Wajax
2019 Annual Report
With over 160 years of experience offering world-class brands,
unwavering customer support and technical expertise for
multiple industries, Wajax is able to provide solutions that help
our customers get more done – efficiently and effectively.
Contents
Wajax at a Glance
Message to Shareholders
Serving Our Customers Coast to Coast
Driving Our Strategy
Engineered Repair Services (ERS)
Investing in Our People
Investing in Our Customers
Driving Sustainable Growth
1
2
4
6
7
8
10
14
Message from the Chairman
Management’s Discussion and Analysis
Management’s Responsibility
for Financial Reporting
Independent Auditors’ Report
Consolidated Statements
of Financial Position
Consolidated Statements of Earnings
18
19
40
40
42
43
Consolidated Statements
of Comprehensive Income
Consolidated Statements
44
of Changes in Shareholders’ Equity
45
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements 46
66
Corporate Information
Locations
43
Wajax at a Glance
Financial Highlights (in millions of Canadian dollars, except leverage ratio, share and per share data)
For the years ended December 31
Revenue
Net earnings
Adjusted net earnings(1)
Funded net debt (1)
Shareholders’ equity
Basic earnings per share
Adjusted basic earnings per share(1)
Cash dividends declared per share
Leverage ratio(1)
Weighted average number of shares outstanding(4)
$
2019
1,553.0
39.5
41.9
276.5
316.8
1.98
2.10
1.00
$
2018
1,481.6
35.9
39.9
222.0
297.0
1.82
2.02
1.00
2.60
19,998,656
2.45
19,686,075
Year-Over-Year Revenue by Category (2) ($ millions)
Revenue by End Market (3)
Targeted Growth
Construction
Material Handling
Engineered Repair Services (ERS)
88.1
Core Strength
Industrial Parts
Forestry
On-Highway
Power/Marine
97.9
104.1
100.2
95.8
163.9
143.7
156.3
163.4
136.4
Cyclical / Major Growth Opportunities
Mining
170.3
164.5
Engines/Transmissions
84.1
92.1
Crane/Utility
29.1
25.5
2019
2018
228.1
273.2
366.6
361.7
For the twelve months
ended December 31
2019
2018
n Construction
n Mining
n Forestry
n Industrial/Commercial
n Oil Sands
n Transportation
n Metal Processing
n Government and Utilities
n Oil and Gas
n Other
15%
15%
14%
11%
11%
9%
7%
7%
3%
8%
19%
16%
14%
11%
9%
9%
6%
4%
4%
8%
Revenue Sources ($ millions)
Revenue by Region ($ millions)
For the twelve months
ended December 31
2019
%
2018 change
For the twelve months
ended December 31
2019
%
2018 change
n Equipment
n Industrial Parts
n Product Support
n Rental
n ERS
$ 523.9 $ 542.8 (3)%
1%
361.7
457.6 4%
34.9 6%
84.6 77%
366.6
476.1
36.9
149.6
n Western Canada $ 623.6 $ 653.1
n Central Canada
(5)%
(Ontario)
n Eastern Canada*
311.1
618.3
324.3
(4)%
504.2 23%
$ 1,553.0 $ 1,481.6
5%
$ 1,553.0 $ 1,481.6
5%
*Includes Quebec and the Atlantic provinces.
Forward-Looking Statements and Information
This Annual Report, including the accompanying Management’s Discussion and Analysis, includes forward-looking statements and information that is based on Wajax’s current beliefs, expectations,
estimates and assumptions in light of information currently available. Actual results, performance and achievements may differ materially from those anticipated or implied in such forward-looking
statements or information. Please see page 38 for a discussion of the risks and uncertainties related to such statements and information.
(1) These measures do not have standardized meaning prescribed by GAAP. See Management’s Discussion and Analysis, page 38.
(2) Category revenue includes all applicable equipment, parts, service and rentals. Consolidated categories may not match total
revenue due to rounding, and exclusion of head office and eliminations.
(3) End markets are based on the North American Industry Classification System (NAICS).
(4) Weighted average number of shares outstanding is net of shares held in trust.
Wajax 2019 Annual Report 1
Message to Shareholders
“Together We Get More Done” is the essence of our company. Wajax’s strategy
is based on a strong foundation, clear growth plans and investments in our
business; all working together to give our customers and our employees a
consistently excellent experience.
Record year for
workplace safety
0.93 TRIF(1)
Recordable Incidents
85
52
35
26
24
2015
2016
2017
2018
2019
Revenue ($ millions)
1,273.3
1,221.9
1,318.7
1,481.6
1,553.0
2015
2016
2017
2018
2019
Our strategy is transforming Wajax from its legacy as a group of decentralized product-
centric distribution businesses to a unified industrial services provider which leverages
market-leading product and service breadth and a superb team to set a new standard for
what customers can expect.
2019
The Wajax team performed exceptionally well in 2019, delivering adjusted net earnings
of $41.9 million, an increase of 5% on record revenue of $1.55 billion, also up 5%. 2019
was another record year for workplace safety with a TRIF rate of 0.93 resulting from an 8%
reduction in recordable injuries.(1)
Efforts to regionally balance revenue paid dividends in 2019. Revenue of $618 million
in eastern Canada grew 23%, offsetting weakness in western Canada where revenue of
$624 million declined 5% under progressively more difficult conditions. Central Canada
revenue of $311 million declined 4% due to the loss of a road-building distribution
agreement. Net of that, revenue in central Canada was up 2%.
While we are satisfied with the results given the challenging market conditions, we had
higher expectations as we entered the year. Weakness related to the western Canada
market and a 14% reduction in demand for construction equipment nationally were the
principal drivers in lower than planned earnings and elevated inventory.(2)
We are very pleased with the significant progress made in 2019 on our infrastructure
initiatives. These programs are designed to improve Wajax’s customer service capabilities,
operational consistency and cost efficiency. We completed an extensive pilot of our new
ERP system and made excellent progress with the testing of our Customer Support
Centres. Organizationally, we completed the centralization of our Finance function and
realigned the management of our regional sales and operations teams. In addition to the
benefits of a simpler organization, the realignment is estimated to save $5 million pre-tax
annually starting in 2020.
Engineered Repair Services (ERS) was an important contributor to our growth in 2019.
Revenue of $156 million (up $68 million or 77%) resulted from the combination of our
legacy ERS business and the first full year of operation of Groupe Delom, which we acquired
in October 2018. ERS is an important competitive differentiator, especially to our large
customers. It encompasses a wide range of services to meet the engineering, repair,
fabrication, maintenance and reliability needs of our industrial and resource customers
in their fixed-plant operations. Adding to our scale in this business, we announced
the acquisition of NorthPoint Technical Services in January 2020. NorthPoint brings a
complimentary branch network, a skilled electro-mechanical repair workforce and additional
revenue of approximately $49 million.(3)
2019 also included steps to ensure that the company has the financial flexibility that
it requires to grow. Among the actions taken in the year, our $400 million bank credit
facility was extended through October 2024 and we completed a public offering of senior
unsecured debentures, maturing January 2025, with net proceeds of $54 million which
were applied to our credit facilities. In addition, Wajax began a real estate monetization
program for selected owned properties. Combined with working capital management
balanced to current market conditions, these activities are expected to reduce leverage to
our target range in support of the base business and to provide flexible access to capital
for our acquisition program.
2 Wajax 2019 Annual Report
(1) Total Recordable Injury Frequency
(2) Based on the demand for construction class excavators in Wajax addressable markets.
(3) Trailing Twelve Month (TTM) revenue of NorthPoint Technical Services to December 31, 2019.
Wajax Strategy
Strong Foundation
Integrated company
provides a strong platform
for growth and consistent
level of customer service
Clear Expectations
for Organic Growth
and Acquisitions
Information systems
Training
Branch network
Sales and Marketing
Customer Support Centres
Customer and
Team Engagement
National branch network
Broad range of products
and services
Strong manufacturer
relationships
Diverse market expertise
One Wajax
Organization
5-year plan
Focus on investing in
more stable categories
with growth opportunities
Well-defined CDN/U.S.
acquisition objectives
Investments in
Our Business
Delivering the best
experience for
our customers
and teams.
2020
Basic Net Earnings ($ millions)
Our plans are based on an expectation that the more challenging market conditions that
emerged in 2019 will continue in 2020 resulting in pressure on capital equipment demand.
Equipment utilization rates, however, are expected to be generally stable on a full year basis
which will support parts and service volumes. Based on manufacturer discussions and
industry information, market conditions are anticipated to improve later in 2020.
Our objective for the year is to manage the business and capital conservatively until trends
in the market improve. Market-related pressure on consolidated revenue is expected to
be at least partially offset by the addition of NorthPoint, higher industrial parts volumes
and expected mining deliveries in the second half of the year. We have also identified
opportunities to improve gross margins, drive additional cost productivity and to lower
finance costs based on reductions in inventory.
In our infrastructure programs, we plan to move forward with the implementation of our new
ERP system beginning in the second quarter. Implementation is expected to occur over an
18 to 24 month timeframe in order to minimize the risks associated with the change. Our
branch network optimization program will also continue including the previously described
efforts to monetize selected real estate assets through either sale and leaseback
transactions or site closure due to the colocation of branches. Proceeds from the real
estate program are expected to be applied to our credit facilities.
We will continue to manage with an appropriate balance between pace and market
conditions while tracking toward our strategic plan goals and targets.
35.9
39.5
27.4
11.0
(11.0)
2015
2016
2017
2018
2019
Adjusted Net Earnings ($ millions)
39.9
41.9
27.8
30.1
20.1
Proceeding with Confidence
2015
2016
2017
2018
2019
We are confident in our direction, pleased with our progress and very excited about our
future. The strategic plan is designed to position Wajax in a unique and valuable position
in the industrial services market. As we progress toward that, and as we listen to the
perspectives of our customers and employees, we see even more benefits from our
strategy than we originally expected.
I will close by thanking our team who have done an excellent job again in 2019. They have
shown constant attention to workplace safety, advanced our strategic plan initiatives,
increased customer service levels and delivered improved financial results. We thank
each of our employees, welcome our new colleagues from NorthPoint and express our
appreciation for the strong support of our manufacturing partners. The energy and
dedication to Wajax’s success is demonstrated every day. It is a real privilege to be part
of this team.
Mark Foote
Chief Executive Officer
Wajax 2019 Annual Report 3
Serving Our Customers Coast to Coast
Location count
Team members
2
137
Fort McMurray
Important customer markets include mining
and SAG-D oil sands extraction, processing,
transportation and related contractors and
support services-driving categories such as
mining, construction and material handling
equipment, engines and transmissions, on-highway
transportation, industrial parts and ERS.
Location count
Team members
8
180
British Columbia
Important customer markets include forestry/pulp
and paper, mining, construction, utilities, natural
gas and intermodal transportation-driving categories
such as mining, construction, material handling and
forestry equipment, industrial parts and ERS.
Location count
Team members
26
572
Prairies
Important customer markets include construction,
forestry, conventional oil and gas (exploration,
extraction, processing, transportation and services),
mining and transportation-driving categories
such as construction, forestry and material
handling equipment, engines and transmissions,
on-highway transportation, industrial parts,
ERS and power generation.
4 Wajax 2019 Annual Report
Wajax's team of almost 2,900 employees
serve 32,000 customers through 115
locations in every major resource and
industrial market in Canada.
Location count
Team members
29
1,087
Quebec
Important customer markets include construction,
forestry/pulp and paper, distribution, mining,
manufacturing, utilities, transportation and
commercial and defense marine-driving categories
such as construction, forestry, mining, material
handling and crane equipment, on-highway
transportation, power generation, marine, engines
and transmissions, industrial parts and ERS. Wajax’s
power generation integration centre, primary ERS
and marine engineering teams and financial shared
services centre are in Quebec.
Location count
Team members
17
189
Atlantic
Important customer markets include construction,
forestry, mining, commercial and defense marine
and transportation-driving categories such as
construction, forestry, mining and material handling
equipment, on-highway transportation, marine,
engines and transmissions, industrial parts
and ERS.
Location count
Team members
33
708
Ontario
Important customer markets include construction,
forestry, distribution, mining, manufacturing, utilities
and transportation-driving categories such as
construction, forestry, mining, material handling
and crane equipment, on-highway transportation,
power generation, marine, industrial parts and
ERS. Wajax’s corporate and support functions are
located in Ontario.
Wajax 2019 Annual Report 5
Driving Our Strategy
The goal of the One Wajax strategy is to provide customers with access
to our full range of products and services while delivering a consistently
excellent level of customer service. We are focused on delivering a strong
experience for our customers and employees through the execution of
clear plans in five key areas:
Investing in our team – The safety, well-being and engagement of our team of nearly
2,900 technicians, sales professionals, support staff and leaders is the foundation of
our company.
Investing in our customers – We have the privilege of supporting 32,000 individual
customers across Canada ranging from small local contractors to the country’s largest
industrial and resource organizations.
Executing a clear organic growth strategy – We have classified our ten current product
and service categories based on a category’s contribution to sustainable growth. While
we are competitive in all of the categories we participate in, our classifications ensure we
allocate resources such as inventory, personnel and marketing, appropriately.
Accretive acquisitions strategy – We have clear acquisition criteria for the Canadian and
U.S. markets. In Canada, the focus is primarily on acquisitions that add to our scale in the
Engineered Repair Services (ERS) business and secondarily to extensions to our existing
distribution businesses. In the U.S. market, the focus is on reviewing growth opportunities
related to distribution businesses that provide a long term growth platform for the One
Wajax multi-category model.
Investing in our infrastructure – We are making major changes to our infrastructure to
improve the consistency of customer service and lower costs. Our current programs include
the ongoing consolidation of our branch network, investing in new information systems and
implementing Customer Support Centres that provide 24/7 customer support in all product
and service categories.
Each of these areas is further described in this report.
Record revenue of
$1.55 billion
32,000
customers
62
Net Promoter
Score®
42,500
CSC calls
Customer Support Centres (CSCs) will provide customers and
branches 24/7 access to experts in all product and service
categories, helping to address Wajax’s most important
service priority – allowing customers to reach the right
Wajax representative quickly. CSCs can be accessed directly
by a customer or by branch staff who require technical
assistance to service a local client. The CSC concept was
piloted in Ontario in 2019 and will be expanded to additional
Ontario and eastern Canada markets in 2020. The CSC
handled approximately 42,500 customer calls during the
test and together with branch support, achieved a significant
improvement in customer service.
6 Wajax 2019 Annual Report
Net Promoter Score is a registered trademark of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.
Engineered Repair Services (ERS)
NorthPoint Technical Services (NTS) was acquired by Wajax
in January 2020. NTS operates nine locations across
Canada that are complimentary to Wajax’s existing ERS
network and has a skilled workforce of 177 specializing in
electro-mechanical repair, a critical area of ERS services. The
combination of NTS’ branch network and technical skills with
Wajax’s sales force and customer relations are expected to
result in substantial growth in our ERS business.
617
ERS employees
ERS Revenue ($ millions)
Wajax estimates the ERS market to be approximately $5 billion annually for commercial and
resource customers. The market is highly fragmented and generally comprised of local or
regional service providers that specialize in shop and field repair and maintenance of various
types of plant equipment. Generally, the largest consumers of ERS services are resource
companies who manage extensive extraction and processing operations and are highly
sensitive to uptime and reliability.
88
49
156
ERS is an important growth category and competitive differentiator for Wajax. It increases our
range of services, improves our ability to meet the needs of a wide range of industrial and
resource customers and compliments our industrial parts category by providing additional
parts volume. Wajax provides an increasingly diverse range of ERS services including
engineering, design, fabrication, repair, preventative maintenance and reliability services for
electro-mechanical, bearings, power transmission, hydraulic, process and instrumentation
systems. The combination of Wajax’s customer reach, deep market knowledge, national
coverage and manufacturing relationships are catalysts for growth in ERS.
Our strategy combines organic growth plans and acquisitions. Revenue grew 77% to
$156 million in 2019 due to the combination of our legacy ERS business and the first full
year of operation of Groupe Delom, which we acquired in October 2018. In January 2020,
Wajax announced the acquisition of NorthPoint Technical Services (approximate annual
volume of $49 million), adding further to the geographic reach and scale of the business.
2018
2019
NorthPoint
TTM Revenue(1)
(1) Trailing Twelve Month (TTM) revenue of NorthPoint
Technical Services to December 31, 2019.
Fort McMurray
Grande Prairie
Prince George
Nisku
Calgary
Saskatoon
Langley
St. John's
Regina
Winnipeg
Thunder Bay
Kirkland Lake
Sudbury
Baie-Comeau
Bathurst
Quebec City
Moncton
LaSalle
Lachine
Montreal (2)
Wajax
(hydraulics, bearing,
PT and process)
NorthPoint (NTS)
(electro-mechanical
repair)
Delom
(electro-mechanical
repair)
Vaughan
Mississauga
Sarnia
Wajax 2019 Annual Report 7
Investing in Our People
Wajax’s team of almost 2,900 technicians, sales professionals, support
staff and leaders is our most important asset. Our customer service
level is a direct reflection of the environment we create for our team.
0.93 TRIF(1)
1.02 in 2018
92%
health and safety
audit score
90% in 2018
2019 Canadian Mental Health Association (CMHA)
National Workplace Excellence Award
Wajax was chosen as the recipient of the 2019 Workplace
Excellence Award. This award is presented annually to an
outstanding organization that has advanced the promotion of
mental health in the workplace.
In 2019, we focused on four priorities set by our team:
Health and Safety – The most important goal in our company is that everyone goes
home safe at the end of every shift. Based on the hard work of all employees, we
achieved our safest year ever, based on an 8% reduction in recordable injuries and
resulting in a TRIF rate of 0.93. In addition to new plans and programs for individual
safety, we launched a development program for frontline leaders to improve our
support to them in helping to manage the safety of their local team.
Communications – 2019 saw some important improvements in how we communicate
throughout the organization. In addition to maintaining a high-level of shop-floor
interaction between leaders and their teams, Wajax launched its new Navigator website
used internally for a broad range of interbranch information sharing, customer service
and employee stories. Navigator is an important tool to satisfy the interest of our
employees on Wajax’s diversity of markets, customers and projects.
Personal Development – Access to technical, sales and leadership training is an
important aspect of employee satisfaction. Wajax implemented a new Learning
Management System in 2019 that now houses over 2,000 individual courses available
to our team. In addition, new general leadership training was piloted and is rolling out
to an expanded group of local managers in 2020.
Onboarding New Team Members – Getting off to a good start as a new employee
builds confidence quickly. In order to improve the experience of new team members,
we developed new standards in the orientation process based on defined schedules
and personal follow-ups. Ensuring a positive experience for new team members is a
major factor in reducing voluntary turnover.
Approximately 20 Town Hall meetings were held in
2018 which brought together branch leadership teams
to discuss the most important areas of improvement
from the perspectives of customers and employees. The
“Voice Of” programs resulted in 88 local action plans
that were used by site managers to engage their teams in
helping to improve their location’s performance in priority
areas of customer service and employee satisfaction. In
total, approximately 80% of Wajax employees have been
engaged in their location’s Voice of the Customer and
Voice of the Employee programs.
8 Wajax 2019 Annual Report
(1) Total Recordable Injury Frequency
Voice of the Employee (VoE)
The objective of the “Voice of the Employee” program is to use
feedback from employees to prioritize areas of improvement
for Wajax that will increase employee satisfaction, continuously
improve the alignment of local leaders and their teams and improve
our service to customers.
Progress is measured throughout the year based on employee
surveys that include individual questions targeting specific areas
of improvement. Overall employee satisfaction is based on an
employee Net Promoter Score (eNPS). Wajax’s eNPS score at the
end of 2019 was +10, an 11 point increase from 2018. eNPS scores
between 0 and +30 are considered good and scores in excess of 30
are considered excellent.
Employees defined the most important areas of improvement as:
communications, performance feedback, training and development
and the onboarding of new team members.
In 2019, local leaders participated in facilitated planning sessions
and developed action plans for their sites to address areas deemed
important by employees. Progress was measured quarterly and is
factored into leadership incentive compensation in 2019 and 2020.
Voice of the Customer (VoC)
The objective of the “Voice of the Customer” program is to use
feedback to prioritize areas of improvement for Wajax that will
improve customer service in each of the main types of customer
interactions – equipment sales, parts sales and service work orders.
Each of these transaction types is “mapped” to understand the key
points of success that the customer deems important.
Progress is measured throughout the year based on customer
surveys that include individual questions on the main interaction
points in each transaction. Overall customer satisfaction is based
on a customer Net Promoter Score (cNPS). Wajax’s cNPS score at
the end of 2019 was +62, a 9 point increase from 2018. cNPS scores
between 0 and +50 are considered good and scores in excess of 50
are considered excellent.
Customers defined the most important areas of improvement as:
reaching the right person quickly (all transaction types), parts
availability service levels and follow-up (all transaction types and
especially with service work orders).
In 2019, local leaders participated in facilitated planning sessions
and developed action plans for their sites to address areas deemed
important by customers. Progress was measured quarterly and is
factored into leadership incentive compensation in 2019 and 2020.
11
point increase
in eNPS
to last year
79%
of employees
understand
and are
engaged
in VoE
9
point increase
in cNPS
to last year
80%
of employees
understand
and are
engaged
in VoC
Wajax 2019 Annual Report 9
Wajax 2019 Annual Report 9
Investing in Our Customers
The diversity of Wajax’s market knowledge, technical capabilities, broad product and service offer and manufacturer
relationships makes every Canadian industrial or resource company a potential customer. Our goal is to maximize our
potential with each customer by understanding their objectives and then configuring our business in a manner that best
suits their needs. The following fifteen customer stories demonstrate the diversity of our ability to serve customers and
are drawn from the approximately 900,000 customer transactions we completed in 2019.
North Warning System Short Range Radar Sites
Working with a major defense contractor, Wajax is updating the power
generation systems for the North Warning System Short Range Radar sites.
The majority of the 37 sites are located in the Canadian Arctic and provide
the Canadian and U.S. departments of defense with intrusion warnings.
The project involves replacement of over 100 systems with new units
designed, built and placed in hardened crates for shipping from Wajax’s
Drummondville, Quebec power generation integration centre. Wajax’s team
worked closely with our engine partners at Deutz on this project.
Site work is performed in remote areas of the Arctic, with most locations
accessible only by helicopter. The sites are required to operate continuously,
requiring Wajax’s 3-person installation crews to be onsite for up to nine
days, working in harsh conditions and under tight timelines to install the
new generators and avoid service interruptions. With a focus on safety and
timelines, delivery of the units is expected to be completed in 2021.
Geared Up to Service the Oil Sands
Ore conveyance and processing systems are critical components in an
oil sands mine, and main drive gear boxes are key to the operation and
reliability of these systems.
A major oil sands customer experienced a critical late night failure in a
main drive gear box during extreme weather conditions and requested that
Wajax assess the problem and recommend a solution that would allow the
customer to restart the affected operation. Wajax technical support was
onsite quickly and completed a diagnosis of the problem within hours. With
no spare gear boxes available at the customer’s site, Wajax’s technical team
worked closely with the customer and provided support for an in-situ repair
allowing a safe re-start of the system as quickly as possible.
The customer’s satisfaction with Wajax’s responsiveness and technical
knowledge resulted in further support to the customer for additional gear
box storage, maintenance, reconditioning and preservation services.
When oil sands and mining customers have difficulties in material handling
and processing systems, Wajax is there quickly and can apply technical
expertise across a broad range of manufacturers and industries to get the
customer running.
Hitachi Reliability Unsurpassed – Even Under Extreme Conditions
The Hitachi EX8000 is one of the world’s largest and most reliable hydraulic
mining shovels. With a bucket capacity of up to 43 cubic meters, it can fill an
ultra-class mining truck in roughly five passes. While the power of the machine is
obvious, its reliability makes it a trusted asset for many of Canada’s large surface
mining operations.
The reliability of the EX8000 was recently demonstrated by a major Wajax
customer during a prolonged cold stretch when temperatures ran to –40°C and
the site’s cable shovel loading fleet was down due to the extreme cold. Mine
operations leaders repositioned their EX8000s to be the sole production loaders
for a 3-day period and the EX8000s operated with near perfect 98.5% reliability,
stopping only for fuel and maintenance checks.
The combination of the power and reliability of Hitachi products and the sales,
technical and aftermarket support provided by Wajax, have created strong
partnerships with our mining customers with three additional large shovels
scheduled for delivery in 2020.
10 Wajax 2019 Annual Report
When It Snows, These Machines are Ready to Go
Montreal sees a lot of snow and relies on snow removal company Roxboro to
keep things moving at the airport, on highways and at major shopping centers
across the region. As one of the largest construction and snow removal
companies in the business, Roxboro leveraged its extensive fleet of more than
130 wheel loaders to get the job done. With winter approaching and some
machines coming to the end of their life cycle, it was time to add some new
muscle to its snow removal arsenal. To support this and to continue to deliver
excellent service while meeting new emissions standards, Roxboro turned to
Wajax which provided a fleet of new-to-market Hitachi wheel loaders in a range
of sizes to meet Roxboro’s requirements. With engines from both Cummins and
Isuzu, the loaders are very efficient and meet all required emissions standards –
exactly what Roxboro needed.
Wajax is continuing to expand the presence of Hitachi wheel loaders in Canada
with construction, municipal and mining customers.
Gear Motor Solution Withstands Harsh Outdoor Conditions
A customer’s bulk material handling system had experienced repetitive failures
operating in a very difficult outdoor environment affected by ice, snow, rain and dust.
The system is intended to operate 24 hours, seven days a week, but was impacted
by a major component which was obsolete causing reliability and costly maintenance
issues. The customer required an up-to-date and highly reliable replacement that
would eliminate unplanned maintenance in the challenging environment. Wajax’s
technical team worked closely with the customer and partners at Sumitomo to
implement improvements to the system that were engineered to improve reliability
through new seal technology, integrated heating systems to improve cold weather
operations and modular components to simplify installation and reduce future
maintenance costs. The changes have been proven in operations to have solved the
customer’s repetitive failure issue, making this important process more reliable and
allowing the customer to operate this key material handling system with confidence.
Wajax 2019 Annual Report 11
Sugar Syrup Filtration System Enhances
Purification and Significantly Reduces Cost
For Wajax’s client, one of Canada’s largest refiners of cane sugar, filtration
is a key step in the production process. Its existing filtration system was
changed on a frequent basis due to high contamination. The frequent
shutdowns resulted in production downtime as well as a large amount
of sugar syrup being wasted. Wajax was entrusted to provide a tailored
solution to address downtime and safety hazards and proposed the
3M DF Series Filtration system. Upon completion of an initial trial, it was
concluded that the 3M technology provided considerable improvement in
service life as the increased filtration surface area achieved up to four
times the throughput compared to the previous filters. The Wajax solution,
improved the number of bags per batch, lowered labour hours, and reduced
production downtime and product waste.
Custom Pillow Block Bearings
Prevent a Costly Mine Shutdown
Scheduled maintenance shutdowns are important events at a mine and
getting through the maintenance period safely and on schedule is essential.
After scheduling a maintenance shutdown, a major mining customer
realized that they were missing required parts with an expected lead time
of 16 weeks for the parts to arrive, and the shutdown was taking place
in just five weeks. The project required two sets of custom pillow blocks
along with other necessary components. With time of the essence, Wajax
and its suppliers teamed up to deliver an innovative solution. Combining
their knowledge, experience and skills with state-of-the-art machinery, fully
machined steel plates were delivered instead of castings. Wajax and its
suppliers worked 16-20 hours a day, seven days a week during a period
of five weeks – successfully delivering the pillow blocks in time for the
customer’s shutdown and saving the customer considerable cost and delay.
New Gearbox Leads to a Bigger
Mix for Growing Chocolate Fix
One of the largest cocoa processor and chocolate ingredient suppliers in
North America had plans to significantly expand production. The project
required an investment in larger and newer mixing tanks. In partnership
with a strategic vendor, SM Cyclo/Sumitomo, Wajax was enlisted to
provide technical support and the required drawings for the gearboxes.
The project included a Sumitomo gearbox with a high horsepower electric
drive motor. Based on the outstanding success of the project, Wajax
completed a subsequent project of four identical tanks for another area
of the plant. The Canadian project extended into international growth
opportunities, with co-workers in the United States taking notice and
contracting the new build of five other tanks, with Wajax as the solution
partner for the project.
Ensuring a Wood Plant Keeps Things Moving Safely
A wood pelletizing plant encountered operational challenges with
sawdust storage. As sawdust and other wood materials were added
to storage silos, the weight caused build-up and blockages that can
lead to the overheating of kiln dryers used in the production process.
The plant needed a solution to monitor and control the flow of wood
material to prevent blockages and detect if chutes were plugged. There
was also another unique need – to be able prevent metal from entering
the pelletizing machine. Wajax partnered with the client to assess the
best custom solution, and provide expertise addressing safety and
operational challenges. This included the provision of numerous multi-
vane paddle Roto-Bindicator™ Pro metal detectors. Wajax also ensured
a magnetic paddlewheel was incorporated. With Wajax’s technical and
safety expertise, the new system was not only able to reduce the risk of
fire and help increase safety for personnel, but also enhance operational
productivity for the client.
12 Wajax 2019 Annual Report
Digging for a Living
David Stalker Excavating Ltd. was hired by Oak Bay Marine Group in Ladysmith B.C.
to excavate a road leading to their new marina, as well as the adjacent mill site.
David’s crew would be digging a tremendous amount of material from some of the
rockiest terrain on Vancouver Island. David needed a powerful excavator that could
spend long days digging through hardened earth and stone. However, powerful
machines can be big and unusable in areas where space is limited. Space for this
job wasn’t an issue, but it would be in the future – and David didn’t want a machine
he could only use today. For this job, David chose the Hitachi ZX345, a “zero-tail-
swing” excavator. Its powerful engine could easily get through tough earth and the
zero-tail-swing meant it could maneuver in tight spaces. David’s new Hitachi 345
had many expectations to live up to, and it met every one of them. His operators
love the three-pump hydraulic system as it gave them fast cycle times, and the
power-boost button meant there was very little it couldn’t get through.
Upgrading Columbia Icefield Adventure “Ice Explorer” Tour Vehicles
Deep in the Canadian Rockies lies one of the largest non-polar ice fields in the
world – the Columbia Icefield. The icefield is home to six major glaciers, including
the most imposing one – the Athabasca Glacier. Tour provider Columbia Icefield
Adventure transports visitors in specialized coach vehicles called Ice Explorers,
which provide safe all-terrain mobility on the glacier and an up-close sight
seeing experience. In season, the Ice Explorer coaches transport thousands
of passengers daily, running up to 16 hours a day.
Meeting stringent environmental standards is top-of-mind for Columbia Icefield
Adventure and they chose to rebuild and retrofit coaches with modern engine
technology. Using engines from Wajax’s partners at MTU, Wajax provided a full
ground-up rebuild for the vehicles, including new powertrain systems that meet
exacting emissions standards.
“To us, partnering with a company that can work with us regularly on maintenance
and evolving our coaches is very important,” says Corey Donovan, general manager,
Columbia Icefield Adventure. “Before the rebuilds, the Ice Explorer engines would
idle on the glacier to maintain heat in the passenger cabin. By eliminating the
need to idle, we minimize our impact on the environment and improve our guests’
experience on the glacier.”
Hydrogen Fuel Cells for Improved Productivity
One of Canada’s largest retailers was reviewing innovative ways to improve efficiency
and safety, and reduce power use in their distribution operations. Hundreds of lead
acid battery powered forklifts ran 24 hours a day, seven days a week and were
causing problems, including acid spills, inefficient battery changeovers, carbon
recycling and health and safety issues. The company chose hydrogen as a solution,
including fuel production and fuel cells to power the forklifts. After a detailed
evaluation of options, Wajax and Hyster’s Nuvera fuel cell systems were selected.
With Wajax providing planning, technical support, installation and training, the
Nuvera system allows the existing mixed fleet of machines to be retrofit with the new
hydrogen systems leading to lower emissions, elimination of acid spills, removal of
battery charging stations and improved safety. Wajax and Hyster have delivered over
100 fuel cells to date and Wajax has developed specialized technical training to
safely support this new technology. The project is expected to increase the retailer’s
productivity and safety and lower its carbon footprint.
Gas Turbine Filtration System Optimizes Maintenance
A global power generation company had excessive maintenance costs related to
turbine service. Their turbine experienced frequent blade fouling that required it
to be taken offline for cleaning, resulting in inefficient timelines between air filter
changes. They needed an innovative filtration system that would provide solutions
to several challenges, including a need to reduce moisture bypass through the
filters into the turbine and eliminating inner liner corrosion issues adding to the
turbine blade fouling. Wajax and its partner Donaldson worked together to assess
the system and proposed changes to improve reliability through the deployment of
a new filtration system. The new system provided an advanced filtration mechanism
with anti-corrosion properties that improved efficiency, lowered turbine fouling and
reduced the frequency of required cleaning. Wajax and Donaldson have an excellent
history of working together to bring advanced filtration systems to customers.
Wajax 2019 Annual Report 13
Family Construction Company Finds Itself in a Tight Spot
Kang Construction Ltd. has been a Wajax customer for over 20 years.
Kang is a family-owned company in need of a fleet of excavators
that could haul a tremendous amount of material, all within the tight
quarters of the city of Calgary. They needed powerful machines that
were comfortable to use in a very compact size. Wajax supplied a
fleet of Hitachi excavators that included large construction class units
and compact machines including a ZX345 used in the excavation of
the Foothills Hospital Calgary Cancer Centre. This Hitachi model is
an "ultrashort" excavator with reduced tail-swing. Kang was incredibly
happy with the performance of their Hitachi excavators. The reduced
tail-swing of the all new ZX345 worked perfectly, and the excavator was
able to function at its highest potential, regardless of the restricted
area. Not only is it efficient, but it has also become a favourite
among Kang’s employees.
A Contractor’s Training Program to Build
Capacity in Local Forestry Community
Goliboski, a contractor based in Thunder Bay, Ontario, started a
training program with Confederation College for the Agoke Development
Corporation – an organization that prepares First Nations people for work
in the Ogoki Forest. The new training program is designed to give local
First Nations communities an opportunity to gain the necessary training
to be skilled equipment operators in the forestry industry. After acquiring
training and safety certificates, students complete a final test with their
machinery. Goliboski uses purpose-built forestry machines from Wajax’s
partner – Tigercat. Having owned Tigercat machinery throughout the
company’s history, the customer knew the significant benefits offered by
the brand. In addition to power, durability and ease of use, Tigercat’s new
digital telematics system allows customers to view operations remotely
in real-time, providing reassurance that things are on track. Tigercat
and Wajax work together to offer the best forestry equipment and
support in the industry.
Driving Sustainable Growth
Wajax currently provides products and services in ten categories. Growth
planning focuses on the relative opportunities in each of these categories
considering market size and share, the strength of manufacturing
relationships, category profitability and the durability of opportunity
through the business cycle.
Revenue by Category Classification (%)
For the twelve months ended December 31
2019 2018 2017
n Targeted Growth
n Core Strength
n Cyclical/Major
35% 34% 32%
47% 47% 50%
Project Opportunities
18% 19% 18%
Wajax’s peak to trough performance has historically been related to a high proportion
of profitability resulting from categories that are sensitive to commodity cycles. The
objective of revenue planning is to derive growth from categories where opportunities exist
and business conditions are more stable through the cycle, while not sacrificing growth
opportunities in more cyclical businesses.
Wajax’s ten product and service categories have been grouped into three classifications:
Targeted Growth – These categories represent the majority of planned growth due
to Wajax’s market share opportunities, excellent manufacturer relationships and
opportunities to grow through the cycle. Targeted Growth categories are Construction,
Material Handling and Engineered Repair Services, and growth is based on gaining
market share. In 2019, these categories collectively grew by 9%.
Core Strength – These categories are very important contributors to Wajax’s revenue
base and growth is expected to be generally consistent with long-term positive trends.
In these categories, Wajax has strong current market shares or performance.
Core Strength categories include Industrial Parts, Forestry, On-Highway and Power
Generation/Marine. In 2019, these categories collectively grew by 4%.
Cyclical/Major Project Opportunities – These categories address customer needs
in more cyclical industries or are sensitive to major capital projects that are difficult
to predict. Growth in the strategic plan in these categories has been estimated on
a conservative basis and is based on forecasts below peak levels. Wajax and its
manufacturing partners offer very strong products and services and we remain well-
positioned to benefit from upside in each of these categories. Cyclical/Major Project
Opportunities categories include Mining, Engines and Transmissions, and Crane/Utility.
In 2019, these categories collectively grew 1%.
Year-Over-Year Revenue Growth by Category Classification ($ millions)
2017
414.7
665.6
241.5
1,321.8(1)
2018
2019
505.0
548.3
+9%
697.9
282.1
1,485.1(1)
728.0
+4%
283.5
+1%
1,559.7(1)
For the twelve months ended December 31
n Targeted Growth
n Core Strength
n Cyclical/Major
Project Opportunities
Targeted Growth
Core Strength
Cyclical/Major Project Opportunities
Construction revenue decreased by 17% driven
Power and Marine revenue increased 5% based
primarily by a 14% decline in demand.
on large project deliveries.
Material Handling revenue increased 14%
Industrial Parts revenue increased 1% based on
driven by a 13% increase in new equipment
sales, ongoing investment in rental and
positive market conditions.
ERS revenue increased 77% driven by
organic growth of 18% and the acquisition
of Groupe Delom.
a broad range of categories.
Forestry revenue increased 20% due primarily
to higher equipment sales.
On-Highway decreased 6%.
Mining revenue increased 4% based on strong
equipment and product support revenue in
western Canada related primarily to coal and
oil sands customers.
Engines and Transmissions revenue decreased
9% due to conditions in the oil and gas market.
Crane/Utility increased 14%.
14 Wajax 2019 Annual Report
(1) Consolidated categories do not match total revenue due to exclusion of head office and eliminations.
Targeted Growth ($ millions)
Construction
Material Handling
Engineered Repair Services (ERS)
288.5
274.1
273.2
230.8
228.1
207.4
169.9
2013
2014
2015
2016
2017
2018
2019
Equipment
Product Support
125.1
122.8
124.1
120.8
109.3
163.9
143.7
2013
2014
2015
2016
2017
2018
2019
Equipment
Product Support
Rental
Working closely with our partners at Hitachi, Bell and other
manufacturers, we plan to continue to grow our market share
in construction equipment, focusing on excavators, wheel
loaders and articulated dump trucks. Wajax offers core
construction products, a full range of aftermarket services,
enhanced sales coverage and is testing new rental options on
heavy equipment to ensure we are meeting the needs of our
construction customers. 2019 revenue was affected by a 14%
decline in the Canadian construction equipment market.
In partnership with Hyster-Yale Material Handling, our focus is
to build upon our strength in the material handling market and
expand our market share through enhanced sales coverage,
ancillary equipment and warehouse products, expanded
aftermarket services and investment in our rental fleet. Wajax
offers a broad range of products and services to address
the material handling needs of warehouse, industrial and
heavy-lift customers.
156.3
88.1
Wajax continues to build ERS capabilities, offering shop and
field services, commissioning, design, repairs and rebuilds,
reliability and installation services. Our organic growth strategy
includes a focus on major account development for industrial
and resource customers and enhanced services including asset
management, condition monitoring and predictive maintenance.
Acquisitions are expected to play an important role in our
business. 2019 revenue was positively affected by organic
growth and acquisition.
63.4
59.7
58.3
63.1
38.2
2013
2014
2015
2016
2017
2018
2019
Services
Note: Certain comparative information has been adjusted to conform to the current year’s presentation.
Wajax 2019 Annual Report 15
Driving Sustainable Growth
Core Strength ($ millions)
Industrial Parts
Forestry
On-Highway
Power Generation/Marine
348.6
326.7
329.9
320.4
340.0
361.7
366.6
2013
2014
2015
2016
2017
2018
2019
Parts
142.8
133.3
130.3
144.3
136.4
116.0
163.4
2013
2014
2015
2016
2017
2018
2019
Equipment
Product Support
106.6
95.7
97.7
101.8
109.4
104.1
97.9
2013
2014
2015
2016
2017
2018
2019
Product Support
96.3
91.8
83.7
77.6
71.9
95.8
100.2
2013
2014
2015
2016
2017
2018
2019
Equipment
Product Support
Rental
Working closely with major vendors, including SKF, Timken,
ITT, 3M, Eaton and Moyno, Wajax offers its customers expert
service and support across a full range of bearings and power
transmission, process and fluid power products. Industrial
Parts is a very significant revenue contributor and an important
competitive differentiator. The category is consumed by virtually
all industrial users and offers access to a large number of
customers, generating sales and service opportunities in
other categories.
In partnership with Tigercat and Hitachi, Wajax offers an
industry-leading range of equipment and aftermarket services
to logging contractors and other forestry customers. Wajax
has achieved strong market share in a number of important
product areas and continues to see growth opportunities as
manufacturing partners invest in new product development that
increases the safety, productivity and cost effectiveness of the
logging operations of customers.
On-Highway product support covers a wide range of shop and
road services for municipalities, coach operators and large
vehicle customers. Working with partners such as Detroit and
Allison, who have excellent market share in the installed vehicle
population, Wajax is an industry leader in large engine and
transmission service. Growth is based on ongoing improvements
in our customer services and expansion of our services to
additional vehicle systems.
Standby, prime power and co-generation power systems are an
important focus for Wajax and our primary partner Rolls-Royce
Power Systems/MTU On-Site Energy. Wajax’s legacy strength
in resource industries has been augmented to focus on growth
areas including data centres, health care and water treatment.
In marine power generation and propulsion, Wajax enjoys strong
partnerships with Rolls-Royce and Volvo, providing growth
opportunities in commercial and defense marine.
Note: Certain comparative information has been adjusted to conform to the current year’s presentation.
16 Wajax 2019 Annual Report
Driving Sustainable Growth
Cyclical/Major Project Opportunities ($ millions)
Mining
180.0
164.5
170.3
132.7
146.9
110.8
85.8
Working closely with Hitachi, Wajax is a leader in the sales
and service of large hydraulic mining shovels, used in surface
mining operations across Canada, and continues to develop new
opportunities in the rigid frame mining truck market. To expand
the range of products and services available to our mining
customers, Wajax also provides re-build services for other major
equipment to help our customers extend the life and efficiency
of their assets.
2013
2014
2015
2016
2017
2018
2019
Equipment
Product Support
124.6
122.8
95.6
70.5
90.0
92.1
84.1
2013
2014
2015
2016
2017
2018
2019
Equipment
Product Support
Wajax supports a very broad range of engines and transmissions
used in off-highway applications such as oil and gas drilling,
well stimulation and large vehicle or system re-powers. Products
and services include design engineering, systems packaging,
shop and field repair, and re-build services. Our primary partners
include Rolls Royce Power Systems/MTU, Allison, Volvo and
Deutz. To partially compensate for the cyclicality in this category,
Wajax continues to focus on aftermarket and re-power services.
This category continued to be negatively affected by weak
Canadian conventional oil and gas markets.
57.0
54.0
41.7
40.9
40.7
29.1
25.5
Working with partners such as Terex, Wajax offers a broad range
of design and fabrication services to provincial utility and other
customers. As utility customers adjust their capital spending
on new equipment, Wajax is reviewing additional crane and
utility opportunities.
Engines/Transmissions
Crane/Utility
2013
2014
2015
2016
2017
2018
2019
Equipment
Product Support
Note: Certain comparative information has been adjusted to conform to the current year’s presentation.
Wajax 2019 Annual Report 17
Message from the Chairman
Wajax’s primary objective during 2019 was the continued execution of
its growth strategy. Building on adjustments made in 2018 to increase
focus on categories offering more resilient growth, the corporation again
delivered stronger financial results – despite the more challenging market
conditions which emerged as the year progressed. The corporation also
advanced its major infrastructure initiatives, increased its financial
flexibility and added to its ERS capabilities.
It was another busy year at Wajax, with Mark and his team continuing to work diligently on
the execution of the corporation’s growth strategy. Consistent with that focus, the majority
of Wajax’s growth in 2019 again came from Targeted Growth categories – categories offering
Wajax more resilient growth throughout the commodity cycle. Consolidated performance in
these categories was strong and the corporation delivered record revenue and increased
net earnings – despite weakening conditions in western Canada and a significant decline
in the demand for construction equipment nationally. The corporation also continued to
advance its major initiatives, such as its new ERP system and Customer Support Centres,
each of which will help transform Wajax and the experience it provides to its customers.
Steps taken during the year to increase the corporation’s financial flexibility, including the
public offering of senior unsecured debentures completed in the fourth quarter, will help to
ensure that the corporation has sufficient capital to pursue strategic acquisitions – such as
the acquisition of NorthPoint Technical Services which closed in early January 2020. Last,
but very certainly not least, Wajax employees achieved another record year in workplace
safety through a continual focus on injury prevention. The health and safety of the Wajax
team has become a fundamental aspect of the corporation’s culture.
While continuing to monitor the pace of change at the corporation, the board shifted its
attention during the year towards the changing market conditions and their impact. Although
these conditions dampened the financial expectations we held at the outset of the year,
the stronger financial results achieved in spite of them underscore the progress made in
transforming Wajax since the strategic reorganization announced in 2016. As a board, we
believe that these results also validate the corporation’s growth strategy and its emphasis
on more resilient product categories and regional diversification. As a result, we remain very
confident in that strategy and the direction of Wajax.
Regrettably, Anne Bélec has advised that she will not be standing for re-election as a
director of the corporation. On behalf of the board, I thank Anne for her contributions and
wish her all the best as she takes on other challenges.
As the important work continues, Wajax employees continue to show their mettle. On
behalf of the board, I thank them for their energy and enthusiasm. Thank you as well to the
corporation’s many loyal customers and suppliers for their continued support, and to my
fellow directors for their counsel throughout the year.
Robert P. Dexter
Chairman of the Board
Board of Directors
Thomas M. Alford ▲n
Director since 2014
Mr. Alford is President, Well Services of
Precision Drilling Corporation.
Edward M. Barrett ●▲
Director since 2006
Mr. Barrett is Chairman and Co-Chief Executive
Officer of Barrett Corporation.
Anne E. Bélec ●▲
Director since 2018
Ms. Bélec is the Co-Founder and
Chief Executive Officer of Mosaic Group, LLC.
Douglas A. Carty ●n
Director since 2009
Mr. Carty is a corporate director and the Chairman
and Co-Founder of Switzer-Carty Transportation Inc.
Sylvia D. Chrominska ●▲
Director since 2015
Ms. Chrominska is a corporate director.
Robert P. Dexter
Director since 1988
Mr. Dexter is Chairman and Chief Executive Officer
of Maritime Travel Inc. and the Chairman of the
Board of Directors of the Corporation.
John C. Eby ●n
Director since 2006
Mr. Eby is a corporate director and a Founder
and the President of Developing Scholars.
A. Mark Foote
Director since 2012
Mr. Foote is President and Chief Executive Officer
of the Corporation.
Alexander S. Taylor ▲n
Director since 2009
Mr. Taylor is President, Nuclear
of SNC-Lavalin Group Inc.
● Audit Committee
▲ Human Resources and Compensation Committee
n Governance Committee
18 Wajax 2019 Annual Report
Management’s Discussion
and Analysis
The following management’s discussion and analysis (“MD&A”)
discusses the consolidated financial condition and results of
operations of Wajax Corporation (“Wajax” or the “Corporation”) for
the year ended December 31, 2019. This MD&A should be read
in conjunction with the information contained in the consolidated
financial statements and accompanying notes for the year ended
December 31, 2019. Information contained in this MD&A is based
on information available to management as of March 2, 2020.
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.
Unless otherwise indicated, all financial information within this MD&A
is in millions of Canadian dollars, except ratio calculations, share,
share rights and per share data. Additional information, including
Wajax’s Annual Report and Annual Information Form, are available
on SEDAR at www.sedar.com.
Wajax Corporation Overview
Founded in 1858, Wajax (TSX: WJX) is one of Canada’s longest-
standing and most diversified industrial products and services
providers. The Corporation operates an integrated distribution
system, providing sales, parts and services to a broad range of
customers in diverse sectors of the Canadian economy, including:
construction, forestry, mining, industrial and commercial, oil sands,
transportation, metal processing, government and utilities, and
oil and gas.
Strategic Direction and Outlook
The goal of the One Wajax strategy is to provide customers with
access to the Corporation's full range of products and services while
delivering a consistently excellent level of customer service. Wajax
is focused on delivering a strong experience for its customers and
employees through the execution of clear plans in five key areas:
Investing in the Wajax team – The safety, well-being and
engagement of the Corporation's team of nearly 2,900 technicians,
sales professionals, support staff and leaders is the foundation of
the Corporation.
Investing in Wajax customers – The Corporation has the privilege
of supporting 32,000 individual customers across Canada ranging
from small local contractors to the country’s largest industrial and
resource organizations.
Executing a clear organic growth strategy – The Corporation has
classified each of its ten current product and service categories
based on a category’s contribution to sustainable growth. While
Wajax is competitive in all of the categories it participates in, these
classifications ensure that resources (such as inventory, capital,
personnel and marketing) are allocated appropriately.
Accretive acquisitions strategy – Wajax has developed clear
acquisition criteria for the Canadian and U.S. markets. In Canada,
the focus is primarily on acquisitions that add to the Corporation's
scale in the Engineered Repair Services ("ERS") business and
secondarily to extensions to the Corporation's existing distribution
businesses. In the U.S. market, the focus is on reviewing growth
opportunities related to distribution businesses that provide a long-
term growth platform for the One Wajax multi-category model.
Investing in the Wajax infrastructure – The Corporation is making
major changes to its infrastructure to improve the consistency
of customer service and lower costs. The Corporation's current
programs include the ongoing consolidation of its branch network,
investing in new information systems and implementing Customer
Support Centres that provide 24/7 customer support in all product
and service categories.
Wajax 2019 Annual Report 19
Outlook
Wajax expects that the more challenging market conditions that
emerged in 2019 will continue in 2020, resulting in pressure on
capital equipment demand. Equipment utilization rates, however,
are expected to be generally stable on a full year basis, which
will support parts and service volumes. Based on manufacturer
discussions and industry information, market conditions are
anticipated to improve later in 2020.
The Corporation's objective for the year is to manage the business
and capital conservatively until trends in the market improve. Market-
oriented pressure on consolidated revenue is expected to be at least
partially offset by higher volumes in engineered repair services and
industrial parts and expected mining deliveries in the second half of
the year. The Corporation has also identified opportunities to improve
gross margins, drive additional cost productivity and to lower finance
costs based on reductions in inventory in 2020.
The Corporation plans to move forward with the implementation
of the new ERP system beginning in the second quarter of 2020.
Implementation is expected to occur over an 18 to 24 month time
frame in order to minimize the risks associated with the change. The
Corporation's branch network optimization program will also continue,
including the previously disclosed efforts to monetize selected real
estate assets through either sale and leaseback transactions or
site closure due to the colocation of branches. Proceeds from the
real estate program are expected to be applied to the Corporation's
credit facilities.
Wajax will continue to manage with an appropriate balance between
pace and market conditions while tracking toward its strategic plan
goals and targets.
Annual and Fourth Quarter Highlights
2019 Full Year Highlights
Revenue increased $71.4 million or 4.8%, to $1,553.0 million in
2019 from $1,481.6 million in 2018. Regionally:
Revenue in western Canada of $623.6 million decreased 4.5%
over the prior year due primarily to lower construction and
engines and transmissions sales. This was partially offset by
higher mining parts and service sales.
Revenue in central Canada of $311.1 million decreased 4.1%
over the prior year mainly due to lower construction and power
generation sales. This was partially offset by strong forestry
equipment sales and higher ERS sales.
Revenue in eastern Canada of $618.3 million increased 22.6%
over the prior year due to sales gains in a majority of product
categories, including higher ERS, industrial parts, material
handling and power generation equipment sales.
Gross profit margin of 18.8% in 2019 increased 0.4% compared to
2018 due mainly to higher equipment and product support margins
offset partially by lower industrial parts margins.
Selling and administrative expenses as a percentage of revenue
decreased 40 bps to 13.7% in 2019 from 14.1% in 2018. Selling
and administrative expenses increased by $3.2 million compared
to 2018 due mainly to higher personnel costs as a result of the
acquisition of Groupe Delom Inc. ("Delom"), Customer Support
Centre ("CSC") project costs, and higher restructuring and other
related costs, partially offset by higher gains on the sale of
properties and lower variable incentive accruals.
EBIT increased $14.9 million, or 25.4%, to $73.5 million in 2019
versus $58.6 million in 2018.(1) The year-over-year improvement
is primarily attributable to increased revenue and gross profit
margins, partially offset by higher selling and administrative
expenses and higher restructuring and other related costs
of $1.4 million.
The Corporation generated net earnings of $39.5 million, or $1.98
per share in 2019, versus $35.9 million, or $1.82 per share
in 2018. The Corporation generated adjusted net earnings of
$41.9 million, or $2.10 per share in 2019, versus $39.9 million,
or $2.02 per share in 2018.(1)
Adjusted EBITDA margin increased to 8.4% in 2019 from 6.2%
in 2018.(1) Adjusted EBITDA margin includes the positive impact
related to the adoption of IFRS 16.(1) See the Changes in
Accounting Policies section.
The Corporation’s backlog at December 31, 2019 of
$218.1 million decreased $69.9 million, or 24.3%, compared
to September 30, 2019 due primarily to lower mining, forestry,
power generation and material handling orders. Compared to
December 31, 2018, backlog increased $11.2 million, or 5.4%,
due primarily to higher mining orders offset partially by lower power
generation, material handling, engines and transmissions and
construction orders.(1)
Inventory of $414.9 million at December 31, 2019 decreased
$20.2 million from September 30, 2019 due to lower equipment
and parts inventory in most categories, partially offset by higher
mining equipment and parts inventory. Inventory increased
$48.9 million from December 31, 2018 due primarily to higher
construction equipment inventory and mining equipment
and parts inventory.
Working capital of $404.1 million at December 31, 2019
increased $1.7 million from September 30, 2019 due
primarily to higher trade and other receivables and deposits
on inventory. These working capital increases were partially
offset by lower inventory and higher accounts payable and
accrued liabilities. Trailing four-quarter average working capital
as a percentage of the trailing 12-month sales was 25.3%, an
increase of 0.9% from September 30, 2019 due primarily to
the higher trailing four-quarter average working capital. Working
capital at December 31, 2019 increased $69.4 million from
December 31, 2018 due primarily to higher trade and other
receivables, inventory levels, and deposits on inventory. These
working capital increases were partially offset by higher accounts
payable and accrued liabilities and current lease liabilities due
to the adoption of IFRS 16. Trailing four-quarter average working
capital as a percentage of the trailing 12-month sales increased
by 3.4% from 2018, due primarily to the higher trailing four-quarter
average working capital.
20 Wajax 2019 Annual Report
Management’s Discussion and Analysis The Corporation’s leverage ratio decreased to 2.60 times
Fourth Quarter Highlights
at December 31, 2019 compared to 2.81 times at
September 30, 2019. The decrease in the leverage ratio was due
to the lower debt level combined with the higher trailing 12-month
pro-forma adjusted EBITDA.(1) The Corporation's leverage ratio
increased to 2.60 times at December 31, 2019 compared to 2.45
times at December 31, 2018 due to the higher debt level offset
partially by the higher trailing 12-month pro-forma adjusted EBITDA.(1)
On July 2, 2019, the Corporation began the implementation of its
new ERP system. Integrity and effectiveness of the system has
been evaluated through pilots in a limited number of branches
in the latter half of 2019. The Corporation's plans are to move
forward with the implementation of the new ERP system beginning
in the second quarter of 2020. Implementation is expected to
occur over an 18 to 24 month time frame in order to minimize the
risks associated with the change.
In the third quarter of 2019, the Corporation commenced
a planned management realignment (the "Management
Realignment"), resulting in a pre-tax restructuring charge of
$3.7 million recognized in the year relating primarily to expected
severance costs. The Management Realignment simplifies the
Corporation’s regional management structure, further enhances the
collaboration between sales and product support, and integrates
Delom with the Corporation's legacy ERS business. These changes
are expected to result in pre-tax annual savings of $5.0 million,
approximately $0.5 million of which was realized in 2019.
In the fourth quarter of 2019, the Corporation entered into two
sale and leaseback transactions for two of its owned properties.
The proceeds net of transaction costs on the sale of the
two properties was $9.4 million and the net book value was
$2.8 million, resulting in a total gain on the sale of properties
of $6.6 million, of which $2.3 million has been recognized in
the fourth quarter.
On October 1, 2019, the Corporation amended its senior
secured credit facility, extending the maturity date from
September 20, 2023 to October 1, 2024.
On December 4, 2019, the Corporation issued $50 million of
senior unsecured debentures by way of a prospectus offering.
On December 11, 2019, a further $7 million of senior unsecured
debentures were issued pursuant to the exercise of an over-
allotment option granted in connection with the offering. The
$57 million in senior unsecured debentures (the “Debentures”)
bear interest at a rate of 6.00% per annum, payable semi-annually
and mature on January 15, 2025.
Subsequent to year-end, the Corporation announced on
January 13, 2020 the acquisition of all of the issued and
outstanding shares of Calgary, Alberta-based NorthPoint Technical
Services ULC ("NorthPoint"). The shares were acquired from an
affiliate of Denver, Colorado-based Lion Equity Partners for an
aggregate purchase price of $18 million.
Revenue in the fourth quarter of 2019 increased $14.2 million or
3.6%, to $403.9 million, from $389.8 million in the fourth quarter
of 2018. Regionally:
Revenue in western Canada of $164.2 million decreased 1.2%
over the prior year due primarily to lower construction equipment
and engines and transmissions sales, partially offset by strength
in mining equipment sales.
Revenue in central Canada of $82.5 million decreased 6.3%
over the prior year mainly due to lower construction equipment
sales, partially offset by strong forestry equipment sales.
Revenue in eastern Canada of $157.3 million increased 16.1%
over the prior year due to sales gains in a majority of product
categories, including higher forestry, material handling, and
power generation equipment sales.
Gross profit margin of 17.6% in the fourth quarter of 2019
increased 0.4% compared to the same period of 2018, due mainly
to higher equipment, product support and ERS margins offset
partially by lower industrial parts margins and a higher proportion
of equipment sales.
Selling and administrative expenses as a percentage of revenue
decreased 180 bps to 12.3% in the fourth quarter of 2019 from
14.1% in the same period of 2018. Selling and administrative
expenses decreased by $5.2 million compared to the fourth
quarter of 2018 due mainly to lower variable incentive accruals,
a $2.3 million gain on sale of properties, lower sales-related
expenses, and lower non-cash losses on mark to market of
derivative instruments.
EBIT increased $9.8 million, or 85.2%, to $21.4 million in the
fourth quarter of 2019 versus $11.6 million in the same period
of 2018.(1) The year-over-year improvement is primarily attributable
to increased revenue and gross profit margins, and lower
operating expenses.
The Corporation generated net earnings of $12.2 million, or $0.61
per share, in the fourth quarter of 2019 versus $6.1 million, or
$0.31 per share, in the same period of 2018. The Corporation
generated adjusted net earnings of $10.1 million, or $0.51 per
share, in the fourth quarter of 2019 versus $8.3 million, or $0.42
per share, in the same period of 2018.(1)
Adjusted EBITDA margin increased to 7.9% in the fourth quarter of
2019 from 6.0% in the same period of 2018.(1) Adjusted EBITDA
margin includes the positive impact related to the adoption of
IFRS 16.(1) See the Changes in Accounting Policies section.
(1) “Backlog”, “Leverage ratio”, “Adjusted net earnings”, “Adjusted EBITDA”, “Adjusted EBITDA margin” and “Pro-forma adjusted EBITDA” do not have standardized meanings prescribed by generally
accepted accounting principles (“GAAP”). “EBIT” and “Working capital” are additional GAAP measures. See the Non-GAAP and Additional GAAP Measures section.
Wajax 2019 Annual Report 21
Management’s Discussion and Analysis Summary of Annual Operating Results
Statement of financial position highlights
Statement of earnings highlights
For the twelve months
ended December 31
2019
2018
% change
Revenue
$ 1,553.0 $ 1,481.6
As at December 31
2019
$
Trade and other receivables
Inventory
$
Accounts payable and accrued liabilities $
Other working capital amounts(1)
$
238.2 $
414.9 $
(287.7) $
38.6 $
2018
206.3
366.0
(253.0)
15.4
291.8 $
272.3
212.8 $
209.5
Working capital(1)
Rental equipment
5.6 $
4.1
36.6%
Property, plant and equipment
73.5 $
19.7 $
58.6
8.8
25.4%
123.9%
Funded net debt(1)(4)
Key ratios:
Leverage ratio(1)(4)
Senior secured leverage ratio(1)(4)
$
$
$
$
404.1 $
334.7
77.0 $
42.1 $
73.7
59.0
276.5 $
222.0
2.60
2.10
2.45
2.45
4.8%
7.2%
1.6%
8.0%
2.1%
10.0%
8.8%
8.4%
5.0%
$
Gross profit
Selling and administrative
expenses
Restructuring and
other related costs
$
$
Earnings before
finance costs and
income taxes(1)
Finance costs
Earnings before
income taxes(1)
Income tax expense
Net earnings
– Basic earnings
per share(2)
– Diluted earnings
per share(2)
$
$
$
$
$
$
$
53.8 $
14.3 $
49.8
14.0
39.5 $
35.9
1.98 $
1.82
1.93 $
1.78
39.9
Adjusted net earnings(1)(3) $
41.9 $
– Adjusted basic
earnings per share(1)(2)(3) $
2.10 $
2.02
4.0%
– Adjusted diluted
earnings per share(1)(2)(3) $
2.05 $
Adjusted EBITDA(1)
$
130.3 $
1.98
91.2
3.5%
42.9%
Key ratios:
Gross profit margin
Selling and
administrative
expenses as a
percentage of
revenue
EBIT margin(1)
Adjusted EBITDA
margin(1)
Effective income
tax rate
18.8%
18.4%
13.7%
4.7%
14.1%
4.0%
8.4%
6.2%
26.5%
28.0%
22 Wajax 2019 Annual Report
(1) These measures do not have a standardized meaning prescribed by GAAP. See the
Non-GAAP and Additional GAAP Measures section.
(2) Weighted average shares, net of shares held in trust, outstanding for calculation of basic
and diluted earnings per share for the twelve months ended December 31, 2019 was
19,998,656 (2018 – 19,686,075) and 20,416,191 (2018 – 20,147,902), respectively.
(3) Net earnings excluding the following:
a. after-tax restructuring and other related costs of $4.1 million (2018 – $3.0 million), or
basic and diluted earnings per share of $0.21 and $0.20 respectively (2018 – basic and
diluted earnings of $0.15 per share) for the twelve months ended December 31, 2019.
b. after-tax gain recorded on sales of properties of $2.3 million (2018 – $0.9 million), or
basic and diluted earnings per share of $0.11 (2018 – $0.04 per share) for the twelve
months ended December 31, 2019.
c. after-tax non-cash gains on mark to market of derivative instruments of $0.4 million
(2018 – losses of $1.6 million), or basic and diluted earnings per share of $0.02
(2018 – $0.08 per share) for the twelve months ended December 31, 2019.
d. after-tax CSC project costs of $0.9 million (2018 – nil), or basic and diluted earnings
per share of $0.05 and $0.04 respectively (2018 – nil) for the twelve months ended
December 31, 2019.
e. after-tax Delom transaction costs of $0.3 million, or basic and diluted earnings per share
of $0.02 for the twelve months ended December 31, 2018.
(4) Effective with the reporting period beginning on January 1, 2019 and the adoption of
IFRS 16, the Corporation has amended the definition of Funded net debt to exclude lease
liabilities not considered part of debt. For comparison purposes, the pro-forma funded net
debt and leverage ratio for December 31, 2018 using the amended definition of funded net
debt is shown in the table above.
Annual Results of Operations
For the year ended December 31, 2019, revenue increased 4.8%, or
$71.4 million, to $1,553.0 million, from $1,481.6 million in 2018.
In addition to regional revenue commentary provided herein, the
following factors contributed to the increase in revenue:
ERS sales have increased due to higher ERS revenues nationally
due primarily to the acquisition of Delom in the fourth quarter of
2018 and organic growth in the legacy ERS business.
Product support sales have increased on strength in mining parts
and service sales in western Canada and higher material handling
sales in all regions. These increases were partially offset by lower
construction sales in western and central Canada and lower
on-highway sales in all regions.
Equipment sales have decreased due to lower construction
sales in western and central Canada, lower mining sales across
all regions, and lower engines and transmissions sales in
western Canada. These decreases were partially offset by higher
forestry sales in all regions and higher material handling sales
in eastern Canada.
Backlog
Backlog of $218.1 million at December 31, 2019 increased
$11.2 million compared to December 31, 2018 due primarily
to higher mining orders offset partially by lower power
generation, material handling, engines and transmissions
and construction orders.
Management’s Discussion and Analysis
Revenue by Geographic Region ($ millions)
Twelve months ended December 31
2019
$ change
(cid:31) Western Canada
(cid:31) Central Canada
(cid:31) Eastern Canada*
Total
$ 623.6 $
311.1
618.3
(29.5)
(13.2)
114.1
$ 1,553.0 $ 71.4
Twelve months ended December 31
2018
(cid:31) Western Canada
(cid:31) Central Canada
(cid:31) Eastern Canada*
Total
$ 653.1
324.3
504.2
$ 1,481.6
* Includes Quebec and the Atlantic provinces.
Revenue by Market
Twelve months ended December 31
2019
Twelve months ended December 31
2018
Revenue Sources ($ millions)
(cid:31) Construction
(cid:31) Mining
(cid:31) Forestry
(cid:31) Industrial/Commercial
(cid:31) Oil Sands
(cid:31) Transportation
(cid:31) Metal Processing
(cid:31) Government and Utilities
(cid:31) Oil and Gas
(cid:31) Other
15%
15%
14%
11%
11%
9%
7%
7%
3%
8%
Twelve months ended December 31
2019
$ change
(cid:31) Equipment sales
(cid:31) Product support
(cid:31) Industrial parts
(cid:31) ERS
(cid:31) Equipment rental
Total
$ 523.9 $
476.1
366.6
149.6
36.9
(18.9)
18.5
4.9
65.0
2.0
$ 1,553.0 $
71.4
(cid:31) Construction
(cid:31) Mining
(cid:31) Forestry
(cid:31) Industrial/Commercial
(cid:31) Oil Sands
(cid:31) Transportation
(cid:31) Metal Processing
(cid:31) Government and Utilities
(cid:31) Oil and Gas
(cid:31) Other
19%
16%
14%
11%
9%
9%
6%
4%
4%
8%
Twelve months ended December 31
2018
(cid:31) Equipment sales
(cid:31) Product support
(cid:31) Industrial parts
(cid:31) ERS
(cid:31) Equipment rental
Total
$ 542.8
457.6
361.7
84.6
34.9
$ 1,481.6
Gross profit
For the year ended December 31, 2019, gross profit increased
$19.6 million, or 7.2%, compared to the same period last year due
to increased volumes and higher gross profit margins. Gross profit
margin of 18.8% in 2019 increased 0.4% compared to 2018 due
mainly to higher equipment and product support margins offset
partially by lower industrial parts margins.
Selling and administrative expenses
For the year ended December 31, 2019, selling and administrative
expenses increased $3.2 million compared to the same period last
year. This increase was primarily due to higher personnel costs as a
result of the acquisition of Delom, CSC project costs in the current
year and higher restructuring costs, partially offset by higher gains on
the sale of properties and lower variable incentive accruals. Selling
and administrative expenses as a percentage of revenue decreased
to 13.7% in 2019 from 14.1% in 2018.
Restructuring and other related costs
In the first quarter of 2018, the Corporation commenced the redesign
of its finance function (the "Finance Reorganization Plan"). The cost
of the Finance Reorganization Plan was expected to be approximately
$5.6 million in severance, project management and interim
duplicate labour costs, of which $1.9 million has been recognized
in 2019, $3.5 million was recognized in 2018, and $0.3 million was
recognized in 2017.
In the third quarter of 2019, the Corporation commenced the
Management Realignment resulting in an estimated restructuring
cost of approximately $3.7 million recognized in the year relating
primarily to expected severance costs. The realignment simplifies
the Corporation’s regional management structure, further enhances
the collaboration between sales and product support, and integrates
Delom with the Corporation's legacy ERS business. These changes
are expected to result in pre-tax annual savings of $5.0 million,
approximately $0.5 million of which was realized in 2019.
Finance costs
For the year ended December 31, 2019, finance costs of
$19.7 million increased $10.9 million compared to the same period
in 2018 due primarily to higher average debt levels, due in part to
the acquisition of Delom in the fourth quarter of 2018, and interest
on lease liabilities of $5.7 million related to right-of-use assets as
a result of the adoption of IFRS 16 on January 1, 2019. See the
Liquidity and Capital Resources section.
Income tax expense
The Corporation’s effective income tax rate for the twelve months
ended December 31, 2019 was 26.5% (2018 – 28.0%) compared to
the statutory rate of 26.8% (2018 – 26.9%) due to the non-taxable
portion of the gain recorded on sales of properties.
Net earnings
For the year ended December 31, 2019, the Corporation generated
net earnings of $39.5 million, or $1.98 per share, compared to
$35.9 million, or $1.82 per share, in the same period of 2018.
The $3.7 million increase in net earnings resulted primarily from
increased revenue and gross profit margins, partially offset by higher
operating expenses, higher restructuring and other related costs, and
higher finance costs.
Wajax 2019 Annual Report 23
Management’s Discussion and Analysis
Adjusted net earnings (See the Non-GAAP
and Additional GAAP Measures section)
Adjusted net earnings for the twelve months ended December 31, 2019
excludes restructuring and other related costs of $4.1 million
after-tax, or $0.21 per share (2018 – $3.0 million after-tax, or $0.15
per share), certain non-recurring CSC project costs of $0.9 million
after-tax, or $0.05 per share (2018 – nil), non-cash gains on mark to
market of derivative instruments of $0.4 million after-tax, or $0.02
per share (2018 – losses of $1.6 million after-tax, or $0.08 per
share), and a gain recorded on sales of properties of $2.3 million
after-tax, or $0.11 per share (2018 – $0.9 million after-tax, or
$0.04 per share).
As such, adjusted net earnings increased $2.0 million to
$41.9 million, or $2.10 per share, for the twelve months ended
December 31, 2019 from $39.9 million, or $2.02 per share,
in the same period of 2018.
Comprehensive income
For the year ended December 31, 2019, the total comprehensive
income of $38.7 million included net earnings of $39.5 million
and an other comprehensive loss of $0.8 million. The other
comprehensive loss of $0.8 million in the current year resulted
primarily from $1.0 million of losses on derivative instruments
outstanding at the end of the period designated as cash flow hedges.
Selected Annual Information
The following selected annual information is audited and has
been prepared on the same basis as the 2019 annual audited
consolidated financial statements except for 2018 and 2017 which
have not been adjusted for the adoption on January 1, 2019 of
IFRS 16 Leases ("IFRS 16").
For the twelve months
ended December 31
2019
2018
2017
Revenue
$ 1,553.0 $ 1,481.6 $ 1,318.7
Net earnings
$
Basic earnings per share $
Diluted earnings
per share
$
39.5 $
1.98 $
35.9 $
1.82 $
27.4
1.40
1.93 $
1.78 $
1.36
Total assets
Non-current liabilities
$ 1,045.1 $
404.8 $
$
831.2 $
244.1 $
694.4
160.9
Revenue in 2019 of $1,553.0 million increased $71.4 million
compared to 2018. The increase is due primarily to ERS strength
in central and eastern Canada, forestry strength in all regions, and
strong material handling sales in eastern Canada. These gains
were partially offset by lower construction revenue in western and
central Canada. Revenue in 2018 of $1,481.6 million increased
$162.9 million compared to 2017. The increase was due to growth
in all regions, led by strong gains in construction, mining, material
handling, power generation and industrial parts. These gains
were partially offset by lower crane and utility revenue primarily
in central Canada.
Net earnings in 2019 of $39.5 million increased $3.7 million, or
10.2%, from 2018. The increase in net earnings resulted primarily
from increased revenue and gross profit margins, partially offset by
higher operating expenses, higher restructuring and other related
costs, and higher finance costs. The Corporation generated adjusted
net earnings of $41.9 million, or $2.10 per share in 2019, versus
$39.9 million, or $2.02 per share in 2018. Net earnings in 2018
of $35.9 million increased $8.5 million, or 30.9%, from 2017. The
increase in net earnings resulted primarily from higher volumes,
improved selling and administrative expense efficiency and lower
finance costs. These increases were partially offset by restructuring
and other related costs of $3.0 million after-tax in 2018. The
Corporation generated adjusted net earnings of $39.9 million,
or $2.02 per share in 2018, versus $30.1 million, or $1.54 per
share, in 2017.
The $350.7 million increase in total assets between
December 31, 2017 and December 31, 2019 was mainly
attributable to higher trade and other receivables of $34.2 million,
inventory of $102.0 million, deposits on inventory of $30.6 million,
goodwill and intangible assets of $37.9 million, and the recognition
of right-of-use assets of $117.1 million due to the adoption
of IFRS 16.
Non-current liabilities at December 31, 2019 of $404.8 million
increased $243.9 million from December 31, 2017 primarily
attributable to the issuance of the Debentures in the fourth quarter
of 2019 resulting in a liability of $54.1 million, an $81.9 million
increase in long-term debt, and an increase in lease liabilities
of $100.7 million due to the adoption of IFRS 16. The increase
in long-term debt resulted mainly from higher working capital at
December 31, 2019 compared to December 31, 2017 and the
acquisition of Delom in 2018.
Dividends declared
per share
$
1.00 $
1.00 $
1.00
Selected Quarterly Information
The following table summarizes unaudited quarterly consolidated
financial data for the eight most recently completed quarters. The
2018 financial data has not been adjusted for the adoption on
January 1, 2019 of IFRS 16.
Revenue
Net earnings
Net earnings per share
– Basic
– Diluted
Adjusted net earnings(2)
Adjusted earnings per share(2)
– Basic
– Diluted
Q4
Q3
Q2
Q1
Q4
Q3(1)
Q2(1)
Q1(1)
2019
2018
$ 403.9 $ 365.1 $ 409.4 $ 374.6 $ 389.8 $ 367.1 $ 382.3 $ 342.4
$
12.2 $
7.6 $
11.9 $
7.9 $
6.1 $
9.1 $
11.4 $
9.3
$
$
0.61 $
0.60 $
0.38 $
0.37 $
0.59 $
0.58 $
0.39 $
0.39 $
0.31 $
0.30 $
0.46 $
0.45 $
0.58 $
0.56 $
0.48
0.46
$
10.1 $
10.3 $
12.6 $
8.7 $
8.3 $
9.5 $
12.3 $
9.6
$
$
0.51 $
0.50 $
0.52 $
0.51 $
0.63 $
0.62 $
0.43 $
0.43 $
0.42 $
0.41 $
0.48 $
0.47 $
0.63 $
0.60 $
0.49
0.47
(1) As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018, a correction of non-material errors in prior periods ("Other adjustments") was
recorded impacting the prior year comparative periods.
(2) These measures do not have a standardized meaning prescribed by GAAP. See the Non-GAAP and Additional GAAP Measures section.
24 Wajax 2019 Annual Report
Management’s Discussion and Analysis
Although quarterly fluctuations in revenue and net earnings are
difficult to predict, during times of weak resource sector activity,
the first quarter will tend to have seasonally lower revenues. As
well, the project timing of large mining trucks and shovels and
power generation packages can shift the revenue and net earnings
throughout the year.
Fourth quarter 2018 net earnings of $6.1 million included after-
tax restructuring and other related costs of $0.5 million, after-tax
non-cash losses on mark to market of derivative instruments of
$1.5 million and after-tax Delom transaction costs of $0.3 million.
Excluding these items, fourth quarter 2018 adjusted net earnings
were $8.3 million.
First quarter 2019 net earnings of $7.9 million included after-tax
restructuring and other related costs of $0.7 million, certain non-
recurring after-tax CSC project costs of $0.5 million and after-tax
non-cash gains on mark to market of derivative instruments of
$0.4 million. Excluding these items, first quarter 2019 adjusted net
earnings were $8.7 million. Second quarter 2019 net earnings of
$11.9 million included after-tax restructuring and other related costs
of $0.3 million, certain non-recurring after-tax CSC project costs
of $0.3 million and after-tax non-cash losses on mark to market
of derivative instruments of $0.2 million. Excluding these items,
second quarter 2019 adjusted net earnings were $12.6 million.
Third quarter 2019 net earnings of $7.6 million included after-tax
restructuring and other related costs of $2.9 million, and after-
tax non-cash gains on mark to market of derivative instruments of
$0.2 million. Excluding these items, third quarter 2019 adjusted net
earnings were $10.3 million. Fourth quarter 2019 net earnings of
$12.2 million included after-tax restructuring and other related costs
of $0.1 million, and after-tax gain recorded on sales of properties of
$2.3 million. Excluding these items, fourth quarter 2019 adjusted net
earnings were $10.1 million. See the Non-GAAP and Additional GAAP
Measures section.
A discussion of Wajax’s previous quarterly results can be found in
Wajax’s quarterly MD&A available on SEDAR at www.sedar.com.
Consolidated Financial Condition
Capital Structure and Key Financial Condition Measures
Shareholders’ equity
Funded net debt(1)(2)
Total capital
December 31
2019
316.8 $
276.5
2018
297.0
222.0
$
$
593.3 $
519.0
Funded net debt to total capital(1)(2)
46.6%
42.8%
Leverage ratio(1)(2)
Senior secured leverage ratio(1)(2)
2.60
2.10
2.45
2.45
(1) See the Non-GAAP and Additional GAAP Measures section.
(2) Effective with the reporting period beginning on January 1, 2019 and the adoption of
IFRS 16, the Corporation has amended the definition of Funded net debt to exclude lease
liabilities not considered part of debt. For comparison purposes, the pro-forma funded net
debt, funded net debt to total capital and leverage ratio for December 31, 2018 using the
amended definition of funded net debt is shown in the table above. See the Non-GAAP and
Additional GAAP Measures section.
The Corporation’s objective is to manage its working capital and
normal-course capital investment programs within a leverage range of
1.5 to 2.0 times and to fund those programs through operating cash
flow and its bank credit facilities as required. There may be instances
whereby the Corporation is willing to maintain a leverage ratio outside
of this range during changes in economic cycles. The Corporation
may also maintain a leverage ratio above the stated range as a result
of investment in acquisitions and may fund those acquisitions using
its bank credit facilities and other debt instruments in accordance
with the Corporation’s expectations of total future cash flows,
financing costs and other factors. The Corporation’s leverage ratio
is currently above the target range primarily due to the acquisition
of Delom and investments made in working capital. See the Funded
Net Debt section.
Shareholders’ Equity
The Corporation’s shareholders’ equity at December 31, 2019 of
$316.8 million increased $19.8 million from December 31, 2018,
as earnings of $39.5 million exceeded dividends declared
of $20.0 million.
The Corporation’s share capital, included in shareholders’ equity on
the statements of financial position, consists of:
Number of
Common
Shares
Amount
Issued and outstanding,
December 31, 2018
Common shares issued to settle
share-based compensation plans
20,132,194 $
182.0
35,509 $
0.5
Issued and outstanding,
December 31, 2019
Shares held in trust,
December 31, 2018
Released for settlement of certain
share-based compensation plans
Shares held in trust,
December 31, 2019
20,167,703 $
182.5
(175,680) $
(1.6)
19,567 $
0.2
(156,113) $
(1.4)
Issued and outstanding, net of shares
held in trust, December 31, 2019 20,011,590 $
181.1
At the date of this MD&A, the Corporation had 20,011,590 common
shares issued and outstanding, net of shares held in trust.
At December 31, 2019, Wajax had four share-based compensation
plans; the Wajax Share Ownership Plan (the "SOP"), the Directors’
Deferred Share Unit Plan (the "DDSUP"), the Mid-Term Incentive
Plan for Senior Executives (the "MTIP") (with MTIP awards being
composed of performance share units ("PSUs") and restricted share
units ("RSUs")) and the Deferred Share Unit Plan (the “DSUP”).
As of December 31, 2019, there were 361,100 (2018 – 325,171)
SOP and DDSUP (treasury share rights plans) rights outstanding,
213,149 (2018 – 290,656) MTIP PSUs and equity-settled DSUP
(market-purchased share rights plans) rights outstanding and
334,696 (2018 – 389,295) MTIP RSUs and cash-settled DSUP
(cash-settled rights plans) rights outstanding. At December 31, 2019,
347,946 SOP and DDSUP rights were vested (December 31, 2018 –
all SOP and DDSUP rights were vested), 15,426 equity-settled DSUP
rights were vested (December 31, 2018 – nil), and 9,127 cash-
settled DSUP rights were vested (December 31, 2018 – 8,577).
Depending on the actual level of achievement of the performance
targets associated with the outstanding MTIP PSUs, the number
of market-purchased shares required to satisfy the Corporation’s
obligations could be higher or lower.
Wajax recorded compensation expense of $3.4 million for the twelve
months ended December 31, 2019 (2018 – $1.8 million) in respect
of these plans.
Wajax 2019 Annual Report 25
Management’s Discussion and Analysis
Funded Net Debt (See the Non-GAAP and
Additional GAAP Measures section)
(Cash) bank indebtedness
Debentures
Long-term debt
$
December 31
2019
2018
(Pro-forma)(1)
(3.2) $
54.1
225.6
3.9
—
218.1
Funded net debt
$
276.5 $
222.0
(1) Effective with the reporting period beginning on January 1, 2019 and the adoption of
IFRS 16, the Corporation has amended the definition of Funded net debt to exclude
lease liabilities not considered part of debt. See the Non-GAAP and Additional GAAP
Measures section.
Funded net debt of $276.5 million at December 31, 2019 increased
$54.5 million compared to $222.0 million at December 31, 2018. (1)
The increase during the period was due primarily to cash used in
operating activities of $9.7 million, payment of lease liabilities of
$22.0 million and dividends paid of $20.0 million.
The Corporation’s ratio of funded net debt to total capital increased
to 46.6% at December 31, 2019 from 42.8% at December 31, 2018,
primarily due to the higher funded net debt level in the current period. (1)
The Corporation’s leverage ratio of 2.60 times at December 31, 2019
increased from the December 31, 2018 ratio of 2.45 times due to
the higher debt level associated with the increase in working capital,
partially offset by the higher trailing 12-month pro-forma adjusted
EBITDA.(1) See the Non-GAAP and Additional GAAP Measures section.
See the Liquidity and Capital Resources section.
Financial Instruments
Wajax uses derivative financial instruments in the management of
its foreign currency, interest rate and share-based compensation
exposures. Wajax policy restricts the use of derivative financial
instruments for trading or speculative purposes.
Wajax monitors the proportion of variable rate debt to its total debt
portfolio and may enter into interest rate hedge contracts to mitigate
a portion of the interest rate risk on its variable rate debt. A change
in interest rates, in particular related to the Corporation’s unhedged
variable rate debt, is not expected to have a material impact on
the Corporation’s results of operations or financial condition over
the long term.
Wajax has entered into interest rate hedge contracts to minimize
exposure to interest rate fluctuations on its variable rate debt.
All interest rate hedge contracts are recorded in the consolidated
financial statements at fair value. As at December 31, 2019, Wajax
had the following interest rate hedge contracts outstanding:
$104.0 million, expiring in November 2024, with a weighted
average interest rate of 2.56%.
Wajax enters into foreign exchange forward contracts to hedge
the exchange risk associated with the cost of certain inbound
inventory and foreign currency-denominated sales to customers
along with the associated receivables as part of its normal course
of business. As at December 31, 2019, Wajax had the following
contracts outstanding:
to buy U.S. $45.2 million (December 31, 2018 – to buy
U.S. $34.3 million),
to sell U.S. $30.5 million (December 31, 2018 – to sell
U.S. $20.9 million), and
to sell Euro €1.1 million (December 31, 2018 – €2.8 million).
The U.S. dollar contracts expire between January 2020 and
March 2021, with an average U.S./Canadian dollar rate of 1.3198.
The Euro contracts expire between January 2020 and November
2020, with an average Euro/Canadian dollar rate of 1.5003.
Wajax has entered into total return swap contracts to hedge the
exposure to share price market risk on a class of MTIP rights
that are cash-settled. All total return swap contracts are recorded
in the consolidated financial statements at fair value. As at
December 31, 2019, Wajax had the following total return swap
contracts outstanding:
contracts totaling 365,000 shares at an initial share value of
$8.3 million (December 31, 2018 – contracts totaling 440,000
shares at an initial share value of $11.5 million)
The total return swap contracts expire between March 2020 and
March 2022.
Wajax measures derivative instruments not accounted for as hedging
items at fair value with subsequent changes in fair value being
recorded in earnings. Derivatives designated as effective hedges are
measured at fair value with subsequent changes in fair value being
recorded in other comprehensive income until the related hedged
item is recorded and affects income or inventory. 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.
A change in foreign currency value, relative to the Canadian dollar,
on transactions with customers that include unhedged foreign
currency exposures is not expected to have a material impact on the
Corporation’s results of operations or financial condition over the
longer term.
Wajax will periodically institute price increases to offset the negative
impact of foreign exchange rate increases and volatility on imported
goods to ensure margins are not eroded. However, a sudden
strengthening of the U.S. dollar relative to the Canadian dollar can
have a negative impact mainly on parts margins in the short term
prior to price increases taking effect.
The impact of a change in the Corporation's share price on cash-
settled MTIP rights is not expected to have a material impact on the
Corporation's results of operations or financial condition over the
longer term.
Wajax is exposed to the risk of non-performance by counterparties
to foreign exchange forward contracts, long-term interest rate hedge
contracts and total return swap contracts. These counterparties are
large financial institutions that maintain high short-term and long-term
credit ratings. To date, no such counterparty has failed to meet its
financial obligations to Wajax. Management does not believe there is
a significant risk of non-performance by these counterparties and will
continue to monitor the credit risk of these counterparties.
Contractual Obligations
Contractual
Obligations
Undiscounted lease
obligations
Bank debt
Debentures
Total
< 1 year
1 – 5
years
After
5 years
$ 158.9 $
$ 227.4 $
57.0 $
$
26.6 $
76.5 $
— $ 227.4 $
— $
— $
55.7
—
57.0
Total
$ 443.3 $
26.6 $ 303.9 $ 112.7
The lease obligations relate primarily to contracts entered into for
facilities, certain leased vehicles, leased computer hardware, and
leased material handling equipment. The bank debt obligation relates
to the bank credit facility, and the debentures obligation relates to the
Debentures. See the Liquidity and Capital Resources section.
(1) Effective with the reporting period beginning on January 1, 2019 and the adoption of IFRS 16, the Corporation has amended the definition of Funded net debt to exclude lease liabilities not
considered part of debt. See the Non-GAAP and Additional GAAP Measures section.
26 Wajax 2019 Annual Report
Management’s Discussion and Analysis
Wajax sponsors certain defined benefit plans that cover executive
employees, a small group of inactive employees and certain
employees on long-term disability benefits. The defined benefit plans
are subject to actuarial valuations in 2021. Management does not
expect future cash contribution requirements to change materially
from the 2019 contribution level of $0.5 million as a result of
these valuations or any declines in fair value of the defined benefit
plans' assets.
Related Party Transactions
The Corporation’s related party transactions, consisting of the
compensation of the Board of Directors and key management
personnel, totaled $6.2 million in 2019 (2018 – $7.9 million).
Off Balance Sheet Financing
The Corporation implemented IFRS 16 on January 1, 2019 and
recorded right-of-use assets and lease liabilities in the amount of
$81.2 million and $82.5 million, respectively. See Notes 4, 10 and
13 of the consolidated financial statements and accompanying notes
for the year ended December 31, 2019.
It is likely but not reasonably certain that existing leases will
be renewed or replaced, resulting in lease commitments being
sustained at current levels. In the alternative, Wajax may incur
capital expenditures to acquire equivalent capacity.
The Corporation had $123.3 million (December 31, 2018 –
$129.0 million) of consigned inventory on hand from a major
manufacturer at December 31, 2019, net of deposits of
$33.1 million (December 31, 2018 – $13.0 million). In the normal
course of business, Wajax receives inventory on consignment from
this manufacturer which is generally sold or rented to customers or
purchased by Wajax. Under the terms of the consignment program,
Wajax is required to make periodic deposits to the manufacturer
on the consigned inventory that is rented to Wajax customers or
on-hand for greater than nine months. This consigned inventory is
not included in Wajax’s inventory as the manufacturer retains title
to the goods. In the event the inventory consignment program was
terminated, Wajax would utilize interest free financing, if any, made
available by the manufacturer and/or utilize capacity under its credit
facility to finance the purchase of inventory.
Although management currently believes Wajax has adequate
debt capacity, Wajax would have to access the equity or debt
capital markets, or reduce dividends to accommodate any
shortfalls in Wajax’s credit facility. See the Liquidity and Capital
Resources section.
Liquidity and Capital Resources
The Corporation’s liquidity is maintained through various sources,
including bank and non-bank credit facilities, debentures and cash
generated from operations.
Bank and Non-bank Credit Facilities and Debentures
In the fourth quarter of 2019, the Corporation amended its
senior secured credit facility, extending the maturity date from
September 20, 2023 to October 1, 2024. In addition, the minimum
value of the interest coverage ratio covenant was reduced to 2.75:1
from 3.0:1. The $0.3 million cost of amending the facility has
been capitalized and will be amortized over the remaining term of
the facility.
At December 31, 2019, Wajax had borrowed $227.4 million and
issued $5.5 million of letters of credit for a total utilization of
$232.9 million of its $400 million bank credit facility. Borrowing
capacity under the bank credit facility is dependent on the level of
inventories on-hand and outstanding trade accounts receivables.
At December 31, 2019, borrowing capacity under the bank credit
facility was equal to $400 million.
The bank credit facility contains customary restrictive covenants,
including limitations on the payment of cash dividends and an
interest coverage maintenance ratio, all of which were met as at
December 31, 2019. In particular, the Corporation is restricted from
declaring dividends in the event the Corporation’s leverage ratio, as
defined in the bank credit facility agreement, exceeds 4.0 times.
Borrowings under the bank credit facility 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
the Corporation's leverage ratio at the time of borrowing and range
between 1.5% and 3.0% for Canadian dollar bankers' acceptances
and U.S. dollar LIBOR borrowings, and 0.5% and 2.0% for prime
rate borrowings.
In addition, Wajax had $57 million of Debentures outstanding at
December 31, 2019, bearing interest at a rate of 6.00% per annum,
payable semi-annually and maturing on January 15, 2025. The
Debentures will not be redeemable before January 15, 2023 (the
“First Call Date”), except upon the occurrence of a change of control
of the Corporation in accordance with the terms of the indenture
governing the Debentures (the "Indenture"). On and after the First
Call Date and prior to January 15, 2024, the Debentures will be
redeemable in whole or in part from time to time at the Corporation’s
option at a redemption price equal to 103.0% of the principal amount
of the Debentures redeemed plus accrued and unpaid interest, if
any, up to but excluding the date set for redemption. On and after
January 15, 2024 and prior to the maturity date, the Debentures
will be redeemable, in whole or in part, from time to time at the
Corporation’s option at par plus accrued and unpaid interest, if any,
up to but excluding the date set for redemption. The Corporation
shall provide not more than 60 nor less than 30 days’ prior notice
of redemption of the Debentures.
The Corporation will have the option to satisfy its obligation to repay
the principal amount of the Debentures due at redemption or maturity
by issuing and delivering that number of freely tradeable common
shares determined in accordance with the terms of the Indenture.
The Debentures will not be convertible into common shares at the
option of the holders at any time.
Under the terms of the bank credit facility, Wajax is permitted to have
additional interest bearing debt of $25 million. As such, Wajax has
up to $25 million of demand inventory equipment financing capacity
with two non-bank lenders. At December 31, 2019, Wajax had no
utilization of the interest bearing equipment financing facilities.
In addition, the Corporation has an agreement with a financial
institution to sell 100% of selected accounts receivable on a
recurring, non-recourse basis. Under this facility, up to $20 million of
accounts receivable is permitted to be sold to the financial institution
and can remain outstanding at any point in time. After the sale,
Wajax does not retain any interests in the accounts receivable, but
continues to service and collect the outstanding accounts receivable
on behalf of the financial institution. At December 31, 2019, the
Corporation continues to service and collect $13.4 million in
accounts receivable on behalf of the financial institution.
As at December 31, 2019, $167.1 million was unutilized under
the bank facility and $25 million was unutilized under the non-bank
facilities. As of March 2, 2020, Wajax continues to maintain its
$400 million bank credit facility and an additional $25 million in
credit facilities with non-bank lenders. Wajax maintains sufficient
liquidity to meet short-term normal course working capital and
maintenance capital requirements and certain strategic investments.
However, Wajax may be required to access the equity or debt capital
markets to fund significant acquisitions.
Wajax 2019 Annual Report 27
Management’s Discussion and Analysis The Corporation’s tolerance to interest rate risk decreases/
increases as the Corporation’s leverage ratio increases/decreases.
At December 31, 2019, $158.1 million of the Corporation’s funded
net debt, or 57.2%, was at a fixed interest rate which is within the
Corporation’s interest rate risk policy.
Cash Flow
The following table highlights the major components of cash flow as
reflected in the Consolidated Statements of Cash Flows for the years
ended December 31, 2019 and December 31, 2018:
2019
2018
$ change
Significant components of the changes in non-cash operating working
capital for the year ended December 31, 2019 compared to the year
ended December 31, 2018 are as follows:
Trade and other receivables increased $32.1 million in 2019
compared to a decrease of $12.6 million in 2018. The increase in
2019 resulted primarily from higher current trade receivables from
large oil sands customers and a large material handling equipment
delivery to a new customer. The decrease in 2018 resulted
primarily from lower trade receivables mainly due to the sale of
selected trade accounts receivable in the year compared to the
same period in 2017.
$
39.5 $
35.9 $
3.7
Inventory increased $36.3 million in 2019 compared to an
Net earnings
Items not affecting
cash flow
Changes in non-cash
operating working
capital
Finance costs
paid on debts
Finance costs paid on
lease liabilities
Income taxes paid
Rental equipment additions
Other non-current liabilities
Cash paid on settlement
of total return swaps
Cash used in
operating activities
Cash used in
investing activities
Cash generated from
financing activities
$
$
$
88.2
54.8
33.5
(50.5)
(33.6)
(16.9)
(13.1)
(8.4)
(4.6)
(5.7)
(27.8)
(37.5)
(1.4)
0.0
(6.5)
(43.6)
(1.4)
(5.7)
(21.3)
6.1
0.1
(1.5)
—
(1.5)
(9.7) $
(3.0) $
(6.7)
increase of $33.2 million in 2018. The increase in 2019 was due
mainly to higher construction equipment inventory and mining
equipment and parts inventory. The increase in 2018 was due
mainly to higher construction and forestry equipment inventory
and higher parts inventory partially offset by lower mining
equipment inventory.
Deposits on inventory increased $24.1 million in 2019 compared
to an increase of $6.6 million in 2018. The increase in both years
was due primarily to increased deposits related to consignment
inventory being held in excess of nine months.
Accounts payable and accrued liabilities increased $34.9 million
in 2019 compared to an increase of $3.2 million in 2018. The
increase in 2019 resulted primarily from higher trade payables,
including higher trade payables related to mining equipment
inventory. The decrease in 2018 resulted primarily from lower
trade payables, including lower trade payables related to mining
equipment inventory.
(2.0) $
(58.9) $
56.9
Investing Activities
18.7 $
59.7 $
(41.0)
For the year ended December 31, 2019, Wajax invested
$5.9 million in property, plant and equipment additions, compared
to $5.5 million in the same period of 2018. Proceeds on disposal
of property, plant and equipment, consisting primarily of proceeds
on disposal of properties, amounted to $10.1 million for the year
ended December 31, 2019, compared to $2.5 million for the
year ended December 31, 2018. Intangible assets additions of
$5.4 million (2018 – $4.8 million) for the twelve months ended
December 31, 2019 resulted primarily from software additions
relating to the new ERP system currently being implemented.
Financing Activities
For the year ended December 31, 2019, the Corporation generated
$18.7 million of cash from financing activities compared to
$59.7 million in the same period of 2018. Financing activities for the
twelve months ended December 31, 2019 included a net bank credit
facility borrowing of $7.4 million (2018 – $75.0 million) and the
proceeds from issuance of the Debentures of $57.0 million (2018 –
nil), partially offset by the payment of lease liabilities of $22.0 million
(2018 – $4.2 million) and dividends paid to shareholders of
$20.0 million (2018 – $19.6 million).
Dividends
Dividends to shareholders for the 2019 and 2018 years were
declared and payable to shareholders of record as follows:
Record Date
Payment Date
Per Share
Amount
April 2, 2019 $
March 29, 2019
July 3, 2019 $
June 14, 2019
September 16, 2019 October 2, 2019 $
December 16, 2019 January 3, 2020 $
0.25 $
0.25 $
0.25 $
0.25 $
5.0
5.0
5.0
5.0
Cash Used In Operating Activities
For the year ended December 31, 2019, cash flows used in operating
activities amounted to $9.7 million, compared to $3.0 million for the
same period in the previous year. The increase in cash flows used in
operating activities was mainly attributable to higher income taxes
paid of $21.3 million, an increase in cash used in changes in non-
cash operating working capital of $16.9 million, higher finance costs
paid on debts of $4.6 million, and higher finance costs paid on lease
liabilities of $5.7 million, partially offset by an increase in items not
affecting cash flow of $33.5 million.
For the year ended December 31, 2019, rental equipment additions
of $37.5 million (2018 – $43.6 million) related primarily to material
handling lift trucks and construction excavators.
Significant components of non-cash operating working capital,
along with changes for the years ended December 31, 2019 and
December 31, 2018 include the following:
Changes in Non-cash
Operating Working Capital (1)
$
Trade and other receivables
Contract assets
Inventory
Deposits on inventory
Prepaid expenses
Accounts payable and accrued liabilities
Contract liabilities
2019
(32.1) $
7.0
(36.3)
(24.1)
1.1
34.9
(1.1)
2018
12.6
(3.0)
(33.2)
(6.6)
(2.0)
3.2
(4.6)
Total Changes in Non-cash
Operating Working Capital
(1) Increase (decrease) in cash flow
28 Wajax 2019 Annual Report
$
(50.5) $
(33.6)
Twelve months ended
December 31, 2019
$
1.00 $
20.0
Management’s Discussion and Analysis
Record Date
Payment Date
Per Share
Amount
Revenue
April 4, 2018 $
March 15, 2018
June 15, 2018
July 4, 2018 $
September 14, 2018 October 2, 2018 $
December 14, 2018 January 3, 2019 $
0.25 $
0.25 $
0.25 $
0.25 $
4.9
4.9
5.0
5.0
Twelve months ended
December 31, 2018
$
1.00 $
19.7
For the three months ended December 31
Equipment sales
Product support
Industrial parts
ERS
Equipment rental
Total revenue
2019
156.5 $
110.2 $
88.5 $
39.2 $
9.5 $
2018
139.1
114.2
90.5
36.8
9.2
403.9 $
389.8
$
$
$
$
$
$
On March 2, 2020, the Corporation declared a dividend of $0.25
per share for the first quarter of 2020 payable on April 2, 2020 to
shareholders of record on March 16, 2020.
Fourth Quarter Consolidated Results
2019
2018
% change
403.9 $
71.1 $
389.8
67.0
3.6%
6.2%
49.6 $
54.8
(9.5)%
0.2 $
0.7
(71.4)%
21.4 $
5.4 $
11.6
2.9
16.0 $
3.8 $
12.2 $
8.7
2.6
6.1
85.2%
89.4%
83.8%
46.5%
99.7%
0.61 $
0.31
99.1%
For the three months
ended December 31
Revenue
Gross profit
Selling and
administrative
expenses
Restructuring and
other related costs
Earnings before
finance costs and
income taxes(1)
Finance costs
Earnings before
income taxes(1)
Income tax expense
Net earnings
Basic earnings
per share(2)
Diluted earnings
per share(2)
$
$
$
$
$
$
$
$
$
$
$
Adjusted basic earnings
per share(1)(2)(3)
Adjusted diluted earnings
per share(1)(2)(3)
$
$
Adjusted net earnings(1)(3) $
10.1 $
8.3
0.60 $
0.30
99.4%
21.6%
0.51 $
0.42
21.2%
Adjusted EBITDA(1)
$
31.9 $
0.50 $
0.41
23.3
21.4%
36.9%
Key ratios:
Gross profit margin
Selling and
administrative
expenses as a
percentage of revenue
EBIT margin(1)
Adjusted EBITDA margin(1)
Effective income tax rate
17.6%
17.2%
12.3%
5.3%
7.9%
23.8%
14.1%
3.0%
6.0%
29.8%
(1) These measures do not have a standardized meaning prescribed by GAAP. See the
Non-GAAP and Additional GAAP Measures section.
(2) Weighted average shares, net of shares held in trust outstanding for calculation of basic
and diluted earnings per share for the three months ended December 31, 2019 was
20,009,494 (2018 – 19,947,235) and 20,421,685 (2018 – 20,393,145), respectively.
(3) Net earnings excluding the following:
a. after-tax restructuring and other related costs of $0.1 million (2018 – $0.5 million), or
basic and diluted earnings per share of $0.01 (2018 – $0.02 per share), for the three
months ended December 31, 2019.
b. after-tax gain recorded on sales of properties of $2.3 million (2018 – nil), or basic
and diluted earnings per share of $0.11 (2018 – nil) for the three months ended
December 31, 2019.
c. after-tax Delom transaction costs of $0.3 million, or basic and diluted earnings per share
of $0.02 for the three months ended December 31, 2018.
d. after-tax non-cash losses on mark to market of derivative instruments of $1.5 million,
or basic and diluted earnings per share of $0.07 for the three months ended
December 31, 2018.
Revenue in the fourth quarter of 2019 increased 3.6%, or
$14.2 million, to $403.9 million from $389.8 million in the
fourth quarter of 2018. The following factors contributed to the
increase in revenue:
Regionally, revenue increased 16.3% in eastern Canada
and decreased 1.0% and 6.2% in western and central
Canada respectively.
Equipment sales have increased due primarily to higher material
handling sales in western and eastern Canada, higher mining
sales in western Canada, and higher forestry sales in central and
eastern Canada. These increases were partially offset by lower
construction sales in western and central Canada.
Backlog
Backlog of $218.1 million at December 31, 2019 decreased
$69.9 million compared to September 30, 2019 due primarily
to decreases in mining, forestry, power generation and material
handling orders.
Gross profit
Gross profit increased $4.1 million, or 6.2%, in the fourth quarter
of 2019 compared to the same quarter last year due to increased
volumes and higher gross profit margins. Gross profit margin
percentage of 17.6% in the fourth quarter of 2019 increased from
17.2% in the same quarter last year due mainly to higher equipment,
product support and ERS margins offset partially by lower industrial
parts margins and a higher proportion of equipment sales.
Selling and administrative expenses
Selling and administrative expenses as a percentage of revenue
decreased to 12.3% in the fourth quarter of 2019 from 14.1% in the
fourth quarter of 2018. Selling and administrative expenses in the
fourth quarter of 2019 decreased $5.2 million compared to the same
quarter last year due mainly to lower variable incentive accruals, the
gain on sale of properties, lower sales-related expenses, and lower
non-cash losses on mark to market of derivative instruments.
Restructuring and other related costs
In the third quarter of 2019, the Corporation commenced the
Management Realignment, resulting in an estimated restructuring
cost of approximately $3.7 million. In the first quarter of 2018,
the Corporation commenced the Finance Reorganization Plan.
The cost of the Finance Reorganization Plan was expected to be
approximately $5.6 million in severance, project management
and interim duplicate labour costs. During the fourth quarter
$0.2 million has been recognized during the three months ended
December 31, 2019, related to both the Finance Reorganization Plan
and Management Realignment.
Finance costs
Finance costs of $5.4 million in the fourth quarter of 2019 increased
$2.6 million compared to the same quarter last year due primarily to
higher average debt levels, due in part to the acquisition of Delom
in the fourth quarter of 2018, and interest on lease liabilities of
$1.7 million related to right-of-use assets as a result of the adoption
of IFRS 16 on January 1, 2019. See the Liquidity and Capital
Resources section.
Wajax 2019 Annual Report 29
Management’s Discussion and Analysis
Income tax expense
Cash Generated From Operating Activities
The Corporation’s effective income tax rate of 23.8% for the fourth
quarter of 2019 (2018 – 29.8%) was lower compared to the statutory
rate of 26.8% (2018 – 26.9%) due mainly to the non-taxable portion
of the gain recorded on sales of properties. The Corporation's
effective income tax rate of 29.8% for the fourth quarter of 2018 was
higher compared to the statutory rate of 26.9% due mainly to the
impact of expenses not deductible for tax purposes.
Cash flows generated from operating activities amounted
to $16.3 million in the fourth quarter of 2019, compared to
$26.5 million in the same quarter of the previous year. The decrease
of $10.1 million was mainly attributable to a decrease in cash
generated from changes in non-cash operating working capital of
$20.9 million, partially offset by higher net earnings of $6.1 million
and an increase in items not affecting cash flow of $3.3 million.
Net earnings
In the fourth quarter of 2019, the Corporation had net earnings of
$12.2 million, or $0.61 per share, compared to $6.1 million, or
$0.31 per share, in the fourth quarter of 2018. The $6.1 million
increase in net earnings resulted primarily from increased revenue
and gross profit margins and lower operating expenses, partially
offset by higher finance costs.
Adjusted net earnings (See the Non-GAAP
and Additional GAAP Measures section)
Adjusted net earnings for the three months ended December 31, 2019
excludes restructuring and other related costs of $0.1 million after-
tax (2018 – $0.5 million), or $0.01 per share (2018 – $0.02 per
share), and the gain recorded on sales of properties of $2.3 million
after-tax (2018 – nil), or $0.11 per share (2018 – nil).
As such, adjusted net earnings increased $1.8 million to
$10.1 million, or $0.51 per share, in the fourth quarter of 2019 from
$8.3 million, or $0.42 per share, in the same period of 2018.
Comprehensive income
Total comprehensive income of $13.0 million in the fourth quarter
of 2019 included net earnings of $12.2 million and an other
comprehensive gain of $0.8 million. In the fourth quarter of 2018,
total comprehensive income of $4.3 million consisted of net earnings
of $6.1 million and other comprehensive loss of $1.8 million.
Fourth Quarter Cash Flows
Cash Flow
The following table highlights the major components of cash flow
as reflected in the Consolidated Statements of Cash Flows for the
quarters ended December 31, 2019 and December 31, 2018:
For the quarter
ended December 31
$
Net earnings
Items not affecting
cash flow
Net change in non-cash
operating working capital
Finance costs paid on debts
Finance costs paid
on lease liabilities
Income taxes paid
Rental equipment additions
Other non-current liabilities
2019
2018
$ Change
12.2 $
6.1 $
20.6
17.3
3.3
(3.7)
(1.7)
(0.1)
(14.2)
0.0
24.2
(2.6)
0.0
(1.7)
(16.3)
(0.4)
6.1
3.3
(20.9)
(1.1)
(1.7)
1.6
2.1
0.4
Cash generated from
operating activities
Cash generated from
(used in) investing
$
16.3 $
26.5 $
(10.1)
activities
$
5.8 $
(54.1) $
59.8
Cash (used in)
generated from
financing activities
$
(18.5) $
35.0 $
(53.4)
30 Wajax 2019 Annual Report
Rental equipment additions in the fourth quarter of 2019 of
$14.2 million (2018 – $16.3 million) related primarily to material
handling lift trucks and construction excavators.
Significant components of non-cash operating working capital, along
with changes for the quarters ended December 31, 2019 and
December 31, 2018 include the following:
Changes in Non-cash
Operating Working Capital (1)
$
Trade and other receivables
$
Contract assets
$
Inventory
$
Deposits on inventory
$
Prepaid expenses
Accounts payable and accrued liabilities $
$
Contract liabilities
2019
(40.4) $
7.3 $
24.7 $
(14.3) $
(0.6) $
32.1 $
(5.4) $
2018
29.5
(0.4)
13.9
0.2
1.3
(17.1)
(3.2)
Total Changes in Non-cash
Operating Working Capital
(1) Increase (decrease) in cash flow
$
3.3 $
24.2
Significant components of the changes in non-cash operating working
capital for the quarter ended December 31, 2019 compared to the
quarter ended December 31, 2018 are as follows:
Trade and other receivables increased $40.4 million in 2019
compared to a decrease of $29.5 million in 2018. The increase in
2019 resulted primarily from higher current trade receivables from
large oil sands customers and a large material handling equipment
delivery to a new customer. The decrease in 2018 resulted
primarily from improved collections and the sale of selected
trade accounts receivable in the fourth quarter compared to the
previous quarter.
Inventory decreased $24.7 million in 2019 compared to a
decrease of $13.9 million in 2018. The decrease in 2019 was
due to lower equipment and parts inventory in most categories,
partially offset by higher mining equipment and parts inventory.
The decrease in 2018 was due to lower construction and
mining equipment inventory offset partially by higher forestry
equipment inventory.
Deposits on inventory increased $14.3 million in 2019 compared
to a decrease of $0.2 million in 2018. The increase in 2019
was due primarily to increased deposits related to consignment
inventory being held in excess of nine months.
Accounts payable and accrued liabilities increased $32.1 million
in 2019 compared to a decrease of $17.1 million in 2018. The
increase in 2019 resulted primarily from higher trade payables,
including higher trade payables related to mining equipment
inventory. The decrease in 2018 resulted primarily from lower
trade payables, including lower trade payables related to mining
equipment inventory.
Investing Activities
During the fourth quarter of 2019, Wajax invested $0.9 million in
property, plant and equipment additions, compared to $2.5 million
in the fourth quarter of 2018. Proceeds on disposal of property,
plant and equipment amounted to $9.7 million in the fourth quarter
of 2019, compared to $0.5 million in the same quarter of the
Management’s Discussion and Analysis
previous year. Intangible assets additions of $2.2 million (2018 –
$1.0 million) in the fourth quarter of 2019 resulted primarily
from software additions relating to the new ERP system currently
being implemented.
Financing Activities
The Corporation used $18.5 million of cash in financing activities
in the fourth quarter of 2019 compared to cash generated from
financing activities of $35.0 million in the same quarter of 2018.
Financing activities in the quarter included a net bank credit facility
repayment of $61.6 million (2018 – net borrowing of $44.0 million),
dividends paid to shareholders of $5.0 million (2018 – $5.0 million)
and finance lease payments of $5.6 million (2018 – $1.1 million),
offset partially by proceeds from issuance of the Debentures of
$57.0 million (2018 – nil).
Critical Accounting Estimates
The preparation of the consolidated financial statements in
conformity with IFRS requires management to make judgements,
estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets, liabilities, revenue
and expenses. Actual results could differ from those judgements,
estimates and assumptions. The Corporation bases its estimates on
historical experience and various other assumptions that are believed
to be reasonable in the circumstances.
The areas where significant judgements and assumptions are used
to determine the amounts recognized in the financial statements
include the allowance for credit losses, inventory obsolescence,
goodwill and intangible assets and the lease term of contracts with
renewal options.
The key assumptions concerning the future and other key sources
of estimation uncertainty that have a significant risk of resulting in a
material adjustment to the carrying amount of assets and liabilities
within the next fiscal year are as follows:
Allowance for credit losses
The Corporation is exposed to credit risk with respect to its trade
and other receivables. However, this is partially mitigated by the
Corporation’s diversified customer base of over 32,000 customers,
with no one customer accounting for more than 10% of the
Corporation’s annual consolidated sales, which covers many business
sectors across Canada. In addition, the Corporation’s customer
base spans large public companies, small independent contractors,
original equipment manufacturers and various levels of government.
The Corporation follows a program of credit evaluations of customers
and limits the amount of credit extended when deemed necessary.
The Corporation maintains an allowance for possible credit losses,
and any such losses to date have been within management’s
expectations. The allowance for credit losses is determined by
estimating the lifetime expected credit losses, taking into account
the Corporation's past experience of collecting payments as well as
observable changes in and forecasts of future economic conditions
that correlate with default on receivables. At the point when the
Corporation is satisfied that no recovery of the amount owing is
possible, the amount is considered not recoverable and the financial
asset is written off. The $2.4 million allowance for credit losses at
December 31, 2019 increased $1.4 million from $1.0 million at
December 31, 2018. As economic conditions change, there is risk
that the Corporation could experience a greater number of defaults
compared to 2019 which would result in an increased charge
to earnings.
Inventory obsolescence
The value of the Corporation’s new and used equipment and high
value parts are evaluated by management throughout the year, on a
unit-by-unit basis. When required, provisions are recorded to ensure
that the book value of equipment and parts are valued at the lower of
cost or estimated net realizable value. The Corporation performs an
aging analysis to identify slow moving or obsolete lower value parts
inventory and estimates appropriate obsolescence provisions related
thereto. The Corporation takes advantage of supplier programs that
allow for the return of eligible parts for credit within specified time
periods. The inventory obsolescence impact on earnings for the three
months ended December 31, 2019 was a recovery of $1.0 million
(2018 – charge of $1.7 million) and for the twelve months ended
December 31, 2019 was a charge of $2.3 million (2018 – charge
of $5.5 million). As economic conditions change, there is risk that
the Corporation could have an increase in inventory obsolescence
compared to prior periods which would result in an increased
charge to earnings.
Goodwill and intangible assets
The value in use of goodwill and intangible assets has been
estimated using the forecasts prepared by management for the next
five years. The key assumptions for the estimate are those regarding
revenue growth, EBITDA margin, discount rate and the level of working
capital required to support the business. These estimates are
based on past experience and management’s expectations of future
changes in the market and forecasted growth initiatives.
The Corporation performs an annual impairment test of its goodwill
and intangible assets unless there is an early indication that the
assets may be impaired in which case the impairment tests would
occur earlier. There was no early indication of impairment in the
quarter ended December 31, 2019.
Lease term of contracts with renewal options
The lease term is defined as the non-cancellable term of the lease,
including any periods covered by a renewal option to extend the lease
if it is reasonably certain that the renewal option will be exercised,
or any periods covered by an option to terminate the lease, if it is
reasonably certain that the termination option will not be exercised.
Significant judgement is used when evaluating whether the
Corporation is reasonably certain that the lease renewal option will
be exercised, including examining any factors that may provide an
economic advantage for renewal. In the event of a significant event
within the Corporation’s control that could affect its ability to exercise
the renewal option, the lease term will be reassessed.
Changes in Accounting Policies
Accounting standards adopted during the year
IFRIC 23 Uncertainty over Income Tax Treatments ("IFRIC 23")
On January 1, 2019, the Corporation adopted IFRIC 23, which
provides guidance when there is uncertainty over income tax
treatments including, but not limited to, whether uncertain tax
treatments should be considered separately; assumptions made
about the examination of tax treatments by tax authorities; the
determination of taxable profit, tax bases, unused tax losses, unused
tax credits, and tax rates; and, the impact of changes in facts and
circumstances. The adoption had no impact on the Corporation.
IFRS 16 Leases ("IFRS 16")
Under IFRS 16, a lessee no longer classifies leases as operating
or financing and records all leases on the consolidated statement
of financial position. On January 1, 2019, the Corporation adopted
IFRS 16 using the modified retrospective transition method
and recognized the cumulative effect of initial application on
January 1, 2019 on the consolidated statement of financial position,
subject to permitted and elected practical expedients. This method
of application has not resulted in a restatement of amounts reported
in periods prior to January 1, 2019. Therefore, the comparative
information continues to be reported under applicable accounting
policies under IAS 17 Leases and related interpretations.
Wajax 2019 Annual Report 31
Management’s Discussion and Analysis The impact of the adoption of IFRS 16 as at January 1, 2019 was
as follows:
As reported
as at
December 31,
2018
Impact of
adoption
of IFRS 16
Adjusted
opening
balance as
at January 1,
2019
$
— $
81.2 $
81.2
253.0
(1.3)
251.6
4.6
9.1
14.0
68.5
18.6
77.6
Right-of-use assets
Accounts payable and
accrued liabilities
Lease liabilities
– current
Lease liabilities
– non-current
On transition to IFRS 16 on January 1, 2019, the Corporation
recognized $82.5 million of additional lease liabilities primarily
related to property leases for the Corporation's branch network.
The Corporation also leases certain vehicles, machinery and IT
equipment. When measuring lease liabilities recognized in the
statement of financial position at the date of initial application,
the Corporation discounted lease payments using its incremental
borrowing rate. The Corporation applied the practical expedient to
apply a single discount rate to a portfolio of leases with reasonably
similar characteristics. The discount rates used are based on the
remaining lease term of the particular lease. The weighted average
incremental borrowing rate applied to lease liabilities recognized on
January 1, 2019 was 6.1%.
The Corporation has elected to apply the practical expedient which
does not require it to reassess whether a contract is, or contains,
a lease at the date of initial application. Instead, the Corporation
is permitted to apply the transition requirements to contracts that
were previously identified as leases applying IAS 17 Leases and
IFRIC 4 Determining whether an Arrangement contains a Lease.
The Corporation applied the definition of a lease under IFRS 16
to contracts entered into or changed on or after January 1, 2019.
The Corporation elected to use the practical expedient allowing
it to exclude the initial direct costs from the measurement of the
right-of-use assets at the date of initial application. In addition, the
Corporation elected to rely on assessments of whether leases were
onerous by applying IAS 37 Provisions, Contingent Liabilities, and
Contingent Assets immediately before the date of initial application as
an alternative to performing an impairment review.
Below is the reconciliation of the lease commitments disclosed
as at December 31, 2018 to the lease liabilities recognized on
January 1, 2019:
Operating lease commitments at December 31, 2018
Less than one year
Between one and five years
More than five years
$
Operating lease commitments at December 31, 2018
Discounted using incremental borrowing rate
New leases/extensions reasonably certain to be exercised
Short term, low value exclusions
Lease liabilities recognized on January 1, 2019
Current
Non-Current
$
$
$
20.2
52.3
27.1
99.7
(22.4)
77.2
6.6
(1.3)
82.5
14.0
68.5
Policy applicable prior to January 1, 2019:
As a lessee
Leases are classified as finance leases when the terms of the lease
transfer substantially all the risks and rewards of ownership to
the Corporation. A leased asset is recorded at the lower of its fair
value and the present value of the minimum lease payments at the
inception of the lease. A lease obligation is recorded and is classified
as current and non-current liabilities. The interest component of the
lease is charged to earnings over the period of the lease using the
effective interest rate 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.
As a lessor
The Corporation’s equipment rentals and leases are classified as
operating leases with amounts received included in revenue on a
straight-line basis over the term of the lease.
Policy applicable from January 1, 2019:
As a lessee
Under IFRS 16, assets and liabilities from a lease are initially
measured on a present value basis. The lease liabilities are
measured at the present value of the remaining lease payments
(including in-substance fixed payments), adjusted for any lease
incentives receivable, variable payments that are based on an index
or a rate, amounts expected to be payable under residual value
guarantees, the exercise price of a purchase option if the lessee
is reasonably certain to exercise that option, and payments of
penalties for early termination of a lease unless the Corporation
is reasonably certain not to terminate early. The lease payments
are discounted using the implicit interest rate in the lease or, if
that rate is not readily determinable, the Corporation's incremental
borrowing rate. The associated right-of-use assets are measured at
the amount equal to the lease liability on January 1, 2019, adjusted
for any prepaid and accrued lease payments relating to the leases
recognized in the statement of financial position immediately before
the date of transition, with no impact on retained earnings or
comparative periods.
The lease liability is measured at amortized cost using the effective
interest rate method and is remeasured if there is a change in the
future lease payments, if there is a change in the Corporation's
estimate of the amounts expected to be payable or if the Corporation
changes its assessments of whether it will exercise a purchase,
renewal, or termination option. The right-of-use asset is subsequently
depreciated using the straight-line method from the commencement
to the earlier of the date of the useful life of the right-of-use asset or
to the end of the lease term. If a lease liability is remeasured, the
corresponding adjustments are made to the carrying amount of the
right-of-use asset, or in profit or loss if the carrying amount of the
right-of-use asset has been reduced to zero.
Short-term leases and leases of low value assets
The Corporation has elected not to recognize right-of-use assets
and lease liabilities for short-term leases, defined as a lease
having a term of 12 months or less and leases of low-value assets.
The respective lease payments associated with these leases are
recognized in the statement of earnings as incurred, unless a
different basis is deemed to be more appropriate.
As a lessor
There was no significant impact to lessor accounting from the
adoption of IFRS 16.
32 Wajax 2019 Annual Report
Management’s Discussion and Analysis
Risk Management and Uncertainties
As with most businesses, Wajax is subject to a number of marketplace
and industry related risks and uncertainties which could have a
material impact on operating results and Wajax’s ability to pay cash
dividends to shareholders. Wajax attempts to minimize many of
these risks through diversification of core businesses and through
the geographic diversity of its operations. In addition, Wajax has
adopted an annual enterprise risk management assessment which is
prepared by the Corporation’s senior management and overseen by
the Board of Directors and committees of the Board of Directors. The
enterprise risk management framework sets out principles and tools
for identifying, evaluating, prioritizing and managing risk effectively
and consistently across Wajax.
The following are a number of risks that deserve particular comment:
diversifying its operations by geography, product offerings and
customer base, there can be no assurance that Wajax’s results of
operations or cash flows will not be adversely affected by changes in
economic conditions.
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,
each of Wajax’s products and services categories are exposed to
fluctuations in the price of oil and natural gas. A downward change
in commodity prices, and particularly in the price of oil and natural
gas, could therefore adversely affect Wajax’s results of operations
or cash flows.
Manufacturer relationships and product access
Growth initiatives, integration of acquisitions and project execution
Wajax seeks to distribute leading product lines in each of its regional
markets and its success is dependent upon continuing relations with
the manufacturers it represents. Wajax endeavours to align itself in
long-term relationships with manufacturers that are committed to
achieving a competitive advantage and long-term market leadership
in their targeted market segments. In equipment and certain
industrial categories, manufacturer relationships are governed
through effectively exclusive distribution agreements. Distribution
agreements are typically multi-year terms and are cancellable by
Wajax or the manufacturer based on a notification period specified
in the 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.
There is a continuing consolidation trend among industrial equipment
and component manufacturers. Consolidation may impact the
products distributed by Wajax, in either a favourable or unfavourable
manner. Consolidation of manufacturers may have a negative impact
on the results of operations or cash flow if product lines Wajax
distributes become unavailable as a result of the consolidation.
Suppliers generally have the ability to unilaterally change distribution
terms and conditions, product lines or limit supply of product in times
of intense market demand. Supplier changes in the area of product
pricing and availability can have a negative or positive effect on
Wajax’s revenue and margins. A change in one of a supplier’s product
lines can result in conflicts with another supplier’s product lines that
may have a negative impact on the results of operations or cash
flow if one of the suppliers cancels its distribution with Wajax due to
the conflict. As well, from time to time suppliers make changes to
payment terms for distributors. This may affect Wajax’s interest-free
payment period or consignment terms, which may have a materially
negative or positive impact on working capital balances such as
cash, inventory, deposits on inventory, trade and other payables
and bank debt.
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 intensive and cyclical in nature, and as a result, customer
demand for Wajax’s products and services may be affected by
economic conditions at both a global or local level. Changes in
interest rates, consumer and business confidence, corporate profits,
credit conditions, foreign exchange, commodity prices and the level of
government infrastructure spending may influence Wajax’s customers’
operating, maintenance and capital spending, and therefore Wajax’s
sales and results of operations. Although Wajax has attempted
to address its exposure to business and industry cyclicality by
The Corporation’s updated Strategic Plan establishes priorities for
organic growth, acquisitions and operating infrastructure, including
maintaining a target leverage ratio range of 1.5 – 2.0 times unless
a leverage ratio outside this range is either to support key growth
initiatives or fluctuations in working capital levels during changes
in economic cycles. The Corporation may also maintain a leverage
ratio above the stated range as a result of investment in significant
acquisitions and may fund those acquisitions using its bank
credit facilities and other debt instruments in accordance with the
Corporation’s expectations of total future cash flows, financing costs
and other factors. See the Strategic Direction and Outlook section
and the Non-GAAP and Additional GAAP Measures sections. While
end market conditions remain challenging, the Corporation believes
it has a robust strategy and is confident in its growth prospects. The
Corporation’s confidence is strengthened by the enhanced earnings
potential of a reorganized Corporation and by relationships with its
customers and vendors. Wajax’s ability to develop its core capabilities
and successfully grow its business through organic growth will be
dependent on achieving the individual growth initiatives. Wajax’s
ability to successfully grow its business through acquisitions will
be dependent on a number of factors including: identification of
accretive new business or acquisition opportunities; negotiation of
purchase agreements on satisfactory terms and prices; prior approval
of acquisitions by third parties, including any necessary regulatory
approvals; securing attractive financing arrangements; and integration
of newly acquired operations into the existing business. All of these
activities associated with growing the business, realizing enhanced
earnings potential from the new structure and investments made
in systems may be more difficult to implement or may take longer
to execute than management anticipates. Further, any significant
expansion of the business may increase the operating complexity of
Wajax, and divert management away from regular business activities.
Any failure of Wajax to successfully manage its growth strategy,
including acquisitions, 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. There can be no assurance,
however, 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.
Wajax 2019 Annual Report 33
Management’s Discussion and Analysis Leverage, credit availability and restrictive covenants
Insurance
Wajax has a $400 million bank credit facility which expires
October 1, 2024. The bank credit facility contains restrictive
covenants which place restrictions on, among other things, the ability
of Wajax to encumber or dispose of its assets, the amount of finance
costs incurred and dividends declared relative to earnings and
certain reporting obligations. A failure to comply with the obligations
of the facility could result in an event of default which, if not cured or
waived, could require an accelerated repayment of the facility. There
can be no assurance that Wajax’s assets would be sufficient to repay
the facility in full.
Wajax’s short-term normal course working capital requirements
can swing widely quarter-to-quarter due to 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. Conversely, as Wajax experiences economic slowdowns,
working capital reduces reflecting the lower activity levels. While
management believes the bank credit facility will be adequate to
meet the Corporation’s normal course working capital requirements,
maintenance capital requirements and certain strategic investments,
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 bank
credit facility matures.
Wajax may be required to access the equity or debt markets or
reduce dividends in order to fund significant acquisitions and growth
related working capital and capital expenditures. The amount of debt
service obligations under the bank credit facility will be dependent 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. 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 sustain or improve 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.
Inventory obsolescence
Wajax maintains substantial amounts of inventory in its business
operations. While Wajax believes it has appropriate inventory
management systems in place, variations in market demand for the
products it sells can result in certain items of inventory becoming
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.
Government regulation
Wajax’s business is subject to evolving laws and government
regulations, particularly in the areas of taxation, the environment,
and health and safety. Changes to such laws and regulations may
impose additional costs on Wajax and may adversely affect its
business in other ways, including requiring additional compliance
measures by Wajax.
34 Wajax 2019 Annual Report
Wajax maintains a program of insurance coverage that is comparable
to those maintained by similar businesses, including property
insurance and general liability insurance. Although the limits and self-
insured retentions of such insurance policies have been established
through risk analysis and the recommendations of professional
advisors, there can be no assurance that such insurance will
remain available to Wajax at commercially reasonable rates or that
the amount of such coverage will be adequate to cover all liability
incurred by Wajax. If Wajax is held liable for amounts exceeding
the limits of its insurance coverage or for claims outside the scope
of that coverage, its business, results of operations or financial
condition could be adversely affected.
Information systems and technology
Information systems are an integral part of Wajax’s business
processes, including marketing of equipment and support services,
inventory and logistics, and finance. Some of these systems are
integrated with certain suppliers’ core processes and systems. Any
disruptions to these systems or new systems due, for example, to
the upgrade or conversion thereof, or the failure of these systems
or new systems to operate as expected could, depending on the
magnitude of the problem, adversely affect Wajax’s operating
results by limiting the ability to effectively monitor and control
Wajax’s operations.
Credit risk
Wajax extends credit to its customers, generally on an unsecured
basis. Although Wajax is not substantially dependent on any one
customer and it has a system of credit management in place,
the loss of a large receivable would have an adverse effect on
Wajax’s profitability.
Labour relations
Wajax had approximately 2,700 employees as at December 31, 2019.
Subsequent to the end of 2019, nearly 200 employees were
added through the acquisition of NorthPoint, bringing the Wajax
team to nearly 2,900. At the outset of 2019, Wajax was party to
twelve collective agreements covering a total of 300 employees.
During 2019, two collective agreements covering 74 employees
were ratified. One agreement covering 7 employees expired at the
end of 2019 and negotiations are in progress. Six agreements
covering 97 employees expire in 2020. Two agreements covering
115 employees expire in 2021. The remaining agreement covering
7 employees expires in 2023. Subsequent to the end of the 2019
year, an additional 19 union employees were added to the team
through the acquisition of NorthPoint; these employees are covered
by two collective agreements expiring in 2022. Wajax believes its
labour relations to be satisfactory and does not anticipate it will
be unable to renew the collective agreements. If Wajax is unable 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 business, results of operations or
financial condition.
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 foreign exchange 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
impact of foreign exchange rate increases on imported goods. The
inability of Wajax to mitigate exchange rate risks or increase prices
Management’s Discussion and Analysis to offset foreign exchange rate increases, including sudden and
volatile changes in the U.S. dollar exchange rate, may have a material
adverse effect on the results of operations or financial condition
of Wajax.
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 require Wajax to lower its selling prices as the U.S. dollar
declines. As well, many of Wajax’s customers export products to the
U.S., and a strengthening Canadian dollar can negatively impact their
overall competitiveness 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 Wajax will periodically institute
price increases on inventory imported from the U.S. to offset the
negative impact of foreign exchange rate increases to ensure margins
are not eroded. However, a sudden strengthening U.S. dollar relative
to the Canadian dollar can have a negative impact mainly on parts
margins in the short-term prior to price increases taking effect.
Wajax maintains a hedging policy whereby significant transactional
currency risks are identified and hedged.
Interest rate risk
Wajax has exposure to interest rate fluctuations on its interest-
bearing financial liabilities, in particular from its long-term debt.
Changes in interest rates can have a negative or positive impact on
Wajax’s finance costs and cash flows. Wajax monitors the proportion
of variable rate debt to its total debt portfolio and may enter into
interest rate hedge contracts to mitigate a portion of the interest
rate risk on its variable rate debt. The inability of Wajax to mitigate
interest rate risks to offset interest rate increases may have a
material adverse effect on the results of operations or financial
condition of Wajax.
Equity price risk
Certain share-based compensation plans of the Corporation, and the
resulting liabilities, are exposed to fluctuations in the Corporation's
share price. Changes in the Corporation's share price can have a
positive or negative impact on Wajax's net earnings and cash flows.
Wajax monitors the proportion of MTIP rights that are cash-settled
and may enter into total return swap contracts to mitigate a portion
of the equity price risk on these MTIP rights. The inability of Wajax
to mitigate equity price risks to offset fluctuations in its share price
may have a material adverse effect on the results of operations or
financial condition of Wajax.
Competition
The categories in which Wajax participates are highly competitive and
include competitors who are national, regional and local. Competitors
can be grouped into three classifications:
Capital Equipment Dealers and Distributors – these competitors
typically represent a major alternative manufacturer and provide
sales, product support, rental, financing and other services in
categories such as construction, forestry, mining and power
generation. Examples include the regional dealer and distributor
networks of Caterpillar, Komatsu, John Deere and Cummins.
Competition is based on product range and quality, aftermarket
support and price.
Industrial Parts Distributors – these competitors typically represent
a broad range of industrial parts manufacturers and offer sales and,
in many cases, product support services including design, assembly
and repair. Competitive product range varies from focused on
specific applications (e.g. hydraulics) to very broad (similar to Wajax).
Competitors can be local, regional and national. Competition is based
on brand access, product quality, customer service levels, price and
ancillary services.
Aftermarket Service Providers – these competitors provide aftermarket
services in areas such as on-highway transportation. Competitors vary
from the dealer and distributor networks of manufacturers such as
Freightliner and Western Star to local service providers. Competition
is based on customer service levels and price.
There can be no assurance that Wajax will be able to continue to
effectively compete. Increased competitive pressures, the growing
influence of online distribution 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.
Guaranteed residual value, recourse and buy-back contracts
In some circumstances Wajax makes certain guarantees to finance
providers on behalf of its customers. These guarantees can take
the form of assuring the resale value of equipment, guaranteeing
a portion of customer lease payments, or agreeing to buy back
the equipment at a specified price. These contracts are subject to
certain conditions being met by the customer, such as maintaining
the equipment in good working condition. Historically, Wajax has
not incurred substantial losses on these types of contracts,
however, there can be no assurance that losses will not be incurred
in the future.
Future warranty claims
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 significant cost overruns may be incurred. If Wajax
has miscalculated the extent of maintenance work required, or
if actual parts and service costs increase beyond the contracted
inflationary adjustments, the contract profitability will be adversely
affected. In order to mitigate this risk, Wajax closely monitors the
contracts for early warning signs of cost overruns. In addition, the
manufacturer may, in certain circumstances, 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.
Wajax 2019 Annual Report 35
Management’s Discussion and Analysis Environmental factors
From time to time, Wajax experiences environmental incidents,
emissions or spills in the course of its normal business activities.
Wajax has established environmental compliance and monitoring
programs, including an internal compliance audit function, which
management believes are appropriate for its operations. In addition,
Wajax retains environmental engineering consultants to conduct the
following activities: environmental site assessments prior to the
acquisition or occupation by Wajax; ongoing monitoring of soil and
groundwater contamination; and remediation of contaminated sites.
To date, these environmental incidents, emissions and spills have
not resulted in any material liabilities to the Corporation, however,
there can be no assurance that any future incidents, emissions or
spills will not result in a material adverse effect on Wajax’s results of
operations or cash flows. Management is not aware of any material
environmental concerns for which a provision has not been recorded.
Cyber security
Wajax’s business relies on information technology including third
party service providers, to process, transmit and store electronic
information including that related to customers, vendors and
employees. A breach in the security of the Corporation’s information
technology, or that of its third party service providers, could expose
the business to a risk of loss, misuse of confidential information
and/or business interruption.
During the year, Wajax’s management, under the supervision of its
CEO and CFO, 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. The CEO and
CFO have concluded that Wajax’s DC&P and ICFR were effective as at
December 31, 2019.
There was no change in Wajax’s ICFR that occurred during the three
months ended December 31, 2019 that has materially affected, or is
reasonably likely to materially affect, Wajax’s ICFR.
Non-GAAP and Additional GAAP Measures
The MD&A contains certain non-GAAP and additional GAAP measures
that do not have a standardized meaning prescribed by GAAP.
Therefore, these financial measures may not be comparable to
similar measures presented by other issuers. Investors are cautioned
that these measures should not be construed as an alternative to
net earnings or to cash flow from operating, investing, and financing
activities determined in accordance with GAAP as indicators of
the Corporation’s performance. The Corporation’s management
believes that:
The Corporation has general security controls in place, including
security tools, and reviews security internally and with the assistance
of a third party. In addition, the Corporation has policies in place
regarding security over confidential customer, vendor and employee
information, performs employee security training, and has recovery
plans in place in the event of a cyber-attack.
(i)
(ii)
these measures are commonly reported and widely used by
investors and management;
the non-GAAP measures are commonly used as an indicator of a
company’s cash operating performance, profitability and ability to
raise and service debt;
Despite such security controls, there is no assurance that cyber
security threats can be fully detected, prevented or mitigated. Should
such threats materialize and depending on the magnitude of the
problem, they could have a material impact on Wajax’s business,
results of operations or financial condition.
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, 2019, Wajax’s management, under the
supervision of its CEO and CFO, had designed DC&P to provide
reasonable assurance that information required to be disclosed
by Wajax in annual filings, interim filings or other reports filed or
submitted under applicable securities legislation is recorded,
processed, summarized and reported within the time periods
specified in such securities legislation. DC&P are designed to ensure
that information required to be disclosed by Wajax in annual filings,
interim filings or other reports filed or submitted under applicable
securities legislation is accumulated and communicated to Wajax’s
management, including its CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosure.
As at December 31, 2019, Wajax’s management, under the
supervision of its CEO and CFO, had designed ICFR to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with IFRS. In completing the design, management used
the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in its 2013 version of Internal Control
– Integrated Framework. With regard to general controls over
information technology, management also used the set of practices
of Control Objectives for Information and related Technology created
by the IT Governance Institute.
36 Wajax 2019 Annual Report
(iii) the additional GAAP measures are commonly used to assess a
company’s earnings performance excluding its capital and tax
structures; and
(iv) “Adjusted net earnings" and "Adjusted basic and diluted
earnings per share" provide indications of the results by the
Corporation’s principal business activities prior to recognizing
non-recurring costs (recoveries) and non-cash losses (gains) on
mark to market of derivative instruments. These adjustments
to net earnings and basic and diluted earnings per share
allow the Corporation's management to consistently compare
periods by removing infrequent charges incurred outside of the
Corporation's principal business activities and the impact of
fluctuations in interest rates and the Corporation's share price.
(v) "Adjusted EBITDA" provides an indication of the results by the
Corporation’s principal business activities prior to recognizing
non-recurring costs (recoveries) and non-cash losses (gains) on
mark to market of derivative instruments. These adjustments
to EBITDA allow the Corporation's management to consistently
compare periods by removing infrequent charges incurred
outside of the Corporation's principal business activities
and the impact of fluctuations in finance costs related to the
Corporation's capital structure, tax rates, long-term assets and
the Corporation's share price.
(vi) "Pro-forma adjusted EBITDA" used in calculating the Leverage
ratio and Senior secured leverage ratio provides an indication
of the results by the Corporation’s principal business activities
adjusted for the EBITDA of business acquisitions made during
the period as if they were made at the beginning of the trailing
12-month period pursuant to the terms of the bank credit facility
and the deduction of payments of lease liabilities, and prior to
recognizing non-recurring costs (recoveries) and non-cash losses
(gains) on mark to market of derivative instruments.
Management’s Discussion and Analysis Non-GAAP financial measures are identified and defined below:
Additional GAAP measures are identified and defined below:
Funded net debt includes bank indebtedness,
debentures and total long-term debt, net
of cash. Funded net debt is relevant in
calculating the Corporation’s funded net debt
to total capital, which is a non-GAAP measure
commonly used as an indicator of a company’s
ability to raise and service debt.
Debt is funded net debt plus letters of credit.
Debt is relevant in calculating the Corporation’s
leverage ratio, which is a non-GAAP measure
commonly used as an indicator of a company’s
ability to raise and service debt.
Total capital is shareholders' equity plus
funded net debt.
Earnings (loss)
before finance
costs and income
taxes (EBIT)
EBIT margin
Earnings (loss)
before income
taxes (EBT)
Working capital
Net earnings (loss) before finance costs, income
tax expense, depreciation and amortization.
Other working
capital amounts
Earnings (loss) before finance costs
and income taxes, as presented on the
Consolidated Statements of Earnings.
Defined as EBIT divided by revenue, as
presented on the Consolidated Statements
of Earnings.
Earnings (loss) before income taxes, as
presented on the Consolidated Statements
of Earnings.
Defined as current assets less current
liabilities, as presented on the Consolidated
Statements of Financial Position.
Defined as working capital less trade
and other receivables and inventory plus
accounts payable and accrued liabilities, as
presented on the Consolidated Statements of
Financial Position.
Funded net debt
Debt
Total capital
EBITDA
EBITDA margin
Adjusted net
earnings (loss)
Adjusted basic and
diluted earnings
(loss) per share
Adjusted EBITDA
Defined as EBITDA divided by revenue, as
presented on the Consolidated Statements
of Earnings.
Net earnings (loss) before after-tax
restructuring and other related costs
(recoveries), (gain) loss recorded on sales of
properties, non-cash losses (gains) on mark to
market of derivative instruments, CSC project
costs, and Delom transaction costs.
Basic and diluted earnings (loss) per share
before after-tax restructuring and other related
costs (recoveries), (gain) loss recorded on
sales of properties, non-cash losses (gains) on
mark to market of derivative instruments, CSC
project costs, and Delom transaction costs.
EBITDA before restructuring and other related
costs (recoveries), (gain) loss recorded on
sales of properties, non-cash losses (gains) on
mark to market of derivative instruments, CSC
project costs, and Delom transaction costs.
Adjusted EBITDA
margin
Defined as adjusted EBITDA divided by
revenue, as presented on the Consolidated
Statements of Earnings.
Pro-forma adjusted
EBITDA
Leverage ratio
Senior secured
leverage ratio
Defined as adjusted EBITDA adjusted for
the EBITDA of business acquisitions made
during the period as if they were made at
the beginning of the trailing 12-month period
pursuant to the terms of the bank credit
facility and the deduction of payments of
lease liabilities.
The leverage ratio is defined as debt at the
end of a particular quarter divided by trailing
12-month pro-forma adjusted EBITDA. The
Corporation’s objective is to maintain this ratio
between 1.5 times and 2.0 times.
The senior secured leverage ratio is defined
as debt excluding debentures at the end of a
particular quarter divided by trailing 12-month
pro-forma adjusted EBITDA.
Funded net debt to
total capital
Defined as funded net debt divided by total
capital. Total capital is the funded net debt
plus shareholder’s equity.
Backlog
Backlog is a management measure which
includes the total sales value of customer
purchase commitments for future delivery or
commissioning of equipment, parts and related
services. This differs from the remaining
performance obligations as defined by IFRS 15
Revenue from Contracts with Customers.
Reconciliation of the Corporation’s net earnings to adjusted net
earnings and adjusted basic and diluted earnings per share is
as follows:
Three months ended
December 31
2019
2018
Twelve months ended
December 31
2019
2018
$
12.2 $
6.1 $
39.5 $
35.9
$
0.1 $
0.5 $
4.1 $
3.0
$
(2.3) $
— $
(2.3) $
(0.9)
Net earnings
Restructuring and
other related
costs, after-tax
Gain recorded
on sales of
properties,
after-tax
Non-cash losses
(gains) on mark
to market of
derivative
instruments,
after-tax
Delom transaction
costs, after-tax
CSC project costs,
after-tax
$
$
$
— $
1.5 $
(0.4) $
1.6
— $
0.3 $
— $
0.3
— $
— $
0.9 $
—
Adjusted
net earnings
Adjusted basic
earnings
per share(1)(2)
Adjusted diluted
earnings
per share(1)(2)
$
10.1 $
8.3 $
41.9 $
39.9
$
0.51 $
0.42 $
2.10 $
2.02
$
0.50 $
0.41 $
2.05 $
1.98
(1) At December 31, 2019, the numbers of basic and diluted shares outstanding were
20,009,494 and 20,421,685, respectively for the three months ended and 19,998,656
and 20,416,191, respectively for the twelve months ended.
(2) At December 31, 2018, the numbers of basic and diluted shares outstanding were
19,947,235 and 20,393,145, respectively for the three months ended and 19,686,075
and 20,147,902, respectively for the twelve months ended.
Wajax 2019 Annual Report 37
Management’s Discussion and Analysis
Reconciliation of the Corporation’s net earnings to EBT, EBIT, EBITDA,
Adjusted EBITDA and Pro-forma adjusted EBITDA is as follows:
Calculation of the Corporation’s funded net debt, debt, leverage ratio
and senior secured leverage ratio is as follows:
$
32.0 $
23.3 $ 130.3 $
97.5
Cautionary Statement Regarding
Forward-Looking Information
For the
three months ended
December 31
2019
2018
For the year ended
December 31
2019
2018
Net earnings
Income tax expense
$
12.2 $
3.8
6.1 $
2.6
39.5 $
14.3
35.9
14.0
EBT
Finance costs(1)
EBIT
Depreciation and
amortization(2)
EBITDA
Restructuring and
other related costs(3)
Gain recorded on
sales of properties
Non-cash losses
(gains) on mark
to market of
derivative
instruments(4)
Delom transaction
costs(5)
CSC project costs(6)
$
Adjusted EBITDA
Delom acquisition
pro-forma adjusted
EBITDA(7)
16.0
5.4
8.7
2.9
21.4
11.6
53.8
19.7
73.5
12.5
8.6
52.8
33.9
20.2
126.3
49.8
8.8
58.6
27.0
85.6
0.2
0.7
5.6
4.1
(2.3)
—
(2.3)
(1.2)
0.0
2.1
(0.5)
—
0.1
0.5
–
—
1.2
2.2
0.5
—
31.9 $
23.3 $ 130.3 $
91.2
—
—
—
6.3
Pro-forma adjusted
EBITDA, as
previously
reported
Payment of lease
liabilities(8)
Pro-forma adjusted
EBITDA
(5.6)
(1.1)
(22.0)
(4.2)
$
26.3 $
22.2 $ 108.4 $
93.3
(1) As a result of the adoption of IFRS 16, the Corporation incurred interest costs that are
included in finance costs of $1.5 million for the three months ended December 31, 2019
and $5.0 million for the twelve months ended December 31, 2019.
(2) As a result of the adoption of IFRS 16, the Corporation incurred depreciation expense that
is included in depreciation and amortization of $4.8 million for the three months ended
December 31, 2019 and $18.4 million for the twelve months ended December 31, 2019.
(3) For 2019, restructuring and other related costs includes costs relating to the Finance
Reorganization Plan and the Management Realignment. The Finance Reorganization Plan
commenced in the first quarter of 2018 and consists of severance, project management
and interim duplicate labour costs as the Corporation redesigns its finance function. The
Management Realignment commenced in the third quarter of 2019 and consists primarily
of severance costs as the Corporation simplifies its regional management structure,
strengthens the partnership between sales and product support, and integrates the
Corporation's legacy ERS business with Delom.
For 2018, restructuring and other related costs includes costs relating to the Finance
Reorganization Plan, a leadership realignment within the Corporation's ERS business,
and the 2016 strategic reorganization. The leadership realignment within the ERS
business was intended to better align such business with the One Wajax model. The 2016
strategic reorganization costs in 2018 related to additional severance costs as part of the
Corporation's transition to the One Wajax model.
(4) Non-cash losses (gains) on mark to market of non-hedged derivative instruments.
(5) In 2018, the Corporation incurred transaction costs in order to acquire Delom. These costs
were primarily for advisory services.
(6) In 2019, the Corporation incurred professional fees relating to the CSC project.
(7) Pro-forma adjusted EBITDA for Delom for pre-acquisition periods, to adjust for the EBITDA of
business acquisitions made during the period as if they were made at the beginning of the
trailing 12-month period pursuant to the terms of the bank credit facility.
(8) Effective with the reporting period beginning on January 1, 2019 and the adoption of
IFRS 16, the Corporation has amended the definition of funded net debt to exclude lease
liabilities not considered part of debt. As a result, the corresponding lease costs must also
be deducted from EBITDA for the purpose of calculating the leverage ratio.
38 Wajax 2019 Annual Report
2019
December 31
2018
(Pro-forma)(1)
2018
(As previously
reported)
Bank indebtedness (cash) $
Lease liabilities
Debentures
Long-term debt
Funded net debt(1)
Letters of credit
$
(3.2) $
—
54.1
225.6
276.5 $
5.5
3.9 $
—
—
218.1
222.0 $
6.1
3.9
13.7
—
218.1
235.8
6.1
Debt
$
282.0 $
228.1 $
241.9
Pro-forma adjusted
EBITDA(2)
Leverage ratio(3)
Senior secured
leverage ratio(4)
$
108.4 $
93.3 $
2.60
2.45
97.5
2.48
2.10
2.45
2.48
(1) Effective with the reporting period beginning on January 1, 2019 and the adoption of
IFRS 16, the Corporation has amended the definition of Funded net debt to exclude lease
liabilities not considered part of debt. For comparison purposes, the pro-forma funded net
debt and leverage ratio for December 31, 2018 using the amended definition of funded net
debt is shown in the table above.
(2) For the twelve months ended December 31, 2019 and December 31, 2018.
(3) Calculation uses trailing four-quarter Pro-forma adjusted EBITDA. This leverage ratio is
calculated for purposes of monitoring the Corporation’s objective target leverage ratio of
between 1.5 times and 2.0 times, and is different from the leverage ratio calculated under
the Corporation’s bank credit facility agreement.
(4) Calculation uses debt excluding debentures divided by the trailing four-quarter Pro-forma
adjusted EBITDA.
While the calculation contains some differences from the leverage ratio calculated under
the Corporation’s bank credit facility agreement, the resulting leverage ratio under the
bank credit facility agreement is not significantly different. See the Liquidity and Capital
Resources section.
This MD&A and Annual Report contains certain forward-looking
statements and forward-looking information, as defined in applicable
securities laws (collectively, “forward-looking statements”). These
forward-looking statements relate to future events or the
Corporation’s future performance. All statements other than
statements of historical fact are forward-looking statements. Often,
but not always, forward-looking statements can be identified by the
use of words such as “plans”, “anticipates”, “intends”, “predicts”,
“expects”, “is expected”, “scheduled”, “believes”, “estimates”,
“projects” or “forecasts”, or variations of, or the negatives of, such
words and phrases or state that certain actions, events or results
“may”, “could”, “would”, “should”, “might” or “will” be taken, occur
or be achieved. Forward-looking statements involve known and
unknown risks, uncertainties and other factors beyond the
Corporation’s ability to predict or control which may cause actual
results, performance and achievements to differ materially from
those anticipated or implied in such forward-looking statements.
There can be no assurance that any forward-looking statement will
materialize. Accordingly, readers should not place undue reliance on
forward-looking statements. The forward-looking statements in this
MD&A and Annual Report are made as of the date of this MD&A,
reflect management’s current beliefs and are based on information
currently available to management. Although management believes
that the expectations represented in such forward-looking statements
are reasonable, there is no assurance that such expectations will
prove to be correct. Specifically, this MD&A and Annual Report
Management’s Discussion and Analysis
competition; our ability to attract and retain skilled staff; our ability to
procure quality products and inventory; and our ongoing relations with
suppliers, employees and customers. The foregoing list of
assumptions is not exhaustive. Factors that may cause actual results
to vary materially include, but are not limited to, a deterioration in
general business and economic conditions; volatility in the supply
and demand for, and the level of prices for, oil, natural gas and other
commodities; a continued or prolonged decrease in the price of oil or
natural gas; fluctuations in financial market conditions, including
interest rates; the level of demand for, and prices of, the products
and services we offer; levels of customer confidence and spending;
market acceptance of the products we offer; termination of
distribution or original equipment manufacturer agreements;
unanticipated operational difficulties (including failure of plant,
equipment or processes to operate in accordance with specifications
or expectations, cost escalation, our inability to reduce costs in
response to slow-downs in market activity, unavailability of quality
products or inventory, supply disruptions, job action and unanticipated
events related to health, safety and environmental matters); our
ability to attract and retain skilled staff and our ability to maintain our
relationships with suppliers, employees and customers. The foregoing
list of factors is not exhaustive. Further information concerning the
risks and uncertainties associated with these forward-looking
statements and the Corporation’s business may be found in this MD&A
under the heading “Risk Management and Uncertainties” and in our
Annual Information Form for the year ended December 31, 2019, filed
on SEDAR. The forward-looking statements contained in this MD&A
and Annual Report are expressly qualified in their entirety by this
cautionary statement. The Corporation does not undertake any
obligation to publicly update such forward-looking statements to
reflect new information, subsequent events or otherwise unless so
required by applicable securities laws.
includes forward-looking statements regarding, among other things,
the main elements of our updated Strategic Plan, including our focus
on executing clear plans in five important areas: investments in our
team, investments in our customers, our organic growth strategy, our
acquisition strategy and investments in our infrastructure; our outlook
on market conditions for 2020, including demand for capital
equipment, equipment utilization rates and our expectation that
conditions will improve later in the year; our objective of managing
the Corporation’s business and capital conservatively during 2020
until market conditions improve; our expectation that market-oriented
pressure on revenue will be at least partially offset by higher volumes
in engineered repair services and industrial parts, and expected
mining deliveries in the second half of 2020; opportunities to
improve gross margins, drive additional cost productivity and lower
finance costs through reductions in inventory; our plans to move
forward with the implementation of our new ERP system, as well as
our implementation time frame and the minimization of risk; the
continuation of our branch optimization program, including our
intention of applying proceeds from the sale of real estate assets to
the Corporation’s credit facilities; our balancing of pace and market
conditions while we track toward our strategic plan goals and targets;
our growth and performance expectations for our Targeted Growth,
Core Strength and Cyclical/Major Project Opportunity product and
service categories; our expectation that the combination of
NorthPoint’s branch network and technical skill with the Corporation’s
sales force will result in substantial growth in our ERS business; our
expectation that we will deliver three large mining shovels to
customers during 2020; our plans to grow market share in our
Targeted Growth categories and our expectation that acquisitions will
play an important role in our ERS business; the expected costs and
benefits of the Management Realignment commenced in Q3 2019,
including expected annual pre-tax savings; the expected costs of the
Finance Reorganization Plan; our expectation that neither the impact
of (a) changes in interest rates (in particular, related to unhedged
variable rate debt), (b) a change in foreign currency value relative to
the Canadian dollar, on transactions with customers which include
unhedged foreign currency exposures, nor (c) a change in the
Corporation’s share price on cash-settled MTIP rights, will have a
material impact on our results of operations or financial condition
over the longer term; our belief that there is no significant risk of
non-performance by counterparties to foreign exchange forward
contracts, long-term interest rate hedge contracts and total return
swap contracts; our expectation that future cash contribution
requirements to defined benefit plans will not change materially; the
adequacy of our debt capacity and sufficiency of our debt facilities;
our intention and ability to access debt and equity markets or reduce
dividends should additional capital be required, including the
potential that we may access equity or debt markets to fund
significant acquisitions, growth related capital and capital
expenditures; our objective of maintaining a leverage ratio between
1.5 – 2.0 times; and our financing, working and maintenance capital
requirements, as well as our capital structure and leverage ratio.
These statements are based on a number of assumptions which may
prove to be incorrect, including, but not limited to, assumptions
regarding general business and economic conditions; the supply and
demand for, and the level and volatility of prices for, oil, natural gas
and other commodities; financial market conditions, including interest
rates; our ability to execute our updated Strategic Plan, including our
ability to develop our core capabilities, execute our organic growth
priorities, complete and effectively integrate acquisitions, such as
Delom and NorthPoint, and to successfully implement new
information technology platforms, systems and software; the future
financial performance of the Corporation; our costs; market
Wajax 2019 Annual Report 39
Management’s Discussion and Analysis Management’s Responsibility
for Financial Reporting
The consolidated financial statements of Wajax Corporation are
the responsibility of management and have been prepared in
accordance with International Financial Reporting Standards. Where
appropriate, the information reflects management’s judgement and
estimates based on the available information. Management is also
responsible for 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
and the discharge of their responsibilities.
Both the external and internal auditors have free and independent
access to the Audit Committee to discuss the scope of their
audits, the adequacy of the system of internal control and the
adequacy of financial reporting. The Audit Committee reports its
findings to the Board, which reviews and approves the consolidated
financial statements.
Wajax’s external auditors, KPMG LLP, are responsible for auditing the
consolidated financial statements and expressing an opinion thereon.
Mark Foote
President and
Chief Executive Officer
Stuart Auld
Chief Financial Officer
Mississauga, Canada, March 2, 2020
Independent
Auditors’ Report
To the Shareholders of Wajax Corporation
Basis for Opinion
Opinion
We have audited the consolidated financial statements of Wajax
Corporation (the Entity), which comprise:
the consolidated statements of financial position as at
December 31, 2019 and December 31, 2018
the consolidated statements of earnings for the years then ended
the consolidated statements of comprehensive income or the
years then ended
the consolidated statements of changes in shareholders’ equity for
the years then ended
the consolidated statements of cash flows for the years
then ended
and notes to the consolidated financial statements, including a
summary of significant accounting policies
We conducted our audit in accordance with Canadian generally
accepted auditing standards. Our responsibilities under those
standards are further described in the “Auditors’ Responsibilities for
the Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Entity in accordance with the ethical
requirements that are relevant to our audit of the financial
statements in Canada and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.
Emphasis of Matter – Change in Accounting Policy
We draw attention to Note 4 to the financial statements which
indicates that the Entity has changed its accounting policy for leases
as of January 1, 2019 due to the adoption of IFRS 16 Leases and
has applied that change using a modified retrospective approach.
(Hereinafter referred to as the “financial statements”).
Our opinion is not modified in respect of this matter.
In our opinion, the accompanying financial statements present fairly,
in all material respects, the consolidated financial position of the
Entity as at December 31, 2019 and December 31, 2018, and its
consolidated financial performance and its consolidated cash flows
for the years then ended in accordance with International Financial
Reporting Standards (IFRS).
Other Information
Management is responsible for the other information. Other
information comprises:
the information included in Management’s Discussion and Analysis
filed with the relevant Canadian Securities Commissions.
the information, other than the financial statements and the
auditors’ report thereon, included in a document likely to be
entitled “Wajax 2019 Annual Report”.
40 Wajax 2019 Annual Report
Our opinion on the financial statements does not cover the other
information and we do not and will not express any form of assurance
conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information identified above and,
in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained
in the audit and remain alert for indications that the other information
appears to be materially misstated.
We obtained the information included in Management’s Discussion
and Analysis filed with the relevant Canadian Securities Commissions
as at the date of this auditors’ report. If, based on the work we have
performed on this other information, we conclude that there is a
material misstatement of this other information, we are required to
report that fact in the auditors’ report.
We have nothing to report in this regard.
The information, other than the financial statements and the auditors’
report thereon, included in a document likely to be entitled “Wajax
2019 Annual Report” is expected to be made available to us after
the date of this auditors’ report. If, based on the work we will perform
on this other information, we conclude that there is a material
misstatement of this other information, we are required to report
that fact to those charged with governance.
Responsibilities of Management and Those Charged with
Governance for the Financial Statements
Management is responsible for the preparation and fair presentation
of the financial statements in accordance with International
Financial Reporting Standards (IFRS), and for such internal control
as management determines is necessary to enable the preparation
of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, management is responsible
for assessing the Entity’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using
the going concern basis of accounting unless management either
intends to liquidate the Entity or to cease operations, or has no
realistic alternative but to do so.
Those charged with governance are responsible for overseeing the
Entity’s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditors’ report that
includes our opinion.
Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with Canadian
generally accepted auditing standards will always detect a material
misstatement when it exists.
Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the
basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted
auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit.
Independent Auditors’ Report
We also:
Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a basis
for our opinion.
The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as
fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit
in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Entity's internal control.
Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures
made by management.
Conclude on the appropriateness of management's use of the
going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related
to events or conditions that may cast significant doubt on the
Entity's ability to continue as a going concern. If we conclude that
a material uncertainty exists, we are required to draw attention
in our auditors’ report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditors’ report. However, future events
or conditions may cause the Entity to cease to continue as a
going concern.
Evaluate the overall presentation, structure and content of the
financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
Communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
Provide those charged with governance with a statement that
we have complied with relevant ethical requirements regarding
independence, and communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
Obtain sufficient appropriate audit evidence regarding the financial
information of the entities or business activities within the group
Entity to express an opinion on the financial statements. We are
responsible for the direction, supervision and performance of the
group audit. We remain solely responsible for our audit opinion.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors’ report
is Laura Price.
Vaughan, Canada, March 2, 2020
Wajax 2019 Annual Report 41
Consolidated Statements
of Financial Position
As at (in thousands of Canadian dollars)
Assets
Current
Cash
Trade and other receivables
Contract assets
Inventory
Deposits on inventory
Lease receivables
Income taxes receivable
Prepaid expenses
Derivative financial assets
Non-Current
Rental equipment
Property, plant and equipment
Right-of-use assets
Lease receivables
Goodwill and intangible assets
Deferred tax assets
Total assets
Liabilities And Shareholders’ Equity
Current
Bank indebtedness
Accounts payable and accrued liabilities
Contract liabilities
Dividends payable
Income taxes payable
Lease liabilities
Derivative financial liabilities
Non-Current
Deferred tax liabilities
Employee benefits
Derivative financial liabilities
Other liabilities
Lease liabilities
Debentures
Long-term debt
Total liabilities
Shareholders’ Equity
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
Contingencies – see Note 26
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
42 Wajax 2019 Annual Report
Note
2019
2018
December 31
$
3,180 $
238,194
23,318
414,928
37,513
617
3,166
6,110
484
—
206,257
30,307
365,997
13,445
—
—
7,190
1,635
727,510
624,831
77,020
42,139
117,091
1,714
79,572
48
73,716
59,017
—
—
73,685
—
6
7
8
8
13
17
9
9
10
13
11
17
317,584
206,418
$ 1,045,094 $ 831,249
$
— $
12
7
18
13
17
287,656
7,230
5,003
—
20,706
2,849
3,932
252,958
8,291
4,989
12,173
4,622
3,167
$ 323,444 $ 290,132
24
14
17
13
15
16
18
3,787
9,144
4,190
1,602
106,424
54,115
225,573
1,209
8,445
5,036
2,214
9,127
—
218,116
404,835
244,147
728,279
534,279
181,075
7,165
130,961
(2,386)
180,369
7,360
110,842
(1,601)
316,815
296,970
$ 1,045,094 $ 831,249
Consolidated Statements
of Earnings
For the years ended December 31 (in thousands of Canadian dollars, except per share data)
Revenue
Cost of sales
Gross profit
Selling and administrative expenses
Restructuring and other related costs
Earnings before finance costs and income taxes
Finance costs
Earnings before income taxes
Income tax expense
Net earnings
Basic earnings per share
Diluted earnings per share
Consolidated Statements
of Comprehensive Income
For the years ended December 31 (in thousands of Canadian dollars)
Net earnings
Items that will not be reclassified to income
Note
2019
2018
20 $ 1,553,046 $ 1,481,597
1,261,222 1,209,330
291,824
212,752
5,587
272,267
209,522
4,143
73,485
19,716
53,769
14,265
58,602
8,775
49,827
13,975
22
23
24
$
39,504 $
35,852
18 $
18
1.98 $
1.93
1.82
1.78
Note
2019
2018
$
39,504 $
35,852
Actuarial gains (losses) on pension plans, net of tax expense of $5 (2018 – expense of $26)
14
14
72
Items that may be subsequently reclassified to income
Losses (gains) on derivative instruments designated as cash flow hedges in prior years reclassified
to net earnings during the year, net of tax recovery of $96 (2018 – expense of $229)
262
(622)
(Losses) gains on derivative instruments outstanding at the end of the year designated
as cash flow hedges, net of tax recovery of $385 (2018 – recovery of $252)
Other comprehensive loss, net of tax
Total comprehensive income
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
(1,047)
(685)
(771)
(1,235)
$
38,733 $
34,617
Wajax 2019 Annual Report 43
Consolidated Statements
of Changes in Shareholders’ Equity
For the year ended December 31, 2019 (in thousands of Canadian dollars)
Note
Share Contributed
surplus
capital
Retained
earnings
Cash flow
hedges
Total
Accumulated
other
comprehensive
loss
December 31, 2018
Net earnings
Other comprehensive gain (loss)
Total comprehensive income (loss)
Shares issued to settle share-based compensation plans
Shares released from trust to settle
share-based compensation plans
Share-based compensation expense
Dividends declared
18
18
19
18
$ 180,369 $
7,360 $ 110,842 $
(1,601) $ 296,970
—
—
—
530
176
—
—
—
—
39,504
14
—
(530)
39,518
—
—
(785)
(785)
—
39,504
(771)
38,733
—
(1,215)
1,550
—
607
—
(20,006)
—
—
—
(432)
1,550
(20,006)
December 31, 2019
$ 181,075 $
7,165 $ 130,961 $
(2,386) $ 316,815
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
For the year ended December 31, 2018 (in thousands of Canadian dollars)
Note
Share Contributed
surplus
capital
Retained
earnings
Cash flow
hedges
Total
Accumulated
other
comprehensive
loss
December 31, 2017
Net earnings
Other comprehensive income
Total comprehensive income
Shares issued to settle share-based compensation plans
Net sale of shares held in trust (net of tax)
Change from equity to cash settled RSUs
Share-based compensation expense
Dividends declared
18
18
19
18
$ 175,863 $
10,455 $
88,643 $
(294) $ 274,667
—
—
—
1,380
3,126
—
—
—
—
—
35,852
72
—
(1,380)
—
(4,578)
2,863
—
35,924
—
6,022
—
—
(19,747)
—
(1,307)
(1,307)
—
—
—
—
—
35,852
(1,235)
34,617
—
9,148
(4,578)
2,863
(19,747)
December 31, 2018
$ 180,369 $
7,360 $ 110,842 $
(1,601) $ 296,970
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
44 Wajax 2019 Annual Report
Consolidated Statements
of Cash Flows
For the years ended December 31 (in thousands of Canadian dollars)
Note
2019
2018
Operating Activities
Net earnings
Items not affecting cash flow:
Depreciation and amortization:
Rental equipment
Property, plant and equipment
Right-of-use assets
Intangible assets
Gain on disposal of property, plant and equipment
Share-based compensation expense
Non-cash income from finance leases
Employee benefits expense, net of payments
Loss on derivative financial instruments
Finance costs
Income tax expense
Changes in non-cash operating working capital
Rental equipment additions
Other non-current liabilities
Cash paid on settlement of total return swaps
Finance costs paid on debts
Finance costs paid on lease liabilities
Income taxes paid
Cash used in operating activities
Investing Activities
Property, plant and equipment additions
Proceeds on disposal of property, plant and equipment
Intangible assets additions
Acquisition of business (net of cash acquired)
Cash used in investing activities
Financing Activities
Net increase in bank debt
Proceeds from issuance of debentures
Net sale of shares held in trust
Transaction costs on debts
Payment of lease liabilities
Payment of tax withholding for share-based compensation
Dividends paid
Cash generated from financing activities
Change in cash and bank indebtedness
Bank indebtedness – beginning of year
Cash (bank indebtedness) – end of year
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
$
39,504 $
35,852
9
9
10
11
19
17
23
24
25
9
17
13
9
11
5
16
15
15, 16
13
20,678
6,876
23,029
2,182
(2,329)
3,446
(174)
470
88
19,716
14,265
17,018
8,757
—
1,190
(1,197)
1,786
—
242
4,213
8,775
13,975
127,751
90,611
(50,546)
(37,531)
(1,374)
(1,479)
(13,051)
(5,675)
(27,764)
(33,640)
(43,638)
(1,444)
—
(8,422)
—
(6,481)
(9,669)
(3,014)
(5,943)
10,124
(5,352)
(795)
(5,527)
2,522
(4,837)
(51,061)
(1,966)
(58,903)
7,362
57,000
—
(3,224)
(21,967)
(432)
(19,992)
75,000
—
9,475
(918)
(4,214)
—
(19,634)
18,747
59,709
7,112
(2,208)
(3,932)
(1,724)
$
3,180 $
(3,932)
Wajax 2019 Annual Report 45
Notes to Consolidated
Financial Statements
For the years ended December 31, 2019 and 2018 (amounts in thousands of Canadian dollars, except share and per share data)
1. Company Profile
Allowance for credit losses
Wajax Corporation (the “Corporation”) is incorporated in Canada.
The address of the Corporation’s registered head office is
2250 Argentia Road, Mississauga, Ontario, Canada. The Corporation
operates an integrated distribution system, providing sales, parts and
services to a broad range of customers in diversified sectors of the
Canadian economy, including: construction, forestry, mining, industrial
and commercial, oil sands, transportation, metal processing,
government and utilities, and oil and gas.
2. Basis of Preparation
Statement of compliance
These consolidated financial statements have been prepared
in accordance with International Financial Reporting Standards
("IFRS") as published by the International Accounting Standards
Board ("IASB").
These consolidated financial statements were authorized for issue
by the Board of Directors on March 2, 2020.
Basis of measurement
These consolidated financial statements have been prepared under
the historical cost basis except for derivative financial instruments
and share-based payment arrangements that have been measured at
fair value. The defined benefit liability is recognized as the net total of
the fair value of the plan assets and the present value of the defined
benefit obligation.
Functional and presentation currency
These 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 these 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 and disclosures
made in these consolidated financial statements. Actual results
could differ from those judgements, estimates and assumptions.
The Corporation bases its estimates on historical experience and
various other assumptions that are believed to be reasonable
in the circumstances.
The key assumptions concerning the future and other key sources
of estimation uncertainty that have a significant risk of resulting in a
material adjustment to the carrying amount of assets and liabilities
within the next fiscal year are as follows:
The Corporation is exposed to credit risk with respect to its trade
and other receivables. However, this is partially mitigated by the
Corporation’s diversified customer base which covers many business
sectors across Canada. In addition, the Corporation's customer
base spans large public companies, small independent contractors,
original equipment manufacturers and various levels of government.
The Corporation follows a program of credit evaluations of customers
and limits the amount of credit extended when deemed necessary.
The Corporation maintains an allowance for possible credit losses,
and any such losses to date have been within management’s
expectations. The allowance for credit losses is determined by
estimating the lifetime expected credit losses, taking into account
the Corporation's past experience of collecting payments as well as
observable changes in and forecasts of future economic conditions
that correlate with default on receivables. At the point when the
Corporation is satisfied that no recovery of the amount owing is
possible, the amount is considered not recoverable and the financial
asset is written off.
Inventory obsolescence
The value of the Corporation’s new and used equipment and high
value parts is evaluated by management throughout the year, on
a unit-by-unit basis. When required, provisions are recorded to
ensure that equipment and parts are valued at the lower of cost
and estimated net realizable value. The Corporation performs an
aging analysis to identify slow moving or obsolete lower value parts
inventory and estimates appropriate obsolescence provisions related
thereto. The Corporation takes advantage of supplier programs
that allow for the return of eligible parts for credit within specified
time periods.
Goodwill and intangible assets
The value in use of goodwill and intangible assets has been
estimated using the forecasts prepared by management for the next
five years. The key assumptions for the estimate are those regarding
revenue growth, earnings before interest, taxes, depreciation and
amortization ("EBITDA") margin, tax rates, discount rates and the
level of working capital required to support the business. These
estimates are based on past experience and management’s
expectations of future changes in the market and forecasted
growth initiatives.
Lease term of contracts with renewal options
The lease term is defined as the non-cancellable term of the lease,
including any periods covered by a renewal option to extend the lease
if it is reasonably certain that the renewal option will be exercised,
or any periods covered by an option to terminate the lease, if it is
reasonably certain that the termination option will not be exercised.
Significant judgement is used when evaluating whether the
Corporation is reasonably certain that the lease renewal option will
be exercised, including examining any factors that may provide an
economic advantage for renewal.
46 Wajax 2019 Annual Report
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.
Revenue recognition
Revenue from contracts with customers is recognized for each
performance obligation as control is transferred to the customer.
The following is a description of principal activities from which the
Corporation generates its revenue, and the associated timing of
revenue recognition.
Revenue type
Nature and timing of satisfaction
of performance obligations
Equipment sales
Retail sales
Construction
contracts
Industrial parts
Product support
Service
Parts
ERS
Retail sales include the sale of new and used
equipment. The Corporation recognizes revenue
when control of the equipment passes to the
customer based on shipment terms.
Construction contracts are equipment sales that
involve the design, installation, and assembly of
power generation systems. As a result of control
transferring over time, revenue is recognized
based on the extent of progress towards
completion of the performance obligation. The
Corporation generally uses the cost-to-cost
measure of progress for its contracts because
it best reflects the transfer of control of the
work-in-progress to the customer as the asset is
being constructed.
The Corporation recognizes revenue when control
of the parts passes to the customer based on
shipment terms.
As a result of control transferring over time,
revenue is recognized based on the extent of
progress towards completion of the performance
obligation. The Corporation generally uses the
cost-to-cost measure of progress for its service
work because the customer controls the asset as
it is being serviced.
The Corporation recognizes revenue when control
of the parts passes to the customer based on
shipment terms or upon customer pickup.
This revenue consists primarily of engineered
repair services ("ERS"). As a result of control
transferring over time, revenue is recognized
based on the extent of progress towards
completion of the performance obligation. The
Corporation generally uses the cost-to-cost
measure of progress for ERS because it best
reflects the transfer of control of the work-in-
progress to the customer as the asset is being
constructed or modified.
The transaction price is generally the amount stated in the contract.
Certain contracts are subject to discounts which are estimated and
included in the transaction price. Provisions are made for expected
returns and warranty costs based on historical data.
Revenue from the rental of equipment is recognized on a straight-line
basis over the term of the lease.
Trade and other receivables
Trade accounts receivable are amounts due from customers for
merchandise sold or services performed in the ordinary course of
business. Other accounts receivable are generally from suppliers
for warranty and rebates. If collection is expected in one year or
less (or in the normal operating cycle of the business, if longer),
they are classified as current assets. If not, they are presented as
non-current assets. Trade accounts receivable are recognized initially
at amounts due, net of impairment for estimated expected credit
losses. The expense relating to expected credit losses is included
within selling and administrative expenses in the consolidated
statements of earnings.
Contract assets
Contract assets primarily relate to the Corporation's rights to
consideration for work completed but not billed at the reporting
date on product support and ERS revenue. The contract assets are
transferred to receivables when billed.
Inventory
Inventory is 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 the cost incurred in
bringing inventory to its present location and condition. Cost of work-
in-process and cost of conversion includes cost of direct labour, direct
materials and a portion of direct and indirect overheads, allocated
based on normal capacity. Net realizable value is the estimated
selling price in the ordinary course of business, less the estimated
costs to sell.
Deposits on inventory
In the normal course of business, the Corporation receives
inventory on consignment from a major manufacturer which is either
rented, sold to customers, or purchased. Under the terms of the
consignment program, the Corporation is required to make periodic
deposits to the manufacturer on the consigned inventory that is
rented to customers or on-hand for greater than nine months. This
consigned inventory is not included in the Corporation’s inventory
as the manufacturer retains title to the goods, however the deposits
paid to the manufacturer are recorded as deposits on inventory. Other
inventory prepayments are also included in deposits on inventory.
Rental equipment
Rental equipment is recorded at cost less accumulated depreciation.
Cost includes all expenditures directly attributable to the acquisition
of the asset. Rental equipment is depreciated over its estimated
useful life to its estimated residual value on a straight-line basis,
which ranges from 4 to 5 years.
Wajax 2019 Annual Report 47
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:
Asset
Method
Rate
Buildings
Equipment and vehicles
Computer hardware
Furniture and fixtures
Leasehold improvements
declining balance
declining balance
straight-line
declining balance
straight-line
5% – 10%
20% – 30%
3 – 5 years
10% – 20%
over the
remaining
terms of
the leases
Goodwill and intangible assets
Goodwill arising in a business combination is recognized as an
asset at the date that control is acquired. Goodwill and indefinite
life intangible assets are subsequently measured at cost less
accumulated impairment losses. Goodwill and indefinite life
intangible assets are not amortized but are tested for impairment
at least annually, or more frequently if certain indicators arise that
indicate the assets might be impaired. Goodwill and indefinite life
intangible assets are allocated to cash-generating units (“CGUs”) that
are expected to benefit from the synergies of the acquisition.
Product distribution rights represent the fair value attributed to these
rights at the time of acquisition and are classified as indefinite life
intangible assets because the Corporation is generally able to renew
these rights with minimal cost of renewal.
Customer lists and non-competition agreements are amortized on
a straight-line basis over their useful lives which range from 2 to 12
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.
Impairment
Property, plant and equipment, rental equipment and definite life
intangible assets are reviewed at the end of each period to determine
if any indicators of impairment exist. If an indicator of impairment
is identified, an impairment test is performed comparing its
recoverable amounts to its carrying value. An impairment loss would
be recognized as the amount by which the asset’s carrying amount
exceeds its recoverable amount. Where the asset does not generate
cash flows that are independent of other assets, impairment is
considered for the CGU or group of CGUs to which the asset belongs.
Goodwill and indefinite life intangible assets are tested for
impairment at least annually or whenever events or changes in
circumstances indicate that their carrying amount may not be
recoverable. To test for impairment, the Corporation compares the
carrying values of its goodwill and indefinite life intangibles to their
recoverable amounts. Recoverable amount is the higher of value
in use or fair value less costs of disposal, if the fair 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 assets. The fair value less costs
of disposal is determined either by an adjusted net asset-based
approach or by the present value of future cash flows from a market
participant perspective. Any impairment of goodwill or indefinite life
intangible assets would be recorded as a charge against earnings.
48 Wajax 2019 Annual Report
A CGU is the smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash inflows from
other assets or groups of assets. For the purpose of impairment
testing the CGUs are grouped at the level at which it is monitored,
which is at the consolidated Corporation level. As a result, goodwill
and intangible assets impairment has been tested for impairment
using the cash flows generated by the consolidated operations
of the Corporation.
Financial assets measured at amortized cost are assessed for
impairment at the end of each reporting period and a loss allowance
is measured by estimating the lifetime expected credit losses
("ECL"). The Corporation uses the simplified approach to determine
ECL on trade and other receivables, using a provision matrix based
on historical credit loss experiences adjusted to reflect information
about current economic conditions and forecasts of future economic
conditions to estimate lifetime ECL. The ECL models applied to
other financial assets and contract assets also required judgement,
assumptions and estimations on changes in credit risks, forecasts
of future economic conditions and historical information on the
credit quality of the financial asset. Impairment losses are recorded
in selling and administrative expenses with the carrying amount
of the financial asset reduced through the use of impairment
allowance accounts.
Cash and bank indebtedness
Cash and bank indebtedness includes cash on hand, demand
deposits, bank overdrafts and outstanding cheques. The Corporation
considers bank indebtedness to be an integral part of the
Corporation’s cash management. Cash and bank indebtedness are
offset and the net amount presented in the consolidated statements
of financial position to the extent that there is a right to set off and a
practice of net settlement.
Finance costs
Finance costs are comprised of interest on the Corporation's debts
and interest expense from lease liabilities measured at the present
value of the lease payment to be made over the lease term under
IFRS 16 Leases. Transaction costs directly attributable to the
acquisition or amendment of bank debt are deferred and amortized to
finance costs over the term of the long-term debt using the effective
interest rate method. Deferred financing costs reduce the carrying
amount of the related long-term debt.
Derivative financial instruments and hedge accounting
The Corporation uses derivative financial instruments in the
management of: a) its foreign currency exposures related to certain
inventory purchases and customer sales commitments, b) its
interest rate risk related to its variable rate debt, and c) its equity
price risk related to certain share-based compensation plans. The
Corporation’s policy is to not utilize derivative financial instruments
for trading or speculative purposes. Where the Corporation intends
to apply hedge accounting it formally documents the relationship
between the derivative and the risk being hedged, as well as the
risk management objective and strategy for undertaking the hedge
transaction. The documentation links the derivative to a specific
asset or liability or to specific firm commitments or forecasted
transactions. The Corporation also assesses, at the hedge's
inception and at least quarterly whether the hedge is effective in
offsetting changes in fair values or cash flows of the risk being
hedged. Should a hedge become ineffective, hedge accounting
will be discontinued prospectively. All derivative instruments are
recorded in the consolidated statements of financial position at
fair value. All changes in fair value are recorded in earnings unless
hedge accounting is applied, in which case the effective portion of
changes in fair value of the hedged instrument are recorded in other
comprehensive income. If the cash flow hedge of a firm commitment
or forecasted transaction results in the recognition of a non-financial
Notes to Consolidated Financial Statements
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.
Share-based compensation plans
The fair value of share-based compensation plan rights is based
on the trading price of a Wajax Corporation common share on
the Toronto Stock Exchange (“TSX”) or a Monte Carlo simulation.
Compensation expense for share-settled plans is based upon the
fair 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.
Compensation expense for cash-settled plans varies with the price of
the Corporation’s shares and is charged to selling and administrative
expenses, recognized over the vesting period with an offset to
accounts payable and accrued liabilities.
Employee benefits
The Corporation has defined contribution pension plans for most
of its employees. The cost of the defined contribution plans is
recognized in earnings based on the contributions required to be
made each year.
The Corporation also has defined benefit plans covering certain of
its employees. The benefits are based on years of service and the
employees’ earnings. Defined benefit plan obligations are accrued
as the employees render the services necessary to earn the pension
benefits. The Corporation has adopted the following policies:
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 salary
escalation, and retirement ages of employees.
For purposes of calculating expected return on plan assets, those
assets are valued at fair value.
The charge to earnings for the defined benefit plans is split
between an operating cost and a finance charge. The finance
charge represents the net interest cost on the defined benefit
obligation net of the expected return on plan assets and is
included in selling and administrative expenses.
Actuarial gains and losses are recognized in full in other
comprehensive income in the year in which they occur.
Income taxes
Income tax expense comprises current and deferred taxes. Current
and deferred taxes are recognized in earnings except to the extent
that they relate to a business combination or to items recognized
directly in equity or in other comprehensive income.
Current tax is the expected taxes payable or receivable on the taxable
income or loss for the year, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to income taxes
payable in respect of previous years.
Deferred tax is recognized in respect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes.
Deferred tax is measured at the tax rates that are expected to
be applied to temporary differences when they reverse, based
on the laws that have been enacted or substantively enacted by
the reporting date.
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. Deferred tax assets are reviewed at each reporting date and
are reduced to the extent that it is no longer probable that the related
tax benefit will be realized.
4. Change in Accounting Policies
Accounting standards adopted during the year
IFRIC 23 Uncertainty over Income Tax Treatments ("IFRIC 23")
On January 1, 2019, the Corporation adopted IFRIC 23, which
provides guidance when there is uncertainty over income tax
treatments including, but not limited to, whether uncertain tax
treatments should be considered separately; assumptions made
about the examination of tax treatments by tax authorities; the
determination of taxable profit, tax bases, unused tax losses, unused
tax credits, and tax rates; and, the impact of changes in facts and
circumstances. The adoption had no impact on the Corporation.
IFRS 16 Leases ("IFRS 16")
Under IFRS 16, a lessee no longer classifies leases as operating
or financing and records all leases on the consolidated statement
of financial position. On January 1, 2019, the Corporation adopted
IFRS 16 using the modified retrospective transition method
and recognized the cumulative effect of initial application on
January 1, 2019 on the consolidated statement of financial position,
subject to permitted and elected practical expedients. This method
of application has not resulted in a restatement of amounts reported
in periods prior to January 1, 2019. Therefore, the comparative
information continues to be reported under applicable accounting
policies under IAS 17 Leases and related interpretations.
Policy applicable prior to January 1, 2019:
As a lessee
Leases are classified as finance leases when the terms of the lease
transfer substantially all the risks and rewards of ownership to
the Corporation. A leased asset is recorded at the lower of its fair
value and the present value of the minimum lease payments at the
inception of the lease. A lease obligation is recorded and is classified
as current and non-current liabilities. The interest component of the
lease is charged to earnings over the period of the lease using the
effective interest rate 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.
As a lessor
The Corporation’s equipment rentals and leases are classified as
operating leases with amounts received included in revenue on a
straight-line basis over the term of the lease.
Policy applicable from January 1, 2019:
As a lessee
Under IFRS 16, assets and liabilities from a lease are initially
measured on a present value basis. The lease liabilities are
measured at the present value of the remaining lease payments
(including in-substance fixed payments), adjusted for any lease
incentives receivable, variable payments that are based on an index
or a rate, amounts expected to be payable under residual value
guarantees, the exercise price of a purchase option if the lessee
is reasonably certain to exercise that option, and payments of
penalties for early termination of a lease unless the Corporation
is reasonably certain not to terminate early. The lease payments
are discounted using the implicit interest rate in the lease or, if
that rate is not readily determinable, the Corporation's incremental
borrowing rate. The associated right-of-use assets are measured
at the amount equal to the lease liability on January 1, 2019,
adjusted for any prepaid and accrued lease payments relating to the
leases recognized in the statement of financial position immediately
before the date of transition, with no impact on retained earnings or
comparative periods.
Wajax 2019 Annual Report 49
Notes to Consolidated Financial Statements The lease liability is measured at amortized cost using the effective
interest rate method and is remeasured if there is a change in the
future lease payments, if there is a change in the Corporation's
estimate of the amounts expected to be payable or if the Corporation
changes its assessments of whether it will exercise a purchase,
renewal, or termination option. The right-of-use asset is subsequently
depreciated using the straight-line method from the commencement
to the earlier of the date of the useful life of the right-of-use asset or
to the end of the lease term. If a lease liability is remeasured, the
corresponding adjustments are made to the carrying amount of the
right-of-use asset, or in profit or loss if the carrying amount of the
right-of-use asset has been reduced to zero.
Short-term leases and leases of low value assets
The Corporation has elected not to recognize right-of-use assets
and lease liabilities for short-term leases, defined as a lease
having a term of 12 months or less and leases of low-value assets.
The respective lease payments associated with these leases are
recognized in the statement of earnings as incurred, unless a
different basis is deemed to be more appropriate.
right-of-use assets at the date of initial application. In addition, the
Corporation elected to rely on assessments of whether leases were
onerous by applying IAS 37 Provisions, Contingent Liabilities, and
Contingent Assets immediately before the date of initial application as
an alternative to performing an impairment review.
Below is the reconciliation of the lease commitments disclosed
as at December 31, 2018 to the lease liabilities recognized on
January 1, 2019:
Operating lease commitments at December 31, 2018
Less than one year
Between one and five years
More than five years
$ 20,189
52,347
27,124
Operating lease commitments at December 31, 2018
Discounted using incremental borrowing rate
99,660
(22,420)
New leases/extensions reasonably
certain to be exercised
Short term, low value exclusions
77,240
6,611
(1,307)
As a lessor
Lease liabilities recognized on January 1, 2019
$ 82,544
There was no significant impact to lessor accounting from the
adoption of IFRS 16.
Current
Non-Current
$ 14,024
$ 68,520
The impact of the adoption of IFRS 16 as at January 1, 2019 was
as follows:
As reported
as at
December 31,
2018
Impact of
adoption
of IFRS 16
Adjusted
opening
balance
as at
January 1,
2019
$
— $ 81,222 $ 81,222
252,958
(1,322)
251,636
4,622
14,024
18,646
9,127
68,520
77,647
Right-of-use assets
Accounts payable and
accrued liabilities
Lease liabilities
– current
Lease liabilities
– non-current
On transition to IFRS 16 on January 1, 2019, the Corporation
recognized $82,544 of additional lease liabilities primarily
related to property leases for the Corporation's branch network.
The Corporation also leases certain vehicles, machinery and IT
equipment. When measuring lease liabilities recognized in the
statement of financial position at the date of initial application,
the Corporation discounted lease payments using its incremental
borrowing rate. The Corporation applied the practical expedient to
apply a single discount rate to a portfolio of leases with reasonably
similar characteristics. The discount rates used are based on the
remaining lease term of the particular lease. The weighted average
incremental borrowing rate applied to lease liabilities recognized on
January 1, 2019 was 6.1%.
The Corporation has elected to apply the practical expedient which
does not require it to reassess whether a contract is, or contains,
a lease at the date of initial application. Instead, the Corporation
is permitted to apply the transition requirements to contracts that
were previously identified as leases applying IAS 17 Leases and
IFRIC 4 Determining whether an Arrangement contains a Lease.
The Corporation applied the definition of a lease under IFRS 16
to contracts entered into or changed on or after January 1, 2019.
The Corporation elected to use the practical expedient allowing
it to exclude the initial direct costs from the measurement of the
5. Acquisition of Business
Groupe Delom Inc. ("Delom")
On October 16, 2018, the Corporation acquired 100% of the issued
and outstanding shares of Montreal, Quebec-based Delom. The
aggregate purchase price for the shares was $52,936 cash.
During the year ended December 31, 2019, the Corporation recorded
adjustments to increase goodwill by $3,074, of which $1,022 related
to an increase in deferred tax liabilities, $369 related to the valuation
of intangible assets, $888 related to the valuation of inventory,
and the remaining $795 related to an increase in the overall
purchase price. The Corporation determined the fair values based on
discounted cash flows, market information, independent valuations
and management's estimates.
Recognized amounts of identifiable assets acquired and liabilities
assumed for the acquisition are as follows:
Cash
Trade and other receivables
Contract assets
Inventory
Prepaid expenses
Property, plant and equipment
Deferred tax liabilities
Accounts payable and accrued liabilities
Contract liabilities
Income taxes payable
Derivative financial liabilities
Other liabilities
Tangible net assets acquired
Intangible assets
Goodwill
Total Purchase Price
$
1,080
14,532
8,010
5,593
899
11,521
(6,162)
(10,880)
(1,792)
(629)
(70)
(204)
21,898
16,696
14,342
$ 52,936
50 Wajax 2019 Annual Report
Notes to Consolidated Financial Statements
As at December 31, 2019, the purchase price allocation is
considered final. Net cash outflow for the acquisition was $51,856,
as $1,080 of cash was acquired as part of Delom's net assets.
Trade and other receivables represents gross contractual amounts
receivable of $14,582 less management's best estimate of the
allowance for credit losses of $50.
Goodwill arises principally from the ability to leverage the assembled
workforce, industry knowledge, future growth and the potential
to realize synergies in the form of cost savings. The goodwill
recorded on the acquisition of Delom is not deductible for income
tax purposes.
6. Trade and Other Receivables
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. Trade and other
receivables are comprised of the following:
7. Contract Assets and Liabilities
The following table provides information about contract assets and
contract liabilities from contracts with customers:
Contract assets
Contract liabilities
$ 23,318 $ 30,307
8,291
7,230
December 31
2019
2018
The contract assets primarily relate to the Corporation's rights to
consideration for work completed but not billed at the reporting date
on product support and engineered repair services ("ERS") revenue.
The contract assets are transferred to receivables when billed upon
completion of significant milestones. The contract liabilities primarily
relate to the advance consideration received from customers on
equipment sales, industrial parts, and ERS revenue, for which
revenue is recognized when control transfers to the customer.
December 31
2019
2018
Revenue recognized in 2019 that was included in the contract liability
balance at the beginning of the year was $5,635 (2018 – $9,415).
Trade accounts receivable
Less: allowance for credit losses
$ 213,686 $ 182,587
(953)
(2,371)
8. Inventory
Net trade accounts receivable
Other receivables
211,315
26,879
181,634
24,623
Total trade and other receivables
$ 238,194 $ 206,257
The Corporation has two agreements with financial institutions to
sell 100% of selected trade accounts receivable on a recurring,
non-recourse basis. Under the first agreement, up to $20,000 of
accounts receivable may be sold to the financial institution and
can remain outstanding at any point in time, while the second
has no limit. After the sale, the Corporation does not retain any
interests in the accounts receivable and removes them from its
consolidated statement of financial position. For the first agreement,
the Corporation continues to service and collect the outstanding
accounts receivable on behalf of the financial institution. As at
December 31, 2019, the Corporation continues to service and collect
$13,388 in accounts receivable on behalf of this financial institution
(December 31, 2018 – $9,877). For the second agreement, after
the sale of accounts receivable to the financial institution, the
Corporation does not continue to service and collect the outstanding
accounts receivable on behalf of the financial institution. Net
proceeds from these programs are classified in operating activities
in the consolidated statements of cash flows.
The Corporation’s exposure to credit and currency risks related to
trade and other receivables is disclosed in Note 17.
The Corporation’s inventory balances consisted of the following:
Equipment
Parts
Work-in-process
Total inventory
December 31
2019
2018
$ 256,058 $ 221,081
127,026
17,890
138,210
20,660
$ 414,928 $ 365,997
All amounts shown are net of obsolescence reserves of $26,263
(2018 – $26,014). For the year ended December 31, 2019, $2,297
(2018 – $5,474) was recorded in cost of sales for the write-down of
inventory to estimated net realizable value.
For the year ended December 31, 2019, the Corporation recognized
$1,006,929 (2018 – $988,513) of inventory as an expense which is
included in cost of sales.
As at December 31, 2019, the Corporation has included $54,022
(December 31, 2018 – $47,266) in Equipment inventory related to
short term rental contracts that are expected to convert to Equipment
sales within a six to twelve month period.
Substantially all of the Corporation’s inventory is pledged as security
for the bank credit facility.
Deposits on inventory in the statements of financial position, amounting
to $37,513 as at December 31, 2019 (December 31, 2018 –
$13,445), represents deposits and other required periodic payments on
equipment held on consignment. These payments reduce the collateral
value of the equipment and therefore the ultimate amount owing to
the supplier upon eventual purchase. Upon sale of the equipment to a
customer, the Corporation is required to purchase the equipment in full
from the supplier.
Wajax 2019 Annual Report 51
Notes to Consolidated Financial Statements
9. Property, Plant and Equipment and Rental Equipment
Land and
buildings
Equipment
and vehicles
Computer
hardware
Furniture
and fixtures
Leasehold
improvements
Property,
plant and
equipment
Rental
equipment
$
Cost
December 31, 2018
Adoption of IFRS 16 reclassification
Additions
Net transfers to inventory
Net transfers to intangibles
Purchased at end of lease
Disposals
37,492 $
—
525
—
—
—
(4,801)
85,851 $
(24,804)
2,810
—
—
4,168
(2,370)
5,712 $
11,135 $
—
1,173
—
(135)
—
(361)
—
693
—
—
—
(177)
11,799 $ 151,989 $ 128,168
—
37,531
(31,575)
—
—
—
(24,804)
5,943
—
(135)
4,168
(8,068)
—
742
—
—
—
(359)
December 31, 2019
$
33,216 $
65,655 $
6,389 $
11,651 $
12,182 $ 129,093 $ 134,124
$
Accumulated depreciation
December 31, 2018
Adoption of IFRS 16 reclassification
Charge for the year
Net transfers to inventory
Net transfers to intangibles
Purchased at end of lease
Disposals
18,092 $
—
687
—
—
—
(1,888)
54,657 $
(11,617)
3,951
—
—
3,498
(1,941)
3,795 $
8,312 $
8,116 $
—
836
—
(122)
—
(356)
—
592
—
—
—
(114)
—
810
—
—
—
(354)
92,972 $
(11,617)
6,876
—
(122)
3,498
(4,653)
54,452
—
20,678
(18,026)
—
—
—
December 31, 2019
$
16,891 $
48,548 $
4,153 $
8,790 $
8,572 $
86,954 $
57,104
Carrying amount
December 31, 2019
$
16,325 $
17,107 $
2,236 $
2,861 $
3,610 $
42,139 $
77,020
Cost
December 31, 2017
Additions
Net transfers to inventory
Disposals
Acquisition of business (Note 5)
$
38,125 $
720
—
(1,353)
—
74,546 $
10,499
—
(8,141)
8,947
4,249 $
1,581
—
(222)
104
11,700 $
633
—
(1,439)
241
9,763 $ 138,383 $ 118,682
43,638
13,996
(34,152)
—
—
(11,911)
—
11,521
563
—
(756)
2,229
December 31, 2018
$
37,492 $
85,851 $
5,712 $
11,135 $
11,799 $ 151,989 $ 128,168
Accumulated depreciation
December 31, 2017
Charge for the year
Net transfers to inventory
Disposals
$
18,004 $
696
—
(608)
56,209 $
6,223
—
(7,775)
3,303 $
505
—
(13)
9,121 $
611
—
(1,420)
8,148 $
722
—
(754)
94,785 $
8,757
—
(10,570)
58,264
17,018
(20,830)
—
December 31, 2018
$
18,092 $
54,657 $
3,795 $
8,312 $
8,116 $
92,972 $
54,452
Carrying amount
December 31, 2018
$
19,400 $
31,194 $
1,917 $
2,823 $
3,683 $
59,017 $
73,716
All property, plant and equipment except land and buildings have been pledged as security for bank debt (Note 16).
10. Right-of-Use Assets
Cost
January 1, 2019 (Note 4)
Adoption of IFRS 16 reclassification
Additions
Disposals
Disposal to lease receivables upon sublease
Purchased at end of lease
Properties
Vehicles
Computer
hardware
Equipment
Total
$
80,375 $
372 $
—
40,613
(746)
—
—
24,805
4,777
(172)
—
(4,168)
475 $
—
1,035
—
—
—
— $
—
2,128
—
(2,128)
—
81,222
24,805
48,553
(918)
(2,128)
(4,168)
December 31, 2019
$ 120,242 $
25,614 $
1,510 $
— $ 147,366
Accumulated depreciation
January 1, 2019
Adoption of IFRS 16 reclassification
Charge for the year
Disposals
Purchased at end of lease
December 31, 2019
Carrying amount
December 31, 2019
52 Wajax 2019 Annual Report
$
— $
—
18,090
(746)
—
— $
11,617
4,793
(127)
(3,498)
— $
—
146
—
—
— $
—
—
—
—
—
11,617
23,029
(873)
(3,498)
$
17,344 $
12,785 $
146 $
— $
30,275
$ 102,898 $
12,829 $
1,364 $
— $ 117,091
Notes to Consolidated Financial Statements
On transition to IFRS 16 on January 1, 2019, the Corporation
recognized $81,222 of right-of-use assets primarily related to
property leases for the Corporation's branch network.
The Corporation entered into two sale and leaseback transactions for
two of its wholly owned properties. The proceeds net of transaction
costs on the sale of the two properties was $9,385 and the carrying
amount was $2,773, resulting in a total gain on the sale of the
properties of $6,612, of which $2,262 has been recognized in the
consolidated statements of earnings and the remainder deferred as
a reduction of the right-of-use asset. The Corporation also recorded
lease liabilities of $6,526 and right-of-use assets of $2,178 related
to these sale and lease back transactions. The terms of the leases
are 10 and 15 years.
11. Goodwill and Intangible Assets
The Corporation performed its annual impairment test of its goodwill
and indefinite life intangibles as at December 31, 2019. The
recoverable amount of the CGU group was estimated based on the
present value of the future cash flows expected to be derived from
the CGU group (value in use). This approach requires assumptions
about revenue growth rates, EBITDA margins, tax rates, discount rates
and the level of working capital required to support the business.
The maintainable discretionary after-tax cash flows from operations
are based on historical results, the Corporation's projected 2020
operating budget and its long term strategic plan. To prepare these
calculations, the forecasts were extrapolated beyond the five year
period at the estimated long-term inflation rate of 2% (2018 – 2%).
The Corporation assumed a discount rate of approximately 9.4%
(2018 – 9.2%) which is based on the Corporation’s after-tax weighted
average cost of capital.
The tax rates applied to the cash flow projections were based on
the effective tax rate of the Corporation of approximately 28.0%.
Tax assumptions are sensitive to changes in tax laws as well as
assumptions about the jurisdictions in which profits are earned. It is
possible that actual tax rates could differ from those assumed.
The Corporation concluded as at December 31, 2019 that no
impairment existed in either the goodwill or the intangible assets
with an indefinite life, as the recoverable amount of the CGU group
exceeded its carrying value.
The Corporation did not reverse any impairment losses for definite
life intangible assets for the years ended December 31, 2019 and
December 31, 2018.
Cost
December 31, 2018
Additions
Disposals
Transfers
Acquisition of business (Note 5)
December 31, 2019
Accumulated amortization
December 31, 2018
Charge for the year
Disposals
Transfers
December 31, 2019
Carrying amount
December 31, 2019
Cost
December 31, 2017
Additions
Disposals
Acquisition of business (Note 5)
December 31, 2018
Accumulated amortization
December 31, 2017
Charge for the year
Disposals
December 31, 2018
Carrying amount
December 31, 2018
Product
distribution
Customer
lists/Non-
competition
rights agreements
Goodwill
$
47,663 $
3,376 $
24,131 $
—
—
—
3,074
—
—
—
(140)
—
—
—
(229)
Software
Total
10,548 $
5,352
(15)
135
—
85,718
5,352
(15)
135
2,705
$
50,737 $
3,236 $
23,902 $
16,020 $
93,895
$
$
— $
—
—
—
— $
— $
—
—
—
7,528 $
1,695
—
—
4,505 $
487
(14)
122
12,033
2,182
(14)
122
— $
9,223 $
5,100 $
14,323
$
50,737 $
3,236 $
14,679 $
10,920 $
79,572
$
36,395 $
3,200 $
7,402 $
—
—
11,268
—
—
176
—
—
16,729
5,554 $
4,837
(3)
160
52,551
4,837
(3)
28,333
$
47,663 $
3,376 $
24,131 $
10,548 $
85,718
$
$
— $
—
—
— $
— $
—
—
6,601 $
927
—
4,245 $
263
(3)
10,846
1,190
(3)
— $
7,528 $
4,505 $
12,033
$
47,663 $
3,376 $
16,603 $
6,043 $
73,685
Amortization of intangible assets is charged to selling and administrative expenses.
Wajax 2019 Annual Report 53
Notes to Consolidated Financial Statements
12. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities are comprised of
the following:
Trade payables
Deferred income – other
Supplier payables
with extended terms
Payroll, bonuses and incentives
Restructuring accrual
Accrued liabilities
Provisions
Accounts payable and
accrued liabilities
Note
2019
2018
December 31
$ 174,770 $ 142,818
1,053
1,078
22
41,310
21,869
3,646
43,584
1,399
34,672
32,223
817
39,193
2,182
$ 287,656 $ 252,958
For the year ended December 31
Expense related to short term leases
Expense related to low value
assets, excluding short term
leases of low value assets
Expense relating to variable lease
payments not included in the
measurement of lease liabilities
Payment of lease liabilities
Interest paid on lease liabilities
Note
$
2019
209
—
1,323
21,967
5,675
23
Total cash outflow for leases
$ 29,174
The maturity analysis of contractual undiscounted cash flows of lease
obligations as at December 31, 2019 is as follow:
Supplier payables with extended terms relate to equipment
purchases from suppliers with payment terms ranging anywhere from
approximately 60 days to 8 months.
Less than one year
One to five years
More than five years
Total undiscounted lease obligations
$ 26,591
76,541
55,739
$ 158,871
13. Lease Liabilities and Lease Receivables
Lessee
Lessor
The Corporation leases properties for its branch network, certain
vehicles, machinery and IT equipment. The lease liabilities are
measured at the present value of the remaining lease payments
discounted using the implicit interest rate in the lease or, if that
rate is not readily determinable, the Corporation's incremental
borrowing rate.
The change in lease liabilities is as follows:
For the year ended December 31
Note
2019
2018
When the Corporation acts as lessor, it determines at lease
commencement whether each lease is a finance lease or an
operating lease. To classify each lease, the Corporation makes an
overall assessment of whether the lease transfers to the lessee
substantially all of the risks and rewards of ownership incidental
to ownership of the underlying asset. If this is the case, then the
lease is a finance lease; if not, then it is an operating lease. As part
of this assessment, the Corporation considers certain indicators
such as whether the lease is for the major part of the economic life
of the asset.
Balance at beginning of year
Changes from operating
cash flows
Finance costs paid
on lease liability
Changes from financing
cash flows
Payment of lease liabilities
Other changes
Lease liabilities recognized on
January 1, 2019 per IFRS 16
Interest expense
New leases, net of disposals
$ 13,749 $
9,511
Operating leases
(5,675)
(494)
(21,967)
(4,214)
The Corporation rents equipment to customers under rental
agreements with terms of up to 5 years. The rentals have been
assessed and classified as operating leases. The rentals may be
cancelled subject to a cancellation fee. The future minimum lease
payments receivable under the agreements are as follows:
4
23
82,544
5,675
52,804
—
494
8,452
Less than one year
Between one and five years
More than five years
$
2019
2018
9,175 $ 10,709
15,269
30
12,052
—
$ 21,227 $ 26,008
Balance at end of year
$ 127,130 $ 13,749
Current
Non-Current
$ 20,706 $
$ 106,424 $
4,622
9,127
Finance leases
Not included in the balance of lease liabilities are short-term leases,
leases of low-value assets and variable lease payments not linked to
an index. Variable lease payments, and lease payments associated
with short-term leases and leases of low-value assets are expensed
as incurred in the consolidated statements of earnings.
The Corporation subleases certain equipment to customers. The
Corporation assessed and classified its subleases as finance leases,
and therefore derecognized the right-of-use assets relating to the
respective head leases being sublet, recognized lease receivables
equal to the net investment in the subleases, and retained the
previously recognized lease liabilities in its capacity as lessee.
54 Wajax 2019 Annual Report
Notes to Consolidated Financial Statements
The following table sets out a maturity analysis of lease receivables,
showing the undiscounted lease payments to be received after
the reporting date:
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:
Less than one year
One to five years
More than five years
Total undiscounted lease payments receivable
Unearned finance income
Lease receivables
Current portion
Long term portion
14. Employee Benefits
$
$
$
$
676
1,812
—
2,488
(157)
2,331
617
1,714
Cash
Fixed Income
Canadian Equities
Foreign Equities
Employees' Plan
December 31,
2019
Executive Plan
December 31,
2019
2.3%
97.7%
—%
—%
0.6%
40.2%
0.3%
58.9%
Combined
Employees' and
Executive Plan
December 31,
2018
3.9%
37.4%
28.2%
30.5%
100.0%
100.0%
100.0%
The history of adjustments on the defined benefit plans recognized
in other comprehensive income for the current and prior year
are as follows:
The Corporation sponsors three pension plans: the Wajax Limited
Pension Plan (the “Employees’ Plan”) which, except for a small group
of employees, is 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
Supplemental Executive Retirement Plan (the “SERP”).
The Corporation also contributes to several union sponsored multi-
employer pension plans for a small number of employees. Two of
these are target benefit plans but they are accounted for as DC plans
since 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.
The Corporation uses actuarial reports prepared by independent
actuaries for funding and accounting purposes and measures
its defined 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, compensation
increases, mortality rates, inflation and service life. While
management believes that the actuarial assumptions are appropriate,
any significant changes to those used would affect the statements of
financial position and statements of earnings.
The schedule for actuarial valuations of the pension plans for funding
purposes is as follows:
Plan
Previous valuation
Next valuation
Employees' Plan
Executive Plan
January 1, 2018
January 1, 2018
January 1, 2021
January 1, 2021
The following significant actuarial assumptions were used to
determine the net defined benefit plan cost and the defined benefit
plan obligations:
December 31
2019
2018
Discount rate – at beginning of year
(to determine plan expenses)
Discount rate – at end of year
(to determine defined benefit obligation)
Rate of compensation increase
Rate of inflation
3.5%
3.0%
3.0%
2.0%
3.3%
3.5%
3.0%
2.0%
Assumptions regarding future mortality were based on the following
mortality tables: 2014 Private Sector Canadian Pensioner's Mortality
Table for the Employees’ Plan, and 2014 Public Sector Canadian
Pensioner's Mortality Table for the Executive Plan and SERP.
Actuarial (gain) loss on defined
benefit obligation arising from:
Experience adjustment
Demographic assumption changes
Economic assumption changes
$
2019
2018
— $
—
1,308
1,308
(1,327)
(307)
260
(665)
(712)
614
Actuarial (gain) loss on asset return
Total remeasurement gain
recognized in OCI, pre-tax
$
(19) $
(98)
Total cash payments
Total cash payments for employee future benefits for 2019,
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
$8,459 (2018 – $8,694).
The Corporation expects to contribute $363 to the defined benefit
pension plans in the year ended December 31, 2020.
The plan expenses recognized in earnings are as follows:
Defined contribution plans
Current service cost
Defined benefit plans
Current service cost
Administration expenses
SERP line of credit fees
Interest cost on defined benefit obligation
Interest income on assets
2019
2018
$
7,967 $
7,853
295
358
228
728
(419)
451
354
227
708
(430)
1,190
1,310
Total plan expense
recognized in earnings
$
9,157 $
9,163
Of the amounts recognized in earnings, $3,600 (2018 – $3,350) is
included in cost of sales and $5,557 (2018 – $5,813) is included in
selling and administrative expenses.
Wajax 2019 Annual Report 55
Notes to Consolidated Financial Statements
The amounts recognized in other comprehensive income are
as follows:
Net actuarial gains
Deferred tax expense
Amount recognized in other
comprehensive income
Cumulative actuarial
losses, net of tax
2019
2018
$
(19) $
5
(98)
26
$
(14) $
(72)
$
3,157 $
3,171
Information about the Corporation’s defined benefit pension plans, in
aggregate, is as follows:
Present value of benefit obligation
2019
2018
Present value of benefit obligation,
beginning of year
Current service cost
Participant contributions
Interest cost on defined
benefit obligation
Actuarial loss (gain)
Benefits paid
Present value of benefit
obligation, end of year
$ 21,390 $ 22,344
451
24
295
19
728
1,308
(1,555)
708
(712)
(1,425)
$ 22,185 $ 21,390
Plan assets
Fair value of plan assets,
beginning of year
Actual return (loss)
Participant contributions
Employer contributions
Benefits paid
Administration expenses
2019
2018
$ 12,325 $ 13,423
(184)
24
841
(1,425)
(354)
1,746
19
492
(1,555)
(358)
Fair value of plan assets, end of year $ 12,669 $ 12,325
Funded Status
2019
2018
Fair value of plan assets, end of year $ 12,669 $ 12,325
Present value of benefit
obligation, end of year
(22,185)
(21,390)
Plan deficit
$
(9,516) $
(9,065)
The accrued benefit liability is included in the Corporation’s statement
of financial position as follows:
Sensitivity analysis
The following sensitivity analysis is hypothetical and should
be used with caution. The sensitivities of the key assumption
have been calculated independently of any changes in other
assumptions. Actual experience may result in changes in a number
of assumptions simultaneously. Changes in one factor may result
in changes in another, which could amplify or reduce the impact of
such assumptions.
A 1% increase in discount rate would result in a $2,548
(2018 – $2,455) decrease to the defined benefit obligation as at
December 31, 2019. A 1% decrease in discount rate would result in
a $2,879 (2018 – $2,774) increase to the defined benefit obligation.
15. Debentures
Senior Unsecured Debentures – 6%, due January 15, 2025
On December 4, 2019, the Corporation issued $50,000 in
unsecured subordinated debentures with a term of five years
due January 15, 2025. On December 11, 2019, an additional
$7,000 in unsecured subordinated debentures were issued under
the same terms. These debentures bear a fixed interest rate of
6.00% per annum, payable semi-annually on January 15 and July
15 of each year, commencing July 15, 2020. The intended use of
the net proceeds of the debentures was to pay down outstanding
indebtedness under the existing credit facility.
The debentures will not be redeemable before January 15, 2023,
except upon the occurrence of a change of control of the Corporation
in accordance with the terms of the indenture governing the
debentures. On or after January 15, 2023, but prior to January 15,
2024, the debentures are redeemable, in whole at any time or in part
from time to time at the option of the Corporation at a price equal
to 103% of the principal amount redeemed plus accrued and unpaid
interest. On or after January 15, 2024, but prior to the maturity date
of January 15, 2025, the debentures are redeemable at a price equal
to their principal amount plus accrued and unpaid interest.
On redemption or at maturity on January 15, 2025, the Corporation
has the option to repay the debentures in either cash or freely
tradable voting shares of the Corporation.
The debentures are classified as a financial liability and initially
recorded at fair value of $54,075 net of transaction costs of $2,925.
The debentures are measured subsequently at amortized cost
using the effective interest method over the life of the debentures.
Movements in the debentures balance are as follows:
For the year ended December 31
Balance at beginning of year
Changes from financing cash flows
Proceeds from issuance
Transaction costs related to issuance
Other changes
Amortization of capitalized transaction costs
$
2019
—
57,000
(2,925)
40
Accounts payable and accrued liabilities $
Employee benefits
(372) $
(9,144)
(620)
(8,445)
Plan deficit
$
(9,516) $
(9,065)
Interest expense on the debentures for the year ended
December 31, 2019 amounted to $295 (2018 – nil).
2019
2018
Balance at end of year
$ 54,115
Present value of benefit obligation includes a benefit obligation of
$6,332 (2018 – $5,919) related to the SERP that is not funded. This
obligation is secured by a letter of credit of $5,359 (2018 – $5,810).
56 Wajax 2019 Annual Report
Notes to Consolidated Financial Statements
16. Long-Term Debt
The Corporation categorizes its financial instruments as follows:
In the fourth quarter of 2019, the Corporation amended its
senior secured credit facility, by extending the maturity date from
September 20, 2023 to October 1, 2024. In addition, the minimum
value of the interest coverage ratio covenant was reduced to
2.75:1 from 3.0:1. The $299 cost of amending the facility has
been capitalized and will be amortized over the remaining term
of the facility.
Borrowings under the bank credit facility 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 the Corporation’s leverage ratio at the time of borrowing
and range between 1.5% and 3.0% for Canadian dollar bankers’
acceptances and U.S. dollar LIBOR borrowings, and 0.5% and 2.0%
for prime rate borrowings.
Borrowing capacity under the bank credit facility is dependent upon
the level of the Corporation’s inventory on hand and the outstanding
trade accounts receivable. In addition, the bank credit facility
contains customary restrictive covenants including limitations on the
declaration of cash dividends and an interest coverage maintenance
ratio, all of which were met as at December 31, 2019.
The following balances were outstanding:
Bank credit facility
Non-revolving term portion
Revolving term portion
Deferred financing costs, net
of accumulated amortization
December 31
2019
2018
$ 50,000 $ 50,000
170,000
177,362
227,362
220,000
(1,789)
(1,884)
Total long-term debt
$ 225,573 $ 218,116
The Corporation had $5,489 (2018 – $6,101) letters of credit
outstanding at the end of the year. Interest on long-term debt
amounted to $13,746 (2018 – $8,281). Movements in the long-term
debt balance are as follows:
For the year ended December 31
2019
2018
Balance at beginning of year
Changes from financing cash flows
Net proceeds of borrowings
Transaction costs related to borrowings
Other changes
Amortization of capitalized
$ 218,116 $ 143,667
7,362
(299)
75,000
(918)
transaction costs
394
367
Balance at end of year
$ 225,573 $ 218,116
17. Financial Instruments and
Financial Risk Management
Financial assets (liabilities)
measured at amortized cost:
Cash (bank indebtedness)
Trade and other receivables
Contract assets
Financial liabilities measured
at amortized cost:
Accounts payable and
accrued liabilities
Contract liabilities
Dividends payable
Other liabilities
Lease liabilities
Debentures
Long-term debt
Net derivative financial liabilities
measured at fair value:
Foreign exchange forwards
Total return swaps
Interest rate swaps
December 31
2019
2018
$
3,180 $
238,194
23,318
(3,932)
206,257
30,307
(287,656)
(7,230)
(5,003)
(1,602)
(127,130)
(54,115)
(225,573)
(252,958)
(8,291)
(4,989)
(2,214)
(13,749)
—
(218,116)
(930)
(2,952)
(2,625)
(67)
(4,265)
(2,236)
The Corporation measures non-derivative financial assets and
financial liabilities at amortized cost. Derivative financial assets/
liabilities are recorded on the consolidated statements of financial
position at fair value. Changes in fair value are recognized in the
consolidated statements of earnings except for changes in fair
value related to derivative financial assets/liabilities which are
effectively designated as hedging instruments which are recognized
in other comprehensive income. The Corporation's derivative
financial assets/liabilities are held with major Canadian chartered
banks and are deemed to be Level 2 financial instruments. The fair
values of financial assets/liabilities measured at amortized cost,
excluding long-term debt, debentures and cash-settled share-based
compensation liabilities, approximate their recorded values due to
the short-term maturities of these instruments. The cash-settled
share-based compensation liability is recorded at fair value based
on the Corporation's share price and deemed to be a Level 1
financial instrument. The fair value of long-term debt approximates
its recorded value due to its floating interest rate. The fair value
of the debentures is estimated based on the trading price of the
debentures, which takes into account the Corporation's own credit
risk. At December 31, 2019, the Corporation has estimated the fair
value of its debentures to be approximately $58,134.
The Corporation, through its financial assets and liabilities, has
exposure to the following risks from its use of financial instruments:
credit risk, liquidity risk, and market risk (consisting of currency
risk, interest rate risk and equity price risk). The following analysis
provides a measurement of these risks as at December 31, 2019
and 2018:
The Corporation uses the following fair value hierarchy for
determining and disclosing the fair value of financial instruments:
Credit risk
Level 1 – unadjusted quoted prices in active markets for identical
assets or liabilities.
Level 2 – other techniques for which all inputs that have a significant
effect on the recorded fair value are observable, either
directly or indirectly.
Level 3 – techniques that use inputs that have a significant effect on
the recorded fair value that are not based on observable
market data.
The Corporation is exposed to credit risk with respect to its trade and
other receivables. This risk is mitigated by the Corporation’s large
customer base which covers many business sectors 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.
Wajax 2019 Annual Report 57
Notes to Consolidated Financial Statements
The aging of the trade accounts receivable is as follows:
Contractual obligations are as follows:
December 31
2019
2018
Total
< 1
year
1 – 5
years
After
5 years
Current
Less than 60 days overdue
More than 60 days overdue
$ 113,565 $ 88,065
75,577
18,945
79,126
20,995
Total trade accounts receivable
$ 213,686 $ 182,587
Undiscounted
lease obligations $ 158,871 $ 26,591 $ 76,541 $ 55,739
—
— 57,000
227,362
57,000
Long-term debt
Debentures
227,362
—
—
Total
$ 443,233 $ 26,591 $ 303,903 $ 112,739
The carrying amounts of accounts receivable represent the maximum
credit exposure.
Market risk
The Corporation maintains an allowance for expected credit losses
taking into account past experience of collecting payments as well as
observable changes in and forecasts of future economic conditions
that correlate with default on receivables. Any such losses to date
have been within management’s expectations. Movement of the
allowance for credit losses is as follows:
Market risk is the risk from changes in market prices, such
as changes in foreign exchange rates, interest rates, and the
Corporation's share price which will affect the Corporation's earnings
as well as the value of the financial instruments held and cash-
settled share-based liabilities outstanding. The exposure to these
risks is managed through the use of various derivative instruments.
a) Currency risk
Certain of the Corporation's sales to customers and purchases
from vendors are exposed to fluctuations in the U.S. dollar
("USD") and the Euro ("EUR"). When considered appropriate, the
Corporation purchases foreign exchange forwards for USD and EUR
as a means of mitigating this risk. A change in foreign currency
relative to the Canadian dollar would not have a material impact
on the Corporation’s unhedged foreign currency-denominated sales
to customers along with the associated receivables, or on the
Corporation’s unhedged foreign currency-denominated purchases
from vendors along with the associated payables. The Corporation
will periodically institute price increases to offset the negative impact
of foreign exchange rate increases and volatility on imported goods
to ensure margins are not eroded. However, a sudden strengthening
of the U.S. dollar relative to the Canadian dollar can have a negative
impact mainly on parts margins in the short term prior to price
increases taking effect.
The Corporation maintains a hedging policy whereby significant
transactional currency risks are typically identified and hedged.
b) Interest rate risk
The Corporation's borrowing costs are impacted by changes in
interest rates. The Corporation’s tolerance to interest rate risk
decreases as the Corporation’s leverage ratio increases and
interest coverage ratio decreases. To manage this risk prudently,
guideline percentages of floating interest rate debt decrease as
the Corporation’s leverage ratio increases. Wajax has entered into
interest rate swap contracts primarily to minimize exposure to
interest rate fluctuations on its variable rate debt.
A 1.00 percentage point change in interest rates on the average
amount outstanding under the bank credit facility for 2019 would
result in a change to earnings before income taxes of approximately
$2,878 for the year.
c) Equity price risk
The Corporation's total return swaps are exposed to fluctuations in
its share price. A $1.00 per share decrease in the share price would
result in a decrease in earnings before income taxes of approximately
$365 relating to the total return swaps. An increase of $1.00 per
share would result in an equal and opposite effect on earnings
before income taxes.
For the year ended December 31
2019
Opening balance
Additions
Utilization
Closing balance
$
953 $
1,891
(473)
2018
832
1,042
(921)
$
2,371 $
953
The Corporation is also exposed to the risk of non-performance by
counterparties to foreign exchange forwards, interest rate swaps
and total return swaps. These counterparties are large financial
institutions that maintain high short-term and long-term credit
ratings. To date, no such counterparty has failed to meet its financial
obligations to the Corporation. Management does not believe there is
a significant risk of non-performance by these counterparties and will
continue to monitor the credit risk of these counterparties.
Liquidity risk
Liquidity risk is the risk that the Corporation will encounter difficulty
in meeting obligations associated with its financial liabilities as
they become due. The contractual maturity of the bank credit facility
is October 1, 2024. At December 31, 2019, the Corporation had
borrowed $227,362 (2018 – $220,000) from the bank credit
facility. The Corporation issued $5,489 (2018 – $6,101) of letters
of credit for a total utilization of $232,851 (2018 – $226,101) of its
$400,000 (2018 – $400,000) bank credit facility and had not utilized
any (2018 – nil) of its $25,000 (2018 – $25,000) interest bearing
equipment financing facilities.
On December 4, 2019, the Corporation issued $50,000 in
senior subordinated debentures with a term of five years due
January 15, 2025. On December 11, 2019 an additional $7,000 in
senior subordinated debentures were issued under the same terms.
On redemption or at maturity on January 15, 2025, the Corporation
has the option to repay the debentures in either cash or freely
tradable voting shares of the Corporation.
Wajax’s $400,000 bank credit facility, of which $167,149 was
unutilized at the end of the year, along with the additional $25,000
of capacity permitted under the bank credit facility, is deemed to
be sufficient to meet Wajax’s short-term normal course working
capital and maintenance capital requirements and certain strategic
investments. However, Wajax may be required to access the equity or
debt markets to fund significant acquisitions.
58 Wajax 2019 Annual Report
Notes to Consolidated Financial Statements
Derivative financial instruments and hedges
The interest rate swaps are designated as effective hedges and
are measured at fair value with subsequent changes in fair value
recorded in other comprehensive income. Amounts in accumulated
other comprehensive income are reclassified to net earnings in the
periods when the hedged item affects profit or loss. For the year
ended December 31, 2019, the Corporation recognized a loss of
$284 (2018 – loss of $1,746), net of tax in other comprehensive
income associated with its interest rate swaps.
The Corporation’s interest rate swaps outstanding are summarized
as follows:
Interest rate swaps
Weighted
Average
Interest
Rate
Notional
Amount
Maturity
The Corporation has certain total return swaps to hedge the
exposure associated with increases in its share price on its
outstanding restricted share units ("RSUs"). The Corporation
does not apply hedge accounting to these relationships and as
such, gains and losses arising from marking these derivatives to
market are recognized in earnings in the period in which they arise.
As at December 31, 2019, the Corporation's total return swaps
cover 365,000 of the Corporation's underlying common shares
(December 31, 2018 – 440,000). During the year, the Corporation
settled a total return swap contract for 205,000 shares, resulting in
a cash payout of $1,479. For the year ended December 31, 2019,
the Corporation recognized a loss of $167 (2018 – loss of $4,265)
associated with its total return swaps.
Derivative financial assets consist of:
December 31
2019
2018
December 31, 2019 $
December 31, 2018 $
104,000
104,000
2.56%
2.70%
November 2024
November 2023
Foreign exchange forwards
$
532 $
1,635
The Corporation enters into short-term foreign exchange forwards
to hedge the exchange risk associated with the cost of certain
inbound inventory and certain foreign currency-denominated sales
to customers along with the associated receivables as part of its
normal course of business. Foreign exchange forwards are initially
recognized on the date the derivative contract is entered into and
are subsequently re-measured at their fair values. The method
of recognizing the resulting gain or loss depends on whether the
derivative is designated as a hedging instrument. In a cash flow
hedging relationship, the effective portion of the change in the
fair value of the hedging derivative, net of taxes, is recognized
in other comprehensive income while the ineffective portion is
recognized within net earnings. Amounts in accumulated other
comprehensive income are reclassified to net earnings in the periods
when the hedged item affects profit or loss. For the year ended
December 31, 2019, the Corporation recognized a gain of $79
(2018 – gain of $52) associated with its foreign exchange forwards in
the consolidated statements of earnings, and a loss of $688 (2018 –
gain of $365), net of tax in other comprehensive income.
The Corporation’s contracts to buy and sell foreign currencies are
summarized as follows:
December 31, 2019
Average
Notional Exchange
Rate
Amount
Purchase contracts US$ 45,190
1.3270
Sales contracts
US$ 30,545
1.3091
€ 1,074
1.5003
December 31, 2018
Average
Notional Exchange
Rate
Amount
Purchase contracts US$ 34,313
1.3146
€ 200
1.5575
Sales contracts
US$ 20,934
1.2856
€ 2,772
1.5288
Maturity
January 2020 to
October 2020
January 2020 to
March 2021
January 2020 to
November 2020
Maturity
January 2019 to
December 2019
January 2019 to
March 2019
January 2019 to
August 2020
January 2019 to
November 2019
Current portion
Long-term portion
$
$
484 $
48 $
1,635
—
Derivative financial liabilities consist of:
Interest rate swaps
Foreign exchange forwards
Total return swaps
$
December 31
2019
2,625 $
1,462
2,952
2018
2,236
1,702
4,265
Total derivative financial liabilities
$
7,039 $
8,203
Current portion
Long-term portion
$
$
2,849 $
4,190 $
3,167
5,036
Losses (gains) on derivative financial assets/liabilities are as follows:
Opening net derivative financial liability $
Loss recognized in net earnings
Loss recognized in other
comprehensive income – net of tax
Tax on loss recognized in
other comprehensive income
Acquisition of business
Cash paid on settlement
of total return swaps
2019
6,568 $
88
2018
396
4,213
972
1,381
358
—
(1,479)
508
70
—
Ending net derivative
financial liability
$
6,507 $
6,568
The balance in accumulated other comprehensive income relates to
changes in the value of the Corporation's various interest rate swaps
and foreign exchange forwards. These accumulated amounts will be
continuously released to the consolidated statements of earnings
within finance costs and gross profit, respectively.
During the periods presented and cumulatively to date, changes
in counterparty credit risk have not significantly contributed to the
overall changes in the fair value of these derivative instruments.
Wajax 2019 Annual Report 59
Notes to Consolidated Financial Statements
18. Share Capital And Earnings Per Share
Earnings per share
The Corporation is authorized to issue an unlimited number of no
par value common shares and an unlimited number of no par value
preferred shares. Each common share entitles the holder of record to
one vote at all meetings of shareholders. All issued common shares
are fully paid. There were no preferred shares outstanding as at
December 31, 2019 (2018 – nil). Each common share represents an
equal beneficial interest in any distributions of the Corporation and
in the net assets of the Corporation in the event of its termination
or winding-up.
Number of
Common
Shares
Note
Amount
20,132,194 $ 181,952
19
35,509
530
The following table sets forth the computation of basic and diluted
earnings per share:
Numerator for basic and
diluted earnings per share:
– net earnings
Denominator for basic
earnings per share:
– weighted average shares,
net of shares held in trust
Denominator for diluted
earnings per share:
– weighted average shares,
net of shares held in trust
– effect of dilutive share rights
Denominator for diluted
earnings per share
2019
2018
$ 39,504 $ 35,852
19,998,656 19,686,075
19,998,656 19,686,075
461,827
417,535
20,416,191 20,147,902
$
$
1.98 $
1.93 $
1.82
1.78
20,167,703 182,482
Basic earnings per share
(175,680)
(1,583)
Diluted earnings per share
19,567
176
24,906 anti-dilutive share rights were excluded from the above
calculation (2018 – 15,865).
(156,113)
(1,407)
19. Share-Based Compensation Plans
20,011,590 $ 181,075
Number of
Common
Shares
Note
Amount
20,026,819 $ 180,572
105,375
1,380
20,132,194
181,952
The Corporation has four share-based compensation plans: the Wajax
Share Ownership Plan (the “SOP”), the Directors’ Deferred Share Unit
Plan (the “DDSUP”), the Mid-Term Incentive Plan for Senior Executives
(the “MTIP”) and the Deferred Share Unit Plan (the “DSUP”). The
following table provides the share-based compensation expense for
awards under all plans:
Treasury share rights plans
SOP equity-settled
DDSUP equity-settled
Total treasury share
rights plans expense
2019
2018
$
52 $
597
—
570
$
649 $
570
Market-purchased share rights plans
MTIP equity-settled
DSUP equity-settled
$
920 $
(19)
960
194
(522,712)
347,032
(4,709)
3,126
Total market-purchased
share rights plans expense
$
901 $
1,154
(175,680)
(1,583)
19,956,514 $ 180,369
Cash-settled rights plans
MTIP cash-settled
DSUP cash-settled
$
1,897 $
(1)
Total cash-settled rights plans expense $
1,896 $
119
(57)
62
Total share-based
compensation expense
$
3,446 $
1,786
Issued and outstanding,
December 31, 2018
Common shares issued to
settle share-based
compensation plans
Issued and outstanding,
December 31, 2019
Shares held in trust,
December 31, 2018
Released for settlement of
certain share-based
compensation plans
Shares held in trust,
December 31, 2019
Issued and outstanding, net
of shares held in trust,
December 31, 2019
Issued and outstanding,
December 31, 2017
Common shares issued
to settle share-based
compensation plans
Issued and outstanding,
December 31, 2018
Shares held in trust,
December 31, 2017
Net sale of shares held in trust
Shares held in trust,
December 31, 2018
Issued and outstanding, net
of shares held in trust,
December 31, 2018
Dividends declared
During 2019, the Corporation declared cash dividends of $1.00
per share or $20,006 (2018 – dividends of $1.00 per share or
$19,747). As at December 31, 2019, the Corporation had $5,003
(December 31, 2018 – $4,989) dividends outstanding to be paid on
January 3, 2020.
On March 2, 2020, the Corporation declared a first quarter 2020
dividend of $0.25 per share or $5,003.
a) Treasury share rights plans
Under the SOP and the DDSUP, rights are issued to the participants
which are settled by issuing Wajax Corporation shares for no cash
consideration. Rights under the SOP vest over three years, while
rights under the DDSUP vest immediately. 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. Whenever
dividends are paid on the Corporation’s shares, additional rights
(dividend equivalents) with a value equal to the dividends are credited
to the participants’ accounts.
60 Wajax 2019 Annual Report
Notes to Consolidated Financial Statements
The following rights under these plans are outstanding:
The following rights under these plans are outstanding:
Number
of rights
Fair value
at time
of grant
Outstanding at December 31, 2018
Grants – new grants
– dividend equivalents
Settlements
325,171 $
50,493
20,945
(35,509)
5,715
799
—
(530)
Outstanding at December 31, 2019
361,100 $
5,984
Outstanding at December 31, 2018
Grants – new grants
– dividend equivalents
Forfeitures
Settlements
Number
of rights
Fair value
at time
of grant
290,656 $
101,354
16,400
(153,194)
(42,067)
6,875
2,418
—
(3,195)
(1,017)
At December 31, 2019, 347,946 share rights were vested
(December 31, 2018, all share rights were vested).
The outstanding aggregate number of shares issuable to satisfy
entitlements under these plans is as follows:
Approved by shareholders
Exercised to date
Rights outstanding
Number
of Shares
1,000,000
(352,810)
(361,100)
Available for future grants at December 31, 2019
286,090
b) Market-purchased share rights plans
The MTIP plan consists of cash-settled restricted share units
("RSUs") and equity-settled performance share units ("PSUs"),
and the equity-settled DSUP plan consists of deferred share
units ("DSUs").
Market-purchased share rights plans consist of PSUs under the
MTIP plan and DSUs, which vest over three years and are settled
in common shares of the Corporation on a one-for-one basis. DSUs
are only subject to time-vesting, whereas PSUs are also subject to
performance vesting. PSUs are comprised of two components: return
on net assets ("RONA") PSUs and total shareholder return ("TSR")
PSUs as described below:
RONA PSUs vest dependent upon the attainment of a target level
of return on net assets. Such performance vesting criteria results
in a performance vesting factor that ranges from 0% to 150%
depending on the level of RONA attained.
TSR PSUs vest dependent upon the attainment of a TSR
market condition. Such performance vesting criteria result in
a performance vesting factor that ranges from 0% to 200%
depending on the Corporation's TSR relative to a pre-selected
group of peers.
These plans are settled through shares purchased on the open
market by the employee benefit plan trust, subject to the attainment
of their vesting conditions. PSUs are settled at the end of the vesting
period, and the number of shares remitted to the participant upon
settlement is equal to the number of PSUs awarded multiplied by
the performance vesting factor less shares withheld to satisfy the
participant's withholding tax requirement. DSUs are settled when
the participant is no longer employed by the Corporation or one of its
subsidiary entities. Whenever dividends are paid on the Corporation’s
shares, additional rights with a value equal to the dividends are
credited to the participants’ accounts with the same vesting
conditions as the original PSUs and DSUs.
Outstanding at December 31, 2019
213,149 $
5,081
At December 31, 2019, 15,426 outstanding rights were vested under
these plans (December 31, 2018 – nil). All vested rights are DSUs.
c) Cash-settled rights plans
Cash-settled rights plans consist of MTIP RSUs and cash-settled
DSUs. Compensation expense varies with the price of the
Corporation's shares and is recognized over the three year vesting
period. RSUs are settled at the end of the vesting period, whereas
DSUs are settled when the participant is no longer employed by the
Corporation or one of its subsidiary entities. Whenever dividends
are paid on the Corporation’s shares, additional rights with a value
equal to the dividends are credited to the participants’ accounts
with the same vesting conditions as the original rights. The value
of the payout is equal to the number of rights awarded including
earned dividend equivalents, multiplied by the five previous day
volume weighted average share price, from the date of settlement.
In the first quarter of 2019, the Corporation paid out $3,111 to
settle the RSU awards granted in 2016. At December 31, 2019, the
carrying amount of the liabilities for these plans was $2,524
(December 31, 2018 – $3,738).
The following rights under these plans are outstanding:
Outstanding at December 31, 2018
Grants – new grants
– dividend equivalents
Forfeitures
Settlements
Outstanding at December 31, 2019
Number
of rights
389,295
151,666
23,274
(67,442)
(162,097)
334,696
At December 31, 2019, 9,127 outstanding rights were vested,
representing all DSUs outstanding (December 31, 2018 –
8,577 rights).
20. Revenue
a) Disaggregation of revenue
In the following table, revenue is disaggregated by revenue type:
Equipment sales
Industrial parts
Product support
ERS
2019
2018
$ 523,874 $ 542,814
361,668
457,576
84,618
366,561
476,125
149,579
Revenue from contracts with customers 1,516,139
36,907
Equipment rental
1,446,676
34,921
Total
$ 1,553,046 $ 1,481,597
Wajax 2019 Annual Report 61
Notes to Consolidated Financial Statements
Movements in the restructuring accrual are outlined in the
following table:
For the year ended December 31
Opening accrual
Charge during the year
Utilized during the year
Recovery during the year
2019
$
817 $
5,587
(2,758)
—
2018
468
4,595
(3,794)
(452)
Ending accrual
$
3,646 $
817
23. Finance Costs
Finance costs for the years ended December 31, 2019 and 2018 is
comprised of the following:
Note
2019
Interest on long-term debt
Interest on debentures
Interest on lease liabilities
16 $ 13,746 $
15
13
295
5,675
2018
8,281
—
494
Finance costs
$ 19,716 $
8,775
24. Income Tax Expense
Income tax expense comprises current and deferred tax as follows:
For the year ended December 31
2019
2018
Current
Deferred
$ 12,425 $ 18,509
(4,534)
1,840
Income tax expense
$ 14,265 $ 13,975
The calculation of current tax is based on a combined federal and
provincial statutory income tax rate of 26.8% (2018 – 26.9%).
Deferred tax assets and liabilities are measured at tax rates that
are expected to apply to the period when the asset is realized or
the liability is settled. Deferred tax assets and liabilities have been
measured using an expected average combined statutory income tax
rate of 26.8% based on the tax rates in years when the temporary
differences are expected to reverse.
The reconciliation of the effective income tax rate is as follows:
For the year ended December 31
Combined statutory income tax rate
Expected income tax expense
at statutory rates
Non-deductible expenses
Non-taxable portion of gain
on real estate disposal
Other
2019
26.8%
2018
26.9%
$ 14,410 $ 13,403
692
636
(654)
(127)
(91)
(29)
Income tax expense
$ 14,265 $ 13,975
As at December 31, 2019, the Corporation has included $22,504
(2018 – $30,144) in Equipment sales related to short-term rental
contracts that are expected to convert to Equipment sales within a
six to twelve month period.
b) Transaction price allocated to the
remaining performance obligations
The following table includes revenue expected to be recognized in
the future related to performance obligations that are unsatisfied
(or partially unsatisfied) at the reporting date:
2020
2021
2022
Total
Equipment sales
Product support
ERS
$
— $
1,100
4,557
— $
—
1,577
— $
—
158
—
1,100
6,292
Total
$ 5,657 $ 1,577 $
158 $ 7,392
The Corporation has applied the practical expedient which permits
the Corporation to not disclose information about remaining
performance obligations that have original expected durations
of one year or less.
21. Employee Costs
Employee costs recorded in Cost of sales and in Selling and
administrative expenses for the Corporation during the year
amounted to:
2019
2018
Wages and salaries, including bonuses $ 236,512 $ 220,925
Other benefits
29,647
Pension costs – defined
contribution plans
Pension costs – defined benefit plans
Share-based compensation expense
7,967
1,190
3,446
7,853
1,310
1,786
35,036
$ 284,151 $ 261,521
22. Restructuring And Other Related Costs
In the third quarter of 2019, the Corporation commenced a planned
Management Realignment resulting in an estimated restructuring
cost of approximately $3,718, recognized in the year relating primarily
to expected severance costs.
In the first quarter of 2018, the Corporation commenced the Finance
Reorganization Plan. The cost of the Finance Reorganization Plan
was expected to be approximately $5,600 in severance, project
management and interim duplicate labour costs, of which $1,869
has been recognized in 2019, $3,485 was recognized in 2018, and
$336 was recognized in 2017.
62 Wajax 2019 Annual Report
Notes to Consolidated Financial Statements
Recognized deferred tax assets and liabilities and the movement of temporary differences during the year are as follows:
Property, plant and equipment
Finance leases
Intangible assets
Goodwill
Accrued liabilities
Provisions
Derivative instruments
Employee benefits
Deferred financing costs
Partnership income not currently taxable
Tax loss carryforwards
December 31,
2018
Recognized in
profit or loss
Recognized
in other
comprehensive
income
Recognized
in retained
earnings
Recognized
on acquisition
of business
December 31,
2019
$
(3,894) $
153
(4,898)
—
4,613
915
1,777
2,272
656
(2,803)
—
(3,394) $
1,915
1,318
(184)
(827)
(540)
(372)
178
(676)
855
(113)
— $
—
—
—
(5)
—
289
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
(1,022) $
—
—
—
—
—
—
—
—
—
—
(8,310)
2,068
(3,580)
(184)
3,781
375
1,694
2,450
(20)
(1,948)
(113)
Net deferred tax (liabilities) assets
$
(1,209) $
(1,840) $
284 $
— $
(1,022) $
(3,787)
Property, plant and equipment
Finance leases
Intangible assets
Accrued liabilities
Provisions
Derivative instruments
Employee benefits
Deferred financing costs
Partnership income not currently taxable
December 31,
2017
Recognized in
profit or loss
Recognized
in other
comprehensive
income
Recognized
in retained
earnings
Recognized
on acquisition
of business
December 31,
2018
$
(3,979) $
229
329
3,670
2,192
121
2,298
1,219
(6,810)
85 $
(76)
(87)
969
(1,277)
1,175
(26)
(563)
4,334
— $
—
—
(26)
—
481
—
—
—
— $
—
—
—
—
—
—
—
(327)
— $
—
(5,140)
—
—
—
—
—
—
(3,894)
153
(4,898)
4,613
915
1,777
2,272
656
(2,803)
Net deferred tax (liabilities) assets
$
(731) $
4,534 $
455 $
(327) $
(5,140) $
(1,209)
25. Changes In Non-Cash Operating Working Capital
27. Capital Management
The net change in non-cash working capital comprises the following:
Objective
2019
2018
Trade and other receivables
Contract assets
Inventory
Deposits on inventory
Prepaid expenses
Accounts payable and accrued liabilities
Contract liabilities
$ (32,093) $ 12,555
(2,968)
(33,220)
(6,571)
(1,962)
3,156
(4,630)
6,989
(36,270)
(24,068)
1,080
34,877
(1,061)
Total
$ (50,546) $
(33,640)
26. Contingencies
In the ordinary course of business, the Corporation is contingently
liable for various amounts that could arise from litigation,
environmental matters or other sources. The Corporation does not
expect the resolution of these matters to have a materially adverse
effect on its financial position or results of operations. Provisions
have been made in these consolidated financial statements when the
liability is expected to result in an outflow of economic resources, and
where the obligation can be reliably measured.
The Corporation defines its capital as the total of its shareholders’
equity, long-term debt, and debentures (“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
As part of the Corporation’s renewed long-term strategy, its capital
structure will continue to be managed such that it maintains a
prudent leverage ratio, defined below, in order to provide funds
available to invest in strategic growth initiatives, provide liquidity
in times of economic uncertainty and to allow for the payment of
dividends. In addition, the Corporation’s tolerance to interest rate risk
decreases/increases as the Corporation’s leverage ratio increases/
decreases. The Corporation’s objective is to manage its working
capital and normal-course capital investment programs within a
leverage range of 1.5 to 2.0 times and to fund those programs
through operating cash flow and its bank credit facilities as required.
There may be instances whereby the Corporation is willing to maintain
a leverage ratio outside of this range during changes in economic
cycles. The Corporation may also maintain a leverage ratio above the
stated range as a result of investment in significant acquisitions and
may fund those acquisitions using its bank credit facilities and other
debt instruments in accordance with the Corporation’s expectations
of total future cash flows, financing costs and other factors.
Wajax 2019 Annual Report 63
Notes to Consolidated Financial Statements
28. Related Party Transactions
The Corporation’s related party transactions consist of the
compensation of the Board of Directors and key management
personnel which is set out in the following table:
Salaries, bonus and other
short-term employee benefits
Pension costs
– defined contribution plans
Pension costs
– defined benefit plans
Share-based compensation expense
2019
2018
$
3,771 $
5,683
189
182
255
1,972
408
1,621
Total compensation
$
6,187 $
7,894
29. Operating Segments
The Corporation’s Chief Executive Officer, who is also the Chief
Operating Decision Maker, regularly assesses the performance of,
and makes resource allocation decisions based on, the Corporation
as a whole. As a result, the Corporation has determined that it
comprises a single operating segment and therefore a single
reportable segment.
30. Comparative Information
Certain comparative information has been reclassified to conform to
the current year’s presentation.
31. Subsequent Event
On January 13, 2020, the Corporation acquired all of the issued and
outstanding shares of Calgary, Alberta-based NorthPoint Technical
Services ULC ("NorthPoint") for approximately $18,000 cash subject
to final working capital adjustments.
The leverage ratio at the end of a particular quarter is defined as
debt divided by trailing 12-month pro-forma adjusted EBITDA. Debt
includes bank indebtedness, debentures, and total long-term debt,
and letters of credit, net of cash. Pro-forma adjusted EBITDA used
in calculating the leverage ratio under the bank credit agreement is
calculated as earnings before restructuring and other related costs
(recoveries), gain recorded on sales of properties, non-cash losses
on mark to market of derivative instruments, CSC project costs,
Delom transaction costs, finance costs, income tax expense and
depreciation and amortization, adjusted for the EBITDA of business
acquisitions made during the period as if they were made at the
beginning of the trailing 12-month period pursuant to the terms of
the bank credit facility.
Although management currently believes the Corporation has
adequate debt capacity, the Corporation may have to access
the equity or debt markets, or temporarily reduce dividends to
accommodate any shortfalls in the Corporation’s credit facilities
or significant growth capital requirements.
There were no significant changes in the Corporation’s approach to
capital management during the year.
Restrictions on capital
The interest bearing debt includes a $400,000 bank credit facility
which expires October 1, 2024. The bank credit facility contains the
following key covenants:
Borrowing capacity is dependent upon the level of the Corporation’s
inventory on hand and the outstanding trade accounts receivable
(“borrowing base”). At December 31, 2019, borrowing capacity
under the bank credit facility was equal to $400,000.
The Corporation will be restricted from the declaration of cash
dividends in the event the Corporation’s leverage ratio, as defined
under the bank credit facility, exceeds 4.0 times.
An interest coverage maintenance ratio.
At December 31, 2019, the Corporation was in compliance with
all covenants and there were no restrictions on the declaration of
quarterly cash dividends.
Under the terms of the $400,000 bank credit facility, the Corporation
is permitted to have additional interest bearing debt of $25,000. As
a result, the Corporation has up to $25,000 of demand inventory
equipment financing capacity with two lenders. The equipment
notes payable under the facilities bear floating rates of interest at
margins over Canadian dollar bankers’ acceptance yields and U.S.
LIBOR rates. Principal repayments are generally due the earlier of
12 months from the date of financing and the date the equipment is
sold. At December 31, 2019, the Corporation had not utilized any of
its interest bearing equipment financing facilities.
64 Wajax 2019 Annual Report
Summary of Quarterly Data – Unaudited
(in millions of dollars, except per share data)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2019
2018
Additional Financial Information
Revenue
Net earnings
Earnings per share – Basic
Earnings per share – Diluted
Eleven Year Summary – Unaudited
$ 374.6 $ 409.4 $ 365.1 $ 403.9 $ 342.4 $ 382.3 $ 367.1 $ 389.8
6.1
0.31
0.30
7.6
0.38 $
0.37
9.3
0.48 $
0.46
11.4
0.58 $
0.56
7.9
0.39 $
0.39
9.1
0.46 $
0.45
12.2
0.61 $
0.60
11.9
0.59 $
0.58
$
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
$ 1,553.0 $ 1,481.6 $ 1,318.7 $ 1,221.9 $ 1,273.3 $ 1,451.3 $ 1,428.5 $ 1,466.0 $ 1,377.1 $ 1,110.9 $ 1,007.2
34.2
4.5
(11.0)
12.2
27.4
15.2
56.4
5.2
63.8
4.6
65.9
4.4
41.2
13.0
11.0
11.2
39.5
19.7
35.9
8.8
47.7
9.0
2.5
4.2
1.7
6.5
4.1
5.4
3.9
5.6
5.3
1.7
37.5
43.6
19.3
13.5
23.0
23.1
20.0
25.1
20.2
5.8
52.8
27.0
23.2
24.7
24.5
22.5
21.6
17.8
13.5
11.2
7.0
0.4
9.7
Per Share
Net (loss)
earnings – Basic $
Dividends declared
Distributions declared
Equity
1.98 $
1.00
—
15.83
1.82 $
1.00
—
14.88
1.40 $
1.00
—
14.08
0.55 $
1.00
—
14.07
(0.59) $
1.23
—
14.44
2.46 $
2.40
—
14.82
2.85 $
2.68
—
14.77
3.95 $
3.10
—
14.45
3.84 $
2.14
—
13.69
3.39 $
—
3.40
12.00
2.06
—
2.47
12.07
$ 404.1 $ 334.7 $ 289.7 $ 268.8 $ 302.7 $ 258.2 $ 272.7 $ 230.1 $ 167.0 $
77.0
73.7
60.4
58.1
64.1
59.4
52.3
43.7
28.1
77.9 $ 160.1
16.4
15.8
42.1
54.1
59.0
—
43.6
—
45.7
—
46.2
—
48.7
—
49.7
—
50.7
—
47.9
—
43.3
—
36.2
—
Operating Results
Revenue
Net earnings (loss)
Interest expense
Property, plant
and equipment
expenditures – net
Rental equipment
expenditures – net
Depreciation and
amortization
Financial Position
Working capital
Rental equipment
Property, plant and
equipment – net
Debentures
Long-term debt
excluding current
portion
Shareholders’ equity
Total assets
225.6
316.8
1,045.1
218.1
297.0
831.2
143.7
274.7
694.4
122.0
278.9
667.3
151.6
288.5
677.5
180.9
248.5
718.2
195.9
247.2
682.1
151.7
241.9
671.9
59.0
227.6
589.9
—
199.3
522.5
79.5
200.4
448.2
2,700
Other Information
Number of employees
Shares
outstanding (000s) 20,012 19,957 19,504 19,826 19,986 16,779 16,744 16,736 16,629 16,629 16,603
Price range of shares
High
Low
$ 19.95 $ 28.17 $ 25.74 $ 25.76 $ 30.93 $ 39.56 $ 46.24 $ 53.43 $ 44.94 $ 38.50 $ 23.40
10.95
2,418
18.49
2,833
38.59
13.34
2,318
13.98
2,725
28.75
2,738
2,382
27.80
21.65
2,766
14.81
2,609
29.38
2,800
15.43
2,291
Wajax 2019 Annual Report 65
Corporate Information
Directors
Officers
Robert P. Dexter
Chairman, Wajax Corporation
Chairman and Chief Executive Officer,
Maritime Travel Inc.
Thomas M. Alford 2, 3
President, Well Services,
Precision Drilling Corporation
Edward M. Barrett 1, 2
Chairman and Co-Chief Executive Officer,
Barrett Corporation
Anne E. Bélec 1, 2
Co-Founder and Chief Executive Officer,
Mosaic Group, LLC.
Douglas A. Carty 1, 3
Corporate Director
Sylvia D. Chrominska 1, 2
Corporate Director
John C. Eby 1, 3
Corporate Director
A. Mark Foote
President and Chief Executive Officer,
Wajax Corporation
Alexander S. Taylor 2, 3
President, Nuclear, SNC-Lavalin Group 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
Home Office
2250 Argentia Road
Mississauga, ON L5N 6A5
Telephone: (905) 212-3300
Fax: (905) 212-3350
A. Mark Foote
President and Chief Executive Officer
Steven C. Deck
Chief Operating Officer
Stuart H. Auld
Chief Financial Officer
Irene Stretton
Vice President, Human Resources
Cristian Rodriguez
Vice President, Environment,
Health and Safety
Donna Baratto
Vice President, Customer Service Centres
Trevor Carson
Vice President, Supply Chain and
Corporate Development
Tania Casadinho
Vice President, Corporate Controller
Andrew W. H. Tam
General Counsel and Corporate Secretary
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 Investor Services Inc.
100 University Avenue, 8th Floor
Toronto, ON M5J 2Y1
Telephone: 1-800-564-6253
Fax: 1-888-453-0330
Web: www.investorcentre.com/service
Auditors
KPMG LLP
Exchange Listing
Toronto Stock Exchange
Symbol
WJX
Wajax Corporation
Share Trading Information
(January 1 – December 31, 2019)
Open
High
Low Close
Volume
of Shares
Traded
$16.75 $19.95 $13.98 $14.80 11,761,231
Quarterly Earnings Reports
Quarterly earnings for 2020 are anticipated to
be announced after market close on May 4,
August 6 and November 2, 2020 and
March 1, 2021.
2020 Dividend Dates
Quarterly dividends are payable to
shareholders of record on or about the 15th
day of the last month in each quarter and
will generally be paid in the first week of the
following month.
Investor Information
Stuart Auld, Chief Financial Officer, or
Trevor Carson, Vice President, Supply Chain
and Corporate Development,
Telephone: (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, Toronto
International Airport, Toronto, Ontario, on
Tuesday, May 5, 2020, at 11:00 a.m. EDT.
Vous pouvez obtenir la version française de
ce rapport en écrivant au secrétaire général,
Corporation Wajax,
2250 Argentia Road,
Mississauga, (ON) L5N 6A5
66 Wajax 2019 Annual Report
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Locations
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Photo Credit
Cover Page: Stacey Helfrich, Marketing Specialist, Acheson
2250 Argentia Road
Mississauga, ON L5N 6A5
Telephone: (905) 212-3300
Fax: (905) 212-3350