|
Premium Sponsor:
| ||||||
|
AEDNews - Construction Equipment Industry News Wajax Announces Results, Plans to Convert to a Corporation Wajax Income Fund recently announced fourth quarter 2009 results and its intention to seek unitholder approval to reorganize the Fund into a corporate structure effective Jan. 1, 2011. Fourth Quarter Highlights
Effective Jan. 1, 2010, Tim Zawislak was appointed to the position of senior vice president, Wajax Power Systems. This division has been created to integrate the operations of Waterous and DDACE business units with the objective of becoming a single national provider of power systems. In January 2010, Gord Duncan decided to step down as senior vice president, Industrial Components with a target date of June 30, 2010. Gord has committed to an appropriate transition and his replacement will be appointed prior to his departure.
Looking forward to 2010, we expect overall market demand for our products to improve modestly, weighted more heavily to the second half of the year. We anticipate that the early part of 2010 will continue to be challenging compared to 2009 as revenue in that period benefited from a larger backlog position at the end of 2008. It is expected that activity in the oil sands and the government and utilities sectors will remain strong, with increased activity in mining and metal processing anticipated as demand for commodities continues to grow. While we believe the construction and conventional oil and gas sectors have attractive longer-term growth prospects, in 2010 they are expected to continue to be well off activity levels experienced in the strong markets of 2008." Conversion to a Corporation The Fund announced today that its board of trustees has approved a process for the conversion of the Fund to a corporation by way of plan of arrangement under the Canada Business Corporations Act. Under the plan of arrangement, effective on or about Jan. 1, 2011, unitholders of the Fund will exchange their units for common shares of a new corporation, to be known as Wajax Corporation, on a one-for-one basis and will continue to indirectly own the same pro rata economic interest in Wajax's business. No tax will be payable by the Fund in connection with the conversion and a tax deferred "rollover" for Canadian federal income tax purposes will be available for the exchange of units for common shares of Wajax Corporation. On Oct. 31, 2006, the Minister of Finance announced the federal government's plan to change the tax treatment of specified investment flow-through trusts (the "SIFT Rules"). The SIFT Rules impose a tax at the trust level on distributions of certain income from publicly traded mutual fund trusts, such as the Fund, at rates of tax comparable to the combined federal and provincial corporate tax rate and treat such distributions as dividends to unitholders. Once the Fund becomes subject to the SIFT Rules in 2011, the comparative income tax advantage of the income trust structure over a corporate structure will be eliminated. Commencing in 2011, assuming growth guidelines are not exceeded in the interim, the Fund will no longer be entitled to deduct distributions made to unitholders in calculating its taxable income and, as such, the Fund will be liable to pay income tax on such distributions otherwise made to unitholders at a rate comparable to the combined federal and provincial corporate tax rate. As a result, the SIFT Rules will reduce the amount the Fund has available to distribute to unitholders to the extent of the SIFT tax payable on distributions made to unitholders. Unitholders will be deemed to have received dividends from a taxable Canadian corporation equal to the amount of the distributions. In effect, the Fund will be subject to tax as if it was a corporation, resulting in the loss of the tax and cash yield benefits that underpinned the rationale for adoption of an income trust structure in the first instance. The board of trustees of the Fund assessed the viability of maintaining the Fund's current trust structure in the circumstances that will prevail in 2011 and concluded that the trust structure would cease to be an effective structure for the maximization of unitholder value beginning in 2011 and that Unitholders would benefit from conversion of the Fund to corporate status at that time. The board of trustees of the Fund has concluded that the conversion is in the Fund's and unitholders' best interests. Subsequent to conversion, it is anticipated that Wajax Corporation will declare and pay a high proportion of net earnings in the form of monthly dividends. As the Canadian economy recovers, Wajax anticipates that the Fund's economic prospects will correspondingly improve in 2010. If the anticipated improvement does occur, Wajax's intention is to maintain the Fund's current distribution rate throughout the year. In 2011, anticipated increases in earnings will be utilized to absorb, to the extent possible, the impact of the corporate tax burden with the objective of paying monthly cash dividends following conversion in an amount comparable to monthly cash distributions paid as a trust. The difference between the annual aggregate monthly distributions and the Fund's 2010 taxable income, if any, will be paid as a special distribution at year-end in cash, non-cash or a combination thereof. There can be no assurance that distributions will continue to be paid by the Fund and/or that dividends will be paid by Wajax Corporation following the conversion in any amount or at all. In particular, the board of directors of Wajax Corporation will have the discretion to modify the dividend policy at any time. The ability of Wajax Corporation to pay cash dividends and the actual amount of such dividends will be dependent upon, among other things, the financial performance of Wajax Corporation, fluctuations in working capital, the sustainability of margins, capital expenditures, any contractual restrictions on dividends, including any agreements with lenders to Wajax Corporation, and the satisfaction of solvency tests imposed by the Canada Business Corporations Act for the declaration and payment of dividends. Unitholders of the Fund will be asked to approve the conversion by way of plan of arrangement at the Annual and Special Meeting of the Fund to be held May 7, 2010. The Management Proxy Circular for such meeting, which will provide full details of the proposed conversion, is expected to be mailed to unitholders on or about April 5, 2010 and will be available at www.sedar.com. In addition, the conversion is subject to the approval of the Ontario Superior Court. The Toronto Stock Exchange has conditionally approved the listing of the common shares to be issued by Wajax Corporation in exchange for the units of the Fund under the conversion subject to the satisfaction of the requirements of such exchange, which are expected to be met on the effective date of the conversion or as soon as is reasonably practicable thereafter. 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 110 branches across Canada. Its customer base spans natural resources, construction, transportation, manufacturing, industrial processing and utilities. Management's Disucssion and Analysis- Q4 2009 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, 2009. This MD&A should be read in conjunction with the information contained in the interim Unaudited Consolidated Financial Statements and accompanying notes for the quarter ended December 31, 2009, the annual Audited Consolidated Financial Statements and accompanying notes of the Fund for the year ended December 31, 2009 and the associated MD&A. Information contained in this MD&A is based on information available to management as of February 26, 2010. Unless otherwise indicated, all financial information within this MD&A is in millions of dollars, except per unit data. Additional information, including the Fund's Annual Report and Annual Information Form, are available at www.sedar.com. 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 interim Unaudited 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 interim Unaudited Consolidated Financial Statements and accompanying notes. Disclosure Controls and Procedures and Internal Control over Financial Reporting The Fund has designed disclosure controls and procedures ("DC&P") to provide reasonable assurance that material information relating to the Fund is made known to the Chief Executive Officer and the Chief Financial Officer, particularly during the period in which the interim filings are being prepared. The Fund has designed internal controls over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian Generally Accepted Accounting Principles. The Fund's Kinecor segment has been implementing a new computer system to manage its business. During the quarter the final portion of the business was migrated to the new system, resulting in a material change in ICFR. Wajax Income Fund Overview The 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. See the Conversion to corporate structure section. The Fund's core distribution businesses are engaged in the sale and after-sales parts and service support of mobile equipment, industrial components and power systems, through a network of 110 branches across Canada. The Fund is a multi-line distributor and represents a number of leading worldwide manufacturers across its core businesses. Its customer base is diversified, spanning natural resources, construction, transportation, manufacturing, industrial processing and utilities. The Fund's strategy is to grow earnings in all segments through continuous improvement of operating margins and revenue growth while maintaining the Fund's strong balance sheet. Revenue growth will be achieved through market share gains, new geographic territories and the addition of new complementary product lines either organically or through acquisitions. Revenue Revenue in the fourth quarter of 2009 decreased $66.4 million to $250.9 million, from $317.3 million in 2008. Segment revenue decreased 14 percent in Mobile Equipment, 25 percent in Industrial Components and 29 percent in Power Systems compared to last year. For the twelve months ended Dec. 31, 2009, revenue decreased $240.4 million, or 20 percent, compared to last year. Excluding Peacock, which was acquired Sept. 5, 2008, revenue for the twelve months ended Dec. 31, 2009 decreased $260.5 million, or 22 percent, compared to last year. Gross profit Gross profit in the fourth quarter of 2009 decreased $19.3 million due to the negative impact of lower revenue and gross profit margins compared to last year. The gross profit margin percentage for the quarter decreased to 22.5 percent in 2009 from 24.0 percent in 2008 due to lower margins on parts and cost overruns on generator set sales in Waterous compared to last year. For the twelve months ended Dec. 31, 2009, gross profit decreased $51.3 million compared to last year. The gross profit margin percentage increased to 24.0 percent in 2009 from 23.5 percent in 2008. Selling and administrative expenses Selling and administrative expenses decreased $7.0 million in the quarter compared to last year. Lower personnel costs and other sales related expense reductions were partially offset by a decline in expense recoveries and $0.9 million of severance costs. Selling and administrative expenses as a percentage of revenue increased to 19.1 percent in 2009 from 17.3 percent in 2008. For the twelve months ended Dec. 31, 2009, selling and administrative expenses decreased $5.6 million compared to last year. This was primarily due to reduced personnel and other sales related expenses, offset by Peacock selling and administrative expenses of $8.3 million, a decline in expense recoveries and a $3.0 million increase in severance costs compared to last year. In 2008, selling and administrative expenses only included Peacock expenses for the period since its acquisition in September 2008. Selling and administrative expenses as a percentage of revenue increased to 20.2 percent in 2009 from 16.7 percent in 2008. Interest expense Quarterly interest expense of $1.0 million decreased $0.4 million compared to last year due to lower funded debt net of cash ("funded net debt") outstanding in 2009 and lower interest rates compared to last year. For the twelve months ended Dec. 31, 2009, interest expense decreased $0.2 million compared to 2008. The positive impact of lower interest rates was mostly offset by the impact of higher funded net debt outstanding in 2009 compared to last year. Income tax expense The effective income tax rate of negative 5.2 percent for the quarter decreased from 2.7 percent the previous year due mainly to a recovery of current income taxes resulting from a tax loss in the Fund's subsidiary Wajax Limited. For the twelve months ended Dec. 31, 2009, the effective income tax rate of negative 6.2 percent decreased from 2.3 percent the previous year due primarily to a recovery of current income taxes resulting from a tax loss in the Fund's subsidiary Wajax Limited. The Fund's effective income tax rate was lower than the Fund's statutory income tax rate of 30.7 percent as the majority of the Fund's income is not currently 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 if its equity capital grows beyond certain dollar limits measured by reference to the Fund's market capitalization on Oct. 31, 2006. The Fund has not exceeded its growth limits at Dec.31, 2009. On March 12, 2009 legislation was enacted to permit income funds to "convert" into public corporations without triggering adverse tax consequences to the income fund and its unitholders. See the Conversion to corporate structure section. Net earnings Quarterly net earnings of $8.3 million, or $0.50 per unit, decreased $11.1 million from $19.4 million, or $1.17 per unit, in 2008. The negative impact of lower volumes and margins outweighed the positive impact of lower selling and administrative expenses, income tax recoveries and reduced interest expense compared to last year. For the twelve months ended Dec. 31, 2009, net earnings decreased $41.6 million to $34.2 million, or $2.06 per unit, from $75.8 million, or $4.57 per unit, in 2008. The negative impact of lower volumes and margins more than offset the positive impact of lower selling and administrative expenses, income tax recoveries and reduced interest expense compared to last year. Comprehensive income Comprehensive income for the quarter of $8.6 million decreased $9.1 million from $17.7 million the previous year due to the $11.1 million decrease in net earnings, partially offset by a $1.9 million decrease in other comprehensive loss compared to last year. The decrease in other comprehensive loss resulted from a decrease in losses on derivative contracts designated as cash flow hedges outstanding at the end of the quarter and losses on derivative contracts designated as cash flow hedges in prior periods transferred to cost of inventory. For the twelve months ended Dec. 31, 2009, comprehensive income of $34.2 million decreased $39.5 million from $73.7 million the previous year due to the $41.6 million decrease in net earnings, offset in part by a $2.1 million decrease in other comprehensive loss compared to last year. The decrease in other comprehensive loss resulted from gains on derivative contracts designated as cash flow hedges outstanding at the end of the year, partially offset by an increase in gains on derivative contracts designated as cash flow hedges in prior periods transferred to cost of inventory. Funded net debt Funded net debt of $70.3 million decreased $30.5 million compared to Sept. 30, 2009. Fourth quarter cash flows from operating activities before changes in non-cash working capital of $11.2 million and a decrease in non-cash working capital of $29.9 million exceeded cash distributions of $7.5 million and capital spending of $3.0 million. Compared to Dec. 31, 2008, funded net debt decreased $50.2 million. The Fund's quarter-end debt-to-equity ratio of 0.35:1 at Dec. 31, 2009 ,decreased from last quarter's ratio of 0.51:1 and decreased from last year's ratio of 0.59:1. Distributable cash (see Non-GAAP Measures section) and distributions For the quarter ended Dec. 31, 2009, distributable cash was $10.0 million, or $0.60 per unit, compared to $20.4 million, or $1.23 per unit, the previous year. The decrease was due to lower cash flows from operations before changes in non-cash working capital, offset partially by lower maintenance capital expenditures compared to last year. For the quarter ended Dec. 31, 2009, monthly cash distributions declared were $0.45 per unit (2008 - $1.08 per unit). For the twelve months ended Dec. 31, 2009, distributable cash was $42.3 million, or $2.55 per unit, compared to $77.0 million, or $4.64 per unit, the previous year. The decrease was essentially attributable to lower cash flows from operations before changes in non-cash working capital, offset by lower maintenance capital expenditures compared to last year. For the twelve months ended December 31, 2009 monthly cash distributions declared were $2.47 per unit (2008 - $4.13 per unit). For 2009, $2.16 per unit (2008 - $4.13 per unit) of distributions will be treated as other income and $0.31 per unit (2008 - $nil) of distributions will be treated as a return of capital for Canadian income tax purposes. In 2008, a $0.47 per unit special non-cash distribution was paid to ensure the Fund's total distributions for the year equaled its taxable income. Distributable cash in excess of cash distributions declared for the twelve months ended Dec. 31, 2009 of $1.3 million, or $0.08 per unit, provides the Fund an amount for future capital requirements or distributions. On February 26, 2010, the Fund announced monthly cash distributions of $0.15 per unit ($1.80 annualized) for the months of March and April payable on April 20, 2010 and May 20, 2010 to unitholders of record on March 31, 2010 and April 30, 2010 respectively. Unitholder tax information relating to 2009 and 2008 distributions is available on the Fund's Web site at www.wajax.com. Conversion to corporate structure On Feb. 26, 2010 the Fund announced that at the Fund's Annual and Special Unitholders' Meeting to be held on May 7, 2010, unitholders will be asked to approve the conversion of the Fund to a corporation pursuant to a plan of arrangement under the Canada Business Corporations Act (the "CBCA") effective on or about January 1, 2011. If approved, the arrangement will result in the reorganization of the Fund into a corporate structure and Unitholders will receive one common share of a new corporation to be called Wajax Corporation for each Unit of the Fund held. Wajax Corporation will continue to be managed by the existing management team. Subsequent to conversion, it is anticipated that Wajax Corporation will declare and pay a high proportion of net earnings in the form of monthly dividends. As the Canadian economy recovers, we anticipate that the Fund's economic prospects will correspondingly improve in 2010. If the anticipated improvement does occur, our intention is to maintain the Fund's current distribution rate throughout the year. In 2011, anticipated increases in earnings will be utilized to absorb, to the extent possible, the impact of the corporate tax burden with the objective of paying monthly cash dividends following conversion in an amount comparable to monthly cash distributions paid as a trust. The difference between the annual aggregate monthly distributions and our 2010 taxable income, if any, will be paid as a special distribution at year-end in cash, non-cash or a combination thereof. There can be no assurance, however, that such dividends will be paid in such amounts or at all. The board of directors of Wajax Corporation will have the discretion to modify the dividend policy at any time. The ability of Wajax Corporation to pay cash dividends and the actual amount of such dividends will be dependent upon, among other things, the financial performance of Wajax Corporation, fluctuations in working capital, the sustainability of margins, capital expenditures, any contractual restrictions on dividends, including any agreements with lenders to Wajax Corporation, and the satisfaction of solvency tests imposed by the CBCA for the declaration and payment of dividends. See the Risk and Uncertainties section. Additional information, including the Fund's Annual Report and Annual Information Form, may be found on SEDAR at www.sedar.com. Article Date: 03-08-2010 Source: Wajax Income Fund Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved. | ||||||
AEDNews is the weekly electronic newsletter published by Associated Equipment Distributors, providing the construction equipment distribution industry with timely news and information related to the equipment business.