Mining a Wealth of Experience Wajax Corporation Annual Report 2011 Financial Highlights Wajax is a leading Canadian distributor and service support provider of mobile equipment, industrial components and power systems. Reflecting a diversified exposure to the Canadian economy, Wajax has three distinct business divisions, which operate through a network of 117 branches across Canada. The Company’s customer base covers core sectors of the Canadian economy – mining, oil and gas, forestry, construction, manufacturing, industrial processing, transportation and utilities. For the years ended December 31 ($ millions, except per share data) 2011 2010 (1) 2009 (1)(2) Revenue Earnings before income taxes Net earnings Cash flows from operating activities before changes in operating assets and liabilities Current assets net of current liabilities, exclusive of funded net debt (3) Funded net debt (3) Shareholders’ equity Basic earnings per share Cash dividends declared Funded net debt to equity Weighted average number of shares outstanding Revenue (2) ($ millions) 1,377.1 1,110.9 1,007.2 1,213.5 1,192.3 $ 1,377.1 $ 1,110.9 $ 1,007.2 87.5 63.8 106.2 165.0 63.7 227.6 3.84 2.14 53.9 56.4 73.4 118.3 45.6 199.3 3.39 3.40 32.2 34.2 45.1 150.9 70.3 200.4 2.06 2.47 0.28:1 0.23:1 0.35:1 16,629,444 16,613,676 16,596,853 Cash Flows from Operating Activities Before Changes in Operating Assets and Liabilities (2) 106.2 73.4 45.1 ($ millions) 87.5 85.0 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 Basic Earnings Per Share(1)(2) ($) Net Earnings (1)(2) ($ millions) 3.84 3.39 4.57 4.34 63.8 56.4 75.8 72.0 2.06 34.2 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 (1) For years prior to 2011, Wajax was an income fund and effectively not subject to income tax. (2) Years 2009, 2008 and 2007 reported under previous Canadian GAAP. (3) Funded net debt includes bank debt and obligations under finance leases net of cash. Wajax at a Glance Overview 2011 Revenue by Region 2011 Revenue by Market • Wajax has three distinct divisions, which operate through a network of 117 branches across Canada. • Wajax is a multi-line distributor and each of its divisions represents a number of leading worldwide manufacturers. • Our customer base is diversified, spanning natural resources, construction, transportation, manufacturing, industrial processing and utilities. Division Overview Wajax Equipment n Western Canada n Eastern Canada n Ontario 54% 29% 17% 2011 Division Revenue By Product Type • The largest multi-line distributor of mobile equipment in Canada. • 32 branches • 980 employees • 50% of total revenue and 47% of total earnings before finance costs, taxes and corporate costs • Business: Distribution, rental, modification and servicing of mobile equipment from leading manufacturers. • Products: Excavators, lift trucks, mining trucks and shovels, forest harvesting equipment, utility equipment, road building equipment, loader backhoes, container handlers, cranes (including crawler and rough terrain cranes), skid steer loaders, wheel loaders, shuttle cars and continuous miners. • Markets: Construction, materials handling, forestry, mining, government, oil & gas, utilities and manufacturing. Wajax Industrial Components By Market • A leading distributor of industrial products • Products: Bearings, power transmission parts, in Canada. • 57 branches • 787 employees • 25% of total revenue and 22% of total earnings before finance costs, taxes and corporate costs • Business: Distribution, servicing, custom design and assembly of industrial components for in-plant customers and original equipment manufacturers. hydraulic components & systems, process pumps & equipment, motors, cylinders, hoses & fittings, hoists, filters and safety supplies. • Markets: Metal processing, construction, mining, food processing, oil & gas, forestry, resellers/ distributors, transportation and industrial/ manufacturing. Wajax Power Systems By Market • One of the largest distributors of diesel engines • Products: Diesel and natural gas engines, and transmissions in Canada. transmissions and power generators. • 28 branches • 949 employees • 25% of total revenue and 31% of total earnings before finance costs, taxes and corporate costs • Business: Distribution, rental and servicing of engines, transmissions and generators for on-highway, off-highway and electric power generation applications. • Markets: Construction, mining, forestry, oil & gas, industrial/commercial, transportation, utilities, marine and military. n Industrial/Commercial n Construction n Oil & Gas n Oil Sands n Mining n Transportation n Forestry n Government & Utilities n Metal Processing n Other n Construction n Mining/Oil Sands n Material Handling n Forestry n Crane & Utility n Industrial/Manufacturing n Mining n Oil & Gas n Forestry n Metal Processing n Construction n Food & Beverage n Transportation n Other 16% 14% 13% 11% 11% 9% 9% 6% 4% 7% 33% 31% 16% 13% 7% 17% 14% 14% 14% 11% 6% 5% 4% 15% n Oil & Gas n On-Highway Transportation n Industrial/Commercial n Oil Sands n Mining n Other 34% 23% 20% 6% 3% 14% Wajax Corporation Annual Report 2011 • 1 Message to Our Shareholders Wajax Corporation’s 2011 Year in Review We achieved record revenues and earnings before income tax in 2011, driven by execution of our strategic initiatives and a stronger Canadian economy. Revenues and earnings before tax rose to a record $1.38 billion and Rebranding Initiative $87.5 million respectively, from $1.11 billion and $53.9 million in In 2011, we worked to strengthen our brand by capitalizing on the history 2010, representing year-over-year increases of 24% and 62%. The before and legacy of the Wajax name. As part of a major rebranding initiative, income tax comparison is appropriate for this first year after conversion all three business segments now share the Wajax name and the stylized from an income fund, when we were effectively not subject to income tax. red “W” logo. Wajax Industries received a name update reflective of These strong results enabled us to declare cash dividends to shareholders its position as Canada’s largest multi-line equipment distributor and totaling $2.14 per share in 2011. Our revenue gains were driven by execution of our strategic initiatives and by a stronger domestic economy, led by robust energy, mining, forestry and construction markets, particularly in western Canada. These factors resulted in increases in both product and parts and service sales throughout the year. In addition to revenue growth, the increase in 2011 earnings before income tax was attributable to maintaining disciplined control over selling and administrative costs in all three business segments. Each of our business segments performed very well and contributed to the overall increase in consolidated 2011 earnings. Wajax Equipment was able to overcome the supply disruption to its Hitachi product line caused by the March earthquake and tsunami in Japan, which resulted in the delay of approximately $40 million in equipment deliveries. In spite of this, Equipment posted a 29% increase in segment earnings on a 23% growth in revenues. Wajax Industrial Components almost doubled its 2010 earnings on a 15% increase in sales and Wajax Power Systems recorded a 71% increase in segment earnings on 35% higher revenues, which included results from the acquisition of Harper Power Products. Harper Acquisition With the acquisition of Harper in May, Wajax Power Systems took a major now operates as Wajax Equipment. Kinecor and its Peacock division now operate as Wajax Industrial Components. DDACE Power Systems, Waterous Power Systems and the newly acquired Harper business now operate as Wajax Power Systems. By bringing all three segments under one common brand name, customers and suppliers will be able to appreciate the company’s size, strength and integrated business approach. This initiative also enhances our recruiting and retention programs, which are designed to attract the industry’s highest calibre personnel. 2012 In 2012, we expect growth in the Canadian economy to be more modest than that experienced in 2011. This is primarily a result of the continuing high value of the Canadian dollar, and the dampening effects of the European sovereign debt crisis and a slowing Chinese economy on world economic activity. However, we expect global demand for commodities, including energy, to remain relatively strong. This should bode well for Canada’s resource-based economy and our three operating segments, which are heavily weighted to the Canadian resource industry, including the energy sector of western Canada. For 2012, each business segment is continuing to implement strategies designed to promote market share, revenue and earnings growth. step towards becoming a Canada-wide total power systems solution Through product sales and aftermarket initiatives, Wajax Equipment provider. The addition of Harper’s nine branches, located in major is continuing to focus on building market share across all of its key markets including Toronto, Ottawa, Hamilton, London and Sudbury, have product lines. In 2011, the segment made significant strides toward given Wajax Power Systems a significant presence in Ontario, where it improving its aftermarket support capabilities, which we believe is the previously had limited coverage. As well, the acquisition means that we foundation for increased market share. Parts availability and customer are the authorized distributor of Detroit Diesel, Mercedes Benz and MTU fill rates have been increased, and upgraded processes adopted for engines, MTU Onsite generator sets and Allison transmissions across inventory forecasting, ordering and stocking. As well, the segment is Canada, with the exception of portions of British Columbia. working to expand its operations in the growing mining sector by building Results from the acquisition for eight months of 2011 have exceeded our expectations, contributing meaningfully to revenues and earnings. its organizational and support infrastructure to capitalize on market opportunities, particularly in Ontario and eastern Canada. In 2012, we expect to build upon this success, particularly in the off- Following the reorganization of its business in 2010, Wajax Industrial highway and power generation segments of the market, as the former Components has undertaken significant initiatives to increase its Harper business is fully integrated into the Wajax Power Systems segment. operational efficiency. Enhancements are being made to inventory 2 • Wajax Corporation Annual Report 2011 Paul E. Gagné Chairman of the Board and supply chain management, and compensation and performance Acknowledgments management systems have been revamped. The segment continues to After nearly a decade as President and Chief Executive Officer, Neil further build and promote its higher margin, value-added engineering and Manning is retiring. Neil has made an outstanding contribution to Wajax. technical services capabilities, particularly in the fluid power and process Under his leadership since 2002, the company has been transformed equipment markets, and its ability to provide shop repair services. As into a high-performing, valued distributor of mobile equipment, industrial well, Wajax Industrial Components is in the midst of developing a full components and power systems. From the time Neil took over as Chief customer interfacing e-commerce capability, with completion scheduled Executive Officer to the end of February 2012, the company’s share price for the end of 2012. Wajax Power Systems has recently broken ground on a new facility in Drummondville, Quebec, which will be leveraged to increase and consolidate its power generation and off-highway packaging and integration capabilities. In 2011, the segment introduced a turn-key has risen from $4.01 to $43.80 and the total return shareholders have enjoyed during that same period was almost 1600%. On behalf of the Board of Directors and the shareholders of Wajax, I thank Neil for these contributions and his commitment to the company’s success. We wish him health and happiness in his retirement. power generation rental fleet initiative in western Canada. The success of We welcome Mark Foote as the new President and Chief Executive Officer. that program has led to our planned expansion of the rental fleet across Mark arrives with a wealth of experience in distribution, supply chain the rest of the country. Since the Harper acquisition, the segment has management and logistics. Most recently, he served as the President and further enhanced its product offering via new distribution agreements for Chief Executive Officer of Zellers, and prior to that, was the President and Doosan generators and Volvo Penta engines. Chief Merchandising Officer at Loblaws Companies. Mark also had a career At the corporate level, our strategic human resources initiative is underway with the goal of implementing best practices consistently across all business segments. This will support our efforts to entrench Wajax as the of more than 20 years at Canadian Tire Corporation, including 5 years as President, Canadian Tire Retail. We look forward to Mark’s contributions to Wajax, its employees, suppliers, customers and shareholders. employer of choice for the top talent in the industry. Strengthening our On behalf of our shareholders, management, and our Board of directors I workplace health and safety culture remains a top corporate priority, and would also like to pay special thanks to Ivan Duvar and Valerie Nielsen, in 2012 we will look to build on the 46% reduction in lost-time injuries who will be retiring from the Board in May 2012. Ivan has been a long- and 69% reduction in total lost days due to injuries achieved in 2011. time Chairman of the Human Resources and Compensation Committee With the foregoing initiatives, and a continuing focus on cost and asset base management within a sound capital structure, we are confident in our ability to continue to deliver a sustainable and superior return on investment to the shareholders of Wajax Corporation. It is important to emphasize that the conversion to a corporate entity has not changed the fundamental business model that produced rewarding results for Wajax Income Fund investors. We continue to operate as a business with low ongoing capital requirements relative to our ability to generate cash. We also continue to maintain our focus on operational excellence and profitable growth across our three business segments and, commencing in 2012, we have established an objective of declaring annual dividends equal to at least 75% of earnings, paid on a monthly basis. of the Board, and his counsel and advice over the last eleven years have been invaluable. Since 1995, Valerie has made many contributions to the work of the Audit and Governance Committees and she has seen the Corporation through significant growth over her tenure. We also wish Ivan and Valerie health and happiness in their retirement. Finally, the past year’s success was made possible through the skill and dedication of our management team and the everyday efforts of the approximately 2,700 people employed throughout our operations. With their support, and the continued loyalty of our customers and suppliers, I am confident Wajax will continue its record of superior performance. Paul E. Gagné Chairman of the Board March 6, 2012 Wajax Corporation Annual Report 2011 • 3 Management’s Discussion and Analysis Management’s Discussion and Analysis The following management’s discussion and analysis (“MD&A”) provides As at December 31, 2011 Wajax’s management, under the supervision a review of the consolidated financial condition and results of operations of its CEO and CFO, had designed ICFR to provide reasonable of Wajax Corporation (“Wajax” or “Corporation”) for the year ended assurance regarding the reliability of financial reporting and the December 31, 2011. On January 1, 2011, Wajax adopted International preparation of financial statements for external purposes in accordance Financial Reporting Standards (“IFRS”). The term “Canadian GAAP” refers with IFRS. In completing the design, management used the criteria set to Canadian generally accepted accounting principles before the adoption forth by the Committee of Sponsoring Organizations of the Treadway of IFRS. The following discussion should be read in conjunction with Commission (“COSO”) in Internal Control – Integrated Framework. With the Corporation’s Consolidated Financial Statements and accompanying regard to general controls over information technology, management notes. Information contained in this MD&A is based on information also used the set of practices of Control Objectives for Information and available to management as of March 6, 2012. related Technology (“COBIT”) created by the IT Governance Institute. Unless otherwise indicated, all financial information within this MD&A is Wajax has not yet completed the design of DC&P and ICFR related to in millions of dollars, except share and per share data. the May 2, 2011 acquisition of the assets of Harper Power Products Inc. Additional information, including Wajax’s Annual Report and Annual Information Form, are available on SEDAR at www.sedar.com. Responsibility of Management and the Board of Directors Management is responsible for the information disclosed in this MD&A and the Consolidated 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 Consolidated 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 Consolidated Financial Statements and accompanying notes. 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 December 31, 2011 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 securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation. DC&P are designed to ensure that information required to be disclosed by Wajax in annual (“Harper”). The Harper operation has had revenues of approximately $49.3 million since the acquisition. Wajax anticipates that the evaluation of the design of DC&P and ICFR related to Harper will be completed prior to June 2012, at which time Harper will be fully integrated with the existing Power Systems segment’s control environment. As at December 31, 2011 Wajax’s management, under the supervision of its CEO and CFO, had evaluated the effectiveness and operation of its DC&P and ICFR. This evaluation included a risk evaluation, documentation of key processes and tests of effectiveness conducted on a sample basis throughout the year. Due to the inherent limitations in all control systems, an evaluation of the DC&P and ICFR can only provide reasonable assurance over the effectiveness of the controls. As a result, DC&P and ICFR are not expected to prevent and detect all misstatements due to error or fraud. With the exception of DC&P and ICFR related to the Harper operation discussed above, the CEO and CFO have concluded that Wajax’s DC&P and ICFR were effective as at December 31, 2011. Other than the integration of the Harper acquisition discussed earlier, there was no change in Wajax’s ICFR that occurred during the fourth quarter of 2011 that has materially affected, or is reasonably likely to materially affect, Wajax’s ICFR. Wajax Corporation Overview Effective January 1, 2011, Wajax Income Fund converted into a corporation pursuant to a plan of arrangement under the Canada Business Corporations Act (“CBCA”) and the shares of Wajax Corporation began trading on the Toronto Stock Exchange on January 4, 2011 under the symbol WJX. filings, interim filings or other reports filed or submitted under securities Wajax’s core distribution businesses are engaged in the sale and legislation is accumulated and communicated to Wajax’s management, after-sale parts and service support of mobile equipment, industrial including its CEO and CFO, as appropriate, to allow timely decisions components and power systems through a network of 117 branches regarding required disclosure. across Canada. Wajax is a multi-line distributor and represents a 4 • Wajax Corporation Annual Report 2011 Management’s Discussion and Analysis number of leading worldwide manufacturers in its core businesses. Its revenue and earnings outlook, our plans and expectations for revenue customer base is diversified, spanning natural resources, construction, and earnings growth, planned marketing, strategic, operational and transportation, manufacturing, industrial processing and utilities. growth initiatives and their expected outcomes, our current and future Wajax’s strategy is to continue to grow earnings in all segments through continuous improvement of operating margins and revenue growth while maintaining a strong balance sheet. Revenue growth will be achieved through market share gains, the addition of new or complementary product lines and aftermarket support services and expansion into new Canadian geographic territories, either organically or through acquisitions. Commencing in 2012, the Corporation has established an objective of declaring annual dividends equal to at least 75% of earnings subject to the Corporation’s financial condition, economic outlook and capital requirements for growth including acquisitions. The Corporation’s intention is to continue paying dividends on a monthly basis. plans regarding the expansion of our business, the addition of new product offerings and expansion into new geographic territories, and our objective with respect to the future payment of dividends. 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, commodities, financial market conditions, including interest rates, 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 Cautionary Statement Regarding Forward-Looking Information in the supply and demand for, and the level of prices for, commodities, This MD&A contains certain forward-looking statements and fluctuations in financial market conditions, including interest rates, the forward-looking information, as defined in applicable securities level of demand for, and prices of, the products and services we offer, laws (collectively, “forward-looking statements”). These forward- market acceptance of the products we offer, termination of distribution looking statements relate to future events or the Corporation’s future or original equipment manufacturer agreements, unanticipated performance. All statements other than statements of historical operational difficulties (including failure of plant, equipment or fact are forward-looking statements. Often, but not always, forward processes to operate in accordance with specifications or expectations, looking statements can be identified by the use of words such as cost escalation, unavailability of quality products or inventory, “plans”, “anticipates”, “intends”, “predicts”, “expects”, “is expected”, supply disruptions, job action and unanticipated events related to “scheduled”, “believes”, “estimates”, “projects” or “forecasts”, or health, safety and environmental matters), our ability to attract and variations of, or the negatives of, such words and phrases or state that retain skilled staff and our ability to maintain our relationships with certain actions, events or results “may”, “could”, “would”, “should”, suppliers, employees and customers. The foregoing list of factors “might” or “will” be taken, occur or be achieved. Forward looking is not exhaustive. Further information concerning the risks and statements involve known and unknown risks, uncertainties and other uncertainties associated with these forward looking statements and the factors beyond the Corporation’s ability to predict or control which Corporation’s business may be found in this MD&A under the heading may cause actual results, performance and achievements to differ “Risk Management and Uncertainties” and in our Annual Information materially from those anticipated or implied in such forward looking Form for the year ended December 31, 2011, filed on SEDAR. The statements. There can be no assurance that any forward looking forward-looking statements contained in this MD&A are expressly statement will materialize. Accordingly, readers should not place qualified in their entirety by this cautionary statement. The Corporation undue reliance on forward looking statements. The forward looking does not undertake any obligation to publicly update such forward- statements in this MD&A are made as of the date of this MD&A, looking statements to reflect new information, subsequent events or reflect management’s current beliefs and are based on information otherwise unless so required by applicable securities laws. Readers currently available to management. Although management believes are further cautioned that the preparation of financial statements in that the expectations represented in such forward-looking statements accordance with IFRS requires management to make certain judgments are reasonable, there is no assurance that such expectations will and estimates that affect the reported amounts of assets, liabilities, prove to be correct. Specifically, this MD&A includes forward looking revenues and expenses. These estimates may change, having either statements regarding, among other things, our expectations for the a negative or positive effect on net earnings as further information Canadian economy in 2012, the global demand for commodities and becomes available, and as the economic environment changes. the associated impact on the Canadian mining and energy sectors, our Wajax Corporation Annual Report 2011 • 5 Management’s Discussion and Analysis International Financial Reporting Standards In February 2008, The Accounting Standards Board of the Canadian Institute of Chartered Accountants confirmed that the use of IFRS is required in Canada for publicly accountable profit oriented enterprises for fiscal years beginning on or after January 1, 2011. The Corporation’s IFRS transition date is January 1, 2010 and has prepared its Consolidated Financial Statements and accompanying notes for the year ending December 31, 2011, with comparatives, in accordance with IFRS as published by the International Accounting Standard Board (“IASB”). Prior to the adoption of IFRS, the financial statements of the Corporation were prepared in accordance with Canadian GAAP. The most significant impacts on the Corporation’s Consolidated Financial Statements resulting from the adoption of IFRS are discussed within the applicable sections of this MD&A and Note 29 of the Consolidated Financial Statements. All comparative figures have been restated in accordance with IFRS, unless otherwise indicated. Consolidated Results Year ended December 31 Revenue Gross profit Selling and administrative expenses Earnings before finance costs and income taxes Finance costs Earnings before income taxes Income tax expense (recovery) Net earnings Earnings per share Basic Diluted 2011 1,377.1 292.4 200.3 92.1 4.6 87.5 23.7 63.8 $3.84 $3.77 $ $ $ $ $ $ $ $ $ $ 2010 1,110.9 237.9 179.6 58.2 4.3 53.9 (2.5) 56.4 $3.39 3.34 $ $ $ $ $ $ $ $ $ $ Revenue by Geographic Region 2011 2010 (cid:31) Western Canada 54% (cid:31) Eastern Canada* 29% (cid:31) Ontario 17% (cid:31) Western Canada 49% (cid:31) Eastern Canada* 34% (cid:31) Ontario 17 % * Includes Quebec and the Atlantic provinces. Revenue by Segment 2011 2010 (cid:31) Equipment 50% (cid:31) (cid:31) Power Systems 25% Industrial Components 25% Equipment 50% Industrial Components 27% (cid:31) (cid:31) (cid:31) Power Systems 23% 6 • Wajax Corporation Annual Report 2011 Management’s Discussion and Analysis (cid:31) Equipment 47% (cid:31) (cid:31) Power Systems 31% Industrial Components 22% EBIT by Segment 2011 Revenue by Market 2011 Equipment 56% Industrial Components 17% (cid:31) (cid:31) (cid:31) Power Systems 27% 2010 2010 Industrial/Commercial 16% (cid:31) (cid:31) Construction 14% (cid:31) Oil and Gas 13% (cid:31) Oil Sands 11% (cid:31) Mining 11% (cid:31) (cid:31) (cid:31) Government & Utilities 6% (cid:31) Metal Processing 4% (cid:31) Other 7% Transportation 9% Forestry 9% Industrial/Commercial 16% (cid:31) (cid:31) Construction 10% (cid:31) Oil and Gas 10% (cid:31) Oil Sands 12% (cid:31) Mining 13% (cid:31) (cid:31) (cid:31) Government & Utilities 7% (cid:31) Metal Processing 5% (cid:31) Other 6% Transportation 11% Forestry 10% Revenue $2.6 million increase in annual and mid-term incentive accruals, $7.5 Revenue in 2011 of $1,377.1 million increased 24%, or $266.2 million of selling and administrative expenses relating to Harper and million, from $1,110.9 million in 2010 and included $49.3 million higher sales related and occupancy costs. These increases were offset of revenue from the acquisition of the assets of Harper by the Power partially by lower bad debt expenses in the Equipment segment. Selling Systems segment effective May 2, 2011. Equipment segment and administrative expenses as a percentage of revenue decreased to revenue increased 23%, or $130.0 million, due mainly to stronger 14.5% in 2011 from 16.2% in 2010. market demand for construction, forestry, mining and material handling equipment and related parts and service volumes. Industrial Components segment revenue increased 15%, or $45.3 million, attributable to improved oil and gas drilling activity in western Canada and higher mining and industrial sector volumes in all regions. Power Systems segment revenue increased 35%, or $90.1 million, due to the acquisition of Harper and an increase in equipment and parts and service revenues, mostly to off-highway oil and gas customers in western Canada, that more than exceeded a reduction in eastern Canada (Quebec and the Atlantic provinces) volumes. Gross profit Gross profit increased $54.5 million, or 23%, in 2011 due to the positive impact of higher volumes compared to last year. The gross profit margin percentage decreased slightly to 21.2% from 21.4% last year as the negative sales mix variance resulting from a higher proportion of equipment sales was partially offset by increased equipment margins. Selling and administrative expenses Selling and administrative expenses increased $20.7 million in the year. This was due primarily to increased personnel costs including a Finance costs Finance costs of $4.6 million increased $0.3 million compared to 2010 due to the impact of higher funded net debt, mainly attributable to the acquisition of Harper on May 2, 2011. Funded net debt includes bank debt and obligations under finance leases, net of cash. Earnings before income taxes Earnings before income taxes increased $33.6 million in the year. The positive impact of higher volumes more than offset the slightly lower gross profit margin percentage, increased selling and administrative costs and higher finance costs compared to 2010. Income tax expense Effective January 1, 2011, Wajax converted from an income fund to a corporation. As a result, Wajax and its subsidiaries are subject to tax on all of their taxable income from that date forward. The 2011 effective income tax rate of 27.1% was less than the Corporation’s statutory income tax rate of 27.7%. The positive impact of partnership income generated in 2011 which will be subject to tax in 2012 at a lower tax rate, more than offset the negative impact of expenses not deductible for tax purposes. Wajax Corporation Annual Report 2011 • 7 Management’s Discussion and Analysis Net earnings Industrial Components segment more than offset the decreases in the Net earnings for the year ended December 31, 2011 increased $7.4 Power Systems segment. Backlog includes the total retail value of million to $63.8 million, or $3.84 per share, from $56.4 million, or customer purchase orders for future delivery or commissioning. $3.39 per share, in 2010. The $33.6 million increase in earnings before income taxes, was partially offset by a $26.2 million increase in CEO succession income tax expense. Comprehensive income Neil Manning retired as President and CEO and a director of Wajax on March 5, 2012. His successor, Mark Foote, assumed the role of President and CEO, and was appointed a director on March 5, Comprehensive income for the year ended December 31, 2011 of 2012. Mark has extensive experience in distribution, supply chain $62.9 million increased $6.7 million from $56.2 million the previous management and logistics. Most recently, he served as the President year due to higher net earnings of $7.4 million, offset partially by a and Chief Executive Officer of Zellers, and prior to that, was the $0.7 million increase in other comprehensive loss. The increase in President and Chief Merchandising Officer at Loblaws Companies. Mark other comprehensive loss resulted from increased actuarial losses also had a career of more than 20 years at Canadian Tire Corporation, on pension plans and a decrease in losses on derivative instruments including five years as President, Canadian Tire Retail. designated as cash flow hedges in prior periods reclassified to cost of inventory or finance costs in the current year, offset partially by gains on derivative instruments designated as cash flow hedges outstanding at the end of the year. Funded net debt Funded net debt of $63.7 million at December 31, 2011 increased $18.1 million compared to December 31, 2010. This increase was mainly a result of net cash flows generated from operating activities of $61.2 million being less than the $29.2 million of cash flows used in investing activities including $23.2 million used for the Harper acquisition, distributions and dividends of $44.7 million, finance lease payments of $3.5 million and debt facility renewal costs of $1.1 million. As a result, Wajax’s year-end funded net debt-to-equity ratio of 0.28:1 increased from last year’s ratio of 0.23:1. On August 12, 2011, Wajax amended and extended the term of its $175 million bank credit facility to August 12, 2016 from December 31, 2011. The terms of the fully secured facility, comprised of a $30 million non-revolving term portion and a $145 million revolving Results of Operations Equipment For the year ended December 31 Equipment* Parts and service Segment revenue Segment earnings Segment earnings margin * Includes rental and other revenue. Revenue by Product Type Market n Construction n Mining/Oil Sands n Material Handling n Forestry n Crane & Utility 2011 2010 $ 428.0 $ 332.4 $ 257.8 $ 223.4 $ 685.8 $ 555.8 $ $50.2 $ 7.3% 39.0 7.0% 2011 33% 31% 16% 13% 7% 2010 30% 30% 17% 12% 11% term portion, are no more restrictive than in the previous facility. See Revenue increased 23%, or $130.0 million, to $685.8 million in 2011 Liquidity and Capital Resources section. Dividends from $555.8 million in 2010. Segment earnings increased $11.2 million to $50.2 million in 2011 compared to $39.0 million in 2010. The following factors contributed to the improved results: For the twelve months ended December 31, 2011 monthly dividends declared totaled $2.14 per share. For the twelve months ended • Equipment revenue increased by $95.6 million compared to last year. December 31, 2010 monthly cash distributions declared as an income Specific year-over-year variances included the following: fund were $3.40 per unit. Tax information relating to 2011 dividends and prior year distributions is available on Wajax’s website at www.wajax.com. Backlog Consolidated backlog at December 31, 2011 of $267.7 million increased $50.4 million, or 23%, from $217.3 million at December 31, 2010. Increases in the Equipment segment, due mainly to higher mining and construction equipment orders, and increases in the » Construction equipment revenue increased $46.3 million due mostly to increased market demand for Hitachi construction excavators in western Canada and Ontario and for JCB equipment in all regions. » Forestry equipment sales increased $23.2 million attributable to higher market demand for Tigercat and forestry related Hitachi products across Canada. » Mining equipment revenue increased $22.3 million resulting from an increase in Hitachi mining revenues in western Canada offset partially by fewer deliveries of LeTourneau mining equipment. 8 • Wajax Corporation Annual Report 2011 Management’s Discussion and Analysis » Material handling equipment revenue increased $14.5 million due to higher market demand primarily in western and eastern Canada Wajax Equipment’s strategy is to continue to focus on building the market share of its key product lines, particularly construction and material (Quebec and Atlantic provinces). handling equipment, and to improve product support capabilities across » Crane and utility equipment revenue decreased $10.7 million due primarily to lower sales to utility customers in Ontario. • Parts and service volumes increased $34.4 million compared to last year resulting from higher mining, construction and material handling sales, mainly in western Canada. • Segment earnings increased $11.2 million compared to last year. The positive impact of higher volumes outweighed the negative impact of a lower gross profit margin and a $6.7 million increase in selling and administrative expenses. The lower gross profit margin resulted from a higher proportion of equipment sales compared to last year. Selling and administrative expenses increased as a result of higher personnel costs including additional annual and mid-term incentive accruals and higher sales related and occupancy costs. These increases were somewhat offset by lower bad debt expenses compared to last year. Backlog of $146.6 million at December 31, 2011 increased $52.6 million compared to December 31, 2010 due mainly to increases in mining equipment orders in all regions and construction equipment orders in western Canada. The backlog includes $25.5 million of LeTourneau equipment orders. During the second quarter of 2011, the Equipment segment entered into an equipment supply agreement with Shell Canada Energy for a total of seven Hitachi mining shovels and construction excavators, adding to the already existing fleet of Hitachi equipment at Shell Albian Sands, Shell’s oil sands operation in the province of Alberta. In support of Shell Albian Sands’ fleet of Hitachi equipment, Wajax has also renewed and extended the existing commercial arrangement with Shell Canada Energy for the supply of parts, components and services until the end of April 2014. On October 17, 2011, Wajax announced it had reached an agreement with LeTourneau Technologies, Inc. (“LeTourneau”) providing for the dealer agreement relating to Wajax’s distribution of LeTourneau mining equipment and parts products in Canada to be discontinued effective April 27, 2012. Joy Global Inc. initially announced the closing of its acquisition of LeTourneau on June 22, 2011 and indicated its intention to integrate all lines of business. As well, the segment will work to expand its operations in the growing mining sector by building its organizational and support infrastructure to capitalize on market opportunities, particularly in Ontario and eastern Canada. During 2011, the segment made significant strides toward improving its aftermarket support capabilities. Parts availability and customer fill rates have been increased, and upgraded processes adopted for inventory forecasting, ordering and stocking. In addition, the sales force compensation plans were revamped to be better aligned with market share targets. The segment’s focus going forward will include the following specific initiatives to continue to build its equipment market share and its aftermarket parts and service business: • The segment intends to expand its mining support infrastructure to improve sales and after-sales support coverage of both above ground and underground mining products in Ontario and eastern Canada. The segment expects to continue to develop its product offering through the introduction of two new underground mining lines, and the new 240 tonne Hitachi mine truck at the end of 2012. The recently formed Rotating Products Group in Fort McMurray, which distributes and services slurry pumps and services equipment such as compressors and gear boxes, is planned to be further developed in the Fort McMurray area prior to expanding to other major mining areas in Canada. • Equipment will continue to focus on the quality and effectiveness of sales personnel and management and provide them the appropriate sales execution tools and training to support their market share improvement objectives. • The efficiency and effectiveness of the service operations is planned to be enhanced through standardization of procedures and quoting practices across the country and implementation of technology to assist in customer on-line access, process flow, job tracking and field technician support. the LeTourneau field facilities and distribution activities with its P&H mining equipment operations. Sales and service of LeTourneau products • The branch coverage in key metropolitan areas will continue to be upgraded. The current Montreal Lachine facility operation is in 2011 generated approximately $35 million of revenue for Wajax and being replaced by two newer facilities to allow for improved market contributed approximately $11 million to its earnings before finance costs penetration. One facility was recently opened in Chambly and and income tax expense. Exit costs or write downs, if any, are expected to another in Laval is scheduled to open in mid-2012. A new Edmonton be minimal. mining facility will be constructed with completion expected in early 2013, and a new branch in eastern Toronto is expected to be opened in 2013 to better serve that portion of the Greater Toronto Area. Wajax Corporation Annual Report 2011 • 9 2011 2010 its working capital requirements. maximize its operational efficiency in order to increase margins and lower Management’s Discussion and Analysis Industrial Components For the year ended December 31 Segment revenue Segment earnings Segment earnings margin Revenue by Market Market n Industrial/Manufacturing n Mining n Oil & Gas n Forestry n Metal Processing n Construction n Food & Beverage n Transportation n Other $ 347.5 $ 302.2 $ 23.1 $ 6.6% 12.0 4.0% 2011 17% 14% 14% 14% 11% 6% 5% 4% 15% 2010 17% 14% 10% 15% 13% 6% 5% 4% 16% Revenue increased $45.3 million, or 15%, to $347.5 million from $302.2 million in 2010. Segment earnings increased $11.1 million to $23.1 million compared to $12.0 million in the previous year. The year-over-year changes in revenue and earnings were a result of the following factors: • Bearings and power transmission parts sales increased $15.2 million due mainly to higher mining revenues across all regions and increased industrial volumes in eastern Canada and Ontario. Improved sales to food and beverage, oil and gas, construction and agriculture customers also contributed to the increase. • Fluid power and process equipment product and service revenue increased $30.1 million on improved oil and gas drilling activity in western Canada and increased sales to industrial, mining, forestry and agriculture sector customers. • Segment earnings increased $11.1 million compared to last year. The positive impact of higher volumes outweighed the negative impact of lower gross profit margins on fluid power and process equipment products and a $0.8 million increase in selling and administrative expenses. The increase in selling and administrative expenses resulted from higher sales related and occupancy costs and computer systems upgrade expenses, somewhat offset by a reduction in personnel costs due to lower severance costs. Backlog of $44.8 million as of December 31, 2011 increased $9.4 million compared to December 31, 2010. The strategic direction of the Industrial Components segment is to continue to grow revenue and earnings by capitalizing on its technical and engineering capabilities by providing engineered solutions built around its product offering. The segment also plans to continue to take steps to 10 • Wajax Corporation Annual Report 2011 Considerable effort has been undertaken over the last number of years to improve Industrial Components revenue and profitability. In 2011, the segment was able to leverage its selling and administrative expense base as revenue grew 15% and segment earnings margins increased from 4.0% in 2010 to 6.6% in 2011. Initiatives to further drive earnings improvements include: • The segment will continue to capitalize on its technical and engineering expertise including further expansion of design and assembly capabilities, shop and field repair and analysis services. This will be supported by a national marketing program and dedicated technical sales representatives in major markets. • Industrial Components expects to grow major product category sales in under-represented territories. This is to include the opening of new bearings and power transmission product branches in western Canada, the addition of hydraulic product lines in Ontario and Quebec and selective acquisitions. • In 2012 the segment plans to upgrade its e-commerce capability in order to meet the evolving electronic transaction needs of its customers and to improve the efficiency of its transactions with suppliers. • Industrial Components intends to improve its inventory management and supply chain processes by further centralizing purchasing controls and transitioning to a “hub and spoke” supply model in order to optimize branch inventory levels, rationalize suppliers and reduce freight expenses. As well it will invest in warehouse management system software to better manage the flow of product inventory. Power Systems For the year ended December 31 Equipment* Parts and service Segment revenue Segment earnings Segment earnings margin * Includes rental and other revenue Revenue by Market Market n Oil & Gas n On-highway Transportation n Industrial/Commercial n Oil Sands n Mining n Other 2011 2010 $ 160.8 $ 116.6 $ 186.6 $ 140.7 $ 347.4 $ 257.3 $ 32.9 $ 9.5% 19.2 7.5% 2011 34% 23% 20% 6% 3% 14% 2010 27% 28% 24% 7% 3% 11% Management’s Discussion and Analysis Revenue increased $90.1 million, or 35%, to $347.4 million in 2011 of Canada except for portions of British Columbia. The Harper business from $257.3 million in 2010. Excluding the Harper acquisition effective is well established in the on-highway sector of the market and has been May 2, 2011, Power Systems revenue increased $40.8 million, or 16%, rebranded as Wajax Power Systems. compared to last year. Segment earnings increased $13.7 million to $32.9 million in 2011 from $19.2 million in 2010. The following factors impacted year-over-year revenue and earnings: • Equipment revenue increased $44.2 million compared to last year driven by increased sales to off-highway oil and gas customers in western Canada, $17.1 million of revenues related to the Harper acquisition and increased power generation rentals. These increases more than offset lower power generation equipment sales in western Canada and the delivery of a large order in eastern Canada for marine power packages last year. • Parts and service volumes increased $45.9 million compared to last year due mainly to $32.2 million of revenues related to the Harper acquisition and higher sales to off-highway customers, primarily those in the mining and oil and gas sectors. The Harper acquisition represents a major step towards the segment’s strategic objective of expanding its off-highway and power generation business to become a Canada-wide total power systems solution provider. Initiatives going forward will include the following: • The segment intends to expand its western Canada electrical power generation rental business into Ontario and eastern Canada. It provides customers with a “turn-key” rental solution including the power generator and related connectivity and support products and services. • Power System plans to continue to expand its product portfolio and geographic territory. Through the Harper acquisition, it intends to further develop its presence in the off-highway and power generation sectors in Ontario and will capitalize on new distribution agreements for Doosan generators in Canada and Volvo Penta engines in Ontario. Power Systems plans to continue to fill gaps in its power generation • Segment earnings increased $13.7 million compared to last year as product offering, as well as expanding to areas of British Columbia a result of higher volumes and gross profit margins, offset by a $10.7 where it is currently not well represented. The segment also intends to million increase in selling and administrative expenses. Gross profit better penetrate the western Canada preventative maintenance service margins increased mainly as a result of higher equipment margins. business for standby and prime power diesel generators. Increased selling and administrative expenses were attributable to the Harper acquisition and higher personnel expenses including commissions and severance costs. • Wajax Power Systems has recently broken ground on a new facility in Drummondville, Quebec, where it will focus on developing the segment’s off-highway and power generation packaging and integration Backlog of $76.3 million as of December 31, 2011 decreased $11.6 capabilities by leveraging its engineering and project management million compared to December 31, 2010 as significant deliveries out expertise to all major geographic markets. of backlog more than offset the increase attributable to the Harper acquisition. • In 2012 the segment will begin to implement a common computer system platform across all three regions of Power Systems to meet Effective December 13, 2011, Richard Plain was appointed to the current and future requirements. position of Senior Vice President, Wajax Power Systems subsequent to the departure of Tim Zawislak. Prior to his appointment, Richard held the position of Vice President Sales and Marketing since joining Wajax Power Systems in 2009 and brings eighteen years of experience in the power systems and equipment distribution businesses in western Canada. On May 2, 2011, Wajax Power Systems purchased the assets of Harper the authorized Ontario distributor for Detroit Diesel, Mercedes-Benz, MTU and Deutz engines, MTU Onsite Energy generator sets and Allison transmissions with adjusted 2010 annual revenue of approximately $71 million. The cash purchase price paid for the assets was $23.2 million, including post closing adjustments. The segment has assumed the operation of Harper’s nine branches in Ontario located in Toronto, Ottawa, Hamilton, London, Sudbury, Timmins, Cornwall, Niagara Falls and Pembroke. With the exception of Deutz engines, Wajax Power Systems is presently the authorized distributor of these lines in the rest Wajax Corporation Annual Report 2011 • 11 Management’s Discussion and Analysis Selected Quarterly Information The following table summarizes unaudited quarterly consolidated financial data for the eight most recently completed quarters. This quarterly information is unaudited but has been prepared on the same basis as the 2011 annual audited Consolidated Financial Statements. Revenue Earnings before income taxes Net earnings Earnings per share Basic Diluted $ $ $ $ $ 2011 2010 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 377.2 $ 361.9 $ 334.1 $ 303.9 $ 316.4 $ 294.4 $ 272.0 $ 228.1 22.5 $ 16.6 $ 24.6 $ 17.9 $ 22.4 $ 16.5 $ 18.0 $ 12.8 $ 14.9 $ 15.8 $ 18.7 $ 19.6 $ 11.9 $ 12.2 $ 8.5 8.9 1.00 $ 0.98 $ 1.08 $ 1.06 $ 0.99 $ 0.98 $ 0.77 $ 0.76 $ 0.95 $ 0.93 $ 1.18 $ 1.16 $ 0.73 $ 0.72 $ 0.53 0.53 Trends in quarterly revenue and earnings have not been evident over the last two years due in part to the recent strength of the Canadian economy. A discussion of Wajax’s previous quarterly results can be found in Wajax’s quarterly MD&A reports available on SEDAR at www.sedar.com. Selected Annual Information Revenue Earnings before income taxes Net earnings Earnings per share Basic Diluted Total assets Non-current liabilities Dividends declared per share Distributions declared per unit 2011 2010 2009(1) $ 1,377.1 $ 1,110.9 $ 1,007.2 $ $ 87.5 63.8 $ $ 3.84 3.77 $ 589.9 $ 99.9 $ 2.14 – $ $ 53.9 56.4 $ $ 3.39 3.34 $ 522.5 $ 18.9 – 3.40 $ $ $ 32.2 34.2 $ $ 2.06 2.04 $ 448.2 $ 87.8 – 2.47 $ (1) 2009 financials are prepared in accordance with Canadian GAAP and certain 2009 comparative amounts have been reclassified to conform with the current period presentation. In particular, amounts recovered from customers or manufacturers have been reclassified out of selling and administrative expenses into revenue. The above reclassifications do not affect net earnings or cashflows. Revenue in 2011 of $1,377.1 million increased $266.2 million Total assets increased $141.7 million between December 31, 2009 compared to 2010 due to the increased market demand for equipment and December 31, 2011. The overall increase in total assets is mainly and parts and service in all segments and the Harper acquisition in attributable to higher inventories, accounts receivable and rental May 2011 that accounted for $49.3 million of the increase. Revenue equipment resulting from the increased sales activity throughout 2010 in 2010 of $1,110.9 million increased $103.7 million from $1,007.2 and 2011. The increase also includes $32.9 million of total assets million in 2009 due to the general uplift in the Canadian economy that resulting from the acquisition of Harper. was experienced in all segments. Earnings before income taxes increased $55.3 million from 2009 to increased $81.0 million from December 31, 2010. This was primarily 2011. The increase was attributable to the increases in revenue noted due to the reclassification of bank debt to non-current liabilities as the above and higher gross profit margins, offset somewhat by increased bank credit facility was extended from December 31, 2011 to August selling and administrative and slightly higher finance costs. 12, 2016 and an increase in deferred taxes payable as the partnership Non-current liabilities at December 31, 2011 of $99.9 million Net earnings increased $29.6 million, or $1.78 per share, from 2009 to 2011. The $55.3 million increase in earnings before income taxes more than offset the $25.7 million increase in income tax expense resulting from the conversion from an income fund to a corporation effective January 1, 2011. income generated in 2011 will be subject to tax in 2012. Non-current liabilities at December 31,2010 of $18.9 million was lower compared to $87.8 million at December 31, 2009 as the $79.7 million of bank debt was included in current liabilities at December 31, 2010 due to the December 31, 2011 maturity of the bank credit facility at that time. In addition, non-current liabilities as at December 31, 2009 did not include obligations under finance leases under Canadian GAAP. 12 • Wajax Corporation Annual Report 2011 Management’s Discussion and Analysis Cash Flow, Liquidity and Capital Resources While the IFRS adjustments do not impact the Corporation’s total cash Net cash flows generated from operating activities flows, cash flows generated from operating activities and cash flows For the year ended December 31, 2011, net cash flows generated from used in investing activities have each been adjusted, by equal and operating activities amounted to $61.2 million, compared to $88.7 offsetting amounts to reflect the reclassification of rental equipment million the previous year. The $27.5 million decrease was due primarily additions as operating activities. to an increased use of operating assets and liabilities of $42.7 million, higher rental equipment additions in the Equipment and Power Systems segments of $14.4 million and higher income taxes paid of $1.9 million. This was partially offset by higher cash flows from operating activities before changes in operating assets and liabilities of $32.8 million. Investing activities For the year ended December 31, 2011, Wajax invested $5.3 million in capital asset additions net of disposals and $0.7 million in intangible asset additions, compared to $1.7 million and $3.2 million for the year ended December 31, 2010, respectively. In addition, the Power Changes in operating assets and liabilities in 2011 compared to 2010 Systems segment paid a total of $23.2 million for the acquisition of the include the following components: assets of Harper on May 2, 2011. Changes in operating assets and liabilities For the year ended December 31 Trade and other receivables Inventories Prepaid expenses Trade and other payables Accrued liabilities Provisions Total 2011 2010 27.1 $ 35.0 $ 0.6 $ (22.9) $ (19.1) $ (0.4) $ 12.0 15.8 (0.6) (51.5) 2.4 (0.5) 20.3 $ (22.4) $ $ $ $ $ $ $ Significant components of the changes in operating assets and liabilities for the twelve months ended December 31, 2011 are as follows: • Trade and other receivables increased $27.1 million due to the impact of higher sales activity in all segments. Financing activities For the year ended December 31, 2011, Wajax used $69.3 million of cash in financing activities compared to $50.0 million in 2010. Financing activities in the year included distributions and dividends paid to shareholders totaling $44.7 million, or $2.69 per share, bank debt and finance lease payments of $23.5 million, and debt facility renewal costs of $1.1 million. Funded net debt of $63.7 million at December 31, 2011 increased $18.1 million compared to December 31, 2010. This increase was mainly a result of net cash flows generated from operating activities of $61.2 million being less than the $29.2 million of cash flows used in investing activities including $23.2 million used for the Harper acquisition, distributions and dividends of $44.7 million, finance lease payments of $3.5 million and debt facility renewal costs of $1.1 million. As a result, Wajax’s year-end funded net debt-to-equity ratio of • Inventories increased $35.0 million as a result of a continued growth 0.28:1 increased from last year’s ratio of 0.23:1. in sales activity in all segments. Fourth Quarter Consolidated Results • Trade and other payables increased $22.9 million reflecting higher For three months ended December 31 inventory related payables. • Accrued liabilities increased $19.1 million on higher customer deposits in the Equipment and Power Systems segments and higher Revenue Gross profit Selling and administrative expenses 2011 2010 $ 377.2 $ 316.4 $ $ 79.3 $ 55.7 $ 64.3 48.4 annual and mid-term incentive accruals. Earnings before finance costs & income taxes $ 23.6 $ 15.9 On the consolidated statement of financial position at December 31, 2011, Wajax had employed $165.0 million in current assets net of current liabilities, exclusive of funded net debt, compared to $118.3 million at December 31, 2010. The $46.7 million increase was due Finance costs Earnings before income taxes Income tax expense (recovery) Net earnings primarily to the cash flow factors listed above, the Harper acquisition Earnings per share and a $9.1 million decrease in dividends payable related to the payment in January 2011 of distributions declared in December 2010 Basic Diluted prior to converting from an income fund to a corporation. $ $ $ $ $ $ 1.2 $ 1.0 22.5 $ 5.9 $ 14.9 (0.9) 16.6 $ 15.8 1.00 $ 0.95 0.98 $ 0.93 Wajax Corporation Annual Report 2011 • 13 Management’s Discussion and Analysis Revenue Comprehensive income Revenue in the fourth quarter of 2011 increased 19% or $60.8 million Comprehensive income for the fourth quarter of $13.0 million to $377.2 million, from $316.4 million in the fourth quarter of 2010 decreased $2.4 million from $15.4 million compared to the same and included $19.9 million of revenue from the acquisition of the quarter in the previous year as a $3.2 million increase in other assets of Harper by the Power Systems segment effective May 2, 2011. comprehensive loss more than offset the $0.8 million increase in Segment revenue increased 20% in Equipment, 16% in Industrial net earnings. The increase in other comprehensive loss resulted from Components and 19% in Power Systems (a decrease of 6% excluding increased actuarial losses on pension plans and gains on derivative Harper revenue) compared to the same quarter last year. instruments designated as cash flow hedges in prior periods reclassified to cost of inventory or finance costs in the current period. Gross profit Gross profit in the fourth quarter of 2011 increased $15.0 million Funded net debt due to the positive impact of higher volumes and gross profit margins Funded net debt of $63.7 million at December 31, 2011 decreased compared to the fourth quarter last year. The gross profit margin $33.8 million compared to September 30, 2011. The decrease percentage for the quarter of 21.0% increased from 20.3% in the resulted mainly from net cash flows generated from operating activities fourth quarter of 2010 due mainly to improved gross profit margins in of $48.7 million which were offset partially by dividends paid of $10.0 all segments. Selling and administrative expenses million, investing activities of $3.0 million and finance lease payments of $1.0 million. Wajax’s quarter-end funded net debt-to-equity ratio of 0.28:1 at December 31, 2011 decreased from the September 30, Selling and administrative expenses increased $7.3 million in the fourth quarter of 2011 compared to the same quarter last year. Of this 2011 ratio of 0.43:1. increase, $3.0 million related to Harper with most of the remainder Dividends attributable to higher sales related costs and annual and mid-term For the fourth quarter ended December 31, 2011 monthly dividends incentive accruals. Selling and administrative expenses as a percentage declared totaled $0.60 per share. For the fourth quarter ended of revenue decreased to 14.8% in the fourth quarter of 2011 from December 31, 2010 monthly cash distributions declared as an income 15.3% in the same quarter of 2010. fund were $1.65 per unit. Finance costs Backlog Quarterly finance costs of $1.2 million increased $0.2 million Consolidated backlog at December 31, 2011 of $267.7 million compared to the same quarter last year due to higher funded net debt, increased $3.9 million from $263.8 million at September 30, 2011 mainly attributable to the acquisition of Harper on May 2, 2011. and increased $50.4 million from $217.3 million at December 31, Earnings before income taxes Quarterly earnings before income taxes increased $7.6 million as the positive impact of the higher volumes and increased gross profit margin percentage, more than offset additional selling and administrative costs and higher finance costs compared to the same quarter last year. Income tax expense For the three months ended December 31, 2011, the effective income tax rate of 26.3% was less than the Corporation’s statutory income tax rate of 27.7%. The positive impact of partnership income generated in 2011, which will be subject to tax in 2012 at a lower rate, more than 2010. Backlog includes the total retail value of customer purchase orders for future delivery or commissioning. Fourth Quarter Results of Operations Equipment For three months ended December 31 Equipment* Parts and service Segment revenue Segment earnings Segment earnings margin 2011 2010 $ 125.4 $ 101.7 58.0 $ 66.9 $ $ 192.3 $ 159.7 $ 14.3 $ 10.8 7.5% 6.8% offset the negative impact of expenses not deductible for tax purposes. * Includes rental and other revenue. Net earnings Quarterly net earnings increased $0.8 million to $16.6 million, or $1.00 per share, from $15.8 million, or $0.95 per share, in the same quarter of 2010. The $7.6 million increase in earnings before income taxes more than offset the $6.8 million increase in income tax expense resulting from the conversion from an income fund to a corporation effective January 1, 2011. Revenue in the fourth quarter of 2011 increased $32.6 million, or 20%, to $192.3 million from $159.7 million in the fourth quarter of 2010. Segment earnings for the quarter increased $3.5 million to $14.3 million compared to the fourth quarter of 2010. The following factors contributed to the Equipment segment’s fourth quarter results: 14 • Wajax Corporation Annual Report 2011 Management’s Discussion and Analysis • Equipment revenue for the fourth quarter increased $23.7 million regions. Sales to oil and gas customers in western Canada, metal compared to the same quarter last year. Specific quarter-over-quarter processing customers in Ontario and additional construction and food variances included the following: and beverage sector volumes in eastern Canada also contributed to » Construction equipment revenue increased $12.0 million on increased market demand for Hitachi construction excavators, in western Canada and Ontario, and higher JCB and other the increased sales. • Fluid power and process equipment products and service revenue in the fourth quarter of 2011 increased $7.8 million on improved oil construction equipment sales across Canada. and gas drilling activity in western Canada and increased sales to » Mining equipment sales increased $7.6 million due mainly to the delivery of a large Hitachi mining shovel in western Canada offset by the delivery of a LeTourneau loader in eastern Canada in 2010. industrial and agriculture sector customers in all regions. • Segment earnings in the fourth quarter of 2011 increased $3.3 million compared to the same quarter last year. The positive impact » Material handling equipment revenue increased $5.9 million on higher volumes in eastern and western Canada offset by lower of higher volumes outweighed a $0.5 million increase in selling and administrative expenses. The increase in selling and administrative sales stemming from reduced market demand in Ontario. expenses resulted mainly from higher sales related costs and » Crane and utility equipment revenue decreased $0.7 million. computer system upgrade expenses. » Forestry equipment sales decreased $1.1 million as lower demand in Ontario and eastern Canada for Tigercat and Peterson Pacific Backlog of $44.8 million as of December 31, 2011 decreased $2.5 million compared to September 30, 2011 and increased $9.4 million products was somewhat offset by higher market demand related compared to December 31, 2010. sales in western Canada primarily for Tigercat equipment. • Parts and service volumes for the fourth quarter increased $8.9 million compared to the same quarter last year due principally to higher mining and construction sector sales, primarily in western Canada. • Segment earnings for the fourth quarter increased $3.5 million to $14.3 million compared to the same quarter last year. The positive Power Systems For three months ended December 31 Equipment* Parts and service Segment revenue Segment earnings impact of higher volumes outweighed a $2.2 million increase in Segment earnings margin selling and administrative expenses resulting from higher sales * Includes rental and other revenue. related expenses and annual and mid-term incentive accruals. $ $ $ $ 2011 2010 43.9 $ 51.6 $ 44.5 35.7 95.5 $ 80.2 7.9 $ 6.5 8.3% 8.1% 2011 2010 in the fourth quarter compared to the same quarter in the previous year. Backlog of $146.6 million at December 31, 2011 increased $0.7 million compared to September 30, 2011 and increased $52.6 million compared to December 31, 2010. Industrial Components For three months ended December 31 Segment revenue Segment earnings Segment earnings margin $ $ 90.2 $ 77.8 5.9 $ 2.6 6.5% 3.4% Revenue of $90.2 million in the fourth quarter of 2011 increased $12.4 million, or 16%, from $77.8 million in the fourth quarter of 2010. Segment earnings increased $3.3 million to $5.9 million in the fourth quarter compared to the same quarter in the previous year. The following factors contributed to the segment’s fourth quarter results: • Bearings and power transmission parts sales in the fourth quarter of 2011 increased $4.6 million compared to the same quarter last year led by higher mining and industrial sector volumes across all Revenue in the fourth quarter of 2011 increased $15.3 million, or 19%, to $95.5 million compared to $80.2 million in the same quarter of 2010. Excluding the Harper acquisition, Power Systems revenue in the fourth quarter of 2011 decreased $4.6 million, or 6% compared to the same quarter last year. Segment earnings increased $1.4 million to $7.9 million The following factors impacted quarterly revenue and earnings: • Equipment revenue decreased $0.6 million compared to last year. Increased sales to off-highway oil and gas customers in western Canada and $7.0 million of revenues related to the Harper acquisition were more than offset by lower power generation equipment sales in western Canada and the delivery of a large order in eastern Canada for marine power packages last year. • Parts and service volumes increased $15.9 million compared to last year due mainly to $12.9 million of revenues related to the Harper acquisition and higher sales to off-highway customers, primarily in the mining and oil and gas sectors. Wajax Corporation Annual Report 2011 • 15 Management’s Discussion and Analysis • Segment earnings in the fourth quarter of 2011 increased $1.4 million compared to the same quarter last year mainly as a result of the Harper On the consolidated statement of financial position at December 31, 2011, Wajax had employed $165.0 million in current assets net of acquisition. Selling and administrative expenses increased $4.1 million current liabilities, exclusive of funded net debt, compared to $191.9 due mostly to $3.0 million of selling and administrative expenses million at September 30, 2011. The $26.9 million decrease was due related to Harper and higher personnel and sales related costs. primarily to the cash flow factors listed above. Backlog of $76.3 million as of December 31, 2011 increased $5.8 Investing activities million compared to September 30, 2011 and decreased $11.6 million During the fourth quarter of 2011, Wajax invested $2.6 million in compared to December 31, 2010. capital asset additions net of disposals and $0.4 million in intangible Fourth Quarter Cash Flows Net cash flows generated from operating activities asset additions, compared to $2.1 million and $0.5 million in the fourth quarter of 2010, respectively. Net cash flows generated from operating activities amounted to $48.7 Financing activities million in the fourth quarter of 2011, compared to $41.4 million in the The Corporation used $37.9 million of cash in financing activities in the same quarter of the previous year. The $7.3 million increase was due fourth quarter of 2011 compared to $21.8 million in the same quarter of mainly to higher cash flows from operating activities before changes in 2010. Financing activities in the quarter included bank debt and finance operating assets and liabilities of $8.7 million and a decreased use of lease payments of $28.0 million and dividends paid to shareholders operating assets and liabilities of $1.4 million, partially offset by higher totaling $10.0 million, or $0.60 per share. rental equipment additions of $2.0 million in the Equipment and Power Systems segments. Liquidity and Capital Resources On August 12, 2011, Wajax amended and extended the term of its $175 Changes in operating assets and liabilities for the fourth quarter in 2011 million bank credit facility to August 12, 2016 from December 31, 2011. compared to the same periods in 2010 include the following components: The $1.1 million cost of extending the facility has been capitalized and Changes in operating assets and liabilities For three months ended December 31 Trade and other receivables Inventories Prepaid expenses Trade and other payables Accrued liabilities Provisions Total 2011 2010 (13.8) $ 9.2 $ (1.5) $ (5.5) $ (15.4) $ 0.3 $ (11.8) 3.6 1.5 (20.1) 3.0 (1.4) (26.7) $ (25.2) $ $ $ $ $ $ $ will be amortized over the five year term. The terms of the $175 million bank credit facility include the following: • The facility is fully secured, expiring August 12, 2016, made up of a $30 million non-revolving term portion and a $145 million revolving term portion. • Borrowing capacity is dependent upon the level of inventories on-hand and the outstanding trade accounts receivable. • The facility contains customary restrictive covenants including limitations on the payment of cash dividends and the maintenance Significant components of the changes in operating assets and liabilities of certain financial ratios all of which were met as at December 31, for the quarter ended December 31, 2011 are as follows: 2011. Wajax is restricted from the declaration of monthly dividends • Trade and other receivables decreased $13.8 million due primarily to collection of a large mining equipment receivable in the Equipment segment and lower sales activity in the Power Systems segment. • Inventories increased $9.2 million, mostly in the Power Systems and Industrial Components segments in anticipation of increased sales activity. • Trade and other payables increased $5.5 million reflecting higher inventory related trade payables. • Accrued liabilities increased $15.4 million due mainly to higher customer deposits in the Equipment and Power Systems segments. in the event the ratio of funded debt to earnings before finance costs, income taxes, depreciation and amortization and share-based compensation expense (the “Leverage Ratio”) exceeds three times. • Borrowings bear floating rates of interest at margins over Canadian dollar bankers’ acceptance yields, U.S. dollar LIBOR rates or prime. Margins on the facility depend on Wajax’s Leverage Ratio at the time of borrowing and range between 1.5% and 3.0% for Canadian dollar bankers’ acceptances and US dollar LIBOR borrowings, and 0.5% and 2.0% for prime rate borrowings. At December 31, 2011, Wajax had borrowed $60.0 million and issued $6.0 million of letters of credit for a total utilization of $66.0 million of its $175 million bank credit facility. At December 31, 2011 borrowing capacity under the bank credit facility was equal to $175.0 million. 16 • Wajax Corporation Annual Report 2011 Management’s Discussion and Analysis Wajax also has a $15 million demand inventory equipment financing • As at December 31, 2011, Wajax had no interest rate swaps facility with a non-bank lender. The equipment notes payable under the outstanding. (As at December 31, 2010, Wajax had entered into facility bear floating rates of interest at margins over Canadian dollar interest rate swaps that effectively fixed the interest rate on $80 million bankers’ acceptance yields. Principal repayments commence between of debt until December 31, 2011). 6 and 12 months from the date of financing and the notes are due in full when the equipment is sold. At December 31, 2011 Wajax had no utilization of its $15 million equipment financing facility. • Wajax enters into short-term currency forward contracts to fix the exchange rate on the cost of certain inbound inventory and to hedge certain foreign currency-denominated sales to (receivables from) Since conversion to a corporation, Wajax has not made, and will not customers as part of its normal course of business. As at December be required to make, any significant income tax payments until 2013 31, 2011, Wajax had contracts outstanding to buy U.S.$36.0 million due to income tax payments being deferred as a result of its partnership and €0.2 million and to sell U.S.$1.0 million (December 31, 2010 – structure. In January 2013, Wajax will be required to make an income tax to buy U.S.$34.1 million and to sell U.S.$0.3 million). The U.S. dollar payment of approximately $44 million. This includes approximately $23 contracts expire between January 2012 and December 2012, with a million of tax on partnership income generated in 2011 and the balance weighted average U.S./Canadian dollar rate of 1.0249 and weighted representing income to be included in 2012 taxable income resulting average Euro / Canadian dollar rate of 1.3993. from the recent change in tax legislation that has effectively removed the partnership income deferral benefit. The Corporation will also commence making monthly income tax installments in January 2013. Wajax measures financial instruments held for trading and not accounted for as hedging items, at fair value with subsequent changes in fair value being charged to earnings. Derivatives designated as effective hedges Wajax’s $175 million bank credit facility along with an additional $15 are measured at fair value with subsequent changes in fair value being million of capacity permitted under the credit facility, should be sufficient charged to other comprehensive income. The fair value of derivative to meet Wajax’s short-term normal course working capital, maintenance instruments is estimated based upon market conditions using appropriate capital and growth capital requirements, including the January 2013 valuation models. The carrying values reported in the balance sheet for income tax payment. However, Wajax may be required to access the financial instruments are not significantly different from their fair values. equity or debt markets in order to fund significant acquisitions and growth related working capital and capital expenditures. Wajax is exposed to non-performance by counterparties to short-term currency forward contracts. These counterparties are large financial Wajax sponsors certain defined benefit plans that cover executive institutions with “Stable” outlook and high short-term and long-term employees, a small group of inactive employees and employees on credit ratings from Standard and Poor’s. To date, no such counterparty long-term disability benefits. The fair value of the defined benefit plans’ has failed to meet its financial obligations to Wajax. Management assets decreased $1.3 million to $11.3 million at December 31, 2011 does not believe there is a significant risk of non-performance by due to a $0.7 million loss on plan assets and excess benefits paid over these counterparties and will continue to monitor the credit risk of contributions for the year. The accrued benefit obligations of the plans these counterparties. at December 31, 2011 were $18.6 million and included a $4.3 million benefit obligation related to the Wajax Limited Supplemental Executive Retirement Plan (SERP) that is not funded but secured by a $4.6 million letter of credit. The resulting deficit for the plans at December 31, 2011 excluding the SERP was $3.1 million. The defined benefit plans are subject to actuarial valuations in 2012 and 2013. Management does not expect future cash contribution requirements to change materially from the 2011 contribution level of $1.0 million as a result of these valuations or any declines in the fair value of the defined benefit plans’ assets. Financial Instruments Wajax uses derivative financial instruments in the management of its foreign currency and interest rate exposures. Wajax’s policy is not to utilize derivative financial instruments for trading or speculative purposes. Significant derivative financial instruments outstanding at the end of the year were as follows: The transition to IFRS did not have a material effect on the Corporation’s accounting for financial instruments. Currency Risk Wajax’s operating results are reported in Canadian dollars. While Wajax’s sales are primarily denominated in Canadian dollars, significant portions of its purchases are in U.S. dollars. Changes in the U.S. dollar exchange rate can have a negative or positive impact on Wajax’s revenue, margins and working capital balances. Wajax enters into short-term currency forward contracts to fix the cost of certain inbound inventory and to hedge certain foreign currency-denominated sales to (receivables from) customers as part of its normal course of business. See the Financial Instruments section. A declining U.S. dollar relative to the Canadian dollar can have a negative effect on Wajax’s revenue and cash flows as a result of certain products being imported from the U.S. Market conditions generally require Wajax Wajax Corporation Annual Report 2011 • 17 Management’s Discussion and Analysis to lower its selling prices as the U.S. dollar declines. As well, many of imported from the U.S. Wajax will periodically institute price increases Wajax’s customers export products to the U.S., and a strengthening to offset the negative impact of foreign exchange rate increases and Canadian dollar can negatively impact their overall competitiveness volatility on imported goods to ensure margins are not eroded. and demand for their products, which in turn may reduce product purchases from Wajax. A strengthening U.S. dollar relative to the Canadian dollar can have a positive effect on Wajax’s revenue as a result of certain products being Wajax maintains a hedging policy whereby significant transactional currency risks are identified and hedged. Contractual Obligations Bank debt Operating leases Obligations under finance leases Total 60.0 71.3 10.3 $ $ $ < 1 year 1 – 5 years $ $ $ – 16.8 3.6 $ $ $ 60.0 33.3 6.7 After 5 years $ – $ 21.2 – $ Total $ 141.6 $ 20.4 $ 100.0 $ 21.2 The $60.0 million bank debt obligation relates to the bank term credit Although Wajax’s consolidated contractual annual lease commitments facility. On August 12, 2011, Wajax amended and extended the term of decline year-by-year, it is anticipated that existing leases will either be its $175 million bank credit facility to August 12, 2016 from December renewed or replaced, resulting in lease commitments being sustained at 31, 2011. current levels. In the alternative, Wajax may incur capital expenditures to The obligations under finance leases relate to certain vehicles financed acquire equivalent capacity. under finance lease arrangements. The leases have a minimum one year Under IFRS, vehicle leases that were previously classified as operating term and are extended on a monthly basis thereafter until termination. leases under Canadian GAAP are assessed as financing leases. Assets For more information on Wajax’s operating lease obligations, see the Off under finance lease are capitalized at the commencement of the lease at Balance Sheet Financing section. Wajax also has contingent contractual obligations where Wajax has guaranteed the resale value of equipment sold (“guaranteed residual value contracts”) or has guaranteed a portion of customer lease payments (“recourse contracts”). These contracts are subject to certain conditions being met by the customer. As at December 31, 2011, Wajax the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. The liability is recorded in the statement of financial position and classified between current and non-current amounts. Lease payments are apportioned between finance costs and a reduction of the obligations under finance leases liability so as to achieve a constant rate of return of interest on the remaining balance of the liability. had guaranteed $5.3 million of contracts (2010 – $5.8 million) with In addition, the Equipment segment had $41.5 million (2010 – $39.4 commitments arising between 2012 and 2014. The commitments made million) of consigned inventory on-hand from a major manufacturer at by Wajax in these contracts reflect the estimated future value of the December 31, 2011. In the normal course of business, Wajax receives equipment, based on the judgment and experience of management. Wajax inventory on consignment from this manufacturer which is generally has recorded a $0.1 million provision in 2011 (2010 – $0.5 million) as sold to customers or purchased by Wajax. This consigned inventory is an estimate of the financial loss likely to result from such commitments. not included in Wajax’s inventory as the manufacturer retains title to Off Balance Sheet Financing the goods. Off balance sheet financing arrangements include operating lease In the event the inventory consignment program was terminated, Wajax contracts entered into for facilities with various landlords, a portion of the would utilize interest free financing, if any, made available by the long-term lift truck rental fleet in Equipment with a non-bank lender and manufacturer and/or utilize capacity under its credit facilities. Although office equipment with various non-bank lenders. The total obligations for management currently believes Wajax has adequate debt capacity, all operating leases are detailed in the Contractual Obligations section. At Wajax would have to access the equity or debt markets, or temporarily December 31, 2011, the non-discounted operating lease commitments reduce dividends to accommodate any shortfalls in Wajax’s credit for facilities totaled $67.9 million, rental fleet $2.5 million, and office facilities. See the Liquidity and Capital Resources section. equipment $0.9 million. 18 • Wajax Corporation Annual Report 2011 Management’s Discussion and Analysis Dividends and Distributions Wajax seeks to distribute leading product lines in each of its regional Dividends to shareholders for the periods January 1, 2011 to December markets and its success is dependent upon continuing relationships 31, 2011 and distributions to unitholders as an income fund for the with the manufacturers it represents. Wajax endeavours to align itself periods January 1, 2010 to December 31, 2010 were declared as follows: in long-term relationships with manufacturers that are committed to Month (1) January February March April May June July August September October November December 2011 Dividends Per Share Amount 2010 Distributions Per Unit Amount $ 0.15 0.15 0.15 0.15 0.18 0.18 0.18 0.20 0.20 0.20 0.20 0.20 $ 2.5 2.5 2.5 2.5 3.0 3.0 3.0 3.3 3.3 3.3 3.3 3.3 $ 0.15 $ 2.5 2.5 0.15 2.5 0.15 2.5 0.15 2.5 0.15 2.5 0.15 2.5 0.15 5.8 0.35 5.8 0.35 5.8 0.35 9.2 0.55 12.5 0.75 Total dividends / distributions for the years ended December 31 $ 2.14 $ 35.6 $ 3.40 $ 56.5 (1) The Corporation’s monthly dividends / cash distributions were generally payable to shareholders / unitholders of record on the last business day of each calendar month and were paid on or about the 20th day of the following month. For the year ending December 31, 2011, Wajax declared dividends to shareholders totaling $2.14 per share. For the year ending December 31, 2010, Wajax declared monthly cash distributions to unitholders totaling $3.40 per unit. Dividends paid in 2011 and distributions paid in 2010 were funded from cash generated from operating activities. Commencing in 2012, the Corporation has established an objective of declaring annual dividends equal to at least 75% of earnings subject to the Corporation’s financial condition, economic outlook and capital requirements for growth including acquisitions. The Corporation’s intention is to continue paying dividends on a monthly basis. achieving a competitive advantage and long-term market leadership in their targeted market segments. In the Equipment and Power Systems segments, and in certain cases in the hydraulics and process pumps portion of the Industrial Components segment, manufacturer relationships are governed through effectively exclusive distribution agreements. Distribution agreements are for the most part open-ended, but are cancellable within a relatively short notification period specified in the agreement. Maintenance capital employed includes rental fleet in the Equipment and Power Systems segments, which will vary with market demand, and other capital which is employed primarily to support and maintain the branch network operations. In addition, Wajax enters into off balance sheet financing arrangements including operating lease contracts entered into for a portion of the long-term lift truck rental fleet in Equipment and office equipment. At December 31, 2011, the non-discounted operating lease commitments for rental fleet totaled $2.5 million and office equipment $0.9 million. Financing Strategies Wajax’s $175 million bank credit facility along with the $15 million demand inventory equipment financing facility should be sufficient to meet Wajax’s short-term normal course working capital, maintenance capital and growth capital requirements. Wajax’s short-term normal course requirements for current assets net of current liabilities, exclusive of funded net debt (“working capital”) can swing widely quarter-to-quarter due to the timing of large inventory purchases and/or sales and changes in market activity. In general, as Wajax experiences growth, there is a need for additional working capital as was the case in 2011. Conversely, as Wajax experiences economic slowdowns working capital reduces reflecting the lower activity levels Tax information relating to 2011 dividends and prior year distributions as was the case in 2009. Fluctuations in working capital are generally is available on Wajax’s website at www.wajax.com. funded by, or used to repay, the bank credit facility. Productive Capacity and Productive Capacity Management Wajax may be required to access the equity or debt markets in order Wajax is a distributor and service support provider. As such, Wajax’s to fund significant acquisitions and growth related working capital and productive capacity is determined primarily by its branch infrastructure capital expenditures. across Canada, manufacturer relationships and other maintenance and growth capital employed. Borrowing capacity under the bank credit facility is dependent on the level of Wajax’s inventories on-hand and outstanding trade accounts Wajax operates from 117 facilities throughout Canada, of which 88 receivables. At December 31, 2011, total borrowing capacity under the are leased. During the second quarter of 2011, Wajax increased its bank credit facility was equal to $175 million of which $66 million was productive capacity through the acquisition of Harper which increased utilized at December 31, 2011. the Power Systems’ Ontario infrastructure by an additional 9 branches. Wajax’s principal properties are primarily sales and service branches. Wajax Corporation Annual Report 2011 • 19 Management’s Discussion and Analysis The bank credit facility contains covenants that could restrict the into account current economic conditions when determining the ability of Wajax to make dividend payments, if (i) the leverage ratio provision for inventory obsolescence, provision for doubtful accounts (Debt to EBITDA) is greater than 3.0 at the time of declaration of the and any impairment of goodwill and other assets. Note 3 to the annual dividend, and (ii) an event of default exists or would exist as a result of Consolidated Financial Statements describes the significant accounting a dividend payment. Share Capital The shares of Wajax issued are included in shareholders’ equity on the balance sheet as follows: Issued and fully paid Shares as at December 31, 2011 policies and methods used in preparation of the annual Consolidated Financial Statements. Wajax bases its estimates on historical experience and various other assumptions that are believed to be reasonable in the circumstances. The more significant estimates include provisions for inventory obsolescence and doubtful accounts, warranty provisions and fair market values for goodwill impairment tests. Number Amount Provision for inventory obsolescence Balance at the beginning of the year Rights exercised 16,629,444 $ 105.9 – – The value of Wajax’s new and used equipment is evaluated by management throughout the year. When required, provisions are Balance at the end of the year 16,629,444 $ 105.9 recorded to ensure that the book value of equipment is valued at Wajax has five share-based compensation plans; the Wajax Share Ownership Plan (“SOP”), the Deferred Share Program (“DSP”), the Directors’ Deferred Share Unit Plan (“DDSUP”), the Mid-Term Incentive Plan for Senior Executives (“MTIP”) and the Deferred Share Unit Plan (“DSUP”). SOP, DSP and DDSUP rights are issued to the participants and are settled by issuing Wajax Corporation shares. The cash-settled MTIP and DSUP consist of annual grants that vest over three years and are subject to time and performance vesting criteria. A portion of the MTIP and the full amount of the DSUP grants are determined by the price of the Corporation’s shares. Compensation expense for the SOP, DSP and DDSUP is determined based upon the fair value of the rights at the date of grant and charged to earnings on a straight line basis over the vesting period, with an offsetting adjustment to contributed surplus. Compensation expense for the DSUP and the share-based portion of the MTIP varies with the price of the Corporation’s shares and is recognized over the vesting period. Wajax recorded compensation cost of $7.2 million for the year (2010 – $5.0 million) in respect of these plans. At December 31, 2011, 109,788 (2010 – 101,999) rights were outstanding under the SOP, 30,216 (2010 – 24,164) rights were outstanding under the DSP and 176,591 (2010 – 147,797) rights were outstanding under the DDSUP. Effective January 1, 2011 the SOP, DSP, DDSUP and MTIP plans were amended to reflect the conversion to a corporation. See Note 21 of the Consolidated Financial Statements. Critical Accounting Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Wajax has taken the lower of cost or estimated net realizable value. Wajax identifies slow moving or obsolete parts inventories and estimates appropriate obsolescence provisions related thereto. Wajax 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 2011 was $3.2 million compared to $4.0 million in 2010. Provision for doubtful accounts Wajax is exposed to credit risk with respect to its trade and other receivables. However, this is somewhat minimized by Wajax’s large customer base which covers most business sectors across Canada. Wajax follows a program of credit evaluations of customers and limits the amount of credit extended when deemed necessary. Wajax maintains provisions for possible credit losses, and any such losses to date have been within management’s expectations. The $3.5 million provision for doubtful accounts at December 31, 2011 decreased $0.4 million from $3.9 million in 2010. As conditions change, actual results could differ from those estimates. Warranty provisions Wajax provides for customer warranty claims that may not be covered by the manufacturers’ standard warranty, primarily in Equipment where the reserve is determined by applying a claim rate to the value of each machine sold. The rate is developed using management’s best estimate of actual warranty expense, generally based on recent claims experience, and adjusted as required. Goodwill and intangible assets Goodwill and indefinite life intangible assets are not amortized but are tested at least annually for impairment, or more frequently if certain indicators arise that indicate the assets might be impaired. Goodwill and indefinite life intangibles are allocated to cash-generating units (“CGU”) that are expected to benefit from the synergies of the acquisition. To test for impairment, Wajax compares each CGU’s 20 • Wajax Corporation Annual Report 2011 Management’s Discussion and Analysis carrying value to its recoverable amount. Recoverable amount is the consolidated income statement and consolidated statement of higher of value in use or fair value less costs to sell, if the fair value comprehensive income for the year ended December 31, 2010 and of can be readily determined. The value in use is the present value of the consolidated statements of financial position as at January 1, 2010 future cash flows using a pre-tax discount rate that reflects the time and December 31, 2010. These reconciliations provide explanations of value of money and the risk specific to the assets. Any impairment each difference. would be recorded as a charge against earnings. During the year, Wajax performed impairment tests, based on value in use, of its goodwill and intangible assets with an indefinite life and concluded that no impairment existed in either the goodwill associated with any of Wajax’s cash-generating units or the intangible assets with an indefinite life. New standards and interpretations not yet adopted As of January 1, 2015, the Corporation will be required to adopt IFRS 9 Financial Instruments, which is the result of the first phase of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple Customer lists and non-competition agreements are amortized on a classification and measurement models for financial assets and straight line basis over their useful lives which range from 2 to 7 years. liabilities with a single model that has only two classification categories: Computer application software is classified as an intangible asset and amortized cost and fair value. The Corporation is currently assessing the is amortized on a straight line basis over the useful life ranging from impact of this standard on its consolidated financial statements. 1 to 7 years. They are reviewed at the end of each reporting period to determine if any indicators of impairment exist. For any indicators of impairment identified, an estimate is made of the recoverable amount of the asset. Impairment of intangible asset is recognized in an amount equal to the difference between the carrying value and the recoverable amount of the related intangible asset and would be recorded as a charge against earnings. Wajax concluded that no impairment of the carrying value of the finite life intangible assets existed. While Wajax uses available information to prepare its estimate of fair value, actual results could differ significantly from management’s estimates which could result in future impairment and losses related to recorded goodwill and other asset balances. Financing costs Transaction costs related to the acquisition or amendment of long-term debt are deferred and amortized to finance costs using an effective yield method. Deferred financing costs are included in the carrying amount of the related debt. Changes in Accounting Policy As of January 1, 2013, the Corporation will be required to adopt IFRS 10 Consolidated Financial Statements, which establishes principles for the preparation and presentation of consolidated financial statements when an entity controls one or more other entities. The Corporation does not expect IFRS 10 to have a material impact on its consolidated financial statements. As of January 1, 2013, the Corporation will be required to adopt IFRS 13 Fair Value Measurement, which defines fair value and sets out a framework for measuring fair value when fair value measurements are required or permitted by other IFRSs. The Corporation is currently assessing the impact of this standard on its consolidated financial statements. As of January 1, 2013, the Corporation will be required to adopt amendments to IAS 1 Presentation of Financial Statements, which require that an entity present separately the items of other comprehensive income that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss. As the amendments only require changes in the presentation Transition to International Financial Reporting Standards of items in other comprehensive income, the Corporation does not This is the first year that the Corporation has presented its Consolidated expect the amendments to IAS 1 to have a material impact on the Financial Statements in accordance with IFRS. The Corporation financial statements. provided information on its transition to IFRS in its MD&A for the quarter ended March 31, 2011. This information has not changed materially from what was provided. The most significant impacts on the Corporation’s Consolidated Financial Statements resulting from the adoption of IFRS are discussed within the applicable sections of this MD&A and Note 29 of the Consolidated Financial Statements. As of January 1, 2013, the Corporation will be required to adopt amendments to IAS 19 Employee Benefits, which requires recognition of actuarial gains and losses immediately in other comprehensive income, the full recognition of past service costs immediately in profit or loss, recognition of the expected return on plan assets in profit or loss to be calculated based on the rate used to discount the defined Note 29 of the Consolidated Financial Statements provides an benefit obligation, and certain additional disclosures. The Corporation explanation of the transition to IFRS. In addition, Note 29 provides is currently assessing the impact of this standard on its consolidated detailed reconciliations between Canadian GAAP and IFRS of the financial statements. Wajax Corporation Annual Report 2011 • 21 Management’s Discussion and Analysis Risk Management and Uncertainties payment terms for distributors. This may affect Wajax’s interest-free As with most businesses, Wajax is subject to a number of marketplace payment period or consignment terms, which may have a materially and industry related risks and uncertainties which could have a negative or positive impact on working capital balances such as cash, material impact on operating results and Wajax’s ability to pay cash inventories, trade and other payables and bank debt. dividends to shareholders. Wajax attempts to minimize many of these risks through diversification of core businesses and through the geographic diversity of its operations. In addition, Wajax has adopted an annual enterprise risk management assessment which is prepared by the Corporation’s senior management and overseen by the Board of Directors and Committees of the Board. The enterprise risk management framework sets out principles and tools for identifying, evaluating, prioritizing and managing risk effectively and consistently across Wajax. The following are a number of risks that deserve particular comment. The ability of Wajax to realize its intention to focus its Industrial Components’ business on, among other things, the importation of high quality, lower cost products from China or other Asian countries and eastern Europe is dependent on the continued economic and political stability of these regions. There is no assurance that Wajax will be able to import such components at a low cost and/or on a consistent basis. Economic conditions/business cyclicality Wajax’s customer base consists of businesses operating in the natural resources, construction, transportation, manufacturing, industrial processing and utilities industries. These industries can be capital Manufacturer relationships and product access intensive and cyclical in nature, and as a result, customer demand for Wajax seeks to distribute leading product lines in each of its regional Wajax’s products and services may be affected by economic conditions markets and its success is dependent upon continuing relations with at both a global or local level. Changes in interest rates, consumer the manufacturers it represents. Wajax endeavours to align itself in and business confidence, corporate profits, credit conditions, foreign long-term relationships with manufacturers that are committed to exchange, commodity prices and the level of government infrastructure achieving a competitive advantage and long-term market leadership spending may influence Wajax’s customers’ operating, maintenance and in their targeted market segments. In the Equipment and Power capital spending, and therefore Wajax’s sales and results of operations. Systems segments, and in certain cases in the hydraulics and process Although Wajax has attempted to address its exposure to business and pumps portion of the Industrial Components segment, manufacturer industry cyclicality by diversifying its operations by geography, product relationships are governed through effectively exclusive distribution offerings and customer base, there can be no assurance that Wajax’s agreements. Distribution agreements are for the most part open-ended, results of operations or cash flows will not be adversely affected by but are cancellable within a relatively short notification period specified changes in economic conditions. in each agreement. Although Wajax enjoys good relationships with its major manufacturers and seeks to develop additional strong long-term partnerships, a loss of a major product line without a comparable replacement would have a significantly adverse effect on Wajax’s results of operations or cash flow. Commodity prices Many of Wajax’s customers are directly and indirectly affected by fluctuations in commodity prices in the forestry, metals and minerals and petroleum and natural gas industries, and as a result Wajax is also indirectly affected by fluctuations in these prices. In particular, There is a continuing consolidation trend among industrial equipment each of Wajax’s businesses is exposed to fluctuations in the price of oil and component manufacturers. Consolidation may impact the products and natural gas. A downward change in these commodity prices, and distributed by Wajax, in either a favourable or unfavourable manner. particularly in the price of oil and natural gas, could therefore adversely Consolidation of manufacturers may have a negative impact on the affect Wajax’s results of operations or cash flows. results of operations or cash flow if product lines Wajax distributes become unavailable as a result of the consolidation. This was the case in the Equipment segment with the discontinued distribution of the LeTourneau product line effective April 27 2012, due to the purchase by Joy Global Inc. of LeTourneau Technologies Inc. Growth initiatives, integration of acquisitions and project execution As part of its long-term strategy, Wajax intends to continue growing its business through a combination of organic growth and strategic acquisitions. Wajax’s ability to successfully grow its business through acquisitions will be dependent on a number of factors including: Suppliers generally have the ability to unilaterally change distribution identification of accretive new business or acquisition opportunities; terms and conditions or limit supply of product in times of intense negotiation of purchase agreements on satisfactory terms and prices; market demand. Supplier changes in the area of product pricing and prior approval of acquisitions by third parties, including regulatory availability can have a negative or positive effect on Wajax’s revenue authorities; securing attractive financing arrangements; and integration and margins. As well, from time to time suppliers make changes to of newly acquired operations into the existing business. All of these 22 • Wajax Corporation Annual Report 2011 Management’s Discussion and Analysis activities may be more difficult to implement or may take longer Wajax may be required to access the equity or debt markets or reduce to execute than management anticipates. Further, any significant dividends in order to fund significant acquisitions and growth related expansion of the business may increase the operating complexity of working capital and capital expenditures. Wajax, and divert management away from regular business activities. Any failure of Wajax to manage its acquisition strategy successfully could have a material adverse impact on Wajax’s business, results of operations or financial condition. Key personnel The success of Wajax is largely dependent on the abilities and experience of its senior management team and other key personnel. Its future performance will also depend on its ability to attract, develop and retain highly qualified employees in all areas of its business. Competition for skilled management, sales and technical personnel is intense, particularly in certain markets where Wajax competes. Wajax continuously reviews and makes adjustments to its hiring, training and compensation practices in an effort to attract and retain a highly competent workforce. However, there can be no assurance that Wajax will be successful in its efforts and a loss of key employees, or failure to attract and retain new talent as needed, may have an adverse impact on Wajax’s current operations or future prospects. Leverage, credit availability and restrictive covenants Wajax has a $175 million bank credit facility which expires August 12, 2016 comprised of a $30 million non-revolving term portion and a $145 million revolving term portion. (see Liquidity and Capital Resources section above). While management believes this facility will be adequate to meet the Corporation’s normal course working capital requirements, there can be no assurance that additional credit will become available if required, or that an appropriate amount of credit with comparable terms and conditions will be available when the facility matures. See Financing Strategies section. The amount of debt service obligations under the credit facility will be dependant on the level of borrowings and fluctuations in interest rates to the extent the rate is unhedged. As a result, fluctuations in debt servicing costs may have a detrimental effect on future earnings or cash flow. Wajax also has credit lines available with other financial institutions for purposes of financing inventory and off balance sheet financing of long- term rental fleet. See Liquidity and Capital Resources section. These facilities are not committed lines and their future availability cannot be assured, which may have a negative impact on cash available for dividends and future growth opportunities. Quality of products distributed The ability of Wajax to maintain and expand its customer base is dependent upon the ability of the manufacturers represented by Wajax to improve and sustain the quality of their products. The quality and reputation of such products are not within Wajax’s control, and there can be no assurance that manufacturers will be successful in meeting these goals. The failure of these manufacturers to maintain a market presence could adversely affect Wajax’s results of operations or cash flow. Foreign exchange exposure Wajax’s operating results are reported in Canadian dollars. While the majority of Wajax’s sales are in Canadian dollars, significant portions of its purchases are in U.S. dollars. Changes in the U.S. dollar exchange rate can have a negative or positive impact on Wajax’s revenue, margins and working capital balances. Wajax mitigates certain exchange rate risks by entering into short-term foreign currency forward contracts to fix the cost of certain inbound inventory and to hedge certain foreign-currency denominated sales to customers. In addition, Wajax will periodically institute price increases to offset the negative The facility contains restrictive covenants which place restrictions on, impact of foreign exchange rate increases on imported goods. The among other things, the ability of Wajax to encumber or dispose of its inability of Wajax to mitigate exchange rate risks or increase prices to assets, the amount of interest cost incurred and dividends made relative offset foreign exchange rate increases, including sudden and volatile to earnings and certain reporting obligations. A failure to comply with changes in the U.S. dollar exchange rate, may have a material adverse the obligations of the facility could result in an event of default which, effect on the results of operations or financial condition of Wajax. if not cured or waived, could require an accelerated repayment of the facilities. There can be no assurance that Wajax’s assets would be sufficient to repay the facility in full. A declining U.S. dollar relative to the Canadian dollar can have a negative effect on Wajax’s revenue and cash flows as a result of certain products being imported from the U.S. In some cases market conditions Wajax’s short-term normal course working capital requirements can require Wajax to lower its selling prices as the U.S. dollar declines. swing widely quarter-to-quarter due to timing of large inventory As well, many of Wajax’s customers export products to the U.S., and purchases and/or sales and changes in market activity. In general, as a strengthening Canadian dollar can negatively impact their overall Wajax experiences growth, there is a need for additional working capital competitiveness and demand for their products, which in turn may as was the case in 2011. Conversely, as Wajax experiences economic reduce product purchases from Wajax. slowdowns working capital reduces reflecting the lower activity levels as was the case in 2009. Wajax Corporation Annual Report 2011 • 23 Management’s Discussion and Analysis A strengthening U.S. dollar relative to the Canadian dollar can have a Inventory obsolescence positive effect on Wajax’s revenue as a result of certain products being Wajax maintains substantial amounts of inventories in all three imported from the U.S. Wajax will periodically institute price increases core businesses. While Wajax believes it has appropriate inventory to offset the negative impact of foreign exchange rate increases and management systems in place, variations in market demand for the volatility on imported goods to ensure margins are not eroded. products it sells can result in certain items of inventory becoming Competition The equipment, industrial components and power systems distribution industries in which Wajax competes are highly competitive. In the Equipment segment, Wajax primarily competes against regional obsolete. This could result in a requirement for Wajax to take a material write down of its inventory balance resulting in Wajax not being able to realize expected revenue and cash flows from its inventory, which would negatively affect results from operations or cash flow. equipment distributors that tend to handle a dedicated product line, such Credit risk as those offered by John Deere, Komatsu and Caterpillar. There can be Wajax extends credit to its customers, generally on an unsecured basis. no assurance that Wajax will be able to continue to compete on the basis Although Wajax is not substantially dependant on any one customer of product quality and price of product lines, distribution and servicing and it has a system of credit management in place, the loss of a large capabilities as well as proximity of its distribution sites to customers. receivable would have an adverse effect on Wajax’s profitability. In terms of the Industrial Components segment, the hydraulics Guaranteed residual value, recourse and buy-back contracts and process equipment branches compete with other distributors In some circumstances Wajax makes certain guarantees to finance of hydraulics components and process equipment on the basis of providers on behalf of its customers. These guarantees can take the quality and price of the product lines, the capacity to provide custom form of assuring the resale value of equipment, guaranteeing a portion engineered solutions and high service standards. The bearings and of customer lease payments, or agreeing to buy back the equipment power transmission product branches compete with a number of at a specified price. These contracts are subject to certain conditions distributors representing the same or competing product lines and rely being met by the customer, such as maintaining the equipment in good primarily on high service standards, price and value added services to working condition. Historically, Wajax has not incurred substantial gain market advantage. losses on these types of contracts, however, there can be no assurance that losses will not be incurred in the future. See Contractual The Power Systems business competes with other major diesel engine distributors representing such products as Cummins and Caterpillar. Obligations section. Competition is based primarily on product quality, pricing and the Future warranty claims ability to service the product after the sale. There can be no assurance that Wajax will be able to continue to effectively compete. Increased competitive pressures or the inability of Wajax to maintain the factors which have enhanced its competitive position could adversely affect its results of operations or cash flow. Litigation and product liability claims In the ordinary course of its business, Wajax may be party to various legal actions, the outcome of which cannot be predicted with certainty. One category of potential legal actions is product liability claims. Wajax carries product liability insurance, and management believes that this insurance is adequate to protect against potential product liability claims. Not all risks, however, are covered by insurance, and no assurance can be given that insurance will be consistently available, or will be consistently available on an economically feasible basis, or that the amounts of insurance will at all times be sufficient to cover each and every loss or claim that may occur involving Wajax’s assets or operations. Wajax provides manufacturers’ and/or dealer warranties for most of the product it sells. In some cases, the product warranty claim risk is shared jointly with the manufacturer. In addition, Wajax provides limited warranties for workmanship on services provided. Accordingly, Wajax has some liability for warranty claims. There is a risk that a possible product quality erosion or a lack of a skilled workforce could increase warranty claims in the future, or may be greater than management anticipates. If Wajax’s liability in respect of such claims is greater than anticipated, it may have a material adverse impact on Wajax’s business, results of operations or financial condition. Maintenance and repair contracts Wajax frequently enters into long-term maintenance and repair contracts with its customers, whereby Wajax is obligated to maintain certain fleets of equipment at various negotiated performance levels. The length of these contracts varies significantly, often ranging up to five or more years. The contracts are generally fixed price, although many contracts have additional provisions for inflationary adjustments. Due to the long-term nature of these contracts, there is a risk that 24 • Wajax Corporation Annual Report 2011 Management’s Discussion and Analysis significant cost overruns may be incurred. If Wajax has miscalculated Government regulation the extent of maintenance work required, or if actual parts and service Wajax’s business is subject to evolving laws and government costs increase beyond the contracted inflationary adjustments, the regulations, particularly in the areas of taxation, the environment, and contract profitability will be adversely affected. In order to mitigate this health and safety. Changes to such laws and regulations may impose risk, Wajax closely monitors the contracts for early warning signs of cost additional costs on Wajax and may adversely affect its business in other overruns. In addition, the manufacturer may, in certain circumstances, ways, including requiring additional compliance measures by Wajax. share in the cost overruns if profitability falls below a certain threshold. Any failure by Wajax to effectively price and manage these contracts could have a material adverse impact on Wajax’s business, results of operations or financial condition. Insurance Strategic Direction and Outlook In 2011 Wajax achieved record revenue and earnings before income tax of $1.38 billion and $87.5 million respectively. Year-over-year revenue increased 24% while earnings before income tax increased 62%. The earnings before income tax comparison is appropriate since 2011 was Wajax maintains a program of insurance coverage that is ordinarily the first year after conversion from an income fund when Wajax was maintained by similar businesses, including property insurance and effectively not subject to income tax. This performance was driven by general liability insurance. Although the limits and deductibles of a stronger Canadian economy and the execution of the Corporation’s such insurance have been established through risk analysis and the strategic initiatives, including the Harper acquisition. Additionally, recommendation of professional advisors, there can be no assurance all three businesses maintained disciplined control over selling and that such insurance will remain available to Wajax at commercially administrative costs. With its Canada-wide branch infrastructure and reasonable rates or that the amount of such coverage will be adequate diverse product lines, Wajax’s business has exposure to virtually all of to cover all liability incurred by Wajax. If Wajax is held liable for the goods producing sectors of the Canadian economy. Stronger sectors amounts exceeding the limits of its insurance coverage or for claims of the economy aiding the Corporation’s revenue growth in 2011 were outside the scope of that coverage, its business, results of operations or energy, mining, construction and forestry, primarily in western Canada. financial condition could be adversely affected. Information systems and technology Looking forward to 2012, management expects growth in the Canadian economy to be more modest than that experienced in 2011. This is Information systems are an integral part of Wajax’s business processes, a result of the continuing high value of the Canadian dollar and the including marketing of equipment and support services, inventory dampening effect on the world economy from the European debt crisis and logistics, and finance. Some of these systems are integrated with and the slowing Chinese economy. However, we expect global demand certain suppliers’ core processes and systems. Any disruptions to these for commodities to remain relatively strong, which should bode well for systems due, for example, to the upgrade or conversion thereof, or the Canada’s mining and energy sectors, particularly in western Canada. failure of these systems to operate as expected could, depending on the The revenue implication from phasing out the LeTourneau mining magnitude of the problem, adversely affect Wajax’s operating results by equipment line at the end of April, is expected to be mitigated by limiting the ability to effectively monitor and control Wajax’s operations. additional Hitachi mining equipment sales as Hitachi’s manufacturing Labour relations Wajax has approximately 2,738 employees. Wajax is a party to thirteen collective agreements covering a total of approximately 416 employees. Of these, seven collective agreements covering 113 employees have expired on or before December 31, 2011 and are currently being re- negotiated. Of the remaining six collective agreements, two expire in 2012, three expire in 2013, and one expires in 2014. Overall, Wajax operations have recovered from the effects of the Japanese earthquake and tsunami in March 2011. As well, management has outlined growth initiatives that are expected to result in increased market share for key product lines, the addition of new products and expansion into new geographic territories. As a result, management expects continued growth in revenue and earnings in 2012, but at a more modest pace than experienced in 2011. believes its labour relations to be satisfactory and does not anticipate Additional information, including Wajax’s Annual Report and Annual it will be unable to renew the collective agreements. If Wajax is unable Information Form, are available on SEDAR at www.sedar.com. to renew or negotiate collective agreements from time to time, it could result in work stoppages and other labour disturbances. The failure to renew collective agreements upon satisfactory terms could have a material adverse impact on Wajax’s businesses, results of operations or financial condition. Wajax Corporation Annual Report 2011 • 25 Management’s Responsibility for Financial Reporting The consolidated financial statements of Wajax Corporation are the Both the external and internal auditors have free and independent responsibility of management and have been prepared in accordance access to the Audit Committee to discuss the scope of their audits, the with International Financial Reporting Standards. Where appropriate, adequacy of the system of internal control and the adequacy of financial the information reflects management’s judgement and estimates based reporting. The Audit Committee reports its findings to the Board, which on the available information. Management is also responsible for reviews and approves the consolidated financial statements. all other information in the Annual Report and for ensuring that this information is consistent with the consolidated financial statements. Wajax maintains a system of internal control designed to provide financial information and the safeguarding of its assets. Wajax also maintains an internal audit function, which reviews the system of internal control and its application. The Audit Committee of the Board, consisting solely of outside directors, meets regularly during the year with management, internal auditors and the external auditors, to review their respective activities Wajax’s external auditors, KPMG LLP, are responsible for auditing the consolidated financial statements and expressing an opinion thereon. Mark Foote President and John J. Hamilton Senior Vice President Chief Executive Officer and Chief Financial Officer and the discharge of their responsibilities. Mississauga, Canada, March 6, 2012 Independent Auditors’ Report To the shareholders of Wajax Corporation including the assessment of the risks of material misstatement of We have audited the accompanying consolidated financial statements the consolidated financial statements, whether due to fraud or error. of Wajax Corporation, which comprise the consolidated statements In making those risk assessments, we consider internal control of financial position as at December 31, 2011, December 31, 2010 relevant to the entity’s preparation and fair presentation of the and January 1, 2010, the consolidated statements of earnings, consolidated financial statements in order to design audit procedures comprehensive income, changes in shareholders’ equity and cash flows that are appropriate in the circumstances, but not for the purpose for the years ended December 31, 2011 and December 31, 2010, of expressing an opinion on the effectiveness of the entity’s internal and notes, comprising a summary of significant accounting policies and control. An audit also includes evaluating the appropriateness of other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. of these consolidated financial statements in accordance with We believe that the audit evidence we have obtained in our audits is International Financial Reporting Standards, and for such internal sufficient and appropriate to provide a basis for our audit opinion. control as management determines is necessary to enable the preparation of consolidated financial statements that are free from Opinion material misstatement, whether due to fraud or error. Auditors’ Responsibility In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Wajax Corporation as at December 31, 2011, December 31, 2010 and Our responsibility is to express an opinion on these consolidated January 1, 2010, and its consolidated financial performance and financial statements based on our audits. We conducted our audits in its consolidated cash flows for the years ended December 31, 2011 accordance with Canadian generally accepted auditing standards. Those and December 31, 2010 in accordance with International Financial standards require that we comply with ethical requirements and plan and Reporting Standards. perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence Chartered Accountants, Licensed Public Accountants about the amounts and disclosures in the consolidated financial Toronto, Canada, March 6, 2012 statements. The procedures selected depend on our judgment, 26 • Wajax Corporation Annual Report 2011 Consolidated Statements of Financial Position Consolidated Financial Statements As at (in thousands of Canadian Dollars) Assets Current Cash Trade and other receivables (note 4) Inventories (note 5) Prepaid expenses Non-Current Rental equipment (note 6) Property, plant and equipment (note 7) Intangible assets (note 9) Deferred taxes (note 23) Employee benefits (note 11) Liabilities and Shareholders’ Equity Current Trade and other payables (note 12) Accrued liabilities Provisions (note 10) Dividends payable Income taxes payable Obligations under finance leases (note 8) Derivative instruments Bank debt (note 14) Non-Current Provisions (note 10) Deferred taxes (note 23) Employee benefits (note 11) Other liabilities Obligations under finance leases (note 8) Derivative instruments Bank debt (note 14) Shareholders’ Equity Share capital (note 17) Trust units (note 18) Contributed surplus (note 21) Retained earnings Accumulated other comprehensive loss Total shareholders’ equity On behalf of the Board: Paul E. Gagné Chairman December 31 2011 December 31 2010 January 1 2010 $ 5,659 174,233 241,524 8,033 429,449 28,060 47,924 84,493 – – $ 42,954 135,517 196,460 7,244 382,175 15,794 43,268 75,794 5,277 240 $ 9,207 123,537 177,909 7,800 318,453 16,370 45,974 75,539 2,229 – 160,477 140,373 138,112 $ 589,926 $ 522,548 $ 456,565 $ $ 163,108 84,050 5,704 3,326 2,398 3,646 208 – 262,440 4,010 17,694 6,843 5,644 6,688 – 59,021 99,900 105,371 – 4,888 117,477 (150) 227,586 $ 134,832 63,762 5,353 12,472 2,072 3,677 2,452 79,680 304,300 4,338 – 4,132 5,221 5,227 – – 18,918 – 105,371 3,931 91,805 (1,777) 199,330 83,723 66,089 4,859 2,491 274 3,850 – – 161,286 3,518 – 3,699 841 6,140 2,643 79,461 96,302 – 105,129 3,538 92,543 (2,233) 198,977 $ 589,926 $ 522,548 $ 456,565 Ian A. Bourne Director Wajax Corporation Annual Report 2011 • 27 Consolidated Financial Statements Consolidated Statements of Earnings For the years ended December 31 (in thousands of Canadian dollars, except per share data) 2011 2010 Revenue (note 19) Cost of sales Gross profit Selling and administrative expenses Earnings before finance costs and income taxes Finance costs (note 20) Earnings before income taxes Income tax expense (recovery) (note 23) Net earnings Basic earnings per share (note 24) Diluted earnings per share (note 24) $ 1,377,100 $ 1,110,888 1,084,667 292,433 200,321 92,112 4,630 87,482 23,679 873,032 237,856 179,643 58,213 4,277 53,936 (2,454) $ 63,803 $ 56,390 $ $ 3.84 3.77 $ $ 3.39 3.34 Consolidated Statements of Comprehensive Income For the years ended December 31 (in thousands of Canadian dollars) Net earnings 2011 2010 $ 63,803 $ 56,390 Actuarial losses on pension plans, net of tax of $885 (2010 – $217) (note 11) (2,544) (628) Losses on derivative instruments designated as cash flow hedges in prior periods reclassified to cost of inventory or finance costs in the current year, net of tax of $237 (2010 – $109) 565 938 Gains (losses) on effective portion of derivative instruments designated as cash flow hedges, net of tax of $381 (2010 – ($155)) Other comprehensive loss, net of tax 1,062 (917) (482) (172) Total comprehensive income $ 62,886 $ 56,218 28 • Wajax Corporation Annual Report 2011 Consolidated Financial Statements Consolidated Statements of Changes in Shareholders’ Equity Accumulated other comprehensive (loss) income For the year ended December 31, 2011 (in thousands of Canadian dollars) Share capital Trust units Contributed surplus Retained earnings Cash flow hedges Total January 1, 2011 $ – 105,371 3,931 91,805 (1,777) $ 199,330 Conversion to corporation 105,371 (105,371) Net earnings Other comprehensive loss Actuarial losses on pension plans, net of tax (note 11) Losses on derivative instruments designated as cash flow hedges in prior years reclassified to cost of inventory or finance costs in the current year, net of tax Gains on effective portion of derivative instruments designated as cash flow hedges, net of tax Total other comprehensive loss Total comprehensive income for the year Dividends (note 16) Share-based compensation expense (note 21) – – – – – – – – December 31, 2011 $ 105,371 – – – – – – – – – – – – – – – – – 957 4,888 – 63,803 – – – 63,803 (2,544) – (2,544) – – (2,544) 61,259 (35,587) – 565 565 1,062 1,627 1,627 – – 1,062 (917) 62,886 (35,587) 957 117,477 (150) $ 227,586 Accumulated other comprehensive (loss) income For the year ended December 31, 2010 (in thousands of Canadian dollars) Share capital Trust units Contributed surplus Retained earnings Cash flow hedges Total 105,129 3,538 92,543 (2,233) $ 198,977 – 56,390 – 56,390 January 1, 2010 $ Net earnings Other comprehensive loss Actuarial losses on pension plans, net of tax (note 11) Losses on derivative instruments designated as cash flow hedges in prior years reclassified to cost of inventory or finance costs in the current year, net of tax Losses on effective portion of derivative instruments designated as cash flow hedges, net of tax Total other comprehensive loss Total comprehensive income for the year Distributions (note 16) Unit rights plans exercised (note 21) Unit-based compensation expense (note 21) December 31, 2010 $ – – – – – – – – – – – – – – – – – – – – – – – – (628) – (628) – – (628) 55,762 (56,500) – – 938 938 (482) 456 456 – – – (482) (172) 56,218 (56,500) – 635 91,805 (1,777) $ 199,330 Wajax Corporation Annual Report 2011 • 29 242 – 105,371 (242) 635 3,931 Consolidated Financial Statements Consolidated Statements of Cash Flows For the years ended December 31 (in thousands of Canadian dollars) 2011 2010 Operating activities Net earnings Items not affecting cash flow: Depreciation and amortization Rental equipment (note 6) Property, plant and equipment Assets under finance lease (note 7) Intangible assets (note 9) Share-based compensation expense (note 21) Other liabilities Non-cash rental expense Employee benefits expense, net of payments Finance costs Income tax expense (recovery) Cash flows from operating activities before changes in operating assets and liabilities Changes in operating assets and liabilities: Trade and other receivables Inventories Prepaid expenses Trade and other payables Accrued liabilities Provisions Cash flows generated from operating activities Rental equipment additions (note 6) Provisions, non-current Finance costs paid Income taxes (paid) received Net cash flows generated from operating activities Investing activities Property, plant and equipment additions Proceeds on disposal of property, plant and equipment Intangible assets additions (note 9) Acquisition of business (note 27) Net cash flows used in investing activities Financing activities Decrease in bank debt Debt facility renewal costs (note 14) Finance lease payments Dividends paid Net cash flows used in financing activities Net change in cash Cash – beginning of year Cash – end of year 30 • Wajax Corporation Annual Report 2011 $ 63,803 $ 56,390 4,838 4,410 3,031 1,216 957 423 (303) (478) 4,630 23,679 3,568 4,065 2,645 966 635 4,380 103 (1,139) 4,277 (2,454) 106,206 73,436 (27,054) (34,959) (571) 22,904 19,076 351 (20,253) 85,953 (20,177) (328) (4,132) (116) 61,200 (5,499) 193 (664) (23,247) (29,217) (20,000) (1,061) (3,484) (44,733) (69,278) (37,295) 42,954 (11,980) (15,768) 556 51,537 (2,430) 494 22,409 95,845 (5,775) 820 (3,999) 1,778 88,669 (4,132) 2,393 (3,220) – (4,959) – (93) (3,351) (46,519) (49,963) 33,747 9,207 $ 5,659 $ 42,954 Notes to the Consolidated Financial Statements Notes to Consolidated Financial Statements December 31, 2011 (amounts in thousands of Canadian dollars, except share and per share data) 1. Corporation Profile as the net total of the plan assets and the present value of the defined Wajax Corporation (the “Corporation”) is incorporated in Canada. The benefit obligation. address of the Corporation’s registered office is 3280 Wharton Way, Mississauga, Ontario, Canada. The Corporation’s core distribution businesses are engaged in the sale and after-sale parts and service support of equipment, industrial components and power systems, through a network of 117 branches across Canada. The Corporation is a multi-line distributor and represents a number of leading worldwide manufacturers across its core businesses. Its customer base is diversified, spanning natural resources, construction, transportation, manufacturing, industrial processing and utilities. In 2010 the Corporation was structured as an unincorporated, open- ended, limited purpose investment trust called Wajax Income Fund (the “Fund”). On January 1, 2011, the Fund converted into a corporation pursuant to a Plan of Arrangement under the Canada Business Corporations Act. Unitholders of the Fund automatically received one common share of the Corporation in exchange for each unit of the Fund. The conversion was accounted for as a continuity of interests. The business continues to be carried on by the same management team that was in place prior to the completion of the conversion. 2. Basis of Preparation Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the Corporation’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand, unless otherwise stated and except share and per share data. Judgements and estimation uncertainty 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, revenues and expenses. Actual results could differ from those estimates. The Corporation bases its estimates on historical experience and various other assumptions that are believed to be reasonable in the circumstances. The more significant judgements, estimates and assumptions that have an effect on the amounts recognized in the consolidated financial statements are discussed in the following notes: Note 4 – provision for doubtful accounts Note 5 – provision for inventory obsolescence Notes 6, 7 and 9 – asset impairment as published by the International Accounting Standards Board (“IASB”). Note 8 – operating and finance leases These are the Corporation’s first consolidated financial statements prepared in accordance with IFRS and IFRS 1 First-time Adoption of Note 9 – impairment of goodwill International Financial Reporting Standards has been applied. Note 10 – warranty provision An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Corporation is provided in Note 29. This note includes reconciliations of equity and total comprehensive income for comparative periods reported under previous Canadian generally accepted accounting principles (“Canadian GAAP”) to those reported under IFRS for the current periods. The Corporation’s date of transition to IFRS was Note 11 – measurement of defined benefit obligations 3. Significant Accounting Policies Principles of consolidation These consolidated financial statements include the accounts of Wajax Corporation and its subsidiary entities, which are all wholly-owned. Intercompany balances and transactions are eliminated on consolidation. January 1, 2010. Revenue recognition The consolidated financial statements were authorized for issue by the Board of Directors on March 6, 2012. Basis of measurement The consolidated financial statements have been prepared under the historical cost basis except for derivative financial instruments and liabilities for cash-settled share-based payment arrangements that have been measured at fair value. The defined benefit liability is recognized Revenue is measured at the fair value of consideration received or receivable and is recognized as it is earned in accordance with the following: • Revenue from the sale of equipment, parts and internally- manufactured or assembled products is recorded at the time goods are shipped to customers or when all contracted-upon conditions have been fulfilled. Wajax Corporation Annual Report 2011 • 31 Notes to the Consolidated Financial Statements • Revenue from the rental of equipment is recognized on a straight-line income with any ineffectiveness charged to earnings. If the cash flow basis over the term of the lease. • Revenue from the provision of engineering and technical services to customers is recognized upon performance of contracted–upon services with the customer. • Revenue for separately priced extended warranty or product maintenance contracts is recognized over the contract period in proportion to the costs expected to be incurred in performing the services under the contract. If insufficient historical evidence exists to support this pattern, then revenue is recognized on a straight-line basis over the term of the contract. • Revenue from arrangements with separately identifiable components is recognized separately for each component based on the relative fair values. Provision is made for expected returns, collection losses and warranty costs based on past performance, and for estimated costs to fulfill contractual obligations and other sales-related contingencies depending on the terms of each individual contract. Derivative financial instruments The Corporation uses derivative financial instruments in the management of its foreign currency and interest rate exposures. The Corporation’s policy is not to utilize derivative financial instruments for trading or speculative purposes. Where the Corporation intends to apply hedge accounting it formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy hedge of a firm commitment or forecast transaction results in the recognition of a non-financial asset or liability, then, at the time the asset or liability is recognized, the associated gains or losses on the derivative that had previously been recognized in other comprehensive income are included in the initial measurement of the asset or liability. Foreign currency transactions and balances The functional and presentation currency of the Corporation is the Canadian dollar. Foreign currency transactions are translated into Canadian dollars at exchange rates prevailing at the time the transactions occur. Monetary assets and liabilities denominated in foreign currencies, such as cash, trade and other receivables and trade payables, are translated into Canadian dollars at the rate of exchange in effect at the statement of financial position date. Exchange gains and losses are included in earnings. Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined using the weighted average method except where the items are not ordinarily interchangeable, in which case the specific identification method is used. Cost of equipment and parts includes purchase cost, conversion cost if applicable and cost incurred in bringing inventory to its present location and condition. Cost of work-in-progress and cost of conversion includes cost of direct labour, direct materials and a portion of direct and indirect overheads, allocated based on normal capacity. for undertaking various hedge transactions. This process includes Cost of inventories includes the associated gains or losses transferred linking all derivatives to specific assets and liabilities on the statement from other comprehensive income relating to forward contracts hedging of financial position or to specific firm commitments or forecasted the purchase of inventory. transactions. The Corporation also assesses, at the hedge’s inception as well as at the end of each quarter on a retrospective and prospective basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of hedged items. Hedge accounting has been applied when the hedge is effective. The Corporation purchases foreign exchange forward contracts to fix the cost of certain inbound inventory and the related accounts payable and to hedge certain anticipated foreign currency denominated sales to customers and the related accounts receivable. All derivative instruments are recorded in the consolidated statements of financial position at fair value unless exempted from derivative treatment as a normal purchase and sale. All changes in their fair value are recorded in earnings unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to sell. Rental equipment Rental equipment assets are recorded at cost less accumulated depreciation. Cost includes all expenditures directly attributable to the acquisition of the asset. Assets are depreciated over their estimated useful lives using the declining balance method at a rate of 20% per year for material handling equipment and a units of production method for power generation equipment. Property, plant and equipment Property, plant and equipment are recorded at cost less accumulated depreciation. Cost includes all expenditures directly attributable to the acquisition of the asset. Assets are depreciated over their estimated useful lives based on the following methods and annual rates: 32 • Wajax Corporation Annual Report 2011 Notes to the Consolidated Financial Statements Method Rate The interest component of the lease is charged to earnings over the Asset Buildings declining balance 4% – 5% Equipment and vehicles declining balance 20% – 30% Information systems straight-line 3 – 7 years Furniture and fixtures declining balance 20% Leasehold improvements straight-line over the remaining terms of the leases Depreciation methods and useful lives are reviewed at each reporting date and adjusted if appropriate. Leased assets are depreciated over the period of the lease using the effective interest method. All other leases are classified as operating leases. The cost of operating leases is charged to earnings on a straight-line basis over the periods of the leases. The classification of leases involves the use of judgement with respect to assessing whether substantially all the risks and rewards incidental to ownership have been transferred. A different judgement with respect to the classification of leases may have a significant effect on the amounts recognized in the financial statements. shorter of the lease term and their useful life. Intangible assets Property, plant and equipment and rental equipment are reviewed at the end of each reporting period to determine if any indicators of impairment exist. For any indicators of impairment identified, Goodwill represents the excess of the purchase price of a business acquisition over the fair value of the net identifiable assets acquired at the date of acquisition. an estimate is made of the recoverable amount of the asset. An Product distribution rights represent the fair value attributed to these impairment loss is recognized when the carrying amount of an asset rights pursuant to an acquisition and are classified as indefinite life held for use exceeds the recoverable amount. The recoverable amount intangibles assets because the Corporation is generally able to renew is the higher of value in use or fair value less costs to sell, if the fair these rights with minimal cost of renewal. value can be readily determined. The value in use is the present value of future cash flows using a pre-tax discount rate that reflects the time value of money and the risk specific to the asset. Where the asset does not generate cash flows that are independent of other assets, impairment is considered for the cash-generating unit (“CGU”) to which the asset belongs. The impairment loss is measured as the amount by which the asset’s carrying amount exceeds its recoverable amount. Goodwill and indefinite life intangibles are not amortized but are tested at least annually for impairment, or more frequently if certain indicators arise that indicate the assets might be impaired. Goodwill and indefinite life intangibles are allocated to CGUs that are expected to benefit from the synergies of the acquisition. To test for impairment, the Corporation compares each CGU’s carrying value to its recoverable amount. Recoverable amount is the higher of value in use or fair value less costs An impairment loss recognized in a prior year for an asset or a CGU, to sell, if the fair value can be readily determined. The value in use is other than goodwill, is reversed if there has been a change in the the present value of future cash flows using a pre-tax discount rate that estimates used to determine the asset’s recoverable amount since the reflects the time value of money and the risk specific to the assets. Any last impairment loss was recognized. An impairment loss is reversed goodwill or indefinite life intangibles impairment would be recorded as only to the extent that the asset’s carrying amount does not exceed the a charge against earnings. carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized. A reversal of an impairment loss is recognized immediately in earnings. Leases As lessor: Customer lists and non-competition agreements are amortized on a straight-line basis over their useful lives which range from 2 to 7 years. Computer application software is classified as an intangible asset and is amortized on a straight-line basis over the useful life ranging from 1 to 7 years. They are reviewed at the end of each reporting period The Corporation’s equipment rentals and leases are classified as to determine if any indicators of impairment exist. For any indicators operating leases with amounts received included in revenue on a of impairment identified, an estimate is made of the recoverable straight-line basis over the term of the lease. As lessee: Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the amount of the asset. Impairment of an intangible asset is recognized in an amount equal to the difference between the carrying value and the recoverable amount of the related intangible asset and would be recorded as a charge against earnings. Corporation. Under finance leases the asset is recorded at the lower of An impairment loss recognized in a prior year for an intangible asset, its fair value and the present value of the minimum lease payments at other than goodwill, is reversed if there has been a change in the the inception of the lease. The liability is included in the statement of estimates used to determine the asset’s recoverable amount since the financial position and is classified as current and non-current liabilities. last impairment loss was recognized. An impairment loss is reversed Wajax Corporation Annual Report 2011 • 33 Notes to the Consolidated Financial Statements only to the extent that the asset’s revised carrying amount does not Share-based compensation plans exceed the carrying amount that would have been determined, net of The fair values of share-settled compensation plans are based on the amortization, if no impairment loss had been recognized. A reversal of trading price of a Wajax Corporation common share on the Toronto an impairment loss is recognized immediately in earnings. Stock Exchange (“TSX”). Compensation expense is based upon the fair Cash Cash includes cash on hand, demand deposits and bank indebtedness. The Corporation considers bank indebtedness to be an integral part value of the rights at the date of grant and is charged to selling and administrative expenses on a straight-line basis over the vesting period, with an offsetting adjustment to contributed surplus. of the Corporation’s cash management. Cash and bank indebtedness The fair values of cash-settled compensation plans are based on are offset and the net amount presented in the statement of financial the trading price of a Wajax Corporation common share on the TSX. position to the extent that there is a right to set off and a practice of net Compensation expense varies with the price of the Corporation’s shares settlement. Financing costs and is recognized over the vesting period. Employee benefits Transaction costs directly attributable to the acquisition or amendment The Corporation has defined contribution pension plans for most of its of bank debt are deferred and amortized to finance costs over the term employees. The cost of the defined contribution plans is recognized in of the debt using an effective interest method. Deferred financing costs earnings based on the contributions required to be made each year. are included in the carrying amount of the related debt. Provisions The Corporation also has defined benefit plans covering some of its employees. The benefits are based on years of service and the Provisions are recognized when there is a present legal or constructive employees’ earnings. Defined benefit plan obligations are accrued obligation arising from past events, the settlement of which is expected as the employees render the services necessary to earn the pension to result in an outflow of economic benefits, and where the obligation benefits. The Corporation has adopted the following policies: can be reliably measured. The obligation is measured at the amount that would rationally be paid to settle or transfer it to a third party at the statement of financial position date. The amount has been determined using an expected cash flow approach that reflects a range of possible outcomes that are probability weighted. The Corporation provides for customer warranty claims that may not be covered by the manufacturers’ standard warranty. Warranties relate to products sold and generally cover a period of 6 months to 5 years. The reserve is determined by applying a claim rate to the value of each machine sold. The rate is developed using management’s best • The cost of pension benefits earned by employees is actuarially determined using the projected unit credit method for defined benefit plans and management’s best estimate of expected plan investment performance, salary escalation, and retirement ages of employees. • For purposes of calculating expected return on plan assets, those assets are valued at fair value. • Prior service costs are amortized on a straight-line basis over the expected average period until the amended benefits become vested. estimate of actual warranty expense, generally based on recent claims experience, and is adjusted as required. The provision is not discounted • When the restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is to reflect the time value of money because the impact is not material. accounted for prior to the settlement. The Corporation has guaranteed the resale value of certain equipment sold • The charge to earnings for the defined benefit plans is split between and guaranteed a portion of certain customers’ lease payments. These an operating cost and a finance charge. The finance charge contracts are subject to certain conditions being met by the customers. represents the interest cost on the accrued benefit obligation net of Financial instruments the expected return on plan assets. The Corporation measures loans and receivables and other financial • Actuarial gains and losses are recognized in full in the statement of liabilities at amortized cost. Derivative instruments are measured at fair comprehensive income in the year in which they occur. value. All changes in their fair value are recorded in earnings unless cash flow hedge accounting is used, in which case changes in fair value Income taxes are recorded in other comprehensive income with any ineffectiveness charged to earnings. Cash was designated as loans and receivables upon initial recognition. Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in earnings except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. 34 • Wajax Corporation Annual Report 2011 Notes to the Consolidated Financial Statements Current tax is the expected tax payable or receivable on the taxable future from those that would never be reclassified to profit or loss. As income or loss for the year, using tax rates enacted or substantively the amendments only require changes in the presentation of items enacted at the reporting date, and any adjustment to tax payable in in other comprehensive income, the Corporation does not expect the respect of previous years. amendments to IAS 1 to have a material impact on its consolidated Deferred tax is recognized in respect of temporary differences between financial statements. the carrying amounts of assets and liabilities for financial reporting As of January 1, 2013, the Corporation will be required to adopt IAS purposes and the amounts used for taxation purposes. Deferred tax is 19 Employee Benefits, which requires recognition of actuarial gains and measured at the tax rates that are expected to be applied to temporary losses immediately in other comprehensive income, the full recognition differences when they reverse, based on the laws that have been of past service costs immediately in profit or loss, recognition of the enacted or substantively enacted by the reporting date. expected return on plan assets in profit or loss to be calculated based A deferred tax asset is recognized for unused tax losses and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. on the rate used to discount the defined benefit obligation, and certain additional disclosures. The Corporation is currently assessing the impact of this standard on its consolidated financial statements. Deferred tax assets are reviewed at each reporting date and are reduced 4. Trade and Other Receivables to the extent that it is no longer probable that the related tax benefit will be realized. New standards and interpretations not yet adopted The new standards or amendments to existing standards set out below are not yet effective for the year ended December 31, 2011 and have Trade accounts receivable Less: allowance December 31 December 31 2011 2010 January 1 2010 $ 157,273 $ 125,108 $ 104,894 not been applied in preparing these consolidated financial statements. for credit losses (3,514) (3,902) (2,117) As of January 1, 2015, the Corporation will be required to adopt IFRS 9 Financial Instruments, which is the result of the first phase of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The Corporation is currently assessing the impact of this standard on its consolidated financial statements. Net trade accounts receivable Other receivables Total trade and 153,759 20,474 121,206 14,311 102,777 20,760 other receivables $ 174,233 $ 135,517 $ 123,537 The Corporation is exposed to credit risk with respect to its trade and other receivables. Provisions are made against trade and other receivables that in the estimation of management may be impaired. As of January 1, 2013, the Corporation will be required to adopt IFRS Credit losses to date have been within management’s expectations, 10 Consolidated Financial Statements, which establishes principles for however actual results could differ from management’s estimate. the preparation and presentation of consolidated financial statements when an entity controls one or more other entities. The Corporation does not expect IFRS 10 to have a material impact on its consolidated financial statements. As of January 1, 2013, the Corporation will be required to adopt IFRS 13 Fair Value Measurement, which defines fair value and sets out a framework for measuring fair value when fair value measurements are required or permitted by other standards. The Corporation is currently assessing the impact of this standard on its consolidated financial statements. The Corporation’s exposure to credit and currency risks related to trade and other receivables is disclosed in note 15. 5. Inventories December 31 December 31 2010 2011 January 1 2010 Equipment Parts Work-in-process $ 106,055 $ 115,716 19,753 88,749 $ 74,623 88,150 89,996 15,136 17,715 Total inventories $ 241,524 $ 196,460 $ 177,909 As of January 1, 2013, the Corporation will be required to adopt amendments to IAS 1 Presentation of Financial Statements, which require that an entity present separately the items of other All amounts shown are net of obsolescence reserves of $11,495 (2010 – $11,145). During the year ended December 31, 2011, $3,209 (2010 – $3,959) was recorded in cost of sales for the write-down of comprehensive income that may be reclassified to profit or loss in the inventories to estimated net realizable value. Wajax Corporation Annual Report 2011 • 35 Notes to the Consolidated Financial Statements The value of the Corporation’s new and used equipment is evaluated 6. Rental Equipment by management throughout the year. When required, provisions are recorded to ensure that the book value of equipment is valued at the lower of cost or estimated net realizable value. The Corporation identifies slow moving or obsolete parts inventories and estimates appropriate obsolescence provisions related thereto. The Corporation takes advantage of supplier programs that allow for the return of eligible parts for credit within specified time periods. The Corporation recognized $974,424 (2010 – $783,210) of inventories as an expense which is included in cost of sales for the year ended December 31, 2011. Substantially all of the Corporation’s inventories are pledged as security for the bank credit facility (Note 14). Cost Accumulated depreciation Net book value January 1, 2011 Additions Transfers to inventories $ 30,397 $ 20,177 (7,126) 14,603 $ 15,794 15,339 (3,073) 4,838 (4,053) December 31, 2011 January 1, 2010 Additions Transfers to inventories $ $ 43,448 $ 15,388 $ 28,060 31,548 $ 5,775 (6,926) 15,178 $ 16,370 2,207 (2,783) 3,568 (4,143) December 31, 2010 $ 30,397 $ 14,603 $ 15,794 Equipment Land and buildings and vehicles Information systems Furniture and fixtures Leasehold improvements Total 33,686 1,088 35 (85) 34,724 32,611 1,578 (256) (247) 57,374 7,968 1,246 (2,683) 4,260 471 21 (32) 9,143 989 239 (355) 10,067 $ 114,530 10,899 1,878 (3,159) 383 337 (4) 63,905 4,720 10,016 10,783 $ 124,148 56,479 4,456 (3,814) 253 15,334 256 (5,534) (5,796) 9,070 206 (135) 2 10,041 $ 123,535 7,213 (10,424) (5,794) 717 (685) (6) 33,686 57,374 4,260 9,143 10,067 $ 114,530 13,142 780 (52) 39,763 5,158 (2,128) 3,397 384 (20) 7,479 396 (278) 7,481 $ 723 (1) 71,262 7,441 (2,479) 13,870 42,793 3,761 7,597 8,203 $ 76,224 12,495 756 (110) 1 38,184 4,538 (2,957) (2) 12,141 393 (5,533) (3,604) 13,142 39,763 3,397 20,854 20,116 20,54 4 21,112 18,295 17,611 959 3,193 863 7,201 391 (120) 7 7,479 2,419 1,869 1,664 7,540 $ 632 (691) – 77,561 6,710 (9,411) (3,598) 7,481 $ 71,262 2,580 $ 47,924 2,501 $ 45,974 2,586 $ 43,268 7. Property, Plant, and Equipment Cost January 1, 2011 Additions Acquisition of business (Note 27) Disposals December 31, 2011 January 1, 2010 Additions Disposals Transfers December 31, 2010 Accumulated depreciation January 1, 2011 Charge for the year Disposals December 31, 2011 January 1, 2010 Charge for the year Disposals Transfers December 31, 2010 Carrying amount December 31, 2011 January 1, 2010 December 31, 2010 36 • Wajax Corporation Annual Report 2011 $ $ $ $ $ $ $ $ $ $ $ Notes to the Consolidated Financial Statements Included in property, plant and equipment are vehicles held under Operating leases – as lessee finance leases as follows: Cost, beginning of year Additions Disposals Purchased at end of lease Cost, end of year Accumulated depreciation, beginning of year Charge for the year Disposals Purchased at end of lease The Corporation leases certain land and buildings, rental equipment and office equipment. Some of the leases have renewal terms. The rental equipment leases have purchase options with the purchase option date varying between 1 and 13 years. The future minimum non-cancelable payments due under the agreements are as follows: December 31 December 31 2010 2011 $ 22,006 $ 22,433 3,081 (3,508) – 5,400 (2,333) (982) 24,091 22,006 12,542 3,031 (1,848) (716) 12,589 2,645 (2,692) – Less than one year Between one and five years More than five years December 31 December 31 2010 2011 January 1 2010 $ 16,827 $ 16,225 $ 17,834 33,281 21,229 35,150 23,454 40,476 26,769 $ 71,337 $ 74,829 $ 85,079 Accumulated depreciation, end of year 13,009 12,542 Net book value $ 11,082 $ 9,464 All property, plant and equipment except land and buildings and vehicles held under finance leases have been pledged as security for bank debt. 8. Operating and Finance Leases Operating leases – as lessor The Corporation rents equipment to customers under rental agreements with terms of up to 5 years. The rentals have been classified as operating leases. Certain rental agreements are subject to overtime charges when usage exceeds the amount contemplated in the agreements. The rentals may be cancelled subject to a cancellation fee. The future minimum non-cancelable lease payments receivable under the agreements are as follows: Less than one year Between one and five years More than five years December 31 December 31 2010 2011 January 1 2010 $ 6,187 $ 4,727 $ 6,136 8,199 17 12,404 – 9,404 – $ 14,403 $ 17,131 $ 15,540 For the year ended December 31, 2011, the Corporation recognized $110 (2010 – $68) of overtime charges under the rental agreements as contingent rent. The total future minimum sublease payments expected to be received are $132 (2010 – $177). Wajax Corporation Annual Report 2011 • 37 Notes to the Consolidated Financial Statements Finance leases – as lessee The Corporation finances certain vehicles under finance lease arrangements. The leases have a minimum one year term and are extended on a monthly basis thereafter until terminated. On termination the difference between the lessor’s proceeds of disposal and the residual value is charged or refunded to the Corporation as a rental adjustment. The leases have been classified as finance leases. Obligations under finance leases are as follows: December 31, 2011 December 31, 2010 January 1, 2010 Present value of minimum lease payments Payment Interest Payment Interest Present value of minimum lease payments Payment Interest Present value of minimum lease payments Less than one year $ 4,061 Between one and five years 7,586 More than five years – 415 898 – 3,646 $ 3,967 6,688 6,006 – – 290 779 – 3,677 $ 4,027 5,227 6,597 – – 177 457 – 3,850 6,140 – Total minimum lease payments Current Non-current Total minimum 11,647 1,313 10,334 9,973 1,069 8,904 10,624 634 9,990 4,061 7,586 415 898 3,646 6,688 3,967 6,006 290 779 3,677 5,227 4,027 6,597 177 457 3,850 6,140 lease payments $ 11,647 1,313 10,334 $ 9,973 1,069 8,904 $ 10,624 634 9,990 9. Intangible Assets Cost January 1, 2011 Acquisition of business (Note 27) Additions December 31, 2011 January 1, 2010 Additions Disposals December 31, 2010 Accumulated amortization January 1, 2011 Amortization for the year December 31, 2011 January 1, 2010 Amortization for the year Disposals December 31, 2010 Carrying amount December 31, 2011 January 1, 2010 December 31, 2010 38 • Wajax Corporation Annual Report 2011 $ $ $ Goodwill 66,335 4,309 – 70,644 66,335 – – $ 66,335 – – – – – – – $ $ $ $ $ $ $ Product Customer lists/ distribution non-competition agreements rights Software Total 4,900 3,900 – 8,800 4,900 – – 4,900 – – – – – – – 4,302 1,000 – 5,302 4,302 – – 4,302 2,565 530 3,095 2,032 533 – 2,565 2,207 2,270 1,737 7,053 $ 42 664 82,590 9,251 664 7,759 $ 92,505 7,093 $ 3,220 (3,260) 82,630 3,220 (3,260) 7,053 $ 82,590 4,231 $ 686 6,796 1,216 4,917 $ 8,012 7,059 $ 433 (3,261) 9,091 966 (3,261) 4,231 $ 6,796 2,842 $ 84,493 34 $ 73,539 2,822 $ 75,794 70,644 66,335 66,335 8,800 4,900 4,900 Notes to the Consolidated Financial Statements Amortization of intangible assets is charged to selling and administrative expenses. Product distribution rights have an indefinite life as the Corporation intends to renew these agreements indefinitely and has historically been able to do so in most cases without incurring significant costs. Goodwill and indefinite life intangible assets have been allocated to the Corporation’s cash-generating units that are expected to benefit from the synergies of the acquisition that gave rise to the goodwill or indefinite life intangible assets as follows: Cash-generating units Equipment Industrial Components Power Systems East Power Systems Central Power Systems West 2011 2011 2010 2010 Product distribution Goodwill rights Goodwill $ 21,341 41,050 1,409 4,309 2,535 – $ 3,300 – 3,900 1,600 21,341 41,050 1,409 – 2,535 $ 70,644 8,800 $ 66,335 Product distribution rights – 3,300 – – 1,600 4,900 The Corporation tests goodwill and other indefinite life intangibles 10. Provisions annually for impairment, or more frequently if certain indicators arise that Warranties Other Total indicate they are impaired. The Corporation tests finite life intangibles and other long lived assets when events or changes in circumstances indicate that the carrying value may not be recoverable. The recoverable Provisions January 1, 2011 Charge for the year $ 9,230 $ 6,931 461 $ 118 9,691 7,049 amount in most cases is estimated based on the value in use determined Utilized in the year (6,529) (497) (7,026) as the present value of future cash flows using a pre-tax discount rate that reflects the time value of money and the risk specific to the asset. The estimation process is complex and different assumptions may result in material differences. In particular, if different estimates of the projected future cash flows or different selection of an appropriate discount rate were made, these changes could materially alter the present value of the cash flows and as a consequence materially different amounts could be reported in the financial statements. In 2011, the Corporation performed impairment tests, based on value in use, of its goodwill and intangible assets with an indefinite life. The Corporation concluded that no impairment existed in either the goodwill associated with any of the Corporation’s cash-generating units or the intangible assets with an indefinite life. Provisions December 31, 2011 Current Non-current Total Provisions January 1, 2010 Charge for the year Utilized in the year Provisions December 31, 2010 Current Non-current $ 9,632 $ 82 $ 9,714 5,622 4,010 82 – 5,704 4,010 $ 9,632 $ 82 $ 9,714 $ 8,199 $ 5,418 178 $ 461 8,377 5,879 (4,387) (178) (4,565) $ 9,230 $ 461 $ 9,691 4,892 4,338 461 – 5,353 4,338 The value in use has been estimated using the budget prepared by Total $ 9,230 $ 461 $ 9,691 management for the next three years. The key assumptions for the estimate are those regarding revenue growth, gross margin 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. To prepare the value in use calculations the budget is extrapolated beyond the three year period at the estimated long term inflation rate (2%) and discounted back to present value. The discount rate is based on the Corporation’s pretax weighted average cost of capital of approximately 12% to reflect a market participant’s view of the cash-generating unit. As at December 31, 2011, the Corporation had guaranteed $5,325 of contracts (2010 – $5,789), with commitments arising between 2012 and 2014. The commitments made by the Corporation in these contracts reflect the estimated future value of the equipment, based on the judgment and experience of management. The Corporation has recorded an $82 provision in 2011 (2010 – $461) as an estimate of the financial exposure likely to result from such commitments. Wajax Corporation Annual Report 2011 • 39 Notes to the Consolidated Financial Statements Litigation The following significant actuarial assumptions were employed to In the ordinary course of business, the Corporation is contingently determine the periodic pension income and the accrued benefit liable for litigation in varying amounts. These liabilities could arise from obligations: litigation, environmental matters or other sources. It is not possible to determine the amounts that may ultimately be assessed against the Corporation, but management believes that any such amounts would not have a material impact on the business or financial position of the Corporation as they generally are fully covered by insurance. Provisions have been made in these consolidated financial statements when the liability is expected to result in an outflow of economic benefits, and where the obligation can be reliably measured. 11. Employee Benefits The Corporation sponsors three pension plans: the Wajax Limited Pension Plan (the “Employees’ Plan”) which, except for a small group of employees collecting long-term disability benefits and a small group of inactive members, has been converted to a defined contribution plan (“DC”) and two defined benefit plans (“DB”): the Pension Plan for Executive Employees of Wajax Limited (the “Executive Plan”) and the Wajax Limited Supplementary Executive Retirement Plan (the “SERP”). The Corporation also contributes to several union sponsored multi-employer plans for a small number of employees. Two of these are target benefit plans but they are all accounted for as DC plans as the Corporation has no involvement in the management of these plans and does not have sufficient information to account for the plans as DB plans. During 2011 the Wajax Pension Plan for Salaried Midwest Employees (the “Midwest Plan”) and the Wajax Pension Plan for Hourly Midwest Employees were merged with the Employees’ Plan. The Corporation uses actuarial reports prepared by independent actuaries for funding and accounting purposes and measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each year. These actuarial assumptions include discount rates, expected long-term rate of return on plan assets, compensation increases and service life. While management believes that the actuarial assumptions are appropriate, December 31 December 31 2010 2011 January 1 2010 Expected long-term rate of return on plan assets Discount rate – at beginning of year 6.0% 7.0% 7.0% (to determine plan expenses) 5.0% 5.5%–5.75% 6.0%–6.5% Discount rate – at end of year (to determine accrued benefit obligation) 4.0% Rate of compensation increase 3.0% 5.0% 5.5%–5.75% 3.0% 3.0% The expected long-term rate of return on plan assets has been derived as the weighted average of the expected returns from each of the main asset classes. The expected return for each asset class is determined by reference to long-term government bond rates plus a risk premium. The risk premiums are long-term assumptions and were set after taking actuarial advice. Plan assets for the DC plans are invested according to the directions of the plan members. Plan assets for defined benefit plans are invested in the following major categories of plan assets as a percentage of total plan assets: Cash Fixed Income Canadian Equities Foreign Equities December 31 December 31 2010 2011 January 1 2010 6.2% 32.3% 29.3% 32.2% 2.5% 36.1% 30.2% 31.2% 4.4% 35.1% 28.2% 32.3% 100.0% 100.0% 100.0% any significant changes to those used would affect the statement of The history of experience adjustments on the defined benefit plans for financial position and statement of earnings. the current and prior year: Actuarial valuations of the pension plans for funding purposes were as follows: Experience gain 2011 2010 Plan Previous valuation Next valuation Employees’ Plan Executive Plan SERP January 1, 2011 January 1, 2009 January 1, 2009 January 1, 2014 January 1, 2012 January 1, 2012 on accrued benefit obligation $ 47 $ 109 Experience (loss) gain on plan assets $ (1,566) $ 89 40 • Wajax Corporation Annual Report 2011 Notes to the Consolidated Financial Statements Total cash payments Plan assets 2011 2010 Total cash payments for employee future benefits for 2011, consisting of cash contributed by the Corporation to its funded pension plans, cash payments directly to beneficiaries for its unfunded pension plans, and cash contributed to its DC plans was $7,561 (2010 – $7,234). The Corporation expects to contribute $487 to the defined benefit pension plans in the year ended December 31, 2012. The plan expenses recognized in earnings are as follows: Fair value of plan assets, beginning of year Actual gain (loss) on plan assets Participant contributions Employer contributions Benefits paid Administration expenses $ 12,557 $ 10,972 892 43 1,561 (831) (80) (683) 43 954 (1,522) (80) Fair value of plan assets, end of year $ 11,269 $ 12,557 2011 2010 Funded status December 31 2011 December 31 2010 January 1 2010 Defined contribution plans Current service cost Defined benefit plans $ 6,678 $ 5,683 Current service cost Administration expenses Finance cost on accrued benefit obligation 346 80 850 290 80 881 Expected return on plan assets (883) (803) Fair value of plan assets, end of year Present value of benefit obligation, end of year $ 11,269 $ 12,557 $ 10,972 (18,599) (17,019) (15,702) Plan deficit $ (7,330) $ (4,462) $ (4,730) Total plan expense recognized in the statement of earnings $ 7,071 $ 6,131 of financial position as follows: The accrued benefit liability is included in the Corporation’s statement Of the amounts recognized in earnings, $2,958 (2010 – $2,528) is included in cost of sales and $4,113 (2010 – $3,603) is included in selling and administrative expenses. The amounts recognized in other comprehensive income are as follows: December 31 2011 December 31 2010 January 1 2010 Employee benefits asset $ Trade and other payables Employee benefits liability – $ (487) (6,843) 240 $ (570) (4,132) – (1,031) (3,699) Plan deficit $ (7,330) $ (4,462) $ (4,730) Net actuarial losses Deferred tax Amount recognized 2011 2010 $ 3,429 $ (885) 845 (217) Present value of benefit obligation includes a benefit obligation of $4,279 (2010 – $3,815) related to the SERP that is not funded. This obligation is secured by a letter of credit of $4,550 (2010 – $4,320). in other comprehensive income $ 2,544 $ 628 12. Trade and Other Payables Cumulative actuarial losses $ 3,172 $ 628 Information about the Corporation’s defined benefit pension plans, in aggregate, is as follows: Present value of benefit obligation 2011 2010 Present value of benefit obligation, beginning of year Current service cost Participant contributions Interest cost Actuarial loss Benefits paid Present value of benefit obligation, $ 17,019 $ 15,702 290 43 881 934 (831) 346 43 850 1,863 (1,522) end of year $ 18,599 $ 17,019 Trade payables Other payables Deferred income Total trade and other payables December 31 2011 December 31 2010 January 1 2010 $ 139,828 $ 124,852 $ 12,362 10,918 7,103 2,877 77,444 6,279 – $ 163,108 $ 134,832 $ 83,723 13. Equipment Notes Payable The Corporation has a $15,000 demand wholesale financing facility. The notes payable bear floating rates of interest at margins over Canadian dollar bankers’ acceptance yields, are secured by the applicable equipment and are due in full when the applicable equipment is sold. As the facility was not used during the year, interest on the equipment notes payable amounted to nil. Wajax Corporation Annual Report 2011 • 41 Notes to the Consolidated Financial Statements 14. Bank Debt 15. Financial Instruments On August 12, 2011, the Corporation amended and extended the The Corporation categorizes its financial assets and financial liabilities term of its $175,000 bank credit facility to August 12, 2016 from as follows: December 31, 2011. The $175,000 fully secured bank credit facility consists of a $30,000 non-revolving term portion and a $145,000 revolving term portion. Borrowing capacity under the bank credit facility is dependent upon the level of the Corporation’s inventories on hand and the outstanding trade accounts receivable. At December 31, 2011 borrowing capacity under the bank credit facility was equal to $175,000. In addition, the bank credit facility contains restrictive covenants including limitations on the payment of cash dividends and the maintenance of certain financial ratios, all of which were met as at December 31, 2011. The Corporation will be restricted from the declaration of monthly cash dividends in the event the Corporation’s ratio of debt to earnings before interest, taxes, depreciation and amortization and share-based compensation expense (the “Leverage Ratio”) exceeds three times. Borrowings under the facility bear floating rates of interest at applicable margins over Canadian dollar bankers’ acceptance yields, U.S. dollar LIBOR rates or prime rates. December 31 December 31 2010 2011 January 1 2010 Loans and receivables: Cash Trade and other receivables 174,233 $ 5,659 $ 42,954 $ 135,517 9,207 123,537 Other financial liabilities: Trade and other payables $ (163,108) $ (134,832) $ Accrued liabilities Dividends payable Other liabilities Bank debt (84,050) (3,326) (5,644) (59,021) (63,762) (12,472) (5,221) (79,680) (83,723) (66,089) (2,491) (841) (79,461) Derivative instruments – cash flow hedges: Foreign exchange December 31 December 31 2010 2011 January 1 2010 forward contracts $ Interest rate swaps (208) $ – (1,332) $ (1,120) (267) (2,376) Bank credit facility, repayable August 12, 2016 Non-revolving term portion $ 30,000 $ Revolving term portion 30,000 30,000 $ 50,000 30,000 50,000 60,000 80,000 80,000 Deferred financing costs, net of accumulated amortization of $82 (2010 – $1,055 and January 1, 2010 – $743) (979) (320) (539) Total bank debt $ 59,021 $ 79,680 $ 79,461 The Corporation had $5,952 (2010 – $5,115) letters of credit outstanding at the end of the year. $ (208) $ (2,452) $ (2,643) The Corporation measures loans and receivables and other financial liabilities at amortized cost. Derivatives designated as effective hedges are measured at fair value with subsequent changes in fair value being charged to other comprehensive income. Cash was designated as loans and receivables upon initial recognition. The fair value of derivative instruments is estimated based upon market conditions using appropriate valuation models. The carrying values reported in the statement of financial position for financial instruments are not significantly different from their fair values. The fair value of trade and other receivables and other financial liabilities approximates their recorded values due to the short-term maturities of these instruments. The classification of fair value measurements is based upon a fair value hierarchy that reflects the significance of the inputs used in making the Finance costs on bank debt amounted to $4,232 (2010 – $4,094). measurements. The level within which the fair value measurement is categorized is based upon the lowest level of input that is significant to the measurement. Level inputs are as follows: Level 1 – quoted prices in active markets for identical financial instruments Level 2 – significant observable inputs other than quoted prices included in Level 1 Level 3 – significant unobservable inputs 42 • Wajax Corporation Annual Report 2011 Notes to the Consolidated Financial Statements As of December 31, 2011, the inputs used to value the Corporation’s The carrying amounts of accounts receivable represent the maximum derivative financial instruments were Level 2 and Level 1 for cash of credit exposure. the fair value hierarchy. The Corporation did not apply any Level 3 measurements. The Corporation did not move any instruments between levels of the fair value hierarchy during the years ended December 31, 2011 and 2010. The following methods and assumptions were used to determine the fair value of each class of assets and liabilities recorded at fair value on the consolidated statement of financial position. Cash (Level 1) The Corporation maintains provisions for possible credit losses by performing an analysis of specific accounts. Any such losses to date have been within management’s expectations. Movement of the allowance for credit losses is as follows: December 31 December 31 2010 2011 January 1 2010 Opening balance Additions $ 3,902 $ 592 2,117 $ 2,635 2,061 1,664 The fair value of cash is determined using quoted market prices in Utilization (980) (850) (1,608) active markets for foreign denominated cash. Derivative instruments (Level 2) Closing balance $ 3,514 $ 3,902 $ 2,117 The fair value of foreign currency forward contracts and interest rate Liquidity risk swaps is determined by discounting contracted future cash flows using Liquidity risk is the risk that the Corporation will encounter difficulty a discount rate derived from swap curves for comparable assets and in meeting obligations associated with its financial liabilities. The liabilities adjusted for changes in credit risk of the counterparties. contractual maturity of bank debt is August 12, 2016. At December Contractual cash flows are calculated using a forward price at maturity 31, 2011 the Corporation had borrowed $60,000 (2010 and January date derived from observed forward prices. Credit risk The Corporation is exposed to non-performance by counterparties to interest rate swaps and short-term currency forward contracts. These counterparties are large financial institutions with “Stable” outlook and high short-term and long-term credit ratings. To date, no 1, 2010 – $80,000) and issued $5,952 (2010 – $5,115 and January 1, 2010 – $4,712) of letters of credit for a total utilization of $65,952 (2010 – $85,115 and January 1, 2010 – $84,712) of its $175,000 (2010 and January 1, 2010 – $175,000) bank credit facility and had not utilized any (2010 and January 1, 2010 – nil) of its $15,000 (2010 and January 1, 2010 – $15,000) equipment financing facility. such counterparty has failed to meet its financial obligations to the The Corporation’s $175,000 bank credit facility along with $15,000 of Corporation. Management does not believe there is a significant risk of capacity permitted in addition to the credit facility should be sufficient non-performance by these counterparties and will continue to monitor to meet the Corporation’s short-term normal course working capital, the credit risk of these counterparties. maintenance capital and growth capital requirements. The Corporation is also exposed to credit risk with respect to its In the long-term the Corporation may be required to access the equity trade and other receivables. This risk is somewhat minimized by the or debt markets in order to fund significant acquisitions and growth Corporation’s large customer base which covers many business sectors related working capital and capital expenditures. across Canada. The Corporation follows a program of credit evaluations of customers and limits the amount of credit extended when deemed necessary. The Corporation’s trade and other receivables consist of trade accounts receivable from customers and other accounts receivable generally from suppliers for warranty and rebates. The aging of the trade accounts receivable is as follows: Financial risk management policy The Corporation has in place a financial risk management policy that addresses the Corporation’s financial exposure to currency risk and interest rate risk. The Corporation’s tolerance to interest rate risk decreases as the percentage of debt to tangible net worth increases. To manage this risk prudently, guideline percentages of floating interest December 31 December 31 2010 2011 January 1 2010 rate debt decrease as the percentage of debt to tangible net worth increases. The policy also defines acceptable levels of exposure to Current $ Less than 60 days overdue More than 60 days overdue 93,268 $ 58,408 5,597 76,183 $ 42,164 6,761 56,618 43,436 4,840 transactional currency risk. The exposure to currency and interest rate risk is managed through the use of various derivative instruments. Derivative instruments are used only to hedge risks as determined Total trade accounts receivable $ 157,273 $ 125,108 $ 104,894 within these policy guidelines. Wajax Corporation Annual Report 2011 • 43 Notes to the Consolidated Financial Statements Currency risk The Corporation enters into short-term currency forward contracts to fix the cost of certain inbound inventory and to hedge certain foreign currency- denominated sales to customers along with the associated receivables as part of its normal course of business. The impact of a change in foreign currency relative to the Canadian dollar on the Corporation’s financial statements of unhedged foreign currency-denominated sales to customers along with the associated receivables and purchases from vendors along with the associated payables would be insignificant. The Corporation’s commitments to buy and sell foreign currencies are summarized as follows: December 31, 2011 Purchase contracts Purchase contracts Sales contracts December 31, 2010 Notional amount Fair value Average exchange rate Maturity USD EUR USD $ $ 35,952 220 979 $ $ (201) (16) 9 1.0249 1.3993 1.0262 January to December 2012 January to June 2012 January to February 2012 Notional amount Fair value Average exchange rate Maturity Purchase contracts USD $ 34,147 $ (1,338) 1.0373 Sales contracts USD 278 6 1.0190 January 2011 to December 2012 April to May 2011 The Corporation maintains a hedging policy whereby significant transactional currency risks are usually identified and hedged. Interest rate risk 17. Share Capital The Corporation’s borrowing costs are impacted by changes in The Corporation is authorized to issue an unlimited number of shares, interest rates. In order to manage this risk to an acceptable level, the with each share entitling the holder of record to one vote at all meetings Corporation may use derivative instruments such as interest rate swap of shareholders. The shares have no par value and all issued shares agreements. As at December 31, 2011 the Corporation had not entered are fully paid. Each share represents an equal beneficial interest in any into any interest rate swaps with its lenders (2010 – interest rate distributions of the Corporation and in the net assets of the Corporation swaps to fix interest payments on $80,000 of debt having a fair value in the event of its termination or winding-up. of ($1,120) and January 1, 2010 – interest rate swaps to fix interest payments on $80,000 of debt having a fair value of ($2,376)). Sensitivity analysis Balance, January 1, 2011 Converted on January 1, 2011 Number of shares Amount – $ – A 1.00 percentage point change in interest rates, all things being equal, would result in a change to earnings before income taxes of from trust units Shares issued 16,629,444 – 105,371 – approximately $912 for the year. 16. Dividends Declared Balance, December 31, 2011 16,629,444 $ 105,371 Commencing in 2012, the Corporation has established an objective of declaring annual dividends equal to at least 75% of earnings subject to the Corporation’s financial condition, economic outlook and capital requirements for growth including acquisitions. 18. Trust Units In 2010 the Corporation was structured as an unincorporated open- ended limited purpose investment trust called Wajax Income Fund. The issued and fully paid trust units of the Fund were included in shareholders’ equity on the statement of financial position and are During the period between January 1, 2011 and December 31, summarized as follows: 2011 the Corporation declared cash dividends of $2.14 per share, or $35,587 (December 31, 2010, distributions of $3.40 per unit or $56,500). The Corporation has declared dividends of $3,326 ($0.20 per share) for the month of January 2012. Number of units Amount Balance, January 1, 2010 Units issued 16,603,423 $ 105,129 242 26,021 Balance, January 1, 2011 Converted on January 1, 2011 16,629,444 105,371 to share capital 16,629,444 105,371 Balance, December 31, 2011 – $ – 44 • Wajax Corporation Annual Report 2011 Notes to the Consolidated Financial Statements 2011 2010 Under the SOP, DSP and the DDSUP, rights are issued to the participants a) Share rights plans 19. Revenue Equipment Parts Service Rental and other Total revenues 20. Finance Costs Interest on bank debt Interest on finance leases $ 553,489 $ 415,835 527,215 627,690 139,151 164,376 28,687 31,545 $ 1,377,100 $ 1,110,888 2011 $ 4,232 $ 398 2010 4,094 183 Finance costs $ 4,630 $ 4,277 21. Share-Based Compensation Plans The Corporation has five share-based compensation plans: the Wajax Share Ownership Plan (“SOP”), the Deferred Share Program (“DSP”), the Directors’ Deferred Share Unit Plan (“DDSUP”), the Mid-Term Incentive Plan for Senior Executives (“MTIP”) and the Deferred Share Unit Plan (“DSUP”). Share Ownership Plan Outstanding at beginning of year Granted in the year – new grants – dividend equivalents Settled in the year Forfeited in the year Outstanding at end of year which, upon satisfaction of certain time and performance vesting conditions, are settled by issuing Wajax Corporation shares for no cash consideration. Vested rights are settled when the participant is no longer employed by the Corporation or one of its subsidiary entities or no longer sits on its board. The aggregate number of shares issuable to satisfy entitlements under these plans may not exceed 1,050,000 shares. Compensation expense is based upon the fair value of the rights at the date of grant and is charged to earnings on a straight-line basis over the vesting period, with an offsetting adjustment to contributed surplus. Whenever dividends are paid on the Corporation’s shares, participants of these plans are granted a number of additional rights equal to the aggregate dollar value of the dividends that would have been paid to each participant if they had received shares under this plan rather than rights, divided by the value of shares on the date that such dividends are paid (“dividend equivalents”). No compensation cost is recorded for these additional rights. The Corporation recorded compensation cost of $957 for the year ended December 31, 2011 (year ended December 31, 2010 – $635) in respect of these plans. December 31, 2011 December 31, 2010 Number of rights Fair value at time of grant Number of rights Fair value at time of grant 101,999 – 7,789 – – $ 1,024 – – – – $ 126,125 – 11,025 (26,021) (9,130) 1,346 – – (242) (80) 109,788 $ 1,024 101,999 $ 1,024 At December 31, 2011 105,213 SOP rights were vested (December 31, 2010 – 93,593). Deferred Share Program December 31, 2011 December 31, 2010 Outstanding at beginning of year Granted in the year – new grants – dividend equivalents Outstanding at end of year Number of rights 24,164 3,989 2,063 $ 30,216 $ Fair value at time of grant Number of rights Fair value at time of grant 600 150 – 750 $ 21,944 2,220 – 24,164 $ 600 – – 600 All DSP rights have vested at December 31, 2011 (no rights had vested at December 31, 2010). Directors’ Deferred Share Unit Plan December 31, 2011 December 31, 2010 Outstanding at beginning of year Granted in the year – new grants – dividend equivalents Outstanding at end of year DDSUP rights vest immediately upon grant. Number of rights Fair value at time of grant Number of rights Fair value at time of grant 147,797 17,148 11,646 $ 2,509 625 – 117,518 17,562 12,717 $ 2,008 501 – 176,591 $ 3,134 147,797 $ 2,509 Wajax Corporation Annual Report 2011 • 45 Notes to the Consolidated Financial Statements The outstanding aggregate number of shares issuable to satisfy 23. Income Taxes entitlements under these plans is as follows: On January 1, 2011, a plan of arrangement was completed and Wajax 2011 2010 Number of shares Number of units Income Fund was converted to Wajax Corporation. The arrangement resulted in the reorganization of the Fund into a corporate structure which is subject to income tax on all of its taxable income at combined federal and provincial rates. Approved by shareholders 1,050,000 1,050,000 Exercised to date Rights outstanding (46,914) (46,914) (316,595) (273,960) Prior to conversion, the Corporation was a “mutual fund trust” as defined under the Income Tax Act (Canada) and was not taxable on its income to the extent that it was distributed to its unitholders. Pursuant Available for future grants 686,491 729,126 to the terms of the Declaration of Trust, all taxable income earned by b) Mid-Term Incentive Plan for Senior Executives (“MTIP”) The MTIP, which is settled in cash, consists of an annual grant that vests over three years and is based upon time and performance vesting criteria, a portion of which is determined by the price of the Corporation’s shares. Compensation expense varies with the price of the Corporation’s shares and is recognized over the vesting period. The Corporation recorded compensation cost of $4,251 for the year ended December 31, 2011 (year ended December 31, 2010 – $3,163) in respect of the share-based portion of the MTIP. At December 31, 2011 the carrying amount of the share-based portion of the MTIP liability was $8,103 (2010 – $3,852). c) Deferred Share Unit Plan (“DSUP”) The DSUP, which is settled in cash, consists of an annual grant that vests over three years and is based upon time and performance vesting criteria. Compensation expense for DSUP rights varies with the price of the Corporation’s shares and is recognized over the vesting period. Vested rights are settled when the participant is no longer employed by the Corporation or one of its subsidiary entities. The Corporation recorded compensation cost of $169 for the year ended December 31, 2011 (year ended December 31, 2010 – nil) in respect of the share- based portion of the DSUP. At December 31, 2011 the carrying amount of the DSUP liability was $169 (2010 – nil). 22. Employee Costs the Fund was distributed to its unitholders. Accordingly, no provision for income taxes was required on taxable income earned by the Fund that was distributed to its unitholders. For 2010, only the Fund’s corporate subsidiaries were subject to tax on their taxable income. Income tax expense comprises current and deferred tax as follows: Current Deferred – Origination and reversal 2011 2010 $ 442 $ 112 of temporary difference 24,401 117 – Change in tax law and rate (1,164) (2,683) Income tax expense (recovery) $ 23,679 $ (2,454) The calculation of current tax is based on a combined federal and provincial statutory income tax rate of 27.7% (2010 – 29.4%). The tax rate for the current year is 1.7% lower than 2010 due to the effect of the reduced statutory tax rates. 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 25.9% based on the tax rates in years when the temporary differences are expected to reverse. The reconciliation of effective income tax is as follows: Employee costs for the Corporation during the year amounted to: 2011 2010 2011 2010 Combined statutory income tax rate 27.7% 29.4% Wages and salaries, including bonuses $ 193,152 $ 173,845 Other benefits Pension costs – defined contribution plans Pension costs – defined benefit plans Share-based payments expense 28,008 25,303 6,678 393 5,377 5,683 448 3,798 Expected income tax expense at statutory rates Income of the Fund taxed directly to unitholders Non-deductible expenses Deferred tax related to changes $ 233,608 $ 209,077 in tax law and rates Other $ 24,233 $ 15,857 – (15,961) 621 315 (1,164) (2,683) (11) 18 Income tax expense (recovery) $ 23,679 $ (2,454) 46 • Wajax Corporation Annual Report 2011 Notes to the Consolidated Financial Statements Recognized deferred tax assets and liabilities Recognized deferred tax assets and liabilities and the movement in temporary differences during the year are as follows: December 31 Recognized in profit or loss 2010 Recognized in other comprehensive income December 31 2011 Accrued liabilities Provisions Employee benefits Property, plant and equipment Finance leases Intangible assets Deferred financing costs Partnership income not currently taxable Tax loss carryforwards Derivative instruments $ 4,792 2,400 1,065 (1,418) (147) (2,052) (38) – – 675 457 104 (198) (355) (48) (303) 9 (23,236) 333 – Net deferred tax assets (liabilities) $ 5,277 (23,237) – – 885 – – – – – – (619) 266 $ 5,249 2,504 1,752 (1,773) (195) (2,355) (29) (23,236) 333 56 $ (17,694) January 1 2010 Recognized in profit or loss Recognized in other comprehensive income December 31 2010 Accrued liabilities Provisions Employee benefits Property, plant and equipment Finance leases Intangible assets Deferred financing costs Tax loss carryforwards Derivative instruments $ 1,538 2,178 883 (1,308) 38 (1,910) (46) 446 410 Net deferred tax assets $ 2,229 3,254 222 (35) (110) (185) (142) 8 (446) – 2,566 – – 217 – – – – – 265 482 $ 4,792 2,400 1,065 (1,418) (147) (2,052) (38) – 675 $ 5,277 24. Earnings Per Share 25. Capital Management The following table sets forth the computation of basic and diluted Objective earnings per share: Numerator for basic and diluted earnings per share: 2011 2010 – net earnings $ 63,803 $ 56,390 Denominator for basic earnings per share: – weighted average shares 16,629,444 16,613,676 Denominator for diluted earnings per share: – weighted average shares – effect of dilutive share rights Denominator for diluted earnings per share Basic earnings per share Diluted earnings per share 16,629,444 294,555 16,613,676 260,924 16,923,999 16,874,600 $ $ 3.84 $ 3.77 $ 3.39 3.34 No share rights were excluded from the above calculations as none were anti-dilutive. The Corporation defines its capital as the total of its shareholders’ equity and bank debt and obligations under finance leases (“interest bearing debt”). The Corporation’s objective when managing capital is to have a capital structure and capacity to support the Corporation’s operations and strategic objectives set by the Board of Directors. Management of capital The Corporation’s capital structure is managed such that it maintains a relatively low Leverage Ratio as the Corporation distributes a significant portion of its cash flow from operating activities before changes in operating assets and liabilities. The Corporation’s level of interest bearing debt is determined by a combination of the Corporation’s cash flow required to meet its strategic objectives and the value of its tangible assets. Wajax Corporation Annual Report 2011 • 47 Notes to the Consolidated Financial Statements Although management currently believes the Corporation has adequate For the eight months since the acquisition, Harper contributed revenue debt capacity, the Corporation may have to access the equity or debt of $49,311 and net earnings of $2,978 to the year to date results. Had markets, or temporarily reduce distributions to accommodate any the acquisition occurred on January 1, 2011 the Corporation estimates shortfalls in the Corporation’s credit facilities or significant growth that it would have reported revenue of $1,401,755 and net earnings of capital requirements. There were no changes in the Corporation’s approach to capital management during the year. Restrictions on capital The Corporation’s interest bearing debt includes a $175,000 bank credit facility which expires August 12, 2016 and a $15,000 demand equipment financing facility. The bank credit facility contains the following covenants: • Borrowing capacity is dependent upon the level of the Corporation’s inventories on-hand and the outstanding trade accounts receivable (“borrowing base”). The Corporation’s borrowing base was in excess of $175,000 at December 31, 2011 and, as a result, did not restrict the borrowing capacity under the bank credit facility. • The Corporation’s ratio of EBITDA to interest expense (the “Interest Coverage Ratio”) must not be lower than three times. As at December 31, 2011 the Corporation’s Interest Coverage Ratio was 23.5 times. The Corporation will be restricted from the declaration of monthly cash dividends in the event the Corporation’s Leverage Ratio exceeds three times. As at December 31, 2011 the Corporation’s Leverage Ratio was 0.7 times and there were no restrictions on the declaration of monthly cash dividends. 26. Related Party Transactions There are no related party transactions requiring disclosure other than the compensation of directors and key management personnel which is set out in the following table: Salaries, bonus and other short-term employee benefits Defined benefit pension Share-based compensation expense 2011 2010 $ 5,422 $ 5,517 398 3,248 335 4,407 $65,013 on its consolidated statement of earnings for the year ended December 31, 2011. In determining these amounts, management has assumed that the level of business activity experienced by Harper after May 2, 2011 is representative of the level of business activity that it would have experienced prior to the acquisition. Recognized amounts of identifiable assets acquired and liabilities assumed are as follows: Trade and other receivables Inventories Prepaid expenses Property, plant and equipment Trade and other payables Tangible net assets acquired Intangible assets (note 9) Total $ 11,662 7,032 218 1,878 (6,794) 13,996 9,251 $ 23,247 An amount of $21,603 was paid on closing based upon a preliminary estimate of tangible net assets acquired. In the third quarter an additional amount of $1,644 was paid to the vendors based on an updated determination of the value of the tangible net assets acquired. The goodwill is mainly attributable to the skills and technical talent of Harper’s workforce and its existing branch network, synergies expected to be achieved from integrating the business into the existing Power Systems segment and the value expected to be generated from initiatives, such as growing the power generation business in Ontario. Amounts attributed to intangible assets will be 75% deductible for income tax purposes. The Corporation incurred acquisition-related costs of $385 relating to external legal fees and due diligence costs. These costs have been included in selling and administrative expenses on the consolidated statement of earnings. 28. Operating Segments The Corporation operates through a network of 117 branches in Total compensation $ 10,164 $ 9,163 Canada in three core businesses which reflect the internal organization 27. Acquisition of Business On May 2, 2011, the Corporation’s Power Systems segment acquired certain assets of Harper Power Products Inc. (“Harper”) for consideration of $23,247. The acquisition price was funded through the Corporation’s existing bank credit facility. The acquisition secures the Ontario distribution rights for certain product lines and complements the segment’s existing product distribution rights in the rest of Canada, except for portions of British Columbia. 48 • Wajax Corporation Annual Report 2011 and management structure according to the nature of the products and services provided. The Corporation’s three core businesses are: i) the distribution, modification and servicing of equipment; ii) the distribution, servicing and assembly of industrial components; and iii) the distribution and servicing of power systems. Information regarding the results of each reportable segment is shown below. Performance is measured based on segment earnings before finance costs and income taxes, as included in the internal management reports that are reviewed by the Corporation’s chief operating decision maker. Notes to the Consolidated Financial Statements 2011 Equipment Parts Service Rental and other Revenue Equipment Components Industrial Segment eliminations Power and unallocated amounts Systems Total $ 397,613 $ 173,188 84,697 30,342 – $ 328,993 18,545 155,876 $ 125,509 61,134 – $ 553,489 627,690 – 164,376 – – 4,906 (3,703) 31,545 $ 685,840 $ 347,538 $ 347,425 $ (3,703) $ 1,377,100 Segment earnings before finance costs and income taxes $ 50,193 $ 23,106 $ 32,915 $ – $ 106,214 Corporate costs and eliminations Earnings before finance costs and income taxes Finance costs Income tax expense Net earnings Segment assets excluding goodwill and other intangible assets Intangible assets Cash Corporate and other assets 50,193 23,106 32,915 (14,102) (14,102) (14,102) 4,630 23,679 92,112 4,630 23,679 $ 50,193 $ 23,106 $ 32,915 $ (42,411) $ 63,803 $ 238,161 $ 114,714 $ 146,695 $ 22,083 47,643 14,760 – $ 499,570 84,493 7 5,659 5,659 204 204 Total assets $ 260,244 $ 162,357 $ 161,455 $ 5,870 $ 589,926 Segment liabilities Corporate and other liabilities $ 144,762 $ 45,969 $ 69,787 $ – $ 260,518 101,822 101,822 Total liabilities $ 144,762 $ 45,969 $ 69,787 $ 101,822 $ 362,340 Asset additions Rental equipment Property, plant and equipment Intangible assets Asset depreciation Rental equipment Property, plant and equipment Intangible assets $ 15,495 $ – $ 2,378 495 1,200 156 4,682 $ 1,789 – – $ 132 13 20,177 5,499 664 $ 18,368 $ 1,356 $ 6,471 $ 145 $ 26,340 $ 4,129 $ 1,591 43 – $ 709 $ – $ 1,097 927 1,605 225 117 21 4,838 4,410 1,216 $ 5,763 $ 2,024 $ 2,539 $ 138 $ 10,464 Wajax Corporation Annual Report 2011 • 49 Notes to the Consolidated Financial Statements 2010 Equipment Parts Service Rental and other Revenue Equipment Components Industrial Segment eliminations Power and unallocated amounts Systems Total $ 301,605 $ 153,708 69,744 30,754 – $ 114,230 $ 285,270 16,928 – 88,237 52,479 2,347 – $ 415,835 527,215 – 139,151 – 28,687 (4,414) $ 555,811 $ 302,198 $ 257,293 $ (4,414) $ 1,110,888 Segment earnings before finance costs and income taxes $ 39,006 $ 11,998 $ 19,176 $ – $ 70,180 Corporate costs and eliminations Earnings before finance costs and income taxes Finance costs Income tax recovery 39,006 11,998 19,176 (11,967) (11,967) (11,967) 4,277 (2,454) 58,213 4,277 (2,454) Net earnings $ 39,006 $ 11,998 $ 19,176 $ (13,790) $ 56,390 Segment assets excluding goodwill and other intangible assets Intangible assets Cash Corporate and other assets $ 208,266 $ 101,548 $ 88,770 $ 21,631 48,414 5,733 – $ 398,584 75,794 42,954 5,216 16 42,954 5,216 Total assets $ 229,897 $ 149,962 $ 94,503 $ 48,186 $ 522,548 Segment liabilities Corporate and other liabilities Total liabilities Asset additions Rental equipment Property, plant and equipment Intangible assets Asset depreciation Rental equipment Property, plant and equipment Intangible assets $ 125,246 $ 44,758 $ 44,771 $ – $ 214,775 108,443 108,443 $ 125,246 $ 44,758 $ 44,771 $ 108,443 $ 323,218 $ 3,698 $ 1,548 104 – $ 1,381 2,778 2,077 $ 1,109 317 – $ 94 21 5,775 4,132 3,220 $ 5,350 $ 4,159 $ 3,503 $ 115 $ 13,127 $ 3,202 $ 1,502 61 – $ 366 $ – $ 1,133 854 1,294 28 136 23 3,568 4,065 966 $ 4,765 $ 1,987 $ 1,688 $ 159 $ 8,599 Segment assets do not include assets associated with the corporate office, financing or income taxes. Additions to corporate assets, and depreciation of these assets, are included in segment eliminations and unallocated amounts. 29. Explanation of Transition to IFRS financial statements for the year ended December 31, 2010 and in This is the first year that the Corporation has presented its consolidated the preparation of an opening IFRS statement of financial position at financial statements in accordance with IFRS. In the year ended December January 1, 2010 (the Corporation’s transition date). 31, 2010, the Corporation reported under previous Canadian GAAP. In preparing its opening IFRS statement of financial position, the The accounting policies set out in Note 3 have been applied in Corporation has adjusted amounts reported previously in financial preparing the consolidated financial statements for the year ended statements prepared in accordance with previous Canadian GAAP. An December 31, 2011, the comparative information presented in these explanation of how the transition from previous Canadian GAAP to 50 • Wajax Corporation Annual Report 2011 Notes to the Consolidated Financial Statements IFRS has affected the Corporation’s reported financial position, financial addition, and as a condition under IFRS 1 for applying this exemption, performance and cash flows is set out in the tables below and the notes goodwill relating to business combinations that occurred prior to that accompany the tables. January 1, 2010 was tested for impairment. No impairment existed at IFRS 1 First-time Adoption of International Financial Reporting the date of transition. Standards sets forth guidance for the initial adoption of IFRS. Under Employee Benefits – actuarial gains and losses (IAS 19 IFRS 1, the standards are applied retrospectively at the transitional “Employee Benefits”) statement of financial position date and, in general, all adjustments Under IFRS, the Corporation’s accounting policy is to recognize all to assets and liabilities are taken to retained earnings, unless certain actuarial gains and losses immediately in other comprehensive income. exemptions are elected and certain mandatory exceptions are applied. At the date of transition, the Corporation has elected to recognize all In preparing its opening IFRS statement of financial position, the cumulative actuarial gains and losses in retained earnings. Corporation has elected the following exemptions: Business combinations before January 1, 2010 (IFRS 3 The Corporation has elected to disclose the present value of the defined “Business Combinations”) benefit obligation, fair value of the plan assets, surplus or deficit in The Corporation has elected not to apply IFRS 3 retrospectively to the plan, and the experience adjustments arising on the plan assets business combinations that took place before January 1, 2010. In or liabilities, for each accounting year prospectively from the date of Employee Benefits – pension costs (IAS 19 “Employee Benefits”) transition to IFRS. Reconciliation of Consolidated Statement of Earnings For the year ended December 31, 2010 (In thousands of Canadian dollars) Revenue Cost of sales Gross profit Canadian GAAP Employee Benefits IAS 19 Inventory IAS 2 Share-based Payment IFRS 2 Leases IAS 17 IFRS $ 1,110,888 873,061 237,827 (29) 29 $ 1,110,888 873,032 237,856 Selling and administrative expenses 181,397 (140) (877) (737) 179,643 Earnings before finance costs and income taxes 56,430 140 Finance costs Earnings before income taxes Income tax (recovery) expense Net earnings 4,094 52,336 (2,683) $ 55,019 140 35 105 877 183 694 185 509 29 737 58,213 4,277 737 53,936 (2,454) 737 $ 56,390 29 9 20 Reconciliation of Consolidated Statement of Comprehensive Income For the year ended December 31, 2010 (In thousands of Canadian dollars) Canadian GAAP Employee Benefits IAS 19 Inventory IAS 2 Share-based Payment IFRS 2 Leases IAS 17 IFRS Net earnings $ 55,019 105 509 20 737 $ 56,390 Actuarial losses on pension plans, net of tax – (628) Gains on derivative instruments designated as cash flow hedges in prior periods reclassified to cost of inventory or finance costs during the period, net of tax Losses on effective portion of derivative instruments designated as cash flow hedges during the period, net of tax 938 (482) (628) 938 (482) Other comprehensive loss, net of tax 456 (628) – Total comprehensive income $ 55,475 (523) 509 – 20 – (172) 737 $ 56,218 Wajax Corporation Annual Report 2011 • 51 Notes to the Consolidated Financial Statements Reconciliation of Consolidated Statement of Financial Position As at January 1, 2010 (In thousands of Canadian dollars) Canadian GAAP Employee Benefits IAS 19 Inventory IAS 2 Share-based Payment IFRS 2 Leases IAS 17 Income Tax IAS 12 Reclass IFRS Assets Current Cash Trade and other receivables Inventories Prepaid expenses Income taxes receivable Deferred taxes Non-Current Rental equipment Property, plant and equipment Intangible assets Deferred taxes Employee benefits Liabilities and Shareholders’ Equity Current Trade and other payables Accrued liabilities Provisions Distributions payable Income taxes payable Obligations under finance leases Non-Current Provisions Deferred taxes Employee benefits Other liabilities Obligations under finance leases Derivative instruments Bank debt $ 9,207 123,537 176,230 7,800 190 3,191 320,155 1,679 (464) 274 (3,191) $ 9,207 123,537 177,909 7,800 – – – – 1,215 – (2,917) – 318,453 16,370 36,164 73,505 – 2,013 9,844 38 883 (2,013) 16,370 (34) 45,974 73,539 34 2,229 – 1,308 128,052 (1,130) 9,882 – $ 448,207 (1,130) 9,882 1,215 – – 1,308 – 138,112 (1,609) – $456,565 657 $ 83,066 66,089 4,859 2,491 – – 3,850 $ 83,723 66,089 4,859 2,491 274 3,850 274 156,505 657 3,850 – – 274 – 161,286 3,518 1,883 2,995 841 – 2,643 79,461 704 6,140 (1,883) 3,518 – 3,699 841 6,140 2,643 79,461 91,341 704 6,140 – – (1,883) – 96,302 Shareholders’ Equity Trust units Contributed surplus Retained earnings 105,307 5,645 91,642 (2,491) (108) 1,215 (178) (2,107) 2,285 Accumulated other comprehensive loss (2,233) Total shareholders’ equity 200,361 (2,491) (108) 1,215 $ 448,207 (1,130) 9,882 1,215 52 • Wajax Corporation Annual Report 2011 105,129 3,538 92,543 (2,233) – – – – 198,977 (1,609) – $456,565 Reconciliation of Consolidated Statement of Financial Position As at December 31, 2010 (In thousands of Canadian dollars) Canadian GAAP Employee Benefits IAS 19 Notes to the Consolidated Financial Statements Inventory IAS 2 Share-based Payment IFRS 2 Leases IAS 17 Income Tax IAS 12 Reclass IFRS Assets Current Cash Trade and other receivables Inventories Prepaid expenses Deferred taxes Non-Current Rental equipment Property, plant and equipment Intangible assets Deferred taxes Employee benefits $ 42,954 135,517 194,752 7,244 6,466 386,933 1,708 (6,466) $ 42,954 135,517 196,460 7,244 – – – 1,708 – (6,466) – 382,175 15,794 36,626 72,972 – 3,013 9,464 (146) 1,065 (2,773) 15,794 (2,822) 43,268 75,794 2,822 5,277 240 4,358 128,405 (1,708) 9,318 – $ 515,338 (1,708) 9,318 1,708 – – 4,358 – 140,373 (2,108) – $522,548 Liabilities and Shareholders’ Equity Current Trade and other payables Accrued liabilities Provisions Distributions payable Income taxes payable Obligations under finance leases Derivative instruments Bank debt $ 134,540 64,229 4,892 12,472 1,599 – 2,452 79,680 292 (6) 473 3,677 $ 134,832 (461) 63,762 5,353 461 12,472 2,072 3,677 2,452 79,680 299,864 292 3,677 473 (6) – – 304,300 Non-Current Provisions Deferred taxes Employee benefits Other liabilities Obligations under finance leases 4,338 2,108 3,118 5,221 – 1,014 5,227 (2,108) 4,338 – 4,132 5,221 5,227 14,785 1,014 5,227 – – (2,108) – 18,918 Shareholders’ Equity Trust units Contributed surplus Retained earnings 105,892 6,426 90,148 (3,014) 414 1,235 (521) (2,495) 3,022 Accumulated other comprehensive loss (1,777) Total shareholders’ equity 200,689 (3,014) 414 1,235 $ 515,338 (1,708) 9,318 1,708 105,371 3,931 91,805 (1,777) 6 – – – 199,330 (2,108) – $522,548 Wajax Corporation Annual Report 2011 • 53 Notes to the Consolidated Financial Statements Material adjustments to the statement of cash flows for 2010 (c) Inventory (IAS 2) Consistent with the Corporation’s accounting policy choice under Under Canadian GAAP, the Corporation did not allocate overhead to IAS 7 Statement of Cash Flows, interest paid and income taxes paid work in process inventory relating to customer repair orders. Under have moved into the body of the Statement of Cash Flows, whereas IFRS the Corporation allocates overhead to work in process inventory they were previously disclosed as supplementary information. Rental relating to customer repair orders resulting in an adjustment to equipment additions are classified as operating activities whereas they inventory and opening retained earnings. were previously classified as investing activities. There are no other material differences between the statement of cash flows presented under IFRS and the statement of cash flows presented under previous Canadian GAAP. Notes to the Reconciliations (a) Employee Benefits (IAS 19) (d) Income Taxes (IAS 12) The effect of applying IAS 12, Income Taxes, is that all deferred tax balances are now classified as non-current. No other changes arise from this section. Applicable income tax rates have been applied to all IFRS adjustments. Under Canadian GAAP, the Corporation accounted for post-employment (e) Share-based Payment (IFRS 2) benefits under CICA Handbook Section 3461, Employee Future Benefits, whereby defined benefit pension plan net actuarial gains or losses over 10% of the greater of the benefit obligation and the fair value of the plan assets were amortized to income over the average remaining service life of active employees. Under IAS 19, Employee Benefits, the Corporation has adopted the policy of recognizing actuarial gains and losses in full in other comprehensive income in the year in which they occur. (b) Leases (IAS 17) Under Canadian GAAP, the Corporation assessed vehicle leases under CICA Handbook Section 3065, Leases, as operating leases. Under Under Canadian GAAP, the Corporation expensed dividend equivalents granted on share rights plans. Under IFRS the grant date fair value reflects all dividend rights therefore no additional compensation cost is recorded. (f) Comparative information Certain comparative amounts have been reclassified to conform with the current period presentation. In particular, cash discounts provided to customers in an amount of $978 have been reclassified out of selling and administrative expenses into revenue. IAS 17, Leases, the Corporation has assessed the vehicle leases as In addition, cash discounts received from vendors in an amount financing leases. Under finance leases the asset is recorded at the lower of $1,265 have been reclassified out of selling and administrative of its fair value and the present value of the minimum lease payments expenses into cost of sales. at the inception of the lease. The liability is included in the statement of financial position and classified between current and non-current amounts. The interest component of the lease payments is charged to earnings over the period of the lease so as to achieve a constant rate of interest on the remaining balance of the liability. Software with a net book value of $2,822 at December 31, 2010 and $34 at January 1, 2010 has been reclassified out of property, plant and equipment and into intangible assets. 54 • Wajax Corporation Annual Report 2011 Summary of Quarterly Data – Unaudited ($ millions , except per share data) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Revenue Net earnings Earnings per share – Basic Earnings per share – Diluted $ 303.9 $ 334.1 $ 361.9 $ 377.2 $ 228.1 $ 272.0 $ 294.4 $ 316.4 12.8 16.5 17.9 16.6 8.9 12.2 19.6 15.8 $ 0.77 $ 0.99 $ 1.08 $ 1.00 $ 0.53 $ 0.73 $ 1.18 $ 0.95 0.76 0.98 1.06 0.98 0.53 0.72 1.16 0.93 2011 2010 Eleven Year Summary – Unaudited For the years ended December 31 ($ millions, except per share data) (2001 – 2009 reported under previous Canadian GAAP) 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 $ 1,377.1 $ 1,110.9 $ 1,007.2 $ 1,213.5 $ 1,192.3 $ 1,206.5 $ 1,049.4 $ 871.4 $ 884.0 $ 908.8 $ 1,047.6 63.8 56.4 34.2 75.8 72.0 71.5 35.6 17.6 9.6 (25.8) 8.7 5.5 5.2 4.5 4.7 4.9 4.5 4.6 7.5 10.9 15.8 18.2 Operating Results Revenue* Net earnings (loss)* Finance costs Cash flows from operating activities before changes in operating assets and liabilities* 106.2 73.4 45.1 87.5 85.0 85.1 46.0 29.5 29.7 Property, plant and equipment – net 5.3 Rental equipment expenditures – net 20.2 1.7 5.8 Depreciation and amortization 13.5 11.2 7.0 0.4 9.7 7.4 7.0 9.7 4.0 8.6 9.9 8.3 7.9 4.7 6.2 3.5 5.4 1.4 6.6 9.5 7.4 1.2 26.2 16.9 0.8 10.0 10.0 10.3 11.9 12.3 15.2 Per Share Net earnings (loss) – Basic* Dividends declared Distributions declared Equity Financial Position Working capital* Rental equipment $ 3.84 $ 3.39 $ 2.06 $ 4.57 $ 4.34 $ 4.31 $ 2.19 $ 1.12 $ 0.61 $ (1.64) $ 0.55 2.14 – – – – – 0.14 0.16 – 3.40 2.47 4.13 4.36 4.43 1.89 – – – – – – – 13.69 12.00 12.07 12.40 11.94 11.89 11.88 12.39 11.38 10.83 13.05 $ 167.0 $ 77.9 $ 160.1 $ 198.8 $ 147.4 $ 147.8 $ 129.8 $ 153.0 $ 157.1 $ 155.0 $ 241.6 28.1 15.8 16.4 21.8 21.7 18.9 17.2 16.4 16.2 14.5 11.3 64.2 Property, plant and equipment – net 47.9 43.3 36.2 33.6 29.5 33.3 29.0 28.8 31.9 37.4 Long-term debt excluding current portion Shareholders’ equity Total assets* Other Information Number of employees 59.0 – 79.5 116.2 53.9 59.0 33.4 70.9 79.8 98.4 176.4 227.6 199.3 200.4 205.7 198.1 197.2 197.1 195.0 178.7 170.0 204.8 589.9 522.5 448.2 529.6 468.2 500.6 437.9 418.1 409.7 442.0 554.5 2,738 2,382 2,291 2,662 2,551 2,566 2,387 2,357 2,279 2,308 2,601 Shares outstanding (thousands) 16,629 16,629 16,603 16,585 16,585 16,585 16,582 15,739 15,697 15,697 15,697 Price range of shares High Low $ 44.94 $ 38.50 $ 23.40 $ 35.75 $ 37.95 $ 47.00 $ 32.45 $ 14.90 $ 8.25 $ 7.25 $ 6.00 27.80 21.65 10.95 14.00 24.80 24.60 13.00 7.70 3.10 3.76 4.00 * 2006, 2005 and 2004 exclude discontinued operations. Wajax Corporation Annual Report 2011 • 55 Corporate Information Directors Paul E. Gagné Chairman, Wajax Corporation Corporate Director Edward M. Barrett 1, 2 Chairman and Co-Chief Executive Officer, Barrett Corporation Ian A. Bourne 1 Corporate Director Douglas A. Carty 1, 2 Corporate Director Officers Paul E. Gagné Chairman A. Mark Foote President and Chief Executive Officer John J. Hamilton Senior Vice President and Chief Financial Officer Brian M. Dyck Senior Vice President, Wajax Equipment Robert P. Dexter, Q.C. 2 Chairman and Chief Executive Officer, Maritime Travel Inc. Adrian A. Trotman Senior Vice President, Wajax Industrial Components Ivan E. H. Duvar 2 Corporate Director John C. Eby 3 Corporate Director Richard M. G. Plain Senior Vice President, Wajax Power Systems Linda J. Corbett Treasurer A. Mark Foote President and Chief Executive Officer, Wajax Corporation Andrew W. H. Tam General Counsel and Secretary JD Hole 2, 3 Corporate Director Valerie A. A. Nielsen 1, 3 Corporate Director Alexander S. Taylor 2, 3 Senior Vice President, Oil, Gas and Petrochemical Business Unit, ABB Inc. 1 Member of the Audit Committee 2 Member of the Human Resources and Compensation Committee 3 Member of the Governance Committee Honourary Director H. Gordon MacNeill 56 • Wajax Corporation Annual Report 2011 Head Office 3280 Wharton Way Mississauga, Ontario L4X 2C5 Tel: (905) 212-3300 Fax: (905) 212-3350 Shareholder Information Transfer Agent and Registrar For information relating to shareholdings, dividends, lost certificates, changes of address or estate transfers, please contact our transfer agent: Computershare Trust Company of Canada 100 University Ave., 9th Floor Toronto, ON M5J 2Y1 Tel: (514) 982-7555 or 1-800-564-6253 Fax: (514) 982-7635 or 1-888-453-0330 E-mail: services@computershare.com Auditors KPMG LLP Exchange Listing Toronto Stock Exchange Symbol: WJX Wajax Corporation Share Trading Information (January 1 – December 31, 2011) Open High Low Volume of Close Shares Traded $37.00 $44.94 $27.80 $38.56 9,649,238 Quarterly Earnings Reports Quarterly earnings for the balance of 2012 are anticipated to be announced on May 8, August 10 and November 6. 2012 Dividend Dates Monthly dividends are payable to shareholders of record on the last business day of each month and are generally paid on the 20th day of the following month or the next following business day. Investor Information John Hamilton Senior Vice President and Chief Financial Officer Tel: (905) 212-3300 Fax: (905) 212-3350 E-mail: ir@wajax.com To obtain a delayed share quote, read news releases, listen to the latest analysts’ conference call, and stay abreast of other Corporation news, visit our website at www.wajax.com. Annual Meeting Shareholders are invited to attend the Annual Meeting of Wajax Corporation, to be held at the Sheraton Gateway Hotel, Terminal 3, Toronto Pearson International Airport, Toronto, Ontario, on Tuesday, May 8, 2012, at 11:00 a.m. Vous pouvez obtenir la version française de ce rapport en écrivant à la Secrétaire, Corporation Wajax 3280 Wharton way Mississauga (ON) L4X 2C5 m o c . y a m n e t Operating Units and Branch Listings Operating Units Wajax Equipment 16745 – 111th Avenue Edmonton, Alberta T5M 2S4 Brian Dyck, Senior Vice President, Wajax Equipment Wajax Power Systems 10025 – 51st Avenue Edmonton, Alberta T6E 0A8 Richard Plain, Senior Vice President, Wajax Power Systems Wajax Industrial Components 2200 – 52nd Avenue Lachine, Québec H8T 2Y3 Adrian Trotman, Senior Vice President, Wajax Industrial Components Branch Listings Wajax Equipment West Kamloops, BC Langley, BC Nanaimo, BC Prince George, BC Sparwood, BC Blackfalds, AB Calgary, AB Clairmont, AB Edmonton, AB (2) Fort McKay, AB Fort McMurray, AB Saskatoon, SK Winnipeg, MB Central Hamilton, ON Kitchener, ON London, ON Mississauga, ON Ottawa, ON Sudbury, ON Thunder Bay, ON Timmins, ON Windsor, ON East Chambly, QC Lachine, QC Québec City, QC St-Félicien, QC Moncton, NB Dartmouth, NS Mount Pearl, NL Pasadena, NL Wabush, NL Wajax Power Systems West Fort St. John, BC Calgary, AB Edmonton, AB Fort McMurray, AB Grande Prairie, AB Red Deer, AB Redcliff, AB Regina, SK Saskatoon, SK Winnipeg, MB Thunder Bay, ON Central Cornwall, ON Hamilton, ON Sudbury, ON London, ON Niagara Falls, ON Ottawa, ON Pembroke, ON Timmins, ON Toronto, ON East Concord, ON Dorval, QC Québec City, QC Saint Nicephore, QC Val d’Or, QC Moncton, NB Dartmouth, NS Mount Pearl, NL Wajax Industrial Components West Fort St. John, BC Prince George, BC Surrey, BC Calgary, AB Edmonton, AB Nisku, AB Regina, SK Saskatoon, SK Flin Flon, MB Thompson, MB Winnipeg, MB Yellowknife, NW Central Belleville, ON Concord, ON Espanola, ON Guelph, ON Kapuskasing, ON London, ON Mississauga, ON Sarnia, ON Sault Ste. Marie, ON Stoney Creek, ON Sudbury, ON Thunder Bay, ON (2) Timmins, ON Windsor, ON Temiscaming, QC East Ottawa, ON Chicoutimi, QC Drummondville, QC Granby, QC Lachine, QC LaSalle, QC Laval, QC Longueuil, QC Noranda, QC Québec City, QC Rimouski, QC Sept Iles, QC Sherbrooke, QC Thetford Mines, QC Tracy, QC Trois Rivières, QC Val d’Or, QC Valleyfield, QC Ville d’Anjou, QC Bathurst, NB Edmundston, NB Moncton, NB Charlottetown, PEI Dartmouth, NS Port Hawkesbury, NS Stellarton, NS Corner Brook, NL Mount Pearl, NL Wabush, NL Wajax Corporation 3280 Wharton Way Mississauga, ON L4X 2C5 Web: www.wajax.com Tel: 905-212-3300 Fax: 905-212-3350
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