Wajax Corporation (TSX:WJX) today announced a significant increase in 2011
second quarter earnings and raised its monthly dividend to $0.20 per share.
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(Dollars in millions, except per Three Months Ended Six Months Ended
share data) June 30 June 30
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2011 2010 2011 2010
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CONSOLIDATED RESULTS
Revenue $ 334.1 $ 272.0 $ 638.0 $ 500.2
Earnings before tax $ 22.4 $ 11.8 $ 40.4 $ 20.3
Net earnings $ 16.5 $ 12.2 $ 29.4 $ 21.0
Basic earnings per share $ 0.99 $ 0.73 $ 1.77 $ 1.27
SEGMENTS
Revenue - Equipment $ 164.2 $ 142.8 $ 315.6 $ 251.2
- Industrial Components $ 89.9 $ 75.9 $ 170.6 $ 148.5
- Power Systems $ 81.0 $ 55.1 $ 154.0 $ 102.6
Earnings - Equipment $ 12.0 $ 10.3 $ 23.1 $ 18.2
% margin 7.3% 7.2% 7.3% 7.2%
- Industrial Components $ 6.5 $ 2.0 $ 11.0 $ 5.2
% margin 7.3% 2.7% 6.4% 3.5%
- Power Systems $ 8.3 $ 3.7 $ 15.3 $ 4.6
% margin 10.2% 6.6% 9.9% 4.5%
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Second Quarter Highlights
-- Consolidated second quarter revenue of $334.1 million increased $62.1
million, or 23%, compared to last year with gains in western Canada
accounting for the majority of the increases in all three businesses.
Power Systems revenue increased 47% on significantly higher equipment
sales in western Canada and as a result of the May 2, 2011 acquisition
of Ontario based Harper Power Products ("Harper"). Industrial Components
revenue increased 18% on stronger demand for all major product
categories and Equipment sales rose 15% on higher revenue from the
construction, forestry and material handling sectors.
-- Net earnings for the quarter were $16.5 million, or $0.99 per share,
compared to $12.2 million, or $0.73 per share recorded in 2010. This
represents an increase of 35% even though the Corporation is now subject
to income tax since its conversion from an income fund as of January 1,
2011. Earnings before tax of $22.4 million were almost double last
year's level as a result of the higher volumes while maintaining
disciplined control over selling, general and administrative costs in
all three segments.
-- Consolidated backlog of $281.7 million at June 30, 2011 increased $66.0
million, or 31%, from $215.7 million at March 31, 2011 mainly as a
result of higher mining and construction equipment orders in the
Equipment segment.
The Equipment segment recently closed an equipment supply agreement with Shell
Canada Energy for a total of seven Hitachi mining shovels and construction
excavators, adding to the already existing fleet of Hitachi equipment at Shell
Albian Sands, Shell's oil sands operation in the province of Alberta. In support
of Shell Albian Sands' fleet of Hitachi equipment, Wajax has also renewed and
extended the existing commercial arrangement with Shell Canada Energy for the
supply of parts, components and services until the end of April 2014. Both
companies enjoy an excellent business relationship and intend to further
strengthen their cooperation going forward.
Effective June 22, 2011, Rowan Companies, Inc. of Houston, Texas completed the
sale of its 100% ownership interest in LeTourneau Technologies, Inc.
("LeTourneau"), a mining wheel loader manufacturer to Milwaukee-based Joy Global
Inc. ("Joy"). Wajax is the exclusive distributor of LeTourneau products in
Canada. Joy has indicated that it intends to look for ways to integrate the
LeTourneau distribution activities with its P&H mining equipment operations
which will likely impact Wajax's current distribution arrangements with
LeTourneau. The sale and service of LeTourneau products in 2010 generated
approximately $40 million of revenue for Wajax and contributed approximately $10
million to earnings before interest and taxes.
The Corporation announced a $0.02 per share increase in its monthly dividend.
Dividends of $0.20 per share ($2.40 annualized) were declared for the months of
August, September and October.
Commenting on the second quarter results and the outlook for the remainder of
2011, Neil Manning, President and CEO, stated:
"We continue to be very pleased with our 2011 results. The second quarter
improvement was driven by the robust energy, mining, forestry and construction
markets particularly in western Canada. However, we were also encouraged by
stronger results in the Equipment segment's Ontario operation and the eastern
Canada business of Industrial Components. Results from the Harper acquisition
for the two months since the transaction closed have met our expectations.
We have been able to minimize the effects of the supply disruption to our
Hitachi product line caused by the earthquake and resulting tsunami in Japan. As
we expected, the most significant issue relates to delays in obtaining mining
equipment, which will have some impact on our 2011 revenue. In addition, we
continue to experience some product shipment delays for a number of other
products from several suppliers, mainly as a result of increased global demand
and component shortages.
For the remainder of the year, we expect economic activity in the broader
Canadian economy will continue at a level similar to that experienced in the
first six months. Notwithstanding negative impacts from the Hitachi equipment
and other product supply disruptions, we also expect pre-tax earnings to
continue to be ahead of last year for the balance of 2011, but at a lower rate
of increase. Our decision to increase the monthly dividend takes into account
the strength of expected future earnings including the potential downside
effects on our LeTourneau products distribution arrangement."
Wajax Corporation is a leading Canadian distributor and service support provider
of equipment, industrial components and power systems. Reflecting a diversified
exposure to the Canadian economy, its three distinct core businesses operate
through a network of 118 branches across Canada. Its customer base spans natural
resources, construction, transportation, manufacturing, industrial processing
and utilities.
Wajax will Webcast its Second Quarter Financial Results Conference Call. You are
invited to listen to the live Webcast on Wednesday, August 3, 2011 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. The archived Webcast will be available
at the above mentioned website within 24 hours after the conference call.
Forward-Looking Statements
This news release contains forward-looking statements. These statements relate
to future events or future performance and reflect management's current
expectations and assumptions.
Although we believe that the expectations represented in such forward-looking
statements are reasonable, there is no assurance that such expectations will
prove to be correct. Undue reliance should not be placed on forward-looking
statements, as a number of factors could cause the actual results to differ
materially from the expectations expressed in the forward-looking statements.
Information on risk factors is included in the Management's Discussion and
Analysis for the year ended December 31, 2010 under the heading "Risk and
Uncertainties", and in other reports filed by Wajax Income Fund and the
Corporation with Canadian securities regulators and available at www.sedar.com.
Management's Discussion and Analysis - Q2 2011
The following management's discussion and analysis ("MD&A") discusses the
consolidated financial condition and results of operations of Wajax Corporation
("Wajax" or "Corporation") for the quarter ended June 30, 2011. On January 1,
2011, Wajax adopted International Financial Reporting Standards ("IFRS"). The
term "Canadian GAAP" refers to Canadian GAAP before the adoption of IFRS. This
MD&A should be read in conjunction with the information contained in the
unaudited Condensed Consolidated Financial Statements and accompanying notes for
the quarter ended June 30, 2011, which have been prepared using IFRS, the annual
Audited Consolidated Financial Statements and accompanying notes of Wajax Income
Fund for the year ended December 31, 2010 which were prepared using Canadian
GAAP, and the associated MD&A. Information contained in this MD&A is based on
information available to management as of August 3, 2011.
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 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
unaudited Condensed 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 unaudited Condensed 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 unaudited
Condensed Consolidated Financial Statements and accompanying notes.
Disclosure Controls and Procedures and Internal Control over Financial Reporting
Wajax has designed disclosure controls and procedures ("DC&P") to provide
reasonable assurance that material information relating to Wajax is made known
to the Chief Executive Officer and the Chief Financial Officer, particularly
during the period in which the interim filings are being prepared. Wajax has
designed internal controls 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
IFRS.
Wajax has not completed the design of DC&P and ICFR related to the May 2, 2011
acquisition of the assets of Harper Power Products ("Harper"). The Harper
operation had revenue of approximately $9.1 million since acquisition. Wajax
anticipates that the design of DC&P and ICFR related to Harper will be completed
prior to June of 2012 at which time it will be integrated with the existing
Power Systems control environment.
There were no changes in internal control over financial reporting that occurred
during Wajax's most recent interim period that have materially affected, or are
reasonably likely to materially affect, the Corporation's ICFR.
Wajax Corporation Overview
Effective January 1, 2011 Wajax Income Fund converted into a corporation,
pursuant to a plan of arrangement under the Canada Business Corporations Act
("CBCA") and the shares of Wajax Corporation began trading on the Toronto Stock
Exchange on January 4, 2011 under the symbol WJX.
Wajax's core distribution businesses are engaged in the sale and after-sale
parts and service support of equipment, industrial components and power systems,
through a network of 118 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 continue to grow earnings in all segments through
continuous improvement of operating margins and revenue growth while maintaining
a strong balance sheet. Revenue growth will be achieved through market share
gains, the addition of new or complementary product lines and expansion into new
geographic territories either organically or through acquisitions.
Forward-Looking Information
This MD&A contains forward-looking statements. These statements relate to future
events or future performance and reflect management's current expectations and
assumptions. The words "anticipate", "expect", "believe", "may", "should",
"estimate", "project", "outlook", "forecast" or similar words are used to
identify such forward-looking information. Such forward-looking statements
reflect management's current beliefs and are based on information currently
available to management of Wajax. Although we believe that the expectations
represented in such forward-looking statements are reasonable, there is no
assurance that such expectations will prove to be correct. By their very nature,
forward-looking statements involve inherent risks and uncertainties (both
general and specific) and the risk that the expectations represented in such
forward-looking statements will not be achieved. Undue reliance should not be
placed on forward-looking statements, as a number of important factors could
cause the actual events, performance or results to differ materially from the
events, performance and results discussed in the forward-looking statements.
These factors include, among other things: changes in laws and regulations
affecting Wajax and its business operations, changes in taxation of Wajax,
general business conditions and economic conditions in the markets in which
Wajax and its customers compete, fluctuations in commodity prices, Wajax's
relationship with its suppliers and manufacturers and its access to quality
products, the ability of Wajax to maintain and expand its customer base, actual
future market conditions being different than anticipated by management and the
Board of Directors of Wajax, and actual future operating and financial results
of Wajax being different than anticipated by management and the Board of
Directors of Wajax. You are cautioned that the foregoing list is not exhaustive.
You 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. Additional information on these and other factors is
included in this MD&A under the heading "Risk and Uncertainties" and in other
reports filed by Wajax with Canadian securities regulators and available at
www.sedar.com. The forward-looking statements contained in this MD&A are
expressly qualified in their entirety by this cautionary statement. The
forward-looking statements contained herein are made as of the date of this MD&A
and Wajax 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.
International Financial Reporting Standards
In February 2008, The Accounting Standards Board of the Canadian Institute of
Chartered Accountants confirmed that the use of IFRS is required in Canada for
publicly accountable profit oriented enterprises for fiscal years beginning on
or after January 1, 2011. The Corporation's first annual IFRS financial
statements will be for the year ending December 31, 2011 and will include the
comparative period of 2010. Accordingly, the Corporation has adopted IFRS
effective January 1, 2010 (the IFRS transition date) and has prepared its
unaudited Condensed Consolidated Financial Statements in accordance with
International Accounting Standard 34 Interim Financial Reporting. Prior to the
adoption of IFRS, the financial statements of the Corporation were prepared in
accordance with Canadian generally accepted accounting principles ("Canadian
GAAP").
The most significant impacts on the Corporation's unaudited Condensed
Consolidated Financial Statements resulting from the adoption of IFRS are
discussed within the applicable sections of this MD&A and Note 13 of the
unaudited Condensed Consolidated Financial Statements.
All comparative figures have been restated in accordance with IFRS, unless
otherwise indicated.
Consolidated Results
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
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Revenue $ 334.1 $ 272.0 $ 638.0 $ 500.2
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Gross profit $ 72.5 $ 59.5 $ 138.4 $ 111.2
Selling and administrative
expenses $ 49.0 $ 46.6 $ 95.9 $ 88.7
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Earnings before finance costs and
income taxes $ 23.5 $ 12.9 $ 42.5 $ 22.5
Finance costs $ 1.1 $ 1.1 $ 2.1 $ 2.1
Income tax expense (recovery) $ 5.8 $ (0.3) $ 11.1 $ (0.7)
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Net earnings $ 16.5 $ 12.2 $ 29.4 $ 21.0
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Earnings per share
- Basic $ 0.99 $ 0.73 $ 1.77 $ 1.27
- Diluted $ 0.98 $ 0.72 $ 1.74 $ 1.25
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Revenue
Revenue in the second quarter of 2011 increased 23% or $62.1 million to $334.1
million, from $272.0 million in 2010 and included $9.1 million of revenue from
the acquisition of the assets of Harper by the Power Systems segment effective
May 2, 2011 for consideration of $23.2 million. Segment revenue increased 15% in
Equipment (formerly Mobile Equipment), 18% in Industrial Components and 47% in
Power Systems compared to last year. For the six months ended June 30, 2011,
revenue increased 28% or $137.8 million.
Gross profit
Gross profit in the second quarter of 2011 increased $13.0 million due to higher
volumes compared to last year. The gross profit margin percentage for the
quarter of 21.7% decreased slightly from 21.9% in 2010 due primarily to a sales
mix variance resulting from a higher proportion of equipment sales in both the
Equipment and Power Systems segments compared to last year.
For the six months ended June 30, 2011, gross profit increased $27.2 million due
to higher volumes compared to last year. The gross profit margin percentage
decreased to 21.7% in 2011 from 22.2% in 2010 due primarily to a sales mix
variance resulting from a higher proportion of equipment sales in both the
Equipment and Power Systems segments compared to last year.
Selling and administrative expenses
Selling and administrative expenses increased $2.4 million in the quarter
compared to last year due mainly to the acquisition of Harper, higher sales
related personnel costs in the Equipment and Power Systems segments, additional
occupancy costs and other sales related expenses. The increase was offset
partially by lower bad debt expense in the Equipment segment compared to last
year. Selling and administrative expenses as a percentage of revenue decreased
to 14.7% in 2011 from 17.1% in 2010.
For the six months ended June 30, 2011, selling and administrative expenses
increased $7.2 million compared to last year due to higher sales related
personnel costs in the Equipment and Power Systems segments, a $2.0 million
increase in annual and mid-term incentive accruals, the acquisition of Harper,
additional occupancy costs and higher other sales related expenses. The increase
was offset partially by lower bad debt expense in the Equipment segment compared
to last year. Selling and administrative expenses as a percentage of revenue
decreased to 15.0% in 2011 from 17.7% in 2010.
Finance costs
Quarterly finance costs of $1.1 million remained the same compared to last year.
The impact of higher funded debt net of cash including obligations under finance
leases ("funded net debt") as a result of the acquisition of Harper on May 2,
2011, was offset by the positive impact of lower interest rates compared to last
year.
For the six months ended June 30, 2011, finance costs of $2.1 million remained
the same compared to 2010.
Income tax expense
Effective January 1, 2011, Wajax converted from an income fund to a corporation.
As a result, Wajax and its subsidiaries are subject to tax on all of their
taxable income from that date forward.
For the three months ended June 30, 2011, the effective income tax rate of 26.1%
was less than the Corporation's statutory income tax rate of 27.7% due mainly to
partnership income generated in 2011 which will be subject to tax in 2012 at a
lower rate.
For the six months ended June 30, 2011, the effective income tax rate of 27.4%
was less than the Corporation's statutory income tax rate of 27.7% due mainly to
partnership income generated in 2011 which will be subject to tax in 2012 at a
lower rate.
Net earnings
Quarterly net earnings of $16.5 million, or $0.99 per share, increased $4.3
million from $12.2 million, or $0.73 per share, in 2010. The positive impact of
higher volumes more than offset the negative impact of increased selling and
administrative and income tax expenses compared to last year.
For the six months ended June 30, 2011, net earnings increased $8.4 million to
$29.4 million, or $1.77 per share, from $21.0 million, or $1.27 per share, in
2010. The positive impact of higher volumes more than offset the negative impact
of increased selling and administrative and income tax expenses compared to last
year.
Comprehensive income
Comprehensive income for the quarter of $17.0 million increased $3.3 million
from $13.7 million the previous year due to the $4.3 million increase in net
earnings, offset by a $1.0 million decrease in other comprehensive income
compared to last year. The reduction in other comprehensive income resulted from
a decrease in gains on derivative instruments designated as cash flow hedges
outstanding at the end of the quarter, offset partially by an increase in losses
on derivative instruments designated as cash flow hedges in prior periods
reclassified to cost of inventory or finance costs in the current period.
For the six months ended June 30, 2011, comprehensive income of $30.1 million
increased $8.1 million from $22.0 million the previous year due to the $8.4
million increase in net earnings, offset by a $0.2 million decrease in other
comprehensive income compared to last year. The reduction in other comprehensive
income resulted from losses on derivative instruments designated as cash flow
hedges outstanding at the end of the period, offset mostly by an increase in
losses on derivative instruments designated as cash flow hedges in prior periods
reclassified to cost of inventory or finance costs in the current period.
Funded net debt
Funded net debt of $111.1 million as at June 30, 2011 increased $65.5 million
compared to December 31, 2010. The increase resulted mainly from cash used for
additional non-cash working capital of $48.0 million, dividends paid of $25.4
million, $21.6 million paid on closing for the acquisition of Harper, $13.9
million disbursed for rental fleet and other capital additions and interest
payments of $1.8 million. The increases were offset by year to date cash flows
from operating activities before changes in non-cash working capital of $47.4
million.
Wajax's $175 million bank credit facility expires December 31, 2011. Management
is currently in discussions with lenders regarding its refinancing and expects
to be able to enter into a new credit facility before the end of 2011.
Dividends
For the quarter ended June 30, 2011 monthly dividends declared totaled $0.51 per
share and included $0.15 per share for the month of April and $0.18 per share
for the months of May and June. For the quarter ended June 30, 2010 monthly cash
distributions declared were $0.45 per unit.
For the six months ended June 30, 2011 monthly dividends declared totaled $0.96
per share. For the six months ended June 30, 2010 monthly cash distributions
declared were $0.90 per unit.
On May 10, 2011 Wajax announced a monthly dividend of $0.18 per share ($2.16
annualized) for the month of July payable on August 22, 2011 to shareholders of
record on July 29, 2011.
On August 3, 2011 Wajax announced monthly dividends of $0.20 per share ($2.40
annualized) for each of the months of August, September and October payable on
September 20, 2011, October 20, 2011 and November 21, 2011 to shareholders of
record on August 31, 2011, September 30, 2011 and October 31, 2011 respectively.
Tax information relating to 2011 dividends and prior year distributions is
available on Wajax's website at www.wajax.com.
Backlog
Consolidated backlog at June 30, 2011 of $281.7 million increased $66.0 million,
or 31%, from $215.7 million at March 31, 2011 due mainly to increases in order
intake in the Equipment segment and the acquisition of Harper.
Quarterly Results of Operations
Equipment
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
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Equipment(i) $ 98.5 $ 82.5 $ 186.0 $ 139.7
Parts and service $ 65.7 $ 60.3 $ 129.6 $ 111.5
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Segment revenue $ 164.2 $ 142.8 $ 315.6 $ 251.2
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Segment earnings $ 12.0 $ 10.3 $ 23.1 $ 18.2
Segment earnings margin 7.3% 7.2% 7.3% 7.2%
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(i) Includes rental revenue.
Revenue in the second quarter of 2011 increased $21.4 million, or 15%, to $164.2
million from $142.8 million in the second quarter of 2010. Segment earnings for
the quarter increased $1.7 million to $12.0 million compared to the second
quarter of 2010. The following factors contributed to the Equipment segment's
second quarter results:
- Equipment revenue increased $16.0 million compared to last year. Specific
quarter-over-quarter variances included the following:
- Construction equipment revenue increased $11.6 million due to increases
in new Hitachi excavator sales, primarily in western Canada, and JCB
equipment sales across Canada.
- Forestry equipment sales increased $8.7 million attributable to higher
market demand in all regions for Tigercat and forestry related Hitachi
products.
- Material handling equipment revenue increased $3.3 million on higher
volumes in all regions.
- Mining equipment sales decreased $5.8 million on fewer deliveries of
LeTourneau mining equipment in western Canada.
- Crane and utility equipment revenue decreased $1.8 million due mainly to
lower sales to utility customers in Ontario and eastern Canada.
- Parts and service volumes increased $5.4 million compared to last year due
principally to higher construction sector sales in western Canada and
mining sector sales in both eastern and western Canada.
- Segment earnings increased $1.7 million to $12.0 million compared to last
year as the positive impact of higher volumes outweighed the negative
impact of slightly lower parts and service margins and a $0.5 million
increase in selling and administrative expenses. Selling and
administrative expenses increased compared to last year due to higher
sales related expenses and offset partially by lower bad debt expense.
Backlog of $151.0 million at June 30, 2011 increased $53.7 million compared to
March 31, 2011 due primarily to an increase in mining and construction equipment
orders in western Canada.
The Equipment segment recently closed an equipment supply agreement with Shell
Canada Energy for a total of seven Hitachi mining shovels and construction
excavators, adding to the already existing fleet of Hitachi equipment at Shell
Albian Sands, Shell's oil sands operation in the province of Alberta. In support
of Shell Albian Sands' fleet of Hitachi equipment, Wajax has also renewed and
extended the existing commercial arrangement with Shell Canada Energy for the
supply of parts, components and services until the end of April 2014.
Effective June 22, 2011 Rowan Companies, Inc. of Houston, Texas completed the
sale of its 100% ownership interest in LeTourneau Technologies, Inc.
("LeTourneau"), a mining wheel loader manufacturer, to Milwaukee-based Joy
Global Inc. ("Joy"). Wajax is the exclusive distributor of LeTourneau products
in Canada. Joy has indicated that it intends to look for ways to integrate the
LeTourneau distribution activities with its P&H mining equipment operations
which will likely impact Wajax's current distribution arrangement with
LeTourneau. The sale and service of LeTourneau products in 2010 generated
approximately $40 million of revenue for Wajax and contributed approximately $10
million to earnings before interest and taxes.
The segment continues to monitor developments in Japan related to the effects of
the March 11, 2011 earthquake and tsunami on the Hitachi Japan supply chain. The
Equipment segment is the distributor of Hitachi construction and forestry
excavators and mining equipment in Canada. Hitachi equipment and parts
distributed by Wajax are manufactured and sourced from various locations in
Japan and the United States. The expected impact on the Equipment segment in
2011 is as follows:
-- Supply disruptions related to parts sourced from Japan have not had, and
are not anticipated to have, a significant effect on 2011 parts revenue.
-- With respect to mining equipment, the segment's continued working
assumption is that there will be a delay in deliveries from Japan of up
to six months. The effect on the segment's 2011 revenue is estimated to
be a reduction of approximately $40 million.
Industrial Components
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Segment revenue $ 89.9 $ 75.9 $ 170.6 $ 148.5
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Segment earnings $ 6.5 $ 2.0 $ 11.0 $ 5.2
Segment earnings margin 7.3% 2.7% 6.4% 3.5%
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Revenue of $89.9 million increased $14.0 million, or 18%, from $75.9 million in
the second quarter of 2010. Segment earnings increased $4.5 million to $6.5
million in the quarter compared to the previous year. The following factors
contributed to the segment's second quarter results:
-- Bearings and power transmission parts sales increased $4.9 million
compared to last year due mainly to higher mining sector volumes across
all regions and increased sales in the forestry, industrial and
transportation sectors, primarily in eastern Canada and Ontario.
-- Fluid power and process equipment products and service revenue increased
$9.1 million on improved oil and gas drilling activity in western Canada
and increased sales to agriculture, metal processing and transportation
customers.
-- Segment earnings increased $4.5 million compared to last year due to the
positive impact of higher volumes and a $0.4 million decrease in selling
and administrative expenses. The decrease in selling and administrative
expenses resulted mainly from lower personnel related costs.
Backlog of $47.0 million as of June 30, 2011 increased $1.5 million compared to
March 31, 2011.
Power Systems
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Equipment $ 36.1 $ 18.4 $ 71.6 $ 32.0
Parts and service $ 44.9 $ 36.7 $ 82.4 $ 70.6
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Segment revenue $ 81.0 $ 55.1 $ 154.0 $ 102.6
----------------------------------------------------------------------------
Segment earnings $ 8.3 $ 3.7 $ 15.3 $ 4.6
Segment earnings margin 10.2% 6.6% 9.9% 4.5%
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Revenue in the second quarter increased $25.9 million, or 47%, to $81.0 million
compared to $55.1 million in 2010 and included $9.1 million of revenue from the
Harper acquisition effective May 2, 2011. Segment earnings increased $4.6
million to $8.3 million in the quarter compared to the previous year. The
following factors impacted quarterly revenue and earnings:
-- Revenue in western Canada increased $18.2 million compared to last year.
Equipment sales improved $15.1 million on higher sales to oil and gas
customers and increased power generation equipment sales. Parts and
service revenue increased $3.1 million mainly as a result of higher
sales to off-highway customers, including those in the mining and oil
and gas sectors.
-- Revenue in central Canada of $9.1 million from the acquisition of Harper
effective May 2, 2011 resulted primarily from sales to on-highway
customers.
-- Revenue in eastern Canada decreased by $1.4 million compared to 2010.
Equipment sales increased $0.6 million while parts and service revenue
decreased $2.0 million due to a decline in military and marine sector
activity.
-- Segment earnings increased $4.6 million compared to last year as the
positive impact of higher volumes more than offset a $2.1 million
increase in selling and administrative expenses. Selling and
administrative expenses increased largely as a result of the Harper
acquisition, higher annual and long term incentive accruals and
commissions, offset partially by savings in other sales related
expenses.
Backlog of $83.7 million as of June 30, 2011 increased $10.8 million compared to
March 31, 2011 due mainly to the acquisition of Harper.
Effective May 2, 2011, Wajax purchased the assets of Harper the authorized
Ontario distributor for Detroit Diesel, Mercedes-Benz, MTU and Deutz engines,
MTU Onsite Energy generator sets and Allison transmissions with adjusted 2010
annual revenue of approximately $71 million. With the exception of Deutz
engines, Wajax Power Systems is presently the authorized distributor of these
lines in the rest of Canada except for portions of British Columbia. The
consideration for the assets was $23.2 million, subject to further post-closing
adjustments.
Wajax Power Systems has assumed the operation of Harper's 10 branches in Ontario
located in Toronto, Ottawa, Hamilton, London, Sudbury, Timmins, Kingston,
Cornwall, Niagara Falls and Pembroke.
With Harper's business well established in the on-highway sector of the market,
Wajax intends to further expand its presence in the off-highway and power
generation sectors in Ontario. This acquisition also represents a major step
towards the strategic objective of becoming a national total power systems
solution provider.
Selected Quarterly Information
2011(1) 2010(1) 2009(2)
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
----------------------------------------------------------------------------
Revenue $ 334.1 $ 303.9 $ 317.1 $ 294.4 $ 272.0 $ 227.4 $ 259.1 $ 234.6
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Net earnings $ 16.5 $ 12.8 $ 15.0 $ 19.6 $ 12.2 $ 8.9 $ 8.3 $ 6.8
Net earnings
per share
- Basic $ 0.99 $ 0.77 $ 0.90 $ 1.18 $ 0.73 $ 0.53 $ 0.50 $ 0.41
- Diluted $ 0.98 $ 0.76 $ 0.89 $ 1.16 $ 0.72 $ 0.53 $ 0.50 $ 0.40
----------------------------------------------------------------------------
(1) 2011 and 2010 financials are prepared in accordance with IFRS. In
addition, certain 2010 comparative amounts have been reclassified to
conform with the current period presentation. In particular, cash
discounts provided to customers have been reclassified out of selling
and administrative into revenue. In addition, cash discounts received
from vendors have been reclassified out of selling and administrative
expenses into cost of sales. The above reclassification do not affect
net earnings or cashflows.
(2) 2009 financials are prepared in accordance with Canadian GAAP. In
addition, certain 2009 comparative amounts have been reclassified to
conform with the current period presentation. In particular, amounts
recovered from customers or manufacturers have been reclassified out of
selling and administrative expenses into revenue. In addition, service
department overhead amounts have been reclassified out of selling and
administrative expenses into cost of sales. The above reclassifications
do not affect net earnings or cashflows.
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.
Cash Flow, Liquidity and Capital Resources
Net Cash Flows used in Operating Activities
While the IFRS adjustments do not impact the Corporation's total cash flows,
cash flows from operating activities and cash flows used in investing activities
have each been adjusted, by equal and offsetting amounts to reflect the
reclassification of rental equipment additions as operating activities.
For the six months ended June 30, 2011, net cash flows used in operating
activities amounted to $14.1 million, compared to $18.5 million generated from
operating activities the previous year. The $32.6 million decrease was due
primarily to a $40.2 million increased use of non-cash working capital and $9.8
million higher lift truck rental fleet additions in the Equipment segment,
offset by higher cash flows from operations before changes in non-cash working
capital of $17.2 million.
Changes in non-cash working capital for the first six months of 2011 compared to
2010 include the following components:
Six months ended June 30
Increase (decrease) in non-cash working
capital 2011 2010
----------------------------------------------------------------------------
Trade and other receivables $ 38.4 $ 23.5
Inventories $ 12.1 $ 0.4
Prepaid expenses $ (0.1) $ 4.7
Trade and other payables $ 0.6 $ (11.7)
Accrued Liabilities $ (2.6) $ (9.7)
Provisions $ (0.4) $ 0.6
----------------------------------------------------------------------------
Total $ 48.0 $ 7.8
----------------------------------------------------------------------------
Significant components of the changes in non-cash working capital for the six
months ended June 30, 2011 are as follows:
-- Trade and other receivables increased $38.4 million due to the impact of
higher sales activity in all segments and the recent postal strike.
-- Inventories increased $12.1 million largely in the Power Systems and
Industrial Components segments as a result of a continued growth in
sales activity.
At June 30, 2011 Wajax had employed $188.8 million in working capital, exclusive
of funded net debt, compared to $118.3 million at December 31, 2010. The $70.5
million increase was due primarily to the cash flow factors listed above, the
Harper acquisition and a $9.5 million decrease in dividends payable related to
the payment in January 2011 of distributions declared in December 2010 prior to
converting from an income fund to a corporation.
Investing Activities
For the six months ended June 30, 2011, Wajax paid $21.6 million of cash on
closing for the acquisition of Harper on May 2, 2011 and a net amount of $2.2
million on capital asset additions net of disposals compared to $1.3 million the
previous year.
Financing Activities
For the six months ended June 30, 2011, Wajax used $13.0 million of cash in
financing activities compared to $16.7 million in 2010. Distributions and
dividends paid to shareholders totaling $25.4 million, or $1.53 per share,
exceeded increases in long-term debt of $14.0 million in the period.
Funded net debt of $111.1 million at June 30, 2011 increased $65.5 million
compared to December 31, 2010. The increase resulted mainly from cash used for
additional non-cash working capital of $48.0 million, distributions and
dividends paid of $25.4 million, $21.6 million paid on closing for the
acquisition of Harper, $13.9 million disbursed for rental fleet and other
capital additions and interest payments of $1.8 million. The increases were
offset by cash flows from operating activities before changes in non-cash
working capital of $47.4 million. Wajax's period-end funded net debt-to-equity
ratio of 0.52:1 at June 30, 2011 increased from the ratio of 0.23:1 at December
31, 2010.
Liquidity and Capital Resources
At June 30, 2011 Wajax had borrowed $94.0 million and issued $5.5 million of
letters of credit for a total utilization of $99.5 million of its $175 million
bank credit facility and had no utilization of its $15 million equipment
financing facility. Borrowing capacity under the bank credit facility is
dependent on the level of inventories on-hand and outstanding trade accounts
receivables. At June 30, 2011 borrowing capacity under the bank credit facility
was equal to $175 million.
Wajax's $175 million bank credit facility along with an additional $15 million
of capacity permitted under the credit facility, should be sufficient to meet
Wajax's short-term normal course working capital, maintenance capital and growth
capital requirements. In the long-term 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.
The $175 million bank credit facility expires December 31, 2011. Management is
currently in discussions with lenders regarding its refinancing and expects to
be able to enter into a new credit facility before the end of 2011.
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 instrument transactions and those outstanding
at the end of the quarter were as follows:
-- Wajax has entered into the following interest rate swaps that have
effectively fixed the interest rate on $80 million of Wajax's debt at
the combined rate of 2.925%, plus applicable margins, until December 31,
2011:
-- On June 7, 2008 the delayed interest rate swap Wajax entered into on
May 9, 2007 with two of its lenders became effective. As a result,
the interest rate on the $30 million non-revolving term portion of
the bank credit facility was effectively fixed at 4.60% plus
applicable margins until expiry of the facility on December 31,
2011.
-- On January 23, 2009 a delayed interest rate swap Wajax entered into
on December 18, 2008 with two of its lenders became effective. As a
result, the interest rate on the $50 million revolving term portion
of the bank credit facility was effectively fixed at 1.92% plus
applicable margins until expiry of the facility on December 31,
2011.
-- Margins on the debt associated with the interest rate swaps depend
on Wajax's Leverage Ratio and range between 0.75% and 2.5%.
-- Wajax enters into short-term currency forward contracts to fix the
exchange rate on the cost of certain inbound inventory and to hedge
certain foreign currency-denominated sales to (receivables from)
customers as part of its normal course of business. As at June 30, 2011,
Wajax had contracts outstanding to buy U.S.$29.3 million and to sell
U.S.$4.4 million and EUR0.006 million (December 31, 2010 - to buy
U.S.$34.1 million and to sell U.S.$0.3 million, June 30, 2010 - to buy
U.S.$41.8 million and EUR0.2 million and to sell U.S.$0.03 million). The
U.S. dollar contracts expire between July 2011 and December 2012, with a
weighted average U.S./Canadian dollar rate of 0.9898 and weighted
average Euro / Canadian dollar rate of 1.3964.
Wajax measures financial instruments held for trading and not accounted for as
hedging items, at fair value with subsequent changes in fair value being charged
to earnings. Derivatives designated as effective hedges are measured at fair
value with subsequent changes in fair value being charged to other comprehensive
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 transition to IFRS did not have a material effect on the Corporation's
accounting for financial instruments.
Currency Risk
There have been no material changes to currency risk since December 31, 2010.
Contractual Obligations
There have been no material changes to contractual obligations since December
31, 2010.
Off Balance Sheet Financing
The Equipment segment had $27.9 million (2010 - $22.6 million) of consigned
inventory on-hand from a major manufacturer as at June 30, 2011. 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.
Wajax's off balance sheet financing arrangements, with non-bank lenders, include
operating lease contracts in relation to Wajax's long-term lift truck rental
fleet in the Equipment segment. At June 30, 2011, the non-discounted operating
lease commitment for the rental fleet was $5.0 million (December 31, 2010 - $6.0
million).
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 bank credit facility. 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 facility. See the Liquidity and Capital Resources
section.
Under IFRS, vehicle leases that were previously classified as operating leases
under Canadian GAAP are assessed as financing leases. Assets under finance lease
are capitalized at the commencement of the lease at the fair value of the leased
asset or, if lower, at the present value of the minimum lease payments. The
liability is recorded in the statement of financial position and classified
between current and non-current amounts. Lease payments are apportioned between
finance charges and a reduction of the lease liability so as to achieve a
constant rate of return of interest on the remaining balance of the liability.
Dividends
Dividends to shareholders were declared as follows:
Record Date Payment Date Per Share Amount
----------------------------------------------------------------------------
April 29, 2011 May 20, 2011 $ 0.15 $ 2.5
May 31, 2011 June 20, 2011 0.18 3.0
June 30, 2011 July 20, 2011 0.18 3.0
----------------------------------------------------------------------------
Three months ended June 30, 2011 $ 0.51 $ 8.5
----------------------------------------------------------------------------
On May 10, 2011 Wajax announced a monthly dividend of $0.18 per share ($2.16
annualized) for the month of July payable on August 22, 2011 to shareholders of
record on July 29, 2011.
On August 3, 2011 Wajax announced monthly dividends of $0.20 per share ($2.40
annualized) for each of the months of August, September and October payable on
September 20, 2011, October 20, 2011 and November 21, 2011 to shareholders of
record on August 31, 2011, September 30, 2011 and October 31, 2011 respectively.
Tax information relating to 2011 dividends and prior year distributions is
available on Wajax's website at www.wajax.com.
Productive Capacity and Productive Capacity Management
During the quarter, Wajax increased its productive capacity through the
acquisition of Harper which increased the Power Systems' Ontario infrastructure
by an additional ten branches. There have been no other material changes to the
Corporation's productive capacity and productive capacity management since
December 31, 2010.
Financing Strategies
Wajax's $175 million bank credit facility along with the $15 million demand
inventory equipment financing facility should be sufficient to meet Wajax's
short-term normal course working capital, maintenance capital and growth capital
requirements. The $175 million bank credit facility expires December 31, 2011.
Management is currently in discussions with lenders regarding its refinancing
and expects to be able to enter into a new credit facility before the end of
2011.
Wajax's short-term normal course working capital requirements can swing widely
quarter-to-quarter due to the timing of large inventory purchases and/or sales
and changes in market activity. In general, as Wajax experiences growth, there
is a need for additional working capital as was the case in 2006 and 2008.
Conversely, as Wajax experiences economic slowdowns working capital reduces
reflecting the lower activity levels as was the case in 2009. Fluctuations in
working capital are generally funded by, or used to repay, the bank credit
facilities.
In the long-term Wajax may also 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.
Borrowing capacity under the bank credit facility is dependent on the level of
Wajax's inventories on-hand and outstanding trade accounts receivables. At June
30, 2011 borrowing capacity under the bank credit facility was equal to $175
million.
The bank credit facility contains covenants that could restrict the ability of
Wajax to make dividend payments, if (i) an event of default exists or would
exist as a result of a dividend payment, and (ii) the leverage ratio (Debt to
EBITDA) is greater than 3.0. If the leverage ratio is less than or equal to 3.0,
then the aggregate dividend payments by the borrowers in each fiscal quarter may
not exceed 115% of distributable cash for the trailing four fiscal quarters.
Borrowing capacity under the bank credit facility is dependent on the level of
inventories on-hand and outstanding trade accounts receivables. For further
detail, the bank credit facility is available on SEDAR at www.sedar.com.
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 June 30, 2011 Number Amount
----------------------------------------------------------------------------
Balance at the beginning of the year 16,629,444 $105.9
Rights exercised - -
----------------------------------------------------------------------------
Balance at end of quarter 16,629,444 $105.9
----------------------------------------------------------------------------
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 $1.1 million for the quarter (2010 - $1.2 million) and $2.5
million for the six months ended (2010 - $1.9 million) in respect of these
plans.
Effective January 1, 2011 the SOP, DSP, DDSUP and MTIP plans have been amended
to reflect the conversion to a corporation.
Critical Accounting Estimates
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Significant accounting estimates include the provision for inventory
obsolescence, provision for doubtful accounts and any impairment of goodwill and
other assets, classification of leases, warranty reserve and measurement of
employee benefit obligations. Wajax makes a provision for doubtful accounts when
there is evidence that a specific account may become uncollectible. Wajax does
not provide a general reserve for bad debts. As conditions change, actual
results could differ from those estimates. Critical accounting estimates used by
Wajax's management are discussed in detail in the MD&A for the year ended
December 31, 2010 which can be found on SEDAR at www.sedar.com.
Accounting Changes
Transition to International Financial Reporting Standards
The Corporation has adopted IFRS on January 1, 2011 as required by the
Accounting Standards Board of the Canadian Institute of Chartered Accountants.
The Corporation provided information on its transition to IFRS in its MD&A for
the quarter ended March 31, 2011. This information has not changed materially
from what was provided.
Note 13 of the condensed consolidated financial statements provides an
explanation of the transition to IFRS. In addition, Note 13 provides detailed
reconciliations between Canadian GAAP and IFRS of the consolidated income
statement and consolidated statement of comprehensive income for the three
months and six months ended June 30, 2010 and of the consolidated statement of
financial position as at June 30, 2010. These reconciliations provide
explanations of each major difference.
New standards and interpretations not yet adopted
As of January 1, 2013, 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.
As of January 1, 2013, the Corporation will be required to adopt IFRS 10
Consolidated Financial Statements, which establishes principles for the
preparation and presentation of consolidated financial statements when an entity
controls one or more other entities. The Corporation does not expect IFRS 10 to
have a material impact on its consolidated financial statements.
As of January 1, 2013, the Corporation will be required to adopt IFRS 13 Fair
Value Measurement, which defines fair value and sets out a framework for
measuring fair value when fair value measurements are required or permitted by
other IFRSs. The Corporation is currently assessing the impact of this standard
on its consolidated financial statements.
As of January 1, 2013, the Corporation will be required to adopt amendments to
IAS 1 Presentation of Financial Statements, which require that an entity present
separately the items of OCI that may be reclassified to profit or loss in the
future from those that would never be reclassified to profit or loss. The
Corporation intends to adopt the amendments in its financial statements for the
annual period beginning on January 1, 2013. As the amendments only require
changes in the presentation of items in other comprehensive income, the
Corporation does not expect the amendments to IAS 1 to have a material impact on
the financial statements.
As of January 1, 2013, the Corporation will be required to adopt amendments to
IAS 19 Employee Benefits, which requires recognition of actuarial gains and
losses immediately in other comprehensive income, the full recognition of past
service costs immediately in profit or loss, recognition of the expected return
on plan assets in profit or loss to be calculated based on the rate used to
discount the defined benefit obligation, and certain additional disclosures. The
Corporation is currently assessing the impact of this standard on its
consolidated financial statements.
Risks 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. Wajax attempts to minimize many of these risks through
diversification of core businesses and through the geographic diversity of its
operations. There are however, a number of risks that deserve particular comment
which are discussed in detail in the MD&A for the year ended December 31, 2010
which can be found on SEDAR at www.sedar.com. For the period July 1, 2011 to
August 3, 2011 there have been no material changes to the business of Wajax that
require an update to the discussion of the applicable risks discussed in the
MD&A for the year ended December 31, 2010.
Outlook
Improvements in the second quarter were driven by the robust energy, mining,
forestry and construction markets particularly in western Canada. However,
management was also encouraged by stronger results in the Equipment segment's
Ontario operation and the eastern Canada business of Industrial Components.
Results from the Harper acquisition for the two months since the transaction
closed have met our expectations.
The Equipment segment has been able to minimize the effects of the supply
disruption to its Hitachi product line caused by the earthquake and resulting
tsunami in Japan. As expected, the most significant issue relates to delays in
obtaining mining equipment, which will have some impact on 2011 revenue. In
addition, the segment continues to experience some product shipment delays for a
number of other products from several suppliers, mainly as a result of increased
global demand and component shortages.
For the remainder of the year, management expects economic activity in the
broader Canadian economy will continue at a level similar to that experienced in
the first six months. Notwithstanding negative impacts from the Hitachi
equipment and other product supply disruptions, management also expects pre-tax
earnings to continue to be ahead of last year for the balance of 2011, but at a
lower rate of increase. Wajax's decision to increase the monthly dividend takes
into account the strength of expected future earnings including the potential
downside effects on its LeTourneau products distribution arrangement.
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 six months ended June 30, 2011
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
(unaudited, in thousands of Canadian June 30, December 31,
dollars) 2011 2010
----------------------------------------------------------------------------
ASSETS
CURRENT
Cash $ - $ 42,954
Trade and other receivables 184,447 135,517
Inventories 218,910 196,460
Prepaid expenses 7,421 7,244
----------------------------------------------------------------------------
410,778 382,175
----------------------------------------------------------------------------
NON-CURRENT
Rental equipment Note 4 23,371 15,794
Property, plant and equipment Note 5 48,350 46,090
Intangible assets Note 6 81,929 72,972
Deferred tax assets Note 9 - 5,277
Pension asset 395 240
----------------------------------------------------------------------------
154,045 140,373
----------------------------------------------------------------------------
$ 564,823 $ 522,548
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank indebtedness $ 7,970 $ -
Trade and other payables 141,258 134,832
Accrued liabilities 68,510 64,229
Provisions 5,286 4,892
Dividends payable 2,993 12,472
Income taxes payable 2,540 2,072
Obligations under finance leases 3,689 3,677
Derivative instrument liability 1,356 2,452
Bank debt 93,839 79,680
----------------------------------------------------------------------------
327,441 304,306
----------------------------------------------------------------------------
NON-CURRENT
Provisions 4,375 4,338
Deferred tax liabilities Note 9 5,590 -
Employee benefits 4,033 4,132
Other liabilities 3,372 5,221
Obligations under finance leases 5,595 5,227
----------------------------------------------------------------------------
22,965 18,918
----------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital 105,892 -
----------------------------------------------------------------------------
Trust units - 105,892
----------------------------------------------------------------------------
Contributed surplus Note 8 7,338 6,426
----------------------------------------------------------------------------
Retained earnings 102,801 89,411
Accumulated other comprehensive loss (1,614) (2,405)
----------------------------------------------------------------------------
101,187 87,006
----------------------------------------------------------------------------
Total shareholders' equity 214,417 199,324
----------------------------------------------------------------------------
$ 564,823 $ 522,548
----------------------------------------------------------------------------
----------------------------------------------------------------------------
These condensed consolidated financial statements were approved by the Board of
Directors on August 3, 2011.
WAJAX CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited, in thousands of Three months
Canadian dollars, except per share ended Six months ended
data) June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Revenue $ 334,069 $272,042 $ 637,998 $500,163
Cost of sales 261,539 212,575 499,605 388,995
----------------------------------------------------------------------------
Gross profit 72,530 59,467 138,393 111,168
----------------------------------------------------------------------------
Selling and administrative
expenses 49,044 46,558 95,887 88,685
----------------------------------------------------------------------------
Earnings before finance
costs and income taxes 23,486 12,909 42,506 22,483
Finance costs 1,109 1,082 2,085 2,149
----------------------------------------------------------------------------
Earnings before income
taxes 22,377 11,827 40,421 20,334
Income tax expense
(recovery) Note 9 5,839 (337) 11,067 (707)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings $ 16,538 $ 12,164 $ 29,354 $ 21,041
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings per share Note 10 $ 0.99 $ 0.73 $ 1.77 $ 1.27
Diluted earnings per share Note 10 $ 0.98 $ 0.72 $ 1.74 $ 1.25
----------------------------------------------------------------------------
----------------------------------------------------------------------------
WAJAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(unaudited, in thousands of Three months ended Six months ended
Canadian dollars) June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Net earnings $ 16,538 $ 12,164 $ 29,354 $ 21,041
----------------------------------------------------------------------------
Losses on derivative instruments
designated as cash flow hedges in
prior periods reclassified to cost
of inventory or finance costs
during the period, net of tax of
$160 (2010 - $34) and year to date,
net of tax of $390 (2010 - $49) 422 320 1,029 459
Gains (losses) on derivative
instruments designated as cash flow
hedges during the period, net of
tax of $16 (2010 - $108) and year
to date, net of tax of $87 (2010 -
$115) 34 1,215 (238) 509
----------------------------------------------------------------------------
Other comprehensive income, net of
tax 456 1,535 791 968
----------------------------------------------------------------------------
Total comprehensive income $ 16,994 $ 13,699 $ 30,145 $ 22,009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
WAJAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended
June 30, 2011 Contributed
(unaudited, in thousands of Share Trust surplus Retained
Canadian dollars) capital units (Note 8) earnings
----------------------------------------------------------------------------
----------------------------------------------------------------------------
January 1, 2011 $ - 105,892 6,426 89,411
Conversion to corporation 105,892 (105,892) - -
Net earnings - - - 29,354
Other comprehensive income
Losses on derivative
instruments designated as
cash flow hedges in prior
periods reclassified to
cost of inventory or
finance costs during the
period, net of tax - - - -
Losses on derivative
instruments designated as
cash flow hedges during
the period, net of tax - - - -
----------------------------------------------------------------------------
Total other comprehensive
income - - - -
----------------------------------------------------------------------------
Total comprehensive income
for the period - - - 29,354
----------------------------------------------------------------------------
Dividends Note 7 - - - (15,964)
----------------------------------------------------------------------------
Share-based compensation
expense Note 8 - - 912 -
----------------------------------------------------------------------------
June 30, 2011 $ 105,892 - 7,338 102,801
----------------------------------------------------------------------------
Accumulated other comprehensive
income (loss) ("AOCL")
-------------------------------
For the six months ended Gains and
June 30, 2011 Actuarial Losses on
(unaudited, in thousands of Gains and Cash Flow
Canadian dollars) Losses Hedges Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
January 1, 2011 (628) (1,777) $ 199,324
Conversion to corporation - - -
Net earnings - - 29,354
Other comprehensive income
Losses on derivative
instruments designated as
cash flow hedges in prior
periods reclassified to
cost of inventory or
finance costs during the
period, net of tax - 1,029 1,029
Losses on derivative
instruments designated as
cash flow hedges during
the period, net of tax - (238) (238)
----------------------------------------------------------------------------
Total other comprehensive
income - 791 791
----------------------------------------------------------------------------
Total comprehensive income
for the period - 791 30,145
----------------------------------------------------------------------------
Dividends - - (15,964)
----------------------------------------------------------------------------
Share-based compensation
expense - - 912
----------------------------------------------------------------------------
June 30, 2011 (628) (986) $ 214,417
----------------------------------------------------------------------------
WAJAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended June
30, 2010 Contributed
(unaudited, in thousands of Share Trust surplus
Canadian dollars) capital units (Note 8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
January 1, 2010 $ - 105,307 5,645
Net earnings - - -
Other comprehensive loss
Losses on derivative instruments
designated as cash flow hedges
in prior periods reclassified
to cost of inventory or finance
costs during the period, net of
tax - - -
Gains on derivative instruments
designated as cash flow hedges
during the period, net of tax - - -
----------------------------------------------------------------------------
Total other comprehensive loss - - -
----------------------------------------------------------------------------
Total comprehensive income for
the period - - -
----------------------------------------------------------------------------
Dividends Note 7 - - -
----------------------------------------------------------------------------
Share-based compensation expense Note 8 - - 592
----------------------------------------------------------------------------
June 30, 2010 $ - 105,307 6,237
----------------------------------------------------------------------------
AOCL
-----------------
For the six months ended June
30, 2010 Gains and
(unaudited, in thousands of Retained Losses on
Canadian dollars) earnings Cash Flow Hedges Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
January 1, 2010 90,258 (2,233) $ 198,977
Net earnings 21,041 - 21,041
Other comprehensive loss
Losses on derivative instruments
designated as cash flow hedges
in prior periods reclassified
to cost of inventory or finance
costs during the period, net of
tax - 459 459
Gains on derivative instruments
designated as cash flow hedges
during the period, net of tax - 509 509
----------------------------------------------------------------------------
Total other comprehensive loss 968 968
----------------------------------------------------------------------------
Total comprehensive income for
the period 21,041 968 22,009
----------------------------------------------------------------------------
Dividends (14,944) - (14,944)
----------------------------------------------------------------------------
Share-based compensation expense - - 592
----------------------------------------------------------------------------
June 30, 2010 96,355 (1,265) $ 206,634
----------------------------------------------------------------------------
WAJAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
Six months ended June 30
(unaudited, in thousands of Canadian
dollars) 2011 2010
----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 29,354 $ 21,041
Items not affecting cash flow:
Depreciation and amortization
Rental equipment 2,066 1,736
Property, plant and equipment 2,364 2,160
Assets under finance lease 1,446 1,249
Intangible assets 252 295
Share-based compensation expense Note 8 912 592
Other liabilities (1,849) 1,268
Non-cash rental expense (49) (27)
Pension expense, net of payments (254) 123
Finance costs 2,085 2,149
Income tax expense (recovery) 11,067 (707)
----------------------------------------------------------------------------
Cash flows from operating activities
before changes in non-cash working
capital 47,394 29,633
----------------------------------------------------------------------------
Changes in non-cash working capital:
Trade and other receivables (38,376) (23,502)
Inventories (12,107) (410)
Prepaid expenses 101 (4,659)
Trade and other payables (601) 12,664
Accrued liabilities 2,611 9,319
Provisions 394 (648)
----------------------------------------------------------------------------
(47,978) (7,236)
----------------------------------------------------------------------------
Cash flows (used in) generated from
operating activities (584) 22,397
----------------------------------------------------------------------------
Rental equipment additions (11,709) (1,861)
Provisions 37 (19)
Interest paid (1,826) (2,083)
Income taxes received (paid) (37) 61
----------------------------------------------------------------------------
Net cash flows (used in) generated from
operating activities (14,119) 18,495
----------------------------------------------------------------------------
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment additions (2,207) (1,367)
Proceeds on disposal of property, plant
and equipment 41 93
Acquisition of business Note
11 (21,603) -
----------------------------------------------------------------------------
Net cash flows used in investing
activities (23,769) (1,274)
----------------------------------------------------------------------------
(37,888) 17,221
----------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in bank debt 14,000 -
Increase in transaction costs - (92)
Payments under finance leases (1,593) (1,677)
Dividends paid Note 7 (25,443) (14,944)
----------------------------------------------------------------------------
Net cash flows used in financing
activities (13,036) (16,713)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net change in cash and cash equivalents (50,924) 508
----------------------------------------------------------------------------
Cash - beginning of period 42,954 9,207
----------------------------------------------------------------------------
(Bank indebtedness) cash - end of period $ (7,970) $ 9,715
----------------------------------------------------------------------------
----------------------------------------------------------------------------
WAJAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2011
(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, industrial components and
power systems, through a network of 118 branches across Canada. The Corporation
is a multi-line distributor and represents a number of leading worldwide
manufacturers across its core businesses. Its customer base is diversified,
spanning natural resources, construction, transportation, manufacturing,
industrial processing and utilities.
In 2010 the Corporation was structured as an unincorporated, open-ended, limited
purpose investment trust called Wajax Income Fund ("the Fund"). On January 1,
2011, the Fund converted into a corporation pursuant to a Plan of Arrangement
under the Canada Business Corporations Act. Unitholders of the Fund
automatically received one common share of the Corporation in exchange for each
unit of the Fund. The conversion was accounted for as a continuity of interests.
The business continues to be carried on by the same management team that was in
place prior to the completion of the conversion.
2. BASIS OF PREPARATION
Statement of compliance
These condensed consolidated financial statements have been prepared in
accordance with International Accounting Standard 34 Interim Financial
Reporting. These are the Corporation's interim International Financial Reporting
Standards ("IFRS") condensed consolidated financial statements for part of the
period covered by the first IFRS annual financial statements, and IFRS 1
First-time Adoption of International Financial Reporting Standards has been
applied. The condensed consolidated financial statements do not include all of
the disclosures required for full annual consolidated financial statements.
Accordingly, these condensed consolidated financial statements should be read in
conjunction with the annual consolidated financial statements of Wajax Income
Fund for the year ended December 31, 2010 reported under previous Canadian
generally accepted accounting principles ("Canadian GAAP") and the condensed
consolidated financial statements of the Corporation for the three months ended
March 31, 2011, which were the first financial statements presented under IFRS.
An explanation of how the transition to IFRS has affected the reported financial
position, financial performance and cash flows of the Corporation is provided in
Note 13. This note includes reconciliations of equity and total comprehensive
income for comparative periods and of equity at the date of transition reported
under previous Canadian GAAP to those reported for those periods and at the date
of transition under IFRS. The Corporation's date of transition to IFRS was
January 1, 2010.
Basis of measurement
The condensed consolidated financial statements have been prepared under the
historical cost basis, except for derivative financial instruments and held for
trading financial instruments that have been measured at fair value.
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.
Judgements and estimation uncertainty
The preparation of the condensed 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 and revenues and expenses. Actual results could differ from
those estimates. The Corporation bases its estimates on historical experience
and various other assumptions that are believed to be reasonable in the
circumstances.
In preparing these condensed consolidated financial statements, the significant
judgments made by management in applying the Corporation's accounting policies
and the key sources of estimation uncertainty are expected to be the same as
those to be applied in the first annual IFRS financial statements. The more
significant judgements and assumptions that have an effect on the amounts
recognized in the condensed consolidated financial statements are provision for
doubtful accounts, inventory obsolescence, asset impairment, classification of
leases, impairment of intangible assets, warranty reserve and measurement of
employee benefit obligations.
3. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
These condensed consolidated financial statements have been prepared using IFRS
currently issued and expected to be effective at the end of the Corporation's
first annual IFRS reporting period, December 31, 2011. Accounting policies
currently adopted under IFRS are subject to change as a result of either a new
standard being issued or as a result of a voluntary change in accounting policy
made by the Corporation during 2011. A change in an accounting policy used may
result in material changes to the Corporation's reported financial position,
results of operations and cash flows.
As of January 1, 2013, 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.
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 amendments to
IAS 1 Presentation of Financial Statements, which require that an entity present
separately the items of OCI that may be reclassified to profit or loss in the
future from those that would never be reclassified to profit or loss. The
Corporation intends to adopt the amendments in its financial statements for the
annual period beginning on January 1, 2013. As the amendments only require
changes in the presentation of items in other comprehensive income, the
Corporation does not expect the amendments to IAS 1 to have a material impact on
the 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. The Corporation
is currently assessing the impact of this standard on its consolidated financial
statements.
4. RENTAL EQUIPMENT
The Corporation acquired rental equipment with a cost of $6,027 during the
quarter (2010 - $582) and $11,709 year to date (2010 - $1,861). Rental equipment
with a carrying amount of $922 during the quarter (2010 - $579) and $2,066 year
to date (2010 - $1,293) ceased to be rented and was classified as held for sale
in the normal course of business and transferred to inventory.
5. PROPERTY, PLANT AND EQUIPMENT
The Corporation acquired property, plant and equipment with a cost of $2,531
during the quarter (2010 - $861) and $4,182 year to date (2010 - $1,962). Assets
with a carrying amount of $310 during the quarter (2010 - $6) and $368 year to
date (2010 - $93) were disposed of, resulting in gains on disposal of nil during
the quarter (2010 - $18) and $16 year to date (2010 - $191).
Included in the above are vehicles held under finance leases:
June 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Cost $ 22,129 $ 22,006
Accumulated depreciation 12,279 12,542
----------------------------------------------------------------------------
Carrying amount $ 9,850 $ 9,464
----------------------------------------------------------------------------
All property, plant and equipment except vehicles held under finance leases have
been pledged as security for bank debt.
6. INTANGIBLE ASSETS
Goodwill Product Customer Total
distribution lists/Non-
rights competition
agreements
----------------------------------------------------------------------------
Cost
----------------------------------------------------------------------------
January 1, 2010 $ 66,335 4,900 4,302 $ 75,537
----------------------------------------------------------------------------
June 30, 2010 66,335 4,900 4,302 75,537
----------------------------------------------------------------------------
----------------------------------------------------------------------------
January 1, 2011 $ 66,335 4,900 4,302 $ 75,537
Acquisition of business 4,309 3,900 1,000 9,209
----------------------------------------------------------------------------
June 30, 2011 70,644 8,800 5,302 84,746
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated amortization
----------------------------------------------------------------------------
January 1, 2010 $ - - 2,032 $ 2,032
Amortization for the period - - 295 295
----------------------------------------------------------------------------
June 30, 2010 - - 2,327 2,327
----------------------------------------------------------------------------
----------------------------------------------------------------------------
January 1, 2011 $ - - 2,565 $ 2,565
Amortization for the period - - 252 252
----------------------------------------------------------------------------
June 30, 2011 - - 2,817 2,817
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net book value
----------------------------------------------------------------------------
January 1, 2010 $ 66,335 4,900 2,270 $ 73,505
----------------------------------------------------------------------------
June 30, 2010 $ 66,335 4,900 1,975 $ 73,210
----------------------------------------------------------------------------
----------------------------------------------------------------------------
January 1, 2011 $ 66,335 4,900 1,737 $ 72,972
----------------------------------------------------------------------------
June 30, 2011 $ 70,644 8,800 2,485 $ 81,929
----------------------------------------------------------------------------
7. DIVIDENDS DECLARED
During the three months ended June 30, 2011 the Corporation declared cash
dividends of $0.51 per share, or $8,481 (June 30, 2010, distributions of $0.45
per unit or $7,472).
Year to date, the Corporation declared cash dividends of $0.96 per share, or
$15,964 (June 30, 2010, distributions of $0.90 per unit or $14,944).
8. 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
Under the SOP, DSP and the DDSUP, rights are issued to the participants which,
upon satisfaction of certain time and performance vesting conditions, are
settled by issuing Wajax Corporation shares for no cash consideration. The
rights are settled when the participant is no longer employed by the Corporation
or one of its subsidiary entities or no longer sits on its board. The aggregate
number of shares issuable to satisfy entitlements under these plans may not
exceed 1,050,000 shares. Compensation expense is based upon the fair value of
the rights at the date of grant and is charged to earnings on a straight-line
basis over the vesting period, with an offsetting adjustment to contributed
surplus. Forfeitures are recognized as they occur. The Corporation recorded
compensation cost of $367 for the quarter (2010 - $300) and $912 for the year to
date (2010 - $592) in respect of these plans.
Share Ownership Plan June 30, 2011 June 30, 2010
----------------------------------------------------------------------------
Number of Fair value at Number of Fair value at
Rights time of grant Rights time of grant
----------------------------------------------------------------------------
Outstanding at beginning
of year 101,999 $ 2,326 126,125 $ 2,764
Granted in the period 4,285 158 4,740 115
----------------------------------------------------------------------------
Outstanding at end of
period 106,284 $ 2,484 130,865 $ 2,879
----------------------------------------------------------------------------
At June 30, 2011 97,524 SOP rights were vested.
Deferred Share Program June 30, 2011 June 30, 2010
----------------------------------------------------------------------------
Number of Fair value at Number of Fair value at
Rights time of grant Rights time of grant
----------------------------------------------------------------------------
Outstanding at beginning
of year 24,164 $ 738 21,944 $ 673
Granted in the period 5,087 191 826 20
----------------------------------------------------------------------------
Outstanding at end of
period 29,251 $ 929 22,770 $ 693
----------------------------------------------------------------------------
No DSP rights have vested at June 30, 2011.
Directors' Deferred Share
Unit Plan June 30, 2011 June 30, 2010
----------------------------------------------------------------------------
Number of Fair value at Number of Fair value at
Rights time of grant Rights time of grant
----------------------------------------------------------------------------
Outstanding at beginning
of year 147,797 $ 3,641 117,518 $ 2,768
Granted in the period 13,269 495 13,936 348
----------------------------------------------------------------------------
Outstanding at end of
period 161,066 $ 4,136 131,454 $ 3,116
----------------------------------------------------------------------------
DDSUP rights vest immediately upon grant.
b) Mid-Term Incentive Plan for Senior Executives ("MTIP")
The MTIP, which is settled in cash, consists of an annual grant that vests over
three years and is based upon time and performance vesting criteria, a portion
of which is determined by the price of the Corporation's shares. Compensation
expense varies with the price of the Corporation's shares and is recognized over
the 3 year vesting period. The Corporation recorded compensation cost of $771
for the quarter (2010 - $869) and $1,559 for the year to date (2010 - $1,336) in
respect of the share-based portion of the MTIP. At June 30, 2011 the carrying
amount of the share-based portion of the MTIP liability was $5,411 (2010 -
$2,144).
c) Deferred Share Unit Plan ("DSUP")
The DSUP, which is settled in cash, consists of an annual grant that vests over
three years and is based upon time and performance vesting criteria.
Compensation expense for DSUP rights varies with the price of the Corporation's
shares and is recognized immediately in earnings. The rights are settled when
the participant is no longer employed by the Corporation or one if its
subsidiary entities. The Corporation has not yet recorded any compensation cost
in respect of the share-based portion of the DSUP.
9. INCOME TAXES
On January 1, 2011, a plan of arrangement was completed and Wajax Income Fund
was converted to Wajax Corporation. The arrangement resulted in the
reorganization of the Fund into a corporate structure which is subject to income
tax on all of its taxable income at combined federal and provincial rates.
Prior to conversion, the Fund was a "mutual fund trust" as defined under the
Income Tax Act (Canada) and was not taxable on its income to the extent that it
was distributed to its unitholders. Pursuant to the terms of the Declaration of
Trust, all taxable income earned by the Fund was distributed to its unitholders.
Accordingly, no provision for income taxes was required on taxable income earned
by the Fund that was distributed to its unitholders. For 2010, only the Fund's
corporate subsidiaries were subject to tax on their taxable income.
Income tax expense comprises current and deferred tax as follows:
For the six months ended June 30 2011 2010
----------------------------------------------------------------------------
Current $ 506 $ 53
Deferred
- Origination and reversal of temporary
difference 11,057 132
- Change in tax law and rate (496) (892)
Income tax expense (recovery) $ 11,067 $ (707)
----------------------------------------------------------------------------
The calculation of current tax is based on a combined federal and provincial
statutory income tax rate of 27.7% (2010 - 29.4%). The tax rate for the current
year is 1.7% lower than 2010 due to the effect of the reduced statutory tax
rates. Deferred tax assets and liabilities are measured at tax rates that are
expected to apply to the period when the asset is realized or the liability is
settled. Deferred tax assets and liabilities have been measured using an
expected average combined statutory income tax rate of 25.9% based on the tax
rates in years when the temporary differences are expected to reverse.
The reconciliation of effective income tax is as follows:
For the six months ended June 30 2011 2010
----------------------------------------------------------------------------
Combined statutory income tax rate 27.7% 29.4%
Expected income tax expense at statutory rates $ 11,196 $ 5,976
Income of the Fund taxed directly to unitholders - (6,500)
Non-deductible expenses 418 257
Deferred tax related to changes in tax law and rates (496) (892)
Other (51) 452
----------------------------------------------------------------------------
Income tax expense (recovery) $ 11,067 $ (707)
----------------------------------------------------------------------------
Deferred income tax relates to book and tax basis differences for assets and
liabilities and is attributable to the following:
June 30, December 31,
2011 2010
--------------------------------------------------------------------------
Accrued liabilities and provisions not
currently deductible $ 8,608 $ 8,258
Partnership income not currently taxable (10,720) -
Property, plant and equipment (1,649) (1,418)
Vehicles under finance lease (177) (146)
Deductible goodwill and other assets (2,168) (2,052)
Deductible future financing costs (16) (38)
Derivative instrument liability not
currently deductible 370 673
Income tax losses available for carry
forward 162 -
--------------------------------------------------------------------------
Net deferred income tax (liabilities)
assets $ (5,590) $ 5,277
--------------------------------------------------------------------------
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Numerator for basic and
diluted earnings per
unit:
- net earnings $ 16,538 $ 12,164 $ 29,354 $ 21,041
----------------------------------------------------------------------------
Denominator for basic
earnings per unit:
- weighted average units 16,629,444 16,603,423 16,629,444 16,603,423
----------------------------------------------------------------------------
Denominator for diluted
earnings per unit:
- weighted average units 16,629,444 16,603,423 16,629,444 16,603,423
- effect of dilutive unit
rights 284,656 261,201 280,641 256,465
----------------------------------------------------------------------------
Denominator for diluted
earnings per unit 16,914,100 16,864,624 16,910,085 16,859,888
----------------------------------------------------------------------------
Basic earnings per unit $ 0.99 $ 0.73 $ 1.77 $ 1.27
----------------------------------------------------------------------------
Diluted earnings per unit $ 0.98 $ 0.72 $ 1.74 $ 1.25
----------------------------------------------------------------------------
----------------------------------------------------------------------------
No share rights were excluded from the above calculations as none were
anti-dilutive.
11. ACQUISITION OF BUSINESS
On May 2, 2011, the Corporation's Power Systems segment acquired certain assets
of Harper Power Products Inc. ("Harper") for consideration of $23,172, subject
to post-closing adjustments. The acquisition price was funded through the
Corporation's existing bank credit facility. The acquisition secures the Ontario
distribution rights for certain product lines and complements the segment's
existing product distribution rights in the rest of Canada, except for portions
of British Columbia.
For the two months since the acquisition, Harper contributed revenue of $9,147
and net earnings of $456 to the quarter's results. Had the acquisition occurred
on January 1, 2011 the Corporation estimates that it would have reported revenue
of $656,290 and net earnings of $30,396 on its condensed consolidated income
statement for the six months ended June 30, 2011. In determining these amounts,
management has assumed that the level of business activity experienced by Harper
after May 2, 2011 is representative of the level of business activity that it
would have experienced prior to the acquisition.
Recognized amounts of identifiable assets acquired and liabilities assumed are
as follows:
Trade and other receivables $ 10,554
Inventories 8,277
Prepaid expenses 281
Property, plant and equipment 1,930
Trade and other payables (7,079)
----------------------------------------------------------------------------
Tangible net assets acquired 13,963
Goodwill and other intangible assets (note 6) 9,209
----------------------------------------------------------------------------
$ 23,172
----------------------------------------------------------------------------
----------------------------------------------------------------------------
An amount of $21,603 was paid on closing based upon a preliminary estimate of
tangible net assets acquired. The final values of tangible net assets acquired
are still being determined. The total purchase price will be adjusted for any
change in the value of tangible net assets acquired once finally determined. An
estimate of the purchase price adjustment has been accrued in trade and other
payables. The amount of any trade and other receivables which prove to be
uncollectable will be deducted from the purchase price.
The goodwill is mainly attributable to the skills and technical talent of
Harper's workforce and its existing branch network, synergies expected to be
achieved from integrating the business into the existing Power Systems segment
and the value expected to be generated from its operation over time, for
example, through growing the power generation business in Ontario. It is
anticipated that amounts attributed to goodwill and other intangible assets will
be 75% deductible for income tax purposes.
The Corporation incurred acquisition-related costs of $385 relating to external
legal fees and due diligence costs. These costs have been included in selling
and administrative expenses on the condensed consolidated income statement.
12. SEGMENTED INFORMATION
The Corporation operates through a network of 118 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 industrial
components; and iii) the distribution and servicing of power systems.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three Segment
months ended Eliminations
June 30, 2011 and
Industrial Power Unallocated
Equipment Components Systems Amounts Total
----------------------------------------------------------------------------
Equipment $ 91,086 $ $ 36,104 $ $ 127,190
Parts 43,954 89,895 29,368 163,217
Service 21,730 15,560 37,290
Rental and other 7,411 (1,039) 6,372
----------------------------------------------------------------------------
Revenue $ 164,181 $ 89,895 $ 81,032 $ (1,039) $ 334,069
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment earnings
before finance
costs and income
taxes $ 11,951 $ 6,544 $ 8,271 $ $ 26,766
Corporate costs
and eliminations (3,280) (3,280)
----------------------------------------------------------------------------
Earnings before
finance costs
and income taxes
11,951 6,544 8,271 (3,280) 23,486
Finance costs 1,109 1,109
Income tax
expense 5,839 5,839
----------------------------------------------------------------------------
Net earnings $ 11,951 $ 6,544 $ 8,271 $ (10,228) $ 16,538
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six Segment
months ended Eliminations
June 30, 2011 and
Industrial Power Unallocated
Equipment Components Systems Amounts Total
----------------------------------------------------------------------------
Equipment $ 171,586 $ $ 71,551 $ $ 243,137
Parts 88,777 170,619 53,449 312,845
Service 40,816 28,963 69,779
Rental and other 14,445 (2,208) 12,237
----------------------------------------------------------------------------
Revenue $ 315,624 $ 170,619 $ 153,963 $ (2,208) $ 637,998
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment earnings
before finance
costs and income
taxes $ 23,142 $ 10,989 $ 15,285 $ $ 49,416
Corporate costs
and eliminations (6,910) (6,910)
----------------------------------------------------------------------------
Earnings before
finance costs
and income taxes
23,142 10,989 15,285 (6,910) 42,506
Finance costs 2,085 2,085
Income tax
expense 11,067 11,067
----------------------------------------------------------------------------
Net earnings $ 23,142 $ 10,989 $ 15,285 $ (20,062) $ 29,354
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment assets
excluding
intangible
assets $ 239,096 $ 120,019 $ 123,405 $ $ 482,520
Intangible assets 21,541 45,768 14,620 81,929
Corporate and
other assets 374 374
----------------------------------------------------------------------------
Total assets $ 260,637 $ 165,787 $ 138,025 $ 374 $ 564,823
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment
For the three Eliminations
months ended and
June 30, 2010 Industrial Power Unallocated
Equipment Components Systems Amounts Total
----------------------------------------------------------------------------
Equipment $ 74,471 $ $ 18,404 $ $ 92,875
Parts 42,334 75,944 23,458 141,736
Service 18,057 13,250 31,307
Rental and other 7,982 (1,858) 6,124
----------------------------------------------------------------------------
Revenue $ 142,844 $ 75,944 $ 55,112 $ (1,858) $ 272,042
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment earnings
before finance
costs and income
taxes $ 10,251 2,049 3,656 $ $ 15,956
Corporate costs
and eliminations (3,047) (3,047)
----------------------------------------------------------------------------
Earnings before
finance costs
and income taxes
10,251 2,049 3,656 (3,047) 12,909
Finance costs 1,082 1,082
Income tax
recovery (337) (337)
----------------------------------------------------------------------------
Net earnings $ 10,251 $ 2,049 $ 3,656 $ (3,792) $ 12,164
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment
For the six months Eliminations
ended and
June 30, 2010 Industrial Power Unallocated
Equipment Components Systems Amounts Total
----------------------------------------------------------------------------
Equipment $ 124,216 $ $ 32,013 $ $156,229
Parts 78,207 148,528 44,721 271,456
Service 33,285 25,819 59,104
Rental and other 15,521 (2,147) 13,374
----------------------------------------------------------------------------
Revenue $ 251,229 $ 148,528 $ 102,553 $ (2,147) $500,163
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment earnings
before finance
costs and income
taxes $ 18,170 $ 5,196 $ 4,600 $ $ 27,966
Corporate costs
and eliminations (5,483) (5,483)
----------------------------------------------------------------------------
Earnings before
finance costs and
income taxes 18,170 5,196 4,600 (5,483) 22,483
Finance costs 2,149 2,149
Income tax
recovery (707) (707)
----------------------------------------------------------------------------
Net earnings $ 18,170 $ 5,196 $ 4,600 $ (6,925) $ 21,041
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment assets
excluding
intangible assets $ 198,958 $ 100,719 $ 98,806 $ $398,483
Intangible assets 21,541 46,225 5,444 73,210
Cash 9,715 9,715
Corporate and
other assets 3,246 3,246
----------------------------------------------------------------------------
Total assets $ 220,499 $ 146,944 $ 104,250 $ 12,961 $484,654
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment assets do not include assets associated with the corporate office,
financing or income taxes. Additions to corporate assets, and depreciation of
these assets, are included in segment eliminations and unallocated amounts.
13. EXPLANATION OF TRANSITION TO IFRS
This is the first year that the Corporation has presented its condensed
consolidated financial statements in accordance with IFRS. In the year ended
December 31, 2010, the Corporation reported under previous Canadian GAAP.
The accounting policies set out in Note 3 of the condensed consolidated
financial statements of the Corporation for the three months ended March 31,
2011 have been applied in preparing the condensed consolidated financial
statements for the three and six months ended June 30, 2011.
In preparing its opening IFRS statement of financial position, the Corporation
has adjusted amounts reported previously in financial statements prepared in
accordance with previous Canadian GAAP. An explanation of how the transition
from previous Canadian GAAP to IFRS has affected the Corporation's reported
financial position, financial performance and cash flows is set out in the
tables below and the notes that accompany the tables.
IFRS 1 First-time Adoption of International Financial Reporting Standards sets
forth guidance for the initial adoption of IFRS. Under IFRS 1, the standards are
applied retrospectively at the transitional statement of financial position date
and, in general, all adjustments to assets and liabilities are taken to retained
earnings, unless certain exemptions are elected and certain mandatory exceptions
are applied. In preparing its opening IFRS statement of financial position, the
Corporation has elected the following exemptions:
Business combinations before January 1, 2010 (IFRS 3 "Business Combinations")
The Corporation has elected not to apply IFRS 3 retrospectively to business
combinations that took place before January 1, 2010. In addition, and as a
condition under IFRS 1 for applying this exemption, goodwill relating to
business combinations that occurred prior to January 1, 2010 was tested for
impairment even though no impairment indicators were identified. No impairment
existed at the date of transition.
Employee Benefits - actuarial gains and losses (IAS 19 "Employee Benefits")
Under IFRS, the Corporation's accounting policy is to recognize all actuarial
gains and losses immediately in other comprehensive income. At the date of
transition, the Corporation has elected to recognize all cumulative actuarial
gains and losses in retained earnings.
Employee Benefits - pension costs (IAS 19 "Employee Benefits")
The Corporation has elected to disclose the present value of the defined benefit
obligation, fair value of the plan assets, surplus or deficit in the plan, and
the experience adjustments arising on the plan assets or liabilities, for each
accounting period prospectively from the date of transition to IFRS.
Reconciliation of Consolidated Income Statement
For the three months ended Canadian Employee Leases Inventory IFRS
June 30, 2010 GAAP Benefits IAS 17 IAS 2
IAS 19
----------------------------------------------------------------------------
(In thousands of Canadian
dollars)
----------------------------------------------------------------------------
Revenue $ 272,042 $ 272,042
Cost of sales 212,296 279 212,575
----------------------------------------------------------------------------
Gross profit 59,746 (279) 59,467
----------------------------------------------------------------------------
Selling and administrative
expenses 46,812 (35) (219) 46,558
----------------------------------------------------------------------------
Earnings before finance
costs and income taxes 12,934 35 219 (279) 12,909
Finance costs 1,045 37 1,082
----------------------------------------------------------------------------
Earnings before income
taxes 11,889 35 182 (279) 11,827
Income tax expense
(recovery) (317) 9 49 (78) (337)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings $ 12,206 26 133 (201) $ 12,164
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of Consolidated Statement of Comprehensive Income
For the three months ended Canadian Employee Leases Inventory IFRS
June 30, 2010 GAAP Benefits IAS 17 IAS 2
IAS 19
----------------------------------------------------------------------------
(In thousands of Canadian
dollars)
----------------------------------------------------------------------------
Net earnings $ 12,206 26 133 (201) $ 12,164
----------------------------------------------------------------------------
Losses on derivative
instruments designated as
cash flow hedges in prior
periods reclassified to
cost of inventory or
finance costs during the
period, net of tax 320 320
Gains on derivative
instruments designated as
cash flow hedges during the
period, net of tax 1,215 1,215
----------------------------------------------------------------------------
Other comprehensive income,
net of tax 1,535 1,535
----------------------------------------------------------------------------
Total comprehensive income $ 13,741 26 133 (201) $ 13,699
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of Consolidated Income Statement
For the six months ended Canadian Employee Leases Inventory IFRS
June 30, 2010 GAAP Benefits IAS 17 IAS 2
IAS 19
----------------------------------------------------------------------------
(In thousands of Canadian
dollars)
----------------------------------------------------------------------------
Revenue $ 500,163 $ 500,163
Cost of sales 389,148 (153) 388,995
----------------------------------------------------------------------------
Gross profit 111,015 153 111,168
----------------------------------------------------------------------------
Selling and administrative
expenses 89,253 (70) (498) 88,685
----------------------------------------------------------------------------
Earnings before finance
costs and income taxes 21,762 70 498 153 22,483
Finance costs 2,076 73 2,149
----------------------------------------------------------------------------
Earnings before income
taxes 19,686 70 425 153 20,334
Income tax expense
(recovery) (882) 18 114 43 (707)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings $ 20,568 52 311 110 $ 21,041
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of Consolidated Statement of Comprehensive Income
For the six months ended June Canadian Employee Leases Inventory IFRS
30, 2010 GAAP Benefits IAS 17 IAS 2
IAS 19
----------------------------------------------------------------------------
(In thousands of Canadian
dollars)
----------------------------------------------------------------------------
Net earnings $ 20,568 52 311 110 $ 21,041
----------------------------------------------------------------------------
Losses on derivative
instruments designated as
cash flow hedges in prior
periods reclassified to cost
of inventory or finance costs
during the period, net of tax 459 459
Gains on derivative
instruments designated as
cash flow hedges during the
period, net of tax 509 509
----------------------------------------------------------------------------
Other comprehensive income,
net of tax 968 968
----------------------------------------------------------------------------
Total comprehensive income $ 21,536 52 311 110 $ 22,009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of Consolidated Statement of Financial Position
As at June 30, Canadian Employee Leases Inventory Income IFRS
2010 GAAP Benefits IAS 17 IAS 2 Tax IAS
IAS 19 12
----------------------------------------------------------------------------
(In thousands of
Canadian
dollars)
----------------------------------------------------------------------------
ASSETS
CURRENT
Cash $ 9,715 $ 9,715
Trade and other
receivables 147,039 147,039
Inventories 177,780 1,832 179,612
Prepaid expenses 12,459 12,459
Income taxes
receivable 204 (204) -
Deferred tax
assets 4,053 (4,053) -
----------------------------------------------------------------------------
351,250 1,832 (4,257) 348,825
----------------------------------------------------------------------------
NON-CURRENT
Rental equipment 15,202 15,202
Property, plant
and equipment 35,279 9,187 44,466
Intangible assets 73,210 73,210
Deferred tax
assets - 865 (76) 2,042 2,831
Pension asset 2,459 (2,339) 120
----------------------------------------------------------------------------
126,150 (1,474) 9,111 2,042 135,829
----------------------------------------------------------------------------
$ 477,400 (1,474) 9,111 1,832 (2,215) $ 484,654
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
CURRENT
Trade and other
payables $ 96,161 (5) $ 96,156
Accrued
liabilities 75,381 75,381
Provisions 4,211 4,211
Distributions
payable 2,491 2,491
Income taxes
payable - 507 (204) 303
Obligations under
finance leases - 3,684 3,684
----------------------------------------------------------------------------
178,244 (5) 3,684 507 (204) 182,226
----------------------------------------------------------------------------
NON-CURRENT
Provisions 3,499 3,499
Deferred income
taxes 2,011 (2,011) -
Employee benefits 2,956 970 3,926
Derivative
instrument
liability 1,518 1,518
Bank debt 79,519 79,519
Other liabilities 2,108 2,108
Obligations under
finance leases - 5,224 5,224
----------------------------------------------------------------------------
91,611 970 5,224 (2,011) 95,794
----------------------------------------------------------------------------
SHAREHOLDERS'
EQUITY
Trust units 105,307 105,307
----------------------------------------------------------------------------
Contributed
surplus 6,237 6,237
----------------------------------------------------------------------------
Retained earnings 97,266 (2,439) 203 1,325 96,355
Accumulated other
comprehensive
loss (1,265) (1,265)
----------------------------------------------------------------------------
96,001 (2,439) 203 1,325 95,090
----------------------------------------------------------------------------
Total
shareholders'
equity 207,545 (2,439) 203 1,325 206,634
----------------------------------------------------------------------------
$ 477,400 (1,474) 9,111 1,832 (2,215) $ 484,654
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Material adjustments to the statement of cash flows for 2010
Consistent with the Corporation's accounting policy choice under IAS 7 Statement
of Cash Flows, interest paid and income taxes paid have moved into the body of
the Statement of Cash Flows, whereas they were previously disclosed as
supplementary information. There are no other material differences between the
statement of cash flows presented under IFRS and the statement of cash flows
presented under previous Canadian GAAP.
Notes to the reconciliations
(a) Employee Benefits (IAS 19)
Under Canadian GAAP, the Corporation accounted for post-employment benefits
under CICA Handbook Section 3461, Employee Future Benefits, whereby defined
benefit pension plan net actuarial gains or losses over 10% of the greater of
the benefit obligation and the fair value of the plan assets were amortized to
income over the average remaining service life of active employees. Under IAS
19, Employee Benefits, the Corporation has adopted the policy of recognizing
actuarial gains and losses in full in other comprehensive income in the period
in which they occur.
(b) Leases (IAS 17)
Under Canadian GAAP, the Corporation assessed vehicle leases under CICA Handbook
Section 3065, Leases, as operating leases. Under IAS 17, Leases, the Corporation
has assessed the vehicle leases as financing leases. Under finance leases the
asset is recorded at the lower of its fair value and the present value of the
minimum lease payments at the inception of the lease. The liability is included
in the statement of financial position and classified between current and
non-current amounts. The interest component of the lease payments is charged to
earnings over the period of the lease so as to achieve a constant rate of
interest on the remaining balance of the liability.
(c) Inventory (IAS 2)
Under Canadian GAAP, the Corporation did not allocate overhead to work in
process inventory relating to customer repair orders. Under IFRS the Corporation
allocates overhead to work in process inventory relating to customer repair
orders resulting in an adjustment to inventory and opening retained earnings.
(d) Income Taxes (IAS 12)
The effect of applying IAS 12, Income Taxes, is that all deferred tax balances
are now classified as non-current. No other changes arise from this section.
Applicable income tax rates have been applied to all IFRS adjustments.
(e) Comparative Information
Certain comparative amounts have been reclassified to conform with the current
period presentation.
In particular, cash discounts provided to customers in an amount of $256 for the
quarter and $493 year to date have been reclassified out of selling and
administrative expenses into revenue.
In addition, cash discounts received from vendors in an amount of $294 for the
quarter and $571 year to date have been reclassified out of selling and
administrative expenses into cost of sales.
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