U.S. Markets close in 4 hrs 9 mins

Wajax Reports 2019 Third Quarter Results

Wajax Reports 2019 Third Quarter Results

TSX Symbol:  WJX

TORONTO , Nov. 4, 2019 /CNW/ - Wajax Corporation ("Wajax" or the "Corporation") today announced its 2019 third quarter results.




(Dollars in millions, except per share data)

Three Months Ended
September 30

Nine Months Ended
September 30


2019

2018

(As adjusted)(5)

2019

2018

(As adjusted)(5)

CONSOLIDATED RESULTS





Revenue

$365.1

$367.1

$1,149.1

$1,091.8

Equipment sales

$109.7

$135.7

$367.4

$403.8

Equipment rental

$9.3

$8.8

$27.4

$25.7

Industrial parts

$90.7

$88.6

$278.1

$271.2

Product support

$117.1

$117.4

$365.9

$343.3

ERS/Other

$38.3

$16.6

$110.4

$47.8






Net earnings

$7.6

$9.1

$27.3

$29.8

Basic earnings per share(1)(2)

$0.38

$0.46

$1.37

$1.52






Adjusted net earnings(3)(4)

$10.3

$9.5

$31.7

$31.4

Adjusted basic earnings per share(1)(2)(3)(4)

$0.52

$0.48

$1.59

$1.60

 

Third Quarter Highlights

  • Revenue in the third quarter of 2019 decreased $2.0 million or 0.5%, to $365.1 million , from $367.1 million in the third quarter of 2018.(5) Regionally:

  • Gross profit margin of 19.0% remained unchanged from the same period of 2018. Gross profit in the third quarter of 2019 includes a one-time, pre-tax charge of $1.2 million in engineering project losses (approximately equivalent to 0.3% in gross profit and $0.04 basic earnings per share). These costs have been deemed to be unrecoverable from sub-contractors or manufacturers and the Corporation has elected to complete the relevant projects at its own cost due to the importance of its relationships with the customers involved.

  • Selling and administrative expenses as a percentage of revenue decreased 120 bps to 13.6% in the third quarter of 2019 from 14.8% in the same period of 2018.(5) Selling and administrative expenses decreased by $4.7 million compared to the third quarter of 2018 due mainly to lower personnel costs.(5) The Corporation incurred lower personnel costs due mainly to lower variable incentive accruals.

  • EBIT increased $0.8 million , or 5.1%, to $15.6 million in the third quarter of 2019 versus $14.9 million in the same period of 2018.(3)(5) The year-over-year improvement is primarily attributable to lower selling and administrative expenses as a percentage of revenue, offset partially by higher restructuring and other related costs.

  • The Corporation generated net earnings of $7.6 million , or $0.38 per share, in the third quarter of 2019 versus $9.1 million , or $0.46 per share, in the same period of 2018.(3)(5) The Corporation generated adjusted net earnings of $10.3 million , or $0.52 per share, in the third quarter of 2019 versus $9.5 million , or $0.48 per share, in the same period of 2018.(3)(5)

  • Adjusted EBITDA margin increased to 9.0% in the third quarter of 2019 from 6.1% in the same period of 2018.(3)(5) Adjusted EBITDA margin includes the positive impact related to the adoption of IFRS 16.(3)(5) See the Changes in Accounting Policies section of the Corporation's Q3 2019 Management's Discussion and Analysis.

  • The Corporation's backlog at September 30, 2019 of $287.9 million decreased $8.6 million , or 2.9%, compared to June 30, 2019 due primarily to lower forestry, power generation and construction orders offset partially by higher mining orders. Compared to the third quarter of 2018, backlog increased $47.7 million , or 19.9%, due primarily to higher mining and marine orders offset partially by lower material handling and power generation orders.(3)

  • Inventory of $435.1 million at September 30, 2019 increased $18.8 million from June 30, 2019 due to higher new equipment and parts inventory. New equipment inventory levels are elevated as a result of lower sales in the quarter but are expected to decline over the balance of the year. Increases in parts inventory supports sales plans in industrial parts and ongoing efforts to improve customer service levels.

  • Working capital of $402.4 million at September 30, 2019 increased $21.9 million from June 30, 2019 due primarily to higher inventory and deposits on inventory and lower accounts payable and accrued liabilities. These working capital increases were partially offset by lower trade and other receivables and higher contract liabilities.

  • The Corporation's leverage ratio increased to 2.81 times at September 30, 2019 compared to 2.71 times at June 30, 2019 .(6) The increase in the leverage ratio was due to the higher debt level associated with the increase in working capital, partially offset by the higher trailing 12-month pro-forma adjusted EBITDA.(3)

  • On July 2, 2019 , the Corporation began the implementation of its new ERP system. Integrity and effectiveness of the system will be confirmed through testing in a limited number of branches until the end of 2019. To ensure sufficient testing is completed, the Corporation will not proceed with broad system implementation before the first quarter of 2020.

  • In the third quarter of 2019, the Corporation commenced a planned management realignment (the "Management Realignment"), resulting in a pre-tax restructuring charge of $3.9M recognized in the quarter relating primarily to expected severance costs. The Management Realignment simplifies the Corporation's regional management structure, further enhances the collaboration between sales and product support, and integrates Delom with the Corporation's legacy ERS business. These changes are expected to result in pre-tax annual savings of $5.0 million , $0.5 million of which is expected to be realized in 2019. Prior to the commencement of the Management Realignment, Thomas Plain , Senior Vice President, Service Operations, left the Corporation.

  • In furtherance of its stated network rationalization plans, the Corporation has completed a market value assessment of its owned real estate holdings. Opportunities to sell redundant real estate, as well as sale and leaseback opportunities, have been identified. Proceeds from any real estate sales will be used primarily for debt reduction. The earnings impact from any sale and leaseback transactions is not expected to be material as any gains are expected to be approximately offset by the incremental lease costs over the term of the lease.


On November 4, 2019, the Corporation declared a dividend of $0.25 per share for the fourth quarter of 2019 payable on January 3, 2020 to shareholders of record on December 16, 2019.

Commenting on the Corporation's results, President and Chief Executive Officer Mark Foote stated, "Consolidated results in the third quarter were below our expectations due to lower than expected revenue in western Canada as well as $1.2 million in engineering project losses. These costs have been deemed to be unrecoverable from sub-contractors or manufacturers and we have elected to complete the relevant projects at our own cost due to the importance of our relationships with the customers involved. We are pleased, however, that our momentum in eastern Canada continued and that revenue trends in central Canada improved. Backlog at the end of the quarter remained strong. The gross profit rate of 19.0% was consistent with the prior quarter despite the engineering project losses. The selling and general administrative expenses rate of 13.6% continues to demonstrate strong cost control. The Management Realignment that commenced during the quarter will further strengthen the partnership between sales and product support, and completes the integration of our legacy ERS business with Delom. In addition to these and other benefits, the changes are expected to deliver $5.0 million in pre-tax cost reductions annually going forward."

Mr. Foote continued, "Due in part to revenue shortfalls as compared to our expectations, inventory was higher than planned and leverage did not decline. While we continue to expect both to improve by year end, further actions are being taken to provide additional financial flexibility to execute our business plan. These actions include the sale of certain owned properties where the site will close due to our branch rationalization plan or where material gains in value exist and capital can be released and applied primarily to debt reduction. We expect to be able to report more on the effect of these actions with our year end results."

Regarding safety, Mr. Foote stated, "Safety performance in Wajax's base business continued to be very strong in the quarter resulting in a TRIF rate of 1.0 and a year to date TRIF rate of 0.85.(7) Our goal continues to be that each member of our team goes home safely at the end of each shift."

Regarding the Corporation's outlook for 2019, Mr. Foote concluded, "Market conditions declined in the third quarter, most significantly in western Canada , resulting in a deceleration in revenue momentum as the quarter progressed. While recognizing the effect of possible weaker conditions, we have not changed our operational plans and we continue to expect 2019 full year adjusted net earnings to increase over 2018 based on consolidated revenue improvements and the full year effect of the acquisition of Delom.(3) We continue to focus closely on margin rates, costs and inventory management while we pursue our growth plans."

Wajax Corporation

Founded in 1858, Wajax (WJX.TO) is one of Canada's longest-standing and most diversified industrial products and services providers. The Corporation operates an integrated distribution system providing sales, parts and services to a broad range of customers in diverse sectors of the Canadian economy, including: construction, forestry, mining, industrial and commercial, oil sands, transportation, metal processing, government and utilities, and oil and gas.

The Corporation's goal is to be Canada's leading industrial products and services provider, distinguished through its three core capabilities: sales force excellence, the breadth and efficiency of repair and maintenance operations, and the ability to work closely with existing and new vendor partners to constantly expand its product offering to customers. The Corporation believes that achieving excellence in these three areas will position it to create value for its customers, employees, vendors and shareholders.

Wajax will webcast its Third Quarter Financial Results Conference Call. You are invited to listen to the live webcast on Tuesday, November 5, 2019 at 2:00 p.m. ET . To access the webcast, please visit our website wajax.com, under "Investor Relations", "Events and Presentations", "Q3 2019 Financial Results" and click on the "Webcast" link.

Notes:



(1)

Weighted average shares, net of shares held in trust, outstanding for calculation of basic and diluted earnings
per share for the three months ended September 30, 2019 was 20,003,554 (2018 – 19,769,733) and 20,409,514
(2018 – 20,241,986), respectively.

(2)

Weighted average shares, net of shares held in trust, outstanding for calculation of basic and diluted earnings
per share for the nine months ended September 30, 2019 was 19,995,004 (2018 – 19,598,065) and 20,398,075
(2018 – 20,069,441), respectively.

(3)

"Adjusted net earnings", "Adjusted basic earnings per share", "Adjusted EBITDA", "Adjusted EBITDA margin",
"pro-forma adjusted EBITDA", "backlog" and "leverage ratio" do not have standardized meanings prescribed by
generally accepted accounting principles ("GAAP").  "EBIT" and "Working capital" are additional GAAP
measures. See the Non-GAAP and Additional GAAP Measures section of the Q3 2019 Management's
Discussion and Analysis.

(4)

Net earnings excluding the following:


a.

after-tax restructuring and other related costs of $2.9 million (2018 – $0.4 million), or basic and diluted
earnings per share of $0.15 and $0.14 respectively (2018 – basic and diluted earnings of $0.02 per
share) for the three months ended September 30, 2019.


b.

after-tax restructuring and other related costs of $3.9 million (2018 – $2.5 million), or basic and diluted
earnings per share of $0.20 and $0.19 respectively (2018 – basic and diluted earnings of $0.13 per
share) for the nine months ended September 30, 2019.


c.

after-tax gain recorded on sales of properties of $0.9 million, or basic and diluted earnings per share of
$(0.05) for the nine months ended September 30, 2018.


d.

after-tax non-cash gains on mark to market of derivative instruments of $0.2 million (2018 – nil), or
basic and diluted earnings per share of $(0.01) (2018 – nil) for the three months ended September 30,
2019.


e.

after-tax non-cash gains on mark to market of derivative instruments of $0.4 million (2018 – nil), or
basic and diluted earnings per share of $(0.02) (2018 – nil) for the nine months ended September 30,
2019.


f.

after-tax CSC project costs of $0.8 million (2018 – nil), or basic and diluted earnings per share of $0.04
(2018 – nil) for the nine months ended September 30, 2019.

(5)

As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31,
2018, a correction of non-material errors in prior periods ("Other adjustments") was recorded impacting the prior
year comparative periods. See the Adjustments to Prior Period Comparative Financial Statements section of
the Q3 2019 Management's Discussion and Analysis.

(6)

Effective with the reporting period beginning on January 1, 2019 and the adoption of IFRS 16, the Corporation
has amended the definition of Funded net debt to exclude lease liabilities not considered part of debt. For
comparison purposes, the pro-forma leverage ratio for December 31, 2018 using the amended definition of
funded net debt is shown above. See the Non-GAAP and Additional GAAP Measures section of the Q3 2019
Management's Discussion and Analysis.

(7)

Total Recordable Incident Frequency (TRIF) is a methodology for measuring injury frequency commonly used
by industrial companies.  It is calculated as the total number of recordable incidents times 200,000 hours of
work divided by the actual number of hours worked.  A recordable incident is one that requires medical treatment
beyond first aid.

 

Cautionary Statement Regarding Forward-Looking Information

This news release contains certain forward-looking statements and forward-looking information, as defined in applicable securities laws (collectively, "forward-looking statements").  These forward-looking statements relate to future events or the Corporation's future performance.  All statements other than statements of historical fact are forward-looking statements.  Often, but not always, forward looking statements can be identified by the use of words such as "plans", "anticipates", "intends", "predicts", "expects", "is expected", "scheduled", "believes", "estimates", "projects" or "forecasts", or variations of, or the negatives of, such words and phrases or state that certain actions, events or results "may", "could", "would", "should", "might" or "will" be taken, occur or be achieved.  Forward looking statements involve known and unknown risks, uncertainties and other factors beyond the Corporation's ability to predict or control which may cause actual results, performance and achievements to differ materially from those anticipated or implied in such forward looking statements.  There can be no assurance that any forward looking statement will materialize.  Accordingly, readers should not place undue reliance on forward looking statements.  The forward looking statements in this news release are made as of the date of this news release, reflect management's current beliefs and are based on information currently available to management.  Although management believes that the expectations represented in such forward-looking statements are reasonable, there is no assurance that such expectations will prove to be correct.  Specifically, this news release includes forward looking statements regarding, among other things, our expectation that new inventory equipment levels will decline over the balance of the year; the expected costs and benefits of the management realignment commenced in Q3 2019, including pre-tax annual savings and savings expected to be realized in 2019; our plans to use proceeds from any real estate sales primarily for debt reduction and our expectation that the earnings impact from any real estate sale and leaseback transaction will not be material; our expectation that inventory levels and leverage will improve by the end of 2019; our expectation that we will report more with our year end results on the effect of our actions to improve financial flexibility; our expectation that our 2019 adjusted net earnings will increase over 2018 based on revenue improvements and the full year effect of the Delom acquisition; our continued close focus on margin rates, costs and inventory management while we pursue our growth plans; our goal of becoming Canada's leading industrial products and services provider, distinguished through our core capabilities; and our belief that achieving excellence in our areas of core capability will position Wajax to create value for its customers, employees, vendors and shareholders. These statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, general business and economic conditions; the supply and demand for, and the level and volatility of prices for, oil, natural gas and other commodities; financial market conditions, including interest rates; our ability to execute our updated Strategic Plan, including our ability to develop our core capabilities, execute on our organic growth priorities, complete and effectively integrate acquisitions, such as Delom, and to successfully implement new information technology platforms, systems and software; the future financial performance of the Corporation; our costs; market competition; our ability to attract and retain skilled staff; our ability to procure quality products and inventory; and our ongoing relations with suppliers, employees and customers.  The foregoing list of assumptions is not exhaustive.  Factors that may cause actual results to vary materially include, but are not limited to, a deterioration in general business and economic conditions; volatility in the supply and demand for, and the level of prices for, oil, natural gas and other commodities; a continued or prolonged decrease in the price of oil or natural gas; fluctuations in financial market conditions, including interest rates; the level of demand for, and prices of, the products and services we offer; levels of customer confidence and spending; market acceptance of the products we offer; termination of distribution or original equipment manufacturer agreements; unanticipated operational difficulties (including failure of plant, equipment or processes to operate in accordance with specifications or expectations, cost escalation, our inability to reduce costs in response to slow-downs in market activity, unavailability of quality products or inventory, supply disruptions, job action and unanticipated events related to health, safety and environmental matters); our ability to attract and retain skilled staff and our ability to maintain our relationships with suppliers, employees and customers.  The foregoing list of factors is not exhaustive.  Further information concerning the risks and uncertainties associated with these forward looking statements and the Corporation's business may be found in our Annual Information Form for the year ended December 31, 2018, filed on SEDAR.  The forward-looking statements contained in this news release are expressly qualified in their entirety by this cautionary statement.  The Corporation does not undertake any obligation to publicly update such forward-looking statements to reflect new information, subsequent events or otherwise unless so required by applicable securities laws.

Additional information, including Wajax's Annual Report, is available on SEDAR at www.sedar.com.

Wajax Corporation
Management's Discussion and Analysis – Q3 2019

The following management's discussion and analysis ("MD&A") discusses the consolidated financial condition and results of operations of Wajax Corporation ("Wajax" or the "Corporation") for the quarter ended September 30 , 2019.  This MD&A should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements and accompanying notes for the quarter ended September 30, 2019 , the annual audited consolidated financial statements and accompanying notes for the year ended December 31, 2018 that are prepared in accordance with International Financial Reporting Standards (IFRS) and the associated MD&A.  Information contained in this MD&A is based on information available to management as of November 4, 2019.

Management is responsible for the information disclosed in this MD&A and the unaudited condensed consolidated interim financial statements and accompanying notes, and has in place appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. Wajax's Board of Directors has approved this MD&A and the unaudited condensed consolidated interim financial statements and accompanying notes.  In addition, Wajax's Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by Wajax and has reviewed this MD&A and the unaudited condensed consolidated interim financial statements and accompanying notes.

Unless otherwise indicated, all financial information within this MD&A is in millions of Canadian dollars, except ratio calculations, share, share rights and per share data.  Additional information, including Wajax's Annual Report and Annual Information Form, are available on SEDAR at www.sedar.com.

Wajax Corporation Overview

Founded in 1858, Wajax (WJX.TO) is one of Canada's longest-standing and most diversified industrial products and services providers. The Corporation operates an integrated distribution system, providing sales, parts and services to a broad range of customers in diverse sectors of the Canadian economy, including: construction, forestry, mining, industrial and commercial, oil sands, transportation, metal processing, government and utilities, and oil and gas.

Strategic Direction and Outlook

The focus of the One Wajax strategy is to provide customers with access to the Corporation's full range of products and services while delivering a consistently excellent level of customer service. The strategy builds on the Corporation's strengths of a well-trained and dedicated team of professionals, a broad range of products and services, deep experience in a wide range of markets, strong relationships with leading manufacturers and a national branch network. The Corporation is focused on delivering a strong experience for its team, customers and investors by executing clear plans in six important areas:

  • Investing in the Wajax team - The safety, well-being and engagement of the Corporation's team of 2,800 technicians, sales professionals, support staff and leaders is the foundation of the Corporation. The Corporation is very proud of the team's accomplishments in workplace safety, progress on personal wellness programs and enhanced training and professional development.

  • Investing in Wajax customers - The Corporation has the privilege of supporting 32,000 individual customers across Canada , ranging from small local contractors to the country's largest industrial and resource companies. Wajax continues to expand its Voice of the Customer (VoC) program which evaluates detailed customer service levels for each location and shares customer feedback openly with all parts of the Corporation. For an increasing number of large customers, the VoC program also uses analytical systems and dedicated teams to explore opportunities to increase the Corporation's share-of-wallet with individual customers.

  • Executing a clear organic growth strategy - The Corporation has classified each of its ten current product and service categories based on the category's contribution to sustainable growth. While Wajax is competitive in all of the categories it participates in, these classifications ensure that resources (such as inventory, personnel and marketing) are allocated appropriately. The Corporation's classifications are Targeted Growth (which includes the Construction, Material Handling and Engineered Repair Services categories), Core Strength (which includes the Industrial Parts, Forestry, On-Highway and Power and Marine categories) and Cyclical and Major Projects (which includes the Mining, Engines and Transmissions and Crane/Utility categories). The majority of the Corporation's strategic plan's organic growth is expected to result from Targeted Growth categories due to the relatively high opportunity for market share increases, resilient aftermarkets, the strength of the Corporation's product and service range and related manufacturer relationships. In 2018, 55% of the Corporation's revenue growth was driven by Targeted Growth categories.

  • Accretive acquisitions strategy - Wajax has developed clear acquisition criteria for the Canadian and U.S. markets. In Canada , the focus is primarily on acquisitions that add to the Corporation's scale in its Engineered Repair Services ("ERS") business and secondarily to extensions to the Corporation's existing distribution businesses. In the U.S. market, the focus is on reviewing growth opportunities related to distribution businesses that provide a long-term growth platform for the One Wajax multi-category model. Acquisitions are considered when they can be achieved within acceptable leverage parameters, are consistent with the Corporation's product and service strategy, accretive to EBITDA margin, provide scale and have effective management teams.

  • Investing in the Wajax infrastructure - The Corporation is making major changes to its infrastructure to improve the consistency of customer service, lower fixed costs and add new sales channels in an increasingly technology-enabled industry. The Corporation's current infrastructure programs include the ongoing consolidation of its branch network to improve customer service and to lower the cost of its physical footprint. In addition, the Corporation is investing in new information systems and capabilities to replace legacy systems and provide a platform for new customer-facing capabilities. In 2018, the Corporation completed the majority of the configuration and testing of a new ERP system. Subsequent to the end of the second quarter of 2019, the Corporation began operational testing of the ERP system - additional commentary is included in the Highlights for the Quarter section of this report.

  • Ongoing refinements to the One Wajax organizational model - In 2016, Wajax made major changes to how its team is organized in order to improve growth, drive consistency and to lower fixed costs. The changes reduced costs by approximately $20 million at the time of the change, primarily through the reduction of administrative personnel costs. As the business has grown, the Corporation has reinvested those savings, primarily in revenue generating roles, such as sales professionals and technicians. Wajax continues to refine its organizational model and expects additional improvements in cost productivity, due in part to technology investments.


Outlook

Market conditions declined in the third quarter, most significantly in western Canada , resulting in a deceleration in revenue momentum as the quarter progressed. While recognizing the effect of possible weaker conditions, the Corporation has not changed its operational plans and it continues to expect 2019 full year adjusted net earnings to increase over 2018 based on consolidated revenue improvements and the full year effect of the acquisition of Groupe Delom Inc. ("Delom"). The Corporation continues to focus closely on margin rates, costs and inventory management while it pursues its growth plans. Leverage is expected to remain within acceptable boundaries and the Corporation believes that it maintains sufficient financial flexibility to execute its 2019 business plan. See the Non-GAAP and Additional GAAP Measures and Cautionary Statement Regarding Forward-Looking Information sections.

Highlights for the Quarter

  • Revenue in the third quarter of 2019 decreased $2.0 million or 0.5%, to $365.1 million , from $367.1 million in the third quarter of 2018.(1) Regionally:

  • Gross profit margin of 19.0% remained unchanged from the same period of 2018.(1) Gross profit in the third quarter of 2019 includes a one-time, pre-tax charge of $1.2 million in engineering project losses (approximately equivalent to 0.3% in gross profit and $0.04 basic earnings per share). These costs have been deemed to be unrecoverable from sub-contractors or manufacturers and the Corporation has elected to complete the relevant projects at its own cost due to the importance of its relationships with the customers involved.

  • Selling and administrative expenses as a percentage of revenue decreased 120 bps to 13.6% in the third quarter of 2019 from 14.8% in the same period of 2018.(1) Selling and administrative expenses decreased by $4.7 million compared to the third quarter of 2018 due mainly to lower personnel costs.(1) The Corporation incurred lower personnel costs due mainly to lower variable incentive accruals.

  • EBIT increased $0.8 million , or 5.1%, to $15.6 million in the third quarter of 2019 versus $14.9 million in the same period of 2018.(1)(2) The year-over-year improvement is primarily attributable to lower selling and administrative expenses as a percentage of revenue, offset partially by higher restructuring and other related costs.

  • The Corporation generated net earnings of $7.6 million , or $0.38 per share, in the third quarter of 2019 versus $9.1 million , or $0.46 per share, in the same period of 2018.(1)(2) The Corporation generated adjusted net earnings of $10.3 million , or $0.52 per share, in the third quarter of 2019 versus $9.5 million , or $0.48 per share, in the same period of 2018.(1)(2)

  • Adjusted EBITDA margin increased to 9.0% in the third quarter of 2019 from 6.1% in the same period of 2018.(1)(2) Adjusted EBITDA margin includes the positive impact related to the adoption of IFRS 16.(1)(2) See the Changes in Accounting Policies section.

  • The Corporation's backlog at September 30, 2019 of $287.9 million decreased $8.6 million , or 2.9%, compared to June 30, 2019 due primarily to lower forestry, power generation and construction orders offset partially by higher mining orders. Compared to the third quarter of 2018, backlog increased $47.7 million , or 19.9%, due primarily to higher mining and marine orders offset partially by lower material handling and power generation orders.(2)

  • Inventory of $435.1 million at September 30, 2019 increased $18.8 million from June 30, 2019 due to higher new equipment and parts inventory. New equipment inventory levels are elevated as a result of lower sales in the quarter but are expected to decline over the balance of the year. Increases in parts inventory supports sales plans in industrial parts and ongoing efforts to improve customer service levels.

  • Working capital of $402.4 million at September 30, 2019 increased $21.9 million from June 30, 2019 due primarily to higher inventory and deposits on inventory and lower accounts payable and accrued liabilities. These working capital increases were partially offset by lower trade and other receivables and higher contract liabilities.

  • The Corporation's leverage ratio increased to 2.81 times at September 30, 2019 compared to 2.71 times at June 30, 2019 . The increase in the leverage ratio was due to the higher debt level associated with the increase in working capital, partially offset by the higher trailing 12-month pro-forma adjusted EBITDA.(2)

  • On July 2, 2019 , the Corporation began the implementation of its new ERP system. Integrity and effectiveness of the system will be confirmed through testing in a limited number of branches until the end of 2019. To ensure sufficient testing is completed, the Corporation will not proceed with broad system implementation before the first quarter of 2020.

  • In the third quarter of 2019, the Corporation commenced a planned management realignment (the "Management Realignment"), resulting in a pre-tax restructuring charge of $3.9M recognized in the quarter relating primarily to expected severance costs. The Management Realignment simplifies the Corporation's regional management structure, further enhances the collaboration between sales and product support, and integrates Delom with the Corporation's legacy ERS business. These changes are expected to result in pre-tax annual savings of $5.0 million , $0.5 million of which is expected to be realized in 2019. Prior to the commencement of the Management Realignment, Thomas Plain , Senior Vice President, Service Operations, left the Corporation.

  • In furtherance of its stated network rationalization plans, the Corporation has completed a market value assessment of its owned real estate holdings. Opportunities to sell redundant real estate, as well as sale and leaseback opportunities, have been identified. Proceeds from any real estate sales will be used primarily for debt reduction. The earnings impact from any sale and leaseback transactions is not expected to be material as any gains are expected to be approximately offset by the incremental lease costs over the term of the lease.


Notes:



(1)

As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018, a correction of
non-material errors in prior periods ("Other adjustments") was recorded impacting the prior year comparative periods. See the
Adjustments to Prior Period Comparative Financial Statements section.

(2)

"Backlog", "Leverage ratio", "Adjusted net earnings", "Adjusted EBITDA", "Adjusted EBITDA margin" and "Pro-forma adjusted EBITDA"
do not have standardized meanings prescribed by generally accepted accounting principles ("GAAP").  "EBIT" and "Working capital"
are additional GAAP measures. See the Non-GAAP and Additional GAAP Measures section.

 

Summary of Operating Results


Three months ended
September 30

Nine months ended
September 30

Statement of earnings highlights

2019

 2018

(As adjusted)(6)

2019

2018

(As adjusted)(6)

Revenue

$

365.1

$

367.1

$

1,149.1

$

1,091.8

Gross profit

$

69.2

$

69.7

$

220.7

$

205.3

Selling and administrative expenses

$

49.5

$

54.3

$

163.2

$

154.7

Restructuring and other related costs

$

4.1

$

0.6

$

5.4

$

3.5

Earnings before finance costs and income taxes(1)

$

15.6

$

14.9

$

52.1

$

47.1

Finance costs

$

5.2

$

2.2

$

14.3

$

5.9

Earnings before income taxes(1)

$

10.4

$

12.6

$

37.8

$

41.1

Income tax expense

$

2.9

$

3.5

$

10.5

$

11.4

Net earnings

$

7.6

$

9.1

$

27.3

$

29.8

-

Basic earnings per share(2)(3)

$

0.38

$

0.46

$

1.37

$

1.52

-

Diluted earnings per share(2)(3)

$

0.37

$

0.45

$

1.34

$

1.48

Adjusted net earnings(1)(4)

$

10.3

$

9.5

$

31.7

$

31.4

-

Adjusted basic earnings per share(1)(2)(3)(4)

$

0.52

$

0.48

$

1.59

$

1.60

-

Adjusted diluted earnings per share(1)(2)(3)(4)

$

0.51

$

0.47

$

1.55

$

1.56

Adjusted EBITDA(1)

$

32.9

$

22.6

$

98.4

$

67.8

Key ratios:





Gross profit margin

19.0%

19.0%

19.2%

18.8%

Selling and administrative expenses as a
percentage of revenue

13.6%

14.8%

14.2%

14.2%

EBIT margin(1)

4.3%

4.0%

4.5%

4.3%

Adjusted EBITDA margin(1)

9.0%

6.1%

8.6%

6.2%

Effective income tax rate

27.7%

27.7%

27.7%

27.7%

 

Statement of financial position highlights
As at

September 30,
2019

June 30, 2019

December 31,
2018

Trade and other receivables

$

197.8

$

210.1

$

206.3

Inventory

$

435.1

$

416.3

$

366.0

Accounts payable and accrued liabilities

$

(257.2)

$

(268.0)

$

(253.0)

Other working capital amounts(1)

$

26.7

$

22.1

$

15.4

Working capital(1)

$

402.4

$

380.5

$

334.7

Rental equipment

$

73.4

$

74.3

$

73.7

Property, plant and equipment

$

156.6

$

160.6

$

59.0

Funded net debt(1)(5)

$

287.8

$

265.7

$

222.0

Key ratio:




Leverage ratio(1)(5)

2.81

2.71

2.45

(1)

These measures do not have a standardized meaning prescribed by GAAP.  See the Non-GAAP and Additional GAAP Measures section.

(2)

Weighted average shares, net of shares held in trust, outstanding for calculation of basic and diluted earnings per share for the three months
ended September 30, 2019 was 20,003,554 (2018 – 19,769,733) and 20,409,514 (2018 – 20,241,986), respectively

(3)

Weighted average shares, net of shares held in trust, outstanding for calculation of basic and diluted earnings per share for the nine months
ended September 30, 2019 was 19,995,004 (2018 – 19,598,065) and 20,398,075 (2018 – 20,069,441), respectively.

(4)

Net earnings excluding the following:


a.

after-tax restructuring and other related costs of $2.9 million (2018 – $0.4 million), or basic and diluted earnings per share of
$0.15 and $0.14 respectively (2018 – basic and diluted earnings of $0.02 per share) for the three months ended September 30,
2019.


b.

after-tax restructuring and other related costs of $3.9 million (2018 – $2.5 million), or basic and diluted earnings per share of
$0.20  and $0.19 respectively (2018 – basic and diluted earnings of $0.13 per share) for the nine months ended September 30,
2019.


c.

after-tax gain recorded on sales of properties of $0.9 million, or basic and diluted earnings per share of $(0.05) for the nine
months ended September 30, 2018.


d.

after-tax non-cash gains on mark to market of derivative instruments of $0.2 million (2018 – nil), or basic and diluted earnings
per share of $(0.01) (2018 – nil) for the three months ended September 30, 2019.


e.

after-tax non-cash gains on mark to market of derivative instruments of $0.4 million (2018 – nil), or basic and diluted earnings
per share of $(0.02) (2018 – nil) for the nine months ended September 30, 2019.


f.

after-tax Customer Support Centre ("CSC") project costs of $0.8 million (2018 – nil), or basic and diluted earnings per share of
$0.04 (2018 – nil) for the nine months ended September 30, 2019.

(5)


Effective with the reporting period beginning on January 1, 2019 and the adoption of IFRS 16, the Corporation has amended the definition
of Funded net debt to exclude lease liabilities not considered part of debt. For comparison purposes, the pro-forma funded net debt and
leverage ratio for December 31, 2018 using the amended definition of funded net debt is shown in the table above.

(6)


As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018, a correction of non-
material errors in prior periods ("Other adjustments") was recorded impacting the prior year comparative periods. See the Adjustments to
Prior Period Comparative Financial Statements section.

 

Results of Operations

Revenue Sources


Three months ended
September 30

Nine months ended
September 30


2019

2018

2019

2018



(As adjusted)(1)


(As adjusted)(1)

Equipment sales

$

109.7

$

135.7

$

367.4

$

403.8

Equipment rental

$

9.3

$

8.8

$

27.4

$

25.7

Industrial parts

$

90.7

$

88.6

$

278.1

$

271.2

Product support

$

117.1

$

117.4

$

365.9

$

343.3

ERS/Other

$

38.3

$

16.6

$

110.4

$

47.8

Total revenue

$

365.1

$

367.1

$

1,149.1

$

1,091.8

(1)

As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018, a correction of non-
material errors in prior periods ("Other adjustments") was recorded impacting the prior year comparative periods. See the Adjustments to
Prior Period Comparative Financial Statements section.

 

Revenue in the third quarter of 2019 decreased 0.5% or $2.0 million , to $365.1 million , from $367.1 million in the third quarter of 2018. In addition to regional revenue commentary provided previously herein, the following factors contributed to the decrease in revenue:

  • Equipment sales have decreased due to lower construction sales in western and central Canada and lower mining sales in western Canada . These decreases were partially offset by higher forestry sales in central and eastern Canada .

  • ERS/Other sales have increased due to higher ERS revenues in central and eastern Canada resulting primarily from the acquisition of Delom in the fourth quarter of 2018.


For the nine months ended September 30, 2019 , revenue increased 5.2%, or $57.3 million , to $1,149.1 million , from $1,091.8 million in 2018. The following factors contributed to the increase in revenue:

  • ERS/Other sales have increased due to higher ERS revenues in central and eastern Canada due primarily to the acquisition of Delom in the fourth quarter of 2018.

  • Product support sales have increased on strength in mining parts and service sales in western Canada and higher material handling sales in all regions. These increases were partially offset by lower construction sales in western and central Canada and lower on-highway sales in all regions.

  • Revenue from industrial parts has increased due primarily to increased bearings, fluid power and hydraulics sales in eastern Canada offset partially by lower sales in western Canada .

  • Equipment sales have decreased due to lower construction sales in western and central Canada and lower mining sales in western and eastern Canada . These decreases were partially offset by higher forestry sales in all regions.


Backlog
Backlog of $287.9 million at September 30, 2019 decreased $8.6 million compared to June 30, 2019 due primarily to lower forestry, power generation and construction orders offset partially by higher mining orders. Backlog of $287.9 million at September 30, 2019 increased $47.7 million compared to September 30, 2018 due primarily to higher mining and marine orders offset partially by lower material handling and power generation orders.

Gross profit
Gross profit decreased $0.5 million , or 0.7%, in the third quarter of 2019 compared to the same quarter last year. Gross profit margin of 19.0% in the third quarter of 2019 remained unchanged from the same quarter last year. Gross profit in the third quarter of 2019 includes a one-time, pre-tax charge of $1.2 million in engineering project losses (approximately equivalent to 0.3% in gross profit and $0.04 basic EPS). As stated above, these costs have been deemed to be unrecoverable from sub-contractors or manufacturers and the Corporation has elected to complete the relevant projects at its own cost due to the importance of its relationships with the customers involved.

For the nine months ended September 30, 2019 , gross profit increased $15.4 million , or 7.5%, compared to the same period last year, due to increased volumes and higher gross profit margins. Gross profit margin of 19.2% increased from 18.8% in the prior year due mainly to a higher proportion of parts and service volumes in the current year.

Selling and administrative expenses
Selling and administrative expenses decreased $4.7 million in the third quarter of 2019 compared to the same quarter last year. This decrease was primarily due to lower personnel costs. The Corporation incurred lower personnel costs due mainly to lower variable incentive accruals. Selling and administrative expenses as a percentage of revenue decreased to 13.6% in the third quarter of 2019 from 14.8% in the third quarter of 2018.

For the nine months ended September 30, 2019 , selling and administrative expenses increased $8.5 million compared to the same period last year. This increase was primarily due to higher personnel costs as a result of the acquisition of Delom, higher sales-related expenses, CSC project costs of $1.2 million in the current year and a $1.1 million gain recorded on sales of properties in 2018. Selling and administrative expenses as a percentage of revenue of 14.2% in 2019 remained unchanged from 2018.

Restructuring and other related costs
In the first quarter of 2018, the Corporation commenced the redesign of its finance function (the "Finance Reorganization Plan").  The cost of the Finance Reorganization Plan is expected to be approximately $5.6 million in severance, project management and interim duplicate labour costs, of which $1.5 million has been recognized in 2019 and $3.8 million recognized in 2018. The remaining $0.3 million in anticipated costs, primarily relating to interim duplicate labour costs, will be expensed as incurred over the remaining project period.  Management anticipates that the majority of the remaining project work will be completed by the end of 2019.

In the third quarter of 2019, the Corporation commenced the Management Realignment resulting in a pre-tax restructuring charge of $3.9M recognized in the quarter relating primarily to expected severance costs. The realignment simplifies the Corporation's regional management structure, further enhances the collaboration between sales and product support, and integrates Delom with the Corporation's legacy ERS business. These changes are expected to result in pre-tax annual savings of $5.0 million , $0.5 million of which is expected to be realized in 2019.

Finance costs
Finance costs of $5.2 million in the third quarter of 2019 increased $2.9 million compared to the same quarter last year due primarily to higher average debt levels, due in part to the acquisition of Delom in the fourth quarter of 2018, and interest on lease liabilities of $1.6 million related to right-of-use assets as a result of the adoption of IFRS 16 on January 1, 2019 . See the Liquidity and Capital Resources section.

For the nine months ended September 30, 2019 , finance costs of $14.3 million increased $8.4 million compared to the same period in 2018 due primarily to higher average debt levels, due in part to the acquisition of Delom in the fourth quarter of 2018, and interest on lease liabilities of $4.0 million related to right-of-use assets as a result of the adoption of IFRS 16 on January 1, 2019 . See the Liquidity and Capital Resources section.

Income tax expense
The Corporation's effective income tax rate in the third quarter of 2019 was 27.7% (2018 – 27.7%) compared to the statutory rate of 26.8% (2018 – 26.9%) due to the impact of expenses not deductible for tax purposes.

The Corporation's effective income tax rate for the nine months ended September 30, 2019 was 27.7% (2018 – 27.7%) compared to the statutory rate of 26.8% (2018 – 26.9%) due to the impact of expenses not deductible for tax purposes.

Net earnings
In the third quarter of 2019, the Corporation generated net earnings of $7.6 million , or $0.38 per share, compared to $9.1 million , or $0.46 per share, in the third quarter of 2018. The $1.6 million decrease in net earnings resulted primarily from higher restructuring and other related costs of $2.5 million after-tax and higher finance costs, offset partially by lower operating expenses.

For the nine months ended September 30, 2019 , the Corporation generated net earnings of $27.3 million , or $1.37 per share, compared to $29.8 million , or $1.52 per share, in the same period of 2018. The $2.4 million decrease in net earnings resulted primarily from higher operating expenses, higher restructuring and other related costs of $1.4 million after-tax, and higher finance costs partially offset by increased revenue and gross profit.

Adjusted net earnings (See the Non-GAAP and Additional GAAP Measures section)
Adjusted net earnings in the third quarter of 2019 excludes restructuring and other related costs of $2.9 million after-tax, or $0.15 per share (2018 – $0.4 million after-tax, or $0.02 per share), and non-cash gains on mark to market of derivative instruments of $0.2 million after-tax, or $0.01 per share (2018 – nil).

As such, adjusted net earnings increased $0.8 million to $10.3 million , or $0.52 per share, in the third quarter of 2019, from $9.5 million , or $0.48 per share, in the same period of 2018.

Adjusted net earnings for the nine months ended September 30, 2019 excludes restructuring and other related costs of $3.9 million after-tax, or $0.20 per share (2018 – $2.5 million after-tax, or $0.13 per share), certain non-recurring CSC project costs of $0.8 million after-tax, or $0.04 per share (2018 – nil) and non-cash gains on mark to market of derivative instruments of $0.4 million after-tax, or $0.02 per share (2018 – nil).

As such, adjusted net earnings increased $0.3 million to $31.7 million , or $1.59 per share, for the nine months ended September 30, 2019 from $31.4 million , or $1.60 per share, in the same period of 2018.

Comprehensive income
In the third quarter of 2019, the total comprehensive income of $8.2 million included net earnings of $7.6 million and an other comprehensive gain of $0.6 million . The other comprehensive gain of $0.6 million in the current period resulted primarily from $0.3 million of gains on derivative instruments outstanding at the end of the period designated as cash flow hedges and $0.3 million of losses on derivative instruments designated as cash flow hedges in prior periods reclassified to net earnings during the current period.

For the nine months ended September 30, 2019 , the total comprehensive income of $25.8 million included net earnings of $27.3 million and an other comprehensive loss of $1.6 million . The other comprehensive loss of $1.6 million in the current year resulted primarily from $1.9 million of losses on derivative instruments outstanding at the end of the period designated as cash flow hedges.

Selected Quarterly Information

The following table summarizes unaudited quarterly consolidated financial data for the eight most recently completed quarters.


2019

2018

2017

(As adjusted)(2)


Q3

Q2

Q1

Q4

Q3(1)

Q2(1)

Q1(1)

Q4

Revenue

$

365.1

$

409.4

$

374.6

$

389.8

$

367.1

$

382.3

$

342.4

$

375.5

Net earnings

$

7.6

$

11.9

$

7.9

$

6.1

$

9.1

$

11.4

$

9.3

$

6.1

Net earnings per share









- Basic

$

0.38

$

0.59

$

0.39

$

0.31

$

0.46

$

0.58

$

0.48

$

0.31

- Diluted

$

0.37

$

0.58

$

0.39

$

0.30

$

0.45

$

0.56

$

0.46

$

0.30

Adjusted earnings per share(3)









- Basic

$

0.52

$

0.63

$

0.43

$

0.42

$

0.48

$

0.63

$

0.49

$

0.47

- Diluted

$

0.51

$

0.62

$

0.43

$

0.41

$

0.47

$

0.60

$

0.47

$

0.45

(1)

As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018, a correction of non-
material errors in prior periods ("Other adjustments") was recorded impacting the prior year comparative periods. See the Adjustments to
Prior Period Comparative Financial Statements section.

(2)

The Corporation has adjusted its comparative 2017 earnings and financial position as a result of the adoption on January 1, 2018 of IFRS
15 Revenue from Contracts with Customers and as a result of a correction of non-material errors in prior periods ("Other adjustments") as
disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018. See the Adjustments to
Prior Period Financial Statements section of the Corporation's MD&A for the year ended December 31, 2018.

(3)

These measures do not have a standardized meaning prescribed by GAAP.  See the Non-GAAP and Additional GAAP Measures section.

 

Although quarterly fluctuations in revenue and net earnings are difficult to predict, during times of weak resource sector activity, the first quarter will tend to have seasonally lower revenues.  As well, large deliveries of mining trucks and shovels and power generation packages can shift the revenue and net earnings throughout the year.

First quarter 2018 net earnings of $9.3 million included after-tax restructuring and other related costs of $1.2 million and after-tax gain recorded on sales of properties of $0.9 million . Excluding the restructuring and other related costs and gain recorded on sales of properties, first quarter 2018 adjusted net earnings were $9.6 million . Second quarter 2018 net earnings of $11.4 million included after-tax restructuring and other related costs of $0.9 million . Excluding the restructuring and other related costs, second quarter 2018 adjusted net earnings were $12.3 million . Third quarter 2018 net earnings of $9.1 million included after-tax restructuring and other related costs of $0.4 million . Excluding the restructuring and other related costs, third quarter 2018 adjusted net earnings were $9.5 million . Fourth quarter 2018 net earnings of $6.1 million included after-tax restructuring and other related costs of $0.5 million , after-tax non-cash losses on mark to market of derivative instruments of $1.5 million and after-tax Delom transaction costs of $0.3 million . Excluding the restructuring and other related costs, non-cash losses on mark to market of derivative instruments and Delom transaction costs, fourth quarter 2018 adjusted net earnings were $8.3 million .

First quarter 2019 net earnings of $7.9 million included after-tax restructuring and other related costs of $0.7 million , certain non-recurring after-tax CSC project costs of $0.5 million and after-tax non-cash gains on mark to market of derivative instruments of $0.4 million . Excluding the restructuring and other related costs, CSC project costs and non-cash gains on mark to market of derivative instruments, first quarter 2019 adjusted net earnings were $8.7 million . Second quarter 2019 net earnings of $11.9 million included after-tax restructuring and other related costs of $0.3 million , certain non-recurring after-tax CSC project costs of $0.3 million and after-tax non-cash losses on mark to market of derivative instruments of $0.2 million . Excluding the restructuring and other related costs, CSC project costs and non-cash losses on mark to market of derivative instruments, second quarter 2019 adjusted net earnings were $12.6 million . Third quarter 2019 net earnings of $7.6 million included after-tax restructuring and other related costs of $2.9 million , and after-tax non-cash gains on mark to market of derivative instruments of $0.2 million . Excluding the restructuring and other related costs and non-cash gains on mark to market of derivative instruments, third quarter 2019 adjusted net earnings were $10.3 million . See the Non-GAAP and Additional GAAP Measures section.

A discussion of Wajax's previous quarterly results can be found in Wajax's quarterly MD&A available on SEDAR at www.sedar.com.

 

Consolidated Financial Condition

Capital Structure and Key Financial Condition Measures


September 30
2019

June 30
2019

December 31
2018

Shareholders' equity

$

308.5

$

305.1

$

297.0

Funded net debt(1)(2)

287.8

265.7

222.0

Total capital

$

596.4

$

570.8

$

519.0

Funded net debt to total capital(1)(2)

48.3%

46.6%

42.8%

Leverage ratio(1)(2)

2.81

2.71

2.45

(1)

See the Non-GAAP and Additional GAAP Measures section.

(2)

Effective with the reporting period beginning on January 1, 2019 and the adoption of IFRS 16, the Corporation has amended the definition of Funded net debt to exclude lease liabilities not considered part of debt. For comparison purposes, the pro-forma funded net debt, funded net debt to total capital and leverage ratio for December 31, 2018 using the amended definition of funded net debt is shown in the table above. See the Non-GAAP and Additional GAAP Measures section.

 

The Corporation's objective is to maintain a leverage ratio between 1.5 times and 2.0 times.  However, there may be instances where the Corporation is willing to maintain a leverage ratio outside this range to support key growth initiatives, acquisitions and fluctuations in working capital levels during changes in economic cycles.  The Corporation's current leverage ratio is currently above the target range primarily due to the acquisition of Delom and investments made in working capital. See the Funded Net Debt section below.

Shareholders' Equity

The Corporation's shareholders' equity at September 30, 2019 of $308.5 million increased $3.4 million from June 30, 2019 , as earnings of $7.6 million exceeded dividends declared of $5.0 million . For the nine months ended September 30, 2019 , the Corporation's shareholders' equity increased $11.6 million , as earnings of $27.3 million exceeded dividends declared of $15.0 million .

The Corporation's share capital, included in shareholders' equity on the statements of financial position, consists of:


Number of
Common Shares


Amount

Issued and outstanding, December 31, 2018

20,132,194


$

182.0

Common shares issued to settle share-based compensation plans

27,473


$

0.5

Issued and outstanding, September 30, 2019

20,159,667


$

182.4

Shares held in trust, December 31, 2018

(175,680)


$

(1.6)

Released for settlement of certain share-based compensation plans

19,567


$

0.2

Shares held in trust, September 30, 2019

(156,113)


$

(1.4)

Issued and outstanding, net of shares held in trust, September 30, 2019

20,003,554


$

181.0

 

At the date of this MD&A, the Corporation had 20,003,554 common shares issued and outstanding, net of shares held in trust.

At September 30, 2019 , Wajax had four share-based compensation plans; the Wajax Share Ownership Plan ("SOP"), the Directors' Deferred Share Unit Plan ("DDSUP"), the Mid-Term Incentive Plan for Senior Executives ("MTIP") (with MTIP awards being composed of performance share units ("PSUs") and restricted share units ("RSUs")) and the Deferred Share Unit Plan ("DSUP").

As of September 30, 2019 , there were 353,432 (2018 – 377,045) SOP and DDSUP (treasury share rights plans) rights outstanding, 219,315 (2018 – 283,422) MTIP PSUs and equity-settled DSUP (market-purchased share rights plans) rights outstanding and 357,903 (2018 – 388,950) MTIP RSUs and cash-settled DSUP (cash-settled rights plans) rights outstanding. At September 30, 2019 , 340,479 SOP and DDSUP rights were vested (September 30, 2018 – all SOP and DDSUP rights were vested), 15,190 equity-settled DSUP rights were vested (September 30, 2018 - nil), and 8,987 cash-settled DSUP rights were vested (September 30, 2018 - 8,496). Depending on the actual level of achievement of the performance targets associated with the outstanding MTIP PSUs, the number of market-purchased shares required to satisfy the Corporation's obligations could be higher or lower.

Wajax recorded compensation expense of $0.5 million for the quarter (2018 – $0.8 million ) and $2.9 million for the nine months ended September 30, 2019 (2018 – $2.8 million ) in respect of these plans.

Funded Net Debt (See the Non-GAAP and Additional GAAP Measures section)


September 30
2019

June 30
2019

December 31
2018




(Pro-forma)(1)

Bank indebtedness (cash)

$

0.4

$

(4.6)

$

3.9

Long-term debt

287.4

270.3

218.1

Funded net debt

$

287.8

$

265.7

$

222.0

(1)

Effective with the reporting period beginning on January 1, 2019 and the adoption of IFRS 16, the Corporation has amended the definition of Funded net debt to exclude lease liabilities not considered part of debt. See the Non-GAAP and Additional GAAP Measures section.

 

Funded net debt of $287.8 million at September 30, 2019 increased $22.1 million compared to $265.7 million at June 30, 2019 . The increase during the quarter was due primarily to cash used in operating activities of $9.3 million , payment of lease liabilities of $4.9 million , dividends paid of $5.0 million and cash used in investing activities of $2.8 million .

Funded net debt of $287.8 million at September 30, 2019 increased $65.8 million compared to $222.0 million at December 31, 2018.(1) The increase during the period was due primarily to cash used in operating activities of $26.0 million , payment of lease liabilities of $16.3 million , dividends paid of $15.0 million and cash used in investing activities of $7.7 million .

The Corporation's ratio of funded net debt to total capital increased to 48.3% at September 30, 2019 from 46.6% at June 30, 2019 .

The Corporation's leverage ratio of 2.81 times at September 30, 2019 increased from the June 30, 2019 ratio of 2.71 times due to  the higher debt level associated with the increase in working capital, partially offset by the higher trailing 12-month pro-forma adjusted EBITDA.(1) See the Non-GAAP and Additional GAAP Measures section.

See the Liquidity and Capital Resources section.

(1)

Effective with the reporting period beginning on January 1, 2019 and the adoption of IFRS 16, the Corporation has amended the definition of Funded net debt to exclude lease liabilities not considered part of debt. See the Non-GAAP and Additional GAAP Measures section.


 

Financial Instruments

Wajax uses derivative financial instruments in the management of its foreign currency, interest rate and share-based compensation exposures.  Wajax policy restricts the use of derivative financial instruments for trading or speculative purposes.

Wajax monitors the proportion of variable rate debt to its total debt portfolio and may enter into interest rate hedge contracts to mitigate a portion of the interest rate risk on its variable rate debt. A change in interest rates, in particular related to the Corporation's unhedged variable rate debt, is not expected to have a material impact on the Corporation's results of operations or financial condition over the long term.

Wajax has entered into interest rate hedge contracts to minimize exposure to interest rate fluctuations on its variable rate debt.  All interest rate hedge contracts are recorded in the consolidated financial statements at fair value. As at September 30, 2019 , Wajax had the following interest rate hedge contracts outstanding:

  • $104.0 million , expiring in November 2023 , with a weighted average interest rate of 2.70%.


Wajax enters into foreign exchange forward contracts to hedge the exchange risk associated with the cost of certain inbound inventory and foreign currency-denominated sales to customers along with the associated receivables as part of its normal course of business.  As at September 30, 2019 , Wajax had the following contracts outstanding:

  • to buy U.S. $40.3 million (December 31, 2018 – to buy U.S. $34.3 million ),
  • to sell U.S. $29.4 million (December 31, 2018 – to sell U.S. $20.9 million ), and
  • to sell Euro €1.2 million (December 31, 2018 – €2.8 million).


The U.S. dollar contracts expire between October 2019 and March 2021 , with an average U.S./Canadian dollar rate of 1.3171.

The Euro contracts expire between January 2020 and November 2020 , with an average Euro/Canadian dollar rate of 1.4903.

Wajax has entered into total return swap contracts to hedge the exposure to share price market risk on a class of MTIP rights that are cash-settled.  All total return swap contracts are recorded in the consolidated financial statements at fair value. As at September 30, 2019 , Wajax had the following total return swap contracts outstanding:

  • contracts totaling 365,000 shares at an initial share value of $8.3 million , expiring between March 2020 and March 2022 .


Contractual Obligations

There have been no material changes to the Corporation's contractual obligations since December 31, 2018 . See the Liquidity and Capital Resources section.

Off Balance Sheet Financing

The Corporation implemented IFRS 16 on January 1, 2019 and recorded right-of-use assets and lease liabilities in the amount of $81.2 million and $82.5 million , respectively. See Notes 3, 9 and 11 of the condensed consolidated interim financial statements and accompanying notes for the period ended September 30, 2019 .

It is likely but not reasonably certain that existing leases will be renewed or replaced, resulting in lease commitments being sustained at current levels.  In the alternative, Wajax may incur capital expenditures to acquire equivalent capacity.

The Corporation had $140.3 million ( June 30, 2019 – $162.3 million ) of consigned inventory on hand from a major manufacturer at September 30, 2019 , net of deposits of $21.6 million ( June 30, 2019 – $12.3 million ).  In the normal course of business, Wajax receives inventory on consignment from this manufacturer which is generally sold or rented to customers or purchased by Wajax.  Under the terms of the consignment program, Wajax is required to make periodic deposits to the manufacturer on the consigned inventory that is rented to Wajax customers or on-hand for greater than nine months.  This consigned inventory is not included in Wajax's inventory as the manufacturer retains title to the goods.  In the event the inventory consignment program was terminated, Wajax would utilize interest free financing, if any, made available by the manufacturer and/or utilize capacity under its credit facility to finance the purchase of inventory.

Although management currently believes Wajax has adequate debt capacity, Wajax would have to access the equity or debt capital markets, or reduce dividends to accommodate any shortfalls in Wajax's credit facility.  See the Liquidity and Capital Resources section.

 

Liquidity and Capital Resources

The Corporation's liquidity is maintained through various sources, including bank and non-bank credit facilities and cash generated from operations.

Bank and Non-bank Credit Facilities

At September 30, 2019 , Wajax had borrowed $289.0 million and issued $5.4 million of letters of credit for a total utilization of $294.4 million of its $400 million bank credit facility. Borrowing capacity under the bank credit facility is dependent on the level of inventories on-hand and outstanding trade accounts receivables. At September 30, 2019 , borrowing capacity under the bank credit facility was equal to $370 million .

The bank credit facility contains customary restrictive covenants, including limitations on the payment of cash dividends and an interest coverage maintenance ratio, all of which were met as at September 30, 2019 . In particular, the Corporation is restricted from declaring dividends in the event the Corporation's leverage ratio, as defined in the bank credit facility agreement, exceeds 4.0 times.

Under the terms of the bank credit facility, Wajax is permitted to have additional interest bearing debt of $25 million .  As such, Wajax has up to $25 million of demand inventory equipment financing capacity with two non-bank lenders.  At September 30, 2019 , Wajax had no utilization of the interest bearing equipment financing facilities.

In addition, the Corporation has an agreement with a financial institution to sell 100% of selected accounts receivable on a recurring, non-recourse basis. Under this facility, up to $20 million of accounts receivable is permitted to be sold to the financial institution and can remain outstanding at any point in time. After the sale, Wajax does not retain any interests in the accounts receivable, but continues to service and collect the outstanding accounts receivable on behalf of the financial institution. At September 30, 2019 , the Corporation continues to service and collect $13.7 million in accounts receivable on behalf of the financial institution.

As at September 30, 2019 , $105.6 million was unutilized under the bank facility and $25 million was unutilized under the non-bank facilities. As of November 4, 2019, Wajax continues to maintain its $400 million bank credit facility and an additional $25 million in credit facilities with non-bank lenders. Wajax maintains sufficient liquidity to meet short-term normal course working capital and maintenance capital requirements and certain strategic investments. However, Wajax may be required to access the equity or debt capital markets to fund significant acquisitions.

The Corporation's tolerance to interest rate risk decreases/increases as the Corporation's leverage ratio increases/decreases.  At September 30, 2019 , $104 million of the Corporation's funded net debt, or 36.1%, was at a fixed interest rate which is within the Corporation's interest rate risk policy.

Cash Flow

The following table highlights the major components of cash flow as reflected in the Condensed Consolidated Interim Statements of Cash Flows for the three and nine months ended September 30, 2019 and September 30, 2018:


Three months ended
September 30


Nine months ended
September 30


2019

2018

Change


2019

2018

Change



(As adjusted)(1)




(As adjusted)(1)


Net earnings

$

7.6

$

9.1

$

(1.5)


$

27.3

$

29.8

$

(2.5)

Items not affecting cash flow

21.8

14.0

7.8


67.7

37.5

30.2

Changes in non-cash operating
working capital

(20.1)

(15.7)

(4.4)


(53.9)

(57.8)

3.9

Finance costs paid

(4.5)

(2.1)

(2.4)


(13.3)

(5.8)

(7.5)

Income taxes paid

(6.2)

(1.5)

(4.7)


(27.6)

(4.8)

(22.8)

Rental equipment additions

(7.8)

(11.3)

3.5


(23.3)

(27.3)

4.0

Other non-current liabilities

0.0

(2.0)

2.0


(1.4)

(1.0)

(0.4)

Cash paid on settlement of total return
swaps


(1.5)

(1.5)

Cash used in operating activities

$

(9.3)

$

(9.5)

$

0.2


$

(26.0)

$

(29.5)

$

3.5

Cash used in investing activities

$

(2.8)

$

(2.2)

$

(0.6)


$

(7.7)

$

(4.8)

$

(2.9)

Cash generated from financing activities

$

7.0

$

11.5

$

(4.5)


$

37.2

$

24.8

$

12.4

(1)

As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018, a correction of non-material errors in prior periods ("Other adjustments") was recorded impacting the prior year comparative periods. See the Adjustments to Prior Period Comparative Financial Statements section.

 

Cash Used In Operating Activities
Cash flows used in operating activities amounted to $9.3 million in the third quarter of 2019, compared to $9.5 million in the same quarter of the previous year.

Rental equipment additions in the third quarter of 2019 of $7.8 million (2018 – $11.3 million ) related primarily to material handling lift trucks and construction excavators.

For the nine months ended September 30, 2019 , cash flows used in operating activities amounted to $26.0 million , compared to $29.5 million for the same period in the previous year. The decrease in cash flows used in operating activities was mainly attributable to an increase in items not affecting cash flow of $30.2 million and a decrease in rental equipment additions of $4.0 million , partially offset by higher income taxes paid of $22.8 million and higher finance costs paid of $7.5 million .

For the nine months ended September 30, 2019 , rental equipment additions of $23.3 million (2018 – $27.3 million ) related primarily to material handling lift trucks and construction excavators.

Significant components of non-cash operating working capital, along with changes for the three and nine months ended September 30, 2019 and September 30, 2018 include the following:

Changes in Non-cash Operating Working Capital(1)

Three months ended
September 30


Nine months ended
September 30


2019

2018


2019

2018



(As adjusted)(2)



(As adjusted)(2)

Trade and other receivables

$

12.3

$

(3.0)


$

8.3

$

(16.9)

Contract assets

(0.8)

(0.2)


(0.3)

(2.6)

Inventory

(15.3)

(12.3)


(61.0)

(47.1)

Deposits on inventory

(8.7)

(4.3)


(9.7)

(6.8)

Prepaid expenses

1.2

(1.9)


1.7

(3.2)

Accounts payable and accrued liabilities

(11.3)

4.9


2.8

20.2

Contract liabilities

2.3

1.1


4.4

(1.4)

Total Changes in Non-cash Operating Working Capital

$

(20.1)

$

(15.7)


$

(53.9)

$

(57.8)

(1)

Increase (decrease) in cash flow

(2)

As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018, a correction of non-material errors in prior periods ("Other adjustments") was recorded impacting the prior year comparative periods. See the Adjustments to Prior Period Comparative Financial Statements section.

 

Significant components of the changes in non-cash operating working capital for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 are as follows:

  • Trade and other receivables decreased $12.3 million in 2019 compared to an increase of $3.0 million in 2018. The decrease in 2019 resulted primarily from lower trade receivables mainly due to strong collections and the sale of selected trade accounts receivable in the current period compared to the same period in 2018. The increase in 2018 resulted primarily from higher sales activity in the third quarter compared to the previous quarter.

  • Inventory increased $15.3 million in 2019 compared to an increase of $12.3 million in 2018. The increase in 2019 was due mainly to higher construction and material handling equipment inventory and higher parts inventory. The increase in 2018 was due mainly to higher material handling and forestry equipment inventory and higher parts inventory.

  • Deposits on inventory increased $8.7 million in 2019 compared to an increase of $4.3 million in 2018. The increase in both years was due primarily to consignment inventory being held in excess of nine months before being sold.

  • Accounts payable and accrued liabilities decreased $11.3 million in 2019 compared to an increase of $4.9 million in 2018. The decrease in 2019 resulted from both lower trade payables and lower accrued liabilities. The increase in 2018 was primarily due to higher accrued liabilities.


Significant components of the changes in non-cash operating working capital for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 are as follows:

  • Trade and other receivables decreased $8.3 million in 2019 compared to an increase of $16.9 million in 2018. The decrease in 2019 resulted primarily from lower trade receivables mainly due to strong collections and the sale of selected trade accounts receivable in the current period compared to the same period in 2018. The increase in 2018 resulted primarily from higher sales activity in the current year compared to the same period in 2017.

  • Inventory increased $61.0 million in 2019 compared to an increase of $47.1 million in 2018. The increase in 2019 was due mainly to higher new equipment inventory, parts inventory and work-in-process. The increase in 2018 was due mainly to higher construction and forestry equipment inventory and higher parts inventory partially offset by lower mining equipment inventory.

  • Deposits on inventory increased $9.7 million in 2019 compared to an increase of $6.8 million in 2018. The increase in both years was due primarily to consignment inventory being held in excess of nine months before being sold.


Investing Activities
During the third quarter of 2019, Wajax invested $1.8 million in property, plant and equipment additions, compared to $1.3 million in the third quarter of 2018. Intangible assets additions of $1.0 million (2018 – $1.2 million ) in the third quarter of 2019 resulted primarily from software additions relating to the new ERP system currently being implemented.

For the nine months ended September 30, 2019 , Wajax invested $5.1 million in property, plant and equipment additions, compared to $3.0 million in the same period of 2018. Intangible assets additions of $3.1 million (2018 – $3.8 million ) for the nine months ended September 30, 2019 resulted primarily from software additions relating to the new ERP system currently being implemented.

Financing Activities
The Corporation generated $7.0 million of cash from financing activities in the third quarter of 2019 compared to cash generated of $11.5 million in the same quarter of 2018. Financing activities in the quarter included a net bank credit facility borrowing of $17.0 million (2018 – $6.0 million ), the sale of shares held in trust of nil (2018 - $11.5 million ), the payment of lease liabilities of $4.9 million (2018 – $1.0 million ) and dividends paid to shareholders of $5.0 million (2018 – $4.9 million ).

For the nine months ended September 30, 2019 , the Corporation generated $37.2 million of cash from financing activities compared to $24.8 million in the same period of 2018. Financing activities for the nine months ended September 30, 2019 included a net bank credit facility borrowing of $69.0 million (2018 – $31.0 million ), the sale of shares held in trust of nil (2018 - $11.5 million ), partially offset by the payment of lease liabilities of $16.3 million (2018 – $3.1 million ) and dividends paid to shareholders of $15.0 million (2018 – $14.6 million ).

Dividends

Dividends to shareholders were declared and payable to shareholders of record as follows:

Record Date


Payment Date


Per Share


Amount

March 29, 2019


April 2, 2019


$

0.25


$

5.0

June 14, 2019


July 3, 2019


$

0.25


$

5.0

September 16, 2019


October 2, 2019


$

0.25


$

5.0

Nine months ended September 30, 2019




$

0.75


$

15.0

 

On November 4, 2019, the Corporation declared a dividend of $0.25 per share for the fourth quarter of 2019 payable on January 3, 2020 to shareholders of record on December 16, 2019.

 

Critical Accounting Estimates

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenue and expenses.  Actual results could differ from those judgements, estimates and assumptions. The Corporation bases its estimates on historical experience and various other assumptions that are believed to be reasonable in the circumstances.

The areas where significant judgements and assumptions are used to determine the amounts recognized in the financial statements include the allowance for credit losses, inventory obsolescence, goodwill and intangible assets and the lease term of contracts with renewal options.

The key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next fiscal year are as follows:

Allowance for credit losses
The Corporation is exposed to credit risk with respect to its trade and other receivables. However, this is partially mitigated by the Corporation's diversified customer base of over 32,000 customers, with no one customer accounting for more than 10% of the Corporation's annual consolidated sales, which covers many business sectors across Canada . In addition, the Corporation's customer base spans large public companies, small independent contractors, original equipment manufacturers and various levels of government.  The Corporation follows a program of credit evaluations of customers and limits the amount of credit extended when deemed necessary.  The Corporation maintains an allowance for possible credit losses, and any such losses to date have been within management's expectations.  The allowance for credit losses is determined by estimating the lifetime expected credit losses, taking into account the Corporation's past experience of collecting payments as well as observable changes in and forecasts of future economic conditions that correlate with default on receivables.  At the point when the Corporation is satisfied that no recovery of the amount owing is possible, the amount is considered not recoverable and the financial asset is written off.  The $2.2 million allowance for credit losses at September 30, 2019 increased $1.2 million from $1.0 million at December 31, 2018.  As economic conditions change, there is risk that the Corporation could experience a greater number of defaults compared to 2018 which would result in an increased charge to earnings.

Inventory obsolescence
The value of the Corporation's new and used equipment and high value parts are evaluated by management throughout the year, on a unit-by-unit basis.  When required, provisions are recorded to ensure that the book value of equipment and parts are valued at the lower of cost or estimated net realizable value.  The Corporation performs an aging analysis to identify slow moving or obsolete lower value parts inventory and estimates appropriate obsolescence provisions related thereto.  The Corporation takes advantage of supplier programs that allow for the return of eligible parts for credit within specified time periods.  The inventory obsolescence charged to earnings for the three months ended September 30, 2019 was $1.1 million (2018 – $0.9 million ) and for the nine months ended September 30, 2019 was $3.3 million (2018 – $3.7 million ).  As economic conditions change, there is risk that the Corporation could have an increase in inventory obsolescence compared to prior periods which would result in an increased charge to earnings.

Goodwill and intangible assets
The value in use of goodwill and intangible assets has been estimated using the forecasts prepared by management for the next five years.  The key assumptions for the estimate are those regarding revenue growth, gross margin, discount rate and the level of working capital required to support the business.  These estimates are based on past experience and management's expectations of future changes in the market and forecasted growth initiatives.

The Corporation performs an annual impairment test of its goodwill and intangible assets unless there is an early indication that the assets may be impaired in which case the impairment tests would occur earlier. There was no early indication of impairment in the quarter ended September 30, 2019 .

Lease term of contracts with renewal options
The lease term is defined as the non-cancellable term of the lease, including any periods covered by a renewal option to extend the lease if it is reasonably certain that the renewal option will be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain that the termination option will not be exercised.

Significant judgement is used when evaluating whether the Corporation is reasonably certain that the lease renewal option will be exercised, including examining any factors that may provide an economic advantage for renewal. In the event of a significant event within the Corporation's control that could affect it's ability to exercise the renewal option, the lease term will be reassessed.

Changes in Accounting Policies

Accounting standards adopted during the period

IFRS 16 Leases
On January 1, 2019 , the Corporation adopted IFRS 16 using the modified retrospective transition method.

As a lessee
Assets and liabilities from a lease are initially measured on a present value basis.  The lease liabilities are measured at the present value of the remaining lease payments (including in-substance fixed payments), less any lease incentives receivable, variable payments that are based on an index or a rate, amounts expected to be payable by the lessor under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for early termination of a lease unless the Corporation is reasonably certain not to terminate early. The lease payments are discounted using the implicit interest rate in the lease or, if that rate is not readily determinable, the Corporation's incremental borrowing rate. The associated right-of-use assets are measured at the amount equal to the lease liability on January 1, 2019 , adjusted for any prepaid and accrued lease payments relating to the lease recognized in the statement of financial position immediately before the date of transition, with no impact on retained earnings.

The lease liability is measured at amortized cost using the effective interest rate method and is remeasured if there is a change in the future lease payments, if there is a change in the Corporation's estimate of the amounts expected to be payable or if the Corporation changes its assessments of whether it will exercise a purchase, renewal, or termination option. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement to the earlier of the date of the useful life of the right-of-use asset or to the end of the lease term. If a lease liability is remeasured, the corresponding adjustments are made to the carrying amount of the right-of-use asset, or in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

Short-term leases and leases of low value assets
The Corporation has elected not to recognize right-of-use assets and lease liabilities for short-term leases, defined as a lease having a term of 12 months or less and leases of low-value assets.  The respective lease payments associated with these leases are recognized in the statement of earnings on a straight-line basis, unless a different basis is deemed to be more appropriate.

As a lessor
There was no significant impact to lessor accounting from the adoption of IFRS 16.

The impact of the adoption of IFRS 16 as at January 1, 2019 is as follows:


As reported as at
December 31, 2018

Impact of adoption
of IFRS 16

Adjusted opening
balance as at
January 1, 2019

Property, plant and equipment

$

59.0

$

81.2

$

140.2

Accounts payable and accrued liabilities

253.0

(1.3)

251.6

Lease liabilities - current

4.6

14.0

18.6

Lease liabilities - non-current

9.1

68.5

77.6

 

Adjustments to Prior Period Comparative Financial Statements

As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018 , a correction of non-material errors in prior periods ("Other adjustments") was recorded impacting the prior year comparative periods.

The Corporation's prior period condensed consolidated interim statements of financial position have been impacted as follows by the Other adjustments:

As at September 30, 2018

As previously
reported

Other
adjustments

As adjusted

Inventory

$

370.0

$

(0.2)

$

369.8

Rental equipment

67.1

(0.8)

66.2

Deferred tax liabilities

0.7

(1.1)

(0.4)

Accounts payable and accrued liabilities

243.7

16.0

259.7

Income taxes payable

10.1

(2.3)

7.8

Other liabilities

3.3

(0.4)

2.9

Retained earnings

124.1

(13.3)

110.8

 

The Corporation's prior period condensed consolidated interim statement of earnings has been impacted as follows by the Other adjustments:

For the three months ended September 30, 2018

As previously
reported

Other
adjustments

As adjusted

Revenue

$

367.4

$

(0.3)

$

367.1

Cost of sales

296.1

1.3

297.4

Income tax expense

3.9

(0.4)

3.5

Net earnings

10.3

(1.2)

9.1

Basic earnings per share

$

0.52

$

(0.06)

$

0.46

Diluted earnings per share

$

0.51

$

(0.06)

$

0.45

 

For the nine months ended September 30, 2018

As previously
reported

Other
adjustments

As adjusted

Revenue

$

1,092.9

$

(1.0)

$

1,091.8

Cost of sales

883.5

3.1

886.6

Selling and administrative expenses

154.9

(0.2)

154.7

Restructuring and other related costs

3.8

(0.3)

3.5

Income tax expense

12.3

(1.0)

11.4

Net earnings

32.4

(2.6)

29.8

Basic earnings per share

$

1.65

$

(0.13)

$

1.52

Diluted earnings per share

$

1.61

$

(0.13)

$

1.48

 

The Corporation's prior period condensed consolidated interim statements of cash flows has been impacted as follows by the Other adjustments:

For the three months ended September 30, 2018

As previously
reported

Other
adjustments

As adjusted

Operating activities:




Net earnings

$

10.3

$

(1.2)

$

9.1

Income tax expense

3.9

(0.4)

3.5

Changes in non-cash operating working capital

(17.4)

1.7

(15.7)

Cash used in operating activities

(9.5)

(9.5)

 

For the nine months ended September 30, 2018

As previously
reported

Other
adjustments

As adjusted

Operating activities:




Net earnings

$

32.4

$

(2.6)

$

29.8

Intangible assets amortization

0.7

(0.2)

0.5

Income tax expense

12.3

(1.0)

11.4

Changes in non-cash operating working capital

(62.0)

4.1

(57.8)

Cash used in operating activities

(29.8)

0.3

(29.5)

Investing activities:




Property, plant and equipment additions

(2.7)

(0.3)

(3.0)

 

Risk Management and Uncertainties

As with most businesses, Wajax is subject to a number of marketplace and industry related risks and uncertainties which could have a material impact on operating results and Wajax's ability to pay cash dividends to shareholders.  Wajax attempts to minimize many of these risks through diversification of core businesses and through the geographic diversity of its operations.  In addition, Wajax has adopted an annual enterprise risk management assessment which is prepared by the Corporation's senior management and overseen by the Board of Directors and committees of the Board of Directors. The enterprise risk management framework sets out principles and tools for identifying, evaluating, prioritizing and managing risk effectively and consistently across Wajax. There are however, a number of risks that deserve particular comment which are discussed in detail in the MD&A for the year ended December 31, 2018 which can be found on SEDAR at www.sedar.com. There have been no material changes to the business of Wajax that require an update to the discussion of the applicable risks discussed in the MD&A for the year ended December 31, 2018 .

 

Disclosure Controls and Procedures and Internal Control over Financial Reporting

Wajax's management, under the supervision of its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), is responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR").

As at September 30, 2019 , Wajax's management, under the supervision of its CEO and CFO, had designed DC&P to provide reasonable assurance that information required to be disclosed by Wajax in annual filings, interim filings or other reports filed or submitted under applicable securities legislation is recorded, processed, summarized and reported within the time periods specified in such securities legislation.  DC&P are designed to ensure that information required to be disclosed by Wajax in annual filings, interim filings or other reports filed or submitted under applicable securities legislation is accumulated and communicated to Wajax's management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

As at September 30, 2019 , Wajax's management, under the supervision of its CEO and CFO, had designed ICFR to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. In completing the design, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its 2013 version of Internal Control – Integrated Framework. With regard to general controls over information technology, management also used the set of practices of Control Objectives for Information and related Technology created by the IT Governance Institute. The Corporation has excluded from its evaluation the ICFR of Delom, which was acquired on October 16, 2018 , as discussed in Note 6 of the consolidated financial statements and accompanying notes for the year ended December 31, 2018 . The total revenue subject to Delom's ICFR represented 5% of the Corporation's consolidated total revenue for the nine months ended September 30, 2019 . The total assets subject to Delom's ICFR represented 5% of the Corporation's consolidated total assets as at September 30, 2019 .

There was no change in Wajax's ICFR that occurred during the three months ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, Wajax's ICFR.

 

Non-GAAP and Additional GAAP Measures

The MD&A contains certain non-GAAP and additional GAAP measures that do not have a standardized meaning prescribed by GAAP.  Therefore, these financial measures may not be comparable to similar measures presented by other issuers.  Investors are cautioned that these measures should not be construed as an alternative to net earnings or to cash flow from operating, investing, and financing activities determined in accordance with GAAP as indicators of the Corporation's performance.  The Corporation's management believes that:

(i)

these measures are commonly reported and widely used by investors and management;

(ii)

the non-GAAP measures are commonly used as an indicator of a company's cash operating performance, profitability and ability to raise and service debt;

(iii)

the additional GAAP measures are commonly used to assess a company's earnings performance excluding its capital and tax structures; and

(iv)

"Adjusted net earnings" and "Adjusted basic and diluted earnings per share" provide indications of the results by the Corporation's principal business activities prior to recognizing non-recurring costs (recoveries) and losses (gains) from non-hedged derivative instruments and the MTIP share-based compensation plans. These adjustments to net earnings and basic and diluted earnings per share allow the Corporation's management to consistently compare periods by removing infrequent charges incurred outside of the Corporation's principal business activities and the impact of fluctuations in interest rates and the Corporation's share price.

(v)

"Adjusted EBITDA" provides an indication of the results by the Corporation's principal business activities prior to recognizing non-recurring costs (recoveries) and losses (gains) from non-hedged derivative instruments and the MTIP share-based compensation plans. These adjustments to EBITDA allow the Corporation's management to consistently compare periods by removing infrequent charges incurred outside of the Corporation's principal business activities and the impact of fluctuations in finance costs related to the Corporation's capital structure, tax rates, long-term assets and the Corporation's share price.

(vi)

"Pro-forma adjusted EBITDA" used in calculating the Leverage Ratio provides an indication of the results by the Corporation's principal business activities adjusted for the EBITDA of business acquisitions made during the period as if they were made at the beginning of the trailing 12-month period pursuant to the terms of the bank credit facility and prior to recognizing non-recurring costs (recoveries), losses (gains) from derivative instruments and share-based compensation plans.

 

Non-GAAP financial measures are identified and defined below:

Funded net debt

Funded net debt includes bank indebtedness and total long-term debt, net of cash.  Funded net debt is relevant in calculating the Corporation's Funded Net Debt to Total Capital, which is a non-GAAP measure commonly used as an indicator of a company's ability to raise and service debt.



Debt

Debt is funded net debt plus letters of credit.  Debt is relevant in calculating the Corporation's Leverage Ratio, which is a non-GAAP measure commonly used as an indicator of a company's ability to raise and service debt.



EBITDA

Net earnings (loss) before finance costs, income tax expense, depreciation and amortization.



EBITDA margin

Defined as EBITDA divided by revenue, as presented on the Condensed Consolidated Interim Statements of Earnings.



Adjusted net earnings (loss)

 

Net earnings (loss) before after-tax restructuring and other related costs (recoveries), (gain) loss recorded on sales of properties, non-cash losses (gains) on mark to market of derivative instruments and CSC project costs.



Adjusted basic and diluted
earnings (loss)
 per share

Basic and diluted earnings (loss) per share before after-tax restructuring and other related costs (recoveries), (gain) loss recorded on sales of properties, non-cash losses (gains) on mark to market of derivative instruments and CSC project costs.



Adjusted EBITDA

EBITDA before restructuring and other related costs (recoveries), (gain) loss recorded on sales of properties, non-cash losses (gains) on mark to market of derivative instruments, Delom transaction costs and CSC project costs.

Adjusted EBITDA margin

Defined as Adjusted EBITDA divided by revenue, as presented on the Condensed Consolidated Interim Statements of Earnings.



Pro-forma adjusted EBITDA

Defined as Adjusted EBITDA adjusted for the EBITDA of business acquisitions made during the period as if they were made at the beginning of the trailing 12-month period pursuant to the terms of the bank credit facility and the deduction of payments of lease liabilities.



Leverage ratio

 

The leverage ratio is defined as Debt at the end of a particular quarter divided by trailing 12-month Pro-forma adjusted EBITDA.  The Corporation's objective is to maintain this ratio between 1.5 times and 2.0 times.



Funded net debt to total
capital

Defined as funded net debt divided by total capital.  Total capital is the funded net debt plus shareholder's equity.



Backlog

Backlog is a management measure which includes the total sales value of customer purchase commitments for future delivery or commissioning of equipment, parts and related services. This differs from the remaining performance obligations as defined by IFRS 15.


Additional GAAP measures are identified and defined below:


Earnings (loss) before
finance costs and income
taxes (EBIT)

Earnings (loss) before finance costs and income taxes, as presented on the Condensed Consolidated Interim Statements of Earnings.



EBIT margin

Defined as EBIT divided by revenue, as presented on the Condensed Consolidated Interim Statements of Earnings.



 

Earnings (loss) before
income taxes (EBT)

 

Earnings (loss) before income taxes, as presented on the Condensed Consolidated Interim Statements of Earnings.



Working capital

Defined as current assets less current liabilities, as presented on the Condensed Consolidated Interim Statements of Financial Position.



Other working capital
amounts

Defined as working capital less trade and other receivables and inventory plus accounts payable and accrued liabilities, as presented on the Condensed Consolidated Interim Statements of Financial Position.

 

Reconciliation of the Corporation's net earnings to adjusted net earnings and adjusted basic and diluted earnings per share is as follows:


Three months ended

Nine months ended


September 30

September 30


2019

2018

2019

2018



(As adjusted)(3)


(As adjusted)(3)

Net earnings

$

7.6

$

9.1

$

27.3

$

29.8

Restructuring and other related costs, after-tax

2.9

0.4

3.9

2.5

Gain recorded on sales of properties, after-tax

(0.9)

Non-cash gains on mark to market of derivative instruments, after-tax

(0.2)

(0.4)

CSC project costs, after-tax

0.8

Adjusted net earnings

$

10.3

$

9.5

$

31.7

$

31.4

Adjusted basic earnings per share(1)(2)

$

0.52

$

0.48

$

1.59

$

1.60

Adjusted diluted earnings per share(1)(2)

$

0.51

$

0.47

$

1.55

$

1.56

(1)

At September 30, 2019, the numbers of basic and diluted shares outstanding were 20,003,554 and 20,409,514, respectively for the three months ended and 19,995,004 and 20,398,075, respectively for the nine months ended.

(2)

At September 30, 2018, the numbers of basic and diluted shares outstanding were 19,769,733 and 20,241,986, respectively for the three months ended and 19,598,065 and 20,069,441, respectively for the nine months ended.

(3)

As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018, a correction of non-material errors in prior periods ("Other adjustments") was recorded impacting the prior year comparative periods. See the Adjustments to Prior Period Comparative Financial Statements section.

 

Reconciliation of the Corporation's net earnings to EBT, EBIT, EBITDA, Adjusted EBITDA and Pro-forma adjusted EBITDA is as follows:


For the three months
ended

For the nine months
ended

For the twelve months
ended


September 30
2019

September 30
2018

September 30
2019

September 30
2018

September 30
2019

June 30
2019

December 31
2018



(As adjusted)(9)


(As adjusted)(9)




Net earnings

$

7.6

$

9.1

$

27.3

$

29.8

$

33.4

$

35.0

$

35.9

Income tax expense

2.9

3.5

10.5

11.4

13.1

13.7

14.0

EBT

10.4

12.6

37.8

41.1

46.5

48.7

49.8

Finance costs(1)

5.2

2.2

14.3

5.9

17.2

14.2

8.8

EBIT

15.6

14.9

52.1

47.1

63.6

62.9

58.6

Depreciation and amortization(2)

13.4

7.1

40.2

18.3

48.8

42.5

27.0

EBITDA

29.1

22.0

92.3

65.4

112.5

105.4

85.6

Restructuring and other related costs(3)

4.1

0.6

5.4

3.5

6.1

2.6

4.1

Gain recorded on sales of properties

(1.1)

(1.2)

Non-cash (gains) losses on mark to
market of derivative instruments(4)

(0.2)

(0.5)

1.6

1.9

2.2

Delom transaction costs(5)

0.5

0.5

0.5

CSC project costs(6)

1.2

1.2

1.1

Adjusted EBITDA

$

32.9

$

22.6

$

98.4

$

67.8

$

121.8

$

111.4

$

91.2

Delom acquisition pro-forma adjusted EBITDA(7)

2.1

6.3

2.1

6.3

Pro-forma adjusted EBITDA, as previously reported

$

32.9

$

24.7

$

98.4

$

74.1

$

121.8

$

113.5

$

97.5

Payment of lease liabilities(8)

(4.9)

(1.0)

(16.3)

(3.1)

(17.5)

(13.6)

(4.2)

Pro-forma adjusted EBITDA

$

28.0

$

23.6

$

82.0

$

71.0

$

104.3

$

100.0

$

93.3

(1)

As a result of the adoption of IFRS 16, the Corporation incurred interest costs that are included in finance costs of $1.4 million for the three months ended September 30, 2019 and $3.5 million for the nine months ended September 30, 2019.

(2)

As a result of the adoption of IFRS 16, the Corporation incurred depreciation expense that is included in depreciation and amortization of $4.5 million for the three months ended September 30, 2019 and $13.6 million for the nine months ended September 30, 2019.

(3)

For 2019, restructuring and other related costs includes costs relating to the Finance Reorganization Plan and the Management Realignment.  The Finance Reorganization Plan commenced in the first quarter of 2018 and consists of severance, project management and interim duplicate labour costs as the Corporation redesigns its finance function. The Management Realignment commenced in the third quarter of 2019 and consists primarily of severance costs as the Corporation simplifies its regional management structure, strengthens the partnership between sales and product support, and integrates the Corporation's legacy ERS business with Delom.


For 2018, restructuring and other related costs includes costs relating to the Finance Reorganization Plan, a leadership realignment within the Corporation's ERS business, and the 2016 strategic reorganization. The leadership realignment within the ERS business was intended to better align such business with the One Wajax model. The 2016 strategic reorganization costs in 2018 related to additional severance costs as part of the Corporation's transition to the One Wajax model.

(4)

Non-cash losses (gains) on mark to market of non-hedged derivative instruments.

(5)

In 2018, the Corporation incurred transaction costs in order to acquire Delom. These costs were primarily for advisory services.

(6)

In 2019, the Corporation incurred professional fees relating to the CSC project.

(7)

Pro-forma adjusted EBITDA for Delom for pre-acquisition periods, to adjust for the EBITDA of business acquisitions made during the period as if they were made at the beginning of the trailing 12-month period pursuant to the terms of the bank credit facility.

(8)

Effective with the reporting period beginning on January 1, 2019 and the adoption of IFRS 16, the Corporation has amended the definition of Funded net debt to exclude lease liabilities not considered part of debt. As a result, the corresponding lease costs must also be deducted from EBITDA for the purpose of calculating the leverage ratio.

(9)

As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018, a correction of non-material errors in prior periods ("Other adjustments") was recorded impacting the prior year comparative periods. See the Adjustments to Prior Period Comparative Financial Statements section.

 

Calculation of the Corporation's funded net debt, debt and leverage ratio is as follows:

null

September 30

June 30

December 31

December 31


2019

2019

2018

2018




(Pro-forma)(1)

(As previously
reported)

Bank indebtedness (cash)

$

0.4

$

(4.6)

$

3.9

$

3.9

Obligations under finance leases

13.7

Long-term debt

287.4

270.3

218.1

218.1

Funded net debt(1)

$

287.8

$

265.7

$

222.0

$

235.8

Letters of credit

5.4

5.4

6.1

6.1

Debt

$

293.3

$

271.2

$

228.1

$

241.9

Pro-forma adjusted EBITDA(2)

$

104.3

$

100.0

$

93.3

$

97.5