Wajax Reports 2019 Second Quarter Results

TSX Symbol:  WJX

TORONTO, Aug. 8, 2019 /CNW/ - Wajax Corporation ("Wajax" or the "Corporation") today announced its 2019 second quarter results.

Second Quarter Highlights

• Revenue in the second quarter of 2019 increased $27.1 million or 7%, to $409.4 million, from $382.3 million in the second quarter of 2018.⁽⁵⁾ Regionally:
  
  
• Revenue in western Canada of $158.4 million increased 4% over the prior year as strong mining equipment and parts and service sales and higher forestry equipment sales were partially offset by lower construction and power generation sales.
• Revenue in central Canada of $82.7 million decreased 11% over the prior year due primarily to lower construction and power generation sales. This was partially offset by higher ERS sales resulting primarily from the acquisition of Groupe Delom Inc. ("Delom") in the fourth quarter of 2018. Lower construction sales relate mainly to road-building equipment no longer sold by the Corporation not being fully offset by growth in other construction lines.
• Revenue in eastern Canada of $168.3 million increased 23% over the prior year due to sales gains in the majority of product categories, including higher ERS sales resulting primarily from the acquisition of Delom in the fourth quarter of 2018 and higher power generation sales. These increases were partially offset by lower mining equipment sales.
  
  
• Gross profit margin of 19.1% increased 0.7% compared to the same period of 2018 due mainly to higher equipment margin rates.
  
  
• Selling and administrative expenses as a percentage of revenue increased 0.4% to 13.9% in the second quarter of 2019 from 13.5% in the same period of 2018.⁽⁵⁾ Selling and administrative expenses increased by $5.2 million compared to the second quarter of 2018 due mainly to higher personnel costs, sales-related expenses and Customer Support Centre ("CSC") project costs of $0.4 million in the current quarter.⁽⁵⁾ As expected, the Corporation incurred higher personnel costs in the second quarter due to increased year-over-year headcount and the acquisition of Delom. The increase in expenses is consistent with the Corporation's 2019 sales goals and workplan for major projects.
  
  
• EBIT increased $3.4 million, or 19.2%, to $21.0 million in the second quarter of 2019 versus $17.7 million in the same period of 2018.⁽³⁾⁽⁵⁾ The year-over-year improvement is primarily attributable to increased revenue, higher gross profit margins and the acquisition of Delom in the fourth quarter of 2018.
  
  
• The Corporation generated net earnings of $11.9 million, or $0.59 per share, in the second quarter of 2019 versus $11.4 million, or $0.58 per share, in the same period of 2018.⁽³⁾⁽⁵⁾ The Corporation generated adjusted net earnings of $12.6 million, or $0.63 per share, in the second quarter of 2019 versus $12.3 million, or $0.63 per share, in the same period of 2018.⁽³⁾⁽⁵⁾
  
  
• Adjusted EBITDA margin increased to 8.7% in the second quarter of 2019 from 6.5% in the same period of 2018.⁽³⁾⁽⁵⁾ Adjusted EBITDA margin includes the positive impact of 1.3% related to the adoption of IFRS 16.⁽³⁾⁽⁵⁾ See the Changes in Accounting Policies section of the Corporation's Q2 2019 Management's Discussion and Analysis.
  
  
• The Corporation's backlog at June 30, 2019 of $296.5 million increased $41.2 million, or 16%, compared to March 31, 2019 due primarily to higher mining and forestry orders offset partially by lower material handling orders. Compared to the second quarter of 2018, backlog increased $39.6 million, or 15%, due primarily to higher mining and forestry orders offset partially by lower material handling and power generation orders.⁽³⁾
  
  
• Inventory of $416.3 million at June 30, 2019 increased $24.0 million from March 31, 2019 due to higher new equipment, parts inventory levels and work-in-process. The level of new equipment inventory is consistent with the Corporation's sales plans. Increases in parts inventory supports sales plans in industrial parts and ongoing efforts to improve customer service levels.
  
  
• Working capital of $380.5 million at June 30, 2019 decreased $4.4 million from March 31, 2019 due primarily to lower trade and other receivables and contract assets and higher accounts payable and accrued liabilities, lease liabilities and contract liabilities. These working capital decreases were partially offset by higher inventory levels. Trailing four-quarter average working capital as a percentage of the trailing 12-month sales was 23.3%, an increase of 0.5% from March 31, 2019 due primarily to the higher trailing four-quarter average working capital.⁽³⁾
  
  
• The Corporation's leverage ratio decreased to 2.71 times at June 30, 2019 compared to 2.89 times at March 31, 2019.⁽⁶⁾ The decrease in the leverage ratio was due to the lower debt level associated with the decrease in working capital and the higher trailing 12-month pro-forma adjusted EBITDA.⁽³⁾
  
  
• On July 2, 2019 and subsequent to the end of the second quarter, the Corporation began the implementation of its new ERP system. Integrity and effectiveness of the system will be confirmed through testing in a limited number of branches until the end of 2019. To ensure sufficient testing is completed, the Corporation does not expect to proceed with broad system implementation before 2020.

On August 8, 2019, the Corporation declared a dividend of $0.25 per share for the third quarter of 2019 payable on October 2, 2019 to shareholders of record on September 16, 2019.

Commenting on the Corporation's results, President and Chief Executive Officer Mark Foote stated, "Consolidated results in the second quarter were consistent with our expectations. Revenue growth of 7% resulted from increased sales in ERS and product support while equipment and industrial parts sales were comparable year-over-year. Results in eastern Canada showed broad strength in the second quarter and there were indications of improvements in market conditions in western Canada. Central Canada revenue performance is an important focus area and we expect improvements as the year progresses."

Mr. Foote continued, "The gross profit rate of 19.1% was generally consistent with the prior year and the sequential improvement experienced in the first quarter. The selling and general administrative expenses rate of 13.9% reflects a strong focus on cost management during a key period of investment in our business in areas including personnel, systems and customer support.

The sequential increase in inventory relates primarily to new equipment and secondarily to parts stock. The current level of inventory supports our sales plans and ongoing efforts to improve our customer service levels in parts. Leverage remains within acceptable boundaries and is expected to improve further as the year progresses. We are pleased with the increase in backlog that reflects continued strength in mining and sequential growth in forestry and construction."

Regarding safety, Mr. Foote stated, "Safety performance in Wajax's base business was exemplary in the second quarter, resulting in a TRIF rate of 0.29. Our priority is to ensure that each member of our team goes home safely at the end of each shift and we continue to work toward a goal of zero injuries."⁽⁷⁾

Mr. Foote concluded, "We expect generally stable market conditions in eastern and central Canada in 2019. In western Canada, activity remains stable to positive in important end markets such as the oil sands and mining but is expected to slow temporarily in areas such as conventional oil and gas, forestry, construction and related markets. Wajax believes that 2019 market conditions in western Canada are more favourable than those that prevailed when energy prices were weak in 2015 and 2016. While recognizing the possible effect of these market conditions, we have not changed our financial targets or operational plans which remain consistent with the original goals of our strategic plan. We expect 2019 full year adjusted net earnings to increase over 2018 based on consolidated revenue improvements and the full year effect of the acquisition of Delom.⁽³⁾ 2019 is an important year for major projects such as the new ERP system and CSC, which are in the early stages of implementation. Our current view of the timing of revenue and costs suggests that the expected earnings improvements in 2019 will be weighted to the second half of the year."

Wajax Corporation

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

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

Wajax will webcast its Second Quarter Financial Results Conference Call. You are invited to listen to the live webcast on Friday, August 9, 2019 at 2:00 p.m. ET. To access the webcast, please visit our website wajax.com, under "Investor Relations", "Events and Presentations", "Q2 2019 Financial Results" and click on the "Webcast" link.

Cautionary Statement Regarding Forward-Looking Information

This news release contains certain forward-looking statements and forward-looking information, as defined in applicable securities laws (collectively, "forward-looking statements").  These forward-looking statements relate to future events or the Corporation's future performance.  All statements other than statements of historical fact are forward-looking statements.  Often, but not always, forward looking statements can be identified by the use of words such as "plans", "anticipates", "intends", "predicts", "expects", "is expected", "scheduled", "believes", "estimates", "projects" or "forecasts", or variations of, or the negatives of, such words and phrases or state that certain actions, events or results "may", "could", "would", "should", "might" or "will" be taken, occur or be achieved.  Forward looking statements involve known and unknown risks, uncertainties and other factors beyond the Corporation's ability to predict or control which may cause actual results, performance and achievements to differ materially from those anticipated or implied in such forward looking statements.  There can be no assurance that any forward looking statement will materialize.  Accordingly, readers should not place undue reliance on forward looking statements.  The forward looking statements in this news release are made as of the date of this news release, reflect management's current beliefs and are based on information currently available to management.  Although management believes that the expectations represented in such forward-looking statements are reasonable, there is no assurance that such expectations will prove to be correct.  Specifically, this news release includes forward looking statements regarding, among other things, our expectation that central Canada revenue performance will show improvements as the year progresses; our expectation that our leverage will improve further as the year progresses; our expectations and outlook for 2019, including our outlook on regional market conditions in Canada as well as certain key end markets; our belief that 2019 market conditions in western Canada are more favourable than those which prevailed in 2015 and 2016 when energy prices were weak; our expectation that our 2019 adjusted net earnings will increase over 2018 based on revenue improvements and the full year effect of the Delom acquisition; our view that expected earnings improvements in 2019 will be weighted to the second half of the year; our goal of becoming Canada's leading industrial products and services provider, distinguished through our core capabilities; and our belief that achieving excellence in our areas of core capability will position Wajax to create value for its customers, employees, vendors and shareholders. These statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, general business and economic conditions; the supply and demand for, and the level and volatility of prices for, oil, natural gas and other commodities; financial market conditions, including interest rates; our ability to execute our updated Strategic Plan, including our ability to develop our core capabilities, execute on our organic growth priorities, complete and effectively integrate acquisitions, such as Delom, and to successfully implement new information technology platforms, systems and software; the future financial performance of the Corporation; our costs; market competition; our ability to attract and retain skilled staff; our ability to procure quality products and inventory; and our ongoing relations with suppliers, employees and customers.  The foregoing list of assumptions is not exhaustive.  Factors that may cause actual results to vary materially include, but are not limited to, a deterioration in general business and economic conditions; volatility in the supply and demand for, and the level of prices for, oil, natural gas and other commodities; a continued or prolonged decrease in the price of oil or natural gas; fluctuations in financial market conditions, including interest rates; the level of demand for, and prices of, the products and services we offer; levels of customer confidence and spending; market acceptance of the products we offer; termination of distribution or original equipment manufacturer agreements; unanticipated operational difficulties (including failure of plant, equipment or processes to operate in accordance with specifications or expectations, cost escalation, our inability to reduce costs in response to slow-downs in market activity, unavailability of quality products or inventory, supply disruptions, job action and unanticipated events related to health, safety and environmental matters); our ability to attract and retain skilled staff and our ability to maintain our relationships with suppliers, employees and customers.  The foregoing list of factors is not exhaustive.  Further information concerning the risks and uncertainties associated with these forward looking statements and the Corporation's business may be found in our Annual Information Form for the year ended December 31, 2018, filed on SEDAR.  The forward-looking statements contained in this news release are expressly qualified in their entirety by this cautionary statement.  The Corporation does not undertake any obligation to publicly update such forward-looking statements to reflect new information, subsequent events or otherwise unless so required by applicable securities laws.

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

Wajax Corporation
Management's Discussion and Analysis – Q2 2019

The following management's discussion and analysis ("MD&A") discusses the consolidated financial condition and results of operations of Wajax Corporation ("Wajax" or the "Corporation") for the quarter ended June 30, 2019.  This MD&A should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements and accompanying notes for the quarter ended June 30, 2019, the annual audited consolidated financial statements and accompanying notes for the year ended December 31, 2018 that are prepared in accordance with International Financial Reporting Standards (IFRS) and the associated MD&A.  Information contained in this MD&A is based on information available to management as of August 8, 2019.

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

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

Wajax Corporation Overview

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

Strategic Direction and Outlook

The focus of the One Wajax strategy is to provide customers with access to the Corporation's full range of products and services while delivering a consistently excellent level of customer service. The strategy builds on the Corporation's strengths of a well-trained and dedicated team of professionals, a broad range of products and services, deep experience in a wide range of markets, strong relationships with leading manufacturers and a national branch network. The Corporation is focused on delivering a strong experience for its team, customers and investors by executing clear plans in six important areas:

• Investing in the Wajax team - The safety, well-being and engagement of the Corporation's team of 2,800 technicians, sales professionals, support staff and leaders is the foundation of the Corporation. The Corporation is very proud of the team's accomplishments in workplace safety, progress on personal wellness programs and enhanced training and professional development.
  
  
• Investing in Wajax' customers - The Corporation has the privilege of supporting 32,000 individual customers across Canada ranging from small local contractors to the country's largest industrial and resource organizations. Wajax continues to expand its Voice of the Customer (VoC) program which evaluates detailed customer service levels for each location and shares customer feedback openly with all parts of the Corporation. For an increasing number of large customers, the VoC program also uses analytical systems and dedicated teams to explore opportunities to increase the Corporation's share-of-wallet with individual customers.
  
  
• Executing a clear organic growth strategy - The Corporation has classified its ten current product and service categories based on a category's contribution to sustainable growth. While Wajax is competitive in all of the categories it participates in, these classifications ensure that resources (such as inventory, personnel and marketing) are allocated appropriately. The Corporation's classifications are Targeted Growth (which includes the Construction, Material Handling and Engineered Repair Services categories), Core Strength (which includes the Industrial Parts, Forestry, On-Highway and Power and Marine categories) and Cyclical and Major Projects (which includes the Mining, Engines and Transmissions and Crane/Utility categories). The majority of the Corporation's strategic plan's organic growth is expected to result from Targeted Growth categories due to the relatively high opportunity for market share increases, resilient aftermarkets, the strength of the Corporation's product and service range and related manufacturer relationships. In 2018, 55% of the Corporation's revenue growth was driven by Targeted Growth categories.
  
  
• Accretive acquisitions strategy - Wajax has developed clear acquisition criteria for the Canadian and U.S. markets. In Canada, the focus is primarily on acquisitions that add to the Corporation's scale in the Engineered Repair Services ("ERS") business and secondarily to extensions to the Corporation's existing distribution businesses. In the U.S. market, the focus is on reviewing growth opportunities related to distribution businesses that provide a long-term growth platform for the One Wajax multi-category model. Acquisitions are considered when they can be achieved within acceptable leverage parameters, are consistent with the Corporation's product and service strategy, accretive to EBITDA margin, provide scale and have effective management teams.
  
  
• Investing in the Wajax infrastructure - The Corporation is making major changes to its infrastructure to improve the consistency of customer service, lower fixed costs and add new sales channels in an increasingly technology-enabled industry. The Corporation's current infrastructure programs include the ongoing consolidation of the branch network to improve customer service and to lower the cost of its physical footprint. In addition, the Corporation is investing in new information systems and capabilities that replace the aged legacy systems and provide a platform for new customer-facing capabilities. In 2018, the Corporation completed the majority of the configuration and testing of its new ERP system. Subsequent to the end of the second quarter of 2019, the Corporation began operational testing of the ERP - additional commentary is included in the Highlights for the Quarter section of this report.
  
  
• Ongoing refinements to the One Wajax organizational model - In 2016, Wajax made major changes to how its team is organized in order to improve growth, drive consistency and to lower fixed costs. The changes reduced costs by approximately $20 million at the time of the change, primarily through the reduction of administrative personnel costs. As the business has grown, the Corporation has reinvested those savings, primarily in revenue generating roles, such as sales professionals and technicians. Wajax continues to refine its organizational model and expects additional improvements in cost productivity, due primarily to technology investments.

Outlook

Wajax expects generally stable market conditions in eastern and central Canada in 2019.  In western Canada, activity remains stable to positive in important end markets such as the oil sands and mining, but is expected to slow temporarily in areas such as conventional oil and gas, forestry, construction and related markets. Wajax believes that 2019 market conditions in western Canada are more favourable than those that prevailed when energy prices were weak in 2015 and 2016. While recognizing the possible effect of these market conditions, the Corporation has not changed its financial targets or operational plans which remain consistent with the original goals of its strategic plan. Wajax expects 2019 full year adjusted net earnings to increase over 2018 based on consolidated revenue improvements and the full year effect of the acquisition of Groupe Delom Inc. ("Delom"). 2019 is an important year for major projects such as the new ERP system and Customer Support Centres ("CSC"), which are in the early stages of implementation. The Corporation's current view of the timing of revenue and costs suggests that the expected earnings improvements in 2019 will be weighted to the second half of the year. Leverage is expected to remain within acceptable boundaries and the Corporation maintains sufficient financial flexibility to execute the 2019 business plan. See the Non-GAAP and Additional GAAP Measures and Cautionary Statement Regarding Forward-Looking Information sections.

Highlights for the Quarter

• Revenue in the second quarter of 2019 increased $27.1 million or 7%, to $409.4 million, from $382.3 million in the second quarter of 2018.⁽¹⁾ Regionally:
  
  
• Revenue in western Canada of $158.4 million increased 4% over the prior year as strong mining equipment and parts and service sales and higher forestry equipment sales were partially offset by lower construction and power generation sales.
• Revenue in central Canada of $82.7 million decreased 11% over the prior year due primarily to lower construction and power generation sales. This was partially offset by higher ERS sales resulting primarily from the acquisition of Delom in the fourth quarter of 2018. Lower construction sales relate mainly to road-building equipment no longer sold by the Corporation not being fully offset by growth in other construction lines.
• Revenue in eastern Canada of $168.3 million increased 23% over the prior year due to sales gains in the majority of product categories, including higher ERS sales resulting primarily from the acquisition of Delom in the fourth quarter of 2018 and higher power generation sales. These increases were partially offset by lower mining equipment sales.
  
  
• Gross profit margin of 19.1% increased 0.7% compared to the same period of 2018 due mainly to higher equipment margin rates.
  
  
• Selling and administrative expenses as a percentage of revenue increased 0.4% to 13.9% in the second quarter of 2019 from 13.5% in the same period of 2018.⁽¹⁾ Selling and administrative expenses increased by $5.2 million compared to the second quarter of 2018 due mainly to higher personnel costs, sales-related expenses and CSC project costs of $0.4 million in the current quarter.⁽¹⁾ As expected, the Corporation incurred higher personnel costs in the second quarter due to increased year-over-year headcount and the acquisition of Delom. The increase in expenses is consistent with the Corporation's 2019 sales goals and workplan for major projects.
  
  
• EBIT increased $3.4 million, or 19.2%, to $21.0 million in the second quarter of 2019 versus $17.7 million in the same period of 2018.⁽¹⁾⁽²⁾ The year-over-year improvement is primarily attributable to increased revenue, higher gross profit margins and the acquisition of Delom in the fourth quarter of 2018.
  
  
• The Corporation generated net earnings of $11.9 million, or $0.59 per share, in the second quarter of 2019 versus $11.4 million, or $0.58 per share, in the same period of 2018.⁽¹⁾⁽²⁾ The Corporation generated adjusted net earnings of $12.6 million, or $0.63 per share, in the second quarter of 2019 versus $12.3 million, or $0.63 per share, in the same period of 2018.⁽¹⁾⁽²⁾
  
  
• Adjusted EBITDA margin increased to 8.7% in the second quarter of 2019 from 6.5% in the same period of 2018.⁽¹⁾⁽²⁾ Adjusted EBITDA margin includes the positive impact of 1.3% related to the adoption of IFRS 16.⁽¹⁾⁽²⁾ See the Changes in Accounting Policies section.
  
  
• The Corporation's backlog at June 30, 2019 of $296.5 million increased $41.2 million, or 16%, compared to March 31, 2019 due primarily to higher mining and forestry orders offset partially by lower material handling orders. Compared to the second quarter of 2018, backlog increased $39.6 million, or 15%, due primarily to higher mining and forestry orders offset partially by lower material handling and power generation orders.⁽²⁾
  
  
• Inventory of $416.3 million at June 30, 2019 increased $24.0 million from March 31, 2019 due to higher new equipment, parts inventory and work-in-process. The level of new equipment inventory is consistent with the Corporation's sales plans. Increases in parts inventory supports sales plans in industrial parts and ongoing efforts to improve customer service levels.
  
  
• Working capital of $380.5 million at June 30, 2019 decreased $4.4 million from March 31, 2019 due primarily to lower trade and other receivables and contract assets and higher accounts payable and accrued liabilities, lease liabilities and contract liabilities. These working capital decreases were partially offset by higher inventory levels. Trailing four-quarter average working capital as a percentage of the trailing 12-month sales was 23.3%, an increase of 0.5% from March 31, 2019 due primarily to the higher trailing four-quarter average working capital.⁽²⁾
  
  
• The Corporation's leverage ratio decreased to 2.71 times at June 30, 2019 compared to 2.89 times at March 31, 2019.⁽³⁾ The decrease in the leverage ratio was due to the lower debt level associated with the decrease in working capital and the higher trailing 12-month pro-forma adjusted EBITDA.⁽²⁾
  
  
• On July 2, 2019 and subsequent to the end of the second quarter, the Corporation began the implementation of its new ERP system. Integrity and effectiveness of the system will be confirmed through testing in a limited number of branches until the end of 2019. To ensure sufficient testing is completed, the Corporation does not expect to proceed with broad system implementation before 2020.

Summary of Operating Results

Results of Operations

Revenue Sources

Revenue in the second quarter of 2019 increased 7.1% or $27.1 million, to $409.4 million, from $382.3 million in the second quarter of 2018. In addition to regional revenue commentary provided previously herein, the following factors contributed to the increase in revenue:

• ERS/Other sales have increased due to higher ERS revenues in central and eastern Canada resulting primarily from the acquisition of Delom in the fourth quarter of 2018.
  
  
• Product support sales have increased on strength in mining and engines and transmissions parts and service sales in western Canada. These increases were partially offset by lower construction sales in western and central Canada.

For the six months ended June 30, 2019, revenue increased 8.2%, or $59.2 million, to $784.0 million, from $724.7 million in 2018. The following factors contributed to the increase in revenue:

• ERS/Other sales have increased due to higher ERS revenues in central and eastern Canada due primarily to the acquisition of Delom in the fourth quarter of 2018.
  
  
• Product support sales have increased on strength in mining parts and service sales in western Canada and higher engines and transmissions sales in all regions.
  
  
• Revenue from industrial parts has increased due primarily to increased bearings and hydraulics sales in eastern Canada offset partially by lower sales in western Canada.
  
  
• Equipment sales have decreased due to lower construction sales in western and central Canada and lower mining sales in eastern Canada. These decreases were partially offset by higher forestry sales in all regions.

Backlog
Backlog of $296.5 million at June 30, 2019 increased $41.2 million compared to March 31, 2019 due primarily to higher mining and forestry orders offset partially by lower material handling orders. Backlog of $296.5 million at June 30, 2019 increased $39.6 million compared to June 30, 2018 due primarily to higher mining and forestry orders offset partially by lower material handling and power generation orders.

Gross profit
Gross profit increased $7.8 million, or 11.0%, in the second quarter of 2019 compared to the same quarter last year, due to increased volumes and higher gross profit margins. Gross profit margin of 19.1% in the second quarter of 2019 increased from 18.5% in the same quarter last year due mainly to higher equipment margin rates.

For the six months ended June 30, 2019, gross profit increased $15.9 million, or 11.7%, compared to the same period last year, due to increased volumes and higher gross profit margins. Gross profit margin of 19.3% increased from 18.7% in the prior year due mainly to a higher proportion of parts and service volumes in the current year.

Selling and administrative expenses
Selling and administrative expenses increased $5.2 million in the second quarter of 2019 compared to the same quarter last year. This increase was primarily due to higher personnel costs, sales-related expenses and CSC project costs of $0.4 million in the current quarter. Selling and administrative expenses as a percentage of revenue increased to 13.9% in the second quarter of 2019 from 13.5% in the second quarter of 2018.

For the six months ended June 30, 2019, selling and administrative expenses increased $13.2 million compared to the same period last year. This increase was primarily due to higher personnel costs, sales-related expenses and CSC project costs of $1.1 million in the current year and a $1.1 million gain recorded on sales of properties in 2018. Selling and administrative expenses as a percentage of revenue increased to 14.5% in 2019 from 13.9% in 2018.

Restructuring and other related costs
In the first quarter of 2018, the Corporation commenced the Finance Reorganization Plan. The cost of the Finance Reorganization Plan is expected to be approximately $5.6 million in severance, project management and interim duplicate labour costs, of which $1.4 million has been recognized in the first half of 2019 and $3.8 million recognized in 2018. The remaining $0.4 million in anticipated costs, primarily relating to project management and interim duplicate labour costs, will be expensed as incurred over the remaining project period.  Management anticipates that the majority of the remaining project work will be substantially completed by the end of 2019.

Finance costs
Finance costs of $4.6 million in the second quarter of 2019 increased $2.6 million compared to the same quarter last year due primarily to higher average debt levels, due in part to the acquisition of Delom in the fourth quarter of 2018, and interest on lease liabilities of $1.0 million related to right-of-use assets as a result of the adoption of IFRS 16 in the first quarter of 2019. See the Liquidity and Capital Resources section.

For the six months ended June 30, 2019, finance costs of $9.1 million increased $5.4 million compared to the same period in 2018 due primarily to higher average debt levels, due in part to the acquisition of Delom in the fourth quarter of 2018, and interest on lease liabilities of $2.4 million related to right-of-use assets as a result of the adoption of IFRS 16 in the first quarter of 2019. See the Liquidity and Capital Resources section.

Income tax expense
The Corporation's effective income tax rate in the second quarter of 2019 was 27.7% (2018 – 27.7%) compared to the statutory rate of 26.8% (2018 – 26.9%) due to the impact of expenses not deductible for tax purposes.

The Corporation's effective income tax rate for the six months ended June 30, 2019 was 27.7% (2018 – 27.7%) compared to the statutory rate of 26.8% (2018 – 26.9%) due to the impact of expenses not deductible for tax purposes.

Net earnings
In the second quarter of 2019, the Corporation had net earnings of $11.9 million, or $0.59 per share, compared to $11.4 million, or $0.58 per share, in the second quarter of 2018. The $0.5 million increase in net earnings resulted primarily from higher revenue, gross profit and lower restructuring and other related costs of $0.6 million after-tax offset partially by higher operating expenses and finance costs.

For the six months ended June 30, 2019, the Corporation had net earnings of $19.8 million, or $0.99 per share, compared to $20.6 million, or $1.06 per share, in the same period of 2018. The $0.9 million decrease in net earnings resulted primarily from higher operating expenses and finance costs not fully offset by increased revenue and gross profit and lower restructuring and other related costs of $1.1 million after-tax.

Adjusted net earnings (See the Non-GAAP and Additional GAAP Measures section)
Adjusted net earnings in the second quarter of 2019 excludes restructuring and other related costs of $0.3 million after-tax, or $0.01 per share (2018 – $0.9 million after-tax, or $0.05 per share), certain non-recurring CSC project costs of $0.3 million after-tax, or $0.01 per share (2018 – nil) and non-cash losses on mark to market of derivative instruments of $0.2 million after-tax, or $0.01 per share (2018 – nil).

As such, adjusted net earnings increased $0.4 million to $12.6 million, or $0.63 per share, in the second quarter of 2019, from $12.3 million, or $0.63 per share, in the same period of 2018.

Adjusted net earnings for the six months ended June 30, 2019 excludes restructuring and other related costs of $1.0 million after-tax, or $0.05 per share (2018 – $2.1 million after-tax, or $0.11 per share), certain non-recurring CSC project costs of $0.8 million after-tax, or $0.04 per share (2018 – nil) and non-cash gains on mark to market of derivative instruments of $0.2 million after-tax, or $0.01 per share (2018 – nil).

As such, adjusted net earnings decreased $0.5 million to $21.3 million, or $1.07 per share, for the six months ended June 30, 2019 from $21.8 million, or $1.12 per share, in the same period of 2018.

Comprehensive income
In the second quarter of 2019, the total comprehensive income of $11.1 million included net earnings of $11.9 million and an other comprehensive loss of $0.8 million. The other comprehensive loss of $0.8 million in the current period resulted primarily from $0.9 million of losses on derivative instruments outstanding at the end of the period designated as cash flow hedges and $0.1 million of losses on derivative instruments designated as cash flow hedges in prior periods reclassified to net earnings during the current period.

For the six months ended June 30, 2019, the total comprehensive income of $17.6 million included net earnings of $19.8 million and an other comprehensive loss of $2.2 million. The other comprehensive loss of $2.2 million in the current year resulted primarily from $2.2 million of losses on derivative instruments outstanding at the end of the period designated as cash flow hedges.

Selected Quarterly Information

The following table summarizes unaudited quarterly consolidated financial data for the eight most recently completed quarters.

Although quarterly fluctuations in revenue and net earnings are difficult to predict, during times of weak resource sector activity, the first quarter will tend to have seasonally lower revenues.  As well, large deliveries of mining trucks and shovels and power generation packages can shift the revenue and net earnings throughout the year.

First quarter 2018 net earnings of $9.3 million included after-tax restructuring and other related costs of $1.2 million and after-tax gain recorded on sales of properties of $0.9 million. Excluding the restructuring and other related costs and gain recorded on sales of properties, first quarter 2018 adjusted net earnings were $9.6 million. Second quarter 2018 net earnings of $11.4 million included after-tax restructuring and other related costs of $0.9 million. Excluding the restructuring and other related costs, second quarter 2018 adjusted net earnings were $12.3 million. Third quarter 2018 net earnings of $9.1 million included after-tax restructuring and other related costs of $0.4 million. Excluding the restructuring and other related costs, third quarter 2018 adjusted net earnings were $9.5 million. Fourth quarter 2018 net earnings of $6.1 million included after-tax restructuring and other related costs of $0.5 million, after-tax non-cash losses on mark to market of derivative instruments of $1.5 million and after-tax Delom transaction costs of $0.3 million. Excluding the restructuring and other related costs, non-cash losses on mark to market of derivative instruments and Delom transaction costs, fourth quarter 2018 adjusted net earnings were $8.3 million.

First quarter 2019 net earnings of $7.9 million included after-tax restructuring and other related costs of $0.7 million, certain non-recurring after-tax CSC project costs of $0.5 million and after-tax non-cash gains on mark to market of derivative instruments of $0.4 million. Excluding the restructuring and other related costs, CSC project costs and non-cash gains on mark to market of derivative instruments, first quarter 2019 adjusted net earnings were $8.7 million. Second quarter 2019 net earnings of $11.9 million included after-tax restructuring and other related costs of $0.3 million, certain non-recurring after-tax CSC project costs of $0.3 million and after-tax non-cash losses on mark to market of derivative instruments of $0.2 million. Excluding the restructuring and other related costs, CSC project costs and non-cash losses on mark to market of derivative instruments, second quarter 2019 adjusted net earnings were $12.6 million. See the Non-GAAP and Additional GAAP Measures section.

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

Consolidated Financial Condition

Capital Structure and Key Financial Condition Measures

The Corporation's objective is to maintain a leverage ratio between 1.5 times and 2.0 times.  However, there may be instances where the Corporation is willing to maintain a leverage ratio outside this range to support key growth initiatives, acquisitions and fluctuations in working capital levels during changes in economic cycles.  The Corporation's current leverage ratio above target has been driven by the acquisition of Delom and investments made in inventory to satisfy the Corporation's sales goals. See the Funded Net Debt section below.

Shareholders' Equity

The Corporation's shareholders' equity at June 30, 2019 of $305.1 million increased $6.6 million from March 31, 2019, as earnings of $11.9 million exceeded dividends declared of $5.0 million. For the six months ended June 30, 2019 the Corporation's shareholders' equity increased $8.1 million, as earnings of $19.8 million exceeded dividends declared of $10.0 million.

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

At the date of this MD&A, the Corporation had 20,003,554 common shares issued and outstanding, net of shares held in trust.

At June 30, 2019, Wajax had four share-based compensation plans; the Wajax Share Ownership Plan ("SOP"), the Directors' Deferred Share Unit Plan ("DDSUP"), the Mid-Term Incentive Plan for Senior Executives ("MTIP") (with MTIP awards being composed of performance share units ("PSUs") and restricted share units ("RSUs")) and the Deferred Share Unit Plan ("DSUP").

As of June 30, 2019, there were 339,115 (2018 – 368,041) SOP and DDSUP (treasury share rights plans) rights outstanding, 252,142 (2018 – 672,477) MTIP PSUs and DSUP (market-purchased share rights plans) rights outstanding and 377,133 (2018 – 8,412) MTIP RSUs and cash-settled deferred share units (cash-settled rights plans) rights outstanding. At June 30, 2019, 326,369 SOP and DDSUP share rights were vested (June 30, 2018 – all SOP and DDSUP share rights were vested). Depending on the actual level of achievement of the performance targets associated with the outstanding MTIP PSUs, the number of market-purchased shares required to satisfy the Corporation's obligations could be higher or lower.

Wajax recorded compensation expense of $0.8 million for the quarter (2018 – $1.1 million) and $2.4 million for the six months ended June 30, 2019 (2018 – $2.0 million) in respect of these plans.

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

Funded net debt of $265.7 million at June 30, 2019 decreased $6.7 million compared to $272.4 million at March 31, 2019.⁽¹⁾ The decrease during the quarter was due primarily to cash generated from operating activities of $20.5 million offset partially by the payment of lease liabilities of $6.2 million, dividends paid of $5.0 million and cash used in investing activities of $2.5 million.

Funded net debt of $265.7 million at June 30, 2019 increased $43.7 million compared to $222.0 million at December 31, 2018.⁽¹⁾ The increase during the period was due primarily to cash used in operating activities of $16.7 million, payment of lease liabilities of $11.4 million, dividends paid of $10.0 million and cash used in investing activities of $4.9 million.

The Corporation's ratio of funded net debt to total capital decreased slightly to 46.6% at June 30, 2019 from 47.7% at March 31, 2019.⁽¹⁾

The Corporation's leverage ratio of 2.71 times at June 30, 2019 decreased from the March 31, 2019 ratio of 2.89 times due to the lower debt level associated with the decrease in working capital and the higher trailing 12-month pro-forma adjusted EBITDA.⁽¹⁾ See the Non-GAAP and Additional GAAP Measures section.

See the Liquidity and Capital Resources section.

Financial Instruments

Wajax uses derivative financial instruments in the management of its foreign currency, interest rate and share-based compensation exposures.  Wajax policy restricts the use of derivative financial instruments for trading or speculative purposes.

Wajax monitors the proportion of variable rate debt to its total debt portfolio and may enter into interest rate hedge contracts to mitigate a portion of the interest rate risk on its variable rate debt. A change in interest rates, in particular related to the Corporation's unhedged variable rate debt, is not expected to have a material impact on the Corporation's results of operations or financial condition over the longer term.

Wajax has entered into interest rate hedge contracts to minimize exposure to interest rate fluctuations on its variable rate debt.  All interest rate hedge contracts are recorded in the consolidated financial statements at fair value. As at June 30, 2019, Wajax had the following interest rate hedge contracts outstanding:

• $104.0 million, expiring in November 2023, with a weighted average interest rate of 2.70%.

Wajax enters into foreign exchange forward contracts to hedge the exchange risk associated with the cost of certain inbound inventory and foreign currency-denominated sales to customers along with the associated receivables as part of its normal course of business.  As at June 30, 2019, Wajax had the following contracts outstanding:

• to buy U.S. $46.2 million (December 31, 2018 – to buy U.S. $34.3 million),
• to sell U.S. $24.9 million (December 31, 2018 – to sell U.S. $20.9 million), and
• to sell Euro €2.5 million (December 31, 2018 – €2.8 million).

The U.S. dollar contracts expire between July 2019 and March 2021, with an average U.S./Canadian dollar rate of 1.3188.

The Euro contracts expire between July 2019 and November 2020, with an average Euro/Canadian dollar rate of 1.5226.

Wajax has entered into total return swap contracts to hedge the exposure to share price market risk on a class of MTIP rights that are cash-settled.  All total return swap contracts are recorded in the consolidated financial statements at fair value. As at June 30, 2019, Wajax had the following total return swap contracts outstanding:

• contracts totaling 365,000 shares at an initial share value of $8.3 million, expiring between March 2020 and March 2022.

Contractual Obligations

There have been no material changes to the Corporation's contractual obligations since December 31, 2018. See the Liquidity and Capital Resources section.

Off Balance Sheet Financing

The Corporation implemented IFRS 16 on January 1, 2019 and recorded right-of-use assets and lease liabilities in the amount of $81.2 million and $82.5 million, respectively. See Notes 3, 9 and 11 of the condensed consolidated interim financial statements and accompanying notes for the period ended June 30, 2019.

It is likely but not reasonably certain that existing leases are likely to be renewed or replaced, resulting in lease commitments being sustained at current levels.  In the alternative, Wajax may incur capital expenditures to acquire equivalent capacity.

The Corporation had $162.3 million (March 31, 2019 – $155.8 million) of consigned inventory on hand from a major manufacturer at June 30, 2019, net of deposits of $12.3 million (March 31, 2019 – $15.0 million).  In the normal course of business, Wajax receives inventory on consignment from this manufacturer which is generally sold or rented to customers or purchased by Wajax.  Under the terms of the consignment program, Wajax is required to make periodic deposits to the manufacturer on the consigned inventory that is rented to Wajax customers or on-hand for greater than nine months.  This consigned inventory is not included in Wajax's inventory as the manufacturer retains title to the goods.  In the event the inventory consignment program was terminated, Wajax would utilize interest free financing, if any, made available by the manufacturer and/or utilize capacity under its credit facility to finance the purchase of inventory.

Although management currently believes Wajax has adequate debt capacity, Wajax would have to access the equity or debt capital markets, or reduce dividends to accommodate any shortfalls in Wajax's credit facility.  See the Liquidity and Capital Resources section.

Liquidity and Capital Resources

The Corporation's liquidity is maintained through various sources, including bank and non-bank credit facilities and cash generated from operations.

Bank and Non-bank Credit Facilities

At June 30, 2019, Wajax had borrowed $272.0 million and issued $5.4 million of letters of credit for a total utilization of $277.4 million of its $400 million bank credit facility. Borrowing capacity under the bank credit facility is dependent on the level of inventories on-hand and outstanding trade accounts receivables. At June 30, 2019, borrowing capacity under the bank credit facility was equal to $400 million.

The bank credit facility contains customary restrictive covenants, including limitations on the payment of cash dividends and an interest coverage maintenance ratio, all of which were met as at June 30, 2019. In particular, the Corporation is restricted from declaring dividends in the event the Corporation's leverage ratio, as defined in the bank credit facility agreement, exceeds 4.0 times.

Under the terms of the bank credit facility, Wajax is permitted to have additional interest bearing debt of $25 million.  As such, Wajax has up to $25 million of demand inventory equipment financing capacity with two non-bank lenders.  At June 30, 2019, Wajax had no utilization of the interest bearing equipment financing facilities.

As at June 30, 2019, $122.6 million was unutilized under the bank facility and $25 million was unutilized under the non-bank facilities. As of August 8, 2019, Wajax maintained a bank credit facility with a limit of $400 million and an additional $25 million in credit facilities with non-bank lenders, which is permitted under the bank credit facility.   Wajax maintains sufficient liquidity to meet short-term normal course working capital and maintenance capital requirements and certain strategic investments. However, Wajax may be required to access the equity or debt capital markets to fund significant acquisitions.

In addition, the Corporation's tolerance to interest rate risk decreases/increases as the Corporation's leverage ratio increases/decreases.  At June 30, 2019, $104 million of the Corporation's funded net debt, or 39%, was at a fixed interest rate which is within the Corporation's interest rate risk policy.

Cash Flow

The following table highlights the major components of cash flow as reflected in the Condensed Consolidated Interim Statements of Cash Flows for the three and six months ended June 30, 2019 and June 30, 2018:

Cash Generated From (Used In) Operating Activities
Cash flows generated from operating activities amounted to $20.5 million in the second quarter of 2019, compared to cash flows used in operating activities of $11.1 million in the same quarter of the previous year. The increase in cash flows generated from operating activities was mainly attributable to an increase in cash generated from changes in non-cash operating working capital of $25.4 million and a decrease in rental equipment additions of $2.3 million.

Rental equipment additions in the second quarter of 2019 of $8.3 million (2018 – $10.6 million) related primarily to lift trucks and construction excavators.

For the six months ended June 30, 2019, cash flows used in operating activities amounted to $16.7 million, compared to $20.0 million for the same period in the previous year. The decrease in cash flows used in operating activities was mainly attributable to an increase in cash generated from changes in non-cash operating working capital of $8.4 million offset partially by higher finance costs paid of $5.1 million.

For the six months ended June 30, 2019, rental equipment additions of $15.6 million (2018 – $16.0 million) related primarily to lift trucks and construction excavators.

Significant components of non-cash operating working capital, along with changes for the three and six months ended June 30, 2019 and June 30, 2018 include the following:

Significant components of the changes in non-cash operating working capital for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 are as follows:

• Trade and other receivables decreased $8.0 million in 2019 compared to an increase of $17.6 million in 2018. The decrease in 2019 resulted primarily from lower trade receivables mainly due to strong collections and the sale of selected trade accounts receivable in the current period compared to the same period in 2018. The increase in 2018 resulted primarily from higher sales activity in the second quarter compared to the previous quarter.
  
  
• Contract assets decreased $6.8 million in 2019 compared to an increase of $5.0 million in 2018. The decrease in 2019 resulted primarily from decreased contracts in progress.
  
  
• Inventory increased $22.1 million in 2019 compared to an increase of $12.9 million in 2018. The increase in 2019 was due mainly to higher construction equipment, parts inventory and work-in-process. The increase in 2018 was due mainly to higher construction and forestry equipment inventory partially offset by lower mining and material handling inventory.
  
  
• Accounts payable and accrued liabilities increased $6.2 million in 2019 compared to an increase of $19.1 million in 2018. The increase in both years resulted primarily from higher trade payables.

Significant components of the changes in non-cash operating working capital for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 are as follows:

• Inventory increased $45.7 million in 2019 compared to an increase of $34.9 million in 2018. The increase in 2019 was due mainly to higher new equipment, parts inventory and work-in-process. The increase in 2018 was due mainly to higher construction and forestry equipment inventory partially offset by lower mining and material handling equipment inventory.
  
  
• Accounts payable and accrued liabilities increased $14.1 million in 2019 compared to an increase of $15.4 million in 2018. The increase in 2019 resulted primarily from higher trade payables. The increase in 2018 resulted primarily from higher trade payables offset partially by the payment of annual incentive accruals relating to 2017.

Investing Activities
During the second quarter of 2019, Wajax invested $1.8 million in property, plant and equipment additions, compared to $0.4 million in the second quarter of 2018. Intangible assets additions of $1.0 million (2018 – $1.3 million) in the second quarter of 2019 resulted primarily from software additions relating to the new ERP system currently being implemented.

For the six months ended June 30, 2019, Wajax invested $3.3 million in property, plant and equipment additions, compared to $1.7 million in the same period of 2018. Intangible assets additions of $2.1 million (2018 – $2.6 million) for the six months ended June 30, 2019 resulted primarily from software additions relating to the new ERP system currently being implemented.

Financing Activities
The Corporation used $19.2 million of cash from financing activities in the second quarter of 2019 compared to cash generated of $15.0 million in the same quarter of 2018. Financing activities in the quarter included a net bank credit facility repayment of $8.0 million (2018 – borrowing of $21.0 million), the payment of lease liabilities of $6.2 million (2018 – $1.1 million) and dividends paid to shareholders of $5.0 million (2018 – $4.9 million).

For the six months ended June 30, 2019, the Corporation generated $30.2 million of cash from financing activities compared to $13.2 million in the same period of 2018. Financing activities for the six months ended June 30, 2019 included a net bank credit facility borrowing of $52.0 million (2018 – $25.0 million), partially offset by the payment of lease liabilities of $11.4 million (2018 – $2.0 million) and dividends paid to shareholders of $10.0 million (2018 – $9.8 million).

Dividends

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

On August 8, 2019, the Corporation declared a dividend of $0.25 per share for the third quarter of 2019 payable on October 2, 2019 to shareholders of record on September 16, 2019.

Critical Accounting Estimates

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenue and expenses.  Actual results could differ from those judgements, estimates and assumptions. The Corporation bases its estimates on historical experience and various other assumptions that are believed to be reasonable in the circumstances.

The areas where significant judgements and assumptions are used to determine the amounts recognized in the financial statements include the allowance for credit losses, inventory obsolescence, goodwill and intangible assets and the lease term of contracts with renewal options.

The key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next fiscal year are as follows:

Allowance for credit losses
The Corporation is exposed to credit risk with respect to its trade and other receivables. However, this is partially mitigated by the Corporation's diversified customer base of over 32,000 customers, with no one customer accounting for more than 10% of the Corporation's annual consolidated sales, which covers many business sectors across Canada. In addition, the Corporation's customer base spans large public companies, small independent contractors, original equipment manufacturers and various levels of government.  The Corporation follows a program of credit evaluations of customers and limits the amount of credit extended when deemed necessary.  The Corporation maintains an allowance for possible credit losses, and any such losses to date have been within management's expectations.  The allowance for credit losses is determined by estimating the lifetime expected credit losses, taking into account the Corporation's past experience of collecting payments as well as observable changes in and forecasts of future economic conditions that correlate with default on receivables.  At the point when the Corporation is satisfied that no recovery of the amount owing is possible, the amount is considered not recoverable and the financial asset is written off.  The $1.5 million allowance for credit losses at June 30, 2019 increased $0.5 million from $1.0 million at December 31, 2018.  As economic conditions change, there is risk that the Corporation could experience a greater number of defaults compared to 2018 which would result in an increased charge to earnings.

Inventory obsolescence
The value of the Corporation's new and used equipment and high value parts are evaluated by management throughout the year, on a unit-by-unit basis.  When required, provisions are recorded to ensure that the book value of equipment and parts are valued at the lower of cost or estimated net realizable value.  The Corporation performs an aging analysis to identify slow moving or obsolete lower value parts inventory and estimates appropriate obsolescence provisions related thereto.  The Corporation takes advantage of supplier programs that allow for the return of eligible parts for credit within specified time periods.  The inventory obsolescence charged to earnings for the three months ended June 30, 2019 was $0.9 million (2018 – $1.6 million) and for the six months ended June 30, 2019 was $2.2 million (2018 – $2.8 million).  As economic conditions change, there is risk that the Corporation could have an increase in inventory obsolescence compared to prior periods which would result in an increased charge to earnings.

Goodwill and intangible assets
The value in use of goodwill and intangible assets has been estimated using the forecasts prepared by management for the next five years.  The key assumptions for the estimate are those regarding revenue growth, gross margin, discount rate and the level of working capital required to support the business.  These estimates are based on past experience and management's expectations of future changes in the market and forecasted growth initiatives.

The Corporation performs an annual impairment test of its goodwill and intangible assets unless there is an early indication that the assets may be impaired in which case the impairment tests would occur earlier. There was no early indication of impairment in the quarter ended June 30, 2019.

Lease term of contracts with renewal options
The lease term is defined as the non-cancellable term of the lease, including any periods covered by a renewal option to extend the lease if it is reasonably certain that the renewal option will be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain that the termination option will not be exercised.

Significant judgement is used when evaluating whether the Corporation is reasonably certain that the lease renewal option will be exercised, including examining any factors that may provide an economic advantage for renewal. In the event of a significant event within the Corporation's control that could affect it's ability to exercise the renewal option, the lease term will be reassessed.

Changes in Accounting Policies

Accounting standards adopted during the period

IFRS 16 Leases
On January 1, 2019, the Corporation adopted IFRS 16 using the modified retrospective transition method.

As a lessee
Assets and liabilities from a lease are initially measured on a present value basis.  The lease liabilities are measured at the present value of the remaining lease payments (including in-substance fixed payments), less any lease incentives receivable, variable payments that are based on an index or a rate, amounts expected to be payable by the lessor under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for early termination of a lease unless the Corporation is reasonably certain not to terminate early. The lease payments are discounted using the implicit interest rate in the lease or, if that rate was not readily determinable, the Corporation's incremental borrowing rate. The associated right-of-use assets are measured at the amount equal to the lease liability on January 1, 2019, adjusted for any prepaid and accrued lease payments relating to the lease recognized in the statement of financial position immediately before the date of transition, with no impact on retained earnings.

The lease liability was and shall be measured at amortized cost using the effective interest rate method and shall be remeasured if there is a change in the future lease payments, if there is a change in the Corporation's estimate of the amounts expected to be payable or if the Corporation changes its assessments of whether it will exercise a purchase, renewal, or termination option. The right-of-use asset was and shall be subsequently depreciated using the straight-line method from the commencement to the earlier of the date of the useful life of the right-of-use asset or to the end of the lease term. If a lease liability is remeasured, the corresponding adjustments shall be made to the carrying amount of the right-of-use asset, or in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

Short-term leases and leases of low value assets
The Corporation has elected not to recognize right-of-use assets and lease liabilities for short-term leases, defined as a lease having a term of 12 months or less and leases of low-value assets.  The respective lease payments associated with these leases are recognized in the statement of earnings on a straight-line basis, unless a different basis is deemed to be more appropriate.

As a lessor
There was no significant impact to lessor accounting from the adoption of IFRS 16.

The impact of the adoption of IFRS 16 as at January 1, 2019 is as follows:

Adjustments to Prior Period Comparative Financial Statements

As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018, a correction of non-material errors in prior periods ("Other adjustments") was recorded impacting the prior year comparative periods.

The Corporation's prior period condensed consolidated interim statements of financial position have been impacted as follows by the Other adjustments:

The Corporation's condensed consolidated interim statement of earnings has been impacted as follows by the Other adjustments:

The Corporation's condensed consolidated interim statement of cash flows has been impacted as follows by the Other adjustments:

Risk Management and Uncertainties

As with most businesses, Wajax is subject to a number of marketplace and industry related risks and uncertainties which could have a material impact on operating results and Wajax's ability to pay cash dividends to shareholders.  Wajax attempts to minimize many of these risks through diversification of core businesses and through the geographic diversity of its operations.  In addition, Wajax has adopted an annual enterprise risk management assessment which is prepared by the Corporation's senior management and overseen by the Board of Directors and committees of the Board of Directors. The enterprise risk management framework sets out principles and tools for identifying, evaluating, prioritizing and managing risk effectively and consistently across Wajax. 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, 2018 which can be found on SEDAR at www.sedar.com. 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, 2018.

Disclosure Controls and Procedures and Internal Control over Financial Reporting

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

As at June 30, 2019, Wajax's management, under the supervision of its CEO and CFO, had designed DC&P to provide reasonable assurance that information required to be disclosed by Wajax in annual filings, interim filings or other reports filed or submitted under applicable securities legislation is recorded, processed, summarized and reported within the time periods specified in such securities legislation.  DC&P are designed to ensure that information required to be disclosed by Wajax in annual filings, interim filings or other reports filed or submitted under applicable securities legislation is accumulated and communicated to Wajax's management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

As at June 30, 2019, Wajax's management, under the supervision of its CEO and CFO, had designed ICFR to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. In completing the design, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in its 2013 version of Internal Control – Integrated Framework. With regard to general controls over information technology, management also used the set of practices of Control Objectives for Information and related Technology ("COBIT") created by the IT Governance Institute. The Corporation has excluded from its evaluation the ICFR of Delom, which was acquired on October 16, 2018, as discussed in Note 6 of the consolidated financial statements and accompanying notes for the year ended December 31, 2018. The total revenue subject to Delom's ICFR represented 5% of the Corporation's consolidated total revenue for the six months ended June 30, 2019. The total assets subject to Delom's ICFR represented 5% of the Corporation's consolidated total assets as at June 30, 2019.

There was no change in Wajax's ICFR that occurred during the three months ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, Wajax's ICFR.

Non-GAAP and Additional GAAP Measures

The MD&A contains certain non-GAAP and additional GAAP measures that do not have a standardized meaning prescribed by GAAP.  Therefore, these financial measures may not be comparable to similar measures presented by other issuers.  Investors are cautioned that these measures should not be construed as an alternative to net earnings or to cash flow from operating, investing, and financing activities determined in accordance with GAAP as indicators of the Corporation's performance.  The Corporation's management believes that:

Non-GAAP financial measures are identified and defined below:

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

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

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

Cautionary Statement Regarding Forward-Looking Information

This MD&A contains certain forward-looking statements and forward-looking information, as defined in applicable securities laws (collectively, "forward-looking statements").  These forward-looking statements relate to future events or the Corporation's future performance.  All statements other than statements of historical fact are forward-looking statements.  Often, but not always, forward looking statements can be identified by the use of words such as "plans", "anticipates", "intends", "predicts", "expects", "is expected", "scheduled", "believes", "estimates", "projects" or "forecasts", or variations of, or the negatives of, such words and phrases or state that certain actions, events or results "may", "could", "would", "should", "might" or "will" be taken, occur or be achieved.  Forward looking statements involve known and unknown risks, uncertainties and other factors beyond the Corporation's ability to predict or control which may cause actual results, performance and achievements to differ materially from those anticipated or implied in such forward looking statements.  There can be no assurance that any forward looking statement will materialize.  Accordingly, readers should not place undue reliance on forward looking statements.  The forward looking statements in this MD&A are made as of the date of this MD&A, reflect management's current beliefs and are based on information currently available to management.  Although management believes that the expectations represented in such forward-looking statements are reasonable, there is no assurance that such expectations will prove to be correct.  Specifically, this MD&A includes forward looking statements regarding, among other things, the main elements of our updated Strategic Plan, including our focus on executing clear plans in six important areas: investments in our team, investments in our customers, our organic growth strategy, our acquisition strategy, investments in our infrastructure and refinements to the One Wajax organizational model; our expectation that the majority of our Strategic Plan growth will originate from our Targeted Growth categories; our expectation of additional improvements in cost productivity as we continue to refine our organizational model; our expectations and outlook for 2019, including our outlook on regional market conditions in Canada as well as certain key end markets; our belief that 2019 market conditions in western Canada are more favourable than those which prevailed in 2015 and 2016 when energy prices were weak; our expectation that our 2019 adjusted net earnings will increase over 2018 based on revenue improvements and the full year effect of the Delom acquisition; our view that expected earnings improvements in 2019 will be weighted to the second half of the year; our expectation that our leverage will improve further as the year progresses; the expected cost of the redesign of our finance function and our expectation that the majority of such project work will be substantially completed by the end of 2019; our objective of maintaining a leverage ratio between 1.5 - 2.0 times; our expectation that the impact of changes in interest rates (in particular, related to unhedged variable rate debt) will not have a material impact on our results of operations or financial condition over the longer term; our financing, working and maintenance capital requirements, as well as our capital structure and leverage ratio; our estimate of the number of shares required to settle our obligations under certain share-based compensation plans; the adequacy of our debt capacity and sufficiency of our debt facilities; our intention and ability to access debt and equity markets or reduce dividends should additional capital be required, including the potential that we may access equity or debt markets to fund significant acquisitions, growth related capital and capital expenditures; and the adequacy of our debt facilities. These statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions regarding general business and economic conditions; the supply and demand for, and the level and volatility of prices for, oil, natural gas and other commodities; financial market conditions, including interest rates; our ability to execute our updated Strategic Plan, including our ability to develop our core capabilities, execute our organic growth priorities, complete and effectively integrate acquisitions, such as Delom, and to successfully implement new information technology platforms, systems and software; the future financial performance of the Corporation; our costs; market competition; our ability to attract and retain skilled staff; our ability to procure quality products and inventory; and our ongoing relations with suppliers, employees and customers. The foregoing list of assumptions is not exhaustive.  Factors that may cause actual results to vary materially include, but are not limited to, a deterioration in general business and economic conditions; volatility in the supply and demand for, and the level of prices for, oil, natural gas and other commodities; a continued or prolonged decrease in the price of oil or natural gas; fluctuations in financial market conditions, including interest rates; the level of demand for, and prices of, the products and services we offer; levels of customer confidence and spending; market acceptance of the products we offer; termination of distribution or original equipment manufacturer agreements; unanticipated operational difficulties (including failure of plant, equipment or processes to operate in accordance with specifications or expectations, cost escalation, our inability to reduce costs in response to slow-downs in market activity, unavailability of quality products or inventory, supply disruptions, job action and unanticipated events related to health, safety and environmental matters); our ability to attract and retain skilled staff and our ability to maintain our relationships with suppliers, employees and customers.  The foregoing list of factors is not exhaustive.  Further information concerning the risks and uncertainties associated with these forward looking statements and the Corporation's business may be found in this MD&A under the heading "Risk Management and Uncertainties" and in our Annual Information Form for the year ended December 31, 2018, filed on SEDAR.  The forward-looking statements contained in this MD&A are expressly qualified in their entirety by this cautionary statement.  The Corporation does not undertake any obligation to publicly update such forward-looking statements to reflect new information, subsequent events or otherwise unless so required by applicable securities laws.

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

WAJAX CORPORATION
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF
FINANCIAL POSITION

 

WAJAX CORPORATION
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF
EARNINGS

 

WAJAX CORPORATION
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF
COMPREHENSIVE INCOME

 

WAJAX CORPORATION
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY

 

WAJAX CORPORATION
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY

 

WAJAX CORPORATION
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF
CASH FLOWS

 

WAJAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS

JUNE 30, 2019
(unaudited, amounts in thousands of Canadian dollars, except share and per share data)

1.   COMPANY PROFILE

Wajax Corporation (the "Corporation") is incorporated in Canada. The address of the Corporation's registered head office is 2250 Argentia Road, Mississauga, Ontario, Canada. The Corporation operates an integrated distribution system, providing sales, parts and services to a broad range of customers in diversified sectors of the Canadian economy, including: construction, forestry, mining, industrial and commercial, oil sands, transportation, metal processing, government and utilities and oil and gas.

2.   BASIS OF PREPARATION

Statement of compliance

These unaudited condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting and do not include all of the disclosures required for annual consolidated financial statements.  Accordingly, these unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2018.  The significant accounting policies follow those disclosed in the most recently reported audited consolidated financial statements, except as disclosed in Note 3.

These unaudited condensed consolidated interim financial statements were authorized for issue by the Board of Directors on August 8, 2019.

3.   CHANGE IN ACCOUNTING POLICIES

Accounting standards adopted during the period

IFRS 16 Leases ("IFRS 16")

On January 1, 2019, the Corporation adopted IFRS 16 using the modified retrospective transition method.

As a lessee
Assets and liabilities from a lease are initially measured on a present value basis.  The lease liabilities are measured at the present value of the remaining lease payments (including in-substance fixed payments), adjusted for any lease incentives receivable, variable payments that are based on an index or a rate, amounts expected to be payable under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for early termination of a lease unless the Corporation is reasonably certain not to terminate early. The lease payments are discounted using the implicit interest rate in the lease or, if that rate was not readily determinable, the Corporation's incremental borrowing rate. The associated right-of-use assets are measured at the amount equal to the lease liability on January 1, 2019, adjusted for any prepaid and accrued lease payments relating to the leases recognized in the statement of financial position immediately before the date of transition, with no impact on retained earnings.

The lease liability was and shall be measured at amortized cost using the effective interest rate method and shall be remeasured if there is a change in the future lease payments, if there is a change in the Corporation's estimate of the amounts expected to be payable or if the Corporation changes its assessments of whether it will exercise a purchase, renewal, or termination option. The right-of-use asset was and shall be subsequently depreciated using the straight-line method from the commencement to the earlier of the date of the useful life of the right-of-use asset or to the end of the lease term. If a lease liability is remeasured, the corresponding adjustments shall be made to the carrying amount of the right-of-use asset, or in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

Short-term leases and leases of low value assets
The Corporation has elected not to recognize right-of-use assets and lease liabilities for short-term leases, defined as a lease having a term of 12 months or less and leases of low-value assets.  The respective lease payments associated with these leases are recognized in the statement of earnings on a straight-line basis, unless a different basis is deemed to be more appropriate.

As a lessor
There was no significant impact to lessor accounting from the adoption of IFRS 16.

The impact of the adoption of IFRS 16 as at January 1, 2019 was as follows:

4.   ADJUSTMENTS TO PRIOR PERIOD COMPARATIVE FINANCIAL STATEMENTS

As disclosed in the Corporation's audited consolidated financial statements for the year ended December 31, 2018, a correction of non-material errors in prior periods ("Other adjustments") was recorded impacting the prior year comparative periods.

The Corporation's prior period condensed consolidated interim statements of financial position have been impacted as follows by the Other adjustments:

The Corporation's condensed consolidated interim statement of earnings has been impacted as follows by the Other adjustments:

The Corporation's condensed consolidated interim statement of cash flows has been impacted as follows by the Other adjustments:

5.   ACQUISITION OF BUSINESS

Groupe Delom Inc. ("Delom")
On October 16, 2018, the Corporation acquired 100% of the issued and outstanding shares of Montreal, Quebec-based Delom. The aggregate purchase price for the shares was $52,936 cash (subject to final working capital adjustments), including $2,000 which was subject to the achievement of certain performance targets post-closing.

Final working capital adjustments and valuations of certain items are not yet complete due to the inherent complexity associated with valuations and the timing of the acquisition. Therefore, the purchase price allocation is preliminary and subject to adjustment on completion of the valuation process. During the six months ended June 30, 2019, the Corporation booked adjustments to increase goodwill by $2,186, of which $1,022 related to an increase in deferred tax liabilities, $369 related to the valuation of intangible assets, and the remaining $795 related to an increase in the overall purchase price. The Corporation determined the preliminary fair values based on discounted cash flows, market information, independent valuations and management's estimates.

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

Net cash outflow for the acquisition was $51,856, as $1,080 of cash was acquired  as part of Delom's net assets.

Trade and other receivables represents gross contractual amounts receivable of $14,582 less management's best estimate of the allowance for credit losses of $50.

Goodwill arises principally from the ability to leverage customer relationships, the established trade names, assembled workforce and industry knowledge, future growth and the potential to realize synergies in the form of cost savings. The goodwill recorded on the acquisition of Delom is not deductible for income tax purposes.

6.   TRADE AND OTHER RECEIVABLES

The Corporation's trade and other receivables consist of trade accounts receivable from customers and other accounts receivable, generally from suppliers for warranty and rebates. Trade and other receivables  as at June 30, 2019 and December 31, 2018 are comprised of the following:

The Corporation has two agreements with financial institutions to sell 100% of selected trade accounts receivable on a recurring, non-recourse basis. Under the first agreement, up to $20,000 of accounts receivable may be sold to the financial institution and can remain outstanding at any point in time, while the second has no limit.  After the sale, the Corporation does not retain any interests in the accounts receivable and removes them from its consolidated statement of financial position. For the first agreement, the Corporation continues to service and collect the outstanding accounts receivable on behalf of the financial institution. As at June 30, 2019, the Corporation continues to service and collect $14,848 in accounts receivable on behalf of this financial institution (December 31, 2018 - $9,877). For the second agreement, after the sale of accounts receivable to the financial institution, the Corporation does not continue to service and collect the outstanding accounts receivable on behalf of the financial institution. Net proceeds from these programs are classified in operating activities in the consolidated statements of cash flows.

7.   CONTRACT ASSETS AND LIABILITIES

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

The contract assets primarily relate to the Corporation's rights to consideration for work completed but not billed at the reporting date on product support and engineered repair services ("ERS") revenue. The contract assets are transferred to receivables when billed upon completion of significant milestones. The contract liabilities primarily relate to the advance consideration received from customers on equipment sales, industrial parts, and ERS revenue, for which revenue is recognized when control transfers to the customer.

8.   INVENTORY

The Corporation's inventory balances as at June 30, 2019 and December 31, 2018 consisted of the following:

All amounts shown are net of obsolescence reserves of $27,415 (2018 - $26,014).

As at June 30, 2019, the Corporation has included $44,750, (December 31, 2018 - $47,281)  in Equipment inventory related to short term rental contracts that are expected to convert to Equipment sales within a six to twelve month period.

Substantially all of the Corporation's inventory is pledged as security for the bank credit facility.

Deposits on inventory in the statements of financial position, amounting to $14,516 as at June 30, 2019  (December 31, 2018 - $13,445), represents deposits and other required periodic payments on equipment held on consignment. These payments reduce the collateral value of the equipment and therefore the ultimate amount owing to the supplier upon eventual purchase. Upon sale of the equipment to a customer, the Corporation is required to purchase the equipment in full from the supplier.

9.   PROPERTY, PLANT AND EQUIPMENT & RENTAL EQUIPMENT

On transition to IFRS 16 on January 1, 2019, the Corporation recognized $81,222 of additional right-of-use assets primarily related to property leases for the Corporation's branch network. As a result of the adoption of IFRS 16, the Corporation incurred additional depreciation expense related to the additional right-of-use assets of $4,663  for the three months ended June 30, 2019 and $9,097 for the year to date.

The Corporation acquired property, plant and equipment, net of lease assets, with a cost of $1,775 during the quarter (2018 - $449) and $3,291 year to date (2018 - $1,735). Assets with a carrying amount of $256 during the quarter (2018 - $128) and $311 year to date (2018 - $550) were disposed of, resulting in a gain on disposal of $8 during the quarter (2018 - gain of $42) and a gain on disposal of $103 year to date (2018 - gain of $1,195).

The Corporation acquired rental equipment with a cost of $8,289 during the quarter (2018 - $10,566) and $15,558 year to date (2018 - $15,990). Equipment with a carrying amount of $644 during the quarter (2018 - $507) and $829 year to date (2018 - $573) was transferred from inventory to rental equipment. Equipment with a carrying amount of $2,595 during the quarter (2018 - $2,092) and $5,425 year to date (2018 - $6,578) was transferred from rental equipment to inventory.

10.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at June 30, 2019 and December 31, 2018 are comprised of the following:

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

11.  LEASES

On transition to IFRS 16 on January 1, 2019, the Corporation recognized $82,544 of additional lease liabilities primarily related to property leases for the Corporation's branch network. The Corporation also leases certain vehicles, machinery and IT equipment.  The vehicle leases have a minimum one year term and are extended on a monthly basis thereafter until terminated.  On termination, the Corporation has an option to purchase the vehicles at their residual value, or the difference between the lessor's proceeds of disposal and the residual value is charged or refunded to the Corporation as a rental adjustment.  The lease liabilities are measured at the present value of the remaining lease payments discounted using the implicit interest rate in the lease or, if that rate is not readily determinable, the Corporation's incremental borrowing rate.

As a result of the adoption of IFRS 16, the Corporation incurred additional interest costs of $839 for the three months ended June 30, 2019 and $2,062 for the year to date.

The change in lease liabilities is as follows:

12.  LONG-TERM DEBT

Borrowings under the bank credit facility bear floating rates of interest at margins over Canadian dollar bankers' acceptance yields, U.S. dollar LIBOR rates or prime. Margins on the facility depend on the Corporation's leverage ratio at the time of borrowing and range between 1.5% and 3.0% for Canadian dollar bankers' acceptances and U.S. dollar LIBOR borrowings, and 0.5% and 2.0% for prime rate borrowings.

Borrowing capacity under the bank credit facility is dependent upon the level of the Corporation's inventory on hand and the outstanding trade accounts receivable. In addition, the bank credit facility contains customary restrictive covenants including limitations on the declaration of cash dividends and an interest coverage maintenance ratio, all of which were met as at June 30, 2019.

As at June 30, 2019 and December 31, 2018, the following balances were outstanding:

The Corporation had $5,435 (2018 - $6,101) letters of credit outstanding at the end of the period. Interest on long-term debt amounted to $3,575 for the three months ended June 30, 2019 (2018 - $1,856) and $6,728 for the six months ended June 30, 2019 (2018 - $3,489).

Movements in the long-term debt balance are as follows:

13.  FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

At June 30, 2019, the Corporation's financial instruments consisted of cash/bank indebtedness, trade and other receivables, interest rate swaps, foreign exchange forwards, total return swaps, trade and other payables, lease liabilities and long-term debt.

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

• Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities.
• Level 2 - other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly.
• Level 3 - techniques that use inputs that have a significant effect on the recorded fair value that are not based on observable market data.

The Corporation categorizes its financial assets and financial liabilities as follows:

The Corporation measures non-derivative financial assets and financial liabilities at amortized cost. Derivative financial assets/liabilities are recorded on the consolidated statements of financial position at fair value. Changes in fair value are recognized in the consolidated statements of earnings except for changes in fair value related to derivative financial assets/liabilities which are effectively designated as hedging instruments which are recognized in other comprehensive income. The Corporation's derivative financial assets/liabilities are held with major Canadian chartered banks and are deemed to be Level 2 financial instruments. The fair values of financial assets/liabilities measured at amortized cost, excluding long-term debt and cash-settled share-based compensation liabilities, approximate their recorded values due to the short-term maturities of these instruments. The cash-settled share-based compensation liability is recorded at fair value based on the Corporation's share price and deemed to be a Level 1 financial instrument. The fair value of long-term debt approximates its recorded value due to its floating interest rate.

Derivative financial instruments and hedges
The interest rate swaps are designated as effective hedges and are measured at fair value with subsequent changes in fair value recorded in other comprehensive income. Amounts in accumulated other comprehensive income are reclassified to net earnings in the periods when the hedged item affects profit or loss. The Corporation recognized a loss of $461 (2018 - gain of $72) during the quarter and a loss of $1,642 (2018 - gain of $95) year to date, net of tax in other comprehensive income associated with its interest rate swaps.

The Corporation's interest rate swaps outstanding are summarized as follows:

The Corporation enters into short-term foreign exchange forwards to hedge the exchange risk associated with the cost of certain inbound inventory and certain foreign currency-denominated sales to customers along with the associated receivables as part of its normal course of business. Foreign exchange forwards are initially recognized on the date the derivative contract is entered into and are subsequently re-measured at their fair values. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument. In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative, net of taxes, is recognized in other comprehensive income while the ineffective portion is recognized within net earnings. Amounts in accumulated other comprehensive income are reclassified to net earnings in the periods when the hedged item affects profit or loss. The Corporation recognized a loss of $160 (2018 - gain of $50) in the quarter and a loss of $43 (2018 - gain of $154) year to date associated with its foreign exchange forwards in the consolidated statements of earnings, and a loss of $442 (2018 - loss of $150) in the quarter and a loss of $558 (2018 - gain of $773) year to date, net of tax in other comprehensive income.

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

The Corporation has certain total return swaps to hedge the exposure associated with increases in its share price on its outstanding restricted share units ("RSUs"). The Corporation does not apply hedge accounting to these relationships and as such, gains and losses arising from marking these derivatives to market are recognized in earnings in the period in which they arise. As at June 30, 2019, the Corporation's total return swaps cover 365,000 of the Corporation's underlying common shares (December 31, 2018 - 440,000).  During the year, the Corporation settled a total return swap contract for 205,000 shares, resulting in a cash payout of $1,479. The Corporation recognized a loss of $366 (2018 - gain of nil) in the quarter and a gain of $171 (2018 - loss of nil) year to date associated with its total return swaps.

Derivative financial assets consist of:

Derivative financial liabilities consist of:

(Gains) losses on derivative financial assets/liabilities are as follows:

The balance in accumulated other comprehensive income relates to changes in the value of the Corporation's various interest rate swaps and foreign exchange forwards. These accumulated amounts will be continuously released to the consolidated statements of earnings within finance costs and gross profit, respectively.

During the periods presented and cumulatively to date, changes in counterparty credit risk have not significantly contributed to the overall changes in the fair value of these derivative instruments.

14.  SHARE CAPITAL AND EARNINGS PER SHARE

The Corporation is authorized to issue an unlimited number of no par value common shares and an unlimited number of no par value preferred shares. Each common share entitles the holder of record to one vote at all meetings of shareholders. All issued common shares are fully paid. There were no preferred shares outstanding as at June 30, 2019 (2018 - nil). Each common share represents an equal beneficial interest in any distributions of the Corporation and in the net assets of the Corporation in the event of its termination or winding-up.

Dividends declared

During the three months ended June 30, 2019, the Corporation declared cash dividends of $0.25 per share or $5,001 (2018 – dividends of $0.25 per share or $4,886). During the six months ended June 30, 2019, the Corporation declared cash dividends of $0.50 per share or $10,002 (2018 - dividends of $0.50 per share or $9,762).

As at June 30, 2019, the Corporation had $5,001 (December 31, 2018 - $4,989) dividends outstanding to be paid on July 3, 2019.

On August 8, 2019, the Corporation declared a third quarter 2019 dividend of $0.25 per share or $5,001.

Earnings per share

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

For the quarter, 41,672 anti-dilutive share rights were excluded from the above calculation (2018 - nil). For the year to date, 62,941 anti-dilutive share rights were excluded from the above calculation (2018 – 38,296).

15.  SHARE-BASED COMPENSATION PLANS

The Corporation has four share-based compensation plans: the Wajax Share Ownership Plan ("SOP"), the Directors' Deferred Share Unit Plan ("DDSUP"), the Mid-Term Incentive Plan for Senior Executives ("MTIP") and the Deferred Share Unit Plan ("DSUP"). The following table provides the share-based compensation expense for awards under all plans:

a) Treasury share rights plans

Under the SOP and the DDSUP, rights are issued to the participants which, upon satisfaction of time vesting conditions, are settled by issuing Wajax Corporation shares for no cash consideration. Vested rights are settled when the participant is no longer employed by the Corporation or one of its subsidiary entities or no longer sits on its Board.  Whenever dividends are paid on the Corporation's shares, additional rights (dividend equivalents) with a value equal to the dividends are credited to the participants' accounts.

The following rights under these plans are outstanding:

At June 30, 2019, 326,369 share rights were vested (December 31, 2018, all share rights were vested).

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

b) Market-purchased share rights plans

The MTIP  plan consists of cash-settled restricted share units ("RSUs") and equity-settled performance share units ("PSUs"), and the equity-settled DSUP plan consists of deferred share units ("DSUs").

Market-purchased share rights plans consist of PSUs under the MTIP plan and DSUs, which vest over three years and are settled in common shares of the Corporation on a one-for-one basis. DSUs are only subject to time-vesting, whereas PSUs are also subject to performance vesting. PSUs are comprised of two components: return on net assets ("RONA") PSUs and total shareholder return ("TSR") PSUs as described below:

• RONA PSUs vest dependent upon the attainment of a target level of return on net assets. Such performance vesting criteria results in a performance vesting factor that ranges from 0% to 150% depending on the level of RONA attained.
  
  
• TSR PSUs vest dependent upon the attainment of a TSR market condition. Such performance vesting criteria result in a performance vesting factor that ranges from 0% to 200% depending on the Corporation's TSR relative to a pre-selected group of peers.

These plans are settled through shares purchased on the open market by the employee benefit plan trust, subject to the attainment of their vesting conditions. PSUs are settled at the end of the vesting period, and the number of shares remitted to the participant upon settlement is equal to the number of PSUs awarded multiplied by the performance vesting factor less shares withheld to satisfy the participant's withholding tax requirement. DSUs are settled when the participant is no longer employed by the Corporation or one of its subsidiary entities.  Whenever dividends are paid on the Corporation's shares, additional rights with a value equal to the dividends are credited to the participants' accounts with the same vesting conditions as the original PSUs and DSUs.

The following rights under these plans are outstanding:

At June 30, 2019, 14,947 outstanding rights were vested (December 31, 2018 - nil). All vested rights are DSUs.

c) Cash-settled rights plans

Cash-settled rights plans consist of MTIP RSUs and cash-settled DSUs. Compensation expense varies with the price of the Corporation's shares and is recognized over the three year vesting period.  RSUs are settled at the end of the vesting period, whereas DSUs are settled when the participant is no longer employed by the Corporation or one of its subsidiary entities. Whenever dividends are paid on the Corporation's shares, additional rights with a value equal to the dividends are credited to the participants' accounts with the same vesting conditions as the original rights. The value of the payout is equal to the number of rights awarded including earned dividend equivalents, multiplied by the five previous day volume weighted average share price, from the date of settlement. In the first quarter of 2019, the Corporation paid out $3,111 to settle the RSU awards granted in 2016. At June 30, 2019, the carrying amount of the liabilities for these plans was $2,051 (December 31, 2018 – $3,738).

The following rights under these plans are outstanding:

At June 30, 2019,  8,844 outstanding rights were vested, representing all DSUs outstanding (December 31, 2018 - 8,577 rights).

16.  REVENUE

Disaggregation of revenue

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

The Corporation has included $4,566 (2018 - $6,412) during the quarter and $10,892 (2018 - $12,655) year to date in Equipment sales related to short-term rental contracts that are expected to convert to Equipment sales within a six to twelve month period.

17.  FINANCE COSTS

Finance costs are comprised of the following:

18.  INCOME TAXES

Income tax expense comprises current and deferred tax as follows:

The calculation of current tax is based on a combined federal and provincial statutory income tax rate of 26.8% (2018 – 26.9%). Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax assets and liabilities have been measured using an expected average combined statutory income tax rate of 26.8% based on the tax rates in years when the temporary differences are expected to reverse.

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

19.  CHANGES IN NON-CASH OPERATING WORKING CAPITAL

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

20.  COMPARATIVE INFORMATION

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

SOURCE Wajax Corporation

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