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Wajax Announces Fourth Quarter Results and Record Earnings From Continuing Operations for 2007
(Market Wire Via Thomson Dialog NewsEdge) TORONTO, ONTARIO, February 29 / MARKET WIRE/ --
Wajax Income Fund (TSX: WJX.UN) -
-----------------------------------
Three Months
(Dollars in millions, except per unit Ended Year Ended
data) December 31 December 31
-----------------------------------
2007 2006 2007 2006
-----------------------------------
CONSOLIDATED RESULTS
--------------------
Revenue $281.5 $294.5 $1,192.3 $1,206.5
Net earnings from continuing
operations $18.6 $18.1 $72.0 $71.5
Basic earnings per unit from
continuing operations $1.12 $1.09 $4.34 $4.31
Distributable cash(1) $19.3 $18.6 $74.1 $74.0
Basic distributable cash per unit(1) $1.16 $1.12 $4.47 $4.46
SEGMENTS
--------
Revenue - Mobile Equipment $149.9 $139.6 $627.6 $619.2
- Industrial Components $75.2 $83.4 $309.5 $322.4
- Power Systems $57.3 $72.2 $258.4 $267.7
Earnings - Mobile Equipment $12.1 $9.8 $45.1 $41.4
% margin 8.1% 7.0% 7.2% 6.7%
- Industrial Components $5.0 $4.4 $20.0 $20.7
% margin 6.6% 5.3% 6.5% 6.4%
- Power Systems $4.5 $8.4 $22.7 $26.8
% margin 7.9% 11.7% 8.8% 10.0%
-----------------------------------
(1) Denotes non-GAAP measure. See Non-GAAP Measures section in the attached Management's Discussion and Analysis (MD&A).
Wajax Income Fund today announced fourth quarter 2007 results and record earnings from continuing operations for the full year.
Highlights
- Revenue in the fourth quarter decreased $13.0 million to $281.5 million. The strengthening Canadian dollar relative to the U.S. dollar had the effect of decreasing fourth quarter 2007 consolidated revenue by approximately $16.0 million as savings on U.S. dollar based product purchases were passed on to customers. Mobile Equipment quarterly revenue increased 7% to $149.9 million in spite of the negative impact of the weaker U.S. dollar, as mining equipment and parts and service sales continued to be strong. Revenue in Industrial Components and Power Systems decreased 10% and 21% respectively, as a result of the slowdown in natural gas drilling in western Canada and, in the case of Power Systems, the negative effects of the weaker U.S. dollar.
- Net earnings from continuing operations for the quarter were $18.6 million or $1.12 per unit compared to $18.1 million or $1.09 per unit recorded in 2006. Improved segment earnings in Mobile Equipment, up 23%, were a result of higher volumes and margins. Industrial Components earnings increased 14% on higher margins and reduced overhead costs. Power Systems earnings declined 46% as a result of the slowdown in natural gas drilling activity in western Canada. For the year, net earnings from continuing operations were a record $72.0 million or $4.34 per unit, up from $71.5 million, or $4.31 per unit in 2006.
- Fourth quarter basic distributable cash (See Non-GAAP Measures section in the MD&A) amounted to $1.16 per unit for the quarter compared to $1.12 per unit in the previous year. Cash distributions declared in the quarter were $1.46 per unit, which included a December special distribution of $0.47 per unit.
- The Fund announced today that subject to standard closing conditions, it has agreed to acquire the assets of Dan Greer Enterprises Limited ("Greer"), the JCB dealer in the Ontario area from Mississauga to Niagara Falls, including Hamilton, for approximately $2.2 million. Greer has annual sales of approximately $7.0 million.
- As of December 1, 2007, the Fund began to distribute the Tigercat line of forestry equipment in Alberta, Ontario, Quebec and part of the Maritimes. Tigercat manufactures a full line of high quality purpose built equipment and is recognized as a market leader in the forestry industry. The Fund is pleased to announce that since year-end, it has secured additional exclusive territorial distribution rights for the Tigercat line of forestry equipment and, by the end of the first quarter, Wajax will become the Tigercat distributor for Manitoba, Newfoundland and Prince Edward Island. This will result in the Fund being the exclusive distributor of the Tigercat line for all Canadian provinces except Saskatchewan and British Columbia.
- The Fund announced monthly cash distributions for March and April, 2008 of $0.33 per unit ($3.96 per unit annualized), payable on April 21, 2008 and May 20, 2008, to unitholders of record on March 31, 2008 and April 30, 2008 respectively. As well, a special non-cash distribution of fund units of $0.05 per unit was deemed to have been made to unitholders of record on December 31, 2007 as provided in the Declaration of Trust. This distribution was deemed to have been made to allocate the non-taxable portion of the Fund's capital gains for the year. The tax effect of this non-cash distribution will be to increase the adjusted cost base of units held by certain unitholders. More complete tax information concerning distributions will be available on the Fund's website at www.wajax.com.
Commenting on the results for 2007 and the outlook for 2008, Neil Manning, President and CEO, stated "In 2007 we achieved another record year of earnings from continuing operations in the face of significant currency and commodity price fluctuations and a mixed economic performance in a number of our markets. We also managed to reduce our debt and we continue to maintain a strong balance sheet with ample capacity for future growth. Looking forward to 2008, consensus expectations are for a moderation in growth for the Canadian economy as a whole. We expect mining, including the oil sands, to continue to be strong, as well as spending on power generation, infrastructure and non-residential construction. The strong Canadian dollar will continue to present challenges for the forestry and manufacturing sectors and to date, there has been no meaningful up-tick in natural gas drilling activity. As a result of our diversity across these markets, we expect the Fund will enjoy another solid performance in 2008."
Wajax Income Fund is a leading Canadian distributor and service support provider of mobile equipment, industrial components and power systems. Reflecting a diversified exposure to the Canadian economy, its three distinct core businesses operate through a network of over 100 branches across Canada. Its customer base spans natural resources, construction, transportation, manufacturing, industrial processing and utilities.
Wajax will Webcast its Fourth Quarter Financial Results Conference Call. You are invited to listen to the live Webcast on Friday, February 29, 2008 at 1:30 p.m. ET. To access the Webcast, enter www.wajax.com and click on the link for the Webcast on the Investor Relations page. The archived Webcast will be available at the above mentioned website within 24 hours after the conference call.
This news release contains forward-looking information. Actual future results may differ from expected results.
Management's Discussion and Analysis - Q4 2007
The following management's discussion and analysis ("MD&A") discusses the consolidated financial condition and results of operations of Wajax Income Fund (the "Fund" or "Wajax") for the quarter ended December 31, 2007. This MD&A should be read in conjunction with the information contained in the Unaudited Interim Consolidated Financial Statements and accompanying notes for the quarter-ended December 31, 2007, the annual Audited Consolidated Financial Statements and accompanying notes of the Fund for the year ended December 31, 2007 and the associated MD&A. Information contained in this MD&A is based on information available to management as of February 29, 2008.
Unless otherwise indicated, all financial information within this MD&A is in millions of dollars, except per unit data.
Responsibility of Management and the Board of Trustees
Management is responsible for the information disclosed in this MD&A and the Consolidated Financial Statements and accompanying notes, and has in place appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. The Fund's Board of Trustees has approved this MD&A and the annual Consolidated Financial Statements and accompanying notes. In addition, the Fund's Audit Committee, on behalf of the Board of Trustees, provides an oversight role with respect to all public financial disclosures made by the Fund, and has reviewed this MD&A and the annual Consolidated Financial Statements and accompanying notes.
Disclosure Controls and Procedures and Internal Control over Financial Reporting
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Fund in annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation and include controls and procedures designed to ensure that information required to be disclosed by the Fund in annual filings, interim filings or other reports filed or submitted under securities legislation is accumulated and communicated to the Fund's management, including its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate to allow timely decisions regarding required disclosure. Due to the inherent limitations in all control systems, an evaluation of the disclosure controls and procedures can only provide reasonable assurance over the effectiveness of the controls. As a result, disclosure controls and procedures are not expected to prevent and detect all misstatements due to error or fraud. During the year the Fund's management, under the supervision of and with the participation of the Fund's CEO and CFO, has designed and evaluated the effectiveness and operation of its disclosure controls and procedures. Based on the evaluation of disclosure controls and procedures, the CEO and CFO, have concluded that the Fund's disclosure controls and procedures are effective as at December 31, 2007.
Internal control over financial reporting
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles. During the year the Fund's management, under the supervision of and with the participation of its CEO and CFO, has completed an assessment of the design of internal control over financial reporting. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework. With regard to general controls over information technologies, management also used the set of practices of Control Objectives for Information and related Technology (COBIT) created by the IT Governance Institute. This assessment includes a risk evaluation and documentation of key processes. Due to the inherent limitations in all control systems, an evaluation of internal control over financial reporting can only provide reasonable assurance over the effectiveness of the controls. As a result, the system of internal control over financial reporting is not expected to prevent and detect all misstatements due to error or fraud. Based on the assessment of internal control over financial reporting, the CEO and CFO have concluded that the Fund's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles as at December 31, 2007.
Wajax Income Fund Overview
Wajax Income Fund is an unincorporated open-ended limited purpose trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated April 27, 2005. The Fund was created to indirectly invest, on June 15, 2005, in substantially all of the assets and business formerly conducted by Wajax Limited.
The Fund intends to make monthly cash distributions, generally payable to unitholders of record on the last business day of each calendar month and to be paid on or about the 20th day of the following month. The Fund may make special cash and/or special non-cash distributions at the end of the year to ensure, as provided in the Fund's Declaration of Trust, that the Fund's total distributions for the year are equal to its taxable income for the year. Cash distributions are dependent on, among other things, the cash flow of the Fund.
Wajax has three core distribution businesses engaged in the sale and after-sales parts and service support of mobile equipment, power systems and industrial components, through a network of over 100 branches across Canada. Its customer base spans natural resources, construction, transportation, manufacturing, industrial processing and utilities.
Forward-Looking Information
This MD&A contains forward-looking statements. These statements relate to future events or future performance and reflect management's current expectations and assumptions. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management of the Fund. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. These factors include and are not restricted to the risks identified in this MD&A. In addition these factors should be considered carefully and readers should not place undue reliance on the forward-looking statements. The forward-looking statements reflect management's expectations as of the date hereof and the Fund does not assume any obligation to update or revise them to reflect new events or circumstances, except as required by law.
Consolidated Results
-----------------------------------
Three months
ended Year ended
December 31 December 31
2007 2006 2007 2006
---------------------------------------------------------------------------
Revenue $281.5 $294.5 $1,192.3 $1,206.5
---------------------------------------------------------------------------
Gross profit $64.5 $67.1 $264.1 $266.2
Selling and administrative expenses $45.1 $47.0 $187.8 $186.9
Gain on sale of property, plant and
equipment - - ($2.4) -
---------------------------------------------------------------------------
Earnings from continuing operations
before interest and income taxes $19.4 $20.1 $78.8 $79.3
Interest expense $1.0 $1.3 $4.9 $4.5
Income tax (recovery) expense ($0.2) $0.8 $1.9 $3.4
---------------------------------------------------------------------------
Net earnings from continuing
operations $18.6 $18.1 $72.0 $71.5
Gain from discontinued operations - $1.3 - $1.3
Net earnings $18.6 $19.4 $72.0 $72.8
---------------------------------------------------------------------------
Distributable cash(1) $19.3 $18.6 $74.1 $74.0
Distributions declared - Cash $24.2 $34.2 $72.3 $73.5
- Non-cash(3) $0.9 - $0.9 -
Distributions paid $16.4 $15.3 $82.9 $63.8
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Earnings from continuing operations
- Basic $1.12 $1.09 $4.34 $4.31
- Diluted $1.11 $1.08 $4.31 $4.28
Earnings per unit
- Basic $1.12 $1.17 $4.34 $4.39
- Diluted $1.11 $1.16 $4.31 $4.36
Distributable cash per unit(1)(2)
- Basic $1.16 $1.12 $4.47 $4.46
- Diluted $1.15 $1.11 $4.44 $4.44
Distributions declared per unit(2)
- Cash $1.46 $2.06 $4.36 $4.43
- Non-cash(3) $0.05 - $0.05 -
Distributions paid per unit(2) $0.99 $0.92 $5.00 $3.85
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(1) Non-GAAP measure, see the Non-GAAP Measures and Distributable Cash
sections.
(2) Based on actual number of units outstanding on the relevant record date.
(3) See Distributions section.
Revenue
Revenue in the fourth quarter of 2007 decreased $13.0 million to $281.5 million from $294.5 million in 2006. However, the strengthening Canadian dollar relative to the U.S. dollar had the effect of decreasing 2007 consolidated quarterly revenue by approximately $16.0 million, or 5%, as the Fund realized lower sales dollars per unit on U.S. sourced products. Segment revenue increased 7% in Mobile Equipment while revenue fell 10% and 21% in Industrial Components and Power Systems, respectively.
For the twelve months ended December 31, 2007, revenue decreased $14.2 million. The strengthening Canadian dollar relative to the U.S. dollar had the effect of decreasing 2007 consolidated annual revenue by approximately $24.0 million, or 2%, as the Fund realized lower sales dollars per unit on U.S. sourced products.
Gross profit
Gross profit in the fourth quarter of 2007 decreased $2.6 million due mainly to the impact of lower volumes. The gross profit margin percentage for the quarter increased to 22.9% in 2007 from 22.8% in 2006 due principally to higher parts and service margins compared to last year.
For the twelve months ended December 31, 2007, gross profit decreased $2.1 million due to a decline in volumes, offset partially by a slight increase in the gross profit percentage to 22.2% from 22.1% last year.
Selling and administrative expenses
Selling and administrative expenses decreased $1.9 million in the quarter mainly due to lower personnel costs in both Power Systems and Industrial Components plus the benefit of cost recoveries, which more than offset higher sales related expenses in Mobile Equipment. However, selling and administrative expenses as a percentage of revenue remained the same at 16.0% compared to last year.
For the twelve months ended December 31, 2007 selling and administrative expenses increased $0.9 million due primarily to increased costs in both Mobile Equipment and Power Systems, offset by cost reductions in Industrial Components. As a result, selling and administrative expenses as a percentage of revenue increased to 15.8% from 15.5%.
Gain on sale of property, plant and equipment
During the third quarter of 2007, the Fund recognized a $2.4 million, or $0.14 per unit after tax, gain on sale of land previously held for development in Power Systems.
Interest expense
Quarterly interest expense of $1.0 million decreased $0.3 million due to the Fund's lower cost of borrowing, lower deferred financing costs and lower funded debt net of cash ("funded net debt") outstanding in 2007 compared to last year. For the twelve months ended December 31, 2007, interest expense increased $0.4 million compared to 2006 due primarily to higher funded net debt outstanding in 2007, offset in part by lower deferred financing costs.
Income tax expense
The effective income tax rate of negative 1.0% for the quarter decreased from 4.3% the previous year due to an increase in the amount of subordinated indebtedness provided by the Fund to its subsidiary Wajax Limited that resulted in additional interest expense in Wajax Limited compared to last year. In addition, a $0.3 million future tax recovery adjustment was made to reflect temporary differences of the Fund that are estimated to reverse after 2010, tax effected at rates that will apply in the periods the differences are expected to reverse.
For the twelve months ended December 31, 2007 the effective tax rate decreased to 2.6% from 4.5% the previous year as an increase in the amount of subordinated indebtedness provided by the Fund to its subsidiary Wajax Limited resulted in additional interest expense in Wajax Limited. This was partially offset by a $1.2 million future tax expense adjustment made in the year to reflect the Fund's taxable temporary differences that are estimated to reverse after 2010, tax effected at rates that will apply in the years the differences are expected to reverse.
The Fund's effective income tax rate was lower than the Fund's statutory income tax rate of 33.6% as the majority of the Fund's income is not subject to tax in the Fund.
The Fund is a "mutual fund trust" as defined under the Income Tax Act (Canada) and is not currently taxable on its income to the extent that it is distributed to its unitholders. Pursuant to the terms of the Declaration of Trust, all income earned by the Fund is distributed to its unitholders. Accordingly, no provision for income taxes is required on income earned by the Fund that is distributed to its unitholders. The Fund's corporate subsidiaries are subject to tax on their taxable income.
Under legislation enacted on June 22, 2007, the Fund as a publicly traded income trust will pay tax on its income distributed commencing in 2011 at a rate that is substantially equivalent to the general corporate income tax rate. The Fund may become taxable on its distributions prior to 2011 where its equity capital grows beyond certain dollar limits measured by reference to the Fund's market capitalization on October 31, 2006. The Fund has not exceeded its growth limits at December 31, 2007.
Net earnings from continuing operations
Quarterly net earnings of $18.6 million, or $1.12 per unit increased $0.5 million from $18.1 million, or $1.09 per unit, in 2006 as the positive impact of higher margins combined with lower selling and administrative, interest and income tax expenses, more than offset the negative impact of lower volumes compared to last year.
Net earnings from continuing operations for the year ended December 31, 2007 increased $0.5 million to $72.0 million, or $4.34 per unit, from $71.5 million, or $4.31 per unit, in 2006. The positive impact of the gain on the sale of property, plant and equipment, higher margins and reduced income tax expense were partially offset by the negative impact of lower volumes, a $2.4 million write-down of forestry equipment inventory and higher selling and administrative and interest expenses compared to last year.
Discontinued operations
The $1.3 million gain from discontinued operations reported in 2006 resulted from the reversal of certain reserves taken for estimated liabilities retained subsequent to the divestiture of Spencer Industries, Inc. ("Spencer") in 2005 that are no longer required.
Net earnings
Quarterly net earnings of $18.6 million, or $1.12 per unit decreased $0.8 million from $19.4 million, or $1.17 per unit, in 2006. For the twelve months ended December 31, 2007 net earnings of $72.0 million, or $4.34 per unit decreased $0.8 million from $72.8 million, or $4.39 per unit, in 2006.
Comprehensive income
Comprehensive income for the quarter of $18.4 million decreased $1.0 million from $19.4 million the previous year due to a $0.8 million decrease in net earnings and an other comprehensive loss of $0.2 million for the quarter. For the twelve months ended December 31, 2007, comprehensive income of $71.3 million decreased $1.5 million from $72.8 million the previous year due to a $0.8 million decrease in net earnings and an other comprehensive loss of $0.7 million. There was no other comprehensive income recorded last year, see the Changes in Accounting Policy section.
Funded net debt
Funded net debt of $60.8 million decreased $16.2 million compared to September 30, 2007 as fourth quarter cash flows from continuing operating activities of $35.1 million exceeded $16.4 million of cash distributions and $2.4 million of capital spending.
Compared to December 31, 2006 funded net debt decreased $6.6 million. The Fund's quarter-end debt-to-equity ratio of 0.31:1 at December 31, 2007 improved from last quarter's ratio of 0.38:1 and from last year's ratio of 0.34:1.
Distributable cash (see Non-GAAP Measures section) and distributions
For the quarter ended December 31, 2007 distributable cash was $19.3 million, or $1.16 per unit, compared to $18.6 million, or $1.12 per unit, the previous year. The $0.7 million increase in distributable cash is due primarily to higher earnings and lower maintenance capital expenditures compared to last year. For the same period cash distributions declared were $1.46 per unit (2006 - $2.06 per unit) and included monthly cash distributions of $0.99 per unit (2006 - $0.94 per unit) plus a special cash distribution of $0.47 per unit (2006 - $1.12 per unit). The special cash distribution was declared to ensure, as provided by the Fund's declaration of Trust, that the Fund's total distributions for the year equal its taxable income.
For the twelve months ended December 31, 2007 distributable cash was $74.1 million, or $4.47 per unit, compared to $74.0 million, or $4.46 per unit, the previous year. For the same period, cash distributions declared were $4.36 per unit (2006 - $4.43 per unit) and included monthly cash distributions totaling $3.89 per unit (2006 - $3.31 per unit) plus a special cash distribution of $0.47 per unit (2006 - $1.12 per unit). The special cash distribution was declared to ensure, as provided by the Fund's declaration of Trust, that the Fund's total distributions for the year equal its taxable income.
In addition, a special non-cash distribution equal to $0.05 per unit (2006 - $nil per unit) was declared December 31, 2007 in order to distribute the Fund's non-taxable portion of its capital gains for the year.
Distributable cash in excess of cash distributions declared for the twelve months ended December 31, 2007 of $1.8 million, or $0.11 per unit, provides the Fund an additional reserve for fluctuations in working capital requirements, growth capital expenditure requirements or future distributions.
The monthly distributions for each of October, November and December were $0.33 per unit.
Unitholder tax information relating to 2007 distributions is available on the Fund's website at www.wajax.com.
Quarterly Results of Operations
Mobile Equipment
-----------------------------------------
Three months ended Year ended
December 31 December 31
2007 2006 2007 2006
-------------------------------------------------------------------
Equipment $105.1 $98.3 $450.8 $453.1
Parts and service $44.8 $41.3 $176.8 $166.1
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Gross revenue $149.9 $139.6 $627.6 $619.2
-------------------------------------------------------------------
Segment earnings $12.1 $9.8 $45.1 $41.4
Segment earnings margin 8.1% 7.0% 7.2% 6.7%
-------------------------------------------------------------------
Revenue in the fourth quarter of 2007 increased $10.3 million, or 7%, to $149.9 million compared to $139.6 million in the fourth quarter of 2006. The strengthening Canadian dollar relative to the U.S. dollar had the effect of decreasing 2007 quarterly revenues by approximately $10.8 million, or 8%, compared to last year. Segment earnings for the quarter increased $2.3 million to $12.1 million compared to the fourth quarter of 2006. For the twelve months ended December 31, 2007, revenue increased $8.4 million, while segment earnings increased $3.7 million to $45.1 million. The strengthening Canadian dollar relative to the U.S. dollar had the effect of decreasing 2007 annual revenues by approximately $16.2 million, or 3%, compared to last year. The following factors contributed to the Mobile Equipment segment's fourth quarter results:
- Equipment revenues increased by $6.8 million compared to last year and included the following quarter-over-quarter variances:
- Mining equipment revenues increased $16.5 million due mainly to additional deliveries of Hitachi products in western Canada and the delivery of a Letourneau loader in eastern Canada.
- Material handling equipment revenues increased $0.7 million as higher volumes in Ontario and eastern Canada more than offset a decline in western Canada.
- Crane and utility equipment revenues decreased $5.3 million due to a decline in new equipment crane sales in western Canada, primarily in the oil and gas sector, and fewer deliveries to a major hydro utility customer in Ontario compared to last year. These revenue declines were partially offset by improved sales in eastern Canada.
- Forestry and construction equipment revenues decreased $5.1 million. New Hitachi excavator sales increased reflecting a higher number of units sold during the quarter. However, overall new Hitachi construction equipment sales decreased as 2006 included the sale of four smaller class trucks not repeated in 2007. New JCB construction equipment sales decreased in a number of regions. Forestry equipment sales decreased due to weaker demand and the transition from the Direct product line to the broader Tigercat line introduced in December 2007.
- Parts and service volumes increased $3.5 million compared to last year primarily from increases in the western Canada mining sector, including parts sales generated from long-term product support programs, and increased volume in the material handling sector in all regions.
- Earnings increased $2.3 million as a result of higher volumes and margins, offset by a $0.2 million increase in selling and administrative expenses compared to last year. Margins improved due mainly to higher margins on mining equipment sales in western Canada compared to last year. Selling and administrative expenses increased primarily due to higher sales related costs in western Canada which were only partially offset by increased expense recoveries compared to last year.
Effective December 1, 2007, the Mobile Equipment operation secured the distribution rights to the Tigercat line of forestry equipment for Alberta, Ontario, Quebec, New Brunswick and Nova Scotia. Tigercat manufactures a full line of high quality purpose built forestry equipment and is recognized as a market leader in the industry.
Subsequent to year-end, the Fund was awarded additional distributions rights for Manitoba, Newfoundland and Prince Edward Island effective by the end of March 2008.
On February 29, 2008 the Fund announced that it agreed to acquire the net assets of Dan Greer Enterprises Ltd. ("Greer"), the JCB dealer located in Stoney Creek, Ontario for approximately $2.2 million. This acquisition will provide the Fund with expanded territorial rights in the Ontario area from Mississauga to Niagara Falls, including Hamilton. Greer has sales of approximately $7 million annually and it is expected that the transaction will close by the end of March 2008.
As previously reported, the Mobile Equipment segment received an order from North American Construction Group ("NACG") for sixteen 320 ton Hitachi mining trucks and two 800 ton Hitachi hydraulic shovels. During 2007 one truck was delivered. As of December 31, 2007 a total of seven trucks and two shovels have been delivered. Subsequent to year-end, NACG decided not to proceed with the purchase of the remaining nine trucks representing a sales value of approximately $27 million.
Industrial Components - Kinecor
-----------------------------------------
Three months ended Year ended
December 31 December 31
2007 2006 2007 2006
------------------------------------------------------------------
Gross revenue $75.2 $83.4 $309.5 $322.4
------------------------------------------------------------------
Segment earnings $5.0 $4.4 $20.0 $20.7
Segment earnings margin 6.7% 5.3% 6.5% 6.4%
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Revenue at Kinecor of $75.2 million decreased 10% in the fourth quarter of 2007, or $8.2 million from $83.4 million in 2006. However, segment earnings increased $0.6 million to $5.0 million, compared to $4.4 million the previous year. For the twelve months ended December 31, 2007, revenue declined $12.9 million, while segment earnings decreased $0.7 million to $20.0 million compared to the same period last year. The following factors contributed to the segment's fourth quarter results:
- Bearings and power transmission parts sales decreased slightly compared to last year. Improved sales in eastern Canada's mining sector and the industrial processing sector were slightly offset by lower revenues in the forestry sector and a decline in sales to steel processors compared to last year.
- Fluid power parts and service revenue declined $8.1 million, as a result of reduced natural gas drilling activity in western Canada, and lower sales to resellers and utilities. This more than offset improved industrial market sales across all regions and higher mining sector sales in Ontario and eastern Canada.
- Segment earnings increased $0.6 million to $5.0 million, compared to last year as higher margins and lower selling and administrative expenses of $1.4 million more than offset the negative impact of lower volumes. Margins increased mainly due to higher bearings and power transmission parts margins and higher volume rebates. Selling and administrative expenses declined due to personnel and other cost reductions including lower bad debt expense compared to last year.
Power Systems
-----------------------------------------
Three months ended Year ended
December 31 December 31
2007 2006 2007 2006
------------------------------------------------------------------
Equipment $26.2 $38.7 $127.3 $139.4
Parts and service $31.1 $33.5 $131.1 $128.3
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Gross revenue $57.3 $72.2 $258.4 $267.7
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Segment earnings $4.5 $8.4 $22.7 $26.8
Segment earnings margin 7.9% 11.7% 8.8% 10.0%
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Revenue in the fourth quarter decreased 21%, or $14.9 million, to $57.3 million compared to $72.2 million in 2006, while segment earnings decreased $3.9 million to $4.5 million in the quarter compared to the previous year. The strengthening Canadian dollar relative to the U.S. dollar had the effect of decreasing 2007 quarterly revenues by approximately $5.2 million compared to last year. For the twelve months ended December 31, 2007, revenue decreased $9.3 million to $258.4 million, while earnings decreased $4.1 million to $22.7 million compared to $26.8 million in 2006. The strengthening Canadian dollar relative to the U.S. dollar had the effect of decreasing 2007 annual revenues by approximately $7.7 million, or 3%, compared to the previous year. The following factors impacted quarterly revenues and earnings:
- Revenue at Waterous Power Systems ("Waterous") in western Canada was down $18.0 million compared to last year due to a decline in equipment sales of $15.5 million and lower parts and service revenues of $2.5 million. The decline in equipment and parts and service revenues were attributable to the continuing slowdown in natural gas drilling activity and a reduction in large engine overhauls compared to last year.
- Revenue at the eastern Canada operation, DD-ACE Power Systems ("DD-ACE") increased $3.1 million compared to 2006. Equipment sales increased $3.0 million, due principally to higher GE Energy engine sales. Parts and service revenues increased $0.1 million compared to last year.
- Segment earnings decreased $3.9 million as the negative impact of lower volumes compared to last year was only partially mitigated by higher margins and reduced selling and administrative expenses of $0.7 million. Margins increased due mainly to a higher proportion of higher margin parts and service revenues compared to last year. Selling and administrative expense reductions were primarily related to lower sales activity in Waterous and higher expense recoveries in DD-ACE, partially offset by increased warranty costs in Waterous.
Selected Quarterly Information
--------------------------------------------------------
2007 2006
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
-----------------------------------------------------------------------
Revenue $281.5 $289.4 $319.1 $302.3 $294.5 $294.7 $314.1 $303.2
Net earnings
from
continuing
operations $18.6 $19.6 $15.0 $18.7 $18.1 $18.0 $18.5 $16.9
Net earnings
from
continuing
operations
per unit
- Basic $1.12 $1.18 $0.91 $1.13 $1.09 $1.09 $1.11 $1.02
- Diluted $1.11 $1.17 $0.90 $1.12 $1.08 $1.08 $1.11 $1.02
Net earnings $18.6 $19.6 $15.0 $18.7 $19.4 $18.0 $18.5 $16.9
Earnings per
unit
- Basic $1.12 $1.18 $0.91 $1.13 $1.17 $1.09 $1.11 $1.02
- Diluted $1.11 $1.17 $0.90 $1.12 $1.16 $1.08 $1.11 $1.02
Distributable
cash(1) $19.3 $19.6 $15.9 $19.4 $18.6 $19.4 $17.5 $18.5
Distributable
cash per
unit(1)
- Basic $1.16 $1.18 $0.96 $1.17 $1.12 $1.17 $1.05 $1.11
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(1) Non-GAAP measure, see the Non-GAAP Measures Section.
Historically the first quarter results reflect some seasonality and are typically the weakest due to decreased activity in many of the sectors serviced by the Fund. However, this trend has not been as evident over the last two-plus years due to the strength of the Canadian economy.
A discussion of the Fund's previous quarterly results can be found in the Fund's quarterly MD&A reports available on SEDAR at www.sedar.com.
Liquidity and Capital Resources
The Fund generated $32.7 million of cash from operations before financing activities in the fourth quarter of 2007 compared to $18.5 million in the fourth quarter of 2006. The $14.2 million increase in cash flows from operations before financing activities was due to a reduction in non-cash working capital and lower investing activities compared to the same period last year.
Cash generated by operating activities amounted to $35.1 million in the fourth quarter of 2007, with $21.3 million of cash generated from operating earnings and $13.8 million from non-cash working capital. Significant components of the change in non-cash working capital included the following:
- Accounts payable and accrued liabilities increased $13.8 million, largely attributable to the higher payables to mining suppliers in Mobile Equipment and increased accruals at year end in all segments.
- Accounts receivable decreased $2.1 million as a result of lower sales in Mobile Equipment compared to the last quarter.
- Prepaid expenses increased $1.4 million as a result of an increase in the amount of deposits with suppliers.
During the quarter the Fund invested a net amount of $2.4 million of cash provided from operating activities. The investing activities included $1.2 million of lift truck rental fleet additions, net of disposals and $1.2 million of other various capital asset additions, net of disposals.
Funded net debt of $60.8 million decreased $16.2 million compared to September 30, 2007, as fourth quarter cash flows from continuing operating activities of $35.1 million exceeded $16.4 million of cash distributions and $2.4 million of capital spending. Compared to December 31, 2006 funded net debt decreased $6.6 million. The Fund's quarter-end debt-to-equity ratio of 0.31:1 at December 31, 2007 improved from last quarter's ratio of 0.38:1 and from last year's ratio of 0.34:1.
At December 31, 2007 the Fund had borrowed $55.0 million and issued $3.8 million of letters of credit for a total utilization of $58.8 million of its $175 million bank credit facility and had utilized $0.1 million of its $15 million equipment financing facility.
The Fund's amended $175 million bank credit facility along with its $15 million equipment financing demand facility should be sufficient to meet the Fund's short-term working capital and maintenance capital requirements. In the long-term the Fund may be required to access the equity or debt markets in order to fund significant acquisitions and growth related working capital and capital expenditures requirements.
Financial Instruments
The Fund uses derivative financial instruments in the management of its foreign currency and interest rate exposures. The Fund's policy is not to utilize derivative financial instruments for trading or speculative purposes. Significant derivative financial instrument transactions and those outstanding at the end of the quarter were as follows:
- The Fund entered into interest-rate swap contracts with two of its lenders in June 2005, such that in total the interest rate on the $30 million non-revolving term portion of the bank credit facility is effectively fixed at 3.47% plus applicable margins until expiry of the facility on June 7, 2008. Margins depend on the Fund's Leverage Ratio and range between 0.75% and 2.50%.
- On May 9, 2007 the Fund entered into a delayed start interest rate swap with two of its lenders such that in total the interest rate on the $30 million non-revolving term portion of the bank credit facility is effectively fixed at 4.60% plus applicable margins. Margins depend on the Fund's Leverage Ratio and range between 0.75% and 2.50%. The delayed interest rate swap commences on June 7, 2008 until expiry of the facility on December 31, 2011.
- The Fund enters into short-term currency forward contracts to fix the cost of certain inbound inventory and to hedge certain foreign currency-denominated sales to, or receivables from, customers as part of its normal course of business. As at December 31, 2007, the Fund had contracts outstanding to buy US$10.7 million and EUR1.2 million (December 31, 2006 - to buy US$9.5 million and EUR0.3 million).
Contractual Obligations
There have been no material changes to contractual obligations since December 31, 2006.
Off-Balance Sheet Financing
The Mobile Equipment segment had $52.1 million of consigned inventory on-hand from a major manufacturer as at December 31, 2007 compared to $67.7 million the previous year. In the normal course of business, Wajax receives inventory on consignment from this manufacturer which is generally sold to customers or purchased by Wajax. This consigned inventory is not included in the Fund's inventory as the manufacturer retains title to the goods.
The Fund's off balance sheet financing arrangements with Wajax Finance (a "private label" financing operation of CIT Financial Ltd.) include operating lease contracts in relation to the Fund's long-term lift truck rental fleet in the Mobile Equipment segment. At December 31, 2007, the non-discounted operating lease commitment for the rental fleet was $13.1 million (December 31, 2006 - $14.2 million).
Non-GAAP Measures
To supplement the consolidated financial statements, the Fund uses certain non-GAAP financial measures that do not have standardized meaning prescribed by Canadian GAAP and are therefore unlikely to be comparable to similar measures used by other entities.
"Distributable cash" and "Distributable cash per unit" are not recognized measures under GAAP, and the method of calculation adopted by the Fund may differ from methods used by other entities. Accordingly, "Distributable cash" and "Distributable cash per unit" as presented may not be comparable to similar measures presented by other entities. The Fund believes that "Distributable cash" and "Distributable cash per unit" are useful financial metrics in the determination of cash flows available for distribution to unitholders. "Distributable cash" and "Distributable cash per unit" should not be construed as an alternative to net earnings as determined by GAAP. See the Distributable Cash section for the method of calculating the Fund's "Distributable cash".
"Maintenance capital expenditures" is not a recognized measure under GAAP, and the method of calculation adopted by the Fund may differ from methods used by other entities. The Fund believes that "Maintenance capital expenditures" represents cash expenditures required to maintain normal operations. "Maintenance capital expenditures" exclude acquisitions and land and building additions as they are considered to be expenditures that are not required to maintain normal operations. See the Distributable Cash section for the method of calculating "Maintenance capital expenditures".
"Standardized distributable cash" and "Standardized distributable cash per unit" are not recognized measures under GAAP. However, "Standardized distributable cash" has been calculated in accordance with the recommendations provided in the CICA publication: Standardized Distributable Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation and Disclosure. See the Standardized Distributable Cash and Reconciliation to Distributable Cash section for the method of calculating the Fund's "Standardized distributable cash".
Distributions
The Fund intends to make monthly cash distributions, generally payable to unitholders of record on the last business day of each calendar month and to be paid on or about the 20th day of the following month. The Fund may make special cash and/or special non-cash distributions at the end of the year to ensure, as provided in the Fund's Declaration of Trust, that the Fund's total distributions for the year are equal to its taxable income for the year.
Distributions are based on distributable cash (see Non-GAAP Measures and Distributable Cash sections) and dependent on, among other things, the cash flow generated from operations before changes in non-cash working capital and after providing for maintenance capital expenditures (see Non-GAAP Measures section) and any amount that the Trustees may reasonably consider to be necessary to provide for the payment of costs or other obligations that have been or are reasonably expected to be incurred by the Fund. See Distributable Cash section below.
Cash distributions to unitholders were declared as follows:
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Record Date Payment Date Per Unit Amount
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October 31, 2007 November 20, 2007 $0.33 $5.5
November 30, 2007 December 20, 2007 0.33 5.5
December 31, 2007 January 21, 2008 0.33 5.5
December 31, 2007 - Special(1) January 21, 2008 0.47 7.8
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Three months ended December 31, 2007 $1.46 $24.2
January 1, 2007 to September 30, 2007 2.90 48.1
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Year ended December 31, 2007 $4.36 $72.3
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(1) See Distributable Cash section below
On December 31, 2007 a special non-cash distribution of $0.05 per unit, or $0.9 million, was paid by way of additional Fund units, in order to distribute the Fund's non-taxable portion of its capital gains for the year. Immediately after the issuance of the additional units, the outstanding Fund units were consolidated such that the number of Fund units was unchanged from the number h | | |
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