2016 annual report - Uni
2016
ANNUAL REPORT
WINNING
WITH
THE BEST
TEAM
SERVICE
AND
BRANDS
FOUNDED IN 1968, UNI-SELECT IS THE LEADER IN THE DISTRIBUTION OF AUTOMOTIVE
REFINISH AND INDUSTRIAL PAINT AND RELATED PRODUCTS IN NORTH AMERICA, AS
WELL AS A LEADER IN THE AUTOMOTIVE AFTERMARKET PARTS BUSINESS IN CANADA.
ABOVE ALL, UNI-SELECT HAS OVER 3,000 TEAM MEMBERS SERVING CLIENTS ACROSS THE
UNITED STATES AND CANADA. WE ARE PROUD TO HAVE THE BEST TEAM IN THE BUSINESS,
A TEAM WE CONTINUE TO DEVELOP AND GROW, EVERY YEAR. AT UNI-SELECT, WE KNOW
THAT TO WIN, WE NEED THE BEST TEAM, THE BEST SERVICE AND THE BEST BRANDS.
TABLE OF CONTENTS
Financial Highlights1
Business Overview2
Message from the Chair4
Message from the CEO6
Operational Review8
People and Community12
Management
14
Governance
15
Management’s Discussion and Analysis
17
Consolidated Financial Statements
49
Shareholder Information
87
FINANCIAL HIGHLIGHTS
SELECTED FINANCIALS
(in millions of US dollars except per share amounts, percentages and otherwise specified)
OPERATING RESULTS
Sales
EBITDA (1)
Adjusted EBITDA (1)
Adjusted EBITDA margin (1)
Restructuring and other charges
Impairment and transaction charges related to the sale of net assets
Net earnings (loss)
Adjusted earnings (1)
Free cash flows (1)
COMMON SHARE DATA
2016
2015(2)
1,197.3
106.8
107.6
9.0%
(0.7)
-
58.3
58.6
109.4
1,355.4
(53.3)
96.6
7.1%
5.3
145.0
(40.2)
56.8
78.5
1.37
1.38
0.335
11.19
42,214,178
42,434,956
Net earnings (loss)
Adjusted earnings (1)
Dividend (C$)
Book value per share
Number of shares outstanding
Weighted average number of outstanding shares
(0.94)
1.33
0.315
10.13
43,135,758
42,777,589
FINANCIAL POSITION
Working capital
191.5
Total assets
976.9
Total net debt (1)
112.0
Total equity
472.4
Adjusted return on average total equity (1)
12.9%
Long-term debt to total equity ratio (1)
28.4%
Total net debt to total net debt and equity ratio (1)19.2%
$1.2B
ADJUSTED EBITDA
MARGIN (1)
2016 SALES
FinishMaster U.S.
$752.9M
Automotive Canada
$444.5M
$107.6M
9.4%
7.6%
7.7%
8.2%
Q4 2015
Q1 2016
9.2%
9.7%
Q2 2016
Q3 2016
8.7%
4.7%
Q1 2015
Q2 2015
Q3 2015
DIVIDEND
PER SHARE (C$)
2016 ADJUSTED
EBITDA(1)
FinishMaster U.S.
$93.4M
228.8
835.2
437.0
12.0%
20.7%
N/A
0.24
0.26
0.26
Q4 2016
FUNDED DEBT TO ADJUSTED
EBITDA (1) RATIO (%)
0.335
0.29 0.315
3.32
3.26
2.74
2.34
1.04
Automotive Canada
$26.6M
0.00
2011
2012
2013
2014
2015
2016
2011
2012
2013
2014
2015
2016
1) This information represents a non-IFRS financial measure.
Please refer to the “Non-IFRS financial measures” section
of this document for further details.
2) 2015 financial results are impacted by the sale of net assets
of Uni-Select USA, Inc. and Beck/Arnley Worldparts, Inc.
completed June 1, 2015.
2016 ANNUAL REPORT UNI-SELECT 1
BUSINESS OVERVIEW
LEADER IN LARGE
AND GROWING
MARKETS
11.3 MILLION
OF THE APPROX. 14.5 MILLION
COVERED CAR ACCIDENTS IN
THE U.S. EACH YEAR ARE
REPAIRABLE1
SALES OF NEW VEHICLES
ARE AT AN ALL-TIME HIGH IN
CANADA AND THE U.S.
COMBINED – UP FROM 13 MILLION
IN 2010 TO MORE THAN
19.5 MILLION
IN 2016
THE AVERAGE AGE OF VEHICLES
HAS NEVER BEEN HIGHER:
NEARLY
10
YEARS
IN CANADA
OVER
11
YEARS
IN THE U.S.
CONSUMERS ARE HOLDING ON TO
THEIR VEHICLES MUCH LONGER:
24 MONTHS
LONGER
THAN THEY DID IN
THE EARLY 2000’S
THERE ARE
OVER 20,000
UNIQUE COMBINATIONS OF
ENGINES AND BODY STYLES
ON THE ROAD TODAY
1) Source: Roman’s Report dated November 24, 2016
2 UNI-SELECT 2016 ANNUAL REPORT
AUTOMOTIVE CANADA
A leader in the distribution of automotive aftermarket parts, tools
and equipment, industrial and paint & related products. We operate
across Canada.
ABOUT
20%
MARKET SHARE OF THE
C$2.6 BILLION WAREHOUSE
DISTRIBUTION SEGMENT IN
THE CANADIAN AUTOMOTIVE
AFTERMARKET
NUMBER
TWO
IN CANADA
10
150+
NETWORK OF
16,000+
DISTRIBUTION
CENTRES ACROSS
THE COUNTRY
1,100+
BUMPER TO BUMPER®
STORES, OF WHICH ABOUT ONE
THIRD ARE CORPORATE STORES
INDEPENDENT CUSTOMERS
AND CORPORATE
STORES
AUTOMOTIVE AND COLLISION
REPAIR SHOPS SERVED, OF WHICH
3,900 SHOPS AND STORES OPERATE
UNDER ONE OF OUR BANNERS
MORE THAN
1,150+
2 MILLION
AUTOMOTIVE PRODUCTS
AVAILABLE
TEAM
MEMBERS
FINISHMASTER U.S.
Largest North American distributor of automotive and industrial
refinish products and equipment. We operate in 32 states, from coast
to coast, across the United States.
ABOUT
27%
MARKET SHARE OF THE
US$2.7B AUTOMOTIVE
PAINT AND PAINT MATERIAL
MARKET IN THE U.S.
NUMBER
ONE
IN THE U.S.
205+
4
PRIMARY SUPPLIER OF
30,000+
CORPORATE FINISHMASTER
LOCATIONS
6,000+
COLLISION REPAIR
CENTRES
STRATEGICALLY LOCATED
DISTRIBUTION CENTRES
AUTOMOTIVE PAINT, INDUSTRIAL
PAINT AND RELATED PRODUCTS
AVAILABLE
1,850+
TEAM
MEMBERS
2016 ANNUAL REPORT UNI-SELECT 3
MESSAGE FROM THE CHAIR
COMMITTED TO
SOUND GOVERNANCE
Under the leadership of the management
team, Uni-Select recorded strong results
in 2016. The Board of Directors is pleased
with the progress made in the execution of
the corporate strategy and looks forward
to the achievement of new milestones in
the years ahead.
The responsibility of the Board is to ensure
that the Corporation has the right elements
in place to continue on its path of profitable
growth and the creation of long-term
shareholder value. Essential among these
is adherence to high standards of corporate
governance, and the Board I have the
honour to lead is fully committed in this
regard.
Numerous actions have been taken in
recent years, including many in 2016,
to further strengthen our governance
structure and processes in response to
changes in the Corporation’s business mix,
evolving best practices and regulations, as
well as shareholder feedback.
BOARD RENEWAL
The composition of the Board and its
committees is at the core of sound
governance. Our Board is a diverse mix of
accomplished individuals whose experience
and professional qualifications are relevant
to our business and the geographies in
which it operates. Each brings a unique
perspective that adds value to the Board’s
deliberations.
Eight of the current ten members have
joined the Board in the past five years,
including two in 2016. Three directors
4 UNI-SELECT 2016 ANNUAL REPORT
are citizens of the United States, the
Corporation’s largest market. Two are
women, positioning Uni-Select in the top
tier of Canadian public companies in terms
of gender diversity.
The majority of the directors are
independent. Board renewal over the
last few years has also resulted in the
appointment of new, independent chairs
for the Audit Committee, the Human
Resources and Compensation Committee,
and the Corporate Governance and
Nominating Committee.
To ensure the Board’s continued alignment
with the needs of the Corporation over
time, a formal annual assessment of
director performance is conducted and
we continue to review the Board’s existing
strengths against our skills matrix and the
evolving needs of the business. We also
have a training program in place for new
directors, and provide ongoing training for
all existing Board members.
In 2016, I personally met a number of
institutional shareholders to discuss
governance and other matters. These
meetings provided valuable insight into
the main areas of interest for these
shareholders and it is my intention
to continue this form of shareholder
engagement in the coming years.
BOARD RESPONSIBILITIES
Uni-Select’s objective is to grow in two
specific market sectors, each presenting
different opportunities and posing
different business risks. One of the primary
responsibilities of the Board is to approve
the strategic plan and determine the risk
appetite, particularly since acquisitions
should continue to have an important
role in accelerating the Corporation’s
growth. We also ensure that appropriate
mitigation measures are in place to
counter potential risks, without unduly
impinging on the Corporation’s ability to
seize market opportunities.
The Board and Management work closely
on the Corporation’s strategic priorities,
reviewing and exploring both shortand long-term growth objectives and
the expected contribution from organic
growth and acquisitions. In 2016, the
Board commenced formal strategy reviews
on a quarterly basis. Given how quickly
our industry is changing, reviewing our
strategic priorities must be a continuous
process.
At the Board’s request, the Corporation
also undertook a thorough enterprise risk
management review and has since put in
place more exhaustive risk assessment
mechanisms and processes. This will
ensure that strategic initiatives will
continue to be supported by appropriate
risk management and focus on generating
long-term shareholder value.
To align the Corporation’s growth objectives
with shareholder interests, the Board also
conducts annual reviews of executive
compensation and reports its findings and
decisions in the management information
circular.
Finally, both the Board and the Human Resources
and Compensation Committee are very attentive
to the Corporation’s recruitment and succession
planning processes for senior leadership positions
and throughout the Corporation.
The Board and Management both believe that
the Corporation has one of the best teams in the
industry and appropriate resources are allocated
to sustain this position.
OUR BOARD IS A DIVERSE MIX OF ACCOMPLISHED
INDIVIDUALS WHOSE EXPERIENCE AND PROFESSIONAL
QUALIFICATIONS ARE RELEVANT TO OUR BUSINESS
AND THE GEOGRAPHIES IN WHICH IT OPERATES.
ACKNOWLEDGEMENTS
Many people contributed to another successful
year for our Corporation. It has been an honour
for me to take on the role of Chair in 2016 and,
on behalf of the Board, I wish to recognize the
leadership of the management team led by Henry
Buckley and the dedication of Uni-Select’s team
members in Canada and the United States. Thank
you as well to our many North American customers,
suppliers and partners.
My fellow directors bring their vast experience and
skills to their roles and I wish to acknowledge their
rigor and commitment to the Corporation’s success.
In closing, I would like to reiterate to shareholders
our commitment to high governance standards
and value creation. Thank you for your confidence.
André Courville
2016 ANNUAL REPORT UNI-SELECT 5
MESSAGE FROM THE CEO
WINNING WITH
THE BEST TEAM
Uni-Select delivered strong financial results
in 2016 and we made great progress in
the execution of our growth strategy.
More important for the long term, our
teams achieved many key milestones in
our ongoing efforts to strengthen the
foundation for our future success.
Throughout 2016, we remained very
focused on profitable growth. In both the
United States and Canada, many actions
were taken to elevate customer service,
expand distribution reach and drive higher
performance from existing assets. These
initiatives were complemented by several
accretive acquisitions on both sides of the
border to extend our geographic coverage
and add density in key markets where we
are already present.
This balanced approach to growth—
organic and acquisitive—is fundamental to
our strategy. It is supported by an effective
post-acquisition integration process led
by dedicated resources that ensure we
effectively welcome new members into our
team, capture synergies, and sustain and
grow sales. Delivering exceptional service
to our customers is also an important
part of our strategy, and is reflected in
our commitment to attract, develop and
retain the best team in the business. We
are creating value for our shareholders and
other stakeholders by executing on these
strategic priorities.
6 UNI-SELECT 2016 ANNUAL REPORT
BUILDING ON LEADERSHIP
Uni-Select today benefits from strong
positions as a distributor in two large
automotive markets—paint and related
refinish products, and automotive
aftermarket parts. In the U.S., our paint
and related products segment operates
under the FINISHMASTER® brand and
holds the number one market share
position. Automotive Canada distributes
parts through our coast-to-coast network
of independent and corporate stores under
the BUMPER TO BUMPER® and AUTO
PARTS PLUS® brands, holding the number
two position nationally. This segment is
also a leader in the distribution of paint and
related refinish products in Canada.
Demand trends are favourable in both
our primary segments, and market
fragmentation offers many opportunities
for consolidation. With a strong balance
sheet and a track record of success
integrating acquisitions and with highly
recognized brands in both segments, we
are very well positioned to continue on
our path of profitable growth.
In 2016, we advanced our strategy on
multiple fronts.
UNITED STATES
Our FinishMaster subsidiary posted solid
top and bottom line results. We completed
several transactions in 2016, adding stores
in both new and existing regional markets,
and we were also active in early 2017. Our
focus on robust acquisition and integration
processes coupled with highly effective
execution resulted in integration success
with accretive results and highly engaged
team members and customers.
Customer service was enhanced through
the opening of a fourth distribution
centre in Moorestown, New Jersey,
in late 2016. We continue to optimize
our processes focusing on delivering
exceptional customer service and high
fill rates.
CANADA
Our Canadian operations faced several
headwinds in 2016, including economic
weakness in the Prairies, soft pockets in
other markets, and a lower currency. We
continued to make significant progress in
major initiatives to drive future sales growth,
efficiency and customer satisfaction.
We revamped and launched our
national unified aftermarket store
program and brand—B U M P E R TO
BUMPER - CANADA’S PARTS PEOPLETM—
for both our independent customers as
well as our corporate stores. All our
independent wholesale customers now
have a choice between our full marketing
brand in BUMPER TO BUMPER and our
menu-driven brand in AUTO PARTS PLUS.
We have accelerated our corporate
store initiative, which complements our
network of independent customers. While
combined we currently have over 150
BUMPER TO BUMPER stores nationally,
our immediate focus is to build a solid
foundation and platform for growth.
We have established a league-leading dedicated
leadership team, standardized our processes,
and are now installing a new point-of-sale system
in the stores. This system, which bolts onto our
ERP platform, should not only help drive sales
growth, but also enable faster synergy capture in
our existing corporate stores and enable future
acquisitions. In addition, it will be a new-era
system adding value for our independent jobbers
who choose to adopt it.
The year was also highlighted by the launch of
the FINISHMASTER brand in Canada by our
Automotive Canada segment. The extension of
this successful model to our existing Canadian
paint, body and equipment program will
strengthen our market position by enhancing
service to the domestic collision repair industry.
WITH OUR STRONG
FINANCIAL PERFORMANCE,
SOLID BALANCE SHEET AND
ACCESS TO LIQUIDITY, WE ARE
AGGRESSIVELY PURSUING THE
BEST OPPORTUNITIES IN BOTH
OUR CORE BUSINESSES
AND ASSESSING
GROWTH OPTIONS
BEYOND.
LOOKING FORWARD
We remain highly focused on executing our
objective to accelerate profitable growth
in 2017. We are maintaining our course and
continuing to target a balance of organic and
acquisitive growth. Our acquisition pipeline is
healthy, organic growth initiatives robust and
we remain acutely focused on building a strong
foundation for future growth.
With our strong financial performance, solid
balance sheet and access to liquidity, we are
aggressively pursuing the best opportunities in
both our core businesses and assessing growth
options beyond. We will also continue to strive
for excellence in serving our customers—
independent jobber customers, installers and
collision repair shops, both large and small—by
offering quality products, maintaining high fill
rates and providing various services to assist
them in growing their business. In everything
we do, cost discipline and expense management
are high on our decision matrix as we seek
to maximize benefits for customers and for
Uni‑Select.
I wish to thank our shareholders for their support
and assure them of our commitment to value
creation. In April 2016, the Board of Directors
approved a 6.25% increase in the quarterly
dividend, we returned an additional $22 million
through share buy-backs, and extended our
purchase program for another year. A 2-for-1
share split took effect in the second quarter.
Our over 3,000 team members across our
network deserve special thanks for their
dedication. Winning in our business requires the
best brands, the best service and the best team.
At Uni-Select, we have the right ingredients
for success, anchored by the best team in the
business.
Henry Buckley
2016 ANNUAL REPORT UNI-SELECT 7
OPERATIONAL REVIEW
FINISHMASTER
U.S.
DRIVING GROWTH
Acquisitions and organic sales continued
to be the primary drivers of growth for
FinishMaster in 2016, further enhancing
our North American leadership in the
distribution of automotive and industrial
refinish products and equipment. We
expanded our reach and geographic
coverage with our first location in Louisiana
and additional branches in Washington,
Texas, Michigan, Minnesota, Missouri,
California and Ohio. Our 2016 growth was
complemented by several new and ongoing
initiatives aimed at enhancing our product
offering, improving distribution and further
enhancing customer experience—both
in‑store and online.
In early 2017, we announced two
acquisitions that will expand our presence
in the northeast. We opened our first
branch in Portland, Oregon, a greenfield
location. We also completed an acquisition
that significantly expanded our footprint in
California, Las Vegas, Nevada, and Phoenix,
Arizona.
While acquisitions will remain a key driver
in 2017 as we expect market consolidation
to continue, our focus will also be on
growth in the industrial paint market and
continuous enhancement of customer
experience.
8 UNI-SELECT 2016 ANNUAL REPORT
INAUGURATION OF FOURTH
DISTRIBUTION CENTRE
In late 2016, we opened our new
Moorestown, New Jersey, distribution
centre, allowing us to maintain industryleading fill rates. This new facility will reduce
transit time to our northeast branches
to one day, ensuring we get customers
product they need when they need it.
STRENGTHENING VENDOR
RELATIONSHIPS
Vendors remain key to our success. We have
developed strong long-term relationships
with world-class, leading product
manufacturers. We are very focused on
growing and strengthening relationships
with partners whose objectives align with
our long-term growth strategies.
SMART® BRAND EXPANSION
Our exclusive SMART product line
continued to grow in 2016 with the
addition of over 70 new products across
nine product categories. SMART is the
fourth largest brand we carry and offers
a product footprint that covers over 80%
of the common repair processes in a body
shop, excluding paint.
In 2016, we experienced a product line
changeover which impacted sales in
the short term. In 2017, we intend to
drive market share growth with our key
paint suppliers—Axalta and PPG—while
expanding our relationship with Akzo Nobel,
a more recent paint partner. Growing with
these vendors equips us to take advantage
of fast-growing automotive and industrial
market opportunities in North America.
In 2017, we will continue to launch new
products under this brand and have a
focused effort on displaying products
prominently in our branches. With
upcoming launches of ten new products
across three product categories expected
early this year, our objective is to cover 95%
of the common repair processes in a body
shop.
TAPPING INTO INDUSTRIAL MARKET
Last year, we fine-tuned our plans to
expand in the industrial sector in 2017.
We have selected key target markets
as well as specific segments and plan to
leverage our existing branch footprint and
expertise, such as mixing, to drive the most
growth. The industrial initiative will be led
by a seasoned executive who joined us in
January.
UNWAVERING CUSTOMER FOCUS
Our focus remains on taking action based
on our core values and maintaining a
customer-centric culture. The needs and
service requirements of our customers—
multi-shop operators (MSO), traditional
collision centres and individual customers—
vary, but we are prepared to provide the
support each needs to succeed.
In 2016, we restructured and strengthened
our MSO team to ensure customers have
the right support and consistent service. To
better support our traditional business, we
implemented a new sales process designed
to help retain our existing customers.
For walk-in business, an “everybody sells”
philosophy has been implemented across
the organization. In late 2016, we also
launched a new e-commerce website,
taking the “walk-in” mentality to a virtual
platform. Accessible on any device, the new
solutions offered will significantly improve
online customer experience.
Throughout 2017, we will continue to
develop our talent and implement the
leadership and sales training processes
launched in the past. This further
strengthens our sales and customeroriented culture.
MORE GROWTH
Market trends remain favourable for 2017
and beyond, supported by significant
growth in new vehicle sales over the
past seven years and the propensity of
consumers to keep their vehicles longer.
As the market leader, FinishMaster is well
positioned to accelerate profitable growth
in a consolidating industry and through the
successful execution of internal initiatives
by engaged team members.
U.S. GROWTH OVERVIEW
January 2016
Acquisition of ColorMaster Automotive
Paint, Inc. with 15 locations in Illinois,
Missouri, Texas and Louisiana
February 2016
Acquisition of Johnson
Michigan Automotive &
Industrial Coatings in
eastern and central
Michigan
March 2016
Acquisition of CPCO, Inc. –
City Paints in San Francisco,
California
April 2016
Acquisition of Annex Group Inc.
with nine locations, including Seattle,
Everett, and Tacoma, Washington and
California, and of Zitco, Inc. – Lowell’s
PCE in Minneapolis/St. Paul
May 2016
Acquisition of Gladwin Paint
Company with eight locations in Austin,
Dallas, Houston, and San Antonio, Texas
November 2016
Acquisition of Autobody Supply Co.
with nine locations in central and
southwestern Ohio, including Columbus
January 2017
Acquisition of Blaise of Color Inc.
in South Plainfield, New Jersey, and
Crown Auto Body Supply LLC in Salem,
Massachusetts
Opening of first branch in Portland,
Oregon
Acquisition of A. D’Angelo & Sons, Inc.
with 14 locations in California, Las Vegas,
Nevada, and Phoenix, Arizona
2016 ANNUAL REPORT UNI-SELECT 9
OPERATIONAL REVIEW
AUTOMOTIVE
CANADA
GROWING THE BUSINESS
Throughout 2016, Automotive Canada
remained as focused as ever on growing
our business with independent jobber
customers and through our corporate
stores, now operating under a strong,
national brand. We also made important
progress building out the Canadian platform
to accelerate the integration of acquisitions
and promote profitable growth, efforts that
will continue throughout 2017.
While facing a number of economic
headwinds, we continued to focus
on organic growth and acquisitions in
2016 including in the Montréal and
Vancouver regions. We also launched the
FINISHMASTER brand in Canada with store
conversions in Toronto and Ottawa, and
through acquisitions in Ontario and British
Columbia to be converted to this banner.
TRULY CANADA’S PARTS PEOPLE
2016 marked a significant milestone
for our BUMPER TO BUMPER banner
with its implementation as our unified
national parts distribution banner across
the country. Already present in Manitoba,
Saskatchewan and Alberta, we proceeded
with the conversion of our existing
Canadian corporate stores and grew the
banner through acquisitions that will also
be converted. All phases of the conversion
of our corporate stores will be completed
in 2017.
Our new national brand clearly illustrates
our commitment to covering all parts for a
wide range of vehicles and as CANADA’S
PARTS PEOPLE. This new image helps us
communicate the message that we cherish
our Canadian roots and values.
We have also converted select independent
jobber customers who see value in the
full-service offering behind the BUMPER
TO BUMPER banner, including tailored
solutions and a turnkey marketing
program.
Customers who wish to maintain
independence and prefer a menudriven approach will continue under
our AUTO PARTS PLUS banner, whose
offering was redefined in 2016 to provide
BUMPER TO BUMPER teamed up with Kevin
Lacroix for the 2016 NASCAR Pinty’s Series,
one of several initiatives providing visibility
to Uni-Select’s national brand last year.
10 UNI-SELECT 2016 ANNUAL REPORT
maximum flexibility. At Automotive
Canada, striking a balance between
our long-standing relationships with
independent jobber customers and
our corporate footprint is key and will
remain a priority in 2017.
SUPPORTING OUR INSTALLER
CUSTOMERS
We continue to deploy the Uni-Select
travelling training centre, a program
designed to help our installer customers
grow their businesses and reach their
full potential. In 2016, our professionals
participated in 277 days of training for
1,918 installer customer team members
from 63 cities in Canada.
By fostering the success of entrepreneurs,
we strengthen our relationship with key
customers, while contributing by extension
to the communities where these businesses
provide employment, and buy goods and
services.
NEW POINT-OF-SALE/JOBBER
MANAGEMENT SYSTEM
In late 2016, we began the implementation
of a point-of-sale management system
in our corporate stores and the roll-out
will continue throughout 2017. Called
PartsWatch, this new system will drive
sales growth and enable faster integration
and synergy capture following acquisitions.
When available, it will also be offered to
independent jobber customers who can
choose to adopt it.
WELCOME TO CANADA,
FINISHMASTER!
In 2016, we launched the successful
FinishMaster business model in Canada,
strengthening our existing paint, body
and equipment program and enhancing
service to the domestic collision repair
industry. Managed by Automotive Canada
and supported by our strong national
distribution network, FINISHMASTER
CANADA® offers Uni-Select’s full line of
premium national brand paint and related
products. The FINISHMASTER brand will
continue to expand and grow in Canada
through greenfield stores and acquisitions.
OPPORTUNITIES AND CHALLENGES
Overall demand trends in the Canadian
automotive aftermarket are favourable,
with continued growth in total vehicle
units in operation and in distances driven.
These key drivers of service demand offer
many opportunities for profitable growth,
tempered by softer economic performance
in some regions of the country.
In 2017, we will continue brand and process
standardization across our network to
elevate customer experience and efficiency.
We are determined to unlock the full value
of our BUMPER TO BUMPER brand and
other brands in our family, and to continue
to fully support our independent jobber
customers. While maintaining a focus on
organic growth, we have a full acquisition
pipeline to accelerate penetration in new
and existing markets.
CANADIAN GROWTH OVERVIEW
February 2016
Acquisition of Pièces d’autos M.A.G.
Inc. in Sherbrooke, Québec
March 2016
Acquisition of Jean Talon Auto Parts
(1993) Ltd. with six locations in
Montréal, Québec
Acquisition of Centre de Pièces Gagnon
in Montréal, Québec
September 2016
Launch of FINISHMASTER CANADA
with three locations in Ontario, namely
in Toronto and Ottawa
October 2016
Acquisition of Guelph Paint and
Bumper Supplies Inc. in Ontario by
FINISHMASTER CANADA
November 2016
Acquisition of Pacific Parts Ltd. with two
locations in the greater Vancouver area,
British Columbia
December 2016
Acquisition of Vancouver Autocolor in
British Columbia by FINISHMASTER
CANADA
2016 ANNUAL REPORT UNI-SELECT 11
PEOPLE AND COMMUNITY
UNLEASHING THE
POTENTIAL OF
OUR PEOPLE
We have long recognized that our greatest
strength—and key differentiator—is our
people.
Uni-Select team members across Canada
and the United States shape and strengthen
our long-term relationships with customers
and suppliers every day. They are the front
line ensuring that our banners and services
are delivering value and strengthening
our position as a preferred distributor in
the automotive aftermarket industry and
the undisputed leader in the automotive
refinish market. Simply put, our team
members are the key to our continued
success.
With our rapid growth and the ever
changing landscape of our industry, it
is paramount that each member of our
expanding team is provided with the right
support, tools and framework to succeed
and reach their full potential.
INTEGRATING PEOPLE,
NOT ASSETS
In 2016, over 500 new team members
joined Uni-Select as the result of
acquisitions in Canada and the United
States. The success of an acquisition—
regardless of size—is inevitably tied to the
effectiveness of the integration process. In
a service-oriented business such as ours,
the onboarding of new team members is
all the more important. Uni-Select has a
strong integration track record, one we
continue to invest in and fine-tune as our
growth accelerates.
While the seamless execution of the
more practical aspects of the onboarding
process is a top priority in the short term,
fostering a positive experience over the
long term and sharing best practices are
equally important. By working together,
we ensure everyone is moving in the same
direction while integrating the strengths
of new team members so that in the end,
we are stronger and better than the sum
of our parts.
DRIVING TALENT DEVELOPMENT
Talent development and fuelling our talent
pipeline to ensure stability within key
functions at all times is paramount. This
is an essential ingredient in our recipe for
winning with the best.
We continually improve our talent
recruitment and retention practices
to ensure that we have the right skills
at the right place, at the right time
and to prioritize promoting our people
from within wherever possible. In
2016,we continued to enhance our
talent development culture by providing
training and coaching to our team
members.
12 UNI-SELECT 2016 ANNUAL REPORT
Across the Corporation, there has been
a sea change over the last few years,
towards becoming a more sales-oriented
organization, in recognition of the servicecentric nature of our business and the
key role that our people play as our
ambassadors every day.
We are equally proud and committed
to maintaining diversity within our
employee base, both in terms of skills and
backgrounds, as well as gender. With a 24%
representation of women overall—and at
all levels of the organization—we are well
ahead of our industry average, which is
around 9%. Diversity remains a top priority
in the years ahead.
ENGAGING = COMMUNICATING
Engagement is fostered through training
and coaching but also through recognition
and communication. With a growing team
in the United States and Canada, investing
in our internal communications platforms,
tools and processes is necessary to ensure
continuous employee engagement and
alignment with our business objectives.
Our leadership team members regularly
hold town hall meetings and conference
calls in Canada and the United States,
to speak with team members about our
business, and to share Uni-Select’s vision
and business objectives.
In 2016, we launched an employee
magazine so that team members could
better understand the part they play in our
organization, our competitive environment
and our priorities. In Canada, we
implemented an internal television network
in our distribution centres and launched a
new intranet to enhance communications
with team members. We are always looking
at new ways to reach and engage our team
to support our objective of winning with
the best.
2016 ANNUAL REPORT UNI-SELECT 13
PEOPLE AND COMMUNITY
MANAGEMENT
IN THE
COMMUNITY
EXECUTIVE
TEAM
At Uni-Select, we believe in a strong
community and we are empowered by
a team committed to strengthening and
supporting the communities in which
we live and work.
Uni-Select’s Executive Team is dedicated
to promoting a culture of teamwork,
performance and integrity throughout the
Corporation to foster long-term success and
maximize shareholder value.
Henry Buckley, MBA
President and Chief
Executive Officer
Every year, team members in Canada
and the United States support causes
that matter to them. This includes
volunteering time, raising funds as well
as making corporate donations to nonprofit charitable organizations that help
make a difference.
Steve Arndt
President and Chief
Operating Officer
FinishMaster, Inc.
CORPORATE GIVING
In Canada, we support a broad range of
causes from health services and youth
development to the arts.
In 2016, we provided support to the
Canadian Red Cross, Justin Slade Youth
Foundation in partnership with High
Fives for Kids Foundation, University
of the Aftermarket, Canadian Cancer
Society, CHU Sainte-Justine Hospital
Fo u n d a t i o n , t h e Pè re S a b l o n
Foundation, Mira Foundation and
Tel‑Jeunes Foundation, to name a few.
In addition, we provide funds and
sponsorships to local schools and sports
teams in communities where we are
present.
GIVE BACK DAY
While many team members in both
Canada and the U.S. are longstanding
volunteers, our FinishMaster business
in the U.S. implemented an annual Give
Back Day in 2015, providing employees
with a paid day off to volunteer for a
charity of their choice.
14 UNI-SELECT 2016 ANNUAL REPORT
FinishMaster team members
participating in Home Office Give
Back Day last August
This initiative continues to grow in
popularity and encourages teamwork
and family participation. In 2016, over
450 volunteer hours were clocked
in support of local non-profits from
food and toy drives to volunteering
for clean‑up at community parks.
FinishMaster is also a longstanding
partner of the United Christmas Service.
Gary O’Connor, MBA
President and Chief
Operating Officer
Automotive Canada
Eric Bussières
Chief Financial Officer
Annie Hotte
Chief People Officer
Me Louis Juneau
Chief Legal Officer and
Corporate Secretary
GOVERNANCE
OUR COMMITMENT
TO GOOD GOVERNANCE
BOARD
OF DIRECTORS
Uni-Select ’s Corporate Governance
Guidelines provide a framework of
authority and accountability to enable
both the Board of Directors and
Management to make timely and effective
decisions that promote shareholder value.
The Board of Directors is dedicated to ensuring that it is composed
of directors with diverse backgrounds as well as a mix of skills
and expertise that add value to the Corporation, and that each
director serves the Board to best discharge its responsibilities.
Our guidelines are complemented by
relevant policies, charters and key position
descriptions that together provide a
comprehensive governance framework.
These components are reviewed on a
regular basis to ensure compliance with
new regulations and emerging best
practices.
The Corporation’s Code of Ethics governs
the conduct of Uni-Select directors,
officers and team members. In 2017, it will
be the subject of a thorough Board review
and update. The new Code will then be
communicated widely to team members.
The Board and Management continue
to promote the Audit Committee
whistleblower procedures, allowing both
team members and non-employees
with the means to anonymously and
confidentially raise issues pertaining to
accounting, internal accounting controls
or auditing matters.
For more information on Uni-Select’s
commitment to ethical conduct, integrity
and good governance practices, please
consult the corporate governance section
of our website at uniselect.com.
André Courville
B.COMM, FCPA,
FCA, ICD.D 1 2 3
Chair of the Board
Uni-Select Inc.
Montréal, Québec
Jean Dulac, B. COMM,
MBA, CHRP, ADM.A. 2 3
President
M&M Nord Ouest Inc.
Amos, Québec
Henry Buckley, MBA
President and Chief
Executive Officer
Uni-Select Inc.
Delta, British Columbia
Jeffrey I. Hall
BASc., P.ENG., ICD.D 1 3
Corporate Director
Oakville, Ontario
James E. Buzzard, AAP 3
President
Clarit Realty, Ltd.
Lakewood Ranch, Florida
Richard L. Keister 1 2
Corporate Director
Hollywood, Florida
Michelle Ann Cormier
CPA, CA, ASC 1 2
Operating Partner
Wynnchurch Capital
Canada, Ltd.
Montréal, Québec
Richard G. Roy, FCPA, FCA
Corporate Director
Verchères, Québec
Patricia Curadeau-Grou
B.COMM, ICD.D 1 3
Corporate Director
Outremont, Québec
Dennis M. Welvaert
B.S. MBA, MAAP 2
President, Welvaert
Business Solutions, LLC
Leander, Texas
1) Member of the Audit Committee, chaired by Mrs. Cormier
2) Member of the Corporate Governance and Nominating Committee, chaired by Mr. Courville
3) Member of the Human Resources and Compensation Committee, chaired by Mrs. Curadeau-Grou
2016 ANNUAL REPORT UNI-SELECT 15
16 UNI-SELECT 2016 ANNUAL REPORT
MANAGEMENT’S
MANAGEMENT’S DISCUSSION
AND ANALYSIS
DISCUSSION AND ANALYSIS 2016
2016 Highlights Preliminary comments to Management’s discussion and analysis 18 19 Profile and description Operational review of the last 3 years Non‐IFRS financial measures Analysis of consolidated results Analysis of results by segment Cash flows Financing Capital structure Financial position Related parties Subsequent events Risk management Change in accounting policies Use of accounting estimates and judgements Exchange rate data Effectiveness of disclosure controls and procedures and internal controls of financial reporting Outlook 19 20 22 24 31 34 36 38 40 41 41 41 44 45 47 47 48 2016 ANNUAL REPORT UNI-SELECT 17
HIGHLIGHTS (In millions of US dollars, except percentages, per share amounts and otherwise specified) SALES $1,197.3 (1)
EBITDA $106.8 (1)
ADJUSTED EBITDA NET EARNINGS 9.0% $1.37/SHARE $107.6 $58.3 (1)
ADJUSTED EARNINGS $58.6 $1.38/SHARE The 2016 results in dollars vary compared to last year’s figures, since the twelve‐month period of 2015 includes five months of operations of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. sold on June 1, 2015. Prior to the disposal, the net assets were included in the Automotive Products group for segmented reporting. ‐
(1)
Earnings per share are at $1.37 compared to a net loss per share of $0.94 last year. Adjusted earnings per share improved by 3.8% from $1.33 last year to $1.38. ‐
Consolidated sales decreased by 11.7%, mainly in relation to the sale of net asset of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. (“net assets”). Sales grew by 13.4%, once sales from net assets sold are excluded, fuelled by sales generated from recent business (1)
acquisitions, representing a growth of 15.0%. Consolidated organic growth is at 0.2%; 1.1% for the Paint and Related Products (US) segment and (1.1%) for the Automotive Products (in Canada) segment. ‐
EBITDA (1) is $106.8 compared to ($53.3) last year. 2015 figures included impairment and transaction charges related to the sale of (1)
net assets of $145.0 and restructuring and other charges of $5.3. Adjusted EBITDA margin improved by 1.9% from 7.1% to 9.0%, mainly in relation to the net assets sold, which had a lower EBITDA margin than the ongoing operations and was driven by accretive business acquisitions as well as ongoing margin improvements. ‐
Net earnings are $58.3 compared to a net loss of $40.2 last year. 2015 figures included impairment and transaction charges related (1)
to the sale of net assets, net of taxes of $93.5 and restructuring and other charges, net of taxes of $4.0. Adjusted earnings of $58.6 improved by 3.2% from $56.8 last year as a result of the growing EBITDA, strengthened by ongoing margin improvements as well as by business acquisitions, which were partially offset by their related intangible amortization and finance costs and by a higher tax rate in relation to different geographic pre‐tax earnings. ‐
Free cash flows (1) grew by 39.4% from $78.5 last year to $109.4, fuelled by newly acquired business operating income and income tax refunds. ‐
As at December 31, 2016, the total net debt stood at $112.0 from a net cash position of $1.1 at the end of last year. The Corporation has an unused credit facility of $284.0 to seize growth opportunities. ‐
14 business acquisitions concluded during the year and one greenfield opening extending the store network to more than 250 stores. ‐
Establishment of the foundation of the corporate store initiative in Canada, including branding BUMPER TO BUMPER® ‐ CANADA’S PARTS PEOPLE™. ‐
Launch of the FINISHMASTER® brand by the Automotive Products segment in Canada. ‐
2‐for‐1 stock split of common shares was effected during the second quarter to increase the number of shares outstanding and enhance affordability to investors. (1)
(1) This information represents a non‐IFRS financial measure. (Refer to the ‘’Non‐IFRS financial measures’’ section for further details.) 18 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 18 PRELIMINARY COMMENTS TO MANAGEMENT’S DISCUSSION AND ANALYSIS BASIS OF PRESENTATION OF MANAGEMENT’S DISCUSSION AND ANALYSIS This Management’s discussion and analysis (“MD&A”) discusses the Corporation’s operating results and cash flows for the periods ended December 31, 2016 compared with those of the periods ended December 31, 2015, as well as its financial position as at December 31, 2016 compared with its financial position as at December 31, 2015. This report should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the 2016 Annual Report. The information contained in this MD&A takes into account all major events that occurred up to February 8, 2017, the date at which the consolidated financial statements and MD&A were approved and authorized for issuance by the Corporation’s Board of Directors. It presents the existing Corporation’s status and business as per Management’s best knowledge as at that date. Additional information on Uni‐Select, including the audited consolidated financial statements and the Corporation’s Annual Information Form, is available on the SEDAR website at sedar.com. In this MD&A, “Uni‐Select” or the “Corporation” refers, as the case may be, to Uni‐Select Inc., its subsidiaries, divisions and joint ventures, if any. Unless otherwise indicated, the financial data presented in this MD&A, including tabular information, is expressed in thousands of US dollars, except per share amounts, percentages and number of shares. Comparisons are presented in relation to the comparable periods of the prior year. The consolidated financial statements contained in the present MD&A were prepared in accordance with International Financial Reporting Standards (“IFRS”). These financial statements have been audited by the Corporation’s external auditors. FORWARD‐LOOKING STATEMENTS The MD&A is intended to assist investors in understanding the nature and importance of the results and trends, as well as the risks and uncertainties associated with Uni‐Select’s operations and financial position. Certain sections of this MD&A contain forward‐looking statements within the meaning of security's legislation concerning the Corporation’s objectives, projections, estimates, expectations or forecasts. Forward‐looking statements involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from forecasted results. Risks that could cause the results to differ materially from expectations are discussed in the “Risk Management” section. Those risks include, among others, competitive environment, consumer purchasing habits, vehicle fleet trends, general economic conditions and the Corporation’s financing capabilities. There is no assurance as to the realization of the results, performance or achievements expressed or implied by forward‐looking statements. Unless required to do so pursuant to applicable security's legislation, Management assumes no obligation as to the updating or revision of forward‐looking statements as a result of new information, future events or other changes. COMPLIANCE WITH IFRS The information included in this report contains certain financial measures that are inconsistent with IFRS. Non‐IFRS financial measures do not have any standardized meaning prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other entities. The Corporation considers that users of its MD&A may analyze its results based on these measurements. (Refer to section “Non‐IFRS financial measures” for further details.)
PROFILE AND DESCRIPTION Uni‐Select is a leader in the distribution of automotive refinish and industrial paint and related products in North America, as well as a leader in the automotive aftermarket parts business in Canada. In Canada, Uni‐Select supports over 16,000 automotive repair and collision repair shops through a growing national network of more than 1,100 independent customers and corporate stores, many of which operate under the Uni‐Select BUMPER TO BUMPER®, AUTO PARTS PLUS® AND FINISHMASTER® store banner programs. It also supports over 3,900 shops and stores through its automotive repair/installer shop banners, as well as through its automotive refinish banners. In the United States, Uni‐Select, through its wholly‐owned subsidiary FinishMaster, Inc., operates a national network of automotive refinish corporate stores under the FINISHMASTER banner which services a network of over 30,000 customers annually, of which it is the primary supplier to over 6,000 collision repair centre customers. Uni‐Select is headquartered in Boucherville, Québec, Canada, and its shares are traded on the Toronto Stock Exchange (TSX) under the symbol UNS. 2016 ANNUAL REPORT UNI-SELECT 19
2016 ANNUAL REPORT UNI‐SELECT 19 OPERATIONAL REVIEW OF THE LAST 3 YEARS The last three years were transformational for the Corporation. The Corporation is evolving in a changing world and has implemented new business strategies and initiatives to reinforce its market share positions, optimize both of its operational segments for superior productivity and pursue the improvement of its replenishment processes and warehouse workflow. The major initiatives and achievements of the Corporation include the following: ‐
Optimizing and rightsizing the distribution network through the Action Plan in 2014 and ultimately the sale of the net assets of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. in 2015. ‐
Establishing a detailed mergers and acquisitions program for both Automotive Products in Canada and FinishMaster US by building capabilities, including standard processes and dedicated teams resulting in numerous acquisitions in 2015 and 2016. ‐
Growing sales at FinishMaster US through organic growth initiatives and by acquiring businesses to expand geographical coverage across the USA and, additionally, building customer density in key large markets. ‐
Transforming and evolving the Automotive business in Canada to compete in the future by adding a corporate store network, complementing the network of independent jobber customers. Developed and now executing new enhanced store banner and merchandising programs (BUMPER TO BUMPER and AUTO PARTS PLUS). In addition, launched the FINISHMASTER brand in Canada with 7 corporate stores to date. All of these activities have resulted in a sound financial position and strong free cash flows for the Corporation, allowing it to further accelerate growth and create value through both segments. SELECTED CONSOLIDATED INFORMATION (in thousands of US dollars, except per share amounts, percentages and otherwise specified)
OPERATING RESULTS Sales EBITDA (1) (1) Adjusted EBITDA Adjusted EBITDA margin (1) 2015
2014
1,197,319 1,355,434
1,784,359
106,848 (53,322)
105,456
107,628 96,603
111,442
9.0% 7.1%
6.2%
5,328
(1,931)
(746) Restructuring and other charges Impairment and transaction charges related to the sale of net assets Net earnings (loss) Adjusted earnings (1) Free cash flows (1) COMMON SHARE DATA ‐ 144,968
‐
58,265 (40,221)
50,125
58,638 56,839
55,271
109,355 78,532
83,610
Net earnings (loss) 1.37 (0.94)
1.18
Adjusted earnings (1) 1.38 1.33
1.30
Dividend (C$) 0.335 0.315
0.290
Book value per share 11.19 10.13
12.09
Number of shares outstanding 42,214,178 43,135,758 42,431,518
Weighted average number of outstanding shares 42,434,956 42,777,589 42,507,842
FINANCIAL POSITION Working capital 191,458 228,774
343,934
Total assets 976,917 835,150
1,190,305
Total net debt (1) 111,973 ‐
260,240
Total equity 472,362 436,978
512,996
12.9% 12.0%
10.9%
Adjusted return on average total equity (1) (1)
2016 This information represents a non‐IFRS financial measure. (Refer to the “Non‐IFRS financial measures” section for further details.) Detailed analysis of the changes in operating results and the consolidated statements of financial position between 2016 and 2015 are provided in the following sections. Detailed analysis of the changes in the operating results and the consolidated statements of financial position between 2015 and 2014 are included in the MD&A in the 2015 Annual Report, available on the SEDAR website at sedar.com. 20 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 20 FINANCIAL YEAR 2016 Growing our network The Corporation was successful in its growth and performance activities through accretive business acquisitions, while navigating through slower economic conditions in Canada and a product line changeover in the United States. Each segment contributed towards the Corporation’s success. Paint and Related Products (US) segment: This segment was active on the acquisition front with 7 business acquisitions concluded during the year, as per this segment strategy, adding 45 locations before synergies opportunities. Integration is progressing as planned and is already yielding the expected benefits. In addition, a new distribution centre on the East Coast was opened to better serve customers. The FinishMaster US team continues to work on organic initiatives to drive future growth. Buying conditions optimized during the year commensurate with increased volumes. Additionally, this segment worked through a product line changeover during the second half of the year. Automotive Products (Canada) segment: 2016 was a transformational year in Canada with the acceleration of the corporate store initiative and the launch of both the new BUMPER TO BUMPER program and the FINISHMASTER brand in Canada. These initiatives are complementary to constant focus on independent jobber customers. This segment added 12 corporate BUMPER TO BUMPER and 4 FINISHMASTER locations to its growing national network. The new BUMPER TO BUMPER program and branding for independent customers and corporate stores was launched and accelerated through the year. Investment continues in the corporate store program building the foundation including a dedicated leadership team, implementation of processes and initiation of the deployment of a point of sales system (POS). That foundation will continue to grow in 2017 as store locations are added. Corporate Office and Others segment: On the corporate side, strategies were initiated to manage cash, enhance performance, limit risks and ultimately improve value, such as: ‐
Renewal and addition of vendor financing agreements with suppliers that should positively impact the cash position in 2017; ‐
Negotiations with information technology suppliers and deployment of a server solution which should provide savings starting in the second half of 2017; ‐
Amendment of the credit facilities extending the maturity date to June 30, 2020; ‐
Hedging of the stock‐based compensations as well as some large accounts payable in order to limit financial risks related to stock price and foreign exchange variations; and ‐
2‐for‐1 stock split of common shares to increase the number of shares outstanding and enhance affordability to investors, as well as share repurchases and a new normal course issuer bid to improve value for shareholders. FINANCIAL YEAR 2015 Sale of the Net Assets and Net Debt Free The Corporation continued its focus on growing its core business units to strengthen its leadership position and announced on February 9, 2015 that it had reached an agreement for the sale of the net assets of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. On June 1, 2015, the Corporation closed the sale of these net assets. Following the announcement of the agreement, the Corporation rightsized its corporate operations, accelerated debt reduction and was debt free. Consequently, the Corporation announced its intention to pursue its growth through acquisitions, leveraging its cash position. 2015 was the turning point toward a business model which includes corporate stores in Canada; 27 stores were acquired during the year. The Paint and Related Products (US) segment was also active with 7 business acquisitions closed during the year. These acquisitions added 34 stores to the network. The results of the period were derived from the various initiatives taken by the Corporation. The customer‐centric approach, providing a superior customer experience, resulted in an organic growth of 2.6%. Adjusted EBIDTA margin improved by 0.9%, notably benefiting from the sale of net assets, as well as the performance of the ongoing operations and the accretive acquisitions. 2016 ANNUAL REPORT UNI-SELECT 21
2016 ANNUAL REPORT UNI‐SELECT 21 FINANCIAL YEAR 2014 Restructuring and Debt Reduction The Corporation continued its execution of the Action Plan to optimize its operations by reducing its inventory level and achieving its cost‐reduction objectives. The Corporation improved its profitability by taking advantage of the Action Plan, the ongoing cost‐reduction initiatives and the optimization of its supply chain. The Corporation also leveraged its technological solutions and added tools to monitor daily activities and access real‐time operational and inventory information, reducing response time. In doing so, the Corporation succeeded in improving adjusted EBITDA compared to the previous year. The positive organic growth was marked by the recruitment of new customers, the intensified enrolment to banner programs and the leverage of business opportunities in paint distribution. Overall, the Corporation aimed to improve customer experience and satisfaction by a selected product offering and customized solutions. The improved profitability combined with the optimization of cash controls permitted the Corporation to reduce its debt by $80,698, excluding the reclassification of the convertible debentures for $44,525 and net business acquisitions of $18,735. On December 11, 2014, the Corporation announced the redemption of its convertible debentures on February 1, 2015. NON‐IFRS FINANCIAL MEASURES The information included in this report contains certain financial measures that are inconsistent with IFRS. Non‐IFRS financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other entities. The Corporation is of the view that users of its MD&A may analyze its results based on these measurements. The following table presents performance measures used by the Corporation which are not defined by IFRS. Organic growth (1) EBITDA (1) Adjusted EBITDA, adjusted earnings and adjusted earnings per share (1) This measure consists of quantifying the increase in pro forma consolidated sales between two given periods, excluding the impact of acquisitions, sales and disposals of stores, net assets sold, exchange‐rate fluctuations and when necessary, the variance in the number of billing days. This measure enables Uni‐Select to evaluate the intrinsic trend in the sales generated by its operational base in comparison with the rest of the market. Determining the rate of organic growth, based on findings that Management regards as reasonable, may differ from the actual rate of organic growth. This measure represents net earnings excluding finance costs, depreciation and amortization, equity income and income taxes. This measure is a financial indicator of a corporation’s ability to service and incur debt. It should not be considered by an investor as an alternative to sales or net earnings, as an indicator of operating performance or cash flows, or as a measure of liquidity, but as additional information. Management uses adjusted EBITDA, adjusted earnings and adjusted earnings per share to assess EBITDA, net earnings and net earnings per share from operating activities, excluding certain adjustments, net of income taxes (for adjusted earnings and adjusted earnings per share), which may affect the comparability of the Corporation’s financial results. Management considers that these measures are more representative of the Corporation’s operational performance and more appropriate in providing additional information. These adjustments include, among other things, restructuring and other charges, impairment and transaction charges related to the sale of net assets and costs related to the closure and disposal of stores. The exclusion of these items does not indicate that they are non‐recurring. EBITDA margin and adjusted EBITDA margin (1) The EBITDA margin is a percentage corresponding to the ratio of EBITDA to sales. The adjusted EBITDA margin is a percentage corresponding to the ratio of adjusted EBITDA to sales. 22 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 22 Free cash flows (2) This measure corresponds to the cash flows from operating activities according to the consolidated statements of cash flows adjusted for the following items: changes in working capital items, equity income, acquisitions of property and equipment and difference between amounts paid for post‐employment benefits and current year expenses. Uni‐Select considers the free cash flows to be a good indicator of financial strength and of operating performance because it shows the amount of funds available to manage growth in working capital, pay dividends, repay debt, reinvest in the Corporation and capitalize on various market opportunities that arise. The free cash flows exclude certain variances in working capital items (such as trade and other receivables, inventory and trade and other payables) and other funds generated and used according to the statements of cash flows. Therefore, it should not be considered as an alternative to the consolidated statements of cash flows, or as a measure of liquidity, but as additional information. Total net debt(3) This measure consists of long‐term debt, including the portion due within a year (as shown in note 18 to the consolidated financial statements), net of cash. Total net debt to total net debt and total equity ratio(3) This ratio corresponds to total net debt divided by the sum of total net debt and total equity. Long‐term debt to total equity This ratio corresponds to long‐term debt, including the portion due within a year (as shown in ratio(3) note 18 to the consolidated financial statements), divided by the total equity. Funded debt to adjusted EBITDA(3) This ratio corresponds to total net debt to adjusted EBITDA. Adjusted return on average total equity(3) This ratio corresponds to adjusted earnings (1) divided by average total equity. (1)
(2)
(3)
Refer to the “Analysis of consolidated results” section for a quantitative reconciliation from the non‐IFRS financial measures to the most directly comparable measure calculated in accordance with IFRS. Refer to the “Cash flows” section for a quantitative reconciliation from the non‐IFRS measures to the most directly comparable measure calculated in accordance with IFRS. Refer to the “Capital structure” section for further details. 2016 ANNUAL REPORT UNI-SELECT 23
2016 ANNUAL REPORT UNI‐SELECT 23 ANALYSIS OF CONSOLIDATED RESULTS The 2016 results in dollars vary compared to last year’s figures, since the twelve‐month period of 2015 includes five months of operations of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. sold on June 1, 2015. The explanations are provided based on percentage of sales. SALES Fourth quarter Twelve‐month period United States Canada 2016
180,758
110,228
2015
153,558
105,663
2016
752,864
444,455
2015
918,078
437,356
Sales 290,986
259,221
1,197,319
1,355,434
‐
Sales from net assets sold Sales net of sales from net assets sold ‐ 290,986
259,221
31,765
266
12.3 0.1 Number of billing days 3,301
1.3 Impact of net assets sold 1,405
0.5 Acquisitions and others (39,570)
(15.3) Consolidated organic growth (2,833)
(1.1)
‐
1,056,167
141,152
14,244
13.4
1.4
% Sales variance Conversion effect of the Canadian dollar (299,267)
1,197,319
%
(979)
5,430
(157,939)
1,908
(0.1)
0.5
(15.0)
0.2
FOURTH QUARTER TWELVE‐MONTH PERIOD The quarter growth of 12.3%, compared to the same quarter in 2015, was driven by the sales generated from recent business acquisitions, mainly in the US, bringing additional sales of $39,570 or 15.3%. Annual sales increased by 13.4%, compared to the same period in 2015, once the sales from net assets sold are excluded. This performance was driven by the sales generated from recent business acquisitions, representing $157,939 or 15.0%, exceeding the impact of the declining Canadian dollar on its conversion to The Corporation is reporting a negative organic growth of 1.1%. US dollar that penalized sales by $14,244 or 1.4%. The Paint and Related Products (US) segment reported a negative organic growth of 2.5% in relation to a product line changeover. The organic growth of 0.2% is resulting from the existing customer Without this impact, the segment would have reported an organic growth and net customer recruitment in the Paint and Related growth of approximately 4.1%, while consolidated organic growth Products (US) segment, offsetting the product line changeover as would have been approximately 2.8%. Driven by the Western well as the softness of the economic conditions adding pressure on provinces, the Automotive Products (in Canada) segment regained the annual performance of the Automotive Products (in Canada) segment. some strength and posted an organic growth of 1.0%. 24 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 24 GROSS MARGIN Fourth quarter Gross margin In % of sales 2016
92,644
31.8%
2015 77,532 29.9% Twelve‐month period 2016
366,602
30.6%
2015
402,617
29.7%
FOURTH QUARTER TWELVE‐MONTH PERIOD The gross margin, in percentage of sales, grew by 1.9%, compared The 0.9% increase in gross margin, in percentage of sales, to the same quarter in 2015, benefiting from accretive business compared to the same period in 2015, is mainly explained by acquisitions as well as optimized buying conditions. accretive business acquisitions as well as optimized buying conditions. These improvements were partially offset by a different revenue mix. These favorable elements were partially offset by: ‐
The net assets sold, which had a higher gross margin in percentage of sales than the remaining operations due to a different mix of stores and distribution centres; and ‐
A different revenue mix. EMPLOYEE BENEFITS Fourth quarter Employee benefits In % of sales 2016
44,974
15.5%
2015
42,272
16.3%
Twelve‐month period 2016
175,621
14.7%
2015
213,666
15.8%
FOURTH QUARTER TWELVE‐MONTH PERIOD Employee benefits, in percentage of sales, improved by 0.8%, compared to the same quarter in 2015. This improvement is mainly attributable to reduced 2016 bonus and other incentive plans, a direct result of the corporate office rightsizing. Furthermore, 2015 figures included unexpected medical claims in the Paint and related Product (US) segment which did not occur this year. Employee benefits, in percentage of sales, improved by 1.1%, compared to the same period in 2015, mainly in relation to the sale of the net assets, which had higher employee benefits in percentage of sales than the remaining operations as well as by the same factors aforementioned in the quarter. These elements were partially offset by additional workers’ compensation insurance claims for former employees of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. sold on June 1, 2015, for which the Corporation remains liable after the disposition, as well as payroll investments required in relation to the corporate stores’ initiatives in the Automotive Products segment (in Canada). 2016 ANNUAL REPORT UNI-SELECT 25
2016 ANNUAL REPORT UNI‐SELECT 25 OTHER OPERATING EXPENSES Fourth quarter Other operating expenses In % of sales 2016
23,846
8.2%
Twelve‐month period 2016
84,879
7.1%
2015 11,936 4.6% 2015
91,977
6.8%
FOURTH QUARTER TWELVE‐MONTH PERIOD Other operating expenses, in percentage of sales, increased by 3.6%, compared to the same quarter in 2015, affected by: ‐
Net gains of $3,301 on the purchase of the remaining interests in joint ventures recorded in 2015; ‐
Negative synergies following the sale of net assets, predominantly related to the enterprise resource planning system and its maintenance; ‐
General increase in professional fees, notably for acquisitions and integration related costs; and ‐
Higher operating expenses, in percentage of sales, essentially related to acquired businesses, a temporary situation until the completion of integrations and synergies. Other operating expenses, in percentage of sales, increased by 0.3%, compared to the same period in 2015. This increase is mainly related to the sale of net assets, which had higher expenses in percentage of sales than the remaining operations and was partially offset by the same items mentioned in the quarter. RESTRUCTURING AND OTHER CHARGES Fourth quarter 2016
(746)
Restructuring and other charges Twelve‐month period 2016
(746)
2015
1,932 2015
5,328
At the end of 2016, the Corporation reviewed its provisions and reversed an amount of $746 in relation to onerous contracts, following the recent negotiations with its information technology suppliers. In 2015, the Corporation recorded restructuring and other charges of $1,932 ($8,234 for the twelve‐month period) in relation to the rightsizing of the corporate operations for severance, moving costs and onerous contracts, following the disposal of the net assets. These charges were partially compensated by a reversal of $2,906 related to the Action Plan implemented on July 11, 2013 and ceased upon the closing of the sale of net assets. (Refer to note 4 in the consolidated financial statements for further details.) IMPAIRMENT AND TRANSACTION CHARGES RELATED TO THE SALE OF NET ASSETS Fourth quarter Impairment and transaction charges related to the sale of net assets 2016
‐
Twelve‐month period 2015
(2,578) 2016
2015
‐
144,968
The charges in 2015 are related to the sale of substantially all the assets of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. The Corporation recorded write‐off of intangible assets (mainly software and customer relationships) for an amount of $65,398 and an impairment of a portion of the goodwill for an amount of $57,715. The Corporation has also recorded transaction‐related charges of $21,855. The Corporation revised its transaction‐related charges during the fourth quarter of 2015 resulting in a reversal of $2,578. (Refer to note 5 in the consolidated financial statements for further details.) 26 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 26 EBITDA Fourth quarter Net earnings (loss) Income tax expense (recovery) 2016
12,695
5,487
Equity loss Depreciation and amortization Additional liabilities related to the sale of net assets (1) Net gains on the purchase of the remaining interests in joint ventures (2) Expenses related to the network optimization and to the closure and disposal of stores (3) Adjusted EBITDA Adjusted EBITDA margin (1)
(2)
(3)
2016 58,265 28,137 %
2015
(40,221)
(32,814)
‐
629
‐ 533
3,334
15,962 13,174
24,570
(746)
Impairment and transaction charges related to the sale of net assets
2015
13,941
5,213
Twelve‐month period 5,224
1,164
Finance costs, net EBITDA Restructuring and other charges 4,484 853
23,970
1,932
(53,322)
5,328
‐
(2,578)
‐ 144,968
1,526
‐
1,526 ‐
‐
(3,301)
‐ ‐
25,350
8.7%
‐
20,023
7.7%
‐
107,628 9.0% 26.6 %
6,006
106,848 (746) (3,301)
2,930
96,603 11.4
7.1%
These liabilities are related to additional workers’ compensation insurance claims for former employees of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. sold on June 1, 2015, for which the Corporation remains liable after the disposition. Net gains were generated by revaluating the fair value of non‐controlling equity interest in the acquirees that were held immediately before obtaining control. Consist primarily of handling and freight expenses required to relocate inventory. FOURTH QUARTER TWELVE‐MONTH PERIOD The adjusted EBITDA margin improvement of 1.0%, compared to Adjusted EBITDA margin improved by 1.9%, compared to the same the same quarter in 2015, is resulting from the following elements: period in 2015, due to a combination of: ‐
Optimized buying conditions; and ‐
The net assets sold, which had a lower EBITDA margin ‐
Reduced bonus and other incentive plans. than the ongoing operations; ‐
Buying conditions optimized; They were in part offset by: ‐
Reduced bonus and other incentive plans; and ‐
Negative synergies following the sale of net assets; ‐
Accretive business acquisitions. ‐
Higher professional fees notably for acquisitions and integration related costs; and These factors have been partially offset by negative synergies ‐
Ongoing investments for the corporate store initiative. following the sale of net assets, ongoing investments related to the corporate store initiative, as well as acquisition and integration related costs. FINANCE COSTS, NET Fourth quarter 2016
1,164
Finance costs, net 2015
853
Twelve‐month period 2016
4,484
2015
6,006
FOURTH QUARTER TWELVE‐MONTH PERIOD The increase in finance costs, compared to the same quarter in The decrease in finance costs, compared to the same period in 2015, is mainly attributable to a higher average debt, resulting 2015, is mainly explained by: from the recent business acquisitions and generating higher ‐
The termination of the swap agreements during the borrowing costs. second quarter of 2015; and ‐
The redemption of the convertible debentures for cancellation on February 1, 2015. (Refer to note 6 in the consolidated financial statements for further details.) 2016 ANNUAL REPORT UNI-SELECT 27
2016 ANNUAL REPORT UNI‐SELECT 27 DEPRECIATION AND AMORTIZATION Fourth quarter 2016
5,224
Depreciation and amortization 2015 3,334 Twelve‐month period 2016
15,962
2015
13,174
FOURTH QUARTER TWELVE‐MONTH PERIOD Depreciation and amortization exceeded the corresponding The increase in depreciation and amortization, compared to the quarter of 2015, impacted by the recent business acquisitions, same period of 2015, is mainly attributable to the net business notably for customer relationship intangible assets. acquisitions. (Refer to note 7 in the consolidated financial statements for further details.) I N C O M E T A X E X P E N S E ( R E C O V E R Y ) Fourth quarter Income tax expense (recovery) Income tax rate 2016
5,487
30.2%
2015 5,213 27.2% Twelve‐month period 2016
28,137
32.6%
2015
(32,814)
44.9%
FOURTH QUARTER TWELVE‐MONTH PERIOD The variance, compared to the same quarter in 2015, is mainly The variance, compared to the same period of 2015, is mainly attributable to different geographic earnings before income taxes attributable to: as well as capital gains taxable at a lower rate included in 2015 ‐
The impairment and transaction charges related to the earnings. sale of net assets in 2015; ‐
Different geographic earnings before income taxes in 2016; and ‐
Lower tax benefits from the financing structure in 2016 following the sale of the net assets in 2015. (Refer to note 8 in the consolidated financial statements for further details.) 28 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 28 EARNINGS AND EARNINGS PER SHARE The following table presents a reconciliation of adjusted earnings and adjusted earnings per share. Fourth quarter Net earnings (loss) attributable to shareholders, as reported 2015
12,695
13,941
(539)
Restructuring and other charges, net of taxes Impairment and transaction charges related to the sale of net assets, net of taxes Additional liabilities related to the sale of net assets, net of taxes Net gains on the purchase of the remaining interests in joint ventures, net of taxes Expenses related to the network optimization and to the closure and disposal of stores, net of taxes Adjusted earnings Earnings (loss) per share attributable to shareholders, as reported Restructuring and other charges, net of taxes Impairment and transaction charges related to the sale of net assets, net of taxes Additional liabilities related to the sale of net assets, net of taxes Net gains on the purchase of the remaining interests in joint ventures, net of taxes Expenses related to the network optimization and to the closure and disposal of stores, net of taxes Adjusted earnings per share 2016
‐
912
‐
1,406
(2,058)
‐
(2,245 )
‐
‐
13,068
11,044
0.30
0.33
(0.01)
0.03
‐
Twelve‐month period %
2016 58,265
(539) 18.3
2015
(40,221)
4,026
‐
93,529
912
‐
‐
(2,245)
‐
1,750
58,638
56,839
1.37
(0.94)
(0.01) 0.10
‐
2.18
0.02
‐
‐
(0.05 ) ‐
(0.05)
‐
‐
‐
0.04
0.31
0.26
1.38
1.33
0.02
(0.05) ‐
19.2
%
3.2
3.8
The conversion effect of the Canadian dollar into US dollar had no impact on earnings per share for the quarter compared to the same period of 2015, while the effect for the twelve‐month period was $0.02 compared to the same period last year. 2016 ANNUAL REPORT UNI-SELECT 29
2016 ANNUAL REPORT UNI‐SELECT 29 CONSOLIDATED QUARTERLY OPERATING RESULTS Historically, the Corporation’s sales are typically stronger during the second and third quarters compared to the first and fourth quarters. Recently, sales have been impacted by both the business acquisitions and disposals, as well as the conversion effect of the Canadian dollar into US dollar. The Corporation records earnings in each quarter. It should be noted that in specific quarters, net earnings were impacted by non‐recurring items. The following table summarizes the main financial information drawn from the consolidated interim financial reports for each of the last eight quarters. 2016 2015 Fourth Quarter Third Quarter
Second Quarter
First Quarter
Fourth Quarter
United States 180,758 202,215
196,478
173,413
Canada 110,228 116,330
127,280
90,617
290,986 318,545
323,758
24,570 25,350 30,836
30,836
29,739
29,739
8.7% 9.7%
(746) Sales EBITDA Adjusted EBITDA Adjusted EBITDA margin (1)
Restructuring and other charges Impairment and transaction charges related to the sale of net assets (2) Net earnings (loss) Adjusted earnings Basic earnings (loss) per share (3) Adjusted basic earnings per share(3) Second Quarter
First Quarter
153,558
Third Quarter 162,040
281,227
321,253
105,663
114,189
127,072
90,432
264,030
259,221
276,229
408,299
411,685
21,703
21,703
23,970
20,023
25,938
26,038
19,035
31,051
(122,265 )
19,491
9.2%
8.2%
7.7%
9.4%
7.6%
4.7%
‐
‐
‐
1,932
100
(1,730)
5,026
‐ 12,695 13,068 ‐
17,281
17,281
‐
16,806
16,806
‐
11,483
11,483
0.30 0.31 0.41
0.41
0.40
0.40
0.27
0.27
(2,578)
13,941
11,044
0.33
0.26
‐
15,747
15,808
13,544
12,373
19,954
134,002
(82,282)
10,033
0.37
0.37
0.29
0.47
(1.94 )
0.24
Diluted earnings (loss) per share (3) 0.30 0.41
0.40
0.27
0.32
0.36
0.29
Dividends declared per share (C$) (3) 0.085 0.085
0.085
0.080
0.080
0.080 0.080
0.075
Average exchange rate for earnings 0.75:$1 0.77:$1
0.78:$1
0.73:$1
0.75:$1
0.76:$1
0.81:$1
0.81:$1
(1.94 )
(1)
In 2016, the Corporation reviewed its provisions and reversed an amount of $746 in relation to onerous contracts, following recent negotiations with its information technology suppliers. Restructuring and other charges reversal of 2015 is attributable to the Action Plan implemented on July 11, 2013, which ceased upon the sale of net assets in June 2015. In 2015, the Corporation incurred restructuring and other charges to rightsize the corporate operations and relocate certain locations. (2)
The charges include the write‐off of intangible assets (mainly software and customer relationships), the impairment of a portion of the goodwill and the transaction charges in relation to the sale of net assets of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. on June 1, 2015. (3)
2‐for‐1 stock split of common shares was effected on May 11, 2016 for shareholders of record as at May 6, 2016. To reflect the effect of the stock split, information pertaining to the number of common shares has been retroactively restated. 30 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 30 ANALYSIS OF RESULTS BY SEGMENT SEGMENTED INFORMATION The Corporation has three reportable segments: Paint and Related Products (US): distribution of automotive refinish and industrial paint and related products representing FinishMaster, Inc. in the US market. Automotive Products (Canada in 2016): distribution of automotive aftermarket parts, including refinish and industrial paint and related products, through Canadian networks (US automotive aftermarket parts network was included in 2015 until the closing of the sale of net assets on June 1, 2015). Corporate Office and Others: head office expenses and other expenses mainly related to the financing structure. The profitability measure employed by the Corporation for assessing performance is EBITDA. OPERATING RESULTS – PAINT AND RELATED PRODUCTS (US) Sales Fourth quarter Twelve‐month period Sales before intersegment sales Intersegment sales 2016
180,758
‐
2015
153,558
‐ 2016
752,864
‐
2015
623,901
(5,090)
Sales 180,758
153,558 752,864
618,811
134,053
‐
21.7
‐
% Sales variance Number of billing days 27,200
2,377
17.7 1.5 Impact of net assets sold 1,405
0.9 Acquisitions and others (34,857)
(22.6) (3,875)
(2.5) Organic growth %
5,430
(132,953)
6,530
0.9
(21.5)
1.1
FOURTH QUARTER TWELVE‐MONTH PERIOD Sales from this segment increased by 17.7%, compared to the Sales from this segment increased by 21.7%, compared to the same quarter in 2015, strengthened by recent business same period of 2015, strengthened by recent business acquisitions acquisitions, representing a growth of 22.6%. which represent a growth of 21.5%. The segment recorded a negative organic growth of 2.5% for the quarter in relation to the implementation of a product line changeover, consolidating the product offering. Without this impact, the segment would have reported an organic growth of approximately 4.1%, a direct result from the sales team’s efforts to attract new customers as well as to capitalize on business relationships with existing customers, improving respective growth. The organic growth of 1.1%, compared to the same period in 2015, is a direct result from the sales team’s efforts to counteract the impact of the product line changeover. Without this impact, the segment would have reported an organic growth of approximately 3.8%. 2016 ANNUAL REPORT UNI-SELECT 31
2016 ANNUAL REPORT UNI‐SELECT 31 EBITDA Fourth quarter Twelve‐month period EBITDA Restructuring and other charges 2016
21,686
‐
2015
16,378
‐
%
2016
93,393
‐ 2015
69,991
440
Adjusted EBITDA Adjusted EBITDA margin 21,686
12.0%
16,378
10.7%
32.4 93,393
12.4%
70,431 32.6
11.4%
%
FOURTH QUARTER TWELVE‐MONTH PERIOD The EBITDA margin improved by 1.3%, compared to the same quarter in 2015, a direct result of optimized buying conditions partially offset by an evolving revenue mix, acquisition and integration related costs, as well as lower cost absorption due to the negative organic growth. The adjusted EBITDA margin improved by 1.0%, compared to the same period in 2015, driven by the same factors as those mentioned in the quarter, as well as by the contribution from recent accretive business acquisitions. Integration of acquisitions is progressing at the expected rate and, during the quarter, 5 locations were consolidated per the integration plan. OPERATING RESULTS – AUTOMOTIVE PRODUCTS (CANADA IN 2016) The 2016 results in dollars vary compared to last year’s figures, since the twelve‐month period of 2015 includes five months of operations of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. sold on June 1, 2015. Sales Fourth quarter Sales 2016
110,228
2015 105,663 ‐
‐ ‐
110,228
105,663 444,455
437,356
7,099
14,244
1.6
3.2
Sale from net assets sold Sales net of sales from net assets sold Twelve‐month period 2016
444,455
% Sales variance Conversion effect of the Canadian dollar 4,565
266
924
Number of billing days Acquisitions and others Organic growth 4.3 0.3 2015
736,623
(299,267)
%
(979)
(0.2)
(4,713)
(4.5) (24,986)
(5.7)
1,042
1.0 (4,622)
(1.1)
0.9 FOURTH QUARTER TWELVE‐MONTH PERIOD Sales growth for this segment reached 4.3%, compared to the Sales increased by 1.6%, compared to the same period in 2015, same quarter in 2015, mainly derived from recent business once the sales from the net assets sold are excluded. Sales acquisitions. generated from recent business acquisitions exceeded the impact of the declining Canadian dollar on its conversion to US dollar of Organic growth regained some strength at the end of the year, $14,244 or 3.2% and the negative organic growth. driven by the Western provinces, and reached 1.0% for the quarter. This improvement was, in part, offset by a reduced Organic growth was below expectations due to a reduced volume volume from existing customers in relation to the softer economic from existing customers in relation to the softer economic conditions in the rest of Canada. conditions, delivery delays on some products and reduction in benefits from price increases compared to 2015. 32 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 32 EBITDA Fourth quarter Twelve‐month period %
2016
5,513
‐
2015
13,019
(433)
Impairment and transaction charges related to the sale of net assets ‐
(2,214)
‐
Net gains on the purchase of the remaining interests in joint (1)
ventures ‐
(3,301)
‐
EBITDA Restructuring and other charges Expenses related to the network optimization and to the closure (2)
and disposal of stores Adjusted EBITDA Adjusted EBITDA margin (1)
(2)
‐
5,513
5.0%
‐
7,071 (22.0) 6.7%
2016 26,611 ‐ ‐
26,611 6.0% 2015
(103,917)
(3,339)
%
144,523
(3,301)
2,930
36,896 (27.9)
5.0%
Net gains were generated by revaluating the fair value of non‐controlling equity interest in the acquirees that were held immediately before obtaining control. Consist primarily of handling and freight expenses required to relocate inventory. FOURTH QUARTER TWELVE‐MONTH PERIOD The adjusted EBITDA margin decrease of 1.7%, compared to the same quarter in 2015, is mainly related to: ‐
Different revenue mix impacting the margin; ‐
Ongoing investments required in relation to the corporate store initiative, including branding (BUMPER TO BUMPER ‐ CANADA’S PARTS PEOPLE); and ‐
Integration costs, net of synergies, pertaining to recent business acquisitions. The adjusted EBITDA margin increase of 1.0%, compared to the same period in 2015, is mainly related to the 2015 weaker performance from the operations that were eventually sold on June 1, 2015. This enhancement was partially offset by: ‐
Reduced fixed cost absorption resulting from the negative organic growth; ‐
Ongoing investments required in relation to the corporate store initiative; ‐
Reduction in benefits from price increases compared to 2015; and ‐
Acquisition and integration costs pertaining to the recent business acquisitions. Integration of the corporate stores, including store rebranding, store processes and the implementation of the new POS system are progressing as per plan. Once completed, these respective activities are expected to yield additional synergies and efficiency. 2016 ANNUAL REPORT UNI-SELECT 33
2016 ANNUAL REPORT UNI‐SELECT 33 OPERATING RESULTS – CORPORATE OFFICE AND OTHERS EBITDA EBITDA Restructuring and other charges Fourth quarter 2016
(2,629)
Impairment and transaction charges related to the sale of net assets Additional liabilities related to the sale of net assets (1) Adjusted EBITDA (1)
(746)
‐
1,526
(1,849)
2015
(5,427)
Twelve‐month period %
2016 (13,156 ) 2015
(19,396)
(746 ) 2,365
‐
(3,426) 46.0 1,526 (12,376 ) %
8,227
‐ (364)
445
‐
(10,724) 15.4
These liabilities are related to additional workers’ compensation insurance claims for former employees of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. sold on June 1, 2015. FOURTH QUARTER TWELVE‐MONTH PERIOD The positive variance, compared to the same quarter in 2015, is The variance, compared to the same period of 2015, is mainly mainly explained by reduced bonus and other incentive plans explained by the negative synergies following the sale of net compared to the same period last year, following the rightsizing. assets. This improvement was, in part, offset by negative synergies These expenses were partially compensated by: ‐
Reduced bonus in relation to the corporate office following the sale of net assets, including the enterprise resource rightsizing; and planning system and its maintenance. However, the Corporation is ‐
Lower stock‐based compensation expenses incurred in expecting savings for the second half of 2017 following the recent relation to the stock price variance as well as to a lower negotiations with its information technology suppliers and number of outstanding options, DSUs and PSUs. internalization of the servers. CASH FLOWS OPERATING ACTIVITIES Fourth quarter Cash flows from (used in) operating activities 2016
54,931
2015 (17,290) Twelve‐month period 2016
136,905
2015
19,186
FOURTH QUARTER TWELVE‐MONTH PERIOD Operating activities generated higher cash inflows as opposed to Operating activities generated higher cash inflows compared to cash outflows required for the same quarter in 2015. The variance last year. This variance is explained by: is mainly explained by: ‐
Increased utilization of the vendor financing program in ‐
Increased utilization of the vendor financing program in 2016 related to strategic purchases; 2016 related to strategic purchases; and ‐
Lower investment required in inventory in 2016, while ‐
Improved operating income mainly related to accretive 2015 inventory was built up to improve fill rates as well as business acquisitions. to minimize the impact of expected pricing increases; ‐
Income tax refunds; and ‐
Higher operating income generated mainly by accretive business acquisitions, exceeding the divestiture impact. These items were partially offset by payments under the vendor financing program of $13,563 in 2016 pertaining to the sold operations. 34 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 34 INVESTING ACTIVITIES Fourth quarter 2016
(27,850)
Cash flows from (used in) investing activities 2015 (22,387) Twelve‐month period 2016
(211,549)
2015
245,005
FOURTH QUARTER TWELVE‐MONTH PERIOD The variance in cash outflows from investing activities is mainly Investing activities required cash outflows as opposed to cash related to renewals of long‐term incentives granted to customers inflows generated last year. This variance is mainly explained by the net proceeds of $321,001 received in 2015 in relation to the in the Paint and Related Products segment. sale of net assets of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. while cash outflows were required in 2016 to support the strategy for business acquisitions as well as renewals of long‐term incentives granted to customers in the Paint and Related Products segment. FINANCING ACTIVITIES Fourth quarter 2016
(25,464)
Cash flows from (used in) financing activities 2015 82,474 Twelve‐month period 2016
5,370
2015
(166,166)
FOURTH QUARTER TWELVE‐MONTH PERIOD Financing activities required cash outflows as opposed to cash Financing activities’ variance is mainly explained by: inflows generated for the same quarter in 2015. This variance is ‐
The reimbursement of the credit facility in 2015 following explained by: the sale of net assets of Uni‐Select USA, Inc. and ‐
The reimbursement of the credit facility in 2016 permitted Beck/Arnley Worldparts, Inc.; by the performance of the operations; and ‐
The cash flows required, in 2015, to redeem the ‐
The usage of the credit facility in 2015, notably to support
convertible debentures for cancellation; and the working capital needs. ‐
The utilization of the credit facility in 2016 to support the strategy for business acquisitions and share repurchases. FREE CASH FLOWS Fourth quarter Twelve‐month period 2016
54,931
(28,522)
2015 (17,290) 39,660 2016
136,905
(17,720)
2015
19,186
76,308
Equity loss 26,409
‐
22,370 629 119,185
‐
95,494
533
Acquisitions of property and equipment (4,790)
(2,994) (9,755)
(17,150)
(64)
21,555
3 20,008 (75)
109,355
(345)
78,532
Cash flows from (used in) operating activities Changes in working capital Difference between amounts paid for post‐employment benefits and current year expenses Free cash flows FOURTH QUARTER TWELVE‐MONTH PERIOD Higher free cash flows were generated from improved operating Higher free cash flows were generated compared to last year due income mainly related to accretive business acquisitions and to: higher vendor incentives that were partially offset by higher capital ‐
Improved operating income generated mainly by expenditures, notably for the POS development in Canada, in accretive business acquisitions and higher vendor comparison to the same quarter in 2015. incentives, exceeding the divestiture impact; ‐
Income tax refunds during the current period; and ‐
Lower capital expenditures following the sale of the net assets. 2016 ANNUAL REPORT UNI-SELECT 35
2016 ANNUAL REPORT UNI‐SELECT 35 FINANCING SOURCES OF FINANCING The Corporation is diversifying its sources of financing in order to manage and mitigate liquidity risk. CREDIT FACILITIES The Corporation has access for its needs to a $400,000 unsecured long‐term revolving credit facility as well as a $20,000 letter of credit facility both with extended maturity date of June 30, 2020 following their amendments during the second quarter. As at December 31, 2016, the unused portion amounted to $284,000 ($321,000 as at December 31, 2015). (Refer to note 18 in the consolidated financial statements for further details.) VENDOR FINANCING PROGRAM The Corporation benefits from a vendor financing program. Under this program, financial institutions make discounted accelerated payments to suppliers and the Corporation makes full payment to the financial institutions according to the new extended payment term agreements with the suppliers. As at December 31, 2016, Uni‐Select benefited from additional deferred payments of accounts payable in the amount of $113,509 and used $188,229 of the program ($90,038 and $148,417 respectively as at December 31, 2015). The authorized limit with the financial institutions is $222,500. These amounts are presented in “Trade and other payables” in the consolidated statements of financial position. This program is available upon the Corporation’s request and may be modified by either party. F U N D R E Q U I R E M E N T S The Corporation is able to meet both its operational and contractual fund requirements and support its various strategic initiatives for future growth, by using the various financing tools mentioned above, as well as its capacity to generate cash flows. OPERATIONAL NEEDS Operational requirements that the Corporation will face in 2017 are summarized as follows: ‐
‐
The purchase of various capital assets for about $23,000 notably for: ‐
Location modernization including warehouse equipment and racking; ‐
Hardware equipment and software applications, including the POS system for the Canadian stores; ‐
Partial renewal of the vehicle fleet through finance leases; ‐
New launch of BUMPER TO BUMPER store locations in the Automotive Products segment; and ‐
Greenfield openings. The dividend payments. CONTRACTUAL OBLIGATIONS Operating leases The Corporation has entered into long‐term operating lease agreements expiring at various dates until 2026 for the rental of buildings, vehicles and outsourcing of information technology services. Some of these lease agreements contain renewal options for additional periods of one to five years which the Corporation may exercise by giving prior notice. Finance leases The Corporation uses finance leases to renew its vehicle fleet. The terms vary from 24 to 60 months depending on the lease. As at December 31, 2016, the carrying values of the leased assets, which are presented under "automotive equipment" along with "property and equipment", were $9,672 ($7,843 as at December 31, 2015). 36 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 36 The following table shows the various contractual obligations due by period. 2017
Long‐term debt (1) (2) 2018
2019
2020
2021
Thereafter
4
4
4
123,844
3
‐
Operating leases 21,417
19,134
15,375
11,648
6,820
9,458
Finance leases (3) 3,722
2,956
2,050
1,272
439
‐
25,143
22,094
17,429
136,764
7,262
9,458
Total (1)
(2)
(3)
Includes credit facility Does not include obligations related to interest on debt Include obligations related to interest on finance leases Post‐employment benefit obligations The Corporation sponsors both defined benefit and defined contribution pension plans. The defined benefit plans include a basic registered pension plan, a registered pension plan for senior management and a non‐registered supplemental pension plan for certain members of senior management. The benefits under the Corporation’s defined benefit plans are based on years of service and final average salary. The two registered pension plans are funded by the Corporation and the members of the plan. Employee contributions are determined according to the members’ salaries and cover a portion of the benefit costs. The employer contributions are based on the actuarial evaluation which determines the level of funding necessary to cover the Corporation’s obligations. For the year ended December 31, 2017, the Corporation expects to make contributions of approximately $2,091 for its defined benefit plans. (Refer to note 17 in the consolidated financial statements for further details.) Off balance sheet arrangements – guarantees Under inventory repurchase agreements, the Corporation has made commitments to financial institutions to repurchase inventory from some of its customers. In Management’s opinion and based on historical experience, the likelihood of significant payments being required under these agreements and losses being absorbed is low as the value of the assets held in guarantee is greater than the Corporation’s financial obligations. (Refer to note 23 in the consolidated financial statements for further details.) Under the terms of its credit facility, the Corporation has issued letters of credit amounting to $10,267 as at December 31, 2016 ($14,854 as at December 31, 2015). (Refer to note 18 in the consolidated financial statements for further details.) 2016 ANNUAL REPORT UNI-SELECT 37
2016 ANNUAL REPORT UNI‐SELECT 37 CAPITAL STRUCTURE The Corporation’s capital management strategy optimizes the capital structure to enable the Corporation to benefit from strategic opportunities that may arise while minimizing related costs and maximizing returns to shareholders. The Corporation adapts capital management to the changing business conditions and the risks related to the underlying assets. LONG‐TERM FINANCIAL POLICIES AND GUIDELINES The strategy of the Corporation is to monitor the following ratios to ensure flexibility in the capital structure: ‐
Total net debt to total net debt and total equity; ‐
Long‐term debt to total equity ratio; ‐
Funded debt to adjusted EBITDA ratio; ‐
Adjusted return on average total equity; and ‐
Dividend payout ratio based on the adjusted earnings of the previous year converted in Canadian dollars. December 31,
2016
2015
Components of debt ratios: Long‐term debt 134,298
90,344
Total net debt 111,973
‐
Total equity 472,362
436,978
Debt ratios (1): Total net debt to total net debt and total equity ratio 19.2%
N/A
Long‐term debt to total equity ratio 28.4%
20.7%
1.04
N/A
Adjusted return on average total equity 12.9%
12.0%
Dividend payout ratio 19.4%
21.6%
Funded debt to adjusted EBITDA ratio (1)
These ratios are not required for banking commitments but represent the ones that the Corporation considers pertinent to monitor and to ensure flexibility in the capital structure. Management continuously monitors its working capital items to improve the cash conversion cycle. The Corporation was in a net cash position as at December 2015, explaining the variances of the total net debt to total net debt and total equity ratio and the funded debt to adjusted EBITDA ratio. The variance of the long‐term debt to total equity ratio is attributable to the long‐term debt increase, partially compensated by an increase of the total equity. The adjusted return on average total equity increase is mainly explained by a reduced average total equity resulting from the impairment and transaction charges in relation to the sale of net assets recorded in 2015 as well as to improved adjusted earnings. BANK COVENANTS For purposes of compliance, the Corporation regularly monitors the requirements of its bank covenants to ensure they are met. As at December 31, 2016, the Corporation met all the requirements. (Refer to note 25 in the consolidated financial statements for further details.) 38 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 38 DIVIDENDS (1) For the 2016 year, the Corporation declared dividends amounting to C$0.335 per share compared to C$0.315 in 2015, representing an increase of 6.3%. On February 8, 2017, the Corporation declared the first quarterly dividend of 2017 of C$0.085, payable on April 18, 2017 to shareholders of record as at March 31, 2017. Dividends are approved by the Board of Directors, which bases its decision on operating results, cash flows and other relevant factors. There is no guarantee that dividends will be declared in the future. These dividends are eligible dividends for income tax purposes. I N F O R M A T I O N O N C A P I T A L S T O C K ( 1) (in thousands of shares) Fourth quarter Number of shares issued and outstanding Weighted average number of outstanding shares 2016
42,214
42,219
2015
43,136
42,872
Twelve‐month period 2016
42,214
42,435
2015
43,136
42,778
At January 31, 2017, 42,248,628 shares of the Corporation were outstanding. Issuance of common shares During the year ended December 31, 2016, the Corporation issued 105,810 (1,066,430 for 2015) common shares at the exercise of stock options for a cash consideration of $1,090 ($11,315 for 2015). The weighted average price of the exercise of stock options was C$13.34 for the year (C$13.51 for 2015). Repurchase and cancellation of shares On August 10, 2016, the Corporation announced that it received approval from the TSX to renew its intention to purchase by way of a new normal course issuer bid (“NCIB”), for cancellation purposes, up to 2,000,000 common shares, representing 4.7% of its 42,231,178 issued and outstanding common shares as of August 1, 2016 over a twelve‐month period beginning on August 17, 2016 and ending on August 16, 2017. In connection with the NCIB, the Corporation established an Automatic Purchase Plan (“APP”), enabling itself to provide standard instructions regarding the repurchase and cancellation of common shares during self‐imposed blackout periods. Such repurchase for cancellation will be determined by the broker in its sole discretion based on the Corporation’s parameters. During the year ended December 31, 2016, 1,027,390 common shares (362,190 for 2015) were repurchased for a cash consideration of $22,043 ($7,747 in 2015) including a share repurchase and cancellation premium of $20,013 ($7,058 in 2015) applied as a reduction of retained earnings. STOCK‐BASED COMPENSATION (1) The Corporation’s stock‐based compensation plans include an equity‐settled common share stock option plan, and cash‐settled plans consisting of a deferred share unit plan and a performance share unit plan. During the third quarter of 2016 and in the normal course of business, the Corporation entered into equity swap agreements. (Refer to notes 16 and 21 in the consolidated financial statements for further details.) Common share stock option plan for management employees and officers For the year ended December 31, 2016, 126,960 options were granted to management employees and officers of the Corporation (514,678 for 2015), with an average exercise price of C$33.94 (C$15.32 in 2015). During the year, 105,810 options were exercised (1,066,430 for 2015), no options were forfeited (104,342 for 2015) and no options expired (same for 2015). As at December 31, 2016, options granted for the issuance of 392,778 common shares (371,628 as at December 31, 2015) were outstanding under the Corporation’s stock option plan, and 1,811,034 common shares (1,937,994 as at December 31, 2015) were reserved for additional options under the stock option plan. For the year ended December 31, 2016, compensation expense of $672 ($1,164 for 2015) was recorded in the “Net earnings (loss)”, with the corresponding amounts recorded in “Contributed surplus”. (1) During the second quarter of 2016, the Corporation carried out a 2‐for‐1 stock split of its common shares. To reflect the effect of the stock split, information pertaining to the number of common shares and stock‐based compensation units has been retroactively restated. 2016 ANNUAL REPORT UNI-SELECT 39
2016 ANNUAL REPORT UNI‐SELECT 39 Deferred share unit plan For the year ended December 31, 2016, the Corporation granted 45,149 DSUs (60,204 DSUs for 2015) and redeemed 84,323 DSUs (49,764 for 2015). Compensation expense of $670 ($3,057 in 2015) was recorded during the year, and 142,256 DSUs were outstanding as at December 31, 2016 (181,430 as at December 31, 2015) for which the compensation liability was $3,141 ($4,476 as at December 31, 2015). The fair value of the equity swap agreement as at December 31, 2016 is a liability of $182. Performance share unit plan For the year ended December 31, 2016, the Corporation granted 76,282 PSUs (223,230 PSUs for 2015) and redeemed 98,684 PSUs (329,660 for 2015). Compensation expense of $3,787 was recorded during the year ($1,829 in 2015), and 216,036 PSUs were outstanding as at December 31, 2016 (238,438 PSUs as at December 31, 2015) for which the compensation liability was $4,959 ($3,009 as at December 31, 2015). The fair value of the equity swap agreement as at December 31, 2016 is a liability of $205. (Refer to note 16 in the consolidated financial statements for further details.) FINANCIAL POSITION During the period, the financial position, when compared to December 31, 2015, has been impacted by business acquisitions and the declining Canadian dollar. The following table shows an analysis of selected items from the consolidated statements of financial position: Dec. 31, 2016
Cash Cash held in escrow Impact of Impact on Dec. 31,
business conversion 2015 acquisitions C$/US$
Net (1)
variance 22,325
14,486
91,432
3,790
(132,556) 10,718 Trade and other receivables 146,130
123,612
16,080 2,774
3,664
Inventory 330,808
269,900
32,148 4,975
23,785
18,358
52,479
‐ 314,550
267,995
3,128 Deferred tax assets, net Trade and other payables 168
(22)
(394)
2,711
63,281
‐
(33,727)
40,716
Balance of purchase price, net 25,303
6,517
18,749 37
‐
Investments and advances to merchant members 28,651
14,082
10,034 82
4,453
Property and equipment 41,982
30,304
3,948 427
7,303
Intangible assets 101,158
65,355
39,041 455
(3,693)
Goodwill 243,807
157,270
85,219 1,318
‐
Long‐term debt (including short‐term portion) 134,298
90,344
42,755 95
1,104
(1)
Explanations for net variance: Cash: Resulting from the free cash flows generated by the operations. Inventory: The increase is related to strategic purchases made at end of the year. Deferred tax assets, net: Increased pre‐tax earnings allowing the recovery of deferred tax losses. Trade and other payables: Mainly attributable to an increased utilization of the vendor financing program at the end of 2016 in relation to the strategic purchases. 40 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 40 RELATED PARTIES For the years ended December 31, 2016 and 2015, common shares of the Corporation were widely held and the Corporation did not have an ultimate controlling party. Transaction with key management personnel Key management includes directors (executive and non‐executive) and members of the Executive Committee. For the years ended December 31, 2016 and 2015, the compensation to key management personnel was as follows: Years ended December 31,
Salaries and short‐term employee benefits Post‐employment benefits (including contributions to defined benefit pension plans) 2016
3,480
244
2015
4,273
434
Stock‐based benefits 3,016
4,671
Severances ‐
1,302
Total compensation 6,740
10,680
There were no other related party transactions with key management personnel for the years ended December 31, 2016 and 2015. Other transactions For the year ended December 31, 2016, the Corporation incurred no rental expenses to the benefit of a related party (rental expenses of $1,241 were incurred in 2015 to the benefit of Clarit Realty, Ltd., a company controlled by a related party). SUBSEQUENT EVENTS During January 2017, the Corporation acquired assets and liabilities of 3 companies operating in the United States for a total cost of $65,504. At the acquisition dates, the preliminary fair value allocated to goodwill amounted to $37,965.
RISK MANAGEMENT In the normal course of business, the Corporation is exposed to a variety of risks that may have a material impact on its business activities, operating results, cash flows and financial position. The Corporation continuously maintains and updates its system of analysis and controls on operational, strategic and financial risks to manage and implement activities with the objective of mitigating the main risks mentioned below. RISKS ASSOCIATED WITH THE ECONOMY Economic climate The economic climate has a moderate impact on sales of automotive aftermarket parts, automotive refinish and industrial paint and related products and on the Corporation’s operations. Although the automotive aftermarket industry is, to some extent, dependent on the economic climate, it is not nearly as affected as new car sales are by a difficult economic situation, since deciding to make car repairs is less discretionary and less expensive than the decision to buy a new vehicle. Inflation Management believes that inflation has little impact on the Corporation’s financial results as the vast majority of price increases imposed by manufacturers on products are passed on to consumers. Nevertheless, low inflation or deflation in the value of aftermarket parts, automotive refinish and industrial paint and related products on the market can have a negative impact on the profitability of its distribution centres. To reduce the risk of deflation in the value of inventoried parts, the Corporation has compensation agreements with most of its suppliers. Distance travelled There is a direct link between unemployment rates, fuel prices and distance travelled as there is a direct link between distance travelled and the rate of vehicle wear and tear and repairs. Fuel prices also affect the Corporation’s delivery costs. 2016 ANNUAL REPORT UNI-SELECT 41
2016 ANNUAL REPORT UNI‐SELECT 41 RISKS ASSOCIATED WITH THE BUSINESS CONTEXT Growth in the vehicle fleet The growing number of car models over the last few years, coupled with their longer lifespan, results in a proliferation of aftermarket parts, imposing financial constraints on distributors and wholesalers that must carry a greater selection of parts to ensure adequate availability. This factor is partly offset by manufacturers putting increasingly sophisticated technological components into their vehicles, resulting in each part having more than one use and costing more to repair, which is favourable to the automotive aftermarket. The rise in the number of foreign vehicle brands in North America is also responsible for the growing number of car models and the proliferation of aftermarket parts. This situation, together with technological complexity, electric cars and greater number of electrical components being used in cars, are factors that tend to favour dealers when consumers are deciding on a service supplier to perform their vehicle maintenance. On the other hand, any potential downsizing of automobile dealers’ network could result in a move toward the aftermarket network for vehicle maintenance and repairs. Products supply and inventory management Uni‐Select primarily distributes parts and products from well‐known and well‐established North American manufacturers. These manufacturers generally take responsibility for products that are defective, poorly designed or non‐compliant with their intended use. Uni‐Select directly imports, to a lesser extent, various parts and products from foreign sources; with regards to these parts, the cash recovery of an eventual recourse against a supplier or manufacturer is uncertain. The Corporation carries liability insurance. In addition, transport logistics between the country of origin and the markets supplied increase the risk of stock outages. The nature of the Corporation’s businesses demands the maintenance of adequate inventories and the ability to meet specific delivery requirements. Supply management is an important element for proper inventory management and under most of our automotive parts supply agreements, the Corporation has return privileges, which helps mitigate the risks associated with inventory obsolescence. To ensure a continuous supply of its products, the Corporation examines the financial results of its main suppliers and regularly reviews the diversification of its sources of supply. Distribution by the manufacturer directly to consumers The distribution of paint depends on the supply of products to the Corporation by certain large and limited number of manufacturers. One or some of these manufacturers could, in the future, decide to distribute their products directly to the end‐customers or through other distributors without using the Corporation’s services as a distributor. Such decision could cause an adverse effect on the profitability of the Corporation’s business depending on the importance of the manufacturer in the Corporation’s supply chain and the availability of alternative supply sources. To reduce such risks, Uni‐Select retains harmonious business relationships with large paint manufacturers, provides efficient distribution and offers loyalty programs to their body shop customers, thereby creating value throughout the supply chain. Technology Ongoing technological developments in recent years require distributors and wholesalers to provide continual training programs to their employees and customers, along with access to new diagnostic tools. Uni‐Select manages the potential impact of these trends through the scope and quality of the training and support programs it provides to independent wholesalers, their employees and their customers. It provides its customers with access to efficient and modern technologies in the areas of data management, warehouse management and telecommunications. Improved safety features such as collision avoidance systems, driverless vehicles and other safety improvements as well as insurance company influence may reduce the demand for some of the Corporation’s paint and related products and may have an impact on the operations and financial results. Environmental risks The industry of paint and of certain parts products distribution involves a certain level of environmental risk. Damages or destruction to warehouses specialised in the storage of such products, notably by fire, resulting in the spillage of paint or hazardous material, can have environmental consequences such as soil contamination or air pollution. These specialised warehouses are well‐equipped to reduce such risks. This includes up‐to‐date sprinkler systems and retention basins in the event of accidental spills. Legal and tax risks The Corporation may be exposed to claims, disputes and legal proceedings arising in the ordinary course of business that may have a material adverse effect on the Corporation’s earnings or financial position. The Corporation is subject to various regulations and taxation authorities. Changes in regulations or tax laws may have a material adverse effect on the Corporations’ earnings or financial position. To mitigate these risks, the Corporation utilizes the services of professional advisors. 42 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 42 RISKS ASSOCIATED WITH THE OPERATIONAL CONTEXT Risks related to Uni‐Select’s business model and strategy In the automotive aftermarket, Uni‐Select’s business model is servicing independent wholesalers and independent installers through a network of company‐owned warehouses and stores. This requires the Corporation to take special measures to promote its wholesalers’ loyalty and long‐term survival. This is why Uni‐Select’s fundamental approach is to drive the growth, competitiveness and profitability of its independent wholesalers by a total business solution that incorporates good purchasing conditions, proactive management of product selection, highly efficient distribution services, innovative marketing programs and various support services, such as training and financing. Furthermore, considering that owners of aftermarket parts stores are aging, Uni‐Select has also implemented succession programs to enable independent wholesalers who wish to retire to sell their business to a family member or an employee. Alternatively, Uni‐Select may decide to purchase the business of its independent wholesalers to protect and grow its distribution network, as part of its corporate strategy. Integration of acquired business The Corporation’s growth‐by‐acquisition strategy carries its share of risks. The Corporation’s success of its acquisitions depends on its ability to integrate and crystallize synergies in terms of efficiently consolidating the operations of the acquired businesses into its existing operations. Uni‐Select has developed an expertise in this regard having successfully acquired and integrated several businesses over the years. To limit its risk, the Corporation has adopted a targeted and selective acquisition strategy, conducts strict due diligence and develops detailed integration plans. Finally, Uni‐Select relies on a multidisciplinary team that is able to accurately assess and manage the risks specific to the markets where it does business. Competition The aftermarket industry in which the Corporation does business is highly competitive. Availabilities of parts, prices, quality and customer service are critical factors. Uni‐Select competes primarily in the DIFM (Do It For Me) segment of the industry with, among others, national retail chains, independent distributors and wholesalers as well as online suppliers. Competition varies from market to market, and some competitors may have superior advantages over Uni‐Select, which may result, among others, in a reduction in selling prices and an increase in marketing and promotional expenses, which would drive down the Corporation's profitability. To reduce this risk, the Corporation regularly reviews its product and service offering to meet the needs of its customer base as effectively as possible. In addition, the proliferation of parts in itself is a barrier to entry into the market for new competitors. Business and financial systems The Corporation relies extensively on its computer systems and the systems of its business partners to manage inventory, process transactions and report results. These systems are subject to damage or interruption from power outages, telecommunications failures, computer viruses, security breaches and catastrophic events. If its computer systems or those of its business partners fail to function properly, the Corporation may experience loss of critical data and interruptions or delays in its ability to manage inventories or process transactions, potentially impacting revenue and operational results. To mitigate that risk, the Corporation is supported by expert firms to prevent its applications from intrusion and loss of data. It includes robust firewalls, backup procedures, dual telecommunication lines, hardware redundancy and external hosting of equipment in specialised sites. Human resources During this period of active change, Uni‐Select must attract, train and retain a large number of competent employees, while controlling payroll. Labour costs are subject to numerous external factors, such as wage rates, fringe benefits and the availability of local skilled resources at the opportune moment. The inability to attract, train and retain employees could affect the Corporation’s growth capacity as well as its financial performance. The Corporation introduced the following to attract, train and retain the best talent: ‐
Guides to accelerate employee on‐boarding and measure proficient acquisition integration; ‐
Focus on areas related to training, such as sales development, business‐related subject matter reinforcement, effective teams and interpersonal communications; ‐
Yearly talent reviews for performance, development and succession; and ‐
Harmonized competitive and equitable pension and benefits programs. 2016 ANNUAL REPORT UNI-SELECT 43
2016 ANNUAL REPORT UNI‐SELECT 43 RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS Liquidity risk Liquidity risk is the risk that the Corporation will encounter difficulty in meeting its obligations on time and at a reasonable cost. This risk is dealt with in the “Financing” section. Credit risk Credit risk stems primarily from the potential inability of customers to discharge their obligations. The maximum credit risk to which the Corporation is exposed represents the carrying amount of cash, cash held in escrow, trade and other receivables and advances to merchant members. No account represents more than 5% of total accounts receivable. In order to manage its risk, specific credit limits are determined for certain accounts and reviewed regularly by the Corporation. The Corporation may also be exposed to credit risk from its foreign exchange forward contracts and its equity swap agreements, which is managed by dealing with reputable financial institutions. The Corporation holds securities on some personal property and some assets of certain customers. Those customers are also required to contribute to a fund to guarantee a portion of their amounts due to the Corporation. The financial condition of customers is examined regularly, and monthly analyses are reviewed to ensure that past‐due amounts are collectible and if necessary, that measures are taken to limit credit risk. Allowances for doubtful accounts and past‐due accounts receivable are reviewed at least quarterly, and a bad‐debt expense is recognized only for accounts receivable for which collection is uncertain. Foreign exchange risk The Corporation is exposed to foreign exchange risk on its financial instruments, mainly related to purchases in currencies other than the respective functional currencies of the Corporation. To limit the impact of fluctuations of the Canadian dollar over the US dollar on net earnings and cash flows, the Corporation uses, from time to time, foreign exchange forward contracts. Management considers that fluctuations in the relative values of the US dollar and the Canadian dollar will not have a material impact on net earnings. The Corporation has certain investments in foreign operations (United States) whose net assets are exposed to foreign currency translation. The Corporation hedges the foreign exchange risk exposure related to those investments with US dollar denominated debt instruments. (For further details, see note 21 in the consolidated financial statements.) Interest rates The Corporation is exposed to interest rate fluctuations, primarily due to its variable‐rate debts. When required to mitigate those fluctuations, the Corporation uses, from time to time, derivative financial instruments, such as swap contracts designed to exchange variable rates for fixed rates. The Corporation does not use financial instruments for trading or speculative purposes. (For further details, refer to note 21 in the consolidated financial statements.) CHANGE IN ACCOUNTING POLICIES FUTURE ACCOUNTING CHANGES At the date of authorization of the consolidated financial statements, certain new standards, amendments and interpretations to existing standards have been published by the International Accounting Standards Board (“IASB”) but are not yet effective, and have not been adopted earlier by the Corporation. Information on new standards, amendments and interpretations that are expected to be relevant to the Corporation’s consolidated financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Corporation’s consolidated financial statements. EFFECTIVE DATE – JANUARY 1, 2018 WITH EARLIER ADOPTION PERMITTED Revenues from contracts with customers In May 2014, the IASB and the Financial Accounting Standards Board (“FASB”) jointly issued IFRS 15 “Revenues from contracts with customers”, a converged standard on the recognition of revenue from contracts with customers. It supersedes the IASB’s current revenue recognition guidance including IAS 18 “Revenue”, IAS 11 “Construction Contracts”, and related interpretations. IFRS 15 provides a single principle‐based five‐step model to use when accounting for revenue arising from contracts with customers. The impact of this new standard is currently being assessed and the Corporation does not expect to have significant impact on the consolidated financial statements upon its adoption. 44 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 44 Financial instruments In July 2014, the IASB issued a complete and final version of IFRS 9 “Financial Instruments”, replacing the current standard on financial instruments (IAS 39). IFRS 9 introduces a single, principle‐based approach for the classification of financial assets, driven by the nature of cash flows and the business model in which an asset is held. IFRS 9 also provides guidance on an entity’s own credit risk relating to financial liabilities and has modified the hedge accounting model to align the economics of risk management with its accounting treatment. The standard results in a single expected‐loss impairment model rather than an incurred losses model. The impact of this new standard is currently being assessed and the Corporation does not expect to have significant impact on the consolidated financial statements upon its adoption. EFFECTIVE DATE – JANUARY 1, 2019 WITH EARLIER ADOPTION PERMITTED IN CERTAIN CIRCUMSTANCES Leases In January 2016, the IASB issued IFRS 16 “Leases”, replacing the current standard on leases (IAS 17). IFRS 16 eliminates the classification as an operating lease and requires lessees to recognize a right‐of‐use asset and a lease liability in the statement of financial position with exemptions permitted for short‐term leases and leases of low value assets. In addition, IFRS 16 changes the definition of a lease, sets requirements on how to account for the asset and liability (including complexities such as non‐lease elements, variable lease payments and options periods), changes the accounting for sale and leaseback arrangements and introduces new disclosure requirements. The Corporation is currently assessing the impact of this standard on its consolidated financial statements. USE OF ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of financial statements in accordance with IFRS requires Management to apply judgment and to make estimates and assumptions that affect the amounts recognized in the consolidated financial statements and notes to the financial statements. Judgment is commonly used in determining whether a balance or transaction should be recognized in the financial statements and estimates and assumptions are more commonly used in determining the measurement of recognized transactions and balances. However, judgment and estimates are often interrelated. Information about the Corporation’s accounting policies is provided in note 3 to the consolidated financial statements, and the most significant uses of judgment, estimates and assumptions relate to the following: ESTIMATES Business combinations: Upon the recognition of a business combination, the Corporation records the assets acquired and liabilities assumed at their estimated fair values. The value of goodwill recognized is directly affected by the estimated values of the assets and liabilities. Any change in the estimates used would result in an increase or decrease in the value of goodwill at the date of acquisition, or in net earnings in subsequent years. (Refer to note 11 in the consolidated financial statements for further details.) Sales recognition: Estimates are used in determining the amounts to be recorded for rights of return, guarantees, and trade and volume discounts. These estimates are based on the Corporation’s historical experience and Management’s assumptions about future events, and are reviewed on a regular basis throughout the year. Inventory valuation: The Corporation uses estimates in determining the net realizable value of its inventory, taking into consideration the quantity, age and condition of the inventory at the time the estimates are made. These estimates also include assumptions about future selling prices and costs, product demand and return fees. The Corporation also uses estimates in determining the value of trade discounts, rebates and other similar items receivable from vendors. These estimates are based on the Corporation’s historical experience and Management’s assumptions about future events, and are reviewed on a regular basis throughout the year. Allowance for surplus or obsolete inventory: The Corporation records an allowance for estimated obsolescence calculated on the basis of assumptions about the future demand for its products and conditions prevailing in the markets where its products are sold. This allowance, which reduces inventory to its net realizable value, is then entered as a reduction of inventory in the consolidated statements of financial position. Management must make estimates when establishing such allowances. In the event that actual market conditions are less favorable than the Corporation’s assumptions, additional allowances could prove necessary. Property and equipment and intangible assets: Assumptions are required in determining the useful lives of property and equipment and intangible assets with finite useful lives. (Refer to note 3 in the consolidated financial statements for further details.) 2016 ANNUAL REPORT UNI-SELECT 45
2016 ANNUAL REPORT UNI‐SELECT 45 Impairments of non‐financial assets: The Corporation uses estimates and assumptions based on historical experience and Management’s best estimates to estimate future cash flows in the determination of the recoverable amounts of assets and the fair value of cash generating units (“CGUs”). Impairment tests require Management to make significant assumptions about future events and operating results. Significant estimates are also required in the determination of appropriate discount rates to apply the future cash flows in order to adjust current market rates for assets and entity‐specific risk factors. Revisions of these assumptions and estimates, or variations between the estimated amounts and actual results may have a significant impact on the assets recorded in the consolidated statements of financial position, and on the Corporation’s net earnings in future periods. For the years ended December 31, 2016 and 2015, with the exception of the impairment losses recorded in 2015 in connection with the agreement for the sale of the net assets of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc., no impairment losses or reversals of previous losses have been recorded on the Corporation’s non‐current assets. (Refer to notes 4, 5 and 15 in the consolidated financial statements for further details.) Deferred taxes: The Corporation estimates its deferred income tax assets and liabilities based on differences between the carrying amounts and tax bases of assets and liabilities. They are measured by applying enacted or substantively enacted tax rates and laws at the date of the financial statements for the years in which temporary differences are expected to reverse. Changes in the timing of the reversals or the income tax rates applicable in future years could result in significant differences between these estimates and the actual amounts realized which would affect net earnings in a subsequent period. Post‐employment benefit obligations: Significant assumptions and estimates are required in the measurement of the Corporation’s obligations under defined benefit pension plans. Management estimates the defined benefit obligations annually with the assistance of independent actuaries; however, the actual outcome may vary due to estimation uncertainties. The estimates of the defined benefit obligations are based on inflation rates, discount rates and mortality rates that Management considers to be reasonable. It also takes into account the Corporation’s specific anticipation of future salary increases and retirement ages of employees. Discount rates are determined close to each year‐end by reference to high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related defined benefit obligations. Variation in these assumptions may significantly impact the Corporation’s defined benefit obligations. (Refer to note 17 in the consolidated financial statements for further details.) Hedge effectiveness: The Corporation uses estimates and assumptions, based on external market trends and Management’s best estimates of entity‐specific risks, in assessing the hedge effectiveness prospectively throughout the hedging relationship, if any. Hedge accounting is terminated when a hedging relationship is no longer highly effective, or when a forecast transaction is no longer probable. Differences in actual results may have an impact on the Corporation’s net earnings in subsequent periods. The Corporation does not use derivative financial instruments for speculative purposes. Provisions: The Corporation makes estimates of projected costs and timelines and the probability of occurrence of the obligations in determining the amount for provisions. Provisions are reviewed at the end of each reporting period and are adjusted to reflect the best estimates. (Refer to note 3 in the consolidated financial statements for further details.) JUDGMENTS Leases: The Corporation uses judgment in determining the classification of its leased assets at inception of the lease. (Refer to note 3 in the consolidated financial statements for further details.) Evidence of asset impairment: The Corporation uses significant judgment in determining the existence of an event which indicates a negative effect on the estimated future cash flows associated with an asset. If applicable, the Corporation performs impairment tests on its CGUs to assess whether the carrying amounts of assets are recoverable. As described in the previous section, various estimates made by Management are used in the impairment tests. Hedge accounting: At the inception of a hedging relationship, if any, the Corporation uses judgment in determining the probability that a forecasted transaction will occur. 46 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 46 EXCHANGE RATE DATA The following table sets forth information about exchange rates based upon rates expressed as US dollars per C$1.00: Average for the period For statement of earnings Period end For statement of financial position Years ended December 31, 2016 2015 2014 0.75 0.74 0.78 0.72 0.91 0.86 As the Corporation uses the US dollar as its reporting currency in its consolidated financial statements and in this document, unless otherwise indicated, results from its Canadian operations are translated into US dollars using the average rate for the period. Variances and explanations related to fluctuations in the foreign exchange rate, and the volatility of the Canadian dollar are therefore related to the translation in US dollars of the Corporation’s results for its Canadian operations and do not have an economic impact on its performance since most of the Corporation’s consolidated sales and expenses are received or denominated in the functional currency of the markets in which it does business. Accordingly, the sensitivity of the Corporation’s results to fluctuations in foreign exchange rates is economically limited.
EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING Management plans and performs an audit of the Corporation’s internal controls related to the Canadian Securities Administrators’ National Instrument 52‐109 “Certification of Disclosure in Issuer’s Annual and Interim Filings” (NI 52‐109). DISCLOSURE CONTROLS AND PROCEDURES Uni‐Select has pursued its evaluation of disclosure controls and procedures in accordance with the NI 52‐109 guidelines. As at December 31, 2016, the President and Chief Executive Officer and the Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are properly designed and effective. INTERNAL CONTROLS OVER FINANCIAL REPORTING Uni‐Select has continued its evaluation of the effectiveness of internal controls over financial reporting as at December 31, 2016, in accordance with the NI 52‐109 guidelines. This evaluation enabled the President and Chief Executive Officer and the Chief Financial Officer to conclude that internal controls over financial reporting were designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with IFRS. During the year ended December 31, 2016, no change in the Corporation’s internal controls over financial reporting occurred that materially affected, or is reasonably likely to materially affect, the Corporation’s internal controls over financial reporting. 2016 ANNUAL REPORT UNI-SELECT 47
2016 ANNUAL REPORT UNI‐SELECT 47 OUTLOOK During the year 2016, the Corporation implemented key initiatives to grow its geographical coverage and build density in key markets at FinishMaster (US). In Canada, the focus was to build the foundation for the automotive corporate store group, launch the FINISHMASTER brand and launch the new BUMPER TO BUMPER program and brand to independent customers and corporate stores. In 2017, the mission remains the same. The goal in both businesses is to drive a combination of profitable organic and acquisitive growth. The Corporation demonstrated, in 2016, the potential of its growth strategy plan and is committed to accelerating its progress in 2017. FinishMaster (US) continues to have the opportunity to expand its geographic coverage and build density in some larger US key markets. It will remain focused on the successful integration of the acquired businesses into the FinishMaster (US) family driving expected synergies and providing better service to more customers. In addition, the segment is committed on accelerating current and implementing new organic growth initiatives. Automotive products in Canada will keep being focused on executing the current strategies of accelerating profitable growth with both independent jobber customers and corporate stores. In 2016, the segment made progress establishing the corporate store group. Today, this group has a committed corporate store leadership team which is dedicated to driving profitable growth, installing an enhanced sales discipline, standard and optimized operational processes, all supported by systems. In 2017, it anticipates rolling out the new POS system to all corporate stores. In 2016, the group launched the new updated BUMPER TO BUMPER program and brand to independent customers and corporate stores and in 2017, will continue to be committed to accelerating that program to more customers nationally. It aims also carry on adding select businesses to the corporate stores to complement the independent jobber customer network, as well as additional FINISHMASTER locations to build the network across Canada. Underlying these growth initiatives, the Corporation will maintain its commitment to delivering exceptional service to customers through a best‐in‐class customer experience and very high fill rates. Operational teams in both businesses are optimizing processes to deliver on these goals. The objective is to extend its market share in both current businesses while setting up the Corporation for the future. The Corporation stands by its strategy to look for business opportunities to deliver shareholder value both now and in the long run. Henry Buckley Eric Bussières President and Chief Executive Officer Chief Financial Officer Approved by the Board of Directors on February 8, 2017. 48 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 48 CONSOLIDATED
CONSOLIDATED FINANCIAL
FINANCIAL STATEMENTS
STATEMENTS December 31, 2016 Management’s report 50 Independent auditor’s report 51 Consolidated statements of earnings 52 Consolidated statements of comprehensive income 53 Consolidated statements of changes in equity 54 Consolidated statements of cash flows 55 Consolidated statements of financial position 56 Notes to consolidated financial statements 57 2016 ANNUAL REPORT UNI-SELECT 49
MANAGEMENT’S REPORT The consolidated financial statements and other financial information included in this Annual Report are the responsibility of the Corporation’s Management. The consolidated financial statements have been prepared by Management in accordance with International Financial Reporting Standards (“IFRS”) and have been approved by the Board of Directors on February 8, 2017. Uni‐Select Inc. maintains internal control systems which, according to Management, reasonably ensure the accuracy of the financial information and maintain proper standards of conduct in the Corporation’s activities. The Board of Directors fulfills its responsibility regarding the consolidated financial statements included in this Annual Report, primarily through its Audit Committee. This Committee, which meets periodically with the Corporation’s directors, management and external auditors, has reviewed the consolidated financial statements of Uni‐Select Inc. and has recommended that they be approved by the Board of Directors. The consolidated financial statements have been audited by the Corporation’s external auditors, Raymond Chabot Grant Thornton LLP. Henry Buckley President and Chief Executive Officer Boucherville February 8, 2017 Eric Bussières Chief Financial Officer 50 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 50 INDEPENDENT AUDITOR’S REPORT To the Shareholders of Uni‐Select Inc. We have audited the accompanying consolidated financial statements of Uni‐Select Inc., which comprise the consolidated statements of financial position as at December 31, 2016 and 2015 and the consolidated statements of earnings, comprehensive income, changes in equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and for such internal control as Management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. 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 Uni‐Select Inc. as at December 31, 2016 and 2015 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). 1
/s/ Raymond Chabot Grant Thornton LLP Montréal (Canada) February 8, 2017 1
CPA auditor, CA public accountancy permit no. A120795 2016 ANNUAL REPORT UNI-SELECT 51
2016 ANNUAL REPORT UNI‐SELECT 51 CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of US dollars, except per share amounts) Year ended
December 31,
Note 2016
2015
1,197,319
1,355,434
830,717
952,817
366,602
402,617
Employee benefits 175,621
213,666
Other operating expenses 4 84,879
91,977
Restructuring and other charges Impairment and transaction charges related to the sale of net assets 5 ‐
Earnings (loss) before finance costs, depreciation and amortization, equity loss and income taxes 106,848
Finance costs, net 6 4,484
6,006
Depreciation and amortization 7 15,962
13,174
Earnings (loss) before equity loss and income taxes (72,502)
86,402
Equity loss ‐
(533)
Earnings (loss) before income taxes 86,402
(73,035)
Income tax expense (recovery) Sales Purchases, net of changes in inventories Gross margin (746)
5,328
144,968
(53,322)
8 Current (5,680)
12,235
Deferred 33,817
(45,049)
28,137
(32,814)
Net earnings (loss) 58,265
(40,221)
Earnings (loss) per share 9 Basic 1.37
(0.94)
Diluted 1.36
(0.94)
Weighted average number of common shares outstanding (in thousands) 9 Basic 42,435
42,778
Diluted 42,693
42,778
The accompanying notes are an integral part of these consolidated financial statements. 52 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 52 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended
December 31,
Note (In thousands of US dollars) 2016
2015
Net earnings (loss) Other comprehensive income (loss) Items that will subsequently be reclassified to net earnings (loss): Effective portion of changes in the fair value of cash flow hedges (net of income tax of $29 in 2015) Net change in the fair value of derivative financial instruments designated as cash flow hedges transferred to earnings (net of income tax of $167 in 2015) Unrealized exchange losses on the translation of debt designated as a hedge of net investments in foreign operations (net of income tax of $6,200 in 2015) Unrealized exchange gains (losses) on the translation of financial statements to the presentation currency (net of income tax of nil in 2016 ($6,689 in 2015)) Items that will not subsequently be reclassified to net earnings (loss): (78)
‐
452
6,229
(16,247)
‐
(13,748)
6,229
(29,621)
1,940
(321)
8,169
(29,942)
66,434
(70,163)
‐
Total other comprehensive income (loss) Comprehensive income (loss) (40,221)
17 Remeasurements of long‐term employee benefit obligations (net of income tax of $745 ($118 in 2015)) 58,265
The accompanying notes are an integral part of these consolidated financial statements. 2016 ANNUAL REPORT UNI-SELECT 53
2016 ANNUAL REPORT UNI‐SELECT 53 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In thousands of US dollars) Note
Balance, December 31, 2014 Net loss Other comprehensive loss Comprehensive loss Contributions by and distributions to shareholders: Repurchase and cancellation of shares Issuance of shares Convertible debentures redemption Dividends Stock‐based compensation Balance, December 31, 2015 Net earnings Other comprehensive income Comprehensive income 20 20 18 16 Contributions by and distributions to shareholders: Repurchase and cancellation of shares 20 Issuance of shares 20 Dividends Stock‐based compensation 16 Balance, December 31, 2016 Attributable to shareholders
Accumulated other comprehensive
Retained income (loss)
Total earnings (note 22)
equity
Equity component of the Share Contributed convertible capital surplus debentures 87,238
2,424
1,687
‐
‐
‐
‐
‐
‐
‐
‐
‐
(689)
11,315
‐
‐
‐
10,626
‐
‐
‐
‐
1,164
1,164
97,864
3,588
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
(2,030)
1,090
‐
‐
(940)
96,924
428,497 (40,221) (321) (40,542) ‐
‐
(1,687)
‐
‐
(1,687)
‐
‐
‐
672
672
‐
‐
‐
‐
‐
4,260
‐
(7,058) ‐ 1,687 (10,587) ‐ (15,958) 371,997 58,265 1,940 60,205 (20,013) ‐ (10,769) ‐ (30,782) 401,420 The accompanying notes are an integral part of these consolidated financial statements. 54 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 54 (6,850)
512,996
‐
(29,621)
(29,621)
(40,221)
(29,942)
(70,163)
‐
‐
‐
‐
‐
‐
(7,747)
11,315
‐
(10,587)
1,164
(5,855)
(36,471)
436,978
‐
6,229
6,229
58,265
8,169
66,434
‐
‐
‐
‐
‐
(30,242)
(22,043)
1,090
(10,769)
672
(31,050)
472,362
CONSOLIDATED STATEMENTS OF CASH FLOWS Note (In thousands of US dollars) Year ended
December 31,
2016
OPERATING ACTIVITIES Net earnings (loss) Non‐cash items: 58,265
2015
(40,221)
Restructuring and other charges 4 Impairment and transaction charges related to the sale of net assets 5 Finance costs, net 6 4,484
6,006
Depreciation and amortization 7 15,962
13,174
Income tax expense (recovery) 8 28,137
(32,814)
Amortization of incentives granted to customers 14,722
12,532
Other non‐cash items 1,704
4,277
10 17,720
(76,308)
(3,553)
(5,330)
Income taxes recovery (paid) 210
Cash flows from operating activities 136,905
19,186
Business acquisitions 11 (161,839)
(40,821)
Net cash proceeds from sale of net assets 5 Net balance of purchase price (2,173)
(1,114)
Cash held in escrow (11,353)
(3,790)
Changes in working capital items Interest paid INVESTING ACTIVITIES (746)
‐
‐
5,328
144,968
(12,426)
321,001
Advances to merchant members and incentives granted to customers (23,757)
(13,282)
Reimbursement of advances to merchant members 1,916
4,141
Dividends received from equity investments Acquisitions of property and equipment (9,755)
Proceeds from disposal of property and equipment Acquisitions and development of intangible assets Cash flows from (used in) investing activities FINANCING ACTIVITIES Increase in long‐term debt Repayment of long‐term debt Convertible debenture redemption Net increase (decrease) in merchant members’ deposits in the guarantee fund Repurchase and cancellation of shares 20 Issuance of shares 20 ‐
662
664
(17,150)
304
(5,250)
(211,549)
245,005
138,965
210,358
(101,730)
(327,984)
‐
(4,948)
(379)
(22,043)
(7,747)
1,090
11,315
(10,533)
(10,570)
5,370
(166,166)
Dividends paid Cash flows from (used in) financing activities (41,713)
175
Effects of fluctuations in exchange rates on cash Net increase (decrease) in cash (69,107)
Cash, beginning of year 91,432
107
Cash, end of year 22,325
91,432
167
(6,700)
91,325
The accompanying notes are an integral part of these consolidated financial statements. 2016 ANNUAL REPORT UNI-SELECT 55
2016 ANNUAL REPORT UNI‐SELECT 55 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Note (In thousands of US dollars) December 31,
ASSETS Current assets: Cash 2016
2015
22,325
91,432
14,486
3,790
12 146,130
123,612
Income taxes receivable 16,751
11,053
Inventory 330,808
269,900
Prepaid expenses 8,076
12,671
Cash held in escrow Trade and other receivables 538,576
512,458
Investments and advances to merchant members 13 28,651
14,082
Property and equipment 14 41,982
30,304
Total current assets Intangible assets 15 101,158
65,355
Goodwill 15 243,807
157,270
Deferred tax assets 8 22,743
55,681
TOTAL ASSETS 976,917
835,150
LIABILITIES Current liabilities: 314,550
267,995
Balance of purchase price, net 25,303
6,517
Provision for restructuring and other charges 4 775
3,983
2,673
2,485
18, 19 3,817
2,704
347,118
283,684
Trade and other payables Dividends payable Current portion of long‐term debt and merchant members’ deposits in the guarantee fund Total current liabilities Long‐term employee benefit obligations 16,802
18,033
18 130,572
87,722
19 5,319
5,531
16, 21 359
‐
16, 17 Long‐term debt Merchant members’ deposits in the guarantee fund Derivative financial instruments Deferred tax liabilities 8 4,385
3,202
TOTAL LIABILITIES 504,555
398,172
EQUITY 97,864
20 96,924
Contributed surplus 4,260
3,588
Retained earnings 401,420
371,997
Share capital 22 (30,242)
(36,471)
TOTAL EQUITY 472,362
436,978
TOTAL LIABILITIES AND EQUITY 976,917
835,150
Accumulated other comprehensive loss The accompanying notes are an integral part of these consolidated financial statements. On of the Board of Directors, André Courville, FCPA, FCA, ICD.D Director Michelle Ann Cormier, CPA, CA, ASC Director 56 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US dollars, except per share amounts, percentages and otherwise specified) 1 ‐ GOVERNING STATUTE AND NATURE OF OPERATIONS Uni‐Select Inc. (“Uni‐Select”) is a corporation domiciled in Canada and duly incorporated and governed by the Business Corporations Act (Québec). Uni‐Select is the parent company of a group of entities, which includes Uni‐Select and its subsidiaries (collectively, the “Corporation”). The Corporation is a major distributor of automotive products and paint and related products for motor vehicles. The Corporation’s registered office is located at 170 Industriel Blvd., Boucherville, Québec, Canada. These consolidated financial statements present the operations and financial position of the Corporation and all of its subsidiaries as well as the Corporation’s interests in jointly controlled entities, if any. The Corporation’s shares are listed on the Toronto Stock Exchange (“TSX”) under the symbol UNS. 2 ‐ BASIS OF PRESENTATION Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The Corporation has consistently applied the same accounting policies for all the periods presented. The Board of Directors approved and authorized for issuance these consolidated financial statements on February 8, 2017. Basis of measurement These consolidated financial statements have been prepared on the historical cost basis except for derivative financial instruments, which are measured at fair value, provisions, which are measured based on the best estimates of the expenditures required to settle the obligation and the post‐employment benefit obligations, which are measured at the present value of the defined‐benefit obligation and reduced by the net value of plan assets. Functional and presentation currency Items included in the financial statements of each of the Corporation’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The Corporation’s functional currencies are the Canadian dollar for entities located in Canada, and the US dollar for entities located in the United States. These consolidated financial statements are presented in US dollars, which is the Corporation’s presentation currency. Use of accounting estimates and judgments The preparation of financial statements in accordance with IFRS requires Management to apply judgment and to make estimates and assumptions that affect the amounts recognized in the consolidated financial statements and notes to the financial statements. Judgment is commonly used in determining whether a balance or transaction should be recognized in the financial statements and, estimates and assumptions are more commonly used in determining the measurement of recognized transactions and balances. However, judgment and estimates are often interrelated. Information about the Corporation’s accounting policies is provided in note 3 to the consolidated financial statements, and the most significant uses of judgment, estimates and assumptions relate to the following: (i)
Estimates Business combinations: Upon the recognition of a business combination, the Corporation records the assets acquired and liabilities assumed at their estimated fair values. The value of goodwill recognized is directly affected by the estimated values of the assets and liabilities. Any change in the estimates used would result in an increase or decrease in the value of goodwill at the date of acquisition, or in net earnings in subsequent years. See note 11 for details on the business combinations completed in the last two years. Sales recognition: Estimates are used in determining the amounts to be recorded for rights of return, guarantees, and trade and volume discounts. These estimates are based on the Corporation’s historical experience and Management’s assumptions about future events, and are reviewed on a regular basis throughout the year. Inventory valuation: The Corporation uses estimates in determining the net realizable value of its inventory, taking into consideration the quantity, age, and condition of the inventory at the time the estimates are made. These estimates also include assumptions about future selling prices and costs, product demand, and return fees. The Corporation also uses estimates in determining the value of trade discounts, rebates, and other similar items receivable from vendors. These estimates are based on the Corporation’s historical experience and Management’s assumptions about future events, and are reviewed on a regular basis throughout the year. 2016 ANNUAL REPORT UNI-SELECT 57
2016 ANNUAL REPORT UNI‐SELECT 57 2 ‐ B ASI S O F PR ES ENT ATIO N ( CON TIN UED) Allowance for surplus or obsolete inventory: The Corporation records an allowance for estimated obsolescence calculated on the basis of assumptions about the future demand for its products and conditions prevailing in the markets where its products are sold. This allowance, which reduces inventory to its net realizable value, is then entered as a reduction of inventory in the consolidated statements of financial position. Management must make estimates when establishing such allowances. In the event that actual market conditions are less favorable than the Corporation’s assumptions, additional allowances could prove necessary. Property and equipment and intangible assets: Assumptions are required in determining the useful lives of property and equipment, and intangible assets with finite useful lives. Refer to note 3 for further details. Impairments of non‐financial assets: The Corporation uses estimates and assumptions based on historical experience and Management’s best estimates to estimate future cash flows in the determination of the recoverable amounts of assets and the fair value of cash generating units (“CGUs”). Impairment tests require Management to make significant assumptions about future events and operating results. Significant estimates are also required in the determination of appropriate discount rates to apply the future cash flows in order to adjust current market rates for assets and entity‐specific risk factors. Revisions of these assumptions and estimates, or variances between the estimated amounts and actual results may have a significant impact on the assets recorded in the consolidated statements of financial position, and on the Corporation’s net earnings in future periods. For the years ended December 31, 2016 and 2015, with the exception of the impairment losses recorded in 2015 in connection with the sale of the net assets of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. described in note 5, no impairment losses or reversals of previous losses have been recorded on the Corporation’s non‐current assets. Refer to notes 4, 5 and 15 for further details. Deferred taxes: The Corporation estimates its deferred income tax assets and liabilities based on differences between the carrying amounts and tax bases of assets and liabilities. They are measured by applying enacted or substantively enacted tax rates and laws at the date of the financial statements for the years in which temporary differences are expected to reverse. Changes in the timing of the reversals or the income tax rates applicable in future years could result in significant differences between these estimates and the actual amounts realized, which would affect net earnings in a subsequent period. Post‐employment benefit obligations: Significant assumptions and estimates are required in the measurement of the Corporation’s obligations under defined benefit pension plans. Management estimates the defined benefit obligations annually with the assistance of independent actuaries; however, the actual outcome may vary due to estimation uncertainties. The estimates of the defined benefit obligations are based on inflation rates, discount rates, and mortality rates that Management considers to be reasonable. It also takes into account the Corporation’s specific anticipation of future salary increases and retirement ages of employees. Discount rates are determined close to each year‐end by reference to high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related defined benefit obligations. Variation in these assumptions may significantly impact the Corporation’s defined benefit obligations. Refer to note 17 for details on the assumptions and estimates used for the years ended December 31, 2016 and 2015. Hedge effectiveness: The Corporation uses estimates and assumptions, based on external market trends and Management’s best estimates of entity‐specific risks, in assessing the hedge effectiveness prospectively throughout the hedging relationship, if any. Hedge accounting is terminated when a hedging relationship is no longer highly effective, or when a forecast transaction is no longer probable. Differences in actual results may have an impact on the Corporation’s net earnings in subsequent periods. The Corporation does not use derivative financial instruments for speculative purposes. Provisions: The Corporation makes estimates of projected costs and timelines, and the probability of occurrence of the obligations in determining the amount for provisions. Provisions are reviewed at the end of each reporting period and are adjusted to reflect the best estimates. Refer to note 3 for further details. (ii) Judgments Leases: The Corporation uses judgment in determining the classification of its leased assets at inception of the lease. Refer to note 3 for further details. Evidence of asset impairment: The Corporation uses significant judgment in determining the existence of an event which indicates a negative effect on the estimated future cash flows associated with an asset. If applicable, the Corporation performs impairment tests on its CGUs to assess whether the carrying amounts of assets are recoverable. As described in the previous section, various estimates made by Management are used in the impairment tests. Hedge accounting: At the inception of a hedging relationship, if any, the Corporation uses judgment in determining the probability that a forecasted transaction will occur. 58 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 58 3 ‐ SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies used to prepare these consolidated financial statements are as follow: Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Corporation. Control exists when the Corporation is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. Subsidiaries are fully consolidated from the date that control begins until the date that control ceases. Transactions with subsidiaries are eliminated on a consolidation basis. The Corporation’s principal subsidiaries owned at 100% as at December 31, 2016 are as follows: 370071 Alberta Ltd. FinishMaster, Inc. FinishMaster Services, Inc. Uni‐Sélect Eastern Inc. Uni‐Select Luxembourg S.à r.l. Uni‐Select Pacific Inc. Uni‐Select Prairies Inc. Uni‐Select Purchases, G.P. Uni‐Sélect Québec Inc. Uni‐Select USA Holdings, Inc. (ii) Equity investments (joint ventures) Joint ventures are entities over which the Corporation exercises joint control, whereby the parties have rights to the net assets of the arrangement. Strategic financial and operating decisions about the relevant activities of the joint arrangement require unanimous consent of the parties. Joint ventures, if any, are accounted for using the equity method. Business combinations The Corporation applies the acquisition method in accounting for business acquisitions. The consideration transferred by the Corporation to obtain control of a subsidiary is calculated as the sum of the fair values, at the acquisition date, of the assets transferred, liabilities incurred and equity interests issued by the Corporation, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred. The Corporation recognizes identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have previously been recognized in the acquiree’s financial statements prior to the acquisition. Assets acquired and liabilities assumed are measured at their acquisition‐date estimated fair values. Goodwill is measured at the acquisition date as the fair value of the consideration transferred including the recognized amount of any non‐controlling interest in the acquiree, less the net recognized amount (generally the fair value) of the identifiable assets acquired and liabilities assumed. When the net result is negative, a bargain purchase gain is recognized immediately in net earnings. Foreign currency translation (i) Foreign currency transactions Foreign currency transactions are initially recorded in the functional currency of the related entity (note 2) using the exchange rate prevailing at the date of the transaction. Assets and liabilities denominated in foreign currencies are translated using closing exchange rates. Any exchange rate differences are recognized in net earnings except for those relating to qualifying cash flow hedges, which are deferred under other comprehensive income (“OCI”) in equity. (ii) Foreign operations Assets and liabilities of foreign operations whose functional currency is other than the presentation currency (note 2) are translated into US dollars using closing exchange rates. Revenues and expenses are translated using average exchange rates for the period. Foreign currency translation differences are recognized and presented under OCI in equity. The exchange rates used in the preparation of the consolidated financial statements were as follows: Year ended December 31,
2016 2015
US$0.74 for C$1 US$0.72 for C$1
US$0.75 for C$1 US$0.78 for C$1
Exchange rate as at year‐end Average exchange rate for the year 2016 ANNUAL REPORT UNI-SELECT 59
2016 ANNUAL REPORT UNI‐SELECT 59 3 ‐ S IGNIFIC ANT AC CO U NTING PO LI CI ES ( C ONT I NUE D ) Sales recognition The Corporation recognizes sales upon shipment of goods at the fair value of the consideration received or receivable, net of right of return provisions and guarantees and other trade and volume discounts, when the significant risks and rewards of ownership have been transferred to the buyer, there is no continuing management involvement with the goods, recovery of the consideration is probable and the amount of revenue can be measured reliably. The Corporation offers its customers a right of return on the sale of goods and certain guarantees. At the time of sales recognition, the Corporation records provisions for the right of return and guarantees which are based on the Corporation’s historical experience and Management’s assumptions. Inventory Inventory consists of finished goods and is valued at the lower of cost and net realizable value. Cost is determined using the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated selling costs. Incentives granted to customers The Corporation provides cash, inventory and equipment incentives to certain customers as consideration for multi‐year purchase commitments (“contracts”). These incentives are recorded at cost and are amortized, contract by contract, as a reduction of sales, on a straight‐line basis over the lesser of the contract term or 48 months, corresponding to the average duration of the contracts. In the event that a customer breaches the commitment, the remaining unamortized book value of the incentive, net of liquidated damages to be received, is immediately recorded as other expenses in net earnings. Property and equipment Property and equipment is measured at its cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to acquiring the asset and preparing the asset for its intended use. The cost less residual value of the property and equipment is depreciated over the estimated useful lives in accordance with the following methods and periods: Paving Buildings Furniture and equipment Computer equipment and system software Automotive equipment Leasehold improvements Vehicles under finance leases Methods
Periods / Rate
Diminishing balance Straight‐line and diminishing balance Straight‐line and diminishing balance Straight‐line and diminishing balance Straight‐line and diminishing balance Straight‐line Straight‐line and diminishing balance 8%
30 to 40 years / 5%
7 to 10 years / 20%
3 to 5 years / 30%
5 years / 30%
Lease term
Lease term / 30%
Depreciation methods, useful lives and residual values are reviewed at each reporting date. Intangible assets For internally‐generated intangible assets, the Corporation records the costs directly attributable to the acquisition and development of an enterprise resource planning software (“ERP”) and the corresponding borrowing costs. In order to accurately reflect the pattern of consumption of the expected benefits, the Corporation amortizes its software and related costs on a straight‐line basis over a 10‐year period. The amortization period begins when the asset is available for its intended use and ceases when the asset is classified as held for sale or is derecognized. Trademarks, which were all acquired as a result of business acquisitions, are determined as having indefinite useful lives based on the prospects for long‐term profitability and the overall positioning of the trademarks on the market in terms of notoriety and sales volume. They are measured at cost less accumulated impairment losses and are not amortized. Other intangible assets, including those acquired as a result of business acquisitions, are measured at cost less accumulated amortization and accumulated impairment losses, and are amortized over their estimated useful lives according to the following methods and periods: Methods
Periods
Straight‐line Straight‐line and diminishing balance 4 to 20 years
3 to 10 years / 30%
Customer relationships and others Software Amortization methods, useful lives and residual values are reviewed at each reporting date. 60 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 60 3 ‐ S IGNIFIC ANT AC CO U NTING PO LI CI ES ( C ONT I NUE D ) Goodwill Goodwill represents the future economic benefits arising from a business combination that are not individually identified and separately recognized. Goodwill is measured at cost less accumulated impairment losses and is not amortized. Borrowing costs Borrowing costs directly attributable to the development of the ERP software (i.e. qualifying asset), if any, are capitalized as part of the cost of that intangible asset until it is substantially ready for its intended use. Otherwise, borrowing costs are recognized in net earnings using the effective interest method. Impairment of assets Property and equipment and intangible assets with finite lives are reviewed at each reporting date to determine whether events or changes in circumstances indicate that the carrying amount of the asset or related CGU may not be recoverable. If any such indication exists, then the assets’ or CGU’s recoverable amount is estimated. Intangible assets with indefinite lives, specifically the goodwill and trademarks, are tested for impairment annually or more frequently if events or circumstances indicate that they are impaired. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre‐tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets. For the purposes of goodwill impairment testing, goodwill acquired in a business combination is allocated to the CGU, or the groups of CGUs, that is expected to benefit from the synergies of the combination. This allocation is subject to an operating segment ceiling test and reflects the lowest level at which goodwill is monitored for internal reporting purposes. An impairment loss is recognized if the carrying amount of an asset or CGU exceeds its estimated recoverable amount. The data used for impairment testing procedures are directly linked to the Corporation’s latest approved budget and strategic plan. Discount factors are determined individually for each CGU and reflect their respective risk profiles as assessed by Management. Impairment losses are recognized in net earnings. Impairment losses recognized with respect to a CGU are allocated first to reduce the carrying amount of any goodwill, and then to reduce the carrying amounts of the other assets of a CGU on a pro‐rata basis. An impairment loss with respect to goodwill, if any, cannot be reversed. For other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss with respect to other assets is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss with respect to other assets is reversed only to the extent that the assets’ carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Leases Leases in terms of which the Corporation assumes substantially all the risks and rewards of ownership are classified as finance leases. On initial recognition, assets acquired under finance leases are recorded in “Property and equipment” at the lower of the fair value of the asset and the present value of the minimum lease payments. A corresponding liability is recorded as a finance lease obligation within “Long‐term debt”. In subsequent periods, the asset is depreciated over the estimated useful life and interest on the obligation is recorded in “Finance costs, net” in the consolidated statements of earnings. Other leases are classified as operating leases and the leased assets are not recognized in the Corporation’s consolidated statements of financial position. Payments made under operating leases are recognized in net earnings on a straight‐line basis over the term of the lease. 2016 ANNUAL REPORT UNI-SELECT 61
2016 ANNUAL REPORT UNI‐SELECT 61 3 ‐ S IGNIFIC ANT AC CO U NTING PO LI CI ES ( C ONT I NUE D ) Income taxes Income tax expense comprises current and deferred tax. Current taxes and deferred taxes are recognized in net earnings except to the extent that they relate to a business combination, or items recognized directly in equity or in OCI. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable with respect to previous years. Deferred tax assets and liabilities for financial reporting purposes are determined according to differences between the carrying amounts and tax bases of assets and liabilities. They are measured by applying enacted or substantively enacted tax rates and laws at the reporting date for the years in which the temporary differences are expected to reverse. Deferred tax assets are recognized to the extent that it is probable that the underlying tax loss or deductible temporary difference will be utilised against future taxable income. Deferred tax liabilities are generally recognised in full, although IAS 12, “Income taxes” specifies limited exemptions. However, deferred taxes are not recognized on the initial recognition of goodwill or on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred taxes on temporary differences associated with investments in subsidiaries and joint ventures are not recognized if the reversal of these temporary differences can be controlled by the Corporation and it is improbable that reversal will occur in the foreseeable future. Deferred taxes on temporary differences associated with investments in subsidiaries and joint ventures, if any, are reassessed at each reporting date and are recognized to the extent that it has become probable that reversal will occur in the foreseeable future. Provisions A provision is recognized if, as a result of a past event, the Corporation has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period. The Corporation’s main provisions are related to restructuring charges, including site decommissioning costs, employee termination benefits and onerous lease obligations. Restructuring charges are recognized when the Corporation has put in place a detailed restructuring plan which has been communicated in sufficient detail to create an obligation. Restructuring charges include only costs directly related to the restructuring plan, and are measured at the best estimate of the amount required to settle the Corporation’s obligations. Subsequent changes in the estimate of the obligation are recognized in the Corporation’s consolidated statements of earnings. Short‐term employee benefits Short‐term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short‐term cash bonus or incentive plans if the Corporation has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be reliably estimated. Stock‐based compensation Equity‐settled common share stock option plan The compensation expense is measured as the fair value at the grant date using the trinomial option pricing model, and is recognized over the vesting period, with a corresponding increase to contributed surplus within equity. Forfeitures and cancellations are estimated at the grant date, and subsequently reviewed at each reporting date. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that are expected to meet the related service conditions at the vesting date. When the stock options are exercised, share capital is credited by the sum of the consideration paid and the related portion previously recorded in contributed surplus. Cash‐settled stock‐based compensation plans The Corporation has two cash‐settled stock‐based compensation plans composed of a Deferred Share Unit Plan (“DSU Plan”) and a Performance Share Unit Plan (“PSU Plan”). Under these plans, the fair value of the liability is measured as the number of units expected to vest multiplied by the fair value of one unit, which is based on the market price of the Corporation’s common shares. The compensation expense and corresponding liability are recognized over the vesting period, if any, and are revalued at each reporting date until settlement, with any changes in the fair value of the liability recognized in net earnings. The Corporation has entered into equity swap agreements in order to manage common shares market price risk relating to the DSUs and PSUs. 62 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 62 3 ‐ S IGNIFIC ANT AC CO U NTING PO LI CI ES ( C ONT I NUE D ) Post‐employment benefit obligations Defined‐contribution plans Contributions to the plans are recognized as an expense in the period that employee services are rendered. Defined benefit plans The Corporation has adopted the following policies for defined benefit plans: - The Corporation’s net obligation with respect to defined benefit pension plans is calculated by estimating the value of future benefits that employees have earned in return for their service in the current and prior periods less the fair value of any plan assets; - The cost of pension benefits earned by employees is actuarially determined using the projected unit credit method. The calculations reflect Management’s best estimates of salary increases, retirement ages and mortality rates of members and discount rate; - When the benefits of a plan are improved, the benefit relating to past service by employees is recognized immediately in net earnings; - Remeasurements comprising of actuarial gains and losses, the effect of the limit of the asset, the effect of minimum funding requirements and the return on plan assets in excess of interest income are recognized immediately in OCI and retained earnings. The current and past service costs related to the defined benefit pension plans are recorded within “Employee benefits”. The net interest income or expense on the net asset or obligation is recorded within “Finance costs, net”. Financial instruments Non derivative financial instruments Financial assets and liabilities are recognized when the Corporation becomes a party to the contractual provisions of the financial instrument. Financial assets and liabilities are initially measured at fair value plus transaction costs and their subsequent measurement depends on their classification. The classification depends on the objectives set forth when the financial instruments were purchased or issued, their characteristics and their designation by the Corporation. The Corporation has made the following classifications: - Loans and receivables are financial assets with fixed or determinable payments that are not quoted on an active market. Cash, cash held in escrow, trade receivables and advances to merchant members are classified as loans and receivables. After initial recognition, these are measured at amortized cost using the effective interest method, less any impairment. - Trade and other payables, balance of purchase price, dividends payable, long‐term debt (except finance leases), and merchant members’ deposits in the guarantee fund are classified as liabilities measured at amortized cost. Subsequent valuations are recorded at amortized cost using the effective interest method. Financial assets are derecognized when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognized when it is extinguished, discharged, cancelled or expired. All financial assets except for those measured at fair value through net earnings are subject to review for impairment at least at each reporting date. A financial asset is impaired if objective evidence indicates that an event has occurred after the initial recognition of the asset having a negative effect on the estimated future cash flows of that asset that can be reliably estimated. An impairment loss with respect to a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Derivative financial instruments and hedge accounting The Corporation uses derivative financial instruments to manage interest rate risk, foreign exchange risk and common share market price risk. The Corporation does not use financial instruments for trading or speculative purposes. Some of the derivative financial instruments are designated as hedging instruments. On initial designation of the hedge, the Corporation formally documents the relationship between the hedging instruments and hedged items, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. At the inception of the hedge relationship and on an ongoing basis, the Corporation assesses if the hedging instruments are expected to be “highly effective” in offsetting the changes in the cash flows of the respective hedged items during the period for which the hedge is designated. Cash flow hedges Derivatives (interest rate swap agreements), if any, are used to manage the floating interest rate of the Corporation’s total debt portfolio and related overall borrowing cost. Derivatives are recognized initially at fair value and attributable transaction costs are recognized in net earnings as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. 2016 ANNUAL REPORT UNI-SELECT 63
2016 ANNUAL REPORT UNI‐SELECT 63 3 ‐ S IGNIFIC ANT AC CO U NTING PO LI CI ES ( C ONT I NUE D ) When a derivative is designated as a hedging instrument for a hedge of changes in cash flows attributable to a particular risk associated with a highly probable forecast transaction that could affect income, the effective portion of changes in the fair value of the derivative is recognized in OCI and presented in the accumulated changes in the fair value of derivative financial instruments designated as cash flow hedges in equity. The amount recognized in OCI is removed and included in net earnings in the same period as the hedged cash flows affect net earnings, under the same line item. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in net earnings. The Corporation considers that its derivative financial instruments are effective as hedges, both at inception and over the term inception and over the term of the instrument, as for the entire term to maturity, the notional principal amount and the interest rate basis in the instruments all match the terms of the debt instrument being hedged. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in OCI and presented in accumulated changes in the fair value of derivative financial instrument designated as cash flow hedges remains in equity until the forecasted interest expense affects net earnings. If the forecasted interest expense is no longer expected to occur, then the balance in OCI is recognized immediately in net earnings. In other cases, the amount recognized in OCI is transferred to net earnings in the same period that the hedged item affects net earnings. Hedge of net investments in foreign operations The Corporation applies hedge accounting to foreign currency translation differences arising between the functional currency of the foreign operation and the parent entity’s functional currency. Foreign currency differences arising on the translation of the debt designated as a hedge of net investments in foreign operations are recognized in OCI to the extent that the hedge is effective, and are presented within equity in the cumulative translation account balance. To the extent that the hedge is ineffective, such differences are recognized in net earnings. When the hedged portion of a net investment is reduced, the relevant amount in the cumulative translation account is transferred to net earnings as part of the profit or loss on partial or on complete disposal. The Corporation elects to exclude from a partial disposal of a foreign operation the repayments of loans forming part of the net investment in a foreign operation. Foreign exchange gains or losses arising on a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future, and which in substance is considered to form part of the net investment in the foreign operation, are recognized in OCI in the cumulative amount of foreign currency translation differences. Hedge of foreign exchange risk Forward contracts are used in order to manage foreign exchange risk. These derivatives are not designated for hedge accounting and are measured at fair value at the end of each period. Fair value variances are recognized in the consolidated statements of earnings, and are presented under “Other operating expenses” with a corresponding asset or liability for derivative financial instruments in the consolidated statements of financial position. Pursuant to the agreement, the Corporation generates offsetting cash flows related to the underlying position with respect to the amount and timing of forecasted foreign currency transactions. The net effect of the forward contracts partly offset fluctuations in currency rates impacting the foreign exchange gains/losses mainly resulting from purchases in currencies other than the respective functional currencies of the Corporation. Hedge of share‐based payments cost Equity swap agreements are used in order to manage common shares market price risk. These derivatives are not designated for hedge accounting and are measured at fair value at the end of each period. Fair value variances are recognized in the consolidated statements of earnings, and are presented under “Employee benefits” with a corresponding asset or liability for derivative financial instruments in the consolidated statements of financial position. Pursuant to the agreement, the Corporation receives the economic benefit of dividends and share price appreciation while providing payments to the financial institution’s cost of funds and any share price depreciation. The net effect of the equity swaps partly offset movements in the Corporation’s share price impacting the cost of the DSU and the PSU plans. 64 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 64 3 ‐ S IGNIFIC ANT AC CO U NTING PO LI CI ES ( C ONT I NUE D ) Accumulated other comprehensive income Cumulative translation account The cumulative translation account comprises all foreign currency differences arising from the translation of the financial statements of Canadian operations to the Corporation’s presentation currency, as well as from the translation of debt designated as a hedge of the Corporation’s net investment in a foreign operation, if any. Accumulated changes in the fair value of derivative financial instrument designated as cash flow hedge The hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments, if any, related to hedged transactions that have not yet been settled. Future accounting changes At the date of authorization of these consolidated financial statements, certain new standards, amendments and interpretations to existing standards have been published by the International Accounting Standards Board (“IASB”) but are not yet effective, and have not been adopted earlier by the Corporation. Information on new standards, amendments and interpretations that are expected to be relevant to the Corporation’s consolidated financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Corporation’s consolidated financial statements. Effective date – January 1, 2018 with earlier adoption permitted Revenues from contracts with customers In May 2014, the IASB and the Financial Accounting Standards Board (“FASB”) jointly issued IFRS 15 “Revenues from contracts with customers”, a converged standard on the recognition of revenue from contracts with customers. It supersedes the IASB’s current revenue recognition guidance including IAS 18 “Revenue”, IAS 11 “Construction Contracts”, and related interpretations. IFRS 15 provides a single principle‐based five‐step model to use when accounting for revenue arising from contracts with customers. The impact of this new standard is currently being assessed and the Corporation does not expect to have significant impact on the consolidated financial statements upon its adoption. Financial instruments In July 2014, the IASB issued a complete and final version of IFRS 9 “Financial Instruments”, replacing the current standard on financial instruments (IAS 39). IFRS 9 introduces a single, principle‐based approach for the classification of financial assets, driven by the nature of cash flows and the business model in which an asset is held. IFRS 9 also provides guidance on an entity’s own credit risk relating to financial liabilities and has modified the hedge accounting model to align the economics of risk management with its accounting treatment. The standard results in a single expected‐loss impairment model rather than an incurred losses model. The impact of this new standard is currently being assessed and the Corporation does not expect to have significant impact on the consolidated financial statements upon its adoption. Effective date – January 1, 2019 with earlier adoption permitted in certain circumstances Leases In January 2016, the IASB issued IFRS 16 “Leases”, replacing the current standard on leases (IAS 17). IFRS 16 eliminates the classification as an operating lease and requires lessees to recognize a right‐of‐use asset and a lease liability in the statement of financial position with exemptions permitted for short‐term leases and leases of low value assets. In addition, IFRS 16 changes the definition of a lease, sets requirements on how to account for the asset and liability (including complexities such as non‐lease elements, variable lease payments and options periods), changes the accounting for sale and leaseback arrangements and introduces new disclosure requirements. The Corporation is currently assessing the impact of this standard on its consolidated financial statements. 2016 ANNUAL REPORT UNI-SELECT 65
2016 ANNUAL REPORT UNI‐SELECT 65 4 ‐ RESTRUCTURING AND OTHER CHARGES The Corporation’s Board of Directors approved, in 2013, an internal strategic and operational plan (the “Action Plan”), which complemented the distribution network consolidation plan announced in 2012. The Action Plan included the closure and rightsizing of certain stores and warehouses, as well as the addition of two new facilities, among other initiatives. The plan ceased in June 2015, when the Corporation concluded the sale of substantially all the assets of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. announced in February 2015. In 2015, following the announcement of the agreement for the sale of these assets and in order to rightsize its corporate operations, the Corporation recognized restructuring and other charges consisting of severance charges of $4,918 and onerous contract charges of $2,876. The Corporation also recognized $440 to relocate certain locations for a total of restructuring and other charges of $8,234. As at December 31, 2016 and 2015, the variances in the provision for restructuring and other charges are detailed as follows: Balance, beginning of year Restructuring and other charges recognized during the year Provision used during the year Change in estimate (1) Sale of net assets Effects of fluctuations in exchange rates Balance, end of year (1)
Year ended
December 31,
2016
3,983
‐
(2,567)
(746)
‐
105
775
2015
6,724
8,234
(5,791)
(2,906)
(1,902)
(376)
3,983
In December 2016, the Corporation reviewed its remaining provisions and reflected a reduction of the restructuring and other charges in the consolidated statements of earnings of $746 for onerous contracts following the recent negotiations with its information technology suppliers. In June 2015, the Corporation reviewed its remaining provisions and reflected the following changes of estimates: a decrease of $1,056 for building decommissioning and a decrease of $1,850 for future rent obligations, resulting in a reduction of the restructuring and other charges in the consolidated statements of earnings of $2,906. 5 ‐ SALE OF NET ASSETS In 2015, following the announcement of the agreement for the sale of substantially all the assets of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. concluded in June 2015, the Corporation recognized impairment and transaction charges of $144,968. The charges included write‐off of assets (mainly software and customer relationships) for an amount of $65,398 and an impairment of a portion of the goodwill for an amount of $57,715. The Corporation has also recorded transaction‐related costs of $21,855. As of December 31, 2015, net cash proceeds amounted to $321,001, which was reflecting the Corporation’s obligation to reimburse a balance of sale price of $469, subsequently paid in January 2016. 66 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 66 6 ‐ FINANCE COSTS, NET Year ended
December 31,
Interest on long‐term debt Interest and accreted interest on convertible debentures (1) Amortization of financing costs Net interest expense on the long‐term employee benefit obligations Interest on merchant members’ deposits in the guarantee fund and others Reclassification of realized losses on derivative financial instruments designated as cash flow hedges to net earnings, and cancellation of swap Total finance costs Interest income from merchant members and others Total finance costs, net (1)
2016
3,652
‐
465
498
102
2015
3,763
252
577
815
106
‐
4,717
(233)
4,484
971
6,484
(478)
6,006
Refer to note 18 for further details. 7 ‐ DEPRECIATION AND AMORTIZATION Year ended
December 31,
Depreciation of property and equipment Amortization of intangible assets Total depreciation and amortization 8 ‐ 2016
7,113
8,849
15,962
2015
6,493
6,681
13,174
INCOME TAXES Income tax expense (recovery) Year ended December 31,
2016
Current tax expense (recovery) (5,680)
12,235
Deferred tax expense (recovery) Origination and reversal of temporary differences Total income tax expense (recovery) 33,817
28,137
(45,049)
(32,814)
2015
Reconciliation of the income tax expense (recovery) The following table presents a reconciliation of income taxes at the combined Canadian statutory income tax rates applicable in the jurisdictions in which the Corporation operates to the amount of reported income taxes in the consolidated statements of earnings: Year ended December 31,
Income taxes at the Corporation’s statutory tax rate – 26.90% (26.90% in 2015) Effect of tax rates in foreign jurisdictions Tax benefit from a financing structure Gain on foreign exchange Non‐deductible expenses and others Income tax expense (recovery) reported in the consolidated statements of earnings 2016
23,242
5,932
(4,019)
384
2,598
28,137
2015
(19,586)
(10,899)
(5,739)
5,059
(1,649)
(32,814)
2016 ANNUAL REPORT UNI-SELECT 67
2016 ANNUAL REPORT UNI‐SELECT 67 8 ‐ I NCOM E TAXES ( CON TINU E D) Recognized deferred tax assets and liabilities December 31, 2016
Non‐capital loss (gain) carryforwards Taxable income during the coming year Provisions and accrued charges, deductible in future years Property and equipment Long‐term employee benefit obligations Financing costs Provision for performance incentives Intangible assets and goodwill Capital loss (gain) on foreign exchange Others Income tax assets Non‐capital loss (gain) carryforwards Taxable income during the coming year Provisions and accrued charges, deductible in future years Property and equipment Long‐term employee benefit obligations Financing costs Cash flow hedges Provision for performance incentives Intangible assets and goodwill Capital loss (gain) on foreign exchange Others Income tax assets Opening balance
48,163
1,195
23,173
(2,512)
2,837
(273)
1,882
(15,253)
(5,309)
(1,424)
52,479
Opening balance
20,454
325
28,910
(19,013)
5,832
41
138
893
(22,816)
‐
(2,827)
11,937
Recognized Recognized in as part of Effects of Recognized other business fluctuations in net comprehensive combinations in exchange earnings
income
(note 11) rates
(29,339)
‐
‐ 485
(1,255)
‐
‐ 60
(14,180)
786
161
26
(111)
6,067
1,231
2,797
(33,817)
‐
‐
(745)
‐
‐
‐
‐
‐
(745)
‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Closing balance
19,309
‐
147
(94)
77
(11)
63
(865)
624
(45)
441
9,140
(1,820)
2,330
(258)
1,834
(10,051)
(3,454)
1,328
18,358
December 31, 2015
Recognized Recognized in as part of Effects of Recognized other business fluctuations in net comprehensive combinations in exchange Closing earnings
income
(note 11) rates
balance
29,384
‐
204 (1,879)
48,163
1,004
‐
‐ (134)
1,195
(5,623)
15,954
(2,379)
(338)
‐
1,225
8,235
(4,196)
1,783
45,049
‐
‐
(118)
‐
(138)
‐
‐
(1,534)
‐
(1,790)
‐ ‐ ‐ ‐ ‐ ‐ (919) ‐ ‐ (715) (114)
547
(498)
24
‐
(236)
247
421
(380)
(2,002)
23,173
(2,512)
2,837
(273)
‐
1,882
(15,253)
(5,309)
(1,424)
52,479
Consolidated statements of financial position presentation December 31,
2016
2015
Deferred tax assets 22,743
55,681
Deferred tax liabilities 4,385
18,358
3,202
52,479
68 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 68 9 ‐ EARNINGS (LOSS) PER SHARE The following table presents a reconciliation of basic and diluted earnings (loss) per share: Note Earnings (loss) per share basic Earnings (loss) per share diluted (1)
Year ended December 31,
2016
58,265
20 42,434,956
258,138
42,693,094
Net earnings (loss) attributable to shareholders considered for basic and diluted earnings (loss) per share Weighted average number of common shares outstanding for basic earnings (loss) per share Impact of the stock options (1) Weighted average number of common shares outstanding for diluted earnings (loss) per share 1.37
1.36
2015
(40,221)
42,777,589
‐
42,777,589
(0.94)
(0.94)
For the year ended December 31, 2016, 126,960 weighted average common shares issuable on the exercise of stock options were excluded from the calculation of diluted earnings per share as the exercise price of the options was higher than the average market price of the shares (347,672 in 2015 were excluded from the calculation of diluted loss per share as their inclusion would have had an anti‐dilutive effect). 10 ‐ INFORMATION INCLUDED IN CONSOLIDATED CASH FLOWS The changes in working capital are detailed as follows: Year ended December 31,
2016
(1,658)
(23,889)
4,954
40,880
(2,567)
17,720
Trade and other receivables Inventory Prepaid expenses Trade and other payables Provision for restructuring charges Total changes in working capital 2015
4,587
(47,623)
(6,397)
(21,084)
(5,791)
(76,308)
2016 ANNUAL REPORT UNI-SELECT 69
2016 ANNUAL REPORT UNI‐SELECT 69 11 ‐ BUSINESS COMBINATIONS During the year ended December 31, 2016, the Corporation acquired assets and liabilities of 7 companies operating in the United States (8 companies in 2015), 6 companies operating in Canada (5 companies in 2015) and acquired the shares of 1 company operating in Canada. In 2015, the Corporation also purchased the remaining interests in 3 joint ventures operating in Canada. Total cost of these acquisitions of $183,342 ($55,939 in 2015), net of the cash of the acquired businesses amounting to $12 ($1,730 in 2015) was preliminarily allocated to the acquired assets and liabilities based on their fair value. The aggregate fair value amounts recognized for each class of the acquirees’ assets and liabilities at the acquisition dates were as follows: Paint and Related Products
Automotive Products
December 31,
2016
2015
Total
Total
Trade and other receivables 13,191
2,912 16,103
8,974
Inventory 26,020
6,151 32,171
17,012
Property and equipment 3,074
874 3,948
3,356
Intangible assets 29,670
‐ 29,670
4,050
Goodwill 86,616
7,849 94,465
29,181
Other non‐current assets 9,484
550 10,034
1,969
Trade and other payables (1,270)
(3,049)
(7,888)
Deferred tax liabilities ‐
‐ ‐
Total cost 166,785
16,557 183,342
55,939
Balance of purchase price (2) (18,333)
(3,170) (21,503)
(6,851)
‐
148,452
‐ ‐
13,387 161,839
(1)
Fair value of non‐controlling equity interest in the acquirees that were held (3)
immediately before obtaining control Net disbursement (1)
(2)
(3)
(1,779) (715)
(8,267)
40,821
For tax purposes, goodwill is expected to be deductible. As at December 31, 2016, $11,331 of this balance of purchase price is held in escrow ($3,790 as at December 31, 2015). The purchase of the Corporation’s interest in 3 joint ventures generated net gains totaling $3,301 recognized in “Other operating expenses” for the year ended December 31, 2015. Those companies were acquired in the normal course of business, and the Corporation incurred $903 ($517 in 2015) of acquisition costs. Since their respective acquisition date, the acquisitions have contributed a total of $121,038 and $6,732 to sales and net earnings respectively ($33,049 and $2,017 in 2015). As at December 31, 2016, the Corporation finalized the purchase price allocation of all companies acquired in 2015, which resulted in a reclassification of $9,371 between goodwill and intangible assets and $125 between other current assets and goodwill (refer to note 15 for further details). 12 ‐ TRADE AND OTHER RECEIVABLES December 31,
Trade receivables Current portion of investments and advances to merchant members (note 13) Total trade and other receivables 70 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 70 2016
132,107
14,023
146,130
2015
112,012
11,600
123,612
13 ‐ INVESTMENTS AND ADVANCES TO MERCHANT MEMBERS December 31,
Incentives granted to customers Shares of companies Advances to merchant members (1) Total investments and advances to merchant members 2016
40,401
375
1,898
42,674
2015
22,896
604
2,182
25,682
Current portion of investments and advances to merchant members 14,023
11,600
Non‐current portion of investments and advances to merchant members 28,651
14,082
(1)
Interest rates varying between 0% and 5.7%, receivable in monthly instalments, maturing on various dates until 2021. 14 ‐ PROPERTY AND EQUIPMENT Balance, January 1, 2015 Additions Acquisitions through business combinations (note 11) Write‐offs (note 5) Land and
paving
Computer Furniture equipment and and system Automotive Leasehold Buildings equipment
software equipment improvements
Total
2,752
7,505
13,600
5,507
17,446 5,114
51,924
37
517
4,470
6,536
4,962 1,183
17,705
531
1,348
751
91
416 219
3,356
(23)
(598)
(716)
(1,239) (211)
(2,787)
Disposals (90)
(438)
(11,270)
(5,621)
(9,638) (3,815)
(30,872)
Depreciation (54)
(433)
(1,034)
(1,579)
(2,951) (442)
(6,493)
Effects of fluctuations in exchange rates ‐
(408)
(740)
(753)
Balance, December 31, 2015 2,768
7,736
Cost 3,038
15,361
21,853
(7,625)
(16,687)
2,768
7,736
5,166
60
387
2
Accumulated depreciation Net book value, end of year 2015 Additions Acquisitions through business combinations (note 11) (270)
‐
5,166
(130) (99)
(2,529)
8,866 1,949
19,478
20,186 10,921
90,837
(15,659)
(11,320) (8,972)
(60,533)
3,819
8,866 1,949
30,304
2,083
4,296
5,140 3,140
15,106
1,828
42
2,076 ‐
3,948
Disposals (79)
(235)
(31)
Depreciation (54)
(458)
(1,161)
Effects of fluctuations in exchange rates (399)
3,819
‐
(1,603)
30,304
(368) (2)
(715)
(3,264) (573)
(7,113)
80
157
130
49
25 11
452
Balance, December 31, 2016 2,775
7,589
8,015
6,603
12,475 4,525
41,982
Cost 3,105
15,694
26,222
24,084
25,725 14,116
108,946
(8,105)
(18,207)
(17,481)
(13,250) (9,591)
(66,964)
7,589
8,015
6,603
12,475 4,525
41,982
Accumulated depreciation Net book value, end of year 2016 (330)
2,775
The carrying values of leased assets, which are presented under “Automotive equipment”, were $9,672 as at December 31, 2016 ($7,843 as at December 31, 2015). 2016 ANNUAL REPORT UNI-SELECT 71
2016 ANNUAL REPORT UNI‐SELECT 71 15 ‐ INTANGIBLE ASSETS AND GOODWILL Intangible assets
Customer relationships Trademarks and others Software (2)
Balance, January 1, 2015 8,650
Goodwill
Total
52,548
72,358 133,556
192,496
Additions ‐
478
3,140 3,618
‐
Acquisitions through business combinations (note 11) ‐
4,050
‐ 4,050
29,181
(62,611)
(57,715)
Write‐offs and impairment (note 5) (750)
Disposals Amortization ‐
‐
Effect of fluctuations in exchange rates ‐
(6,145)
‐
(3,659)
(3,907) (3,907)
‐
(3,022) (6,681)
‐
(2,182) (2,670)
Balance, December 31, 2015 7,900
46,784
10,671 65,355
157,270
Cost 7,900
77,386
23,108 108,394
157,270
(1)
Accumulated amortization ‐
Net book value, end of year 2015 (488)
(55,716) (6,692)
(30,602)
(12,437) (43,039)
7,900
46,784
10,671 65,355
157,270
‐
Additions ‐
1,201
3,950 5,151
‐
Acquisitions through business combinations (note 11) 29,670
‐ 29,670
94,465
9,371
(9,246)
‐
Adjustments following the business combinations final purchase
price allocation (note 11) ‐
9,371
Amortization ‐
(6,404)
Effect of fluctuations in exchange rates ‐
110
350 460
1,318
Balance, December 31, 2016 7,900
80,732
12,526 101,158
243,807
Cost 7,900
117,754
27,799 153,453
243,807
(37,022)
(15,273) (52,295)
80,732
12,526 101,158
(1)
Accumulated amortization ‐
Net book value, end of year 2016 7,900
(1)
(2)
‐ (2,445) (8,849)
‐
‐
243,807
The weighted average amortization period of the intangible assets with useful lives is 5 years for software and 12 years for customer relationships and others. As at December 31, 2016, software includes the capitalized portion of costs and the accumulated amortization, amounting to $10,520 and $5,050 respectively ($10,171 and $3,880 at December 31, 2015), related to the acquisition and internal development of an ERP. Impairment testing for cash‐generating units containing goodwill and intangible assets with indefinite useful lives (trademarks) For the purpose of impairment testing, goodwill and trademarks are allocated to the Corporation’s two CGUs, Canada and United States, which represent the lowest level within the Corporation at which the goodwill and trademarks are monitored for internal management purposes. The recoverable amounts of the Corporation’s CGUs were based on their value in use and were determined with the assistance of independent valuation consultants. The carrying amounts of the units were determined to be lower than their recoverable amounts, and no impairment loss was recognized. Value in use was determined by discounting the future cash flows expected to be generated from the continuing use of the units. Value in use in 2016 was determined similarly as in 2015. The calculation of the value in use was based on the following key assumptions: - Cash flows were projected based on experience, actual operating results and the five‐year business plan in both 2016 and 2015. Cash flows for a further five‐year period were extrapolated using constant growth rates of 2.0% (2.0% in 2015) for both the Canadian operations and the US operations, which do not exceed the long‐term average growth rates for the industry. - Pre‐tax discount rates of 11.8% (11.6% in 2015) for the Canadian operations and 13.6% (13.4% in 2015) for the US operations were applied in determining the recoverable amount of the units. The discount rates were estimated based on experience and the industry’s weighted average cost of capital, which was based on a possible range of debt leveraging of 15% at market interest rates of 3.5% (4.1% in 2015) for the Canadian operations and 2.8% (3.4% in 2015) for the US operations. The key assumptions reflect Management’s assessment of future trends in the automotive aftermarket and are based on both external and internal sources. The sensitivity analysis indicated that no reasonable possible changes in the assumptions would cause the carrying amount of each CGU to exceed its recoverable amount. 72 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 72 16 ‐ STOCK‐BASED COMPENSATION The Corporation’s stock‐based compensation plans include an equity‐settled common share stock option plan, and cash‐settled plans consisting of a deferred share unit plan and a performance share unit plan. During the second quarter of 2016, the Corporation carried out a 2‐for‐1 stock split of its common shares. To reflect the effect of the stock split, information pertaining to stock‐based compensation has been retroactively restated, such as DSUs, PSUs and options. During the third quarter of 2016 and in the normal course of business, the Corporation entered into equity swap agreements (note 21). Common share stock option plan for management employees and officers The Corporation has a common share stock option plan for management employees and officers (the “stock option plan”) where a total of 3,400,000 shares have been reserved for issuance. Under the plan, the options are granted at the average closing price of the Corporation’s common shares on the TSX for the five trading days preceding the grant date. Options granted vest over a period of three years plus one day following the date of issuance and are exercisable over a period of no greater than seven years. For the year ended December 31, 2016, 126,960 options were granted to management employees and officers of the Corporation (514,678 for 2015), with an average exercise price of C$33.94 (C$15.32 in 2015). During the year, 105,810 options were exercised (1,066,430 for 2015), no options were forfeited (104,342 for 2015) and no options expired (same for 2015). As at December 31, 2016, options granted for the issuance of 392,778 common shares (371,628 as at December 31, 2015) were outstanding under the Corporation’s stock option plan, and 1,811,034 common shares (1,937,994 as at December 31, 2015) were reserved for additional options under the stock option plan. A summary of the Corporation’s stock option plan for the years ended December 31, 2016 and 2015 is presented as follows: 2016 Number of options
Outstanding, beginning of year Granted Exercised Forfeited Outstanding, end of year Exercisable, end of year 371,628
126,960
(105,810)
‐
392,778
127,829
2015
Weighted average exercise Number of price options
C$ 14.46 1,027,722
33.94 514,678
13.34 (1,066,430)
‐ (104,342)
21.06 371,628
19.41 26,874
Weighted average exercise price
C$
13.06
15.32
13.51
14.65
14.46
15.32
The range of exercise prices, the weighted average exercise prices and the weighted average remaining contractual life of the Corporation’s options are as follows: December 31, 2016
Exercisable price C$ 11.45 14.38 15.32 33.94 Number outstanding
14,886
55,500
195,432
126,960
392,778
Options outstanding
Options exercisable
Weighted average Weighted Weighted remaining average average contractual exercise Number
exercise life (years)
price exercisable
price
C$ C$
3.01
11.45 14,886
11.45
4.01
14.38 11,190
14.38
5.01
15.32 70,013
15.32
6.01
33.94 31,740
33.94
5.11
21.06 127,829
19.41
2016 ANNUAL REPORT UNI-SELECT 73
2016 ANNUAL REPORT UNI‐SELECT 73 16 ‐ S TOC K B AS ED‐ COMPENSATION ( CONT I NU E D) December 31, 2015
Exercisable price C$ 11.45 14.38 15.32 Number outstanding
61,056
88,624
221,948
371,628
Options outstanding
Options exercisable
Weighted Weighted average Weighted remaining average average contractual exercise Number
exercise life (years)
price exercisable
price
C$ C$
4.01
11.45 ‐
‐
5.01
14.38 ‐
‐
6.01
15.32 26,874
15.32
5.44
14.46 26,874
15.32
For the year ended December 31, 2016, compensation expense of $672 ($1,164 for 2015) was recorded in the “Net earnings (loss)”, with the corresponding amounts recorded in “Contributed surplus”. The fair value of the stock options granted on January 4, 2016 was determined using the Trinomial option pricing model. The assumptions used in the calculation of their fair value were as follows: Grant date fair value Dividend yield Expected volatility Forfeiture rate Risk‐free interest rate Expected life Exercise price Share price C$ % % % % years C$ C$ 2016
2015
33.94
0.94
24.69
6.67
1.02
6.99
33.94
33.94
15.32
1.98
26.24
6.67
1.42
6.99
15.32
15.32
The expected volatility is estimated for each award tranche, taking into account the average historical volatility of the share price over the expected term of the options granted. Deferred share unit plan For the year ended December 31, 2016, the Corporation granted 45,149 DSUs (60,204 DSUs for 2015) and redeemed 84,323 DSUs (49,764 for 2015). Compensation expense of $670 ($3,057 in 2015) was recorded during the year, and 142,256 DSUs were outstanding as at December 31, 2016 (181,430 as at December 31, 2015) for which the compensation liability was $3,141 ($4,476 as at December 31, 2015). The fair value of the equity swap agreement as at December 31, 2016 is a liability of $182. Performance share unit plan For the year ended December 31, 2016, the Corporation granted 76,282 PSUs (223,230 PSUs for 2015) and redeemed 98,684 PSUs (329,660 for 2015). Compensation expense of $3,787 was recorded during the year ($1,829 in 2015), and 216,036 PSUs were outstanding as at December 31, 2016 (238,438 PSUs as at December 31, 2015) for which the compensation liability was $4,959 ($3,009 as at December 31, 2015). The fair value of the equity swap agreement as at December 31, 2016 is a liability of $205. 17 ‐ POST‐EMPLOYMENT BENEFIT OBLIGATIONS The Corporation sponsors both defined benefit and defined contribution pension plans. The defined benefit plans include a basic registered pension plan, a registered pension plan for senior management and a non‐registered supplemental pension plan for certain members of senior management. The benefits under the Corporation’s defined benefit plans are based on the years of service and the final average salary. The two registered pension plans are funded by the Corporation and the members of the plan. Employee contributions are determined according to the members’ salaries and cover a portion of the benefit costs. The employer contributions are based on the actuarial evaluation which determines the level of funding necessary to cover the Corporation’s obligations. The Corporation also contributes to various other plans that are accounted for as defined contribution plans. The total expense for the Corporation’s defined contribution plan was $1,635 for the year ended December 31, 2016 ($1,697 for 2015). 74 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 74 17 ‐ P OST ‐ EM PLO YM EN T B EN EFIT OBLIGATIONS ( CO NT I NU E D) Defined benefit pension plans An actuarial valuation of the defined benefit pension plans is obtained at least every three years. The defined benefit plans expose the Corporation to actuarial risks such as longevity risk, currency risk, interest rate risk and investment risk. The present value of the defined benefit plan obligation is calculated by reference to the best estimate of the mortality of plan members. Longevity risk exists because an increase in the life expectancy of plan members will increase the plan obligation. A change in the valuation of the plans’ foreign assets due to changes in foreign exchange rates exposes the plans to currency risk. A decrease in the bond interest rate used to calculate the present value of the defined benefit obligation will increase the plan obligation. This interest rate risk will be partially offset by an increase in return on the plans’ fixed income funds. Investment risk occurs if the return on plan assets is lower than the corporate bond interest rate used to determine the discount rate. Currently, the plans have a balanced investment mix of 52.6% in equity funds, 20.3% in fixed income funds and 27.1% in other funds. Due to the long‐term nature of plans’ defined benefit obligations, the Corporation considers to be appropriate that a reasonable portion of the plans’ assets should be invested in equity, fixed income and other funds to generate additional long‐term return. Information regarding the status of the obligation and plan assets of the defined benefit plans is as follows: 2016
2015
53,154
2,347
802
2,253
(3,566)
58,740
2,888
593
2,271
(1,561)
(463)
(606)
1,812
55,733
665
(201)
(10,241)
53,154
Defined benefit obligations Balance, beginning of year Current service cost Employee contributions Interest expense Benefits paid Remeasurements: Actuarial losses (gains) from changes in financial assumptions Actuarial gains from experience adjustments Effects of movements in exchange rates Balance, end of year 2016
2015
Plan assets Fair value, beginning of year Interest income Employer contributions Employee contributions Benefits paid Administration fees Return on plan assets (excluding amounts included in interest income) Effects of movements in exchange rates Fair value, end of year 42,606
1,755
2,630
802
(3,566)
(236)
1,616
1,424
47,031
37,069
1,456
8,928
593
(1,334)
(219)
25
(3,912)
42,606
2016 ANNUAL REPORT UNI-SELECT 75
2016 ANNUAL REPORT UNI‐SELECT 75 17 ‐ P OST ‐ EM PLO YM EN T B EN EFIT OBLIGATIONS ( CO NT I NU E D) December 31,
Components of plan assets Investments in equity funds Investments in fixed income funds Investments in other funds 2016
% 52.6 20.3 27.1 100.0 2015
%
52.5
16.0
31.5
100.0
The net obligation is presented in “Long‐term employee benefit obligations” in the consolidated statements of financial position. Fair value of plan assets Defined benefit obligations Long‐term employee benefit obligations December 31,
2016
47,031
(55,733)
(8,702)
2015
42,606
(53,154)
(10,548)
The expense for defined benefit plans recognized in “Employee benefits” and in “Finance costs, net” in the consolidated statements of earnings is as follows: Current service cost Net interest expense Administration fees Defined benefit plans expense Year ended December 31,
2016
2,347
498
236
3,081
2015
2,888
815
219
3,922
Remeasurements of long‐term employee benefit obligations recognized in OCI are as follows: Actuarial losses (gains) from changes in financial assumptions Actuarial gains from experience adjustments Return on plan assets (excluding amounts included in interest income)
76 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 76 Year ended December 31,
2016
(463)
(606)
(1,616)
(2,685)
2015
665
(201)
(25)
439
17 ‐ P OST ‐ EM PLO YM EN T B EN EFIT OBLIGATIONS ( CO NT I NU E D) The significant actuarial assumptions at the reporting date are as follows (weighted average assumptions as at December 31): Discount rate Rate of compensation increase Average life expectancies Male, 45 years of age at reporting date Female, 45 years of age at reporting date Male, 65 years of age at reporting date Female, 65 years of age at reporting date % % years years years years December 31,
2016
4.00
3.50
2015
3.95
3.50
87.7
90.0
86.6
89.1
87.6
90.0
86.5
89.0
For the year ended December 31, 2017, the Corporation expects to make contributions of approximately $2,091 for its defined benefit pension plans. The significant actuarial assumptions for the determination of the defined benefit obligation are the discount rate, the rate of compensation increase and the average life expectancy. The calculation of the net defined benefit obligation is sensitive to these assumptions. The following table summarizes the effects of the changes in these actuarial assumptions of the defined benefit obligation: Discount rate Increase of 1% Decrease of 1% Rate of compensation Increase of 0.5% Decrease of 0.5% Average life expectancies Increase of 10% Decrease of 10% December 31,
2016
%
2015
%
(14.2)
18.8
(14.6)
19.4
1.9
(1.7)
2.4
(1.9)
1.9
(2.1)
1.9
(2.0)
2016 ANNUAL REPORT UNI-SELECT 77
2016 ANNUAL REPORT UNI‐SELECT 77 18 ‐ CREDIT FACILITIES, LONG‐TERM DEBT AND CONVERTIBLE DEBENTURES Revolving credit facility On May 20, 2016, the Corporation amended the terms of its $400,000 unsecured long‐term revolving credit facility and extended its maturity to June 30, 2020. This facility is available in Canadian or US dollars and can be repaid at any time without penalty. The variable interest rates are based on the LIBOR in US dollars, bankers’ acceptances and prime rates plus the applicable margins. Letter of credit facility On June 29, 2016, the Corporation amended the terms of its $20,000 unsecured letter of credit facility and extended its maturity to June 30, 2020. This facility is available for the issuance of Canadian and US dollars letters of credit. The variable interest rates are based on the LIBOR in US dollars, bankers’ acceptances and prime rates plus the applicable margins. The Corporation’s letters of credit have been issued to guarantee the payments of certain employee benefits and certain inventory purchases by subsidiaries. The letters of credit are not recorded as liabilities in the Corporation’s long‐term debt as the related guarantees have been recorded directly in the Corporation’s consolidated statements of financial position, if applicable. As at December 31, 2016, $10,267 of letters of credit have been issued ($14,854 in 2015). Long‐term debt Effective Maturity interest rate
Revolving credit facility, variable rates – $125,407 ($84,200 as at December 31, 2015) Finance leases, variable rates Others Instalments due within a year Long‐term debt 2020
‐
2021
2.07%
to 4.58%
‐
‐
Current
portion December 31,
2016
2015
3,722 4 3,726 123,841
10,439
18
134,298
3,726
130,572
82,426
7,898
20
90,344
2,622
87,722
Convertible debentures In 2011, the Corporation issued convertible unsecured subordinated debentures, which were bearing interest at a rate of 5.90% per annum, payable semi‐annually on January 31 and July 31 of each year. The debentures were convertible, at the option of the holder, into common shares of the Corporation at a price of C$41.76 per share pre‐split, representing a conversion rate of 23.9 common shares per C$1,000 principal amount of convertible debentures. The convertible debentures had a January 31, 2016 maturity date, and may be redeemed by the Corporation, in certain circumstances, after January 31, 2014. In accordance with the terms established at the issuance of the debentures, the Corporation redeemed, in February 2015, its convertible debentures for cancellation, at par, for an aggregate principal amount of C$51,750. Until the redemption, the effective annual interest rate was 8.16%. The equity component of the debentures, initially determined as the difference between the fair value of the convertible debentures as a whole and the fair value of the liability component, was reclassified to retained earnings for a total amount of $1,687.
Minimum future payments Principal repayments due on long‐term debt (excluding finance leases) and present value of the Corporation’s future lease obligations as of December 31, 2016 are presented as follows: Long‐term debt (excluding finance leases) Present value of future lease obligations 2017
2018
2019
2020
4
4
4
123,844 3
‐
3,722
2,956
2,050
1,272 439
‐
78 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 78 2021 Thereafter
19 ‐ MERCHANT MEMBERS’ DEPOSITS IN THE GUARANTEE FUND Merchant members are required to contribute to a fund to guarantee a portion of their amounts due to the Corporation. The deposit amounts are based on each merchant member’s purchase volume, and bear interest at the prime rate less 1%. As at December 31, 2016, the interest rate in effect was 2.7% (2.7% at December 31, 2015). The variation in deposits is as follows: Total merchant members’ deposits in the guarantee fund Instalments due within a year Non‐current portion of the merchant members’ deposits in the guarantee fund December 31,
2016
5,410
91
5,319
2015
5,613
82
5,531
20 ‐ SHARE CAPITAL During the second quarter of 2016, the Corporation carried out a 2‐for‐1 stock split of its common shares. To reflect the effect of the stock split, information pertaining to common shares has been retroactively restated. Authorized The Corporation’s capital structure includes an unlimited number of common shares, without par value, and an unlimited number of preferred shares, without par value, issuable in series with the following characteristics: (i) Common shares Each common share entitles the holder thereof to one vote and to receive dividends in such amounts and payable at such time as the Board of Directors shall determine after the payment of dividends to the preferred shares. In the event of a liquidation, dissolution or winding‐up, the holders shall be entitled to participate in the distribution of the assets after payment to the holders of the preferred shares. (ii) Preferred shares The preferred shares, none of which are issued and outstanding, are non‐voting shares issuable in series. The Board of Directors has the right, from time to time, to fix the number of, and to determine the designation, rights, privileges, restrictions and conditions attached to the preferred shares of each series. The number of preferred shares that may be issued and outstanding is limited to a number equal to no more than 20% of the number of common shares issued and outstanding at the time of issuance of any preferred shares. The holders of any series of preferred shares are entitled to receive dividends and have priority over common shares in the distribution of the assets in the event of a liquidation, dissolution or winding‐up. December 31,
Issued and fully paid Balance, beginning of year (43,135,758 common shares (42,431,518 in 2015)) Issuance of 105,810 common shares on the exercise of stock options (1,066,430 in 2015) Repurchase and cancellation of 1,027,390 common shares (362,190 in 2015) Balance, end of year (42,214,178 common shares (43,135,758 in 2015)) 2016
2015
97,864
1,090
(2,030)
96,924
87,238
11,315
(689)
97,864
Repurchase and cancellation of shares On August 10, 2016, the Corporation announced that it received approval from the TSX to renew its intention to purchase by way of a new normal course issuer bid (“NCIB”), for cancellation purposes, up to 2,000,000 common shares, representing 4.7% of its 42,231,178 issued and outstanding common shares as of August 1, 2016 over a twelve‐month period beginning on August 17, 2016 and ending on August 16, 2017. In connection with the NCIB, the Corporation established an Automatic Purchase Plan (“APP”), enabling itself to provide standard instructions regarding the repurchase and cancellation of common shares during self‐imposed blackout periods. Such repurchase for cancellation will be determined by the broker in its sole discretion based on the Corporation’s parameters. During the year ended December 31, 2016, 1,027,390 common shares (362,190 for 2015) were repurchased for a cash consideration of $22,043 ($7,747 in 2015) including a share repurchase and cancellation premium of $20,013 ($7,058 in 2015) applied as a reduction of retained earnings. Issuance of shares During the year ended December 31, 2016, the Corporation issued 105,810 (1,066,430 for 2015) common shares at the exercise of stock options for a cash consideration of $1,090 ($11,315 for 2015). The weighted average price of the exercise of stock options was C$13.34 for the year (C$13.51 for 2015). 2016 ANNUAL REPORT UNI-SELECT 79
2016 ANNUAL REPORT UNI‐SELECT 79 20 ‐ S H AR E CA PIT AL Dividends A total of C$0.335 per common share was declared by the Corporation for the year ended December 31, 2016 (C$0.315 for 2015). 21 ‐ FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The classification of financial instruments as well as their carrying amounts and fair values, are summarized as follows: December 31, 2016
Carrying amount
Financial assets classified as loans and receivables Cash Cash held in escrow Trade receivables Advances to merchant members Fair value
December 31, 2015
Carrying
amount
Fair
value
Level 3
22,325
14,486
132,107
1,898
22,325
14,486
132,107
1,898 Level 3 91,432
3,790
112,012
2,182
91,432
3,790
112,012
2,182
Financial liabilities carried at amortized cost Trade and other payables Balance of purchase price Dividends payable Long‐term debt (except finance leases) Merchant members’ deposits in the guarantee fund
Level 2
Level 3
298,188
25,303
2,673
123,859
5,410
298,188
25,303
2,673
123,859 Level 2 N/A Level 3 252,091
6,517
2,485
82,446
5,613
252,091
6,517
2,485
82,446
N/A
Financial liabilities carried at fair value Equity swap agreements Level 2
387
N/A
N/A
Other liabilities Finance leases Level 2
10,439
7,898
7,898
387
10,439 Level 2 Financial assets classified as loans and receivables The fair value of the cash, cash held in escrow and trade receivables approximate their carrying amount given that they will mature shortly. The fair value of the advances to merchant members was determined based on discounted cash flows using effective interest rates available to the Corporation at the end of the reporting period for similar instruments. Financial assets carried at fair value The fair value of the foreign exchange forward contracts was determined using exchange rates quoted in the active market adjusted for the credit risk added by the financial institutions. They are not included in the above table, as their fair value is not significant as at December 31, 2016. Financial liabilities carried at amortized cost The fair value of the trade and other payables, balance of purchase price and dividends payable approximate their carrying amount given that they will mature shortly. The fair value of the long‐term debt (except finance leases) has been determined by calculating the present value of the interest rate spread that exists between the actual credit facilities and the rate that would be negotiated with the economic conditions at the reporting date. The fair value of long‐term debt approximates its carrying value as the effective interest rates applicable to the Corporation’s credit facilities reflect current market conditions. The fair value of the merchant members’ deposits in the guarantee fund could not be determined given that they result from transactions not observable in the market. Financial liabilities carried at fair value The fair value of the equity swap agreements was determined using shares prices quoted in the active market adjusted for the credit risk added by the financial institutions. 80 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 80 21 ‐ FI NANCIAL IN ST RUM ENT S AN D RISK M A NA G EM ENT ( CO NT I NU E D) Other liabilities The fair value of the finance leases has been determined by calculating the present value of the interest rate spread that exists between the actual credit facilities and the rate that would be negotiated with the economic conditions at the reporting date. As at December 31, 2016, the fair value of the finance leases approximates their carrying value as the effective interest rates applicable to the Corporation’s finance leases reflect current market conditions. Fair value hierarchy Financial instruments measured at fair value in the statements of financial position are classified according to the following hierarchy: Level 1: consists of measurements based on quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: consists of measurement techniques mainly based on inputs, other than quoted prices (included within Level 1), that are observable either directly or indirectly in the market; and Level 3: consists of measurement techniques that are not mainly based on observable market data. Derivative financial instruments – hedge of foreign exchange risk During the fourth quarter of 2016, the Corporation entered into forward contracts for a nominal amount of $3,184 in order to mitigate the foreign exchange risks mainly related to purchases in currencies other than the respective functional currencies of the Corporation. The average rate of these forward contracts is fixed at 0.75 until their respective terms ranging from 1 to 12 months. Derivative financial instruments – hedge of share‐based payments cost During the third quarter of 2016, the Corporation entered into equity swap agreements in order to manage common shares market price risk. As at December 31, 2016, the equity swap agreements covered the equivalent of 318,371 common shares of the Corporation. Derivative financial instruments used in cash flow hedges In 2011, the Corporation entered into swap agreements to hedge the variable interest cash flows related to forecasting transactions beginning in 2012 on a portion of the Corporation’s revolving credit facility for a nominal amount at inception of $80,000. These interest rate swaps fixed the interest cash flows at 0.97% until their maturity in 2016. The cash flows related to the interest rate swaps were expected to occur in the same periods as they were expected to affect the net earnings (loss). These swap agreements were designated as cash flow hedges until June 2015 when the Corporation unwound the swap agreements at a cost of $352. Risk management arising from financial instruments In the normal course of business, the Corporation is exposed to risks that arise from financial instruments primarily consisting of credit risk, liquidity risk, foreign exchange risk and interest rate risk. The Corporation manages these risk exposures on an ongoing basis. (i) Credit risk Credit risk stems primarily from the potential inability of customers to discharge their obligations. The maximum credit risk to which the Corporation is exposed represents the carrying amount of cash, cash held in escrow, trade and other receivables and advances to merchant members. No account represents more than 5% of total accounts receivable. In order to manage its risk, specified credit limits are determined for certain accounts and reviewed regularly by the Corporation. The Corporation may also be exposed to credit risk from its foreign exchange forward contracts and its equity swap agreements, which is managed by dealing with reputable financial institutions. The Corporation holds in guarantee some personal property and some assets of certain customers. Those customers are also required to contribute to a fund to guarantee a portion of their amounts due to the Corporation. The financial condition of customers is examined regularly, and monthly analyses are reviewed to ensure that past‐due amounts are collectible and, if necessary, that measures are taken to limit credit risk. Over the past few years, no significant amounts have had a negative impact on the Corporation’s net earnings (loss) with the average bad debt on sales rate at 0.2% for the last three years. 2016 ANNUAL REPORT UNI-SELECT 81
2016 ANNUAL REPORT UNI‐SELECT 81 21 ‐ FI NANCIAL IN ST RUM ENT S AN D RISK M A NA G EM ENT ( CO NT I NU E D) As at December 31, 2016, past‐due accounts receivable represent $4,990 ($2,501 as at December 31, 2015) and an allowance for doubtful accounts of $3,077 ($1,573 as at December 31, 2015) is provided. Allowance for doubtful accounts and past‐due accounts receivable are reviewed at least quarterly, and a bad‐debt expense is recognized only for accounts receivable for which collection is uncertain. The variances in the allowance for doubtful accounts are as follows: Balance, beginning of year Bad‐debt expense Write‐offs Sale of net assets Currency translation adjustment Balance, ending of year December 31,
2016
1,573
2,012
(576)
‐
68
3,077
2015
4,798
2,320
(3,180)
(2,240)
(125)
1,573
Management considers that all the above financial assets, that are not impaired or past due for each December 31 reporting dates under review, are of good credit quality. (ii) Liquidity risk Liquidity risk is the risk that the Corporation will encounter difficulty in meeting its obligations on time and at a reasonable cost. The Corporation manages its liquidity risk on a consolidated basis through its use of different capital markets in order to ensure flexibility in its capital structure. The Corporation prepares budget and cash forecasts, taking into account its current and future cash requirements, to ensure that it has sufficient funds to meet its obligations. The Corporation has renewable revolving credit and letter of credit facilities totaling $400,000 and $20,000 respectively as at December 31, 2016 ($400,000 and $20,000 as at December 31, 2015). Refer to note 18 for further details. The Corporation benefits from an available amount on its credit facilities of approximately $284,000 as at December 31, 2016 ($321,000 as at December 31, 2015). Management is of the opinion that as a result of the cash flows generated by operations and the financial resources available, the liquidity risk of the Corporation is appropriately mitigated. The contractual maturities and estimated future interest payments of the Corporation’s financial liabilities are as follows: December 31, 2016
Non‐derivative financial instruments Trade and other payables Balance of purchase price Dividends payable Long‐term debt (except finance leases) Interest payable Merchant members’ deposits in the guarantee fund Derivative financial instruments Equity swap agreements 82 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 82 Maturing Carrying under one One to Over three amount
year three years
years 297,688
25,303
2,673
123,859
500
5,410
455,433
297,688
25,303
2,673
4
500
91
326,259
‐
‐
‐
123,852
‐
‐
123,852
‐
‐
‐
3
‐
5,319
5,322
387
455,820
387
326,646
‐
123,852
‐
5,322
21 ‐ FI NANCIAL IN ST RUM ENT S AN D RISK M A NA G EM ENT ( CO NT I NU E D) December 31, 2015
Maturing Carrying under one One to Over three amount
year three years
years Non‐derivative financial instruments Trade and other payables Balance of purchase price Dividends payable Long‐term debt (except finance leases) Interest payable Merchant members’ deposits in the guarantee fund 251,469
6,517
2,485
82,446
622
5,613
349,152
251,469
6,517
2,485
3
622
82
261,178
‐
‐
‐
82,436
‐
‐
82,436
‐
‐
‐
7
‐
5,531
5,538
(iii) Foreign exchange risk The Corporation is exposed to foreign exchange risk on its financial instruments mainly related to purchases in currencies other than the respective functional currencies of the Corporation. To limit the impact of fluctuations of the Canadian dollar over the US dollar on forecasted cash flows, the Corporation uses forward contracts from time to time. The Corporation has certain investments in foreign operations (United States) whose net assets are exposed to foreign currency translation. The Corporation hedges the foreign exchange risk exposure related to those investments with US dollar denominated debt instruments (note 18). For the year ended December 31, 2016, Management considers that a 5% rise or fall in exchange rates, assuming that all other variables remain the same, will not have a significant impact on net earnings (loss). These changes are considered to be reasonably possible based on an observation of current market conditions. (iv) Interest rate risk The Corporation is exposed to interest rate fluctuations, primarily due to its variable rate debts. The Corporation manages its interest rate exposure by maintaining an adequate balance of fixed versus variable rate debt and by concluding swap agreements to exchange variable rates for fixed rates. As at December 31, 2016, the Corporation is therefore exposed to interest rate risk on its variable rates revolving credit facility and finance leases. Refer to note 18 for further details. For the year ended December 31, 2016, a 25‐basis‐point rise or fall in interest rates, assuming that all other variables remain the same, would have resulted in a $224 increase or decrease in the Corporation’s net earnings (loss), and no impact in OCI. These changes are considered to be reasonably possible based on an observation of current market conditions. 22 ‐ ACCUMULATED OTHER COMPREHENSIVE INCOME Unrealized exchange Accumulated changes in losses on the translation fair value of derivative Cumulative of debt designated as a
financial instruments translation hedge of net investments designated as cash flow account
in foreign operations
hedges
Balance, beginning of year (1) Other comprehensive income (loss) (1) Balance, December 31, 2015 Other comprehensive income Balance, December 31, 2016 (1)
Total
17,577
(16,247)
1,330
(24,053)
(13,748)
(37,801)
(374)
374 ‐ (6,850)
(29,621)
(36,471)
6,229
7,559
‐ (37,801)
‐ ‐ 6,229
(30,242)
Reclassification of $6,323 and $(9,691) from “Cumulative translation account” to “Unrealized exchange losses on the translation of debt designated as a hedge of net investments in foreign operations” to adjust comparative figures, which had no impact on total accumulated other comprehensive income as at December 31, 2015. 2016 ANNUAL REPORT UNI-SELECT 83
2016 ANNUAL REPORT UNI‐SELECT 83 23 ‐ COMMITMENTS AND GUARANTEES Commitments The Corporation has entered into long‐term operating lease agreements expiring at various dates until 2026 for the rental of buildings and vehicles, and outsourcing of information technology services. The rent expense recorded in the consolidated statements of earnings was $16,497 for the year ended December 31, 2016 ($20,109 for 2015). The committed minimum lease payments under these agreements are as follows: December 31, 2016
Less than one year Between one and five years More than five years Total minimum lease payments 21,417
52,977
9,458
83,852
Some of these lease agreements contain renewal options for additional periods of one to five years which the Corporation may exercise by giving prior notice. Guarantees Under inventory repurchase agreements, the Corporation has made commitments to financial institutions to repurchase inventory from some of its customers at rates of 60% or 75% of the cost of the inventory for a maximum of $44,956 as at December 31, 2016 (at rates of 60% or 75% and for a maximum of $44,835 as at December 31, 2015). In the event of a default by a customer, the inventory would be liquidated in the normal course of the Corporation’s operations. These agreements are for undetermined periods of time. In Management’s opinion and based on historical experience, the likelihood of significant payments being required under these agreements and losses are being absorbed is low as the value of the assets held in guarantee is greater than the Corporation’s financial obligations. 24 ‐ RELATED PARTIES For the years ended December 31, 2016 and 2015, common shares of the Corporation were widely held, and the Corporation did not have an ultimate controlling party. Transactions with key management personnel Key management includes directors (executive and non‐executive) and members of the Executive Committee. For the years ended December 31, 2016 and 2015, the compensation to key management personnel was as follows: Year ended December 31,
Salaries and short‐term employee benefits Post‐employment benefits (including contributions to defined benefit pension plans) Stock‐based benefits Severances Total compensation 2016
3,480
244
3,016
‐
6,740
2015
4,273
434
4,671
1,302
10,680
There were no other related party transactions with key management personnel for the years ended December 31, 2016 and 2015. Other transactions For the year ended December 31, 2016, the Corporation incurred no rental expenses to the benefit of a related party (rental expenses of $1,241 were incurred in 2015 to the benefit of Clarit Realty, Ltd., a company controlled by a related party). 84 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 84 25 ‐ CAPITAL MANAGEMENT Guided by its low‐asset‐base‐high‐utilization philosophy, the Corporation’s strategy is to monitor the following ratios to ensure flexibility in the capital structure: - Total net debt to total net debt and total equity; - Long‐term debt to total equity ratio; - Ratio of funded debt on earnings (loss) before finance costs, depreciation and amortization, equity loss and income taxes excluding certain adjustments, among other things, restructuring and other charges, as well as impairment and transaction charges related to the sale of net assets (the “other adjustments”); - Return on average total equity; and - Annual dividend payout ratio based on the previous year net earnings excluding the other adjustments. In the management of capital, the Corporation includes total equity, long‐term debt, and bank indebtedness net of cash. The Corporation manages and adjusts its capital structure in light of the changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Corporation has several tools, notably share repurchase for cancellation program pursuant to normal course issuer bids and flexible credit facilities adding flexibility to business opportunities. The Corporation constantly analyzes working capital levels, notably inventory, to ensure that the optimal level is maintained and regularly adjusts quantities to satisfy demand as well as the level of diversification required by customers. The Corporation has also put in place a vendor financing program under which payments to certain suppliers are deferred. The Corporation assesses its capital management on a number of bases, including: total net debt to total net debt and total equity, long‐term debt to total equity ratio, return on average total equity ratio and funded debt on earnings (loss) before finance costs, depreciation and amortization, equity loss and income taxes ratio excluding the other adjustments. The indicators used by the Corporation are as follows: December 31,
2016 2015 Total net debt to total net debt and total equity ratio 19.2 % N/A Long‐term debt to total equity ratio 28.4 % 20.7 % 12.8 % (8.5)% 1.05 N/A Return on average total equity ratio (1) Ratio of funded debt on earnings (loss) before finance costs, depreciation and amortization, equity loss and income taxes excluding the other adjustments (1)
The return on average total equity ratio is negative in 2015 due to the impairment of assets following the sale of the net assets of Uni‐Select USA, Inc. and Beck/Arnley Worldparts, Inc. Refer to note 5 for further details. The interest rate applicable on the revolving credit facility is contingent on the achievement of certain financial ratios such as funded debt on earnings (loss) before finance costs, depreciation and amortization, equity loss and income taxes excluding the other adjustments, and total net debt to total net debt and total equity, which are the same ratios the Corporation is required to comply with. The Corporation was in compliance with these covenants as at December 31, 2016. The Corporation’s overall strategy with respect to capital risk management remains unchanged from the prior year. 2016 ANNUAL REPORT UNI-SELECT 85
2016 ANNUAL REPORT UNI‐SELECT 85 26 ‐ SEGMENTED INFORMATION The Corporation is providing information on three reportable segments: Paint and Related Products (representing FinishMaster, Inc. in the US market), Automotive Products (representing the Canadian networks, and the US automotive aftermarket parts network until the the sale of net assets on June 1, 2015), and Corporate Office and Others. The profitability measure employed by the Corporation for assessing segment performance is segment income. Year ended
December 31,
Sales before intersegment sales Paint and
Related Products
2016
2015
752,864 736,623
‐
‐ ‐
‐
‐
‐ 618,811
444,455
736,623
‐
‐ 93,393 70,431
26,611
37,267
‐ 440
‐
‐ ‐
‐
93,393 69,991
26,611
‐ Sales 752,864 Segment income (loss) (1) Restructuring and other charges Impairment and transaction charges related to the sale of net assets Segment income (loss) (2)
reported (2)
Corporate Office and Others
2016
2015
444,455
Intersegment sales (1)
Automotive Products
2016
2015
623,901
(5,090)
(3,339)
144,523
(103,917)
(13,902)
(746)
‐
(13,156)
(10,724) 8,227 2016
1,197,319 1,360,524
‐
(5,090)
1,197,319 1,355,434
106,102
96,974
(746)
‐
445 (19,396) Total
2015
106,848
5,328
144,968
(53,322)
The chief operating decision maker uses primarily one measure of profit to make decisions and assess performance, being gross margin less employee benefits and other operating expenses. Per consolidated statements of earnings, corresponds to “Earnings (loss) before finance costs, depreciation and amortization, equity loss and income taxes”. The Corporation operates in Canada and the United States. The primary financial information per geographic location is as follows: Year ended
December 31,
Sales United States Canada Total 2016
2015
752,864
444,455
1,197,319
918,078
437,356
1,355,434
December 31, 2016
United States 22,552 84,029 198,266 Property and equipment Intangible assets Goodwill Canada
19,430
17,129
45,541
Total
41,982
101,158
243,807
December 31, 2015
United States 15,838 51,110 119,525 Property and equipment Intangible assets Goodwill Canada
14,466
14,245
37,745
Total
30,304
65,355
157,270
27 ‐ SUBSEQUENT EVENTS During January 2017, the Corporation acquired assets and liabilities of 3 companies operating in the United States for a total cost of $65,504. At the acquisition dates, the preliminarily fair value allocated to goodwill amounted to $37,965. 86 UNI-SELECT 2016 ANNUAL REPORT
2016 ANNUAL REPORT UNI‐SELECT 86 SHAREHOLDER INFORMATION
DIVIDENDS DECLARED IN 2016
DECLARED
RECORD DATE
February 10, 2016
March 31, 2016
April 27, 2016
June 30, 2016
July 27, 2016
September 30, 2016
October 26, 2016
December 31, 2016
PAYABLE DATE
April 19, 2016
July 19, 2016
October 18, 2016
January 17, 2017
C$
0.080
0.085
0.085
0.085
EXCHANGE LISTING
TSX: UNS
AUDITORS
Raymond Chabot Grant Thornton LLP
DIVIDEND POLICY
The Corporation’s practice is to declare
quarterly dividends, subject to profitability,
liquidity requirements to finance
growth, the general financial health of
the Corporation and other factors as
determined by the Board of Directors from
time to time.
LEGAL COUNSEL
McCarthy Tétrault LLP
Dividends paid by the Corporation, unless
otherwise indicated, are designated as
eligible dividends for tax purposes. The
Corporation does not have a dividend
reinvestment plan.
TRANSFER AGENT
Computershare Trust Company of Canada
1500 Robert-Bourassa Blvd., Suite 700
Montréal, QC H3A 3S8
514.982.7555 or 1.800.564.6253
Email: service@computershare.com
Website: computershare.com
FILINGS
The Corporation files all mandatory
information with Canadian Securities
Administrators which can be found at
sedar.com. This report as well as other
corporate documents can be found on the
Corporation’s website at uniselect.com.
BANKERS
National Bank of Canada
Royal Bank of Canada, N.A.
Bank of America
Bank of Montreal
Caisse Centrale Desjardins du Québec
JPMorgan Chase Bank, N.A.
M&T Bank
Laurentian Bank of Canada
ANNUAL GENERAL
MEETING OF SHAREHOLDERS
May 4, 2017, at 1:30 PM (ET)
Mortagne Hotel
Iles-de-Boucherville – Room A
1228 Nobel Street
Boucherville, QC
CORPORATE OFFICE
170 Industriel Blvd.
Boucherville, QC J4B 2X3
450.641.2440
questions@uniselect.com
INVESTOR RELATIONS
450.641.6972
investorrelations@uniselect.com
ETHICS LINE
1.855.650.0998
whistleblower@uniselect.com
As part of the Audit Committee
whistleblower procedures, this hotline
allows team members and others to
anonymously and confidentially raise
accounting, internal controls and ethical
inquiries or complaints.
TRADEMARKS
All trademarks, registered or not, of
Uni-Select Inc. and/or of its subsidiaries
include but are not limited to UNI‑SELECT,
FINISHMASTER, FINISHMASTER CANADA,
AUTO EXTRA , AUTO PARTS PLUS,
AUTO‑PLUS, AUTO-SELECT, BUMPER TO
BUMPER - CANADA’S PARTS PEOPLE,
COOLING DEPOT, MÄKTIG, COLOR
XTRA, COLOR PLUS, SMART, PUREZONE,
P R O C O L O R , S E L E C TA U T O X P E R T,
SMARTLINK, UNI-PRO and WORLDPARTS.
All other trademarks, registered or not,
are trademarks of their respective owners.
All logos, trade names and trademarks
referred to and used herein remain the
property of their respective owners
and may not be used, changed, copied,
altered, or quoted without the written
consent of the respective owners. All
rights reserved.
© Uni-Select Inc. 2017. All rights reserved.
Printed in Canada
2016 ANNUAL REPORT UNI-SELECT 87
uniselect.com
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