Wajax Announces 2012 Fourth Quarter Earnings
TSX Symbol: WJX
(Dollars in Three Months Ended December 31 Year Ended December 31 millions, except per share data)
2012 2011 2012 2011
CONSOLIDATED RESULTS
Revenue $364.9 $377.2 $1,466.0 $1,377.1
Net earnings $14.2 $16.6 $65.9 $63.8
Basic earnings $0.85 $1.00 $3.95 $3.84 per share
SEGMENTS
Revenue - $201.6 $192.3 $778.5 $685.8
Equipment
- Power Systems $79.0 $95.5 $332.3 $347.4
- Industrial $85.3 $90.2 $360.0 $347.5
Components
Net Earnings - $14.0 $14.3 $56.1 $50.2
Equipment
% margin 6.9% 7.5% 7.2% 7.3%
- Power Systems $5.0 $7.9 $26.1 $32.9
% margin 6.3% 8.3% 7.9% 9.5%
- Industrial $3.6 $5.9 $22.1 $23.1
Components
% margin 4.2% 6.5% 6.1% 6.6%
TORONTO, March 5, 2013 /CNW/ - Wajax Corporation ("Wajax" or the
"Corporation") today announced its 2012 fourth quarter earnings.
Fourth Quarter Highlights
-- Consolidated fourth quarter revenue of $364.9 million decreased
$12.3 million, or 3%, compared to last year, as weakness in the
western Canadian oil and gas market overshadowed strength in
the forestry and construction markets. The Equipment segment's
revenue increased 5% on stronger demand in the forestry and
construction markets, particularly in western Canada. Softness
in western Canadian oil and gas industry activity was the
primary cause of declines in revenues for the Power Systems and
Industrial Components segments of 17% and 5%, respectively.
-- Net earnings for the quarter were $14.2 million, or $0.85 per
share, compared to $16.6 million, or $1.00 per share, recorded
in 2011. Equipment segment net earnings decreased slightly as
selling and administrative cost increases more than offset the
benefit of higher revenue. Power Systems and Industrial
Components segment net earnings declined $2.9 million and $2.3
million, respectively, on lower revenues and gross margins.
-- Consolidated backlog of $184.1 million at December 31, 2012
decreased 9% compared to September 30, 2012, on lower customer
orders in the mining and oil and gas sectors in the Equipment
and Power Systems segments.
-- Funded net debt at December 31, 2012 of $173.7 million
increased $34.4 million compared to September 30, 2012,
primarily as a result of increases in mining equipment related
working capital and a total of $10.1 million paid for the
acquisition of two businesses, Kaman Industrial Technologies,
Ltd. (discussed below) and Ace Hydraulic Ltd.
On December 7, 2012, Wajax increased the limit of its bank credit facility by
$75 million, on substantially the same terms and conditions as the existing
facility. The fully secured facility, due August 12, 2016, is now comprised
of an $80 million non-revolving term portion and a $220 million revolving term
portion. The additional borrowing capacity is available to fund future
growth, including increases in working capital and acquisitions.
On December 31, 2012, Industrial Components acquired the assets of Kaman
Industrial Technologies, Ltd. ("Kaman Canada"), consisting of six branch
locations in British Columbia and one branch location in Ontario. The Kaman
Canada branches are engaged in the distribution of industrial components, with
annual revenues of approximately $21.0 million. Subsequent to completing the
acquisition, on February 21, 2013, Industrial Components announced the
formation of a strategic alliance with Kaman Canada's U.S.-based parent
corporation, Kaman Industrial Technologies Corporation ("Kaman U.S."), to
target North American parts-supply contracts. The alliance will operate as
Sourcepoint Industrial and provide customers with an alternative to country
based supply agreements. Customers of the alliance will be served through
Industrial Components' 65 branches across Canada and Kaman U.S.'s more than
200 customer service centers and five distribution centers across the U.S.,
Mexico and Puerto Rico.
The Corporation declared dividends of $0.27 per share ($3.24 annualized) for
the months of March and April.
Outlook
In 2012, Wajax achieved another record performance with revenue and earnings
before tax of $1.47 billion and $89.7 million, respectively. Wajax was
positively impacted by strong construction and forestry markets across Canada
in 2012. The oil and gas sector in western Canada remained active in the
first half of the year, but began to decline in the second half of 2012 as
deteriorating industry fundamentals in North America resulted in reduced
customer spending. In particular, this decline affected Power Systems and
Industrial Components. Mining activity, including in the oil sands, was
somewhat stronger compared to last year in all segments. Although quoting
activity remained high at year-end, the Equipment segment saw a reduction in
mining equipment backlog in the latter part of the year as customers began to
take a more cautious approach in making commitments to buy equipment.
Looking forward to 2013, Mark Foote, President and CEO, commented, "The
combined effect of continuing weakness in the oil and gas market, delays in
mining investment decisions and the loss of the LeTourneau distribution rights
will create challenges for our growth in 2013. Quoting activity for mining
remains very active in both Equipment and Power Systems. However, we do not
expect meaningful improvement in the oil and gas market during 2013. As a
result, we anticipate a weaker first half of the year relative to 2012.
Achieving full year earnings that are comparable to 2012 will depend on
reasonable end market recovery in the second half of 2013."
Wajax Corporation
Wajax is a leading Canadian distributor and service support provider of mobile
equipment, power systems and industrial components. Reflecting a diversified
exposure to the Canadian economy, its three distinct core businesses operate
through a network of 128 branches across Canada. Its customer base spans
natural resources, construction, transportation, manufacturing, industrial
processing and utilities.
Wajax will Webcast its Fourth Quarter Financial Results Conference Call. You
are invited to listen to the live Webcast on Tuesday, March 5, 2013 at 2:30
p.m. ET. To access the Webcast, enter www.wajax.com and click on the link
for the Webcast on the Investor Relations page.
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 outlook for certain of our key end markets,
some of the challenges we face in 2013, and our outlook with respect to our
financial results for the 2013 financial year. These statements are based on
a number of assumptions which may prove to be incorrect, including, but not
limited to, assumptions regarding general business and economic conditions,
the supply and demand for, and the level and volatility of prices for,
commodities, financial market conditions, including interest rates, the future
financial performance of the Corporation, our costs, market competition, our
ability to attract and retain skilled staff, our ability to procure quality
products and inventory and our ongoing relations with suppliers, employees and
customers. The foregoing list of assumptions is not exhaustive. Factors
that may cause actual results to vary materially include, but are not limited
to, a deterioration in general business and economic conditions, volatility in
the supply and demand for, and the level of prices for, commodities,
fluctuations in financial market conditions, including interest rates, the
level of demand for, and prices of, the products and services we offer, 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, unavailability of
quality products or inventory, supply disruptions, job action and
unanticipated events related to health, safety and environmental matters), our
ability to attract and retain skilled staff and our ability to maintain our
relationships with suppliers, employees and customers. The foregoing list of
factors is not exhaustive. 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.
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, 2012, filed on
SEDAR.
Management's Discussion and Analysis - 2012
The following management's discussion and analysis ("MD&A") provides a review
of the consolidated financial condition and results of operations of Wajax
Corporation ("Wajax" or the "Corporation") for the year ended December 31,
2012. The following discussion should be read in conjunction with the
Corporation's Consolidated Financial Statements and accompanying notes.
Information contained in this MD&A is based on information available to
management as of March 5, 2013.
Unless otherwise indicated, all financial information within this MD&A is in
millions of Canadian dollars, except share and per share data. Additional
information, including Wajax's Annual Report and Annual Information Form, are
available on SEDAR at www.sedar.com.
Responsibility of Management and the Board of Directors
Management is responsible for the information disclosed in this MD&A and the
Consolidated Financial Statements and accompanying notes, and has in place
appropriate information systems, procedures and controls to ensure that
information used internally by management and disclosed externally is
materially complete and reliable. Wajax's Board of Directors has approved this
MD&A and the Consolidated Financial Statements and accompanying notes. In
addition, Wajax's Audit Committee, on behalf of the Board of Directors,
provides an oversight role with respect to all public financial disclosures
made by Wajax, and has reviewed this MD&A and the Consolidated Financial
Statements and accompanying notes.
Disclosure Controls and Procedures and Internal Control over Financial
Reporting
Wajax's management, under the supervision of its Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), is responsible for establishing
and maintaining disclosure controls and procedures ("DC&P") and internal
control over financial reporting ("ICFR").
As at December 31, 2012, Wajax's management, under the supervision of its CEO
and CFO, had designed disclosure controls and procedures ("DC&P") to provide
reasonable assurance that information required to be disclosed by Wajax in
annual filings, interim filings or other reports filed or submitted under
applicable securities legislation is recorded, processed, summarized and
reported within the time periods specified in such securities legislation.
DC&P are designed to ensure that information required to be disclosed by Wajax
in annual filings, interim filings or other reports filed or submitted under
applicable securities legislation is accumulated and communicated to Wajax's
management, including its CEO and CFO, as appropriate, to allow timely
decisions regarding required disclosure.
As at December 31, 2012, Wajax's management, under the supervision of its CEO
and CFO, had designed internal control over financial reporting ("ICFR") to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with International Financial Reporting Standards ("IFRS"). In
completing the design, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control - Integrated Framework. With regard to general controls over
information technology, management also used the set of practices of Control
Objectives for Information and related Technology ("COBIT") created by the IT
Governance Institute.
During the year, Wajax's management, under the supervision of its CEO and CFO,
evaluated the effectiveness and operation of its DC&P and ICFR. This
evaluation included a risk evaluation, documentation of key processes and
tests of effectiveness conducted on a sample basis throughout the year. Due
to the inherent limitations in all control systems, an evaluation of the DC&P
and ICFR can only provide reasonable assurance over the effectiveness of the
controls. As a result, DC&P and ICFR are not expected to prevent and detect
all misstatements due to error or fraud. The CEO and CFO have concluded that
Wajax's DC&P and ICFR are effective as at December 31, 2012.
There was no change in Wajax's ICFR that occurred during the three months
ended December 31, 2012 that has materially affected, or is reasonably likely
to materially affect, Wajax's ICFR.
Wajax Corporation Overview
Wajax's core distribution businesses are engaged in the sale and after-sale
parts and service support of mobile equipment, power systems and industrial
components through a network of 128 branches across Canada. Wajax is a
multi-line distributor and represents a number of leading worldwide
manufacturers in its core businesses. Its customer base is diversified,
spanning natural resources, construction, transportation, manufacturing,
industrial processing and utilities.
Wajax's strategy is to grow earnings in all segments through organic growth
and tuck-under acquisitions while maintaining a dividend payout ratio of at
least 75% of earnings. Planned organic growth includes "base business"
initiatives that are achieved within the normal scope, resources and markets
of each core business, while "new opportunity" initiatives are organic growth
opportunities that we see as significant, requiring more effort, planning and
resources to achieve. Wajax expects to ensure sufficient capital is
available to meet its growth requirements within a conservative capital
structure.
Cautionary Statement Regarding Forward-Looking Information
This MD&A contains certain forward-looking statements and forward-looking
information, as defined in applicable securities laws (collectively,
"forward-looking statements"). These forward-looking statements relate to
future events or the Corporation's future performance. All statements other
than statements of historical fact are forward-looking statements. Often,
but not always, forward looking statements can be identified by the use of
words such as "plans", "anticipates", "intends", "predicts", "expects", "is
expected", "scheduled", "believes", "estimates", "projects" or "forecasts", or
variations of, or the negatives of, such words and phrases or state that
certain actions, events or results "may", "could", "would", "should", "might"
or "will" be taken, occur or be achieved. Forward looking statements involve
known and unknown risks, uncertainties and other factors beyond the
Corporation's ability to predict or control which may cause actual results,
performance and achievements to differ materially from those anticipated or
implied in such forward looking statements. There can be no assurance that
any forward looking statement will materialize. Accordingly, readers should
not place undue reliance on forward looking statements. The forward looking
statements in this MD&A are made as of the date of this MD&A, reflect
management's current beliefs and are based on information currently available
to management. Although management believes that the expectations
represented in such forward-looking statements are reasonable, there is no
assurance that such expectations will prove to be correct. Specifically,
this MD&A includes forward looking statements regarding, among other things,
our plans for revenue and earnings growth, including planned marketing,
strategic, operational and growth initiatives and their intended outcomes, our
plans regarding the expansion of our businesses, our financing and capital
requirements, our outlook for certain of our key end markets, some of the
challenges we face in 2013, our outlook with respect to our financial results
for the 2013 financial year, and our objective with respect to the future
payment of dividends. These statements are based on a number of assumptions
which may prove to be incorrect, including, but not limited to, assumptions
regarding general business and economic conditions, the supply and demand for,
and the level and volatility of prices for, commodities, financial market
conditions, including interest rates, the future financial performance of the
Corporation, our costs, market competition, our ability to attract and retain
skilled staff, our ability to procure quality products and inventory and our
ongoing relations with suppliers, employees and customers. The foregoing
list of assumptions is not exhaustive. Factors that may cause actual results
to vary materially include, but are not limited to, a deterioration in general
business and economic conditions, volatility in the supply and demand for, and
the level of prices for, commodities, fluctuations in financial market
conditions, including interest rates, the level of demand for, and prices of,
the products and services we offer, 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, unavailability of quality products or
inventory, supply disruptions, job action and unanticipated events related to
health, safety and environmental matters), our ability to attract and retain
skilled staff and our ability to maintain our relationships with suppliers,
employees and customers. The foregoing list of factors is not exhaustive.
Further information concerning the risks and uncertainties associated with
these forward looking statements and the Corporation's business may be found
in this MD&A under the heading "Risk Management and Uncertainties" and in our
Annual Information Form for the year ended December 31, 2012, 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 further cautioned
that the preparation of financial statements in accordance with IFRS requires
management to make certain judgments and estimates that affect the reported
amounts of assets, liabilities, revenues and expenses. These estimates may
change, having either a negative or positive effect on net earnings as further
information becomes available, and as the economic environment changes.
Annual Consolidated Results
Year ended December 31 2012 2011
Revenue $1,466.0 $1,377.1
Gross profit $301.8 $292.4
Selling and administrative expenses $207.7 $200.3
Earnings from operating activities $94.1 $92.1
Finance costs $4.4 $4.6
Earnings before income taxes $89.7 $87.5
Income tax expense $23.8 $23.7
Net earnings $65.9 $63.8
Basic earnings per share $3.95 $3.84
Diluted earnings per share $3.89 $3.77
Pie Charts - Revenue by Geographic Region
2012 2011
Western Canada 54% 54%
Eastern Canada * 27% 29%
Ontario 19% 17%
* Includes Quebec and the Atlantic provinces.
Pie Charts - Revenue by Segment
2012 2011
Equipment 53% 50%
Power Systems 23% 25%
Industrial Components 24% 25%
Pie Charts - EBIT by Segment
2012 2011
Equipment 54% 47%
Power Systems 25% 31%
Industrial Components 21% 22%
Pie Charts - Revenue by Market
2012 2011
Construction 17% 14%
Industrial/Commercial 14% 16%
Mining 12% 11%
Oil Sands 11% 11%
Oil and Gas 10% 13%
Forestry 10% 9%
Transportation 9% 9%
Government & Utilities 6% 6%
Metal Processing 5% 4%
Other 6% 7%
In 2012, Wajax was positively impacted by strong construction markets across
the country, particularly in western Canada, as demand for equipment sold by
the Equipment segment increased by approximately 15% year-over-year. Oil and
gas activity remained strong in the first half of 2012 with increased sales
over 2011. Oil and gas sector activity in western Canada, however, declined
in the second half of 2012 as deteriorating industry fundamentals in North
America resulted in a decline in customer spending. This decline primarily
affected the Power Systems and Industrial Components segments. Mining
activity, including the oil sands market, was somewhat stronger compared to
last year in all segments. Although quoting activity remained high at
year-end, the Equipment segment saw a reduction in mining equipment backlog in
the latter part of the year as customers began to take a more cautious
approach in making commitments to buy equipment. In 2012, Wajax also
benefited from stronger activity in the forestry and metal processing sectors
compared to last year.
Revenue
Revenue in 2012 of $1,466.0 million increased 6%, or $88.9 million, from
$1,377.1 million in 2011. Equipment segment revenue increased 14%, or $92.7
million, driven by stronger market demand for equipment, primarily in the
construction and mining markets, and increased parts and service volumes in
the western Canadian construction market. Power Systems' segment revenue
decreased 4%, or $15.1 million, as lower volumes to off-highway oil and gas
customers in western Canada, attributable to lower industry activity, more
than offset increased power generation equipment sales and the additional four
months of revenue from the former operations of Harper Power Products Inc.
("Harper") acquired on May 2, 2011. Segment revenue in Industrial Components
increased 4%, or $12.5 million, due primarily to higher bearings and power
transmission parts volumes in all regions and higher fluid power and process
equipment product and service sales in eastern Canada.
Gross profit
Gross profit increased $9.4 million, or 3%, in 2012 as the positive impact of
higher volumes compared to last year was partially offset by the negative
impact of lower gross profit margins. The gross profit margin percentage
decrease to 20.6% from 21.2% last year was mainly attributable to the mix of
equipment and parts and service sales compared to last year.
Selling and administrative expenses
Selling and administrative expenses increased $7.4 million in the year. This
was due primarily to increased personnel and sales related costs and $3.5
million of additional expenses from the former Harper operation. These
increases were partially offset by lower annual and mid-term incentive
accruals. Selling and administrative expenses as a percentage of revenue
decreased to 14.2% in 2012 from 14.5% in 2011.
Finance costs
Finance costs of $4.4 million decreased $0.2 million compared to 2011. The
cost of higher funded net debt levels outstanding during the year were more
than offset by the Corporation's lower cost of borrowing compared to last
year. Funded net debt includes bank debt, bank indebtedness and obligations
under finance leases, net of cash. See Non-IFRS Measures section.
Income tax expense
The Corporation's effective income tax rate of 26.5% in 2012 decreased from
27.1% in 2011 as a result of the impact of reduced statutory income tax rates.
Net earnings
Net earnings for the year ended December 31, 2012 increased $2.1 million to
$65.9 million, or $3.95 per share, from $63.8 million, or $3.84 per share, in
2011. The positive impact of higher volumes and lower finance costs more
than compensated for the lower gross profit margin percentage and increased
selling and administrative expenses compared to last year.
Comprehensive income
Comprehensive income of $65.4 million for the year ended December 31, 2012
included net earnings of $65.9 million, offset partially by an other
comprehensive loss of $0.6 million. The other comprehensive loss was mainly
attributable to actuarial losses on pension plans of $0.7 million.
Funded net debt
Funded net debt of $173.7 million at December 31, 2012 increased $110.0
million compared to December 31, 2011. Increases in non-cash operating
working capital of $114.3 million resulted in negative cash flows from
operating activities of $39.1 million in 2012. Other uses of cash included
dividends paid of $50.6 million, investing activities of $16.0 million
including $10.1 million used for acquisitions in the Industrial Components
segment, finance lease payments of $2.6 million and debt facility amendment
costs of $0.6 million. As a result, Wajax's year-end leverage ratio of 1.55
times increased from last year's ratio of 0.60 times. (This leverage ratio
is calculated as funded net debt-to-EBITDA. As funded net debt and EBITDA do
not have standardized meanings prescribed by IFRS, these financial measures
may not be comparable to similar measures presented by other companies. See
Non-IFRS Measures section.)
On May 24, 2012 and December 7, 2012, Wajax amended its bank credit facility
to increase the limit of the facility by $50 million and $75 million
respectively, on substantially the same terms and conditions as the existing
facility. The fully secured facility of $300 million, due August 12, 2016, is
now comprised of an $80 million non-revolving term portion and a $220 million
revolving term portion.
Dividends
For the twelve months ended December 31, 2012 monthly dividends declared
totaled $3.10 per share. For the twelve months ended December 31, 2011
monthly dividends declared totaled $2.14 per share.
Backlog
Consolidated backlog at December 31, 2012 of $184.1 million decreased $83.6
million, or 31%, from $267.7 million at December 31, 2011 on reductions in all
segments. Backlog includes the total retail value of customer purchase
orders for future delivery or commissioning. See the Annual Results of
Operations section for further backlog detail by segment.
CEO
On March 5, 2012, Mark Foote assumed the role of President and CEO of Wajax,
and was appointed a director effective March 6, 2012. Mark has extensive
experience in distribution, supply chain management and logistics. Most
recently, he served as the President and Chief Executive Officer of Zellers,
and prior to that, was the President and Chief Merchandising Officer at
Loblaws Companies. Mark also had a career of more than 20 years at Canadian
Tire Corporation, including five years as President, Canadian Tire Retail.
Senior Vice President, Human Resources
On September 4, 2012, Katie Hunter was appointed Senior Vice President, Human
Resources of Wajax. Ms. Hunter has held the position of Vice President,
Human Resources at various companies in the manufacturing, mining and health
care sectors and brings extensive experience in human resource management.
Annual Results of Operations
Equipment
For the year ended December 31 2012 2011
Equipment* $513.9 $428.0
Parts and service $264.6 $257.8
Segment revenue $778.5 $685.8
Segment earnings $56.1 $50.2
Segment earnings margin 7.2% 7.3%
(1) Includes rental and other revenue.
Revenue by Product Type 2012 versus 2011
Market 2012 2011
Construction 35% 33%
Mining/Oil sands 30% 31%
Material Handling 16% 16%
Forestry 12% 13%
Crane & Utility 7% 7%
Revenue increased 14%, or $92.7 million, to $778.5 million in 2012 from $685.8
million in 2011. Segment earnings increased $5.9 million to $56.1 million in
2012 compared to $50.2 million in 2011. The following factors contributed to
the improved results:
-- Equipment revenue increased $85.9 million compared to last
year. Specific year-over-year variances included the
following:
o Construction equipment revenue increased $39.4 million mainly as a
result of market demand which drove higher sales of Hitachi
excavators and JCB construction equipment, primarily in western
Canada and Ontario. Sales of Wirtgen road building equipment in
Ontario also contributed to the increase. These increases were
offset partially by declines in eastern Canada due to competitive
pressures. o Mining equipment sales increased $23.9 million due primarily to the
delivery of three additional LeTourneau loaders. Excluding the
LeTourneau product line, which was discontinued in the second
quarter of 2012, mining sales increased $5.6 million on higher
Hitachi and rotating equipment deliveries. o Forestry equipment revenues increased $9.1 million as strength in
the lumber market led to higher market demand for Tigercat and
forestry related Hitachi equipment. o Material handling equipment revenue increased $8.7 million as
higher market demand and increased market share resulted in higher
volumes in all regions. o Crane and utility equipment revenue increased $4.8 million
attributable to higher crane sales in western and eastern Canada.
-- Parts and service volumes increased $6.8 million compared to
last year. Excluding the LeTourneau product line, parts and
service volumes increased $17.9 million, or 8%, owing to higher
mining and construction volumes in western Canada.
-- Segment earnings increased $5.9 million to $56.1 million
compared to last year. The positive impact of higher volumes
outweighed the negative impact of a slightly lower gross profit
margin and a $5.0 million increase in selling and
administrative expenses. The lower gross profit margin
resulted primarily from a higher proportion of equipment sales
compared to last year. Selling and administrative expenses
increased as higher personnel and sales related expenses and
additional environmental remediation provisions more than
offset lower bad debt expenses compared to last year.
Backlog of $82.2 million at December 31, 2012 decreased $64.4 million compared
to December 31, 2011. Mining equipment backlog declined on a reduction of
customer orders and the delivery of four LeTourneau loaders during the year.
In addition, construction sector related backlog is lower as Wajax and
manufacturers' inventory levels currently allow for timelier product shipments
to customers.
Effective November 2, 2012, the Equipment segment became the exclusive
Canadian distributor of Bell articulated dump trucks ("ADT's"). These trucks,
manufactured by Bell Equipment Limited, are one of the world's leading truck
lines for construction, quarry and medium duty resource applications and are
sold in 80 countries. Wajax estimates the annual size of the Canadian ADT
market to be at least 500 units, or $225 million. Wajax also estimates the
existing Canadian installed base of trucks manufactured by Bell to be
approximately 300 units, which is expected to yield an immediate parts and
service opportunity. The geographic scope and capability of Equipment's
Canada-wide distribution network were central factors in securing distribution
rights to this world-class product line.
On October 17, 2011, Wajax announced it had reached an agreement with
LeTourneau Technologies, Inc. ("LeTourneau") providing for the dealer
agreement relating to Wajax's distribution of LeTourneau mining equipment and
parts products in Canada to be discontinued effective April 27, 2012.
LeTourneau revenue for the twelve months ended December 31, 2012 included
equipment sales of $25.8 million and parts and service volumes of $12.5
million and contributed approximately $8.5 million to the Equipment segment's
earnings.
Wajax Equipment's base business strategic initiatives are centered around a
continued focus on increasing the market share of its existing key product
lines, particularly construction and material handling equipment, and
improving its aftermarket capabilities and contribution across all lines of
business. The segment intends to grow its mining business by building on its
leadership position in Hitachi mining shovels through expansion of its mining
operations across Canada and the introduction of the extended Hitachi mining
truck line. It will also grow its base business through selected product
line extensions and tuck-under acquisitions. The segment's new market
opportunity is to further develop its Rotating Product group's opportunities
in the Canadian mining market.
During 2012, the segment strengthened its sales organization to better support
its market share target objectives by restructuring sales staff in eastern
Canada and Ontario and through the provision of management training and sales
execution tools. Development of the Rotating Products group and expansion of
the segment's mining operations infrastructure into eastern Canada and Ontario
resulted in better than expected sales and provided greater visibility into
future market opportunities. New product lines announced in 2012 included
the Hitachi 240 ton mine truck and the Bell ADT.
The focus to further drive the segment's strategy will include the following
specific initiatives:
-- The segment will maintain its focus on increasing market share
in key product lines through continued sales force
effectiveness improvements including the development of
in-house training programs and by providing tools to track
sales lead generation, coverage and performance.
-- Expansion of the segment's mining operations includes the
continued development of the required infrastructure and
organization to sell and service both above ground and
underground mining products in central and eastern Canada. The
segment is also actively marketing the 320 ton and new 240 ton
Hitachi mine trucks across Canada and working with the
manufacturer to clearly demonstrate the value proposition to
customers including quality and cost effectiveness. In
addition, the segment is working to introduce new underground
and drilling product lines to provide customers with an
expanded product and service offering in the future. Wajax has
invested in mining equipment inventory, including shovels and
trucks, to ensure product is available to execute this
initiative.
-- The capacity and quality of the service operation's delivery
structure will be enhanced through a focus on operational
effectiveness. This will include service management training
and stronger benchmarking and key performance indicator ("KPI")
measurements to identify and market more profitable business
opportunities. The segment intends to implement bolt-on
service management system technologies that will enhance the
segment's productivity.
-- The segment will actively market the Bell ADT product line
through its Canada-wide distribution network by leveraging its
current construction equipment market position. As well,
Equipment intends to capitalize on the immediate parts and
service opportunity of the existing installed base of trucks in
Canada manufactured by Bell, which is estimated to be 300
units.
-- The recently formed Rotating Products group in Fort McMurray is
planned to be further developed to maximize the significant
opportunities in the oil sands market. The main focus is on
marketing high quality and cost effective slurry system
products, parts and services through exclusive vendor
relationships. The segment's secondary focus will include the
provisioning of plant and field service labour and engineering
expertise to support customer's plant maintenance and field
service activities. While currently built around the oil sands
market in Fort McMurray, this business represents future growth
opportunities in other major mining market areas such as
northern Ontario and Quebec.
Power Systems
For the year ended December 31 2012 2011
Equipment* $129.0 $160.8
Parts and service $203.3 $186.6
Segment revenue $332.3 $347.4
Segment earnings $26.1 $32.9
Segment earnings margin 7.9% 9.5%
(1) Includes rental and other revenue.
Revenue by Market 2012 versus 2011
Market 2012 2011
Oil & Gas 26% 34%
On-highway Transportation 25% 23%
Industrial/Commercial 20% 20%
Oil Sands 7% 6%
Mining 5% 3%
Other 17% 14%
Revenue decreased $15.1 million, or 4%, to $332.3 million in 2012 from $347.4 million in 2011. (Excluding revenue from the former Harper operation, Power Systems revenue decreased $27.8 million, or 9%, compared to last year.) Segment earnings decreased $6.8 million to $26.1 million in 2012 from $32.9 million in 2011. The following factors impacted year-over-year revenue and earnings:
-- Equipment revenue decreased $31.8 million. The majority of the
decrease was caused by lower equipment volumes to off-highway
oil and gas customers, as a result of reduced industry activity
in western Canada. Lower power generation equipment volumes in
eastern Canada and lower marine sector sales also contributed
to the decline. These decreases were partially offset by
increased power generation equipment sales in western Canada.
-- Parts and service volumes increased $16.7 million compared to
last year due mainly to an additional four months of revenue in
2012 from the former Harper operations acquired on May 2, 2011
and higher power generation parts and service volumes.
-- Segment earnings decreased $6.8 million compared to last year
due to the negative impact of lower volumes and a $3.2 million
increase in selling and administrative expenses. Gross profit
margins remained flat year-over-year. Selling and
administrative expenses increased owing to $3.5 million of
additional expenses attributable to the former Harper operation
and higher personnel and sales related costs. These increases
were offset by $2.7 million of lower annual incentive accruals.
Backlog of $60.4 million as of December 31, 2012 decreased $15.9 million
compared to December 31, 2011 predominantly caused by lower oil and gas
related off-highway orders in western Canada.
The segment's base business strategic initiatives are intended to expand its
success in off-highway mechanical drive systems while maintaining the
segment's position in the on-highway parts and service market. It will also
complete the Canada-wide integration of its three operating units. The
segment's new market opportunity is to establish Power Systems as one of
Canada's leaders in commercial electrical power generation ("EPG").
Specifics of the initiatives going forward will include the following:
-- The segment's off-highway business will expand its aftermarket
capabilities by adding sales representatives in key markets and
introducing re-power programs for oil and gas fracturing
trailers and mining haul trucks. The segment will also
leverage product technology advancements by its major suppliers
to gain market share and focus on marine market opportunities.
-- The segment's on-highway business will diversify into other
"higher value" parts and service offerings by leveraging its
size and footprint to attract National Fleet Accounts. It will
also develop its relationship with "Wheel Time", the North
American distributors' association, to gain purchasing
efficiencies and access to "all makes" parts offerings.
-- As part of the segment's integration of its former regional
business units, within the next three years a common computer
system platform will be implemented across all three regions of
Power Systems allowing for cost efficiencies and
standardization of processes, reporting and KPI measurements.
-- The primary growth focus of Power Systems is to build its EPG
business by creating a stand-alone EPG group with a world-class
team. The group will leverage Power Systems' national
footprint and diverse product portfolio. The EPG market is
comprised of high growth sectors such as mining and remote
northern community development, and also has exposure to less
cyclical sectors such as industrial and commercial markets.
The new EPG group will further develop its large project
capabilities and continue its success in the standby and prime
diesel, rental and gas markets. In 2012, a new facility was
opened in Drummondville to support the Quebec EPG market and to
provide infrastructure, including engineering, for a national
integration centre.
Industrial Components
For the year ended December 31 2012 2011
Segment revenue $360.0 $347.5
Segment earnings $22.1 $23.1
Segment earnings margin 6.1% 6.6%
Revenue by Market 2012 versus 2011
Market 2012 2011
Industrial/Manufacturing 16% 17%
Mining 15% 14%
Forestry 13% 14%
Oil & Gas 13% 14%
Metal Processing 12% 11%
Construction 6% 6%
Food & Beverage 5% 5%
Transportation 4% 4%
Other 16% 15%
Revenue increased $12.5 million, or 4%, to $360.0 million from $347.5 million
in 2011. Segment earnings decreased $1.0 million to $22.1 million compared to
$23.1 million in the previous year. The year-over-year changes in revenue
and earnings were a result of the following factors:
-- Bearings and power transmission parts sales increased $10.3
million, or 6%, compared to last year led by higher sales to
mining, metal processing and construction sector customers
across all regions. Improved transportation, food and
beverage and oil and gas sector sales also contributed to the
increase. These increases were offset in part by a decline in
sales to industrial sector customers in eastern Canada.
-- Fluid power and process equipment products and service revenue
increased $2.2 million, or 1%, resulting from higher sales to
metal processing, food and beverage and agriculture sector
customers. These increases were offset somewhat by a decline
in mining sector volumes.
-- Segment earnings decreased $1.0 million compared to last year.
The positive impact of higher volumes was more than offset by
the negative impact of a slightly lower gross profit margin and
a $3.4 million increase in selling and administrative
expenses. The increase in selling and administrative expenses
resulted primarily from higher personnel and sales related
costs, computer system upgrade expenses and professional fees
related to acquisitions. These increases were offset by a $1.4
million reduction in annual incentive accruals compared to last
year.
Backlog of $41.6 million as of December 31, 2012 decreased $3.2 million
compared to December 31, 2011 and includes $1 million related to the two
acquisitions made in the fourth quarter discussed below.
On October 22, 2012, Industrial Components acquired all of the issued and
outstanding shares of ACE Hydraulic Limited ("ACE"), a hydraulic cylinder
repair business located in Bathurst, New Brunswick with annual revenues of
approximately $2.0 million. The consideration for the business was $1.4
million, subject to post-closing adjustments. The acquisition represents an
important step towards the segment's strategy of expanding its engineering,
service and repair capabilities across Canada.
On December 31, 2012, Industrial Components acquired the assets Kaman
Industrial Technologies, Ltd. ("Kaman Canada"), consisting of six branch
locations in British Columbia and one branch in Ontario. Kaman Canada is a
distributor of industrial components with annual revenues of approximately
$21.0 million. The consideration paid for the assets was $8.7 million,
subject to post-closing adjustments. The acquisition aligns with the
segment's strategy of growing all of its lines of business across Canada.
On February 21, 2013, Industrial Components announced it had formed a
strategic alliance with Kaman Canada's U.S.-based parent company, Kaman
Industrial Technologies Corporation ("Kaman U.S."). The strategic alliance
will target North American parts-supply contracts. The alliance will operate
as Sourcepoint Industrial and will provide customers with an alternative to
country based supply agreements. Customers of the alliance will be served
through Industrial Components' 65 branch locations and 13 service centres
Canada-wide and Kaman U.S.'s more than 200 customer service centers and five
distribution centers across the U.S., Mexico and Puerto Rico.
Industrial Components' base business strategic initiatives relate to the
expansion of its branch network through organic growth and acquisitions and
the continued steps to maximize its operational efficiency in order to
increase margins and lower its working capital requirements. The new market
opportunity for the segment is to grow revenue and earnings in its Engineering
and Repair Services ("ERS") business by capitalizing on its technical and
engineering capabilities by providing engineered solutions and repair services
built around its product offering.
Particulars of these initiatives are as follows:
-- The segment expects to grow its base business revenues with the
recent acquisition of the Kaman Canada branches and by opening
bearing and power transmission parts branches in
under-represented areas in southern Alberta, depending on
market conditions. In addition, the recent formation of
Sourcepoint Industrial alliance with Kaman U.S. will allow
Industrial Components to jointly bid on North American
parts-supply contract business.
-- Industrial Components intends to improve operational
efficiencies related to its inventory management, supply chain
and e-commerce capabilities. Inventory management and supply
chain process improvements are expected to reduce product
procurement, distribution and freight costs and lower inventory
levels. During 2013, the segment will continue to upgrade
its e-commerce capability to meet the evolving transactional
needs of its customers and improve the efficiency of its
transactions with suppliers.
-- The segment will continue to leverage its technical expertise,
product knowledge and customer relationships to expand its
higher margin ERS business, which complements its core business
of distributing technical products and repair parts.
Engineering design and fabrication services will be expanded to
offer customized solutions to customers' operational and
technical challenges. Capabilities in key centres will be
expanded to provide customers with additional service offerings
including shop repair, field repair and reliability services.
The recent acquisition of ACE, a hydraulic cylinder repair
business, represented an important step towards developing the
ERS business across Canada.
Annual Cash Flows
Cash Flows Used In Operating Activities
For the year ended December 31, 2012, cash flows used in operating activities
amounted to $39.1 million, compared to $61.3 million generated in the previous
year. The $100.4 million decrease in operating cash flows was caused by an
increased use of non-cash operating working capital of $94.1 million, higher
rental equipment additions of $4.9 million in the Equipment and Power Systems
segments, decreased other non-current liabilities of $3.9 million, and income
taxes paid of $2.3 million. This was partially offset by higher cash flows
from operating activities before changes in non-cash operating working capital
of $4.8 million.
Changes in operating non-cash working capital in 2012 compared to 2011 include
the following components:
Changes in non-cash operating
working capital *
For the year ended December 31 2012 2011
Trade and other receivables $17.1 $27.1
Inventories $39.0 $35.0
Prepaid expenses ($1.0) $0.6
Accounts payable and accrued $58.4 ($39.8)
liabilities
Provisions $0.8 ($2.5)
Total $114.3 $20.3
* Cash used in (generated)
Significant components of the changes in non-cash operating working capital
for the twelve months ended December 31, 2012 are as follows:
-- Trade and other receivables increased $17.1 million. A
significant increase in the Equipment segment, related to a
large mining equipment delivery and increased sales activity,
was partially offset by reductions in the Power Systems and
Industrial Components segments due to lower sales activity in
the fourth quarter compared to last year.
-- Inventories increased $39.0 million due principally to a $35.4
million increase in mining equipment (trucks and shovels) in
the Equipment segment.
-- Accounts payable and accrued liabilities decreased $58.4
million reflecting reductions in the Equipment and Power
Systems segments. Reductions in the Equipment segment were
attributable to lower trade payables and customer deposits
related to mining equipment. Decreases in the Power Systems
segment resulted from lower deferred income and inventory
related trade payables. Reductions in annual and mid-term
incentive accruals also contributed to the decrease.
Overall, the majority of the $114.3 million increase in non-cash operating
working capital occurred in the Equipment segment where significant
investments were made in order to better penetrate the mining and construction
markets. In particular, the Equipment segment increased its mining equipment
related operating working capital by approximately $75 million attributable to
higher inventory and accounts receivable levels and reduced trade payables and
customer deposits. At December 31, 2012, the segment had increased its
investment in Hitachi mining equipment inventory to $40.5 million, including
shovels and new mining trucks.
On the consolidated statement of financial position at December 31, 2012,
Wajax had employed $243.9 million in current assets net of current
liabilities, exclusive of funded net debt, compared to $165.0 million at
December 31, 2011. The $78.9 million increase was essentially attributable to
the $114.3 million increase in non-cash operating working capital as detailed
above and the ACE and Kaman Canada acquisitions totaling $10.1 million.
These increases were offset by an increase of $42.0 million in income taxes
payable and $1.2 million of dividends payable. The increase in income taxes
payable relates to both the tax on partnership income generated in 2011 which
was deferred to 2012 and current tax on 2012 income, of which $44.6 million
was paid on January 31, 2013. See Liquidity and Capital Resources section
for further detail.
Investing Activities
For the year ended December 31, 2012, Wajax invested $5.7 million in property,
plant and equipment additions, net of disposals, and $0.2 million in
intangible asset additions, compared to $5.4 million and $0.7 million for the
year ended December 31, 2011, respectively. In addition, the Industrial
Components segment invested a total of $10.1 million during 2012 for the
acquisition of the shares of ACE on October 22, 2012 and the acquisition of
the assets of Kaman Canada on December 31, 2012. Investing activities for
the twelve months ended December 31, 2011 also included $23.2 million of cash
paid on the acquisition of Harper on May 2, 2011.
Financing Activities
For the year ended December 31, 2012, the Corporation generated $39.3 million
of cash from financing activities compared to $69.3 million of cash used in
financing activities in 2011. Financing activities in the year included bank
debt borrowing of $93.0 million, offset partially by dividends paid to
shareholders totaling $50.6 million, or $3.03 per share, finance lease
payments of $2.6 million and debt facility amendment costs of $0.6 million.
Funded net debt of $173.7 million at December 31, 2012 increased $110.0
million compared to December 31, 2011. Increases in non-cash operating
working capital of $114.3 million resulted in negative cash flows from
operating activities of $39.1 million in 2012. Other uses of cash included
dividends paid of $50.6 million, investing activities of $16.0 million
including $10.1 million used for the ACE and Kaman Canada acquisitions,
finance lease payments of $2.6 million and debt facility amendment costs of
$0.6 million. As a result, Wajax's year-end leverage ratio of 1.55 times
increased from last year's ratio of 0.60 times. See Non-IFRS Measures
section.
Selected Annual Information
2012 2011 2010 (1)
Revenue $1,466.0 $1,377.1 $1,110.9
Earnings before income taxes $89.7 $87.5 $53.9
Net earnings $65.9 $63.8 $56.4
Basic earnings per share $3.95 $3.84 $3.39
Diluted earnings per share $3.89 $3.77 $3.34
Total assets $671.9 $589.9 $522.5
Non-current liabilities $173.2 $99.9 $18.9
Dividends declared per share $3.10 $2.14 -
Distributions declared per unit - - $3.40
(1) This information has been prepared on the same basis as the 2012
annual audited Consolidated Financial Statements
Revenue in 2012 of $1,466.0 million increased $88.9 million compared to
2011. The additional four months of revenue in 2012 from the former Harper
operation accounted for $12.6 million of the increase. Increased equipment
and parts and service revenue in the Equipment and Industrial Components
segments more than offset the decline in the Power Systems segment. Revenue in
2011 of $1,377.1 million increased $266.2 million compared to 2010 due to the
increased market demand for equipment and parts and service in all segments
and the Harper acquisition in May 2011 which accounted for $49.3 million of
the increase.
Earnings before income taxes increased $35.8 million from 2010 to 2012. The
increase was attributable to the increases in revenue noted above, offset
somewhat by the negative impact of lower gross profit margins, increased
selling and administrative expenses and higher finance costs.
Net earnings increased $9.5 million, or $0.56 per share, from 2010 to 2012.
The $35.8 million increase in earnings before income taxes more than offset
the $26.3 million increase in income tax expense resulting from the conversion
from an income fund to a corporation effective January 1, 2011.
The $149.4 million increase in total assets between December 31, 2010 and
December 31, 2012 included $12.5 million resulting from the acquisitions of
ACE and Kaman Canada in 2012 and $32.9 million from the acquisition of Harper
in 2011. The remaining increase of $104.0 million is mainly attributable to
higher inventories, accounts receivable and rental equipment resulting from
the higher sales activity throughout 2011 and 2012 and an increased inventory
investment in the Equipment segment to better penetrate the mining and
construction markets. These increases were offset partially by a $43.0 million
reduction in cash from 2010.
Non-current liabilities at December 31, 2012 of $173.2 million increased $73.3
million from December 31, 2011 as an increase in bank debt to fund higher
working capital requirements and the ACE and Kaman Canada acquisitions was
partially offset by a reduction in deferred taxes payable. Non-current
liabilities at December 31, 2011 of $99.9 million increased $81.0 million from
December 31, 2010 due primarily to the reclassification of bank debt to
non-current liabilities as the Corporation renewed its bank facility to 2016,
and an increase in deferred taxes payable as the partnership income generated
in 2011 was deferred and not subject to tax until 2012.
Selected Quarterly Information
The following table summarizes unaudited quarterly consolidated financial data
for the eight most recently completed quarters. This quarterly information
is unaudited but has been prepared on the same basis as the 2012 annual
audited Consolidated Financial Statements.
2012 2011
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Revenue $364.9 $356.4 $386.6 $358.1 $377.2 $361.9 $334.1 $303.9
Earnings before $19.3 $21.8 $25.2 $23.3 $22.5 $24.6 $22.4 $18.0
income taxes
Net earnings $14.2 $16.2 $18.5 $17.1 $16.6 $17.9 $16.5 $12.8
Net earnings
per share
- Basic $0.85 $0.97 $1.11 $1.03 $1.00 $1.08 $0.99 $0.77
- Diluted $0.84 $0.95 $1.09 $1.01 $0.98 $1.06 $0.98 $0.76
Significant seasonal trends in quarterly revenue and earnings have not been evident over the last two years.
A discussion of Wajax's previous quarterly results can be found in Wajax's quarterly MD&A reports available on SEDAR at www.sedar.com.
Liquidity and Capital Resources
On May 24, 2012 and December 7, 2012, Wajax amended its bank credit facility to increase the limit of the facility by $50 million and $75 million respectively, to $300 million on substantially the same terms and conditions as the existing facility. The $0.6 million cost of amending the facility has been capitalized and will be amortized over the remaining term of the facility. The terms of the $300 million bank credit facility include the following:
-- The facility is fully secured, expiring August 12, 2016, and is
now made up of an $80 million non-revolving term portion and a
$220 million revolving term portion.
-- Borrowing capacity is dependent upon the level of inventories
on-hand and the outstanding trade accounts receivable.
-- The facility contains customary restrictive covenants including
limitations on the payment of cash dividends and the
maintenance of certain financial ratios all of which were met
as at December 31, 2012. Wajax is restricted from the
declaration of monthly dividends in the event the Corporation's
leverage ratio, as defined in the bank credit facility
agreement, exceeds three times. The Corporation's interest
coverage ratio, as defined under the bank credit facility, must
not be lower than three times.
-- Borrowings bear floating rates of interest at margins over
Canadian dollar bankers' acceptance yields, U.S. dollar LIBOR
rates or prime. Margins on the facility depend on Wajax's
leverage ratio at the time of borrowing and range between 1.5%
and 3.0% for Canadian dollar bankers' acceptances and U.S.
dollar LIBOR borrowings, and 0.5% and 2.0% for prime rate
borrowings.
At December 31, 2012, Wajax had borrowed $154.8 million and issued $5.9
million of letters of credit for a total utilization of $160.7 million of its
$300 million bank credit facility. At December 31, 2012, borrowing capacity
under the bank credit facility was equal to $300 million.
Under the terms of the $300 million bank credit facility, Wajax is permitted
to have additional interest bearing debt of $15 million. As such, Wajax has
up to $15 million of demand inventory equipment financing capacity with two
non-bank lenders. The equipment notes payable under the facilities bear
floating rates of interest at margins over Canadian dollar bankers' acceptance
yields and U.S. LIBOR rates. Principal repayments are generally due the
earlier of 12 months from the date of financing and the date the equipment is
sold. At December 31, 2012 Wajax had no utilization of its interest bearing
equipment financing facilities.
The Corporation's capital structure is managed such that it maintains a
relatively low leverage ratio as the Corporation pays dividends to
shareholders equal to a significant portion of its earnings. In addition, the
Corporation's tolerance to interest rate risk decreases/increases as the
Corporation's leverage ratio increases/decreases. The rate of interest on
the Corporation's funded debt is currently all floating which is outside of
the Corporation's interest rate risk policy. Management is willing to
maintain this level of floating rate debt given the low interest rate
environment. The Corporation's objective is to maintain a leverage ratio
between 1.5 times and 2.0 times. However, there may be instances where the
Corporation is willing to maintain a leverage ratio outside the range. See
Non-IFRS section.
Since its conversion to a corporation on January 1, 2011, Wajax had not made
any significant income tax payments until January 31, 2013. This is due to
income tax payments being deferred as a result of its partnership structure.
On January 31, 2013, Wajax made an income tax payment of $44.6 million. This
included approximately $23 million of tax on partnership income generated in
2011 and the balance representing tax on income to be included in 2012 taxable
income as a result of a change in tax legislation that has effectively removed
the partnership income deferral benefit. The Corporation also commenced making
monthly income tax installments in December 2012.
A key strategy of the Equipment segment is to grow its mining business through
expansion into eastern Canada and the introduction of the new Hitachi mining
truck. To ensure mining equipment is available to execute its strategy,
Wajax has purchased certain mining equipment (large excavators and trucks)
that do not currently have committed purchase orders. As such, since the
beginning of the year Wajax has increased its investment in Hitachi mining
equipment inventory by $35.4 million to $40.5 million as at December 31, 2012,
of which $36.5 million is available to fill future customer purchases.
Depending on the level of economic activity in the Canadian mining sector,
Wajax may continue to use its debt facilities to finance a portion of this and
other mining equipment scheduled to be delivered in 2013.
Wajax's $300 million bank credit facility along with the additional $15
million of capacity permitted under the bank credit facility should be
sufficient to meet Wajax's short-term normal course working capital and
maintenance capital requirements, including the additional mining equipment
inventory. However, Wajax may be required to access the equity or debt markets
in order to fund significant acquisitions and growth related working capital
and capital expenditures.
See the Annual Cash Flows section for further detail.
Contractual Obligations
After Contractual Obligations Total 1 year 1 - 5 years 5 years
Bank debt $ 153.0 $ - $ 153.0 $ -
Operating leases $ 97.0 $ 16.7 $ 47.0 $ 33.3
Obligations under $ 11.8 $ 3.6 $ 8.2 $ - finance leases
Total $ 261.8 $ 20.3 $ 208.2 $ 33.3
The $153.0 million bank debt obligation relates to the long-term portion of the term credit facility and excludes current bank indebtedness and letters of credit.
The operating leases relate to contracts entered into for facilities, a portion of the long-term lift truck rental fleet in Equipment and office equipment. See the Off Balance Sheet Financing section for additional information.
The obligations under finance leases relate to certain vehicles financed under finance lease arrangements. The leases have a minimum one year term and are extended on a monthly basis thereafter until termination.
Wajax also has contingent contractual obligations where Wajax has guaranteed the resale value of equipment sold ("guaranteed residual value contracts") or has guaranteed a portion of customer lease payments ("recourse contracts"). These contracts are subject to certain conditions being met by the customer. As at December 31, 2012, Wajax had guaranteed $1.2 million of contracts (2011 - $5.3 million) with commitments arising between 2013 and 2016. The commitments made by Wajax in these contracts reflect the estimated future value of the equipment, based on the judgment and experience of management. Wajax has recorded a $0.1 million provision in 2012 (2011 - $0.1 million) as an estimate of the financial loss likely to result from such commitments.
The above table does not include obligations to fund pension benefits. Wajax sponsors certain defined benefit plans that cover executive employees, a small group of inactive employees and employees on long-term disability benefits. The defined benefit plans are subject to actuarial valuations in 2014 and 2015. Management does not expect future cash contribution requirements to change materially from the 2012 contribution level of $1.3 million as a result of these valuations or any declines in the fair value of the defined benefit plans' assets.
Financial Instruments
Wajax uses derivative financial instruments in the management of its foreign currency and interest rate exposures. Wajax's policy is not to utilize derivative financial instruments for trading or speculative purposes. Significant derivative financial instruments outstanding at the end of the year were as follows:
Wajax enters into short-term currency forward contracts
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. As at December 31, 2012, Wajax had contracts
outstanding to buy U.S.$26.5 million and to sell
U.S.$11.1 million (December 31, 2011 - to buy U.S.$36.0
million and €0.2 million and to sell U.S.$1.0
million). The U.S. dollar contracts expire between
January 2013 and April 2014, with a weighted average
U.S./Canadian dollar rate of 0.9959.
Wajax measures derivative instruments not accounted for as hedging items at fair value with subsequent changes in fair value being recorded in earnings. Derivatives designated as effective hedges are measured at fair value with subsequent changes in fair value being recorded in other comprehensive income until the related hedged item is recorded and affects income. The fair value of derivative instruments is estimated based upon market conditions using appropriate valuation models. The carrying values reported in the balance sheet for financial instruments are not significantly different from their fair values. The impact of a change in foreign currency relative to the Canadian dollar on the Corporation's financial statements of unhedged foreign currency-denominated sales to customers along with the associated receivables and purchases from vendors along with associated payables would be insignificant.
Wajax is exposed to the risk of non-performance by counterparties to short-term currency forward contracts. These counterparties are large financial institutions with a "Stable" outlook and high short-term and long-term credit ratings from Standard and Poor's. To date, no such counterparty has failed to meet its financial obligations to Wajax. Management does not believe there is a significant risk of non-performance by these counterparties and will continue to monitor the credit risk of these counterparties.
Off Balance Sheet Financing
Off balance sheet financing arrangements include operating lease contracts entered into for facilities with various landlords, a portion of the long-term lift truck rental fleet in Equipment with a non-bank lender, and office equipment with various non-bank lenders. The total obligations for all operating leases are detailed in the Contractual Obligations section. At December 31, 2012, the non-discounted operating lease commitments for facilities totaled $95.6 million, rental fleet $0.8 million, office equipment $0.5 million and vehicles $0.1 million.
Although Wajax's consolidated contractual annual lease commitments decline year-by-year, it is anticipated that existing leases will either be renewed or replaced, resulting in lease commitments being sustained at current levels. In the alternative, Wajax may incur capital expenditures to acquire equivalent capacity.
The Equipment segment had $97.2 million (2011 - $41.5 million) of consigned inventory on-hand from a major manufacturer at December 31, 2012. In the normal course of business, Wajax receives inventory on consignment from this manufacturer which is generally sold to customers or purchased by Wajax. 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 facilities.
Although management currently believes Wajax has adequate debt capacity, Wajax would have to access the equity or debt markets, or temporarily reduce dividends to accommodate any shortfalls in Wajax's credit facilities. See the Liquidity and Capital Resources section.
Share Capital
The shares of Wajax issued are included in shareholders' equity on the balance sheet as follows:
Issued and fully paid Shares as at December 31, Number Amount 2012
Balance at the beginning of the year 16,629,444 $105.4
Rights exercised 107,003 1.3
Balance at the end of the year 16,736,447 $106.7
At the date of this MD&A, the Corporation had 16,736,447 common shares outstanding.
Wajax has five share-based compensation plans; the Wajax Share Ownership Plan ("SOP"), the Deferred Share Program ("DSP"), the Directors' Deferred Share Unit Plan ("DDSUP"), the Mid-Term Incentive Plan for Senior Executives ("MTIP") and the Deferred Share Unit Plan ("DSUP"). SOP, DSP and DDSUP rights are issued to the participants and are settled by issuing Wajax Corporation shares. The cash-settled MTIP and DSUP consist of annual grants that vest over three years and are subject to time and performance vesting criteria. A portion of the MTIP and the full amount of the DSUP grants are determined by the price of the Corporation's shares. Compensation expense for the SOP, DSP and DDSUP is determined based upon the fair value of the rights at the date of grant and charged to earnings on a straight line basis over the vesting period, with an offsetting adjustment to contributed surplus. Compensation expense for the DSUP and the share-based portion of the MTIP varies with the price of the Corporation's shares and is recognized over the vesting period. Wajax recorded compensation cost of $3.4 million for the year (2011 - $5.4 million) in respect of these plans. At December 31, 2012, 254,952 (2011 - 316,595) rights were outstanding under the SOP, DSP and DDSUP.
Dividends
Dividends to shareholders for the periods January 1, 2012 to December 31, 2012 and January 1, 2011 to December 31, 2011 were declared as follows:
2012 2011
Month ((1)) Per Share Amount Per Share Amount
January $ 0.20 $ 3.3 $ 0.15 $ 2.5
February 0.20 3.3 0.15 2.5
March 0.27 4.5 0.15 2.5
April 0.27 4.5 0.15 2.5
May 0.27 4.5 0.18 3.0
June 0.27 4.5 0.18 3.0
July 0.27 4.5 0.18 3.0
August 0.27 4.5 0.20 3.3
September 0.27 4.5 0.20 3.3
October 0.27 4.5 0.20 3.3
November 0.27 4.5 0.20 3.3
December 0.27 4.5 0.20 3.3
Total dividends for the years ended December 31 $ 3.10 $ 51.8 $ 2.14 $ 35.6
(1) The Corporation's monthly dividends were generally payable to shareholders of record on the last business day of each calendar month and were paid on or about the 20(th) day of the following month.
For the year ending December 31, 2012, Wajax declared dividends to shareholders totaling $3.10 per share. For the year ending December 31, 2011, Wajax declared dividends to shareholders totaling $2.14 per share. Dividends paid in 2012 and 2011 were funded from cash generated from operating activities.
The Corporation declared monthly dividends of $0.27 per share, or $4.5 million, in January, February, March and April of 2013.
In 2012, the Corporation established an objective of declaring annual dividends equal to at least 75% of earnings subject to the Corporation's financial condition, economic outlook and capital requirements for growth including acquisitions. The Corporation pays dividends on a monthly basis.
Fourth Quarter Consolidated Results
For three months ended December 31 2012 2011
Revenue $364.9 $377.2
Gross profit $73.6 $79.3
Selling and administrative expenses $53.0 $55.7
Earnings from operating activities $20.6 $23.6
Finance costs $1.3 $1.2
Earnings before income taxes $19.3 $22.5
Income tax expense $5.1 $5.9
Net earnings $14.2 $16.6
Basic earnings per share $0.85 $1.00
Diluted earnings per share $0.84 $0.98
The Equipment segment was positively impacted in the quarter by increased demand for forestry equipment, attributable to higher lumber prices, particularly in British Columbia. The Equipment segment also benefitted from a somewhat stronger construction market in the quarter compared to last year. Weakness in oil and gas sector activity in western Canada, which started in the third quarter of 2012, continued in the fourth quarter as deteriorating industry fundamentals in North America resulted in a decline in customer spending. This decline primarily affected the Power Systems and Industrial Components segments. Mining activity, including the oil sands market, was somewhat flat compared to last year. Although quoting activity remained high at year-end, the Equipment segment saw a reduction in mining equipment backlog in the latter part of the year as customers began to take a more cautious approach in making commitments to buy equipment.
Revenue Revenue in the fourth quarter of 2012 decreased 3%, or $12.3 million, to $364.9 million, from $377.2 million in the fourth quarter of 2011. Segment revenue increased 5% in Equipment. Segment revenue decreased 17% in Power Systems and decreased 5% in Industrial Components due mainly to the lower oil and gas sector activity in western Canada.
Gross profit Gross profit in the fourth quarter of 2012 decreased $5.7 million due to the decrease in volumes and a lower gross profit margin percentage compared to the fourth quarter last year. The gross profit margin percentage for the quarter of 20.2% declined from 21.0% in the fourth quarter of 2011 due to lower parts and service margins offset by the impact of lower equipment revenues compared to last year.
Selling and administrative expenses Selling and administrative expenses decreased $2.7 million in the fourth quarter of 2012 compared to the same quarter last year. Decreases resulting from lower annual and mid-term incentive accruals were offset in part by an increase in bad debt expense and environmental remediation provisions compared to last year. Selling and administrative expenses as a percentage of revenue decreased to 14.5% in the fourth quarter of 2012 from 14.8% compared to the same quarter of 2011.
Finance costs Quarterly finance costs of $1.3 million increased $0.1 million compared to the same quarter last year as the cost of higher funded debt levels outstanding during the quarter was mostly offset by the Corporation's lower cost of borrowing compared to the same quarter last year.
Income tax expense The Corporation's effective income tax rate of 26.3% for the quarter was unchanged from the previous year.
Net earnings Quarterly net earnings decreased $2.4 million to $14.2 million, or $0.85 per share, from $16.6 million, or $1.00 per share, in the same quarter of 2011. The impact of reduced volumes, a lower gross profit margin percentage and slightly higher finance costs more than offset the lower selling and administrative expenses compared to the same quarter last year.
Comprehensive income Total comprehensive income of $13.7 million in the fourth quarter of 2012 included net earnings of $14.2 million, offset partially by an other comprehensive loss of $0.5 million. The other comprehensive loss was mainly attributable to actuarial losses on pension plans of $0.7 million.
Funded net debt Funded net debt of $173.7 million at December 31, 2012 increased $34.4 million compared to September 30, 2012. Increases in non-cash operating working capital of $25.4 million resulted in negative cash flows from operating activities for the quarter of $8.8 million. Other uses of cash included dividends paid of $13.6 million, investing activities of $10.7 million including $10.1 million used for the ACE and Kaman Canada acquisitions, finance lease payments of $0.8 million and debt facility amendment costs of $0.3 million. Wajax's leverage ratio of 1.55 times at December 31, 2012 increased from the September 30, 2012 ratio of 1.22 times. See Non-IFRS Measures section.
Dividends For the fourth quarter ended December 31, 2012 monthly dividends declared totaled $0.81 per share. For the fourth quarter ended December 31, 2011 monthly dividends declared were $0.60 per share.
Backlog Consolidated backlog at December 31, 2012 of $184.1 million decreased $18.3 million, or 9%, compared to September 30, 2012 due to reductions in the Equipment and Power Systems segments. Backlog includes the total retail value of customer purchase orders for future delivery or commissioning. See the Fourth Quarter Results of Operations section for further backlog detail by segment.
Fourth Quarter Results of Operations
Equipment
For three months ended December 31 2012 2011
Equipment* $130.7 $125.4
Parts and service $70.9 $66.9
Segment revenue $201.6 $192.3
Segment earnings $14.0 $14.3
Segment earnings margin 6.9% 7.5%
(1) Includes rental and other revenue.
Revenue in the fourth quarter of 2012 increased $9.3 million, or 5%, to $201.6 million from $192.3 million in the fourth quarter of 2011. Segment earnings for the quarter decreased $0.3 million to $14.0 million compared to the fourth quarter of 2011. The following factors contributed to the Equipment segment's fourth quarter results:
-- Equipment revenue for the fourth quarter increased $5.3 million
compared to the same quarter last year. Specific
quarter-over-quarter variances included the following:
o Forestry equipment revenues increased $9.0 million resulting from
higher Tigercat product sales in all regions and increased sales of
forestry related Hitachi equipment in western Canada on strong
market demand in British Columbia. o Construction equipment revenue increased $3.2 million mainly as a
result of market demand which drove increased sales of Hitachi
excavators in western Canada and Ontario, offset partially by lower
JCB and other equipment sales in eastern Canada owing to lower
demand and competitive market pressures. o Crane and utility equipment revenue increased $0.7 million mainly
attributable to higher new equipment sales to utility customers. o Mining equipment sales decreased $7.3 million as Hitachi mining
equipment deliveries in western Canada were, on average, of a
smaller size with a lower per unit sales value. o Material handling equipment revenue decreased $0.3 million.
-- Parts and service volumes for the fourth quarter increased $4.0
million compared to the same quarter last year. Excluding the
LeTourneau product line, which was discontinued in the second
quarter of this year, parts and service volumes for the fourth
quarter increased $10.2 million, or 17%. The $10.2 million
increase was due primarily to higher mining sector volumes in
western Canada driven by the installed base of Hitachi
equipment and growth in the Rotating Products Group in Fort
McMurray. Increased materials handling sector sales in western
Canada also contributed to the increase.
-- Segment earnings for the fourth quarter decreased $0.3 million
to $14.0 million compared to the same quarter last year. The
negative impact of a $2.1 million increase in selling and
administrative expenses outweighed the positive impact of
higher volumes. Selling and administrative expenses increased
on higher personnel and sales related expenditures and
additional environmental remediation provisions compared to
last year.
Backlog of $82.2 million at December 31, 2012 decreased $13.2 million compared
to September 30, 2012 due largely to lower mining equipment backlog.
Power Systems
For three months ended December 31 2012 2011
Equipment* $31.5 $43.9
Parts and service $47.5 $51.6
Segment revenue $79.0 $95.5
Segment earnings $5.0 $7.9
Segment earnings margin 6.3% 8.3%
(1) Includes rental and other revenue.
Revenue in the fourth quarter of 2012 decreased $16.5 million, or 17%, to
$79.0 million compared to $95.5 million in the same quarter of 2011. Segment
earnings decreased $2.9 million to $5.0 million in the fourth quarter compared
to the same quarter in the previous year. The following factors impacted
quarterly revenue and earnings compared to last year:
-- Equipment revenue decreased $12.4 million. The majority of the
decrease was due to lower equipment sales to off-highway oil
and gas customers as a result of reduced industry activity in
western Canada. These decreases were partially offset by
increased power generation equipment sales.
-- Parts and service volumes decreased $4.1 million compared to
last year as a result of lower sales to off-highway customers
resulting from reduced activity in western Canada's oil and gas
sector offset somewhat by higher mining sector sales in eastern
Canada. Lower power generation parts and service volumes and
reduced sales to on-highway customers also contributed to the
decline.
-- Segment earnings in the fourth quarter of 2012 decreased $2.9
million compared to the same quarter last year as the impact of
reduced volumes and a lower gross profit margin was mitigated
somewhat by a $2.5 million decrease in selling and
administrative expenses. The lower gross profit margin
resulted from a reduction in both equipment and parts and
service margins offset by a higher proportion of equipment
sales compared to last year. Selling and administrative
expenses decreased due principally to lower personnel costs,
including lower annual incentive accruals, and a decline in
other sales related costs.
Backlog of $60.4 million as of December 31, 2012 decreased $5.1 million
compared to September 30, 2012 due primarily to reductions in power generation
and oil and gas sector related backlog in western Canada.
Industrial Components
For three months ended December 31 2012 2011
Segment revenue $85.3 $90.2
Segment earnings $3.6 $5.9
Segment earnings margin 4.2% 6.5%
Revenue of $85.3 million in the fourth quarter of 2012 decreased $4.9 million,
or 5%, from $90.2 million in the fourth quarter of 2011. Segment earnings
decreased $2.3 million to $3.6 million in the fourth quarter compared to the
same quarter in the previous year. The following factors contributed to the
segment's fourth quarter results:
-- Bearings and power transmission parts sales decreased $0.2
million compared to the same quarter last year. The impact of
a reduction in oil and gas sector sales in western Canada and
lower industrial sector volumes was partially offset by
improved sales to customers in the transportation, construction
and food and beverage sectors.
-- Fluid power and process equipment products and service revenue
in the fourth quarter of 2012 decreased $4.7 million, or 11%,
due to lower oil and gas sector sales in western Canada.
-- Segment earnings in the fourth quarter of 2012 decreased $2.3
million compared to the same quarter last year due essentially
to the negative impact of lower volumes and gross profit
margins in western Canada and a nominal increase in selling and
administrative expenses.
Backlog of $41.6 million as of December 31, 2012 remain the same compared to
September 30, 2012 and includes $1 million related to the two acquisitions
made in the quarter.
Fourth Quarter Cash Flows
Cash Flows Used In Operating Activities
Cash flows used in operating activities amounted to $8.8 million in the fourth
quarter of 2012, compared to $48.7 million generated in the same quarter of
the previous year. The $57.5 million decrease was caused by an increased use
of non-cash operating working capital of $52.0 million, lower cash flows from
operating activities before changes in non-cash operating working capital of
$3.1 million, higher income taxes paid of $1.9 million and decreased other
non-current liabilities of $1.6 million, offset by lower rental equipment
additions of $1.4 million.
Changes in non-cash operating working capital for the fourth quarter of 2012
compared to the same quarter in 2011 include the following components:
Changes in non-cash operating working capital*
For three months ended 2012 2011
December 31
Trade and other receivables $6.9 ($13.8)
Inventories ($8.9) $9.3
Prepaid expenses $0.7 ($1.5)
Accounts payable and accrued $29.1 ($18.8)
liabilities
Provisions ($2.4) ($1.8)
Total $25.4 ($26.7)
* Cash used in (generated)
Significant components of the changes in non-cash operating working capital for the quarter ended December 31, 2012 are as follows:
-- Trade and other receivables increased $6.9 million due
primarily to higher sales activity in the Equipment segment
reduced somewhat by lower accounts receivable in the Industrial
Components segment on lower sales activity.
-- Inventories decreased $8.9 million due mainly to lower stocking
levels in Industrial Components and decreases in the Equipment
segment as reductions in construction equipment were only
partially offset by an increase in mining equipment.
-- Accounts payable and accrued liabilities decreased $29.1
million resulting from lower mining inventory trade payables in
the Equipment segment. These decreases were offset in part by
higher inventory related trade payables in the Industrial
Components segments.
Included in the $25.4 million increase in non-cash operating working capital,
was the Equipment segment's additional investment of approximately $34.6
million in mining equipment related operating working capital attributable to
higher inventory and reduced trade payables.
On the consolidated statement of financial position at December 31, 2012,
Wajax had employed $243.9 million of current assets net of current
liabilities, exclusive of funded net debt, compared to $214.2 million at
September 30, 2012. The $29.7 million increase was due primarily to the $25.4
million increase in non-cash operating working capital as detailed above, the
ACE and Kaman Canada acquisitions less a $2.0 million increase in income taxes
payable. See Liquidity and Capital Resources section for further detail.
Investing Activities
During the fourth quarter of 2012, Wajax invested $0.6 million in property,
plant and equipment additions, net of disposals, compared to $2.6 million in
the fourth quarter of 2011. In addition, the Industrial Components segment
paid a total of $1.4 million for the acquisition of the shares of ACE on
October 22, 2012 and $8.7 million for the acquisition of the assets of Kaman
Canada on December 31, 2012.
Financing Activities
The Corporation generated $15.3 million of cash from financing activities in
the fourth quarter of 2012 compared to $37.9 million of cash used in financing
activities in the same quarter of 2011. Financing activities in the quarter
included bank debt borrowings of $30.0 million, offset by dividends paid to
shareholders totaling $13.6 million, or $0.81 per share, finance lease
payments of $0.8 million and debt facility amendment costs of $0.3 million.
Non-IFRS Measures
The MD&A contains certain financial measures that do not have a standardized
meaning prescribed by IFRS. 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
profit or to cash flow from operating, investing, and financing activities
determined in accordance with IFRS as indicators of the Corporation's
performance. The Corporation's management believes that these measures are
commonly reported and widely used by investors as an indicator of a company's
cash operating performance and ability to raise and service debt.
These financial measures are identified and defined below:
Leverage ratio At the end of a particular quarter, the leverage ratio
is defined as funded net debt at the end of a
particular quarter divided by trailing 12-month
EBITDA. The Corporation's objective is to maintain
this ratio between 1.5 times and 2.0 times.
Funded net debt Funded net debt includes bank debt, bank indebtedness
and obligations under finance leases, net of cash.
EBITDA Earnings before finance costs, income tax expense,
depreciation and amortization.
Reconciliation of the Corporations earnings to EBITDA is as follows:
For the twelve For the twelve
months ended months ended
December 31 September 30
2012 2011 2012
Earnings $65.9 $63.8 $68.3
Depreciation and amortization 17.8 13.5 16.6
Finance costs 4.4 4.6 4.3
Income tax expense 23.8 23.7 24.6
EBITDA $112.0 $105.6 $113.8
Calculation of the Corporations funded net debt and leverage ratio is as follows:
December 31 September 30
2012 2011 2012
Bank indebtedness (cash) $10.2 $(5.7) $6.0
Obligations under finance leases 11.8 10.3 11.3
Bank debt 151.7 59.0 122.0
Funded net debt $173.7 $63.7 $139.3
Leverage ratio 1.55 0.60 1.22
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with
IFRS requires management to make judgements, estimates and assumptions that
affect the application of accounting policies and the reported amounts of
assets, liabilities, revenue and expenses. Actual results could differ from
those judgements, estimates and assumptions. Note 3 to the annual
Consolidated Financial Statements describes the significant accounting
policies and methods used in preparation of the annual Consolidated Financial
Statements. The Corporation bases its estimates on historical experience and
various other assumptions that are believed to be reasonable in the
circumstances.
The key assumptions concerning the future and other key sources of estimation
uncertainty that have a significant risk of resulting in a material adjustment
to the carrying amount of assets and liabilities within the next fiscal year
are as follows:
Allowance for doubtful accounts
The Corporation is exposed to credit risk with respect to its trade and other
receivables. However, this is somewhat minimized by the Corporation's large
customer base which covers most business sectors across Canada. Wajax follows
a program of credit evaluations of customers and limits the amount of credit
extended when deemed necessary. The Corporation maintains provisions for
possible credit losses, and any such losses to date have been within
management's expectations. The provision for doubtful accounts is determined
on an account-by-account basis. The $2.5 million provision for doubtful
accounts at December 31, 2012 decreased $1.0 million from $3.5 million in 2011
due to reduction in the Equipment segment. As conditions change, actual
results could differ from those estimates.
Inventory obsolescence
The value of the Corporation's new and used equipment is 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 is valued
at the lower of cost or estimated net realizable value. The Corporation
performs an aging analysis to identify slow moving or obsolete parts
inventories and estimates appropriate obsolescence provisions related
thereto. The Corporation takes advantage of supplier programs that allow for
the return of eligible parts for credit within specified time periods. The
inventory obsolescence charged to earnings for 2012 was $1.9 million compared
to $3.2 million in 2011.
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 three years. The key
assumptions for the estimate are those regarding revenue growth, gross margin
and the level of working capital required to support the business. These
estimates are based on past experience and management's expectations of future
changes in the market and forecasted growth initiatives. To prepare the
value in use calculations, the forecasts are extrapolated beyond the three
year period at the estimated long-term inflation rate (2%) and discounted back
to present value. The discount rate is based on the Corporation's pre-tax
weighted average cost of capital of approximately 11% to reflect a market
participant's view of the cash-generating unit.
During the year, the Corporation performed impairment tests, based on value in
use, of its goodwill and intangible assets with an indefinite life and
concluded that no impairment existed in either the goodwill associated with
any of Wajax's cash-generating units ("CGUs") or the intangible assets with an
indefinite life.
Warranty provision
The Corporation maintains provisions for possible customer warranty claims
that may not be covered by the manufacturers' standard warranty and limited
warranties for workmanship on services provided. The provisions are
developed using the management's best estimate of actual warranty expense,
generally based on recent claims experience, and are regularly reviewed and
adjusted as required.
Changes in Accounting Policy
On January 1, 2012, the Corporation early adopted amendments to International
Accounting Standard ("IAS") 1 Presentation of Financial Statements:
Presentation of Items of Other Comprehensive Income. The amendments to IAS 1
require that an entity present separately the items of other comprehensive
income that may be reclassified to profit or loss in the future from those
that would never be reclassified to profit or loss. These amendments are to be
applied retrospectively in the first annual fiscal period beginning on or
after July 1, 2012, with early adoption permitted. This new presentation is
included in the consolidated statements of comprehensive income.
New standards and interpretations not yet adopted
The new standards or amendments to existing standards that may be significant
to the Corporation set out below are not yet effective for the year ended
December 31, 2012 and have not been applied in preparing these consolidated
financial statements.
As of January 1, 2013, the Corporation will be required to adopt the
amendments to IFRS 7 Offsetting Financial Assets and Liabilities, which
contains new disclosure requirements for financial assets and liabilities that
are offset in the statement of financial position or are subject to master
netting arrangements or similar arrangements. The Corporation does not
expect IFRS 7 to have a material impact on its consolidated financial
statements.
As of January 1, 2013, the Corporation will be required to adopt IFRS 10
Consolidated Financial Statements, which establishes principles for the
preparation and presentation of consolidated financial statements when an
entity controls one or more other entities. The Corporation does not expect
IFRS 10 to have a material impact on its consolidated financial statements.
As of January 1, 2013, the Corporation will be required to adopt IFRS 13 Fair
Value Measurement, which defines fair value and sets out a framework for
measuring fair value when fair value measurements are required or permitted by
other standards. The Corporation is currently assessing the impact of this
standard on its consolidated financial statements.
As of January 1, 2013, the Corporation will be required to adopt IAS 19
Employee Benefits, which requires recognition of actuarial gains and losses
immediately in other comprehensive income, the full recognition of past
service costs immediately in profit or loss, recognition of the expected
return on plan assets in profit or loss to be calculated based on the rate
used to discount the defined benefit obligation, and certain additional
disclosures. This standard does not significantly impact the Corporation's
consolidated financial statements.
As of January 1, 2015, the Corporation will be required to adopt IFRS 9
Financial Instruments, which is the result of the first phase of the IASB's
project to replace IAS 39 Financial Instruments: Recognition and Measurement.
The new standard replaces the current multiple classification and measurement
models for financial assets and liabilities with a single model that has only
two classification categories: amortized cost and fair value. The Corporation
is currently assessing the impact of this standard on its consolidated
financial statements.
Risk Management and Uncertainties
As with most businesses, Wajax is subject to a number of marketplace and
industry related risks and uncertainties which could have a material impact on
operating results and Wajax's ability to pay cash dividends to shareholders.
Wajax attempts to minimize many of these risks through diversification of core
businesses and through the geographic diversity of its operations. In
addition, Wajax has adopted an annual enterprise risk management assessment
which is prepared by the Corporation's senior management and overseen by the
Board of Directors and Committees of the Board. The enterprise risk management
framework sets out principles and tools for identifying, evaluating,
prioritizing and managing risk effectively and consistently across Wajax.
The following are a number of risks that deserve particular comment:
Manufacturer relationships and product access
Wajax seeks to distribute leading product lines in each of its regional
markets and its success is dependent upon continuing relations with the
manufacturers it represents. Wajax endeavours to align itself in long-term
relationships with manufacturers that are committed to achieving a competitive
advantage and long-term market leadership in their targeted market segments.
In the Equipment and Power Systems segments, and in certain cases in the
hydraulics and process pumps portion of the Industrial Components segment,
manufacturer relationships are governed through effectively exclusive
distribution agreements. Distribution agreements are for the most part
open-ended, but are cancellable within a relatively short notification period
specified in each agreement. Although Wajax enjoys good relationships with its
major manufacturers and seeks to develop additional strong long-term
partnerships, a loss of a major product line without a comparable replacement
would have a significantly adverse effect on Wajax's results of operations or
cash flow.
There is a continuing consolidation trend among industrial equipment and
component manufacturers. Consolidation may impact the products distributed by
Wajax, in either a favourable or unfavourable manner. Consolidation of
manufacturers may have a negative impact on the results of operations or cash
flow if product lines Wajax distributes become unavailable as a result of the
consolidation. This was the case in the Equipment segment with the
discontinued distribution of the LeTourneau product line effective April 27
2012, due to the purchase by Joy Global Inc. of LeTourneau Technologies Inc.
Suppliers generally have the ability to unilaterally change distribution terms
and conditions or limit supply of product in times of intense market demand.
Supplier changes in the area of product pricing and availability can have a
negative or positive effect on Wajax's revenue and margins. As well, from time
to time suppliers make changes to payment terms for distributors. This may
affect Wajax's interest-free payment period or consignment terms, which may
have a materially negative or positive impact on working capital balances such
as cash, inventories, trade and other payables and bank debt.
Economic conditions/Business cyclicality
Wajax's customer base consists of businesses operating in the natural
resources, construction, transportation, manufacturing, industrial processing
and utilities industries. These industries can be capital intensive and
cyclical in nature, and as a result, customer demand for Wajax's products and
services may be affected by economic conditions at both a global or local
level. Changes in interest rates, consumer and business confidence, corporate
profits, credit conditions, foreign exchange, commodity prices and the level
of government infrastructure spending may influence Wajax's customers'
operating, maintenance and capital spending, and therefore Wajax's sales and
results of operations. Although Wajax has attempted to address its exposure to
business and industry cyclicality by diversifying its operations by geography,
product offerings and customer base, there can be no assurance that Wajax's
results of operations or cash flows will not be adversely affected by changes
in economic conditions.
Commodity prices
Many of Wajax's customers are directly and indirectly affected by fluctuations
in commodity prices in the forestry, metals and minerals and petroleum and
natural gas industries, and as a result Wajax is also indirectly affected by
fluctuations in these prices. In particular, each of Wajax's businesses is
exposed to fluctuations in the price of oil and natural gas. A downward change
in commodity prices, and particularly in the price of oil and natural gas,
could therefore adversely affect Wajax's results of operations or cash flows.
Growth initiatives, integration of acquisitions and project execution
As part of its long-term strategy, Wajax intends to continue growing its
business through a combination of organic growth and strategic acquisitions.
Wajax's ability to successfully grow its business through organic growth will
be dependent on the segments' achieving their individual base business
objectives and new opportunities. Wajax's ability to successfully grow its
business through acquisitions will be dependent on a number of factors
including: identification of accretive new business or acquisition
opportunities; negotiation of purchase agreements on satisfactory terms and
prices; prior approval of acquisitions by third parties, including regulatory
authorities; securing attractive financing arrangements; and integration of
newly acquired operations into the existing business. All of these activities
associated with growing the business, may be more difficult to implement or
may take longer to execute than management anticipates. Further, any
significant expansion of the business may increase the operating complexity of
Wajax, and divert management away from regular business activities. Any
failure of Wajax to manage its growth strategy, including acquisitions,
successfully could have a material adverse impact on Wajax's business, results
of operations or financial condition.
Key personnel
The success of Wajax is largely dependent on the abilities and experience of
its senior management team and other key personnel. Its future performance
will also depend on its ability to attract, develop and retain highly
qualified employees in all areas of its business. Competition for skilled
management, sales and technical personnel is intense, particularly in certain
markets where Wajax competes. Wajax continuously reviews and makes
adjustments to its hiring, training and compensation practices in an effort to
attract and retain a highly competent workforce. However, there can be no
assurance that Wajax will be successful in its efforts and a loss of key
employees, or failure to attract and retain new talent as needed, may have an
adverse impact on Wajax's current operations or future prospects.
Leverage, credit availability and restrictive covenants
Wajax has a $300 million bank credit facility which expires August 12, 2016
comprised of a $80 million non-revolving term portion and a $220 million
revolving term portion. The facility contains restrictive covenants which
place restrictions on, among other things, the ability of Wajax to encumber or
dispose of its assets, the amount of interest cost incurred and dividends
declared relative to earnings and certain reporting obligations. A failure to
comply with the obligations of the facility could result in an event of
default which, if not cured or waived, could require an accelerated repayment
of the facilities. There can be no assurance that Wajax's assets would be
sufficient to repay the facility in full.
Wajax's short-term normal course working capital requirements can swing widely
quarter-to-quarter due to timing of large inventory purchases and/or sales and
changes in market activity. In general, as Wajax experiences growth, there
is a need for additional working capital as was the case in 2012.
Conversely, as Wajax experiences economic slowdowns working capital reduces
reflecting the lower activity levels as was the case in 2009. While
management believes the bank credit facility will be adequate to meet the
Corporation's normal course working capital requirements, there can be no
assurance that additional credit will become available if required, or that an
appropriate amount of credit with comparable terms and conditions will be
available when the facility matures.
Wajax may be required to access the equity or debt markets or reduce dividends
in order to fund significant acquisitions and growth related working capital
and capital expenditures.
The amount of debt service obligations under the bank credit facility will be
dependant on the level of borrowings and fluctuations in interest rates to the
extent the rate is unhedged. As a result, fluctuations in debt servicing costs
may have a detrimental effect on future earnings or cash flow.
Wajax also has credit lines available with other financial institutions for
purposes of financing inventory and off balance sheet financing of long-term
rental fleet. These facilities are not committed lines and their future
availability cannot be assured, which may have a negative impact on cash
available for dividends and future growth opportunities.
Quality of products distributed
The ability of Wajax to maintain and expand its customer base is dependent
upon the ability of the manufacturers represented by Wajax to improve and
sustain the quality of their products. The quality and reputation of such
products are not within Wajax's control, and there can be no assurance that
manufacturers will be successful in meeting these goals. The failure of these
manufacturers to maintain a market presence could adversely affect Wajax's
results of operations or cash flow.
Government regulation
Wajax's business is subject to evolving laws and government regulations,
particularly in the areas of taxation, the environment, and health and safety.
Changes to such laws and regulations may impose additional costs on Wajax and
may adversely affect its business in other ways, including requiring
additional compliance measures by Wajax.
Insurance
Wajax maintains a program of insurance coverage that is ordinarily maintained
by similar businesses, including property insurance and general liability
insurance. Although the limits and deductibles of such insurance have been
established through risk analysis and the recommendation of professional
advisors, there can be no assurance that such insurance will remain available
to Wajax at commercially reasonable rates or that the amount of such coverage
will be adequate to cover all liability incurred by Wajax. If Wajax is held
liable for amounts exceeding the limits of its insurance coverage or for
claims outside the scope of that coverage, its business, results of operations
or financial condition could be adversely affected.
Inventory obsolescence
Wajax maintains substantial amounts of inventories in all three core
businesses. While Wajax believes it has appropriate inventory management
systems in place, variations in market demand for the products it sells can
result in certain items of inventory becoming obsolete. This could result in a
requirement for Wajax to take a material write down of its inventory balance
resulting in Wajax not being able to realize expected revenue and cash flows
from its inventory, which would negatively affect results from operations or
cash flow.
Information systems and technology
Information systems are an integral part of Wajax's business processes,
including marketing of equipment and support services, inventory and
logistics, and finance. Some of these systems are integrated with certain
suppliers' core processes and systems. Any disruptions to these systems due,
for example, to the upgrade or conversion thereof, or the failure of these
systems to operate as expected could, depending on the magnitude of the
problem, adversely affect Wajax's operating results by limiting the ability to
effectively monitor and control Wajax's operations.
Credit risk
Wajax extends credit to its customers, generally on an unsecured basis.
Although Wajax is not substantially dependant on any one customer and it has a
system of credit management in place, the loss of a large receivable would
have an adverse effect on Wajax's profitability.
Labour relations
Wajax has approximately 2,833 employees. Wajax is a party to thirteen
collective agreements covering a total of approximately 410 employees. Of
these, two collective agreements covering 108 employees expired on or before
December 31, 2012 and are currently being re-negotiated. Of the remaining
eleven collective agreements, four expire in 2013, five expire in 2014, and
two expire in 2015. Overall, Wajax believes its labour relations to be
satisfactory and does not anticipate it will be unable to renew the collective
agreements. If Wajax is unable to renew or negotiate collective agreements
from time to time, it could result in work stoppages and other labour
disturbances. The failure to renew collective agreements upon satisfactory
terms could have a material adverse impact on Wajax's businesses, results of
operations or financial condition.
Foreign exchange exposure
Wajax's operating results are reported in Canadian dollars. While the majority
of Wajax's sales are in Canadian dollars, significant portions of its
purchases are in U.S. dollars. Changes in the U.S. dollar exchange rate can
have a negative or positive impact on Wajax's revenue, margins and working
capital balances. Wajax mitigates certain exchange rate risks by entering into
short-term foreign currency forward contracts to fix the cost of certain
inbound inventory and to hedge certain foreign-currency denominated sales to
customers. In addition, Wajax will periodically institute price increases to
offset the negative impact of foreign exchange rate increases on imported
goods. The inability of Wajax to mitigate exchange rate risks or increase
prices to offset foreign exchange rate increases, including sudden and
volatile changes in the U.S. dollar exchange rate, may have a material adverse
effect on the results of operations or financial condition of Wajax.
A declining U.S. dollar relative to the Canadian dollar can have a negative
effect on Wajax's revenue and cash flows as a result of certain products being
imported from the U.S. In some cases market conditions require Wajax to lower
its selling prices as the U.S. dollar declines. As well, many of Wajax's
customers export products to the U.S., and a strengthening Canadian dollar can
negatively impact their overall competitiveness and demand for their products,
which in turn may reduce product purchases from Wajax.
A strengthening U.S. dollar relative to the Canadian dollar can have a
positive effect on Wajax's revenue as a result of certain products being
imported from the U.S. Wajax will periodically institute price increases to
offset the negative impact of foreign exchange rate increases and volatility
on imported goods to ensure margins are not eroded.
Wajax maintains a hedging policy whereby significant transactional currency
risks are identified and hedged.
Competition
The equipment, power systems and industrial components distribution industries
in which Wajax competes are highly competitive. In the Equipment segment,
Wajax primarily competes against regional equipment distributors that tend to
handle a dedicated product line, such as those offered by John Deere, Komatsu
and Caterpillar. There can be no assurance that Wajax will be able to continue
to compete on the basis of product quality and price of product lines,
distribution and servicing capabilities as well as proximity of its
distribution sites to customers.
The Power Systems business competes with other major diesel engine
distributors representing such products as Cummins and Caterpillar.
Competition is based primarily on product quality, pricing and the ability to
service the product after the sale.
In terms of the Industrial Components segment, the hydraulics and process
equipment branches compete with other distributors of hydraulics components
and process equipment on the basis of quality and price of the product lines,
the capacity to provide custom-engineered solutions and high service
standards. The bearings and power transmission product branches compete with a
number of distributors representing the same or competing product lines and
rely primarily on high service standards, price and value added services to
gain market advantage.
There can be no assurance that Wajax will be able to continue to effectively
compete. Increased competitive pressures or the inability of Wajax to maintain
the factors which have enhanced its competitive position could adversely
affect its results of operations or cash flow.
Litigation and product liability claims
In the ordinary course of its business, Wajax may be party to various legal
actions, the outcome of which cannot be predicted with certainty. One category
of potential legal actions is product liability claims. Wajax carries product
liability insurance, and management believes that this insurance is adequate
to protect against potential product liability claims. Not all risks, however,
are covered by insurance, and no assurance can be given that insurance will be
consistently available, or will be consistently available on an economically
feasible basis, or that the amounts of insurance will at all times be
sufficient to cover each and every loss or claim that may occur involving
Wajax's assets or operations.
Guaranteed residual value, recourse and buy-back contracts
In some circumstances Wajax makes certain guarantees to finance providers on
behalf of its customers. These guarantees can take the form of assuring the
resale value of equipment, guaranteeing a portion of customer lease payments,
or agreeing to buy back the equipment at a specified price. These contracts
are subject to certain conditions being met by the customer, such as
maintaining the equipment in good working condition. Historically, Wajax has
not incurred substantial losses on these types of contracts, however, there
can be no assurance that losses will not be incurred in the future. See
Contractual Obligations section.
Future warranty claims
Wajax provides manufacturers' and/or dealer warranties for most of the product
it sells. In some cases, the product warranty claim risk is shared jointly
with the manufacturer. In addition, Wajax provides limited warranties
for workmanship on services provided. Accordingly, Wajax has some liability
for warranty claims. There is a risk that a possible product quality erosion
or a lack of a skilled workforce could increase warranty claims in the future,
or may be greater than management anticipates. If Wajax's liability in respect
of such claims is greater than anticipated, it may have a material adverse
impact on Wajax's business, results of operations or financial condition.
Maintenance and repair contracts
Wajax frequently enters into long-term maintenance and repair contracts with
its customers, whereby Wajax is obligated to maintain certain fleets of
equipment at various negotiated performance levels. The length of these
contracts varies significantly, often ranging up to five or more years. The
contracts are generally fixed price, although many contracts have additional
provisions for inflationary adjustments. Due to the long-term nature of these
contracts, there is a risk that significant cost overruns may be incurred. If
Wajax has miscalculated the extent of maintenance work required, or if actual
parts and service costs increase beyond the contracted inflationary
adjustments, the contract profitability will be adversely affected. In order
to mitigate this risk, Wajax closely monitors the contracts for early warning
signs of cost overruns. In addition, the manufacturer may, in certain
circumstances, share in the cost overruns if profitability falls below a
certain threshold. Any failure by Wajax to effectively price and manage these
contracts could have a material adverse impact on Wajax's business, results of
operations or financial condition.
Environmental factors
From time to time, Wajax experiences environmental incidents, emissions or
spills in the course of its normal business activities. With the assistance of
environmental consultants, Wajax has established environmental compliance and
monitoring programs which management believes are appropriate for its
operations. To date, these environmental incidents, emissions and spills have
not resulted in any material liabilities to the Corporation, however, there
can be no assurance that any future incidents, emissions or spills will not
result in a material adverse effect on Wajax's results of operations or cash
flows.
Strategic Direction and Outlook
In 2012 Wajax achieved another record performance with revenue and earnings
before tax of $1.47 billion and $89.7 million, respectively. Wajax was
positively impacted by strong construction and forestry markets across Canada
in 2012. The oil and gas sector in western Canada remained active in the
first half of the year, but began to decline in the second half of 2012 as
deteriorating industry fundamentals in North America resulted in reduced
customer spending. In particular, this decline affected Power Systems and
Industrial Components. Mining activity, including in the oil sands, was
somewhat stronger compared to last year in all segments. Although quoting
activity remained high at year-end, the Equipment segment saw a reduction in
mining equipment backlog in the latter part of the year as customers began to
take a more cautious approach in making commitments to buy equipment.
Looking forward to 2013, the combined effect of continuing weakness in the oil
and gas market, delays in mining investment decisions and the loss of the
LeTourneau distribution rights will create challenges for growth in 2013.
Quoting activity for mining remains very active in both Equipment and Power
Systems. However, Wajax does not expect meaningful improvement in the oil
and gas market during 2013. As a result, management anticipates a weaker first
half of the year relative to 2012. Achieving full year earnings that are
comparable to 2012 will depend on reasonable end market recovery in the second
half of 2013.
Additional information, including Wajax's Annual Report and Annual Information
Form, are available on SEDAR at www.sedar.com.
WAJAX CORPORATION
Unaudited Condensed Consolidated Financial Statements
For the three and twelve months ended December 31, 2012
Notice required under National Instrument 51-102, "Continuous Disclosure
Obligations" Part 4.3(3) (a):
The attached condensed consolidated financial statements have been prepared by
Management of Wajax Corporation and have not been reviewed by the
Corporation's auditors.
WAJAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
FINANCIAL POSITION
As at December December
(unaudited, in thousands of Canadian 31, 2012 31, 2011
dollars) Note
ASSETS
CURRENT
Cash $ - $ 5,659
Trade and other receivables 194,567 174,233
Inventories 285,185 241,524
Prepaid expenses 7,089 8,033
486,841 429,449
NON-CURRENT
Rental equipment 4 43,731 28,060
Property, plant and equipment 5 50,700 47,924
Intangible assets 87,668 84,493
Deferred taxes 10 2,922 -
185,021 160,477
$ 671,862 $ 589,926
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank indebtedness $ 10,195 $ -
Accounts payable and accrued 186,897 245,011
liabilities
Provisions 7,033 7,851
Dividends payable 4,519 3,326
Income taxes payable 44,349 2,398
Obligations under finance leases 3,611 3,646
Derivative instruments 149 208
256,753 262,440
NON-CURRENT
Provisions 4,088 4,010
Deferred taxes 10 - 17,694
Employee benefits 7,160 6,843
Other liabilities 2,083 5,644
Obligations under finance leases 8,192 6,688
Bank debt 6 151,701 59,021
173,224 99,900
SHAREHOLDERS' EQUITY
Share capital 7 106,651 105,371
Contributed surplus 4,346 4,888
Retained earnings 130,944 117,477
Accumulated other comprehensive loss (56) (150)
Total shareholders' equity 241,885 227,586
$ 671,862 $ 589,926
These condensed consolidated financial statements were approved by the Board
of Directors on March 5, 2013.
WAJAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS
(unaudited, in Three months ended Twelve months ended
thousands of December 31 December 31
Canadian dollars,
except per share 2011 2012 2011
data) Note 2012
Revenue $ 364,929 $ 377,182 $ 1,466,014 $ 1,377,100
Cost of sales 291,319 297,850 1,164,199 1,084,667
Gross profit 73,610 79,332 301,815 292,433
Selling and 53,010 55,698 207,672 200,321
administrative
expenses
Earnings from 20,600 23,634 94,143 92,112
operating
activities
Finance costs 1,337 1,153 4,442 4,630
Earnings before 19,263 22,481 89,701 87,482
income taxes
Income tax 5,069 5,920 23,762 23,679
expense 10
Net earnings $ 14,194 $ 16,561 $ 65,939 $ 63,803
Basic earnings $ 0.85 $ 1.00 $ 3.95 $ 3.84
per share 11
Diluted earnings $ 0.84 $ 0.98 $ 3.89 $ 3.77
per share 11
WAJAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
Three months ended Twelve months ended
December 31 December 31 (unaudited, in thousands of Canadian dollars) 2012 2011 2012 2011
Net earnings $ 14,194 $ 16,561 $ 65,939 $ 63,803
Items that will not be reclassified to income
Actuarial losses on pension plans, net of tax recovery of $251 (2011 - $885) and (683) (2,544) (683) (2,544) year to date, net of tax recovery of $251 (2011 - $885)
Items that may subsequently be reclassified to income
Losses (gains) on derivative instruments designated as cash flow hedges in prior periods reclassified to cost of inventory or 186 (649) 517 565 finance costs during the period, net of tax recovery of $66 (2011 - expense of $224) and year to date, net of tax recovery of $187 (2011 - $237)
(Losses) gains on derivative instruments outstanding at the end of the period designated as cash flow hedges, (42) (354) (423) 1,062 net of tax recovery of $15 (2011 - $126) and year to date, net of tax recovery of $149 (2011 - expense of $381)
Other comprehensive loss, (539) (3,547) (589) (917)
net of tax
Total comprehensive income $ 13,655 $ 13,014 $ 65,350 $ 62,886
WAJAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
other
comprehensive
(loss) income
("AOCL")
For the Share Contributed Retained Cash flow
twelve months capital surplus earnings hedges
ended
December 31,
2012
(unaudited,
in thousands
of Canadian
dollars) Note Total
January 1, $ 105,371 4,888 117,477 (150) $
2012 227,586
Net earnings - - 65,939 - 65,939
Other - - (683) 94
comprehensive
loss (589)
Total - - 65,256 94
comprehensive
income for
the period 65,350
Shares issued 1,280 (1,280) - -
to settle
share-based
compensation
plans 9 -
Dividends 8 - - (51,789) - (51,789)
Share-based - 738 - -
compensation
expense 9 738
December 31, $ 106,651 4,346 130,944 (56) $
2012 241,885
WAJAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
AOCL
For the Share Trust Contributed Retained Cash
twelve months capital units surplus earnings flow
ended hedges
December 31,
2011
(unaudited,
in thousands
of Canadian
dollars) Note Total
January 1, $ - 105,371 3,931 91,805 (1,777) $
2011 199,330
Conversion to 105,371 (105,371) - - -
corporation -
Net earnings - - - 63,803 - 63,803
Other - - - (2,544) 1,627
comprehensive
loss (917)
Total - - - 61,259 1,627
comprehensive
income for
the period 62,886
Dividends 8 - - - (35,587) - (35,587)
Share-based - - 957 - -
compensation
expense 9 957
December 31, $ 105,371 - 4,888 117,477 (150) $
2011 227,586
WAJAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
Three months ended Twelve months ended
December 31 December 31
(unaudited, in Note 2012 2011 2012 2011
thousands of
Canadian dollars)
OPERATING
ACTIVITIES
Net earnings $ 14,194 $ 16,561 $ 65,939 $ 63,803
Items not
affecting cash
flow:
Depreciation
and
amortization
Rental 2,404 1,471 7,883 4,838
equipment
Property, 2,265 2,035 8,467 7,441
plant and
equipment
Intangible 376 315 1,466 1,216
assets
Loss on 5 10 75 139 61
disposal of
property,
plant and
equipment
Share rights 9 219 (386) 738 957
plans
compensation
expense
(income)
Non-cash (1,024) (125) (1,687) (303)
rental
expense
Employee (633) 46 (618) (478)
benefits
(income)
expense, net
of payments
Non-cash (241) - 72 -
(gain) loss
on derivative
instruments
Finance costs 1,337 1,153 4,442 4,630
Income tax 10 5,069 5,920 23,762 23,679
expense
23,976 27,065 110,603 105,844
Changes in 12 (25,362) 26,655 (114,347) (20,253)
non-cash
operating
working capital
Rental 4 (3,583) (4,996) (25,076) (20,177)
equipment
additions
Other (562) 1,041 (3,784) 95
non-current
liabilities
Finance costs (1,377) (1,011) (4,118) (4,132)
paid
Income taxes (1,887) (18) (2,387) (116)
paid
Cash (used in) (8,795) 48,736 (39,109) 61,261
generated from
operating
activities
INVESTING
ACTIVITIES
Property, plant 5 (586) (2,682) (6,234) (5,499)
and equipment
additions
Proceeds on 5 28 47 523 132
disposal of
property, plant
and equipment
Intangible (32) (413) (237) (664)
assets
additions
Acquisition of 13 (10,078) 10 (10,078) (23,247)
businesses
Cash used in (10,668) (3,038) (16,026) (29,278)
investing
activities
FINANCING
ACTIVITIES
Increase 6 30,000 (27,000) 92,998 (20,000)
(decrease) in
bank debt
Debt facility 6 (343) 11 (568) (1,061)
amendment
(costs) income
Finance lease (819) (975) (2,553) (3,484)
payments
Dividends paid (13,557) (9,978) (50,596) (44,733)
Cash generated 15,281 (37,942) 39,281 (69,278)
from (used in)
financing
activities
Change in cash (4,182) 7,756 (15,854) (37,295)
(Bank (6,013) (2,097) 5,659 42,954
indebtedness)
cash - beginning
of period
(Bank $ (10,195) $ 5,659 $ (10,195) $ 5,659
indebtedness)
cash - end of
period
WAJAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2012
(unaudited, amounts in thousands of Canadian dollars, except share and per
share data)
1. COMPANY PROFILE
Wajax Corporation (the "Corporation") is incorporated in Canada. The address
of the Corporation's registered office is 3280 Wharton Way, Mississauga,
Ontario, Canada. The Corporation's core distribution businesses are engaged in
the sale and after-sale parts and service support of equipment, power systems
and industrial components, through a network of 128 branches across Canada.
The Corporation is a multi-line distributor and represents a number of leading
worldwide manufacturers across its core businesses. Its customer base is
diversified, spanning natural resources, construction, transportation,
manufacturing, industrial processing and utilities.
2. BASIS OF PREPARATION
Statement of compliance
These condensed consolidated financial statements have been prepared in
accordance with International Accounting Standard 34 Interim Financial
Reporting and do not include all of the disclosures required for full
consolidated financial statements. Accordingly, these condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements of Wajax Corporation for the year ended
December 31, 2011. The significant accounting policies follow those
disclosed in the most recently reported audited consolidated financial
statements.
Basis of measurement
The condensed consolidated financial statements have been prepared under the
historical cost basis except for derivative financial instruments and
liabilities for cash-settled share-based payment arrangements that have been
measured at fair value. The employee benefit liability is recognized as the
net total of the pension plan assets, plus unrecognized past service cost and
unrecognized actuarial losses, less unrecognized actuarial gains and losses
and the present value of the defined benefit obligation.
Functional and presentation currency
These condensed consolidated financial statements are presented in Canadian
dollars, which is the Corporation's functional currency. All financial
information presented in Canadian dollars has been rounded to the nearest
thousand, unless otherwise stated and except share and per share data.
3. CHANGE IN ACCOUNTING POLICY
On January 1, 2012, the Corporation early adopted amendments to International
Accounting Standard ("IAS") 1 Presentation of Financial Statements:
Presentation of Items of Other Comprehensive Income. The amendments to IAS 1
require that an entity present separately the items of other comprehensive
income that may be reclassified to profit or loss in the future from those
that would never be reclassified to profit or loss. These amendments are to be
applied retrospectively in the first annual fiscal period beginning on or
after July 1, 2012, with early adoption permitted. This new presentation is
included in the consolidated statements of comprehensive income.
4. RENTAL EQUIPMENT
The Corporation acquired rental equipment with a cost of $3,583 during the
quarter (2011 - $4,996) and $25,076 year to date (2011 - $20,177). Rental
equipment with a carrying amount of $276 during the quarter (2011 - $777) and
$1,522 year to date (2011 - $3,073) ceased to be rented and was classified as
held for sale in the normal course of business and transferred to inventories.
5. PROPERTY, PLANT AND EQUIPMENT
The Corporation acquired property, plant and equipment with a cost of $586
during the quarter (2011 - $2,682) and $6,234 year to date (2011 - $5,499).
Assets with a carrying amount of $38 during the quarter (2011 - $122) and $662
year to date (2011 - $193) were disposed of, resulting in losses on disposal
of $10 during the quarter (2011 - $75) and $139 year to date (2011 - $61).
6. BANK DEBT
On May 24, 2012 and December 7, 2012, the Corporation amended its bank credit
facility to increase the limit of the facility by $50,000 and $75,000
respectively, on substantially the same terms and conditions as the existing
facility. The fully secured facility of $300,000, due August 12, 2016, is now
comprised of an $80,000 non-revolving term portion and a $220,000 revolving
term portion. The $568 cost of amending the facility has been capitalized and
will be amortized over the remaining term of the facility.
7. SHARE CAPITAL
Number of Shares Amount
Balance, December 31, 2010 - $ -
Converted on January 1, 2011 from trust 16,629,444 105,371
units
Balance, December 31, 2011 16,629,444 $ 105,371
Shares issued to settle share-based 107,003 1,280
compensation plans
Balance, December 31, 2012 16,736,447 $ 106,651
8. DIVIDENDS DECLARED
During the three months ended December 31, 2012, the Corporation declared cash
dividends of $0.81 per share or $13,557 (December 31, 2011, dividends of $0.60
per share or $9,978).
Year to date, the Corporation declared cash dividends of $3.10 per share or
$51,789 (December 31, 2011, dividends of $2.14 per share or $35,587).
The Corporation has declared dividends of $0.27 per share or $4,519 for each
of January and February 2013.
9. SHARE-BASED COMPENSATION PLANS
The Corporation has five share-based compensation plans: the Wajax Share
Ownership Plan ("SOP"), the Deferred Share Program ("DSP"), the Directors'
Deferred Share Unit Plan ("DDSUP"), the Mid-Term Incentive Plan for Senior
Executives ("MTIP") and the Deferred Share Unit Plan ("DSUP").
a) Share Rights Plans
The Corporation recorded compensation cost of $219 for the quarter (2011 -
recovery of $386) and $738 for the year to date (2011 - $957) in respect of
these plans.
Share Rights Plans December 31, 2012 December 31, 2011
Number of Fair value Number of Fair value
Rights at Rights at
time of time of
grant grant
Outstanding at 316,595 $ 4,908 273,960 $ 4,133
beginning of year
Granted in - new grants 27,231 1,304 21,137 775
the period
- dividend 18,129 - 21,498 -
equivalents
Settled in the period (107,003) (1,280) - -
Outstanding at end of 254,952 $ 4,932 316,595 $ 4,908
period
At December 31, 2012, 240,102 share rights were vested (December 31, 2011 -
312,020).
b) Cash-settled rights plans
The Corporation recorded a compensation recovery of $513 for the quarter (2011
- expense of $568) and an expense of $2,653 for the year to date (2011 -
$4,420) in respect of the share-based portion of the MTIP. At December 31,
2012, the carrying amount of the share-based portion of these liabilities was
$2,444 (2011 - $8,272).
10. INCOME TAXES
Income tax expense comprises current and deferred tax as follows:
2012 2011
Current $ 44,353 $ 442
Deferred - Origination and reversal of (20,621) 24,401
temporary difference
- Change in tax law and rates 30 (1,164)
Income tax expense $ 23,762 $ 23,679
The calculation of current tax is based on a combined federal and provincial
statutory income tax rate of 26.2% (2011 - 27.7%). The tax rate for the
current year is 1.5% lower than 2011 due to the effect of the reduced
statutory tax rates. Deferred tax assets and liabilities are measured at tax
rates that are expected to apply to the period when the asset is realized or
the liability is settled. Deferred tax assets and liabilities have been
measured using an expected average combined statutory income tax rate of 26.1%
based on the tax rates in years when the temporary differences are expected to
reverse.
The reconciliation of effective income tax is as follows:
2012 2011
Combined statutory income tax rate 26.2% 27.7%
Expected income tax expense at statutory rates $ 23,502 $ 24,233
Non-deductible expenses 548 621
Deferred tax related to changes in tax law and 30 (1,164)
rates
Other (318) (11)
Income tax expense $ 23,762 $ 23,679
Recognized deferred tax assets and liabilities
Recognized deferred tax assets and liabilities are comprised as follows:
December December
31, 2012 31, 2011
Property, plant and equipment $ (2,099) $ (1,773)
Finance leases 117 (195)
Intangible assets (2,973) (2,355)
Accrued liabilities 5,241 5,249
Provisions 2,265 2,504
Derivative instruments 18 56
Employee benefits 1,861 1,752
Deferred financing costs 81 (29)
Partnership income not currently taxable (1,893) (23,236)
Tax loss carryforwards 304 333
Net deferred tax assets (liabilities) $ 2,922 $ (17,694)
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
Three months ended Twelve months ended
December 31 December 31
2012 2011 2012 2011
Numerator for basic
and diluted
earnings per share:
net earnings $ 14,194 $ 16,561 $ 65,939 $ 63,803
Denominator for
basic earnings per
share:
- weighted average
shares 16,736,447 16,629,444 16,699,874 16,629,444
Denominator for
diluted earnings
per share:
- weighted average
shares 16,736,447 16,629,444 16,699,874 16,629,444
- effect of
dilutive share
rights 234,518 307,790 254,236 294,555
Denominator for
diluted earnings
per share 16,970,965 16,937,234 16,954,110 16,923,999
Basic earnings per
share $ 0.85 $ 1.00 $ 3.95 $ 3.84
Diluted earnings
per share $ 0.84 $ 0.98 $ 3.89 $ 3.77
No share rights were excluded from the above calculations as none were
anti-dilutive.
12. CHANGES IN NON-CASH OPERATING WORKING CAPITAL
Three months ended Twelve months ended
December 31 December 31
2012 2011 2012 2011
Trade and other receivables $ (6,900) $ 13,770 $ (17,139) $ (27,054)
Inventories 8,854 (9,250) (39,035) (34,959)
Prepaid expenses (680) 1,535 999 (571)
Accounts payable and (29,067) 18,761 (58,354) 39,833
accrued liabilities
Provisions 2,431 1,839 (818) 2,498
Total $ (25,362) $ 26,655 $ (114,347) $ (20,253)
13. ACQUISITION OF BUSINESSES
On October 22, 2012, the Industrial Components segment acquired all of the
issued and outstanding shares of ACE Hydraulic Limited, a hydraulic cylinder
repair business located in Bathurst, New Brunswick with annual revenues of
approximately $2,000.
On December 31, 2012, the Industrial Components segment acquired certain
assets of Kaman Industrial Techonologies, a leading distributor of industrial
parts in British Columbia and southern Ontario with annual revenues of
approximately $21,000.
Recognized amounts of identifiable assets acquired and liabilities assumed for
both acquisitions are as follows:
Trade and other receivables $ 3,210
Inventories 3,104
Prepaid expenses 55
Property, plant and equipment 1,853
Accounts payable and accrued liabilities (1,853)
Deferred taxes (188)
Other liabilities (302)
Obligations under finance leases (205)
Tangible net assets acquired 5,674
Intangible assets 4,404
Consideration paid $ 10,078
The consideration paid is subject to post-closing adjustments and therefore
the purchase price equation is subject to change.
14. OPERATING SEGMENTS
The Corporation operates through a network of 128 branches in Canada in three
core businesses which reflect the internal organization and management
structure according to the nature of the products and services provided. The
Corporation's three core businesses are: i) the distribution, modification and
servicing of equipment; ii) the distribution, servicing and assembly of power
systems; and iii) the distribution, servicing and assembly of industrial
components.
For the Segment
three months Eliminations
ended and
December 31, Power Industrial Unallocated
2012 Equipment Systems Components Amounts Total
Equipment $ 118,815 $ 29,506 $ - $ - $ 148,321
Parts 42,195 31,305 80,679 - 154,179
Service 28,746 16,189 4,646 - 49,581
Rental and
other 11,861 2,027 - (1,040) 12,848
Revenue $ 201,617 $ 79,027 $ 85,325 $ (1,040) $ 364,929
Segment
earnings
before
finance
costs and
income taxes $ 13,995 $ 5,015 $ 3,607 $ $ 22,617
Corporate
costs and
eliminations (2,017) (2,017)
Earnings
before
finance
costs
and income
taxes 13,995 5,015 3,607 (2,017) 20,600
Finance
costs 1,337 1,337
Income tax
expense 5,069 5,069
Net earnings $ 13,995 $ 5,015 $ 3,607 $ (8,423) $ 14,194
For the
twelve Segment
months Eliminations
ended and
December 31, Power Industrial Unallocated
2012 Equipment Systems Components Amounts Total
Equipment $ 475,647 $ 123,024 $ - $ - $ 598,671
Parts 165,398 135,043 341,164 - 641,605
Service 99,239 68,276 18,885 - 186,400
Rental and
other 38,198 5,951 - (4,811) 39,338
Revenue $ 778,482 $ 332,294 $ 360,049 $ (4,811) $ 1,466,014
Segment
earnings
before
finance
costs and
income taxes $ 56,130 $ 26,130 $ 22,130 $ $ 104,390
Corporate
costs and
eliminations (10,247) (10,247)
Earnings
before
finance
costs
and income
taxes 56,130 26,130 22,130 (10,247) 94,143
Finance
costs 4,442 4,442
Income tax
expense 23,762 23,762
Net earnings $ 56,130 $ 26,130 $ 22,130 $ (38,451) $ 65,939
As at
December 31,
2012
Segment
assets
excluding
intangible
assets $ 315,499 $ 145,444 $ 121,045 $ $ 581,988
Intangible
assets 21,845 14,488 51,333 2 87,668
Corporate
and other
assets 2,206 2,206
Total assets $ 337,344 $ 159,932 $ 172,378 $ 2,208 $ 671,862
For the Segment
three months Eliminations
ended and
December 31, Power Industrial Unallocated
2011 Equipment Systems Components Amounts Total
Equipment $ 117,581 $ 42,341 $ - $ - $ 159,922
Parts 44,004 35,273 85,185 - 164,462
Service 22,854 16,329 5,007 - 44,190
Rental and
other 7,849 1,546 - (787) 8,608
Revenue $ 192,288 $ 95,489 $ 90,192 $ (787) $ 377,182
Segment
earnings
before
finance
costs and
income taxes $ 14,337 $ 7,885 $ 5,902 $ $ 28,124
Corporate
costs and
eliminations (4,490) (4,490)
Earnings
before
finance
costs
and income
taxes 14,337 7,885 5,902 (4,490) 23,634
Finance
costs 1,153 1,153
Income tax
expense 5,920 5,920
Net earnings $ 14,337 $ 7,885 $ 5,902 $ (11,563) $ 16,561
For the
twelve Segment
months Eliminations
ended and
December 31, Power Industrial Unallocated
2011 Equipment Systems Components Amounts Total
Equipment $ 397,613 $ 155,876 $ - $ - $ 553,489
Parts 173,188 125,509 328,993 - 627,690
Service 84,697 61,134 18,545 - 164,376
Rental and
other 30,342 4,906 - (3,703) 31,545
Revenue $ 685,840 $ 347,425 $ 347,538 $ (3,703) $ 1,377,100
Segment
earnings
before
finance
costs and
income taxes $ 50,193 $ 32,915 $ 23,106 $ $ 106,214
Corporate
costs and
eliminations (14,102) (14,102)
Earnings
before
finance
costs
and income
taxes 50,193 32,915 23,106 (14,102) 92,112
Finance
costs 4,630 4,630
Income tax
expense 23,679 23,679
Net earnings $ 50,193 $ 32,915 $ 23,106 $ (42,411) $ 63,803
As at
December 31,
2011
Segment
assets
excluding
intangible
assets $ 238,161 $ 146,695 $ 114,714 $ $ 499,570
Intangible
assets 22,083 14,760 47,643 7 84,493
Cash 5,659 5,659
Corporate
and other
assets 204 204
Total assets $ 260,244 $ 161,455 $ 162,357 $ 5,870 $ 589,926
Segment assets do not include assets associated with the corporate office,
financing costs or income taxes. Additions to corporate assets, and
depreciation of these assets, are included in segment eliminations and
unallocated amounts.
Mark Foote, President and Chief Executive Officer Email: mfoote@wajax.com
John Hamilton, Chief Financial Officer Email: jhamilton@wajax.com
Telephone #: (905) 212-3300
SOURCE: Wajax Corporation
To view this news release in HTML formatting, please use the following URL:
http://www.newswire.ca/en/releases/archive/March2013/05/c9246.html
CO: Wajax Corporation
ST: Ontario
NI: MAC ERN CONF
-0- Mar/05/2013 13:08 GMT
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