disposal proceeds and the carrying amount of
the asset and are recognized in the statement of income when the asset is
derecognized.
Impairment of non-financial assets
Ag Growth assesses at each reporting date whether there is an indication that an
asset may be impaired. If such an indication exists, or when annual testing for
an asset is required, Ag Growth estimates the asset's recoverable amount. The
recoverable amount of goodwill as well as intangible assets not yet available
for use is estimated at least annually on December 31. The recoverable amount is
the higher of an asset's or CGU's fair value less costs to sell and its value in
use.
Value in use is determined by discounting estimated future cash flows using a
pre-tax discount rate that reflects the current market assessment of the time
value of money and the specific risks of the asset. In determining fair value
less costs to sell, recent market transactions are taken into account, if
available. If no such transactions can be identified, an appropriate valuation
model is used. The recoverable amount of assets that do not generate independent
cash flows is determined based on the CGU to which the asset belongs.
Ag Growth bases its impairment calculation on detailed budgets and forecast
calculations that are prepared separately for each of Ag Growth's CGUs to which
the individual assets are allocated. These budgets and forecast calculations
generally cover a period of five years. For periods after five years, a terminal
value approach is used.
An impairment loss is recognized in the consolidated statement of income if an
asset's carrying amount or that of the CGU to which it is allocated is higher
than its recoverable amount. Impairment losses of CGUs are first charged against
the carrying value of the goodwill balance included in the CGU and then against
the value of the other assets, in proportion to their carrying amount. In the
consolidated statement of income, the impairment losses are recognized in those
expense categories consistent with the function of the impaired asset.
For assets other than goodwill, an assessment is made at each reporting date as
to whether there is any indication that previously recognized impairment losses
may no longer exist or may have decreased. If such indication exists, Ag Growth
estimates the asset's or CGU's recoverable amount. A previously recognized
impairment loss is reversed only if there has been a change in the assumptions
used to determine the asset's recoverable amount since the last impairment loss
was recognized. The reversal is limited so that the carrying amount of the asset
does not exceed its recoverable amount, nor exceed the carrying amount that
would have been determined, net of depreciation, had no impairment loss been
recognized for the asset or CGU in prior years. Such a reversal is recognized in
the consolidated statement of income.
Goodwill is tested for impairment annually as at December 31 and when
circumstances indicate that the carrying value may be impaired. Impairment is
determined for goodwill by assessing the recoverable amount of each CGU to which
the goodwill relates. Where the recoverable amount of the CGU is less than its
carrying amount, an impairment loss is recognized. Impairment losses relating to
goodwill cannot be reversed in future periods.
Intangible assets with indefinite useful lives are tested for impairment
annually as at December 31, either individually or at the CGU level, as
appropriate, and when circumstances indicate that the carrying value may be
impaired.
Cash and cash equivalents
All highly liquid temporary cash investments with an original maturity of three
months or less when purchased are considered to be cash equivalents. For the
purpose of the consolidated statement of cash flows, cash and cash equivalents
consist of cash and money market funds, net of outstanding bank overdrafts.
Inventory
Inventory is comprised of raw materials and finished goods. Inventory is valued
at the lower of cost and net realizable value, using a first-in, first-out
basis. For finished goods, costs include all direct costs incurred in
production, including direct labour and materials, freight, directly
attributable manufacturing overhead costs based on normal operating capacity and
property, plant and equipment depreciation.
Inventories are written down to net realizable value when the cost of
inventories is estimated to be unrecoverable due to obsolescence, damage or
declining selling prices. Net realizable value is the estimated selling price in
the ordinary course of business, less estimated costs of completion and the
estimated costs necessary to make the sale. When the circumstances that
previously caused inventories to be written down below cost no longer exist, or
when there is clear evidence of an increase in selling prices, the amount of the
write-down previously recorded is reversed.
Financial instruments
Financial assets and liabilities
Ag Growth classifies its financial assets as (i) financial assets at fair value
through profit or loss, (ii) loans and receivables or (iii) available-for-sale,
and its financial liabilities as either (i) financial liabilities at fair value
through profit or loss or (ii) other financial liabilities. Derivatives are
designated as hedging instruments in an effective hedge, as appropriate.
Appropriate classification of financial assets and liabilities is determined at
the time of initial recognition or when reclassified in the consolidated
statement of financial position.
All financial instruments are recognized initially at fair value plus, in the
case of investments and liabilities not at fair value through profit or loss,
directly attributable transaction costs. Financial instruments are recognized on
the trade date, which is the date on which Ag Growth commits to purchase or sell
the asset.
Financial assets at fair value through profit or loss ("FVTPL")
Financial assets at FVTPL include financial assets held-for-trading and
financial assets designated upon initial recognition at FVTPL. Financial assets
are classified as held-for-trading if they are acquired for the purpose of
selling or repurchasing in the near term. This category includes derivative
financial instruments entered into that are not designated as hedging
instruments in hedge relationships as defined by IAS 39.
Financial assets at FVTPL are carried in the consolidated statement of financial
position at fair value with changes in the fair value recognized in finance
income or finance costs in the consolidated statement of income.
Ag Growth has currently not designated any financial assets upon initial
recognition as FVTPL.
Derivatives embedded in host contracts are accounted for as separate derivatives
and recorded at fair value if their economic characteristics and risks are not
closely related to those of the host contracts and the host contracts are not
held-for-trading. These embedded derivatives are measured at fair value with
changes in fair value recognized in the consolidated statement of income.
Reassessment only occurs if there is a change in the terms of the contract that
significantly modifies the cash flows that would otherwise be required.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. Assets in this
category include receivables and cash and cash equivalents. Loans and
receivables are initially recognized at fair value plus transaction costs. They
are subsequently measured at amortized cost using the effective interest method
less any impairment. The effective interest amortization is included in finance
income in the consolidated statement of income. The losses arising from
impairment are recognized in the consolidated statement of income in finance
costs.
Available-for-sale financial investments
Available-for-sale financial investments include equity and debt securities.
Equity investments classified as available-for-sale are those which are neither
classified as held-for-trading nor designated at FVTPL. Debt securities in this
category are those which are intended to be held for an indefinite period of
time and which may be sold in response to needs for liquidity or in response to
changes in the market conditions.
After initial measurement, available-for-sale financial investments are
subsequently measured at fair value with unrealized gains or losses recognized
as other comprehensive income in the available-for-sale reserve until the
investment is derecognized, at which time the cumulative gain or loss is
recognized in other operating income, or determined to be impaired, at which
time the cumulative loss is reclassified to the consolidated statement of income
in finance costs and removed from the available-for-sale reserve.
For a financial asset reclassified out of the available-for-sale category, any
previous gain or loss on that asset that has been recognized in equity is
amortized to profit or loss over the remaining life of the investment using the
effective interest method. Any difference between the new amortized cost and the
expected cash flows is also amortized over the remaining life of the asset using
the effective interest method. If the asset is subsequently determined to be
impaired, then the amount recorded in equity is reclassified to the consolidated
statement of income.
Derecognition
A financial asset is derecognized when the rights to receive cash flows from the
asset have expired or when Ag Growth has transferred its rights to receive cash
flows from the asset.
Impairment of financial assets
Ag Growth assesses at each reporting date whether there is any objective
evidence that a financial asset or a group of financial assets is impaired. A
financial asset is deemed to be impaired if, and only if, there is objective
evidence of impairment as a result of one or more events that has occurred after
the initial recognition of the asset (an incurred "loss event") and that loss
event has an impact on the estimated future cash flows of the financial asset or
the group of financial assets that can be reliably estimated.
For financial assets carried at amortized cost, Ag Growth first assesses
individually whether objective evidence of impairment exists individually for
financial assets that are individually significant, or collectively for
financial assets that are not individually significant. If Ag Growth determines
that no objective evidence of impairment exists for an individually assessed
financial asset, it includes the asset in a group of financial assets with
similar credit risk characteristics and collectively assesses them for
impairment. Assets that are individually assessed for impairment and for which
an impairment loss is, or continues to be, recognized are not included in a
collective assessment of impairment.
If there is objective evidence that an impairment loss has occurred, the amount
of the loss is measured as the difference between the asset's carrying amount
and the present value of estimated future cash flows. The present value of the
estimated future cash flows is discounted at the financial asset's original
effective interest rate.
The carrying amount of the asset is reduced through the use of an allowance
account and the amount of the loss is recognized in profit or loss. Interest
income continues to be accrued on the reduced carrying amount and is accrued
using the rate of interest used to discount the future cash flows for the
purpose of measuring the impairment loss. The interest income is recorded as
part of finance income in the consolidated statement of income.
Loans and receivables, together with the associated allowance, are written off
when there is no realistic prospect of future recovery. If, in a subsequent
year, the amount of the estimated impairment loss increases or decreases because
of an event occurring after the impairment was recognized, the previously
recognized impairment loss is increased or reduced by adjusting the allowance
account. If a write-off is later recovered, the recovery is credited to finance
costs in the consolidated statement of income.
For available-for-sale financial investments, Ag Growth assesses at each
reporting date whether there is objective evidence that an investment or a group
of investments is impaired. In the case of equity investments classified as
available-for-sale, objective evidence would include a significant or prolonged
decline in the fair value of the investment below its cost. "Significant" is
evaluated against the original cost of the investment and "prolonged" against
the period in which the fair value has been below its original cost. Where there
is evidence of impairment, the cumulative loss - measured as the difference
between the acquisition cost and the current fair value, less any impairment
loss on that investment previously recognized in the statement of income - is
removed from other comprehensive income and recognized in the consolidated
statement of income. Impairment losses on equity investments are not reversed
through the consolidated statement of income; increases in their fair value
after impairment are recognized directly in other comprehensive income. In the
case of debt instruments classified as available-for-sale, impairment is
assessed based on the same criteria as financial assets carried at amortized
cost. However, the amount recorded for impairment is the cumulative loss
measured as the difference between the amortized cost and the current fair
value, less any impairment loss on that investment previously recognized in the
statement of income. If, in a subsequent year, the fair value of a debt
instrument increases and the increase can be objectively related to an event
occurring after the impairment loss was recognized in the consolidated statement
of income, the impairment loss is reversed through the consolidated statement of
income.
Financial liabilities at FVTPL
Financial liabilities at FVTPL include financial liabilities held-for-trading
and financial liabilities designated upon initial recognition at FVTPL.
Financial liabilities are classified as held-for-trading if they are acquired
for the purpose of selling in the near term. This category includes derivative
financial instruments entered into by the Company that are not designated as
hedging instruments in hedge relationships as defined by IAS 39.
Gains or losses on liabilities held-for-trading are recognized in the statement
of income.
Ag Growth has not designated any financial liabilities upon initial recognition
as FVTPL.
Other financial liabilities
Financial liabilities are measured at amortized cost using the effective
interest rate method. Financial liabilities include long-term debt issued, which
is initially measured at fair value, which is the consideration received, net of
transaction costs incurred. Transaction costs related to the long-term debt
instruments are included in the value of the instruments and amortized using the
effective interest rate method. The effective interest expense is included in
finance costs in the consolidated statement of income.
Derecognition
A financial liability is derecognized when the obligation under the liability is
discharged or cancelled or expires.
When an existing financial liability is replaced by another from the same lender
on substantially different terms, or the terms of an existing liability are
substantially modified, such an exchange or modification is treated as a
derecognition of the original liability and the recognition of a new liability,
and the difference in the respective carrying amounts is recognized in the
consolidated statement of income.
Interest income
For all financial instruments measured at amortized cost, interest income or
expense is recorded using the effective interest method, which is the rate that
exactly discounts the estimated future cash payments or receipts through the
expected life of the financial instrument or a shorter period, where
appropriate, to the net carrying amount of the financial asset or liability.
Interest income is included in finance income in the consolidated statement of
income.
Derivative instruments and hedge accounting
Ag Growth uses derivative financial instruments such as forward currency
contracts and interest rate swaps to hedge its foreign currency risk and
interest rate risk. Such derivative financial instruments are initially
recognized at fair value on the date on which a derivative contract is entered
into and are subsequently remeasured at fair value. Derivatives are carried as
financial assets when the fair value is positive and as financial liabilities
when the fair value is negative.
Ag Growth analyzes all of its contracts, of both a financial and non-financial
nature, to identify the existence of any "embedded" derivatives. Embedded
derivatives are accounted for separately from the host contract at the inception
date when their risks and characteristics are not closely related to those of
the host contracts and the host contracts are not carried at fair value.
Any gains or losses arising from changes in the fair value of derivatives are
recorded directly in the consolidated statement of income, except for the
effective portion of cash flow hedges, which is recognized in other
comprehensive income.
For the purpose of hedge accounting, hedges are classified as:
-- Fair value hedges when hedging the exposure to changes in the fair value
of a recognized asset or liability or an unrecognized firm commitment
(except for foreign currency risk).
-- Cash flow hedges when hedging exposure to variability in cash flows that
is either attributable to a particular risk associated with a recognized
asset or liability or a highly probable forecast transaction or the
foreign currency risk in an unrecognized firm commitment.
At the inception of a hedge relationship, Ag Growth formally designates and
documents the hedge relationship to which Ag Growth wishes to apply hedge
accounting and the risk management objective and strategy for undertaking the
hedge. The documentation includes identification of the hedging instrument, the
hedged item or transaction, the nature of the risk being hedged and how the
entity will assess the effectiveness of changes in the hedging instrument's fair
value in offsetting the exposure to changes in the cash flows attributable to
the hedged risk. Such hedges are expected to be highly effective in achieving
offsetting changes in cash flows and are assessed on an ongoing basis to
determine whether they have been highly effective throughout the financial
reporting periods for which they were designated.
Hedges that meet the strict criteria for hedge accounting are accounted for as
follows:
Cash flow hedges
The effective portion of the gain or loss on the hedging instrument is
recognized directly as other comprehensive income in the cash flow hedge
reserve, while any ineffective portion is recognized immediately in the
consolidated statement of income in other operating income or expenses. Amounts
recognized as other comprehensive income are transferred to the consolidated
statement of income when the hedged transaction affects profit or loss, such as
when the hedged financial income or financial expense is recognized or when a
forecast sale occurs. Where the hedged item is the cost of a non-financial asset
or non-financial liability, the amounts recognized as other comprehensive income
are transferred to the initial carrying amount of the non-financial asset or
liability.
If the forecast transaction or firm commitment is no longer expected to occur,
the cumulative gain or loss previously recognized in equity is transferred to
the consolidated statement of income. If the hedging instrument expires or is
sold, terminated or exercised without replacement or rollover, or if its
designation as a hedge is revoked, any cumulative gain or loss previously
recognized in other comprehensive income remains in other comprehensive income
until the forecast transaction or firm commitment affects profit or loss.
Ag Growth uses primarily forward currency contracts as hedges of its exposure to
foreign currency risk in forecast transactions and firm commitments.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount
reported in the statement of financial position if, and only if, there is a
currently enforceable legal right to offset the recognized amounts and there is
an intention to settle on a net basis, or to realize the assets and settle the
liabilities simultaneously.
Fair value of financial instruments
Fair value is the estimated amount that Ag Growth would pay or receive to
dispose of these contracts in an arm's length transaction between knowledgeable,
willing parties who are under no compulsion to act. The fair value of financial
instruments that are traded in active markets at each reporting date is
determined by reference to quoted market prices, without any deduction for
transaction costs.
For financial instruments not traded in an active market, the fair value is
determined using appropriate valuation techniques that are recognized by market
participants. Such techniques may include using recent arm's length market
transactions, reference to the current fair value of another instrument that is
substantially the same, discounted cash flow analysis or other valuation models.
Provisions
Provisions are recognized when Ag Growth has a present obligation, legal or
constructive, as a result of a past event, it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation
and a reliable estimate can be made of the amount of the obligation. Where Ag
Growth expects some or all of a provision to be reimbursed, for example under an
insurance contract, the reimbursement is recognized as a separate asset but only
when the reimbursement is virtually certain. The expense relating to any
provision is presented in the statement of income, net of any reimbursement. If
the effect of the time value of money is material, provisions are discounted
using a current pre-tax rate that reflects, where appropriate, the risks
specific to the liability. Where discounting is used, the increase in the
provision due to the passage of time is recognized as a finance cost.
Warranty provisions
Provisions for warranty-related costs are recognized when the product is sold or
service provided. Initial recognition is based on historical experience. The
initial estimate of warranty-related costs is revised quarterly.
Profit per share
The computation of profit per share is based on the weighted average number of
shares outstanding during the period. Diluted profit per share is computed in a
similar way to basic profit per share except that the weighted average shares
outstanding are increased to include additional shares assuming the exercise of
share options, share appreciation rights and convertible debt options, if
dilutive.
Revenue recognition
Revenue is recognized to the extent that it is probable that the economic
benefits will flow to Ag Growth and the revenue can be reliably measured,
regardless of when the payment is being made. Revenue is measured at the fair
value of the consideration received or receivable, taking into account
contractually defined terms of payment and excluding taxes or duty. Ag Growth
assesses its revenue arrangements against specific criteria in order to
determine if it is acting as principal or agent. Ag Growth has concluded that it
is acting as a principal in all of its revenue arrangements. The following
specific recognition criteria must also be met before revenue is recognized:
Sale of goods
Revenue from the sale of goods is in general recognized when significant risks
and rewards of ownership are transferred to the customer. Ag Growth generally
recognizes revenue when products are shipped, free on board shipping point; the
customer takes ownership and assumes risk of loss; collection of the related
receivable is probable; persuasive evidence of an arrangement exists; and, the
sales price is fixed or determinable. Customer deposits are recorded as a
current liability when cash is received from the customer and recognized as
revenue at the time product is shipped, as noted above.
In transactions involving the sale of specific customer products, Ag Growth
applies layaway sales accounting. Under layaway sales, Ag Growth recognizes
revenue prior to the product being shipped, provided the following criteria are
met as of the reporting date:
-- The goods are ready for delivery to the customer; this implies the goods
have been produced to the specifications of the customer and Ag Growth
has assessed, through its quality control processes, that the goods
comply with the specifications;
-- A deposit of more than 80% of the total contract value for the
respective goods has been received;
-- The goods are specifically identified for the customer in Ag Growth's
inventory tracking system; and
-- Ag Growth does not have any other obligation than to ship the product,
or to store the product until the customer picks it up.
Bill and hold
Ag Growth applies bill and hold sales accounting. Under bill and hold sales, Ag
Growth recognizes revenue when the buyer takes title, provided the following
criteria are met as of the reporting date:
-- It is probable that delivery will be made;
-- The item is on hand, identified and ready for delivery to the buyer at
the time the sale is recognized;
-- The buyer specifically acknowledges the deferred delivery instructions;
and
-- The usual payment terms apply.
Construction contracts
Ag Growth from time to time enters into arrangements with its customers that are
considered construction contracts. These contracts (or a combination of
contracts) are specifically negotiated for the construction of an asset or a
combination of assets that are closely interrelated or interdependent in terms
of their design, technology and function or their ultimate purpose or use.
Ag Growth principally operates fixed price contracts. If the outcome of such a
contract can be reliably measured, revenue associated with the construction
contract is recognized by reference to the stage of completion of the contract
activity at period end (the percentage of completion method).
The outcome of a construction contract can be estimated reliably when: (i) the
total contract revenue can be measured reliably; (ii) it is probable that the
economic benefits associated with the contract will flow to the entity; (iii)
the costs to complete the contract and the stage of completion can be measured
reliably; and (iv) the contract costs attributable to the contract can be
clearly identified and measured reliably so that actual contract costs incurred
can be compared with prior estimates.
When the outcome of a construction contract cannot be estimated reliably
(principally during early stages of a contract), contract revenue is recognized
only to the extent of costs incurred that are expected to be recoverable. In
applying the percentage of completion method, revenue recognized corresponds to
the total contract revenue (as defined above) multiplied by the actual
completion rate based on the proportion of total contract costs (as defined
above) incurred to date and the estimated costs to complete.
Income taxes
Ag Growth and its subsidiaries are generally taxable under the statutes of their
country of incorporation.
Current income tax assets and liabilities for the current and prior period are
measured at the amount expected to be recovered from or paid to the taxation
authorities. The tax rates and tax laws used to compute the amount are those
that are enacted or substantively enacted at the reporting date in the countries
where Ag Growth operates and generates taxable income. Current income tax
relating to items recognized directly in equity is recognized in equity and not
in the consolidated statement of income. Management periodically evaluates
positions taken in the tax returns with respect to situations in which
applicable tax regulations are subject to interpretation and establishes
provisions where appropriate.
Ag Growth follows the liability method of accounting for deferred taxes. Under
this method, income tax liabilities and assets are recognized for the estimated
tax consequences attributable to the temporary differences between the carrying
value of the assets and liabilities on the financial statements and their
respective tax bases.
Deferred tax liabilities are recognized for all taxable temporary differences,
except:
-- Where the deferred tax liability arises from the initial recognition of
goodwill or of an asset or liability in a transaction that is not a
business combination and, at the time of the transaction, affects
neither the accounting profit nor the taxable profit or loss.
-- In respect of taxable temporary differences associated with investments
in subsidiaries, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary
differences will not reverse in the foreseeable future.
Deferred tax assets are recognized for all deductible temporary differences,
carryforward of unused tax credits and unused tax losses, to the extent that it
is probable that taxable profit will be available against which the deductible
temporary differences and the carryforward of unused tax credits and unused tax
losses can be utilized.
The carrying amount of deferred tax assets is reviewed at each reporting date
and reduced to the extent that it is no longer probable that sufficient taxable
profit will be available to allow all or part of the deferred tax asset to be
utilized. Unrecognized deferred tax assets are reassessed at each reporting date
and are recognized to the extent that it has become probable that future taxable
profits will allow the deferred tax asset to be recovered. Deferred tax assets
and liabilities are measured at the tax rates that are expected to apply in the
year when the asset is realized or the liability is settled, based on tax rates
(and tax laws) that have been enacted or substantively enacted at the reporting
date.
Deferred tax items are recognized in correlation to the underlying transaction
either in the income statement, other comprehensive income or directly in
equity.
Deferred tax assets and deferred tax liabilities are offset if a legally
enforceable right exists to offset current tax assets against current income tax
liabilities and the deferred taxes relate to the same taxable entity and the
same taxation authority.
Tax benefits acquired as part of a business combination, but not satisfying the
criteria for separate recognition at that date, would be recognized subsequently
if information about facts and circumstances changed. The adjustment would
either be treated as a reduction to goodwill if it occurred during the
measurement period or in profit or loss, when it occurs subsequent to the
measurement period.
Sales tax
Revenues, expenses and assets are recognized net of the amount of sales tax,
except where the sales tax incurred on a purchase of assets or services is not
recoverable from the taxation authority, in which case the sales tax is
recognized as part of the cost of acquisition of the asset or as part of the
expense item as applicable and where receivables and payables are stated with
the amount of sales tax included.
The net amount of sales tax recoverable from, or payable to, the taxation
authority is included as part of receivables or payables in the consolidated
statement of financial position.
Share-based compensation plans
Employees of Ag Growth may receive remuneration in the form of share-based
payment transactions, whereby employees render services and receive
consideration in the form of equity instruments (equity-settled transactions,
long-term incentive plan and directors deferred compensation plan) or cash
(cash-settled transactions, share award incentive plan). In situations where
equity instruments are issued and some or all of the goods or services received
by the entity as consideration cannot be specifically identified, the
unidentified goods or services received are measured as the difference between
the fair value of the share-based payment transaction and the fair value of any
identifiable goods or services received at the grant date and are capitalized or
expensed as appropriate.
Equity-settled transactions
The cost of equity-settled transactions is recognized, together with a
corresponding increase in other capital reserves, in equity, over the period in
which the performance and/or service conditions are fulfilled.
The cumulative expense recognized for equity-settled transactions at each
reporting date until the vesting period reflects the extent to which the vesting
period has expired and Ag Growth's best estimate of the number of the shares
that will ultimately vest. The expense or credit recognized for a period
represents the movement in cumulative expense recognized as at the beginning and
end of that period and is recognized in the consolidated statement of income in
the respective function line. When options and other share-based compensation
awards are exercised or exchanged, the amounts previously credited to
contributed surplus are reversed and credited to shareholders' equity. The
amount of cash, if any, received from participants is also credited to
shareholders' equity.
Where the terms of an equity-settled transaction award are modified, the minimum
expense recognized is the expense as if the terms had not been modified, if the
original terms of the award are met. An additional expense is recognized for any
modification that increases the total fair value of the share-based payment
transaction, or is otherwise beneficial to the employee as measured at the date
of modification.
Where an equity-settled award is cancelled, it is treated as if it vested on the
date of cancellation and any expense not yet recognized for the award (being the
total expense as calculated at the grant date) is recognized immediately. This
includes any award where vesting conditions within the control of either the
Company or the employee are not met. However, if a new award is substituted for
the cancelled award, and designated as a replacement award on the date that it
is granted, the cancelled and new awards are treated as if they were a
modification of the original award.
The dilutive effect of outstanding options is reflected as additional share
dilution in the computation of diluted earnings per share.
Cash-settled transactions
The cost of cash-settled transactions is measured initially at fair value at the
grant date using the Black-Scholes model (note 21). This fair value is expensed
over the period until the vesting date, with recognition of a corresponding
liability. The liability is remeasured to fair value at each reporting date up
to and including the settlement date, with changes in fair value recognized in
the consolidated statement of income in the line of the function the respective
employee is engaged in.
Post-retirement benefit plans
Ag Growth contributes to retirement savings plans subject to maximum limits per
employee. Ag Growth accounts for such defined contributions as an expense in the
period in which the contributions are required to be made. Ag Growth does not
have any defined benefit plans. Certain of Ag Growth's plans classify as
multi-employer plans and would ultimately provide the employee a defined benefit
pension. However, based upon the evaluation of the available information, Ag
Growth is not required to account for the plans in accordance with the defined
benefit accounting rules, and accounts for such plans as it does defined
contribution plans.
Research and development expenses
Research expenses, net of related tax credits, are charged to the consolidated
statement of income in the period they are incurred. Development costs are
charged to operations in the period of the expenditure unless they satisfy the
condition for recognition as an internally generated intangible asset.
Government grants
Government grants are recognized at fair value where there is reasonable
assurance that the grant will be received and all attaching conditions will be
complied with. Where the grants relate to an asset, the fair value is credited
to the cost of the asset and is released to the income statement over the
expected useful life in a consistent manner with the depreciation method for the
relevant assets.
Investment tax credits
Federal and provincial investment tax credits are accounted for as a reduction
of the cost of the related assets or expenditures in the year in which the
credits are earned and when there is reasonable assurance that the credits can
be used to recover taxes.
4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the financial statements requires management to make
judgments, estimates and assumptions that affect the reported amounts of assets,
liabilities, income, expenses and the disclosure of contingent liabilities. The
estimates and related assumptions are based on previous experience and other
factors considered reasonable under the circumstances, the results of which form
the basis of making the assumptions about carrying values of assets and
liabilities that are not readily apparent from other sources. However,
uncertainty about these assumptions and estimates could result in outcomes that
require a material adjustment to the carrying amount of the asset or liability
affected in future periods.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognized in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and
future periods. The key assumptions concerning the future and other key sources
of estimation uncertainty at the reporting date that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year are described below.
Construction contracts
The percentage of completion and the revenue to recognize are determined on the
basis of estimates. Consequently, Ag Growth has implemented an internal
financial budgeting and reporting system. In particular, Ag Growth reviews the
estimates of contract revenue and contract costs on a quarterly basis.
Impairment of non-financial assets
Ag Growth's impairment test is based on value in use or fair value less cost to
sell calculations that use a discounted cash flow model. The cash flows are
derived from the forecast for the next five years and do not include
restructuring activities that Ag Growth is not yet committed to or significant
future investments that will enhance the asset's performance of the CGU being
tested. These calculations require the use of estimates and forecasts of future
cash flows. Qualitative factors, including market presence and trends, strength
of customer relationships, strength of local management, strength of debt and
capital markets, and degree of variability in cash flows, as well as other
factors, are considered when making assumptions with regard to future cash flows
and the appropriate discount rate. The recoverable amount is most sensitive to
the discount rate as well as the forecasted margins and growth rate used for
extrapolation purposes. A change in any of the significant assumptions or
estimates used to evaluate goodwill and other non-financial assets could result
in a material change to the results of operations. The key assumptions used to
determine the recoverable amount for the different CGUs are further explained in
note 12.
Development costs
Development costs are capitalized in accordance with the accounting policy
described in note 3. Initial capitalization of costs is based on management's
judgment that technical and economical feasibility is confirmed, usually when a
project has reached a defined milestone according to an established project
management model.
Useful lives of key property, plant and equipment and intangible assets
The depreciation method and useful lives reflect the pattern in which management
expects the asset's future economic benefits to be consumed by Ag Growth. Refer
to note 3 for the estimated useful lives.
Fair value of financial instruments
Where the fair value of financial assets and financial liabilities recorded in
the consolidated statement of financial position cannot be derived from active
markets, they are determined using valuation techniques including the discounted
cash flow models. The inputs to these models are taken from observable markets
where possible, but where this is not feasible, a degree of judgment is required
in establishing fair values. The judgments include considerations of inputs such
as liquidity risk, credit risk and volatility. Changes in assumptions about
these factors could affect the reported fair value of financial instruments.
Share-based payments
Ag Growth measures the cost of equity-settled share-based payment transactions
with employees by reference to the fair value of equity instruments at the grant
date, whereas the fair value of cash-settled share-based payments is remeasured
at every reporting date. Estimating fair value for share-based payments requires
determining the most appropriate valuation model for a grant of these
instruments, which is dependent on the terms and conditions of the grant. This
also requires determining the most appropriate inputs to the valuation model
including the expected life of the option, volatility and dividend yield.
Taxes
Uncertainties exist with respect to the interpretation of complex tax
regulations, changes in tax laws and the amount and timing of future taxable
income. Given the wide range of international business relationships and the
long-term nature and complexity of existing contractual agreements, differences
arising between the actual results and the assumptions made, or future changes
to such assumptions, could necessitate future adjustments to taxable income and
expenses already recorded. Ag Growth establishes provisions, based on reasonable
estimates, for possible consequences of audits by the tax authorities of the
respective countries in which it operates. The amount of such provisions is
based on various factors, such as experience of previous tax audits and
differing interpretations of tax regulations by the taxable entity and the
responsible tax authority.
Such differences of interpretation may arise on a wide variety of issues,
depending on the conditions prevailing in the respective company's domicile. As
Ag Growth assesses the probability for a litigation and subsequent cash outflow
with respect to taxes as remote, no contingent liability has been recognized.
Deferred tax assets are recognized for all unused tax losses to the extent that
it is probable that taxable profit will be available against which the losses
can be utilized. Significant management judgment is required to determine the
amount of deferred tax assets that can be recognized, based upon the likely
timing and the level of future taxable profits together with future tax planning
strategies.
Acquisition accounting
For acquisition accounting purposes, all identifiable assets, liabilities and
contingent liabilities acquired in a business combination are recognized at fair
value at the date of acquisition. Estimates are used to calculate the fair value
of these assets and liabilities as of the date of acquisition. Contingent
consideration resulting from business combinations is valued at fair value at
the acquisition date as part of the business combination. Where the contingent
consideration meets the definition of a derivative and, thus, a financial
liability, it is subsequently remeasured to fair value at each reporting date.
The determination of the fair value is based on discounted cash flows. The key
assumptions take into consideration the probability of meeting each performance
target and the discount factor.
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, 2015. 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.
Offsetting Financial Assets and Liabilities
In December 2011, the IASB issued amendments to IAS 32 Financial Instruments:
Presentation. The amendments are intended to clarify certain aspects of the
existing guidance on offsetting financial assets and financial liabilities due
to the diversity in application of the requirements on offsetting. The IASB also
amended IFRS 7 to require information about all recognized financial instruments
that are set off in accordance with IAS 32. The amendments also require
disclosure of information about recognized financial instruments subject to
enforceable master netting arrangements and similar agreements even if they are
not set off under IAS 32.
The amendments to IAS 32 are effective for annual periods beginning on or after
January 1, 2012. However, the new offsetting disclosure requirements are
effective for annual periods beginning on or after January 1, 2013 and interim
periods within those annual periods. The amendments need to be provided
retrospectively to all comparative periods. The Corporation is currently
assessing the impact of adopting these amendments on the 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 of 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 3l, 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
that 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 2011
(a) Airlanco Inc. ("Airlanco")
Effective October 4, 2011, the Company acquired substantially all of the
operating assets of Airlanco, a manufacturer of grain drying systems. The
Company acquired Airlanco to expand its catalogue of aeration and dust
collection products.
The purchase has been accounted for by the acquisition method with the results
of Airlanco's operations included in the Company's net earnings from the date of
acquisition. The assets and liabilities of Airlanco on the date of acquisition
have been recorded in the consolidated financial statements at their estimated
fair values as follows:
$
----------
Accounts receivable 1,549
Inventory 2,134
Prepaid expenses and other 126
Property, plant and equipment 1,747
Intangible assets
Distribution network 3,090
Brand name 1,608
Order backlog 21
Patents 4
Goodwill 3,087
Accounts payable and accrued liabilities (1,192)
Customer deposits (204)
----------
11,970
----------
----------
The allocation of the consideration transferred to acquired assets and
liabilities is preliminary, utilizing information available at the time the
consolidated financial statements were prepared, and the final allocation of the
consideration transferred may change when more information becomes available.
The goodwill of $3,087 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 the Airlanco CGU and is expected to be
deductible for tax purposes.
From the date of acquisition, Airlanco has contributed $2,701 of revenue and a
net loss before tax of $92 to the 2011 results of the company. If the
acquisition had taken place as at January 1, 2011, revenue and profit from
continuing operations would have increased by $9,766 and $2,088, respectively.
The consideration transferred of $11,970 was paid in cash. The impacts on the
cash flow on the acquisition of Airlanco are as follows:
$
----------
Transaction costs of the acquisition 160
Purchase consideration transferred 11,970
----------
Net cash flow on acquisition 12,130
----------
----------
As at December 31, 2011, the Company had restricted cash of $508 relating to the
acquisition of Airlanco and $91 of transaction costs payable included in
acquisition price, transaction and financing costs payable.
7. BUSINESS COMBINATIONS 2010
(a) 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 aquisition 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 consolidated financial statements at their fair values
as follows:
$
----------
Accounts receivable 1,208
Inventory 4,465
Prepaid expenses and other 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'
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 $572 from cash
held in trust to the vendors. As at December 31, 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 purchase 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. The assets and liabilities of Franklin on the date of acquisition
have been recorded in the consolidated financial statements at their estimated
fair values as follows:
$
----------
Inventory 1,557
Prepaid expenses and other 8
Property, plant and equipment 8,171
Goodwill 68
Obligations under finance lease contracts (707)
Accounts payable and accrued liabilities (241)
----------
Purchase consideration transferred 8,856
----------
----------
The goodwill of $68 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 the Franklin CGU and is expected to be
deductible for tax purposes.
The acquisition of Franklin was an asset purchase and as such the Company does
not have access to the books and records of Franklin for any periods prior to
the acquisition date of October 1, 2010. Therefore, the impacts on revenues and
profit of the Company from an acquisition of Franklin at the beginning of 2010
cannot be reported. From the date of acquisition, Franklin has contributed
$3,261 of revenue and a net loss before tax of $548 to the 2010 results.
The purchase consideration in the amount of $8,856 was paid in cash. The impacts
on the cash flow on acquisition of Franklin are as follows:
$
----------
Transaction costs of the acquisition 356
Purchase consideration transferred 8,856
----------
Net cash flow on acquisition 9,212
----------
----------
In the three-month period ended December 31, 2011, the conditions related to the
cash holdback were met and the Company transferred $250 cash held in trust to
the vendors. As at December 31, 2011 there are no remaining funds held in trust.
(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 consolidated financial statements at their estimated
fair values as follows:
$
----------
Accounts receivable 4,211
Inventory 4,162
Prepaid expenses and other 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 goodwill of $7,343 comprises the value of expected synergies arising from
the acquisition and the values included in the workforce of the new subsidiary.
Goodwill at the time of the transaction is not deductible for tax purposes.
From the acquisition date of December 20, 2010, Tramco contributed $184 of
revenue and a net loss before tax of $78 to 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 December 31, 2011, the Company had restricted cash of $1,017
relating to the acquisition of Tramco. Additionally, there is $322 due to vendor
included in acquisition price, transaction and financing costs payable.
8. OTHER EXPENSES (INCOME)
2011 2010
$ $
------------------------
(a) Other operating expense (income)
Cash flow hedge accounting 126 (121)
Net loss on disposal of property, plant and
equipment 76 262
Other (302) (746)
------------------------
(100) (605)
------------------------
------------------------
(b) Finance expense (income)
Interest income from banks (117) (765)
Loss (gain) on foreign exchange 276 (1,300)
------------------------
159 (2,065)
------------------------
------------------------
(c) Finance costs
Interest on overdrafts and other finance costs 51 49
Interest, including non-cash interest, on debts
and borrowings 2,377 2,344
Interest, including non-cash interest, on
convertible debentures (note 23) 10,220 10,083
Finance charges payable under finance lease
contracts 20 8
------------------------
12,668 12,484
------------------------
------------------------
2011 2010
$ $
------------------------
(d) Cost of goods sold
Depreciation 4,933 2,927
Amortization of intangible assets 503 450
Warranty provision 280 748
Cost of inventories recognized as an expense 198,487 159,833
------------------------
204,203 163,958
------------------------
------------------------
(e) Selling, general and administrative expenses
Depreciation 485 385
Amortization of intangible assets 3,273 2,968
Minimum lease payments recognized as an
operating lease expense 943 1,273
Transaction costs 1,676 1,696
Selling, general and administrative 48,449 44,736
------------------------
54,826 51,058
------------------------
------------------------
(f) Employee benefits expense
Wages and salaries 67,085 58,686
Share-based payment transaction expense 2,038 6,504
Pension costs 1,925 1,470
------------------------
71,048 66,660
------------------------
------------------------
Included in cost of goods sold 48,013 30,630
Included in general and administrative expense 23,035 36,030
------------------------
71,048 66,660
------------------------
------------------------
9. PROPERTY, PLANT AND EQUIPMENT
Furniture
Leasehold and
Land Grounds Buildings improvements fixtures
$ $ $
--------------------------------------------------------
COST
Balance, January 1,
2011 4,777 488 27,599 431 982
Additions 61 35 9,730 35 80
Acquisitions of a
subsidiary 52 71 764 - 65
Classification as
assets held for
sale (146) - (1,089) - -
Disposals - - - - -
Exchange differences 7 3 176 - 21
--------------------------------------------------------
Balance, December
31, 2011 4,751 597 37,180 466 1,148
--------------------------------------------------------
--------------------------------------------------------
DEPRECIATION
Balance, January 1,
2011 - 124 1,492 196 295
Depreciation charge
for the year - 65 1,055 71 105
Classification as
asset held for sale - - (134) - -
Disposals - - - - -
Exchange differences - 1 33 3 6
--------------------------------------------------------
Balance, December
31, 2011 - 190 2,446 270 406
--------------------------------------------------------
--------------------------------------------------------
Net book value,
January 1, 2011 4,777 364 26,107 235 687
Net book value,
December 31, 2011 4,751 407 34,734 196 742
Computer Manufacturing Construction
Vehicles hardware equipment in progress Total
$ $ $ $ $
----------------------------------------------------------
COST
Balance, January 1,
2011 5,283 1,948 31,548 17,589 90,645
Additions 1,043 525 15,039 (17,294) 9,254
Acquisitions of a
subsidiary 101 25 668 - 1,746
Classification as
assets held for
sale - - - - (1,235)
Disposals (164) (24) (724) - (912)
Exchange differences 112 27 269 (18) 597
--------------------------------------------------------
Balance, December
31, 2011 6,375 2,501 46,800 277 100,095
--------------------------------------------------------
--------------------------------------------------------
DEPRECIATION
Balance, January 1,
2011 1,889 1,115 6,512 - 11,623
Depreciation charge
for the year 673 308 3,141 - 5,418
Classification as
asset held for sale - - - - (134)
Disposals (68) (16) (262) - (346)
Exchange differences 8 11 38 - 100
----------------------------------------------------------
Balance, December
31, 2011 2,502 1,418 9,429 - 16,661
----------------------------------------------------------
--------------------------------------------------------
Net book value,
January 1, 2011 3,394 833 25,036 17,589 79,022
Net book value,
December 31, 2011 3,873 1,083 37,371 277 83,434
Buildings
and Furniture
building Leasehold and
Land Grounds components improvements fixtures
$ $ $ $ $
---------------------------------------------------------
COST
Balance, January 1,
2010 2,919 235 14,030 453 856
Additions - 80 3,012 - 12
Acquisitions of a
subsidiary 2,023 180 11,159 - 98
Disposals (66) - (170) - -
Exchange
differences (99) (7) (432) (22) 16
---------------------------------------------------------
Balance, December
31, 2010 4,777 488 27,599 431 982
---------------------------------------------------------
---------------------------------------------------------
DEPRECIATION
Balance, January 1,
2010 - 77 1,036 139 214
Depreciation charge
for the year - 47 490 63 82
Disposals - - (23) - -
Exchange
differences - - (11) (6) (1)
---------------------------------------------------------
Balance, December
31, 2010 - 124 1,492 196 295
---------------------------------------------------------
---------------------------------------------------------
Net book value,
January 1, 2010 2,919 158 12,994 314 642
Net book value,
December 31, 2010 4,777 364 26,107 235 687
---------------------------------------------------------
---------------------------------------------------------
Computer Manufacturing Construction
Vehicles hardware equipment in progress Total
$ $ $ $ $
---------------------------------------------------------
COST
Balance, January 1,
2010 3,870 1,568 22,451 253 46,635
Additions 1,276 206 2,902 17,309 24,797
Acquisitions of a
subsidiary 161 214 6,915 - 20,750
Disposals (146) (5) (260) - (647)
Exchange
differences 122 (35) (460) 27 (890)
---------------------------------------------------------
Balance, December
31, 2010 5,283 1,948 31,548 17,589 90,645
---------------------------------------------------------
---------------------------------------------------------
DEPRECIATION
Balance, January 1,
2010 1,454 871 4,971 - 8,762
Depreciation charge
for the year 519 254 1,858 - 3,313
Disposals (79) (3) (146) - (251)
Exchange
differences (5) (7) (171) - (201)
---------------------------------------------------------
Balance, December
31, 2010 1,889 1,115 6,512 - 11,623
---------------------------------------------------------
---------------------------------------------------------
Net book value,
January 1, 2010 2,416 697 17,480 253 37,873
Net book value,
December 31, 2010 3,394 833 25,036 17,589 79,022
---------------------------------------------------------
---------------------------------------------------------
Construction in progress is comprised primarily of building and equipment, the
cost of which are not depreciated until the assets are ready for use in the
reporting period.
Ag Growth regularly assesses its long-lived assets for impairment. As at
December 31, 2011 and 2010, the recoverable amount of each CGU exceeded the
carrying amounts of the assets allocated to the respective units.
Capitalized borrowing costs
No borrowing costs were capitalized in 2010 or 2011.
Finance leases
Included in manufacturing equipment is equipment held under finance leases, the
carrying value of which at December 31, 2011 was $131 (December 31, 2010 - $839,
January 1, 2010 - nil). Leased assets are pledged as security for the related
finance lease liabilities.
10. INTANGIBLE ASSETS
Distribution Brand Order Development
networks names Patents Software backlog projects Total
$ $ $ $ $ $ $
----------------------------------------------------------------
COST
Balance,
January 1,
2011 52,346 32,582 1,138 1,092 628 - 87,786
Additions
Internal
development - - - - - 2,011 2,011
Acquisition 3,090 1,608 4 - 21 - 4,723
Exchange
differences 197 124 20 25 17 (1) 382
----------------------------------------------------------------
Balance,
December
31, 2011 55,633 34,314 1,162 1,117 666 2,010 94,902
----------------------------------------------------------------
----------------------------------------------------------------
AMORTIZATION
Balance,
January 1,
2011 14,509 - 568 - 364 - 15,441
Amortization
charge for
the year 3,226 - 87 135 281 47 3,776
Exchange
differences 139 - 10 5 21 - 175
----------------------------------------------------------------
Balance,
December
31, 2011 17,874 - 665 140 666 47 19,392
----------------------------------------------------------------
----------------------------------------------------------------
Net book
value,
December
31, 2011 37,759 34,314 497 977 - 1,963 75,510
----------------------------------------------------------------
----------------------------------------------------------------
Distribution Brand Order
networks names Patents Software backlog Total
$ $ $ $ $ $
------------------------------------------------------------
COST
Balance, January
1, 2010 49,709 29,812 1,184 - - 80,705
Additions -
acquisition of
subsidiary 3,263 3,104 - 1,118 635 8,120
Exchange
differences (626) (334) (46) (26) (7) (1,039)
------------------------------------------------------------
Balance,
December 31,
2010 52,346 32,582 1,138 1,092 628 87,786
------------------------------------------------------------
------------------------------------------------------------
AMORTIZATION
Balance, January
1, 2010 11,763 - 501 - - 12,264
Amortization
charge for the
year 2,970 - 83 - 365 3,418
Exchange
differences (224) - (16) - (1) (241)
------------------------------------------------------------
Balance,
December 31,
2010 14,509 - 568 - 364 15,441
------------------------------------------------------------
------------------------------------------------------------
Net book value,
January 1, 2010 37,946 29,812 683 - - 68,441
Net book value,
December 31,
2010 37,837 32,582 570 1,092 264 72,345
------------------------------------------------------------
------------------------------------------------------------
The Company is continuously working on research and development projects. The
Company operates a development centre that coordinates the efforts throughout Ag
Growth. Development costs capitalized include the development of new products
and the development of new applications of already existing products and
prototypes. Research costs and development costs that are not eligible for
capitalization have been expensed and are recognized in selling, general and
administrative expenses.
Intangible assets include patents acquired through business combinations, which
have a remaining life of seven years. All brand names with a carrying amount of
$34,314 (December 31, 2010 - $32,582, January 1, 2010 - $29,812) have been
qualified as indefinite useful life intangible assets, as the Company expects to
maintain these brand names and currently no end point of the useful lives of
these brand names can be determined. The Company assesses the assumption of an
indefinite useful life at least annually. For definite life intangibles, the
Company assesses whether there are indicators of impairment at subsequent
reporting dates as a triggering event for performing an impairment test.
Other significant intangible assets are goodwill (note 11) and the distribution
network of the Company. The distribution network was acquired in past business
combinations and reflects the Company's dealer network in North America and the
dealer network of the Mepu operating division. The remaining amortization period
for the distribution network ranges from 4 to 19 years.
As of the reporting date, the Company had no contractual commitments for the
acquisition of intangible assets.
11. GOODWILL
2011 2010
$ $
------------------------
COST
Balance, beginning of year 62,355 52,187
Additions - acquisition of subsidiary 3,087 11,025
Exchange differences 434 (857)
------------------------
Balance, end of year 65,876 62,355
------------------------
------------------------
12. IMPAIRMENT TESTING
For purposes of impairment testing, the Company determined that each of its
seven operating divisions were CGUs as of its IFRS transition date. Under the
IFRS 1 transition guidance, Ag Growth performed an impairment test as at January
1, 2010. Upon the acquisition of Franklin during 2010, Ag Growth reconsidered
its CGUs and concluded that Wheatheart no longer met the CGU definition and
management then reallocated the assets and goodwill on a relative fair value
basis to the Applegate and Westfield CGUs.
Goodwill acquired through business combinations is allocated on a relative fair
value basis to the CGUs that benefit from the acquisition. The Company performs
its annual goodwill impairment test as at December 31 on all CGUs. The
recoverable amount of the CGUs has been determined based on value in use for the
year ended December 31, 2011 and fair value less costs to sell calculation as at
January 1, 2010, the Transaction Date, using cash flow projections covering a
five-year period. The various pre-tax discount rates applied to the cash flow
projections are between 11.8% and 17.1% (December 31, 2010 - 12.2% and 18.9%,
January 1, 2010 - 14.3% and 19.8%) and cash flows beyond the five-year period
are extrapolated using a 3% growth rate (December 31, 2010 - 3%, January 1, 2010
- 3%), which is management's estimate of long-term inflation and productivity
growth in the industry and geographies, in which it operates.
The Company's CGUs and goodwill and indefinite life intangible assets allocated
thereto are as follows:
December 31, December 31, January 1,
2011 2010 2010
$ $ $
---------------------------------------
Westfield
Goodwill 30,435 30,435 29,208
Intangible assets with indefinite
lives 19,000 19,000 19,000
---------------------------------------
Edwards
Goodwill 6,438 6,438 5,123
Intangible assets with indefinite
lives 5,163 5,163 5,163
---------------------------------------
Hi Roller
Goodwill 5,588 5,465 5,751
Intangible assets with indefinite
lives 3,296 3,224 3,392
---------------------------------------
Union Iron
Goodwill 8,199 8,018 8,437
Intangible assets with indefinite
lives 2,193 2,144 2,257
---------------------------------------
Tramco
Goodwill 7,450 7,286 -
Intangible assets with indefinite
lives 2,360 2,308 -
---------------------------------------
Other
Goodwill 7,766 4,713 3,668
Intangible assets with indefinite
lives 2,302 743 -
---------------------------------------
Total
Goodwill 65,876 62,355 52,187
Intangible assets with indefinite
lives 34,314 32,582 29,812
---------------------------------------
---------------------------------------
Key assumptions used in valuation calculations
The calculation of value in use or fair value less cost to sell for all the CGUs
are most sensitive to the following assumptions:
-- Gross margin;
-- Discount rates;
-- Market share during the budget period; and
-- Growth rate used to extrapolate cash flows beyond the budget period.
Gross margins
Forecasted gross margins are based on actual gross margins achieved in the years
preceding the forecast period. Margins are kept constant over the forecast
period and the terminal period, unless management has started an efficiency
improvement process.
Discount rates
Discount rates reflect the current market assessment of the risks specific to
each CGU. The discount rate was estimated based on the weighted average cost of
capital for the industry. This rate was further adjusted to reflect the market
assessment of any risk specific to the CGU for which future estimates of cash
flows have not been adjusted.
Market share assumptions
These assumptions are important because, as well as using industry data for
growth rates (as noted below), management assesses how the CGU's position,
relative to its competitors, might change over the forecast period.
Growth rate estimates
Rates are based on published research and are primarily derived from the
long-term CPI expectations for the markets in which Ag Growth operates.
Management considers CPI to be a conservative indicator of the long-term growth
expectations for the agricultural industry.
13. ASSETS HELD FOR SALE
In 2010, Ag Growth transferred all production activities from its Lethbridge,
Alberta facility to Nobleford, Alberta. Ag Growth concluded that the land and
building in Lethbridge, Alberta, Canada met the definition of an asset held for
sale. The carrying amounts of the assets as presented in the consolidated
statement of financial position solely consist of the land and building. The
land carrying value is $146 as at December 31, 2011.
14. AVAILABLE-FOR-SALE INVESTMENT
On December 22, 2009, the Company purchased two million common shares at $1.00
per share in a private Canadian corporate farming organization ("Investco"). The
Company's investment represents approximately 2.0% of the outstanding shares of
Investco. At this point in time, management intends to hold the investment for
an indefinite period of time.
In the year ended December 31, 2011, Investco completed a private placement of
22,193,921 common shares at $1.40 per common share. The private placement
included a large number of unrelated parties and increased Investco's
outstanding common shares by approximately 40%. The private placement was
determined to represent a quoted market price and as a result the Company
assessed the fair value of its 2,000,000 common shares at $1.40 per common
share. Accordingly, the Company increased the value of its investment by $800
with the offsetting amount recorded in other comprehensive income. As at
December 31, 2011, given there has been no recent market activity, the $2.8M
represents cost which is deemed to be the fair value carrying amount.
15. CASH AND CASH EQUIVALENTS/CHANGES IN NON-CASH WORKING CAPITAL
Cash and cash equivalents as at the date of the consolidated statement of
financial position and for the purpose of the consolidated statement of cash
flows are as follows:
December 31, December 31, January 1,
2011 2010 2010
$ $ $
---------------------------------------
Cash at banks and on hand 6,839 11,201 41,110
Short-term deposits - 23,780 67,984
---------------------------------------
Total cash and cash equivalents 6,839 34,981 109,094
---------------------------------------
---------------------------------------
Cash at banks earns interest at floating rates based on daily bank deposit
rates. Short-term deposits are made for varying periods of between one day and
three months, depending on the immediate cash requirements of the Company, and
earn interest at the respective short-term deposit rates.
The change in the non-cash working capital balances related to operations is
calculated as follows:
2011 2010
$ $
------------------------
Accounts receivable (9,607) (9,664)
Inventory (9,850) (1,321)
Prepaid expenses and other assets 5,034 (5,248)
Accounts payable and accrued liabilities (1,755) 2,046
Customer deposits 1,445 (2,868)
Provisions 280 748
------------------------
(14,453) (16,307)
------------------------
------------------------
16. RESTRICTED CASH
Restricted cash of $2,439 (2010 - $1,860) consists of holdbacks related to the
acquisition of Tranco (note 7), and Airlanco (note 6), $885 of funds advanced to
Ag Growth as collateral for a receivable from an end user of Ag Growth products
and $29 related to the long-term incentive plan (note 21). Subsequent to
December 31, 2011, the $855 receivable from the end user was collected and the
restricted cash was released.
17. 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:
December 31, December 31, January 1,
2011 2010 2010
$ $ $
---------------------------------------
Total accounts receivable 50,188 39,019 25,571
Less allowance for doubtful accounts (497) (484) (499)
---------------------------------------
Total accounts receivable, net 49,691 38,535 25,072
---------------------------------------
---------------------------------------
Of which
Neither impaired nor past due 33,412 17,661 17,552
Not impaired and past the due date as
follows:
Within 30 days 9,356 7,231 3,457
31 to 60 days 2,761 7,044 927
61 to 90 days 957 3,295 795
Over 90 days 3,702 3,788 2,840
Less allowance for doubtful accounts (497) (484) (499)
---------------------------------------
Total accounts receivable, net 49,691 38,535 25,072
---------------------------------------
---------------------------------------
Trade receivables assessed to be impaired are included in selling, general and
administrative expenses in the period of the assessment. The movement in the
Company's allowance for doubtful accounts for the periods ended December 31,
2011 and December 31, 2010 was as follows:
2011 2010
$ $
------------------------
Balance, beginning of year 484 499
Additional provision recognized 10 113
Amounts written off during the period as
uncollectible (1) (5)
Amounts recovered during the period 34 17
Unused provision reversed (33) (137)
Exchange differences 3 (3)
------------------------
Balance, end of year 497 484
------------------------
------------------------
18. INVENTORY
December 31, December 31, January 1,
2011 2010 2010
$ $ $
---------------------------------------
Raw materials 37,159 29,516 21,581
Finished goods 27,399 23,058 18,040
---------------------------------------
64,558 52,574 39,621
---------------------------------------
---------------------------------------
Inventory is recorded at the lower of cost and net realizable value.
During the year ended December 31, 2011, no provisions (2010 - nil) were
expensed through cost of goods sold. There were no write-downs of finished goods
and no reversals of write-downs included in cost of goods sold during the year.
19. PROVISIONS
Provisions consist of the Company's warranty provision. A provision is
recognized for expected claims on products sold based on past experience of the
level of repairs and returns. It is expected that most of these costs will be
incurred in the next financial year. Assumptions used to calculate the provision
for warranties were based on current sales levels and current information
available about returns.
2011 2010
$ $
------------------------
Balance, beginning of year 1,942 1,194
Costs recognized 3,032 2,971
Amounts charged against provision (2,752) (2,223)
------------------------
Balance, end of year 2,222 1,942
------------------------
------------------------
20. EQUITY
(a) Common shares
Authorized
Unlimited number of 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 81,951 2,737
Settlement of SAIP obligation - vested shares 140,000 5,449
--------------------------
Balance, December 31, 2010 12,399,550 151,376
Purchase of common shares under LTIP (note 21(a)) (67,996) (3,346)
Conversion of subordinated debentures 2,556 115
Settlement of LTIP obligation - vested shares
(note 21(e)) 77,510 2,894
--------------------------
Balance, December 31, 2011 12,411,620 151,039
--------------------------
--------------------------
The 12,411,620 common shares at December 31, 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.
The 12,399,550 common shares at December 31, 2010 are net of 143,890 common
shares with a stated value of $5,027 that are being held by the Company under
the terms of the LTIP until vesting conditions are met.
(b) Normal course issuer bid
On November 17, 2011, Ag Growth commenced a normal course issuer bid for up to
994,508 common shares, representing 10% of the Company's public float at the
time. The normal course issuer bid will terminate on November 20, 2012 unless
terminated earlier by Ag Growth. In the year ended December 31, 2011, no common
shares were purchased under the 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
2011 2010
$ $
--------------------------
Balance, beginning of year 6,121 3,859
Equity-settled director compensation 345 227
Obligation under LTIP 1,769 4,279
Exercise price on vested SAIP awards - 18
Settlement of LTIP obligation - vested shares (2,894) (2,262)
--------------------------
Balance, end of year 5,341 6,121
--------------------------
--------------------------
(d) Accumulated other comprehensive income
Accumulated other comprehensive income 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 investment. Gains and losses are reclassified to the
consolidated statement of income when the available-for-sale investment is
impaired or derecognized.
(e) Dividends paid and proposed
In the year ended December 31, 2011, the Company declared dividends of $30,109
or $2.40 per common share (2010 - $26,854 or $2.12 per common share). Ag
Growth's dividend policy is to pay cash dividends on or about the 30th 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 December 31, 2011, the Company declared dividends of $0.20 per
common share on each of January 31, 2012 and February 28, 2012.
(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 per Right.
21. 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 on January 1 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 different consolidated
statement of income lines by function depending on the role of the respective
management member. For the year ended December 31, 2011, Ag Growth expensed
$1,769 (2010 - $3,570) for the LTIP. Additionally, there is $29 in restricted
cash related to the LTIP.
During the year ended December 31, 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 share award incentive plan that 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.
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. As at December 31, 2011, 220,000 (2010 -
220,000) Share Awards have been granted and 40,000 (2010 - 80,000) remain
outstanding.
During the year ended December 31, 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. Subsequent to December 31,
2011, the remaining 40,000 Share Awards vested, at which time the participants
received a cash payment of $1,490. For the year ended December 31, 2011, Ag
Growth recorded income of $76 (2010 - expense of $2,707) for the Share Awards.
(c) Directors' Deferred Compensation Plan ("DDCP")
Under 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 years ended December 31, 2011 and 2010, the Directors elected to receive
the majority of their remuneration in common shares. For the year ended December
31, 2011, an expense of $345 (2010 - $227) 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 year
ended December 31, 2011, 9,161 common shares were granted under the DDCP and as
at December 31, 2011, a total of 23,144 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 allow these individuals an
opportunity 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 December 31, 2011, a total of 935,325 options (2010 - 970,319) are
available for grant. No options have been granted as at December 31, 2011.
(e) Summary of expenses recognized under share-based payment plans
For the year ended December 31, 2011, an expense of $2,038 (2010 - $6,504) was
recognized for employee and Director services rendered.
The total carrying amount of the liability for the SAIP as of December 31, 2011
was $1,495 (2010 - $3,574). There have been no cancellations or modifications to
any of the plans during the years ended December 31, 2011 or December 31, 2010.
A summary of the status of the options under the SAIP is presented below:
2011 2010
------------------------
Shares Shares
# #
------------------------
Outstanding, beginning of year 80,000 220,000
Exercised (40,000) (140,000)
------------------------
Outstanding, end of year 40,000 80,000
------------------------
------------------------
The exercise price on all SAIP awards is $0.10 per common share. All outstanding
options under the SAIP as of December 31, 2011 vested and were exercised on
January 1, 2012.
A summary of the status of the shares under the LTIP is presented below:
2011 2010
------------------------
Shares Shares
# #
------------------------
Outstanding, beginning of year 143,890 57,941
Vested (77,510) (81,951)
Granted 67,996 167,900
------------------------
Outstanding, end of year 134,376 143,890
------------------------
------------------------
The following table lists the inputs to the models used for the SAIP for the
years ended December 31, 2011 and December 31, 2010:
2011 2010
$ $
---------------------------
Dividend yield (%) 0 0
Expected volatility (%) 26.88 23.20
Risk-free interest rate (%) 1 1
Expected life of share options (years) 1 1
Weighted average share price ($) 37.48 50.07
Model used Black-Scholes Black-Scholes
---------------------------
---------------------------
The fair value per option at December 31, 2011 was $37.38.
The dividend yield was set to 0% for the calculation of the option value, as the
Share Award holders already receive during the period between grant date and
vesting date of the Share Award the same dividend as all actual shareholders.
The expected life of the Share Awards is the period between the reporting date
and the vesting date, as the Share Awards can be exercised by the holders only
at the vesting date. The expected volatility reflects the assumption that the
historical volatility over a period similar to the Share Awards is indicative of
future trends, which may also not necessarily be the actual outcome.
(f) Accelerated vesting and death benefits
On October 15, 2010, Ag Growth announced the passing of its Chief Executive
Officer. Upon his passing, all previously unvested share-based compensation
vested immediately, certain death benefits became payable to his estate and the
Company became entitled to proceeds of $3,000 related to an insurance policy,
which was recorded in prepaid expenses and other assets as at December 31, 2010.
The insurance proceeds were received in 2011.
22. LONG-TERM DEBT AND OBLIGATIONS FROM FINANCE LEASES
Interest December 31, 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 131 432 -
Nordea equipment
loan (Euro
denominated) 2.0 2013 - 112 -
GMAC loans 0.0 2011 and 2014 16 16 16
------------------------------------
Total current
portion of
interest-
bearing loans
and borrowings 147 560 16
------------------------------------
Non current
interest-
bearing loans
and borrowings
Series A secured
notes (U.S.
dollar
denominated) 6.8 2016 25,425 24,865 26,165
Term debt (U.S.
dollar
denominated) 3.8 2012 10,709 - -
Nordea equipment
loan (Euro
denominated) 2.0 2013 - 196 -
GMAC loans 0.0 2011 and 2014 3 15 31
Obligations
under finance
leases 6.5 2011 - 2012 - 138 -
------------------------------------
Total non-
current
interest-
bearing loans
and borrowings 36,137 25,214 26,196
------------------------------------
36,284 25,774 26,212
Less deferred
financing costs 313 558 793
------------------------------------
Total interest-
bearing loans
and borrowings 35,971 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
year ended December 31, 2011 on Ag Growth's Canadian dollar term debt was 3.5%
(2010 - 3.1%), and on its U.S. dollar term debt was 3.8% (2010 - 3.8%). As at
December 31, 2011 and December 31, 2010, there were no amounts 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.
Term loans bear interest at rates of prime plus 0.5% to prime plus 1.5% based on
performance calculations. As at December 31, 2011, term loans of U.S. $10,530
were outstanding and there were no term loans outstanding at December 31, 2010.
Ag Growth's credit facility provides for term loans of up to $38,000 and U.S.
$20,500 and matures October 29, 2012. In the event the credit facility is not
renewed, all outstanding amounts become repayable in quarterly installments
beginning on January 31, 2014.
Subsequent to December 31, 2011, the Company renewed its credit facility on
substantially the same terms with its existing lenders. The renewed credit
facility includes a $25 million accordion feature, bears interest at rates of
prime plus 0.0% to prime plus 1.0% based on performance calculations and matures
on the earlier of March 8, 2016 or three months prior to maturity date of
convertible unsecured subordinated debentures, unless refinanced on terms
acceptable to the Lenders.
The Nordea equipment loan is denominated in Euros, bears interest at 2% and was
fully repaid during the year ended December 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 2.5 and to provide debt service coverage of a minimum of 1.0. As at
December 31, 2011 and December 31, 2010, Ag Growth was in compliance with all
financial covenants.
23. CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES
January 1,
2011 2010 2010
$ $ $
---------------------------------------
Principal amount 114,885 115,000 115,000
Equity component (7,475) (7,475) (7,475)
Accretion 2,770 1,438 185
Financing fees, net of amortization (2,978) (3,823) (4,603)
---------------------------------------
Convertible unsecured subordinated
debentures 107,202 105,140 103,107
---------------------------------------
---------------------------------------
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 year ended December 31, 2011, holders
of 115 Debentures exercised the conversion option and were issued 2,556 common
shares. As at December 31, 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
30). 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 year ended December 31, 2011, the Company
recorded accretion of $1,332 (2010 - $1,253), non-cash interest expense related
to financing costs of $845 (2010 - $780) and interest expense on the 7% coupon
of $8,043 (2010 - $8,050). 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 income tax of $2,041, and its pro rata share of financing costs of $329.
24. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
December 31, December 31, January 1,
2011 2010 2010
$ $ $
---------------------------------------
Trade payables 8,212 7,323 4,074
Other payables 4,860 7,207 2,418
Personnel-related accrued liabilities 7,176 6,687 4,929
Accrued outstanding service invoices 750 587 330
Other 1,266 819 985
---------------------------------------
22,264 22,623 12,736
---------------------------------------
---------------------------------------
Trade payables and other payables are non-interest bearing and are normally
settled on 30- or 60-day terms. Personnel-related accrued liabilities include
primarily vacation accruals, bonus accruals and overtime benefits. For
explanations on the Company's credit risk management processes, refer to note
27.
25. INCOME TAXES
The major components of income tax expense for the years ended December 31, 2011
and 2010 are as follows:
Consolidated statement of income
2011 2010
$ $
------------------------
Current tax expense
Current income tax charge 3,910 5,627
Deferred tax expense
Origination and reversal of temporary differences 5,743 8,049
------------------------
Income tax expense reported in the consolidated
statement of income 9,653 13,676
------------------------
------------------------
Consolidated statement 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-
saleinvestment (1,490) (1,034)
Exchange differences on translation of foreign
operations 214 (540)
--------------------------
Income tax charged directly to other comprehensive
income (1,276) (1,574)
--------------------------
--------------------------
A reconciliation between tax expense and the product of accounting profit
multiplied by the Company's domestic tax rate for the year ended December 31,
2011 and 2010 is as follows:
2011 2010
$ $
------------------------
Accounting profit before income tax 34,176 44,437
------------------------
At the Company's statutory income tax rate of 28.05%
(2010 - 29.54%) 9,586 13,127
Tax rate changes 265 (520)
Recognition of deferred tax assets (91) -
Foreign rate differential 901 1,252
Permanent differences and others (1,008) (183)
------------------------
At the effective income tax rate 28.24% (2010 -
30.78%) 9,653 13,676
------------------------
------------------------
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
Consolidated statement of statement of
financial position income
------------------------------------------------------------
As at As at As at
December 31, December 31, January 1,
2011 2010 2010 2011 2010
$ $ $ $ $
------------------------------------------------------------
Inventories (200) (192) (120) 8 72
Property, plant
and equipment
and other
assets (10,145) (9,112) (6,757) 1,033 (475)
Intangible
assets (12,900) (13,044) (10,154) (144) 652
Deferred
financing costs (63) 21 165 84 144
Accruals and
long-term
provisions 1,642 748 452 (894) (296)
Tax loss
carryforwards
expiring
between 2016 to
2027 16,809 21,871 29,736 5,062 7,865
Investment tax
credit
carryforward
expiring
between 2025
and 2030 4,627 4,763 4,710 136 (53)
Canadian
exploration
expenses 29,157 29,157 29,157 - -
Capitalized
development
expenditures (465) - - 465 -
Convertible
debentures (1,279) (1,628) (1,984) (349) (356)
SAIP liability 397 977 1,690 580 713
Equity impact
LTIP 1,283 1,253 989 (30) (264)
Foreign exchange
gains - 6 (487) 6 (493)
Other
comprehensive
income 269 (1,221) (2,255) - -
Exchange
difference on
translation of
foreign
operations - - - (214) 540
------------------------------------------------------------
Deferred tax
expense 5,743 8,049
--------------------
--------------------
Net deferred tax
assets 29,132 33,599 45,142
----------------------------------------
----------------------------------------
Reflected in the
statement of
financial
position as
follows
Deferred tax
assets 38,092 42,063 47,356
Deferred tax
liabilities (8,960) (8,464) (2,214)
----------------------------------------
Deferred tax
assets, net 29,132 33,599 45,142
----------------------------------------
----------------------------------------
Reconciliation of deferred tax assets, net
2011 2010
$ $
------------------------
Opening balance as at January 1 33,599 45,142
Deferred tax expense during the period recognized in
profit or loss (5,743) (8,049)
Deferred tax income during the period recognized in
other comprehensive income 1,276 1,574
Deferred tax liabilities acquired on acquisitions - (5,068)
------------------------
Opening balance as at December 31 29,132 33,599
------------------------
------------------------
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 all deductible temporary differences as of the
reporting date and as at December 31, 2010.
The Company has recorded tax losses related to its Finnish operations of $1,413
Euros. Based on historical results and an expectation of future profits, a
deferred tax asset has been recognized for these losses as it is probable they
will be utilized.
At December 31, 2011, there was no recognized deferred tax liability (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 asset 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 tax filing positions are
probable to be sustained, there are a number of 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 to the Company attached to the payment of
dividends in either 2011 or 2010 by the Company to its shareholders.
26. POST-RETIREMENT BENEFIT PLANS
Ag Growth contributes to group retirement savings plans subject to maximum
limits per employee. Ag Growth accounts for such defined contributions as an
expense in the period in which the contributions are required to be made. The
expense recorded during the year ended December 31, 2011 was $1,925 (2010 -
$1,470). Ag Growth expects to contribute $2,000 for the full year 2012.
Ag Growth accounts for one plan covering substantially all of its employees of
the Mepu division as a defined contribution plan, although it does provide the
employees with a defined benefit (average pay) pension. The plan qualifies as a
multi-employer plan and is administered by the Government of Finland. Ag Growth
is not able to obtain sufficient information to account for the plan as a
defined benefit plan.
27. 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
December 31, 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 consolidated statement of financial position sensitivity relates to
derivatives.
-- The sensitivity of the relevant consolidated statement 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 December
31, 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 December 31, 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 December 31, 2011, Ag Growth's U.S. dollar
denominated debt totalled U.S. $35.5 million (2010 - $25.0 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 on revenue:
Settlement dates Face value Average rate
U.S. $ Cdn $
-----------------------------
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 gains and losses 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 year ended December 31,
2011 were U.S. $214 million, and the total of its cost of goods sold and its
selling, general and administrative expenses denominated in that currency were
U.S. $132 million. Accordingly, a 10% increase or decrease in the value of the
U.S. dollar relative to its Canadian counterpart would result in a $21.4 million
increase or decrease in sales and a total increase or decrease of $13.2 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 a $3.6 million increase or decrease in the foreign exchange gain
and a $7.0 million increase or decrease to other comprehensive income.
The counterparty to the contracts are three multinational commercial banks and
therefore credit risk of counterparty non-performance is remote. Realized gains
or losses are included in net earnings and for the year ended December 31, 2011
the Company realized a gain on its foreign exchange contracts of $5.0 million
(2010 - $8.7 million).
The open foreign exchange forward contracts as at December 31, 2011 are as follows:
Notional Canadian dollar equivalent
Notional amount
of currency sold Contract amount Cdn $ equivalent Unrealized loss
U.S. $ $ $ $
-------------------------------------------------------------------
60,000 0.9905 59,430 1,828
-------------------------------------------------------------------
-------------------------------------------------------------------
The open foreign exchange forward contracts as at December 31, 2010 are as follows:
Notional Canadian dollar equivalent
Notional amount
of currency sold Contract amount Cdn $ equivalent Unrealized gain
U.S. $ $ $ $
-------------------------------------------------------------------
55,000 1.08 59,400 4,200
-------------------------------------------------------------------
-------------------------------------------------------------------
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
consolidated statement of income.
The cash flow hedges of the expected future sales were assessed to be highly
effective and a net unrealized loss of $1,828, with a deferred tax asset of $481
relating to the hedging instruments, is included in accumulated other
comprehensive income.
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 December 31, 2011,
December 31, 2010 and January 1, 2010 are at a fixed rate of interest. As at
December 31, 2011, the Company had outstanding $10,530 of U.S. dollar term debt
at a floating rate of interest. A 10% increase or decrease in the Company's
interest rate would result in an increase or decrease of $7 to long-term
interest expense.
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 consolidated statement 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 December 31, 2011, the Company had two customers (December 31, 2010 - two
customers, January 1, 2010 - four customers) that accounted for approximately
14% (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 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 December 31, 2011:
December 31, 2011 0 - 6 6 - 12 12 - 24 2 - 4 After 4
Total months months months years years
$ $ $ $ $ $
-----------------------------------------------
Bank debt (includes
interest) 45,497 1,073 1,073 2,133 14,351 26,867
Trade and other payables 24,486 24,486 - - - -
Finance lease obligations 131 66 65 - - -
Dividends payable 2,509 2,509 - - - -
Convertible unsecured
subordinated debentures
(include interest) 139,011 4,021 4,021 8,042 122,927 -
Acquisition price,
transaction and financing
costs payable 1,938 1,429 509 - - -
-----------------------------------------------
Total financial liability
payments 213,572 33,584 5,668 10,175 137,278 26,867
-----------------------------------------------
-----------------------------------------------
December 31, 2010 0 - 6 6 - 12 12 - 24 2 - 4 After 4
Total months months months years years
$ $ $ $ $ $
-----------------------------------------------
Bank debt (includes
interest) 35,225 912 912 1,824 3,613 27,964
Trade and other payables 24,565 24,565 - - - -
Finance lease obligations 570 226 226 118 - -
Dividends payable 2,509 2,509 - - - -
Convertible unsecured
subordinated debentures
(include interest) 147,200 4,025 4,025 8,050 131,100 -
Acquisition price,
transaction and financing
costs payable 11,994 11,994 - - - -
-----------------------------------------------
Total financial liability
payments 222,063 44,231 5,163 9,992 134,713 27,964
-----------------------------------------------
-----------------------------------------------
(b) Fair value
Set out below is a comparison by class of the carrying amounts and fair value of
the Company's financial instruments that are carried in the consolidated
financial statements:
December 31, December 31,
2011 2010 January 1, 2010
--------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
$ $ $ $ $ $
--------------------------------------------------
Financial assets
Held-for-trading
Derivative instruments - - 4,200 4,200 9,500 9,500
Loans and receivables
Cash and cash equivalents 6,839 6,839 34,981 34,981 109,094 109,094
Cash held in trust - - 822 822 - -
Restricted cash 2,439 2,439 1,860 1,860 - -
Accounts receivable 49,691 49,691 38,535 38,535 25,072 25,072
Financial liabilities
Other financial
liabilities
Interest-bearing loans
and borrowings 36,153 39,593 25,204 28,171 26,212 26,338
Trade and other payables 24,486 24,486 24,565 24,565 13,930 13,930
Finance lease obligations 131 131 570 570 - -
Dividends payable 2,509 2,509 2,509 2,509 2,224 2,224
Acquisition price,
transaction and financing
costs payable 1,938 1,938 11,994 11,994 1,028 1,028
Derivative instruments 1,828 1,828 - - - -
Convertible unsecured
subordinated debentures 107,202 107,671 105,140 116,231 103,107 106,400
--------------------------------------------------
--------------------------------------------------
The fair value of the financial assets and liabilities are included at the
amount 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, dividends payable, finance lease obligations, acquisition
price, transaction and financing costs payable, accounts payable and
other current liabilities approximate their carrying amounts largely due
to the short-term maturities of these 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 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 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 and one option embedded in a
convertible debt agreement. The most frequently applied valuation
techniques 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 that require inputs other than quoted prices in Level 1,
and for which all inputs that 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 that 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
consolidated statement of financial position is as follows:
December 31, 2011 December 31, 2010
-----------------------------------------------
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
$ $ $ $ $ $
-----------------------------------------------
Financial assets
Cash and cash equivalents 6,839 - - 34,981 - -
Cash held in trust - - - 822 - -
Derivative instruments - - - - 4,200 -
Restricted cash 2,439 - - 1,860 - -
-----------------------------------------------
-----------------------------------------------
During the reporting periods ended December 31, 2011 and December 31, 2010,
there were no transfers between Level 1 and Level 2 fair value measurements.
At December 31, 2011, Ag Growth has $2,439 of restricted cash, which is
classified as a current asset (note 16).
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).
28. 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
December 31, 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. Ag Growth defines net debt as long-term debt
plus the liability component of Debentures, less cash and cash equivalents.
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:
December 31, December 31, January 1,
2011 2010 2010
$ $ $
---------------------------------------
Net debt 136,187 94,677 19,416
EBITDA 56,038 66,200 60,680
Ratio 2.43 times 1.43 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:
December 31, December 31, January 1,
2011 2010 2010
$ $ $
---------------------------------------
Net debt 136,187 94,677 19,416
Shareholders' equity 202,159 210,294 231,395
Ratio 0.67 times 0.45 times 0.08 times
---------------------------------------
---------------------------------------
29. RELATED PARTY DISCLOSURES
Relationship between parent and subsidiaries
The main transactions between the corporate entity of the Company and its
subsidiaries is the providing of cash fundings based on the equity and
convertible debt funds of Ag Growth International Inc. Furthermore, the
corporate entity of the Company is responsible for the billing and supervision
of major construction contracts with external customers and the allocation of
sub-projects to the different subsidiaries of the Company. Finally, the parent
company is providing management services to the Company entities. Between the
subsidiaries there are limited inter-company sales of inventories and services.
Because all subsidiaries are currently 100% owned by Ag Growth International
Inc., these inter-company transactions are 100% eliminated on consolidation.
Other relationships
Burnet, Duckworth & Palmer LLP ("BDP") provides legal services to the Company
and a Director of Ag Growth is a partner of BDP. The total cost of these legal
services was $0.4 million during the year ended December 31, 2011 (2010 - $0.1
million). Included in accounts payable and accrued liabilities as at December
31, 2011 is $0.5 million (2010 - $0.1 million) owing to BDP. These transactions
are measured at the exchange amount and were incurred during the normal course
of business.
Compensation of key management personnel of Ag Growth
Ag Growth's key management consists of 25 individuals including its CEO, CFO,
its Officers and other senior management, divisional general managers and its
Directors.
2011 2010
$ $
------------------------
Short-term employee benefits 85 73
Contributions to defined contribution plans 165 122
Salaries 4,526 3,553
Accelerated vesting and death benefits - 2,549
Share-based payments 2,038 6,504
------------------------
Total compensation paid to key management personnel 6,814 12,801
------------------------
------------------------
Key management interests in an employee incentive plan
Share Awards held by key management personnel under the SAIP have the following
expiry dates and exercise prices:
December 31,December 31, January 1,
2011 2010 2010
------------------------------------
Issue date Exercise Number Number Number
Expiry date price outstanding outstanding outstanding
$ # # #
--------------------------------------------
2007 January 1, 2010,
2011 and 2012 0.10 40,000 80,000 220,000
--------------------------------------------
--------------------------------------------
Key management employees have been granted the following LTIP awards for the
different vesting dates without any exercise price:
Shares outstanding
------------------------------------------------
December 31, December 31, January 1,
2011 2010 2010
Issue date Expiry date # # #
------------------------------------------------
2007 2009 - 2011 - 17,482 46,933
2008 2010 - 2012 2,675 5,352 7,339
2009 2011 - 2013 80,704 121,056 -
2010 2012 - 2014 50,997 - -
------------------------------------------------
134,376 143,890 54,272
------------------------------------------------
------------------------------------------------
30. EARNINGS PER SHARE
Net earnings per share is 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:
December 31, December 31,
2011 2010
$ $
--------------------------
Net profit attributable to shareholders for basic
and diluted earnings per share 24,523 30,761
--------------------------
Basic weighted average number of shares 12,423,173 12,675,342
Dilutive effect of DDCP 16,719 10,593
Dilutive effect of LTIP 122,463 142,437
--------------------------
Diluted weighted average number of shares 12,562,355 12,828,372
--------------------------
Basic earnings per share 1.97 2.43
Diluted earnings per share 1.95 2.40
--------------------------
--------------------------
There have been no other transactions involving ordinary shares or potential
ordinary shares between the reporting date and the date of completion of these
consolidated financial statements.
The convertible unsecured subordinated debentures were excluded from the
calculation of the above diluted net earnings per share because their effect is
anti-dilutive.
31. 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 provided
internally to the 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,
intangible assets and
available-for-sale
Revenues investment
--------------------------------------------------------
2011 2010 2011 2010
$ $ $ $
--------------------------------------------------------
Canada 63,746 57,971 152,411 148,108
United States 187,645 174,489 64,787 57,166
International 54,541 36,807 10,422 10,448
--------------------------------------------------------
305,932 269,267 227,620 215,722
--------------------------------------------------------
--------------------------------------------------------
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.
32. COMMITMENTS AND CONTINGENCIES
(a) Contractual commitment for the purchase of property, plant and equipment
As of the reporting date, the Company has entered into commitments to purchase
property, plant and equipment of $1.5 million.
(b) Letters of credit
As at December 31, 2011, the Company has outstanding letters of credit in the
amount of $1,987 (2010 - $642).
(c) 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 657
After one year but not more than five years 1,857
----------
2,514
----------
----------
These leases have a life of between one and five years with no renewal options
included in the contracts.
During the year ended December 31, 2011, the Company recognized an expense of
$943 (2010 - $1,273) for leasing contracts. This amount relates only to minimum
lease payments.
(d) Finance leases
The Company has finance leases for various items of manufacturing equipment.
Future minimum lease payments under finance leases, together with the present
value of the net minimum lease payments, are as follows:
December 31, 2011 December 31, 2010
Minimum lease payments Minimum lease payments
$ $
---------------------------------------------
Within one year 131 432
After one year but not more
than five years - 138
---------------------------------------------
Total minimum lease payments 131 570
Less amount representing
finance charges 4 23
---------------------------------------------
Present value of minimum lease
payments 127 547
---------------------------------------------
---------------------------------------------
The leased equipment is pledged as collateral. Interest expense related to
obligations under capital leases was $23 for the year ended December 31, 2011
(2010 - nil).
(e) 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.
33. EXPLANATION OF TRANSITION TO IFRS
The Company's consolidated annual financial statements were previously prepared
in accordance with Canadian GAAP.
The Company's consolidated financial statements for the year ended December 31,
2011 are the first annual financial statements prepared in accordance with IFRS
and were prepared as described in note 3, including application of IFRS 1.
IFRS 1 also requires that comparative financial information is provided. As a
result, the first date at which the Company has applied IFRS was January 1, 2010
(the "Transition Date"). IFRS 1 requires first-time adopters to retrospectively
apply all effective IFRS standards as of the reporting date, which for the
Company is December 31, 2011. However, it also provides for certain optional
exemptions and certain mandatory exceptions for first-time adopters.
Elected exemptions from full retrospective application
In preparing these consolidated financial statements in accordance with IFRS 1,
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 Transition Date.
(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 on or after the date of transition.
RECONCILIATION OF FINANCIAL POSITION
The following is a reconciliation of the Company's consolidated statement of
financial position reported in accordance with Canadian GAAP to its consolidated
statement of financial position reported in accordance with IFRS at the
transition date January 1, 2010:
Canadian IFRS
Note GAAP Adjustments IFRS
$ $ $
--------------------------------------
ASSETS
Current assets
Cash and cash
equivalents 109,094 - 109,094
Accounts receivable 25,072 - 25,072
Inventories 6 39,432 189 39,621
Prepaid expenses and
other assets 2 1,858 (86) 1,772
Income taxes recoverable 598 - 598
Derivative instruments 7,652 - 7,652
Deferred taxes 5, 8 10,103 (10,103) -
--------------------------------------
193,809 (10,000) 183,809
--------------------------------------
Non-current assets
Property, plant and
equipment, net 3, 7 27,779 10,094 37,873
Goodwill 3 52,337 (150) 52,187
Intangible assets, net 3 69,023 (582) 68,441
Available-for-sale
investment 2,000 - 2,000
Derivative instruments 1,848 - 1,848
Deferred tax asset 3, 5b, 7, 8 41,054 6,302 47,356
--------------------------------------
194,041 15,664 209,705
--------------------------------------
Total assets 387,850 5,664 393,514
--------------------------------------
--------------------------------------
Canadian IFRS
Note GAAP Adjustments IFRS
$ $ $
--------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and
accrued liabilities 8 13,930 (1,194) 12,736
Customer deposits 8,340 - 8,340
Long-term incentive plan 1 2,184 (2,184) -
Dividends payable 2,224 - 2,224
Acquisition price,
transaction and
financing costs payable 1,028 - 1,028
Current portion of
deferred credit 5a 9,305 (9,305) -
Current portion of long-
term debt 16 - 16
Provisions 8 - 1,194 1,194
--------------------------------------
37,027 (11,489) 25,538
--------------------------------------
Non-current liabilities
Long-term debt 25,403 - 25,403
Convertible unsecured
subordinated debentures 103,107 - 103,107
Deferred tax liability 3, 5b, 7 1,047 1,167 2,214
Deferred credit 5a 38,601 (38,601) -
Share award incentive
plan 1 5,866 (9) 5,857
--------------------------------------
174,024 (37,443) 136,581
--------------------------------------
Total liabilities 211,051 (48,932) 162,119
--------------------------------------
Shareholders' equity
Common shares 157,279 - 157,279
Accumulated other
comprehensive income 5,590 - 5,590
Equity component of
convertible debentures - 5,105 5,105
Contributed surplus 8,653 (4,794) 3,859
Retained earnings 5,277 54,285 59,562
--------------------------------------
Total shareholders'
equity 176,799 54,596 231,395
--------------------------------------
387,850 5,664 393,514
--------------------------------------
--------------------------------------
The following is a reconciliation of the Company's consolidated statement of
financial position reported in accordance with Canadian GAAP to its consolidated
statement of financial position reported in accordance with IFRS at December 31,
2010:
Canadian
Note GAAP Adjustments IFRS
$ $ $
--------------------------------------
ASSETS
Current assets
Cash and cash
equivalents 34,981 - 34,981
Cash held in trust 822 - 822
Restricted cash 1,860 - 1,860
Accounts receivable 4 36,910 1,625 38,535
Inventories 4, 6 53,631 (1,057) 52,574
Prepaid expenses and
other assets 2 7,840 (212) 7,628
Derivative instruments 4,200 - 4,200
Deferred taxes 8 10,817 (10,817) -
--------------------------------------
151,061 (10,461) 140,600
--------------------------------------
Non-current assets
Property, plant and
equipment, net 7 67,206 11,816 79,022
Goodwill 2, 4 64,055 (1,700) 62,355
Intangible assets, net 4 72,388 (43) 72,345
Available-for-sale
investment 2,000 - 2,000
Deferred tax asset 5b, 7, 8 34,853 7,210 42,063
--------------------------------------
240,502 17,283 257,785
--------------------------------------
Total assets 391,563 6,822 398,385
--------------------------------------
--------------------------------------
Canadian IFRS
Note GAAP Adjustments IFRS
$ $ $
--------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and
accrued liabilities 8 24,565 (1,942) 22,623
Customer deposits 6,573 - 6,573
Long-term incentive plan 1 1,870 (1,870) -
Dividends payable 2,509 - 2,509
Acquisition price,
transaction and
financing costs payable 11,994 - 11,994
Income taxes payable 56 - 56
Current portion of
deferred credit 5a 8,302 (8,302) -
Current portion of long-
term debt 128 - 128
Current portion of
obligations under
finance leases 432 - 432
Current portion of share
award incentive plan 2,003 - 2,003
Current portion of
Deferred tax liability 8 426 (426) -
Provisions 8 - 1,942 1,942
--------------------------------------
58,858 (10,598) 48,260
--------------------------------------
Non-current liabilities
Long-term debt 24,518 - 24,518
Obligations under
finance leases 138 - 138
Convertible unsecured
subordinated debentures 105,140 - 105,140
Deferred tax liability 5b,7,8 6,602 1,862 8,464
Deferred credit 5a 34,018 (34,018) -
Share award incentive
plan 1 1,573 (2) 1,571
--------------------------------------
171,989 (32,158) 139,831
--------------------------------------
Total liabilities 230,847 (42,756) 188,091
--------------------------------------
Shareholders' equity
Common shares 151,376 - 151,376
Accumulated other
comprehensive income
(loss) (1,026) 583 (443)
Equity component of
convertible debentures - 5,105 5,105
Contributed surplus 11,121 (5,000) 6,121
Retained earnings
(accumulated deficit) (755) 48,890 48,135
--------------------------------------
Total shareholders'
equity 160,716 49,578 210,294
--------------------------------------
391,563 6,822 398,385
--------------------------------------
--------------------------------------
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 the Transition Date:
Equity
component of Contributed
Common shares debenture surplus
Note $ $ $
----------------------------------------------------
As reported under
Canadian GAAP -
December 31, 2009 157,279 - 8,653
Reclassifications
Long-term incentive
plan liability 1 - - 2,184
Equity component of
debenture 8 - 7,146 (7,146)
Differences increasing
(decreasing) reported
amounts:
DDCP 1 - - 168
SAIP 1 - - -
Deferred income taxes 5b - (2,041) -
Transaction costs 2 - - -
Translation of foreign
operations 3 - - -
Deferred income taxes
deferred credit 5a,7 - - -
Inventories 6 - - -
Property, plant and
equipment 7 - - -
-------------------------------------------
As reported under IFRS
- January 1, 2010 157,279 5,105 3,859
-------------------------------------------
-------------------------------------------
Accumulated other
Retained comprehensive
earnings income Total
Note $ $ $
----------------------------------------------------
As reported under
Canadian GAAP -
December 31, 2009 5,277 5,590 176,799
Reclassifications
Long-term incentive
plan liability 1 - - 2,184
Equity component of
debenture 8 - - -
Differences increasing
(decreasing) reported
amounts:
DDCP 1 (168) - -
SAIP 1 9 - 9
Deferred income taxes 5b 57 - (1,984)
Transaction costs 2 (86) - (86)
Translation of foreign
operations 3 (427) - (427)
Deferred income taxes
deferred credit 5a,7 44,794 - 44,794
Inventories 6 189 - 189
Property, plant and
equipment 7 9,917 - 9,917
-------------------------------------------
As reported under IFRS
- January 1, 2010 59,562 5,590 231,395
-------------------------------------------
-------------------------------------------
The following is a reconciliation of the Company's equity reported in accordance
with Canadian GAAP to its equity in accordance with IFRS at December 31, 2010:
Equity
component of Contributed
Common shares debenture surplus
Note $ $ $
----------------------------------------------------
As reported under
Canadian GAAP -
December 31, 2010 151,376 - 11,121
Reclassifications
Long-term incentive
plan liability 1 - - 1,870
Equity component of
debenture 8 - 7,146 (7,146)
Differences increasing
(decreasing) reported
amounts
DDCP 1 - - 276
SAIP 1 - - -
Income taxes -
convertible
debentures 5b - (2,041) -
Transaction costs 2 - - -
Translation of foreign
operations 3 - - -
Deferred income taxes
- deferred credit 5a - - -
Deferred income taxes
- temporary
differences 7 - - -
Property, plant and
equipment 7 - - -
Inventories 6 - - -
-------------------------------------------
As reported under IFRS
- December 31, 2010 151,376 5,105 6,121
-------------------------------------------
-------------------------------------------
Accumulated other
Retained comprehensive
earnings income Total
Note $ $ $
----------------------------------------------------
As reported under
Canadian GAAP -
December 31, 2010 (755) (1,026) 160,716
Reclassifications
Long-term incentive
plan liability 1 - - 1,870
Equity component of
debenture 8 - - -
Differences increasing
(decreasing) reported
amounts
DDCP 1 (276) - -
SAIP 1 2 - 2
Income taxes -
convertible
debentures 5b 413 - (1,628)
Transaction costs 2 (1,789) - (1,789)
Translation of foreign
operations 3 (427) 427 -
Deferred income taxes
- deferred credit 5a 42,320 - 42,320
Deferred income taxes
- temporary
differences 7 (3,632) 224 (3,408)
Property, plant and
equipment 7 11,884 (68) 11,816
Inventories 6 395 - 395
--------------------------------------------
As reported under IFRS
- December 31, 2010 48,135 (443) 210,294
--------------------------------------------
--------------------------------------------
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 statement of financial position at the Transition
Date include:
-- 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. At the Transition Date, the impact of this
adjustment was to decrease the long-term incentive plan liability and
increase contributed surplus by $2,184 (December 31, 2010 - $1,870).
-- 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. At the Transition Date, the impact
of this adjustment was to decrease the share award incentive plan
liability and increase retained earnings by $9 (December 31, 2010 - $2).
-- For the directors deferred compensation plan ("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. At the transition date, the
impact of this adjustment was to decrease retained earnings and increase
contributed surplus by $168 (December 31, 2010 - $276).
2. Transaction Costs
In accordance with IFRS 3 (revised 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. As at the Transition Date, the impact of this
adjustment was to decrease prepaid expenses and other assets and decrease
retained earnings by $86. Transaction costs incurred in 2010 related to the
business combinations for Mepu, Franklin and Tramco (note 7) resulted in an
aggregate decrease to the goodwill balance in the amount of $1,577 and an
additional decrease of $126 to prepaid expenses at December 31, 2010.
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 and
have no impact on the other comprehensive income of the Company.
4. 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, as described in note 3, 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. As at December 31, 2010, as a result of the
adjustment, the Company increased accounts receivable by $1,625, decreased
inventory $1,452, decreased goodwill $123, and decreased intangible assets $43
(as the sale adjustment impacted the acquisition accounting).
5. Income Taxes
As noted above, the deferred tax balances as of the Transition Date and as of
December 31, 2010 are impacted by the IFRS and Canadian GAAP adjustments.
Additionally, 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 $47,906 (January 1, 2010) and
$42,320 (December 31, 2010), respectively. 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 as of the
different reporting dates during the comparison period 2010 and the
elimination of the deferred credit as reported under Canadian GAAP.
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 an
additional temporary difference for the Company's $115,000 Debenture. An
additional deferred tax liability of $1,984 has to be recorded as of the
Transition Date (December 31, 2010 - $1,628). The impact of $1,984 as of
the Transition Date results in a corresponding debit entry to the equity
component of the convertible debenture of $2,041 and increase to
retained earnings of $57. Subsequent movements in the deferred tax
liability of $413 at December 31, 2010 resulted in a decrease to
deferred income tax expense.
6. 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 $189 at transition ($395 - December 31,
2010).
7. 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 the transition date to increase from the
recorded amount under Canadian GAAP by $9,917 (December 31, 2010 - $11,816). The
related tax impact of the change in temporary differences resulted in additional
deferred tax liability of $3,112 at the Transition Date (December 31, 2010 -
$3,408).
8. Reclassifications
Certain balances have been reclassified between accounts to conform with IFRS.
Reconciliation of profit and loss for the twelve-month period ended December 31,
2010
Year ended
December 31,
2010
Note $
--------------------
Net income reported under Canadian GAAP 36,156
Differences increasing (decreasing) net income
Depreciation expense 1 2,113
Cost of sales 1 (44)
Deferred income tax
Deferred credit 2a (5,586)
Convertible debentures 2b 339
Temporary differences 2c (375)
Cost of sales 3 8
General and administrative 4 (1,703)
General and administrative 5 (115)
Translation gain 6 (32)
--------------------
Net profit recorded under IFRS 30,761
--------------------
--------------------
Notes to the reconciliations:
1. The componentization of property, plant, equipment and change in useful
lives and depreciation methods resulted in a decrease to depreciation
expense of $2,113, and a reduction to the gain on sale of property,
plant and equipment of $44, 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 deferred tax expense of $5,586 at December 31, 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 movements in the deferred tax
liability of $339 at December 31, 2010 resulted in a decrease to
deferred income tax expense.
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 of $375 to future income tax expense at December
31, 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 $1,703 at December 31, 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 (decrease) the SAIP
expense by $(7) and the DDCP by $108 for year ended December 31, 2010.
6. 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.
(e) 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 year ended December 31, 2010:
Year ended
December 31,
Note 2010
$
--------------------
Comprehensive income as reported under Canadian
GAAP 29,540
--------------------
Differences (decreasing) increasing reported
amounts
Differences in net income (i) (5,395)
Change in other comprehensive income
Foreign currency translation (ii) 583
--------------------
(4,812)
--------------------
Comprehensive income as reported under IFRS 24,728
--------------------
--------------------
(i) Differences in net income
Reflects the differences in net income between Canadian GAAP and IFRS as
described in note 33.
(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 revenue and expenses at average rates during the period.
The increase in property, plant and equipment creates increased foreign currency
translation adjustments recorded in OCI.
34. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform to the
current year's presentation.
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