Why
ShawCor?
Global Leadership
Organizational Excellence
More than 75 manufacturing and service facilities
We are a high-performing organization in which
in over 25 countries give ShawCor unrivalled
proximity to every major energy-producing region.
everyone is aligned and motivated to advance our
strategies for growth.
Superior Execution
Strong Industry Fundamentals
The industry’s most advanced continuous
Global demand for oil and gas is expected to
improvement program helps us execute complex
increase 30% between 2011 and 2035 due to
customer projects safely, on-time and on-budget,
rapid economic growth in developing countries.
providing superior customer satisfaction.
Technological Innovation
Proven Performance
In the past 10 years, ShawCor’s common shares
Continuing research and development
have delivered a total return to shareholders
of market-leading, proprietary technology has
of 207%, equivalent to a compound annual
created a powerful competitive advantage.
return of 12%.
STrOnG
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2012 a n n ua L r E P OrT
Corporate InformationCorporate address, Stock Information and annual meetingHEAD OFFICE25 Bethridge RoadToronto, OntarioCanada M9W 1M7Telephone: 416 743 7111Facsimile: 416 743 7199AuDItOrsErnst & Young LLPtrAnsFEr AgEnt AnD rEgIstrArCIBC Mellon Trust Company c/o Canadian Stock Transfer Company Inc. P.O. Box 700, Station B Montreal, Quebec Canada H3B 3K3Telephone: 800 387 0825 416 682 3860 Facsimile: 888 249 6189 E-mail: inquiries@canstockta.comstOCk LIstIngThe Toronto Stock Exchange Common Shares Trading Symbol: SCLAnnuAL MEEtIngThursday, May 16, 2013 4:00 p.m. The Fairmont Royal York Hotel Toronto, Ontario Canadawww.shawcor.comV.L. sHAwChair of the BoardL.w.J. HutCHIsOnVice Chair of the Boardw.P. BuCkLEyPresident and Chief Executive Officerg.s. LOVEVice President, Finance and Chief Financial OfficerD.r. EwErtCorporate SecretaryCorporate OfficersOperations managementM.J. sIMMOnsGroup President ShawCor Ltd.D.L. BrOussArDPresident Flexpipe SystemsJ.D. tIkkAnEnPresident Bredero ShawJ.D.B. gIBsOnChief Executive Officer SocothermJ.L. BArkHOusESenior Vice President Americas & Global OperationsBredero ShawP.L. EVAnsSenior Vice President Asia Pacific Bredero ShawF. CIstrOnEVice President and General Manager, Operations ShawCor Ltd.r.J. DunnVice President and General Manager Canusa-CPSs.J. EDMOnDsOnVice President Research & Development ShawCor Ltd.F. gALLInAVice President Special Projects ShawCor Ltd.M.L. gArCEsVice President ShawCor Manufacturing System ShawCor Ltd.D.r. gIBBVice President Information Technology ShawCor Ltd.g.L. grAHAMVice President Corporate Services ShawCor Ltd.s.A. HABErErVice President Market Development & Acquisitions ShawCor Ltd.t.L. HutzuLVice President, Legal ShawCor Ltd.g.g. PAssLErVice President, and General Manager ShawFlexP.A. PIErrOzVice President Human Resources ShawCor Ltd.J.A. tABAkVice President and General Manager DSG-CanusaH.A.A.M. tAusCHVice President and General Manager Europe, Middle East, Africa, Russia Bredero ShawJ.A. tEPPAnVice President and General Manager GuardianCharacterized by steadily growing demand and rapid depletion of conventional reserves, the industry we serve is exploring new technologies and new frontiers to meet global energy challenges. These trends play directly to ShawCor’s strengths as the world’s largest provider of advanced pipeline coatings and related energy services. This year’s report takes a look at the combination of strong industry fundamentals and fundamental corporate strengths that will sustain ShawCor’s record-breaking performance in the future.the Bredero shaw pipecoating plant in kuantan, Malaysia, one of the largest facilities of its kind in the world. A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Financial and
Operating Highlights
ShawCor’s Mission
To be the market leader and technology innovator with a primary focus on the global pipeline
industry and to use this base as a platform to build an international energy services company
while achieving ShawCor’s performance objectives.
2012 Highlights (in Canadian dollars)
Financial Summary
1.48 B
REVENUE
178.4 M
NET INCOME
(attributable to shareholders of the Company)
2.73 B
MARKET CAPITALIZATION
As Of d EC. 31 2012
Year ended December 31
(in thousands of Canadian dollars)
OPER ATING R ESULTS
Revenue
EBITDA
Income from operations
Net income note 1
Earnings per share, Class A and Class B – basic
Earnings per share, Class A and Class B – diluted
CASH FLOW
Cash provided by operating activities
FINANCIAL POSITION
Working capital
Total assets
Equity per share (Class A and Class B)
note 1: Attributable to shareholders of the Company
2012
2011
$ 1,482,849
266,886
212,226
178,418
$
$ 1,157,265
128,168
83,907
56,280
$
$
$
2.53
2.50
$
$
0.79
0.78
$
530,091
$
45,325
326,296
$
$ 1,927,569
$
287,142
$ 1,226,749
$
14.32
$
12.29
Corporate Profile
Table of Contents
ShawCor Ltd. is a global energy services
1 Financial and Operating Highlights
20 Strong Fundamentals/Fundamental Strengths
company specializing in technology-
2 Message to Shareholders
21 Financial Review
based products and services for the
5 A Personal Letter from Virginia Shaw
96 ShawCor Directors
pipeline and pipe services and the
8 Strong Fundamentals
97 Corporate Governance
petrochemical and industrial markets.
10 ShawCor At-a-Glance
98 Primary Operating Locations
The Company operates eight business
12 Global Leadership
IBC Corporate Information
units with more than seventy-five
14 Technological Innovation
manufacturing and service facilities
16 Unique Capabilities
employing over 8,000 people around
18 Superior Execution
the world.
1
1
M e S Sag e T O S H a r e HOL de r S
A N N UA L R E P O RT 2 01 2 S H awC O r LT d.
record-breaking
Performance
during 2012, ShawCor generated record breaking revenue of $1.48 billion, a 28 percent increase
over 2011, record net income of $178.4 million, a 217 percent improvement over the prior year,
and entered 2013 with a record 12 month backlog of $850 million. Five of ShawCor’s business
units achieved record revenue in 2012 including Bredero Shaw, Flexpipe Systems, Canusa-CPS,
guardian and ShawFlex. The Company’s exceptional performance in 2012 was driven by
higher revenue, higher gross margins and higher utilization rates at many of our facilities. I am
also pleased to report that ShawCor’s commitment to its HS e Program has resulted in improved
Health & Safety performance across the Company and the achievement of our Incident and
Injury Free (IIF) goal at 50 of our locations in 2012.
In the Pipeline and Pipe Services segment, revenue was up 31 percent to a
record $1.34 billion, due to significantly higher activity at Bredero Shaw and
at Flexpipe Systems. Revenue in the Petrochemical and Industrial segment,
at $147.1 million, was up 7 percent over the prior year.
During 2012, Bredero Shaw commenced production on the $500 million
Inpex Ichthys project and the $170 million Chevron Wheatstone trunkline
and flow lines projects, with the majority of work on these contracts
expected to extend through this year and into 2014. We also started or
continued work on five other major pipe coating projects around the world
ranging in value from $40 million to $80 million. In addition, a substantial
portion of ShawCor’s revenue comes from orders that are less than
$20 million in value. These smaller orders are often secured through long-
term frame agreements and form a strong and stable base of business that
typically does not impact the backlog as they are usually executed shortly
after receipt.
ShawCor’s other businesses also contributed to our record performance
in 2012, led by healthy sales gains at Flexpipe Systems. This division
continued to grow its market share in North America while expanding its
international coverage to meet the demands of new overseas customers.
Other highlights during the year included increased usage of the Canusa-
CPS IntelliCOAT® automated sleeve installation technology and the
application of the ShawCor Simulated Service Vessel (SSV) to validate
pipeline design criteria for the Wasit, Goliat and Wheatstone projects and
to conduct validation tests for a new, high temperature version (120°C)
of Bredero Shaw’s Thermotite® Ultra™ deepwater insulation system. The
Brigden® portable coating plant completed the Jack/St. Malo Project in
Beaumont, Texas and Bredero Shaw also mobilized two Compression Coat
Technology (CCT) portable concrete coating plants to La Brea, Trinidad
where they are being used on a major project for Technip.
WILLIAM P. BUCKLEY
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
2
2
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
As mentioned, ShawCor’s Health & Safety performance
improved during 2012 with a reduction in the Total Recordable
Case Frequency rate of 7 percent while incident severity was
reduced by 5 percent compared to the 2011 levels. A majority
of the Company’s locations, 50 out of 86, were IIF during 2012
and our largest division, Bredero Shaw, achieved its best safety
performance ever.
A WINNIN g gROWTh sTRATEgY
ShawCor has grown into the world’s largest provider of
advanced pipeline coatings, with a family of eight energy
service businesses that hold leading positions in their respective
markets. This growth has been achieved by emphasizing
the unique differences that set the Company apart from its
competitors. Our success has been driven by expanding
strategic capabilities, a commitment to technological leadership
in the industries we serve, an unwavering focus on superior
execution and a culture of continuous improvement throughout
our organization. With over 80 strategically located facilities
in 25 countries, ShawCor provides customers with industry-
leading logistics advantages. Many of the Company’s pipe
coating facilities are co-located with pipe mills or at deepwater
ports on supply lines from the pipe mills to the major petroleum
basins. Examples include our Kabil, Indonesia and Kuantan,
Malaysia coating operations where recent investments in
additional deepwater berths provide the capacity to meet the
requirements of the largest projects. By offering complete
pipe mill to pipeline logistics, the broadest array of highly
differentiated products and redundant back-up facilities,
ShawCor provides customers with both reduced project
construction risk and pipeline performance risk. Together, these
attributes represent what we call The ShawCor Difference and
they continue to guide our efforts to build a larger and even
more successful company.
In 2012, we welcomed Socotherm to the ShawCor family as
our eighth operating business following the acquisition of
the remaining 60 percent interest in the holding company,
Fineglade Limited. The second largest provider of advanced
pipeline coatings in the world, Socotherm has strengthened
ShawCor’s global market presence through strategic locations
in Europe, South America and the U.S.A., while providing
complementary expertise and technological capabilities in
deepwater pipeline insulation systems.
Closer to home, we also continued to support the ongoing
success of Flexpipe Systems, a business acquired in 2008,
whose innovative flexible composite pipe solutions have earned
growing acceptance in the rapidly expanding shale oil and gas
markets. Our growth strategy for Flexpipe, including broadening
the product line by offering higher pressure and temperature
capabilities and entering new markets, paid dividends in 2012
as the division achieved record levels of revenue and operating
income. In order to sustain this growth, the division added an
additional 178,000 square foot facility in Calgary to provide
increased manufacturing space for new products and keep pace
with North American demand as well as strong sales growth in
Australia, Latin America and other international markets.
We are also experiencing strong growth at Guardian, a leading
provider of tubular management solutions with a steadily
expanding presence in North America’s major shale plays. In
2012, Guardian expanded into the Eagle Ford Shale and Permian
basins through the acquisition of the assets and business of
Magnum Tubular Inspection, LLC in Texas.
While the current and projected pace of pipeline construction
bodes well for ShawCor’s pipeline coating and related energy
services businesses, we also see growing opportunities in
the pipeline rehabilitation market. Currently, 10 percent of
the Company’s North American pipe coating is for pipeline
replacement and this is expected to grow as more aging
infrastructure is replaced. ShawCor intends to focus increased
resources on the development of unique new products to serve
this growth market.
These investments are consistent with our focus on the highest
growth segments of the energy industry. Today, we have a
strong and expanding presence in each of the fastest growing
pipeline markets including offshore, deepwater, oil sands, shale
plays, enhanced recovery, LNG energy production, pipeline
rehabilitation and potable water.
ThE PROMI sINg ROA d A hEAd
ShawCor continued to win most of the major pipe-coating
contracts awarded around the world during the past year, as
evidenced by the growth in our 12-month backlog. It reached
a record $850 million at year end 2012, up $302 million from
our previous record year-end backlog of $548 million on
December 31, 2011. Including the value of booked orders
extending beyond the 12-month time horizon, the Company
had a total order book of approximately $1.0 billion at the
end of 2012. A list of the more than $1.0 billion in major new
projects ShawCor won in 2011 and 2012 can be found on
page 12 of this report.
3
M e S Sag e T O S H a r eHOL de r S
A N N UA L R E P O RT 2 01 2 S H awC O r LT d.
growth, combined with increasingly rapid depletion of
existing reserves, is encouraging the world’s energy producers
to turn their attention to the new frontiers of energy
production to fill the gap in energy supply.
Global energy infrastructure investment is anticipated to
remain strong over the next five years and we expect to win
a substantial share of the major pipecoating contracts. Pipe
coatings represent less than 10 percent of the total installed
cost of oil or gas pipelines, but address two high risk issues that
could impact pipeline owners and operators: the importance
of on-time delivery to the construction schedule and the vital
impact that coatings have on the integrity and performance of
the pipeline over its working life. As a trusted partner with a
hard-earned reputation for superior execution and technological
leadership along with a strong record for performance and a
leading global position in all of the high growth segments of the
pipeline industry, ShawCor is a first-choice supplier on many of
the world’s leading energy projects.
At the same time, our prospects continue to improve,
buoyed by the strong fundamentals of the industry we serve.
Environmental concerns continue to support the increased use
of clean burning natural gas. With energy projects becoming
increasingly complex and costly, leading oil and gas producers
are relying on energy services suppliers like ShawCor to provide
the technologies needed to ensure such projects are successful.
Energy demand is projected to grow steadily over the next
few decades, led by the developing nations of the world. This
growth, combined with increasingly rapid depletion of existing
reserves, is encouraging the world’s energy producers to turn
their attention to the new frontiers of energy production to fill
the gap in energy supply. This will require growing investment
in pipeline infrastructure and ShawCor will be at the forefront
of this activity, with a strong global presence and the unrivalled
capabilities that are necessary to lower project construction
risk, optimize pipeline performance and enable the safe and
reliable transportation of hydrocarbon energy to world markets.
single class share structure, which is expected to increase
the shareholder base and enhance liquidity for shareholders;
3. providing earnings per share accretion on a pro-forma
basis of approximately 12.8 percent; 4. ensuring increased
diversification of the shareholder base as many investment
mandates exclude investment in companies with dual class
share structures; 5. providing the Company with enhanced
financing flexibility going forward; and 6. enabling payment to
all remaining shareholders after completion of the transaction
of a $1.00 per share special dividend.
In order to fund the share reorganization, the Company has
issued $350 million in investment grade senior notes at an
attractive weighted average 3.65 percent interest rate with a
weighted average 10.4-year term. With a capital structure
post-transaction that is both appropriate and efficient, including
our cash balances and available committed credit lines in excess
of $165 million, ShawCor is well positioned to execute the
Company’s growth agenda, including potential future acquisitions.
In closing, I would like to express my appreciation to each
of ShawCor’s more than 8,000 employees for helping the
Company achieve new records for financial and safety
performance. I would also like to thank our customers,
suppliers and other business partners for their continued
support. As always, the active guidance of ShawCor’s Board
of Directors has been instrumental to our success. In particular,
on behalf of ShawCor’s employees and the Board, I wish
to thank Virginia Shaw for her unfailing leadership,
encouragement and support as a Director, Vice Chair and
Chair of the Company over the past 19 years. During this
period, ShawCor has established itself as a global leader in
pipe coatings and related energy services and created a solid
foundation for continuing success in the years ahead.
shARE REOR gANIZATION
Sincerely,
As noted in the letter from the Chair, Virginia Shaw, the
Company has recently completed a share reorganization,
resulting in the conversion of the Company’s share structure
to a single class of common shares. The reorganization provides
a number of benefits to the Company and its stakeholders
including 1. allowing the Company to eliminate the Class B
Shares and dual class share structure, thereby transferring
control to the general market; 2. providing a widely held
WILLIAM P. BUCKLEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
4
5ANNUAL REPORT 2012 SHawCOr LTd. Since becoming a public company in 1969, ShawCor has grown into the world’s largest provider of advanced pipeline coatings, with a family of complementary energy service businesses that hold leading positions in their respective markets. This growth has been a result of the hard work and dedication of many employees at ShawCor and its predecessor companies throughout this 44-year period. The growth story began well before the Company became a publicly traded entity. In the early 1950s my grandfather, Francis E. Shaw, foresaw the advantages of pre-coating pipe prior to shipment to the pipeline right-of-way. Along with my father, Leslie E. Shaw, he opened the Company’s first coating facilities in Toronto and south-western Ontario to serve the needs of the gas distribution networks across the province. Subsequently, coating facilities were opened in Western Canada and, by the mid-1960s, the first international coating operations were established in Venezuela, Mexico and Australia. During this period, my father, Leslie Shaw, and my uncle, JR Shaw, joined the family business with my father becoming President of the Company in 1968 and Chair in 1987. It was also during this period that the company began to broaden its product offering and the markets that it served with the establishment of the predecessor companies of ShawFlex in 1960 and Canusa-CPS in 1967. In February 1969, Shaw Pipe Industries Ltd. became a public company listed on the Toronto Stock Exchange with my uncle, JR Shaw, as Chair and my father, Leslie Shaw, as President and CEO. At that time the Company operated two divisions, the Pipe Protection Division and the Manufacturing Division, with nine plants and a Personal Letter fromVirginia Shawa PerSOnaL LeTTer FrOM VIrgInIa SHaw a P e r S O na L L e T T e r F rOM V I rg I n I a S H aw
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Completion of the acquisition of Socotherm leads us to
ShawCor as we know it today with eight operating divisions,
over 8,000 employees and more than seventy-five locations
in over twenty-five countries around the world.
over 300 employees located across Canada. Beginning in
October 1975, the Company paid its first dividend to
shareholders of $0.10 per share. Since that time, the Company
has regularly increased the dividend payout and the compound
annual growth in dividend payments over the past seven years
has increased at the rate of 23.8 percent. These dividend
payments have augmented gains through share price
appreciation and together have provided an average annual total
return to shareholders (TRS) of 13.7 percent from February 1969
to the end of 2012, a rate of return that compares quite
favourably to the 9.0 percent TRS achieved by the S&P/TSX
index during the same period!
By 1977, the Company employed approximately 700 people and,
for the first time, participated in a major pipe coating project in
the Middle East with the establishment of a joint venture facility
in Saudi Arabia for the fusion bond epoxy coating and double
jointing of a 774 mile 48” diameter crude oil pipeline. In July
1978, the Company’s founder and my grandfather, Francis Shaw,
passed away.
By 1981, the Company employed just over 1,200 people and
operated sixteen plants across Canada, the U.S., the U.K.
and Australia. During the 1980’s, growth was impacted by
recessions which affected the energy industry in 1983 and
again in 1986. Notwithstanding these events, the Company
continued to grow with the acquisition of Guardian Inspection
Services in 1987. It was also during that year my father, Leslie
Shaw, succeeded my uncle, JR Shaw, as Chair. In the following
year, 1988, the Company’s revenue exceeded $100 million for
the first time. In 1993, Shaw Pipeline Services was established
to continue the commercialization of the proprietary ultra-sonic
pipeline weld inspection system that was initially developed by
Guardian Inspection several years earlier.
In 1996, under my father Leslie Shaw’s leadership, negotiations
were initiated that would change the future of the Company.
The outcome was the formation, by Shaw Industries and
Dresser Industries, of a joint venture entity that would hold the
worldwide assets and businesses of Shaw Pipe Protection and
Bredero Price. This new entity, to be known as Bredero Shaw
was, and is to this day, the world’s largest provider of pipe
coatings and related products and services.
In December 1998, the Company acquired the DSG Group
of companies, a manufacturer of heat shrink products for
automotive, electrical, telecommunications and utility
applications with operations in Germany and Poland.
Immediately thereafter, the Company’s non-pipeline heat shrink
operations became known as DSG-Canusa while the pipeline
heat shrink operations became known as Canusa-CPS.
As ShawCor’s global reach continued to expand and
with the advent of the internet and other forms of digital
communications, it became apparent that the Company
needed to adopt a new and distinctive global brand and trade
name reflecting the increasingly global nature of the business.
Following a lengthy review of potential alternatives, in May
2001 the Company’s name was changed from Shaw Industries
Ltd. to ShawCor Ltd. and a new corporate and division image
program was implemented.
In a major step that clearly defined the Company’s future
direction, the remaining 50% interest in the Bredero Shaw
joint venture was purchased from the Halliburton Company on
October 1, 2002 for US$200 million in cash and shares. As a
young man my father, Leslie Shaw, had a dream of building a
world-class pipe coating operation. With the acquisition of the
Halliburton Company’s interest in the joint venture, this goal
was achieved as ShawCor became the sole owner of the world’s
largest pipe coating business.
More recently, the ShawCor growth trajectory has continued
with the acquisition, in June 2008, of the flexible composite
pipe manufacturer, Flexpipe Systems, a manufacturer of flexible
composite pipe used by energy producers for oil and gas
gathering systems, water transportation, CO₂ injection and
other corrosive applications.
Beginning in July 2010, the Company formed an investor group
with two private equity partners which completed a share
capital investment in the global pipe coater, Socotherm S.p.A.
Subsequently, in October 2012, ShawCor announced the
acquisition of its partners’ interests in the investor group
with the result that the Company now owns approximately
96 percent of Socotherm, which serves the oil and gas industry
from operations in Argentina, Brazil, the Gulf of Mexico,
Venezuela and Italy. Completion of the effective acquisition
6
of Socotherm leads us to ShawCor as we know it today with
eight operating divisions, over 8,000 employees and more than
eighty locations in over twenty-five countries around the world.
Even during the early years of its operations, the Company’s
management believed strongly that sustainable growth
would be achieved by meeting customer needs through the
development and introduction of unique, highly differentiated
products. ShawCor’s ability to answer new challenges in the
evolving search for energy resources is based on a strong
foundation of technological innovation and leadership as
exemplified by the 248 enforceable patents currently held
by the company.
Throughout its history, the Company’s R&D Group and
technical personnel within the divisions have supported the
commercialization of many new products based on ShawCor’s
industry leading technology platforms including: Polymer
Compounding, Adhesive Technology, Flow Assurance/Thermal
Design, Crosslink Formulation, Specialized Concrete Systems
and Anticorrosion Science. These technologies have ensured
a steady flow of market-leading products and processes such
as the Thermotite® Ultra™ deepwater insulation system, the
ShawCor Simulated Service Vessel (SSV) which is the industry’s
largest and most advanced pressure vessel used for testing
subsea pipeline insulation systems at water depths to 3,000 m
and temperatures up to 180°C and the Mobile Robotic Cutback
System used to finish the ends of pipe coated with insulation.
Each of these products and processes I am proud to say has
been chosen to receive a Spotlight on New Technology Award
at the Offshore Technology Conference in three out of the
past four years.
As the third generation of the Shaw family to serve the
Company and its stakeholders, I became a Director nineteen
years ago in 1994, Vice Chair in 2000 and succeeded my father
as Chair of the Board upon his passing early in 2007. During my
time on the Board, I have worked diligently to serve the interests
of all stakeholders and have supported ShawCor’s growth
programs by playing a proactive role in the oversight of the
Company’s strategy and long-term planning.
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
While I am extremely proud of the impact that I and my family
have had on the success achieved by ShawCor during its tenure
as a public company over the past 43 years, I recognized that
it was the appropriate time to consider the sale of the family’s
controlling interest in the Company. Completion of the recent
share reorganization and the resulting sale of my family’s
controlling interest in ShawCor mark the end of one era and the
beginning of another in the Company’s long and distinguished
history. On behalf of the Shaw family, I would like to thank
each current and former employee for their commitment and
enthusiasm without which ShawCor would not be where it
is today. I would also like to thank our President and CEO,
Bill Buckley, Vice Chair Leslie Hutchison, Lead Director
Jack Petch and each of the other past and present members of
the Board of Directors for their advice and support during the
nineteen years that I have served on the Board. While I will
miss working alongside ShawCor employees on a daily basis,
I will continue to support the Company as an investor with keen
interest. Please accept my best wishes for continued success
as ShawCor begins the next exciting chapter in its future.
Sincerely,
VIRgINIA L. shAW
CHAIR OF THE BOARD
7
ANNUAL REPORT 2012 ShawCor Ltd. 8Strong FundamentalsSTrOng FundaMenTaLSEnergy demand is expected to increase more than one third between 2011 and 2035, driven by strong growth in the world’s emerging economies.While oil demand rises by 0.5% between 2011 and 2035, demand for natural gas rises at a compound average annual growth rate of 1.6% per year, an increase of 50% during the period.Rising global energy demand and increasing depletion rates require new sources of oil and gas including: deepwater, shale plays, frontier gas, LNG and oil sands.global energy demand by region(Millions of Tonnes of Oil Equivalent) Source: IEA Source: IEA Source: EIA, IEAglobal energy demand by fuel (Millions of Tonnes of Oil Equivalent)The challenge to meet global demand (Quadrillion BTU)ShawCor’s prospects are supported by the strong, long-term fundamentals of the industry we serve. Between now and 2035, the world’s primary energy demand is expected to grow between 1.2 and 1.5 percent per year, led by the fast-growing economies of Asia Pacific and other developing regions. Meanwhile, the depletion rate for existing hydrocarbon reserves is running at about 6.5 to 7.7 percent per year and growing. To bridge the gap, the world’s leading energy producers are tapping new energy deposits in increasingly remote and challenging locations. From the high Arctic to the deep oceans, to shale plays and the oil sands, the growth frontiers of oil and gas production are driving the need for new pipeline investment and innovative technological solutions. What’s more, the amount of capital investment required for the development of each new energy discovery is steadily increasing. During the 10-year period from 1995 to 2004, global capital expenditures on the development of new oil and gas resources exceeded US$2 trillion and resulted in a net increase in crude oil production of approximately 12 million barrels per day. Over the six-year period from 2005 to 2010, the world spent about the same amount but was unable to achieve any increase in production. This trend is expected to continue to drive demand for advanced technological solutions that reduce risk and minimize recovery costs. Meanwhile, the rehabilitation of existing land pipelines, which already represents 10 percent of land pipe coating revenue, is also supported by strong fundamentals. Sixty-seven percent of the global pipeline infrastructure was installed more than 20 years ago, before the advent of today’s advanced coating technologies. Increasing environmental awareness and stricter government regulation will continue to drive growth as aging infrastructure is replaced. For all of these reasons, global spending on energy infrastructure is expected to remain strong during the upcoming years. As the world’s market and technological leader in advanced pipeline coatings and a diversified energy services company active in many of the industry’s highest growth markets, ShawCor is ideally positioned to benefit from these trends. 19902000201020202030203520,00015,00010,0005,0000OECDNON-OECDExisting Oil SupplyExisting Natural Gas SupplyOil to OffsetDepletionNatural Gas to OffsetDepletionIncreased Oil DemandIncreased Natural Gas Demand199020002010202020302035400350300250200150100500CoalOilGasHydroNuclearBioenergyOther renewables20,00015,00010,0005,0000199020002010202020302035 ANNUAL REPORT 2012 ShawCor Ltd. 9Rising capital spending to unlock new energy resources will support increased infrastructure investment.Aging pipeline systems are creating growing demand for pipeline rehabilitation products and services. Steady growth in energy demand, faster depletion rates, a shift toward increasingly remote and challenging resource plays and an aging pipeline infrastructure point toward a steady increase in pipeline investment to address evolving supply and demand dynamics.Increasing capital expenditures (Oil price $ per bbl) aging global pipeline infrastructureIncreasing pipeline investment, 2001-2018(US$ billions)Source: Barclay’s Capital May/June 2012 Update, EIASource: Douglas-WestwoodSource: Oil & Gas Journal, Douglas-WestwoodShawCor is poised for significant growth as global investment in pipelines and related energy infrastructure increases to address the industry’s new supply-demand dynamics.11-20 Years18%<10 Years15%>21 Years67%2000200220042006200820102012600,000500,000400,000300,000200,000100,00000130020010000203181716151413121110090807060504 ST rOng Fu n da M e n Ta L S / Fu n da M e n Ta L ST r e ngT H S
A N N UA L R E P O RT 2 01 2 S H awC O r LT d.
ShawCor
at-a-glance
ShawCor has established a leading position in its chosen
markets through an unwavering focus on global growth,
flawless execution, technological innovation and
organizational excellence. with a network of over 75 pipe
coating and other operating facilities around the globe,
we are located in the world’s primary energy producing
regions and on each of the industry’s fast-growing frontiers.
PIPeLIne and P IPe SerVICeS
8,000+
dEdICATEd EMPLOYEEs
AROUNd ThE WORLd
75+
MANUfACTURINg, s ALEs ANd
sERVICE f ACILITIEs WORLd WIdE
25+
COUNTRIEs AROUNd ThE
WORLd ARE hOME TO
shAW COR fACILITIEs
Bredero Shaw
Flexpipe Systems
Socotherm
Shaw Pipeline Services
BUsINEss dEs CRIPTION
The global leader in pipe coating
solutions for corrosion protection,
flow assurance, insulation, field joints
and weight coating applications for
onshore and offshore pipelines.
Leading manufacturer of flexible
composite pipe systems used
for oil and gas gathering, water
transportation, CO₂ injection and
other corrosive applications that
benefit from the product’s pressure
and corrosion resistance capabilities.
The world’s second largest provider
of pipe coating solutions for corrosion
protection, flow assurance, thermal
insulation and concrete weight
applications, strategically positioned
to serve European, South American,
and U.S. offshore markets.
A leader in specialized NDT
inspection with a primary focus on
both the upstream and downstream
oil and gas industry where the
division is the premier global provider
of girth weld inspection services for
land and offshore pipelines.
KEY CU sTOMER sE gMENTs
Pipeline owners
Oil and gas producers
Pipeline contractors
Pipe mills
hIgh gROWTh MARKET s
Deepwater/Offshore
Onshore/Oil Sands
LNG/Enhanced Recovery
Rehabilitation/Shale Plays
10
Oil and gas producers
Gas distributors
Oil and gas producers
EPC contractors
Pipe mills
Lay barge operators
Spool bases
Pipeline owners and contractors
Oil and Gas Gathering
Enhanced Recovery
CO₂ Injection
Water Transportation
Deepwater/Offshore
Onshore/Rehabilitation
LNG/Enhanced Recovery
Deepwater/Offshore
Onshore
Ultrasonic Inspection
Real Time Radiography
11Canusa-CPSGuardianDSG-Canusa ShawFlexANNUAL REPORT 2012 ShawCor LtD. Business DescriptionBusiness Descriptionkey customer segmentshigh growth marketsThe market leader in field applied pipeline joint protection and insulation systems for onshore and offshore corrosion and thermal protection applications in the global oil, gas, water and insulated pipeline markets.Leading provider of a complete range of tubular management solutions including integrated inspection, threading, refurbishment and inventory services as one of the largest OCTG inspection businesses in the USA, Canada and Mexico.Leading global manufacturer of heat shrinkable tubing, sleeves and moulded products as well as heat shrink accessories and equipment with a manufacturing presence in three key markets: Americas, Europe and Asia/Pacific. World-class manufacturer of specialty wire and cable products for use in severe service industrial environments.Oil and gas pipelines District heating and cooling systemsWater and waste water pipelinesDrilling contractorsOil and gas producersTubular rental companiesAutomotiveElectrical/UtilityCommunicationsMilitary/CommercialMining/IndustrialPetrochemicalPower generationPulp and paperMiningAutomationDeepwater/OffshoreOnshore/Oil SandsLNG/RehabilitationPotable Water/District HeatingOnshore/ShaleOffshore Oil and GasOnshore/Oil Sands (SAGD)Electrical/UtilityCommunicationsAutomotiveElectronicsPetrochemical/Power GenerationPulp and Paper/Primary MetalsAutomation/RoboticsAutomotivePetroChemiCaL anD inDuStriaL75+ Global Locationscoating facility portaBle coating plant other operating facility f u n da m e n ta l st r e ngt h s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
global
Leadership
With a global network of 32 pipe coating
facilities, ShawCor is the industry’s leading
provider of advanced pipeline coatings.
Through Bredero Shaw and Socotherm, we
command a leading position in all energy
producing regions of the world and are
positioned for continuing growth on each
of the industry’s fastest growing frontiers.
Activity in Asia Pacific has been particularly
robust owing to the region’s fast growing
economies, the increasing use of LNG
liquefaction to meet rising natural gas
demand and the relative scarcity of onshore
energy deposits. The coastal waters of
Southeast Asia and Australia contain
among the world’s largest untapped oil
and gas reserves, a hydrocarbon bonanza
that has attracted growing interest from
major energy companies. We are the only
industry competitor with two high-capacity
coating plants in the region, an important
consideration in mitigating supply risk on
large infrastructure projects.
In 2011 and 2012, ShawCor secured
more than US$1.0 billion in pipe coating
contracts globally. These orders will
ensure a record level of activity at many
of our facilities over the next two years.
This work included a record US$500
million in contracts with Mitsui & Co. Ltd.
and McDermott Australia Pty. Ltd., in
connection with the Ichthys LNG Project
for Inpex Corporation and Total E&P. Also
included were US$170 million in contracts
awarded by Chevron Australia Pty. Ltd. to
protect 300 kilometres of trunk line and
flow lines for the Wheatstone LNG project
with advanced anti-corrosion, insulation,
flow assurance and concrete weight
coatings. We expect this trend to continue
as the economic advantages of LNG drive
further exploration and development across
many regions of the world.
12
In 2012, ShawCor significantly strength-
ened its leading market position with the
addition of Socotherm as the Company’s
eighth business division. The second
largest pipe coating business in the world,
Socotherm has expanded ShawCor’s
presence in Europe, South America, and
the U.S. while providing complementary
expertise in offshore and flow assurance
pipeline technologies.
We also continued to extend our leadership
on other fronts. The exploitation of shale
deposits in the U.S. has the potential
to make that country a net exporter of
energy by 2020 and ShawCor continues
to strengthen its position in this high-
growth energy frontier. Our Guardian
division, a leading supplier of downhole
tubular management solutions, acquired
Magnum Tubular Inspection in 2012 to
accelerate its penetration into the Eagle
Ford and Permian Plays. Flexpipe Systems,
the market leader in flexible composite
pipe solutions for the onshore, enhanced
oil recovery and shale oil and gas sectors,
expanded its manufacturing facilities in
2012 to keep pace with orders throughout
North America and meet increasing
international demand. We also continued
to expand our capabilities to meet the
needs of customers in Canada’s oil sands
as recently acquired ShawCor CSI Services
widened its offering of custom factory-
and field-applied coating services for this
growing energy sector.
M a jOr PrOj e C T awa r d S
Chevron Wheatstone
>US$170M
Inpex Ichthys GEP
Inpex Ichthys URF
Exxon Mobile Barzan
Zawtika
>US$400M
>US$100M
>US$45M
>US$60M
North Sea Flow Assurance
>US$40M
Technip, Trinidad
Pearl Energy Ruby
Apache Julimar
Linea 5
>US$80M
>US$30M
>US$45M
>US$40M
1
2
1
Preparation of steel reinforcing
cages for concrete weight coating
on the Inpex Ichthys Project.
2
Socotherm’s modern pipecoating
facility in Pozzallo, Italy.
Volatile weather conditions in the North Sea make exploration, drilling and the construction of pipelines challenging.“ we awarded the Ichthys gas export Pipeline Coating Contract to Bredero Shaw, one of ShawCor’s pipe coating divisions, because of their industry-leading logistics capabilities, rigorous safety systems and overall reputation for excellence. Bredero Shaw is the only supplier with two major coating facilities in South-east asia equipped for multiple vessel berthing and both plants were required to provide certainty of supply for the massive Ichthys gas export Pipeline Project. Our working relationship has been a model of what’s required for the safe and successful execution of a very large and complex project.”Patrick Cresswell Gas Export Pipeline Manager, Ichthys Project, INPEXCoating pipe for the Inpex Ichthys Gas Export Pipeline at the Bredero Shaw facility in Kuantan, Malaysia. f u n da m e n ta l st r e ngt h s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Technological
Innovation
ShawCor’s ability to answer new challenges
in the evolving search for energy resources
is based on a strong foundation of
technological innovation and leadership.
Today, we hold 248 enforceable patents,
including 20 awarded in 2012, with an
additional 170 patents pending and utilize
over 80 proprietary material formulations.
Most of these scientific advancements
are focused on the introduction of new
products and services that enhance
performance, reduce operating costs or
minimize environmental risk on the growing
frontiers of energy production.
Among the most promising sources of
new hydrocarbon deposits are the world’s
oceans, which are estimated by the
International Energy Agency to contain
more than 200 billion barrels of recoverable
reserves. As energy producers move
progressively offshore to recover deeper
ocean deposits, ShawCor is developing
the advanced technological solutions
required for such increasingly remote and
challenging environments.
One such product is Thermotite® ULTRA™,
an innovative subsea insulation system
with unlimited depth capability that allows
hydrocarbons to keep flowing even though
the pipeline is surrounded by frigid ocean
temperatures. Developed with energy
producing partners and tested in ShawCor’s
Simulated Service Vessel in Toronto,
Thermotite® ULTRA™ has already been
used on two major offshore projects during
the past two years. In August of last year,
we extended the Thermotite® ULTRA™
product line with the trial of a new ULTRA™
product for high temperature flow lines
at our pipe coating facility in Kuantan,
Malaysia. This new insulation system is
now being included in bids for offshore
deepwater projects around the world.
Many of the processes used in ShawCor’s
coating plants and other operating facilities
14
also make use of new and unique
technologies. One example of such an
industry leading process technology is
Bredero Shaw’s Mobile Robotic Cutback
System, an innovative end machining
technology for insulated pipe. This new
technology eliminates the manual
preparation of pipe ends using wire
brushing, grinding and scraping. The new
process is safer, quieter, requires less
labour and produces consistent high quality
cutback profiles while generating recyclable
waste. The benefit of these process
improvements have been recognized
through the receipt of a Spotlight on New
Technology Award at the 2013 Offshore
Technology Conference in Houston, Texas,
the third time in the past four years that
ShawCor has received one of these
prestigious awards.
The introduction of new technology has
also spurred the rapid growth of Flexpipe
Systems which has added two new
products to the original FlexPipe Linepipe
product line. FlexPipe HT High Temperature
Linepipe and FlexCord™ Linepipe have
solidified the company’s position as the
single-source market leader for composite
line pipe in North America’s conventional
oil and gas and emerging shale basins.
Flexpipe sees its next growth opportunity
in the development of a larger six- and
eight-inch diameter, impact resistant
composite product to replace conventional
steel pipe. Produced in standard 44-ft.
lengths, FlexFlow Linepipe can be readily
shipped, easily installed and quickly and
permanently coupled with our newly
developed, unique coupling system.
Similar technological innovation can be
seen at work in the growing popularity of
Canusa-CPS’s IntelliCOAT® system, which
employs infrared radiation to apply heat-
shrinkable sleeves for customers in the field
with unprecedented precision, consistency
and speed.
1
2
1
ShawCor has again been chosen to
receive a Spotlight on New Technology
Award at the 2013 Offshore
Technology Conference in Houston,
Texas for the Bredero Shaw Mobile
Robotic Cutback System.
2
Canusa-CPS IntelliCOAT®, the
world’s first fully-automated
system for heat shrinkable sleeve
installation, being used on the Shell
Connect DE Project in Germany.
Volatile weather conditions in the North Sea make exploration, drilling and the construction of pipelines challenging.“ always one of ShawCor’s greatest strengths, technological innovation plays an increasingly important role in helping customers meet new challenges in today’s dynamic energy industry. Most of our research and development efforts are focused on creating practical solutions for specific customer needs and involve rigorous process engineering to ensure optimum performance and reliability. One such innovation was a low-dust concrete weight coating product that improves the working environment on lay barges and which won first prize in the offshore division for the Inpex australia 2013 HSe awards.”dr. Stephen edmondson Vice President, Research & Development, ShawCorProduction trials for a new high temperature (120°C) Thermotite® ULTRA™ deepwater insulation system being conducted for a customer at the Bredero Shaw facility in Kuantan, Malaysia. Fu n da M e n Ta L ST r e ngT H S
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
unique
Capabilities
Over the past 60 years, ShawCor’s pipe
coating businesses have developed
strong working relationships with the
world’s leading energy producers, pipe
manufacturers and pipeline installation
contractors. Today, we are the preferred
supplier for technologically advanced
pipe coating solutions and coating plant
to pipeline right of way logistics. Equally
important is our reputation for fulfilling the
most demanding project requirements on
spec, on time and on budget.
Our capabilities start with an unmatched
network of 32 pipe coating facilities that
place us in close proximity to all of the
world’s major hydrocarbon regions. This
makes us uniquely capable of handling the
largest and most demanding pipe coating
contracts anywhere in the world with the
additional capacity required to meet any
contingency. In 2011 and 2012, we improved
throughput and pipe handling capabilities
on the anticorrosion and insulation lines at
our Kabil, Indonesia and Kuantan, Malaysia
facilities, added new yard space in Kabil
following construction of two new berths
at its deepwater port and also added a
second new birth at the facility in Kuantan.
These improvements played an essential
role in helping ShawCor win most of the
major pipe coating contracts awarded in
the Asia Pacific region over the past two
years. In addition, our fixed plant network
is complemented by 14 mobile facilities,
including our Brigden® mobile coating
plant, which can be assembled and running
within six weeks anywhere in the world.
Built to perform at the same operating
standards as our fixed plants, Brigden
was successfully deployed to provide
anticorrosion and thermal insulation
coatings for the Chevron Jack/St. Malo
Project in the Gulf of Mexico during the
past year.
16
We are also uniquely equipped to help
our clients minimize risk, an important
consideration in the construction of
multi-billion dollar energy infrastructure
projects. While the coating system typically
represents less than 10 percent of the
total installed cost of a pipeline project,
its performance is absolutely critical to
ensure the integrity of the pipeline over
its expected lifetime. Our reputation as
an industry leader is an important asset
with more than 400,000 km of pipelines
around the world that are protected by
our coating solutions.
Increasingly, however, we are also working
with our clients to validate the performance
of advanced coating solutions before they
are deployed in extreme environments. In
2011, ShawCor inaugurated the Subsea Test
Facility and Simulated Service Vessel (SSV)
at its headquarters in Toronto, Canada
where this state-of-the-art equipment
is used to test the thermal, compression
resistance and flow assurance capabilities
of newly developed insulation coatings
and joint protection systems before critical
pipelines are installed. In 2012, the SSV was
used to validate the performance of the
insulation on the flow lines for the Chevron
Wheatstone Project prior to the pipe being
coated. The largest and most advanced
test vessel of its kind, the SSV has proven
instrumental in helping ShawCor secure
several major deepwater pipe coating
contracts awarded since the test facility
was commissioned in 2011.
1
2
1
2
Bredero Shaw has added a second
berth at its coating facility in
Kuantan, Malaysia which is capable
of loading and unloading pipe
24 hours per day to meet customer
schedules.
Bredero Shaw has also added two
new berths at its deepwater port in
Kabil, Indonesia which provides the
capability for simultaneous load-in
and load-out of pipe when required
to meet demand.
Volatile weather conditions in the North Sea make exploration, drilling and the construction of pipelines challenging.The Simulated Service Vessel (SSV) at the ShawCor Subsea Test Facility provides unique capabilities to test and validate deepwater insulation and joint protection systems under actual operating conditions.“ Quality and reliability of flow assurance coatings are critical elements of deepwater pipeline design. On behalf of clients, I have witnessed the tests and confirmed the data used to validate the performance of pipeline insulation systems undergoing evaluation in the Simulated Service Vessel (SSV) at the ShawCor Subsea Test Facility in Toronto. I have been involved in every step of the testing procedures and guided through the new and unique technologies being employed by ShawCor’s extremely competent technical staff, which ensured the completion of a safe and successful project.”alberto Manfredini Project Manager, DNV Canada Ltd. ANNUAL REPORT 2012 SHawCOr LTd. 18Superior execution090810111214,00012,00010,0008,0006,0004,0002,0000FundaMenTaL STrengTHSThe ShawCor Management System (SMS) is continuing to generate increasing cost savings as new SMS-related initiatives are introduced across all of the Company’s operations.A reputation for superior execution is of paramount advantage in a world of multi-billion dollar energy infrastructure investments, where the impact of project delays can be measured in millions of dollars per day. Our customers expect on-time, on-budget performance every time, and so do we. It’s a commitment that lies at the heart of every ShawCor facility worldwide through the ShawCor Management System (SMS).First launched in 2006, SMS is an industry-leading continuous improvement program that draws upon the best elements of lean manufacturing, Six Sigma and other world-class manufacturing systems, as well as lessons from our own manufacturing experience over many years. The SMS program combines these elements with a strong corporate culture to drive excellence in ShawCor’s manufacturing and business processes throughout every corner of the organization.Today, the performance of each of our manufacturing locations is continuously audited against eight measurable SMS elements that address: standardized work, product/service and process launch, product and process engineering, global operations metrics, SMS leadership management, workforce engagement, quality and process control and knowledge sharing.During the past year, we began to migrate SMS into the non-manufacturing areas of ShawCor’s businesses including finance, information technology, human resources and procurement. While this process is not yet complete, it has already contributed toward an additional $12.8 million in SMS-related savings during 2012 as well as procurement savings of almost $6.0 million. To date we have achieved almost $40.0 million in cumulative annual savings as a result of improved efficiencies, material variance reductions, manufacturing process improvements, standardized launch methodologies for new products and a growing number of SMS-related initiatives in our manufacturing and non-manufacturing operations. Equally important, such improvements also translate into multiple benefits for our customers including lower costs, higher quality and better on-time performance.Our commitment to continuous improvement is supported through ShawCor’s active participation in the Association for Manufacturing Excellence (AME), which serves as an appropriate setting for the celebration of our ongoing SMS professional development, planning and communication programs. The 2012 AME Conference was attended by 114 ShawCor managers and executives, 40 percent of whom represented non-manufacturing functions. In 2013, SMS will continue to be rolled out throughout our divisions to support the achievement of continuous improvement as a unified, higher performing organization. This year, we expect to see the benefits of SMS increase in terms of cost savings and organizational strength with superior execution at our operating facilities and in our strategic and business support functions.After years of growth through the successful integration of several businesses, we also turned our attention during the year to strengthening the ShawCor brand itself. In September, we unveiled a major upgrade to the Company’s online presence with new corporate and divisional websites that feature consistent design and branding, an expanded social media presence and a new generation of complementary sales and marketing materials. These efforts were accompanied by an extensive internal communications initiative aimed at unleashing our full potential as an international energy services company.SMS Cost Savings (in thousands of Canadian dollars)1 Leaders and employees use the Daily Management Process to discuss operational performance improvements facilitated through SMS initiatives. 1 Volatile weather conditions in the North Sea make exploration, drilling and the construction of pipelines challenging.“ we continuously advance our capabilities in order to meet increasing customer and industry requirements with confidence. The ShawCor Management System (SMS) is the foundation that guides our leaders and employees in this continuous improvement process. every year, we seek improvement and set new standards that raise the level of performance in quality, on-time delivery, operating costs and responsiveness to customer needs. By expanding SMS enterprise wide, we will unleash the power of collaboration and accountability across the organization and create a culture committed to superior execution – a vision that only great companies are able to realize.” Bob garces Vice President, ShawCor Manufacturing SystemInsulated pipe coated for the Chevron Jack/St. Malo Project in the Gulf of Mexico, at Bredero Shaw’s Brigden mobile coating facility in Beaumont, Texas, is loaded for transportation to the lay barge. 2020ANNUAL REPORT 2012 ShawCor Ltd. StroNG FUNdaMENtaLS / FUNdaMENtaL StrENGthS20Spoolable composite pipe manufactured by Flexpipe Systems is loaded onboard an ocean freighter for shipment to Australia for use on a Santos project. FUNdaMENtaL StrENGthSAll of these fundamental trends play to ShawCor’s strengths as the world’s largest provider of advanced pipeline coatings and a leading pipeline and energy services company. Global leadership. Each of our eight business units commands the #1 or #2 position in its market and shares an unwavering focus on global growth.Unique capabilities. Our global network of over 40 fixed and portable coating plants and over 50 other operating facilities provide unmatched logistics capabilities that allow us to take on the largest and most complex jobs anywhere in the world.Technological innovation. Market-leading research and development capabilities have enabled ShawCor to offer the most technologically advanced products and services in the industry.Superior execution. The industry’s most advanced continuous improvement program helps us execute complex customer projects safely, on-time and on- budget with consistent customer satisfaction.Diversified presence. We serve the needs of customers in all high growth sectors including conventional onshore, offshore, deepwater, oil sands, shale plays, enhanced recovery, LNG energy production, pipeline rehabilitation and potable water.Proven performance. ShawCor secured more than US$1.0 billion in major pipe coating contracts during the past two years and ended 2012 with a record year-end 12 month backlog of $850 million.StroNG FUNdaMENtaLSGlobal energy demand is projected to grow by more than one third between 2011 and 2035. Meanwhile, the depletion rate for producing deposits is between 6.5 and 7.7 percent per year and rising. To bridge the gap, energy producers are turning to increasingly remote and challenging locations such as deepwater, oil sands, shale plays and other new frontiers. This has resulted in:• greater distances between new energy sources and their end markets• increased investment in new pipeline infrastructure• higher demand from energy producers for innovative, cost-saving products and support services A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Financial Review
Management’s Discussion and Analysis
22
Executive Overview
22
1.0
22
1.1 Core Businesses
23
1.2 Vision and Objectives
23
1.3 Key Performance Drivers
24
1.4 Key Performance Indicators
25
1.5 Capability to Deliver Results
26
Financial Highlights
2.0
Selected Annual Financial Information 26
2.1
27
Foreign Exchange Impact
2.2
Significant Business Developments
3.0
28
Strategic Review and Reorganization 28
3.1
29
3.2 Acquisition of Fineglade
30
4.0 Results from Operations
30
4.1 Consolidated Information
32
Segment Information
4.2
33
Liquidity and Capitalization
5.0
5.1 Cash Provided by Operating Activities 33
34
5.2 Cash Used in Investing Activities
5.3 Cash Used in Financing Activities
34
5.4
Liquidity and Capital
Resource Measures
5.5 Contingencies and Off Balance
5.6
Sheet Arrangements
Financial Instruments and
Other Instruments
5.7 Outstanding Share Capital
6.0 Quarterly Selected
6.1
7.0
Financial Information
Fourth Quarter Highlights
Disclosure Controls and Internal
Controls over Financial Reporting
7.1 Transactions with Related Parties
8.0 Critical Accounting Estimates and
Accounting Policy Developments
8.1 Critical Accounting Estimates
8.2
Accounting Standards Issued but
Not Yet Applied
34
35
36
38
38
39
40
40
40
40
42
9.0 Outlook
10.0 Risks and Uncertainties
10.1 Economic Risks
10.2 Litigation and Legal Risks
10.3 HSE Risks
10.4 Political and Regulatory Risks
11.0 Environmental Matters
12.0 Reconciliation of
Non-GAAP Measures
13.0 Subsequent Events
14.0 Forward-Looking Information
Management’s Responsibility
for Financial Statements
Independent Auditors’ Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of
Comprehensive Income
Consolidated Statement of
Changes in Equity
Consolidated Statements of Cash Flow
Notes to the Consolidated
Financial Statements
Six-Year Review
Quarterly Information
ShawCor Directors
Corporate Governance
Primary Operating Locations
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45
46
46
47
48
48
49
50
51
52
53
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95
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98
Corporate Information
IBC
21
m a nag e m e n t ’ s di s c us s ion a n d a na lys i s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Management’s Discussion and Analysis
The following Management’s Discussion and Analysis (“MD&A“), is a discussion of the consolidated financial position and results of operations
of ShawCor Ltd. (“ShawCor” or “the Company”) for the years ended December 31, 2012 and 2011 and should be read together with ShawCor’s
audited consolidated financial statements and accompanying notes for the same periods. All dollar amounts in this MD&A are in thousands of
Canadian dollars except per share amounts or unless otherwise stated.
This MD&A and the audited consolidated financial statements and comparative information have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board, which are also generally
accepted accounting principles (“GAAP”) for publicly accountable enterprises in Canada. This MD&A contains forward-looking information
and reference should be made to section 14 hereof.
1.0 Executive Overview
ShawCor is a growth oriented, global energy services company serving the Pipeline and Pipe Services and the Petrochemical and
Industrial segments of the energy industry. The Company operates eight divisions with over seventy-five manufacturing, sales
and service facilities located around the world. The Company is publicly traded on the Toronto Stock Exchange (“TSX”).
1.1 Core Businesses
ShawCor provides a broad range of products and services, which include high quality pipe coating services, flexible composite pipe,
onshore and offshore pipeline corrosion and thermal protection, state-of-the-art ultrasonic and radiographic inspection services,
tubular management services, heat-shrinkable polymer tubing and control and instrumentation wire and cable.
The Company and its predecessors have designed, engineered, marketed and sold these products and services worldwide for over
50 years. ShawCor has made substantial investments in research and development (“R&D”) initiatives and earned strong customer
loyalty based on a history of project execution success.
The Company operates in a highly competitive international business environment with its success attributed to its strategic global
locations, its extensive portfolio of proprietary technologies and its commitment to the use of industry-leading business processes
and programs. ShawCor is the world’s largest applicator of pipeline coatings for the oil and gas industry for both onshore and
offshore pipelines.
The primary driver of demand for the Company’s products and services is the level of energy industry investment in pipeline
infrastructure for hydrocarbon development and transportation around the globe. This investment, in turn, is driven by global levels of
economic activity and the resulting growth in hydrocarbon demand, the impact of resource depletion on the supply of hydrocarbons
and the financial position of the major energy companies. The relationship between global hydrocarbon demand and supply and the
level of energy industry investment in infrastructure tends to be cyclical.
As at December 31, 2012, the Company operated its eight divisions through two reportable operating segments: Pipeline and Pipe
Services; and Petrochemical and Industrial.
Pipeline and Pipe Services
The Pipeline and Pipe Services segment is the largest segment of the Company and accounted for 90% of consolidated revenue for
the year ended December 31, 2012. This segment includes the Bredero Shaw, Canusa-CPS, Shaw Pipeline Services, Flexpipe Systems,
Socotherm and Guardian divisions.
• Bredero Shaw’s product offerings include specialized internal anticorrosion and flow efficiency pipe coating systems, insulation
coating systems, weight coating systems and custom coating and field joint application services for onshore and offshore pipelines.
• Canusa-CPS manufactures heat-shrinkable sleeves, adhesives, sealants and liquid coatings for corrosion protection on onshore
and offshore pipelines.
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• Shaw Pipeline Services provides ultrasonic and radiographic pipeline girth weld inspection services to pipeline operators and
construction contractors worldwide for both onshore and offshore pipelines.
• Flexpipe Systems manufactures spoolable composite pipe systems used for oil and gas gathering, water disposal, carbon dioxide
injection pipelines and other applications requiring corrosion resistance and high pressure capabilities.
• Guardian provides a complete range of tubular management services including inventory management systems, mobile inspection,
in-plant inspection and the refurbishment and rethreading of drill pipe, production tubing and casing.
• Socotherm provides specialized thermal insulation coatings, anticorrosion coatings, internal coatings, and concrete weight coatings
for onshore and offshore pipelines.
Petrochemical and Industrial
The Petrochemical and Industrial segment, which includes the DSG–Canusa and ShawFlex divisions, accounted for 10% of
consolidated revenue for the year ended December 31, 2012. Operations within this segment utilize polymer and adhesive
technologies that were developed for the Pipeline and Pipe Services segment and are now being applied to applications in
Petrochemical and Industrial markets.
• DSG–Canusa is a global manufacturer of heat-shrinkable products including thin, medium and heavy-walled tubing, sleeves
and molded products as well as heat-shrink accessories and equipment.
• ShawFlex is a manufacturer of wire and cable for control, instrumentation, thermocouple, power, marine and robotics applications.
1.2 Vision and Objectives
ShawCor’s vision and business strategy is to be the market leader and technology innovator with a primary focus on the global
pipeline industry and to use this base as a platform to build an international energy services company while achieving the following
key performance objectives:
• generate a Return on Equity (“ROE”) of 15% over the full business cycle;
• generate average annual net income growth of 15% over the full business cycle;
• continuously improve on an industry leading health, safety and environmental (“HSE”) management system to support
the Company’s commitment to an Incident and Injury Free (“IIF”) workplace;
• maintain a strong market share with each division being number one or a strong number two in its respective market;
• achieve flawless execution supported by clear lines of accountability and responsibility;
• increase the flow of new products using the New Product Development (“AFPD”) system to achieve a minimum of 20%
of revenue from new products introduced within the current or previous two years;
• achieve lowest cost producer status using the ShawCor Manufacturing System (“SMS”) program combined with effective
global procurement;
• provide a reliable organization based on best practices in governance, financial control and business processes; and
• provide a workplace and career growth environment that will attract and retain top calibre employees who are essential
to achieving the corporate growth and profitability objectives.
1.3 Key Performance Drivers
The Company believes the following key performance drivers are critical to the success of its businesses:
• demand for the Company’s products and services that is primarily determined by investment in new energy infrastructure
necessary to supply global energy needs;
• current and forecasted oil and gas commodity prices and availability of capital to enable customers to finance energy
infrastructure investment;
• the Company’s competitive position globally and its ability to maintain operations in each of the major oil and gas producing regions;
• the Company’s technology and its ability to research and commercialize innovative products that provide added value
to customers and provide competitive differentiation;
• the Company’s operational effectiveness and its ability to maintain efficient utilization of productive capacity at each
geographic location;
• access to capital and maintenance of sufficient available liquidity to support continuing operations and finance growth activities;
• the ability to identify and execute successful business acquisitions that result in strategic global growth; and
• the ability to attract and retain key personnel.
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1.4 Key Performance Indicators
Several of the drivers identified above are beyond the Company’s control; however, there are certain key performance indicators that
the Company utilizes to monitor its progress in achieving its vision and performance objectives. These indicators are detailed below.
Certain of the following key performance indicators used by ShawCor are not measurements in accordance with Generally Accepted
Accounting Principles (“GAAP”), should not be considered as an alternative to net income or any other measure of performance
under GAAP and may not necessarily be comparable to similarly titled measures of other entities. Refer to section 12 – Reconciliation
of Non-GAAP Measures, for additional information with respect to Non-GAAP measures used by the Company.
Net Income Growth
As part of its performance objectives, the Company has set a goal for average annual net income growth of 15% over the full business
cycle, as described in section 1.2 – Vision and Objectives. Net income (attributable to shareholders of the Company) increased by
$122.1 million, or 217%, from $56.3 million for the year ended December 31, 2011 to $178.4 million for the year ended December 31,
2012. The increase was mainly attributable to higher revenue in the Asia Pacific, North America and Latin America regions in the
Pipeline and Pipe Services segment as described in section 4.2.1 – Pipeline and Pipe Services segment, a gain on sale of land of
$12.1 million, partially offset by an increase in selling, general and administrative (“SG&A”) expenses of $38.9 million as described
in section 4.1 – Consolidated Information.
Return on Equity (“ROE”)
ROE, a non-GAAP measure, is defined as net income for the year divided by average shareholders’ equity for the most recently
completed year. ROE is used by the Company to assess the efficiency of generating profits from each unit of shareholders’ equity.
As part of its performance objectives, the Company has set an ROE target of 15%, as described in section 1.2 – Vision and Objectives.
The Company’s ROE for the years ended December 31, 2012 and 2011 was 19.8% and 6.7%, respectively. The increase of 13.1 percentage
points was primarily due to an increase in net income of $122.1 million, partially offset by an increase in average shareholders’ equity
of $56.7 million.
Free Cash Flow (“FCF”)
FCF, a non-GAAP measure, is defined as cash flow from operating activities less capital expenditures and dividend payments during
the year. FCF represents the cash available from operations after spending on maintenance of existing assets and expanding the
current asset base and is a measure of the Company’s ability to generate cash flow to fund growth. FCF increased by $461.9 million
from a negative cash outflow of $32.6 million during 2011 to a cash inflow of $429.3 million during 2012. The change was primarily
due to significantly higher cash provided by operating activities of $484.8 million, partially offset by an increase in capital
expenditures of $18.5 million and an increase in dividends paid of $4.4 million.
Employees
The Company conducts periodic employee surveys and monitors turnover in key personnel positions in order to assess
employee engagement.
Market Position
The Company’s record of successful project execution and the resulting repeat business demonstrate customer loyalty, which is one
of many qualitative measures that the Company utilizes to measure customer satisfaction. The following table sets forth the relative
market position by division within the markets that the Company operated in during the year ended December 31, 2012:
Bredero Shaw
Canusa–CPS
Shaw Pipeline Services
Flexpipe Systems
Guardian
DSG–Canusa
ShawFlex
Socotherm
24
Market Position
First
First
First
Second
First
Second
First
Second
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Safety and Environmental Stewardship
The Company maintains a comprehensive Health, Safety and Environmental (“HSE”) management system in place within each of its
eight operating divisions and is committed to being an Incident and Injury Free (“IIF”) workplace with no damage to the environment.
For the years ended December 31, 2012 and December 31, 2011, the Company had recordable injuries per million person hours worked
of 6.2 and 6.7, respectively. During 2012, the Company completed 24 HSE audits at manufacturing and service locations across all
eight divisions and developed action plans to correct any deficiencies identified in the audits.
1.5 Capability to Deliver Results
Capital Resources
The Company operates in the global energy industry and, as a result, the operations of the Company tend to be cyclical. In addition,
the Company can undertake major pipe coating projects anywhere in the world as part of its normal operations. These factors, as well
as the Company’s growth initiatives, can result in variations in the amount of investment in property, plant and equipment, working
capital and project guarantees required to support the Company’s businesses. The Company’s policy is to manage its financial
resources, including debt facilities, so as to maintain sufficient financial capacity to fund these investment requirements.
Capital expenditures increased by $18.5 million from $56.0 million for the year ended December 31, 2011 to $74.4 million for the year
ended December 31, 2012. The Company believes it has sufficient available resources and capacity to meet the market demand for
its products and services in the markets where the Company operates. The Company may, however, incur new capital expenditures
to facilitate growth in new markets.
The current level of working capital investment is expected to be sufficient to support the level of business activity projected in 2013;
however, unexpected increases in business activity or specific pipe coating project requirements may result in higher working capital
requirements. Any such increase in requirements will be financed from the Company’s cash balances and available committed
credit facilities. The Company had cash and cash equivalents and short-term investments of $372.0 million and $67.3 million as
at December 31, 2012 and 2011, respectively, and had unutilized lines of credit available of $166.7 million and $162.3 million, as at
December 31, 2012 and 2011, respectively.
The current financial position of the Company is strong and the Company does not foresee any difficulties in maintaining a sufficient
level of financial capacity to execute the Company’s growth strategy.
Please refer to section 5 – Liquidity and Capitalization, for additional information with respect to the Company’s liquidity and
financial position.
Non-Capital Resources
The Company considers its people as the most significant non-capital resource required in order to achieve the vision and objectives
identified above. The Company’s executives are comprised of senior business leaders who bring a broad range of experience and
skill sets in the oil and gas industry, finance, tax, law and corporate governance. The leadership team’s experience combined with
the employees’ knowledge and dedication to excellence has resulted in a long history of proven financial success and stability,
with the resulting creation of value for the Company’s stakeholders.
On an ongoing basis, the Company monitors its succession planning program in order to mitigate the impact of planned or unplanned
departures of key personnel. As at December 31, 2012, the Company believes it has sufficient human resources to operate its
businesses at an optimal level and execute its strategic plan.
Systems and Processes
Management regularly reviews the Company’s operational systems and processes and develops new ones as required. Key
operational programs utilized by the Company during the year ended December 31, 2012 included systems and controls over project
bidding, capital expenditures, internal controls over financial reporting, product development, HSE management and human resource
development. In addition, the ShawCor Manufacturing System (“SMS”) program has been implemented to increase operating
efficiency and achieve significant cost savings in each of the Company’s eight divisions.
As at December 31, 2012, the Company believes it has sufficient systems and processes in place to operate its businesses at
an optimal level and execute its strategic plan.
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2.0 Financial Highlights
2.1 Selected Annual Financial Information
(in thousands of Canadian dollars, except per share amounts)
Revenue
Cost of goods sold and services rendered
Gross profit
Selling, general and administrative expenses
Research and development expenses
Foreign exchange (gains) losses
Amortization of property, plant and equipment
Amortization of intangible assets
Gain on sale of land and other items
Impairment of property, plant and equipment,intangible assets and goodwill
Income from Operations
Accounting gain on acquisition
Income (loss) on investment in associate
Finance income (costs), net
Income before income taxes
Income taxes
Non-controlling interest
Net Income (attributable to shareholders of the company)
Net Income (attributable to shareholders of the company)
Add:
Non-controlling interest
Income taxes
Finance (income) costs, net
Gain on sale of land
Impairment of property, plant and equipment, intangible assets and goodwill
Amortization of property, plant and equipment and intangible assets
Accounting gain on acquisition
EBITDA(a)
Per Share Information:
Net Income
Basic (Classes A and B)
Diluted (Classes A and B)
Cash Dividends per Share
Class A
Class B
Twelve Months Ended December 31
2012
2011
2010
$ 1,482,849
904,362
$ 1,157,265
735,266
$ 1,034,163
623,641
578,487
308,172
12,242
(119)
45,133
8,248
(12,101)
4,686
212,226
413
8,694
1,318
222,651
44,188
45
$ 178,418
$ 178,418
$
$
421,999
269,241
13,119
1,338
41,906
7,244
–
5,244
83,907
–
(10,133)
(4,507)
69,267
12,987
–
56,280
56,280
45
44,188
(1,318)
(12,101)
4,686
53,381
(413)
–
12,987
4,507
–
5,244
49,150
–
410,522
219,084
11,050
(5,647)
45,077
5,038
–
16,089
119,831
13,181
(1,989)
(2,805)
128,268
33,196
–
95,072
95,072
–
33,196
2,805
–
16,089
50,115
(13,181)
$
$
$ 266,886
$ 128,168
$ 184,096
$
$
$
$
2.53
2.50
0.380
0.345
$
$
$
$
0.79
0.78
0.315
0.286
$
$
$
$
1.35
1.33
0.295
0.268
(a) Earnings before interest, income taxes, depreciation and amortization (“EBITDA”) is a non-GAAP measure and should not be considered as an alternative to net
income or any other measure of performance under GAAP. Non-GAAP measures do not have standardized meanings under IFRS. The Company’s method of
calculating these measures may differ from other entities and as a result may not necessarily be comparable to measures used by other entities. Refer to section 9
– Reconciliation of non-GAAP measures, for additional information with respect to non-GAAP measures used by the Company.
26
(in thousands of Canadian dollars)
Total Assets
Total Non-current Liabilities
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
December 31
2012
December 31
2011
$ 1,927,569
$ 211,617
$ 1,226,749
$ 110,342
Revenue
Revenue increased by $325.6 million, or 28%, from $1,157.3 million in the year ended December 31, 2011 to $1,482.9 million in the
comparable period in 2012, primarily as a result of increased market activity in both the Pipeline and Pipe Services segment and
the Petrochemical and Industrial segment (refer to section 4.2 – Segment Information for further details).
Revenue increased by $123.1 million, or 12% from $1,034.2 million in 2010 to $1,157.3 million in 2011, primarily driven by increased
revenue in both the Pipeline and Pipe Services segment and the Petrochemical and Industrial segment.
Income from Operations
Income from operations increased by $128.3 million, or 153%, from $83.9 million in 2011 to $212.2 million in 2012. Revenue increased
$325.6 million as explained above, with an increase in gross profit of $156.5 million and a gain on sale of land of $12.1 million, partially
offset by an increase in SG&A expenses of $38.9 million and an increase in amortization expenses pertaining to property, plant,
equipment and intangibles of $4.2 million.
Income from operations decreased by $35.9 million, or 30%, from $119.8 million in 2010 to $83.9 million in 2011. Revenue increased
$123.1 million as explained above, with an increase in gross profit of $11.5 million and lower impairment charges on property, plant,
equipment, goodwill and intangible assets of $10.8 million offset by increased foreign exchange losses of $7.0 million, an increase
in research and development expenses of $2.1 million and an increase in SG&A expenses of $50.2 million.
Net Income
Net income (attributable to shareholders of the Company) increased by $122.1 million, or 217%, from $56.3 million in 2011 to
$178.4 million in 2012. The increase was primarily due to the increase in income from operations as explained above, increased
income from investment in associate of $18.8 million and an increase in net finance income of $5.8 million, partially offset by
an increase in income taxes of $31.2 million.
Net income (attributable to shareholders of the Company) decreased by $38.8 million, or 41%, from $95.1 million in 2010 to
$56.3 million in 2011. The decrease was primarily due to the decrease in income from operations as explained above, an accounting
gain on acquisition of $13.2 million reported in 2010 and a higher loss on investment in associate of $8.1 million, partially offset by
a 7.2 percentage point reduction in the effective income tax rate from 25.9% in 2010 to 18.7% in 2011.
2.2 Foreign Exchange Impact
The following table sets forth the significant currencies in which the Company operates and the average foreign exchange rates for
these currencies versus Canadian dollars, for the following periods:
US Dollar
Euro
British Pound
Year Ended December 31
2012
1.0036
1.2921
1.5888
2011
0.9931
1.3750
1.5854
The following table sets forth the impact on revenue, income from operations and net income (attributable to the shareholders
of the Company), compared with the prior year period, as a result of foreign exchange fluctuations on the translation of foreign
currency operations.
(in thousands of Canadian dollars)
Revenue
Income from operations
Net income (attributable to shareholders of the Company)
Year Ended December 31, 2012
$
409
2,346
3,335
In addition to the translation impact noted above, for the year ended December 31, 2012, the Company recorded a foreign exchange
gain of $0.1 million, compared to a loss of $1.3 million in the year ended December 31, 2011, as a result of the impact of changes in
foreign exchange rates on monetary assets and liabilities and short term foreign currency intercompany loans within the group, net
of hedging activities.
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3.0 Significant Business Developments
3.1 Strategic Review and Reorganization
On August 30, 2012, Ms. Virginia Shaw, the Chair of the ShawCor Board of Directors and the indirect controlling shareholder
(the “Controlling Shareholder”) of the Company, advised the Board of Directors that she was prepared to consider a possible sale
of her shares of ShawCor as part of a sale of the Company.
The Board struck a committee of independent directors (the “Special Committee”) to conduct a strategic review of alternatives,
including canvassing potentially interested third parties to determine if an appropriate transaction was available that would be
acceptable to Ms. Shaw and would be in the best interests of ShawCor and its shareholders.
On January 14, 2013, the Company announced that the Board of Directors of ShawCor, after careful analysis, consideration and advice
from the Special Committee, and advice from independent financial and legal advisors, had unanimously approved and the Company
had entered into a definitive agreement with respect to a reorganization proposal negotiated by the Special Committee with the
Controlling Shareholder. The Chair and the Vice-Chair abstained from voting on the transaction.
The proposed reorganization is to be implemented pursuant to a court-approved plan of arrangement under the Canada Business
Corporations Act. It has been announced that the shareholders’ meeting to consider the arrangement will take place on March 14,
2013. The arrangement will require a special resolution of ShawCor shareholders approving the transaction in addition to approvals
required under applicable securities laws.
The arrangement also requires approval by the Ontario Superior Court of Justice at a hearing to be held following the shareholders’
meeting. If approved, the arrangement is expected to close late in the first quarter of 2013 or early in the second quarter.
The Special Committee retained TD Securities Inc. (“TD Securities”) to act as its financial advisor and to provide an independent
fairness opinion, and received independent legal advice from Stikeman Elliott LLP. Kingsdale Shareholder Services Inc. has been
retained as proxy solicitation agent.
Terms of the Transaction
The reorganization proposal contemplates the elimination of ShawCor’s dual class share structure through the purchase of all
of the Class A and Class B shares of ShawCor by a newly formed Canadian corporation. The new corporation would purchase all of
the Class A shares of ShawCor in exchange for new common shares on a 1:1 basis. The new corporation would also acquire all of the
Class B shares of ShawCor in exchange for a mix of new common shares and cash. The consideration paid for the Class B shares of
ShawCor will be $43.43 in cash or 1.1 new common shares per Class B share, such that 90% of the total consideration will be paid
in cash and 10% of the total consideration will be paid in new common shares. At closing, the new corporation and ShawCor would
amalgamate, under the name ShawCor Ltd. All issued and outstanding shares would, as a result, be the same class of common shares.
Following closing, a special dividend of $1.00 per share would be paid on all remaining shares (the payment date for such dividend
remains to be determined).
The closing conditions of the reorganization proposal include, among others, receipt of required ShawCor shareholder approvals,
receipt of Toronto Stock Exchange approval, receipt of court approvals, there being no material adverse change in the affairs of
ShawCor or applicable laws, and sufficient financing being available to complete the transactions contemplated in the reorganization.
ShawCor’s Board would also retain a “fiduciary out” ability to change its recommendation to shareholders.
Recommendation of the Board and the Special Committee
In approving the definitive agreement and making its recommendation that shareholders (other than the Controlling Shareholder)
vote in favour of the reorganization proposal, the Board of Directors and the Special Committee considered the fairness opinion
prepared by TD Securities and a number of other factors relating to the fairness of the reorganization proposal.
The factors relating to fairness considered by the Board and the Special Committee included, among others, the following:
a) The reorganization transaction is expected to be accretive to ShawCor from an earnings per share perspective,
b) The premium to the then current trading price and resulting dilution to Class A shareholders is within the range of precedents
generally for similar types of transactions,
c) The Special Committee has received a fairness opinion from TD Securities that the consideration to be paid to the Class B
shareholders pursuant to the Arrangement is fair, from a financial point of view, to the Class A and Class B shareholders, other than
the Controlling Shareholder,
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A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
d) The elimination of the Class B shares may facilitate future change of control transactions following the completion of the
transaction. It will also result in a widely held single class structure, and is expected to diversify ShawCor’s shareholder base, as many
investment mandates exclude investment in companies with dual class structures, and to increase liquidity and provide for enhanced
financing flexibility going forward,
e) The transaction is subject to shareholder and court approval, and shareholders will be provided with dissent rights, and
f) After completion of the transaction, all remaining shareholders will receive a $1.00 per share special dividend.
Pro Forma Impact of Proposed Transaction on the Company’s Financial Condition
(in millions of Canadian dollars, except ratios)
Cash and cash equivalents(a)
Debt:
Bank indebtedness
Loan payable
Obligations under finance leases
New private placement notes (less DF(b) costs)
Equity (including non-controlling interest)
Total capitalization
EBITDA
Total debt/capitalization
Net debt/capitalization
Total debt/EBITDA
Net debt(d)/EBITDA
(a) Includes short term deposits
(b) Debt financing
(c) NM – Not meaningful
(d) Net debt = Total debt less cash and cash equivalents
Reported
December 31
2012
Adjusted for
Proposed
Transaction
Pro Forma
December 31
2012
$
372.0
$
(223.9)
$
148.1
3.8
17.1
14.6
–
35.5
1,005.9
1,041.4
266.9
3.41%
NM(c)
0.13
NM(c)
–
–
–
347.4
–
(572.6)
3.8
17.1
14.6
347.4
382.9
433.2
816.2
266.9
46.92%
28.77%
1.43
0.88
Based on the pro forma impact of the proposed transaction on the Company’s financial condition, ShawCor believes that the increase
in net finance costs and leverage that will result from the completion of the transaction will not be excessive taking into account the
cyclicality of the Company’s businesses. Furthermore, the Company believes that based on available cash balances of $148 million,
combined with available committed credit lines in excess of $165 million, the Company is fully able to carry out its capital expenditure
and growth investment strategic plan. The servicing of the proposed new private placement notes, resulting in higher finance costs, is
not expected to have any material adverse impact on the Company’s cash flows.
3.2 Acquisition of Fineglade
On October 24, 2012, ShawCor Ltd., through one of its subsidiaries, acquired the remaining 60% of Fineglade Limited (“Fineglade”).
Fineglade, which currently holds approximately 96% of the outstanding shares of Socotherm S.p.A., was previously owned 40% by
ShawCor Ltd. and 60% by an entity controlled by Sophia Capital.
The total consideration for the acquisition of the remaining 60% of Fineglade was $144.7 million, which included a cash payment
of $68.0 million (€52.3 million), the set-off of a pre-existing loan from ShawCor to Sophia Capital in the amount of $57.4 million
(€44.6 million), deferred purchase consideration of $3.3 million (€2.6 million) and the settlement of other loans provided to
Fineglade and the entity controlled by Sophia Capital in the amount of $16.0 million (US$16.0 million).
Socotherm S.p.A., headquartered in Italy, is an international pipe coating contractor primarily serving the oil and gas industry from
active operations in Brazil, Argentina, Venezuela, the Gulf of Mexico and Italy.
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Significant Business Contracts
In January 2012, the Company was awarded a significant contract from Technip USA to provide concrete weight coatings, anode
installation and other related services for a Latin American pipeline project, consisting of approximately 100 km of 36” pipe to be
installed offshore for the transportation of natural gas. Bredero Shaw mobilized two Compression Coat Technology (CCT) concrete
weight coating plants to La Brea, Trinidad for this project. Initial operations commenced during the first quarter of 2012, with concrete
coating beginning in the third quarter of 2012.
In February 2012, the Company was awarded the Ichthys LNG project by Mitsui & Co., with a value in excess of US$400 million,
to provide pipeline coatings and related products and services for the gas export pipeline. The Ichthys LNG project is a joint venture
between INPEX and Total. The contract involves coating 889 km of 42” pipe that will be protected with asphalt enamel coating,
Sureflow™ internal coating and HeviCote® concrete weight coating. In addition, Bredero Shaw has received a contract for anode
procurement and installation as well as custom coating. The Company is executing the work, which commenced in the third quarter
of 2012, at Bredero Shaw’s facilities in Kabil, Indonesia and Kuantan, Malaysia.
In March 2012, the Company was awarded contracts with a value in excess of US$30 million from PEARLOIL (Sebuku) Limited,
a wholly-owned subsidiary of Pearl Energy, which is the Southeast Asia operating arm of Mubadala Oil & Gas, a business unit of
Mubadala Development Company, to provide pipeline coatings and related products and services for the Ruby Gas Field Development
Project. The Ruby Field Development export pipeline will connect the offshore gas field to a dedicated receiving terminal in North
Bontang, East Kalimantan, Indonesia and a tie-in pipeline will connect the receiving terminal to Total’s onshore facilities at Senipah
in East Kalimantan. The contracts will be executed at Bredero Shaw’s facilities in Kabil, Indonesia and Kuantan, Malaysia. The export
pipeline and related tie-in pipeline contracts involve coating approximately 240 km of 14” diameter pipe that will be protected with
three layer and asphalt enamel anticorrosion coatings and concrete weight coating. In addition Bredero Shaw has also received
a contract for anode procurement and installation as well as custom coating. The project commenced during the second quarter
of 2012.
In May 2012, the Company was awarded a contract from Apache in Australia with a value in excess of US$45 million to provide
pipeline coatings and related products and services for the Julimar Development Project. The Apache-operated Julimar Development
Project is a joint venture between Apache (65%) and Kuwait Foreign Petroleum Exploration Company – KUFPEC (35%). The project
will supply raw gas from the Julimar and Brunello gas fields to the Chevron-operated Wheatstone Project in Western Australia.
The contract involves coating 47 km of 18” pipe that will be protected with various configurations of three-layer polypropylene
anticorrosion coating, Thermotite® five-layer polypropylene insulation and HeviCote® concrete weight coating. In addition, Bredero
Shaw has also received a contract for anode procurement and installation. Work commenced during the second quarter of 2013 at
Bredero Shaw’s facility in Kuantan, Malaysia.
In July 2012, the Company was awarded contracts with a value in excess of US$40 million from the consortium between Dragados
Offshore and Swiber Offshore Construction and from Tubacero S.A. de C.V. to provide pipeline coatings and related products and
services for the Linea 5 Pipeline Project operated by Petróleos Mexicanos (PEMEX). The Linea 5 Project will consist of approximately
77 km of 36” pipe to be installed offshore between the Plataforma Enlace Litoral and the Terminal Maritima de Dos Bocas in the Bay
of Campeche, Mexico. Natural gas will be transported from the Litoral field to the terminal in Dos Bocas for supply to the PEMEX
distribution network in Tabasco, Mexico. The contracts involve coating the pipe with fusion bond epoxy (FBE) anticorrosion coating
at Bredero Shaw Mexico’s Monterrey plant and the supply of heat shrinkable joint protection sleeves manufactured by ShawCor’s
Canusa-CPS division. Lastly, Bredero Shaw Mexico will coat the pipe with concrete weight coating using its Compression Coat
Technology (CCT) plant in Coatzacoalcos where anode installation will also be completed. Coating for this project began during
the third quarter of 2012.
4.0 Results from Operations
4.1 Consolidated Information
Revenue
The following table sets forth revenue by reportable operating segment for the following periods:
(in thousands of Canadian dollars)
Pipeline and Pipe Services
Petrochemical and Industrial
Elimination
Consolidated
30
2012
2011
Change
$ 1,337,877
147,068
(2,096)
$ 1,021,099
138,080
(1,914)
$ 316,778
8,988
(182)
$ 1,482,849
$ 1,157,265
$ 325,584
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Consolidated revenue increased by $325.6 million, or 28%, from $1,157.3 million in 2011 to $1,482.9 million in 2012, due to
an increase of $316.8 million, or 31%, in the Pipeline and Pipe Services segment and $9.0 million, or 7%, in the Petrochemical
and Industrial segment.
Revenue for the Pipeline and Pipe Services segment in 2012 was $1,337.9 million, or $316.8 million higher than in 2011, due to higher
revenue in Asia Pacific, Latin America and North America, partially offset by lower revenue in EMAR. See section 4.2.1 – Pipeline and
Pipe Services segment for additional disclosure with respect to the change in revenue in the Pipeline and Pipe Services segment.
Revenue for the Petrochemical and Industrial segment increased by $9.0 million in 2012 compared to 2011, primarily due to higher
activity levels in North America and Asia Pacific, partially offset by lower revenue in EMAR. See section 4.2.2 – Petrochemical and
Industrial segment for additional disclosure with respect to the change in revenue in the Petrochemical and Industrial segment.
Income from Operations
The following table sets forth income from operations (“Operating Income”) and Operating Margin for the following periods:
(in thousands of Canadian dollars)
Income from operations
Operating Margin(a)
(a) Operating Margin is defined as Operating Income divided by revenue.
2012
$ 212,226
14.3%
$
2011
83,907
7.3%
Change
$ 128,319
7.0%
Operating Income increased by $128.3 million, or 153%, from $83.9 million in 2011 to $212.2 million in 2012. Gross profit increased by
$156.5 million, primarily due to higher revenue and a higher gross margin percentage. Detracting from the increase in gross profit was
the increase in SG&A expenses of $38.9 million and an increase in amortization expenses pertaining to property, plant, equipment
and intangible assets of $4.2 million, partially offset by a gain on sale of land of $12.1 million.
The increase in gross profit resulted from higher revenue of $325.6 million, as explained above, and an increase in gross margin of
2.5 percentage points due to favourable product and project mix and better facility utilization and absorption of overheads.
SG&A expenses increased by $38.9 million in 2012 compared with 2011 primarily due to a $17.3 million increase in salaries and other
personnel related costs, a $27.6 million increase in short and long term management incentive compensation accruals and expenses
pertaining to the strategic review process of $4.0 million. These cost increases were partially offset by the fact that the 2011 SG&A
had included a provision for bad debts of $9.6 million pertaining to a contract dispute with a customer.
Finance Costs, Net
The following table sets forth the components of finance costs, net for the following periods:
(in thousands of Canadian dollars)
Interest income on short-term deposits
Interest expense, other
Interest expense on long-term debt
Finance (income) costs – net
$
2012
(3,001)
1,683
–
$
2011
(1,024)
4,864
667
$
Change
(1,977)
(3,181)
(667)
$
(1,318)
$
4,507
$
(5,825)
The net finance income increased by $5.8 million, from a net finance cost of $4.5 million in 2011 to a net finance income of $1.3 million
in 2012, mainly due to lower accretion expense on certain non-current liabilities, no interest expense on long-term debt and higher
interest income on short-term deposits.
Income Taxes
The Company recorded an income tax expense of $44.2 million (20% of income before income taxes) in 2012, compared to an
income tax expense of $13.0 million (19% of income before income taxes) in 2011. The effective income tax rate for the twelve months
ending December 31, 2012 is much lower than the expected income tax rate of 27% due to the significant portion of the Company’s
taxable income that was earned in the Trinidad Free Zone, Asia Pacific, the Middle East and other jurisdictions where the expected tax
rate is 25% or less.
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m a nag e m e n t ’ s di s c us s ion a n d a na lys i s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
4.2 Segment Information
4.2.1 Pipeline and Pipe Services Segment
The following table sets forth, by geographic location, the Revenue, Operating Income and Operating Margin for the Pipeline and Pipe
Services segment for the following periods:
(in thousands of Canadian dollars)
North America
Latin America
EMAR
Asia Pacific
Total Revenue
Operating Income
Operating Margin
2012
2011
Change
$ 605,196
172,300
226,392
333,989
$ 547,881
38,499
241,885
192,834
$
57,315
133,801
(15,493)
141,155
$ 1,337,877
$ 1,021,099
$ 316,778
$ 237,707
17.8%
$
96,446
9.4%
$ 141,261
8.4%
In the Pipeline and Pipe Services segment, revenue for the year ended December 31, 2012 was $1,337.9 million, an increase of
$316.8 million, or 31%, from $1,021.1 million in the comparable period in the prior year. Activity level in all regions, except for EMAR,
was significantly higher in 2012 compared to 2011:
• In North America, revenue increased by $57.3 million, or 11%, due to increased sales of flexible composite pipe, tubular management
services, the CSI acquisition completed in April 2011, small diameter pipe coating and increased large project activity, particularly
with the execution of the Jack St. Malo and Cardon IV projects at mobile plants in Beaumont, Texas and several large diameter pipe
coating projects in Canada.
• Latin America revenue was higher by $133.8 million, or 348%, due to higher activity levels on the P55 Risers project in Brazil, the
Technip project in Trinidad, the Linea 5 project at the Veracruz and Monterrey facilities in Mexico and the acquisition of Socotherm
completed in the fourth quarter of 2012.
• EMAR revenue decreased by $15.5 million, or 6%. Increased volumes from the Barzan project in Ras Al Khaimah (“RAK”) and
higher flow assurance pipe coating volumes in Orkanger, Norway were more than offset by the reduction in volumes at the Leith,
Scotland facility where the Total Laggan, Breagh and Gundrun projects had been executed in 2011 and reduced activity levels in
pipeline inspection services.
• In Asia Pacific, revenue increased by $141.2 million, or 73%, in 2012, mainly due to increased production levels on large offshore
coating projects such as the M9 Zawtika, Pearl Energy Ruby, Inpex Ichthys and Chevron Wheatstone projects. This was partially
offset by closure of the Kembla Grange, Australia facility in early 2012.
Operating Income for the year ended December 31, 2012 was $237.7 million compared to $96.4 million for the year ended
December 31, 2011, an increase of $141.3 million, or 147%, with the operating margin increasing by 8.4 percentage points to 17.8%.
The increase in Operating Income is primarily due to the higher revenues, as explained above, and a 2.5 percentage point increase
in gross profit margin due to a favourable change in project mix and better utilization of facilities and absorption of overheads on
higher revenues, as explained above, and a gain on sale of land of $12.1 million, partially offset by higher SG&A expenses as explained
in section 4.1 – Consolidated Information.
4.2.2 Petrochemical and Industrial Segment
The following table sets forth, by geographic location, the revenue, Operating Income and Operating Margin for the Petrochemical
and Industrial segment for the following periods:
(in thousands of Canadian dollars)
North America
EMAR
Asia Pacific
Total Revenue
Operating Income
Operating Margin
32
$
2012
92,551
50,496
4,021
$
2011
80,762
54,237
3,081
$ 147,068
$ 138,080
$
19,886
13.5%
$
18,242
13.2%
$
$
$
Change
11,789
(3,741)
940
8,988
1,644
0.3%
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Revenue in the Petrochemical and Industrial segment increased in 2012 by $9.0 million, or 7%, to $147.1 million, compared to the
comparable period in 2011 due to increased shipments of wire and cable products to the oil sands and electrical utilities markets and
increased heat shrinkable product shipments in North America. This was partially offset by lower automotive shipments to EMAR
due to a weaker European economy.
Operating Income for 2012 was $19.9 million compared to $18.2 million for 2011, an increase of $1.6 million, or 9%. The increase was
primarily due to higher revenue, as explained above.
4.2.3 Financial and Corporate
Financial and corporate costs include corporate expenses not allocated to the operating segments and other non-operating items,
including foreign exchange gains and losses on foreign currency denominated cash and working capital balances. The corporate
division of the Company only earns revenue that is considered incidental to the activities of the Company. As a result, it does not
meet the definition of a reportable operating segment as defined under IFRS.
The following table sets forth the Company’s unallocated financial and corporate expenses, before foreign exchange gains and losses,
for the years ended December 31:
(in thousands of Canadian dollars)
Financial and corporate expenses
2012
2011
Change
$
(45,486)
$
(29,443)
$
(16,043)
Financial and corporate costs increased by $16.0 million, from the year ended December 31, 2011, to $45.5 million for the year ended
December 31, 2012, primarily as a result of an increase in salaries and personnel related expenses of $1.8 million, increased accruals
for short and long-term management incentive compensation of $12.0 million and expenses related to the strategic review process
of $4.0 million.
5.0 Liquidity and Capitalization
The following table sets forth the Company’s cash flows by activity and cash balances for the following periods:
(in thousands of Canadian dollars)
Net Income
Non-cash items
Settlement of decommissioning liability obligations
Settlement of provisions
Increase in non-current deferred revenue
Change in employee future benefits
Change in non-cash working capital and foreign exchange
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Foreign exchange gain (loss) on foreign cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents at end of period
2012
2011
$ 178,463
40,361
(1,580)
(7,292)
64,392
1,168
254,579
530,091
(243,405)
(50,699)
548
236,535
56,731
$
56,280
63,854
(1,074)
(2,240)
–
636
(72,131)
45,325
(105,973)
(41,056)
2,437
(99,267)
155,998
$ 293,266
$
56,731
The Company expects to generate sufficient cash flows and have access to its credit facilities to meet contractual obligations, planned
development and growth initiatives as and when they are required.
5.1 Cash Provided by Operating Activities
Cash provided by operating activities increased by $484.8 million from $45.3 million during 2011 to $530.1 million during 2012,
primarily due to an increase in net income of $122.2 million, an increase in non-current deferred revenue of $64.4 million and an
increase in non-cash working capital and foreign exchange of $326.7 million. This was partially offset by a decrease in cash provided
by other non-cash items of $23.5 million. The cash provided by the change in non-cash working capital and foreign exchange
increased by $331.7 million in 2012, mainly because of an increase in the current portion of deferred revenue of $349.6 million
compared to a decrease of $27.3 million during 2011, and was partially offset by an increase in accounts receivable and inventory
related to higher revenue.
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m a nag e m e n t ’ s di s c us s ion a n d a na lys i s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
5.2 Cash Used in Investing Activities
Cash used in investing activities increased by $137.4 million from $106.0 million during 2011 to $243.4 million during 2012, mainly
due to higher purchases of short-term investments of $57.7 million, an increase of $51.1 million in loans receivable, an increase in the
investment in property, plant and equipment of $18.5 million and the acquisition of Fineglade, which increased cash acquisition costs
by $36.2 million over 2011.
5.3 Cash Used in Financing Activities
Cash used in financing activities increased by $9.6 million from $41.1 million during 2011 to $50.7 million during 2012, mainly due to
an increase in dividend payments of $4.4 million and an increase of $2.4 million spent to repurchase the Company’s shares in 2012
over 2011.
5.4 Liquidity and Capital Resource Measures
Accounts Receivable
The following table sets forth the Company’s average trade accounts receivable – net balance and days sales outstanding in trade
accounts receivable (“DSO”) as at:
(in thousands of Canadian dollars, except DSO)
Average trade accounts receivable
DSO(a)
2012
2011
$ 281,625
57
$ 236,275
62
$
Change
45,350
5
(a) DSO, a non-GAAP measure, is the average number of days that trade accounts receivable-net are outstanding based on a 90-day cycle. The Company’s method
of calculating this measure may differ from other entities and as a result may not necessarily be comparable to measures used by other entities. See section 12
– Reconciliation of non-GAAP measures for additional information with respect to DSO.
Average trade accounts receivable increased by $45.4 million from $236.3 million as at December 31, 2011 to $281.6 million as at
December 31, 2012 as a result of increased business activity. DSO decreased by 5 days from 62 during the same period, primarily
due to the timing of sales and collection of receivables in the fourth quarter of 2012 compared to the fourth quarter of 2011.
Inventories
The following table sets forth the Company’s inventories balance as at:
(in thousands of Canadian dollars)
Inventories
2012
2011
Change
$ 202,887
$ 146,786
$
56,101
Inventories increased by $56.1 million from $146.8 million as at December 31, 2011 to $202.9 million as at December 31, 2012, due to
an increase in raw materials inventory of approximately $47.4 million, an increase of $3.8 million in work in process and an increase
of $10.6 million in finished goods inventory, in anticipation of work to be completed in the first half of 2013.
Accounts Payable
The following table sets forth the Company’s average accounts payable balance and days of purchases outstanding in accounts
payable and accrued liabilities (“DPO”) as at:
(in thousands of Canadian dollars, except DPO)
Average accounts payable and accrued liabilities
DPO(a)
2012
2011
$ 206,901
70
$ 144,270
62
$
Change
62,631
8
(a) DPO, a non-GAAP measure, is the average number of days from when purchased goods and services are received until payment is made to the suppliers based on
a 90-day cycle. The Company’s method of calculating this measure may differ from other entities and as a result may not necessarily be comparable to measures
used by other entities. See section 12 – Reconciliation of non-GAAP measures, for additional information with respect to DPO.
Average accounts payable and accrued liabilities increased by $62.6 million, or 43%, from $144.3 million as at December 31, 2011, to
$206.9 million as at December 31, 2012. DPO increased by 8 days in the same period, driven by an increase in accounts payable and
accrued liabilities and the timing of purchases in the fourth quarter of 2012 compared with the prior year.
34
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
5.5 Contingencies and Off Balance Sheet Arrangements
Commitments and Contingencies
As part of the Company’s normal operations, it often enters into contracts, such as leases and purchase contracts, which obligate the
Company to make disbursements in the future. The following table summarizes these future payments required in respect of the
Company’s contractual obligations:
(in thousands of Canadian dollars)
Operating leases
Decommissioning liabilities
Loans payable
Obligations under finance leases
Deferred purchase consideration
Total contractual obligations
2013
20,421
3,109
8,395
2,566
19,374
53,865
2014
10,942
1,314
8,682
4,922
–
25,860
2015
9,987
5,627
–
1,684
–
17,298
2016
7,341
142
–
1,684
–
9,167
2017
After 2017
3,827
–
–
1,684
–
5,511
11,747
24,172
–
8,664
–
44,583
Total
64,265
34,364
17,077
21,204
19,374
156,284
The following table sets forth the Company’s future minimum finance lease payments:
(in thousands of Canadian dollars)
Total future minimum lease payments
Less: imputed interest
Balance of obligations under finance leases
Less: current portion
Non-current obligations under finance leases
$
2012
21,204
(6,549)
14,655
(1,927)
$
12,728
Legal Claims
In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with customers,
suppliers, ex-employees and other third parties. Management believes that adequate provisions have been recorded in the accounts
where required. Although it is not possible to estimate the extent of potential costs and losses, if any, management believes, but can
provide no assurance, that the ultimate resolution of such contingencies would not have a material adverse effect on the consolidated
financial position of the Company.
Performance, Bid and Surety Bonds
The Company provides standby letters of credit for performance, bid and surety bonds through financial intermediaries to various
customers in support of project contracts for the successful execution of these contracts. If the Company fails to perform under the
terms of the contract, the customer has the ability to draw upon all or a portion of the bond as compensation for the Company’s
failure to perform. The contracts which these performance bonds support generally have a term of one to three years, but could
extend up to four years. Bid bonds typically have a term of less than one year and are renewed, if required, over the term of the
applicable contract. If the Company is unwilling to issue performance and other types of bonds, it could have a materially adverse
effect on the ability of the Company to generate revenue. Historically, the Company has not made and does not anticipate that it will
be required to make material payments under these types of bonds.
The Company’s utilizes its credit facilities to support the Company’s bonds. The Company had utilized credit facilities of $81.2 million
as at December 31, 2012 (December 31, 2011 – $61.6 million) in support of its bonds.
The following table presents the Company’s total credit facilities as at December 31:
(in thousands of Canadian dollars)
Total available credit facilities
Bank Indebtedness, Standby letters of credit for performance, bid and surety bonds
Unutilized credit facilities(a)
2012
2011
$ 251,688
84,979
$ 236,168
73,836
$ 166,709
$ 162,332
(a) Excludes the banking facilities of the Company’s 30% owned joint venture, Arabian Pipe Coating Company Ltd. (“APCO”), which is held for sale.
On June 22, 2011, the Company renewed its Unsecured Committed Bank Credit Facility for a period of four years, with terms
and conditions similar to the prior agreement, except that the maximum borrowing limit was reduced from US$190.0 million to
US$150.0 million, with an option to increase the credit limit to US$200.0 million with the consent of lenders.
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m a nag e m e n t ’ s di s c us s ion a n d a na lys i s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Loans Payable
The Company’s Russian joint venture has loans from OOO ArkhTekhnoProm and TES Limited Liability Company in the amount of
627 million Russian roubles payable on demand. The Company’s portion of these loans has been proportionately consolidated and
included on the consolidated balance sheet as at December 31, 2012 in the amount of $5.1 million or 157 million Russian roubles at
the current exchange rate (December 31, 2011 – $5.1 million or 156 million Russian roubles at the then current exchange rate). Interest
is calculated on these loans at 9.625% to 14.40% per annum and is to be paid over the period of actual use. In the event that the
Company’s Russian joint venture fails to repay the outstanding loan within the time specified by the loan agreement, a penalty in the
amount of 24% per annum will be assessed on the outstanding loan amount on a daily basis.
The Company’s Socotherm division and its subsidiaries had approximately $11.6 million of loans payable to joint venture partners and
other parties. These loans are non-interest bearing and without additional covenants or restrictions. The current portion of these
loans are payable upon demand.
Debt Covenants
Under the terms of the Company’s credit facilities, the Company must maintain the following:
• Fixed Charge Coverage Ratio of more than 2.5 to 1; and
• Debt to total capitalization ratio of less than 0.40 to 1.
The Company was in compliance with the debt covenants detailed above as at December 31, 2012. These debt covenants are
non-GAAP measures and should not be considered as an alternative to net income or any other measure of performance under GAAP.
Non-GAAP measures do not have standardized meanings prescribed by IFRS and are not necessarily comparable to similarly titled
measures of other entities. See section 12 – Reconciliation of non-GAAP measures, for additional information with respect to these
debt covenants.
5.6 Financial Instruments and Other Instruments
5.6.1 Fair Value
IFRS 7, Financial Instruments – Disclosure, provides a hierarchy of valuation techniques based on whether the inputs to those
valuation techniques are observable or unobservable. Observable inputs are those which reflect market data obtained from
independent sources, while unobservable inputs reflect the Company’s assumptions with respect to how market participants
would price an asset or liability. These two inputs, as used to measure fair value, fall into the following three different levels of
the fair value hierarchy:
Level 1 Quoted prices in active markets for identical instruments that are observable.
Level 2 Quoted prices in active markets for similar instruments; inputs other than quoted prices that are observable and derived from
or corroborated by observable market data.
Level 3 Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
The hierarchy requires the use of observable market data when available.
The following table presents, for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a
recurring basis as at December 31, 2012 and does not include those instruments where the carrying amount is a reasonable
approximation of the fair value:
(in thousands of Canadian dollars)
Assets
Derivative financial instruments – current
Liabilities
Derivative financial instruments – current
Fair Value
Level 1
Level 2
Level 3
$
3,988
$
3,988
1,275
$
1,275
$
–
–
–
–
$
3,988
$
3,988
1,275
$
1,275
$
–
–
–
–
The current derivative financial instruments relate to foreign exchange forward contracts entered into by the Company (as described
below) and are valued by comparing the rates at the time the derivatives are acquired to the period-end rates quoted in the market.
The fair values of the Company’s remaining financial instruments are not materially different from their carrying values.
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A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
The following table presents the changes in the Level 3 fair value category for the year ended December 31, 2012:
(in thousands of Canadian dollars)
Opening balance – January 1, 2011
Additions
Balance – December 31, 2011
Gains recognized in the statement of income
Closing balance – December 31, 2012
$
Fair value
807
1,692
2,499
(2,499)
–
5.6.2 Financial Risk Management
The Company’s operations expose it to a variety of financial risks including market risk (including foreign exchange and interest
rate risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial
markets and seeks to minimize potential adverse effects on the Company’s financial position and financial performance. Risk
management is the responsibility of Company management. Material risks are monitored and are regularly reported to the Board
of Directors.
Foreign Exchange Risk
The majority of the Company’s business is transacted outside of Canada through subsidiaries operating in several countries.
The net investments in these subsidiaries as well as their revenue, operating expenses and non-operating expenses are based
in foreign currencies. As a result, the Company’s consolidated revenue, expenses and financial position may be impacted by
fluctuations in foreign exchange rates as these foreign currency items are translated into Canadian dollars. As at December 31, 2012,
fluctuations of +/– 5% in the Canadian dollar, relative to those foreign currencies, would impact the Company’s consolidated revenue,
income from operations, and net income (attributable to shareholders of the Company) for the year then ended by approximately
$50.5 million, $13.9 million and $10.5 million, respectively, prior to hedging activities. In addition, such fluctuations would impact
the Company’s consolidated total assets, consolidated total liabilities and consolidated total shareholders’ equity by $72.0 million,
$52.0 million and $20.0 million, respectively.
The objective of the Company’s foreign exchange risk management activities is to minimize transaction exposures associated with
the Company’s foreign currency denominated cash streams and the resulting variability of the Company’s earnings. The Company
utilizes foreign exchange forward contracts to manage this foreign exchange risk. The Company does not enter into foreign exchange
contracts for speculative purposes. With the exception of the Company’s US dollar based operations, the Company does not hedge
translation exposures.
Interest Rate Risk
The following table summarizes the Company’s exposure to interest rate risk as at December 31, 2012:
(in thousands of Canadian dollars)
Financial assets
Cash equivalents
Loans receivable
Financial liabilities
Bank indebtedness
Loans payable
Non
Interest Bearing
Floating Rate
Fixed
Interest Rate
$
–
3,386
3,386
–
11,646
$
–
3,745
3,745
3,801
5,431
$
$
32,800
–
32,800
–
–
–
$
11,646
$
9,232
$
$
20,878
Total
32,800
7,131
39,931
3,801
17,077
The Company’s interest rate risk arises primarily from its floating rate bank indebtedness and long-term notes receivable and is not
currently considered to be material.
Credit Risk
Credit risk arises from cash and cash equivalents held with banks, forward foreign exchange contracts, as well as credit exposure of
customers, including outstanding accounts receivable. The maximum credit risk is equal to the carrying value of the financial instruments.
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m a nag e m e n t ’ s di s c us s ion a n d a na lys i s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
The objective of managing counter-party credit risk is to prevent losses in financial assets. The Company is subject to considerable
concentration of credit risk since the majority of its customers operate within the global energy industry and are therefore affected to
a large extent by the same macroeconomic conditions and risks. The Company manages this credit risk by assessing the credit quality
of all counter parties, taking into account their financial position, past experience and other factors. Management also establishes and
regularly reviews credit limits of counter parties and monitors utilization of those credit limits on an ongoing basis.
As at December 31, 2012 and 2011, ShawCor had no customers who generated revenue greater than 10% of total consolidated revenue.
The carrying value of accounts receivable is reduced through the use of an allowance for doubtful accounts and the amount of the
loss is recognized in the consolidated statement of income with a charge to selling, general and administrative expenses. When
a receivable balance is considered to be uncollectible, it is written off against the allowance for doubtful accounts. Subsequent
recoveries of amounts previously written off are credited against selling, general and administrative expenses. As at December 31,
2012, $26.6 million, or 9.3% of trade accounts receivable, were more than 90 days overdue, which is consistent with prior period
aging analysis. The Company expects to receive full payment on accounts receivable that are neither past due nor impaired.
The following is an analysis of the change in the allowance for doubtful accounts for the year ended December 31, 2012 and 2011:
(in thousands of Canadian dollars)
Balance – Beginning of year
Bad debt expense
Recovery of previously written-off bad debts
Write-offs of bad debts
Impact of change in foreign exchange rates
Balance – End of year
$
2012
13,967
7,997
(333)
(11,000)
(1,222)
2011
3,775
9,160
126
(328)
1,234
$
9,409
13,967
5.7 Outstanding Share Capital
As at February 22, 2013, the Company had 57,527,550 Class A Subordinate Voting shares outstanding and 12,760,635 Class B
Multiple Voting shares outstanding. In addition, as at February 22, 2013, the Company had stock options outstanding to purchase up
to 2,427,847 Class A Subordinate Voting shares.
6.0 Quarterly Selected Financial Information
The following tables set forth the Company’s summary of selected financial information for the four quarters of 2012 and 2011:
(in thousands of Canadian dollars except per share amounts)
Q1-2012
Q2-2012
Q3-2012
Q4-2012
Operating Results
Revenue
Income from operations
Net income (attributable to shareholders of the Company)
Net income per share (Classes A and B)
Basic
Diluted
$ 312,268
30,855
23,274
$ 326,922
22,795
21,404
$ 395,275
67,277
53,438
$ 448,384
91,299
80,302
$
0.33
0.33
$
0.30
0.30
$
0.76
0.75
$
1.14
1.13
(in thousands of Canadian dollars except per share amounts)
Q1-2011
Q2-2011
Q3-2011
Q4-2011
Operating Results
Revenue
Income from operations
Net income (attributable to shareholders of the Company)
Net income per share (Classes A and B)
Basic
Diluted
$ 279,466
30,095
20,485
$ 264,541
22,660
15,703
$ 271,478
(60)
(3,144)
$ 341,780
31,212
23,236
$
0.29
0.29
$
0.22
0.21
$
(0.04)
(0.04)
$
0.32
0.32
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The following are key factors affecting the comparability of quarterly financial results.
• The Company’s operations in the Pipeline and Pipe Services segment, representing 90% of the Company’s consolidated revenue in
2012, are largely project-based. The nature and timing of projects can result in variability in the Company’s quarterly revenue and
profitability. In addition, certain of the Company’s operations are subject to a degree of seasonality, particularly in the Pipeline and
Pipe Services segment.
• Over 74% of the Company’s revenue in 2012 is transacted in currencies other than Canadian dollars, with a majority transacted in
US dollars. Changes in the rates of exchange between the Canadian dollar and other currencies could have a significant effect on
the amount of this revenue when it is translated into Canadian dollars. See section 2.2 - Foreign Exchange Impact, for additional
information with respect to the effects of foreign exchange fluctuations on the results of the Company.
• In the second half of 2012, the Company’s revenue increased by 33% over the first half of 2012, primarily due to large projects
commencing in the Asia Pacific region.
6.1 Fourth Quarter Highlights
Highlights of the Company’s 2012 fourth quarter include:
Fourth Quarter 2012 Versus Fourth Quarter 2011
• Revenue: Consolidated revenue increased 31%, or $106.6 million, from $341.8 million during the fourth quarter of 2011 to
$448.4 million during the fourth quarter of 2012, due to an increase of $109.6 million, or 36%, in the Pipeline and Pipe Services
segment, partially offset by a decrease of $3.1 million, or 9% in the Petrochemical and Industrial segment. Revenue for the
Pipeline and Pipe Services segment was significantly higher in the fourth quarter of 2012 than in the fourth quarter of 2011, as
a result of increased activity in Asia Pacific and Latin America, partially offset by lower revenue in North America and EMAR.
Revenue for the Petrochemical and Industrial segment was lower in the fourth quarter of 2012 than in the fourth quarter of 2011,
mainly because of a decrease of 11% in North American revenue.
• Operating Income: Operating Income increased by $60.1 million, from $31.2 million during the fourth quarter of 2011 to $91.3 million
during the fourth quarter of 2012. Gross profit increased by $51.5 million, primarily due to higher revenue and a higher gross margin
percentage, a gain on sale of land of $12.1 million, a lower impairment loss on property, plant and equipment of $4.4 million, lower
research and development expenses of $1.8 million and a foreign exchange gain of $0.8 million in the fourth quarter of 2012
compared to a foreign exchange loss of $0.5 million in the fourth quarter of 2011. These sources of income growth were partially
offset by an increase in selling, general and administration (“SG&A”) expenses of $6.8 million and an increase in amortization
expenses pertaining to property, plant, equipment and intangible assets of $4.3 million. Higher revenue of $106.6 million, as
explained above, combined with a 2.4 percentage point increase in gross margin, generated the increased gross profit, with the
gross margin percentage improvement driven by favourable product and project mix and better facility utilization and absorption
of overheads. SG&A expenses increased by $6.8 million compared with the fourth quarter of 2011 primarily due to a $3.0 million
increase in salaries and other personnel related costs, expenses of $4.0 million related to the strategic review process announced in
September 2012 and a $7.2 million increase in short and long term management incentive compensation accruals. These increases
were partially offset by lower expenses for pensions and the provision for doubtful debts of $6.1 million. A $0.8 million impairment
charge was recorded in the fourth quarter of 2012 to provide for costs to dismantle the plant, machinery and buildings at the
Kembla Grange, Australia facility in anticipation of the sale of that facility’s land that is expected to be completed in the next
few months.
• Finance Costs: In the fourth quarter of 2012, net finance income was $1.0 million, compared to a net finance cost of $1.2 million
during the fourth quarter of 2011, as a result of lower accretion expense on certain non-current liabilities and higher interest income
on short-term deposits.
• Income Taxes: The Company recorded an income tax expense of $18.3 million (19% of income before income taxes) in the fourth
quarter of 2012, compared to an income tax expense of $4.8 million (17% of income before income taxes) in the fourth quarter of
2011. The effective tax rate in the fourth quarter of 2012 was lower than the Company’s expected effective income tax rate of 27%,
due to the significant portion of the Company’s taxable income that was earned in the Trinidad Free Zone, Asia Pacific, the Middle
East and other jurisdictions where the expected tax rate is 25% or less.
• Net Income: Net income increased by $57.1 million, from $23.2 million during the fourth quarter ended December 31, 2011 to
$80.3 million during the fourth quarter ended December 31, 2012, mainly due to higher revenue and gross profit margins as
explained above. In addition, an increase in the income on investment in associate (Fineglade Ltd., prior to the completion of the
acquisition noted in section 1.0) of $8.0 million and a gain on the sale of land of $12.1 million were partially offset by higher income
taxes of $13.5 million.
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A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Fourth Quarter 2012 Versus Third Quarter 2012
• Revenue: Consolidated revenue increased by $53.1 million, or 13%, from $395.3 million during the third quarter of 2012 to
$448.4 million during the fourth quarter of 2012, due to an increase of $55.9 million, or 16%, in the Pipeline and Pipe Services
segment, partially offset by a decrease of $3.0 million, or 8%, in the Petrochemical and Industrial segment. Revenue for the Pipeline
and Pipe Services segment in the fourth quarter of 2012 was $415.5 million, or $55.9 million higher than in the third quarter of 2012,
primarily due to increased activity in Asia Pacific and Latin America, partially offset by lower revenue in EMAR and North America.
Revenue for the Petrochemical and Industrial segment decreased by $3.0 million during the fourth quarter of 2012 compared to
the third quarter of 2012, primarily due to lower activity levels in North America.
• Operating Income: Operating Income increased by $24.0 million from the third quarter of 2012 to $91.3 million during the fourth
quarter of 2012. Gross profit increased by $18.3 million, primarily due to higher revenue of $53.1 million. Also contributing to the
increase in operating income was a reduction in research and development expenses and the charge for impairment of property,
plant and equipment of $1.2 million and $3.0 million, respectively, and a gain on sale of land of $12.1 million. These sources of higher
income were partially offset by an increase in SG&A expenses of $7.5 million and higher amortization of property, plant, equipment
and intangible assets of $3.5 million. SG&A expenses increased by $7.5 million compared with the third quarter of 2012 due to
expenses of $4.0 million, related to the strategic review process and a $3.2 million increase in salaries and other personnel related
costs. A $0.8 million impairment charge was recorded in the fourth quarter 2012 as noted above, compared to a charge of $3.9 million
in the third quarter of 2012 pertaining to the Kembla Grange, Australia facility.
• Finance Costs: In the fourth quarter of 2012, net finance income was $1.0 million, compared to a net finance income of $0.2 million
during the third quarter of 2012, as a result of the elimination of accretion expense on certain non-current liabilities.
• Income Taxes: The Company recorded an income tax expense of $18.3 million (19% of income before income taxes) in the fourth
quarter of 2012, compared to an income tax expense of $14 million (21% of income before income taxes) in the third quarter of
2012. The effective tax rate in the fourth quarter of 2012 was lower than the Company’s expected effective income tax rate of 27%,
due to the significant portion of the Company’s taxable income that was earned in the Trinidad Free Zone, Asia Pacific, the Middle
East and other jurisdictions where the expected tax rate is 25% or less.
• Net Income: Net income increased by $26.9 million, from $53.4 million during the third quarter ended September 30, 2012 to
$80.3 million during the fourth quarter ended December 31, 2012, mainly due to higher revenue as explained above. In addition,
a gain on the sale of land of $12.1 million and income on investment in associate of $6.0 million was partially offset by higher
income taxes of $4.3 million and higher SG&A expenses of $7.5 million.
7.0 Disclosure Controls and Internal Controls over Financial Reporting
The President and Chief Executive Officer and the Vice President, Finance and Chief Financial Officer, together with the management
of the Company, have evaluated the effectiveness of the Company’s Disclosure Controls and Procedures (“DC&Ps”) (as defined in the
rules of the Canadian Securities Administrators) and the effectiveness of Internal Controls over Financial Reporting (“ICFRs”). Based
on that evaluation, they have concluded that the Company’s DC&Ps were effective as at December 31, 2012 and 2011. Furthermore,
they have concluded that the Company’s ICFRs were effective as at December 31, 2012. There were no material changes in either the
Company’s DC&Ps or its ICFRs during 2012.
7.1 Transactions with Related Parties
The Company had no material transactions with related parties during the year 2012 and all related party transactions were in the
normal course of business, except for the proposed transaction with the Company’s controlling shareholder described in section 3 –
Significant Business Developments.
8.0 Critical Accounting Estimates and Accounting Policy Developments
8.1 Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and
assumptions that affect the amounts of assets, liabilities and contingencies at the date of the financial statements, and the reported
amounts of revenue and expenses during the period. These estimates and assumptions are made with management’s best judgment
given the information available at the time; however, actual results could differ from the estimates.
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Critical estimates used in preparing the consolidated financial statements include:
Long-lived Assets and Goodwill
The Company evaluates the carrying values of the Cash Generating Units’ (“CGUs”) goodwill on an annual basis on October 31 of
each year to determine whether or not impairment of these assets has occurred and whether writedowns of the value of these assets
are required. Similarly, the Company evaluates the carrying values of CGUs for long-lived assets whenever circumstances arise that
could indicate impairment or reversal of impairment, and at each reporting date. These impairment tests include certain assumptions
regarding discount rates and future cash flows generated by these assets in determining the value-in-use and fair value less costs to
sell calculations. Actual results could differ from these assumptions.
Future Benefit Obligations
The Company provides future benefits to its employees under a number of defined benefit arrangements. The calculation of
the accrued benefit obligations recognized in the consolidated financial statements includes a number of assumptions regarding
discount rates, long-term rates of return on pension plan assets, rates of employee compensation increases, rates of inflation and
life expectancies. The outcome of any of these factors could differ from the estimates used in the calculations and have an impact
on operating expenses, non-current assets and non-current liabilities.
Provisions and Contingent Liabilities
Provisions and liabilities for legal and other contingent matters are recognized in the period when it becomes probable that there will
be a future outflow of economic benefits resulting from past operations or events and the amount of the cash outflow can be reliably
measured. The timing of recognition and measurement of the provision requires the application of judgment to existing facts and
circumstances, which can be subject to change. The carrying amounts of provisions and liabilities are reviewed regularly and adjusted
to take account of changing facts and circumstances. The Company is required to determine whether a loss is probable based on
judgment and interpretation of laws and regulations and whether the loss can be reliably measured. When a loss is determined it is
charged to the consolidated statement of income. The Company must continually monitor known and potential contingent matters
and make appropriate provisions by charges to income when warranted by circumstances.
Decommissioning Liabilities
Decommissioning liabilities include legal and constructive obligations related to owned and leased facilities. These have been
recorded in the consolidated financial statements based on estimated future amounts required to satisfy these obligations. The
amount recognized is the present value of estimated future expenditures required to settle the obligation using a current pre-tax risk
free rate. A corresponding asset equal to the present value of the initial estimated liability is capitalized as part of the cost of the
related long-lived asset. Changes in the estimated liability resulting from revisions to estimated timing or future decommissioning
cost estimates are recognized as a change in the decommissioning liability and the related long-lived asset. The amount capitalized
in property, plant and equipment is depreciated on a straight line basis over the useful life of the related asset. Increases in the
decommissioning liabilities resulting from the passage of time are recognized as a finance cost in the consolidated statement of income.
Actual expenditures incurred are charged against the accumulated decommissioning liability.
Financial Instruments
The Company has determined the estimated fair values of its financial instruments not traded in an active market based on
appropriate valuation methodologies; however, considerable judgment is required to develop these estimates, mainly based on market
conditions existing at the end of each reporting period. Accordingly, these estimated fair values are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The estimated fair value amounts can be materially affected by the
use of different assumptions or methodologies.
Income Taxes
The recording of income tax expense includes certain estimations related to the impact in the current year of future events.
Differences between the estimated and actual impact of these events could impact tax expense, current taxes payable or deferred
taxes. In particular, earnings and losses in foreign jurisdictions may be taxed at rates different from those expected in Canada.
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8.2 Accounting Standards Issues but Not Yet Applied
IFRS 9 Financial Instruments
IFRS 9, Financial Instruments, was issued in November 2009 and addresses classification and measurement of financial assets and
replaces the multiple category and measurement models in IAS 39, Financial Instruments – Recognition and Measurement, for debt
instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss.
IFRS 9 also replaces the models for measuring equity instruments, and such instruments are either recognized at fair value through
profit or loss or at fair value through other comprehensive income (loss).
Requirements for financial liabilities were added in October 2010 and they largely carried forward existing requirements in IAS 39,
except that fair value changes due to credit risk for liabilities designated at fair value through profit or loss would generally be
recorded in other comprehensive income (loss).
The standard was initially effective for annual periods beginning on or after January 1, 2013, but Amendments to IFRS 9 Mandatory
Effective Date of IFRS 9 and Transition Disclosures, issued in December 2011, moved the mandatory effective date to January 1, 2015
with earlier adoption permitted. The Company has not yet assessed the impact of the standard or determined whether it will adopt
the standard early.
IFRS 10 Consolidated Financial Statements
For annual periods beginning on January 1, 2013, IFRS 10, Consolidated Financial Statements, will replace portions of IAS 27 Consolidated
and Separate Financial Statements and interpretation SIC-12 Consolidation – Special Purpose Entities. The new standard requires
consolidated financial statements to include all controlled entities under a single control model. The Company will be considered to
control an investee when it is exposed, or has rights to variable returns from its involvement with the investee, and has the current
ability to affect those returns through its power over the investee. As required by this standard, control is reassessed as facts and
circumstances change. All facts and circumstances must be considered to make a judgment about whether the Company controls
another entity. Additional guidance is given on how to evaluate whether certain relationships give the Company the current ability to
affect its returns, including how to consider options and convertible instruments, holding less than a majority of voting rights, how to
consider protective rights and principal-agency relationships (including removal rights), all of which may differ from current practice.
The Company has not yet completed the process of evaluating the effect of and the planning for the transition to IFRS 10 and will
begin to report using IFRS 10 starting in 2013.
IFRS 11 Joint Arrangements
On January 1, 2013, ShawCor will be required to adopt IFRS 11, Joint Arrangements, which applies to accounting for interests in joint
arrangements where there is joint control. The standard requires the joint arrangements to be classified as either joint operations
or joint ventures. The structure of the joint arrangement would no longer be the most significant factor when classifying the joint
arrangement as either a joint operation or a joint venture. In addition, the option to account for joint ventures (previously called
jointly controlled entities) using proportionate consolidation will be removed and replaced by equity accounting.
The Company has not yet completed the process of evaluating the effect of and the planning for the transition to IFRS 11 and will
begin to report using IFRS 11 starting in 2013.
IFRS 12 Disclosure of Interests in Other Entities
On January 1, 2013, ShawCor will be required to adopt IFRS 12, Disclosure of Interests in Other Entities, which includes disclosure
requirements about subsidiaries, joint ventures and associates, as well as unconsolidated structured entities and replaces existing
disclosure requirements. Due to this new standard, the Company will be required to disclose the following: judgments and
assumptions made when deciding how to classify involvement with another entity, interests that non-controlling interests have in
consolidated entities and nature of the risks associated with interests in other entities.
The Company has not yet completed the process of evaluating the effect of and the planning for the transition to IFRS 12 and will
begin to report using IFRS 12 starting in 2013.
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IFRS 13 Fair Value Measurement
On January 1, 2013, ShawCor will be required to adopt IFRS 13, Fair Value Measurement. The new standard will generally converge
the IFRS and U.S. Generally Accepted Accounting Principles requirements on how to measure fair value and the related disclosures.
IFRS 13 establishes a single source of guidance for fair value measurements, when fair value is required or permitted by IFRS. Upon
adoption, the Company will provide a single framework for measuring fair value while requiring enhanced disclosures when fair value
is applied. In addition, fair value will be defined as the ‘exit price’ and concepts of ‘highest and best use’ and ‘valuation premise’ would
be relevant only for non-financial assets and liabilities.
The Company has not yet completed the process of evaluating the effect of and the planning for the transition to IFRS 13 and will begin
to report using IFRS 13 starting in 2013.
IAS 1 Presentation of Financial Statements
The IASB amended IAS 1, Presentation of Financial Statements, by revising how certain items are presented in other comprehensive
income (“OCI”). Items within OCI that may be reclassified to profit or loss will be separated from items that will not. The standard
is effective for financial years beginning on or after July 1, 2012 with early adoption permitted.
The Company is in the process of reviewing the standard to determine the impact on the consolidated financial statements and will
begin to report using IAS 1 amendments starting in 2013.
IAS 19 Employee Benefits
On January 1, 2013, ShawCor will be required to adopt IAS 19, Employee Benefits. The IASB has issued numerous amendments to
IAS 19. These range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on
plan assets to simple clarifications and re-wording. The amended standard will impact the net benefit expense as the expected return
on plan assets will be calculated using the same interest rate as applied for the purpose of discounting the benefit obligation. The
amendments become effective for annual periods beginning on or after 1 January 2013. IAS 19 is required to be applied for accounting
periods beginning on or after January 1, 2013, with earlier adoption permitted.
The Company has not yet completed the process of evaluating the effect of and the planning for the transition to IAS 19 and will begin
to report using IAS 19 starting in 2013.
IAS 27 Separate Financial Statements
On January 1, 2013, ShawCor will be required to adopt IAS 27, Separate Financial Statements. As a result of the issue of the new
consolidation suite of standards, IAS 27 has been reissued to reflect the changes to the consolidation guidance recently included
in IFRS 10. In addition, IAS 27 will now only prescribe the accounting and disclosure requirements for investments in subsidiaries, joint
ventures and associates when the Company prepares separate financial statements.
The Company has not yet completed the process of evaluating the effect of and the planning for the transition to IAS 27 and will begin
to report using IAS 27 starting in 2013.
IAS 28 Investments in Associates and Joint Ventures
On January 1, 2013, ShawCor will be required to adopt IAS 28, Investments in Associates and Joint Ventures. As a consequence of
the issue of IFRS 10, IFRS 11 and IFRS 12, IAS 28 has been amended and will provide further accounting guidance for investments in
associates and will set out the requirements for the application of the equity method when accounting for investments in associates
and joint ventures. This standard will be applied by the Company when there is joint control or significant influence over an investee.
Significant influence is the power to participate in the financial and operating policy decisions of the investee but does not include
control or joint control of those policy decisions. When it has been determined that the Company has an interest in a joint venture,
the Company will recognize an investment and will account for it using the equity method in accordance with IAS 28.
The Company has not yet completed the process of evaluating the effect of and the planning for the transition to IAS 28 and will begin
to report using IAS 28 starting in 2013.
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9.0 Outlook
The outlook for market activity in the Company’s Pipeline and Pipe Services segment by region and in the Petrochemical and Industrial
segment is outlined below:
Pipeline and Pipe Services Segment – North America
Following a 10% increase in revenue in 2012, the Company expects that revenue from the pipeline and pipe services segment
businesses in North America in 2013 will be consistent with 2012. The Company expects that increasing market share gains in
spoolable composite pipe and at ShawCor’s Guardian OCTG pipe inspection and refurbishment business, where the previously
announced expansion into the Eagle Ford region of Texas is underway, should offset any weakness in well drilling and completions.
The Company is currently experiencing healthy demand for large diameter pipe coating projects in Canada and this is expected to
continue for the next few years based on bidding activity. Also expected to bolster activity in North America is the increase in project
activity in the Gulf of Mexico which should translate into consistent project activity at the Company’s Bredero Shaw and Socotherm
facilities that supply the Gulf of Mexico offshore market.
Pipeline and Pipe Services Segment – Latin America
ShawCor expects that 2013 revenue for the Latin America region will be a continued source of growth for the Company particularly in
light of the acquisition of Socotherm and its strong position in Argentina, Venezuela and Brazil. In 2012, the Company’s Latin America
region produced revenue growth of 348% with the launch in the second half of the year of the Company’s mobile concrete coating
site in Trinidad for the $90 million Technip project as well as the $40 million Linea 5 project at the Company’s concrete coating facility
in Mexico. Production on the Technip project will continue in the first half of 2013 with approximately half of the project complete at
year end 2012. While activity in Mexico is expected to remain strong and consistent, the Company’s Bredero Shaw facility in Brazil
will likely not see a significant improvement in volumes until 2014.
Pipeline and Pipe Services Segment – EMAR
The Company’s Europe, Middle East, Africa, Russia (“EMAR”) region has experienced strong project revenue from the pipe coating
facilities in Orkanger, Norway and Ras Al Khaimah, UAE and this is expected to continue in 2013, supported by the Company’s recent
acquisition of Socotherm which will contribute revenue from its facilities in Europe.
Pipeline and Pipe Services Segment – Asia Pacific
In 2012, the 73% growth in revenue generated by the Company’s Asia Pacific region, particularly in the second half of 2012, was
instrumental in the Company’s overall growth. In 2013, Asia Pacific will again be the key source of growth for ShawCor. At December 31,
2012, the Company’s backlog includes large projects for Chevron Wheatstone, Inpex Ichthys and Apache Julimar. With this backlog in
hand, strong revenue growth from the Asia Pacific region is assured. The gains in facility utilization and strong operational performance
on these projects already evident in the fourth quarter of 2012 indicate that 2013 revenue growth should be matched by gains in
operating income.
Petrochemical and Industrial Segment
ShawCor’s Petrochemical and Industrial segment businesses are significantly exposed to demand in the North American and
European automotive and industrial markets. Although the outlook for demand in industrial markets in developed economies remains
uncertain, the Company’s strong order book should generate modest growth in 2013. In addition, the Company will be focused on
seeking to capture market opportunities in areas less sensitive to the performance of the developed economies, such as growth in
Asia at the DSG-Canusa China facility and the demand for highly engineered wire and cable systems related to nuclear facility
refurbishment and continued oil sands and other resource development projects.
Order Backlog
The Company’s order backlog consists of firm customer orders only and represents the revenue the Company expects to realize on
booked orders over the succeeding twelve months. The Company reports the twelve month billable backlog because it provides a
leading indicator of significant changes in consolidated revenue. The order backlog at December 31, 2012 reached a new record level
of $850 million, an increase of 17.7% from the level of $722 million at September 30, 2012 and also up 55.1% from the $548 million
level reported one year ago. The reported backlog increased by $65 million in the quarter as a result of the completion of the
Socotherm acquisition. Also contributing to backlog growth was the inclusion of a greater percentage of the orders booked in the
Asia Pacific region that are expected to be executed in the upcoming twelve months. Including the value of booked projects that
are expected to be executed beyond the next twelve months, the Company’s order book at December 31, 2012 is approximately
one billion dollars. In addition, the Company currently has outstanding bids with a value that exceeds one billion dollars. This order
backlog and longer term order book supports our outlook for continued strong performance.
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10.0 Risks and Uncertainties
Operating in an international environment, servicing predominantly the oil and gas industry, ShawCor faces a number of business
risks and uncertainties that could materially and adversely affect the Company’s projections, business, results of operations and
financial condition.
The following summarizes the Company’s risks and uncertainties and how it manages and mitigates each risk:
10.1 Economic Risks
An economic downturn could adversely affect demand for the Company’s products and services and, consequently, its projections,
business, results of operations and financial condition.
Demand for oil and natural gas is influenced by numerous factors, including the North American and worldwide economies as well as
activities of the Organization of Petroleum Exporting Countries (“OPEC”). Economic declines impact demand for oil and natural gas
and result in a softening of oil and gas prices and projected oil and gas drilling activity. If economic conditions or international markets
decline unexpectedly, the Company’s projections, business, results of operations and financial condition could be materially adversely
affected. In addition, if actions by OPEC and other oil producers to increase production of oil adversely affect world oil prices, additional
declines in rig counts could result, particularly internationally, and the Company’s projections, business, results of operations and
financial condition could be materially adversely affected. Similarly, demand for the products of the Petrochemical and Industrial
segment’s businesses is largely dependent on the level of general economic activity in North America and Europe. Decreases in
economic activity in these regions could result in significant decreases in activity levels in these businesses.
A cyclical decline in the level of global pipeline construction could have a material adverse effect on the Company’s projections,
business, results of operations and financial condition.
The Company’s business is materially dependent on the level of global pipeline construction activity which in turn relates to the
growth in demand for oil and natural gas and the availability of new supplies to meet this increased demand. Reductions in capital
spending by producers could dampen demand for the Company’s products and services supplied in pipeline markets.
Revenue generated by the Company’s Pipeline and Pipe Services segment accounted for 90% of consolidated sales in 2012. With this
proportion expected to continue, the Company’s revenue is materially dependent on the global Pipeline and Pipe Services industry.
Any reduction in the anticipated growth in pipeline market activity could have a material adverse effect on the Company’s projections,
business, results of operations and financial condition.
Increases in the prices and/or shortages in the supply of raw materials used in the Company’s manufacturing processes could
adversely affect the competitiveness of the Company, its ability to serve its customers’ needs and its financial performance.
The Company purchases a broad range of materials and components throughout the world in connection with its manufacturing
activities. Major items include polyolefin and other polymeric resins, iron ore, cement, adhesives, sealants and copper and other
nonferrous wire. The ability of suppliers to meet performance and quality specifications and delivery schedules is important to the
maintenance of customer satisfaction. While the materials required for its manufacturing operations have generally been readily
available, cyclical swings in supply and demand can produce short-term shortages and/or price spikes. The Company’s ability to
pass on any such price increases may be restricted in the short term.
A decline in global drilling activity could have a material adverse effect on the Company’s projections, business, results of
operations and financial condition.
The Company’s business is materially dependent on the level of global drilling activity, which, in turn depends on global oil and gas
demand, prices and production depletion rates. Lower drilling activity decreases demand for the Company’s products and services,
including small diameter pipe coating, composite pipe and tubular inspection and inventory management services.
Economic Risk Mitigation
The Company cannot completely mitigate economic risks. However, the Company maintains a competitive geographical presence
in a diverse number of regions and has implemented several systems and processes to manage operational risks and to achieve
continuous improvements in operational effectiveness in addition to various cost reduction initiatives. Through these efforts,
economic risk is mitigated.
Refer to section 1.5 – Capability to Deliver Results, for additional information with respect to the Company’s systems and processes.
45
m a nag e m e n t ’ s di s c us s ion a n d a na lys i s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
10.2 Litigation and Legal Risks
The Company could be subject to substantial liability claims, which could adversely affect its projections, business, results
of operations and financial condition.
Some of the Company’s products are used in hazardous applications where an accident or a failure of a product could cause personal
injury, loss of life, damage to property, equipment or the environment, as well as the suspension of the end-user’s operations. If the
Company’s products were to be involved in any of these difficulties, the Company could face litigation and may be held liable for those
losses. The Company’s insurance coverage may not be adequate in risk coverage or policy limits to cover all losses or liabilities that it
may incur. Moreover, the Company may not be able in the future to maintain insurance at levels of risk coverage or policy limits that
management deems adequate. Any claims made under the Company’s policies likely will cause its premiums to increase. Any future
damages deemed to be caused by the Company’s products or services that are not covered by insurance, or that are in excess of
policy limits or subject to substantial deductibles, could have a material adverse effect on the Company’s projections, business,
results of operations and financial condition.
The Company is subject to litigation and could be subject to future litigation and significant potential financial liability.
From time to time, the Company is a party to litigation and legal proceedings that it considers to be a part of the ordinary course
of business. Although none of the litigation or legal proceedings in which the Company is currently involved could reasonably be
expected to have a material adverse effect on the Company’s projections, business, results of operations or financial condition, the
Company may, however, become involved in material legal proceedings in the future. Such proceedings may include, for example,
product liability claims and claims relating to the existence or use of hazardous materials on the Company’s property or in its
operations, as well as intellectual property disputes and other material legal proceedings with competitors, customers, employees
and governmental entities. These proceedings could arise from the Company’s current or former actions and operations or the actions
or operations of businesses and entities acquired by the Company prior to acquisition.The Company maintains insurance it believes to
be commercially reasonable and customary; however, such coverage may be inadequate for or inapplicable to particular claims.
Litigation and Legal Risk Mitigation
The Company cannot completely mitigate legal risks. However, the Company maintains adequate commercial insurance to mitigate
most adverse litigation and legal risks.
10.3 HSE Risks
The Company is subject to Health, Safety and Environmental laws and regulations that expose it to potential financial liability.
The Company’s operations are regulated under a number of federal, provincial, state, local and foreign environmental laws and
regulations, which govern, among other things, the discharge of hazardous materials into the air and water as well as the handling,
storage and disposal of hazardous materials. Compliance with these environmental laws is a major consideration in the manufacturing
of the Company’s products, as the Company uses, generates, stores and disposes of hazardous substances and wastes in its
operations. The Company may be subject to material financial liability for any investigation and clean-up of such hazardous materials.
In addition, many of the Company’s current and former properties are or have been used for industrial purposes. Accordingly, the
Company also may be subject to financial liabilities relating to the investigation and remediation of hazardous materials resulting
from the actions of previous owners or operators of industrial facilities on those sites. Liability in certain instances may be imposed
on the Company regardless of the legality of the original actions relating to the hazardous or toxic substances or whether or not the
Company knew of, or was responsible for, the presence of those substances. The Company is also subject to various Canadian and US
federal, provincial, state and local laws and regulations as well as foreign laws and regulations relating to safety and health conditions
in its manufacturing facilities. Those laws and regulations may also subject the Company to material financial penalties or liabilities
for any non-compliance, as well as potential business disruption if any of its facilities or a portion of any facility is required to be
temporarily closed as a result of any violation of those laws and regulations. Any such financial liability or business disruption could
have a material adverse effect on the Company’s projections, business, results of operations and financial condition.
46
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Demand for the Company’s products and services could be adversely affected by changes to Canadian, US or other countries’ laws
or regulations pertaining to the emission of Carbon Dioxide and other Greenhouse Gases (“GHGs”) into the atmosphere.
Although the Company is not a large producer of GHGs, the products and services of the Company’s production are mainly related
to the transmission of hydrocarbons including crude oil and natural gas, whose ultimate consumption are major sources of GHG
emissions. Changes in the regulations concerning the release of GHGs into the atmosphere, including the introduction of so-called
carbon taxes or limitations over the emissions of GHGs, may adversely impact the demand for hydrocarbons and ultimately, the
demand for the Company’s products and services.
HSE Risk Mitigation
To minimize risks associated with HSE matters, the Company has implemented a comprehensive audit program in which it has
completed detailed environmental audits at manufacturing and service locations across all eight divisions. Furthermore, the Company
is committed to being an IIF workplace.
10.4 Political and Regulatory Risks
The Company’s international operations may experience interruptions due to political, economic or other risks, which could
adversely affect the Company’s projections, business, results of operations and financial condition.
During 2012, the Company derived over 40% of its total revenue from its facilities outside Canada, the US and Western Europe.
In addition, part of the Company’s sales from its locations in Canada and the US were for use in other countries. The Company’s
operations in certain international locations are subject to various political and economic conditions existing in those countries
that could disrupt operations. These risks include:
• currency fluctuations and devaluations;
• currency restrictions and limitations on repatriation of profits;
• political instability and civil unrest;
• hostile or terrorist activities; and
• restrictions on foreign operations.
The Company’s foreign operations may suffer disruptions and may incur losses that would not be covered by insurance. In particular,
civil unrest in politically unstable countries may increase the possibility that the Company’s operations could be interrupted or
adversely affected. The impact of such disruptions could include the Company’s inability to ship products in a timely and cost
effective manner, its inability to place contractors and employees in various countries or regions, or result in the need for evacuations
or similar disruptions.
Any material currency fluctuations or devaluations or political unrest that may disrupt oil and gas exploration and production or
the movement of funds and assets could materially adversely affect the Company’s projections, business, results of operations and
financial condition.
The Company’s projections, business, results of operations and financial condition could be adversely affected by actions under
Canadian, US or other trade laws.
The Company is a Canadian-based company with significant operations in the United States. The Company also owns and operates
international manufacturing operations that support its Canadian and US operations. If actions under Canadian, US or other trade
laws were instituted that limited the Company’s access to the materials or products necessary for such manufacturing operations,
the Company’s ability to meet its customers’ specifications and delivery requirements would be reduced. Any such reduction in the
Company’s ability to meet its customers’ specifications and delivery requirements could have a material adverse effect on the
Company’s projections, business, results of operations and financial condition.
Political and Regulatory Risk Mitigation
The Company manages political and regulatory risks by working with governments, regulators and other parties to resolve issues,
if any. In addition, the Company ensures that it is compliant with the laws and regulations within the jurisdictions where it operates.
47
m a nag e m e n t ’ s di s c us s ion a n d a na lys i s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
11.0 Environmental Matters
While environmental related liabilities are considered immaterial to the Company’s financial results, they are important to the
Company from a social responsibility standpoint. Refer to section 10.3 – HSE Risks for additional information with respect to
the Company’s environmental matters.
As at December 31, 2012, the accruals on the consolidated balance sheet related to environmental matters and included as
decommissioning liability obligations were $22.9 million. The Company believes the accruals to be sufficient to fully satisfy all
liabilities related to known environmental matters.
12.0 Reconciliation of Non-GAAP Measures
The Company evaluates its performance using a number of different measures that are not in accordance with GAAP and should not
be considered as an alternative to net income or any other measure of performance under GAAP. Non-GAAP measures do not have
standardized meanings prescribed by IFRS. The Company’s method of calculating these measures may differ from other entities and
as a result may not necessarily be comparable to measures used by other entities.
EBITDA
EBITDA, a non-GAAP measure, is defined as earnings before interest, income taxes, depreciation and amortization, impairment of
property, plant, equipment, goodwill and intangible assets, gain on sale of land and accounting gain on acquisition. The Company
believes that EBITDA is a useful supplemental measure that provides a meaningful indication of the Company’s results from principal
business activities prior to the consideration of how these activities are financed or the tax impacts in various jurisdictions. Refer to
section 2.1 – Selected Annual Information of this report for a reconciliation of the Company’s EBITDA to its net income in accordance
with GAAP.
Return on Equity (“ROE”)
ROE, a non-GAAP measure, is defined as net income divided by average shareholders’ equity over the year and is used by the
Company to assess the efficiency of generating profits from each unit of shareholders’ equity.
The following table sets forth the calculation of the Company’s ROE as at December 31:
(in thousands of Canadian dollars)
Net income for the year
Average shareholders’ equity
ROE
2012
2011
$ 178,418
899,665
$
56,280
842,974
19.8%
6.7%
Free Cash Flow (“FCF”)
FCF, a non-GAAP measure, is defined as operating cash flow less capital expenditures and dividends paid during the year. FCF is
intended to demonstrate the amount of cash the Company has available to invest in capital growth initiatives and the ability to
generate cash flows to maintain operations.
The following table sets forth the calculation of the Company’s FCF as at December 31:
(in thousands of Canadian dollars)
Cash provided by operating activities
Less:
Capital expenditures
Dividends paid
FCF
48
2012
2011
$ 530,091
$
45,325
(74,439)
(26,332)
(55,982)
(21,930)
$ 429,320
$
(32,587)
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Days Sales Outstanding (“DSO”)
DSO is defined as the average number of days trade accounts receivable are outstanding based on a 90-day cycle and is calculated
by dividing the average trade accounts receivable balance for the quarter by the revenue for that same quarter, and multiplying by
90 days. DSO approximates the measure of the average number of days from when the Company recognizes revenue until the cash
is collected from the customer. The following table sets forth the calculation for the Company’s DSO as at December 31:
(in thousands of Canadian dollars)
Average trade accounts receivable
Revenue for the fourth quarter
DSO
2012
2011
$ 281,625
448,384
$ 236,275
341,780
57
62
Days Payables Outstanding (“DPO”)
DPO is defined as the average number of days from when purchased goods and services are received until payment is made to the
suppliers based on a 90-day cycle and is calculated by dividing the average accounts payable and accrued liabilities for the quarter
by the cost of goods sold for that same quarter, and multiplying by 90 days. The following table sets forth the calculation for the
Company’s DPO as at December 31:
(in thousands of Canadian dollars)
Average accounts payable and accrued liabilities
Cost of goods sold for the Fourth quarter
DPO
2012
2011
$ 206,901
266,043
$ 144,270
210,985
70
62
Working Capital Ratio
Working capital ratio is defined as current assets divided by current liabilities. This metric provides management with an indication
of the current liquidity available to the Company before considering long-term debt. The following table sets forth the calculation for
the Company’s working capital ratio as at December 31:
(in thousands of Canadian dollars)
Current assets
Current liabilities
Working capital ratio
2012
2011
$ 1,024,466
698,170
$ 536,138
248,996
1.47
2.15
Fixed Charge Coverage Ratio
Fixed Charge Coverage Ratio is defined as EBITDA divided by interest expense. The Company is required to maintain a fixed charge
coverage ratio of more than 2.5 to 1 under the terms of its credit facilities. The following table sets forth the calculation of the
Company’s fixed charge coverage ratio for the twelve-month periods ended December 31, 2012 and December 31, 2011:
(in thousands of Canadian dollars)
EBITDA
Interest expense
Fixed charge coverage ratio
2012
2011
$ 266,886
1,683
$ 128,168
5,531
158.6
23.2
The Company is in compliance with this debt covenant as at December 31, 2012.
Debt to Total Capitalization Ratio
Debt to total capitalization ratio is defined as the sum of the Company’s long-term debt and long-term bonds divided by the sum of
shareholders’ equity, long-term debt and long-term bonds. The Company is required to maintain a debt to total capitalization ratio
of no more than 0.40 to 1. The Company is in compliance with this debt covenant as at December 31, 2012.
13.0 Subsequent Events
On March 20, 2013, the Company eliminated its dual-class share structure, as per its previously announced Plan of Arrangement
(“Arrangement”), as laid out in section 3.1 – Strategic Review and Reorganization. The Arrangement was overwhelmingly approved by
shareholders of ShawCor at a special meeting held on March 14, 2013. The Ontario Superior Court of Justice (Commercial List) issued
a final order approving the Arrangement on March 18, 2013.
49
m a nag e m e n t ’ s di s c us s ion a n d a na lys i s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
The Company also closed its previously announced unsecured senior note private placement in the amount of US$350 million and
the increase of its existing unsecured revolving credit facility by US$100 million to US$250 million, the extension of the facility’s
term to five years and the reduction in interest rates payable thereunder. The Board of Directors of ShawCor has declared that the
special dividend of $1.00 per common share of ShawCor, payable pursuant to the Arrangement, will be payable on April 19, 2013 to
shareholders of record at the close of business on April 4, 2013.
14.0 Forward-Looking Information
This document includes certain statements that reflect management’s expectations and objectives for the Company’s future
performance, opportunities and growth, which statements constitute “forward-looking information” and “forward-looking
statements” (collectively “forward-looking information) under applicable securities laws. Such statements, other than statements
of historical fact, are predictive in nature or depend on future events or conditions. Forward-looking information involves estimates,
assumptions, judgments and uncertainties. These statements may be identified by the use of forward-looking terminology such as
“may”, “will”, “should”, “anticipate”, “expect”, “believe”, “predict”, “estimate”, “continue”, “intend”, “plan” and variations of these
words or other similar expressions. Specifically, this document includes forward-looking information in the Outlook section and
elsewhere in respect of, among other things, the ability to achieve performance objectives, the sufficiency of resources and capital to
meet market demand and to execute the Company’s growth strategy, the timing of major project activity, the impact of the existing
order backlog and other factors on the Company’s revenue and operating income, the impact of global economic activity on the
demand for the Company’s products, the impact of changing energy demand, supply and prices, the impact and likelihood of changes
in competitive conditions in the markets in which the Company participates, the impact of changing laws for environmental
compliance on the Company’s capital and operating costs, and the adequacy of the Company’s existing accruals in respect thereof
and in respect of litigation matters generally, the level of payments under the Company’s performance bonds, the outlook for revenue
and operating income and the expected development in the Company’s order backlog.
Forward-looking information involves known and unknown risks and uncertainties that could cause actual results to differ materially
from those predicted by the forward-looking information. We caution readers not to place undue reliance on forward-looking
information as a number of factors could cause actual events, results and prospects to differ materially from those expressed in or
implied by the forward-looking information. Significant risks facing the Company include, but are not limited to: changes in global
or regional economic activity and changes in energy supply and demand, which impact on the level of drilling activity and pipeline
construction; exposure to product and other liability claims; shortages of or significant increases in the prices of raw materials used
by the Company; compliance with environmental, trade and other laws; political, economic and other risks arising from the Company’s
international operations; fluctuations in foreign exchange rates, as well as other risks and uncertainties, as more fully described herein
under the heading “Risks and Uncertainties”.
These statements of forward-looking information are based on assumptions, estimates and analysis made by management in light
of its experience and perception of trends, current conditions and expected developments as well as other factors believed to be
reasonable and relevant in the circumstances. These assumptions include those in respect of continued global economic recovery,
increased investment in global energy infrastructure, the Company’s ability to execute projects under contract, the continued supply
of and stable pricing for commodities used by the Company, the availability of personnel resources sufficient for the Company to
operate its businesses and the maintenance of operations in major oil and gas producing regions. The Company believes that the
expectations reflected in the forward-looking information are based on reasonable assumptions in light of currently available
information. However, should one or more risks materialize or should any assumptions prove incorrect, then actual results could
vary materially from those expressed or implied in the forward-looking information included in this document and the Company
can give no assurance that such expectations will be achieved.
When considering the forward-looking information in making decisions with respect to the Company, readers should carefully
consider the foregoing factors and other uncertainties and potential events. The Company does not assume the obligation to revise
or update forward-looking information after the date of this document or to revise it to reflect the occurrence of future unanticipated
events, except as may be required under applicable securities laws.
Additional information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com.
March 1, 2013
50
C on S oL i dat e d F i na nC i a L S tat e M e n t S
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Management’s responsibility for Financial Statements
The accompanying consolidated financial statements of ShawCor Ltd. included in this Annual Report are the responsibility
of management and have been approved by the Board of Directors.
The consolidated financial statements have been prepared by management in accordance with International Financial Reporting
Standards, as issued by the International Accounting Standards Board. When alternative accounting methods exist, management
has selected those it deems to be most appropriate in the circumstances. The consolidated financial statements include estimates
based on the experience and judgment of management in order to ensure that the financial statements are presented fairly, in
all material respects. Financial information presented elsewhere in the annual report is consistent with that in the consolidated
financial statements.
The management of the Company and its subsidiaries developed and continues to maintain systems of internal accounting controls
and management practices designed to provide reasonable assurance that the financial information is relevant, reliable and accurate
and that the Company’s assets are appropriately accounted for and adequately safeguarded.
The Board of Directors exercises its responsibilities for ensuring that management fulfils its responsibilities for financial reporting and
internal control with the assistance of its Audit Committee.
The Audit Committee is appointed by the Board and all of its members are Directors who are not officers or employees of ShawCor Ltd.
or any of its subsidiaries. The Committee meets periodically to review quarterly financial reports and to discuss internal controls
over the financial reporting process, auditing matters and financial reporting issues. The Committee reviews the Company’s annual
consolidated financial statements and recommends their approval to the Board of Directors.
These financial statements have been audited by Ernst & Young LLP, the external auditors, on behalf of the shareholders.
Ernst & Young LLP has full and free access to the Audit Committee.
February 28, 2013
WILLIAM P. BUCKLEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GARY S. LOVE
VICE-PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER
51
C on S oL i dat e d F i na nC i a L S tat e M e n t S
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
independent auditors’ report
To the Shareholders of ShawCor Ltd.
We have audited the accompanying consolidated financial statements of ShawCor Ltd., which comprise the consolidated
balance sheets as at December 31, 2012 and 2011, and the consolidated statements of income, comprehensive income, changes
in shareholders’ equity and cash flow for the years ended December 31, 2012 and 2011, and a summary of significant accounting
policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance
with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable
the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our
audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors
consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of ShawCor Ltd.
as at December 31, 2012 and 2011 and its financial performance and its cash flows for the years ended December 31, 2012 and 2011
in accordance with International Financial Reporting Standards.
ChARtEREd A CCOUntAntS
LICEnSEd PUBLIC A CCOUntAntS
Toronto, Canada
February 28, 2013
52
ANNUAL REPORT 2012 ShawCor Ltd. 53 December 31 December 31 (in thousands of Canadian dollars) 2012 2011AssetsCurrent AssetsCash and cash equivalents nOtE 7 $ 293,266 $ 56,731Short-term investments nOtE 8 78,747 10,545Loan receivable nOtE 9 604 2,047Accounts receivable nOtE 10 389,929 279,324Income taxes receivable nOtE 24 13,675 15,981Inventories nOtE 11 202,887 146,786Prepaid expenses 41,370 24,454Derivative financial instruments nOtE 24 3,988 270 1,024,466 536,138Non-current Assets Loans receivable nOtE 9 6,527 12,622Property, plant and equipment nOtE 12 392,592 299,118Intangible assets nOtE 13 144,694 86,362Long-term Investment nOtE 15 1,348 30,095Deferred income taxes nOtE 32 32,453 30,058Other assets nOtE 16 12,638 12,022Goodwill nOtE 17 285,710 220,334 875,962 690,611Assets held for sale nOtE 18 27,141 – $ 1,927,569 $ 1,226,749LiAbiLities Current Liabilities Bank indebtedness nOtE 21 $ 3,801 $ 12,281Loans payable nOtE 21 8,395 5,001Accounts payable and accrued liabilities nOtE 19 224,497 156,064Provisions nOtE 20 43,193 12,317Income taxes payable nOtE 24 37,991 35,200Derivative financial instruments nOtE 24 1,275 419Deferred revenue nOtE 22 377,091 27,446Obligations under finance lease nOtE 26 1,927 268 698,170 248,996Non-current Liabilities Loans payable nOtE 21 8,682 –Obligations under finance lease nOtE 26 12,728 –Provisions nOtE 20 54,151 50,859Deferred revenue nOtE 22 64,392 –Derivative financial instruments nOtE 24 – 2,499Deferred income taxes nOtE 32 71,664 56,984 211,617 110,342Liabilities directly associated with the assets classified as held for sale nOtE 18 11,917 – 921,704 359,338equity Share capital nOtE 27 221,687 218,381Contributed surplus 17,525 16,391Retained earnings 799,849 664,475Non-controlling interest (331) –Accumulated other comprehensive loss (32,865) (31,836) 1,005,865 867,411 $ 1,927,569 $ 1,226,749The accompanying notes are an integral part of these consolidated financial statements.PAUL G. ROBInSOn, DIRECTOR VIRGInIA L. ShAW, DIRECTOR Consolidated Balance Sheets c on s ol i dat e d f i na nc i a l stat e m e n t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Consolidated Statements of income
For the year ended December 31 (in thousands of Canadian dollars, except per share amounts)
Sale of products
Rendering of services
Revenue
Cost of Goods sold and services Rendered
Gross Profit
Selling, general and administrative expenses
Research and development expenses
Foreign exchange (gains) losses
Amortization of property, plant and equipment nOtE 12
Amortization of intangible assets nOtE 13
Gain on sale of land
Impairment of property, plant and equipment nOtE 14
income from Operations
Accounting gain on acquisition – net nOtE 5
Income (loss) on investment in associate
Finance income (costs), net
income before income taxes
Income taxes nOtE 32
Net income
Net income Attributable to:
Shareholders of the Company
Non-controlling interests
Net income
earnings per share
Basic nOtE 31
Diluted nOtE 31
Weighted Average Number of shares Outstanding (000s)
Basic nOtE 31
Diluted nOtE 31
The accompanying notes are an integral part of these consolidated financial statements.
2012
2011
$
385,933
1,096,916
1,482,849
904,362
$ 332,242
825,023
1,157,265
735,266
578,487
308,172
12,242
(119)
45,133
8,248
(12,101)
4,686
212,226
413
8,694
1,318
222,651
44,188
178,463
421,999
269,241
13,119
1,338
41,906
7,244
–
5,244
83,907
–
(10,133)
(4,507)
69,267
12,987
56,280
178,418
45
56,280
–
$
178,463
$
56,280
$
$
2.53
2.50
$
$
0.79
0.78
70,413
71,278
70,725
71,536
54
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Consolidated Statements of Comprehensive income
For the year ended December 31 (in thousands of Canadian dollars)
Net income for the Year
2012
2011
$
178,463
$
56,280
Other Comprehensive (Loss) income
Unrealized (loss) gain on translation of foreign operations
Gain on hedges of unrealized foreign currency translation
Gain on hedges of unrealized foreign currency translation transferred to net income during the period
Share of other comprehensive loss attributable to investment in associate
Income tax on other comprehensive (loss) income
Gain on hedges of unrealized foreign currency translation
Gain on hedges of unrealized foreign currency translation transferred to net income during the period
Other Comprehensive (Loss) income for the Year, Net of income tax
Comprehensive income for the Year
Comprehensive income Attributable to:
Shareholders of the Company
Non-controlling interests
Comprehensive income for the Year
The accompanying notes are an integral part of these consolidated financial statements.
(826)
–
–
–
–
–
(826)
177,637
177,389
248
177,637
9,134
603
(1,833)
(3,081)
(103)
311
5,031
61,311
61,311
–
61,311
55
c on s ol i dat e d f i na nc i a l stat e m e n t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Consolidated Statement of Changes in equity
For the year ended December 31, 2012
(in thousands of Canadian dollars)
Capital Stock
Contributed
Surplus
Retained Non-Controlling
Interest
Earnings
balance – December 31, 2010
$ 206,775
$ 18,144
$ 644,191
$
Net income for the year
Issued on exercise of stock options
Compensation cost on exercised options
Compensation cost on exercised RSUs
Stock-based compensation expense
Purchase – Normal Course Issuer Bid
Excess of purchase price over stated value of shares
Other comprehensive income
Dividends paid nOtE 27
–
9,878
4,122
7
–
(2,401)
–
–
–
–
–
(4,122)
(7)
2,376
–
–
–
–
56,280
–
–
–
–
–
(14,066)
–
(21,930)
balance – December 31, 2011
$ 218,381
$ 16,391
$ 664,475
$
Net income for the year
Issued on exercise of stock options
Compensation cost on exercised options
Compensation cost on exercised RSUs
Stock-based compensation expense
Purchase – Normal Course Issuer Bid
Excess of purchase price over stated value of shares
Other comprehensive (loss) income
Acquisition of non-controlling interest
Dividends paid nOtE 27
–
3,988
1,415
79
–
(2,176)
–
–
–
–
–
–
(1,415)
(79)
2,628
–
–
–
–
178,418
–
–
–
–
–
(16,712)
–
–
(26,332)
–
–
–
–
–
–
–
–
–
–
–
45
–
–
–
–
–
–
203
(579)
–
Accumulated
Other
Comprehensive
(Loss) Income
Total
Equity
$ (36,867)
$ 832,243
–
–
–
–
–
–
–
5,031
–
56,280
9,878
–
–
2,376
(2,401)
(14,066)
5,031
(21,930)
$ (31,836)
$ 867,411
–
–
–
–
–
–
–
(1,029)
–
–
178,463
3,988
–
–
2,628
(2,176)
(16,712)
(826)
(579)
(26,332)
balance – December 31, 2012
$ 221,687
$ 17,525
$ 799,849
$
(331)
$ (32,865)
$ 1,005,865
The accompanying notes are an integral part of these consolidated financial statements.
56
Consolidated Statements of Cash Flow
For the year ended December 31 (in thousands of Canadian dollars)
OPeRA tiNG AC tiv itie s
Net income for the year
Add (deduct) items not affecting cash
Amortization of property, plant and equipment nOtE 12
Amortization of intangible assets nOtE 13
Amortization of long-term prepaid expenses
Decommissioning obligations expense nOtE 20
Other provisions expense nOtE 20
Stock based and incentive based compensation nOtE 28
Deferred income taxes nOtE 32
(Gain) loss on disposal of property, plant and equipment
(Gain) on sale of land and other items
Accounting (gain) on acquisition nOtE 5
Investment (income) loss on long-term investment
Impairment of property, plant and equipment nOtE 14
Other
Settlement of decommissioning liability obligations nOtE 20
Settlement of other provisions nOtE 20
Increase in non-current deferred revenue
Net change in employee future benefits nOtES 20 And 23
Net change in non-cash working capital and foreign exchange
Cash Provided by Operating Activities
iNvestiNG A Ctiv itie s
(Increase) in loan receivable
Net purchase of short term investments
Purchases of property, plant and equipment nOtE 12
Proceeds on disposal of land
Proceeds on disposal of property, plant and equipment
Purchase of intangible assets nOtE 13
Investment in associate nOtE 15
Loan provided to associate nOtES 9 And 15
(Increase) decrease in other assets
Business acquisition nOtE 5
Cash Used in investing Activities
FiNANCiNG A Ctiv itie s
(Decrease) increase in bank indebtedness nOtE 21
Repayment of loan nOtE 30
Repayments of obligations under finance lease
Repayment of long-term debt nOtE 21
Issuance of shares on exercise of stock options nOtE 27
Repurchase of treasury shares nOtE 27
Dividends paid to shareholders nOtE 27
Cash Used in Financing Activities
effect of Foreign exchange on Cash and Cash equivalents
Net increase (Decrease) in Cash and Cash equivalents for the Year
Cash and Cash equivalents – beginning of Year
Cash and Cash equivalents – end of Year
supplemental information
Cash interest paid
Cash interest received
Cash income taxes paid
The accompanying notes are an integral part of these consolidated financial statements.
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
2012
2011
$
178,463
$
56,280
45,133
8,248
900
(472)
1,457
15,297
(881)
(416)
(12,101)
(9,445)
(8,694)
4,686
(3,351)
(1,580)
(7,292)
64,392
1,168
254,579
530,091
(62,085)
(68,202)
(74,439)
12,722
1,465
(62)
(2,824)
–
(956)
(49,024)
41,906
7,244
754
425
4,362
4,501
(14,686)
180
–
–
10,133
5,244
3,791
(1,074)
(2,240)
–
636
(72,131)
45,325
(10,911)
(10,545)
(55,982)
–
745
(392)
(10,517)
(10,347)
4,815
(12,839)
(243,405)
(105,973)
(8,480)
(522)
(465)
–
3,988
(18,888)
(26,332)
(50,699)
548
236,535
56,731
12,281
–
(416)
(24,402)
9,878
(16,467)
(21,930)
(41,056)
2,437
(99,267)
155,998
$
293,266
$
56,731
$
$
765
1,959
44,047
$
$
5,531
1,024
35,379
57
no t e S t o t h e C on S oL i dat e d F i na nC i a L Stat e M e n t S
a n n Ua L r e P o rt 2012 | S h awC o r Lt d.
notes to the Consolidated Financial Statements
noTe 1
CorporaTe informaTion
ShawCor Ltd. is a publicly listed company incorporated in
Canada with its shares listed on the Toronto Stock Exchange.
ShawCor Ltd., together with its wholly owned subsidiaries
(collectively referred to as the “Company” or “ShawCor”), is a
growth oriented, global energy services company serving the
Pipeline and Pipe Services and the Petrochemical and Industrial
segments of the energy industry. The Company operates eight
divisions with over 75 manufacturing and service facilities
located around the world. Further information as it pertains
to the nature of operations is set out in note 4.
The head office, principal address and registered office
of the Company is 25 Bethridge Road, Toronto, Ontario,
M9W 1M7, Canada.
no Te 2
BaSiS of prepara Tion
These consolidated financial statements have been prepared
in accordance with International Financial Reporting Standards
(“IFRS”), as issued by the International Accounting Standards
Board, applicable to the preparation of financial statements,
including International Accounting Standard (“IAS”) 1,
Presentation of Financial Statements.
The policies applied in these consolidated financial
statements are based on IFRS issued and outstanding
as of December 31, 2012.
basis of Presentation and Consolidation
The consolidated financial statements have been prepared on
the historical cost basis, except for certain non-current assets
and financial instruments, which are measured at fair value,
as explained in the accounting policies set out in note 3.
The consolidated financial statements are presented in Canadian
dollars and all values are rounded to the nearest thousand,
except when otherwise stated.
The consolidated financial statements comprise the financial
statements of the Company and the entities under its control
and the Company’s proportionate share in joint ventures.
The preparation of consolidated financial statements in conformity
with IFRS requires the use of certain critical accounting estimates.
It also requires management to exercise its judgment in the
process of applying the Company’s accounting policies. The areas
involving a higher degree of judgment or complexity, or areas
where assumptions and estimates are significant to the
consolidated financial statements are disclosed in note 3.
The results of the subsidiaries acquired during the period are
included in the consolidated financial statements from the date
of the acquisition. Adjustments are made, where necessary, to
the financial statements of the subsidiaries and joint ventures to
ensure consistency with those policies adopted by the Company.
All intercompany transactions, balances, income and expenses
are eliminated upon consolidation.
The audited consolidated financial statements and
accompanying notes for the year ended December 31, 2012
were authorized for issue by the company’s Board of Directors
on February 28, 2013.
noTe 3
Summary of SignifiC anT a CCounTing poLiCieS
The consolidated financial statements have been prepared
by management in accordance with IFRS. The more significant
accounting policies are as follows:
a) business Combinations
Business combinations are accounted for using the acquisition
accounting method. Identifiable assets, liabilities and contingent
liabilities acquired are measured at fair value at the acquisition
date. The consideration transferred is measured at fair value and
includes the fair value of any contingent consideration. The costs
of the acquisition transaction costs and any restructuring costs
are charged to the consolidated statement of income in the
period in which they are incurred.
58
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
For an acquisition achieved in stages, the acquisition date fair
value of the acquirer’s previously held equity interest in the
acquiree is remeasured to fair value at the acquisition date
through profit or loss.
The excess of the aggregate consideration transferred over the
fair value of the Company’s share of the identifiable net assets
acquired is recorded as goodwill.
b) interest in Joint ventures
The Company has interests in several jointly controlled entities
(“joint ventures”), whereby joint control has been established
by contractual agreements that establish joint control over the
economic activities of the entity. The Company accounts for
joint ventures using proportionate consolidation. As a result,
the consolidated financial statements include the Company’s
proportionate share of the joint venture’s assets and liabilities,
income and expenses, and cash flow with items of a similar
nature on a line by line basis, from the effective date that the
joint control commenced, up to the date that joint control
ceased. Adjustments are made where necessary to bring
the accounting policies in line with those of the Company.
The Company recognizes the portion of gains or losses on
the sale of assets by the Company to the joint venture that
is attributable to the other venturers. The Company does not
recognize its share of gains or losses from the joint venture that
result from the Company’s purchase of assets from the joint
venture until it resells the assets to an independent party.
However, a loss on the transaction is recognized immediately
if the loss provides evidence of a reduction in the net realizable
value of current assets, or an impairment loss.
A listing of all jointly controlled entities is presented in note 30.
c) Foreign Currency translation
Functional and Presentation Currency
Items included in the financial statements of each of the
Company’s entities are measured using the currency of the
primary economic environment in which the entity operates
(the “functional currency”). The consolidated financial
statements of the Company are presented in Canadian
dollars, which is the parent Company’s presentation and
functional currency.
Transactions
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from
the settlement of such transactions and from the translation
at period-end exchange rates of monetary assets and liabilities
denominated in foreign functional currencies are recognized
in the consolidated statement of income, except when deferred
in other comprehensive income (loss) as qualifying net
investment hedges.
Translation of Foreign Operations
The results and financial position of all the group entities
that have a functional currency different from the presentation
currency are translated into the presentation currency
as follows:
• assets and liabilities for each balance sheet presented
are translated at the closing rate at the date of that balance
sheet; and
• income and expenses for each income statement
are translated at the average exchange rates prevailing
at the dates of the transactions.
On consolidation, exchange differences arising from the
translation of the net investment in foreign operations, and
of borrowings and other currency instruments designated
as hedges of such investments, are taken to other
comprehensive income (loss).
When a foreign operation is partially disposed of or sold,
exchange differences that were recorded in accumulated other
comprehensive income (loss) are recognized in the consolidated
statement of income as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition
of a foreign entity are treated as assets and liabilities of the
foreign entity and translated at the closing rate.
d) Revenue Recognition
Revenue is recognized to the extent that it is probable that the
economic benefits will flow to the Company and the revenue can
be reliably measured, regardless of when the payment is being
made. Revenue is measured at the fair value of the consideration
received or receivable, taking into account contractually defined
terms of payment and excluding taxes or duty.
Sale of Goods
Revenue from the sale of goods is recognized when the
significant risks and rewards of ownership of the goods have
passed to the buyer, usually on delivery of the goods.
Rendering of Services
Revenue from pipe coating, inspection, repair and other services
provided in respect of customer-owned property is recognized as
services and are performed under specific contracts. Revenue on
these contracts is recognized using the percentage of completion
method based on a proportional performance basis using output
as a measure of performance. Losses, if any, on these contracts
are provided for in full at the time such losses are identified.
Services performed in advance of billings are recorded as unbilled
revenue pursuant to the contractual terms. In general, amounts
become billable upon the achievement of certain milestones or
in accordance with predetermined payment schedules. Changes
in the scope of work are not included in net revenue until earned
and realization is assured.
59
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
e) Cash and Cash equivalents
Cash and cash equivalents consist of balances with banks and
other short-term highly liquid investments with original maturity
dates on acquisition of 90 days or less. The amounts presented
in the consolidated financial statements approximate the fair
value of cash and cash equivalents.
proceeds or the net recoverable amount, and the carrying value
of the asset) is included in the consolidated statement of income
in the year the asset is derecognized.
The assets’ residual values, useful lives and methods of
amortization are reviewed at the end of each reporting period
and adjusted prospectively if appropriate.
f) inventories
Inventories are measured at the lower of cost or net realizable
value. Cost is determined on a first-in, first-out (“FIFO”) basis,
except in certain project based pipe coating businesses where
the average cost basis is employed, and includes direct
materials, direct labour and variable and fixed manufacturing
overheads. Net realizable value for finished goods, work-in-
process and raw materials inventories required for production
is the estimated amount that would be realized on eventual sale
of completed products, less the estimated costs necessary to
complete the sale, while for excess raw materials it is the current
market price. Ownership of inbound inventories is recognized
at the time title passes to the Company.
g) Property, Plant and equipment
Property, plant and equipment are recorded at historical cost
less accumulated amortization and accumulated impairment.
Direct costs are included in the asset’s carrying amount or
recognized as a separate asset, such as borrowing costs for
long-term construction projects and major inspections, as
appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Company
and the cost of the item can be measured reliably. The carrying
amount of the replaced part is derecognized.
All other repair and maintenance costs are recognized
in the consolidated statement of income during the financial
period in which they are incurred. The expected cost for the
decommissioning and remediation of an asset is included in the
cost of the respective asset if the recognition criteria are met.
Property, plant and equipment, other than land and project-
related facilities and equipment, are amortized over their useful
lives commencing when the asset is available for use on a
straight line basis at the following annual rates:
• 100% for land improvements;
• 4% to 10% on buildings;
h) borrowing Costs
Borrowing costs directly attributable to the acquisition,
construction or production of a qualifying asset are capitalized
as part of the cost of the asset. All other borrowing costs are
expensed in the period in which they occur. Borrowing costs
consist of interest and other costs that an entity incurs in
connection with the borrowing of funds.
i) Deferred Costs
Costs related to the mobilization of project-specific plants for
fixed term projects are included in work-in-process inventories
and are charged to costs of goods sold on a percentage of
completion basis. Such costs are to be included in inventories
only if incurred after the Company is awarded the project and
if directly related to the performance of the contract.
j) intangible Assets
Intangible assets acquired separately are measured at cost.
The cost of intangible assets acquired in a business combination
is the fair value as at the date of acquisition. Following initial
recognition, intangible assets are carried at cost less any
accumulated amortization and any accumulated impairment
losses. Internally generated intangible assets, excluding
capitalized development costs, are not capitalized and the
expenditure is reflected in the consolidated statement of income
during the period in which they are incurred.
Intellectual Property and Intangible Assets with Limited Lives
Intellectual property and intangible assets with limited lives
are amortized over the useful economic life and assessed
for impairment whenever there is an indication that the
intangible asset may be impaired. Amortization is recorded
on a straight-line basis over their estimated useful lives of
up to 15 years. The amortization period and the amortization
method is reviewed at least at each year-end and adjusted
prospectively if appropriate.
• 5% to 50% on machinery and equipment; and
• project related facilities are amortized over the estimated
project life.
An item of property, plant and equipment is derecognized
when no further economic benefits are expected from its use
or disposal. Any gains or losses arising on derecognition of the
asset (calculated as the difference between the net disposal
Intangible Assets with Indefinite Lives
Intangible assets with indefinite useful lives are not amortized
but are tested for impairment annually, or when there is an
indication that the asset may be impaired either individually
or at the Cash Generating Unit (“CGU”) level. The assessment
of indefinite life is reviewed annually to determine whether the
indefinite life continues to be supportable; if not, the change in
useful life from indefinite to finite is made on a prospective basis.
60
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Gains or losses arising from the derecognition of an intangible
asset are measured as the difference between the net disposal
proceeds and the carrying amount of the assets and are
recognized in the consolidated statement of income when
the asset is derecognized.
k) impairment of Non-financial Assets
Assets that have indefinite useful lives are not subject to
amortization and are tested annually for impairment or
when there is an indication that the asset may be impaired.
Assets that are subject to amortization are reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.
An impairment loss is recognized for the amount by which
the asset’s carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset’s fair value
less costs to sell and its value in use. For the purposes of
assessing impairment, assets are grouped at the lowest levels
for which there is a separately identifiable CGU. Non-financial
assets, other than goodwill, that suffered an impairment are
reviewed for possible reversal of the impairment whenever
indicators exist.
l) Goodwill
Goodwill represents the excess of the purchase price of the
Company’s interest in subsidiary entities over the fair value
of the underlying net identifiable tangible and intangible assets
arising at the date of acquisition.
Goodwill is deemed to have an indefinite life and is tested
annually for impairment or when there is an indicator of
impairment and carried at cost less accumulated impairment
losses. Impairment losses on goodwill are not reversed.
Goodwill is allocated to CGUs for the purpose of impairment
testing. The allocation is made to those CGUs or groups of
CGUs that are expected to benefit from the business
combination in which the goodwill arose, identified according
to operating segment.
Gains and losses on the disposal of an entity include the carrying
amount of goodwill relating to the entity sold.
m) investments in Associates
The Company accounts for investments in which it has significant
influence using the equity method and these investments are
initially recognized at cost, and the carrying amount is increased
or decreased to recognize the investor’s share of the profit or
loss of the investee, after the date of acquisition.
n) employee Future benefits
The Company provides future benefits to its employees
under a number of defined benefit and defined contribution
arrangements. The liability recognized in the consolidated
balance sheet in respect of defined benefit pension plans is the
present value of the defined benefit obligation at the end of the
reporting period. The fair value of plan assets is recorded and
included in “other assets” on the consolidated balance sheet.
The defined benefit obligation is determined by independent
actuaries using the projected benefit method pro-rated on
service. The present value of the defined benefit obligation is
determined by discounting the estimated future cash outflows
using interest rates of high-quality corporate bonds that have
terms to maturity matching the terms of the related pension
obligation. Plan assets are valued at quoted market prices
at the consolidated balance sheet date.
Past service costs arising from plan amendments are amortized
on a straight-line basis over the average period until the benefits
become vested. If the benefits have already vested, past
service costs are recognized immediately in the consolidated
statement of income following the introduction of, or changes
to, a pension plan.
Net actuarial gains and losses that exceed 10% of the greater
of the benefit obligation and the fair value of plan assets are
amortized over the average remaining service lives of the
employees who are members of the plan. For the Company’s
principal plans, these periods range from 5 years to 21 years.
For the Company’s defined contribution plans, costs are
determined based on the services provided by the Company’s
employees and are recognized in the consolidated statement
of income as those services are provided.
o) Leases
Finance leases, which transfer to the Company substantially all
the risks and benefits incidental to ownership of the leased item,
are capitalized at the commencement of the lease at the fair
value of the leased property or, if lower, at the present value of
the minimum lease payments. Lease payments are apportioned
between finance charges and reduction of the lease liability so as
to achieve a constant rate of interest on the remaining balance of
the liability.
Leases in which substantially all of the benefits and risks of
ownership are retained by the lessor are classified as operating
leases. Payments made under operating leases are charged to
the consolidated statement of income on a straight-line basis
over the period of the lease.
p) trade and Other Receivables
Impairment of trade and other receivables is constantly
monitored. Impairments are based on observed customer
solvency, the aging of trade and other receivables, historical
values and customer specific and industry risks. External credit
ratings as well as bank and trade references are reviewed
when available.
61
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
q) Provisions
A provision is an accrued liability, legal or constructive, resulting
from a past event with a high degree of uncertainty with respect
to either the timing or amount. Provisions must be probable and
should be measurable to be recognized, and are determined by
discounting the expected future cash flows at a pre-tax rate that
reflects current market assessments of the time value of money
and the risks specific to the liability. The increase in the provision
due to the passage of time is recognized as finance costs in the
consolidated statement of income.
r) Financial instruments
Financial assets include financial assets held for trading and
financial assets designated upon initial recognition at fair value
through profit or loss. Financial assets are classified as held
for trading if they are acquired for the purpose of selling or
repurchasing in the near term. Financial assets at fair value
through profit or loss are carried in the statement of financial
position at fair value with changes in fair value recognized in
the consolidated statement of income. Interest income from
financial assets at fair value through profit or loss is recognized
in the consolidated statement of income as part of other income
when the Company’s right to receive payments is established.
Held-to-maturity financial assets, loans and receivables
and other liabilities not held for trading are accounted for at
amortized cost with related expenses charged to selling, general
and administrative expenses in the consolidated statement
of income.
Available-for-sale financial assets are those non-derivative
financial assets that are so designated by the Company or do not
fall into another category. Available-for-sale financial assets are
carried on the consolidated balance sheet at fair value with gains
or losses from changes in fair value in a period included in other
comprehensive income (loss).
All financial liabilities are initially recorded at fair value and
designated upon inception as fair value through profit or loss,
or other liabilities. Financial liabilities classified as fair value
through profit or loss include derivative financial instruments.
Any changes in fair value are recognized through the
consolidated statement of income.
Loans and borrowings are initially recorded at fair value less any
directly attributable transaction costs. After initial recognition,
other liabilities are subsequently measured at amortized cost
using the effective interest rate method.
The following is a summary of the classes of financial
instruments included in the Company’s consolidated balance
sheet as well as their designation by the Company under the
new accounting standards:
Balance Sheet Item
Designation
Cash and cash equivalents
Short-term investments
Accounts receivable
Income taxes receivable
Loans receivable
Derivative financial instruments
Assets held for sale
Bank indebtedness
Loans payable
Accounts payable and accrued liabilities
Income taxes payable
Deferred purchase consideration
Other provisions
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Fair value through profit and loss
Available for sale financial assets
Loans and borrowings
Loans and borrowings
Loans and borrowings
Loans and borrowings
Loans and borrowings
Loans and borrowings
Derivative Financial Instruments
The Company’s policy is to document its risk management
objectives and strategy for undertaking various derivative
financial instrument transactions. Derivative financial
instruments designated as effective net investment hedges
are reflected in the consolidated balance sheet at fair value, with
any gains or losses resulting from fair value changes included
in other comprehensive income (loss) to the extent of hedge
effectiveness. Derivative financial instruments not designated
as part of a formal hedging relationship are carried at fair value
in the consolidated balance sheet, with gains or losses resulting
from changes in fair value in a period charged or credited to
foreign exchange gains and losses on the consolidated statement
of income.
Financial instruments measured at fair value are categorized
into one of the following three hierarchy levels for disclosure
purposes:
Level 1 Quoted prices in active markets for identical instruments
that are observable.
Level 2 Quoted prices in active markets for similar instruments;
inputs other than quoted prices that are observable and
derived from or corroborated by observable market data.
Level 3 Valuations derived from valuation techniques in which
one or more significant inputs are unobservable.
The hierarchy requires the use of observable market data
when available.
62
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Derecognition
Financial assets are derecognized where the contractual rights
to the receipt of cash flows expire or the asset is transferred to
another party whereby the entity no longer has any significant
continuing involvement in the risks and rewards associated with
the asset. Financial liabilities are derecognized where the related
obligations are either discharged, cancelled or expire. The
difference between the carrying value of the financial liability
extinguished or transferred to another party and the fair value
of the consideration paid, including the transfer of non-cash
assets or liabilities assumed, is recognized in the consolidated
statement of income in the period in which it is incurred.
Impairment
Financial assets carried at amortized cost are assessed at each
reporting date for any potential impairment. If there is objective
evidence that an impairment loss has been incurred, the amount
of the loss is measured as the difference between the carrying
amount and the present value of estimated future cash flows
discounted using the original effective interest rate. The carrying
amount of the asset is then reduced by the amount of the
impairment and is recognized in the consolidated statement
of income.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an
event occurring after the impairment was recognized, the reversal
of the previously recognized impairment loss is recognized in the
consolidated statement of income.
Comprehensive Income
The Company’s comprehensive income comprises net income
and other comprehensive income (loss), which is made up of
unrealized foreign currency gains or losses on the translation
of the financial statements of foreign operations, unrealized
gains or losses on available-for-sale financial assets, and
changes in unrealized gains or losses on financial instruments
designated as effective net investment hedges.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is included in the
consolidated balance sheet as a separate component of
shareholders’ equity, and includes other comprehensive income
(loss) accumulated over the years.
s) share-based and Other incentive-based Compensation
The Company has various stock-based compensation plans. The
Company recognizes compensation expense in respect of all of
its stock-based compensation plans. The compensation expense
is equal to the estimated fair value, based on an appropriate
pricing model, of the incentive options, rights or units granted
at the grant date, and is amortized over the vesting period
of the incentive options, rights or units.
In accordance with IFRS, for each award of stock-based
compensation that vests in installments, the fair value is
determined on each installment as a separate award. Non-
market vesting conditions are included in assumptions about
the number of options that are expected to vest. At the end
of each reporting period, the Company revises its estimates of
the number of options, rights or incentive units that are expected
to vest based on the non-market vesting conditions.
For options, units or rights that are settled with equity, an
amount equal to compensation expense is initially credited to
contributed surplus and transferred to share capital if and when
the option, unit or right is exercised. Options, units or rights that
are settled with cash are classified as liability instruments in
accordance with IFRS, as their terms require that they be settled
in cash. Until the date of settlement, the liability associated
with cash-settled options, units or rights is remeasured at the
fair value at each reporting period, with any changes in the
fair value recognized in the consolidated statement of income.
Consideration received on the exercise of a stock option, right
or unit is credited to share capital, when additional equity
instruments are issued.
For cash-settled awards, the fair value is recalculated at each
balance sheet date until the awards are settled based on the
estimated number of awards that are expected to vest, adjusting
for market and non-market based performance conditions.
During the vesting period, a liability is recognized representing
the portion of the vesting period that has expired at the balance
sheet date multiplied by the fair value of the awards at that date.
After vesting, the full fair value of the unsettled awards at each
balance sheet date is recognized as a liability. Movements in the
liability are recognized in the consolidated statement of income.
The fair value is recalculated using an option pricing model.
Awards where the employee has the right to choose whether
a share-based transaction is settled in cash or by issuing equity,
is accounted for as a compound financial instrument. The
Company measures the fair value of the compound financial
instrument as at the date of issue, taking into account the terms
and conditions of the grant. Stock-based compensation awards
that constitute compound financial instruments of the Company
are classified as liability instruments on the consolidated
balance sheet.
t) Research and Development Costs
In accordance with IAS 38, Intangible Assets, research and
development expenditures are charged to the consolidated
statement of income, except for development costs, which
are capitalized as an intangible asset when the following criteria
are met:
• the project is clearly defined and the costs are separately
identified and reliably measured;
• the technical feasibility of the project is demonstrated;
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No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
• the project will generate future economic benefit;
• resources are available to complete the project; and
• the project is intended to be completed.
The intangible asset is carried at cost less any accumulated
amortization and accumulated impairment losses. Amortization
of the asset commences when development has been completed
and the asset is available for use. It is amortized over the period
of expected future benefit, generally between three to ten years.
During the period of development, the asset is tested for
impairment annually. All other development costs are charged
to the consolidated statement of income.
u) income taxes
Income tax expense for the period comprises current and
deferred taxes. Tax is recognized in the consolidated statement
of income, except to the extent that it relates to items
recognized in other comprehensive income (loss).
The current income tax charge is calculated on the basis of the
tax laws enacted or substantively enacted at the consolidated
balance sheet date in the countries where the Company and
its subsidiaries operate and generate taxable income.
The Company accounts for income taxes using the liability
method. Under this method, deferred income tax assets and
liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are
measured using the enacted or substantively enacted tax rates
and laws that will be in effect when the differences are expected
to reverse. Deferred tax liabilities are not recognized if they arise
from the initial recognition of goodwill; deferred income tax is
not accounted for if it arises from initial recognition of an asset
or liability in a transaction other than a business combination
that at the time of the transaction affects neither accounting
nor taxable profit or loss.
Deferred income tax assets are recognized only to the extent
that it is probable that future taxable profit will be available
against which the temporary differences can be utilized.
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income tax assets
and liabilities relate to income taxes levied by the same taxation
authority on either the same taxable entity or different taxable
entities where there is an intention to settle the balances
on a net basis.
Investment tax credits relating to the acquisition of assets
are accounted for using the cost reduction approach, reducing
the cost of the asset acquired or amortized into income over
the useful life of the asset.
64
v) transaction Costs
Transaction costs associated with financial assets carried
at fair value through profit or loss are expensed as incurred,
while transaction costs associated with all other financial assets
are included in the initial carrying amount of the asset.
w) earnings Per share (“ePs”)
Basic EPS is calculated using the weighted average number
of shares outstanding during the period.
Diluted EPS is calculated using the treasury stock method
for determining the dilutive effect of outstanding financial
instruments issued under the Company’s various stock-based
compensation plans. Under this method, the conversion of
dilutive financial instruments and related issue of shares is
assumed at the beginning of the period (or at the time of award,
if later).
The proceeds from the conversion or exercise of dilutive financial
instruments plus future period compensation expenses are
assumed to be used to purchase common shares at the average
market price during the period, and the incremental number of
shares (the difference between the number of shares assumed
issued and assumed purchased) is included in the denominator
of the diluted EPS computation.
x) segment Reporting
Operating segments are reported in a manner consistent
with the internal reporting provided to the chief operating
decision-maker. The chief operating decision-maker, who
is responsible for allocating resources and assessing the
performance of the operating segments, has been identified
as the Chief Executive Officer.
y) Use of estimates
The preparation of consolidated financial statements in
conformity with IFRS requires management to make estimates
and assumptions that affect the amounts of assets and liabilities
and disclosures of contingent liabilities at the date of the
consolidated financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Critical estimates used in preparing the consolidated financial
statements include:
Long-lived Assets and Goodwill
The Company evaluates the carrying values of the CGUs’
goodwill on an annual basis on October 31 of each year to
determine whether or not impairment of these assets has
occurred and whether writedowns of the value of these assets
are required. Similarly, the Company evaluates the carrying
values of CGUs for long-lived assets whenever circumstances
arise that could indicate impairment or reversal of impairment,
at each reporting date. These impairment tests include certain
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
assumptions regarding discount rates and future cash flows
generated by these assets in determining the value-in-use and
fair value less costs to sell calculations. Actual results could
differ from these assumptions.
over the useful life of the related asset. Increases in the
decommissioning liabilities resulting from the passage of time
are recognized as a finance cost in the consolidated statement
of income.
Future Benefit Obligations
The Company provides future benefits to its employees under
a number of defined benefit arrangements. The calculation
of the accrued benefit obligations recognized in the consolidated
financial statements includes a number of assumptions
regarding discount rates, long-term rates of return on pension
plan assets, rates of employee compensation increases, rates
of inflation, and life expectancies. The outcome of any of these
factors could differ from the estimates used in the calculations
and have an impact on operating expenses, non-current assets
and non-current liabilities.
Provisions and Contingent Liabilities
Provisions and liabilities for legal and other contingent matters
are recognized in the period when it becomes probable that
there will be a future outflow of economic benefits resulting from
past operations or events and the amount of the cash outflow
can be reliably measured. The timing of recognition and
measurement of the provision requires the application of
judgment to existing facts and circumstances, which can be
subject to change. The carrying amounts of provisions and
liabilities are reviewed regularly and adjusted to take account
of changing facts and circumstances.
The Company is required to determine whether a loss
is probable based on judgment and interpretation of
laws and regulations and whether the loss can be reliably
measured. When a loss is determined it is charged to the
consolidated statement of income. The Company must
continually monitor known and potential contingent matters
and make appropriate provisions by charges to income when
warranted by circumstances.
Decommissioning Liabilities
Decommissioning liabilities include legal and constructive
obligations related to owned and leased facilities. These have
been recorded in the consolidated financial statements based
on estimated future amounts required to satisfy these
obligations. The amount recognized is the present value of
estimated future expenditures required to settle the obligation
using a current pre-tax risk free rate. A corresponding asset
equal to the present value of the initial estimated liability is
capitalized as part of the cost of the related long-lived asset.
Changes in the estimated liability resulting from revisions
to estimated timing or future decommissioning cost estimates
are recognized as a change in the decommissioning liability and
the related long-lived asset. The amount capitalized in property,
plant and equipment is depreciated on a straight line basis
Actual expenditures incurred are charged against the accumulated
decommissioning liability.
Financial Instruments
The Company has determined the estimated fair values of its
financial instruments not traded in an active market based on
appropriate valuation methodologies; however, considerable
judgment is required to develop these estimates, mainly based on
market conditions existing at the end of each reporting period.
Accordingly, these estimated fair values are not necessarily
indicative of the amounts the Company could realize in a current
market exchange. The estimated fair value amounts can be
materially affected by the use of different assumptions
or methodologies.
Income Taxes
The recording of income tax expense includes certain estimations
related to the impact in the current year of future events.
Differences between the estimated and actual impact of these
events could impact tax expense, current taxes payable or
deferred taxes. In particular, earnings and losses in foreign
jurisdictions may be taxed at rates different from those expected
in Canada.
z) Accounting standards issued but Not Yet Applied
The standards and interpretations that are issued, but not yet
effective, up to the date of issuance of the Company’s financial
statements are disclosed below. The Company intends to adopt
these standards, if applicable, when they become effective.
IFRS 9 Financial Instruments
IFRS 9, Financial Instruments, was issued in November 2009 and
addresses classification and measurement of financial assets
and replaces the multiple category and measurement models in
IAS 39, Financial Instruments – Recognition and Measurement, for
debt instruments with a new mixed measurement model having
only two categories: amortized cost and fair value through profit
or loss. IFRS 9 also replaces the models for measuring equity
instruments, and such instruments are either recognized at fair
value through profit or loss or at fair value through other
comprehensive income (loss).
Requirements for financial liabilities were added in October 2010
and they largely carried forward existing requirements in IAS 39,
except that fair value changes due to credit risk for liabilities
designated at fair value through profit or loss would generally
be recorded in other comprehensive income (loss).
65
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
The standard was initially effective for annual periods beginning
on or after January 1, 2013, but Amendments to IFRS 9 Mandatory
Effective Date of IFRS 9 and Transition Disclosures, issued in
December 2011, moved the mandatory effective date to
January 1, 2015 with earlier adoption permitted. The Company
has not yet assessed the impact of the standard or determined
whether it will adopt the standard early.
IFRS 10 Consolidated Financial Statements
For annual periods beginning on January 1, 2013, IFRS 10,
Consolidated Financial Statements, will replace portions of IAS 27
Consolidated and Separate Financial Statements and interpretation
SIC-12 Consolidation – Special Purpose Entities. The new standard
requires consolidated financial statements to include all
controlled entities under a single control model. The Company
will be considered to control an investee when it is exposed,
or has rights to variable returns from its involvement with the
investee, and has the current ability to affect those returns
through its power over the investee. As required by this
standard, control is reassessed as facts and circumstances
change. All facts and circumstances must be considered to make
a judgment about whether the Company controls another entity.
Additional guidance is given on how to evaluate whether certain
relationships give the Company the current ability to affect
its returns, including how to consider options and convertible
instruments, holding less than a majority of voting rights, how
to consider protective rights and principal-agency relationships
(including removal rights), all of which may differ from
current practice.
The Company has not yet completed the process of evaluating
the effect of and the planning for the transition to IFRS 10 and
will begin to report using IFRS 10 starting in 2013.
IFRS 11 Joint Arrangements
On January 1, 2013, ShawCor will be required to adopt IFRS 11,
Joint Arrangements, which applies to accounting for interests
in joint arrangements where there is joint control. The standard
requires the joint arrangements to be classified as either joint
operations or joint ventures. The structure of the joint
arrangement would no longer be the most significant factor
when classifying the joint arrangement as either a joint operation
or a joint venture. In addition, the option to account for joint
ventures (previously called jointly controlled entities) using
proportionate consolidation will be removed and replaced
by equity accounting.
The Company has not yet completed the process of evaluating
the effect of and the planning for the transition to IFRS 11 and will
begin to report using IFRS 11 starting in 2013.
IFRS 12 Disclosure of Interests in Other Entities
On January 1, 2013, ShawCor will be required to adopt IFRS 12,
Disclosure of Interests in Other Entities, which includes disclosure
requirements about subsidiaries, joint ventures and associates,
as well as unconsolidated structured entities and replaces
existing disclosure requirements. Due to this new standard, the
Company will be required to disclose the following: judgments
and assumptions made when deciding how to classify
involvement with another entity, interests that non-controlling
interests have in consolidated entities and nature of the risks
associated with interests in other entities.
The Company has not yet completed the process of evaluating
the effect of and the planning for the transition to IFRS 12 and
will begin to report using IFRS 12 starting in 2013.
IFRS 13 Fair Value Measurement
On January 1, 2013, ShawCor will be required to adopt IFRS 13,
Fair Value Measurement. The new standard will generally
converge the IFRS and U.S. Generally Accepted Accounting
Principles requirements on how to measure fair value and the
related disclosures. IFRS 13 establishes a single source of
guidance for fair value measurements, when fair value is required
or permitted by IFRS. Upon adoption, the Company will provide
a single framework for measuring fair value while requiring
enhanced disclosures when fair value is applied. In addition, fair
value will be defined as the ‘exit price’ and concepts of ‘highest
and best use’ and ‘valuation premise’ would be relevant only for
non-financial assets and liabilities.
The Company has not yet completed the process of evaluating
the effect of and the planning for the transition to IFRS 13 and
will begin to report using IFRS 13 starting in 2013.
IAS 1 Presentation of Financial Statements
The IASB amended IAS 1, Presentation of Financial Statements, by
revising how certain items are presented in other comprehensive
income (“OCI”). Items within OCI that may be reclassified to
profit or loss will be separated from items that will not. The
standard is effective for financial years beginning on or after
July 1, 2012 with early adoption permitted.
The Company is in the process of reviewing the standard to
determine the impact on the consolidated financial statements
and will begin to report using IAS 1 amendments starting in 2013.
IAS 19 Employee Benefits
On January 1, 2013, ShawCor will be required to adopt IAS 19,
Employee Benefits. The IASB has issued numerous amendments
to IAS 19. These range from fundamental changes such as
removing the corridor mechanism and the concept of expected
returns on plan assets to simple clarifications and re-wording.
The amended standard will impact the net benefit expense as
the expected return on plan assets will be calculated using the
66
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
same interest rate as applied for the purpose of discounting the
benefit obligation. The amendment becomes effective for annual
periods beginning on or after 1 January 2013. IAS 19 is required to
be applied for accounting periods beginning on or after January 1,
2013, with earlier adoption permitted.
performance based on segment operating income or loss,
which is measured differently than operating income or loss in
the consolidated financial statements. Interest income, finance
costs and income taxes are managed at a consolidated level
and are not allocated to the reportable operating segments.
The Company has not yet completed the process of evaluating
the effect of and the planning for the transition to IAS 19 and will
begin to report using IAS 19 starting in 2013.
IAS 27 Separate Financial Statements
On January 1, 2013, ShawCor will be required to adopt IAS 27,
Separate Financial Statements. As a result of the issue of the new
consolidation suite of standards, IAS 27 has been reissued to
reflect the changes to the consolidation guidance recently
included in IFRS 10. In addition, IAS 27 will now only prescribe
the accounting and disclosure requirements for investments in
subsidiaries, joint ventures and associates when the Company
prepares separate financial statements.
The Company has not yet completed the process of evaluating
the effect of and the planning for the transition to IAS 27 and will
begin to report using IAS 27 starting in 2013.
IAS 28 Investments in Associates and Joint Ventures
On January 1, 2013, ShawCor will be required to adopt IAS 28,
Investments in Associates and Joint Ventures. As a consequence of
the issue of IFRS 10, IFRS 11 and IFRS 12, IAS 28 has been amended
and will provide further accounting guidance for investments in
associates and will set out the requirements for the application
of the equity method when accounting for investments in
associates and joint ventures. This standard will be applied by
the Company when there is joint control or significant influence
over an investee. Significant influence is the power to participate
in the financial and operating policy decisions of the investee
but does not include control or joint control of those policy
decisions. When it has been determined that the Company
has an interest in a joint venture, the Company will recognize
an investment and will account for it using the equity method
in accordance with IAS 28.
The Company has not yet completed the process of evaluating
the effect of and the planning for the transition to IAS 28 and
will begin to report using IAS 28 starting in 2013.
Note 4
SegmeNt INformatIoN
ShawCor’s operating segments are being reported based on
the financial information provided to the Chief Executive Officer,
who has been identified as the Chief Operating Decision-Maker
(“CODM”) in monitoring segment performance and allocating
resources between segments. The CODM assesses segment
As at December 31, 2012, the Company had two reportable
operating segments: Pipeline and Pipe Services and Petrochemical
and Industrial. Inter-segment transactions between Pipeline and
Pipe Services and Petrochemical and Industrial are accounted for
at negotiated transfer prices.
Pipeline and Pipe Service
The Pipeline and Pipe Services segment comprises the following
business units:
• Bredero Shaw, which provides pipe-coating, lining and
insulation products;
• Flexpipe Systems, which provides spoolable composite
pipe systems;
• Canusa–CPS, which manufactures heat shrinkable sleeves,
adhesives and liquid coatings for pipeline joint protection
applications;
• Shaw Pipeline Services, which provides ultrasonic and
radiographic weld inspection services for land and marine
pipeline construction;
• Guardian, which provides oilfield tubular management
services and inspection, testing and refurbishment of
oilfield tubular; and
• Socotherm, which provides pipe coating, lining and
insulation products.
Petrochemical and Industrial
The Petrochemical and Industrial segment comprises the
following business units:
• ShawFlex, which manufactures wire and cable for process
instrumentation and control applications; and
• DSG-Canusa, which manufactures heat-shrinkable tubing
for automotive, electrical, electronic and utility applications.
Financial and Corporate
The financial and corporate division for ShawCor only earns
revenue that is considered incidental to the activities of the
Company. As a result, it does not meet the definition of
a reportable operating segment as defined in IFRS.
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No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
segment information
The following table sets forth information by segment for the years ended December 31:
(in thousands of
Canadian dollars)
Revenue
External
Inter-segment
Operating expense
Research and
development
Amortization of
property, plant
and equipment
Amortization of
intangible assets
Impairment of property,
plant and equipment
(Gain) on sale of land
Income (loss)
Pipeline and
Pipe Services
Petrochemical
and Industrial
Financial
and Corporate
Eliminations
and Adjustments
2012
2011
2012
2011
2012
2011
2012
2011
2012
Total
2011
$ 1,337,236 $ 1,019,400 $ 145,613 $ 137,865 $
641
1,699
1,455
215
1,337,877
1,021,099
147,068
138,080
– $
–
–
– $
–
– $
(2,096)
– $ 1,482,849 $ 1,157,265
–
–
(1,914)
–
(2,096)
(1,914) 1,482,849
1,157,265
1,049,026
863,900
123,859
116,318
41,626
27,541
(2,096)
(1,914) 1,212,415
1,005,845
9,084
10,220
1,143
1,285
2,015
1,614
41,227
38,045
2,180
2,235
1,726
1,626
8,248
7,244
4,686
(12,101)
5,244
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
12,242
13,119
45,133
41,906
8,248
7,244
4,686
(12,101)
5,244
–
from operations
$ 237,707 $
96,446 $
19,886 $
18,242 $
(45,367) $
(30,781) $
– $
– $ 212,226 $
83,907
Accounting gain
on acquisition
Income (loss) on
investment
in associate
Interest income
Interest expense
Income tax expense
Goodwill
Total assets
Total liabilities
Additions to property,
plant and equipment,
413
–
–
–
–
–
–
940
(4,058)
–
270,152
1,733,851
1,041,086
–
–
–
–
204,718
1,047,206
286,064
–
2
(4)
–
15,558
124,324
17,877
–
–
–
–
15,616
75,218
20,148
8,694
2,059
2,379
(44,188)
–
933,985
42,447
(10,133)
1,024
(5,531)
(12,987)
–
812,480
18,963
–
–
–
–
–
–
(864,591)
(179,706)
–
413
–
–
–
–
–
–
(10,133)
8,694
1,024
3,001
(5,531)
(1,683)
(12,987)
(44,188)
220,334
285,710
(708,155) 1,927,569 1,226,749
359,338
921,704
34,163
net of disposals
$
58,781 $
50,096 $
16,374 $
2,975 $
1,695 $
1,986 $
– $
– $
76,850 $
55,057
68
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Geographical information
The following table sets forth information by geographical region for the years ended December 31, the geographic region is
determined by the country or location of operation.
(in thousands of Canadian dollars)
Canada
UsA
Latin America
eMAR
Asia Pacific
eliminations
2012
total
Revenue
External
Inter-segment
$ 481,408
2,079
$ 214,260
–
$ 172,284
16
$ 276,887
1
$ 338,010
–
$
–
(2,096)
$ 1,482,849
–
483,487
214,260
172,300
276,888
338,010
(2,096)
1,482,849
Non-current assets(a)
$ 505,657
$ 412,185
$
75,627
$ 170,756
$
99,859
$ (405,852) $ 858,232
(in thousands of Canadian dollars)
Canada
USA
Latin America
EMAR
Asia Pacific
Eliminations
2011
Total
Revenue
External
Inter-segment
$ 418,258
1,598
$ 208,570
218
$
419,856
208,788
38,401
97
38,498
$ 296,121
1
$ 195,915
–
$
–
(1,914)
$ 1,157,265
–
296,122
195,915
(1,914)
1,157,265
Non-current assets(a)
$ 569,652
$ 222,708
$
72,457
$ 107,733
$
91,077
$ (403,902) $ 659,725
(a) Excluding financial instruments, deferred tax assets and post-employment benefits
noTe 5
aCquiSiTion
On October 24, 2012, the Company acquired the remaining 60%
of Fineglade Limited (“Fineglade”). Fineglade which currently
holds approximately 96% of the outstanding shares of
Socotherm S.p.A., was previously owned 40% by ShawCor Ltd.
and 60% by an entity controlled by Sophia Capital. Prior to the
acquisition, the investment in Fineglade was shown as an
investment in associate (December 31, 2011 – $30.1 million).
After the acquisition the Company fully consolidates Fineglade
and the financial results of its subsidiaries.
The total consideration for the acquisition of the remaining 60%
of Fineglade was $144.7 million satisfied by a cash payment of
$68.0 million (€52.3 million), the set-off of a pre-existing loan
from ShawCor to Sophia Capital in the amount of $57.4 million
(€44.6 million), deferred purchase consideration of $3.3 million
(€2.6 million) and the settlement of other loans provided to
Fineglade and the entity controlled by Sophia Capital in the
amount of $16.0 million (US$16.0 million).
Significant judgments and assumptions made regarding the
provisional purchase price allocation in the course of the
acquisition of Fineglade and its ownership of Socotherm S.p.A.
include the following:
• For intangible assets associated with customer relationships,
the Company based its valuation on the expected future cash
flows using the multi-period excess earnings approach. This
method employed a discounted cash flow analysis using the
present value of the estimated after-tax cash flows expected
to be generated from the purchased intangible asset using risk
adjusted discount rates and revenue forecasts as appropriate
based upon the geographical regions.
• For the valuation of brand and intellectual property, the
relief-from-royalty method was applied which included
estimating the cost savings that result from the Company’s
ownership of trademarks and licenses on which it does not
have to pay royalties to a licensor. The intangible assets are
then recognized at the present value of these savings. The
corporate brand Socotherm was assumed to have an unlimited
life due to its long history and respected market position.
• The Company has elected to measure the non-controlling
interest in Socotherm S.p.A. at their proportionate share
of the value of net identifiable assets acquired.
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A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
The following table shows the provisional purchase price
allocation for the acquisition of Fineglade, and assigns the
total consideration paid to the net assets acquired:
noTe 6
empL oyee BenefiTS expenSe
The following table sets forth the Company’s employee benefits
expense for the periods indicated:
(in thousands of Canadian dollars)
2012
2011
Salaries, wages and
employee benefits
Pension
Share-based and other
incentive-based
compensation nOtE 28
Total
no Te 7
$ 392,704
10,897
$ 344,949
11,275
15,297
4,501
$ 418,898
$ 360,725
CaSh and CaSh e quivaLenTS
The following table sets forth the Company’s cash and cash
equivalents as at the periods indicated:
(in thousands of Canadian dollars)
Cash
Cash equivalents
December 31
2012
December 31
2011
$ 260,466
32,800
$
56,731
–
$ 293,266
$
56,731
noTe 8
ShorT-Term inveST menTS
Short-term investments consist of liquid financial instruments
with a maturity date greater than 90 days and less than one year.
(in thousands of Canadian dollars)
Consideration (including fair value
of existing 40% of Fineglade):
Cash (net of cash acquired of $21,217)
Set off of loan receivable from Sophia Capital
Deferred purchase consideration
Loans to be converted to equity
Fair value of 40% of Fineglade interest
before the acquisition
Assets acquired at fair value:
Current assets (excluding cash acquired of $21,217)
Property, plant and equipment
Intangible assets
Deferred income tax assets
Other non-current assets
Assets held for sale (net)
Current liabilities assumed
Deferred income tax liabilities
Other non-current liabilities assumed
total identifiable net assets at fair value
Non-controlling interest
Goodwill
$
46,819
57,406
3,348
15,953
54,207
$ 177,733
$
56,528
81,425
68,627
6,067
19,369
6,430
(69,135)
(19,127)
(40,941)
$ 109,243
579
67,911
$ 177,733
The goodwill acquired represents the acquired human capital
and the benefits that the Company expects to earn from the
acquisition due to expected synergies and other intangible
assets that do not meet the criteria for recognition as identifiable
intangible assets.
The acquisition of the remaining 60% of Fineglade resulted
in an accounting gain on acquisition, as follows:
Revaluation of the equity interest in Fineglade
before the acquisition
Other comprehensive income associated
with previously held equity interest
Acquisition related costs
$
13,131
(3,685)
(9,033)
Accounting gain on acquisition – net
$
413
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noTe 9
LoanS re CeivaBLe
The following table details the loans receivable as at:
(in thousands of Canadian dollars)
December 31
2012
December 31
2011
Current
Loan to associate(a)
Loans receivable
Non-current
Notes receivable(b)
Loans receivable
Loan to associate(a)
Total
(a) Loan to Fineglade.
$
$
$
$
–
604
604
3,745
2,782
–
6,527
2,047
–
2,047
3,845
–
8,777
12,622
$
7,131
$
14,669
(b) Long-term notes receivable relate to an amount advanced by the Company
to an external party to support the construction of port facilities at a Bredero
Shaw plant location in Kabil, Indonesia. Interest is payable semi-annually
at US prime plus 0.25%, with principal repayments to be made in four
semi-annual instalments beginning no later than March 31, 2018, as set
out in the loan agreement terms.
noTe 10
aCCounTS re CeivaBLe
The following table sets forth the Company’s trade and other
receivables as at the periods indicated:
(in thousands of Canadian dollars)
Trade accounts receivable
Allowance for doubtful
accounts nOtE 24
Unbilled revenue and
other receivables
December 31
2012
December 31
2011
$ 286,005
$ 268,119
(9,409)
(13,967)
113,333
25,172
$ 389,929 $ 279,324
The following tables sets forth the aging of the Company’s trade
accounts receivable as at the periods indicated:
(in thousands of Canadian dollars)
Current
Past due 1 to 30 days
Past due 31 to 60 days
Past due 61 to 90 days
Past due for more than 90 days
December 31
2012
December 31
2011
$ 116,252
88,588
38,815
15,703
26,647
$ 157,142
44,423
28,968
13,596
23,990
Total trade accounts receivable
Less: allowance for doubtful accounts
286,005
(9,409)
268,119
(13,967)
trade accounts receivable – net(a)
$ 276,596
$ 254,152
(a) The trade accounts receivable – net balance above excludes unbilled revenue
and other receivables outstanding in the amount of $113.3M and $25.2M
as at December 31, 2012, December 31, 2011, respectively.
noTe 11
invenT orieS
The following table sets forth the Company’s inventories as at
the periods indicated:
(in thousands of Canadian dollars)
Raw materials and supplies
Work-in-progress
Finished goods
Inventory obsolescence
December 31
2012
December 31
2011
$
$ 146,049
18,725
54,601
(16,038)
98,688
14,493
43,992
(10,387)
$ 202,887 $ 146,786
During the year 2012, the Company recorded an increase
of $5.7 million in the provision for inventory obsolescence, due
to the build-up of certain excess raw materials. During the year
2011, the Company recorded a recovery of $0.6 million on the
provision for inventory obsolescence, due to certain excess raw
materials being allocated to new projects.
71
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
noTe 12
proper Ty, pLanT and e quipmenT
The following table sets forth the Company’s property, plant and equipment as at:
(in thousands of Canadian dollars)
Cost
Balance – January 1, 2011
Exchange differences
Additions
Acquisitions
Decommissioning liabilities and others
Disposals
Land and
Land Improvements
Buildings
Machinery
and Equipment
Capital Projects-
in-Progress
Total
$
38,935
1,465
13
–
–
(703)
$ 131,496
235
6,336
–
–
(1,988)
$ 537,269
(6,547)
45,642
6,150
2,026
(13,075)
$
18,195
(2,804)
3,991
–
–
(46)
$ 725,895
(7,651)
55,982
6,150
2,026
(15,812)
Balance – December 31, 2011
$
39,710
$ 136,079
$ 571,465
$
19,336
$ 766,590
Exchange differences
Additions
Acquisitions
Assets held for sale
Decommissioning liabilities and others
Disposals
(3,495)
4,959
7,942
(73)
11,767
(131)
(981)
3,015
37,806
(976)
1,868
(4,071)
(3,510)
50,726
33,632
(23,063)
(9,438)
(25,434)
(2,486)
15,739
3,760
–
–
(1,027)
(10,472)
74,439
83,140
(24,112)
4,197
(30,663)
balance – December 31, 2012
$
60,679
$ 172,740
$ 594,378
$
35,322
$ 863,119
Accumulated Amortization
Balance – January 1, 2011
Exchange differences
Amortization expense
Decommissioning liabilities and others
Eliminated on disposal
$
(11,751)
947
(2,334)
–
569
$
(73,178)
2,915
(7,925)
–
1,494
$ (324,205)
1,697
(28,055)
(3,592)
8,701
$
Balance – December 31, 2011
$
(12,569)
$
(76,694)
$ (345,454)
$
Exchange differences
Amortization expense
Assets held for sale
Decommissioning liabilities and others
Eliminated on disposal
(924)
(2,655)
17
(797)
–
(2,783)
(3,039)
976
(38)
1,658
4,850
(38,260)
18,616
(344)
18,369
balance – December 31, 2012
$
(16,928)
$
(79,920)
$ (342,223)
$
Accumulated impairment
Balance – January 1, 2011
Exchange differences
Impairment
Eliminated on disposal
$
(2,494)
8
–
–
$
(6,326)
87
(659)
–
$
(20,244)
1,458
(4,585)
–
$
Balance – December 31, 2011
$
(2,486)
$
(6,898)
$
(23,371)
$
Exchange differences
Impairment
Eliminated on disposal
(10)
–
–
(64)
(234)
–
(1,075)
(4,452)
7,134
balance – December 31, 2012
$
(2,496)
$
(7,196)
$
(21,764)
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ (409,134)
5,559
(38,314)
(3,592)
10,764
$ (434,717)
1,143
(43,954)
19,609
(1,179)
20,027
$ (439,071)
$
(29,064)
1,553
(5,244)
–
$
(32,755)
(1,149)
(4,686)
7,134
$
(31,456)
Net book value
As at January 1, 2012
As at December 31, 2012
24,655
41,255
$
52,487
85,624
$
202,640
$ 230,391
19,336
35,322
$
299,118
$ 392,592
72
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Intellectual Property,
Intangible Assets,
Intangible Assets,
with Limited Life(a) with Limited Life(b) with Indefinite Life(c)
Total
$
$
65,004
(665)
351
–
(227)
$
36,844
(2,411)
41
3,868
(400)
1,931
–
–
675
(331)
$ 103,779
(3,076)
392
4,543
(958)
$
64,463
$
37,942
$
2,275
$ 104,680
(441)
62
14,621
–
(2,845)
–
51,338
–
$
78,705
$
86,435
$
(9,498)
(599)
(3,731)
$
(1,970)
993
(3,513)
$
$
$
(13,828)
$
(4,490)
$
124
(4,565)
332
(3,683)
$
(18,269)
$
(7,841)
$
7
–
3,382
–
5,664
–
–
–
–
–
–
–
(3,279)
62
69,341
–
$ 170,804
$
(11,468)
394
(7,244)
$
(18,318)
456
(8,248)
$
(26,110)
$
$
$
$
$
$
(227)
227
–
–
–
55,279
50,635
60,436
$
$
$
$
$
$
(400)
400
–
–
–
34,474
33,452
78,594
$
$
$
$
$
$
(331)
331
–
–
–
$
$
$
(958)
958
–
–
–
1,600
2,275
5,664
91,353
$
$
86,362
$ 144,694
noTe 13
inT angiBLe aSSeTS
The following table sets forth the Company’s intangible assets as at:
(in thousands of Canadian dollars)
Cost
Balance – January 1, 2011
Exchange differences
Additions
Acquisition of a subsidiary
Disposals and write-offs
Balance – December 31, 2011
Exchange differences
Additions
Acquisition of a subsidiary
Disposals and write-offs
balance – December 31, 2012
Accumulated Amortization
Balance – January 1, 2011
Foreign exchange
Amortization
Balance – December 31, 2011
Exchange differences
Amortization
balance – December 31, 2012
Accumulated impairment
Balance – January 1, 2011
Disposals and write-offs
Balance – December 31, 2011
Disposals and write-offs
balance – December 31, 2012
Net book value
As at January 1, 2011
As at December 31, 2011
As at December 31, 2012
(a) Intellectual property, with limited life, represents the cost of certain technology and know-how and patents obtained in acquisitions. The Company amortizes
the cost of intellectual property over its estimated useful life of 15 years.
(b) Intangible assets, with limited life, represents trademarks, customer relationships and non-competition agreements acquired directly or in conjunction with a past
business combination. The Company amortizes the cost of intangible assets with limited life over its estimated useful life of 15 years. The net book value of
customer relationship as at December 31, 2012 is $75.6 million, and is included in intangible assets with limited life in the table above.
(c) Intangible assets, with indefinite life, represent the value of brands obtained in the Flexpipe and the Socotherm acquisitions. As the cost of intangible assets with
indefinite life is not amortized, the Company assesses these intangible assets for impairment on an annual basis or when there is an indicator of impairment.
73
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
noTe 14
impairmenT of proper Ty, pLanT and e quipmenT
During 2012, the closure of the Kembla Grange, Australia facility
resulted in a further impairment loss of $4.7 million to dismantle,
sell and scrap equipment and buildings in order to make the land
ready for sale.
During fiscal 2011, qualitative factors such as line reductions,
reduced levels of drilling activity, project outlook in certain
regions and low capacity utilization coupled with the lingering
impact of the financial crisis of 2008 had an impact on some
CGUs of the Company, which were dependent on a few major
projects that were coming close to completion. More specifically,
indications were that two production plants in the Company’s
Bredero Shaw group of CGUs may be impaired. These two
production plants are located in Leith, United Kingdom and
Kembla Grange, Australia. In Leith, the existing facility lease
was not likely to be renewed upon expiration and therefore
the Company expected to close the facility in 2013. In Kembla
Grange, Australia, the project outlook for 2012 and beyond
was not encouraging and the Company had decided to close
the facility by the third quarter of 2012. In Sharjah, U.A.E., the
Company had been awarded a major contract and the outlook
for the next 5 years had improved. Consequently, there was
a reversal of previously recorded impairment. Each one of these
production plants is a separate CGU in the Pipeline and Pipe
services segment.
Leith,
Scotland
Kembla Grange,
Australia
Sharjah,
U.A.E.
$
$
$
$
218
1,831
2,049
$
$
461
3,491
3,952
Leith,
scotland
Kembla Grange,
Australia
–
–
–
$
$
234
4,452
4,686
$
$
$
$
–
(757)
$
(757)
$
sharjah,
U.A.e.
–
–
–
$
$
Total
679
4,565
5,244
total
234
4,452
4,686
The VIU is determined by discounting the future cash flows
generated from the Company’s continuing use of the respective
CGU. The discount rates used are pre-tax and reflect specific
risks relating to the CGU. The discounted cash flow model
employed by the Company reflects the specific risks of each
CGU and its business environment. The model calculates the
VIU as the present value of the projected free cash flows and the
terminal value of each CGU. To ensure the reasonability of the
VIU estimate, the VIU calculation for each CGU was compared
to the CGUs FVLCS amount.
(in thousands of Canadian dollars)
December 31, 2011
Buildings
Plant, machinery, and equipment
Impairment charge
(in thousands of Canadian dollars)
December 31, 2012
Buildings
Plant, machinery, and equipment
impairment charge
Recoverable Amount
The Company determines the recoverable amount for its CGUs,
as the higher of Value In Use (“VIU”) and the CGUs Fair Value
Less Costs to Sell (“FVLCS”). For the property, plant and
equipment impairment test, the VIU of each of the CGUs (except
for Kembla Grange, Australia) was higher than the CGUs FVLCS.
The Company determines the recoverable amount for its CGUs
using the VIU model for the purpose of testing property, plant
and equipment for impairment. VIU calculations use pre-tax
cash flow projections based on three-year financial business
plans (“Business Plans”) approved by the Board of Directors.
Management also determined budgeted gross margin based on
past performance and its expectations of market developments.
Cash flows beyond the three-year period are extrapolated using
estimated growth rates as applicable. The growth rate does
not exceed the long-term average growth rate for the business
in which the CGU operates.
74
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Details relating to the discounted cash flow models used in the
impairment tests of the property, plant and equipment balances
are as follows:
noTe 16
oTher aSSeTS
Leith,
Scotland
Kembla Grange,
Australia
Sharjah,
U.A.E.
The following table details the other assets as at December 31:
December 31, 2011
Valuation basis
Period of specific
projected cash flows
Discount rate
Growth rate
December 31, 2012
Valuation basis
Period of specific
projected cash flows
Discount rate
Growth rate
Value-in-use
FVLCS Value-in-use
2 years
20.1%
0.0%
1 year
–
n/a
Leith, Kembla Grange,
Australia
scotland
3 years
15.7%
(a)
sharjah,
U.A.e.
(in thousands of Canadian dollars)
Long-term prepaid expenses
Deposit guarantee
Defined employee future
benefit asset
value-in-use
FvLCs value-in-use
noTe 17
goodwiLL
December 31
2012
December 31
2011
$
9,089
212
$
9,146
–
3,337
2,876
$
12,638
$
12,022
1 year
20.1%
n/a
–
–
n/a
2 years
15.7%
(a)
The changes in the carrying amount of goodwill are shown
below:
(a) The property, plant and equipment at the Sharjah CGU were assumed to have
been redeployed to other sites of the Company at the end of forecast period.
The terminal values for the redeployed assets were estimated as the amount
that other divisions would be expected to pay for these redeployed assets;
as a result, no terminal growth rates were applied to this CGU.
noTe 15
Long-Term inveST menTS
The following table sets forth the Company’s long-term
investment as at December 31:
December 31
2012
December 31
2011
(in thousands of Canadian dollars)
Investment in associate subject
to significant influence
(refer to note 5)
Other long-term investment
(in thousands of Canadian Dollars)
Gross amount of goodwill
Accumulated impairment
balance – beginning of year
Acquisitions
Foreign exchange
December 31
2012
December 31
2011
$ 220,542
(208)
$ 215,412
(208)
220,334
68,945
(3,569)
215,204
1,880
3,250
balance – end of year
$ 285,710
$ 220,334
In 2012, goodwill acquired during the year was a result of
the acquisitions of Fineglade and Magnum Tubular Inspection,
LLC, which is a part of the Guardian division. During 2011, the
Company acquired certain coating assets and business of Altus
Energy Services.
The following table summarizes the significant carrying amounts
of goodwill:
–
1,348
$
30,095
–
$
$
1,348
$
30,095
(in thousands of Canadian dollars)
Other Long-term investment
The equity investment carried at a cost of $1,348 is primarily
related to a Socotherm Americas S.A. investment in an
agricultural company in Argentina. Socotherm Americas S.A.
is a subsidiary of Socotherm S.p.A.
Bredero Shaw (excluding BSRTL)
Thermotite Brasil Ltda &
BS Servicios de Injecao
(collectively BSRTL)
Flexpipe Systems
DSG-Canusa GmbH
Guardian
Socotherm S.p.A.
December 31
2012
December 31
2011
$ 138,614
$ 140,744
13,184
49,730
15,558
1,011
67,613
14,244
49,730
15,616
–
–
$ 285,710
$ 220,334
75
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
a) impairment testing for each
Reporting Unit Containing Goodwill
The Company performs a goodwill impairment test for each
specified Group of CGUs (“GCGU”) that contains goodwill
at the Company’s traditional annual goodwill impairment
testing date of October 31 (“Annual Goodwill Valuation Date”).
At the Annual Goodwill Valuation Date of October 31, 2011
and October 31, 2012, the Company concluded there was no
impairment of goodwill in any of its GCGUs, as the recoverable
amount for these GCGUs was higher than their respective
carrying amount.
b) Recoverable Amount
The Company determines the recoverable amount for its GCGUs
as the higher of VIU and the FVLCS. For the goodwill impairment
test, the FVLCS of each of the GCGUs was higher than its VIU.
FVLCS calculations use post-tax cash flow projections based on
three-year financial Business Plans approved by the Company’s
Board of Directors, which are then projected out for a further
period of two years based on management’s best estimates.
Cash flows beyond the five-year period are extrapolated using
estimated growth rates as applicable. The growth rate does not
exceed the long-term average growth rate for the business in
which the GCGUs operate. The FVLCS is calculated net of selling
costs that are estimated at 2%.
The FVLCS is determined by discounting the future free cash
flows generated from the Company’s continuing use of the
respective GCGUs. The discount rates used are post-tax and
reflect specific risks relating to the GCGUs. The discounted
cash flow model employed by the Company reflects the specific
risks of each GCGU and their business environment. The model
calculates the FVLCS as the present value of the projected free
cash flow and the Terminal Value of each GCGU.
The calculation of FVLCS for each GCGU is most sensitive to the
following key assumptions:
• Projected Cash Flow
• Market Assumptions
• Discount Rate
• Growth Rate and Terminal Value
Projected Cash Flow
The Projected Cash Flow for each GCGU is derived from the
most recently completed Business Plan, which is projected out
for a future time period of two years based on management’s
best estimates. Projected Cash Flow is estimated by adjusting
forecasted annual net income (for the forecast period) for
non-cash items (such as amortization, accretion, and foreign
exchange), investments in working capital and investments
in capital assets. Estimating future earnings requires judgment,
consideration of past and actual performance, as well as
expected developments in the GCGU’s respective markets
and in the overall macroeconomic environment.
Market Assumptions
The forecasted revenue for a GCGU in the Business Plan is
based on that GCGU securing an estimated number of projects.
A change in the number of estimated projects to be secured by
a GCGU can have a material impact on the projected future cash
flows for that particular GCGU. The gross margin for each GCGU
in the Business Plan is also dependent on assumptions made
about the price of raw materials in the future; a change in the
assumptions of these key inputs can have a material impact
on the projected future cash flow for a particular GCGU.
Discount Rate
Discount rates represent the current market assessment of the
risks specific to each GCGU, regarding the time value of money
and the individual risks of the underlying assets, which have not
been incorporated in the cash flow estimates. The discount rate
calculation is based on the specific circumstances of the Company
and its GCGUs and is derived from the Weighted Average Cost
of Capital (“WACC”) for the consolidated Company. The WACC
takes into account both debt and equity. The cost of equity is
derived from the expected return on investment by the Company’s
investors. The cost of debt is based on the interest bearing
borrowings the Company is obliged to service. GCGU specific
risk is incorporated by applying individual specific risk factors;
these specific risk factors are evaluated annually.
The following are the discount rates used in the calculation
of the impairment tests:
(in thousands of Canadian dollars)
Bredero Shaw (excluding BSRTL)
Thermotite Brasil Ltda & BS Servicios
de Injeção (collectively BSRTL)
Flexpipe Systems
DSG-Canusa GmbH
October 31,
2012
October 31,
2011
11%
14%
12%
12%
11%
14%
13%
12%
Terminal Value Growth Rate
The Terminal Value Growth Rate is used to calculate the
Terminal Value of the GCGUs at the end of the Projected Free
Cash Flow period of five years. A Terminal Value Growth Rate
of 3.0% was used for all goodwill impairment tests, reflecting
a conservative expectation of long-term growth in energy
infrastructure investment; this figure also reflects the Company’s
best estimate of the set of economic conditions that are
expected to exist over the forecast period.
76
Sensitivity to Changes in Assumptions
With regard to the assessment of FVLCS of the Bredero
Shaw, BSRTL, Flexpipe Systems and DSG-Canusa GmbH
GCGUs, management believes that no reasonably possible
change in any of the above key assumptions would cause the
carrying value of the unit to materially exceed its recoverable
amount, as estimated by the GCGU’s FVLCS.
noTe 18
aSSeTS CLaSSified aS heLd for S aLe
In October 2012, the Company entered into negotiations with
its joint venture partners in Arabian Pipecoating Company Ltd.
(“APCO”), located in the Kingdom of Saudi Arabia, for the sale
of its 30% investment. Up to September 30, 2012, the financial
results of APCO were consolidated proportionately as the
Company’s share of the joint venture. As at December 31, 2012,
the Company’s proportionate share of the assets and liabilities
in the joint venture have been reclassified as assets held for sale
and liabilities held for sale, respectively.
With the acquisition of Fineglade, and its subsidiaries, additional
assets and liabilities are classified as held for sale.
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
The following table shows the major classes of assets and
liabilities of APCO and Fineglade and its subsidiaries classified
as held for sale as at December 31, 2012:
(in thousands of Canadian dollars)
Assets
Cash
Trade receivables (net of bad debt provision)
Prepaids
Inventory
Property, plant and equipment
(net of accumulated amortization)
Deferred tax assets
Income taxes receivable
Assets classified as held for sale
Liabilities
Trade payables
Accrued liabilities
Income and withholding taxes payable
Liabilities directly associated with assets
classified as held for sale
$
2012
5,984
10,747
976
3,161
6,202
40
31
$
27,141
(5,694)
(3,430)
(2,793)
(11,917)
Net assets directly associated with disposal groups
$
15,224
noTe 19
aCCounTS p ayaBLe and aCCrued LiaBiLiTieS
The following table sets forth the Company’s trade and other
payables as at December 31:
(in thousands of Canadian dollars)
Trade payables
Accrued liabilities
December 31
2012
December 31
2011
$
87,052
137,445
$
60,556
95,508
$ 224,497 $ 156,064
77
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
noTe 20
proviSionS
The following table sets forth the Company’s provisions as at:
(in thousands of Canadian dollars)
Balance – January 1, 2011
Provision adjustments
Settlement of liabilities
Accretion expense
Foreign exchange differences
Loss on settlement
Other
Balance – December 31, 2011
Provision adjustments
Settlement of liabilities
Accretion expense
Foreign exchange differences
Loss on settlement
Other
balance – December 31, 2012
January 1, 2011
Current
Non-current
December 31, 2011
Current
Non-current
December 31, 2012
Current
Non-current
Decommissioning
Liabilities
Deferred
Purchase
Consideration(a)
Defined
Employee Future
Benefit Liability
$ 20,685
3,188
(1,074)
443
157
(18)
–
$ 13,269
–
–
1,053
1,205
–
–
$
9,161
6,020
(5,392)
–
8
–
539
$
Other
Provisions
9,801
6,519
(2,240)
–
(121)
(7)
(20)
Total
$ 52,916
15,727
(8,706)
1,496
1,249
(25)
519
$ 23,381
$ 15,527
$ 10,336
$ 13,932
$ 63,176
3,301
(1,580)
256
(52)
(3,246)
(206)
3,426
–
867
(446)
–
–
4,619
(6,114)
–
(35)
–
531
35,006
(1,178)
–
348
–
(1,329)
46,352
(8,872)
1,123
(185)
(3,246)
(1,004)
$ 21,854
$ 19,374
$
9,337
$ 46,779
$ 97,344
3,211
17,474
–
13,269
–
9,161
4,681
5,120
7,892
45,024
$ 20,685
$ 13,269
$
9,161
$
9,801
$ 52,916
6,001
17,380
–
15,527
–
10,336
6,316
7,616
12,317
50,859
$ 23,381
$ 15,527
$ 10,336
$ 13,932
$ 63,176
3,155
18,699
19,374
–
–
9,337
20,664
26,115
43,193
54,151
$ 21,854
$ 19,374
$
9,337
$ 46,779
$ 97,344
(a) The deferred purchase consideration represents contingent consideration payable in the amount of $3,426 in connection with the acquisition of SO-4 and
Fineglade, and $15,948 of contingent consideration payable in connection with the previous acquisition of Thermotite Brasil Ltda. and BS Servicios de Injeção.
Decommissioning Liabilities
The total undiscounted cash flow which is estimated to be required to settle all decommissioning liabilities is $34.4 million,
$26.7 million and $25.4 million as at December 31, 2012, December 31, 2011 and January 1, 2011, respectively, and the current
pre-tax risk-free rates at which the estimated cash flows have been discounted range between 0.25% and 17.8%. Settlement
for all decommissioning liabilities is expected to be funded by future cash flows from the Company’s operations.
78
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
noTe 21
noTe 22
CrediT f aCiLiTieS and Long- Term deBT
deferred revenue
During the year ended December 31, 2012, certain customers
provided advance payments on long-term contracts, taking
the total value of deferred revenue to $441.5 million as at
December 31, 2012. Of this amount $377.1 million was included
in current liabilities and $64.4 million in non-current liabilities.
noTe 23
empL oyee fuTure BenefiTS
The Company provides future benefits to its employees under a
number of defined benefit and defined contribution arrangements.
The defined benefit pension plans are in Canada, the U.K. and
Norway and include both flat-dollar plans for hourly employees
and final earning plans for salaried employees. The Company
also provides a post-retirement life insurance benefit to its
Canadian retirees and a post-employment benefit to its hourly
and salaried employees in Indonesia.
The total cash payments made by the Company to fund defined
benefit and defined contribution pension plans during 2012 were
$13.0 million (2011 – $10.6 million). The Company measures
the fair value of assets and accrued benefit obligations as at
December 31. Actuarial valuations for the Company’s six
ongoing registered defined benefit pension plans and the SERP
arrangement are generally required at least every three years.
The most recent actuarial valuations of the plans were
conducted as at December 31, 2009 (two plans), January 1, 2011
(one plan), August 1, 2010 (one plan), December 31, 2011
(two plans) and January 1, 2012 (one plan).
Credit Facilities
The following table sets forth the Company’s total credit facilities
as at December 31:
(in thousands of Canadian dollars)
Bank indebtedness(a)
Standard letters of credit for
performance, bid and surety
bonds nOtE 26
Total utilized credit facilities
Total available credit facilities(b)
December 31
2012
December 31
2011
$
3,801
$
12,281
81,178
84,979
251,688
61,555
73,836
236,168
Unutilized credit facilities
$ 166,709
$ 162,332
(a) Excludes the banking facilities of the Company’s 30% owned joint venture,
Arabian Pipe Coating Company Ltd.
(b) The Company guarantees the bank credit facilities of its subsidiaries.
On June 22, 2011, the Company renewed its Unsecured Committed
Bank Credit Facility for a period of four years, with terms and
conditions similar to the prior agreement, except that the
maximum borrowing limit was reduced by US$40.0 million from
US$190.0 million to US$150.0 million, with an option to increase
the credit limit to US$200.0 million with the consent of lenders.
Debt Covenants
The Company has undertaken to maintain certain covenants
in respect of its Unsecured Committed Bank Credit Facility.
Specifically, the Company is required to maintain a Fixed Charge
Coverage Ratio (Earnings Before Interest, Taxes, Depreciation
and Amortization (“EBITDA”) divided by interest expense) of
more than 2.5 to 1 and a debt to total capitalization ratio of less
than 0.40 to 1. The Company is in compliance with these
covenants as at December 31, 2012 and 2011.
Loans Payable
The following table sets forth the Company’s loans payable as at:
(in thousands of Canadian dollars)
Loans payable – current
Loans payable – non-current
December 31
2012
December 31
2011
$
$
8,395
8,682
$
17,077
$
5,001
–
5,001
79
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
The principal assumptions made by the actuaries for the
actuarial valuation of the plans were:
2012
2011
4.00%
4.00%
n/a
UP94
(generational)
4.60%
4.00%
n/a
UP94@2020
4.60%
6.25%
4.00%
3.90%
3.50%
0.50%
K2005
2.60%
4.10%
3.50%
5.30%
6.50%
4.00%
2.60%
3.50%
0.60%
K2005
4.00%
5.40%
4.00%
The overall expected long-term return on plan assets is
management’s best estimate of long-term future investment
returns, taking into account the long-term asset allocation
targets for the plans as outlined in the current investment
policy and the expected long-term return for each asset class.
The amounts recognized in the consolidated balance sheet are
as follows:
(in thousands of Canadian dollars)
Accrued employee future
benefit asset
Pension plans
Post-employment benefit
Post-retirement life insurance
Accrued employee future
benefit liability
Pension plans
Post-employment benefit
Post-retirement life insurance
Net accrued future employee
benefit liability
December 31
2012
December 31
2011
$
$
3,337
–
–
2,876
–
–
(7,000)
(2,051)
(286)
(8,309)
(1,757)
(270)
$
(6,000) $
(7,460)
The following was the composition of plan assets at the balance
sheet dates, as a percentage of total plan assets, for the
registered Canadian employee future benefit plans:
(in thousands of Canadian dollars)
December 31
2012
December 31
2011
4.40%
n/a
2.60%
s1PA
(projected)
5.00%
n/a
2.20%
S1PA
(projected)
Equities
Fixed income
Real estate
Other
62%
33%
–
5%
59%
37%
–
4%
100%
100%
5.00%
4.96%
n/a
6.00%
10.00%
n/a
CsO80
6.70%
n/a
10.00%
5.70%
6.19%
n/a
6.70%
10.00%
n/a
CSO80
7.97%
n/a
10.00%
The following was the composition of plan assets at the balance
sheet dates, as a percentage of total invested plan assets, for the
SERP plan(a):
(in thousands of Canadian dollars)
December 31
2012
December 31
2011
Equities
Fixed income
Real estate
Other
99%
–
–
1%
96%
–
–
4%
100%
100%
(a) The amounts in the above table exclude amounts sitting in the refundable tax
account held by the CRA.
Canada
Defined benefit obligation
Discount rate
Salary increase
Increases to pensions in pay
Mortality
Benefit expense of year ended
December 31
Discount rate
Expected rate of return on assets
Salary increase
Norway
Defined benefit obligation
Discount rate
Salary increase
Increases to pensions in pay
Mortality
Benefit expense of year ended
December 31
Discount rate
Expected rate of return on assets
Salary increase
United Kingdom
Defined benefit obligation
Discount rate
Salary increase
Increases to pensions in pay
Mortality
Benefit expense of year ended
December 31
Discount rate
Expected rate of return on assets
Salary increase
indonesia
Defined benefit obligation
Discount rate
Salary increase
Inflation rate
Mortality
Benefit expense of year ended
December 31
Discount rate
Expected rate of return on assets
Salary increase
80
The amounts recognized in the consolidated statement of
income are as follows:
(in thousands of Canadian dollars)
Current service cost
Interest costs
Expected return on plan assets
Past service costs
Actuarial gains and losses
Currency (gains) losses
Curtailment and settlement
Impact of IAS 19
paragraph 58/IFRIC 14
Defined benefit expense recognized
Defined contribution
expense recognized
December 31
2012
December 31
2011
$
$
3,723
4,515
(4,509)
12
1,671
(35)
–
5,377
(723)
4,654
3,289
4,475
(4,537)
100
1,637
8
–
4,972
1,056
6,028
total employee benefits expense(a)
$
10,897
$
11,275
(a) The total amount is included in the consolidated statement of income
as SG&A. See note 6 for further information.
Changes in the present value of the defined benefit obligation
are as follows:
(in thousands of Canadian dollars)
balance – beginning of year
Valuation effect
Employer portion of
current service cost
Actuarial losses and
changes in assumptions
Employee contributions
Interest cost
Foreign exchange differences
Benefits paid
Curtailment and settlement
Past service cost
3,723
3,289
9,799
–
4,515
209
(2,836)
–
23
9,897
–
4,475
90
(2,452)
–
100
balance – end of year
$ 116,178
$ 100,591
6,243
5,247
(in thousands of Canadian dollars)
December 31
2012
December 31
2011
$ 100,591
154
$
85,192
–
Impact of IAS 19
paragraph 58/IFRIC 14
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Changes in the fair value of the plan assets are as follows:
(in thousands of Canadian dollars)
balance – beginning of year
Valuation effect
Actuarial gains (losses)
Expected return on plan assets
Employer contributions
Employee contributions
Benefits paid
Curtailment and settlement
Foreign exchange differences
December 31
2012
December 31
2011
$
$
78,277
(371)
3,237
4,509
6,114
–
(2,836)
–
332
74,107
(90)
(3,357)
4,537
5,392
–
(2,452)
–
140
balance – end of year
$
89,262
$
78,277
Amounts for the current and previous period are as follows:
Present value of defined
benefit obligation
Fair value of plan assets
Deficit of the funded plans
Unrecognized past service costs
Unrecognized actuarial losses
Liability before the impact of
December 31
2012
December 31
2011
$ 116,178
89,262
$ 100,591
78,277
26,916
11
23,266
22,314
–
17,886
IAS 19 paragraph 58/IFRIC 14
3,639
4,428
Liability in the statement
of financial position
Percentage of plan assets
Percentage of plan liabilities
2,361
3,032
$
6,000
$
7,460
6.72%
5.16%
9.53%
7.42%
Actual Return on Plan Assets
The actual return on plan assets for the years ended
December 31, 2012 and 2011 amounted to $7.75 million
and $1.18 million, respectively.
81
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Contributions
The Company expects to contribute $6.75 million to its defined
benefit plans for the year ended December 31, 2013.
(in thousands of Canadian dollars)
Present value of defined
benefit obligations
Fair value of plan assets
Deficit in the plan
Actuarial losses on plan
liabilities in year
Actuarial (gains) losses on
plan assets in year
noTe 24
finanCiaL inSTrumenTS
December 31
2012
December 31
2011
$ 116,178
89,262
$ 100,591
78,277
26,916
22,314
Fair value
IFRS 7, Financial Instruments – Disclosure, provides a hierarchy
of valuation techniques based on whether the inputs to
those valuation techniques are observable or unobservable.
Observable inputs are those which reflect market data obtained
from independent sources, while unobservable inputs reflects
the Company’s assumptions with respect to how market
participants would price an asset or liability. These two inputs
used to measure fair value fall into the following three different
levels of the fair value hierarchy:
9,799
9,897
Level 1 Quoted prices in active markets for identical instruments
$
(3,237) $
3,357
that are observable.
Level 2 Quoted prices in active markets for similar instruments;
inputs other than quoted prices that are observable and
derived from or corroborated by observable market data.
Level 3 Valuations derived from valuation techniques in which
one or more significant inputs are unobservable.
The hierarchy requires the use of observable market data
when available.
The Company has classified its financial instruments as follows:
(in thousands of Canadian dollars)
Loans and receivables, measured
at amortized cost
Cash and cash equivalents
Short-term investments
Loans receivable
Accounts receivable
Income taxes receivable
Fair value through profit or loss,
measured at fair value
Derivative financial
instruments – asset
Derivative financial
instruments – liability
Loans and borrowings, measured
at amortized cost
Bank indebtedness
Loans payable
Accounts payable and
accrued liabilities
Income taxes payable
Deferred purchase consideration
Other provisions
Finance lease obligations
December 31
2012
December 31
2011
$ 293,266
78,747
7,131
389,929
13,675
$
56,731
10,545
14,669
279,324
15,981
3,988
270
1,275
2,918
3,801
17,077
224,497
37,991
19,374
47,407
14,655
12,281
5,001
156,064
35,200
15,527
13,932
268
$
$
82
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
The following table presents, for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value
on a recurring basis as at December 31, 2012 and does not include those instruments where the carrying amount is a reasonable
approximation of the fair value:
(in thousands of Canadian dollars)
Assets
Derivative financial instruments – current
LiAbiLi ties
Derivative financial instruments – current
The current derivative financial instruments relate to foreign
exchange forward contracts entered into by the Company (as
described below) and are valued by comparing the rates at the
time the derivatives are acquired to the period-end rates quoted
in the market. The fair values of the Company’s remaining
financial instruments are not materially different from their
carrying values.
The following table presents the changes in the Level 3 fair value
category for the year ended December 31, 2012:
(in thousands of Canadian dollars)
Opening balance – January 1, 2011
Additions
Balance – December 31, 2011
Losses recognized in the statement of income
$
Fair value
807
1,692
2,499
(2,499)
Closing balance – December 31, 2012
$
–
Foreign exchange Forward Contracts
and Other Hedging Arrangements
The Company utilizes financial instruments to manage the risk
associated with foreign exchange rates. The Company formally
documents all relationships between hedging instruments and
the hedge items, as well as its risk management objective and
strategy for undertaking various hedge transactions.
Fair value
Level 1
Level 2
Level 3
$
$
$
$
3,988
3,988
1,275
1,275
$
$
$
$
–
–
–
–
$
$
$
$
3,988
3,988
1,275
1,275
$
$
$
$
–
–
–
–
The following table sets out the notional amounts outstanding
under foreign exchange contracts, the average contractual
exchange rates and the settlement of these contracts as at
December 31, 2012:
(in thousands, except weighted average rate amounts)
US dollars sold for Canadian dollars
Less than one year
Weighted average rate
US dollars sold for Euros
Less than one year
Weighted average rate
US dollars sold for Malaysian Ringgits
Less than one year
Weighted average rate
Euros sold for US dollars
Less than one year
Weighted average rate
British Pound sold for US dollars
Less than one year
Weighted average rate
NOK sold for US dollars
Less than one year
Weighted average rate
Us$18,000
1.01
Us$87,575
1.29
Us$32,328
0.46
€61,962
1.30
£5,000
1.59
NOK 114,936
0.17
As at December 31, 2012, the Company had notional amounts
of $247.7 million of forward contracts outstanding (2011 –
$25.8 million) with the fair value of the Company’s net benefit
from all foreign exchange forward contracts totalling $2.0 million
(2011 – $1.5 million net benefit).
83
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Financial Risk Management
The Company’s operations expose it to a variety of financial risks
including market risk (including foreign exchange and interest
rate risk), credit risk and liquidity risk. The Company’s overall
risk management program focuses on the unpredictability of
financial markets and seeks to minimize potential adverse effects
on the Company’s financial position and financial performance.
Risk management is the responsibility of Company management.
Material risks are monitored and are regularly reported to the
Board of Directors.
2012, fluctuations of +/– 5% in the Canadian dollar, relative
to those foreign currencies, would impact the Company’s
consolidated revenue, income from operations, and net income
(attributable to shareholders of the Company) for the year
then ended by approximately $50.5 million, $13.9 million and
$10.5 million, respectively, prior to hedging activities. In addition,
such fluctuations would impact the Company’s consolidated
total assets, consolidated total liabilities and consolidated
total shareholders’ equity by $72.0 million, $52.0 million and
$20.0 million, respectively.
Foreign exchange Risk
The majority of the Company’s business is transacted outside
of Canada through subsidiaries operating in several countries.
The net investments in these subsidiaries as well as their revenue,
operating expenses and non-operating expenses are based in
foreign currencies. As a result, the Company’s consolidated
revenue, expenses and financial position may be impacted by
fluctuations in foreign exchange rates as these foreign currency
items are translated into Canadian dollars. As at December 31,
The objective of the Company’s foreign exchange risk management
activities is to minimize transaction exposures associated with
the Company’s foreign currency-denominated cash streams
and the resulting variability of the Company’s earnings. The
Company utilizes foreign exchange forward contracts to manage
this foreign exchange risk. The Company does not enter into
foreign exchange contracts for speculative purposes. With the
exception of the Company’s US dollar based operations, the
Company does not hedge translation exposures.
interest Rate Risk
The following table summarizes the Company’s exposure to interest rate risk as at December 31, 2012:
(in thousands of Canadian dollars)
Non interest bearing
Floating Rate
Fixed
interest Rate
total
Financial assets
Cash equivalents
Loans receivable
Financial liabilities
Bank indebtedness
Loans payable
$
$
$
–
3,386
3,386
–
11,646
$
11,646
$
$
$
$
–
3,745
3,745
3,801
5,431
9,232
$
32,800
–
$
32,800
7,131
$
32,800
$
39,931
$
$
–
–
–
$
3,801
17,077
$
20,878
The Company’s interest rate risk arises primarily from its floating rate bank indebtedness and long-term notes receivable and is not
currently considered to be material.
Credit Risk
Credit risk arises from cash and cash equivalents held with
banks, forward foreign exchange contracts, as well as credit
exposure of customers, including outstanding accounts
receivable. The maximum credit risk is equal to the carrying
value of the financial instruments.
The objective of managing counter-party credit risk is to prevent
losses in financial assets. The Company is subject to considerable
concentration of credit risk since the majority of its customers
operate within the global energy industry and are therefore
affected to a large extent by the same macroeconomic
conditions and risks. The Company manages this credit risk by
assessing the credit quality of all counter parties, taking into
account their financial position, past experience and other
factors. Management also establishes and regularly reviews
credit limits of counter parties and monitors utilization of
those credit limits on an ongoing basis.
As at December 31, 2012 and 2011, the Company had no
customers who generated revenue greater than 10% of total
consolidated revenue.
84
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
The carrying value of accounts receivable are reduced through
the use of an allowance for doubtful accounts and the amount
of the loss is recognized in the consolidated statement of income
with a charge to selling, general and administrative expenses.
When a receivable balance is considered to be uncollectible,
it is written off against the allowance for doubtful accounts.
Subsequent recoveries of amounts previously written off are
credited against selling, general and administrative expenses.
As at December 31, 2012, $26.6 million, or 9.3% of trade
accounts receivable, were more than 90 days overdue, which
is consistent with prior period aging analysis. The Company
expects to receive full payment on accounts receivable that
are neither past due nor impaired.
The following is an analysis of the change in the allowance
for doubtful accounts for the year ended December 31, 2012
and 2011:
(in thousands of Canadian dollars)
balance – beginning of year
Bad debt expense
Recovery of previously
written-off bad debts
Write-offs of bad debts
Impact of change in foreign
exchange rates
December 31
2012
December 31
2011
$
13,967
7,997
$
3,775
9,160
(333)
(11,000)
126
(328)
(1,222)
1,234
balance – end of year
$
9,409
$
13,967
Liquidity Risk
The Company’s objective in managing liquidity risk is to maintain sufficient, readily available cash reserves in order to meet its
liquidity requirements at any point in time. The Company achieves this by maintaining sufficient cash and cash equivalents and
through the availability of funding from committed credit facilities. As at December 31, 2012, the Company had cash and cash
equivalents totalling $293.3 million (2011 – $56.7 million) and had unutilized lines of credit available to use of $166.7 million
(2011 – $162.3 million).
The following are the contractual maturities of the Company’s financial liabilities as at December 31, 2012:
(in thousands of Canadian dollars)
Less than 1 year
1 – 3 years
3 – 5 years
thereafter
total
Bank indebtedness
Loans payables
Accounts payable and accrued liabilities
Decommissioning liabilities
Deferred purchase consideration
Other provisions
Income taxes payable
$
$
3,801
8,395
224,497
3,109
19,374
20,664
37,991
$
–
8,682
–
6,941
–
9,415
–
$ 317,831
$ 25,038
$
–
–
–
142
–
–
–
142
$
–
–
–
24,172
–
16,700
–
$
3,801
17,077
224,497
34,364
19,374
46,779
37,991
$ 40,872
$ 383,883
noTe 25
CapiTaL managemenT
The Company defines capital that it manages as the aggregate
of its equity and interest bearing debt. The Company’s objectives
when managing capital are to ensure that the Company will
continue to operate as a going concern and continue to provide
products and services to its customers, preserve its ability to
finance expansion opportunities as they arise, and provide
returns to its shareholders.
The following table sets forth the Company’s total managed
capital as at:
(in thousands of Canadian dollars)
Bank indebtedness
Loans payable
Obligations under finance leases
Equity
December 31
2012
December 31
2011
$
3,801
17,077
14,655
1,005,865
$
12,281
5,001
268
867,411
$ 1,041,398 $ 884,961
The Company manages its capital structure and makes
adjustments to it in light of changes in economic conditions,
the risk characteristics of the underlying assets and business
investment opportunities. To maintain or adjust the capital
structure, the Company may attempt to issue or re-acquire
85
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
shares, acquire or dispose of assets, or adjust the amount of
cash, cash equivalents, bank indebtedness or long-term debt
balances. The Company’s capital is not subject to any capital
requirements imposed by any regulators; however, it is limited
by the terms of its credit facility and long-term debt agreements.
Specifically, the Company has undertaken to maintain certain
covenants in respect of its Unsecured Committed Bank Credit
Facility. The Company is in compliance with these covenants
as at December 31, 2012.
noTe 26
CommiT menTS and ConTingenCieS
a) Operating Leases
The Company has entered into various commercial leases
on certain motor vehicles, items of machinery and office and
manufacturing sites. These leases have a life of one to sixteen
years with no renewal options.
The following table presents the future minimum rental
payments payable under the operating leases as at
December 31, 2012:
(in thousands of Canadian dollars)
Within one year
After one year but not more than five years
More than five years
December 31
2012
$
20,421
32,097
11,747
$
64,265
The lease expenditure charged to the consolidated statement
of income during the year is $22.6 million.
b) Finance Leases
The Company has finance leases and purchase commitments
in place for various items of plant and machinery. These leases
have terms of renewal but no purchase options. Renewals
are at the option of the specific entity that holds the lease. The
following table presents the future minimum lease payments
under finance leases with the present value of the net minimum
lease payments:
(in thousands of Canadian dollars)
Within one year
After one year but not
more than five years
After more than five years
Total minimum lease payments
Less: Amounts representing
interest charges
Present value of minimum
lease payments
2012
Minimum
Payments
Present value
of Payments
$
2,567
$
1,927
4,922
13,715
21,204
2,535
10,193
14,655
(6,549)
–
$
14,655
$
14,655
c) Legal Claims
In the ordinary course of business activities, the Company may
be contingently liable for litigation and claims with customers,
suppliers and other third parties. Management believes that
adequate provisions have been recorded in the accounts where
required. Although it is not possible to estimate the extent
of potential costs and losses, if any, management believes, but
can provide no assurance, that the ultimate resolution of such
contingencies would not have a material adverse effect on
the consolidated financial position of the Company.
d) Performance, bid and surety bonds
The Company provides standby letters of credit for performance,
bid and surety bonds through financial intermediaries to various
customers in support of project contracts for the successful
execution of these contracts. If the Company fails to perform
under the terms of the contract, the customer has the ability
to draw upon all or a portion of the bond as compensation for
the Company’s failure to perform. The contracts which these
performance bonds support generally have a term of one
to three years, but could extend up to four years. Bid bonds
typically have a term of less than one year and are renewed,
if required, over the term of the applicable contract. Historically,
the Company has not made and does not anticipate that it will
be required to make material payments under these types
of bonds.
The Company utilizes its credit facilities to support the
Company’s bonds. The Company had utilized credit facilities
of $85.0 million as at December 31, 2012 (December 31, 2011 –
$73.8 million).
86
noTe 27
Share CapiTaL
The following table sets forth the Company’s shares outstanding as at December 31:
(all dollar amounts in thousands
of Canadian dollars)
Number of shares
Balance, January 1, 2012
Issued on exercise of stock options
Issued on exercise of RSUs
Conversions of Class B into Class A
Purchase – normal course issuer bid
balance, December 31, 2012
stated value
Balance, January 1, 2012
Issued – stock options
Compensation cost on exercised options
Compensation cost on exercised RSUs
Conversions of Class B into Class A
Purchase – normal course issuer
balance, December 31, 2012
Number of shares
Balance, January 1, 2011
Issued on exercise of stock options
Issued on exercise of RSUs
Conversions of Class B into Class A
Purchase – normal course issuer bid
balance, December 31, 2011
stated value
Balance, January 1, 2011
Issued – stock options
Compensation cost on exercised options
Compensation cost on exercised RSUs
Conversions of Class B into Class A
Purchase – normal course issuer
balance, December 31, 2011
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Class A
2012
Class b
total
57,832,572
204,060
2,738
23,700
(572,000)
12,784,335
–
–
(23,700)
–
70,616,907
204,060
2,738
–
(572,000)
57,491,070
12,760,635
70,251,705
$
$ 217,398
3,988
1,415
79
2
(2,176)
983
–
–
–
(2)
–
$ 218,381
3,988
1,415
79
–
(2,176)
$ 220,706
$
981
$ 221,687
Class A
2011
Class B
Total
57,578,299
622,380
255
273,738
(642,100)
13,058,073
–
–
(273,738)
–
70,636,372
622,380
255
–
(642,100)
57,832,572
12,784,335
70,616,907
$
$ 205,772
9,878
4,122
7
20
(2,401)
1,003
–
–
–
(20)
–
$ 206,775
9,878
4,122
7
–
(2,401)
$ 217,398
$
983
$ 218,381
All shares have been issued and fully paid and have no par value.
There are an unlimited number of Class A subordinate voting
shares (Class A shares) and Class B multiple voting shares
(Class B shares) authorized. Holders of Class A shares are
entitled to one vote per share and receive a non-cumulative
dividend premium of 10% over the dividends paid to holders
of Class B shares. Holders of Class B shares are entitled to ten
votes per share and are convertible at any time into Class A
shares on a one-for-one basis.
Under the terms of the Normal Course Issuer Bid (“NCIB”), the
Company was entitled to repurchase up to 2,000,000 Class A
shares and up to 100,000 Class B shares between December 1,
2010 and November 30, 2011.
The NCIB was renewed on November 30, 2011 entitling the
Company to repurchase up to 3,000,000 Class A shares and
up to 100,000 Class B Shares between December 1, 2011 and
November 30, 2012.
87
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
During the year ended December 31, 2012, 572,000 Class A
shares were repurchased and cancelled for total consideration of
$18.9 million.
In 2012, dividends declared and paid during the year were $0.380
per Class A share and $0.345 per Class B share (2011 – $0.315
per Class A share and $0.286 per Class B share).
noTe 28
Share-B aSed CompenS aTion and
oTher inCenTive-B aSed CompenS aTion
As at December 31, 2012, the Company had the following
two stock option plans, both of which were initiated in 2001:
i. Under the Company’s 2001 employee stock option plan (the
“2001 Employee Plan”), which is a traditional stock option
plan, the options granted have a term of approximately
ten years from the date of the grant. Exercises are permitted
on the basis of 20% of the optioned shares per year over five
years, on a cumulative basis, commencing one year following
the date of the grant. The grant price equals the closing sale
price of the Class A shares on the day prior to the grant.
On March 3, 2010, the Board of Directors (“Board”) approved
the amended 2001 Employee Plan (the “Amended 2001
Employee Plan”). All stock options granted in 2010 under
the Amended 2001 Employee Plan have a tandem share
appreciation right (“SAR”) attached, which allows the option
holder to exercise either the option and receive a share,
or exercise the SAR and receive a cash payment that is
equivalent to the difference between the grant price and fair
market value. All stock options granted under the Amended
2001 Employee Plan have the same characteristics as stock
options that were granted under the original 2001 Employee
Plan, with respect to vesting requirements, term, termination
and other provisions.
On March 3, 2011, the Board modified the Amended 2001
Employee Plan (the “Restated 2001 Employee Plan”) to
facilitate the cashless exercise of stock options and SARs
by the holders of such instruments.
ii. Under the Company’s 2001 director plan (the “2001 Director
Plan”), options are granted on an annual basis and the
maximum number of Class A shares issued in any single grant
shall be equal to the number of Class A shares and Class B
shares of the Company owned by the individual director, at the
date of the option grant, subject to a maximum of 8,000 Class
A shares for each of the Chairman and Vice Chair, and 4,000
Class A shares for each of the other eligible directors. The
options vest immediately and have a legal life of five years.
The grant price equals the closing sale price of the Class A
shares on the day prior to the grant. No options have been
granted under the 2001 Director Plan since 2006 and none
are currently outstanding.
A summary of the status of the Company’s stock option plans and changes during the year is presented below:
stock Options without tandem share Appreciation Rights
balance outstanding – beginning of year
Granted
Exercised
Forfeited
balance outstanding – end of year
Options exercisable
2012
2011
total shares
Weighted Average
exercise Price
Total Shares
Weighted Average
Exercise Price
$
2,164,600
187,000
(204,060)
(41,400)
2,106,140
1,585,292
$
20.67
32.81
19.55
22.36
21.83
20.03
$
2,702,160
102,260
(622,380)
(17,440)
2,164,600
1,548,020
$
18.93
37.32
15.87
20.06
20.67
19.35
88
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Options Outstanding
Options exercisable
Weighted Average
Remaining
Outstanding as at
December 31, 2012
236,400
916,980
44,000
589,500
217,000
102,260
2,106,140
Contractual Weighted Average
Life (years)
exercise Price December 31, 2012
exercisable as at Weighted Average
exercise Price
0.70
3.86
3.54
4.55
8.45
8.00
4.37
$
$
12.01
16.32
21.00
27.71
32.67
37.32
21.83
$
236,400
742,580
40,000
521,860
24,000
20,452
1,585,292
$
12.01
16.49
20.91
27.43
31.77
37.32
20.03
Options Outstanding
Options Exercisable
Weighted Average
Remaining
Contractual Weighted Average
Exercise Price December 31, 2011
Exercisable as at Weighted Average
Exercise Price
Outstanding as at
December 31, 2011
247,200
1,065,380
44,000
675,760
30,000
102,260
2,164,600
Life (years)
1.68
4.61
4.55
5.54
6.00
9.00
4.79
$
12.06
16.32
21.00
27.65
31.77
37.32
$
247,200
781,580
38,000
463,240
18,000
–
$
20.67
1,548,020
$
12.06
16.58
20.85
27.31
31.77
–
19.35
Range of
exercise Price
$10.00 to $15.00
$15.01 to $20.00
$20.01 to $25.00
$25.01 to $30.00
$30.01 to $35.00
$35.01 to $40.00
Range of
Exercise Price
$10.00 to $15.00
$15.01 to $20.00
$20.01 to $25.00
$25.01 to $30.00
$30.01 to $35.00
$35.01 to $40.00
The Board of Directors approved the granting of 187,000 stock
options during the year ended December 31, 2012 under the
2001 Employee Plan (the “Plan”). The total fair value of the stock
options granted during the year ended December 31, 2012 was
$2.1 million (2011 – $1.3 million) and was calculated using the
Black-Scholes pricing model with the following assumptions:
Weighted average share price
Exercise price
Expected life of options
Expected stock price volatility
Expected dividend yield
Risk-free interest rate
$
$
$
$
2012
32.81
32.81
7.25
35%
0.9%
1.7%
2011
36.31
37.32
7.25
35%
0.8%
3.2%
The volatility measured at the standard deviation of continuously
compounded share returns is based on the statistical analysis of
daily share prices over the last ten years.
The fair value of options granted under the Plan will be amortized
to compensation expense over the five-year vesting period of
options. The compensation cost from the amortization of granted
stock options for the year ended December 31, 2012, included in
selling, general and administrative expenses, was $1.7 million
(2011 – $1.7 million).
89
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
stock Options with tandem share Appreciation Rights
balance outstanding – beginning of period
Granted
Exercised
Forfeited
Expired
balance outstanding – end of period
Options exercisable
2012
2011
total shares
Weighted Average
Fair value(a)
Total Shares
Weighted Average
Fair Value
$
154,300
68,900
–
–
–
223,200
54,560
$
12.93
11.74
–
–
–
12.56
9.56
$
118,500
35,800
–
–
–
154,300
–
$
12.94
12.89
–
–
–
12.93
–
(a) The weighted average fair value refers to the fair value of the underlying shares of the Company on the grant date of the SARs.
ESUP
The ESUP authorizes the Board to grant awards of restricted
share units (“RSUs”) and performance share units (“PSUs”) to
employees of the Company as a form of incentive compensation.
All RSUs and PSUs are to be settled with Class A shares and are
valued on the basis of the underlying weighted average trading
price of the Class A shares over the five trading days preceding
the grant date. The valuation is not subsequently adjusted for
changes in the market price of the Class A shares prior to the
settlement of the award. Each RSU and PSU granted under
the ESUP represents one Class A share. The ESUP provides that
the maximum number of Class A shares that are reserved for
issuance from time to time shall be fixed at 1,000,000 Class A
shares. The RSUs vest in two tranches over a period of one to
five years and four to seven years, respectively, and become
payable once vesting is completed. Compensation cost is
recognized over the vesting period in accordance with IFRS. All
RSUs and PSUs granted are classified as equity instruments in
accordance with IFRS as their terms require that they be settled
in shares.
During the second quarter of 2012, the Company issued
251,284 PSUs to consultants which were subsequently
cancelled in the fourth quarter of 2012.
The mark-to-market liability for the stock options with SARs
as at December 31, 2012, is $1.6 million (2011 – $0.6 million), all
of which is included in accounts payable and accrued liabilities
on the Consolidated Balance Sheets.
On March 3, 2010, the Board approved a new long-term
incentive program (“LTIP”) for executives and key employees
and a deferred share unit (“DSU”) plan for directors of the
Company. Additional details with respect to the LTIP and DSU
plan are as follows:
LtiP
The LTIP includes the existing stock option plan discussed above
and two new plans, the Value Growth Plan (“VGP”) and the
Employee Share Unit Plan (”ESUP”).
VGP
The VGP is a cash-based awards plan, which rewards executives
and key employees for improving operating income and revenue
over a three year performance period. Units granted to
participants vest at the end of the third year of the performance
period for which they were granted. The value of units is
determined based on the growth rate in operating income and
revenue on a cumulative basis for the three consecutive years
that comprise the performance period and is measured against
the prior three year baseline period. Compensation cost is
recognized on a straight-line basis over the vesting period.
All units granted under the VGP will be classified as liability
instruments in accordance with IFRS as their terms require
that they be settled in cash.
The liability as at December 31, 2012 is $12.3 million
(2011 – $2.6 million).
90
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
The following table sets forth the Company’s RSU/PSUs reconciliation for the years ended December 31:
balance outstanding – beginning of year
Granted
Exercised
Forfeited
Cancelled
balance outstanding – end of year
RSU/PSUs exercisable
2012
2011
Weighted Average
Grant Date
Fair value(a)(b)
total shares
Weighted Average
Grant Date
Fair Value(a)
Total Shares
$
93,289
306,695
(2,738)
(10,975)
(251,284)
134,987
30.34
32.85
28.97
31.96
33.11
30.79
$
53,563
40,772
(255)
(791)
–
93,289
26.51
35.30
27.69
27.69
–
30.34
14,984
$
29.98
6,057
$
26.72
(a) RSU awards do not have an exercise price; as a result grant date weighted average fair value has been calculated.
(b) PSU awards do not have an exercise price; their weighted average fair value is the closing stock price on the reporting date.
DsU
Under the Company’s DSU plan, all directors (other than the
President and Chief Executive Officer) of the Company can elect
to receive all or a portion of their compensation for services
rendered as a director of the Company, in share units or a
combination of share units and cash. The number of DSUs
received is equal to the amount to be paid in DSUs divided by
the weighted average trading price of the Class A shares over the
five days immediately preceding the date of the grant. DSUs are
to be settled at the time that the director ceases to be a member
of the Board and each DSU entitles the holder to receive one
Class A share or the cash equivalent. DSUs vest immediately on
the date of the grant. The value of a DSU and the related
compensation expense is determined and recorded based on the
current market price of the underlying Class A shares on the
date of the grant. Common shares are purchased on the open
market to settle outstanding share units.
All DSUs granted will be classified as liability instruments on the
date of the grant in accordance with IFRS as the unit holder has
the option to settle in cash or in shares.
The following table sets forth the Company’s DSU reconciliation for the years ended December 31:
balance outstanding – beginning of year
Granted
Exercised(b)
balance outstanding – end of year
DSUs exercisable
2012
2011
Weighted Average
Grant Date
Fair value(a)
total shares
Weighted Average
Grant Date
Fair Value(a)
Total Shares
60,924
36,497
–
97,421
$
28.45
36.87
–
31.61
$
30,260
36,910
(6,246)
60,924
–
$
–
–
$
29.53
28.26
32.55
28.45
–
(a) DSU awards do not have an exercise price; as a result grant date weighted average fair value has been calculated.
(b) DSU awards cannot be exercised while the director is still a member of the board of directors.
The mark-to-market liability for the DSUs as at December 31, 2012 is $3.8 million (2011 – $1.8 million), all of which is included in
accounts payable and accrued liabilities on the consolidated balance sheets.
91
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
incentive-based Compensation
The following table sets forth the incentive-based compensation
expense for the years ended December 31:
noTe 30
inTereST in JoinT venTureS
The following table presents the joint venture interests of
the Company as at December 31, 2012, which have been
consolidated proportionately:
Country of
Incorporation
Activity
Proportion of
Interest Held
U.S.A.
Canada
Hal Shaw Inc.
Shaw & Shaw Ltd.
Helicone Holdings
Russia
Limited
Brazil
Socotherm Brasil S.A.
Atlantida Socotherm S.A. Venezuela
U.S.A.
Socotherm La Barge LLC
Pipe coating
Pipe coating
Pipe coating
Pipe coating
Pipe coating
Pipe coating
50%
83%
25%
50%
50%
51%
The following table presents the Company’s share of the assets,
liabilities, income and expenses of the jointly controlled entities
described above for the years ended and as at December 31:
(in thousands of Canadian dollars)
Revenue
Operating expenses
Income (loss) before income taxes
Income taxes
Net loss
Cash Provided by (used in)
Operating activities
Investing activities
Financing activities
Current assets
Non-current assets
total assets
Current liabilities
Non-current liabilities
total Liabilities
Net assets
$
$
$
$
$
$
$
$
$
$
2012
58,524
55,493
3,031
(6,972)
(3,941) $
4,715
–
3,268
39,262
26,531
65,793
46,755
39,572
$
$
$
$
$
$
$
2011
27,790
28,420
(630)
(41)
(589)
569
(1,331)
(124)
21,981
5,687
27,668
11,089
769
86,327
$
11,858
(20,534) $
15,810
(in thousands of Canadian dollars)
Stock option expense
VGP expense
DSU expense
RSU expense
SAR expense
total incentive-based
compensation expense
$
$
2012
1,650
9,663
2,039
978
967
2011
1,675
975
875
701
275
$
15,297
$
4,501
noTe 29
Key managemenT CompenS aTion
Key management includes directors (executive and non-executive)
and corporate officers. The compensation paid or payable to key
management for employee and director services is shown below
for the year ended December 31:
(in thousands of Canadian dollars)
2012
2011
Salaries and other short-term
incentive compensation
and employee benefits
Post-employment benefits
Share-based and other long-term
incentive payments
Director fees and
other compensation
$
$
8,508
542
3,834
490
2,069
1,291
2,039
$
13,158
$
1,632
7,247
92
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
The Company’s Russian joint venture has loans from OOO
ArkhTekhnoProm and TES Limited Liability Company in the
amount of 627 million Russian roubles payable on demand.
The Company’s portion of these loans has been proportionately
consolidated and included on the consolidated balance sheet as
at December 31, 2012 in the amount of $5.1 million or 157 million
Russian roubles at the current exchange rate (December 31, 2011
– $5.1 million or 156 million Russian roubles at the then current
exchange rate). Interest is calculated on these loans at 9.625%
to 14.40% per annum and is to be paid over the period of actual
use. In the event that the Company’s Russian joint venture fails
to repay the outstanding loan within the time specified by the
loan agreement, a penalty in the amount of 24% per annum will
be assessed on the outstanding loan amount on a daily basis.
noTe 31
noTe 32
inC ome TaxeS
The following table sets forth the Company’s income tax expense
for the years ended December 31:
(in thousands of Canadian dollars)
2012
2011
Current tax
Based on taxable income
of current year
Adjustment to prior year provision
Total current taxation expense
$
51,985 $
(6,916)
37,533
(9,860)
for the year
45,069
27,673
Deferred income tax
Reversal of temporary differences
Total deferred tax expense
(881)
(881)
(14,686)
(14,686)
earningS per Share (“ epS”)
total income tax expense
$
44,188
$
12,987
The following table details the weighted-average number of
shares outstanding for the purposes of calculating basic and
diluted EPS for the following periods:
Income taxes on items recognized in other comprehensive
income were as follows:
(in thousands of Canadian dollars)
2012
2011
Income used to calculate EPS
Net income for the year(a)
Average number of shares
outstanding during the
year – basic
Class A
Class B
Dilutive effect of stock options
Class A
Class B
Average number of shares
outstanding during the
year – diluted
Class A
Class B
2012
2011
$ 178,418
$
56,280
57,652
12,761
70,413
865
–
865
58,517
12,761
71,278
57,941
12,784
70,725
811
–
811
58,752
12,784
71,536
0.79
0.78
Basic EPS
Diluted EPS
$
$
2.53
2.50
$
$
(a) Attributable to shareholders of the Company
Deferred income tax related
to items booked directly
to equity during the year:
Gain on hedges of unrealized
foreign currency translation
Gain (loss) on hedges of unrealized
foreign currency translation
transferred to net income
during period
income tax benefit charged to
other comprehensive income
$
–
$
103
–
(311)
$
–
$
(208)
The following table sets forth a reconciliation of the Company’s
effective income tax rate for the years ended December 31:
Expected income tax expense
based on statutory rate
Tax rate differential on earnings
of foreign subsidiaries
Benefit of previously
unrecognized tax losses
Unrecognized tax losses
of foreign subsidiaries
Adjustment to prior year provision
Other
effective income tax Rate
2012
2011
27.0%
27.0%
(8.6%)
(2.1%)
(0.3%)
(1.6%)
3.1%
(3.1%)
1.7%
19.8%
8.9%
(14.1%)
0.7%
18.8%
93
No t e s t o t h e C oN s ol i dat e d F i Na NC i a l s tat e m e N t s
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Recognized Deferred tax Assets and Liabilities
Deferred tax assets and liabilities are offset when there is a
legally enforceable right to offset deferred tax assets against
deferred tax liabilities and they relate to the same tax authority
on the same taxable entity.
CONs OLiDA teD bALANCe sHeets
(in thousands of Canadian dollars)
Deferred tax Assets
Amortizable property,
plant and equipment
Provisions and future expenditures
Net operating losses
December 31
2012
December 31
2011
$
$
11,952
10,955
9,546
2,470
24,008
3,580
Deferred income tax assets
$
32,453
$
30,058
Deferred tax Liabilities
Amortizable property,
plant and equipment
Provisions and future expenditures
(14,604)
(57,060)
(36,873)
(20,111)
Deferred income tax liabilities
(71,664)
(56,984)
Net Deferred tax Liability
$
(39,211) $
(26,926)
The Company has recorded deferred tax assets of $9.5 million
and $3.6 million at December 31, 2012 and 2011, respectively,
pertaining to loss carry forwards based on management’s
financial projections and the relevant tax legislation in each
jurisdiction.
CONs OLiDA teD s tAteMeNts OF iNCOMe
(in thousands of Canadian dollars)
2012
2011
Deferred tax Assets
Amortizable property,
plant and equipment
Provisions and future expenditures
Net operating losses
$
(9,482) $
13,053
(5,966)
15,032
(7,955)
(3,580)
Deferred income tax assets
(2,395)
3,497
Deferred tax Liabilities
Amortizable property,
plant and equipment
Provisions and future expenditures
Deferred income tax liabilities
Change in deferred tax
Deferred tax assets acquired
through acquisitions
(22,269)
36,949
14,680
12,285
(6,582)
(11,601)
(18,183)
(14,686)
The Company has recognized a deferred tax liability for taxes
that would be payable on the unremitted earnings of certain
of the Company’s subsidiaries, associates and joint ventures
of $nil and $nil for the years ended December 31, 2012 and
2011, respectively, as the Company has determined that the
undistributed profits of its subsidiaries will not be distributed
in the foreseeable future. The temporary difference associated
with investments in subsidiaries, associates and joint ventures,
for which a deferred tax liability has not been recognized
aggregates to $146.2 million and $181.9 million for the years
ended December 31, 2012 and 2011, respectively.
The Company has net operating losses of $73.9 million and
$21.9 million for the years ended December 31, 2012 and 2011,
respectively, in various jurisdictions for which no deferred tax
asset has been recognized. These losses expire subsequent
to the 2017 fiscal year. The Company has capital losses of
$8.0 million and $19.3 million for the years ended December 31,
2012 and 2011, respectively, in various jurisdictions for which
no deferred tax asset has been recognized. These capital losses
carry forward indefinitely.
The Company is subject to income tax laws in various
jurisdictions. Tax laws are complex and potentially subject to
different interpretations by the taxpayer and the relevant tax
authority. The provision for income taxes and deferred tax
represents management’s interpretation of the relevant tax laws
and its estimate of current and future income tax implications
of the transactions and events during the period. The Company
may be required to change its provision for income taxes or
deferred tax balances when the ultimate deductibility of certain
items is successfully challenged by taxing authorities or if
estimates used in determining the amount of deferred tax
asset to recognized change significantly, or when receipt of
new information indicates the need for adjustment in the
amount of deferred tax to be recognized. Additionally, future
events, such as changes in tax laws, tax regulations, or
interpretations of such laws or regulations, could have an impact
on the provision for income tax, deferred tax balances and the
effective tax rate. Any such changes could materially affect the
amounts reported in the consolidated financial statements
in the year these changes occur.
(13,166)
–
noTe 33
Deferred tax Recovery
$
(881) $
(14,686)
ComparaTive figureS
The comparative audited consolidated financial statements have
been reclassified from unaudited financial statements previously
presented to conform to the presentation of the current year
audited consolidated financial statements in accordance with IFRS.
94
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Six-Year review (UnaUdited)
For the year ended December 31:
(in thousands of Canadian dollars
except per share information)
2012
iFRs
2011
IFRS
2010
IFRS
2009
CGAAP
(nOtE 5)
2008
CGAAP
2007
CGAAP
OPeRA tiNG ResUL ts
Revenue
EBITDA nOtE 1
Net income nOtE 2
Cash flow
Cash from operating activities
Purchases of property, plant
and equipment
FiNANCiAL PO sitiON
Working capital nOtE 3
Long-term debt
Equity
Total assets
PeR sH ARe iNFORMA tiON
(Class A and Class B)
Net income (loss)
Basic
Diluted
Dividends
Class A
Class B
Shareholders’ equity per share nOtE 4
$ 1,482,849
266,886
178,418
$ 1,157,265
128,168
56,280
$ 1,034,163
186,035
95,072
$ 1,183,978
254,143
131,450
$ 1,379,577
262,158
145,733
$ 1,048,099
201,076
87,357
$ 530,091
$
45,325
$
53,244
$
299,333
$
154,361
$
97,514
74,439
55,982
48,723
34,358
89,799
91,855
$ 326,296
–
1,005,865
1,927,569
$
287,142
–
867,411
1,226,749
$
283,852
25,005
832,243
1,224,936
$
312,966
52,287
790,422
1,185,977
$
229,169
91,226
732,452
1,227,289
$
$
$
$
$
2.53
2.50
0.380
0.345
14.32
$
$
$
$
$
0.79
0.78
0.315
0.286
12.28
$
$
$
$
$
1.35
1.33
0.295
0.268
11.79
$
$
$
$
$
1.86
1.85
0.535
0.486
11.21
$
$
$
$
$
2.06
2.03
0.253
0.229
10.40
$
$
$
$
$
$
255,625
72,726
578,787
963,614
1.20
1.19
0.230
0.209
8.12
Quarterly information (UnaUdited)
(in thousands of Canadian dollars except per share information)
First
Second
Third
Fourth
Total
Revenue
Net income nOtE 2
Net income per share (Class A and Class B)
Diluted
2012
2011
2012
2011
2012
2011
$
$
$
$
$
$
312,268
279,466
23,274
20,485
0.33
0.29
$
$
$
$
$
$
326,922
264,541
21,404
15,703
$ 395,275
$ 271,478
53,438
$
(3,144)
$
$ 448,384
$ 341,780
80,302
$
23,236
$
$ 1,482,849
$ 1,157,265
$ 178,418
56,280
$
0.30
0.21
$
$
0.75
(0.04)
$
$
1.13
0.32
$
$
2.50
0.78
Note 1: EBITDA is a Non-GAAP measure calculated by adding back to net income, income taxes, finance costs, amortization of property, plant and equipment and
intangible assets, and impairment of fixed assets. EBITDA does not have a standardized meaning prescribed by GAAP and is not necessarily comparable to
similar measures provided by other companies. EBITDA is used by many analysts in the oil and gas industry as one of several important analytical tools.
Note 2: Attributable to shareholders of the Company.
Note 3: Working capital has been calculated as current assets minus current liabilities.
Note 4: Equity per share is a Non-GAAP measure calculated by dividing shareholders’ equity by the number of Class A and Class B shares outstanding at the date of
the balance sheet.
Note 5: Restated due to the adoption of CICA Handbook section 3064.
95
ANNUAL REPORT 2012 ShawCor Ltd. 96v.L. sHAWSt. James, Barbados, W.I.Ms. Shaw was appointed Chair of the Board of ShawCor Ltd. in February 2007, was Vice Chair of the Board from August 2000 until February 2007, and has been a Director of the Company since April 1994. Z.D. siMOOakville, OntarioMr. Simo is a former President and CEO of Tecsyn International Inc. and has been a Director of ShawCor Ltd. since August 1987.e.C. vALiqUettePembroke, OntarioMs. Valiquette is a Chartered Accountant and a former Senior Vice President and Chief Financial Officer of ING Canada Inc. and has been a Director of ShawCor Ltd. since March 2005.J.F. PetCH q.C.Toronto, OntarioMr. Petch is Chair of the University of Toronto Asset Management Corporation and Chair Emeritus of the University's Governing Council and has been a Director of ShawCor Ltd. since March 2005.R.J. RitCHieCalgary, AlbertaMr. Ritchie was the CEO and a Director of Canadian Pacific Railway Limited from 2001 to 2006, and has been a Director of ShawCor Ltd. since April 1994. L.W.J. HUtCHisONSt. James, Barbados, W.I.Mr. Hutchison joined ShawCor in 1998 and is Managing Director of ShawCor Global Services Limited, a position he has held since November 2007, and has been a Director and Vice Chair of the Company since February 2008.P.G. RObiNsONToronto, OntarioMr. Robinson is President and General Manager of Litens Automotive Group, a position he has held since 2001, and has been a Director of ShawCor Ltd. since August 2001. H.A. sHAW Calgary, AlbertaMs. Shaw is the Executive Chair of Corus Entertainment Inc., a position she has held since September 1999, and has been a Director of ShawCor Ltd. since May 2008.J.t. bALDWiNLondon, EnglandMr. Baldwin is the Vice President for the Southern Corridor for BP, a position he has held since July 2012, and has been a Director of ShawCor Ltd. since March 2010. D.s. bLACKWOODHouston, TexasMr. Blackwood is President (Americas), Wood Group PSN, a position he has held since April 2011, and has been a Director of ShawCor Ltd. since May 2011.W.P. bUCKLeYToronto, OntarioMr. Buckley is President and CEO of ShawCor Ltd., a position he has held since June 2005, and has been a Director of the Company since August 2005.J.W. DeRRiCKBuffalo, New YorkMr. Derrick is Chief Executive Officer of Derrick Corporation, a position he has held since 1992, and has been a Director of ShawCor Ltd. since August 2007.D.H. FReeMANToronto, OntarioMr. Freeman is a Chartered Accountant and from 1983 to 2011 was a partner at KPMG LLP. He has been a Director of ShawCor Ltd. since October 2011.ShawCor directors A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Corporate Governance
The Board of Directors (the “Board”) and management of the Company recognize that effective corporate governance is central to
the prudent direction and operation of the Company in a manner that ultimately enhances shareholder value. The following discussion
outlines the Company’s system of corporate governance.
The business and affairs of the Company are managed under the supervision of the Board. Broadly, the Board approves overall corporate
strategy and assesses management’s implementation of agreed strategies, and reviews the results achieved. The Board’s role consists
of the approval of strategic plans, the review of corporate risks identified by management and monitoring the Company’s practices
and policies for dealing with these risks, management succession planning, the monitoring of business practices and assessment of
the integrity of the Company’s internal controls and information and governance systems.
The Board oversees the Company’s strategic planning process, reviews and approves strategies, and assesses management's success
in implementing the strategies. This is done regularly and through an annual special purpose Board Meeting held each year to review
and approve the Company’s strategic and annual business plan. The strategic plan is updated each year so that it always projects the
next three-year period. Management reports to the Board quarterly, highlighting and commenting upon divisional performance
compared with annual business plan forecasts and prior year results. As part of the strategic plan review process, the Board identifies
and evaluates the principal opportunities and risks of the Company's businesses, and seeks to ensure that management puts in place
appropriate systems to manage the principal risks.
The Audit, Compensation and Corporate Governance Committees of the Board are each comprised of independent directors. The
Executive Committee is comprised of the Chair, the Chief Executive Officer and three independent directors. Ten of thirteen members
of the Board are considered to be independent.
The corporate governance practices and policies of the Company have been developed under the general stewardship of the Corporate
Governance Committee. The Committee believes that the corporate governance practices of the Company are appropriate for the
Company. As a result of evolving laws, policies and practices, the Corporate Governance Committee regularly reviews the corporate
governance practices and policies of the Company in order to facilitate compliance with applicable requirements and implements best
practices appropriate to its operations. In recent years, the following steps have been taken by the Committee as part of the ongoing
process of enhancing the Company’s corporate governance:
• instituted and updated mandatory share ownership guidelines for all directors, the Chief Executive Officer and other
designated executives
• reviewed and revised the mandate of the Board of Directors
• reviewed and revised the charters for the Audit, Compensation and Corporate Governance Committees and appointed only
independent directors to these Committees
• completed evaluations of the Board’s performance as well as individual director’s performance reviews
• reviewed and updated the Company’s Code of Conduct for directors, officers and employees, a copy of which may be found on
SEDAR (www.sedar.com)
• instituted a whistleblower hotline to assist employees in reporting suspected violations of the Code of Conduct
• created a charter for and appointed an Executive Committee
• established and appointed a Lead Director
• instituted a majority voting policy for directors
• instituted a DSU plan for directors
• reviewed and updated the Company’s Confidentiality, Insider Trading and Disclosure policies
• eliminated the Company’s dual class share structure through a shareholder and court approved plan of arrangement
97
A N N UA L R E P O RT 2 01 2 S h awC o r Lt d.
Flexpipe systems
Canusa-CPs
3501 54th Avenue S.E.
Calgary, Alberta T2C 0A9
25 Bethridge Road
Toronto, Ontario M9W 1M7
T: 403 503 0548
F: 403 503 0547
T: 416 743 71 1 1
F: 416 743 5927
socotherm
shaw Pipeline services
Viale Risorgimento 62
45011 Adria (RO) Italy
T: 39 0426 941000
F: 39 0426 901055
4250 N. Sam Houston Pkwy. E.
Suite 180
Houston, Texas 77032
T: 832 601 0850
F: 281 442 1593
Guardian
950 – 78th Avenue
Edmonton, Alberta T6P 1L7
T: 780 440 1444
F: 780 440 4261
Primary operating Locations
pipeLine and pipe ServiCeS
bredero shaw
ShawCor Pipe Protection
3838 N. Sam Houston Pkwy. E.
Suite 300
Houston, Texas 77032
T: 281 886 2350
F: 281 886 2351
Bredero Shaw
Lakeside House
1 Furzeground Way
Stockley Park
Uxbridge, Middlesex
England UB11 1BD
T: 44 208 622 3071
F: 44 208 622 3169
Shaw Pipe Protection
3200, 450 1st Street S.W.
Calgary, Alberta T2P 5H1
T: 403 263 2255
F: 403 264 3649
Bredero Shaw
#17-01/02 United Square
101 Thomson Road
Singapore 307591
T: 65 6732 2355
F: 65 6732 9073
peTroChemiCaL and induSTriaL
DsG-Canusa
shawFlex
25 Bethridge Road
Toronto, Ontario M9W 1M7
25 Bethridge Road
Toronto, Ontario M9W 1M7
T: 416 743 71 1 1
F: 416 743 7752
T: 416 743 71 1 1
F: 416 743 2565
98
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Corporate InformationCorporate address, Stock Information and annual meetingHEAD OFFICE25 Bethridge RoadToronto, OntarioCanada M9W 1M7Telephone: 416 743 7111Facsimile: 416 743 7199AuDItOrsErnst & Young LLPtrAnsFEr AgEnt AnD rEgIstrArCIBC Mellon Trust Company c/o Canadian Stock Transfer Company Inc. P.O. Box 700, Station B Montreal, Quebec Canada H3B 3K3Telephone: 800 387 0825 416 682 3860 Facsimile: 888 249 6189 E-mail: inquiries@canstockta.comstOCk LIstIngThe Toronto Stock Exchange Common Shares Trading Symbol: SCLAnnuAL MEEtIngThursday, May 16, 2013 4:00 p.m. The Fairmont Royal York Hotel Toronto, Ontario Canadawww.shawcor.comV.L. sHAwChair of the BoardL.w.J. HutCHIsOnVice Chair of the Boardw.P. BuCkLEyPresident and Chief Executive Officerg.s. LOVEVice President, Finance and Chief Financial OfficerD.r. EwErtCorporate SecretaryCorporate OfficersOperations managementM.J. sIMMOnsGroup President ShawCor Ltd.D.L. BrOussArDPresident Flexpipe SystemsJ.D. tIkkAnEnPresident Bredero ShawJ.D.B. gIBsOnChief Executive Officer SocothermJ.L. BArkHOusESenior Vice President Americas & Global OperationsBredero ShawP.L. EVAnsSenior Vice President Asia Pacific Bredero ShawF. CIstrOnEVice President and General Manager, Operations ShawCor Ltd.r.J. DunnVice President and General Manager Canusa-CPSs.J. EDMOnDsOnVice President Research & Development ShawCor Ltd.F. gALLInAVice President Special Projects ShawCor Ltd.M.L. gArCEsVice President ShawCor Manufacturing System ShawCor Ltd.D.r. gIBBVice President Information Technology ShawCor Ltd.g.L. grAHAMVice President Corporate Services ShawCor Ltd.s.A. HABErErVice President Market Development & Acquisitions ShawCor Ltd.t.L. HutzuLVice President, Legal ShawCor Ltd.g.g. PAssLErVice President, and General Manager ShawFlexP.A. PIErrOzVice President Human Resources ShawCor Ltd.J.A. tABAkVice President and General Manager DSG-CanusaH.A.A.M. tAusCHVice President and General Manager Europe, Middle East, Africa, Russia Bredero ShawJ.A. tEPPAnVice President and General Manager GuardianCharacterized by steadily growing demand and rapid depletion of conventional reserves, the industry we serve is exploring new technologies and new frontiers to meet global energy challenges. These trends play directly to ShawCor’s strengths as the world’s largest provider of advanced pipeline coatings and related energy services. This year’s report takes a look at the combination of strong industry fundamentals and fundamental corporate strengths that will sustain ShawCor’s record-breaking performance in the future.the Bredero shaw pipecoating plant in kuantan, Malaysia, one of the largest facilities of its kind in the world. Why
ShawCor?
Global Leadership
Organizational Excellence
More than 75 manufacturing and service facilities
We are a high-performing organization in which
in over 25 countries give ShawCor unrivalled
proximity to every major energy-producing region.
everyone is aligned and motivated to advance our
strategies for growth.
Superior Execution
Strong Industry Fundamentals
The industry’s most advanced continuous
Global demand for oil and gas is expected to
improvement program helps us execute complex
increase 30% between 2011 and 2035 due to
customer projects safely, on-time and on-budget,
rapid economic growth in developing countries.
providing superior customer satisfaction.
Technological Innovation
Proven Performance
In the past 10 years, ShawCor’s common shares
Continuing research and development
have delivered a total return to shareholders
of market-leading, proprietary technology has
of 207%, equivalent to a compound annual
created a powerful competitive advantage.
return of 12%.
STrOnG
FundamE nTaLS
FundamE nTaL
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2012 a n n ua L r E P OrT