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

TSX Symbol:  WJX

TORONTO, Nov. 2, 2020 /CNW/ - Wajax Corporation ("Wajax" or the "Corporation") today announced its 2020 third quarter results.

Third Quarter Highlights

• Revenue in the third quarter of 2020 decreased $24.5 million, or 6.7%, to $340.6 million, from $365.1 million in the third quarter of 2019. Regionally:
  
  

• During the quarter, the Corporation qualified for the Canada Emergency Wage Subsidy ("CEWS") program and recognized $5.4 million as a reimbursement of compensation expense with $2.6 million and $2.8 million, respectively, allocated to cost of sales and selling and administrative expenses in proportion to personnel costs recorded in those areas.
  
  

• Gross profit margin of 18.8% in the third quarter of 2020 decreased 0.2% compared to the same period of 2019. Excluding the $2.6 million CEWS recovery discussed above, gross profit margin was 18.0% in the third quarter of 2020, representing a decrease of 1.0% compared to the same period of 2019. The decline in margin was driven primarily by lower parts and service margins, offset partially by higher ERS and equipment margins. Excluding the effect of the CEWS recovery, the gross profit margin of 18.0% improved sequentially by 3.1% when compared to the gross profit margin of 14.9% recorded in the second quarter of 2020. The sequential improvement was due primarily to lower activity associated with the disposal of aged inventory, which negatively affected gross profit margin in the preceding quarter.
  
  

• Selling and administrative expenses as a percentage of revenue decreased 1.3% to 12.3% in the third quarter of 2020 from 13.6% in the same period of 2019. Selling and administrative expenses decreased by $7.6 million compared to the third quarter of 2019, due mainly to cost control initiatives, a gain recorded on the sale of properties of $1.4 million and the recovery of personnel expenses from the CEWS of $2.8 million discussed above. Excluding the $2.8 million CEWS recovery, selling and administrative expenses as a percentage of revenue decreased 0.4% to 13.1% in the third quarter of 2020 from 13.6% in the same period of 2019.
  
  

• EBIT decreased $1.3 million, or 8.3%, to $14.3 million in the third quarter of 2020 versus $15.6 million in the same period of 2019.⁽²⁾ The year-over-year decrease in EBIT is primarily attributable to lower revenue and higher restructuring costs, partially offset by reduced selling and administrative costs and the CEWS recovery.⁽²⁾
  
  

• The Corporation generated net earnings of $6.7 million, or $0.33 per share, in the third quarter of 2020 versus $7.6 million, or $0.38 per share, in the same period of 2019. The Corporation generated adjusted net earnings of $10.1 million, or $0.50 per share, in the third quarter of 2020 versus $10.3 million, or $0.52 per share, in the same period of 2019.⁽²⁾
  
  

• Adjusted EBITDA margin increased to 9.5% in the third quarter of 2020 from 9.0% in the same period of 2019.⁽²⁾
  
  

• The Corporation's backlog at September 30, 2020 of $172.2 million decreased $18.5 million, or 9.7%, compared to June 30, 2020, due primarily to lower orders in most categories, but most notably in the construction, material handling and ERS categories.⁽²⁾ Compared to September 30, 2019, backlog decreased $115.7 million, or 40.2%, due to lower orders in all categories except construction, but most notably lower orders in the mining, power generation and material handling categories.⁽²⁾
  
  

• Total owned and consignment inventory declined $39.2 million in the third quarter of 2020. Owned inventory of $390.0 million at September 30, 2020 decreased $23.7 million from June 30, 2020 due primarily to lower equipment inventory in the construction, power generation and mining categories. Consignment inventory, comprised primarily of construction excavators, declined by $15.5 million.
  
  

• Working capital of $392.0 million at September 30, 2020 decreased $3.2 million from June 30, 2020, due primarily to lower inventory and higher provisions, partially offset by lower accounts payable and accrued liabilities and lower bank indebtedness.⁽²⁾ Trailing four-quarter average working capital as a percentage of the trailing 12-month sales was 27.9%, an increase of 0.3% from June 30, 2020, due to the lower trailing 12-month sales.⁽²⁾
  
  

• Cash flows generated from operating activities amounted to $34.8 million in the third quarter of 2020, compared to cash used in operating activities of $9.3 million in the same quarter of the previous year. The increase in cash generated of $44.1 million was mainly attributable to an increase in cash generated from changes in inventory of $47.6 million, a decrease in income taxes paid of $5.3 million and a decrease in rental equipment additions of $4.2 million, offset partially by a decrease in cash generated from changes in trade and other receivables of $12.4 million.
  
  

• The Corporation's leverage ratio decreased to 2.59 times at September 30, 2020, compared to 2.82 times at June 30, 2020.⁽²⁾ The decrease in the leverage ratio was due to the lower debt level, partially offset by the lower trailing 12-month pro-forma adjusted EBITDA.⁽²⁾ The Corporation's senior secured leverage ratio was 2.05 times at September 30, 2020, compared to 2.29 times at June 30, 2020.⁽²⁾
  
  

• In the third quarter of 2020, the Corporation implemented workforce reductions in response to the economic conditions created by COVID-19 and related sales volume impacts. A pre-tax restructuring cost of $7.7 million was recognized in the quarter relating primarily to severance costs. 243 employees were released, representing annual compensation costs of approximately $19.3 million. Almost all affected personnel were on temporary layoff and as such, the majority of the $19.3 million was not incurred by the Corporation in 2020.
  
  

• In the third quarter of 2020, the Corporation entered into a sale and leaseback transaction for one of its owned properties. The proceeds net of transaction costs on the sale of the property were $5.2 million and the carrying amount was $1.2 million, resulting in a total gain on the sale of the property of $4.0 million, of which $1.5 million has been recognized in the quarter.

On November 2, 2020, the Corporation declared a dividend of $0.25 per share for the fourth quarter of 2020 payable on January 5, 2021 to shareholders of record on December 15, 2020.

Update Regarding COVID-19 Pandemic Response

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

Commenting on the Corporation's results, President and Chief Executive Officer Mark Foote stated, "Current business conditions, relating primarily to COVID-19 and secondarily to weak resource markets in western Canada, continued to have a negative effect on the Corporation's results during the third quarter of 2020. Volume trends in comparison to last year improved as the quarter progressed.

While volumes have recently shown an improving trend, we continue to expect revenue to be lower year-over-year in the fourth quarter. As such, we made the difficult decision in the third quarter to reduce the workforce by approximately 8% when compared to January 1, 2020."

Mr. Foote continued, "In response to difficult market conditions and consistent with our plans, owned and consignment inventory continued to decline in the third quarter while margins improved sequentially from the second quarter when accelerated disposal of aged inventory temporarily reduced margins.

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

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

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

Wajax Corporation

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

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

Wajax will webcast its Third Quarter Financial Results Conference Call. You are invited to listen to the live webcast on Tuesday, November 3, 2020 at 2:00 p.m. ET. To access the webcast, please visit our website wajax.com, under "Investor Relations", "Events and Presentations", "Q3 2020 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 intention to manage owned and consignment equipment inventory levels based on the expectation that current market conditions will persist for the balance of 2020; our expectation that our capital investment will remain at a minimum level; our expectation that the proceeds of our real estate monetization program will be used for debt reduction; our expectation that revenue in the fourth quarter of 2020 will be lower year-over-year; our focus and key objectives in managing our business through the COVID-19 pandemic, as well as weak resource markets in western Canada; our intention to partially offset volume declines with cost reductions, while managing customer service levels, working capital and capital spending accordingly; our expectation that the Corporation's current sources of liquidity will be sufficient while we prepare to return to growing the business as conditions improve; our goal of becoming Canada's leading industrial products and services provider, distinguished through our core capabilities; and our belief that achieving excellence in our areas of core capability will position Wajax to create value for its customers, employees, vendors and shareholders. These statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, our ability to successfully manage our business through the COVID-19 pandemic and actions taken by governments, public authorities and customers in response to the novel coronavirus; general business and economic conditions; the supply and demand for, and the level and volatility of prices for, oil, natural gas and other commodities; financial market conditions, including interest rates; our ability to execute our updated Strategic Plan, including our ability to develop our core capabilities, execute on our organic growth priorities, complete and effectively integrate acquisitions, such as NorthPoint, and to successfully implement new information technology platforms, systems and software; the future financial performance of the Corporation; our costs; market competition; our ability to attract and retain skilled staff; our ability to procure quality products and inventory; and our ongoing relations with suppliers, employees and customers. The foregoing list of assumptions is not exhaustive. Factors that may cause actual results to vary materially include, but are not limited to, the geographic spread and ultimate impact of the COVID-19 virus and the duration of the coronavirus pandemic; the duration of travel, business and other restrictions imposed by governments and public authorities in response to COVID-19, as well as other measures that may be taken by such authorities; actions taken by our customers in relation to the COVID-19 pandemic, including slowing, reducing or halting operations; a continued or prolonged deterioration in general business and economic conditions (including as a result of the COVID-19 pandemic); volatility in the supply and demand for, and the level of prices for, oil, natural gas and other commodities; a continued or prolonged decrease in the price of oil or natural gas; fluctuations in financial market conditions, including interest rates; the level of demand for, and prices of, the products and services we offer; levels of customer confidence and spending; market acceptance of the products we offer; termination of distribution or original equipment manufacturer agreements; unanticipated operational difficulties (including failure of plant, equipment or processes to operate in accordance with specifications or expectations, cost escalation, our inability to reduce costs in response to slow-downs in market activity, unavailability of quality products or inventory, supply disruptions (including disruptions caused by the COVID-19 pandemic), job action and unanticipated events related to health, safety and environmental matters); our ability to attract and retain skilled staff and our ability to maintain our relationships with suppliers, employees and customers. The foregoing list of factors is not exhaustive. Further information concerning the risks and uncertainties associated with these forward-looking statements and the Corporation's business may be found in our Annual Information Form for the year ended December 31, 2019 (the "AIF"), in our annual MD&A for financial risks, and in our most recent quarterly MD&A, all of which have been filed on SEDAR. The forward-looking statements contained in this news release are expressly qualified in their entirety by this cautionary statement. The Corporation does not undertake any obligation to publicly update such forward-looking statements to reflect new information, subsequent events or otherwise unless so required by applicable securities laws.

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

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

Wajax Corporation
Management's Discussion and Analysis – Q3 2020

The following management's discussion and analysis ("MD&A") discusses the consolidated financial condition and results of operations of Wajax Corporation ("Wajax" or the "Corporation") for the quarter ended September 30, 2020. This MD&A should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements and accompanying notes for the quarter ended September 30, 2020, the annual audited consolidated financial statements and accompanying notes for the year ended December 31, 2019 that are prepared in accordance with International Financial Reporting Standards ("IFRS") and the associated MD&A. Information contained in this MD&A is based on information available to management as of November 2, 2020.

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

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

Wajax Corporation Overview

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

Strategic Direction and Outlook

The goal of the One Wajax strategy is to provide customers with access to the Corporation's full range of products and services while delivering a consistently excellent level of customer service. Wajax is focused on delivering a strong experience for its customers and employees through the execution of clear plans in five key areas:

• Investing in the Wajax team - The safety, well-being and engagement of the Corporation's team of nearly 2,900 technicians, sales professionals, support staff and leaders is the foundation of the Corporation.
  
  

• Investing in Wajax customers - The Corporation has the privilege of supporting 32,000 individual customers across Canada ranging from small local contractors to the country's largest industrial and resource organizations.
  
  

• Executing a clear organic growth strategy - The Corporation has classified each of its ten current product and service categories based on a category's contribution to sustainable growth. While Wajax is competitive in all of the categories it participates in, these classifications ensure that resources (such as inventory, capital, personnel and marketing) are allocated appropriately.
  
  

• Accretive acquisitions strategy - Wajax has developed clear acquisition criteria for the Canadian and U.S. markets. In Canada, the focus is primarily on acquisitions that add to the Corporation's scale in the Engineered Repair Services ("ERS") business and secondarily to extensions to the Corporation's existing distribution businesses. In the U.S. market, the focus is on reviewing growth opportunities related to distribution businesses that provide a long-term growth platform for the One Wajax multi-category model.
  
  

• Investing in the Wajax infrastructure - The Corporation is making major changes to its infrastructure to improve the consistency of customer service and lower costs. The Corporation's current programs include the ongoing consolidation of its branch network, investing in new information systems and implementing Customer Support Centres (each a "CSC") that provide 24/7 customer support in all product and service categories.

Outlook
Current business conditions, relating primarily to COVID-19 and secondarily to weak resource markets in western Canada, continued to have a negative effect on the Corporation's results during the third quarter of 2020. Volume trends in comparison to last year improved as the quarter progressed.

While volumes have recently shown an improving trend, Wajax continues to expect revenue to be lower year-over-year in the fourth quarter. As such, the Corporation made the difficult decision in the third quarter to reduce the workforce by approximately 8% when compared to January 1, 2020.

In response to difficult market conditions and consistent with the Corporation's plans, owned and consignment inventory continued to decline in the third quarter while margins improved sequentially from the second quarter when accelerated disposal of aged inventory temporarily reduced margins.

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

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

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

See the Cautionary Statement Regarding Forward-Looking Information section.

Highlights for the Quarter

• Revenue in the third quarter of 2020 decreased $24.5 million, or 6.7%, to $340.6 million, from $365.1 million in the third quarter of 2019. Regionally:
  
  

• During the quarter, the Corporation qualified for the Canada Emergency Wage Subsidy ("CEWS") program and recognized $5.4 million as a reimbursement of compensation expense with $2.6 million and $2.8 million, respectively, allocated to cost of sales and selling and administrative expenses in proportion to personnel costs recorded in those areas.
  
  

• Gross profit margin of 18.8% in the third quarter of 2020 decreased 0.2% compared to the same period of 2019. Excluding the $2.6 million CEWS recovery discussed above, gross profit margin was 18.0% in the third quarter of 2020, representing a decrease of 1.0% compared to the same period of 2019. The decline in margin was driven primarily by lower parts and service margins, offset partially by higher ERS and equipment margins. Excluding the effect of the CEWS recovery, the gross profit margin of 18.0% improved sequentially by 3.1% when compared to the gross profit margin of 14.9% recorded in the second quarter of 2020. The sequential improvement was due primarily to lower activity associated with the disposal of aged inventory, which negatively affected gross profit margin in the preceding quarter.
  
  

• Selling and administrative expenses as a percentage of revenue decreased 1.3% to 12.3% in the third quarter of 2020 from 13.6% in the same period of 2019. Selling and administrative expenses decreased by $7.6 million compared to the third quarter of 2019, due mainly to cost control initiatives, a gain recorded on the sale of properties of $1.4 million and the recovery of personnel expenses from the CEWS of $2.8 million discussed above. Excluding the $2.8 million CEWS recovery, selling and administrative expenses as a percentage of revenue decreased 0.4% to 13.1% in the third quarter of 2020 from 13.6% in the same period of 2019.
  
  

• EBIT decreased $1.3 million, or 8.3%, to $14.3 million in the third quarter of 2020 versus $15.6 million in the same period of 2019.⁽¹⁾ The year-over-year decrease in EBIT is primarily attributable to lower revenue and higher restructuring costs, partially offset by reduced selling and administrative costs and the CEWS recovery.
  
  

• The Corporation generated net earnings of $6.7 million, or $0.33 per share, in the third quarter of 2020 versus $7.6 million, or $0.38 per share, in the same period of 2019. The Corporation generated adjusted net earnings of $10.1 million, or $0.50 per share, in the third quarter of 2020 versus $10.3 million, or $0.52 per share, in the same period of 2019.⁽¹⁾
  
  

• Adjusted EBITDA margin increased to 9.5% in the third quarter of 2020 from 9.0% in the same period of 2019.⁽¹⁾
  
  

• The Corporation's backlog at September 30, 2020 of $172.2 million decreased $18.5 million, or 9.7%, compared to June 30, 2020, due primarily to lower orders in most categories, but most notably in the construction, material handling and ERS categories. Compared to September 30, 2019, backlog decreased $115.7 million, or 40.2%, due to lower orders in all categories except construction, but most notably lower orders in the mining, power generation and material handling categories.⁽¹⁾
  
  

• Total owned and consignment inventory declined $39.2 million in the third quarter of 2020. Owned inventory of $390.0 million at September 30, 2020 decreased $23.7 million from June 30, 2020 due primarily to lower equipment inventory in the construction, power generation and mining categories. Consignment inventory, comprised primarily of construction excavators, declined by $15.5 million.
  
  

• Working capital of $392.0 million at September 30, 2020 decreased $3.2 million from June 30, 2020, due primarily to lower inventory and higher provisions, partially offset by lower accounts payable and accrued liabilities and lower bank indebtedness.⁽¹⁾ Trailing four-quarter average working capital as a percentage of the trailing 12-month sales was 27.9%, an increase of 0.3% from June 30, 2020, due to the lower trailing 12-month sales.⁽¹⁾
  
  

• Cash flows generated from operating activities amounted to $34.8 million in the third quarter of 2020, compared to cash used in operating activities of $9.3 million in the same quarter of the previous year. The increase in cash generated of $44.1 million was mainly attributable to an increase in cash generated from changes in inventory of $47.6 million, a decrease in income taxes paid of $5.3 million and a decrease in rental equipment additions of $4.2 million, offset partially by a decrease in cash generated from changes in trade and other receivables of $12.4 million.
  
  

• The Corporation's leverage ratio decreased to 2.59 times at September 30, 2020, compared to 2.82 times at June 30, 2020.⁽¹⁾ The decrease in the leverage ratio was due to the lower debt level, partially offset by the lower trailing 12-month pro-forma adjusted EBITDA.⁽¹⁾ The Corporation's senior secured leverage ratio was 2.05 times at September 30, 2020, compared to 2.29 times at June 30, 2020.⁽¹⁾
  
  

• In the third quarter of 2020, the Corporation implemented workforce reductions in response to the economic conditions created by COVID-19 and related sales volume impacts. A pre-tax restructuring cost of $7.7 million was recognized in the quarter relating primarily to severance costs. 243 employees were released, representing annual compensation costs of approximately $19.3 million. Almost all affected personnel were on temporary layoff and as such, the majority of the $19.3 million was not incurred by the Corporation in 2020.
  
  

• In the third quarter of 2020, the Corporation entered into a sale and leaseback transaction for one of its owned properties. The proceeds net of transaction costs on the sale of the property were $5.2 million and the carrying amount was $1.2 million, resulting in a total gain on the sale of the property of $4.0 million, of which $1.5 million has been recognized in the quarter.

Update Regarding COVID-19 Pandemic Response

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

Summary of Operating Results

Results of Operations

Revenue Sources

Revenue in the third quarter of 2020 decreased 6.7%, or $24.5 million, to $340.6 million from $365.1 million in the third quarter of 2019. In addition to regional revenue commentary provided previously herein, the following factors contributed to the decrease in revenue:

• Product support sales have decreased due mainly to lower mining and engines and transmissions revenue in western Canada and lower on-highway sales in all regions.
  
  

• Industrial parts sales have decreased due primarily to lower bearings and process sales across all regions and lower hydraulics sales in western Canada.

For the nine months ended September 30, 2020, revenue decreased 9.4%, or $107.5 million, to $1,041.6 million, from $1,149.1 million in the same period of 2019. The following factors contributed to the decrease in revenue:

• Equipment sales have decreased due mainly to lower forestry and engines and transmissions sales across all regions, lower construction sales in western Canada, and lower power generation sales in eastern Canada. These decreases were partially offset by higher mining equipment sales in western and eastern Canada.
  
  

• Product support sales have decreased primarily on weakness in construction, mining and engines and transmissions sales in western Canada and lower on-highway sales across all regions.
  
  

• Industrial parts sales have decreased due primarily to lower bearings and hydraulics sales across all regions.
  
  

• ERS sales have increased in western and central Canada due primarily to the acquisition of NorthPoint effective January 13, 2020.

Backlog
The Corporation's backlog at September 30, 2020 of $172.2 million decreased $18.5 million, or 9.7%, compared to June 30, 2020, due primarily to lower orders in most categories, but most notably in the construction, material handling and ERS categories. Compared to September 30, 2019, backlog decreased $115.7 million, or 40.2%, due to lower orders in all categories except construction, but most notably lower orders in the mining, power generation and material handling categories.

Canada Emergency Wage Subsidy (CEWS)
During the third quarter, the Corporation qualified for the CEWS program and recognized $5.4 million as a reimbursement of compensation expense with $2.6 million and $2.8 million, respectively, allocated to cost of sales and selling and administrative expenses in proportion to personnel costs recorded in those areas.

For the nine months ended September 30, 2020, the Corporation recognized $20.9 million as a reimbursement of compensation expense with $9.7 million and $11.2 million, respectively, allocated to cost of sales and selling and administrative expenses in proportion to personnel costs recorded in those areas.

Gross profit
Gross profit decreased $5.3 million, or 7.6%, in the third quarter of 2020 compared to the same quarter last year due to lower volumes and lower parts and service margins, partially offset by higher ERS and equipment margins and the recovery of personnel expenses from the CEWS.

Gross profit margin of 18.8% in the third quarter of 2020 decreased 0.2% compared to the same period of 2019. Excluding the $2.6 million CEWS recovery discussed above, gross profit margin was 18.0% in the third quarter of 2020, representing a decrease of 1.0% compared to the same period of 2019. The decline in margin was driven primarily by lower parts and service margins, offset partially by higher ERS and equipment margins. Excluding the effect of the CEWS recovery, the gross profit margin of 18.0% improved sequentially by 3.1% when compared to the gross profit margin of 14.9% recorded in the second quarter of 2020. The sequential improvement was due primarily to lower activity associated with the disposal of aged inventory, which negatively affected gross profit margin in the preceding quarter.

For the nine months ended September 30, 2020, gross profit decreased $27.8 million, or 12.6%, compared to the same period last year due to decreased volumes and lower equipment and parts margins, partially offset by higher ERS sales and margins, and the recovery of personnel expenses from the CEWS.

For the nine months ended September 30, 2020, gross profit margin of 18.5% decreased 0.7% compared to the prior year. Excluding the $9.7 million year-to-date CEWS recovery discussed above, gross profit margin was 17.6%, representing a decrease of 1.6% compared to the prior year. The decline in margin was driven primarily by lower equipment and parts margins, offset partially by higher ERS sales and margins. The lower equipment margins were driven partially by the Corporation's accelerated disposal of aged and used equipment during the second quarter.

Selling and administrative expenses
Selling and administrative expenses as a percentage of revenue decreased to 12.3% in the third quarter of 2020 from 13.6% in the third quarter of 2019. Selling and administrative expenses in the third quarter of 2020 decreased $7.6 million compared to the third quarter of 2019 due mainly to cost control initiatives, a gain recorded on the sale of properties of $1.4 million and the recovery of personnel expenses from the CEWS of $2.8 million discussed above. Excluding the $2.8 million CEWS recovery, selling and administrative expenses as a percentage of revenue decreased to 13.1% in the third quarter of 2020 from 13.6% in the same period of 2019.

For the nine months ended September 30, 2020, selling and administrative expenses decreased $23.9 million compared to the same period last year. This decrease was due mainly to cost control initiatives, a gain recorded on the sale of properties of $1.4 million and the $11.2 million recovery of personnel expenses from the CEWS. Selling and administrative expenses as a percentage of revenue decreased to 13.4% in 2020 from 14.2% in 2019.

Restructuring and other related costs
In the third quarter of 2020, the Corporation implemented workforce reductions in response to the economic conditions created by COVID-19 and related sales volume impacts. A restructuring cost of $7.7 million was recognized in the quarter relating primarily to severance costs.

In the first quarter of 2018, the Corporation commenced the redesign of its finance function (the "Finance Reorganization Plan"). For the nine months ended September 30, 2020, the Corporation has recognized $0.1 million related to duplicate labour costs. The Corporation does not expect to incur additional costs relating to the Finance Reorganization Plan.

Finance costs
Finance costs of $5.1 million in the third quarter of 2020 decreased $0.1 million compared to the same quarter last year due to lower borrowings under the bank credit facility, offset partially by higher interest on lease liabilities. See the Liquidity and Capital Resources section.

For the nine months ended September 30, 2020, finance costs of $16.9 million increased $2.6 million compared to the same period in 2019 due primarily to the issuance of debentures in the fourth quarter of 2019, the acquisition of NorthPoint in the first quarter of 2020 and higher interest on lease liabilities, partially offset by lower borrowings under the bank credit facility. See the Liquidity and Capital Resources section.

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

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

Net earnings
In the third quarter of 2020, the Corporation had net earnings of $6.7 million, or $0.33 per share, compared to $7.6 million, or $0.38 per share, in the third quarter of 2019. The $0.9 million decrease in net earnings resulted primarily from lower revenue and higher restructuring costs, partially offset by reduced selling and administrative costs and the CEWS recovery.

For the nine months ended September 30, 2020, the Corporation generated net earnings of $20.9 million, or $1.05 per share, compared to $27.3 million, or $1.37 per share, in the same period of 2019. The $6.4 million decrease in net earnings resulted primarily from lower revenue, lower equipment and parts margins, higher restructuring costs and higher finance costs, partially offset by reduced selling and administrative costs and the CEWS recovery.

Adjusted net earnings (See the Non-GAAP and Additional GAAP Measures section)
Adjusted net earnings for the three months ended September 30, 2020 excludes restructuring and other related costs of $5.6 million after-tax, or $0.28 per share (2019 - $2.9 million after-tax, or $0.15 per share), non-cash gains on mark to market of derivative instruments of $1.0 million after-tax, or $0.05 per share (2019 - gains of $0.2 million after-tax, or $0.01 per share), and a gain recorded on the sale of properties of $1.2 million after-tax, or $0.06 per share (2019 - nil).

As such, adjusted net earnings decreased $0.3 million to $10.1 million, or $0.50 per share, in the third quarter of 2020 from $10.3 million, or $0.52 per share, in the same period of 2019.

Adjusted net earnings for the nine months ended September 30, 2020 excludes restructuring and other related costs of $5.7 million after-tax, or $0.28 per share (2019 – $3.9 million after-tax, or $0.20 per share), non-cash gains on mark to market of derivative instruments of $0.2 million after-tax, or $0.01 per share (2019 – gains of $0.4 million after-tax, or $0.02 per share), a gain recorded on the sale of properties of $1.2 million after-tax, or $0.06 per share (2019 - nil), and NorthPoint transaction costs of $0.2 million after-tax, or $0.01 per share (2019 - nil). Adjusted net earnings in the same period of 2019 also excludes certain non-recurring CSC project costs of $0.8 million after-tax, or $0.04 per share.

As such, adjusted net earnings decreased $6.2 million to $25.5 million, or $1.27 per share, for the nine months ended September 30, 2020 from $31.7 million, or $1.59 per share, in the same period of 2019.

Comprehensive income
Total comprehensive income of $6.4 million in the third quarter of 2020 included net earnings of $6.7 million and an other comprehensive loss of $0.3 million. The other comprehensive loss of $0.3 million in the current period resulted from $0.1 million of losses on derivative instruments outstanding at the end of the period designated as cash flow hedges and $0.2 million of gains on derivative instruments designated as cash flow hedges in prior periods reclassified to earnings during the current period.

For the nine months ended September 30, 2020, the total comprehensive income of $15.9 million included net earnings of $20.9 million and an other comprehensive loss of $5.0 million. The other comprehensive loss of $5.0 million in the current year resulted from $4.2 million of losses on derivative instruments outstanding at the end of the period designated as cash flow hedges and $0.8 million of gains on derivative instruments designated as cash flow hedges in prior periods reclassified to earnings during the current period.

Selected Quarterly Information

The following table summarizes unaudited quarterly consolidated financial data for the eight most recently completed quarters. The 2018 financial data has not been adjusted for the adoption on January 1, 2019 of IFRS 16 Leases ("IFRS 16").

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. However, the project timing of large mining trucks and shovels and power generation packages can shift the revenue and net earnings throughout the year. In addition, the sale of large construction units can also impact revenue due to the seasonality in that industry.

On October 16, 2018, the Corporation acquired Groupe Delom Inc. ("Delom"), and effective January 13, 2020, the Corporation acquired NorthPoint. The results of operations and financial position of these acquired businesses have been included in the figures since the dates of acquisition.

The recent COVID-19 pandemic has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, physical distancing, self-isolation and quarantine periods, have impacted economies and financial markets worldwide, resulting in an economic slowdown. The pandemic may also affect customer demand and supply chains, impact capital resources, as well as increase government regulations or intervention, among other impacts, all of which may negatively affect the business and the financial results of the Corporation and alter the typical seasonal trend.

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 manage its working capital and normal-course capital investment programs within a leverage range of 1.5 to 2.0 times and to fund those programs through operating cash flow and its bank credit facilities as required. There may be instances whereby the Corporation is willing to maintain a leverage ratio outside of this range during changes in economic cycles. The Corporation may also maintain a leverage ratio above the stated range as a result of investment in acquisitions and may fund those acquisitions using its bank credit facilities and other debt instruments in accordance with the Corporation's expectations of total future cash flows, financing costs and other factors. The Corporation's leverage ratio is currently above the target range primarily due to the acquisition of NorthPoint in the first quarter of 2020, the acquisition of Delom in the fourth quarter of 2018, investments made in working capital and the adverse effect of COVID-19 on the Corporation's operating results. See the Funded Net Debt section.

Shareholders' Equity

The Corporation's shareholders' equity at September 30, 2020 of $319.1 million increased $1.9 million from June 30, 2020. For the nine months ended September 30, 2020 the Corporation's shareholders' equity increased $2.3 million.

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

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

At September 30, 2020, Wajax had four share-based compensation plans; the Wajax Share Ownership Plan (the "SOP"), the Directors' Deferred Share Unit Plan (the "DDSUP"), the Mid-Term Incentive Plan for Senior Executives (the "MTIP") (with MTIP awards being composed of performance share units ("PSUs") and restricted share units ("RSUs")) and the Deferred Share Unit Plan (the "DSUP").

As of September 30, 2020, there were 462,828 SOP and DDSUP (treasury share rights plans) rights outstanding of which 434,662 rights were vested, 283,601 MTIP PSUs and equity-settled DSUP (market-purchased share rights plans) rights outstanding of which 20,571 rights were vested, and 455,858 MTIP RSUs and cash-settled DSUP (cash-settled rights plans) rights outstanding of which 9,972 rights were vested. Depending on the actual level of achievement of the performance targets associated with the outstanding MTIP PSUs, the number of market-purchased shares required to satisfy the Corporation's obligations could be higher or lower.

Wajax recorded compensation expense of $1.5 million for the quarter (2019 – expense of $0.5 million) and $2.7 million for the nine months ended September 30, 2020 (2019 - expense of $2.9 million) in respect of these plans.

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

Funded net debt of $254.8 million at September 30, 2020 decreased $28.3 million compared to $283.0 million at June 30, 2020. The decrease during the quarter was due primarily to cash generated from operating activities of $34.8 million and proceeds on disposal of property, plant and equipment of $6.3 million, offset partially by payment of lease liabilities of $6.1 million and dividends paid of $5.0 million.

Funded net debt of $254.8 million at September 30, 2020 decreased $21.7 million compared to $276.5 million at December 31, 2019. The decrease during the year to date was due primarily to cash generated from operating activities of $70.7 million, offset partially by the $17.9 million acquisition of NorthPoint, payment of lease liabilities of $16.7 million and dividends paid of $15.0 million.

The Corporation's ratio of funded net debt to total capital decreased to 44.4% at September 30, 2020 from 47.2% at June 30, 2020, primarily due to the lower funded net debt level in the current period.

The Corporation's leverage ratio of 2.59 times at September 30, 2020 decreased from the June 30, 2020 ratio of 2.82 times due to the lower debt level, partially offset by the lower trailing 12-month pro-forma adjusted EBITDA. See the Non-GAAP and Additional GAAP Measures section.

See the Liquidity and Capital Resources section.

Financial Instruments

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

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

Wajax has entered into interest rate hedge contracts to minimize exposure to interest rate fluctuations on its variable rate debt. All interest rate hedge contracts are recorded in the unaudited condensed consolidated interim financial statements at fair value. As at September 30, 2020, Wajax had the following interest rate hedge contracts outstanding:

• $150.0 million, expiring in November 2024, with a weighted average interest rate of 2.12% (December 31, 2019 - $104.0 million, expiring in November 2024, with a weighted average interest rate of 2.56%)

Wajax enters into foreign exchange forward contracts to hedge the exchange risk associated with the cost of certain inbound inventory and foreign currency-denominated sales to customers along with the associated receivables as part of its normal course of business. As at September 30, 2020, Wajax had the following contracts outstanding:

• to buy U.S. $41.3 million (December 31, 2019 – to buy U.S. $45.2 million),

• to sell U.S. $29.0 million (December 31, 2019 – to sell U.S. $30.5 million), and

• to sell Euro €1.0 million (December 31, 2019 – €1.1 million).

The U.S. dollar contracts expire between October 2020 and June 2022, with an average U.S./Canadian dollar rate of 1.3548.

The Euro contracts expire between October 2020 and September 2021, with an average Euro/Canadian dollar rate of 1.5568.

Wajax has entered into total return swap contracts to hedge the exposure to share price market risk on a class of MTIP rights that are cash-settled. All total return swap contracts are recorded in the unaudited condensed consolidated interim financial statements at fair value. As at September 30, 2020, Wajax had the following total return swap contracts outstanding:

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

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

Contractual Obligations

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

Off Balance Sheet Financing

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

The Corporation had $73.3 million (December 31, 2019 – $128.0 million) of consigned inventory on hand from a major manufacturer at September 30, 2020, net of deposits of $44.2 million (December 31, 2019 – $33.1 million). In the normal course of business, Wajax receives inventory on consignment from this manufacturer which is generally sold or rented to customers or purchased by Wajax. Under the terms of the consignment program, Wajax is required to make periodic deposits to the manufacturer on the consigned inventory that is rented to Wajax customers or on-hand for greater than nine months. This consigned inventory is not included in Wajax's inventory as the manufacturer retains title to the goods. In the event the inventory consignment program was terminated, Wajax would utilize interest free financing, if any, made available by the manufacturer and/or utilize capacity under its credit facility to finance the purchase of inventory.

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

Liquidity and Capital Resources

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

Bank and Non-bank Credit Facilities and Debentures

At September 30, 2020, Wajax had borrowed $200.1 million and issued $6.4 million of letters of credit for a total utilization of $206.6 million of its $400.0 million bank credit facility. Borrowing capacity under the bank credit facility is dependent on the level of inventories on-hand and outstanding trade accounts receivables. At September 30, 2020, borrowing capacity under the bank credit facility was equal to $388.3 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 September 30, 2020. In particular, the Corporation is restricted from declaring dividends in the event the Corporation's senior secured leverage ratio, as defined in the bank credit facility agreement, exceeds 4.0 times. At September 30, 2020, the Corporation's senior secured leverage ratio was 2.05 times.

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

In addition, Wajax had $57.0 million of senior unsecured debentures outstanding at September 30, 2020, bearing interest at a rate of 6.00% per annum, payable semi-annually and maturing on January 15, 2025 (the "Debentures"). The Debentures will not be redeemable before January 15, 2023 (the "First Call Date"), except upon the occurrence of a change of control of the Corporation in accordance with the terms of the indenture governing the Debentures (the "Indenture"). On and after the First Call Date and prior to January 15, 2024, the Debentures will be redeemable in whole or in part from time to time at the Corporation's option at a redemption price equal to 103.0% of the principal amount of the Debentures redeemed plus accrued and unpaid interest, if any, up to but excluding the date set for redemption. On and after January 15, 2024 and prior to the maturity date, the Debentures will be redeemable, in whole or in part, from time to time at the Corporation's option at par plus accrued and unpaid interest, if any, up to but excluding the date set for redemption. The Corporation shall provide not more than 60 nor less than 30 days' prior notice of redemption of the Debentures.

The Corporation will have the option to satisfy its obligation to repay the principal amount of the Debentures due at redemption or maturity by issuing and delivering that number of freely tradeable common shares determined in accordance with the terms of the Indenture. The Debentures will not be convertible into common shares at the option of the holders at any time.

Under the terms of the bank credit facility, Wajax is permitted to have additional interest bearing debt of $25.0 million. As such, Wajax has up to $25.0 million of demand inventory equipment financing capacity with two non-bank lenders. At September 30, 2020, Wajax had no utilization of the interest bearing equipment financing facilities.

In addition, the Corporation has an agreement with a financial institution to sell 100% of selected accounts receivable on a recurring, non-recourse basis. Under this facility, up to $20.0 million of accounts receivable is permitted to be sold to the financial institution and can remain outstanding at any point in time. After the sale, Wajax does not retain any interests in the accounts receivable, but continues to service and collect the outstanding accounts receivable on behalf of the financial institution. At September 30, 2020, the Corporation continues to service and collect $10.3 million in accounts receivable on behalf of the financial institution.

As at September 30, 2020, $193.4 million was unutilized under the bank facility and $25.0 million was unutilized under the non-bank facilities. As of November 2, 2020, Wajax continues to maintain its $400.0 million bank credit facility and an additional $25.0 million in credit facilities with non-bank lenders. Wajax maintains sufficient liquidity to meet short-term normal course working capital and maintenance capital requirements and certain strategic investments. However, Wajax may be required to access the equity or debt capital markets to fund significant acquisitions.

The Corporation's tolerance to interest rate risk decreases/increases as the Corporation's leverage ratio increases/decreases. At September 30, 2020, $204.5 million of the Corporation's funded net debt, or 80.3%, 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:

Operating Activities
Cash flows generated from operating activities amounted to $34.8 million in the third quarter of 2020, compared to cash used in operating activities of $9.3 million in the same quarter of the previous year. The increase in cash generated of $44.1 million was mainly attributable to an increase in cash generated from changes in non-cash operating working capital of $39.8 million, a decrease in income taxes paid of $5.3 million and a decrease in rental equipment additions of $4.2 million. The increase in cash generated from changes in non-cash operating working capital of $39.8 million was driven primarily by an increase in cash generated from changes in inventory of $47.6 million, offset partially by a decrease in cash generated from changes in trade and other receivables of $12.4 million.

Rental equipment additions in the third quarter of 2020 of $3.6 million (2019 – $7.8 million) related primarily to material handling lift trucks.

For the nine months ended September 30, 2020, cash flows generated from operating activities amounted to $70.7 million, compared to cash used in operating activities of $26.0 million for the same period in the previous year. The increase in cash generated of $96.8 million was mainly attributable to an increase in cash generated from changes in non-cash operating working capital of $75.0 million, lower income taxes paid of $23.0 million, and a decrease in rental equipment additions of $8.5 million, partially offset by lower net earnings of $6.4 million. The increase in cash generated from changes in non-cash operating working capital of $75.0 million was driven primarily by an increase in cash generated from changes in inventory of $102.6 million and an increase in cash generated from changes in trade and other receivables of $27.9 million, offset partially by an increase in cash used from changes in accounts payable and accrued liabilities of $52.8 million.

For the nine months ended September 30, 2020, rental equipment additions of $14.8 million (2019 – $23.3 million) related primarily to material handling lift trucks.

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

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

• Inventory decreased $32.4 million in the third quarter of 2020 compared to an increase of $15.3 million in the same period of 2019. The decrease in the third quarter of 2020 was due primarily to lower equipment inventory in the construction, power generation and mining categories. The increase in 2019 was due mainly to higher construction and material handling equipment inventory and higher parts inventory.
  
  

• Accounts payable and accrued liabilities decreased $13.6 million in the third quarter of 2020 compared to a decrease of $14.1 million in the same period of 2019. The decrease in the third quarter of 2020 resulted primarily from reduced inventory purchasing activity as the Corporation continues to manage its working capital. The decrease in 2019 resulted from both lower trade payables and lower accrued liabilities.

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

• Trade and other receivables decreased $36.2 million in 2020 compared to a decrease of $8.3 million in 2019. The decrease in 2020 resulted primarily from lower sales activity. The decrease in 2019 resulted primarily from lower trade receivables mainly due to strong collections and the sale of selected trade accounts receivable in the period compared to the same period in 2018.
  
  

• Inventory decreased $41.7 million in 2020 compared to an increase of $61.0 million in 2019. The decrease in 2020 was due mainly to lower equipment and parts inventory as the Corporation continues to manage its inventory levels. The increase in 2019 was due mainly to higher new equipment inventory, parts inventory and work-in-process.
  
  

• Accounts payable and accrued liabilities decreased $53.8 million in 2020 compared to a decrease of $1.0 million in 2019. The decrease in 2020 resulted primarily from reduced inventory purchasing activity.

Investing Activities
During the third quarter of 2020, Wajax invested $1.6 million in property, plant and equipment additions, compared to $1.8 million in the third quarter of 2019. Proceeds on disposal of property, plant and equipment amounted to $6.3 million during the third quarter of 2020, primarily from the sale and leaseback of a property, compared to nil in the third quarter of 2019.

For the nine months ended September 30, 2020, Wajax invested $4.1 million in property, plant and equipment additions, compared to $5.1 million in the same period of 2019. Proceeds on disposal of property, plant and equipment amounted to $6.7 million for the nine months ended September 30, 2020, compared to $0.5 million in the same period of 2019. Intangible assets additions of $1.6 million (2019 – $3.1 million) for the nine months ended September 30, 2020 resulted primarily from software additions relating to the Corporation's new ERP system; implementation of the new ERP system, previously planned for the second quarter of 2020, remains deferred until 2021. For the nine months ended September 30, 2020, Wajax invested $17.9 million (2019 - nil) on the acquisition of NorthPoint, net of cash acquired of $1.4 million.

Financing Activities
The Corporation used $29.7 million of cash in financing activities in the third quarter of 2020 compared to cash generated from financing activities of $7.0 million in the same quarter of 2019. Financing activities in the quarter included a net bank credit facility repayment of $18.6 million (2019 – net borrowing of $17.0 million), dividends paid to shareholders of $5.0 million (2019 – $5.0 million) and payment of lease liabilities of $6.1 million (2019 – $4.9 million).

For the nine months ended September 30, 2020, the Corporation used $59.4 million of cash in financing activities compared to cash generated from financing activities of $37.2 million in the same period of 2019. Financing activities for the nine months ended September 30, 2020 included a net bank credit facility repayment of $27.2 million (2019 – net borrowing of $69.0 million), payment of lease liabilities of $16.7 million (2019 – $16.3 million) and dividends paid to shareholders of $15.0 million (2019 – $15.0 million).

Dividends

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

On November 2, 2020, the Corporation declared a dividend of $0.25 per share for the fourth quarter of 2020 payable on January 5, 2021 to shareholders of record on December 15, 2020.

Critical Accounting Estimates

The preparation of the unaudited condensed consolidated interim financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are those that require management to make assumptions about matters that are highly uncertain at the time the estimate or assumption is made. Critical accounting estimates are also those that could potentially have a material impact on the Corporation's financial results were a different estimate or assumption used.

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

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

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

Allowance for credit losses
The Corporation is exposed to credit risk with respect to its trade and other receivables. However, this is partially mitigated by the Corporation's diversified customer base of over 32,000 customers, with no one customer accounting for more than 10% of the Corporation's annual consolidated sales, which covers many business sectors across Canada. In addition, the Corporation's customer base spans large public companies, small independent contractors, original equipment manufacturers and various levels of government. The Corporation follows a program of credit evaluations of customers and limits the amount of credit extended when deemed necessary. The Corporation maintains an allowance for possible credit losses, and any such losses to date have been within management's expectations. The allowance for credit losses is determined by estimating the lifetime expected credit losses, taking into account the Corporation's past experience of collecting payments as well as observable changes in and forecasts of future economic conditions that correlate with default on receivables. At the point when the Corporation is satisfied that no recovery of the amount owing is possible, the amount is considered not recoverable and the financial asset is written off. The $3.5 million allowance for credit losses at September 30, 2020 increased $1.1 million from $2.4 million at December 31, 2019. As economic conditions change, there is risk that the Corporation could experience a greater number of defaults compared to prior periods which would result in an increased charge to earnings.

Inventory obsolescence
The value of the Corporation's new and used equipment and high value parts are evaluated by management throughout the year, on a unit-by-unit basis. When required, provisions are recorded to ensure that the book value of equipment and parts are valued at the lower of cost or estimated net realizable value. The Corporation performs an aging analysis to identify slow moving or obsolete lower value parts inventory and estimates appropriate obsolescence provisions related thereto. The Corporation takes advantage of supplier programs that allow for the return of eligible parts for credit within specified time periods. The inventory obsolescence impact on earnings for the three months ended September 30, 2020 was a charge of $1.1 million (2019 – charge of $1.1 million) and for the nine months ended September 30, 2020 was a charge of $5.4 million (2019 - charge of $3.3 million). As economic conditions change, there is risk that the Corporation could have an increase in inventory obsolescence compared to prior periods which would result in an increased charge to earnings.

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

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

The Corporation performs an annual impairment test of its goodwill and intangible assets unless there is an early indication that the assets may be impaired in which case the impairment tests would occur earlier. There was no early indication of impairment for the quarter ended September 30, 2020.

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

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

Changes in Accounting Policies

No new standards have been adopted in the current period.

Accounting standards and amendments issued but not yet adopted

• Amendments to IAS 1, Presentation of Financial Statements (effective January 1, 2023) clarify the classification of liabilities as current or non-current. For the purposes of non-current classification, the amendments remove the requirement for a right to defer settlement of a liability for at least twelve months to be unconditional. Instead, such a right must have substance and exist at the end of the reporting period in order to qualify for non-current classification. Management is currently assessing the impact of adopting these amendments on its financial statements.

• Amendments to IFRS 9, Financial Instruments and IFRS 7, Financial Instruments: Disclosures (effective January 1, 2021) are the IASB's response to the ongoing reform of inter-bank offered rates and other interest rate benchmarks. The amendments are the Phase 2 amendments and complement those issued in 2019 as part of Phase 1 amendments. A company will not have to derecognize the carrying amount of financial instruments for changes required by the reform, but will instead update the effective interest rate to reflect the change to the alternative benchmark rate. In addition, a company will not have to discontinue its hedge accounting solely because it makes changes required by the reform, if the hedge meets other hedge accounting criteria. And finally, some additional disclosure may be necessary relating to any new risks arising from the reform. Management is currently assessing the impact of adopting these amendments on its financial statements.

Risk Management and Uncertainties

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

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

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

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

Disclosure Controls and Procedures and Internal Control over Financial Reporting

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

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

As at September 30, 2020, Wajax's management, under the supervision of its CEO and CFO, had designed ICFR to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. In completing the design, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its 2013 version of Internal Control – Integrated Framework. With regard to general controls over information technology, management also used the set of practices of Control Objectives for Information and related Technology created by the IT Governance Institute. The Corporation has excluded from its evaluation the ICFR of NorthPoint, which was acquired effective January 13, 2020, as discussed in Note 3 of the unaudited condensed consolidated interim financial statements and accompanying notes for the period ended September 30, 2020. The total revenue subject to NorthPoint's ICFR represented 2.7% of the Corporation's consolidated total revenue for the nine months ended September 30, 2020. The total assets subject to NorthPoint's ICFR represented 2.4% of the Corporation's consolidated total assets as at September 30, 2020.

There was no change in Wajax's ICFR that occurred during the three months ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, Wajax's ICFR.

Non-GAAP and Additional GAAP Measures

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

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: