Dexterra Group Inc. — Interim / Quarterly Report 2021

Nov 9, 2021

Management’s Discussion and Analysis Three and nine months ended September 30, 2021 and 2020

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The following Management’s Discussion and Analysis (“MD&A”) prepared as at November 9, 2021 for Dexterra Group Inc. (“Dexterra Group” or the “Corporation”), provides information concerning Dexterra Group’s financial condition and results of operations. This MD&A is based on unaudited condensed consolidated interim financial statements (“Financial Statements”) for the three and nine months ended September 30, 2021 (“Q3 2021”) and September 30, 2020 (“Q3 2020”) respectively. Readers should also refer to Dexterra Group's most recent audited consolidated financial statements and MD&A for the years ended December 31, 2020 and 2019 and Annual Information Form (“AIF”) available on SEDAR at sedar.com and Dexterra Group’s website at dexterra.com. Some of the information contained in this MD&A contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Information” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those indicated or underlying forward-looking information as a result of various factors including those described elsewhere in this MD&A and AIF.

The accompanying Q3 2021 Financial Statements of Dexterra Group as at and for the three and nine months ended September 30, 2021 and September 30, 2020 are the responsibility of Dexterra Group’s management and have been prepared in accordance with International Financial Reporting Standards (“IFRS” or “GAAP”) and all amounts presented are in thousands of Canadian dollars unless otherwise indicated.

Financial Summary

Three months ended September 30,	Nine months ended September 30,
(000's except per share amounts) 2021 2020	2021 2020(6)
Total Revenue $ 202,760 $ 176,918 EBITDA(1)(2)(5) $ 22,372 $ 33,444 Adjusted EBITDA excluding CEWS(1) $ 22,372 $ 17,551 Adjusted EBITDA excluding CEWS as a % of revenue 11% 10% Net earnings(3)(6) $ 7,764 $ 16,061 Earnings per share Basic & Diluted(4) $ 0.12 $ 0.25 Total assets $ 540,477 $ 547,257 Total loans and borrowings $ 79,635 $ 108,499 Net capital proceeds (spending) $ (902) $ (194)	$ 531,792 $ 313,397 $ 62,701 $ 58,477 $ 53,601 $ 24,870 10% 8% $ 20,451 $ 64,452 $ 0.31 $ 1.37 $ 540,477 $ 547,257 $ 79,635 $ 108,499 $ (4,896) $ 1,307

(1) Please refer to “Non-GAAP measures” for the definition of EBITDA and Adjusted EBITDA excluding CEWS.

(2) Includes nil and $9.1 million of pre-tax Canada Emergency Wage Subsidy for the three and nine months ended September 30, 2021, respectively (2020 - $9.5 million and $28.7 million for the three and nine months ended September 30, 2020 results, respectively).

(3) Includes the recognition for the nine months ended September 30, 2021 of a tax benefit of $1.1 million related to non-capital loss carryforwards based on the implementation of a new tax plan and the profitability of the related businesses.

(4) All 2020 share and per share data presented has been retroactively adjusted to reflect the five-for-one share consolidation completed on July 16, 2020.

(5) The Q3 2020 and YTD EBITDA comparatives include amounts awarded from legal proceedings in the amount of $6.6 million. Acquisition costs of $0.2 million and $1.7 million for the three and nine months ended September 30, 2020, respectively were also included in EBITDA. These items are not expected to be recurring and have been excluded from Adjusted EBITDA excluding CEWS.

(6) 2020 YTD comparative includes a Bargain purchase gain in the amount of $34.1 million from the acquisition of Horizon North Logistics Inc. 2020 comparative information includes the results of Horizon North Logistics Inc. from May 29, 2020 onwards which was the effective date of the Acquisition (as defined below under the heading “Core Business”).

Non-GAAP measures

Certain measures in this MD&A do not have any standardized meaning as prescribed by GAAP and, therefore, are considered non-GAAP measures. Non-GAAP measures include “EBITDA”, calculated as earnings before interest, taxes, depreciation, amortization, depreciation from equity investments, share based compensation, bargain purchase gain (reduction), and gain/ loss on disposal of property, plant and equipment. “Adjusted EBITDA excluding CEWS as a percentage of revenue”, calculated as EBITDA before acquisition costs and non-recurring items (“Adjusted EBITDA”) and excluding Canada Emergency Wage Subsidy (“CEWS”) (“Adjusted EBITDA excluding CEWS”) divided by revenue, and “Free Cash Flow”, calculated as net cash flows from (used in) operating activities, less sustaining capital expenditures, payments for lease liabilities and finance costs, to provide investors with supplemental measures of Dexterra Group's operating performance and thus highlight trends in its core businesses that may not otherwise be apparent when relying solely on GAAP financial measures. Dexterra Group also believes that securities analysts, investors and other interested parties frequently use non-GAAP measures in the evaluation of issuers. Dexterra Group’s management also uses non-GAAP measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets, and to determine components of management compensation.

These measures are regularly reviewed by the Chief Operating Decision Makers and provide investors with an alternative method for assessing the Corporation’s operating results in a manner that is focused on the performance of the Corporation’s ongoing operations and to provide a more consistent basis for comparison between periods. These measures should not be construed as alternatives to net earnings and total comprehensive income determined in accordance with GAAP as indicators of the Corporation’s performance. The method of calculating these measures may differ from other entities and accordingly, may not be comparable to measures used by other entities. For a reconciliation of these non-GAAP measures to their nearest measure under GAAP please refer to “Reconciliation of non-GAAP measures”.

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Management’s Discussion and Analysis Three and nine months ended September 30, 2021 and 2020

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Management's Discussion and Analysis

Core Business

Dexterra Group is a publicly listed corporation (TSX: DXT.TO) delivering quality solutions to create, manage and operate infrastructure, offering both experience and regional expertise across Canada under its three operating business units: Integrated Facilities Management, Workforce Accommodations, Forestry and Energy Services (“WAFES”), and Modular Solutions.

Our Integrated Facilities Management business delivers operations and maintenance solutions for built assets and infrastructure in the public and private sectors, including aviation, defence, retail, healthcare, education and government. Our WAFES business provides a full range of workforce accommodations solutions, forestry services and access solutions to clients in the mining, forestry, construction and other natural resource sectors. Our Modular Solutions business integrates modern design concepts with off-site manufacturing processes to produce high-quality building solutions for rapid affordable housing, specialty kiosks, commercial, residential and industrial clients. As a result of our diverse product and service offerings, Dexterra Group is uniquely positioned to meet the needs of our customers in numerous sectors across Canada.

On May 29, 2020, Dexterra Group (previously Horizon North Logistics Inc.) completed a transaction (the “Acquisition”) with 10647802 Canada Limited, operating as Dexterra Integrated Facilities Management (“Dexterra”), a subsidiary of Fairfax Financial Holdings Limited (“Fairfax Financial”). Pursuant to the Acquisition, the Corporation acquired all of the outstanding common shares of Dexterra and in exchange issued 31,785,993 common shares of Dexterra Group to Dexterra’s sole shareholder, 9477179 Canada Inc., a wholly-owned subsidiary of Fairfax Financial. Accordingly, Fairfax Financial indirectly owns a 49% interest in the combined Corporation, while existing shareholders of the Corporation maintained a 51% interest. Prior to the Acquisition, Fairfax Financial had no ownership interest in Dexterra Group. For accounting purposes, the Acquisition constituted a reverse acquisition that involved a change of control of Dexterra Group and a business combination of Horizon North Logistics Inc. and Dexterra. The Corporation also changed its name in 2020 to Dexterra Group Inc. As a result, 2020 comparative information included herein is solely Dexterra up until the Acquisition closing date of May 29, 2020. Horizon North financial results are included subsequent to the Acquisition closing date and a bargain purchase gain of $34.1 million was recorded at the time of the Acquisition. Refer to the audited Consolidated Financial Statements for the years ended December 31, 2020 and 2019 for further information.

On July 16, 2020, the Corporation completed a five-for-one share consolidation of all of its issued and outstanding common shares. All share and per share data presented, including share options outstanding, has been retroactively adjusted to reflect the share consolidation, unless otherwise noted.

Third Quarter Results and Overview

Highlights

• The Corporation generated consolidated revenue of $202.8 million for Q3 2021 which increased $29.1 million or 17% as compared to Q2 2021, and $25.8 million, or 15%, as compared with Q3 2020. The increase in revenue from Q2 2021 is mainly attributed to growth in the WAFES business segment due to improved market conditions as COVID restrictions relaxed, new business obtained and the seasonal nature of the Forestry business;

• The Corporation’s EBITDA for Q3 2021 was $22.4 million. After deducting the wage subsidies included in Q2 2021 of $4.1 million, EBITDA was 22% higher when compared to Q2 2021;

• The Corporation reported consolidated net earnings of $7.8 million for Q3 2021 compared to consolidated net earnings of $8.2 million in Q2 2021, a decrease of $0.4 million, or 5%. Excluding the wage subsidies recorded in Q2 2021, net earnings increased by $3.7 million in Q3 2021;

• Dexterra Group generated net cash flows of $1.8 million from operating activities in Q3 2021, primarily reflecting additional working capital investments in Q3 2021 related to higher revenue in the quarter including the modular education and forestry sectors;

• The Integrated Facilities Management business had Q3 2021 revenue of $39.1 million, which is up 1% from Q2 2021 and 9% from Q3 2020. Adjusted EBITDA excluding CEWS for Q3 2021 was $3.1 million, an increase of $1.0 million as compared to Q3 2020 and generally consistent with Q2 2021. The increase was mainly due to a reduction of certain COVID-19 health measures and new business. The Q3 2021 Adjusted EBITDA excluding CEWS as a percentage of revenue is consistent with Q2 2021 at 8%;

• The WAFES business had Q3 2021 revenue of $118.7 million, which is an increase of $31.1 million and $15.5 million when compared to Q2 2021 and Q3 2020, respectively. The increase in Q3 2021 compared to Q2 2021 is due to several factors, including the BC Coastal pipeline operations being included for a full quarter in Q3 2021, seasonal forestry activities, new contracts won and improved utilization of assets as COVID-19 restrictions were eased. Adjusted EBITDA excluding CEWS for the same period was $20.9 million, an increase of $6.1 million and $3.3 million from Q2 2021 and Q3 2020, respectively.

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Management’s Discussion and Analysis Three and nine months ended September 30, 2021 and 2020

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The 2020 comparative numbers for revenue and EBITDA also included the one-time gain from legal proceedings of $6.6 million;

• The Modular Solutions business had Q3 2021 revenue of $45.1 million and EBITDA of $2.8 million, a decrease of $3.2 million and $1.9 million, respectively, when compared to Q2 2021. The decrease is primarily due to customer delays in the rapid affordable housing projects which negatively impacts the optimization of plant capacity and the resolution of a historical contract dispute. The decrease in revenue does not represent lost revenue. Revenue from these delayed projects is expected to be recorded in Q4 2021 and early 2022;

• Modular Solutions Backlog1 for rapid affordable housing was $92.6 million at September 30, 2021. This excludes $34.8 million of contracts being finalized with existing customers, the recurring modular business for education and specialty commercial structures of approximately $40.0 million per annum and the backlog for Industrial and U.S. manufacturing supply projects of $25.3 million won in Q3 2021;

• Debt was $79.6 million at September 30, 2021, down from $85.4 million at December 31, 2020. Debt increased $7.7 million during Q3 2021 due to the aforementioned working capital investments for revenue growth and seasonal volumes in the education and forestry sectors. The Corporation extended its credit facility effective on September 7, 2021 for a three-year term. The amendment increases the available limit from $175 million to $200 million plus an uncommitted accordion of $125 million. The Corporation has significant unused credit facilities to execute on its growth strategy;

• Dexterra Group was selected as the winner of the Avetta Award for Canada’s Safest Employer in the Services Sector presented by Canadian Occupational Safety Magazine and Key Media; and

• Dexterra Group declared a dividend for the fourth quarter of 2021 of $0.0875 per share for shareholders of record at December 30, 2021 to be paid January 17, 2022.

Operational Analysis

Operational Analysis
		Three months ended September 30,				Nine months ended September 30,
(000's)		2021		2020(3)		2021		2020(3)
Revenue:
Integrated Facilities Management	$	39,073	$	35,696	$	115,880	$	108,706
WAFES		118,680		103,160		281,874		156,456
Modular Solutions		45,055		39,511		135,228		50,555
Inter-segment eliminations		(48)		(1,449)		(1,190)		(2,320)
Total Revenue	$	202,760	$	176,918	$	531,792	$	313,397
EBITDA:
Integrated Facilities Management	$	3,133	$	5,598	$	10,774	$	18,737
WAFES		20,915		28,532		53,847		42,855
Modular Solutions		2,782		3,935		10,400		6,260
Corporate costs and Inter-segment eliminations		(4,458)		(4,621)		(12,320)		(9,375)
Total EBITDA(1)	$	22,372	$	33,444	$	62,701	$	58,477
Other revenue(2)		—		(6,569)		—		(6,569)
Acquisition costs		—		210		—		1,701
CEWS		—		(9,534)		(9,100)		(28,739)
Adjusted EBITDA excluding CEWS	$	22,372	$	17,551	$	53,601	$	24,870

(1) Includes CEWS of nil and $9.1 million for the three and nine months ended Q3 2021: Integrated Facilities Management - $1.7 million, WAFES -$6.6 million, Modular Solutions -$0.6 million, Corporate - $0.2 million and CEWS of $9.5 million and $28.7 million for the three and nine months ended September 30, 2020: Integrated Facilities Management - $12.7 million, WAFES - $11.9 million, Modular Solutions -$2.9 million, Corporate - $1.2 million.

(2) Other revenue includes amounts awarded to the Corporation from legal proceedings with two former customers in the amount of $6.6 million. These items are expected to be nonrecurring.

(3) 2020 YTD comparative information includes the results of Horizon North Logistics Inc. from May 29, 2020 onwards which was the effective date of the Acquisition.

1 Backlog is the total value of work that has not yet been completed that: (a) has a high certainty of being performed based on the existence of an executed contract or work order specifying job scope, value and timing; or (b) has been awarded to Dexterra Group, as evidenced by an executed letter of award or agreement, describing the general job scope, value and timing of such work, and where the finalization of a formal contract in respect of such work is reasonably assured and expects to be recognized in the next 12 months.

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Management’s Discussion and Analysis Three and nine months ended September 30, 2021 and 2020

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Integrated Facilities Management

For Q3 2021, Integrated Facilities Management revenues were $39.1 million and increased by $3.4 million, or 9%, from the $35.7 million in Q3 2020. The increase is mainly attributable to the reduction of certain COVID-19 health measures and new business. Management expects this upward trend to continue as government COVID-19 restrictions are lifted, especially in the aviation and retail sectors, which continue to face challenges. Aviation volumes were approximately 50% of pre-COVID-19 levels in Q3 2021.

Adjusted EBITDA excluding CEWS as a percentage of revenue is 8.0% for Q3 2021, which is slightly below 8.6% in Q2 2021, and an improvement from 6.0% recorded in Q3 2020. The increased margin from Q3 2020 is due to management’s focus on margin improvements and better resource utilization compared to 2020 costs of operating in a more restrictive COVID-19 environment.

Year to date, Integrated Facilities Management revenues were $115.9 million and increased by $7.2 million or 7% from the $108.7 million in 2020. The growth in the segment is mainly attributable to the reduction of certain COVID-19 health measures and new contracts. Certain key industry sectors continue to have reduced volumes such as aviation and retail. Management expects the growth rate to improve as pandemic restrictions are lifted in Q4 2021. Management also expects increased bidding activity in the future periods as customers finalize their post-COVID plans.

Year-to-date Adjusted EBITDA excluding CEWS as a percentage of revenue for this segment is 8% which is consistent with Q2 2021 and improved from 6% in the same period in 2020.

Direct Costs

Direct costs are comprised of labour, materials, supplies and transportation, which vary directly with revenues, and a relatively fixed component that includes rent and utilities. Direct Costs for Q3 2021 were $34.7 million compared to $29.0 million in Q3 2020, an increase of $5.7 million, or 20%, due to the impact of CEWS in 2020 and costs associated with increased activity in the segment.

For the nine months ended September 30, 2021, direct costs were $100.5 million, compared to $86.9 million in 2020. This increase of $13.6 million is primarily due to the $11.0 million of additional CEWS received in 2020 when compared to 2021. The remaining increase was consistent with the factors driving the increase in 2021 volume.

WAFES

WAFES is comprised of two revenue streams: Workforce accommodations (“WA”) & Forestry and Energy Services. A significant portion of our WAFES business is support services which are not capital intensive and aligns closely with our integrated facilities management business. The remainder relates to owned services.

For Q3 2021, 48% of WAFES revenue relates to support services and is growing as we focus on building this revenue base.

Support services includes assisting clients with food and facilities services on-site at their remote locations. These services are “capital light” with little investment required. The Forestry services business is also part of WAFES support services.

Owned services represents remote WA activities in which the accommodation structures are owned and installed by Dexterra Group as part of an equipment supply contract or bundled with food and facilities services as in the case of turn-key camp contracts or the Corporation’s open lodge operations. This category also includes Energy Services, where the Corporation owns the matting and relocatable structures, which are sold or rented to clients.

Revenue from the WAFES segment for the three months ended September 30, 2021 was $118.7 million, an increase of $15.5 million compared to Q3 2020. WAFES revenue performance was strong in Q3 2021 due to stronger camp occupancy, mobilization of new contracts with a significant oil-sands customer, and Q3 being the peak season for the Forestry business. Forestry, including Fire Camps, contributed $19.5 million of revenue in Q3 2021, compared to $12.7 million in Q3 2020. Pipeline camps in British Columbia rebounded strongly in September with good utilization, though our Kitimat open camp will likely continue to be closed until late Q2 2022 due to delays in scheduling of the LNG Canada project. The increase in all areas of the business included a $6.2 million increase in Energy Services revenue related to the robust activity in the energy sector in the quarter. The comparative revenue for Q3 2020 also had revenues of $8.7 million from the Kitimat open camp, which is temporarily closed in late 2021, as well as legal settlements of $6.6 million, which did not reoccur in 2021.

The Q3 2021 Adjusted EBITDA excluding CEWS as a percentage of revenue is 18%, which is slightly higher than the Q3 2020 comparative of 17%.

Revenue from the WAFES segment for the nine months ended September 30, 2021 was $281.9 million, an increase of $125.4 million compared to Q3 2020. The increase in segment revenues was primarily driven by the Acquisition, which added $70.3 million to revenue reported year to date in 2021. Adjusting for the Acquisition, revenue represents an increase of $55.3 million over the prior period, which is attributable to growth throughout the business.

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Management’s Discussion and Analysis Three and nine months ended September 30, 2021 and 2020

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Excluding the impact of CEWS and legal settlements, the Adjusted EBITDA excluding CEWS as a percentage of revenue was 16% in 2020 and it improved to 17% for the nine-month period ended September 2021. This increase in margin resulted from stronger support services revenue with the addition of new contracts and business.

Revenues from Energy Services were $12.7 million and $24.7 million for the three and nine months ended September 30, 2021, respectively. Q3 2021 revenues were up from the $6.4 million in Q2 2021 and the $9.2 million in Q3 2020, which included a $2.5 million increase in mat sales. Both the relocatable structures and matting business are expected to continue to experience increasing utilization throughout the remainder of 2021 and into 2022 as the energy business rebounds.

Direct Costs

Direct costs are comprised of labour, materials, supplies and transportation, which vary directly with revenues, and a relatively fixed component, that includes rent and utilities. Direct costs in the WAFES business unit for Q3 2021 were $96.8 million or 81% of revenue, compared to 76% of revenue after excluding the CEWS impact of $4.2 million for Q3 2020. In comparison, direct costs for Q2 2021 were 82% of revenue after excluding $2.9 million CEWS. The increase in the percentage of direct costs when compared to the prior year is due to the positive impact in 2020 of the Kitimat open lodge and legal settlements of $6.6 million in Q3 2020. Management continues to be focused on managing costs as we navigate the COVID-19 impacts to this business unit and the costs in 2021 are in line with expectations.

Modular Solutions

Modular Solutions segment revenues for Q3 2021 were $45.1 million, a decrease of $3.2 million from Q2 2021. The decrease was caused by site and administrative delays in the rapid affordable housing projects with the City of Toronto, site access delays on projects in British Columbia and the resolution of a historical contract dispute. Revenue from these projects is expected to be recorded in Q4 2021 and Q1 2022. In comparison to Q3 2020, revenue for Q3 2021 increased by $5.5 million, or 13.7%.

EBITDA for Q3 2021 was $2.8 million, a decrease of $1.9 million from Q2 2021. Adjusted EBITDA excluding CEWS as a percentage of revenue was 6% for the quarter compared to Q2 2021 of 9%. The timing of projects impacted the optimization of plant capacity and related overhead absorption. EBITDA margins are expected to rebound to normal levels in 2022 of approximately 7%.

Revenue from the Modular segment for the nine months ended September 30, 2021 was $135.2 million, an increase of $84.7 million, which is attributed to the timing of the Acquisition in 2020. Year-to-date EBITDA was $10.4 million, which is $4.1 million higher than the same period in 2020 due to the timing of the Acquisition. The Adjusted EBITDA excluding CEWS is higher by $6.5 million. Adjusted EBITDA excluding CEWS as a percentage of revenue for the year-to-date Q3 2021 is consistent at 7% as compared to the prior year.

A key metric for the Modular Solutions segment is the backlog of projects and timing of backlog execution. The focus for this business unit is to secure and increase backlog, which was $92.6 million for rapid affordable housing at the end of Q3 2021, excluding $34.8 million of contracts being finalized with existing customers and $25.3 million for Industrial and U.S. manufacturing supply projects signed in Q3 2021. Additionally, Modular Solutions has recurring modular business beyond the projects above worth approximately $40 million per annum, which mainly consists of education modules, retail stores and kiosks. A key goal over time is also to diversify our modular product market verticals. The overall outlook remains positive with significant opportunities to increase revenue and EBITDA in the near term as our backlog grows.

Direct Costs

Direct costs are comprised of labour, raw materials and transportation, which vary directly with revenues, and a relatively fixed component that includes rent, utilities and the design and technical services required in the bidding cycle and post award manufacturing and installation of the product.

Direct costs for the three and nine months ended September 30, 2021 were 91% and 89% of revenue, respectively, as compared to the 87% of revenue in Q2 2021, and 87% in Q3 2020. The increase in direct cost as a percentage of revenue reflects the lower revenue and overhead absorption in Q3 2021 caused by delays in several projects discussed above and the CEWS impact in 2020.

Other Items

Selling, General & Administrative Expense

Selling, general & administrative (“SG&A”) expenses are comprised of head and corporate office costs including the executive officers and directors of the Corporation, and shared services, including information technology, corporate accounting staff and the associated costs of supporting a public company.

SG&A expenses for Q3 2021 were $8.4 million, an increase of $0.6 million when compared to Q3 2020. SG&A expenses were 4% of total revenue in Q3 2021, which is improved by 1% when compared to the 5% for both Q2 2021 and Q3 2020.

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Management’s Discussion and Analysis Three and nine months ended September 30, 2021 and 2020

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SG&A expenses for the nine months ended September 30, 2021 were $25.3 million, an increase of $9.4 million compared to the same period in 2020, mainly due to the Acquisition. As a percentage of revenue, SG&A expenses were 5% of total revenue year to date for both 2021 and 2020 periods.

Depreciation and Amortization

Depreciation and Amortization
		Three months ended September 30,				Nine months ended		September 30,
(000's)		2021		2020		2021		2020
Depreciation of property, plant and equipment and right-of-use assets	$	8,516	$	8,014	$	26,594	$	11,907
Amortization of intangibles		867		771		2,554		2,020
Total depreciation and amortization	$	9,383	$	8,785	$	29,148	$	13,927

For Q3 2021, depreciation and amortization was $9.4 million, an increase of $0.6 million compared to Q3 2020, which aligns with the small increase in property, plant and equipment and right-of-use assets in Q3 2021 comparing to Q3 2020. Depreciation and amortization expense was lower by $0.3 million in Q3 2021 compared to $9.7 million in Q2 2021 due to the positive impact of excess assets sold in the WAFES business unit. The Corporation's plan to operate in a capital light model should continue to reduce depreciation expense in the upcoming years as existing assets become fully depreciated and excess assets in the WAFES business are sold.

For the nine months ended September 30, 2021, depreciation and amortization was $29.1 million, an increase of $15.2 million compared to 2020, mainly due to the timing of the property, plant and equipment and right-of-use assets acquired in the Acquisition.

Finance costs

Finance costs include interest on loans and borrowings, interest on lease liabilities and accretion of debt financing costs.

The effective interest rate on loans and borrowings for the nine months ended September 30, 2021 was 3.5%. The interest rate is impacted by the debt level and tiered interest rate structure of the credit facility. The rate ranges from bank prime rate plus 0.50% to 2.75% per annum.

Goodwill

Goodwill of $98.6 million is made up of $96.0 million recognized on the acquisition of certain assets and associated liabilities comprising the services business carried on by Carillion Canada and certain of its affiliates (the “Carillion Services Assets”) in 2018 and $2.6 million recognized on the acquisition of the Powerful Group of Companies in 2019. Goodwill is not amortized. Goodwill relating to the Carillion Services Assets is deductible for tax purposes. The Corporation concluded there were no new indicators of impairment of its goodwill or intangibles as at September 30, 2021.

Gain/Loss on disposal

For Q3 2021, the loss on disposal was $0.4 million compared to a loss on disposal of $0.4 million in Q3 2020. For the nine months ended September 30, 2021, the gain on disposal was $0.1 million, which is consistent with the gain on disposal of $0.1 million in 2020. The gains and losses on disposals are typically generated from rationalization of excess assets for conversion to cash.

Non-controlling interest

Dexterra Group owns 49% of Tangmaarvik Inland Camp Services Inc. (“Tangmaarvik”) and controls its operations. As a result, the results of Tangmaarvik are consolidated with the results of Dexterra Group and a non-controlling interest is recognized. For the three and nine months ended September 30, 2021, a loss of $0.02 million and earnings of $0.2 million were attributed to the non-controlling interest, respectively, compared to loss of $0.1 million and earnings of $0.3 million in the same periods of the prior year.

Joint Venture

On September 2, 2021, the Corporation signed a new limited partnership agreement with an existing Aboriginal partner to form Big Spring Lodging Limited Partnership (“BSL LP”). The Corporation owns 49% of the newly formed partnership. During the period, the Corporation contributed assets to the BSL LP with a carrying value of $1.8 million as a in-kind contribution to BSL LP. The Partnership is accounted for as a joint venture using the equity method.

Dexterra Group owns 49% of Gitxaala Horizon North Services LP (“Gitxaala”), which was part of the Acquisition. This equity investment is recorded at cost and increases or decreases with the Corporation's share of the profit or loss of Gitxaala and any capital contributions. Earnings for the three and nine months ended September 30, 2021 were $0.4 million and $1.7 million respectively.

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Management’s Discussion and Analysis Three and nine months ended September 30, 2021 and 2020

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Income taxes

The Corporation's effective income tax rate for the three and nine months ended September 30, 2021 was 26.9% and 26.1%, compared to 26.8% and 14.5% in 2020. The effective tax rate for the three and nine months ended September 30, 2021 is consistent with the combined federal and provincial income tax rate after taking the tax benefit of non-capital loss carry forwards of $1.1 million recorded in Q1 2021 into account and an adjustment upon filing of the 2020 tax returns. The effective rate in 2020 reflected the non-taxable nature of the bargain purchase gain of $34.1 million.

The Corporation has non-capital losses for Canadian tax purposes of $70.8 million at September 30, 2021 (December 31, 2020 - $77.1 million) available to reduce future taxable income in Canada, and non-capital losses for United States tax purposes of $0.8 million available to reduce future taxable income in the United States. The Corporation expects to fully utilize these losses before their expiry except as noted below.

Deferred tax assets of $0.6 million have not been recognized in respect of $2.4 million of tax losses as it is not probable that future taxable profit will be generated against which a subsidiary of the Corporation can utilize the benefits.

The Corporation has completed the first phase of its tax plan, which is helping to reduce cash taxes payable in 2021 and future years.

COVID-19 Pandemic

At this time, it is unknown to the Corporation how the COVID-19 pandemic will evolve and impact demand for the Corporation’s services, which may lead to lower or delayed revenue, changes to the federal and provincial governments’ support programs for businesses to help offset the impact of COVID-19, impact on the Corporation’s customers and their solvency and on the Corporation's supply chain and safety of its workforce.

Revenue growth may be slower due to COVID-19, as the economy rebounds from the impacts of the pandemic and the rapidly evolving restrictions put in place by both the provincial and federal governments. Management has continued to invest in resources for the future as it believes the COVID-19 pandemic will have a lessening impact on the business in the fourth quarter of 2021 and into 2022.

Outlook

Operations Outlook

The Corporation is poised for strong growth in 2022. The traditional seasonality of the businesses impacts sequential quarter comparisons with Q2 and Q3 expected to be its strongest quarters. Nevertheless, Q4 2021 will exhibit growth compared to Q4 2020 despite having the Kitimat open camp closed. Management is focused on organic growth as well as selective acquisitions. Timing of the acquisitions is unknown and is dependent upon opportunities identified and the willingness of other parties to sell their businesses. The Corporation has taken steps to prepare for growth with the recently amended credit facility, an ERP implementation and by refining processes throughout the business to promote scalability. Hiring of new people continues to be a challenge that we are actively managing across all business segments.

With the opening of the NRB Modular Solutions plant in Cambridge in Q2 2021, production capacity for Modular Solutions has increased in excess of $100 million annually. Growth in Modular Solutions revenues in Q4 2021 and into 2022 is expected.

In the Integrated Facilities Management business, the organic growth prospects are significant and compound annual growth rates for the overall market are estimated to be double digit over the next several years. Bidding activities are brisk and the Corporation won several smaller contracts during Q3 2021. Dexterra Group has also been significantly impacted in both the airport and retail sectors and expects the improvement in the aviation sector to have a positive impact on its results as the population receives vaccinations and federal restrictions on travel lessen. Management forecasts that this improvement will be very gradual through 2022 and into 2023. The focus of this business is on winning new bids and maintaining current profit margins while providing excellent service to existing clients.

The WAFES business in Q4 2021 is expected to be consistent with the prior year and lower than Q3 2021 due to seasonality of the business. WAFES is expected to continue to be strong in 2022, commensurate with market activity. The Kitimat open camp is expected to be fully open in the second half of 2022 which will have a significant impact on the results.

Liquidity and Capital Resources

For the three months ended September 30, 2021, cash generated by operating activities was $1.8 million, compared to $21.2 million in the same period of 2020 and compared to $20.2 million in Q2 2021. The decrease from Q2 2021 was driven primarily by the increase in working capital required to support the increase in revenue and the seasonality of the business in the forestry and education sectors. Cash flows from operating activities in Q3 2020 were also positively impacted by $6.6 million in legal settlements and CEWS of $9.5 million.

The Corporation's financial position and liquidity are strong. The Corporation generated Free Cash Flow of $24.6 million for the nine months ended September 30, 2021. Debt is lower by $5.6 million year to date and will further decrease in Q4 2021 and into 2022, absent M&A activities.

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Management’s Discussion and Analysis Three and nine months ended September 30, 2021 and 2020

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Capital Spending

For the nine months ended September 30, 2021, gross capital spending for property, plant and equipment was $5.2 million compared to $3.1 million in the same period of 2020. Capital spending in 2021 has been mainly focused on the NRB Cambridge plant expansion, totaling $3.3 million, compared to the purchase of small equipment in 2020. Management expects sustaining capital spending for 2021 to be less than $10 million, excluding the new NRB plant or other growth oriented investments.

Quarterly Summary of Results

Quarterly Summary of Results
(000's except per share amounts)	Three months ended
	2021 September 2021 June 2021 March 2020 December
Revenue EBITDA Adjusted EBITDA excluding CEWS Net earnings (loss) attributable to shareholders Net earnings per share, basic and diluted(2)	$ 202,760 $ 173,627 $ 155,404 $ 164,418 22,372 22,502 17,825 18,713
	22,372 18,308 12,921 13,271
	7,780 8,206 4,277 (103)
	$ 0.12 $ 0.13 $ 0.07 $ 0.00

(000's except per share amounts)	Three months ended
	2020 September 2020 June 2020 March 2019 December
Revenue(1) EBITDA(1) Adjusted EBITDA excluding CEWS Net earnings attributable to shareholders Net earnings per share, basic and diluted(2)	$ 176,918 $ 76,106 $ 60,373 $ 64,134 33,444 22,885 2,148 3,240
	17,551 4,037 3,282 3,315
	16,131 47,139 864 1,370
	$ 0.25 $ 1.08 $ 0.03 $ 0.04

(1) Revenue and EBITDA for the third quarter of 2020 includes $6.6 million related to amounts awarded on two legal proceedings with former customers.

(2) All share and per share data presented prior to Q3 2020 has been retroactively adjusted to reflect the five-for-one share consolidation completed on July 16, 2020.

Reconciliation of non-GAAP measures

The following provides a reconciliation of non-GAAP measures to the nearest measure under GAAP for items presented throughout the MD&A.

(000's)	Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020
Net earnings Add: Share based compensation Depreciation & amortization	$ 7,764 $ 16,061 $ 20,451 $ 64,452 522 157 1,582 206 9,383 8,785 29,148 13,927
Equity investment depreciation	190 122 518 155
Finance costs Bargain purchase gain Loss (gain) on disposal of property, plant and equipment Income tax expense	1,224 2,051 3,880 3,094 — — — (34,128) 428 385 (117) (119) 2,861 5,883 7,239 10,890
EBITDA(1)	$ 22,372 $ 33,444 $ 62,701 $ 58,477
Acquisition costs Other revenue CEWS	— 210 — 1,701 — (6,569) — (6,569) — (9,534) (9,100) (28,739)
Adjusted EBITDA excluding CEWS	$ 22,372 $ 17,551 $ 53,601 $ 24,870

(1) Includes nil and $9.1 million of pre-tax CEWS for the three and nine months ended September 30, 2021, respectively ($9.5 million and $28.7 million for the three and nine months ended September 30, 2020).

(2) Other revenue includes amounts awarded to the Corporation from legal proceedings with two former customers in the amount of $6.6 million. These items are expected to be non-recurring.

(3) 2020 YTD comparative information includes the results of Horizon North Logistics Inc. from May 29, 2020 onwards which was the effective date of the Acquisition.

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Management’s Discussion and Analysis Three and nine months ended September 30, 2021 and 2020

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(000's)	Three months ended September 30, Nine months ended September 30,
	2021 2020 2021 2020
Net cash flows from operating activities Sustaining capital expenditures, net of proceeds(1) Purchase of intangible assets Finance costs paid Lease payments	$ 1,819 $ 21,213 $ 39,883 $ 39,793 (524) (66) (1,307) 1,670 (151) (128) (1,579) (363) (1,814) (2,102) (4,200) (3,610) (2,078) (2,035) (8,205) (2,904)
Free Cash Flow	$ (2,748) $ 16,882 $ 24,592 $ 34,586

(1) Total capital expenditures for the three and nine months ended September 30, 2021 were $0.9 million and $5.2 million respectively, which includes $0.4 million and $3.6 million in growth capital mainly related to the NRB Cambridge plant.

Accounting Policies

Dexterra Group’s IFRS accounting policies are provided in Note 3 to the Consolidated Financial Statements for the year ended December 31, 2020.

Outstanding Shares

Dexterra Group had 65,151,083 voting common shares issued and outstanding as at November 9, 2021, of which 49% or 31,924,031 are owned by subsidiaries of Fairfax Financial.

Off-Balance Sheet Financing

Dexterra Group has no off-balance sheet financing.

Management’s Report on Disclosure Controls and Procedures and Internal Controls over Financial Reporting

Disclosure Controls and Procedures

The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) have designed, or caused to be designed under their supervision, disclosure controls and procedures (“DC&P”) as defined in National Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings (“NI 52-109”) of the Canadian Securities Administrators, to provide reasonable assurance that: (i) material information relating to the Corporation is made known to the CEO and the CFO by others, particularly during the period in which the interim filings are being prepared; and (ii) information required to be disclosed by the Corporation in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation.

There were no changes in Dexterra Group’s DC&P that occurred during the period ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, Dexterra Group’s DC&P.

Internal Controls over Financial Reporting

The CEO and the CFO have designed, or caused to be designed under their supervision, internal controls over financial reporting (“ICFR”) as defined in NI 52-109 of the Canadian Securities Administrators, in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

There were no changes to the Corporation’s ICFR during the period ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Corporation’s ICFR.

Limitations on the Effectiveness of Disclosure Controls and Procedures and Internal Control over Financial

Reporting

Because of their inherent limitations, DC&P and ICFR may not prevent or detect misstatements, errors or fraud. Control systems, no matter how well conceived or implemented, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met.

Risks and Uncertainties

The financial risks, critical accounting estimates and judgements, and risk factors related to Dexterra Group and its business, which should be carefully considered, are disclosed in the Annual Information Form under “Risk Factors” and in the Corporation's Consolidated Financial Statements for the year ended December 31, 2020 under Note 22, dated March 10, 2021, and this MD&A should be read in conjunction with them. Such risks may not be the only risks facing Dexterra Group. Additional risks not currently known may also impair Dexterra Group’s business operations and results of operation.

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Management’s Discussion and Analysis Three and nine months ended September 30, 2021 and 2020

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Critical Accounting Estimates and Judgements

This MD&A of Dexterra Group’s financial condition and results of operations is based on its consolidated financial statements, which are prepared in accordance with IFRS. The preparation of the consolidated financial statements requires management to make estimates and judgements about the future. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The MD&A should be read in conjunction with the Q3 2021 Financial Statements.

Financial Instruments and Risk Management

In the normal course of business, the Corporation is exposed to a number of financial risks that can affect its operating performance. These risks are: credit risk, liquidity risk and interest rate risk. The Corporation’s overall risk management program and prudent business practices seek to minimize any potential adverse effects on the Corporation’s financial performance. The MD&A should be read in conjunction with the Q3 2021 Financial Statements.

Forward-Looking Information

Certain statements contained in this MD&A may constitute forward-looking information under applicable securities law. Forward-looking information may relate to Dexterra Group’s future outlook and anticipated events, business, operations, financial performance, financial condition or results and, in some cases, can be identified by terminology such as “continue”; “forecast”; “may”; “will”; “project”; “could”; “should”; “expect”; “plan”; “anticipate”; “believe”; “outlook”; “target”; “intend”; “estimate”; “predict”; “might”; “potential”; “continue”; “foresee”; “ensure” or other similar expressions concerning matters that are not historical facts. In particular, statements regarding Dexterra Group’s future operating results and economic performance, its leverage, NRB Modular Solutions production capacity and backlog, and its objectives and strategies are forward-looking statements. These statements are based on certain factors and assumptions, including expected growth, results of operations, performance and business prospects and opportunities regarding Dexterra Group, which Dexterra Group believes are reasonable as of the current date. While management considers these assumptions to be reasonable based on information currently available to Dexterra Group, they may prove to be incorrect. Forward-looking information is also subject to certain known and unknown risks, uncertainties and other factors that could cause Dexterra Group’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward- looking information, including, but not limited to: the ability to retain clients, renew existing contracts and obtain new business; an outbreak of contagious disease that could disrupt its business; the highly competitive nature of the industries in which Dexterra Group operates; reliance on suppliers and subcontractors; cost inflation; volatility of industry conditions could impact demand for its services; a reduction in the availability of credit could reduce demand for Dexterra Group’s products and services; Dexterra Group’s significant shareholder may substantially influence its direction and operations and its interests may not align with other shareholders; its significant shareholder’s 49% ownership interest may impact the liquidity of the common shares; cash flow may not be sufficient to fund its ongoing activities at all times; loss of key personnel; the failure to receive or renew permits or security clearances; significant legal proceedings or regulatory proceedings/changes; environmental damage and liability is an operating risk in the industries in which Dexterra Group operates; climate changes could increase Dexterra Group’s operating costs and reduce demand for its services; liabilities for failure to comply with public procurement laws and regulations; any deterioration in safety performance could result in a decline in the demand for its products and services; failure to realize anticipated benefits of acquisitions and dispositions; inability to develop and maintain relationships with Indigenous communities; the seasonality of Dexterra Group’s business; inability to restore or replace critical capacity in a timely manner; reputational, competitive and financial risk related to cyber-attacks and breaches; failure to effectively identify and manage disruptive technology; economic downturns can reduce demand for Dexterra Group’s services; its insurance program may not fully cover losses. Additional risks and uncertainties are described in Note 22 of the Corporation's Consolidated Financial Statements for the years ended December 31, 2020 and 2019 contained in its most recent Annual Report filed with securities regulatory authorities in Canada and available on SEDAR at sedar.com. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. Dexterra Group is under no obligation and does not undertake to update or alter this information at any time, except as may be required by applicable securities law.

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