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Wajax Announces 2020 Second Quarter Results and Provides an Update Regarding COVID-19 Response

PR Newswire - Thu Aug 6, 5:59PM CDT

TSX Symbol: WJX

TORONTO , Aug. 6, 2020 /CNW/ - Wajax Corporation (" Wajax" or the " Corporation ") today announced its 2020 second quarter results.

(Dollars in millions, except per share data)

Three Months Ended

June 30

Six Months Ended

June 30



2020

2019

2020

2019

CONSOLIDATED RESULTS









Revenue

$356.9



$409.4



$701.0



$784.0



Equipment sales

$136.6



$145.6



$220.2



$257.7



Product support

$91.1



$124.6



$208.9



$248.9



Industrial parts

$81.6



$93.9



$173.3



$187.4



ERS

$39.7



$36.2



$82.1



$72.0



Equipment rental

$8.0



$9.2



$16.5



$18.0













Net earnings

$10.2



$11.9



$14.3



$19.8



Basic earnings per share (1)

$0.51



$0.59



$0.71



$0.99













Adjusted net earnings (2)(3)

$9.6



$12.6



$15.4



$21.3



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

$0.48



$0.63



$0.77



$1.07



  Second Quarter Highlights

  • Revenue in the second quarter of 2020 decreased $52.5 million or 12.8%, to $356.9 million , from $409.4 million in the second quarter of 2019. Regionally:



    • Revenue in western Canada of $130.9 million decreased 17.3% over the prior year due primarily to lower product support revenue in most categories, lower equipment sales in the forestry and engines and transmissions categories, and lower industrial parts sales. These decreases were partially offset by higher mining equipment revenue in the quarter.
    • Revenue in central Canada of $74.2 million decreased 10.4% over the prior year mainly due to lower equipment sales, partially offset by higher Engineered Repair Services (" ERS ") sales attributable to the acquisition of NorthPoint Technical Services ULC (" NorthPoint ") effective January 13, 2020 .
    • Revenue in eastern Canada of $151.9 million decreased 9.8% over the prior year primarily due to lower equipment sales in the material handling, power generation and forestry categories and lower industrial parts sales. These decreases were partially offset by higher mining equipment revenue in the quarter.

  • During the quarter, the Corporation qualified for the Canada Emergency Wage Subsidy (" CEWS ") program and recognized $15.5 million as a reimbursement of compensation expense with $7.1 million and $8.4 million , respectively, allocated to cost of sales and selling and administrative expenses in proportion to personnel costs recorded in those areas. Receipt of the subsidy supported the Corporation's objective of minimizing, to the extent possible, the effect of current market conditions on its employees, including the avoidance of significant additional temporary and permanent layoffs and a partial recall of employees placed on layoff or reduced hours earlier in the quarter.



  • Gross profit margin of 16.8% in the second quarter of 2020 decreased 2.3% compared to the same period of 2019. Excluding the $7.1 million CEWS recovery discussed above, gross profit margin was 14.9% in the second quarter of 2020, representing a decrease of 4.3% compared to the same period of 2019. The decline in margin was driven primarily by lower new and used equipment margins resulting from the Corporation's accelerated disposal of aged and used equipment and by a higher overall mix of lower margin equipment sales. These factors negatively affected total gross profit margin in the second quarter by 3.4%. The Corporation expects margin pressure to continue in 2020 albeit at a less significant level than was experienced in the second quarter.



  • Selling and administrative expenses as a percentage of revenue decreased 2.6% to 11.2% in the second quarter of 2020 from 13.9% in the same period of 2019. Selling and administrative expenses decreased by $16.8 million compared to the second quarter of 2019 due mainly to cost control initiatives and the recovery of personnel expenses from the CEWS. The reduction in costs were material in offsetting the negative earnings impact of volume declines in the second quarter. Excluding the $8.4 million CEWS recovery discussed above, selling and administrative expenses as a percentage of revenue decreased 0.3% to 13.6% in the second quarter of 2020 from 13.9% in the same period of 2019.



  • EBIT decreased $1.0 million , or 4.9%, to $20.0 million in the second quarter of 2020 versus $21.0 million in the same period of 2019. (2) The year-over-year decrease in EBIT is primarily attributable to lower revenue and a higher proportion of lower margin equipment sales compared to higher margin parts and service sales, partially offset by reduced selling and administrative costs and the CEWS recovery. (2)



  • The Corporation generated net earnings of $10.2 million , or $0.51 per share, in the second quarter of 2020 versus $11.9 million , or $0.59 per share, in the same period of 2019. The Corporation generated adjusted net earnings of $9.6 million , or $0.48 per share, in the second quarter of 2020 versus $12.6 million , or $0.63 per share, in the same period of 2019. (2)



  • Adjusted EBITDA margin increased to 8.8% in the second quarter of 2020 from 8.7% in the same period of 2019. (2)



  • The Corporation's backlog at June 30, 2020 of $190.8 million decreased $41.0 million , or 17.7%, compared to March 31, 2020 due primarily to the delivery of two large mining shovels and lower material handling and ERS orders. Compared to June 30, 2019 , backlog decreased $105.7 million , or 35.7%, due to lower orders in most categories, but most notably in the mining, power generation, material handling, and forestry categories. (2)



  • Total owned and consignment inventory declined $51.0 million in the second quarter of 2020. Owned inventory of $413.7 million at June 30, 2020 decreased $29.1 million from March 31, 2020 due primarily to lower equipment inventory in the construction and forestry categories, and lower parts inventory in the construction and industrial parts categories. Consignment inventory, comprised primarily of construction excavators, declined by $21.9 million .



  • Working capital of $395.3 million at June 30, 2020 decreased $28.0 million from March 31, 2020 due primarily to lower trade and other receivables, inventory and contract assets, partially offset by lower accounts payable and accrued liabilities and contract liabilities. (2) Trailing four-quarter average working capital as a percentage of the trailing 12-month sales was 27.6%, an increase of 1.2% from March 31, 2020 , due primarily to the lower trailing 12-month sales. (2)



  • Cash flows generated from operating activities amounted to $43.3 million in the second quarter of 2020, compared to $20.5 million in the same quarter of the previous year. The increase in cash generated of $22.8 million was mainly attributable to an increase in cash generated from changes in non-cash operating working capital of $14.9 million , a decrease in income taxes paid of $5.0 million and a decrease in rental equipment additions of $6.4 million .



  • The Corporation's leverage ratio decreased to 2.82 times at June 30, 2020 compared to 3.04 times at March 31, 2020 . (2) The decrease in the leverage ratio was due to the lower debt level associated with the decrease in working capital, partially offset by the lower trailing 12-month pro-forma adjusted EBITDA. (2) The Corporation's senior secured leverage ratio was 2.29 times at June 30, 2020 compared to 2.53 times at March 31, 2020 . (2)

On August 6, 2020, the Corporation declared a dividend of $0.25 per share for the third quarter of 2020 payable on October 2, 2020 to shareholders of record on September 15, 2020.

Update Regarding COVID-19 Pandemic Response

The coronavirus pandemic and the measures implemented to stop the spread of COVID-19 have continued to have a significant effect on Wajax. The table below summarizes the Corporation's four main objectives in managing through this difficult period, and provides an update regarding key actions taken to date in furtherance of these objectives.

Objective

Actions Include:

Protecting the

health, safety

and well-

being of

employees.

To achieve physical distancing, approximately 40% of employees continue to work remotely or from home. To protect frontline employees whose roles require them to be in branches or at customer sites, protocols have been implemented that promote operational physical distancing, restrict site access, change shift rotations, enhance pre-work hazard assessments and ensure the required level of personal protective equipment ("PPE") is available.

Employees required to be in isolation due to actual or suspected illness or exposure continue to receive 10 days of fully paid leave. Company-paid health and dental benefits have now been extended for up to 180 days (from an initial 90-day period) for employees on temporary layoff.

Employee and operational policies and practices have been changed in a broad range of areas to further protect employee health and safety and adhere to provincial and local requirements.

All-employee meetings continue to be held weekly to update employees on health and safety, support programs and the status of the Corporation's business.

Providing

strong service

to customers.

No material disruptions have been experienced in the Corporation's branch network or supply chain, nor the supply chains of the Corporation's manufacturing partners.

At the end of the second quarter of 2020, the majority of the Corporation's customers were in operation, generating varying levels of demand, and volume-appropriate staffing levels continue to be adjusted for field, branch, and support operations.

Protecting the

financial

health of the

Corporation.

Cost Reduction

As at June 30, 2020, 767 employees were on temporary layoff, reduced hours or participating in workshare programs. During the second quarter of 2020, the Corporation recalled 228 employees and did not proceed with further planned permanent or temporary layoffs.

Voluntary compensation reductions have been extended, including a salary reduction of 20% for the CEO, a 20% reduction of all board and committee retainers, a 10% salary reduction for senior executives, and salary reductions of between 5-10% for managers.

Discretionary expenses have been significantly reduced.

Liquidity and Working Capital Management

As at June 30, 2020, the Corporation had access to $174.8 million in liquidity within its bank credit facility, an increase of $37.4 million from the prior quarter. The Corporation has no debt maturing before 2024. In the second quarter, the Corporation generated $43.3 million in cash from operations.

The Corporation will continue to manage owned and consignment equipment inventory levels based on an expectation that current market conditions will persist for the balance of the year.

Capital investment is expected to remain at a minimum level.

As at June 30, 2020, the Corporation had restarted its previously disclosed real estate monetization program.

The Corporation continues to work closely with customers on credit limits to support their businesses through this difficult period. No material provisions were required for expected credit losses in the second quarter.

Continuing to be

well-positioned to

execute the

Corporation's

growth strategy.

The implementation of the Corporation's new ERP system, previously planned for the second quarter of 2020, remains deferred until 2021.

The Corporation continues to execute its growth strategies where appropriate based on market conditions relevant to individual categories.

ERS acquisition opportunities continue to be reviewed for execution when conditions are deemed appropriate.

Commenting on the Corporation's results, President and Chief Executive Officer Mark Foote stated, "Current business conditions, driven primarily by COVID-19 concerns and secondarily by weak resource markets in western Canada , continued to have a negative effect on Wajax's results during the second quarter of 2020. The volume declines in the first two months of the quarter improved in June as customer activity began to increase, and revenue was positively affected by the early delivery to customers of two large mining shovels which we had previously expected to deliver in the third quarter of 2020. While volumes have recently shown an improving trend, we continue to expect revenue to be lower year-over-year in the third quarter."

Mr. Foote continued, "In response to difficult market conditions and consistent with our plan to reduce inventory, Wajax accelerated actions to dispose of aged and used equipment inventory in the second quarter which, combined with a higher mix of lower margin equipment sales, had a negative effect on gross profit rate. While we expect to continue to take actions to reduce inventory to conditions-appropriate levels, we do not expect the same degree of margin decline in subsequent quarters. 

Wajax's focus is to continue to manage the business according to its four key objectives: protecting the health and safety of employees, providing strong service to customers, protecting the Corporation's financial health and returning to a focus on growth when conditions improve.

Wajax expects to partially offset the effect of volume declines with cost reductions while managing customer service levels, working capital and capital spending accordingly. The Corporation's current sources of liquidity are expected to be sufficient while preparing to return to growing the business as conditions improve."

Mr. Foote concluded, "Our sincere thanks go to each and every member of our team which continues to work safely and has shown commitment and flexibility during a difficult period. We are very proud of Wajax's dedication to serving its customers under challenging conditions."

Wajax Corporation

Founded in 1858, Wajax (TSX: WJX) is one of Canada's longest-standing and most diversified industrial products and services providers. The Corporation operates an integrated distribution system providing sales, parts and services to a broad range of customers in diverse sectors of the Canadian economy, including: construction, forestry, mining, industrial and commercial, oil sands, transportation, metal processing, government and utilities, and oil and gas.

The Corporation's goal is to be Canada's leading industrial products and services provider, distinguished through its three core capabilities: sales force excellence, the breadth and efficiency of repair and maintenance operations, and the ability to work closely with existing and new vendor partners to constantly expand its product offering to customers. The Corporation believes that achieving excellence in these three areas will position it to create value for its customers, employees, vendors and shareholders.

Wajax will webcast its Second Quarter Financial Results Conference Call. You are invited to listen to the live webcast on Friday, August 7, 2020 at 2:00 p.m. ET . To access the webcast, please visit our website wajax.com , under " Investor Relations ", " Events and Presentations ", " Q2 2020 Financial Results " and click on the "Webcast" link.

Notes:





(1)

Weighted average shares, net of shares held in trust, outstanding for calculation of basic and diluted earnings per share for the three months ended June 30, 2020 was 20,033,619 (2019 – 20,003,554) and 20,462,587 (2019 – 20,385,109), respectively.



Weighted average shares, net of shares held in trust, outstanding for calculation of basic and diluted earnings per share for the six months ended June 30, 2020 was 20,025,024 (2019 – 19,990,658) and 20,427,433 (2019 – 20,371,457), respectively.

(2)

"Adjusted net earnings", "Adjusted basic earnings per share", "Adjusted EBITDA", "Adjusted EBITDA margin", "pro-forma adjusted EBITDA", "backlog", "leverage ratio" and "senior secured leverage ratio" 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 of the Q2 2020 Management's Discussion and Analysis.

(3)

Net earnings excluding the following:



a.

after-tax restructuring and other related costs of $0.3 million, or basic and diluted earnings per share of $0.01 per share for the three months ended June 30, 2019.



b.

after-tax restructuring and other related costs of $0.1 million (2019 – $1.0 million), or basic and diluted earnings per share of less than $0.01 (2019 – $0.05) for the six months ended June 30, 2020.



c.

after-tax non-cash gains on mark to market of derivative instruments of $0.6 million (2019 – losses of $0.2 million), or basic and diluted earnings per share of $0.03 (2019 – $0.01 loss per share) for the three months ended June 30, 2020.



d.

after-tax non-cash losses on mark to market of derivative instruments of $0.8 million (2019 – gains of $0.2 million), or basic and diluted loss per share of $0.04 (2019 – $0.01 earnings per share) for the six months ended June 30, 2020.



e.

after-tax NorthPoint transaction costs of $0.2 million, or basic and diluted earnings per share of $0.01 for the six months ended June 30, 2020.



f.

after-tax CSC project costs of $0.3 million, or basic and diluted earnings per share of $0.01 for the three months ended June 30, 2019.



g.

after-tax CSC project costs of $0.8 million, or basic and diluted earnings per share of $0.04 for the six months ended June 30, 2019.

Cautionary Statement Regarding Forward-Looking Information

This news release contains certain forward-looking statements and forward-looking information, as defined in applicable securities laws (collectively, " forward-looking statements "). These forward-looking statements relate to future events or the Corporation's future performance. All statements other than statements of historical fact are forward-looking statements. Often, but not always, forward looking statements can be identified by the use of words such as "plans", "anticipates", "intends", "predicts", "expects", "is expected", "scheduled", "believes", "estimates", "projects" or "forecasts", or variations of, or the negatives of, such words and phrases or state that certain actions, events or results "may", "could", "would", "should", "might" or "will" be taken, occur or be achieved. Forward looking statements involve known and unknown risks, uncertainties and other factors beyond the Corporation's ability to predict or control which may cause actual results, performance and achievements to differ materially from those anticipated or implied in such forward looking statements. There can be no assurance that any forward-looking statement will materialize. Accordingly, readers should not place undue reliance on forward-looking statements. The forward-looking statements in this news release are made as of the date of this news release, reflect management's current beliefs and are based on information currently available to management. Although management believes that the expectations represented in such forward-looking statements are reasonable, there is no assurance that such expectations will prove to be correct. Specifically, this news release includes forward looking statements regarding, among other things, our expectation that, while margin pressure will continue in 2020, it will continue at a less significant level than in the second quarter; our intention to manage owned and consignment equipment inventory levels based on the expectation that current market conditions will persist for the balance of 2020; our expectation that our capital investment will remain at a minimum level; our expectation that revenue in the third quarter of 2020 will be lower year-over-year; our expectation that we will continue to take actions to reduce inventory levels, but that the same degree of margin decline will not continue in subsequent quarters; our key objectives in managing our business through the COVID-19 pandemic, as well as weak resource markets in western Canada ; our intention to partially offset volume declines with cost reductions, while managing customer service levels, working capital and capital spending accordingly; our expectation that the Corporation's current sources of liquidity will be sufficient while we prepare to return to growing the business as conditions improve; our goal of becoming Canada's leading industrial products and services provider, distinguished through our core capabilities; and our belief that achieving excellence in our areas of core capability will position Wajax to create value for its customers, employees, vendors and shareholders. These statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, our ability to successfully manage our business through the COVID-19 pandemic and actions taken by governments, public authorities and customers in response to the novel coronavirus; general business and economic conditions; the supply and demand for, and the level and volatility of prices for, oil, natural gas and other commodities; financial market conditions, including interest rates; our ability to execute our updated Strategic Plan, including our ability to develop our core capabilities, execute on our organic growth priorities, complete and effectively integrate acquisitions, such as NorthPoint, and to successfully implement new information technology platforms, systems and software; the future financial performance of the Corporation; our costs; market competition; our ability to attract and retain skilled staff; our ability to procure quality products and inventory; and our ongoing relations with suppliers, employees and customers. The foregoing list of assumptions is not exhaustive. Factors that may cause actual results to vary materially include, but are not limited to, the geographic spread and ultimate impact of the COVID-19 virus and the duration of the coronavirus pandemic; the duration of travel, business and other restrictions imposed by governments and public authorities in response to COVID-19, as well as other measures that may be taken by such authorities; actions taken by our customers in relation to the COVID-19 pandemic, including slowing, reducing or halting operations; a continued or prolonged deterioration in general business and economic conditions (including as a result of the COVID-19 pandemic); 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 (including disruptions caused by the COVID-19 pandemic), job action and unanticipated events related to health, safety and environmental matters); our ability to attract and retain skilled staff and our ability to maintain our relationships with suppliers, employees and customers. The foregoing list of factors is not exhaustive. Further information concerning the risks and uncertainties associated with these forward-looking statements and the Corporation's business may be found in our Annual Information Form for the year ended December 31, 2019 (the " AIF "), in our annual MD&A for financial risks, and in our most recent quarterly MD&A, all of which have been filed on SEDAR. The forward-looking statements contained in this news release are expressly qualified in their entirety by this cautionary statement. The Corporation does not undertake any obligation to publicly update such forward-looking statements to reflect new information, subsequent events or otherwise unless so required by applicable securities laws.

Readers are cautioned that the risks described in the AIF, and in our annual and quarterly MD&A, are not the only risks that could impact the Corporation. We cannot accurately predict the full impact that COVID-19 will have on our business, results of operations, financial condition or the demand for our products and services due to the uncertainties related to the spread of the virus. Risks and uncertainties not currently known to the Corporation, or currently deemed to be immaterial, may have a material effect on the Corporation's business, financial condition or results of operations.

Additional information, including Wajax's Annual Report, is available on SEDAR at www.sedar.com

Wajax Corporation

Management's Discussion and Analysis – Q2 2020

The following management's discussion and analysis (" MD&A ") discusses the consolidated financial condition and results of operations of Wajax Corporation (" Wajax " or the " Corporation ") for the quarter ended June 30, 2020 . This MD&A should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements and accompanying notes for the quarter ended June 30, 2020 , the annual audited consolidated financial statements and accompanying notes for the year ended December 31, 2019 that are prepared in accordance with International Financial Reporting Standards (" IFRS ") and the associated MD&A. Information contained in this MD&A is based on information available to management as of August 6, 2020.

Management is responsible for the information disclosed in this MD&A and the unaudited condensed consolidated interim financial statements and accompanying notes, and has in place appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. Wajax's Board of Directors has approved this MD&A and the unaudited condensed consolidated interim financial statements and accompanying notes. In addition, Wajax's Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by Wajax and has reviewed this MD&A and the unaudited condensed consolidated interim financial statements and accompanying notes.

Unless otherwise indicated, all financial information within this MD&A is in millions of Canadian dollars, except ratio calculations, share, share rights and per share data. Additional information, including Wajax's Annual Report and Annual Information Form, are available on SEDAR at www.sedar.com .

Wajax Corporation Overview

Founded in 1858, Wajax (TSX: WJX) is one of Canada's longest-standing and most diversified industrial products and services providers. The Corporation operates an integrated distribution system, providing sales, parts and services to a broad range of customers in diverse sectors of the Canadian economy, including: construction, forestry, mining, industrial and commercial, oil sands, transportation, metal processing, government and utilities, and oil and gas.

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 (each a " CSC ") that provide 24/7 customer support in all product and service categories.

Outlook

Current business conditions, relating primarily to COVID-19 concerns and secondarily to weak resource markets in western Canada , continued to have a negative effect on the Corporation's results during the second quarter of 2020. The volume declines in the first two months of the quarter improved in June as customer activity began to increase, and revenue was positively affected by the early delivery to customers of two large mining shovels which the Corporation had previously expected to deliver in the third quarter of 2020. While volumes have recently shown an improving trend, Wajax continues to expect revenue to be lower year-over-year in the third quarter.

In response to difficult market conditions and consistent with the Corporation's plans to reduce inventory, Wajax accelerated plans to dispose of aged and used equipment inventory in the second quarter which, combined with a higher mix of lower margin equipment sales, had a negative effect on gross profit rate. While the Corporation expects to continue to take actions to reduce inventory to conditions-appropriate levels, it does not expect the same degree of margin decline in subsequent quarters.

Wajax's focus is to manage the business according to its four key objectives: protecting the health and safety of employees, providing strong service to customers, protecting the financial health of the Corporation and positioning the Corporation to execute its growth strategy as conditions improve.

Wajax expects to partially offset the effect of volume declines with cost reductions while managing customer service levels, working capital and capital spending accordingly. The Corporation's current sources of liquidity are expected to be sufficient while preparing to return to growing the business and providing strong service to customers as conditions improve.

An update regarding Wajax's response to COVID-19 is set out below.

See the Cautionary Statement Regarding Forward-Looking Information section.

Highlights for the Quarter

  • Revenue in the second quarter of 2020 decreased $52.5 million or 12.8%, to $356.9 million , from $409.4 million in the second quarter of 2019. Regionally:



    • Revenue in western Canada of $130.9 million decreased 17.3% over the prior year due primarily to lower product support revenue in most categories, lower equipment sales in the forestry and engines and transmissions categories, and lower industrial parts sales. These decreases were partially offset by higher mining equipment revenue in the quarter.
    • Revenue in central Canada of $74.2 million decreased 10.4% over the prior year mainly due to lower equipment sales, partially offset by higher ERS sales attributable to the acquisition of NorthPoint Technical Services ULC (" NorthPoint ") effective January 13, 2020 .
    • Revenue in eastern Canada of $151.9 million decreased 9.8% over the prior year primarily due to lower equipment sales in the material handling, power generation and forestry categories and lower industrial parts sales. These decreases were partially offset by higher mining equipment revenue in the quarter.

  • During the quarter, the Corporation qualified for the Canada Emergency Wage Subsidy (" CEWS ") program and recognized $15.5 million as a reimbursement of compensation expense with $7.1 million and $8.4 million , respectively, allocated to cost of sales and selling and administrative expenses in proportion to personnel costs recorded in those areas. Receipt of the subsidy supported the Corporation's objective of minimizing, to the extent possible, the effect of current market conditions on its employees, including the avoidance of significant additional temporary and permanent layoffs and a partial recall of employees placed on layoff or reduced hours earlier in the quarter.



  • Gross profit margin of 16.8% in the second quarter of 2020 decreased 2.3% compared to the same period of 2019. Excluding the $7.1 million CEWS recovery discussed above, gross profit margin was 14.9% in the second quarter of 2020, representing a decrease of 4.3% compared to the same period of 2019. The decline in margin was driven primarily by lower new and used equipment margins resulting from the Corporation's accelerated disposal of aged and used equipment and by a higher overall mix of lower margin equipment sales. These factors negatively affected total gross profit margin in the second quarter by 3.4%. The Corporation expects margin pressure to continue in 2020 albeit at a less significant level than was experienced in the second quarter.



  • Selling and administrative expenses as a percentage of revenue decreased 2.6% to 11.2% in the second quarter of 2020 from 13.9% in the same period of 2019. Selling and administrative expenses decreased by $16.8 million compared to the second quarter of 2019 due mainly to cost control initiatives and the recovery of personnel expenses from the CEWS. The reduction in costs were material in offsetting the negative earnings impact of volume declines in the second quarter. Excluding the $8.4 million CEWS recovery discussed above, selling and administrative expenses as a percentage of revenue decreased 0.3% to 13.6% in the second quarter of 2020 from 13.9% in the same period of 2019.



  • EBIT decreased $1.0 million , or 4.9%, to $20.0 million in the second quarter of 2020 versus $21.0 million in the same period of 2019. (1) The year-over-year decrease in EBIT is primarily attributable to lower revenue and a higher proportion of lower margin equipment sales compared to higher margin parts and service sales, partially offset by reduced selling and administrative costs and the CEWS recovery.



  • The Corporation generated net earnings of $10.2 million , or $0.51 per share, in the second quarter of 2020 versus $11.9 million , or $0.59 per share, in the same period of 2019. The Corporation generated adjusted net earnings of $9.6 million , or $0.48 per share, in the second quarter of 2020 versus $12.6 million , or $0.63 per share, in the same period of 2019. (1)



  • Adjusted EBITDA margin increased to 8.8% in the second quarter of 2020 from 8.7% in the same period of 2019. (1)



  • The Corporation's backlog at June 30, 2020 of $190.8 million decreased $41.0 million , or 17.7%, compared to March 31, 2020 due primarily to the delivery of two large mining shovels and lower material handling and ERS orders. Compared to June 30, 2019 , backlog decreased $105.7 million , or 35.7%, due to lower orders in most categories, but most notably in the mining, power generation, material handling, and forestry categories. (1)



  • Total owned and consignment inventory declined $51.0 million in the second quarter of 2020. Owned inventory of $413.7 million at June 30, 2020 decreased $29.1 million from March 31, 2020 due primarily to lower equipment inventory in the construction and forestry categories, and lower parts inventory in the construction and industrial parts categories. Consignment inventory, comprised primarily of construction excavators, declined by $21.9 million .



  • Working capital of $395.3 million at June 30, 2020 decreased $28.0 million from March 31, 2020 due primarily to lower trade and other receivables, inventory and contract assets, partially offset by lower accounts payable and accrued liabilities and contract liabilities. (1) Trailing four-quarter average working capital as a percentage of the trailing 12-month sales was 27.6%, an increase of 1.2% from March 31, 2020 , due primarily to the lower trailing 12-month sales. (1)



  • Cash flows generated from operating activities amounted to $43.3 million in the second quarter of 2020, compared to $20.5 million in the same quarter of the previous year. The increase in cash generated of $22.8 million was mainly attributable to an increase in cash generated from changes in non-cash operating working capital of $14.9 million , a decrease in income taxes paid of $5.0 million and a decrease in rental equipment additions of $6.4 million .



  • The Corporation's leverage ratio decreased to 2.82 times at June 30, 2020 compared to 3.04 times at March 31, 2020 . (1) The decrease in the leverage ratio was due to the lower debt level associated with the decrease in working capital, partially offset by the lower trailing 12-month pro-forma adjusted EBITDA. (1) The Corporation's senior secured leverage ratio was 2.29 times at June 30, 2020 compared to 2.53 times at March 31, 2020 . (1)

(1)

"Backlog", "Leverage ratio", "Senior secured 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.

Update Regarding COVID-19 Pandemic Response

The coronavirus pandemic and the measures implemented to stop the spread of COVID-19 have continued to have a significant effect on Wajax. The table below summarizes the Corporation's four main objectives in managing through this difficult period, and provides an update regarding key actions taken to date in furtherance of these objectives.

Objective

Actions Include:

Protecting the

health, safety

and well-

being of

employees.

To achieve physical distancing, approximately 40% of employees continue to work remotely or from home. To protect frontline employees whose roles require them to be in branches or at customer sites, protocols have been implemented that promote operational physical distancing, restrict site access, change shift rotations, enhance pre-work hazard assessments and ensure the required level of personal protective equipment ("PPE") is available.

Employees required to be in isolation due to actual or suspected illness or exposure continue to receive 10 days of fully paid leave. Company-paid health and dental benefits have now been extended for up to 180 days (from an initial 90-day period) for employees on temporary layoff.

Employee and operational policies and practices have been changed in a broad range of areas to further protect employee health and safety and adhere to provincial and local requirements.

All-employee meetings continue to be held weekly to update employees on health and safety, support programs and the status of the Corporation's business.

Providing

strong service

to customers.

No material disruptions have been experienced in the Corporation's branch network or supply chain, nor the supply chains of the Corporation's manufacturing partners.

At the end of the second quarter of 2020, the majority of the Corporation's customers were in operation, generating varying levels of demand, and volume-appropriate staffing levels continue to be adjusted for field, branch, and support operations.

Protecting the

financial

health of the

Corporation.

Cost Reduction

As at June 30, 2020, 767 employees were on temporary layoff, reduced hours or participating in workshare programs. During the second quarter of 2020, the Corporation recalled 228 employees and did not proceed with further planned permanent or temporary layoffs.

Voluntary compensation reductions have been extended, including a salary reduction of 20% for the CEO, a 20% reduction of all board and committee retainers, a 10% salary reduction for senior executives, and salary reductions of between 5-10% for managers.

Discretionary expenses have been significantly reduced.

Liquidity and Working Capital Management

 

As at June 30, 2020, the Corporation had access to $174.8 million in liquidity within its bank credit facility, an increase of $37.4 million from the prior quarter. The Corporation has no debt maturing before 2024. In the second quarter, the Corporation generated $43.3 million in cash from operations.

The Corporation will continue to manage owned and consignment equipment inventory levels based on an expectation that current market conditions will persist for the balance of the year.

Capital investment is expected to remain at a minimum level.

As at June 30, 2020, the Corporation had restarted its previously disclosed real estate monetization program.

The Corporation continues to work closely with customers on credit limits to support their businesses through this difficult period. No material provisions were required for expected credit losses in the second quarter.

Continuing to be

well-positioned to

execute the

Corporation's

growth strategy.

The implementation of the Corporation's new ERP system, previously planned for the second quarter of 2020, remains deferred until 2021.

The Corporation continues to execute its growth strategies where appropriate based on market conditions relevant to individual categories.

ERS acquisition opportunities continue to be reviewed for execution when conditions are deemed appropriate.

Summary of Operating Results



Three months ended

June 30

Six months ended

June 30

Statement of earnings highlights

2020



2019



2020



2019



Revenue

$

356.9



$

409.4



$

701.0



$

784.0



Gross profit

$

60.1



$

78.3



$

128.9



$

151.5



Selling and administrative expenses

$

40.1



$

56.9



$

97.4



$

113.6



Restructuring and other related (recoveries) costs

$



$

0.4



$

0.1



$

1.4



Earnings before finance costs and income taxes (1)

$

20.0



$

21.0



$

31.4



$

36.5



Finance costs

$

5.9



$

4.6



$

11.8



$

9.1



Earnings before income taxes (1)

$

14.1



$

16.5



$

19.7



$

27.3



Income tax expense

$

3.9



$

4.6



$

5.4



$

7.6



Net earnings

$

10.2



$

11.9



$

14.3



$

19.8



–  Basic earnings per share (2)(3)

$

0.51



$

0.59



$

0.71



$

0.99



–  Diluted earnings per share (2)(3)

$

0.50



$

0.58



$

0.70



$

0.97



Adjusted net earnings (1)(4)

$

9.6



$

12.6



$

15.4



$

21.3



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

$

0.48



$

0.63



$

0.77



$

1.07



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

$

0.47



$

0.62



$

0.75



$

1.05



Adjusted EBITDA (1)

$

31.5



$

35.7



$

58.7



$

65.4



Key ratios:









Gross profit margin

16.8

%

19.1

%

18.4

%

19.3

%

Selling and administrative expenses as a

percentage of revenue

11.2

%

13.9

%

13.9

%

14.5

%

EBIT margin (1)

5.6

%

5.1

%

4.5

%

4.7

%

Adjusted EBITDA margin (1)

8.8

%

8.7

%

8.4

%

8.3

%

Effective income tax rate

27.4

%

27.7

%

27.4

%

27.7

%

Statement of financial position

highlights

As at

June 30

2020

March 31

2020

December 31

2019

Trade and other receivables

$

210.1

$

235.2

$

238.2

Inventory

$

413.7

$

442.8

$

414.9

Accounts payable and accrued liabilities

$

(254.7)

$

(285.9)

$

(287.7)

Other working capital amounts (1)

$

26.2

$

31.2

$

38.6

Working capital (1)

$

395.3

$

423.3

$

404.1

Rental equipment

$

65.6

$

76.8

$

77.0

Property, plant and equipment

$

44.5

$

44.8

$

42.1

Funded net debt (1)

$

283.0

$

314.7

$

276.5

Key ratios:







Leverage ratio (1)

2.82

3.04

2.60

Senior secured leverage ratio (1)

2.29

2.53

2.10

(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 June 30, 2020 was 20,033,619 (2019 – 20,003,554) and 20,462,587 (2019 – 20,385,109), respectively.

(3)

Weighted average shares, net of shares held in trust, outstanding for calculation of basic and diluted earnings per share for the six months ended June 30, 2020 was 20,025,024 (2019 – 19,990,658) and 20,427,433 (2019 – 20,371,457), respectively.

(4)

Net earnings excluding the following:



a.

after-tax restructuring and other related costs of $0.3 million, or basic and diluted earnings per share of $0.01 per share for the three months ended June 30, 2019.



b.

after-tax restructuring and other related costs of $0.1 million (2019 – $1.0 million), or basic and diluted earnings per share of less than $0.01 (2019 – $0.05) for the six months ended June 30, 2020.



c.

after-tax non-cash gains on mark to market of derivative instruments of $0.6 million (2019 – losses of $0.2 million), or basic and diluted earnings per share of $0.03 (2019 – $0.01 loss per share) for the three months ended June 30, 2020.



d.

after-tax non-cash losses on mark to market of derivative instruments of $0.8 million (2019 – gains of $0.2 million), or basic and diluted loss per share of $0.04 (2019 – $0.01 earnings per share) for the six months ended June 30, 2020.



e.

after-tax NorthPoint transaction costs of $0.2 million, or basic and diluted earnings per share of $0.01 for the six months ended June 30, 2020.



f.

after-tax CSC project costs of $0.3 million, or basic and diluted earnings per share of $0.01 for the three months ended June 30, 2019.



g.

after-tax CSC project costs of $0.8 million, or basic and diluted earnings per share of $0.04 for the six months ended June 30, 2019.

Results of Operations

Revenue Sources



Three months ended June 30

Six months ended June 30



2020

2019

2020

2019

Equipment sales

$

136.6

$

145.6

$

220.2

$

257.7

Product support

$

91.1

$

124.6

$

208.9

$

248.9

Industrial parts

$

81.6

$

93.9

$

173.3

$

187.4

ERS

$

39.7

$

36.2

$

82.1

$

72.0

Equipment rental

$

8.0

$

9.2

$

16.5

$

18.0

Total revenue

$

356.9

$

409.4

$

701.0

$

784.0

Revenue in the second quarter of 2020 decreased 12.8%, or $52.5 million , to $356.9 million from $409.4 million in the second quarter of 2019. In addition to regional revenue commentary provided previously herein, the following factors contributed to the decrease in revenue:

  • Equipment sales have decreased due primarily to lower forestry and engines and transmissions sales across all regions, and lower power generation sales in eastern Canada . These decreases were partially offset by higher mining sales in western and eastern Canada .
  • Product support sales have decreased due mainly to lower mining and engines and transmissions revenue in western Canada and lower on-highway sales in all regions.
  • Industrial parts sales have decreased due primarily to lower bearings and hydraulics sales across all regions.

For the six months ended June 30, 2020 , revenue decreased 10.6%, or $83.0 million , to $701.0 million , from $784.0 million in the same period of 2019. The following factors contributed to the decrease in revenue:

  • Equipment sales have decreased due mainly to lower forestry and engines and transmissions sales across all regions, lower construction sales in western Canada , and lower power generation sales in eastern Canada . These decreases were partially offset by higher mining sales in western and eastern Canada .
  • Product support sales have decreased primarily on weakness in construction, mining and engines and transmissions sales in western Canada and lower on-highway sales across all regions.
  • Industrial parts sales have decreased due primarily to lower bearings and hydraulics sales across all regions.
  • ERS sales have increased nationally due primarily to the acquisition of NorthPoint effective January 13, 2020 .

Backlog

The Corporation's backlog at June 30, 2020 of $190.8 million decreased $41.0 million , or 17.7%, compared to March 31, 2020 due primarily to the delivery of two large mining shovels and lower material handling and ERS orders. Compared to June 30, 2019 , backlog decreased $105.7 million , or 35.7%, due to lower orders in most categories, but most notably in the mining, power generation, material handling, and forestry categories.

Canada Emergency Wage Subsidy (CEWS)

During the quarter, the Corporation qualified for the CEWS program and recognized $15.5 million as a reimbursement of compensation expense with $7.1 million and $8.4 million , respectively, allocated to cost of sales and selling and administrative expenses in proportion to personnel costs recorded in those areas. Receipt of the subsidy supported the Corporation's objective of minimizing, to the extent possible, the effect of current market conditions on its employees including the avoidance of significant additional temporary and permanent layoffs and a partial recall of employees placed on layoff or reduced hours earlier in the quarter.

Gross profit

Gross profit decreased $18.2 million , or 23.2%, in the second quarter of 2020 compared to the same quarter last year due to lower volumes, lower new and used equipment margins and a higher overall mix of lower margin equipment sales, partially offset by a higher proportion of ERS sales and the recovery of personnel expenses from the CEWS.

Gross profit margin of 16.8% in the second quarter of 2020 decreased 2.3% compared to the same period of 2019. Excluding the $7.1 million CEWS recovery discussed above, gross profit margin was 14.9% in the second quarter of 2020, representing a decrease of 4.3% compared to the same period of 2019. The decline in margin was driven primarily by lower new and used equipment margins resulting from the Corporation's accelerated disposal of aged and used equipment and by a higher overall mix of lower margin equipment sales. These factors negatively affected total gross profit margin in the second quarter by 3.4%. The Corporation expects margin pressure to continue in 2020 albeit at a less significant level than was experienced in the second quarter.

For the six months ended June 30, 2020 , gross profit decreased $22.6 million , or 14.9%, compared to the same period last year due to decreased volumes, lower equipment and parts margins and a lower proportion of higher margin parts and service sales, partially offset by a higher proportion of ERS sales and the recovery of personnel expenses from the CEWS.

For the six months ended June 30, 2020 gross profit margin of 18.4% decreased 0.9% compared to the prior year. Excluding the $7.1 million CEWS recovery discussed above, gross profit margin was 17.4%, representing a decrease of 1.9% compared to the prior year. The decline in margin was driven primarily by lower equipment and parts margins and a lower proportion of higher margin parts and service sales, partially offset by a higher proportion of ERS sales and the recovery of personnel expenses from the CEWS.

Selling and administrative expenses

Selling and administrative expenses as a percentage of revenue decreased to 11.2% in the second quarter of 2020 from 13.9% in the second quarter of 2019. Selling and administrative expenses in the second quarter of 2020 decreased $16.8 million compared to the second quarter of 2019 due mainly to cost control initiatives and the recovery of personnel expenses from the CEWS. Excluding the $8.4 million CEWS recovery discussed above, selling and administrative expenses as a percentage of revenue decreased to 13.6% in the second quarter of 2020 from 13.9% in the same period of 2019.

For the six months ended June 30, 2020 , selling and administrative expenses decreased $16.3 million compared to the same period last year. This decrease was due mainly to cost control initiatives and the $8.4 million recovery of personnel expenses from the CEWS. Selling and administrative expenses as a percentage of revenue decreased to 13.9% in 2020 from 14.5% in 2019.

Restructuring and other related costs

In the first quarter of 2018, the Corporation commenced the redesign of its finance function (the " Finance Reorganization Plan "). During the year the Corporation recognized $0.1 million related to duplicate labour costs. The Corporation does not expect to incur additional costs relating to the Finance Reorganization Plan.

Finance costs

Finance costs of $5.9 million in the second quarter of 2020 increased $1 .4 million compared to the same quarter last year due primarily to the issuance of debentures in the fourth quarter of 2019, the acquisition of NorthPoint in the first quarter of 2020 and higher interest on lease liabilities, partially offset by lower borrowings under the bank credit facility. See the Liquidity and Capital Resources section.

For the six months ended June 30, 2020 , finance costs of $11.8 million increased $2.6 million compared to the same period in 2019 due primarily to the issuance of debentures in the fourth quarter of 2019, the acquisition of NorthPoint in the first quarter of 2020 and higher interest on lease liabilities, partially offset by lower borrowings under the bank credit facility. See the Liquidity and Capital Resources section.

Income tax expense

The Corporation's effective income tax rate of 27.4% for the second quarter of 2020 (2019 – 27.7%) was higher compared to the statutory rate of 26.5% (2019 – 26.8%) due mainly to the impact of expenses not deductible for tax purposes.

The Corporation's effective income tax rate for the six months ended June 30, 2020 was 27.4% (2019 – 27.7%) compared to the statutory rate of 26.5% (2019 – 26.8%) due mainly to the impact of expenses not deductible for tax purposes.

Net earnings

In the second quarter of 2020, the Corporation had net earnings of $10.2 million , or $0.51 per share, compared to $11.9 million , or $0.59 per share, in the second quarter of 2019. The $1.7 million decrease in net earnings resulted primarily from lower revenue, a higher proportion of lower margin equipment sales compared to higher margin parts and service sales, and higher finance costs, partially offset by reduced operating expenses and the CEWS recovery.

For the six months ended June 30, 2020 , the Corporation generated net earnings of $14.3 million , or $0.71 per share, compared to $19.8 million , or $0.99 per share, in the same period of 2019. The $5.5 million decrease in net earnings resulted primarily from lower revenue, lower equipment and parts margins, a lower proportion of higher margin parts and service sales and higher finance costs, partially offset by reduced operating expenses and the CEWS recovery.

Adjusted net earnings (See the Non-GAAP and Additional GAAP Measures section)

Adjusted net earnings for the three months ended June 30, 2020 excludes non-cash gains on mark to market of derivative instruments of $0.6 million after-tax, or $0.03 per share (2019 - losses of $0.2 million after-tax, or $0.01 per share). Adjusted net earnings in the same period of 2019 also excludes restructuring and other related costs of $0.3 million after-tax, or $0.01 per share, and certain non-recurring CSC project costs of $0.3 million after-tax, or $0.01 per share.

As such, adjusted net earnings decreased $3.0 million to $9.6 million , or $0.48 per share, in the second quarter of 2020 from $12.6 million , or $0.63 per share, in the same period of 2019.

Adjusted net earnings for the six months ended June 30, 2020 excludes restructuring and other related costs of $0.1 million after-tax, or less than $0.01 per share (2019 – $1.0 million after-tax, or $0.05 per share), non-cash losses on mark to market of derivative instruments of $0.8 million after-tax, or $0.04 per share (2019 – gains of $0.2 million after-tax, or $0.01 per share), and NorthPoint transaction costs of $0.2 million after-tax, or $0.01 per share (2019 - nil). Adjusted net earnings in the same period of 2019 also excludes certain non-recurring CSC project costs of $0.8 million after-tax, or $0.04 per share.

As such, adjusted net earnings decreased $6.0 million to $15.4 million , or $0.77 per share, for the six months ended June 30, 2020 from $21.3 million , or $1.07 per share, in the same period of 2019.

Comprehensive income

Total comprehensive income of $7.9 million in the second quarter of 2020 included net earnings of $10.2 million and an other comprehensive loss of $2.3 million . The other comprehensive loss of $2.3 million in the current period resulted from $1.4 million of losses on derivative instruments outstanding at the end of the period designated as cash flow hedges and $0.9 million of losses on derivative instruments designated as cash flow hedges in prior periods reclassified to earnings during the current period.

For the six months ended June 30, 2020 , the total comprehensive income of $9.6 million included net earnings of $14.3 million and an other comprehensive loss of $4.7 million . The other comprehensive loss of $4.7 million in the current year resulted primarily from $4.1 million of losses on derivative instruments outstanding at the end of the period designated as cash flow hedges.

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 Leases (" IFRS 16 ").





2020



2019



2018





Q2



Q1



Q4



Q3



Q2



Q1



Q4



Q3 (1)

Revenue

$

356.9

$

344.1

$

403.9

$

365.1

$

409.4

$

374.6

$

389.8

$

367.1

Net earnings

$

10.2

$

4.1

$

12.2

$

7.6

$

11.9

$

7.9

$

6.1

$

9.1

Earnings per share

































- Basic

$

0.51

$

0.20

$

0.61

$

0.38

$

0.59

$

0.39

$

0.31

$

0.46

- Diluted

$

0.50

$

0.20

$

0.60

$

0.37

$

0.58

$

0.39

$

0.30

$

0.45

Adjusted net earnings (2)

$

9.6

$

5.8

$

10.1

$

10.3

$

12.6

$

8.7

$

8.3

$

9.5

Adjusted earnings per share (2)

































- Basic

$

0.48

$

0.29

$

0.51

$

0.52

$

0.63

$

0.43

$

0.42

$

0.48

- Diluted

$

0.47

$

0.28

$

0.50

$

0.51

$

0.62

$

0.43

$

0.41

$

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 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.

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.

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 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 .

First quarter 2020 net earnings of $4.1 million included after-tax restructuring and other related costs of $0.1 million , after-tax non-cash losses on mark to market of derivative instruments of $1.4 million , and after-tax NorthPoint transaction costs of $0.2 million . Excluding these items, first quarter 2020 adjusted net earnings were $5.8 million . Second quarter 2020 net earnings of $10.2 million included after-tax non-cash gains on mark to market of derivative instruments of $0.6 million . Excluding this item, second quarter 2020 adjusted net earnings were $9.6 million . See the Non-GAAP and Additional GAAP Measures section.

A discussion of Wajax's previous quarterly results can be found in Wajax's quarterly MD&A available on SEDAR at www.sedar.com .

Consolidated Financial Condition

Capital Structure and Key Financial Condition Measures



June 30

2020

March 31

2020

December 31

2019

Shareholders' equity

$

317.1

$

313.7

$

316.8

Funded net debt (1)

283.0

314.7

276.5

Total capital

$

600.2

$

628.5

$

593.3

Funded net debt to total capital (1)

47.2%

50.1%

46.6%

Leverage ratio (1)

2.82

3.04

2.60

Senior secured leverage ratio (1)

2.29

2.53

2.10





(1)

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 NorthPoint in the first quarter of 2020, the acquisition of Groupe Delom Inc. (" Delom ") in the fourth quarter of 2018, investments made in working capital and the adverse effect of COVID-19 on the Corporation's operating results. See the Funded Net Debt section.

Shareholders' Equity

The Corporation's shareholders' equity at June 30, 2020 of $317.1 million increased $3.4 million from March 31, 2020 , as total comprehensive income of $7.9 million exceeded dividends declared of $5.0 million . For the six months ended June 30, 2020 the Corporation's shareholders' equity increased $0.3 million .

The Corporation's share capital included in shareholders' equity on the condensed consolidated interim statements of financial position, consists of:



Number of

Common Shares

Amount

Issued and outstanding, December 31, 2019 and June 30, 2020

20,167,703

$

182.5

Shares held in trust, December 31, 2019

(156,113)

$

(1.4)

Released for settlement of certain share-based compensation plans

22,029

$

0.2

Shares held in trust, June 30, 2020

(134,084)

$

(1.2)

Issued and outstanding, net of shares held in trust, June 30, 2020

20,033,619

$

181.3

At the date of this MD&A, the Corporation had 20,033,619 common shares issued and outstanding, net of shares held in trust.

At June 30, 2020 , 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 June 30, 2020 , there were 439,771 SOP and DDSUP (treasury share rights plans) rights outstanding of which 412,407 rights were vested, 275,531 MTIP PSUs and equity-settled DSUP (market-purchased share rights plans) rights outstanding of which 19,986 rights were vested, and 442,894 MTIP RSUs and cash-settled DSUP (cash-settled rights plans) rights outstanding of which 9,689 rights were vested. 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 $1.1 million for the quarter (2019 – expense of $0.8 million ) and $1.2 million for the six months ended June 30, 2020 (2019 - expense of $2.4 million ) in respect of these plans.

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



June 30

2020

March 31

2020

December 31

2019

Bank indebtedness (cash)

$

11.5

$

6.0

$

(3.2)

Debentures

54.4

54.2

54.1

Long-term debt

217.1

254.5

225.6

Funded net debt

$

283.0

$

314.7

$

276.5

Funded net debt of $283.0 million at June 30, 2020 decreased $31.7 million compared to $314.7 million at March 31, 2020 . The decrease during the quarter was due primarily to cash generated from operating activities of $43.3 million offset partially by payment of lease liabilities of $4.7 million and dividends paid of $5.0 million .

Funded net debt of $283.0 million at June 30, 2020 increased $6.5 million compared to $276.5 million at December 31, 2019 . The increase during the year to date was due primarily to the $17.9 million acquisition of NorthPoint, payment of lease liabilities of $10.7 million and dividends paid of $10.0 million offset partially by cash generated from operating activities of $35.9 million .

The Corporation's ratio of funded net debt to total capital decreased to 47.2% at June 30, 2020 from 50.1% at March 31, 2020 , primarily due to the lower funded net debt level in the current period.

The Corporation's leverage ratio of 2.82 times at June 30, 2020 decreased from the March 31, 2020 ratio of 3.04 times due to the lower debt level associated with the decrease in working capital, partially offset by the lower trailing 12-month pro-forma adjusted EBITDA. See the Non-GAAP and Additional GAAP Measures section.

See the Liquidity and Capital Resources section.

Financial Instruments

Wajax uses derivative financial instruments in the management of its foreign currency, 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 unaudited condensed consolidated interim financial statements at fair value. As at June 30, 2020 , Wajax had the following interest rate hedge contracts outstanding:

  • $150.0 million , expiring in November 2024 , with a weighted average interest rate of 2.12% ( December 31, 2019 - $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 June 30, 2020 , Wajax had the following contracts outstanding:

  • to buy U.S. $53.8 million ( December 31, 2019 – to buy U.S. $45.2 million ),
  • to sell U.S. $22.7 million ( December 31, 2019 – to sell U.S. $30.5 million ),
  • to buy Euro €0.4 million ( December 31, 2019 – nil), and
  • to sell Euro €0.8 million ( December 31, 2019 – €1.1 million).

The U.S. dollar contracts expire between July 2020 and June 2022 , with an average U.S./Canadian dollar rate of 1.3581.

The Euro contracts expire between July 2020 and January 2021 , with an average Euro/Canadian dollar rate of 1.5383.

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 unaudited condensed consolidated interim financial statements at fair value. As at June 30, 2020 , Wajax had the following total return swap contracts outstanding:

  • contracts totaling 387,000 shares at an initial share value of $7.2 million ( December 31, 2019 - contracts totaling 365,000 shares at an initial share value of $8.3 million )

The total return swap contracts expire between March 2021 and March 2023 .

Contractual Obligations

There have been no material changes to the Corporation's contractual obligations since December 31, 2019 . See the Liquidity and Capital Resources section.

Off Balance Sheet Financing

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 $86.1 million ( December 31, 2019$123.3 million ) of consigned inventory on hand from a major manufacturer at June 30, 2020 , net of deposits of $40.6 million ( December 31, 2019$33.1 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

At June 30, 2020 , Wajax had borrowed $218.7 million and issued $6.5 million of letters of credit for a total utilization of $225.2 million of its $400.0 million bank credit facility. Borrowing capacity under the bank credit facility is dependent on the level of inventories on-hand and outstanding trade accounts receivables. At June 30, 2020 , borrowing capacity under the bank credit facility was equal to $400.0 million .

The bank credit facility contains customary restrictive covenants, including limitations on the payment of cash dividends and an interest coverage maintenance ratio, all of which were met as at June 30, 2020 . In particular, the Corporation is restricted from declaring dividends in the event the Corporation's senior secured leverage ratio, as defined in the bank credit facility agreement, exceeds 4.0 times. At June 30, 2020 , the Corporation's senior secured leverage ratio was 2.29 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 $57.0 million of senior unsecured debentures outstanding at June 30, 2020 , bearing interest at a rate of 6.00% per annum, payable semi-annually and maturing on January 15, 2025 (the " Debentures "). 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 $25.0 million . As such, Wajax has up to $25.0 million of demand inventory equipment financing capacity with two non-bank lenders. At June 30, 2020 , 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 $20.0 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 June 30, 2020 , the Corporation continues to service and collect $13.1 million in accounts receivable on behalf of the financial institution.

As at June 30, 2020 , $174.8 million was unutilized under the bank facility and $25.0 million was unutilized under the non-bank facilities. As of August 6, 2020, Wajax continues to maintain its $400.0 million bank credit facility and an additional $25.0 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.

The Corporation's tolerance to interest rate risk decreases/increases as the Corporation's leverage ratio increases/decreases. At June 30, 2020 , $204.4 million of the Corporation's funded net debt, or 72.2%, 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 Condensed Consolidated Interim Statements of Cash Flows:



Three months ended June 30

Six months ended June 30



2020

2019

Change

2020

2019

Change

Net earnings

$

10.2

$

11.9

$

(1.7)

$

14.3

$

19.8

$

(5.5)

Items not affecting cash flow

22.1

24.1

(2.0)

46.1

45.8

0.2

Net change in non-cash operating working capital

17.8

2.8

14.9

1.5

(33.7)

35.2

Finance costs paid on debts

(2.0)

(3.4)

1.4

(5.1)

(6.4)

1.3

Finance costs paid on lease liabilities

(2.6)

(1.0)

(1.6)

(4.3)

(2.4)

(1.9)

Income taxes paid

(0.2)

(5.2)

5.0

(3.7)

(21.5)

17.8

Rental equipment additions

(1.9)

(8.3)

6.4

(11.3)

(15.6)

4.3

Other non-current liabilities

(0.2)

(0.5)

0.3

(0.2)

(1.3)

1.2

Cash paid on settlement of total return swaps

(1.4)

(1.5)

0.1

Cash generated from (used in) operating activities

$

43.3

$

20.5

$

22.8

$

35.9

$

(16.7)

$

52.6

Cash used in investing activities

$

(1.7)

$

(2.5)

$

0.8

$

(21.0)

$

(4.9)

$

(16.0)

Cash (used in) generated from financing activities

$

(47.1)

$

(19.2)

$

(27.9)

$

(29.7)

$

30.2

$

(59.9)

Operating Activities

Cash flows generated from operating activities amounted to $43.3 million in the second quarter of 2020, compared to $20.5 million in the same quarter of the previous year. The increase in cash generated of $22.8 million was mainly attributable to an increase in cash generated from changes in non-cash operating working capital of $14.9 million , a decrease in income taxes paid of $5.0 million and a decrease in rental equipment additions of $6.4 million .

Rental equipment additions in the second quarter of 2020 of $1.9 million (2019 – $8.3 million ) related primarily to material handling lift trucks.

For the six months ended June 30, 2020 , cash flows generated from operating activities amounted to $35.9 million , compared to cash used in operating activities of $16.7 million for the same period in the previous year. The increase in cash flows generated from operating activities was mainly attributable to an increase in cash generated from changes in non-cash operating working capital of $35.2 million , lower income taxes paid of $17.8 million , and a decrease in rental equipment additions of $4.3 million , partially offset by lower net earnings of $5.5 million .

For the six months ended June 30, 2020 , rental equipment additions of $11.3 million (2019 – $15.6 million ) related primarily to material handling lift trucks.

Changes in significant components of non-cash operating working capital include the following:

Changes in Non-cash Operating Working Capital (1)

Three months ended

June 30

Six months ended

June 30



2020

2019

2020

2019

Trade and other receivables

$

23.7

$

8.0

$

36.3

$

(4.0)

Contract assets

5.7

6.8

5.5

0.5

Inventory

31.5

(22.1)

9.3

(45.7)

Deposits on inventory

2.2

1.0

(6.4)

(1.1)

Prepaid expenses

(0.5)

1.3

(0.3)

0.5

Accounts payable and accrued liabilities

(31.4)

6.2

(40.8)

14.1

Contract liabilities

(13.4)

1.5

(2.2)

2.0

Total Changes in Non-cash Operating Working Capital

$

17.8

$

2.8

$

1.5

$

(33.7)



(1)   Increase (decrease) in cash flow

Significant components of the changes in non-cash operating working capital for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 are as follows:

  • Trade and other receivables decreased $23.7 million in the second quarter of 2020 compared to a decrease of $8.0 million in the same period of 2019. The decrease in the second quarter of 2020 resulted primarily from lower sales activity in the quarter compared to the previous quarter. The decrease in 2019 resulted primarily from lower trade receivables mainly due to strong collections and the sale of selected trade accounts receivable in the period.



  • Inventory decreased $31.5 million in the second quarter of 2020 compared to an increase of $22.1 million in the same period of 2019. The decrease in the second quarter of 2020 was due primarily to lower equipment inventory in the construction and forestry categories and lower parts inventory in the construction and industrial parts categories. The increase in 2019 was due mainly to higher construction equipment, parts inventory and work-in-process.



  • Accounts payable and accrued liabilities decreased $31.4 million in the second quarter of 2020 compared to an increase of $6.2 million in the same period of 2019. The decrease in the second quarter of 2020 resulted primarily from reduced inventory purchasing activity as the Corporation continues to manage its working capital, and lower payroll accruals. The increase in 2019 resulted primarily from higher trade payables.



  • Contract liabilities decreased $13.4 million in the second quarter of 2020 compared to an increase of $1.5 million in the same period of 2019. The decrease in the second quarter of 2020 resulted primarily from a deposit received in the first quarter on a large mining equipment order that was delivered in the second quarter.

Significant components of the changes in non-cash operating working capital for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 are as follows:

  • Trade and other receivables decreased $36.3 million in 2020 compared to an increase of $4.0 million in 2019. The decrease in 2020 resulted primarily from lower sales activity.



  • Inventory decreased $9.3 million in 2020 compared to an increase of $45.7 million in 2019. The decrease in 2020 was due mainly to lower used equipment and parts inventory. The increase in 2019 was due mainly to higher new equipment, parts inventory and work-in-process.



  • Deposits on inventory increased $6.4 million in 2020 compared to an increase of $1.1 million in 2019. 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 decreased $40.8 million in 2020 compared to an increase of $14.1 million in 2019. The decrease in 2020 resulted primarily from reduced inventory purchasing activity as the Corporation continues to manage its working capital. The increase in 2019 resulted primarily from higher trade payables.

Investing Activities

During the second quarter of 2020, Wajax invested $1.5 million in property, plant and equipment additions, compared to $1.8 million in the second quarter of 2019. Proceeds on disposal of property, plant and equipment amounted to $0.3 million during the second quarter of 2020, compared to $0.3 million in the second quarter of 2019. Intangible assets additions of $0.4 million (2019 – $1.0 million ) in the second quarter of 2020 resulted primarily from software additions relating to the Corporation's new ERP system.

For the six months ended June 30, 2020 , Wajax invested $2.5 million in property, plant and equipment additions, compared to $3.3 million in the same period of 2019. Proceeds on disposal of property, plant and equipment amounted to $0.4 million for the six months ended June 30, 2020 , compared to $0.4 million in the same period of 2019. Intangible assets additions of $1.4 million (2019 – $2.1 million ) for the six months ended June 30, 2020 resulted primarily from software additions relating to the Corporation's new ERP system; implementation of the new ERP system, previously planned for the second quarter of 2020, remains deferred until 2021. For the six months ended June 30, 2020 , Wajax invested $17.9 million (2019 - nil) on the acquisition of NorthPoint, net of cash acquired of $1.4 million .

Financing Activities

The Corporation used $47.1 million of cash in financing activities in the second quarter of 2020 compared to cash used in financing activities of $19.2 million in the same quarter of 2019. Financing activities in the quarter included a net bank credit facility repayment of $37.4 million (2019 – net repayment of $8.0 million ), dividends paid to shareholders of $5.0 million (2019 – $5.0 million ) and payment of lease liabilities of $4.7 million (2019 – $6.2 million ).

For the six months ended June 30, 2020 , the Corporation used $29.7 million of cash in financing activities compared to cash generated from financing activities of $30.2 million in the same period of 2019. Financing activities for the six months ended June 30, 2020 included a net bank credit facility repayment of $8.6 million (2019 – net borrowing of $52.0 million ), payment of lease liabilities of $10.7 million (2019 – $11.4 million ) and dividends paid to shareholders of $10.0 million (2019 – $10.0 million ).

Dividends

Dividends to shareholders were declared and payable to shareholders of record as follows:

Record Date

Payment Date

Per Share

Amount

March 16, 2020

April 2, 2020

$

0.25

$

5.0

June 15, 2020

July 3, 2020

$

0.25

$

5.0

Six months ended June 30, 2020



$

0.50

$

10.0

On August 6, 2020, the Corporation declared a dividend of $0.25 per share for the third quarter of 2020 payable on October 2, 2020 to shareholders of record on September 15, 2020.

Critical Accounting Estimates

The preparation of the unaudited condensed consolidated interim 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. Critical accounting estimates are those that require management to make assumptions about matters that are highly uncertain at the time the estimate or assumption is made. Critical accounting estimates are also those that could potentially have a material impact on the Corporation's financial results were a different estimate or assumption used.

Estimates and underlying assumptions are reviewed on an ongoing basis. These estimates and assumptions are subject to change at any time based on experience and new information. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

On March 11, 2020 , the World Health Organization declared the novel coronavirus a global pandemic. With the majority of governments declaring a state of emergency in response to the COVID-19 pandemic, any estimate of the length and severity of these developments is therefore subject to significant uncertainty, and accordingly estimates of the extent to which the COVID-19 pandemic may materially and adversely affect the Corporation's operations, financial results and condition in future periods are also subject to significant uncertainty. Therefore, uncertainty about judgements, estimates and assumptions made by management during the preparation of the Corporation's unaudited condensed consolidated interim financial statements related to the potential impacts of the COVID-19 outbreak on revenue, expenses, assets, liabilities, and note disclosures could result in a material adjustment to the carrying value of the asset or liability affected.

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 $2.5 million allowance for credit losses at June 30, 2020 increased $0.1 million from $2.4 million at December 31, 2019 . As economic conditions change, there is risk that the Corporation could experience a greater number of defaults compared to prior periods 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 June 30, 2020 was a charge of $3.2 million (2019 – charge of $0.9 million ) and for the six months ended June 30, 2020 was a charge of $4.3 million (2019 - charge of $2.2 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.

Unanticipated changes in management's assumptions or estimates could materially affect the determination of the fair value of the Corporation and therefore, could reduce or eliminate the excess of fair value over the carrying value of a Corporation and could potentially result in an impairment charge in the future.

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 impairment recognized in the quarter ended June 30, 2020 .

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 incentive 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

No new standards have been adopted in the current period, and there are no known upcoming new standards or amendments to existing standards that are considered to be significant to the Corporation.

Risk Management and Uncertainties

As with most businesses, the Corporation is subject to a number of marketplace and industry related risks and uncertainties which could have a material impact on operating results and the Corporation's ability to pay cash dividends to shareholders. The Corporation attempts to minimize many of these risks through diversification of core businesses and through the geographic diversity of its operations. In addition, the Corporation has adopted an annual enterprise risk management assessment which is prepared by the 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 the Corporation. There are however, a number of risks that deserve particular comment which are discussed in detail in the MD&A for the year ended December 31, 2019 which can be found on SEDAR at www.sedar.com . During the year, the Corporation has identified a new risk factor related to the outbreak of the novel strain of coronavirus, which is further discussed below:

COVID-19

On March 11, 2020 , the World Health Organization declared COVID-19 a pandemic. COVID-19's impact on global markets has been significant through the first half of 2020 and as the situation continues to evolve, the full magnitude of its effects on the economy and on the Corporation's financial and operational performance is uncertain.

The coronavirus pandemic and the measures implemented to stop the spread of COVID-19 have had a significant effect on the Corporation. The Corporation's focus is to manage the business according to the four objectives outlined in the Strategic Direction and Outlook section of the Corporation's MD&A for the quarter ended June 30, 2020 , and to partially offset volume declines with cost reductions while managing customer service levels, working capital and capital spending accordingly.

The Corporation will continue to closely monitor the COVID-19 situation. Should the duration, spread or intensity of the pandemic further develop in 2020, the Corporation's supply chain, market pricing and customer demand could be affected. These factors may further impact the Corporation's operating plan, its liquidity and cash flows, and the valuation of its long-lived assets.

Disclosure Controls and Procedures and Internal Control over Financial Reporting

Wajax's management, under the supervision of its Chief Executive Officer (" CEO ") and Chief Financial Officer (" CFO "), is responsible for establishing and maintaining disclosure controls and procedures (" DC&P ") and internal control over financial reporting (" ICFR ").

As at June 30, 2020 , Wajax's management, under the supervision of its CEO and CFO, had designed DC&P to provide reasonable assurance that information required to be disclosed by Wajax in annual filings, interim filings or other reports filed or submitted under applicable securities legislation is recorded, processed, summarized and reported within the time periods specified in such securities legislation. DC&P are designed to ensure that information required to be disclosed by Wajax in annual filings, interim filings or other reports filed or submitted under applicable securities legislation is accumulated and communicated to Wajax's management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

As at June 30, 2020 , 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. The Corporation has excluded from its evaluation the ICFR of NorthPoint, which was acquired effective January 13, 2020 , as discussed in Note 3 of the unaudited condensed consolidated interim financial statements and accompanying notes for the period ended June 30, 2020 . The total revenue subject to NorthPoint's ICFR represented 2.6% of the Corporation's consolidated total revenue for the six months ended June 30, 2020 . The total assets subject to NorthPoint's ICFR represented 2.5% of the Corporation's consolidated total assets as at June 30, 2020 .

There was no change in Wajax's ICFR that occurred during the three months ended June 30, 2020 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:

(i)

these measures are commonly reported and widely used by investors and management;

(ii)

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;

(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.

Non-GAAP financial measures are identified and defined below:

Funded net debt

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

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

Total capital is shareholders' equity plus funded net debt.





EBITDA

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





EBITDA margin

Defined as EBITDA divided by revenue, as presented in the condensed consolidated interim statements of earnings.





Adjusted net earnings (loss)

Net earnings (loss) before after-tax restructuring and other related costs (recoveries), (gain) loss recorded on sales of properties, non-cash losses (gains) on mark to market of derivative instruments, CSC project costs, and NorthPoint transaction costs.





Adjusted basic and diluted

earnings (loss)
per share

 

Basic and diluted earnings (loss) per share before after-tax restructuring and other related costs (recoveries), (gain) loss recorded on sales of properties, non-cash losses (gains) on mark to market of derivative instruments, CSC project costs, and NorthPoint transaction costs.





Adjusted EBITDA

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 NorthPoint transaction costs.





Adjusted EBITDA margin

Defined as adjusted EBITDA divided by revenue, as presented in the condensed consolidated interim statements of earnings.





Pro-forma adjusted EBITDA

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.





Leverage ratio

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.





Senior secured leverage

ratio

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.



Additional GAAP measures are identified and defined below:





Earnings (loss) before

finance costs and income

taxes (EBIT)

Earnings (loss) before finance costs and income taxes, as presented in the condensed consolidated interim statements of earnings.





EBIT margin

Defined as EBIT divided by revenue, as presented in the condensed consolidated interim statements of earnings.





Earnings (loss) before

income taxes (EBT)

Earnings (loss) before income taxes, as presented in the condensed consolidated interim statements of earnings.





Working capital

Defined as current assets less current liabilities, as presented in the condensed consolidated interim statements of financial position.





Other working capital amounts

Defined as working capital less trade and other receivables and inventory plus accounts payable and accrued liabilities, as presented in the condensed consolidated interim statements of financial position.

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



Three months ended

Six months ended



June 30

June 30



2020

2019

2020

2019

Net earnings

$

10.2

$

11.9

$

14.3

$

19.8

Restructuring and other related costs, after-tax

$

$

0.3

$

0.1

$

1.0

Non-cash (gains) losses on mark to market of

derivative instruments, after-tax

$

(0.6)

$

0.2

$

0.8

$

(0.2)

NorthPoint transaction costs, after-tax

$

$

$

0.2

$

CSC project costs, after-tax

$

$

0.3

$

$

0.8

Adjusted net earnings

$

9.6

$

12.6

$

15.4

$

21.3

Adjusted basic earnings per share (1)(2)

$

0.48

$

0.63

$

0.77

$

1.07

Adjusted diluted earnings per share (1)(2)

$

0.47

$

0.62

$

0.75

$

1.05





(1)

At June 30, 2020, the numbers of basic and diluted shares outstanding were 20,033,619 and 20,462,587, respectively for the three months ended and 20,025,024 and 20,427,433, respectively for the six months ended.

(2)

At June 30, 2019, the numbers of basic and diluted shares outstanding were 20,003,554 and 20,385,109, respectively for the three months ended and 19,990,658 and 20,371,457, respectively for the six months ended.

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



Three months ended

Six months ended

Twelve months ended



June 30

2020

June 30

2019

June 30

2020

June 30

2019

June 30

2020

March 31

2020

December 31

2019

Net earnings

$

10.2

$

11.9

$

14.3

$

19.8

$

34.0

$

35.7

$

39.5

Income tax expense

3.9

4.6

5.4

7.6

12.1

12.8

14.3

EBT

14.1

16.5

19.7

27.3

46.1

48.5

53.8

Finance costs

5.9

4.6

11.8

9.1

22.4

21.0

19.7

EBIT

20.0

21.0

31.4

36.5

68.4

69.5

73.5

Depreciation and amortization

12.4

13.7

25.7

26.8

51.7

53.0

52.8

EBITDA

32.4

34.7

57.1

63.2

120.1

122.4

126.3

Restructuring and other

related costs (1)

0.4

0.1

1.4

4.3

4.7

5.6

Gain recorded on sales of

properties

(2.3)

(2.3)

(2.3)

Non-cash (gains) losses on

mark to market of derivative

instruments (2)

(0.8)

0.2

1.2

(0.3)

1.0

2.0

(0.5)

NorthPoint transaction costs (3)

0.2

0.2

0.2

CSC project costs (4)

0.4

1.1

0.2

0.6

1.2

Adjusted EBITDA

$

31.5

$

35.7

$

58.7

$

65.4

$

123.6

$

127.8

$

130.3

NorthPoint acquisition pro-

forma EBITDA (5)

0.4

0.6

Payment of lease liabilities (6)

(4.7)

(6.2)

(10.7)

(11.4)

(21.2)

(22.8)

(22.0)

Pro-forma adjusted EBITDA

$

26.8

$

29.5

$

48.0

$

54.0

$

102.7

$

105.6

$

108.4





(1)

For 2020, restructuring and other related costs includes costs relating to the Finance Reorganization Plan. 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.



For 2019, restructuring and other related costs includes costs relating to the Finance Reorganization Plan and the Management Realignment. 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.

(2)

Non-cash losses (gains) on mark to market of non-hedged derivative instruments.

(3)

In 2020, the Corporation incurred transaction costs in order to acquire NorthPoint. These costs were primarily for advisory services.

(4)

In 2019, the Corporation incurred professional fees relating to the CSC project.

(5)

Pro-forma EBITDA for NorthPoint 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.

(6)

Effective with the reporting period beginning on January 1, 2019 and the adoption of IFRS 16, the Corporation 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.

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



June 30

2020

March 31 

2020

December 31

2019

Bank indebtedness (cash)

$

11.5

$

6.0

$

(3.2)

Debentures

54.4

54.2

54.1

Long-term debt

217.1

254.5

225.6

Funded net debt

$

283.0

$

314.7

$

276.5

Letters of credit

6.5

6.5

5.5

Debt

$

289.5

$

321.2

$

282.0

Pro-forma adjusted EBITDA (1)

$

102.7

$

105.6

$

108.4

Leverage ratio (2)

2.82

3.04

2.60

Senior secured leverage ratio (3)

2.29

2.53

2.10





(1)

For the twelve months ended June 30, 2020, March 31, 2020 and December 31, 2019.

(2)

Calculation uses debt divided by the 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.

(3)

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.

Cautionary Statement Regarding Forward-Looking Information

This MD&A contains certain forward-looking statements and forward-looking information, as defined in applicable securities laws (collectively, " forward-looking statements "). These forward-looking statements relate to future events or the Corporation's future performance. All statements other than statements of historical fact are forward-looking statements. Often, but not always, forward looking statements can be identified by the use of words such as "plans", "anticipates", "intends", "predicts", "expects", "is expected", "scheduled", "believes", "estimates", "projects" or "forecasts", or variations of, or the negatives of, such words and phrases or state that certain actions, events or results "may", "could", "would", "should", "might" or "will" be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors beyond the Corporation's ability to predict or control which may cause actual results, performance and achievements to differ materially from those anticipated or implied in such forward looking statements. There can be no assurance that any forward-looking statement will materialize. Accordingly, readers should not place undue reliance on forward looking statements. The forward-looking statements in this MD&A are made as of the date of this MD&A, reflect management's current beliefs and are based on information currently available to management. Although management believes that the expectations represented in such forward-looking statements are reasonable, there is no assurance that such expectations will prove to be correct. Specifically, this MD&A includes forward looking statements regarding, among other things, the main elements of our One Wajax strategy, 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 expectation that revenue in the third quarter of 2020 will be lower year-over-year; our expectation that we will continue to take actions to reduce inventory levels, but that the same degree of margin decline will not continue in subsequent quarters; our intention to partially offset volume declines with cost reductions, while managing customer service levels, working capital and capital spending accordingly; our expectation that the Corporation's current sources of liquidity will be sufficient while we prepare to return to growing the business as conditions improve; our key objectives in managing our business through the COVID-19 pandemic, as well as weak resource markets in western Canada ; our expectation that, while margin pressure will continue in 2020, it will continue at a less significant level than in the second quarter; our expectation that our capital investment will remain at a minimum level; our belief that we will not incur additional costs relating to the Finance Reorganization Plan; our objective of managing our working capital and normal-course capital investments programs within a leverage ratio range of 1.5 - 2.0 times and to fund those programs through operating cash flow and our bank credit facilities as required; our expectation that the impact of changes in interest rates (in particular, related to unhedged variable rate debt), will not have a material impact on our results of operations or financial condition over the long term; 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; 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, our ability to successfully manage our business through the COVID-19 pandemic and actions taken by governments, public authorities and customers in response to the novel coronavirus; 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 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, the geographic spread and ultimate impact of the COVID-19 virus and the duration of the coronavirus pandemic; the duration of travel, business and other restrictions imposed by governments and public authorities in response to COVID-19, as well as other measures that may be taken by such authorities; actions taken by our customers in relation to the COVID-19 pandemic, including slowing, reducing or halting operations; a continued or prolonged deterioration in general business and economic conditions (including as a result of the COVID-19 pandemic); 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 (including disruptions caused by the COVID-19 pandemic), 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 (the " AIF "), and in our annual MD&A for financial risks, each of which have been filed on SEDAR. The forward-looking statements contained in this MD&A are expressly qualified in their entirety by this cautionary statement. The Corporation does not undertake any obligation to publicly update such forward-looking statements to reflect new information, subsequent events or otherwise unless so required by applicable securities laws.

Readers are cautioned that the risks described in the AIF, and in our annual MD&A, are not the only risks that could impact the Corporation. We cannot accurately predict the full impact that COVID-19 will have on our business, results of operations, financial condition or the demand for our products and services due to the uncertainties related to the spread of the virus. Risks and uncertainties not currently known to the Corporation, or currently deemed to be immaterial, may have a material effect on the Corporation's business, financial condition or results of operations.

Additional information, including Wajax's Annual Report, are available on SEDAR at www.sedar.com .

WAJAX CORPORATION

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF

FINANCIAL POSITION


As at

(unaudited, in thousands of Canadian dollars)

Note

June 30, 2020

December 31, 2019

ASSETS







CURRENT







Cash



$

$

3,180

Trade and other receivables

4

210,131

238,194

Contract assets

5

20,275

23,318

Inventory

6

413,675

414,928

Deposits on inventory

6

43,943

37,513

Lease receivables - current



2,028

617

Income taxes receivable



384

3,166

Prepaid expenses



6,710

6,110

Derivative financial assets - current

13

898

484





698,044

727,510

NON-CURRENT







Rental equipment

7

65,566

77,020

Property, plant and equipment

7

44,477

42,139

Right-of-use assets

8

126,801

117,091

Lease receivables



8,362

1,714

Goodwill and intangible assets



88,309

79,572

Derivative financial assets

13

48





333,515

317,584

Total assets



$

1,031,559

$

1,045,094

LIABILITIES AND SHAREHOLDERS' EQUITY







CURRENT







Bank indebtedness



$

11,546

$

Accounts payable and accrued liabilities

9

254,711

287,656

Contract liabilities

5

5,194

7,230

Dividends payable

14

5,008

5,003

Lease liabilities - current

10

22,771

20,706

Derivative financial liabilities - current

13

3,532

2,849





302,762

323,444

NON-CURRENT







Deferred tax liabilities



1,175

3,787

Employee benefits



9,384

9,144

Derivative financial liabilities

13

11,144

4,190

Other liabilities



1,094

1,602

Lease liabilities

10

117,372

106,424

Debentures

11

54,356

54,115

Long-term debt

12

217,125

225,573





411,650

404,835

Total liabilities



714,412

728,279

SHAREHOLDERS' EQUITY







Share capital

14

181,274

181,075

Contributed surplus



7,036

7,165

Retained earnings



135,932

130,961

Accumulated other comprehensive loss



(7,095)

(2,386)

Total shareholders' equity



317,147

316,815

Total liabilities and shareholders' equity



$

1,031,559

$

1,045,094



 Subsequent events (Note 22)                                                                 

 See accompanying notes to unaudited condensed consolidated interim financial statements.

WAJAX CORPORATION

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF

EARNINGS





Three months ended June 30

Six months ended June 30

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

Note

2020

2019

2020

2019













Revenue

16

$

356,936

$

409,429

$

701,009

$

783,981

Cost of sales



296,812

331,110

572,118

632,497

Gross profit



60,124

78,319

128,891

151,484

Selling and administrative expenses



40,138

56,890

97,356

113,645

Restructuring and other related (recoveries) costs



(23)

387

112

1,364

Earnings before finance costs and income taxes



20,009

21,042

31,423

36,475

Finance costs

17

5,945

4,587

11,769

9,129

Earnings before income taxes



14,064

16,455

19,654

27,346

Income tax expense

18

3,856

4,564

5,388

7,576

Net earnings



$

10,208

$

11,891

$

14,266

$

19,770













Basic earnings per share

14

$

0.51

$

0.59

$

0.71

$

0.99

Diluted earnings per share

14

0.50

0.58

0.70

0.97

WAJAX CORPORATION

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF

COMPREHENSIVE INCOME



Three months ended June 30

Six months ended June 30

(unaudited, in thousands of Canadian dollars)

2020

2019

2020

2019

Net earnings

$

10,208

$

11,891

$

14,266

$

19,770

Items that may be subsequently reclassified to earnings









(Gains) losses on derivative instruments designated as

cash flow hedges in prior periods reclassified to net

earnings during the period, net of tax expense of $332

(2019 - recovery of $28) and year to date, net of tax

expense of $228 (2019 - recovery of $8)

(901)

75

(619)

21











(Losses) gains on derivative instruments outstanding at the

end of the period designated as cash flow hedges, net of

tax recovery of $528 (2019 - recovery of $320) and year to

date, net of tax recovery of $1,505 (2019 - recovery of

$821)

(1,434)

(870)

(4,090)

(2,231)

Other comprehensive loss, net of tax

(2,335)

(795)

(4,709)

(2,210)

Total comprehensive income

$

7,873

$

11,096

$

9,557

$

17,560



See accompanying notes to unaudited condensed consolidated interim financial statements.

WAJAX CORPORATION

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF

CHANGES IN SHAREHOLDERS' EQUITY











Accumulated

other

comprehensive

loss



For the six months ended June 30, 2020

(unaudited, in thousands of Canadian dollars)

 

Note

Share

capital

Contributed

surplus

Retained

earnings

Cash flow

hedges

Total















December 31, 2019



$

181,075

$

7,165

$

130,961

$

(2,386)

$

316,815

Net earnings



14,266

14,266

Other comprehensive loss



(4,709)

(4,709)

Total comprehensive income (loss)



14,266

(4,709)

9,557

Shares released from trust to settle share-based compensation plans

14

199

(1,264)

721

(344)

Share-based compensation expense

15

1,135

1,135

Dividends declared

14

(10,016)

(10,016)

June 30, 2020



$

181,274

$

7,036

$

135,932

$

(7,095)

$

317,147



See accompanying notes to unaudited condensed consolidated interim financial statements.

WAJAX CORPORATION

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF

CHANGES IN SHAREHOLDERS' EQUITY











Accumulated

other

comprehensive

loss



For the six months ended June 30, 2019

(unaudited, in thousands of Canadian dollars)

 

Note

Share

capital

Contributed

surplus

Retained

earnings

Cash flow

hedges

Total















December 31, 2018



$

180,369

$

7,360

$

110,842

$

(1,601)

$

296,970

Net earnings



19,770

19,770

Other comprehensive loss



(2,210)

(2,210)

Total comprehensive income (loss)



19,770

(2,210)

17,560

Shares issued to settle share-based compensation plans

14

487

(487)

Shares released from trust to settle share-based compensation

plans

14

176

(1,215)

607

(432)

Share-based compensation expense

15

1,019

1,019

Dividends declared

14

(10,002)

(10,002)

June 30, 2019



$

181,032

$

6,677

$

121,217

$

(3,811)

$

305,115



See accompanying notes to unaudited condensed consolidated interim financial statements.

WAJAX CORPORATION

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF

CASH FLOWS





Three months ended June 30

Six months ended June 30

(unaudited, in thousands of Canadian dollars)

Note

2020

2019

2020

2019

OPERATING ACTIVITIES











Net earnings



$

10,208

$

11,891

$

14,266

$

19,770

Items not affecting cash flow:











Depreciation and amortization:











Rental equipment

7

4,813

5,173

9,942

10,351

Property, plant and equipment

7

1,943

1,802

3,771

3,444

Right-of-use assets

8

5,163

5,846

11,076

11,303

Intangible assets



446

841

903

1,675

Gain on disposal of property, plant and

equipment

7

(180)

(8)

(215)

(103)

Share-based compensation expense

15

1,121

761

1,175

2,442

Non-cash income from finance leases



(310)

(476)

Employee benefits expense, net of payments



114

48

240

157

(Gain) loss on derivative financial instruments

13

(764)

526

2,485

(128)

Finance costs

17

5,945

4,587

11,769

9,129

Income tax expense

18

3,856

4,564

5,388

7,576





32,355

36,031

60,324

65,616

Changes in non-cash operating working capital

19

17,763

2,825

1,451

(33,710)

Rental equipment additions

7

(1,897)

(8,289)

(11,261)

(15,558)

Other non-current liabilities



(170)

(461)

(191)

(1,344)

Cash paid on settlement of total return swaps

13

(1,396)

(1,479)

Finance costs paid on debts



(1,993)

(3,386)

(5,090)

(6,377)

Finance costs paid on lease liabilities

10,17

(2,584)

(1,012)

(4,307)

(2,401)

Interest collected on lease receivables



37

58

Income taxes paid



(209)

(5,208)

(3,672)

(21,468)

Cash generated from (used in) operating activities



43,302

20,500

35,916

(16,721)













INVESTING ACTIVITIES











Property, plant and equipment additions

7

(1,487)

(1,775)

(2,493)

(3,291)

Proceeds on disposal of property, plant and equipment

7

282

264

436

414

Intangible assets additions



(390)

(980)

(1,402)

(2,064)

Collection of lease receivables



271

434

Acquisition of business (net of cash acquired)

3

(342)

(17,931)

Cash used in investing activities



(1,666)

(2,491)

(20,956)

(4,941)













FINANCING ACTIVITIES











Net (decrease) increase in bank debt

12

(37,426)

(8,000)

(8,636)

52,000

Transaction costs on debts

11

(37)

Payment of lease liabilities

10

(4,702)

(6,232)

(10,657)

(11,404)

Payment of tax withholding for share-based compensation



(345)

(432)

Dividends paid



(5,008)

(5,001)

(10,011)

(9,990)

Cash (used in) generated from financing activities



(47,136)

(19,233)

(29,686)

30,174

Change in cash and bank indebtedness



(5,500)

(1,224)

(14,726)

8,512

(Bank indebtedness) cash - beginning of period



(6,046)

5,804

3,180

(3,932)

(Bank indebtedness) cash - end of period



$

(11,546)

$

4,580

$

(11,546)

$

4,580



See accompanying notes to unaudited condensed consolidated interim financial statements.

WAJAX CORPORATION

NOTES TO CONDENSED CONSOLIDATED INTERIM

FINANCIAL STATEMENTS

June 30, 2020

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

1.   COMPANY PROFILE

Wajax Corporation (the "Corporation") is incorporated in Canada . The address of the Corporation's registered 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 unaudited condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting and do not include all of the disclosures required for annual consolidated financial statements. Accordingly, these unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2019 . The significant accounting policies follow those disclosed in the most recently reported audited consolidated financial statements. 

These unaudited condensed consolidated interim financial statements were authorized for issue by the Board of Directors on August 6, 2020.

3.   ACQUISITION OF BUSINESS

NorthPoint Technical Services ULC ("NorthPoint")

On January 13, 2020 , the Corporation acquired all of the issued and outstanding shares of Calgary, Alberta -based NorthPoint. The aggregate purchase price for the shares was $19,369 cash (subject to final working capital adjustments). NorthPoint was formed in 2018 as a national electro-mechanical services provider and specializes in the repair of rotating industrial equipment. NorthPoint revenues of $18,387 and net earnings of $784 were included in the condensed consolidated interim statements of earnings from the date of acquisition.

Final valuations of certain items, including goodwill and intangibles, are not yet complete due to the inherent complexity associated with valuations and the timing of the acquisition. Therefore, the purchase price allocation is preliminary and subject to adjustment on completion of the valuation process.

Recognized amounts of identifiable assets acquired and liabilities assumed for the acquisition are as follows:

Cash

$

1,438

Trade and other receivables

8,236

Contract assets

2,471

Inventory

1,207

Prepaid expenses

337

Property, plant and equipment

3,409

Right-of-use assets

12,926

Accounts payable and accrued liabilities

(5,340)

Contract liabilities

(116)

Income taxes payable

(68)

Lease liabilities - current

(1,680)

Deferred tax liabilities

(119)

Lease liabilities - non-current

(11,570)

Tangible net assets acquired

$

11,131

Goodwill

8,238

Total Purchase Price

$

19,369

Net cash outflow for the acquisition was $17,931 , as $1,438 of cash was acquired as part of NorthPoint's net assets.

Trade and other receivables represents gross contractual amounts receivable of $8,294 less management's best estimate of the allowance for credit losses of $58 .

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 NorthPoint is not deductible for income tax purposes.

NorthPoint transaction costs, primarily for advisory services, were approximately $241 and were included in selling and administrative expenses for the year to date.

4.   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:



June 30, 2020

December 31, 2019

Trade accounts receivable

$

184,096

$

213,686

Less: allowance for credit losses

(2,450)

(2,371)

Net trade accounts receivable

181,646

211,315

Other receivables

28,485

26,879

Total trade and other receivables

$

210,131

$

238,194

5.   CONTRACT ASSETS AND LIABILITIES

The following table provides information about contract assets and contract liabilities from contracts with customers:



June 30, 2020

December 31, 2019

Contract assets

$

20,275

$

23,318

Contract liabilities

$

5,194

$

7,230

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.

6.   INVENTORY

The Corporation's inventory balances consisted of the following:



June 30, 2020

December 31, 2019

Equipment

$

261,668

$

256,058

Parts

132,161

138,210

Work-in-process

19,846

20,660

Total inventory

$

413,675

$

414,928

All amounts shown are net of obsolescence reserves of $28,454 ( December 31, 2019 - $26,263 ).

As at June 30, 2020 , the Corporation has included $44,795 ( December 31, 2019 - $54,022 ) 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 condensed consolidated interim statements of financial position, amounting to $43,943 as at June 30, 2020 ( December 31, 2019 - $37,513 ), 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.

7.   PROPERTY, PLANT AND EQUIPMENT & RENTAL EQUIPMENT

The Corporation's property, plant and equipment balance at June 30, 2020 is $44,477 ( December 31, 2019 - $42,139 ). The Corporation acquired property, plant and equipment with a cost of $1,487 during the quarter (2019 - $1,775 ) and $2,493 year to date (2019 - $3,291 ), net of property, plant and equipment acquired through business acquisitions of $3,409 year to date (2019 - nil). Assets with a carrying amount of $102 during the quarter (2019 - $256 ) and $221 year to date (2019 - $311 ) were disposed of, resulting in a gain on disposal of $180 during the quarter (2019 - gain of $8 ) and a gain on disposal of $215 year to date (2019 - gain of $103 ). The Corporation recognized depreciation of property, plant and equipment of $1,943 during the quarter (2019 - $1,802 ) and $3,771 year to date (2019 - $3,444 ).

The Corporation's rental equipment balance at June 30, 2020 is $65,566 ( December 31, 2019 - $77,020 ). The Corporation acquired rental equipment with a cost of $1,897 during the quarter (2019 - $8,289 ) and $11,261 year to date (2019 - $15,558 ). Equipment with a carrying amount of $446 during the quarter (2019 - $644 ) and $2,057 year to date (2019 - $829 ) was transferred from inventory to rental equipment. Equipment with a carrying amount of $8,723 during the quarter (2019 - $2,595 ) and $14,830 year to date (2019 - $5,425 ) was transferred from rental equipment to inventory. The Corporation recognized depreciation of rental equipment of $4,813 during the quarter (2019 - $5,173 ) and $9,942 year to date (2019 - $10,351 ).

8.   RIGHT-OF-USE ASSETS

The Corporation's right-of-use assets balance at June 30, 2020 is $126,801 ( December 31, 2019 - $117,091 ). The Corporation recognized net right-of-use assets additions of $5,987 during the quarter (2019 - $31,811 ) and $8,288 year to date (2019 - $32,134 ). In addition, the Corporation acquired right-of-use assets through business acquisitions of $12,926 year to date (2019 - nil).

The Corporation recognized depreciation of right-of-use assets during the quarter of $5,163 (2019 - $5,846 ) and $11,076 year to date (2019 - $11,303 ).

9.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities are comprised of the following:



June 30, 2020

December 31, 2019

Trade payables

$

165,633

$

174,770

Deferred rental income

952

1,078

Supplier payables with extended terms

23,334

41,310

Payroll, bonuses and incentives

21,032

21,869

Restructuring accrual

1,644

3,646

Accrued liabilities

39,379

43,584

Provisions

2,737

1,399

Accounts payable and accrued liabilities

$

254,711

$

287,656

Supplier payables with extended terms relate to equipment purchases from suppliers with payment terms ranging anywhere from approximately 60 days to 8 months.

10.   LEASE LIABILITIES & LEASE RECEIVABLES

Lessee

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:





Three months ended

June 30

Six months ended

June 30



Note

2020

2019

2020

2019

Balance at beginning of period



$

138,256

$

91,445

$

127,130

$

13,749

Changes from operating cash flows











Finance costs paid on lease liabilities



(2,584)

(1,012)

(4,307)

(2,401)

Changes from financing cash flows











Payment of lease liabilities



(4,702)

(6,232)

(10,657)

(11,404)

Other changes











Lease liabilities recognized on January 1,

2019 per IFRS 16



82,544

Acquisition of business

3

13,250

Interest expense

17

2,584

1,012

4,307

2,401

New leases, net of disposals



6,589

31,410

10,420

31,734

Balance at end of period



$

140,143

$

116,623

$

140,143

$

116,623

Current



$

22,771

$

19,791

$

22,771

$

19,791

Non-Current



$

117,372

$

96,832

$

117,372

$

96,832

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, lease payments associated with short-term leases and leases of low-value assets are expensed as incurred in the condensed consolidated interim statements of earnings.

Lessor

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.

Operating leases

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.

Finance leases

The Corporation subleases certain equipment to customers. The Corporation assessed and classified its subleases as finance leases, and therefore derecognizes the right-of-use assets relating to the respective head leases being sublet, recognizes lease receivables equal to the net investment in the subleases, and retains the previously recognized lease liabilities in its capacity as lessee.

In addition, the Corporation leases certain equipment to customers under finance leases, and therefore derecognizes the inventory being leased and recognizes a lease receivable equal to the net investment in the lease.

11.   DEBENTURES

Senior Unsecured Debentures - 6%, due January 15, 2025

In December 2019 , the Corporation issued $57,000 in unsecured subordinated debentures with a term of five years due January 15, 2025 . 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 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.

Movements in the debentures balance are as follows:

For the period ending June 30, 2020

Three months ended

Six months ended

Balance at beginning of period

$

54,211

$

54,115

Transaction costs related to issuance

(37)

Amortization of deferred financing costs

145

278

Balance at end of period

$

54,356

$

54,356

Finance costs on the debentures were $995 during the quarter and $1,979 year to date. 

12.   LONG-TERM DEBT

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 June 30, 2020 .

The following balances were outstanding:



June 30, 2020

December 31, 2019

Bank credit facility





         Non-revolving term portion

$

50,000

$

50,000

         Revolving term portion

168,726

177,362



$

218,726

$

227,362

Deferred financing costs, net of accumulated amortization

(1,601)

(1,789)

Total long-term debt

$

217,125

$

225,573

The Corporation had $6,485 ( December 31, 2019 - $5,489 ) letters of credit outstanding at the end of the period. Finance costs on long-term debt amounted to $2,403 for the quarter (2019 - $3,575 ) and $5,541 year to date (2019 - $6,728 ). Movements in the long-term debt balance are as follows:



Three months ended

June 30

Six months ended

June 30



2020

2019

2020

2019

Balance at beginning of period

$

254,457

$

278,215

$

225,573

$

218,116

Changes from financing cash flows









Net proceeds of borrowings

(37,426)

(8,000)

(8,636)

52,000

Other changes









Amortization of deferred financing costs

94

99

188

198

Balance at end of period

$

217,125

$

270,314

$

217,125

$

270,314

13.   FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

The Corporation uses the following fair value hierarchy for determining and disclosing the fair value of financial instruments:

  • 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 categorizes its financial instruments as follows:



June 30, 2020

December 31, 2019







Financial assets (liabilities) measured at amortized cost:





(Bank indebtedness) cash

$

(11,546)

$

3,180

Trade and other receivables

210,131

238,194

    Contract assets

20,275

23,318

    Lease receivables

10,390

2,331







Financial liabilities measured at amortized cost:





Accounts payable and accrued liabilities

(254,711)

(287,656)

Contract liabilities

(5,194)

(7,230)

Dividends payable

(5,008)

(5,003)

Other liabilities

(1,094)

(1,602)

Lease liabilities

(140,143)

(127,130)

Debentures

(54,356)

(54,115)

Long-term debt

(217,125)

(225,573)







Net derivative financial liabilities measured at fair value:





Foreign exchange forwards

(625)

(930)

Total return swaps

(3,954)

(2,952)

Interest rate swaps

(9,199)

(2,625)

The Corporation measures non-derivative financial assets and financial liabilities at amortized cost. Derivative financial assets/liabilities are recorded on the condensed consolidated interim statements of financial position at fair value. Changes in fair value are recognized in the condensed consolidated interim 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. Cash-settled share-based compensation liabilities are 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 lease receivables approximates its carrying value. The fair value of the debentures can be estimated based on the trading price of the debentures, which takes into account the Corporation's own credit risk. At June 30, 2020 , the Corporation has estimated the fair value of its debentures to be approximately $52,440 . The fair values of all other financial assets and liabilities, other than lease liabilities, approximate their recorded values due to the short-term maturities of these instruments.

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. The Corporation recognized a loss of $692 during the quarter (2019 - loss of $461 ) and a loss of $4,807 year to date (2019 - loss of $1,642 ), 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

Notional

Amount

Weighted

Average

Interest Rate

Maturity

June 30, 2020

$

150,000

2.12

%

November 2024

December 31, 2019

$

104,000

2.56

%

November 2024

June 30, 2019

$

104,000

2.70

%

November 2023

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. The Corporation recognized a gain of $5 in the quarter (2019 - loss of $160 ) and a loss of $87 year to date (2019 - loss of $43 ) associated with its foreign exchange forwards in the condensed consolidated interim statements of earnings, and a loss of $1,260 in the quarter (2019 - loss of $442 ) and a gain of $288 year to date (2019 - loss of $558 ), net of tax in other comprehensive income.

The Corporation's contracts to buy and sell foreign currencies are summarized as follows:

June 30, 2020

Notional

Amount

Average

Exchange

Rate

Maturity

Purchase contracts

US$

53,786

1.3639

July 2020 to May 2021



405

1.5265

July 2020

Sales contracts

US$

22,660

1.3444

July 2020 to June 2022



782

1.5444

July 2020 to January 2021











December 31, 2019

Notional

Amount

Average

Exchange

Rate

Maturity

Purchase contracts

US$

45,190

1.3270

January 2020 to October 2020

Sales contracts

US$

30,545

1.3091

January 2020 to March 2021



1,074

1.5003

January 2020 to November 2020











June 30, 2019

Notional

Amount

Average

Exchange

Rate

Maturity

Purchase contracts

US$

46,223

1.3271

July 2019 to August 2020



22

1.4915

July 2019

Sales contracts

US$

24,896

1.3034

July 2019 to March 2021



2,495

1.5226

July 2019 to November 2020

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 June 30, 2020 , the Corporation's total return swaps cover 387,000 of the Corporation's underlying common shares ( December 31, 2019 - 365,000), and expire between March 2021 and March 2023 . During the year to date, the Corporation settled a total return swap contract for 121,000 shares, resulting in a cash payout of $1,396 . The Corporation recognized a gain of $759 in the quarter (2019 - loss of $366 ) and a loss of $2,398 year to date (2019 - gain of $171 ) associated with its total return swaps.

Derivative financial assets consist of:



June 30, 2020

December 31, 2019

Foreign exchange forwards

$

898

$

532







Current portion

$

898

$

484

Long-term portion

$

$

48

Derivative financial liabilities consist of:



June 30, 2020

December 31, 2019

Interest rate swaps

$

9,199

$

2,625

Foreign exchange forwards

1,523

1,462

Total return swaps

3,954

2,952

Total derivative financial liabilities

$

14,676

$

7,039







Current portion

$

3,532

$

2,849

Long-term portion

$

11,144

$

4,190

Movements in the net derivative financial liability balance are as follows:



Three months ended

June 30

Six months ended

June 30



2020

2019

2020

2019

Opening net derivative financial liability

$

11,872

$

6,210

$

6,507

$

6,568

(Gain) loss recognized in net earnings

(764)

526

2,485

(128)

Loss recognized in other comprehensive income - net of

tax

1,952

903

4,519

2,200

Tax on loss recognized in other comprehensive income

718

332

1,663

810

Cash paid on settlement of total return swaps

(1,396)

(1,479)

Ending net derivative financial liability

$

13,778

$

7,971

$

13,778

$

7,971

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 where hedge accounting is applied. These accumulated amounts will be continuously released to the condensed consolidated interim 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.

14.   SHARE CAPITAL AND 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 June 30, 2020 (2019 - 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

Amount

Issued and outstanding, December 31, 2019 and June 30, 2020

20,167,703

$

182,482

Shares held in trust, December 31, 2019

(156,113)

(1,407)

Released for settlement of certain share-based compensation

plans

22,029

199

Shares held in trust, June 30, 2020

(134,084)

(1,208)

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

2020

20,033,619

$

181,274

 



Number of

Common

Shares

Amount

Issued and outstanding, December 31, 2018

20,132,194

$

181,952

Common shares issued to settle share-based compensation

plans

27,473

487

Issued and outstanding, June 30, 2019

20,159,667

182,439

Shares held in trust, December 31, 2018

(175,680)

(1,583)

Released for settlement of certain share-based compensation

plans

19,567

176

Shares held in trust, June 30, 2019

(156,113)

(1,407)

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

2019

20,003,554

$

181,032

Dividends declared

During the three months ended June 30, 2020 , the Corporation declared cash dividends of $0.25 per share or $5,008 (2019 - dividends of $0.25 per share or $5,001 ). During the six months ended June 30, 2020 , the Corporation declared cash dividends of $0.50 per share or $10,016 (2019 - dividends of $0.50 per share or $10,002 ). As at June 30, 2020 , the Corporation had $5,008 ( December 31, 2019 - $5,003 ) dividends outstanding which were paid on July 3, 2020.

Earnings per share

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



Three months ended June 30

Six months ended June 30



2020

2019

2020

2019

Numerator for basic and diluted earnings per share:









– net earnings

$

10,208

$

11,891

$

14,266

$

19,770

Denominator for basic earnings per share:









– weighted average shares, net of shares

held in trust

20,033,619

20,003,554

20,025,024

19,990,658

Denominator for diluted earnings per share:









– weighted average shares, net of shares

held in trust

20,033,619

20,003,554

20,025,024

19,990,658

– effect of dilutive share rights

428,968

381,555

402,409

380,799

Denominator for diluted earnings per share

20,462,587

20,385,109

20,427,433

20,371,457

Basic earnings per share

$

0.51

$

0.59

$

0.71

$

0.99

Diluted earnings per share

$

0.50

$

0.58

$

0.70

$

0.97

For the quarter, 179,808 anti-dilutive share rights were excluded from the above calculation (2019 - 41,672). For the year to date, 182,128 anti-dilutive share rights were excluded from the above calculation (2019 – 62,941).

15.   SHARE-BASED COMPENSATION PLANS

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:



Three months ended

June 30

Six months ended

June 30



2020

2019

2020

2019

Treasury share rights plans









SOP equity-settled

$

24

$

18

$

41

$

18

DDSUP equity-settled

125

147

274

301

Total treasury share rights plans expense

$

149

$

165

$

315

$

319

Market-purchased share rights plans









MTIP equity-settled

$

374

$

378

$

793

$

662

DSUP equity-settled

11

(87)

27

38

Total market-purchased share rights plans expense

$

385

$

291

$

820

$

700

Cash-settled rights plans









MTIP cash-settled

$

558

$

312

$

90

$

1,424

DSUP cash-settled

29

(7)

(50)

(1)

Total cash-settled rights plans expense

$

587

$

305

$

40

$

1,423

Total share-based compensation expense

$

1,121

$

761

$

1,175

$

2,442

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.

The following rights under these plans are outstanding:



Number of rights

Fair value at time of

grant

Outstanding at December 31, 2019

361,100

$

5,984

Grants    – new grants

55,303

350

               – dividend equivalents

23,368

Outstanding at June 30, 2020

439,771

$

6,334

At June 30, 2020 , 412,407 share rights were vested ( December 31, 2019 - 347,946 share rights were vested).

The outstanding aggregate number of shares issuable to satisfy entitlements under these plans is as follows:



Number of Shares

Approved by shareholders

1,300,000

Exercised to date

(352,810)

Rights outstanding

(439,771)

Available for future grants at June 30, 2020

507,419

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.

The following rights under these plans are outstanding:



Number of rights

Fair value at time of

grant

Outstanding at December 31, 2019

213,149

$

5,081

Grants    – new grants

109,294

1,828

               – dividend equivalents

15,473

Forfeitures

(15,459)

(337)

Settlements

(46,926)

(1,138)

Outstanding at June 30, 2020

275,531

$

5,434

At June 30, 2020 , 19,986 outstanding rights were vested ( December 31, 2019 - 15,426 rights were vested). 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. At June 30, 2020 , the carrying amount of the liabilities for these plans was $1,218 ( December 31, 2019$2,524 ).

The following rights under these plans are outstanding:



Number of rights

Outstanding at December 31, 2019

334,696

Grants    – new grants

195,252

               – dividend equivalents

25,257

Forfeitures

(14,155)

Settlements

(98,156)

Outstanding at June 30, 2020

442,894

At June 30, 2020 , 9,689 outstanding rights were vested ( December 31, 2019 - 9,127 rights were vested).

16.   REVENUE

Disaggregation of revenue

In the following table, revenue is disaggregated by revenue type:



Three months ended June 30

Six months ended June 30



2020

2019

2020

2019

Equipment sales

$

136,598

$

145,571

$

220,238

$

257,683

Product support

91,076

124,568

208,902

248,894

Industrial parts

81,564

93,936

173,287

187,360

ERS

39,701

36,186

82,098

72,024

Revenue from contracts with customers

348,939

400,261

684,525

765,961

Equipment rental

7,997

9,168

16,484

18,020

Total

$

356,936

$

409,429

$

701,009

$

783,981

The Corporation has included $7,633 during the quarter (2019 - $4,566 ) and $12,193 year to date (2019 - $10,892 ) in Equipment sales related to short-term rental contracts that are expected to convert to Equipment sales within a six to twelve month period.

17.   FINANCE COSTS

Finance costs are comprised of the following:





Three months ended June 30

Six months ended June 30



Note

2020

2019

2020

2019

Interest on long-term debt

12

$

2,403

$

3,575

$

5,541

$

6,728

Interest on debentures

11

995

1,979

Interest on lease liabilities

10

2,584

1,012

4,307

2,401

Interest income on lease receivables



(37)

(58)

Finance costs



$

5,945

$

4,587

$

11,769

$

9,129

18.   INCOME TAX EXPENSE

Income tax expense comprises current and deferred tax as follows:

For the six months ended June 30

2020

2019

Current

$

6,386

$

5,613

Deferred

(998)

1,963

Income tax expense

$

5,388

$

7,576

The calculation of current tax is based on a combined federal and provincial statutory income tax rate of 26.5% (2019 – 26.8%). 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 26.5% based on the tax rates in years when the temporary differences are expected to reverse.

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

For the six months ended June 30

2020

2019

Combined statutory income tax rate

26.5%

26.8%

Expected income tax expense at statutory rates

$

5,208

$

7,329

Non-deductible expenses

284

319

Other

(104)

(72)

Income tax expense

$

5,388

$

7,576

19.   CHANGES IN NON-CASH OPERATING WORKING CAPITAL

The net change in non-cash operating working capital comprises the following:



Three months ended June 30

Six months ended June 30



2020

2019

2020

2019

Trade and other receivables

$

23,654

$

8,045

$

36,301

$

(3,981)

Contract assets

5,733

6,849

5,514

464

Inventory

31,466

(22,055)

9,328

(45,690)

Deposits on inventory

2,226

957

(6,430)

(1,071)

Prepaid expenses

(460)

1,268

(263)

452

Accounts payable and accrued liabilities

(31,426)

6,222

(40,847)

14,090

Contract liabilities

(13,430)

1,539

(2,152)

2,026

Total

$

17,763

$

2,825

$

1,451

$

(33,710)

20. GOVERNMENT ASSISTANCE

Canada Emergency Wage Subsidy

On April 11, 2020 , the Government of Canada passed the Canada Emergency Wage Subsidy ("CEWS") to support employers facing financial hardship as measured by certain revenue declines as a result of the COVID-19 pandemic. The CEWS currently provides eligible businesses with a reimbursement of compensation expense for the 12 week period from March 15 to June 6, 2020 of up to 75% of eligible employees' employment remuneration, subject to certain criteria. The Corporation applied for the CEWS for the period from March 15 to June 6, 2020 to the extent it met the requirements to receive the subsidy. In accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance , during the three and six months ended June 30, 2020 , the Corporation recognized $15,508 as a reimbursement of compensation expense with $7,083 and $8,425 allocated to cost of sales and selling and administrative expenses, respectively, in proportion to personnel costs recorded in those areas. As at June 30, 2020 , the entire $15,508 subsidy was received from the Government of Canada .

On July 27, 2020 , the government enacted legislation to extend the CEWS until December 19, 2020 , with new eligibility conditions. The Corporation will continue to monitor its eligibility for the subsidy.

21.   COMPARATIVE INFORMATION

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

22.   SUBSEQUENT EVENTS

On August 6, 2020, the Corporation declared a third quarter 2020 dividend of $0.25 per share or $5,008 .

On July 15, 2020 , the Corporation completed a sale leaseback transaction for one of its wholly owned properties, with a lease term of 10 years. The proceeds from the sale, gross of any transaction costs was $5,423 and the carrying amount of the property was $1,210 .

SOURCE Wajax Corporation

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