Wajax Reports 2018 First Quarter Results

TSX Symbol:  WJX

TORONTO, May 7, 2018 /CNW/ - Wajax Corporation ("Wajax" or the "Corporation") today announced improved 2018 first quarter results compared to the previous year.

 

First Quarter Highlights

• Revenue in the first quarter of 2018 increased 7.3%, or $23.3 million, to $342.7 million from $319.4 million in the first quarter of 2017.⁽¹⁾ The following factors contributed to the increase in revenue:
  
  
• • Regionally, revenue increased 12% in both western and eastern Canada and decreased 8% in central Canada. Central Canada trends are due in part to timing and market conditions and are expected to improve as the year progresses.
    
    
  • Equipment sales have increased due primarily to higher construction and material handling sales in all regions offset partially by a decrease in mining sales in western Canada.
    
    
  • Product support sales have decreased due primarily to lower construction sales in all regions and lower on-highway transportation sales in central Canada offset partially by higher mining sales in all regions. Declines in construction product support relate to the Wajax-initiated elimination in most markets of the JCB product line and certain major service projects in western Canada that occurred in the first quarter of 2017 that were not repeated this year.
    
    
  • Other sales have increased due to higher ERS revenues in western and eastern Canada.
    
    
• EBIT increased $4.1 million, or 35.7%, to $15.4 million in the first quarter of 2018 versus $11.3 million in the same period of 2017.⁽¹⁾⁽²⁾ The year-over-year improvement is attributable to increased revenue, improved equipment and ERS margin rates and lower selling and administrative expenses, including a gain recorded on sales of properties of $1.1 million, offset partially by restructuring and other related costs of $2.0 million in the current period.
  
  
• The Corporation generated net earnings of $9.9 million, or $0.51 per share, in the first quarter of 2018 versus $6.3 million, or $0.32 per share, in the same period of 2017. The Corporation generated adjusted net earnings of $10.4 million, or $0.53 per share, in the first quarter of 2018 versus $6.3 million, or $0.32 per share, in the same period of 2017. Adjusted net earnings in the first quarter of 2018 excludes the after-tax restructuring and other related costs and gain recorded on sales of properties.⁽¹⁾⁽²⁾
  
  
• The Corporation's backlog at March 31, 2018 of $205.4 million increased $26.5 million, or 15%, compared to December 31, 2017 due primarily to increases in power generation and industrial parts orders. Compared to the first quarter of 2017, backlog increased $45.4 million, or 28%, due primarily to higher power generation and industrial parts orders.⁽²⁾
  
  
• Inventories of $339.6 million at March 31, 2018 increased $26.4 million from December 31, 2017 due primarily to higher construction equipment inventory.⁽¹⁾
  
  
• The Corporation's leverage ratio increased marginally to 2.12 times at March 31, 2018 compared to 2.08 times at December 31, 2017.⁽¹⁾⁽²⁾ The increase in the leverage ratio was primarily due to the higher debt level relating to increased inventories and lower accounts payable and accrued liabilities, offset partially by the higher trailing 12-month adjusted EBITDA.
  
  
• The Corporation declared a Q2 2018 dividend of $0.25 per share payable on July 4, 2018 to shareholders of record on June 15, 2018.

Commenting on the Corporation's first quarter results, President and Chief Executive Officer Mark Foote stated, "We are pleased to see a strong year over year improvement in our first quarter financial results.  As compared to the same period last year, we saw gains in our targeted growth categories of construction, material handling and engineered repair services.  Regional strength in eastern and western Canada more than offset the decline in central Canada, where we expect trends to improve.  We are extremely proud to report a continued improvement on our safety record as evidenced by a 33% reduction in recordable incidents and a Total Recordable Incident Frequency (TRIF) rate of 1.05.  We will continue to dedicate significant time and resources to ensuring that every member of our team goes home safe and uninjured at the end of every shift." ⁽⁵⁾

Mr. Foote continued, "In 2018, Wajax expects year-over-year adjusted net earnings to increase, due primarily to organic revenue growth.  Given the Corporation's plans to increase market share in highly competitive categories, gross margins are expected to be under pressure.  While Wajax will make planned investments in programs that advance the Corporation's strategy, an ongoing focus on overall cost productivity is expected to assist Wajax in managing expected margin pressure.  Viewed over the full year, market conditions in central and eastern Canada are expected to be generally stable, and while conditions in western Canada may continue to improve in 2018, year-over-year gains are not expected to be as significant as they were in 2017." ⁽¹⁾

Mr. Foote concluded, "Our organic growth priorities have been adjusted to increase the focus on product and service categories where Wajax has market share opportunities and where customers are less affected by commodity prices.  Our team is very confident in our long term growth potential and opportunities for improved productivity, both of which are enhanced by the benefits of the strategic reorganization completed in the first quarter of 2017."

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: 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 First Quarter Financial Results Conference Call.  You are invited to listen to the live webcast on Tuesday May 8, 2018 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 expectations and outlook for 2018, including with respect to adjusted net earnings and gross margins, as well as our expectation that our ongoing focus on cost productivity will assist us in offsetting planned investments in our strategy and expected margin pressure; our outlook on regional market conditions in Canada during 2018, including our expectation that, while market conditions in western Canada may continue to improve in 2018, year-over-year gains are not expected to be as significant as they were in 2017; our confidence in our long term growth potential and opportunities for improved productivity; the benefits of the strategic reorganization we commenced in 2016 and completed in the first quarter of 2017; 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, assumptions regarding 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 and to successfully implement new information technology platforms, systems and software; our ability to realize the full 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, 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, 2017, 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 – Q1 2018

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 March 31, 2018.  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 March 31, 2018, the annual audited consolidated financial statements and accompanying notes for the year ended December 31, 2017 and the associated MD&A.  Information contained in this MD&A is based on information available to management as of May 7, 2018.

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 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.

Strategic Direction and Outlook

In 2017, the Corporation completed a comprehensive review and update of its Strategic Plan which defines objectives for organic growth, acquisitions and operations. The key points of the updated Strategic Plan are as follows:

• Organic growth priorities have been adjusted to increase the focus on product and service categories where Wajax has market share opportunities, and where customers are less affected by commodity prices. Historically, Wajax's peak and trough financial performance has been primarily related to categories that are sensitive to commodity prices. While nothing in the updated strategy lessens the potential upside from growth in these very important areas, the investment focus will be in product and service categories that are more durable through the cycle.
  
  
• Wajax will continue to integrate its historically decentralized infrastructure and will make increased technology investments to lower its cost-to-serve, improve customer access to its full range of products and services, and open new sales channels. Wajax will also continue to consolidate its physical branch network where opportunities exist and make investments in multi-purpose facilities capable of broadening service to local customers.
  
  
• Wajax will increase investment in its customer-facing teams, focusing on sales professionals and technicians. The Corporation's reorganization was effective in right-sizing the company to the then-current business conditions and simultaneously enabling the implementation of stronger sales and shop management practices. Using the foundation now built, the Corporation plans to increase hiring to grow its sales and service teams while continuing to focus on the efficiency of personnel costs in support areas.
  
  
• The majority of Wajax's growth is expected to result from organic programs. However, Wajax will continue to review acquisition opportunities that allow the Corporation to increase its ability to serve existing and new customers through expanded geographic reach and extensions to its product and service portfolio.

Wajax expects 2018 year-over-year adjusted net earnings to increase, due primarily to organic revenue growth.⁽¹⁾ Given the Corporation's plans to increase market share in highly competitive categories, gross margins are expected to be under pressure. While Wajax will make planned investments in programs that advance the Corporation's strategy, an ongoing focus on overall cost productivity is expected to assist Wajax in managing the expected margin pressure. Viewed over the full year, market conditions in central and eastern Canada are expected to be generally stable, and while conditions in western Canada may continue to improve in 2018, year-over-year gains are not expected to be as significant as they were in 2017. See the Non-GAAP and Additional GAAP Measures and Cautionary Statement Regarding Forward-Looking Information sections.

Highlights for the Quarter

• Revenue in the first quarter of 2018 increased $23.3 million, or 7%, to $342.7 million from $319.4 million in the first quarter of 2017.⁽²⁾ Regionally:
  
  
• • Revenue in western Canada of $158.3 million increased 12% over the prior year. Sales improved in the majority of product categories including construction, engines and transmissions, engineered repair services ("ERS") and material handling. Mining sales declined.
  • Revenue in central Canada of $72.1 million decreased 8% from the prior year. Decreases, due in part to timing and market conditions, were experienced in the forestry, on-highway transportation, crane and utility, and power generation product categories which were partially offset by higher material handling equipment sales. Construction sales grew modestly.
  • Revenue in eastern Canada of $113.1 million increased 12% over the prior year due to sales gains in the majority of product categories, led by improved results in material handling, power generation, ERS and mining sales. Construction sales were flat.
    
    
• Selling and administrative expenses as a percentage of revenue decreased 120 basis points to 14.3% in the first quarter of 2018 from 15.5% in the same period of 2017. Selling and administrative expenses decreased by $0.5 million compared to the first quarter of 2017 due mainly to a $1.1 million gain recorded on sales of properties recorded in the first quarter of 2018 offset partially by higher personnel costs.
  
  
• Adjusted EBITDA margin increased to 6.3% in the first quarter of 2018 from 5.2% in the same period of 2017. Adjusted EBITDA excludes the restructuring and other related costs and gain recorded on sales of properties.⁽¹⁾⁽²⁾
  
  
• EBIT increased $4.1 million, or 35.7%, to $15.4 million in the first quarter of 2018 versus $11.3 million in the same period of 2017.⁽¹⁾⁽²⁾ The year-over-year improvement is attributable to increased revenue, improved equipment and ERS margin rates and lower selling and administrative expenses, including a gain recorded on sales of properties of $1.1 million, offset partially by restructuring and other related costs of $2.0 million in the current period.
  
  
• Based on the improved EBIT result, the Corporation generated net earnings of $9.9 million, or $0.51 per share, in the first quarter of 2018 versus $6.3 million, or $0.32 per share, in the same period of 2017. The Corporation generated adjusted net earnings of $10.4 million, or $0.53 per share, in the first quarter of 2018 versus $6.3 million, or $0.32 per share, in the same period of 2017. Adjusted net earnings in the first quarter of 2018 excludes the after-tax restructuring and other related costs and gain recorded on sales of properties.⁽¹⁾⁽²⁾
  
  
• The Corporation's backlog at March 31, 2018 of $205.4 million increased $26.5 million, or 15%, compared to December 31, 2017 due primarily to increases in power generation and industrial parts orders. Compared to the first quarter of 2017, backlog increased $45.4 million, or 28%, due primarily to higher power generation and industrial parts orders.⁽¹⁾
  
  
• Inventories of $339.6 million at March 31, 2018 increased $26.4 million from December 31, 2017 due primarily to higher construction equipment inventory.⁽²⁾
  
  
• Working capital of $312.2 million at March 31, 2018 increased $11.4 million due primarily to higher inventory levels and lower accounts payable and accrued liabilities. Working capital at March 31, 2018 as a percentage of the trailing 12-month sales was 22.0%, an increase of 40 basis points from December 31, 2017.⁽¹⁾⁽²⁾
  
  
• The Corporation's leverage ratio increased marginally to 2.12 times at March 31, 2018 compared to 2.08 times at December 31, 2017.⁽¹⁾⁽²⁾ The increase in the leverage ratio was primarily due to the higher debt level relating to increased inventories and lower accounts payable and accrued liabilities, offset partially by the higher trailing 12-month adjusted EBITDA.

 

Summary of Operating Results

 

Results of Operations

Revenue

 

Revenue in the first quarter of 2018 increased 7.3%, or $23.3 million, to $342.7 million from $319.4 million in the first quarter of 2017. 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 sales in all regions offset partially by a decrease in mining sales in western Canada.
  
  
• Product support sales have decreased due primarily to lower construction sales in all regions and lower on-highway transportation sales in central Canada offset partially by higher mining sales in all regions. Declines in construction product support relate to the Wajax-initiated elimination in most markets of the JCB product line and certain major service projects in western Canada that occurred in the first quarter of 2017 that were not repeated this year.
  
  
• Other sales have increased due to higher ERS revenues in western and eastern Canada.

Backlog
Backlog of $205.4 million at March 31, 2018 increased $26.5 million compared to December 31, 2017 due primarily to increases in power generation and industrial parts orders. Backlog increased $45.4 million compared to March 31, 2017 due primarily to higher power generation and industrial parts orders.

Gross profit
Gross profit increased $5.5 million, or 9.1%, in the first quarter of 2018 compared to the same quarter last year, due to increased volumes and higher gross profit margins. Gross profit margin percentage of 19.4% in the first quarter of 2018 increased from 19.0% in the same quarter last year due mainly to improved equipment and ERS margin rates.

Selling and administrative expenses
Selling and administrative expenses as a percentage of revenue decreased to 14.3% in the first quarter of 2018 from 15.5% in the first quarter of 2017. Selling and administrative expenses decreased $0.5 million in the first quarter of 2018 compared to the same quarter last year due mainly to a $1.1 million gain recorded on sales of properties recorded in the first quarter of 2018 offset partially by higher personnel costs.

Restructuring and other related costs
In the first quarter of 2018, the Corporation commenced the redesign of its finance function to better align with the "One Wajax" operational model.  The redesign is anticipated to cost approximately $5.6 million in severance, project management and interim duplicate labour costs. The Corporation established a $1.7 million provision in Q1 2018 to cover anticipated severance costs for the balance of 2018. The remaining $3.9 million in anticipated costs, primarily relating to project management and interim duplicate labour costs, will be expensed as incurred over the project period.  Management anticipates that the majority of the project will be completed by the first half of 2019.

During the quarter, the Corporation also commenced a leadership re-alignment within its ERS function, which is also intended to better align such function with the "One Wajax" model.  The costs of the re-alignment are estimated at $0.5 million of which $0.3 million has been included in the provision established in Q1 2018. Management anticipates that the majority of the estimated costs will be incurred by Q2 2018.

Finance costs
Finance costs of $1.7 million in the first quarter of 2018 decreased $0.8 million compared to the same quarter last year due primarily to lower average interest rates relating to the senior notes redemption in the fourth quarter of 2017 offset partially by higher average debt levels.  See the Liquidity and Capital Resources section.

Income tax expense
The Corporation's effective income tax rate of 27.6% for the first quarter of 2018 (2017 – 28.1%) was higher compared to the statutory rate of 26.9% (2017 – 26.9%) due to the impact of expenses not deductible for tax purposes.

Net earnings
In the first quarter of 2018, the Corporation had net earnings of $9.9 million, or $0.51 per share, compared to $6.3 million, or $0.32 per share, in the first quarter of 2017.  The $3.6 million increase in net earnings resulted primarily from higher volumes, improved gross profit margins, lower selling and administrative expenses and a gain recorded on sales of properties of $0.9 million after-tax. These increases were partially offset by restructuring and other related costs of $1.4 million after-tax compared to the prior year.

Adjusted net earnings (See the Non-GAAP and Additional GAAP Measures section)
Adjusted net earnings excludes restructuring and other related costs of $1.4 million after-tax, or $0.07 per share (2017 – nil) and a gain recorded on sales of properties of $0.9 million after-tax, or $0.05 per share (2017 – nil) recorded in the first quarter of 2018.

As such, adjusted net earnings increased $4.1 million to $10.4 million, or $0.53 per share, in the first quarter of 2018 from $6.3 million, or $0.32 per share, in the same period of 2017. The $4.1 million increase in adjusted net earnings resulted primarily from higher volumes and improved gross profit margins, lower selling and administrative expenses and lower finance costs.

Comprehensive income
Total comprehensive income of $10.6 million in the first quarter of 2018 included net earnings of $9.9 million and other comprehensive income of $0.8 million. In the first quarter of 2017, total comprehensive income of $6.2 million consisted of net earnings of $6.3 million and an other comprehensive loss of $0.1 million.

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 2017 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.

Fourth quarter 2017 net earnings of $7.7 million included an after-tax gain recorded on sales of properties of $1.2 million and after-tax senior notes redemption costs of $4.0 million. Excluding the gain recorded on sales of properties and senior notes redemption costs, fourth quarter 2017 adjusted net earnings were $10.5 million. The first quarter 2018 net earnings of $9.9 million included after-tax restructuring and other related costs of $1.4 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 $10.4 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 March 31, 2018 of $292.0 million increased $6.7 million from December 31, 2017, as earnings of $9.9 million exceeded dividends declared of $4.9 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 March 31, 2018, 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 March 31, 2018, there were 399,135 (2017 – 356,522) SOP and DDSUP (treasury share settled) rights outstanding and 685,311 (2017 – 519,464) MTIP and DSUP (market-purchased share settled) rights outstanding.  At March 31, 2018, all SOP and DDSUP rights were vested (2017 – 70,385 SOP rights and 280,119 DDSUP rights were vested). At March 31, 2018, 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 the outstanding MTIP and DSUP grants, the number of market-purchased shares required to satisfy the Corporation's obligations could be higher or lower.

Wajax recorded compensation expense of $1.0 million for the quarter (2017 – $0.9 million) in respect of these plans.

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

 

Funded net debt of $170.1 million at March 31, 2018 increased $15.2 million compared to $154.9 million at December 31, 2017. The increase during the quarter was due primarily to cash used in operating activities of $9.2 million, dividends paid of $4.9 million and finance lease payments of $0.9 million.

The Corporation's ratio of funded net debt to total capital increased to 36.8% at March 31, 2018 from 35.2% at December 31, 2017, primarily due to the higher funded net debt level in the current period.

The Corporation's leverage ratio of 2.12 times at March 31, 2018 increased from the December 31, 2017 ratio of 2.08 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 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 longer 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 interim condensed consolidated financial statements at fair value. As at March 31, 2018, Wajax had the following interest rate hedge contracts outstanding:

• $64.0 million, expiring between November 2019 and January 2023, with a weighted average interest rate of 2.15%.

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 March 31, 2018, Wajax had the following contracts outstanding:

• to buy U.S. $48.5 million (December 31, 2017 – to buy U.S. $48.5 million), and
• to sell U.S. $13.2 million (December 31, 2017 – to sell U.S. $13.8 million).

The U.S. dollar contracts expire between April 2018 and December 2018, with a weighted average U.S./Canadian dollar rate of 1.2713.

Contractual Obligations

There have been no material changes to the Corporation's contractual obligations since December 31, 2017. 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, 2017.  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 $86.0 million (December 31, 2017 – $90.6 million) of consigned inventory on hand from a major manufacturer at March 31, 2018, net of deposits of $5.9 million (December 31, 2017 – $6.4 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 and cash generated from operations.

Bank and Non-bank Credit Facilities

At March 31, 2018, Wajax had borrowed $149.0 million and issued $6.1 million of letters of credit for a total utilization of $155.1 million of its $300 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 March 31, 2018, 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 March 31, 2018. 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 March 31, 2018, Wajax had no utilization of the interest bearing equipment financing facilities.

As of May 7, 2018, 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 March 31, 2018, $144.9 million was unutilized under the bank facility and $25 million was unutilized under the non-bank facilities.  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 March 31, 2018, $64 million of the Corporation's funded net debt, or 38%, 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 Statements of Cash Flows for the three months ended March 31, 2018 and March 31, 2017:

 

Cash (Used In) Generated From Operating Activities
Cash flows used in operating activities amounted to $9.2 million in the first quarter of 2018, compared to cash flows generated from operating activities of $0.1 million in the same quarter of the previous year. The decrease of $9.3 million was mainly attributable to a decrease in cash generated from changes in non-cash operating working capital of $10.9 million and an increase in rental equipment additions of $2.0 million, offset partially by increased net earnings of $3.6 million and lower income taxes paid of $1.5 million.

Rental equipment additions in the three months ended March 31, 2018 of $5.4 million (2017 – $3.4 million) related primarily to lift trucks.

Significant components of non-cash operating working capital, along with changes for the three months ended March 31, 2018 and March 31, 2017 include the following:

 

Significant components of the changes in non-cash operating working capital for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 are as follows:

• Trade and other receivables decreased $3.7 million in 2018 compared to a decrease of $0.4 million in 2017.
  
  
• Inventories increased $21.9 million in 2018 compared to an increase of $5.0 million in 2017. The increase in 2018 was due mainly to higher construction equipment inventory. The increase in 2017 was due to higher equipment inventory partially offset by lower parts inventory as a result of inventory reduction measures.
  
  
• Accounts payable and accrued liabilities decreased $4.6 million in 2018 compared to a decrease of $13.3 million in 2017. The decrease in 2018 resulted primarily from lower trade payables related to mining equipment inventory offset partially by the payment of annual incentive accruals relating to 2017. The decrease in 2017 resulted primarily from lower trade payables due in part to the payment of equipment inventory.

Investing Activities
During the first quarter of 2018, Wajax invested $1.0 million in property, plant and equipment additions, compared to $0.5 million in the first quarter of 2017. Proceeds on disposal of property, plant and equipment, consisting primarily of proceeds on disposal of properties, amounted to $1.6 million in the first quarter of 2018, compared to $0.1 million in the same quarter of the previous year. Intangible assets additions of $1.3 million (2017 – nil) in the first quarter of 2018 resulted primarily from software additions relating to the new enterprise operating system currently being implemented.

Financing Activities
The Corporation used $1.8 million of cash from financing activities in the three months ended March 31, 2018 compared to $8.1 million in the three months ended March 31, 2017. Financing activities in the three months ended March 31, 2018 included a net bank credit facility borrowing of $4.0 million (2017 – nil) offset by dividends paid to shareholders of $4.9 million (2017 – $5.0 million) and finance lease payments of $0.9 million (2017 – $1.0 million).

Dividends

Dividends to shareholders were declared as follows:

 

On May 7, 2018, the Corporation declared a dividend of $0.25 per share for the second quarter of 2018, payable on July 4, 2018 to shareholders of record on June 15, 2018.

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 many 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 expected credit loss model.  The $1.0 million provision for doubtful accounts at March 31, 2018 increased $0.2 million from $0.8 million at December 31, 2017.  As economic conditions change, there is risk that the Corporation could experience a greater number of defaults compared to 2017 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 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 March 31, 2018 was $1.3 million (2017 – $1.7 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 annual impairment tests 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 ending March 31, 2018.

Changes in Accounting Policies

Accounting standards adopted during the period

IFRS 15 On January 1, 2018, the Corporation adopted 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 judgement thresholds have been introduced which may affect the timing of revenue recognized.

The Corporation records revenue from contracts with customers in accordance with the five steps in IFRS 15 as follows:

1. Identify the contract with a customer;
2. Identify the performance obligations in the contract;
3. Determine the transaction price, which is the total consideration provided by the customer;
4. Allocate the transaction price among the performance obligations in the contract based on their relative fair values; and
5. Recognize revenue when the relevant criteria are met for each unit (at a point in time or over time).

Revenue from contracts with customers is recognized for each performance obligation as control is transferred to the customer as follows:

 

The transaction price is generally the amount stated in the contract.  Certain contracts are subject to discounts which are estimated and included in the transaction price.

The following change has resulted in an adjustment from the adoption of IFRS 15:

• The revenue recognition pattern for Product Support and Other will change to an over-time pattern to best depict performance in transferring control of the repair service, rather than the point in time recognition that was previously used. The key judgement for recognizing revenue on incomplete service orders is estimating the transaction price and the margin that will eventually be realized.

The Corporation has elected to use the retrospective application method and has recorded the cumulative adjustment of the accounting change to retained earnings as at January 1, 2017 and has restated its comparative 2017 earnings and financial position. The Corporation has elected to use a practical expedient when restating its prior year results and not disclose the amounts of the transaction price allocated to remaining performance obligations nor provide an explanation of when it expects to recognize those amounts as revenue.

The effect of adopting IFRS 15 on the condensed consolidated statements of financial position is as follows:

 

The effect of adopting IFRS 15 on the condensed consolidated statement of earnings for the three months ended March 31, 2017 is as follows:

 

IFRS 9 On January 1, 2018, the Corporation adopted IFRS 9 Financial Instruments retrospectively with no restatement of comparative periods.  The standard includes revised guidance on the classification and measurement of financial assets, including impairment and a new general hedge accounting model. IFRS 9 largely retains the existing accounting requirements for financial liabilities with the exception of accounting for certain non-substantial modifications of financial liabilities and the accounting treatment of fair value changes attributable to changes in its own credit risk of financial liabilities that are designated as fair value through profit or loss.

Classification and measurement IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics.  Financial assets are classified and measured based on the three categories: amortized cost, fair value through other comprehensive income ("FVOCI") and fair value through profit and loss ("FVTPL").  Financial liabilities are classified and measured in two categories: amortized cost or FVTPL.  Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are not separated, but the hybrid financial instrument as a whole is assessed for classification.  The adoption of the new classification requirements under IFRS 9 did not result in significant changes in measurement or the carrying amounts of financial assets and liabilities. The following table summarizes the classification impacts upon the adoption of IFRS 9.

 

Impairment IFRS 9 replaces the "incurred loss" model in IAS 39 with a forward-looking "expected credit loss" ("ECL") model.  The ECL model requires judgement, including consideration of how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis.  The new impairment model is applied, at each reporting date, to the Corporation's financial assets measured at amortized cost and contract assets.

The Corporation adopted the practical expedient to determine ECL on trade and other receivables using a provision matrix based on historical credit loss experiences adjusted to reflect information about current economic conditions and forecasts of future economic conditions to estimate lifetime ECL.  The ECL models applied to other financial assets and contract assets also required judgement, assumptions and estimations on changes in credit risks, forecasts of future economic conditions and historical information on the credit quality of the financial asset.  The provision matrix and other ECL models applied on adoption of IFRS 9 did not have a material impact on the financial assets of the Corporation.

Impairment losses are recorded in general and administrative expenses with the carrying amount of the financial asset or contract asset reduced through the use of impairment allowance accounts.

General hedging The Corporation has elected to adopt the new general hedge accounting model in IFRS 9. IFRS 9 requires the Corporation to ensure that hedge accounting relationships are aligned with the Corporation's risk management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness.  The Corporation's risk management strategy is disclosed in its 2017 Annual Report.  All hedging relationships designated under IAS 39 at December 31, 2017 met the criteria for hedge accounting under IFRS 9 at January 1, 2018 and are therefore treated as continuing hedging relationships.  Under IFRS 9, for cash flow hedges of foreign currency risk associated with forecast inventory purchases, the amounts accumulated in the cash flow hedges reserve are included directly in the initial cost of the inventory item when it is recognized. Otherwise the adoption of the standard did not have an impact on the effectiveness of the Corporation's hedging arrangements.

New standards and interpretations not yet adopted
The new standards that may be significant to the Corporation set out below are not effective for the year ended December 31, 2018 and have not been applied in preparing these interim condensed 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 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, 2017 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, 2017.

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 March 31, 2018, 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 March 31, 2018, 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 March 31, 2018 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 goal of becoming Canada's leading industrial products and services provider, distinguished through our core capabilities; 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 main elements of our updated Strategic Plan, including adjustments to our organic growth priorities, continued integration of our infrastructure, increased technology investments, further consolidation of our physical branch network, and investments in multi-purpose facilities and in customer-facing teams, as well as our focus on cost efficiency in support areas and continued review of acquisition opportunities; our expectations and outlook for 2018, including with respect to adjusted net earnings and gross margins, as well as our expectation that our ongoing focus on cost productivity will assist us in offsetting planned investments in our strategy and expected margin pressure; our outlook on regional market conditions in Canada, including our expectation that, while market conditions in western Canada may continue to improve in 2018, year-over-year gains are not expected to be as significant as they were in 2017; our expectation that the redesign of our finance function will be completed during the first half of 2019 and that the majority of the costs related to our ERS leadership re-alignment will be incurred by Q2 2018; 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; our expectation that a change in interest rates will not have a material impact on our results of operations over the longer term; our expectation that a change in foreign currency, relative to the Canadian dollar, on transactions with customers that include unhedged foreign currency exposures, will not have a material impact on our results of operations or financial condition over the longer term; our belief there is not a significant risk of non-performance by counterparties to short-term currency forward contracts; the adequacy of our debt capacity and sufficiency of our debt facilities; and our intention and ability to access debt and equity markets or reduce dividends should additional capital be required, including the potential that we may 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, 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 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 full 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, 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 this MD&A under the heading "Risk Management and Uncertainties" and in our Annual Information Form for the year ended December 31, 2017, 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 months ended March 31, 2018

 

 

 

 

 

 

WAJAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS

March 31, 2018
(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, 2017.  The significant accounting policies follow those disclosed in the most recently reported audited consolidated financial statements, except as disclosed in Note 3.

These unaudited condensed consolidated interim financial statements were authorized for issue by the Board of Directors on May 7, 2018.

3.  CHANGE IN ACCOUNTING POLICIES

Accounting standards adopted during the period

IFRS 15 On January 1, 2018, the Corporation adopted 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 judgement thresholds have been introduced which may affect the timing of revenue recognized.

The Corporation records revenue from contracts with customers in accordance with the five steps in IFRS 15 as follows:

1. Identify the contract with a customer;
2. Identify the performance obligations in the contract;
3. Determine the transaction price, which is the total consideration provided by the customer;
4. Allocate the transaction price among the performance obligations in the contract based on their relative fair values; and
5. Recognize revenue when the relevant criteria are met for each unit (at a point in time or over time).

Revenue from contracts with customers is recognized for each performance obligation as control is transferred to the customer as follows: 

 

The transaction price is generally the amount stated in the contract.  Certain contracts are subject to discounts which are estimated and included in the transaction price.

The following change has resulted in an adjustment from the adoption of IFRS 15:

• The revenue recognition pattern for Product Support and Other will change to an over-time pattern to best depict performance in transferring control of the repair service, rather than the point in time recognition that was previously used.  The key judgement for recognizing revenue on incomplete service orders is estimating the transaction price and the margin that will eventually be realized.

The Corporation has elected to use the retrospective application method and has recorded the cumulative adjustment of the accounting change to retained earnings as at January 1, 2017 and has restated its comparative 2017 earnings and financial position.  The Corporation has elected to use a practical expedient when restating its prior year results and not disclose the amounts of the transaction price allocated to remaining performance obligations nor provide an explanation of when it expects to recognize those amounts as revenue.

The effect of adopting IFRS 15 on the condensed consolidated statements of financial position is as follows:

 

The effect of adopting IFRS 15 on the condensed consolidated statement of earnings for the 3 months ended March 31, 2017 is as follows:

 

IFRS 9 On January 1, 2018, the Corporation adopted IFRS 9 Financial Instruments retrospectively with no restatement of comparative periods.  The standard includes revised guidance on the classification and measurement of financial assets, including impairment and a new general hedge accounting model.  IFRS 9 largely retains the existing accounting requirements for financial liabilities with the exception of accounting for certain non-substantial modifications of financial liabilities and the accounting treatment of fair value changes attributable to changes in its own credit risk of financial liabilities that are designated as fair value through profit or loss.

Classification and measurement IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics.  Financial assets are classified and measured based on the three categories: amortized cost, fair value through other comprehensive income ("FVOCI") and fair value through profit and loss ("FVTPL").  Financial liabilities are classified and measured in two categories: amortized cost or FVTPL.  Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are not separated, but the hybrid financial instrument as a whole is assessed for classification.  The adoption of the new classification requirements under IFRS 9 did not result in significant changes in measurement or the carrying amounts of financial assets and liabilities.  The following table summarizes the classification impacts upon the adoption of IFRS 9.

 

Impairment IFRS 9 replaces the "incurred loss" model in IAS 39 with a forward-looking "expected credit loss" ("ECL") model.  The ECL model requires judgement, including consideration of how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis.  The new impairment model is applied, at each reporting date, to the Corporation's financial assets measured at amortized cost and contract assets.

The Corporation adopted the practical expedient to determine ECL on trade and other receivables using a provision matrix based on historical credit loss experiences adjusted to reflect information about current economic conditions and forecasts of future economic conditions to estimate lifetime ECL.  The ECL models applied to other financial assets and contract assets also required judgement, assumptions and estimations on changes in credit risks, forecasts of future economic conditions and historical information on the credit quality of the financial asset.  The provision matrix and other ECL models applied on adoption of IFRS 9 did not have a material impact on the financial assets of the Corporation.

Impairment losses are recorded in general and administrative expenses with the carrying amount of the financial asset or contract asset reduced through the use of impairment allowance accounts. 

General hedging The Corporation has elected to adopt the new general hedge accounting model in IFRS 9.  IFRS 9 requires the Corporation to ensure that hedge accounting relationships are aligned with the Corporation's risk management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness.  The Corporation's risk management strategy is disclosed in its 2017 Annual Report.  All hedging relationships designated under IAS 39 at December 31, 2017 met the criteria for hedge accounting under IFRS 9 at January 1, 2018 and are therefore treated as continuing hedging relationships.  Under IFRS 9, for cash flow hedges of foreign currency risk associated with forecast inventory purchases, the amounts accumulated in the cash flow hedges reserve are included directly in the initial cost of the inventory item when it is recognized.  Otherwise the adoption of the standard did not have an impact on the Corporation's hedging arrangements.

New standards and interpretations not yet adopted

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 $5,424 during the quarter (2017 – $3,358). Equipment with a carrying amount of $65 during the quarter (2017 - $nil) was transferred from inventories to rental equipment. Equipment with a carrying amount of $4,487 during the quarter (2017 - $617) was transferred from rental equipment to inventories.

5.  PROPERTY, PLANT AND EQUIPMENT

The Corporation acquired property, plant and equipment with a cost of $950 during the quarter (2017 – $494). Assets with a carrying amount of $422 during the quarter (2017 – $71) were disposed of, resulting in a gain on disposal of $1,153 during the quarter (2017 – loss of $11).

6.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

7.  OBLIGATIONS UNDER FINANCE LEASES

 

8.  LONG-TERM DEBT

 

9.  SHARE CAPITAL

 

10. DIVIDENDS DECLARED

During the three months ended March 31, 2018, the Corporation declared cash dividends of $0.25 per share or $4,876 (2017 – dividends of $0.25 per share or $4,956).

On May 7, 2018, the Corporation declared a second quarter 2018 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 $150 for the quarter (2017 – $177) in respect of the SOP and DDSUP plans.

 

At March 31, 2018, all share rights were vested (March 31, 2017 – 350,504).

b) Market-purchased share rights plans
The Corporation recorded compensation cost of $762 for the quarter (2017 - $627) in respect of these plans. The following RSUs and PSUs under the plans are outstanding:

  

At March 31, 2018 and 2017, no RSUs or PSUs were vested. At March 31, 2018, the number of shares held in trust approximates the number of market-purchased share settled rights outstanding.

c) Cash-settled rights plans
The Corporation recorded compensation cost of $52 for the quarter (2017 – $74) in respect of the share-based portion of the MTIP and DSUP for grants dated before March, 2016. At March 31, 2018, the carrying amount of the share-based portion of these liabilities was $403 (March 31, 2017 – $1,004).

12. DISAGGREGATED REVENUE

 

13. INCOME TAXES

Income tax expense comprises current and deferred tax as follows:

 

The calculation of current tax is based on a combined federal and provincial statutory income tax rate of 26.9% (2017 – 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:

 

Excluded from the above calculations are 124,994 outstanding share rights (2017- nil) as they are currently anti-dilutive.  These share rights could potentially dilute earnings per share in future periods.

15. CHANGES IN NON-CASH OPERATING WORKING CAPITAL

 

16. COMPARATIVE INFORMATION

Certain comparative information has been reclassified to conform to the current year's presentation.

SOURCE Wajax Corporation

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