Wajax Reports 2017 Third Quarter Results

TSX Symbol:  WJX

TORONTO, Nov. 7, 2017 /CNW/ - Wajax Corporation ("Wajax" or the "Corporation") today announced improved 2017 third quarter results compared to the previous year.

Third Quarter Highlights

• Revenue increased $12.4 million or 4%, to $299.0 million in Q3 2017 versus $286.6 million for the same period in 2016. Revenue in Q3 2016 included approximately $20 million in additional mining equipment sales that were not repeated in Q3 2017. Adjusting for these sales, revenue increased 12% year-over-year. Regionally:
• • Revenue in western Canada of $124 million declined 4%. Sales gains in the majority of product categories, led by strong gains in construction, partially offset reductions in mining. Revenue in western Canada in Q3 2016 included approximately $20 million in additional mining equipment sales that were not repeated in Q3 2017. Adjusting for these sales, revenue in western Canada increased 14% year-over-year;
  • Revenue in central Canada of $71 million increased 7% due primarily to improved results in construction and material handling; and
  • Revenue in eastern Canada of $104 million increased 13% due primarily to improved results in forestry, material handling and on-highway transportation.
• EBIT increased to $15.3 million in Q3 2017 versus $13.4 million for the same period in 2016.⁽¹⁾ The year-over-year improvement is attributable to increased revenue and improved parts and service margin rates, partially offset by higher selling and administrative expenses relating primarily to incentive compensation and an accrual of $1.0 million in the prior year for insurance proceeds related to the Fort McMurray wildfires that occurred in the second quarter of 2016.
• Based on the improved EBIT result, the Corporation generated net earnings of $9.1 million, or $0.46 per share, for Q3 2017 versus $7.6 million, or $0.38 per share, for the same period in 2016.
• The Corporation's Q3 2017 backlog was $170.3 million, an increase of $10.6 million, or 7%, from the Q2 2017 backlog of $159.7 million, due primarily to higher construction and material handling equipment orders.⁽¹⁾ Compared to the third quarter of 2016, backlog increased $28.2 million, or 20%, due primarily to higher material handling equipment and industrial parts orders.⁽¹⁾
• Inventories of $333.0 million increased $27.9 million from Q2 2017 inventories of $305.1 million. The increase in inventories primarily relates to an increase in equipment inventories, which include a new construction equipment line, support the Corporation's increasing backlog and relate to an expansion of construction equipment rental operations.
• The Corporation's leverage ratio increased to 2.08 times primarily as a result of a higher debt level relating to increased inventories, offset partially by the higher trailing 12-month adjusted EBITDA.⁽¹⁾
• Wajax declared a Q4 2017 dividend of $0.25 per share ($1.00 per share annualized) payable on January 3, 2018 to shareholders of record on December 15, 2017.

The Corporation also today announced that Michael Gross, Senior Vice President, Power and Marine, will be leaving Wajax to pursue other opportunities.  Mr. Gross has agreed to remain with the Corporation for a period sufficient to assist with the orderly transition of his responsibilities. 

Commenting on the Corporation's third quarter results, President and Chief Executive Officer Mark Foote stated, "We are satisfied with the improvement in our third quarter financial results, in particular increased revenue in eastern and central Canada.  As compared to the same period last year, we saw gains across most categories, led by higher construction and material handling equipment sales in western and central Canada.  These equipment sales gains helped offset the large mining shovel sale achieved in the same period last year, but not repeated this year.  We are also very pleased with our safety performance in the third quarter, with a 36% reduction in TRIF versus the prior year and no lost time incidents.⁽⁴⁾  We express our thanks to the entire Wajax team for their hard work and ongoing dedication to improving customer service, working safely and delivering better financial results."

Mr. Foote continued, "Although third quarter results continue to show year-over-year improvement, management expects the balance of the year to be challenging.  While market conditions have improved in western Canada, pressure on gross margins and customer spending in many major resource and industrial markets continue to be factors affecting near-term results.  The Corporation remains focused on generating revenue sufficient to offset the four large mining shovel deliveries made in 2016, which are not expected to be repeated in 2017, managing margins effectively and ensuring the Corporation delivers the expected benefits from the 2016 strategic reorganization.  Assuming the achievement of these objectives, management continues to anticipate adjusted net earnings for 2017 will increase compared to 2016 adjusted net earnings."⁽¹⁾ 

Mr. Foote concluded, "We're working closely with the Board of Directors to update our strategic plan, which defines objectives for organic growth, acquisitions and operations.  I remain confident in our long term growth potential and opportunities for improved productivity, both of which are enhanced by the benefits of the reorganization completed in the first quarter of 2017.  We've expanded our financial capacity and financial flexibility through the enhanced credit facility and early redemption of the senior notes.  Further details on our strategic plan will be shared in the first quarter of next year."

Wajax Corporation

Founded in 1858, Wajax (TSX: WJX) is one of Canada's longest-standing and most diverse industrial products and services providers. The Corporation operates an integrated distribution system providing sales, parts and services to a broad range of customers in diversified sectors of the Canadian economy, including: transportation, forestry, industrial and commercial, construction, oil sands, mining, 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 7, 2017 at 1:00 p.m. ET.  To access the Webcast, please visit our website wajax.com, under "Investor Relations", "Events and Presentations", "Webcasts" and click on the webcast link.

Notes:

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 outlook for major resource and industrial markets for the remainder of 2017; our areas of focus for the remainder of 2017, including generating revenue sufficient to offset the four large mining shovel deliveries we made in 2016 which are not expected to repeat in 2017, effectively managing our margins and delivering the expected benefits from our 2016 strategic reorganization; our outlook for 2017 adjusted net earnings should we be successful in achieving the forgoing objectives; our 4 Points of Growth Strategy and the goals for such strategy, including our goal of becoming Canada's leading industrial products and services provider; 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, assumptions regarding general business and economic conditions; the supply and demand for, and the level and volatility of prices for, oil and other commodities; financial market conditions, including interest rates; our ability to execute our 4 Points of Growth strategy, including our ability to develop our core capabilities, execute on our organic growth priorities, complete and effectively integrate acquisitions and to successfully implement new information technology platforms, systems and software; our ability to realize the expected benefits from our 2016 strategic reorganization, including cost savings and productivity gains; 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 and other commodities; a continued or prolonged decrease in the price of oil; 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, 2016, 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 2017

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, 2017.  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, 2017, the annual audited consolidated financial statements and accompanying notes for the year ended December 31, 2016 and the associated MD&A.  Information contained in this MD&A is based on information available to management as of November 7, 2017.

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

Strategic Direction and Outlook

The strategic reorganization announced in March 2016 was completed during the first quarter of 2017. The Corporation continues to estimate annualized cost savings from the reorganization of approximately $17 million, starting in 2017. Management anticipates that certain volume related costs and investments in strategic initiatives to pursue organic growth opportunities will be incurred in 2017, which will partially offset these cost savings.

Management remains committed to, and confident in, the execution of our 4 Points of Growth Strategy to create value for customers, vendors and shareholders.

Wajax's 4 Points of Growth

Working closely with the Board of Directors, the Corporation is completing an update of its strategic plan that defines objectives for organic growth, acquisitions strategy and operational programs. The Corporation is confident in its growth potential and opportunities for improved productivity, both of which are enhanced by the benefits of the reorganization completed in the first quarter of 2017. The recent early redemption and refinancing of the senior notes using the enhanced credit facility reduces the cost of debt and provides expanded flexibility to pursue growth initiatives. The Corporation plans to provide further information on its strategy in the first quarter of 2018.

Looking forward to the remainder of 2017, although third quarter results continue to show year-over-year improvement, management expects the balance of the year to be challenging. While market conditions have improved in western Canada, pressure on gross margins and customer spending in many major resource and industrial markets continue to be factors affecting near-term results. The Corporation remains focused on generating revenue sufficient to offset the four large mining shovel deliveries made in 2016, which are not expected to be repeated in 2017, managing margins effectively and ensuring the Corporation delivers the expected benefits from the 2016 strategic reorganization. Assuming the achievement of these objectives, management continues to anticipate adjusted net earnings for 2017 will increase compared to 2016 adjusted net earnings.⁽¹⁾  See the Non-GAAP and Additional GAAP Measures and Cautionary Statement Regarding Forward-Looking Information sections.

Highlights for the Quarter

• Revenue increased $12.4 million or 4%, to $299.0 million in Q3 2017 versus $286.6 million for the same period in 2016. Revenue in Q3 2016 included approximately $20 million in additional mining equipment sales that were not repeated in Q3 2017. Adjusting for these sales, revenue increased 12% year-over-year. Regionally:
• • Revenue in western Canada of $124 million declined 4%. Sales gains in the majority of product categories, led by strong gains in construction, partially offset reductions in mining. Revenue in western Canada in Q3 2016 included approximately $20 million in additional mining equipment sales that were not repeated in Q3 2017. Adjusting for these sales, revenue in western Canada increased 14% year-over-year.
  • Revenue in central Canada of $71 million increased 7% due primarily to improved results in construction and material handling.
  • Revenue in eastern Canada of $104 million increased 13% due primarily to improved results in forestry, material handling and on-highway transportation.
• EBIT increased to $15.3 million in Q3 2017 versus $13.4 million for the same period in 2016.⁽¹⁾ The year-over-year improvement is attributable to increased revenue and improved parts and service margin rates, partially offset by higher selling and administrative expenses relating primarily to incentive compensation and an accrual of $1.0 million in the prior year for insurance proceeds related to the Fort McMurray wildfires that occurred in the second quarter of 2016.
• Based on the improved EBIT result, the Corporation generated net earnings of $9.1 million, or $0.46 per share, for Q3 2017 versus $7.6 million, or $0.38 per share, for the same period in 2016.
• The Corporation's Q3 2017 backlog was $170.3 million, an increase of $10.6 million, or 7%, from the Q2 2017 backlog of $159.7 million, due primarily to higher construction and material handling equipment orders.⁽¹⁾  Compared to the third quarter of 2016, backlog increased $28.2 million, or 20%, due primarily to higher material handling equipment and industrial parts orders.⁽¹⁾
• Inventories of $333.0 million increased $27.9 million from Q2 2017 inventories of $305.1 million. The increase in inventories primarily relates to an increase in equipment inventories, which include a new construction equipment line, support the Corporation's increasing backlog and relate to an expansion of construction equipment rental operations.
• The Corporation's leverage ratio increased to 2.08 times primarily as a result of a higher debt level  relating to increased inventories, offset partially by the higher trailing 12-month adjusted EBITDA.⁽¹⁾
• On September 20, 2017, the Corporation amended its bank credit facility, increasing the facility size from $250.0 million to $300.0 million, expanding financial covenants and extending the maturity date from August 12, 2020 to September 20, 2021. Proceeds from the amended bank credit facility were used on October 23, 2017 to redeem the senior notes outstanding.

 

Summary of Operating Results

 

Results of Operations

Revenue

Revenue in the third quarter of 2017 increased 4.3%, or $12.4 million, to $299.0 million, from $286.6 million in the third quarter of 2016. In addition to regional revenue commentary provided previously herein, the following factors contributed to the increase in revenue:

• Equipment sales have increased due primarily to higher construction and material handling equipment sales in all regions and higher forestry equipment sales in western and eastern Canada. These increases were partly offset by a decrease in mining equipment sales in western Canada and a decrease in power generation equipment sales in eastern Canada.
  
  
• Revenue from industrial parts has increased due primarily to increased bearings and power transmission sales in western and eastern Canada.
  
  
• Product support revenue has increased on strength in construction and on-highway parts and service sales in all regions, partially offset by lower mining sales in western Canada.

For the nine months ended September 30, 2017, revenue increased 3.8%, or $34.5 million, to $942.7 million, from $908.2 million in 2016. The following factors contributed to the increase in revenue:

• Equipment sales have increased due to higher construction equipment sales in western and central Canada, partially offset by a decrease in mining equipment sales in western Canada and lower power generation equipment sales in central Canada.
  
  
• Revenue from industrial parts has increased due primarily to increased bearings and power transmission sales in all regions and increased fluid power and process equipment sales in western and eastern Canada.
  
  
• Product support revenue has increased on strength in construction and on-highway parts and service sales in all regions.

Backlog
Backlog of $170.3 million at September 30, 2017 increased $10.6 million compared to June 30, 2017 due primarily to increases in construction and material handling equipment orders.  Backlog increased $28.2 million compared to September 30, 2016 due primarily to increases in material handling equipment and industrial parts orders.

Gross Profit
Gross profit increased $6.9 million in the third quarter of 2017, compared to the same quarter last year, due to higher gross profit margins and increased volumes. Gross profit margin of 21.0% in the third quarter of 2017 increased from 19.5% in the prior year due mainly to higher construction and on-highway parts margin rates and improved service margins.

For the nine months ended September 30, 2017, gross profit increased $18.1 million, compared to the same period last year, as a result of higher gross profit margins and increased volumes. Gross profit margin of 19.8% increased from 18.5% in the prior year due mainly to higher construction, mining and on-highway parts and service margins and higher off-highway parts margins.

Selling and administrative expenses
Selling and administrative expenses increased $5.0 million in the third quarter of 2017, compared to the same quarter last year, due mainly to higher annual incentive accruals and an accrual of $1.0 million in the prior year for insurance proceeds related to the Fort McMurray wildfires that occurred in the second quarter of 2016. This increase was partially offset by lower personnel costs attributable to headcount reductions from the Corporation's 2016 strategic reorganization. Selling and administrative expenses as a percentage of revenue increased to 15.9% in the third quarter of 2017 from 14.9% in the third quarter of 2016.

For the nine months ended September 30, 2017, selling and administrative expenses increased $3.0 million, compared to the same period last year. This increase was primarily due to an increase in annual incentive accruals and an accrual of $1.0 million in the prior year for insurance proceeds related to the Fort McMurray wildfires that occurred in the second quarter of 2016. These increases were partially offset by lower personnel costs as a result of headcount reductions from the Corporation's 2016 strategic reorganization. Selling and administrative expenses as a percentage of revenue decreased to 15.6% in 2017 from 15.8% in 2016.

In the third quarter of 2017, the Corporation realized $0.1 million (for the nine months ended September 30, 2017 – $4.3 million) of selling and administrative savings and an additional $0.2 million (for the nine months ended September 30, 2017 – $1.9 million) of cost of sales savings related to the strategic reorganization. The Corporation continues to estimate annualized cost savings from the 2016 strategic reorganization of approximately $17.0 million. The Corporation realized $8.6 million in cost savings in 2016 as a result of the strategic reorganization. Management anticipates certain volume related costs and investments in strategic initiatives to pursue organic growth opportunities will be incurred in 2017, which will partially offset the cost savings from the strategic reorganization.

Finance costs
Quarterly finance costs of $2.6 million decreased $0.3 million compared to 2016 due to lower debt levels.  See the Liquidity and Capital Resources section.

For the nine months ended September 30, 2017, finance costs of $7.8 million decreased $0.6 million compared to the same period in 2016 due to lower debt levels. See the Liquidity and Capital Resources section.

Income tax expense
The Corporation's effective income tax rate of 28.3% for the third quarter of 2017 was higher compared to the statutory rate of 26.9% due to the impact of expenses not deductible for tax purposes.  The Corporation's effective income tax rate of 28.1% for the third quarter of 2016 was higher compared to the statutory rate of 26.9% due to the impact of expenses not deductible for tax purposes. The statutory income tax rate of 26.9% is unchanged compared to 2016.

The Corporation's effective income tax rate for the nine months ended September 30, 2017 of 28.0% was higher compared to the statutory rate of 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, 2016 of 37.0% was higher compared to the statutory rate of 26.9% due to the impact of expenses not deductible for tax purposes. The statutory income tax rate of 26.9% is unchanged compared to 2016.

Net earnings
In the third quarter of 2017, the Corporation had net earnings of $9.1 million, or $0.46 per share, compared to $7.6 million, or $0.38 per share, in the third quarter of 2016.  The $1.5 million increase in net earnings resulted primarily from higher volumes and improved gross profit margins offset partially by higher selling and administrative expenses compared to the prior quarter.

For the nine months ended September 30, 2017, the Corporation had net earnings of $22.9 million, or $1.16 per share, compared to $2.1 million, or $0.11 per share, in the same period in 2016. The $20.8 million increase in net earnings resulted primarily from higher volumes and gross profit margins and a restructuring recovery of $0.2 million after-tax or $0.01 per share in the current year compared to restructuring costs of $9.1 million after-tax, or $0.46 per share, in the prior year.

Adjusted net earnings (See the Non-GAAP and Additional GAAP Measures section)
Adjusted net earnings for the nine months ended September 30, 2017 excludes the restructuring recovery of $0.2 million after-tax, or $0.01 per share. As such, adjusted net earnings were $22.6 million, or $1.15 per share for the nine months ended September 30, 2017.

For the nine months ended September 30, 2016, adjusted net earnings excludes restructuring costs of $9.1 million after-tax, or $0.46 per share. As such, adjusted net earnings were $11.2 million, or $0.56 per share for the nine months ended September 30, 2016.

Comprehensive income
Total comprehensive income of $9.3 million in the third quarter of 2017 included net earnings of $9.1 million and other comprehensive income of $0.2 million.  In the third quarter of 2016, total comprehensive income consisted of net earnings of $7.6 million and other comprehensive income of $0.7 million.

For the nine months ended September 30, 2017, the total comprehensive income of $22.4 million included net earnings of $22.9 million offset partially by an other comprehensive loss of $0.4 million. For the nine months ended September 30, 2016, the total comprehensive income of $1.3 million included net earnings of $2.1 million and an other comprehensive loss of $0.8 million. The other comprehensive loss in the prior year resulted from $0.4 million of losses on derivative instruments designated as cash flow hedges in prior periods reclassified to cost of inventory and $1.2 million of losses on derivative instruments designated as cash flow hedges outstanding at the end of the period.

Senior Vice President, Power and Marine
The Corporation announced on November 7, 2017 Michael Gross, Senior Vice President, Power and Marine, will be leaving Wajax to pursue other opportunities.  Mr. Gross has agreed to remain with the Corporation for a period sufficient to assist with the orderly transition of his responsibilities. 

Selected Quarterly Information

The following table summarizes unaudited quarterly consolidated financial data for the eight most recently completed quarters.  This quarterly information is unaudited but has been prepared on the same basis as the 2016 annual audited consolidated financial statements.

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

The first quarter 2016 net loss of $9.7 million included after-tax restructuring costs of $9.1 million. Excluding the restructuring costs, first quarter 2016 adjusted net loss was $0.6 million.  The fourth quarter 2015 net loss of $33.3 million included after-tax impairment of goodwill and intangible assets of $37.3 million. Excluding the impairment of goodwill and intangible assets, fourth quarter 2015 adjusted net earnings was $4.0 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

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 either support key growth initiatives or fluctuations in working capital levels during changes in economic cycles.  See the Funded Net Debt section below.

Shareholders' Equity

The Corporation's shareholders' equity at September 30, 2017 of $279.6 million increased $5.2 million from June 30, 2017, as earnings of $9.1 million exceeded dividends declared of $4.9 million. For the nine months ended September 30, 2017 the Corporation's shareholders' equity increased $2.8 million, as earnings of $22.9 million exceeded dividends declared of $14.7 million and shares purchased through two employee benefit plan trusts funded by the Corporation (for future settlement of share-based compensation plan awards) of $7.5 million.

The Corporation's share capital, included in shareholders' equity on the balance sheet, consists of:

At the date of this MD&A, the Corporation had 19,504,107 common shares issued and outstanding, net of shares held in trust.

At September 30, 2017, 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") and the Deferred Share Unit Plan ("DSUP"). 

As of September 30, 2017, there were 370,791 (2016 – 366,584) SOP and DDSUP (treasury share settled) rights outstanding and 538,252 (2016 – 324,440) MTIP and DSUP (market-purchased share settled) rights outstanding.  At September 30, 2017, 370,791 (2016 – 360,826) SOP and DDSUP rights were vested. At September 30, 2017, the number of shares held in trust approximates the number of market-purchased share settled rights outstanding. Depending on the actual level of achievement of the performance targets associated with such MTIP and DSUP grants, the number of shares required to satisfy the Corporation's obligations could be higher or lower.

Wajax recorded compensation expense of $0.7 million for the quarter (2016 – $0.7 million) and $2.7 million for the nine months ended September 30, 2017 (2016 – $1.6 million) in respect of these plans.

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

Funded net debt of $153.7 million at September 30, 2017 increased $12.5 million compared to $141.2 million at June 30, 2017.  The increase during the quarter was due primarily to cash used in operating activities of $4.8 million, dividends paid of $4.9 million and finance lease payments of $1.0 million.

Funded net debt of $153.7 million at September 30, 2017 increased $27.7 million compared to $126.0 million at December 31, 2016. The increase during the period was due primarily to dividends paid of $14.8 million, common shares purchased and held in trust of $7.5 million and finance lease payments of $3.1 million.

The Corporation's ratio of funded net debt to total capital increased to 35.5% at September 30, 2017 from 34.0% at June 30, 2017, primarily due to the higher funded net debt in the current period.

The Corporation's leverage ratio of 2.08 times at September 30, 2017 increased from the June 30, 2017 ratio of 1.95 times due to the higher debt level offset partially by the higher trailing 12-month adjusted EBITDA. See the Non-GAAP and Additional GAAP Measures section.

See the Liquidity and Capital Resources section.

Financial Instruments

Wajax uses derivative financial instruments in the management of its foreign currency and interest rate exposures.  Wajax's policy restricts the use of derivative financial instruments for trading or speculative purposes. 

Wajax enters into short-term currency 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, 2017, Wajax had the following contracts outstanding:

• to buy U.S. $34.0 million (December 31, 2016 – to buy U.S. $55.1 million), and
• to sell U.S. $11.8 million (December 31, 2016 – to sell U.S. $10.8 million).

The U.S. dollar contracts expire between October 2017 and May 2018, with a weighted average U.S./Canadian dollar rate of 1.2794.

Contractual Obligations

There have been no material changes to the Corporation's contractual obligations since December 31, 2016. See the Liquidity and Capital Resources section.

Off Balance Sheet Financing

Off balance sheet financing arrangements include operating lease contracts for facilities with various landlords and other equipment related mainly to office equipment. There have been no material changes to the Corporation's total obligations for all operating leases since December 31, 2016.  See the Contractual Obligations section above.

Although Wajax's consolidated contractual annual lease commitments decline year-by-year, it is anticipated that existing leases will either 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 $72.1 million (June 30, 2017 – $51.4 million) of consigned inventory on-hand from a major manufacturer at September 30, 2017, net of deposits of $7.3 million (June 30, 2017 – $7.2 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 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, senior notes and cash generated from operations.

Bank and Non-bank Credit Facilities and Senior Notes

On September 20, 2017, the Corporation amended its bank credit facility, extending the maturity date from August 12, 2020 to September 20, 2021. In addition, a $50 million non-revolving term facility was added to the existing $250 million revolving term portion of the facility, increasing the total facility size to $300 million. The existing financial covenants under the credit facility restricting distributions, acquisitions and investments have been increased to a leverage ratio of 4.0 times. The $0.4 million cost of amending the facility has been capitalized and will be amortized over the remaining term of the facility.

On September 20, 2017, the Corporation issued a notice of redemption for all of its outstanding 6.125% senior notes due October 23, 2020. The redemption date was October 23, 2017 and the redemption price was 103.063% of the principal amount of the senior notes, plus accrued and unpaid interest to the redemption date.

At September 30, 2017, Wajax had borrowed $18.0 million and issued $7.3 million of letters of credit for a total utilization of $25.3 million of its $300 million bank credit facility.  In addition, Wajax had $125 million in senior notes outstanding bearing an interest rate of 6.125% per annum, payable semi-annually.  Borrowing capacity under the bank credit facility is dependent on the level of inventories on-hand and outstanding trade accounts receivables.  At September 30, 2017, borrowing capacity under the bank credit facility was equal to $300 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, 2017. 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.  The senior notes are unsecured and contain customary incurrence based covenants.  All covenants were met as at September 30, 2017.

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, 2017, Wajax had no utilization of the interest bearing equipment financing facilities.

As of November 7, 2017, Wajax maintained a bank credit facility with a limit of $300 million and an additional $25 million in credit facilities with non-bank lenders, which is permitted under the bank credit facility. As at September 30, 2017, $274.7 million was unutilized under the bank facility and $25 million was unutilized under the non-bank facilities.  Subsequent to September 30, 2017, $128.8 million was drawn on the bank credit facility to pay for the redemption of the senior notes. 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 markets to fund significant acquisitions.

In addition, the Corporation's tolerance to interest rate risk decreases/increases as the Corporation's leverage ratio increases/decreases.  At September 30, 2017, $125 million of the Corporation's funded net debt, or 81%, 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 Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2017 and September 30, 2016.

Cash (Used In) Generated From Operating Activities
Cash used in operating activities amounted to $4.8 million in the third quarter of 2017, compared to cash generated from operating activities of $17.9 million in the same quarter of the previous year.  The decrease of $22.7 million was mainly attributable to a decrease in cash generated from non-cash working capital of $21.5 million and an increase in rental equipment additions of $1.3 million.

Rental equipment additions in the third quarter of 2017 of $5.8 million (2016 – $4.5 million) related primarily to lift trucks.

For the nine months ended September 30, 2017, cash used in operating activities amounted to $0.9 million, compared to cash generated from operating activities of $30.0 million for the same period in the previous year. The $30.9 million decrease was mainly attributable to a decrease in cash generated from non-cash working capital of $52.6 million offset partially by higher net earnings of $20.8 million.

For the nine months ended September 30, 2017, rental equipment additions of $12.3 million (2016 – $9.7 million) related primarily to lift trucks.

Significant components of non-cash operating working capital, along with changes for the three and nine months ended September 30, 2017 and September 30, 2016 include the following:

Significant components of the changes in non-cash operating working capital for the quarter ended September 30, 2017 compared to the quarter ended September 30, 2016 are as follows:

• Trade and other receivables increased $4.2 million in 2017 compared to a decrease of $0.6 million in 2016. The increase in 2017 resulted primarily from higher trade receivables from certain large oil sands customers in the third quarter.
  
  
• Contracts in progress decreased $1.4 million in 2017 compared to a decrease of $0.6 million in 2016. The decrease in 2017 reflects a reduction in contract revenue recognized in advance of billings related to power generation projects.
  
  
• Inventories increased $27.2 million in 2017 compared to a decrease of $0.2 million in 2016. The increase in 2017 was due to higher construction, mining and material handling equipment inventory.
  
  
• Accounts payable and accrued liabilities increased $11.6 million in 2017 compared to an increase of $1.7 million in 2016. The increase in 2017 resulted primarily from higher trade payables.

Significant components of the changes in non-cash operating working capital for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 are as follows:

• Trade and other receivables decreased $20.0 million in 2017 compared to an increase of $8.0 million in 2016. The decrease in 2017 resulted primarily from lower mining sales activity. The increase in 2016 resulted primarily from higher mining sales activity in the third quarter.
  
  
• Contracts in progress decreased $5.4 million in 2017 compared to a decrease of $0.4 million in 2016. The decrease in 2017 reflects a reduction in contract revenue recognized in advance of billings related to power generation projects.
  
  
• Inventories increased $47.5 million in 2017 compared to a decrease of $20.7 million in 2016. The increase in 2017 was due to higher equipment and work in process inventory. The decrease in 2016 was due to lower inventory levels driven primarily by lower sales activity and higher inventory obsolescence and lower construction equipment inventory.
  
  
• Accounts payable and accrued liabilities decreased $24.8 million in 2017 compared to an increase of $4.5 million in 2016. The decrease in 2017 resulted primarily from lower trade payables due in part to the payment of equipment inventory. The increase in 2016 resulted from the higher trade payables due primarily to a large mining equipment payable and the balance remaining in the restructuring cost provision recorded in the first quarter of 2016.

Investing Activities
During the third quarter of 2017, Wajax invested $0.7 million in property, plant and equipment additions, net of disposals, compared to $0.2 million in the third quarter of 2016. For the nine months ended September 30, 2017, Wajax invested $1.2 million in property, plant and equipment additions, net of disposals, compared to $2.4 million for the nine months ended September 30, 2016.

Financing Activities
The Corporation generated $11.4 million of cash from financing activities in the third quarter of 2017 compared to a use of cash of $20.8 million from financing activities in the same quarter of 2016. Financing activities in the quarter included a net bank credit facility borrowing of $18.0 million offset partially by dividends paid to shareholders of $4.9 million (2016 – $5.0 million) and finance lease payments of $1.0 million (2016 – $1.0 million).

For the nine months ended September 30, 2017, the Corporation used $8.0 million of cash from financing activities compared to $35.1 million in the same period of 2016. Financing activities for the nine months ended September 30, 2017 included dividends paid to shareholders of $14.8 million (2016 – $15.0 million), common shares purchased and held by trusts funded by the Corporation of $7.5 million (2016 – $3.2 million) and finance lease payments of $3.1 million (2016 – $3.3 million) offset by a net bank credit facility borrowing of $18.0 million.

Dividends

Dividends to shareholders were declared as follows:

 

On November 7, 2017, Wajax announced a fourth quarter dividend of $0.25 per share ($1.00 per share annualized) payable on January 3, 2018 to shareholders of record on December 15, 2017.

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 doubtful accounts, inventory obsolescence and goodwill and intangible assets.

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 doubtful accounts
The Corporation is exposed to credit risk with respect to its trade and other receivables. However, this is somewhat minimized by the Corporation's diversified customer base, of over 30,000 customers with no one customer accounting for more than 10% of the Corporation's annual consolidated sales, which covers most business sectors across Canada. In addition, the Corporation's customer base spans large public companies, small independent contractors, OEM's 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 provisions for possible credit losses, and any such losses to date have been within management's expectations.  The provision for doubtful accounts is determined on an account-by-account basis.  The $1.1 million provision for doubtful accounts at September 30, 2017 remained unchanged from December 31, 2016.  As economic conditions change, there is risk that the Corporation could experience a greater number of defaults compared to 2016 which would result in an increased charge to earnings.

Inventory obsolescence
The value of the Corporation's new and used equipment is 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 is valued at the lower of cost or estimated net realizable value.  The Corporation performs an aging analysis to identify slow moving or obsolete parts inventories 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, 2017 was $1.6 million (2016 – $2.2 million) and for the nine months ended September 30, 2017 was $4.9 million (2016 – $8.6 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 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 test would occur earlier.  There was no early indication of impairment in the quarter ending September 30, 2017.

Operating segments
Determination of the Corporation's operating segments requires significant judgement.  Operating segments have changed since December 31, 2016 as follows:

With the completion of the strategic reorganization during the first quarter of 2017, the Corporation's Chief Executive Officer, who is also the Chief Operating Decision Maker, regularly assesses the performance of, and makes resource allocation decisions based on, the Corporation as a whole. As a result, the Corporation has determined that it comprises a single operating segment and therefore a single reportable segment, which differs from the three reportable segments which existed prior to the reorganization.

As a result of the reorganization, 2016 revenue under the previous three reportable segments has been presented in the single segment view as follows:

Changes in Accounting Policies

Accounting standards adopted during the period

Effective January 1, 2017, the Corporation adopted the amendments to IAS 7 Statement of Cash Flows, which requires disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flow and non-cash flow changes.

New standards and interpretations not yet adopted

The new standards or amendments to existing standards that may be significant to the Corporation set out below are not yet effective for the year ended December 31, 2017 and have not been applied in preparing these consolidated financial statements.

On January 1, 2018, the Corporation will be required to adopt IFRS 15 Revenue from Contracts with Customers. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgemental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The Corporation has established a project team to manage the adoption of the new standard. The team has identified each of the Corporation's material revenue streams and, with the assistance of an expert, has determined how the new standard will impact each of these revenue streams. The team has determined that the new standard will have an impact on the timing of revenue recognition for long term power generation projects, for which revenue is currently recognized over time. Under IFRS 15, revenue for some of these contracts will be recognized later at a point in time, if the contract does not meet the specified criteria for over time recognition. In addition, the new standard will change the Corporation's calculation of revenue for contracts with variable consideration. The Corporation is currently assessing which transition method to use when applying the new standard: the retrospective method or the cumulative effect method. The Corporation continues to assess the impact of the new standard on its reported revenue and expects to disclose its conclusions in its year-end financial statements.

On January 1, 2018, the Corporation will be required to adopt IFRS 9 Financial Instruments, which will replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. Additional changes to the new standard will align hedge accounting more closely with risk management. The Corporation is currently assessing the impact of this standard on its consolidated financial statements.

On January 1, 2019, the Corporation will be required to adopt IFRS 16 Leases. The new standard contains a single lease accounting model for lessees, whereby all leases with a term longer than 12 months are recognized on-balance sheet through a right-of-use asset and lease liability. The model features a front-loaded total lease expense recognized through a combination of depreciation and interest. Lessor accounting remains similar to current requirements. The Corporation's long term leases primarily relate to rental of real estate. The new standard will result in a material increase in right of use assets and lease obligations but the impact to earnings has not yet been estimated.

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. The enterprise risk management framework sets out principles and tools for identifying, evaluating, prioritizing and managing risk effectively and consistently across Wajax.  A number of more significant risks are discussed in detail in the MD&A for the year ended December 31, 2016 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, 2016.

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, 2017, 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, 2017, Wajax's management, under the supervision of its CEO and CFO, had designed internal control over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards ("IFRS"). In completing the design, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") 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 ("COBIT") created by the IT Governance Institute.

There was no change in Wajax's ICFR that occurred during the three months ended September 30, 2017 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:

Non-GAAP financial measures are identified and defined below:

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

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

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

Cautionary Statement Regarding Forward-Looking Information

This MD&A 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 MD&A are made as of the date of this MD&A, 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 MD&A includes forward looking statements regarding, among other things, our 4 Points of Growth strategy and the goals for such strategy, including our goal of becoming Canada's leading industrial products and services provider; our belief that achieving excellence in our areas of core capability will position Wajax to create value for its customers, employees, vendors and shareholders; the benefits we expect to achieve from our 2016 strategic reorganization, including full annualized cost savings of $17 million starting in 2017 and our expectation that, during 2017, such cost savings will be partially offset by certain volume related costs and investments in strategic initiatives; our commitment to and confidence in the 4 Points of Growth strategy; our updated strategic plan, expected to be communicated in Q1 2018; our confidence in our growth potential and opportunities for improved productivity, which we believe are enhanced by the completion of the strategic reorganization in Q1 2017; our outlook for major resource and industrial markets for the remainder of 2017; our areas of focus for the remainder of 2017, including generating revenue sufficient to offset the four large mining shovel deliveries we made in 2016 which are not expected to repeat in 2017, effectively managing our margins and delivering the expected benefits from our 2016 strategic reorganization; our outlook for 2017 adjusted net earnings should we be successful in achieving the forgoing objectives; our target leverage ratio range of 1.5 – 2.0 times; our financing, working and maintenance capital requirements, as well as our capital structure and leverage ratio; our estimate of the number of shares required to settle our obligations under certain share-based compensation plans; the adequacy of our debt capacity and sufficiency of our debt facilities; our intention and ability to access debt and equity markets or reduce dividends should additional capital be required; our expectation that the covenants under our senior notes would not be any more restrictive than under our bank credit facility; and the potential that we may be required to access equity or debt markets to fund significant acquisitions. These statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions regarding general business and economic conditions; the supply and demand for, and the level and volatility of prices for, oil and other commodities; financial market conditions, including interest rates; our ability to execute our 4 Points of Growth strategy, including our ability to develop our core capabilities, execute on our organic growth priorities, complete and effectively integrate acquisitions and to successfully implement new information technology platforms, systems and software; our ability to realize the expected benefits from our 2016 strategic reorganization, including cost savings and productivity gains; 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 and other commodities; a continued or prolonged decrease in the price of oil; 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 this MD&A under the heading "Risk Management and Uncertainties" and in our Annual Information Form for the year ended December 31, 2016, filed on SEDAR.  The forward-looking statements contained in this MD&A 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, are available on SEDAR at www.sedar.com.

WAJAX CORPORATION

Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2017

These unaudited condensed consolidated interim financial statements were approved by the Board of Directors on November 7, 2017.

 

WAJAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2017
(unaudited, amounts in thousands of Canadian dollars, except share and per share data)

1.   COMPANY PROFILE

Wajax Corporation (the "Corporation") is incorporated in Canada. The address of the Corporation's registered office is 2250 Argentia Road, Mississauga, Ontario, Canada. The Corporation operates an integrated distribution system providing sales, parts and services to a broad range of customers in diversified sectors of the Canadian economy, including:  transportation, forestry, industrial and commercial, construction, oil sands, mining,  metal processing, government and utilities and oil and gas.

2.   BASIS OF PREPARATION

Statement of compliance
These unaudited condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting and do not include all of the disclosures required for full consolidated financial statements.  Accordingly, these unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2016.  The significant accounting policies follow those disclosed in the most recently reported audited consolidated financial statements, except as disclosed in Note 3.

Basis of measurement
These unaudited condensed consolidated interim financial statements have been prepared under the historical cost basis except for derivative financial instruments and liabilities for cash-settled share-based payment arrangements that have been measured at fair value. The defined benefit liability is recognized as the net total of the fair value of the plan assets and the present value of the defined benefit obligation.

Functional and presentation currency
These unaudited condensed consolidated interim financial statements are presented in Canadian dollars, which is the Corporation's functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand, unless otherwise stated and except share and per share data.

3.   CHANGE IN ACCOUNTING POLICIES

Accounting standards adopted during the period

Effective January 1, 2017, the Corporation adopted the amendments to IAS 7 Statement of Cash Flows, which requires disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flow and non-cash flow changes. See Notes 7 and 8 for additional disclosures.

New standards and interpretations not yet adopted

On January 1, 2018, the Corporation will be required to adopt IFRS 15 Revenue from Contracts with Customers. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgemental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The Corporation has established a project team to manage the adoption of the new standard. The team has identified each of the Corporation's material revenue streams and, with the assistance of an expert, has determined how the new standard will impact each of these revenue streams. The team has determined that the new standard will have an impact on the timing of revenue recognition for long term power generation projects, for which revenue is currently recognized over time. Under IFRS 15, revenue for some of these contracts will be recognized later at a point in time, if the contract does not meet the specified criteria for over time recognition. In addition, the new standard will change the Corporation's calculation of revenue for contracts with variable consideration. The Corporation is currently assessing which transition method to use when applying the new standard: the retrospective method or the cumulative effect method. The Corporation continues to assess the impact of the new standard on its reported revenue and expects to disclose its conclusions in its year-end financial statements.

On January 1, 2018, the Corporation will be required to adopt IFRS 9 Financial Instruments, which will replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. Additional changes to the new standard will align hedge accounting more closely with risk management. The Corporation is currently assessing the impact of this standard on its consolidated financial statements.

On January 1, 2019, the Corporation will be required to adopt IFRS 16 Leases. The new standard contains a single lease accounting model for lessees, whereby all leases with a term longer than 12 months are recognized on-balance sheet through a right-of-use asset and lease liability. The model features a front-loaded total lease expense recognized through a combination of depreciation and interest. Lessor accounting remains similar to current requirements. The Corporation's long term leases primarily relate to rental of real estate. The new standard will result in a material increase in right of use assets and lease obligations but the impact to earnings has not yet been estimated.

4.   RENTAL EQUIPMENT

The Corporation acquired rental equipment with a cost of $5,775 during the quarter (2016 – $4,524) and $12,272 year to date (2016 – $9,748). Equipment with a carrying amount of $79 during the quarter (2016 - $770) and $111 year to date (2016 – $3,491) was transferred from inventories to rental equipment. Equipment with a carrying amount of $832 during the quarter (2016 - $1,993) and $2,179 year to date (2016 – $6,825) was transferred from rental equipment to inventories.

5.   PROPERTY, PLANT AND EQUIPMENT

The Corporation acquired property, plant and equipment with a cost of $1,025 during the quarter (2016 – $498) and $2,146 year to date (2016 – $6,119). Assets with a carrying amount of $234 during the quarter (2016 – $223) and $903 year to date (2016 – $590) were disposed of, resulting in a gain on disposal of $105 during the quarter (2016 – $46) and $59 year to date (2016 – $176).

6.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

7.   OBLIGATIONS UNDER FINANCE LEASES

8.   LONG-TERM DEBT

On September 20, 2017, the Corporation amended its bank credit facility, extending the maturity date from August 12, 2020 to September 20, 2021. In addition, a $50,000 non-revolving term facility was added to the existing $250,000 revolving term portion of the facility, increasing the total facility size to $300,000. The existing financial covenants under the credit facility restricting distributions, acquisitions and investments have been increased to a leverage ratio of 4.0 times. The $435 cost of amending the facility has been capitalized and will be amortized over the remaining term of the facility.

On September 20, 2017, the Corporation issued a notice of redemption for all of its outstanding 6.125% senior notes due October 23, 2020. The senior notes have been presented as a current liability on the statement of financial position, representing senior notes of $125,000 net of deferred financing costs of $1,625. The senior notes will be redeemed on October 23, 2017 using proceeds from the bank credit facility, which is presented on the statement of financial position as Long-term debt.

 

9.   SHARE CAPITAL

During the nine months ended September 30, 2017, the Corporation purchased 321,744 (2016 – 200,968) common shares on the open market through Employee Benefit Plan Trusts for the future settlement of certain share-based compensation plans. The cash consideration paid for the purchase was $7,499, (2016 - $3,245) the reduction in share capital was $2,901 (2016 - $1,808) and the premium charged to retained earnings was $4,598 (2016 - $1,437).

10.  DIVIDENDS DECLARED

During the three months ended September 30, 2017, the Corporation declared cash dividends of $0.25 per share or $4,876 (2016 – dividends of $0.25 per share or $4,948).

Year to date, the Corporation declared cash dividends of $0.75 per share or $14,708 (2016 – dividends of $0.75 per share or $14,913).

On November 7, 2017, the Corporation declared a fourth quarter 2017 dividend of $0.25 per share or $4,876.

11.  SHARE-BASED COMPENSATION PLANS

The Corporation has 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") and the Deferred Share Unit Plan ("DSUP").

a) Treasury share rights plans
The Corporation recorded compensation cost of $140 for the quarter (2016 – $178) and $458 for the year to date (2016 – $544) in respect of the SOP and DDSUP plans.

At September 30, 2017, all share rights were vested (September 30, 2016 – 360,826).

b) Market-purchased share rights plans
In March 2016, the MTIP and DSUP were amended such that all new grants under the MTIP, comprised of restricted share units ("RSUs") and performance share units ("PSUs"), and all new grants under the DSUP will be settled in market-purchased common shares of the Corporation on a one-for-one basis provided that the time and performance vesting criteria are met.  Whenever dividends are paid on the Corporation's shares, additional rights with a value equal to the dividends are credited to the participants' accounts with the same vesting conditions as the original MTIP and DSUP rights. Grants prior to March 2016 under these plans will be settled in cash. The Corporation recorded compensation cost of $672 for the quarter (2016 - $435) and $2,083 for the year to date (2016 – $784) in respect of these plans. The following RSUs and PSUs under the plans are outstanding:

At September 30, 2017, no RSUs or PSUs were vested (September 30, 2016 – nil).

c) Cash-settled rights plans
The Corporation recorded compensation recovery of $72 for the quarter (2016 – cost of $131) and compensation cost of $135 for the year to date (2016 – $238) in respect of the share-based portion of the MTIP and DSUP for grants dated before March, 2016. At September 30, 2017, the carrying amount of the share-based portion of these liabilities was $1,053 (September 30, 2016 – $1,097).

12.  REVENUE

 

13.  INCOME TAXES

The calculation of current tax is based on a combined federal and provincial statutory income tax rate of 26.9% (2016 – 26.9%). Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax assets and liabilities have been measured using an expected average combined statutory income tax rate of 26.9% based on the tax rates in years when the temporary differences are expected to reverse.

The reconciliation of the effective income tax rate is as follows:

 

14.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

For the quarter, 3,793 anti-dilutive share rights (2016 – nil) were excluded from the above calculation. For the year to date, 14,252 anti-dilutive share rights (2016 – nil) were excluded from the above calculation.

15.  CHANGES IN NON-CASH OPERATING WORKING CAPITAL

 

16.  OPERATING SEGMENTS

With the completion of the reorganization during the first quarter of 2017, the Corporation's Chief Executive Officer, who is also the Chief Operating Decision Maker, regularly assesses the performance of, and makes resource allocation decisions based on, the Corporation as a whole. As a result, the Corporation has determined that it comprises a single operating segment and therefore a single reportable segment, which differs from the three reportable segments which existed prior to the reorganization.

SOURCE Wajax Corporation

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