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Wajax Reports 2018 Second Quarter Results

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Wajax Reports 2018 Second Quarter Results

Canada NewsWire

TSX Symbol:  WJX

TORONTO, Aug. 9, 2018 /CNW/ - Wajax Corporation ("Wajax" or the "Corporation") today announced improved 2018 second quarter results compared to the previous year.






(Dollars in millions, except per share data)


Three Months Ended
June 30


Six Months Ended
June 30



2018

2017(5)


2018

2017(5)




(As restated)



(As restated)

CONSOLIDATED RESULTS







Revenue


$382.7

$325.9


$725.5

$645.4


Equipment sales


$144.6

$109.7


$268.9

$207.5


Equipment rental


$8.9

$7.6


$16.8

$16.0


Industrial parts


$93.6

$87.0


$182.5

$176.6


Product support


$120.3

$108.4


$226.0

$219.7


Other                                          


$15.3

$13.2


$31.2

$25.5








Net earnings


$12.2

$7.7


$22.0

$14.1

Basic earnings per share(1)(2)


$0.62

$0.40


$1.13

$0.71








Adjusted net earnings(3)(4)


$13.1

$7.5

$23.5

$13.8

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


$0.67

$0.38


$1.20

$0.70

 

Second Quarter Highlights

  • Revenue in the second quarter of 2018 increased 17.4%, or $56.8 million, to $382.7 million from $325.9 million in the second quarter of 2017. The following factors contributed to the increase in revenue:

    • Regionally, revenue increased 28% in eastern Canada, 16% in central Canada and 10% in western Canada over the same period in the prior year. On a national basis, sales gains were driven by a broad range of categories including construction, material handling, industrial parts, power generation and mining.

    • Equipment sales have increased due primarily to higher power generation, forestry, material handling and construction sales in central and eastern Canada and higher mining sales in eastern Canada.

    • Revenue from industrial parts has increased due primarily to higher bearings sales in all regions.

    • Product support sales have increased due primarily to higher mining sales in all regions offset partially by lower engines and transmissions sales in central and eastern Canada.

  • EBIT increased $5.4 million, or 40.6%, to $18.7 million in the second quarter of 2018 versus $13.3 million in the same period of 2017.(3)(5) The year-over-year improvement is attributable to increased revenue and lower selling and administrative expenses as a percentage of revenue, offset partially by restructuring and other related costs of $1.3 million in the current period.

  • Based on improved EBIT results and lower finance costs, the Corporation generated net earnings of $12.2 million, or $0.62 per share, in the second quarter of 2018 versus $7.7 million, or $0.40 per share, in the same period of 2017.(3) The Corporation generated adjusted net earnings of $13.1 million, or $0.67 per share, in the second quarter of 2018 versus $7.5 million, or $0.38 per share, in the same period of 2017. Adjusted net earnings in the second quarter of 2018 excludes the after-tax restructuring and other related costs.(3)(5)

  • The Corporation's backlog at June 30, 2018 of $256.9 million increased $51.5 million, or 25%, compared to March 31, 2018 due primarily to increases in mining, material handling and forestry orders. Compared to the second quarter of 2017, backlog increased $97.2 million, or 61%, due primarily to higher construction, mining, power generation, engineered repair services ("ERS") and material handling orders.(3)

  • Inventories of $354.0 million at June 30, 2018 increased $14.4 million from March 31, 2018 due primarily to higher construction and forestry equipment inventory offset partially by lower mining and material handling inventory.(5)

The Corporation declared a Q3 2018 dividend of $0.25 per share payable on October 2, 2018 to shareholders of record on September 14, 2018.

Commenting on the Corporation's second quarter results, President and Chief Executive Officer Mark Foote stated, "We are pleased to see a strong year-over-year improvement in our second quarter results. Gains in our targeted growth categories of construction, material handling and ERS continue to reflect strengthening execution of our strategy. We are also pleased with the strong increases shown broadly across other categories. Power generation delivered strong revenue performance in the second quarter due to project deliveries. In mining, increases in product support were complimented by an improvement in backlog reflecting future large equipment orders.(3) Regional strength was balanced and we are very pleased with our growth in eastern and central Canada. The Wajax team continued to operate with safety as its highest priority, resulting in a second quarter TRIF rate of 0.9. We continue to focus on our goal of zero injuries and working to ensure that every member of our team goes home safely at the end of every shift."(6)

Mr. Foote continued, "In 2018, Wajax expects year-over-year adjusted net earnings to increase, due primarily to organic revenue growth.(1) The Corporation continues to work closely with major manufacturers to forecast demand and to manage extended lead times for product. 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." 

Wajax Corporation

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.

Wajax will webcast its Second Quarter Financial Results Conference Call. You are invited to listen to the live webcast on Friday, August 10, 2018 at 1:00 p.m. ET. To access the webcast, please visit our website wajax.com, under "Investor Relations", "Events and Presentations", "2018 Second Quarter Results" and click on the "Webcast" link.

Notes:

(1)

Weighted average shares outstanding for calculation of basic and diluted earnings per share for the three months ended June 30, 2018 was 19,517,436  (2017 – 19,601,269) and 20,244,879 (2017 – 20,158,516), respectively.

(2)

Weighted average shares outstanding for calculation of basic and diluted earnings per share for the six months ended June 30, 2018 was 19,510,808  (2017 – 19,709,348) and 20,199,244 (2017 – 20,228,511), respectively.

(3)

"Adjusted net earnings", "Adjusted basic earnings per share", "EBIT" and "backlog" do not have standardized meanings prescribed by GAAP.  See the Non-GAAP and Additional GAAP Measures section of the Q2 2018 Management Discussion and Analysis.

(4)

Net earnings excluding the following:


a.  

after-tax restructuring and other related costs of $0.9 million (2017 – recoveries of $0.2 million), or basic and diluted earnings per share of $0.05 (2017 – $(0.01) per share), for the three months ended June 30, 2018.


b.  

after-tax restructuring and other related costs of $2.4 million (2017 – recoveries of $0.2 million), or basic and diluted earnings per share of $0.12 (2017 – $(0.01) per share), for the six months ended June 30, 2018.


c.  

after-tax gain recorded on sales of properties of $0.9 million (2017 – nil), or basic and diluted earnings per share of ($0.05) (2017 – nil) for the six months ended June 30, 2018.

(5)

The Corporation has restated its comparative 2017 earnings and financial position as a result of the adoption on January 1, 2018 of IFRS 15 Revenue from Contracts with Customers. See the Changes in Accounting Policies section of the Q2 2018 Management Discussion and Analysis.

(6)

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

 

Cautionary Statement Regarding Forward-Looking Information

This news release contains certain forward-looking statements and forward-looking information, as defined in applicable securities laws (collectively, "forward-looking statements").  These forward-looking statements relate to future events or the Corporation's future performance.  All statements other than statements of historical fact are forward-looking statements.  Often, but not always, forward looking statements can be identified by the use of words such as "plans", "anticipates", "intends", "predicts", "expects", "is expected", "scheduled", "believes", "estimates", "projects" or "forecasts", or variations of, or the negatives of, such words and phrases or state that certain actions, events or results "may", "could", "would", "should", "might" or "will" be taken, occur or be achieved.  Forward looking statements involve known and unknown risks, uncertainties and other factors beyond the Corporation's ability to predict or control which may cause actual results, performance and achievements to differ materially from those anticipated or implied in such forward looking statements.  There can be no assurance that any forward looking statement will materialize.  Accordingly, readers should not place undue reliance on forward looking statements.  The forward looking statements in this news release are made as of the date of this news release, reflect management's current beliefs and are based on information currently available to management.  Although management believes that the expectations represented in such forward-looking statements are reasonable, there is no assurance that such expectations will prove to be correct.  Specifically, this news release includes forward looking statements regarding, among other things, our expectations and outlook for 2018, including with respect to year-over-year 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 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 – Q2 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 June 30, 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 June 30, 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 August 9, 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 and make investments in customer support and multi-purpose facilities in order to improve the consistency of customer service levels and to broaden local access to the Corporation's full range of products and services.

  • Wajax will increase investment in its customer-facing teams, focusing on sales professionals and technicians. The strategic reorganization commenced by the Corporation in 2016 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 second quarter of 2018 increased $56.8 million, or 17%, to $382.7 million from $325.9 million in the second quarter of 2017.(2) Regionally:

    • Revenue in western Canada of $153.3 million increased 10% over the prior year due to sales gains in the majority of product categories including construction, power generation and mining offset partially by lower forestry sales.
    • Revenue in central Canada of $93.5 million increased 16% from the prior year due primarily to higher power generation, material handling, forestry and mining sales offset partially by lower crane and utility sales.
    • Revenue in eastern Canada of $136.9 million increased 28% over the prior year due to sales gains in the majority of product categories, including improved results in construction, material handling, mining, forestry, power generation and industrial parts.

  • Selling and administrative expenses as a percentage of revenue decreased 180 basis points to 13.5% in the second quarter of 2018 from 15.3% in the same period of 2017. Selling and administrative expenses increased by $1.8 million compared to the second quarter of 2017 due mainly to higher personnel costs and sales-related expenses.

  • Adjusted EBITDA margin increased to 6.8% in the second quarter of 2018 from 5.7% in the same period of 2017. Adjusted EBITDA excludes the restructuring and other related costs.(1)(2)

  • EBIT increased $5.4 million, or 40.6%, to $18.7 million in the second quarter of 2018 versus $13.3 million in the same period of 2017.(1)(2) The year-over-year improvement is attributable to increased revenue and lower selling and administrative expenses as a percentage of revenue, offset partially by restructuring and other related costs of $1.3 million in the current period.

  • Based on improved EBIT results and lower finance costs, the Corporation generated net earnings of $12.2 million, or $0.62 per share, in the second quarter of 2018 versus $7.7 million, or $0.40 per share, in the same period of 2017. The Corporation generated adjusted net earnings of $13.1 million, or $0.67 per share, in the second quarter of 2018 versus $7.5 million, or $0.38 per share, in the same period of 2017. Adjusted net earnings in the second quarter of 2018 excludes the after-tax restructuring and other related costs.(1)(2)

  • The Corporation's backlog at June 30, 2018 of $256.9 million increased $51.5 million, or 25%, compared to March 31, 2018 due primarily to increases in mining, material handling and forestry orders. Compared to the second quarter of 2017, backlog increased $97.2 million, or 61%, due primarily to higher construction, mining, power generation and material handling orders.(1)

  • Inventories of $354.0 million at June 30, 2018 increased $14.4 million from March 31, 2018 due primarily to higher construction and forestry equipment inventory offset partially by lower mining and material handling inventory.

  • Working capital of $335.9 million at June 30, 2018 increased $23.7 million from March 31, 2018 due primarily to higher trade and other receivables and inventory levels offset partially by higher accounts payable and accrued liabilities. Working capital at June 30, 2018 as a percentage of the trailing 12-month sales was 22.2%, an increase of 20 basis points from March 31, 2018.(1)(2)

  • The Corporation's leverage ratio increased slightly to 2.18 times at June 30, 2018 compared to 2.12 times at March 31, 2018.(1)(2) The increase in the leverage ratio was primarily due to the higher debt level relating to increased trade and other receivables and inventories, offset partially by the higher trailing 12-month adjusted EBITDA.

 

(1)

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

(2)

The Corporation has restated its comparative 2017 earnings and financial position as a result of the adoption on January 1, 2018 of IFRS 15 Revenue from Contracts with Customers. See the Changes in Accounting Policies section.

 

Summary of Operating Results

Statement of earnings highlights

Three months ended

Six months ended


June 30

June 30



2018

2017

(As restated)(5)


2018

2017

(As restated)(5)

Revenue

$

382.7

$

325.9

$

725.5

$

645.4

Gross profit

$

71.7

$

62.9

$

138.0

$

123.8

Selling and administrative expenses

$

51.7

$

49.9

$

100.7

$

99.5

Restructuring and other related costs (recoveries)

$

1.3

$

(0.3)

$

3.3

$

(0.3)

Earnings before finance costs and income taxes(1)

$

18.7

$

13.3

$

34.1

$

24.7

Finance costs

$

2.0

$

2.6

$

3.7

$

5.2

Earnings before income taxes(1)

$

16.8

$

10.7

$

30.4

$

19.5

Income tax expense

$

4.6

$

2.9

$

8.4

$

5.4

Net earnings

$

12.2

$

7.7

$

22.0

$

14.1

-  Basic earnings per share(2)(3)

$

0.62

$

0.40

$

1.13

$

0.71

-  Diluted earnings per share(2)(3)

$

0.60

$

0.38

$

1.09

$

0.69

Adjusted net earnings(1)(4)

$

13.1

$

7.5

$

23.5

$

13.8

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

$

0.67

$

0.38

$

1.20

$

0.70

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

$

0.65

$

0.37

$

1.16

$

0.68

Adjusted EBITDA(1)

$

25.9

$

18.5

$

47.6

$

35.3

Key ratios:










Gross profit margin


18.7%


19.3%


19.0%


19.2%


Selling and administrative expenses as a










percentage of revenue


13.5%


15.3%


13.9%


15.4%


EBIT margin(1)


4.9%


4.1%


4.7%


3.8%


Adjusted EBITDA margin(1)


6.8%


5.7%


6.6%


5.5%


Effective income tax rate


27.6%


27.6%


27.6%


27.8%













June 30

2018


March 31

2018

December 31

2017

(As restated)(4)

Statement of financial position highlights





As at





Trade and other receivables



$

218.1

$

200.3

$

203.9

Inventories



$

354.0

$

339.6

$

313.2

Accounts payable and accrued liabilities



$

(241.5)

$

(225.5)

$

(229.5)

Other working capital amounts(1)



$

5.4

$

(2.2)

$

13.0

Working capital(1)



$

335.9

$

312.2

$

300.8

Rental equipment



$

64.2

$

58.9

$

61.3

Property, plant and equipment



$

42.1

$

43.8

$

43.9

Funded net debt(1)



$

188.6

$

170.1

$

154.9

Key ratio:




2.18


2.12


2.08

Leverage ratio(1)






(1)

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

(2)

Weighted average shares outstanding for calculation of basic and diluted earnings per share for the three months ended June 30, 2018 was 19,517,436  (2017 – 19,601,269) and 20,244,879 (2017 – 20,158,516), respectively.

(3)

Weighted average shares outstanding for calculation of basic and diluted earnings per share for the six months ended June 30, 2018 was 19,510,808  (2017 – 19,709,348) and 20,199,244 (2017 – 20,228,511), respectively.

(4)

Net earnings excluding the following:


a.  

after-tax restructuring and other related costs of $0.9 million (2017 – recoveries of $0.2 million), or basic and diluted earnings per share of $0.05 (2017 – $(0.01) per share), for the three months ended June 30, 2018.


b.  

after-tax restructuring and other related costs of $2.4 million (2017 – recoveries of $0.2 million), or basic and diluted earnings per share of $0.12 (2017 – $(0.01) per share), for the six months ended June 30, 2018.


c. 

after-tax gain recorded on sales of properties of $0.9 million (2017 – nil), or basic and diluted earnings per share of ($0.05) (2017 – nil) for the six months ended June 30, 2018.

(5)

The Corporation has restated its comparative 2017 earnings and financial position as a result of the adoption on January 1, 2018 of IFRS 15 Revenue from Contracts with Customers. See the Changes in Accounting Policies section.

 

Results of Operations

Revenue



Three months ended

Six months ended



June 30

June 30




2018

2017


2018

2017




(As restated)


(As restated)

Equipment sales


$

144.6

$

109.7

$

268.9

$

207.5

Industrial parts



93.6


87.0


182.5


176.6

Product support



120.3


108.4


226.0


219.7

Other



15.3


13.2


31.2


25.5

Revenue from contracts with customers



373.8


318.3


708.7


629.3

Equipment rental



8.9


7.6


16.8


16.0

Total revenue


$

382.7

$

325.9

$

725.5

$

645.4

 

Revenue in the second quarter of 2018 increased 17.4%, or $56.8 million, to $382.7 million from $325.9 million in the second 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 power generation, forestry, material handling and construction sales in central and eastern Canada and higher mining sales in eastern Canada.

  • Revenue from industrial parts has increased due primarily to higher bearings sales in all regions.

  • Product support sales have increased due primarily to higher mining sales in all regions offset partially by lower engine and transmission sales in central and eastern Canada.

For the six months ended June 30, 2018, revenue increased 12.4%, or $80.1 million, to $725.5 million, from $645.4 million in 2017. The following factors contributed to the increase in revenue:

  • Equipment sales have increased due to higher construction, power generation, material handling and engine and transmission sales in all regions, partially offset by a decrease in crane and utility sales in central Canada.

  • Revenue from industrial parts has increased due primarily to increased bearings sales in western and eastern Canada.

  • Product support sales have increased on strength in mining parts and service sales in all regions offset partially by lower construction and engine and transmission sales in all regions.

  • Other sales have increased due to higher engineered repair services ("ERS") revenues in all regions.

Backlog
Backlog of $256.9 million at June 30, 2018 increased $51.5 million compared to March 31, 2018 due primarily to increases in mining, material handling and forestry orders. Backlog increased $97.2 million compared to June 30, 2017 due primarily to higher construction, mining, power generation and material handling orders.

Gross profit
Gross profit increased $8.8 million, or 13.9%, in the second quarter of 2018 compared to the same quarter last year, due to increased volumes offset partially by lower gross profit margins. Gross profit margin percentage of 18.7% in the second quarter of 2018 decreased from 19.3% in the same quarter last year due mainly to a higher proportion of equipment volumes and lower parts and service margin rates offset partially by higher equipment margin rates.

For the six months ended June 30, 2018, gross profit increased $14.2 million, or 11.5%, compared to the same period last year, primarily as a result of increased volumes. Gross profit margin of 19.0% decreased slightly from 19.2% in the prior year.

Selling and administrative expenses
Selling and administrative expenses as a percentage of revenue decreased to 13.5% in the second quarter of 2018 from 15.3% in the second quarter of 2017. Selling and administrative expenses increased $1.8 million in the second quarter of 2018 compared to the same quarter last year due mainly to higher personnel costs and higher sales-related expenses.

For the six months ended June 30, 2018, selling and administrative expenses increased $1.2 million, compared to the same period last year. This increase was primarily due to higher personnel costs and higher sales-related expenses partially offset by a $1.1 million gain recorded on sales of properties in the first quarter of 2018. Selling and administrative expenses as a percentage of revenue decreased to 13.9% in 2018 from 15.4% in 2017.

Restructuring and other related costs (recoveries)
In the first quarter of 2018, the Corporation commenced a redesign of its finance function to better align with the "One Wajax" operating model.  The redesign is anticipated to cost approximately $5.6 million in severance, project management and interim duplicate labour costs, of which $2.6 million has been recognized in the first half of 2018. The remaining $3.0 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 first quarter of 2018, 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 recognized in the first half of 2018. Management anticipates that the majority of the estimated costs will be incurred by Q3 2018.

During the second quarter of 2018, the Corporation incurred $0.4 million of additional severance related costs associated with the 2016 strategic reorganization which were expensed and paid during the three months ended June 30, 2018.  The Corporation does not anticipate any future costs related to the 2016 strategic reorganization.

Finance costs
Finance costs of $2.0 million in the second quarter of 2018 decreased $0.6 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.

For the six months ended June 30, 2018, finance costs of $3.7 million decreased $1.5 million compared to the same period in 2017 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 second quarter of 2018 (2017 – 27.6%) was higher compared to the statutory rate of 26.9% (2017 – 26.9%) due to the impact of expenses not deductible for tax purposes.

The Corporation's effective income tax rate for the six months ended June 30, 2018 of 27.6% (2017 – 27.8%) 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 second quarter of 2018, the Corporation had net earnings of $12.2 million, or $0.62 per share, compared to $7.7 million, or $0.40 per share, in the second quarter of 2017.  The $4.5 million increase in net earnings resulted primarily from higher volumes and lower finance costs offset partially by restructuring and other related costs of $0.9 million after-tax compared to restructuring recoveries of $0.2 million after-tax in the prior year.

For the six months ended June 30, 2018, the Corporation had net earnings of $22.0 million, or $1.13 per share, compared to $14.1 million, or $0.71 per share, in the same period of 2017. The $7.9 million increase in net earnings resulted primarily from higher volumes, lower finance costs and a gain recorded on sales of properties of $0.9 million after-tax in the current year. These increases were partially offset by restructuring and other related costs of $2.4 million after-tax in the current year compared to restructuring recoveries of $0.2 million after-tax in the prior year.

Adjusted net earnings (See the Non-GAAP and Additional GAAP Measures section)
Adjusted net earnings for the three months ended June 30, 2018 excludes restructuring and other related costs of $0.9 million after-tax, or $0.05 per share (2017 – restructuring recoveries of $0.2 million after-tax, or $0.01 per share).

As such, adjusted net earnings increased $5.6 million to $13.1 million, or $0.67 per share, in the second quarter of 2018 from $7.5 million, or $0.38 per share, in the same period of 2017. The $5.6 million increase in adjusted net earnings resulted primarily from higher volumes and lower finance costs.

Adjusted net earnings for the six months ended June 30, 2018 excludes restructuring and other related costs of $2.4 million after-tax, or $0.12 per share (2017 – restructuring recoveries of $0.2 million after-tax, or $0.01 per share) and a gain recorded on sales of properties of $0.9 million after-tax, or $0.05 per share (2017 – nil).

As such, adjusted net earnings increased $9.7 million to $23.5 million, or $1.20 per share, for the six months ended June 30, 2018 from $13.8 million, or $0.70 per share, in the same period of 2017. The $9.7 million increase in adjusted net earnings resulted primarily from higher volumes and lower finance costs.

Comprehensive income
Total comprehensive income of $12.2 million in the second quarter of 2018 included net earnings of $12.2 million and other comprehensive income of $0.1 million. In the second quarter of 2017, total comprehensive income of $7.2 million consisted of net earnings of $7.7 million and an other comprehensive loss of $0.5 million.

For the six months ended June 30, 2018, the total comprehensive income of $22.9 million included net earnings of $22.0 million and other comprehensive income of $0.8 million. The other comprehensive income of $0.8 million in the current year resulted primarily from $0.8 million of gains on derivative instruments designated as cash flow hedges outstanding at the end of the period. For the six months ended June 30, 2017, the total comprehensive income of $13.4 million included net earnings of $14.1 million and an other comprehensive loss of $0.6 million. The other comprehensive loss of $0.6 million in the prior year resulted primarily from $0.5 million of losses on derivative instruments designated as cash flow hedges outstanding at the end of the period.

Selected Quarterly Information

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



2018

2017 (As restated)

2016



Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Revenue


$

382.7

$

342.7

$

375.5

$

297.9

$

325.9

$

319.4

$

313.7

$

286.6

Net earnings


$

12.2

$

9.9

$

7.7

$

8.7

$

7.7

$

6.3

$

8.9

$

7.6

Net earnings per share



















- Basic   


$

0.62

$

0.51

$

0.39

$

0.44

$

0.40

$

0.32

$

0.45

$

0.38


- Diluted


$

0.60

$

0.49

$

0.38

$

0.43

$

0.38

$

0.31

$

0.44

$

0.37

 

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. The second quarter 2018 net earnings of $12.2 million included after-tax restructuring and other related costs of $0.9 million. Excluding the restructuring and other related costs, second quarter 2018 adjusted net earnings were $13.1 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



June 30

2018

March 31

2018

December 31

2017

(As restated)

Shareholders' equity


$

300.4

$

292.0

$

285.3

Funded net debt(1)


188.6

170.1

154.9

Total capital


$

489.0

$

462.1

$

440.2

Funded net debt to total capital(1)


38.6%

36.8%

35.2%

Leverage ratio(1)


2.18

2.12

2.08

(1)   See the Non-GAAP and Additional GAAP Measures section.

 

The Corporation's objective is to maintain a leverage ratio between 1.5 times and 2.0 times.  However, there may be instances where the Corporation is willing to maintain a leverage ratio outside this range to 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 June 30, 2018 of $300.4 million increased $8.4 million from March 31, 2018, as earnings of $12.2 million exceeded dividends declared of $4.9 million. For the six months ended June 30, 2018 the Corporation's shareholders' equity increased $15.1 million, as earnings of $22.0 million exceeded dividends declared of $9.8 million.

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



  Number of
Common Shares

Amount

Issued and outstanding, December 31, 2017


20,026,819

$

180.6

Common shares issued to settle share-based compensation plans


40,843


0.4

Issued and outstanding, June 30, 2018


20,067,662

$

180.9

Shares held in trust, December 31, 2017 and June 30, 2018


(522,712)

$

(4.7)

Issued and outstanding, net of shares held in trust, June 30, 2018


19,544,950

$

176.2

 

At the date of this MD&A, the Corporation had 19,544,950 common shares issued and outstanding, net of shares held in trust.

At June 30, 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 June 30, 2018, there were 368,041 (2017 – 366,679) SOP and DDSUP (treasury share settled) rights outstanding and 672,477 (2017 – 525,262) MTIP and DSUP (market-purchased share settled) rights outstanding.  At June 30, 2018 and June 30, 2017, all SOP and DDSUP rights were vested. 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 $1.1 million for the quarter (2017 – $1.1 million) and $2.0 million for the six months ended June 30, 2018 (2017 – $1.9 million) in respect of these plans.

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




June 30
2018


March 31

2018


December
31 2017

Bank indebtedness


$

11.1

$

13.4

$

1.7

Obligations under finance lease



8.7


8.9


9.5

Long-term debt



168.8


147.8


143.7

Funded net debt(1)


$

188.6

$

170.1

$

154.9

(1)

See the Non-GAAP and Additional GAAP Measures section.

 

Funded net debt of $188.6 million at June 30, 2018 increased $18.5 million compared to $170.1 million at March 31, 2018. The increase during the quarter was due primarily to cash used in operating activities of $11.0 million, primarily driven by the Corporation's decision to increase inventory levels to satisfy future sales, dividends paid of $4.9 million and finance lease payments of $1.1 million.

Funded net debt of $188.6 million at June 30, 2018 increased $33.7 million compared to $154.9 million at December 31, 2017. The increase during the period was due primarily to cash used in operating activities of $20.2 million, as a result of increased inventory levels to satisfy customer demands, dividends paid of $9.8 million and finance lease payments of $2.0 million.

The Corporation's ratio of funded net debt to total capital increased to 38.6% at June 30, 2018 from 36.8% at March 31, 2018, primarily due to the higher funded net debt level in the current period.

The Corporation's leverage ratio of 2.18 times at June 30, 2018 increased from the March 31, 2018 ratio of 2.12 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 June 30, 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 June 30, 2018, Wajax had the following contracts outstanding:

  • to buy U.S. $52.1 million (December 31, 2017 – to buy U.S. $48.5 million), and
  • to sell U.S. $27.3 million (December 31, 2017 – to sell U.S. $13.8 million).

The U.S. dollar contracts expire between July 2018 and January 2020, with a weighted average U.S./Canadian dollar rate of 1.2788.

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.

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 $96.2 million (March 31, 2018$86.0 million) of consigned inventory on hand from a major manufacturer at June 30, 2018, net of deposits of $8.9 million (March 31, 2018$5.9 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 June 30, 2018, Wajax had borrowed $174.3 million and issued $8.0 million of letters of credit for a total utilization of $182.3 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 June 30, 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 June 30, 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 June 30, 2018, Wajax had no utilization of the interest bearing equipment financing facilities.

As of August 9, 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 June 30, 2018, $117.7 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 June 30, 2018, $64 million of the Corporation's funded net debt, or 34%, 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 and six months ended June 30, 2018 and June 30, 2017:


Three months ended


Six months ended



June 30


June 30




2018

2017

(As restated)

Change


2018

2017
(As restated)

Change

Net earnings

$

12.2

$

7.7

$

4.5

$

22.0

$

14.1

$

7.9

Items not affecting cash flow


13.5


12.4


1.1


24.3


23.9


0.4

Net change in non-cash operating working capital


(23.6)


(7.5)


(16.1)


(44.6)


(17.6)


(27.0)

Finance costs paid


(2.1)


(4.4)


2.3


(3.7)


(4.9)


1.2

Income taxes paid


(1.5)


(1.3)


(0.2)


(3.3)


(4.5)


1.2

Rental equipment additions


(10.6)


(3.1)


(7.5)


(16.0)


(6.5)


(9.5)

Other non-current liabilities


1.1


-


1.1


1.0


(0.6)


1.6

Cash (used in) generated from operating activities

$

(11.0)

$

3.8

$

(14.8)

$

(20.2)

$

3.8

$

(24.0)

Cash used in investing activities

$

(1.6)

$

(0.1)

$

(1.5)

$

(2.3)

$

(0.5)

$

(1.8)

Cash generated from (used in) financing activities

$

15.0

$

(11.3)

$

26.3

$

13.2

$

(19.4)

$

32.6

 

Cash (Used In) Generated From Operating Activities
Cash flows used in operating activities amounted to $11.0 million in the second quarter of 2018, compared to cash flows generated from operating activities of $3.8 million in the same quarter of the previous year. The decrease of $14.8 million was mainly attributable to a decrease in cash generated from changes in non-cash operating working capital to increase inventory levels of $16.1 million and an increase in rental equipment additions of $7.5 million resulting from the Corporation's strategy to increase its rental fleet. These decreases were partially offset by increased net earnings of $4.5 million and lower finance costs paid of $2.3 million.

Rental equipment additions in the second quarter of 2018 of $10.6 million (2017 – $3.1 million) related primarily to lift trucks.

For the six months ended June 30, 2018, cash used in operating activities amounted to $20.2 million, compared to cash generated from operating activities of $3.8 million for the same period in the previous year. The $24.0 million decrease was mainly attributable to a decrease in cash generated from non-cash working capital of $27.0 million and an increase in rental equipment additions of $9.5 million offset partially by higher net earnings of $7.9 million, lower finance costs paid of $1.2 million and lower income taxes paid of $1.2 million.

For the six months ended June 30, 2018, rental equipment additions of $16.0 million (2017 – $6.5 million) related primarily to lift trucks.

Significant components of non-cash operating working capital, along with changes for the three and six months ended June 30, 2018 and June 30, 2017 include the following:


Three months ended

Six months ended

Changes in Non-cash Operating Working Capital(1)

June 30
2018

June 30
2017
(As restated)

June 30
2018

June 30
2017
(As restated)

Trade and other receivables

$

(17.6)

$

22.6

$

(13.9)

$

23.6

Contract assets


(5.0)


0.4


(2.4)


2.9

Inventories


(12.9)


(13.4)


(34.8)


(19.0)

Deposits on inventory


(3.0)


5.7


(2.5)


12.1

Prepaid expenses


(0.7)


0.3


(1.4)


(0.5)

Accounts payable and accrued liabilities


16.6


(23.1)


12.0


(36.4)

Provisions


(1.1)


-


(1.8)


(0.3)

Total Changes in Non-cash Operating Working Capital

$

(23.6)

$

(7.5)

$

(44.6)

$

(17.6)

(1)   Increase (decrease) in cash flow

 

Significant components of the changes in non-cash operating working capital for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 are as follows:

  • Trade and other receivables increased $17.6 million in 2018 compared to a decrease of $22.6 million in 2017. The increase in 2018 resulted primarily from higher sales activity in the second quarter compared to the previous quarter. The decrease in 2017 resulted primarily from lower mining sales activity in the second quarter compared to the first quarter.

  • Inventories increased $12.9 million in 2018 compared to an increase of $13.4 million in 2017. The increase in 2018 was due mainly to higher construction and forestry equipment inventory partially offset by lower mining and material handling inventory. The increase in 2017 was due to higher equipment and parts inventory partially offset by lower mining equipment inventory.

  • Accounts payable and accrued liabilities increased $16.6 million in 2018 compared to a decrease of $23.1 million in 2017. The increase in 2018 resulted primarily from higher trade payables. The decrease in 2017 resulted primarily from lower trade payables due in part to the payment of mining equipment inventory.

Significant components of the changes in non-cash operating working capital for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 are as follows:

  • Trade and other receivables increased $13.9 million in 2018 compared to a decrease of $23.6 million in 2017. The increase in 2018 resulted primarily from higher sales activity in the first half of 2018 compared to the same period in 2017. The decrease in 2017 resulted primarily from lower mining sales activity in the second quarter.

  • Inventories increased $34.8 million in 2018 compared to an increase of $19.0 million in 2017. The increase in 2018 was due mainly to higher construction and forestry equipment inventory partially offset by lower mining and material handling equipment inventory. The increase in 2017 was due to higher equipment inventory partially offset by lower mining equipment inventory.

  • Accounts payable and accrued liabilities increased $12.0 million in 2018 compared to a decrease of $36.4 million in 2017. The increase in 2018 resulted primarily from higher trade payables 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 second quarter of 2018, Wajax invested $0.4 million in property, plant and equipment additions, compared to $0.6 million in the second quarter of 2017. Proceeds on disposal of property, plant and equipment amounted to $0.2 million in the second quarter of 2018, compared to $0.6 million in the same quarter of the previous year. Intangible assets additions of $1.3 million (2017 – nil) in the second quarter of 2018 resulted primarily from software additions relating to the new enterprise operating system currently being implemented.

For the six months ended June 30, 2018, Wajax invested $1.4 million in property, plant and equipment additions, compared to $1.1 million for the six months ended June 30, 2017. Proceeds on disposal of property, plant and equipment, consisting primarily of proceeds on disposal of properties, amounted to $1.7 million for the six months ended June 30, 2018, compared to $0.6 million for the six months ended June 30, 2017. Intangible assets additions of $2.6 million (2017 – nil) for the six months ended June 30, 2018 resulted primarily from software additions relating to the new enterprise operating system currently being implemented.

Financing Activities
The Corporation generated $15.0 million of cash from financing activities in the second quarter of 2018 compared to a use of cash of $11.3 million in the same quarter of 2017. Financing activities in the quarter included a net bank credit facility borrowing of $21.0 million (2017 – nil) offset by dividends paid to shareholders of $4.9 million (2017 – $5.0 million) and finance lease payments of $1.1 million (2017 – $1.0 million).

For the six months ended June 30, 2018, the Corporation generated $13.2 million of cash from financing activities compared to a use of cash of $19.4 million in the same period of 2017. Financing activities for the six months ended June 30, 2018 included a net bank credit facility borrowing of $25.0 million (2017 – nil) offset by dividends paid to shareholders of $9.8 million (2017 – $9.9 million) and finance lease payments of $2.0 million (2017 – $2.0 million).

Dividends

Dividends to shareholders were declared as follows:

Record Date


Payment Date


Per Share


Amount

March 15, 2018


April 4, 2018


$

0.25


$

4.9

June 15, 2018


July 4, 2018



0.25



4.9

Six months ended June 30, 2018




$

0.50


$

9.8

 

On August 9, 2018, the Corporation declared a dividend of $0.25 per share for the third quarter of 2018, payable on October 2, 2018 to shareholders of record on September 14, 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, OEMs 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 $1.1 million provision for doubtful accounts at June 30, 2018 increased $0.3 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 June 30, 2018 was $1.6 million (2017 – $1.6 million) and for the six months ended June 30, 2018 was $2.9 million (2017 – $3.3 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 ended June 30, 2018.

Changes in Accounting Policies

Accounting standards adopted during the period

IFRS 15 Revenue from Contracts with Customers – 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:

Revenue type


Timing of satisfaction of performance obligation

Equipment sales




•  Retail sales


When control of the equipment passes to the customer based on shipment terms

 


•  Construction contracts


As a result of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.  The Corporation generally uses the cost-to-cost measure of progress for its contracts because it best reflects the transfer of an asset to the customer which occurs as costs are incurred on the contract

 

Industrial parts


When control of the product passes to the customer based on shipment terms

 

Product support


As a result of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.  The Corporation generally uses the cost-to-cost measure of progress for its product support services because it best reflects the transfer of an asset to the customer which occurs as costs are incurred

 

Other


As a result of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.  The Corporation generally uses the cost-to-cost measure of progress for its engineered repair services because it best reflects the transfer of an asset to the customer which occurs as costs are incurred

 

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 financial position and earnings.  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:




As originally reported

December 31, 2016


IFRS 15 adjustment


As restated

January 1, 2017

Trade and other receivables


$

194.6

$

(2.9)

$

191.7

Contract assets


$

7.1

$

15.2

$

22.3

Inventories


$

283.4

$

(9.5)

$

273.9

Deferred tax assets


$

4.6

$

(0.8)

$

3.8

Retained earnings


$

90.8

$

2.1

$

92.9












As originally reported

December 31, 2017


IFRS 15 adjustment


As restated

December 31, 2017

Trade and other receivables


$

207.4

$

(3.4)

$

203.9

Contract assets


$

4.1

$

15.2

$

19.3

Inventories


$

322.8

$

(9.5)

$

313.2

Deferred tax liabilities


$

1.4

$

0.6

$

2.0

Retained earnings


$

97.7

$

1.7

$

99.3

 

The effect of adopting IFRS 15 on the condensed consolidated statement of earnings for the three months ended June 30, 2017 is as follows:




As originally reported


IFRS 15 adjustment


As restated

Revenue


$

325.3

$

0.6

$

325.9

Cost of sales


$

262.7

$

0.4

$

263.0

Income tax expense


$

2.9

$

0.1

$

2.9

Net earnings


$

7.6

$

0.2

$

7.7

Basic earnings per share


$

0.39

$

0.01

$

0.40

Diluted earnings per share


$

0.37

$

0.01

$

0.38

                                                                                                                                           

The effect of adopting IFRS 15 on the condensed consolidated statement of earnings for the six months ended June 30, 2017 is as follows:




As originally reported


IFRS 15 adjustment


As restated

Revenue


$

643.7

$

1.7

$

645.4

Cost of sales


$

520.3

$

1.3

$

521.6

Income tax expense


$

5.3

$

0.1

$

5.4

Net earnings


$

13.8

$

0.3

$

14.1

Basic earnings per share


$

0.70

$

0.01

$

0.71

Diluted earnings per share


$

0.68

$

0.01

$

0.69

 

IFRS 9 Financial Instruments – 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 to measurement or the carrying amounts of financial assets and liabilities. The following table summarizes the classification impacts upon the adoption of IFRS 9:

Asset/Liability

Classification under IAS 39

Classification under IFRS 9

Cash

Loans and receivables

Amortized cost

Trade and other receivables

Loans and receivables

Amortized cost

Derivative instruments

FV if hedging instrument, or Held-for-trading

FV if hedging instrument, or mandatorily at FVTPL

Bank indebtedness

Other liabilities

Amortized cost

Accounts payable and accrued liabilities

Other liabilities

Amortized cost

Dividends payable

Other liabilities

Amortized cost

Other liabilities

Other liabilities

Amortized cost

Long-term debt

Other liabilities

Amortized cost

 

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 June 30, 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 June 30, 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 June 30, 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:

      1. these measures are commonly reported and widely used by investors and management;
      2. the non-GAAP measures are commonly used as an indicator of a company's cash operating performance, profitability and ability to raise and service debt;
      3. the additional GAAP measures are commonly used to assess a company's earnings performance excluding its capital and tax structures; and
      4. "Adjusted net earnings" and "Adjusted basic and diluted earnings per share" provide indications of the results by the Corporation's principal business activities prior to recognizing restructuring and other related costs (recoveries), (gain) loss recorded on sales of properties and senior notes redemption costs that are outside the Corporation's normal course of business.  "Adjusted EBITDA" used in calculating the Leverage Ratio excludes restructuring and other related costs (recoveries), (gain) loss recorded on sales of properties and senior notes redemption costs which is consistent with the leverage ratio calculation under the Corporation's bank credit agreement.

Non-GAAP financial measures are identified and defined below:

Funded net debt

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



Debt

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



EBITDA

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



EBITDA margin

Defined as EBITDA divided by revenue, as presented on the interim condensed Consolidated Statements of Earnings.



Adjusted net earnings (loss)

Net earnings (loss) before after-tax restructuring and other related costs (recoveries), (gain) loss recorded on sales of properties and senior notes redemption costs.



Adjusted basic and diluted earnings (loss) per share

Basic and diluted earnings (loss) per share before after-tax restructuring and other related costs (recoveries), (gain) loss recorded on sales of properties and senior notes redemption costs.



Adjusted EBITDA

EBITDA before restructuring and other related costs (recoveries), (gain) loss recorded on sales of properties and senior notes redemption costs.



Adjusted EBITDA margin

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



Leverage ratio

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



Funded net debt to total capital

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



Backlog

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


Additional GAAP measures are identified and defined below:



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

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



EBIT margin

Defined as EBIT divided by revenue, as presented on the interim condensed Consolidated Statements of Earnings.



Earnings (loss) before income taxes (EBT)

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



Working capital

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



Other working capital amounts

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


 

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


Three months ended

Six months ended


June 30

June 30



2018

2017
(As restated)


2018

2017
(As restated)

Net earnings

$

12.2

$

7.7

$

22.0

$

14.1

Restructuring and other related costs (recoveries), after-tax


0.9


(0.2)


2.4


(0.2)

(Gain) recorded on sales of properties, after-tax


-


-


(0.9)


-

Adjusted net earnings

$

13.1

$

7.5

$

23.5

$

13.8

Adjusted basic earnings per share(1)(2)  

$

0.67

$

0.38

$

1.20

$

0.70

Adjusted diluted earnings per share(1)(2)  

$

0.65

$

0.37

$

1.16

$

0.68

(1)

At June 30, 2018 the numbers of basic and diluted shares outstanding were 19,517,436 and 20,244,879, respectively for the three months ended and 19,510,808 and 20,199,244, respectively for the six months ended.

(2)

At June 30, 2017 the numbers of basic and diluted shares outstanding were 19,601,269 and 20,158,516, respectively for the three months ended and 19,709,348 and 20,228,511, respectively for the six months ended.

 

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


For the three months
ended

For the six months
ended

For the twelve months
ended


June 30
2018

June 30
2017
(As restated)

June 30
2018

June 30
2017
(As restated)

June 30
2018

March 31
2018

December 31
2017

(As restated)

Net earnings

$

12.2

$

7.7

$

22.0

$

14.1

$

38.4

$

34.0

$

30.5

Income tax expense


4.6


2.9


8.4


5.4


14.7


13.0


11.7

EBT


16.8


10.7


30.4


19.5


53.1


47.0


42.1

Finance costs


2.0


2.6


3.7


5.2


8.2


8.9


9.8

Senior notes redemption(1)


-


-


-


-


5.5


5.5


5.5

EBIT


18.7


13.3


34.1


24.7


66.8


61.4


57.4

Depreciation and amortization


5.9


5.5


11.4


10.9


22.9


22.5


22.4

EBITDA


24.7


18.8


45.5


35.6


89.7


83.9


79.8

Restructuring and other related costs (recoveries)(2)


1.3


(0.3)


3.3


(0.3)


3.3


1.7


(0.3)

(Gain) recorded on sales of properties(3)


-


-


(1.1)


-


(2.6)


(2.6)


(1.5)

Adjusted EBITDA

$

25.9

$

18.5

$

47.6

$

35.3

$

90.3

$

83.0

$

77.9

(1)

For the twelve months ended June 30, 2018, March 31, 2018 and December 31, 2017 – Includes the $5.5 million senior notes redemption costs recorded in the fourth quarter of 2017.

(2)

For the three months ended June 30, 2018 – Includes the $1.3 million restructuring and other related costs recorded in the second quarter of 2018.


For the three and six months ended June 30, 2017 – Includes the $0.3 million restructuring and other related recoveries recorded in the second quarter of 2017.


For the six and twelve months ended June 30, 2018 – Includes the $1.3 million restructuring and other related costs recorded in the second quarter of 2018 and the $2.0 million restructuring and other related costs recorded in the first quarter of 2018.


For the twelve months ended March 31, 2018 – Includes the $2.0 million restructuring and other related costs recorded in the first quarter of 2018 and the $0.3 million restructuring and other related recoveries recorded in the second quarter of 2017.


For the twelve months ended December 31, 2017 – Includes the $0.3 million restructuring and other related recoveries recorded in the second quarter of 2017.

(3)

For the six months ended June 30, 2018 and the twelve months ended June 30, 2018 and March 31, 2018 – Includes the $1.1 million gain recorded on sales of properties recorded in the first quarter of 2018 and the $1.5 million gain recorded on sales of properties recorded in 2017. For the twelve months ended December 31, 2017 – Includes the $1.5 million gain recorded on sales of properties recorded in 2017.

 

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



June 30

March 31

December 31



2018

2018

2017

(As restated)

Bank indebtedness (cash)


$

11.1

$

13.4

$

1.7

Obligations under finance leases


8.7

8.9

9.5

Long-term debt


168.8

147.8

143.7

Funded net debt


$

188.6

$

170.1

$

154.9

Letters of credit



8.0


6.1


7.3

Debt


$

196.7

$

176.2

$

162.2






Leverage ratio(1)


2.18

2.12

2.08

(1)

Calculation uses trailing four-quarter Adjusted EBITDA.


This leverage ratio is calculated for purposes of monitoring the Corporation's objective target leverage ratio of between 1.5 times and 2.0 times.  The calculation contains some differences from the leverage ratio calculated under the Corporation's bank credit facility agreement.  The resulting leverage ratio under the bank credit facility agreement is not significantly different.  See the Liquidity and Capital Resources section.

 

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 year-over-year 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; the expected cost of the redesign of our finance function and our expectation that the majority of such project will be completed during the first half of 2019; the expected cost of our ERS leadership re-alignment and our expectation that the majority of such costs will be incurred by Q3 2018; our expectation that we will not incur any future costs related to our 2016 strategic reorganization; 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 or financial condition over the longer term; 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 Financial Statements

For the three and six months ended June 30, 2018

WAJAX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

FINANCIAL POSITION











As at

(unaudited, in thousands of Canadian dollars)


Note


June 30, 2018

December 31, 2017
As restated (Note 3)

January 1, 2017
As restated (Note 3)

ASSETS










CURRENT










Cash




$

-

$

-

$

4,854

Trade and other receivables





218,064


203,949


191,744

Contract assets





21,687


19,329


22,319

Inventories





354,010


313,240


273,933

Deposits on inventory





9,357


6,874


19,407

Prepaid expenses





5,693


4,329


5,463

Derivative instruments





946


-


553






609,757


547,721


518,273











NON-CURRENT










Rental equipment


4



64,192


61,257


58,106

Property, plant and equipment


5



42,143


43,934


45,658

Goodwill and intangible assets  





44,008


41,905


41,205

Deferred tax assets





290


-


3,802






150,633


147,096


148,771





$

760,390

$

694,817

$

667,044











LIABILITIES AND SHAREHOLDERS' EQUITY










CURRENT










Bank indebtedness




$

11,075

$

1,724

$

-

Accounts payable and accrued liabilities


6



241,530


229,458


232,715

Provisions





4,272


6,043


5,839

Dividends payable





4,886


4,876


4,956

Income taxes payable





8,403


667


2,287

Obligations under finance leases


7



3,664


3,790


3,701

Derivative instruments





-


396


-






273,830


246,954


249,498











NON-CURRENT










Provisions





3,382


2,150


2,305

Deferred tax liabilities





-


2,009


-

Employee benefits





8,663


8,545


8,106

Other liabilities





219


435


1,118

Obligations under finance leases


7



5,013


5,721


5,154

Long-term debt


8



168,845


143,667


121,952






186,122


162,527


138,635











SHAREHOLDERS' EQUITY










Share capital


9



176,229


175,863


178,764

Contributed surplus





12,092


10,455


7,137

Retained earnings





111,573


99,312


92,908

Accumulated other comprehensive income (loss)





544


(294)


102

Total shareholders' equity





300,438


285,336


278,911





$

760,390

$

694,817

$

667,044

 

See accompanying notes to these unaudited condensed consolidated interim financial statements.

WAJAX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS







Three months ended June 30

Six months ended June 30

(unaudited, in thousands of Canadian dollars,
except per share data)

Note

2018

2017
As restated
(Note 3)

2018

2017
As restated
(Note 3)











Revenue

12

$

382,728

$

325,945

$

725,453

$

645,375

Cost of sales



311,061


263,018


587,432


521,581

Gross profit



71,667


62,927


138,021


123,794

Selling and administrative expenses



51,662


49,905


100,661


99,454

Restructuring and other related costs (recoveries)



1,256


(315)


3,256


(315)

Earnings before finance costs and income taxes



18,749


13,337


34,104


24,655

Finance costs



1,956


2,642


3,680


5,180

Earnings before income taxes



16,793


10,695


30,424


19,475

Income tax expense

13


4,638


2,948


8,401


5,417

Net earnings


$

12,155

$

7,747

$

22,023

$

14,058











Basic earnings per share

14

$

0.62

$

0.40

$

1.13

$

0.71

Diluted earnings per share

14

$

0.60

$

0.38

$

1.09

$

0.69

 

WAJAX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME





Three months ended June 30

Six months ended June 30

(unaudited, in thousands of Canadian dollars)

2018

2017
As
restated
(Note 3)

2018

2017
As
restated
(Note 3)










Net earnings

$

12,155

$

7,747

$

22,023

$

14,058










Items that may be subsequently reclassified to income

(Gains) losses on derivative instruments designated

as cash flow hedges in prior periods reclassified to finance
costs during the period, net of tax expense of $72
(2017 – $5) and year to date, net of tax recovery of $17
(2017 – expense of $30)


(196)


(15)


45


(81)










Gains (losses) on derivative instruments outstanding at
the end of the period designated as cash flow hedges,
net of tax expense of $98 (2017 – recovery of $197)
and year to date, net of tax expense of $292
(2017 – recovery of $198)


265


(534)


793


(537)










Other comprehensive income (loss), net of tax


69


(549)


838


(618)










Total comprehensive income

$

12,224

$

7,198

$

22,861

$

13,440

 

See accompanying notes to these unaudited condensed consolidated interim financial statements.

WAJAX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS' EQUITY















Accumulated
other
comprehensive
income
(loss)










For the six months ended June 30, 2018

(unaudited, in thousands of Canadian dollars)

Note

Share
capital

Contributed
surplus

Retained
earnings

Cash flow
hedges

Total










December 31, 2017 (as restated)

3

$

175,863

10,455

99,312

(294)

$

285,336










Net earnings



-

-

22,023

-


22,023










Other comprehensive income



-

-

-

838


838










Total comprehensive income for the period



-

-

22,023

838


22,861

Shares issued to settle share-based compensation plans

11


366

(366)

-

-


-

Dividends declared

10


-

-

(9,762)

-


(9,762)

Share-based compensation expense

11


-

2,003

-

-


2,003

June 30, 2018


$

176,229

12,092

111,573

544

$

300,438

 

See accompanying notes to these unaudited condensed consolidated interim financial statements.



WAJAX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS' EQUITY
















Accumulated
other
comprehensive
income (loss)



For the six months ended June 30, 2017

(unaudited, in thousands of Canadian dollars)

 

Note


Share
capital

Contributed
surplus

Retained
earnings

As restated
(Note 3)

Cash flow
hedges


Total

As restated
(Note 3)










December 31, 2016 (as reported)


$

178,764

7,137

90,812

102

$

276,815

Impact of adopting IFRS 15

3


-

-

2,096

-


2,096

January 1, 2017 (as restated)

3


178,764

7,137

92,908

102


278,911










Net earnings (as restated)



-

-

14,058

-


14,058










Other comprehensive loss



-

-

-

(618)


(618)










Total comprehensive income (loss) for the period



-

-

14,058

(618)


13,440

Shares purchased and held in trust



(2,901)

-

(4,598)

-


(7,499)

Dividends declared

10


-

-

(9,832)

-


(9,832)

Share-based compensation expense

11


-

1,729

-

-


1,729

June 30, 2017


$

175,863

8,866

92,536

(516)

$

276,749

 

See accompanying notes to these unaudited condensed consolidated interim financial statements.

WAJAX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

CASH FLOWS



Three months ended
June 30


Six months ended

June 30

(unaudited, in thousands of Canadian dollars)

Note


2018


2017

As
restated
(Note 3)


2018


2017

As
restated
(Note 3)

OPERATING ACTIVITIES











Net earnings


$

12,155

$

7,747

$

22,023

$

14,058


Items not affecting cash flow:












Depreciation and amortization:













Rental equipment



3,712


3,383


7,050


6,678




Property, plant and equipment



2,026


1,977


3,848


3,949




Intangible assets



166


142


515


284



(Gain) loss on disposal of property, plant and equipment

5


(42)


35


(1,195)


46



Share-based compensation expense

11


1,091


925


2,003


1,729



Non-cash rental expense



(38)


5


(32)


179



Employee benefits expense, net of payments



4


63


118


161



Change in fair value of non-hedge derivative instruments



(12)


239


(116)


262



Finance costs



1,956


2,642


3,680


5,180



Income tax expense

13


4,638


2,948


8,401


5,417




25,656


20,106


46,295


37,943


Changes in non-cash operating working capital

15


(23,633)


(7,511)


(44,587)


(17,628)


Rental equipment additions

4


(10,566)


(3,139)


(15,990)


(6,497)


Other non-current liabilities



1,134


15


1,016


(569)


Finance costs paid



(2,085)


(4,408)


(3,709)


(4,889)


Income taxes paid



(1,528)


(1,299)


(3,273)


(4,517)


Cash (used in) generated from operating activities



(11,022)


3,764


(20,248)


3,843











INVESTING ACTIVITIES











Property, plant and equipment additions

5


(449)


(627)


(1,399)


(1,121)


Proceeds on disposal of property, plant and equipment

5


170


563


1,745


623


Intangible assets additions



(1,306)


(10)


(2,618)


(17)


Cash used in investing activities



(1,585)


(74)


(2,272)


(515)











FINANCING ACTIVITIES











Net increase in bank debt

8


21,000


-


25,000


-


Common shares purchased and held in trust

9


-


(5,281)


-


(7,499)


Finance lease payments

7


(1,128)


(1,034)


(2,041)


(2,045)


Settlement of non-hedge derivative instruments



(38)


(27)


(38)


10


Dividends paid



(4,876)


(4,956)


(9,752)


(9,912)


Cash generated from (used in) financing activities



14,958


(11,298)


13,169


(19,446)

Change in cash and bank indebtedness



2,351


(7,608)


(9,351)


(16,118)

(Bank indebtedness) cash - beginning of period



(13,426)


(3,656)


(1,724)


4,854

Bank indebtedness - end of period


$

(11,075)

$

(11,264)

$

(11,075)

$

(11,264)

 

See accompanying notes to these unaudited condensed consolidated interim financial statements.

WAJAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

JUNE 30, 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 August 9, 2018.

3.   CHANGE IN ACCOUNTING POLICIES

Accounting standards adopted during the period

IFRS 15 Revenue from Contracts with Customers - 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: 

Revenue type

Timing of satisfaction of performance obligation

Equipment sales




  • Retail sales

When control of the equipment passes to the customer based on shipment terms



  • Construction contracts

As a result of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.  The Corporation generally uses the cost-to-cost measure of progress for its contracts because it best reflects the transfer of an asset to the customer which occurs as costs are incurred on the contract



Industrial parts

When control of the product passes to the customer based on shipment terms



Product support

As a result of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.  The Corporation generally uses the cost-to-cost measure of progress for its product support services because it best reflects the transfer of an asset to the customer which occurs as costs are incurred



Other

As a result of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.  The Corporation generally uses the cost-to-cost measure of progress for its engineered repair services because it best reflects the transfer of an asset to the customer which occurs as costs are incurred

 

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 financial position and earnings.  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:



As originally reported

December 31, 2016


IFRS 15
adjustment


As restated

January 1, 2017

Trade and other receivables

$

194,613

$

(2,869)

$

191,744

Contract assets

$

7,095

$

15,224

$

22,319

Inventories

$

283,421

$

(9,488)

$

273,933

Deferred tax assets

$

4,573

$

(771)

$

3,802

Retained earnings

$

90,812

$

2,096

$

92,908










As originally reported

December 31, 2017


IFRS 15
adjustment


As restated

December 31, 2017

Trade and other receivables

$

207,353

$

(3,404)

$

203,949

Contract assets

$

4,128

$

15,201

$

19,329

Inventories

$

322,778

$

(9,538)

$

313,240

Deferred tax liabilities

$

1,401

$

608

$

2,009

Retained earnings

$

97,661

$

1,651

$

99,312

 

The effect of adopting IFRS 15 on the condensed consolidated statement of earnings for the three months ended June 30, 2017 is as follows:



As originally reported


IFRS 15 adjustment


As restated

Revenue

$

325,312

$

633

$

325,945

Cost of sales

$

262,652

$

366

$

263,018

Income tax expense

$

2,876

$

72

$

2,948

Net earnings

$

7,552

$

195

$

7,747

Basic earnings per share

$

0.39

$

0.01

$

0.40

Diluted earnings per share

$

0.37

$

0.01

$

0.38

 

The effect of adopting IFRS 15 on the condensed consolidated statement of earnings for the six months ended June 30, 2017 is as follows:



As originally reported


IFRS 15 adjustment


As restated

Revenue

$

643,699

$

1,676

$

645,375

Cost of sales

$

520,273

$

1,308

$

521,581

Income tax expense

$

5,318

$

99

$

5,417

Net earnings

$

13,789

$

269

$

14,058

Basic earnings per share

$

0.70

$

0.01

$

0.71

Diluted earnings per share

$

0.68

$

0.01

$

0.69

 

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 to measurement or the carrying amounts of financial assets and liabilities.  The following table summarizes the classification impacts upon the adoption of IFRS 9.

Asset/Liability

Classification under IAS 39

Classification under IFRS 9

Cash

Loans and receivables

Amortized cost

Trade and other receivables

Loans and receivables

Amortized cost

Derivative instruments

FV if hedging instrument, or Held-for-trading

FV if hedging instrument, or mandatorily at FVTPL

Bank indebtedness

Other liabilities

Amortized cost

Accounts payable and accrued liabilities

Other liabilities

Amortized cost

Dividends payable

Other liabilities

Amortized cost

Other liabilities

Other liabilities

Amortized cost

Long-term debt

Other liabilities

Amortized cost

 

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 $10,566 during the quarter (2017 – $3,139) and $15,990 year to date (2017 – $6,497). Equipment with a carrying amount of $507 during the quarter (2017 - $31) and $573 year to date (2017 – $31) was transferred from inventories to rental equipment. Equipment with a carrying amount of $2,092 during the quarter (2017 - $729) and $6,578 year to date (2017 – $1,346) was transferred from rental equipment to inventories.

5.   PROPERTY, PLANT AND EQUIPMENT
The Corporation acquired property, plant and equipment with a cost of $449 during the quarter (2017 – $627) and $1,399 year to date (2017 – $1,121). Assets with a carrying amount of $128 during the quarter (2017 – $598) and $550 year to date (2017 – $669) were disposed of, resulting in a gain on disposal of $42 during the quarter (2017 – loss of $35) and $1,195 year to date (2017 – loss of $46).

6.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES




June 30, 2018


December 31, 2017

Trade payables


$

130,028

$

114,923

Contract liabilities



189


1,005

Deferred income – other



16,147


16,941

Supplier payables with extended terms



47,303


36,119

Payroll, bonuses and incentives



20,428


29,577

Restructuring accrual



1,347


468

Accrued liabilities



26,088


30,425

Accounts payable and accrued liabilities


$

241,530

$

229,458

 

7.   OBLIGATIONS UNDER FINANCE LEASES



     Three months ended

June 30


Six months ended

June 30



2018


2017


2018


2017

Balance at beginning of period

$

8,879

$

8,164

$

9,511

$

8,855

Changes from financing cash flows










Finance lease payments


(1,128)


(1,034)


(2,041)


(2,045)

Other changes










New finance leases


926


444


1,207


764

Balance at end of period

$

8,677

$

7,574

$

8,677

$

7,574

 

8.   LONG-TERM DEBT



Three months ended

June 30


Six months ended

June 30



2018


2017


2018


2017

Balance at beginning of period

$

147,755

$

122,136

$

143,667

$

121,952

Changes from financing cash flows










Net proceeds of borrowings


21,000


-


25,000


-

Other changes










Amortization of capitalized transaction costs


90


188


178


372

Balance at end of period

$

168,845

$

122,324

$

168,845

$

122,324

 

9.   SHARE CAPITAL



Number of
Common Shares


Amount

Issued and outstanding, December 31, 2017


20,026,819

$

180,572

Common shares issued to settle share-based compensation plans

11

40,843


366

Issued and outstanding, June 30, 2018


20,067,662

$

180,938

Shares held in trust, December 31, 2017 and June 30, 2018


(522,712)


(4,709)

Issued and outstanding, net of shares held in trust, June 30, 2018


19,544,950

$

176,229








Number of
Common Shares


Amount

Issued and outstanding, December 31, 2016 and June 30, 2017


20,026,819

$

180,572

Shares held in trust, December 31, 2016


(200,968)


(1,808)

Purchased for future settlement of certain share-based compensation plans


(321,744)


(2,901)

Shares held in trust, June 30, 2017


(522,712)


(4,709)

Issued and outstanding, net of shares held in trust, June 30, 2017


19,504,107

$

175,863

 

10.  DIVIDENDS DECLARED
During the three months ended June 30, 2018, the Corporation declared cash dividends of $0.25 per share or $4,886 (2017 – dividends of $0.25 per share or $4,876).

Year to date, the Corporation declared cash dividends of $0.50 per share or $9,762 (2017 – dividends of $0.50 per share or $9,832).

On August 9, 2018, the Corporation declared a third quarter 2018 dividend of $0.25 per share or $4,886.

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 $139 for the quarter (2017 – $141) and $289 for the year to date (2017 – $318) in respect of the SOP and DDSUP plans. The following units under the plans are outstanding:


Six months ended

June 30, 2018

Six months ended

June 30, 2017


Number of
rights


Fair value at
time of grant

Number of
rights


Fair value at
time of grant

Outstanding at beginning of year

388,983

$

6,524

345,458

$

5,935

Granted in the period

– new grants

11,746


289

13,502


300


– dividend equivalents

8,155


-

7,719


-

Settled in the period

(40,843)


(366)

-


-

Outstanding at end of period

368,041

$

6,447

366,679

$

6,235

 

At June 30, 2018 and June 30, 2017, all share rights were vested.

b) Market-purchased share rights plans
The Corporation recorded compensation cost of $952 for the quarter (2017 - $784) and $1,714 for the year to date (2017 – $1,411) in respect of these plans. The following RSUs and PSUs under the plans are outstanding:


Six months ended

June 30, 2018

Six months ended

June 30, 2017


Number of
rights


Fair value at
time of grant

Number of
rights


Fair value at
time of grant

Outstanding at beginning of year

498,440

$

9,424

315,916

$

5,211

Granted in the period

– new grants

202,166


5,653

211,940


5,223


– dividend equivalents

12,421


-

8,767


-

Forfeitures

(40,550)


(803)

(11,361)


(204)

Outstanding at end of period

672,477

$

14,274

525,262

$

10,230

   

At June 30, 2018 and June 30, 2017, no RSUs or PSUs were vested.

c) Cash-settled rights plans
The Corporation recorded compensation cost of $7 for the quarter (2017 – $133) and compensation recovery of $26 for the year to date (2017 – cost of $207) in respect of the share-based portion of the MTIP and DSUP for grants dated before March, 2016. At June 30, 2018, the carrying amount of the share-based portion of these liabilities was $210 (June 30, 2017$1,125).

12.  DISAGGREGATED REVENUE



Three months ended

June 30


Six months ended

June 30



2018


2017

As restated
(Note 3)


2018


2017

As restated
(Note 3)

Equipment sales

$

144,642

$

109,663

$

268,895

$

207,525

Industrial parts


93,592


87,010


182,541


176,572

Product support


120,298


108,416


225,987


219,689

Other


15,315


13,240


31,243


25,543

Revenue from contracts with customers


373,847


318,329


708,666


629,329

Equipment rental


8,881


7,616


16,787


16,046

Total

$

382,728

$

325,945

$

725,453

$

645,375

 

13.  INCOME TAXES
Income tax expense comprises current and deferred tax as follows:

For the six months ended June 30


2018


2017

As restated
(Note 3)

Current

$

11,009

$

2,814

Deferred – Origination and reversal of temporary differences


(2,608)


2,603

Income tax expense

$

8,401

$

5,417

 

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:

For the six months ended June 30


2018


2017

As restated
(Note 3)

Combined statutory income tax rate


26.9%


26.9%

Expected income tax expense at statutory rates

$

8,184

$

5,239

Non-deductible expenses


257


248

Other


(40)


(70)

Income tax expense

$

8,401

$

5,417

 

14.  EARNINGS PER SHARE

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



Three months ended

June 30


Six months ended

June 30



2018


2017

As restated
(Note 3)


2018


2017

As restated
(Note 3)

Numerator for basic and diluted earnings per share:









– net earnings

$

12,155

$

7,747

$

22,023

$

14,058

Denominator for basic earnings per share:

– weighted average shares, net of shares held in trust


19,517,436


19,601,269


19,510,808


19,709,348

Denominator for diluted earnings per share:









– weighted average shares, net of shares held in trust


19,517,436


19,601,269


19,510,808


19,709,348

– effect of dilutive share rights


727,443


557,247


688,436


519,163

Denominator for diluted earnings per share


20,244,879


20,158,516


20,199,244


20,228,511

Basic earnings per share

$

0.62

$

0.40

$

1.13

$

0.71

Diluted earnings per share

$

0.60

$

0.38

$

1.09

$

0.69

 

For the quarter, no anti-dilutive share rights were excluded from the above calculation (2017 – nil). For the year to date, 38,296 anti-dilutive share rights were excluded from the above calculation (2017 – 38,729).

15.  CHANGES IN NON-CASH OPERATING WORKING CAPITAL


Three months ended

June 30

Six months ended

June 30



2018


2017

As restated
(Note 3)


2018


2017

As restated
(Note 3)


Trade and other receivables

$

(17,612)

$

22,592

$

(13,882)

$

23,619


Contract assets


(4,967)


352


(2,358)


2,870


Inventories


(12,872)


(13,445)


(34,765)


(19,015)


Deposits on inventory


(3,006)


5,715


(2,483)


12,050


Prepaid expenses


(667)


343


(1,364)


(453)


Accounts payable and accrued liabilities


16,588


(23,103)


12,036


(36,383)


Provisions


(1,097)


35


(1,771)


(316)

Total

$

(23,633)

$

(7,511)

$

(44,587)

$

(17,628)

 

16.  COMPARATIVE INFORMATION

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

SOURCE Wajax Corporation

View original content: http://www.newswire.ca/en/releases/archive/August2018/09/c6965.html

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