2014 Annual Report
BUILDING AN
INTEGRATED ENERGY
SERVICES LEADER
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.
FINANCIAL SUMMARY
Year ended December 31 (in thousands of Canadian dollars)
2014
2013
Operating Results
Revenue
Adjusted EBITDA(a)
Income from operations
Net income(b)
Earnings per share – basic
Earnings per share – diluted
Cash Flow
Cash provided by operating activities
Financial Position
Working capital
Total assets
Equity per share
$ 1,890,029
$
1,847,549
336,701
148,676
94,861
1.55
1.53
$
$
$
391,223
323,457
219,862
3.55
3.51
$
$
$
$
187,985
$
32,264
$
378,733
$
267,489
$ 1,939,970
$ 1,651,928
$
15.20
$
10.98
(a) Adjusted EBITDA is a non-GAAP measure calculated by adding back to net income the sum of net fi nance costs, income taxes,
amortization of property, plant, equipment and intangible assets, gains/losses from assets held for sale, gain on sale of land,
impairment of assets and joint ventures and non-controlling interest. 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.
(b) Attributable to shareholders of the Company.
TABLE OF CONTENTS
SHAWCOR 2014 REVENUE
IN EXCESS OF
LEADING MARKET POSITIONS
IN AVAILABLE MARKET
PLATFORM OF FIVE FOCUSED
BUSINESSES, EACH
›$1.8B
›$30B
›$100M
All above amounts in Canadian dollars.
CORPORATE PROFILE
ShawCor Ltd. is a global energy services company specializing in technology based products
and services for the pipeline and pipe services and the petrochemical and industrial markets.
The Company operates nine business units with more than 105 manufacturing and service facilities
employing over 8,000 people around the world.
On the Cover: Newly acquired Desert NDT is a leader in non-destructive testing and integrity management services.
Opposite: A Shaw Pipeline Services Automated Ultrasonic Testing process in action on the EMAS spool base in Ingleside, Texas.
47
IFC
21
22
Financial and
Operating Highlights
2 Message to Shareholders
ShawCor At-a-Glance
4
Fundamental Strengths
6
Building an Integrated
9
Energy Services Leader
Financial Review
Management’s Discussion
and Analysis
Management’s Responsibility
for Financial Statements
Independent Auditor’s Report
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Six-year Review and
Quarterly Information
ShawCor Directors
Corporate Governance
Primary Operating Locations
91
92
93
94 Corporate Information
48
49
54
90
BUILDING AN
INTEGRATED ENERGY
SERVICES LEADER
Over the past 45 years, ShawCor has evolved into the world’s largest provider
of advanced pipeline coating systems, with a growing range of complementary
energy services companies. Today we are focused on tapping the shared
potential of these businesses as never before. This annual report sets out
our plans for building an integrated energy services leader.
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MESSAGE TO SHAREHOLDERS
STRONG
FOUNDATIONS
The fi ve growth platforms we are building provide the foundation to transform ShawCor
into a truly integrated energy services leader and hold the potential to double ShawCor’s
revenue over the next decade. The markets we are targeting represent an estimated
$30 billion in business opportunities and we believe that ShawCor is uniquely positioned
to take advantage of them.
As the events of the past year have demonstrated, the
global energy industry is still highly cyclical, with exploration
and production activity highly correlated to the price of
oil and gas. In 2014, WTI and Brent Crude prices declined
approximately 44% and 49% respectively, and natural gas
prices decreased by about 26%. As a result, many energy
producers had begun to reduce planned capital expenditures
by the end of last year.
Within this environment, ShawCor posted strong fi nancial
performance in 2014. Revenue reached a record $1.89 billion
as top line growth in several of our divisions and the
mid-year acquisition of Desert NDT off set lower large pipe
coating project activity following completion of the Inpex
Ichthys project early in the year. Adjusted EBITDA continued
at a strong level of $337 million, down 14% from the record
2013 level, refl ecting lower average margins compared
to 2013. Net earnings per share (diluted), however, fell
56.4% to $1.53, impacted by after tax impairment charges
of approximately $99 million relating primarily to the
goodwill and intangible assets of pipe coating facilities in
Brazil and the Gulf of Mexico and the carrying value of
Socotherm’s 50% joint venture interest in Venezuela, plus
the issuance of approximately 4.2 million shares pursuant
to the Company’s public share off ering in the fall of 2014.
In 2015, ShawCor will certainly be impacted by the current
downturn in the energy sector, particularly in the Company’s
North American businesses that are directly associated
with upstream well construction and completion activity.
Representing approximately 25% of the Company’s revenue,
these businesses will see a reduction in activity as the
number of wells drilled and completed declines in 2015.
The remaining 75% of ShawCor’s revenue is not directly
linked to the fl uctuations in commodity prices. Most of
this revenue is derived from customer expenditures on
long-term energy infrastructure, much of which is related
to natural gas transportation. These projects take years to
develop and are based on both long-term commodity price
assumptions and fundamental gaps between sources of
supply and areas of energy demand growth. The Company’s
expectations for strong large project activity in 2015 are
supported by the current booked order backlog, which
stood at $766 million as of the start of the year. Beyond
2015, the combination of demand growth, projected to be
37% between now and 2040, and increasing depletion rates
for existing sources of oil and gas are expected to create
attractive long-term fundamentals for our business and
support continued growth.
ShawCor’s success has always come from focusing on long-
term fundamentals and continuously building upon our core
strengths. These strengths include a global reach from a
network of permanent locations in 18 countries and seven
rapidly deployable mobile plants. We also enjoy the benefi t
of strong customer relationships and brand recognition
with virtually all of the leading global energy players.
Our reputation for excellence is based on a long track
record of successful project execution and an unwavering
commitment to quality and continuous improvement.
Also supporting ShawCor’s success is a strong foundation
of technological leadership and innovation. Today, we
hold more than 280 issued patents covering 57 unique
technologies with another 164 patents pending. The
Company’s advanced technologies are built from core
competencies in material science and related disciplines
and have allowed us to consistently deliver cost reduction,
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STRONG LEADERSHIP
(from left to right):
Gary Love, Chief
Financial Offi cer and
Vice President Finance;
Steve Orr, Chief Executive
Offi cer; and John Tikkanen,
Executive Vice President,
Strategic Planning.
improved reliability and enhanced return on
investment to our customers.
When we consider these core strengths in the
context of today’s evolving energy industry,
we are encouraged by three trends that bode
well for the future. Chief among them is the
increasing role that shale and deepwater
resources will play in replacing the depletion
of conventional land production. At the same
time, the world’s aging pipeline infrastructure
is creating a growing market for integrity and
rehabilitation services. Finally, the geographic
gap between where energy is sourced and the
growing economies that need it will require
investments in extensive new pipeline and
LNG infrastructure.
Against this backdrop, ShawCor is building
a global integrated energy services leader
based on fi ve platforms for growth – Pipeline
Performance, Composite Production Systems,
Integrity Management, Oilfi eld Asset
Management and Connectivity. Each of these
platforms directly refl ects the evolution of the
energy industry and draws upon the collective
resources of our nine business divisions.
While each division enjoys solid growth
prospects within its respective market, we are
determined to harness their shared potential
by linking many of the discrete products and
services they deliver into complete value-
added systems and solutions that address the
major industry challenges within each of our
fi ve targeted growth platforms. By doing this,
we will also be increasing the proportion of
total revenues tied to our customers’ ongoing
operating expenditures and thus mitigating
some of the fl uctuation in our results over
time. You can learn more about our plans on
pages 10 to 18 of this report.
During the year ahead, our focus will remain
on four key priorities designed to deliver
strong performance to our shareholders.
First, we will sustain our leadership in the
pipe coating business by leveraging our
industry-leading technology, customer
relationships, and reputation for quality
and performance, to capture a major share
of upcoming major pipe coating projects.
Second, as we have done in Pozzallo, Italy,
we will bring all Socotherm pipe coating
facilities up to standard by completing our
profi t improvement program. Third, we will
continue to develop the technology required
to extend our leadership in discrete products
and services and to integrate them into
complete systems that meet our customers’
major challenges. Finally, we will continue to
expand the products and services we deliver
to the global pipeline industry by targeting
acquisitions that provide access to technology
enabling blocks, facilitate geographic and/or
portfolio expansion, or furnish the foundation
needed for new platforms.
Meanwhile, our long-term goals will not
change. These include a commitment to
maintaining a return on invested capital of
15% and earnings per share growth of 15%
per year over the full business cycle, with
consistent and proportionate growth in our
dividend. To ensure stability throughout the
cycle, we are committed to maintaining a
strong balance sheet with net debt to capital
and EBITDA of less than 45% and 1.5 times,
respectively. Fundamental to achieving
these goals, and refl ecting our commitment
to act with integrity in everything we do, is
ShawCor’s unwavering focus on the health
and safety of our people.
In closing, I would like to extend my
appreciation to the many employees, business
partners, customers, and communities who
have contributed to ShawCor’s growth
success. I would also like to thank former CEO
Bill Buckley and the rest of the Board for their
advice and guidance during what has been
another challenging and successful year for
ShawCor. With your continued support, we
look forward to reporting on our progress.
STEVE ORR
Chief Executive Offi cer
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SHAWCOR AT-A-GLANCE
INDUSTRY
LEADERSHIP
ShawCor is the world’s largest provider of advanced pipeline coating systems and related
energy services. An unrivalled network of 105 global locations in 20 countries places us in
the heart of every important energy-producing region and at the forefront of the fastest-
growing segments in the industry.
PIPELINE AND PIPE SERVICES
Bredero Shaw/
Socotherm
Canusa-CPS
Flexpipe Systems
Shaw Pipeline Services
BUSINESS
DESCRIPTION
The global leaders in
pipe coating solutions
for corrosion protection,
fl ow assurance, thermal
insulation, fi eld joints,
custom coating and
concrete weight coating
applications for onshore
and off shore pipelines.
The market leader in fi eld
applied pipeline coatings
and insulation systems
for onshore and off shore
corrosion, mechanical
and thermal protection
applications in the
global oil, gas, water, and
insulated pipeline markets.
Leading manufacturer
of fl exible composite
pipe systems used for
oil and gas gathering,
water transportation,
CO₂ injection and other
corrosive applications that
benefi t from the product’s
pressure and corrosion
resistance capabilities.
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 off shore
pipelines.
KEY CUSTOMER
SEGMENTS
• Pipeline owners
• Oil and gas producers
• EPC contractors
• Pipe mills and
distributors
• Pipeline owners
• Oil and gas producers
• Pipeline contractors
• District heating and
cooling systems
• Water and
wastewater pipeline
• Oil and gas producers
• Pipeline owners
• Gas distributors
• Lay barge operators
• Spool bases
• Pipeline owners and
contractors
HIGH GROWTH
MARKETS
• Deepwater/Off shore
• Onshore/Oil Sands
• LNG/Enhanced Recovery
• Rehabilitation/
Shale Plays
• Deepwater/Off shore
• Onshore/Oil Sands
• LNG/Enhanced Recovery
• Potable Water/
District Heating
• Oil and Gas Gathering
• Enhanced Recovery
• CO₂ Injection
• Water Transportation
• Deepwater/Off shore
• Onshore
• Ultrasonic Inspection
• Real Time Radiography
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• Coating Facility
• Portable Coating Plant
• Other Operating Facility
PETROCHEMICAL AND INDUSTRIAL
2014 KEY HIGHLIGHTS
Desert NDT
Guardian
DSG-Canusa
ShawFlex
Leading US provider of
inspection and integrity
services for gathering
lines and midstream
infrastructure. Services
to ensure safe operations
extend the entire
asset lifecycle. Data
management allows clients
to confi dently affi rm the
safety and compliance of
their systems.
• Oil and gas producers
• Pipeline owners
• Pipeline contractors
Leading North American
provider of a complete
range of tubular
management solutions
including integrated
inspection, threading,
refurbishment and
inventory management.
• Drilling contractors
• Oil and gas producers
• Tubular rental
companies
• Onshore / shale
• Oil and gas gathering
• OCTG Manufacturers
and Suppliers
• Onshore/Shale
• Off shore Oil and Gas
• Onshore/Oil Sands (SAGD)
World-class manufacturer
of specialty wire and cable
products for use in
severe service industrial
environments.
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/Pacifi c.
• Automotive
• Electrical/Utility
• Communications
• Aerospace/Defence/
Mass Transit
• Industrial
• Automotive
• Communications
• Aerospace/Defence/
Mass Transit
• Petrochemical
• Power generation
• Pulp and paper
• Mining
• Automation
• Petrochemical/Power
Generation/Nuclear
• Control & Automation/
Robotics
• Light Rail/Rapid Transit
105+
GLOBAL LOCATIONS
9
MOBILE COATING
PLANTS
›8,000
EMPLOYEES WORLDWIDE
20
COUNTRIES ACROSS
THE WORLD
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FUNDAMENTAL STRENGTHS
STRONG
LONG-TERM
FUNDAMENTALS
Despite recent volatility in energy prices and slower economic growth in most of
the developed world, ShawCor’s prospects are supported by the strong, long-term
fundamentals. Between now and 2040, the world’s primary energy demand is expected
to grow by up to 2.0% per year, led by the fast-growing economies of Asia Pacifi c and
other developing regions. Meanwhile, the depletion rate for existing hydrocarbon
reserves is running between 6.0% and 7.5% per year.
To bridge this gap, the world’s leading energy producers
are exploring and developing new energy deposits in
increasingly remote and challenging environments. From
the high Arctic to the deep oceans, to the shale plays and
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 cost of fi nding and developing new
hydrocarbon deposits 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 oil production of about 12 million barrels per
day. Over the six-year period from 2005 to 2010, the
energy industry invested about the same amount of capital
without a corresponding increase in production. This trend
is expected to keep driving the demand for advanced
technological solutions that reduce risk and minimize
recovery costs.
ADDITIONAL
INFORMATION
You can learn more
about the market
dynamics of the
global energy
industry, including
detailed projections of
supply and demand,
by visiting the U.S.
Energy Information
Administration at:
www.eia.gov
Meanwhile, expenditures on the maintenance and
rehabilitation of existing land pipelines are expected to
grow substantially. More than 60% of the North American
pipeline infrastructure is older than 20 years, and 50%
of all pipelines are approaching their original design life
expectancy. Increasing public awareness and tightening
government regulation will continue to drive growth in
expenditures on the inspection, repair and replacement of
aging infrastructure.
For all of these reasons, global spending on energy
infrastructure is expected to remain strong in the decades
ahead. As the world’s market and technological leader in
advanced pipeline coating systems and a diversifi ed
energy services company active in all of the industry’s
high-growth segments, ShawCor will continue to benefi t
from these trends.
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FOUR KEY OPPORTUNITIES FOR SHAWCOR
Growth in
Unconventionals
Growth in
Deepwater Reserves
Transportation for Mismatch
of Supply – Demand
Aging Infrastructure and
Increasing Public Scrutiny
• Large regional plays (i.e. Bakken,
Eagle Ford, Vaca Muerta)
• Factory approach to achieve
• Technical extremes
• Component and system reliability
• Execution critical
economics
• Operational continuity
• Gas mobility through pipeline
and eff ectiveness
and LNG
• Recurring revenues from
• Production infrastructure to
pipeline operating expenditures
feed exports
1
GLOBAL ENERGY DEMAND
BY REGION
(millions of tonnes of oil equivalent)
2
15,000
10,000
5,000
0
15,000
Non-OECD
10,000
OECD
5,000
0
GLOBAL ENERGY DEMAND
BY FUEL
(millions of tonnes of oil equivalent)
Other renewables
Bioenergy
Hydro
Nuclear
Gas
Oil
Coal
1990
2000
2010
2020
2030
2035
1990
2011
2020
2025
2030
2035
Energy demand is expected to increase more than one third
between 2011 and 2035, driven by strong growth in the world’s
emerging economies.
(Source: IEA)
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.
(Source: IEA)
3
400
350
300
250
200
150
100
50
0
CHALLENGE TO MEET
GLOBAL DEMAND
(quadrillion BTU)
Existing
Natural Gas
Supply
Existing
Oil Supply
Natural Gas
for Demand
Growth
Oil for Demand
Growth
Natural Gas
to Replace
Depletion
Oil to Replace
Depletion
4
AGING GLOBAL PIPELINE
INFRASTRUCTURE
(%)
OUTER CIRCLE
International
p 23% Less than 11 years
p 31% 11–20 years
p 46% More than 21 years
INNER CIRCLE
North America
p 19% Less than 11 years
p 19% 11–20 years
p 62% More than 21 years
1980
1990
2000
2010
2020
2030
2040
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.
(Source: EIA, IEA)
Aging pipeline systems are creating growing demand for pipeline
rehabilitation products and services.
(Source: Douglas-Westwood)
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BUILDING AN
INTEGRATED ENERGY
SERVICES LEADER
ShawCor is the world’s largest provider of advanced pipeline coating systems and
a leading provider of related energy services. Today, we are working to harness the
shared potential of our businesses by systematically linking their market-leading
products and services into fully integrated customer solutions that address the energy
industry’s most important challenges. Over the next few years we are determined to
create a global, integrated energy services company built on fi ve platforms of growth –
Pipeline Performance, Composite Production Systems, Integrity Management, Oilfi eld
Asset Management and Connectivity.
INSIDE THIS SECTION
1
2
3
4
5
10 Pipeline
Performance
12 Composite
Production
Systems
14 Integrity
Management
16 Oilfi eld Asset
Management
18 Connectivity
BUILDING AN INTEGRATED ENERGY SERVICES LEADER
PIPELINE
PERFORMANCE
▶ ShawCor is the industry
leader in advanced
pipeline coating
systems for extreme
environments. Here,
fi nished pipeline will
be fed into the ocean
depths through a lay
barge stringer.
Through our Bredero Shaw, Canusa CPS and Socotherm
divisions, ShawCor is the industry’s leading provider of
advanced pipeline coatings, with a network of 43 state-
of-the art facilities worldwide. Today we are leveraging
this dominant position to create innovative solutions
that extend the life, and expand the operating envelope,
of our customers’ critical pipeline assets.
While pipeline coating systems typically represent less than fi ve percent of the
total installed cost of major infrastructure projects, they are critical to ensuring
the uninterrupted operation of these multi-billion dollar assets. Our advanced
coatings ensure that pipelines can be operated at the optimal fl ow rate over the
maximum period for which they are designed. By developing next generation
anti-corrosion coatings such as High Performance Powder Coating (HPPC) and
Sure-bondTM, we are creating solutions that reduce risk, meet the increasingly
stringent demands of regulators for pipeline integrity, and enhance the reliability,
working life and economic return of operators’ pipeline assets. Adding value
through coatings and bundling the system with advanced integrity management
services further distinguishes ShawCor as a trusted, full-service solutions provider
and strengthens our leadership in the development of advanced pipeline
coating systems.
We are also advancing our eff orts to gain market share by expanding the
operating capability of pipelines through the development of new fl ow assurance
technologies. As energy producers move into increasingly extreme environments
to replace conventional reserves, ShawCor has been answering the need for a
new generation of high-performance thermal coating systems. Over the past few
years, we have continuously pushed the boundaries of high-temperature resistant
insulation coatings that are critical to the exploitation of deep and ultra-deep
marine hydrocarbon reservoirs.
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BUILDING AN INTEGRATED ENERGY SERVICES LEADER
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▶ FlexPipe System’s
advanced polymer-
based pipe product
line continues to
expand owing to faster
installation time and
lower cost of ownership
than traditional steel
pipe systems.
COMPOSITE
PRODUCTION
SYSTEMS
The second of ShawCor’s fi ve growth platforms, Composite
Production Systems, represents one of the most promising
segments in the energy services industry. Advanced
polymer-based pipe, fi ttings and associated components
continue to displace steel pipeline systems and ShawCor’s
fastest growing division, Flexpipe Systems, is at the
forefront of this trend.
Flexpipe Systems is a leading manufacturer of fl exible composite pipe systems
used for oil and gas gathering, water transportation, CO2 injection and other
applications that require advanced pressure and corrosion resistance capabilities.
Compared to conventional steel pipes, fl exible composites are much easier to
install and maintain. This translates into accelerated production and reduced cost
of ownership for the pipeline owner and makes the industry’s shift from steel
to fl exible composite pipe inevitable. ShawCor is ideally positioned to lead this
transition given our global distribution network, extensive industry relationships
and technological leadership in advanced pipeline materials. Today, Flexpipe
continues to expand the potential size of its addressable composite market
through new product development.
So far, Flexpipe’s participation in the composite revolution has been limited
to small diameter spoolable pipe. Over the past year, however, Flexpipe has
advanced the product testing and manufacturing process for a new family of
proprietary discrete length larger diameter composite pipe. Several full-scale
fi eld trials with leading customers were successfully completed during 2014 and
full commercialization will take place later this year. Initially, this product will
be available in 6-inch and 8-inch diameters, both with 750 and 1500psi pressure
ratings and a service life of 20 years. By gradually expanding its sights to other
geographic regions and extending the product line to include up to 12-inch
diameter pipe, Flexpipe intends to secure a leading position in a global market
that will grow to reach $10 billion in annual sales.
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BUILDING AN INTEGRATED ENERGY SERVICES LEADER
INTEGRITY
MANAGEMENT
There are an estimated 2.5 million miles of energy pipelines
in North America, 60% of which are more than 20 years old.
ShawCor is executing a strategy to deliver the inspection,
maintenance and rehabilitation services required for these
aging systems and lead industry eff orts to improve the
quality and reliability of new pipeline installations.
Shaw Pipeline Services is a leading global provider of girth weld inspection
services for land and off shore pipelines and a leader in non-destructive testing
(NDT) through the development of proprietary real-time radiography (RTR) and
ultrasonic inspection technologies. Its prospects will continue to be supported
by aging North American pipelines and increasing public and regulatory scrutiny
of both old and new installations.
To expand our presence in this $3 billion market, in 2014, ShawCor acquired
Desert NDT – a leading U.S. provider of NDT, integrity management and
inspection services for gathering pipelines and midstream infrastructure.
Desert NDT has given ShawCor an immediate presence in major U.S. oil and
gas basins and provided a critical source of skilled NDT technicians to deploy
the Company’s advanced RTR and ultrasonic inspection technologies.
Looking ahead, we are already working on what customers will ultimately want
– continuous, system-wide monitoring and high resolution leak detection that
doesn’t require shutting down or reducing the operation of the pipeline. To get
there, we are leveraging our resources through multi-disciplinary technology
communities that draw on technical and business expertise from all divisions,
and results-focused research agreements with leading universities. We have also
partnered with industry innovators to develop remote data monitoring through
Zedi Inc. and asset tracking technology through Vintri Technologies. In 2015,
we expect to fi eld trial solutions that incorporate electronic sensor technology
to continuously report pipeline integrity data to operators, with the goal of
identifying potential leaks before they occur.
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▶ The acquisition of Desert
NDT has enhanced the
geographic presence and
technological leadership
in advanced RTR and
ultrasonic inspection.
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BUILDING AN INTEGRATED ENERGY SERVICES LEADER
▶ Guardian’s Mobile
EMI desk allows for
real-time magnetic
analysis of tubular
products in the fi eld.
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OILFIELD
ASSET
MANAGEMENT
4
The advent of horizontal drilling and completion technologies
has opened up the huge potential of unconventional shale oil
and gas production. With these technologies has come the
need for a factory approach to energy production where the
oilfi eld operator’s return on investment depends on sustaining
peak operating performance and high rates of asset utilization.
ShawCor is readily positioned to meet this challenge. Our Guardian division is an
industry leader in oilfi eld tubular management, with a focus on production tubing,
casing and drill pipe. As an integrated oilfi eld asset company, Guardian off ers a
wide range of services including: in-plant and mobile inspection, refurbishment,
machining, manufacturing and web-based inventory systems.
Guardian helps its customers operate at peak effi ciency by: minimizing customer
equipment costs and downhole failures during drilling operations and well
production; providing high-quality (ISO 9001:2008 Certifi ed) in-plant and
mobile service and faster turnaround time; and maximizing inventory turnover
with advanced web-based systems that allow customers to track the location,
condition and history of their tubular assets. In 2015, this tracking capability will
be expanded to provide fi eld deployed real-time inventory access.
The Company has a strong presence in key oilfi eld markets throughout North
America, yet our share of this highly fragmented market is approximately 5%.
With ShawCor’s well-established management system for drill pipe, and our
strong market position in Canada, we see abundant potential to grow our oilfi eld
management business in the U.S. and Mexico and to add new categories, such
as the high pressure tubulars used in the “fracing” process (frac and fl ow iron)
to our one-stop branch service model.
As in our other growth platforms, we will acquire, integrate and generate
synergies from complementary companies that add important technology, expand
our geographic footprint and improve our capacity to deliver timely, value-added
product and service solutions to our customers.
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BUILDING AN INTEGRATED ENERGY SERVICES LEADER
CONNECTIVITY
5
Energy producers recognize the need for improved control
and instrumentation to reduce installation time, eliminate
complexity, increase oil and gas recovery and generally
enhance the reliability and effi ciency of their operations.
ShawCor is ready to earn a growing share of the oilfi eld
connectivity market by leveraging the strengths of our
Petrochemical and Industrial divisions.
As oilfi eld operations become increasingly complex, more advanced devices
are needed ‘downhole’ to control the activities associated with completions
and enhanced reservoir recovery. These devices are controlled from the surface
but the connection in between is often the weakest link in oilfi eld operations.
Producers know that better connectivity leads to gains in recovery rates, lower
operating costs, earlier production and improved system reliability.
ShawCor has the foundation required to serve this growing market through its two
well-established Petrochemical and Industrial divisions. DSG-Canusa is a leading
global manufacturer of heat shrink products, accessories and equipment that
insulate, protect and environmentally seal critical control systems in a variety
of electrical, electronic and mechanical applications. ShawFlex is a world-class
manufacturer of instrumentation, thermocouple, control, power, marine and robotics
cables. Their products are used primarily in the petrochemical, power generation,
pulp and paper, primary metals, automation, robotics and automotive industries.
These businesses have a long track record of providing sealed specialty-cable
solutions for harsh operating environments to a wide range of customers around
the world, including a few energy companies. However, there is much more we
can do to extend the industry-leading technologies of our Petrochemical and
Industrial divisions to the oilfi eld. For example, by adding recognized oilfi eld
brands to established sales channels in both the Pipeline and Pipe Services and
Petrochemical and Industrial segments of our business, we stand to capitalize on
an opportunity to provide complete connectivity solutions in a highly fragmented
market that is conservatively estimated to exceed $10 billion per year.
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▶ DSG-Canusa’s
investments in world-
class facilities have
strengthened the
division’s technological
leadership and customer
service capabilities.
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FINANCIAL
REVIEW
INSIDE THIS SECTION
Management’s Discussion and Analysis
22
Management’s Responsibility for Financial Statements
Independent Auditors’ Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Six-Year Review
Quarterly Information
ShawCor Directors
Corporate Governance
Primary Operating Locations
Corporate Information
1.0
1.1
1.2
1.3
1.4
1.5
2.0
2.1
2.2
Executive Overview
Core Businesses
Vision and Objectives
Key Performance Drivers
Key Performance Indicators
Capability to Deliver Results
Financial Highlights
Selected Annual Financial Information
Foreign Exchange Impact
3.0
Business Developments for the Period
4.0
4.1
4.2
Results from Operations
Consolidated Information
Segment Information
Liquidity and Capitalization
Cash Provided by Operating Activities
Cash Used in Investing Activities
Cash Used in Financing Activities
Liquidity and Capital Resource Measures
Contingencies and Off Balance Sheet Arrangements
Long-Term Debt
Financial Instruments and Other Instruments
5.0
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8 Outstanding Share Capital
6.0
6.1
7.0
8.0
8.1
8.2
8.3
Quarterly Selected Financial Information
Fourth Quarter Highlights
Disclosure Controls and Internal Controls over
Financial Reporting
Critical Accounting Estimates and Accounting
Policy Developments
Critical Accounting Estimates
Accounting Standards Issued but not yet Applied
New Accounting Standards Adopted
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 Forward-Looking Information
14.0 Additional Information
22
22
23
23
23
24
25
25
26
26
28
28
29
31
31
31
31
31
32
32
33
33
36
36
38
38
38
39
39
39
41
41
42
42
43
43
44
45
46
47
48
49
50
51
52
53
54
90
90
91
92
93
94
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S
DISCUSSION AND ANALYSIS
The following Management’s Discussion and Analysis (“MD&A”), is a discussion of the consolidated fi nancial position and results of operations of ShawCor Ltd.
(“ShawCor” or “the Company”) for the years ended December 31, 2014 and 2013 and should be read together with ShawCor’s audited consolidated fi nancial
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 fi nancial 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 13 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. With the completion of the Desert
NDT acquisition on July 8, 2014, the Company now operates nine
divisions with over ninety manufacturing, sales and service facilities
located around the world. The Company is publicly-traded on the
Toronto Stock Exchange.
1.1 Core Businesses
ShawCor provides a broad range of products and services, which
include high quality pipe coating services, fl exible composite pipe,
onshore and off shore 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 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 off shore 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 fi nancial 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, 2014, the Company operated its nine 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 91% of consolidated revenue for the year
ended December 31, 2014. This segment includes the Bredero Shaw,
Canusa-CPS, Shaw Pipeline Services, Flexpipe Systems, Guardian,
Socotherm and Desert NDT divisions.
•
•
•
Bredero Shaw’s product off erings include specialized internal
anticorrosion and fl ow effi ciency pipe coating systems, insulation
coating systems, weight coating systems and custom coating and
fi eld joint application services for onshore and off shore pipelines.
Canusa-CPS manufactures heat-shrinkable sleeves, adhesives,
sealants and liquid coatings for corrosion protection on onshore
and off shore pipelines.
Shaw Pipeline Services provides ultrasonic and radiographic pipeline
girth weld inspection services to pipeline operators and construction
contractors worldwide for both onshore and off shore pipelines.
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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 off shore pipelines.
•
•
•
•
•
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 diff erentiation;
the Company’s operational eff ectiveness and its ability to maintain
effi cient utilization of productive capacity at each geographic location;
access to capital and maintenance of suffi cient available liquidity to
support continuing operations and fi nance growth activities;
the ability to identify and execute successful business acquisitions
that result in strategic global growth; and
•
•
•
•
Desert NDT provides non-destructive testing services for new oil
and gas gathering pipelines and oilfi eld infrastructure integrity
management services.
Petrochemical and Industrial
The Petrochemical and Industrial segment, which includes the DSG-
Canusa and ShawFlex divisions, accounted for 9% of consolidated
revenue for the year ended December 31, 2014. 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 Invested Capital (“ROIC”) of 15% over the full
business cycle;
generate average annual net income growth of 15% over the full
business cycle;
continuously improve health, safety and environmental (“HSE”)
performance as measured by recordable injuries per million person
hours worked to support the Company’s commitment to an Incident
and Injury Free (“IIF”) workplace;
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 fi nance energy
infrastructure investment;
•
the ability to attract and retain key personnel.
1.4 Key Performance Indicators
Several of the drivers identifi ed 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 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 12.0 – 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) decreased
by $125.0 million, or 57%, from $219.9 million for the year ended
December 31, 2013 to $94.9 million for the year ended December 31,
2014. The decrease was mainly due to the impairment charges of
$120.4 million recorded in the third and fourth quarters of 2014, lower
Adjusted Operating Income (a non-GAAP measure defi ned as Operating
Income excluding impairment charges), as explained in section 4.1 below,
the increase in loss from investment in joint ventures of $18.5 million,
driven mainly by the Venezuela impairment, and a net increase in fi nance
cost of $3.5 million. This was partially off set by lower income tax expense
of $57.4 million, higher net gain on assets held for sales of $10.1 million
and the impact of changes in non controlling interest of $3.4 million.
Return on Invested Capital (“ROIC”)
ROIC, a non-GAAP measure, is defi ned as net income for the year
adjusted for after tax interest expense divided by average invested
capital for the most recently completed year. ROIC is used by the
Company to assess the effi ciency of generating profi ts from each unit
of invested capital. As part of its performance objectives, the Company
has set a ROIC target of 15%, as described in Section 1.2 – Vision and
Objectives. The Company’s ROIC for the years ended December 31,
2014 and 2013 was 8.5% and 23.5%, respectively. The decrease of
15 percentage points was primarily due to a decrease of $122.7 million
in net income for the year, adjusted for after-tax interest expense
combined with an increase in average invested capital of $289.9 million.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Safety and Environmental Stewardship
The Company maintains a comprehensive HSE management system
in place within each of its nine operating divisions and is committed
to being an IIF workplace with no damage to the environment. For the
years ended December 31, 2014 and December 31, 2013, the Company
had recordable injuries per million person hours worked of 7.0 and
5.9, respectively. During 2014, the Company completed 20 HSE audits
at manufacturing and service locations across all nine divisions and
developed action plans to correct any defi ciencies identifi ed 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 fi nancial resources, including debt
facilities, so as to maintain suffi cient fi nancial capacity to fund these
investment requirements.
Capital expenditures increased by $0.9 million from $76.7 million for
the year ended December 31, 2013 to $77.6 million for the year ended
December 31, 2014. The Company believes it has suffi cient 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
suffi cient to support the level of business activity projected in 2015;
however, unexpected increases in business activity or specifi c pipe
coating project requirements may result in higher working capital
requirements. Any such increase in requirements will be fi nanced from
the Company’s cash balances and available committed credit facilities.
The Company had cash and cash equivalents and short term investments
of $117.1 million and $86.0 million as at December 31, 2014 and 2013,
respectively, and had unutilized lines of credit available of $381.0 million
and $209.5 million, as at December 31, 2014 and 2013, respectively.
The current fi nancial position of the Company is strong and the
Company does not foresee any diffi culties in maintaining a suffi cient
level of fi nancial 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 fi nancial position.
Non-Capital Resources
The Company considers its people as the most signifi cant non-capital
resource required in order to achieve the vision and objectives identifi ed
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, fi nance, 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
fi nancial 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, 2014, the Company
believes it has suffi cient 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, 2014
included systems and controls over project bidding, capital expenditures,
internal controls over fi nancial reporting, product development, HSE
management and human resource development. In addition, the
ShawCor Manufacturing System (“SMS”) program has been implemented
to increase operating effi ciency and achieve signifi cant cost savings in
each of the Company’s nine divisions.
As at December 31, 2014, the Company believes it has suffi cient 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 Financial Information
(in thousands of Canadian dollars)
Revenue
Cost of Goods Sold and Services Rendered
Gross Profi t
Selling, general and administrative expenses
Research and development expenses
Foreign exchange gains
Amortization of property, plant and equipment
Amortization of intangible assets
Gain on sale of land
Impairment(a)
Income from Operations
Accounting gain on acquisition
Gain (loss) on assets held for sale
Income from investment in associates
(Loss) income from investment in joint ventures
Finance (costs) income, net
Income before Income Taxes
Income taxes
Non-controlling interests
Net Income (attributable to shareholders of the Company)
Net Income (attributable to shareholders of the Company)
Add:
Income taxes
Accounting gain on acquisition
Finance costs, net
Amortization of property, plant, equipment and intangible assets
Gain on sale of land and others
Impairment(a)
Impairment of investments in joint ventures
EBITDA(b)
Non-controlling interests
(Gain) loss on assets held for sale
ADJUSTED EBITDA(b)
Per Share Information:
Net Income
Basic
Diluted
Cash Dividend per Share:
Common Shares
Class A
Class B
$ 1,890,029
1,166,319
723,710
Twelve Months Ended December 31,
2014
2013
2012
(restated)
$ 1,847,549
1,058,946
$ 1,469,187
895,004
788,603
382,755
15,687
(4,936)
66,484
10,312
(5,156)
–
323,457
–
(3,683)
–
(3,874)
(14,912)
300,988
78,402
2,724
219,862
219,862
78,402
–
14,912
76,796
(5,156)
–
–
$
$
574,183
306,108
12,242
(109)
44,985
7,319
(12,101)
4,686
211,053
413
–
8,694
618
1,360
222,138
43,783
45
178,310
178,310
43,783
(413)
(1,360)
52,304
(12,101)
4,686
–
$
$
$
384,816
$
265,209
2,724
3,683
45
–
$
391,223
$
265,254
375,153
13,053
(3,747)
55,219
15,587
(609)
120,378
148,676
–
6,427
877
(22,375)
(18,401)
115,204
21,010
(667)
94,861
94,861
21,010
–
18,401
70,806
(609)
120,378
18,948
343,795
(667)
(6,427)
336,701
1.55
1.53
0.575
–
–
$
$
$
$
3.55
3.51
1.375
0.100
0.091
$
$
$
$
2.53
2.50
–
0.380
0.345
$
$
$
$
$
$
$
$
(a) Relates mainly to the Bredero Shaw Brasil, Socotherm Gulf of Mexico and Bridgen plant impairments; refer to section 3.0 for additional details.
(b) Earnings before interest, income taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA 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 under IFRS. The Company’s method of calculating these measures may diff er from
other entities and as a result may not necessarily be comparable to measures used by other entities. Refer to Section 12.0 – Reconciliation of Non-GAAP Measures, for additional information with
respect to other non-GAAP measures used by the Company.
(in thousands of Canadian dollars)
Total Assets
Total Non-current Liabilities
December 31,
2014
December 31,
2013
$ 1,939,970
524,462
$
$ 1,651,928
542,278
$
Revenue
Consolidated revenue increased by $42.4 million, or 2%, from
$1,847.6 million for the year ended December 31, 2013, to
$1,890.0 million for the year ended December 31, 2014, due to an
increase of $29.0 million in the Pipeline and Pipe Services segment and
an increase of $14.6 million in the Petrochemical and Industrial segment.
Consolidated revenue benefi tted from the impact on translation of
foreign operations from the weakening Canadian dollar as noted in
section 2.2 below.
Consolidated revenue increased by 26%, or $378.4 million,
from $1,469.2 million for the year ended December 31, 2012 to
$1,847.6 million for the year ended December 31, 2013, due to
increases of $363.5 million in the Pipeline and Pipe Services segment
and $15.4 million in the Petrochemical and Industrial segment.
Income from Operations
During 2014, the Company recorded impairment charges of
$120.4 million. Excluding these charges, Adjusted Operating Income
(refer to Section 12.0 – Reconciliation of Non-GAAP Measures)
decreased by $54.4 million, from the year ended December 31, 2013
to $269.1 million during the comparable period in 2014. Adjusted
Operating Income was impacted by a year over year decrease in gross
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MANAGEMENT’S DISCUSSION AND ANALYSIS
profi t of $64.9 million, a decrease in net foreign exchange gains of
$1.2 million and a lower gain on sale of land of $4.5 million. These
reductions were partially off set by decreases in SG&A expenses of
$7.6 million, in research and development expenses of $2.6 million
and in amortization of property, plant, equipment and intangible assets
of $6.0 million.
In addition to the translation impact noted above, the Company recorded
a foreign exchange gain of $3.7 million in 2014, compared to a gain of
$4.9 million for the comparable period in the prior year, 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.
Income from operations increased by $112.4 million from the year ended
December 31, 2012 to $323.5 million during the comparable period in
2013. Operating Income benefi ted from a year over year increase in
gross profi t of $214.4 million, an increase in net foreign exchange gain of
$4.8 million and an impairment charge of $4.7 million incurred in 2012.
This was partially off set by increases in SG&A expenses of $76.6 million,
research and development expenses of $3.4 million, amortization of
property, plant, equipment and intangible assets of $24.5 million and
a lower gain on sale of land of $6.9 million.
Net Income (attributable to shareholders of the Company)
Net income decreased by $125.0 million, from $219.9 million during
the twelve-month ended December 31, 2013 to $94.9 million during
the twelve-month period ended December 31, 2014. This decrease was
mainly due to the impairment charges of $120.4 million recorded in the
third and fourth quarters of 2014, lower Adjusted Operating Income, as
explained above, the increase in loss from investment in joint ventures
of $18.5 million, driven mainly by the Venezuela impairment, and a net
increase in fi nance cost of $3.5 million. This was partially off set by lower
income tax expense of $57.4 million, higher net gain on assets held
for sale of $10.1 million and the impact of changes in non controlling
interest of $3.4 million.
Net income increased by $41.6 million, from $178.3 million during the
twelve-month ended December 31, 2012 to $219.9 million during the
twelve-month period ended December 31, 2013, mainly due to higher
Operating Income of $112.4 million in 2013 as explained above. This was
partially off set by increases in net fi nance costs of $16.3 million, income
tax expense of $34.6 million and income on investment in associate of
$8.7 million recorded in 2012.
2.2 Foreign Exchange Impact
The following table sets forth the signifi cant 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
2014
1.1064
1.4638
1.8178
2013
1.0324
1.3734
1.6204
The following table sets forth the impact on revenue, Operating
Income and net income, compared with the prior year period, as a
result of foreign exchange fl uctuations on the translation of foreign
currency operations.
(in thousands of Canadian dollars)
Year Ended December 31, 2014
Revenue
Income from operations
Net income (attributable to shareholders of the Company)
$
50,166
12,349
14,623
3.0 BUSINESS DEVELOPMENTS
Equity Investment in ZEDI Inc.
On February 20, 2014, ShawCor completed an equity investment in Zedi
Inc. (“Zedi”), a Calgary, Alberta based company engaged in end-to-end
solutions for production operations management in the oil and gas
industry. Zedi has successfully developed and deployed remote fi eld
monitoring and related data management solutions for the optimization
of oil and gas well production. Zedi also completed a management
led buyout through an Alberta court and shareholder approved plan
of arrangement. ShawCor’s equity investment in Zedi consists of an
approximately 25% common share interest plus convertible preferred
shares for a total investment of approximately $24 million, which was
accounted for using the equity method of accounting.
Moho Nord Subsea Project in Congo
On February 25, 2014, ShawCor, through its Socotherm pipe coating
division, received a contract with a value in excess of US$40 million
from Tenaris S.A. to provide pipeline coatings for the Moho Nord Oil
Pipeline project. The Moho Nord project is located in water depths of
650 to 1,150 metres approximately 75 kilometers off the Congo coast
in West Africa. The contract was executed primarily at the Socotherm
pipe coating facility in Pozzallo, Italy with additional work completed
at Socotherm’s facilities in Adria, Italy and Escobar, Argentina.
South Stream Off shore Pipeline Project
On February 26, 2014, ShawCor, through its Bredero Shaw pipe coating
division, received a contract with a value of approximately US$50 million
from EUROPIPE GmbH for the concrete weight coating of Line 1 of the
South Stream Off shore Pipeline. The South Stream Off shore Pipeline
system is comprised of 4 pipelines that will cross the Black Sea and
transport gas from Russia to Bulgaria and on to Central and Southern
Europe. The contract will be executed at the Bredero Shaw pipe coating
facility in Leith, Scotland. This contract involves coating approximately
148 km of 32" pipe with concrete weight coating.
On June 30, 2014, the Company announced its Bredero Shaw pipe
coating division, had received a contract with a value of approximately
US$50 million from Marubeni Sumitomo Consortium for coating services
for Line 2 of the South Stream Off shore Pipeline. The contract will be
executed at a pipe coating facility in Bredero Shaw’s Europe, Middle
East, Africa and Russia (“EMAR”) region. This contract involves coating
approximately 342 km of 32" pipe with 3-Layer Polypropylene and
internal fl ow coating.
On July 3, 2014, the Company announced that its fi eld-applied pipeline
coatings and services division, Canusa-CPS, had received a contract with
a value of approximately Cdn $30 million from Saipem SpA to provide
fi eld joint coating services for Line 1 of the South Stream Off shore
Pipeline. This contract involves the manufacture of 3-layer polypropylene
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heat shrink sleeves, and their application on each pipe weld of the
900 km 32" off shore pipeline utilizing the Canusa-CPS patented
IntelliCOAT™ automated system.
On December 18, 2014, the Company announced the majority of the
work associated with its South Stream contracts had been suspended
pursuant to suspension notices received from each customer. The
suspensions received are applicable for a limited period of time and
none of these contracts has been terminated to date. At this time, there
can be no assurance as to whether these projects will be reactivated
or subsequently terminated.
Shah Deniz Project in Azerbaijan
On May 22, 2014, the Company announced its Bredero Shaw pipe
coating division, had received a contract with a value of approximately
US$70 million from BP Exploration (Shah Deniz) Ltd. for and on behalf
of the South Caucasus Pipeline Company Ltd. for coating services for
the South Caucasus Pipeline Expansion (“SCPX”) project. The objective
of the SCPX Project is to expand the capacity of the existing South
Caucasus Pipeline system to accommodate additional gas throughput
from the Shah Deniz Stage 2 development in the Azerbaijan sector of
the Caspian Sea.
This contract involves coating approximately 491 km of predominately
48" pipe with 3-Layer Polyethylene and internal fl ow coating. Coating
commenced in 2014 and is expected to be completed in late 2015.
On November 18, 2014, the Company announced that its Bredero Shaw
pipe coating division had received a second contract with a value of
approximately US$200 million from BP Exploration (Shah Deniz) Limited
for pipeline coating for the Shah Deniz Stage 2 development project. The
contract is scheduled to be executed at the Caspian Pipe Coatings (CPC)
plant in Baku, Azerbaijan.
The contract awarded involves the application of anti-corrosion and
concrete weight coatings and upgrades to the CPC plant in Baku to
enable the facility to meet the project’s requirements for anti-corrosion
and concrete weight coating.
Coating is expected to commence in 2015 with completion planned for
October 2015.
Together with the previously awarded contracts relating to the
Shah Deniz Stage 2 and the related South Caucasus Pipeline projects,
Bredero Shaw has now secured contracts totaling over US$500 million
on these projects.
Retirement of Bill Buckley and Appointment of Steve Orr as CEO
On May 1, 2014, Bill Buckley retired as Chief Executive Offi cer of
ShawCor at the Company’s Annual Meeting, where he was also
re-elected as a director of the Company. Steve Orr, the President of
ShawCor at that time, succeeded him as CEO on that date and was
also elected as a director at the meeting.
Acquisition of Scotia Automated Inspection Service
On April 23, 2014, the Company acquired the assets and business
of Scotia Automated Inspection Service (“SAIS”), a provider of Non
Destructive Testing (“NDT”) services based in the North of Scotland
(Inverness). SAIS currently markets its services into the North Sea
region – UK, Norway and Netherlands.
SAIS’ current off erings include traditional NDT services such as fi lm
radiography, manual ultrasonic, magnetic particle and liquid penetrate
inspections. The acquisition of the SAIS business will allow the
Company’s Shaw Pipeline Services (“SPS”) division to expand its global
off shore pipeline inspection market position by providing SAIS with
advanced NDT technologies that further enhance SAIS’ relationships
with current and new customers.
Acquisition of Desert NDT LLC
On July 8, 2014, the Company completed the acquisition of all of
the outstanding shares of Desert NDT LLC (“Desert”), for a total
consideration of US$263.9 million. Desert is a Houston-based provider
of non-destructive testing (“NDT”) services for new oil and gas gathering
pipelines and infrastructure integrity management services. Desert
operates through 18 branches located in major U.S. oil and gas basins.
The acquisition was funded with cash and through available revolving
credit facilities.
Completion of Sale of Brazilian Joint Venture Interest
On September 4, 2014 the Company completed the sale of its
Socotherm division’s joint venture interest in Socotherm Brasil, fi rst
announced in December 2013, to its joint venture partner, Tenaris.
Socotherm Brasil operates a pipe coating facility which is managed
by Tenaris and which is located at the Confab welded pipe mill in
Pindamonhangaba, Brazil.
From the sale, ShawCor realized net proceeds of approximately
US$29.7 million.
The sale of Socotherm’s joint venture interest in Socotherm Brasil is
consistent with ShawCor’s strategy to focus its pipe coating investments
on operations it manages and controls. Following the sale, ShawCor will
continue to serve Tenaris’ global pipe coating needs and the Brazilian
pipe coating market from its global pipe coating plant network.
Completion of Approximately $230 million Bought Public Off ering
On September 19, 2014, the Company closed its bought public off ering
of 3,650,000 common shares (the “Shares”) at a price of $54.85 per Share
(the “Issue Price”) for gross proceeds of $200.2 million (the “Off ering”).
The Off ering was underwritten by a syndicate led by TD Securities Inc.
and included Cormark Securities Inc., RBC Dominion Securities Inc.,
AltaCorp Capital Inc., BMO Nesbitt Burns Inc., CIBC World Markets Inc.,
National Bank Financial Inc. and Scotia Capital Inc. (collectively,
the “Underwriters”).
On October 3, 2014, the Underwriters exercised in full an over-allotment
option and purchased an additional 547,500 common shares of the
Company at a price of $54.85 per common share. The closing of the
over-allotment option increased the total gross proceeds of the Off ering
to $230.2 million.
The Company used the net proceeds from the Off ering for general
corporate purposes, including to repay a portion of its outstanding
revolving debt in the normal course in order to create debt availability
to fund future corporate investments, which may potentially include
future acquisitions.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Impairment Charges
The Company incurred an impairment charge of $41.4 million
($29.4 million net of tax) in the third quarter of 2014, relating primarily
to goodwill and intangible assets that arose from the 2010 purchase
of the Company’s joint venture partners in Thermotite do Brasil Ltda.
The write-down was calculated based on a variety of factors, including
anticipated Brazilian market developments, and represents a non-cash
charge that will not impact the Company’s ability to generate revenue
or income from its operations in Brazil. The Company is committed to
continuing to serve the Brazil market for deep water pipe coatings.
On December 22, 2014, the Company announced that it expected
to incur an after tax impairment charge of up to approximately
$80 million. The fi nal amount of the impairment charges of $97.9 million
($70.0 million net of tax) was recorded by the Company in the fourth
quarter of 2014. The impairment charges recorded related to goodwill
and intangible assets of the Socotherm Gulf of Mexico coating facility
in Channelview, Texas, property, plant and equipment of other company
assets in the Gulf of Mexico, and the carrying value of Socotherm’s 50%
joint venture interest in Venezuela. The charge results from recently
conducted annual impairment testing under IFRS of the carrying value
of ShawCor’s long lived assets.
The write-down of goodwill and intangible assets associated with the
Socotherm Gulf of Mexico facility was based primarily on two factors:
(i) anticipated market developments in the Gulf of Mexico including the
likelihood of project delays as a result of the recent global decline in
oil prices, and (ii) the Company’s intention to shift non-Gulf of Mexico
production from the Channelview, Texas operations to Pozzallo, Italy
following the successful launch of production at the Pozzallo facility
which is better positioned logistically to service project activity in
Europe, the Middle East and Africa. The write down of the joint venture
interest in Venezuela was primarily the result of the accelerating
devaluation of the local currency in Venezuela.
The write-down is a non-cash charge that will not impact the Company’s
ability to generate revenue from its operations in the Gulf of Mexico
or Venezuela.
Acquisition of Dhatec B.V.
On January 5, 2015, the Company announced that it had completed
the acquisition of Dhatec B.V. (“Dhatec”). Dhatec is a Netherlands
based company which designs, assembles and markets engineered
pipe logistics products and services which mitigate damage and
enhance safety and effi ciency in the manufacturing, coating, handling,
transportation, preservation and storage of pipe. Dhatec’s revenue in
2014 was approximately US$25 million.
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
2014
2013
$ 1,716,789
177,033
(3,793)
$ 1,890,029
$
$ 1,687,768
162,449
(2,668)
$ 1,847,549
$
Change
29,021
14,584
(1,125)
42,480
Consolidated revenue increased by $42.4 million, or 2%, from
$1,847.6 million for the year ended December 31, 2013 to
$1,890.0 million for the year ended December 31, 2014, due to
an increase of $29.0 million in the Pipeline and Pipe Services segment
and an increase of $14.6 million in the Petrochemical and Industrial
segment. Consolidated revenue benefi tted from the impact on
translation of foreign operations from the weakening Canadian
dollar as noted in section 2.2 above.
Revenue for the Pipeline and Pipe Services segment in 2014 was
$1,716.8 million, or $29.0 million higher than in 2013, primarily due
to higher activity levels in North America, Latin America and EMAR,
partially off set by decreased revenue in Asia Pacifi c. 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
$14.6 million in 2014 compared to 2013, primarily due to higher activity
levels in all three regions. 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 Operating Income and Operating Margin for the following periods:
(in thousands of Canadian dollars)
Income from Operations
Adjusted Operating Income(a)
Adjusted Operating Margin(b)
$
2014
148,676
269,054
14.2%
$
2013
323,457
323,457
17.5%
$
Change
(174,781)
(54,403)
(3.3%)
(a) Adjusted Operating Income is Operating Income excluding impairment charges and is a non-GAAP measure. Please refer to Section 12.0 – Reconciliation of Non-GAAP Measures to
GAAP measures.
(b) Adjusted Operating Margin is defi ned as Adjusted Operating Income divided by revenue and is a non-GAAP measure.
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Adjusted Operating Income decreased by $54.4 million from the
year ended December 31, 2013 to $269.1 million in the year ended
December 31, 2014. Adjusted Operating Income was impacted by a
year over year decrease in gross profi t of $64.9 million, a decrease in
net foreign exchange gains of $1.2 million and a lower gain on sale of
land of $4.5 million. These reductions were partially off set by decreases
in SG&A expenses of $7.6 million, in research and development expenses
of $2.6 million and in amortization of property, plant, equipment and
intangible assets of $6.0 million.
The decrease in gross profi t resulted from a 4.4 percentage point
decrease in gross margin, attributable to changes in product and project
mix compared to the prior year, particularly in the Pipeline and Pipe
Services segment’s Asia Pacifi c and Latin America regions which had
benefi tted from high gross margins on several large concrete weight
coating projects in 2013. This was partially off set by the higher revenue
in 2014, as explained above.
SG&A expenses decreased by $7.6 million in 2014 compared to 2013.
The reduction in SG&A expenses was the result of one time costs of
$7.6 million incurred to complete the Company’s Plan of Arrangement
on March 20, 2013 and related expenses associated with amended
executive retirement arrangements of $ 5.0 million incurred in the fi rst
quarter of 2013 and higher bad debts and warranty provisions recorded
in 2013 of $6.4 million, combined with lower management incentive
compensation expenses of $24.3 million in 2014. These reductions in
SG&A expenses were partially off set by increases over the prior year of
$18.7 million in personnel related costs, $9.5 million from the acquisition
of Desert NDT and $9.0 million of rental and building costs primarily
associated with pipe storage and increased activity in EMAR.
Finance Costs, Net
The following table sets forth the components of fi nance 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 costs – net
2014
(1,229)
6,210
13,420
$
2013
(1,156)
5,949
10,119
$
18,401
$
14,912
$
Change
(73)
261
3,301
3,489
$
$
In 2014, net fi nance cost was $18.4 million, compared to a net fi nance cost of $14.9 million in 2013. The increase in net fi nance cost was primarily a
result of higher interest on long-term debt that was issued on March 20, 2013.
Income Taxes
The following table sets forth the income tax expenses for the following periods:
(in thousands of Canadian dollars)
Income tax expense
2014
2013
Change
$
21,010
$
78,402
$
(57,392)
The Company recorded an income tax expense of $21.0 million in 2014
compared to an income tax expense of $78.4 million in 2013. Excluding
the impact of impairment charges ($139.3 million, deferred tax of
$39.9 million), the Company recorded an income tax expense of
$60.9 million (24% of income before income taxes) in 2014 compared
to an income tax expense of $78.4 million (26% of income before
income taxes) in 2013. The Company’s tax rate for the twelve month
period ended December 30, 2014 was lower than expected income tax
rate of 27% due to a portion of the Company’s taxable income being
earned in the Trinidad Free Zone, Asia Pacifi c, the Middle East and other
jurisdictions where the tax rate is 25% or less.
4.2 Segment Information
4.2.1 Pipeline and Pipe Services Segment
The following table sets forth the revenue by geographic location, Adjusted Operating Income and Adjusted Operating Margin for the Pipeline and
Pipe Services segment for the following periods:
(in thousands of Canadian dollars, except Adjusted Operating Margin)
North America
Latin America
EMAR
Asia Pacifi c
Total Revenue
Adjusted Operating Income(a)
Adjusted Operating Margin(b)
2014
2013
$
787,809
185,057
400,480
343,443
$ 1,716,789
$
279,859
16.3%
$
671,317
161,627
191,814
663,010
$ 1,687,768
$
368,805
21.9%
$
$
$
Change
116,492
23,430
208,666
(319,567)
29,021
(88,946)
(5.6%)
(a) Adjusted Operating Income is Operating Income excluding impairment charges and is a non-GAAP measure. Please refer to Section 12.0 – Reconciliation of Non-GAAP Measures to
GAAP measures..
(b) Adjusted Operating Margin is defi ned as Adjusted Operating Income divided by revenue and is a non-GAAP measure.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Revenue in the Pipeline and Pipe Services segment for the year
ended December 31, 2014 was $1,716.8 million, an increase of
$29.0 million, from $1,687.8 million for the year ended December 31,
2013. Consolidated revenue benefi tted from the impact on translation
of foreign operations from the weakening Canadian dollar as noted in
section 2.2 above, combined with higher revenue in North America,
EMAR and Latin America, off set by lower activity levels in Asia Pacifi c:
•
•
In North America, revenue increased by $116.5 million, or 17%,
primarily due to the addition of approximately $61.0 million in
revenue from the acquisition of Desert NDT in the third quarter of
2014, increased fl exible composite pipe volume in the US, higher
revenues from tubular management services and higher volumes at
the Socotherm Gulf of Mexico facility. This was partially off set by
lower activity levels in small diameter pipe coatings in the US.
Latin America revenue was higher by $23.4 million, or 14%, due to
increased large project activity in Mexico at both the Veracruz and
Coatzacoalcos facilities and higher activity levels in Brazil for the
Sapinhoa project. This was partially off set by lower revenue on the
Technip project in Trinidad, which was completed in 2013.
•
EMAR revenue increased by $208.6 million, or 109%, due to higher
activity levels at the Socotherm facilities in Italy, increased pipe
coating activity levels at the Leith, Scotland and RAK facilities and
the Shah Deniz II project in the Caspian, and higher revenue from
pipe weld inspection services due to the acquisition of SAIS in the
fi rst quarter of 2014.
•
Revenue in Asia Pacifi c decreased by $319.6 million, or 48%, primarily
due to the lower volumes associated with the completion of large
projects like Inpex Ichthys, Chevron Wheatstone and Apache Julimar
at both Kabil, Indonesia and Kuantan, Malaysia.
Adjusted Operating Income for the year ended December 31, 2014 was
$279.9 million compared to $368.8 million for the year ended December 31,
2013, a decrease of $88.9 million, or 24% due to the following factors:
•
•
Lower gross profi t of $66.9 million driven by a 4.6 percentage
point decrease in gross margin due to less favourable project mix,
particularly in the Asia Pacifi c and Latin America regions which had
benefi tted from high gross margins on several large concrete weight
coating projects in 2013, partially off set by higher revenue of
$29.0 million, as explained above.
Higher SG&A expenses, primarily due to the inclusion of $9.5 million
of SG&A expenses from the newly acquired Desert NDT business and
higher rental and building costs, mainly due to higher activity in the
EMAR region.
•
A $5.2 million gain on sale of land recorded in the fourth quarter
of 2013.
4.2.2 Petrochemical and Industrial Segment
The following table sets forth the revenue by geographic location, Operating Income and Operating Margin for the Petrochemical and Industrial
segment for the following periods:
(in thousands of Canadian dollars, except Operating Margin)
North America
EMAR
Asia Pacifi c
Total Revenue
Operating Income
Operating Margin
$
$
$
2014
107,338
62,629
7,066
177,033
26,750
15.1%
$
$
$
2013
101,117
55,457
5,875
162,449
20,576
12.7%
$
$
$
Change
6,221
7,172
1,191
14,584
6,174
2.4%
In the year ended December 31, 2014, revenue increased by
$14.6 million, or 9%, to $177.0 million compared to the year ended
December 31, 2013, due to increased shipments of wire and cable
products to North American electrical utilities, combined with increased
heat shrinkable product shipments in all three regions and the impact
of foreign exchange on revenue, as noted in section 2.2 above.
Operating Income for the year ended December 31, 2014 was
$26.8 million compared to $20.6 million for the year ended December 31,
2013, an increase of $6.2 million, or 30%. The increase was primarily
due to lower SG&A expenses of $4.1 million in 2014 compared to 2013,
primarily due to restructuring charges of $3.2 million recorded in the
fourth quarter of 2013. In addition, gross profi t was higher by
$2.0 million as a result of the increase in revenue of $14.6 million, as
explained above, partially off set by a 1.0 percentage point decrease
in the gross margin due to unfavourable product mix.
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 defi nition of a reportable
operating segment as defi ned under IFRS.
The following table sets forth the Company’s unallocated fi nancial and corporate expenses, before foreign exchange gains and losses, for the
following period:
(in thousands of Canadian dollars)
Financial and corporate expenses
2014
2013
Change
$
(41,302)
$
(70,860)
$
(29,558)
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Financial and corporate costs decreased by $29.6 million from the twelve
month period ended December 31, 2013 to $41.3 million for the twelve
month period ended December 31, 2014, primarily as a result of higher
one time costs of $7.6 million incurred to complete the Company’s Plan
of Arrangement on March 20, 2013 and related expenses associated
with amended executive retirement arrangements of $5.0 million
incurred in the fi rst quarter of 2013. In addition, management incentive
compensation expenses were lower by $16.0 million and restructuring
costs reduced by $2.6 million in 2014 compared to 2013.
5.0 LIQUIDITY AND CAPITALIZATION
The following table sets forth the Company’s cash fl ows by activity and cash balances for the following periods:
(in thousands of Canadian dollars)
Net Income
Non-cash items
Settlement of decommissioning obligations
Settlement of other provisions
Net change in non-current deferred revenue
Net change in employee future benefi ts
Net change in non-cash working capital and foreign exchange
Cash provided by operating activities
Cash used in investing activities
Cash provided by (used in) fi nancing activities
Foreign exchange impact on cash and cash equivalents
Net Change in Cash and Cash Equivalents
Cash and cash equivalents at beginning of year
Cash and Cash Equivalents at End of Year
The Company expects to generate suffi cient cash fl ows and have
continued access to its credit facilities to meet contractual obligations
and planned development and growth initiatives as and when they are
required. The Company expects that working capital investment will be
required to support revenue growth consistent with historical working
capital measures as noted in Section 5.4. The Company typically utilizes
its available cash balances and its committed credit facilities to fund
working capital requirements.
5.1 Cash Provided by Operating Activities
Cash provided by operating activities was $188.0 million in 2014, an
improvement of $155.7 million compared to 2013. The improvement
was due to a change in the movement of non-cash working capital
and foreign exchange of $116.5 million, an increase in non-cash items
of $78.9 million and a net reduction in the movement of non-current
deferred revenue of $64.4 million in 2014 compared to the prior year.
This was partially off set by a decrease in net income of $128.4 million.
The change in the movement of non-cash working capital and foreign
exchange refl ected a net decrease in the current portion of deferred
revenue of $310.3 million in 2014 compared to 2013. This was partially
off set by net increases in accounts receivable of $88.0 million and in
income tax payable, inventories and prepaid expenses totaling
$110.1 million in 2014 compared to 2013. Net income decreased
due to the reasons as discussed in Section 2.1.
5.4 Liquidity and Capital Resource Measures
$
2014
94,194
194,540
(215)
(16,824)
–
33
(83,743)
187,985
(347,806)
190,463
6,519
37,161
79,395
$
2013
222,586
115,603
(817)
(19,449)
(64,392)
(20,994)
(200,273)
32,264
(38,066)
(215,734)
15,950
(205,586)
284,981
$
116,556
$
79,395
5.2 Cash Used in Investing Activities
Cash used in investing activities increased by $309.7 million from
$38.1 million during 2013 to $347.8 million during 2014. The increase
was due to an increase in the business acquisition activities of
$250.8 million, primarily due to the Desert NDT acquisition, a net
decrease of $65.3 million in the redemption of short term investments,
an increase in investment in associate of $18.0 million, and an increase in
other assets of $10.0 million both relating to investments made in Zedi
Inc., and the payment of deferred purchase consideration of $18.8 million
in 2014. This was partially off set by the proceeds from assets held for
sale of $46.4 million during 2014.
5.3 Cash Provided by (Used in) Financing Activities
Cash provided by fi nancing activities was $190.5 million for 2014
compared to cash used in fi nancing activities of $215.7 million for 2013,
a net increase of $406.2 million. This was partially due to the increase
in the issue of new shares of $208.1 million. In addition in 2013, the
Company purchased the Class B shares under the Company’s Plan of
Arrangement in the amount of $503.1 million in the second quarter of
2013, and paid a higher dividend of $53.2 million in 2013 compared to
2014 as a result of the 2013 special dividend. These 2013 uses of cash
were partially off set by the proceeds from the issuance of long term debt
of $356.3 million during the second quarter of 2013.
Accounts Receivables
The following table sets forth the Company’s average trade accounts receivable – net balance and days sales outstanding in trade accounts
receivables (“DSO”) as at December 31:
(in thousands of Canadian dollars, except DSO)
Average trade accounts receivable
DSO(a)
$
2014
341,218
61
$
2013
248,944
55
$
Change
92,274
6
(a) DSO, a non-GAAP measure, is the average number of days that trade accounts receivables-net (which excludes unbilled and other receivables) are outstanding based on a 90 day cycle.
The Company’s method of calculating this measure may diff er from other entities and as a result may not necessarily be comparable to measures used by other entities. See Section 12.0 –
Reconciliation of Non-GAAP Measures for additional information with respect to DSO.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Average trade accounts receivables increased by $92.3 million from
$248.9 million as at December 31, 2013 to $341.2 million as at
December 31, 2014 as a result of increased revenue in the fourth quarter
of 2014 compared with the fourth quarter a year ago. DSO increased by
6 days from 55 during the fourth quarter of 2013 to 61 during the fourth
quarter of 2014, primarily due to the timing of sales and collection of
receivables in the fourth quarter of 2014 compared to the fourth quarter
of 2013 and due to the larger drawdown in deferred revenue in the
fourth quarter of 2013.
Inventories
The following table sets forth the Company’s inventories balance as at December 31:
(in thousands of Canadian dollars)
Inventories
2014
2013
$
194,732
$
180,876
$
Change
13,856
Inventories increased by $13.8 million from $180.9 million as at December 31, 2013 to $194.7 million as at December 31, 2014, as a reduction in raw
materials of $7.5 million was more than off set by increases in work-in-process and fi nished goods inventory.
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)
$
2014
261,088
73
$
2013
240,639
88
$
Change
20,449
(15)
(a) DPO, a non-GAAP measure, is the 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 diff er from other entities and as a result may not necessarily be comparable to measures used by other entities. See Section 12.0 – Reconciliation of Non-GAAP
Measures, for additional information with respect to DPO.
Average accounts payable and accrued liabilities increased by
$20.5 million from $240.6 million for the year ended December 31, 2013,
to $261.1 million for the year ended December 31, 2014. DPO decreased
by 15 days from 2013 levels, due to changes in the timing of purchases
in the fourth quarter of 2014 compared with the prior year.
5.5 Unsecured Credit Facilities
(in thousands of Canadian dollars)
Bank indebtedness
Standard letters of credit for
performance, bid and surety bonds
Total utilized credit facilities
Total available credit facilities(a)
2014
$
4,685
$
137,667
142,352
523,305
2013
5,229
106,206
111,435
320,910
Unutilized credit facilities
$
380,953
$
209,475
(a) The Company guarantees the bank credit facilities of its subsidiaries.
On March 20, 2013, the Company renewed its Unsecured Committed
Bank Credit Facility (“Credit Facility”) for a period of fi ve years, with
terms and conditions similar to the prior agreement, except that
the maximum borrowing limit was raised by US$100 million from
US$150 million to US$250 million, with an option to increase the credit
limit to US$400 million with the consent of lenders. On June 16, 2014,
the option to increase the credit limit to US$400 million was exercised
with the consent of the lenders and a new option to increase the credit
limit to US$550 million with the consent of the lenders was added.
The Company pays a fl oating interest rate on this credit facility that
is a function of the Company’s total debt to Earnings Before Interest,
Taxes, Depreciation and Amortization (“EBITDA”) ratio. Allowable credit
utilization outside of this facility is US$50 million.
Debt Covenants
The Company has undertaken to maintain certain covenants in respect
of its Credit Facility. Specifi cally, the Company is required to maintain an
Interest Coverage Ratio (EBITDA) plus rental payments divided by interest
expense plus rental payments) of more than 2.5 to 1 and a debt to total
EBITDA ratio of less than 3.00 to 1. The Company was in compliance with
these covenants as at December 31, 2014 and December 31, 2013.
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 12.0
– Reconciliation of Non-GAAP Measures, for additional information with
respect to these debt covenants.
5.6 Long-Term Debt
In March 2013, the Company issued Senior Notes for gross proceeds of
US$350 million, bearing interest at rates between 2.98% and 4.07% and
having maturities ranging from 7 to 15 years. The total long-term debt
balance as at December 31, 2014 is $406.9 million (U.S. $350.0 million)
{December 31, 2013 – $374.4 million (U.S. $350.0 million)}. The
long-term debt has been designated as a hedge of the Company’s net
investment in a U.S. dollar functional currency subsidiary as described in
Section 5.8 below.
Financial Ratios
The Company has undertaken to maintain certain covenants in respect
of the long-term debt that are consistent with the debt covenants
described for the Company’s Credit Facility above.
The Company was in compliance with these covenants as at
December 31, 2014 and December 31, 2013.
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5.7 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)
2015
Purchase commitments
Bank indebtedness
Loan payable
Accounts payable
Deferred purchase consideration
Long-term debt
Finance costs – long-term debt
Obligations under fi nance leases
Operating leases
Total contractual obligations
$
$
71,363
4,685
58
89,077
4,873
–
13,835
1,891
20,711
$
2016
–
–
63
–
–
–
13,835
1,378
15,423
$
2017
–
–
–
–
–
–
13,835
1,357
8,917
$
2018
–
–
–
–
–
–
13,835
1,336
6,077
2019
After 2019
–
–
–
–
–
–
13,835
1,336
4,710
$
–
–
–
–
–
406,926
72,076
11,640
9,969
$
Total
71,363
4,685
121
89,077
4,873
406,926
141,251
18,938
65,807
$
206,493
$
30,699
$
24,109
$
21,248
$
19,881
$
500,611
$
803,041
The following table sets forth the Company’s future minimum fi nance
lease payments:
(in thousands of Canadian dollars)
Total future minimum lease payments
Less: imputed interest
Balance of obligations under fi nance leases
Less: current portion
$
2014
18,938
(5,443)
13,495
(1,222)
Non-current obligations under fi nance leases
$
12,273
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’s utilizes its credit facilities to support the Company’s
bonds. The Company had utilized credit facilities of $142.4 million as at
December 31, 2014 (December 31, 2013 – $111.4 million) for support
of its bonds.
As at December 31, 2014, the Company has not entered into any
material commitments for capital expenditures.
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
eff ect on the consolidated fi nancial position of the Company.
Performance, Bid and Surety Bonds
The Company provides standby letters of credit for performance, bid
and surety bonds through fi nancial 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
5.8 Financial Instruments and Other Instruments
Fair Value
IFRS 13, Fair Value Measurement, provides a hierarchy of valuation
techniques based on whether the inputs to those valuation techniques
are observable or unobservable. Observable inputs are those which
refl ect market data obtained from independent sources, while
unobservable inputs refl ects 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 diff erent
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 signifi cant inputs are unobservable.
The hierarchy requires the use of observable market data when available.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table presents the fair value hierarchy levels for the fi nancial assets and liabilities that are measured at fair value on a recurring basis as
at December 31, 2014 and for fi nancial assets and liabilities where fair values are disclosed as at December 31, 2014:
(in thousands of Canadian dollars)
Assets
Cash and cash equivalents
Short-term investments
Derivative fi nancial instruments
Convertible preferred shares
Deposit guarantee
Liabilities
Bank indebtedness
Deferred purchase consideration
Long-term debt
Derivative fi nancial instruments
The current derivative fi nancial 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.
Financial Risk Management
The Company’s operations expose it to a variety of fi nancial 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 fi nancial markets and seeks
to minimize potential adverse eff ects on the Company’s fi nancial position
and fi nancial 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 fi nancial position may
be impacted by fl uctuations in foreign exchange rates as these foreign
currency items are translated into Canadian dollars. As at December 31,
2014, fl uctuations 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 $61.7 million,
$8.6 million and $6.8 million, respectively, prior to hedging activities. In
addition, such fl uctuations would impact the Company’s consolidated
total assets, consolidated total liabilities and consolidated total equity
by $76.3 million, $20.0 million and $56.3 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 U.S. dollar based
operations, the Company does not hedge translation exposures.
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Fair Value
Level 1
Level 2
Level 3
$
$
$
$
$
$
116,556
550
5,578
10,000
893
133,577
4,685
4,873
406,926
794
$
417,278
$
116,556
550
–
–
–
117,106
4,685
–
–
–
4,685
$
$
$
$
$
$
–
–
5,578
–
893
6,471
–
4,873
406,926
794
$
412,593
$
–
–
–
10,000
–
10,000
–
–
–
–
–
Foreign Exchange Forward Contracts
The Company utilizes fi nancial 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.
The Company utilizes fi nancial instruments to manage the risk
associated with foreign exchange rates.
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, 2014:
(in thousands, except weighted average rate amounts)
Canadian dollars sold for U.S. dollars
Less than one year
Weighted average rate
U.S. dollars sold for Canadian dollars
Less than one year
Weighted average rate
U.S. dollars sold for Malaysian Ringgits
Less than one year
Weighted average rate
Euros sold for U.S. dollars
Less than one year
Weighted average rate
British pounds sold for U.S. dollars
Less than one year
Weighted average rate
Norwegian Kroners sold for U.S. dollars
Less than one year
Weighted average rate
Australian dollars sold for U.S. dollars
Less than one year
Weighted average rate
Malaysian Ringgits sold for U.S. dollars
Less than one year
Weighted average rate
CAD$14,025
1.13
US$13,200
1.11
US$2,800
3.50
€44,020
1.31
£3,430
1.57
NOK 112,697
0.13
AUD$1,554
0.85
MYR 32,500
0.28
The Company does not apply hedge accounting to account for its foreign
exchange forward contracts. As at December 31, 2014, the Company
had notional amounts of $130.9 million of forward contracts outstanding
(2013 – $115.2 million) with the fair value of the Company’s net gain
from all foreign exchange forward contracts totalling $4.7 million (2013 –
$1.0 million net benefi t).
Net Investment Hedge
The Company’s long-term debt (Senior Notes) has been designated as
a hedge of the net investment in one of the Company’s subsidiaries,
which has the U.S. dollar as its functional currency. During the year
ended December 31, 2014, a loss of $32.5 million on the translation
of the Senior Notes was transferred to other comprehensive income
to off set the losses on translation of the net investment in the
subsidiary. There was no ineff ectiveness of this hedge for the year
ended December 31, 2014.
Interest Rate Risk
The following table summarizes the Company’s exposure to interest rate risk as at December 31, 2014:
(in thousands of Canadian dollars)
Financial assets
Cash equivalents
Short-term investments
Loans receivable
Convertible preferred shares
Financial liabilities
Bank indebtedness
Loans payable
Long term debt
Non-Interest
Bearing
Floating Rate
Fixed
Interest Rate
$
$
$
$
–
550
215
10,000
10,765
–
121
–
121
$
$
$
$
–
–
4,434
–
4,434
4,685
–
–
4,685
$
$
$
$
$
$
4,104
–
2,372
–
6,476
–
–
406,926
Total
4,104
550
7,021
10,000
21,675
4,685
121
406,926
$
406,926
$
411,732
The Company’s interest rate risk arises primarily from its fl oating 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 fi nancial instruments.
The objective of managing counter-party credit risk is to prevent losses
in fi nancial 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 aff ected 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 fi nancial 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.
For the year ended December 31, 2014, the Company had no customer
who generated revenue greater than 10% of total consolidated revenue.
For the year ended December 31, 2013, there was one customer who
generated approximately 22% of total consolidated revenue. This
revenue resulted primarily from a single contract for which a substantial
upfront payment was received in 2012 and which was recorded as
deferred revenue at that time.
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 statements 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, 2014, $28.1 million, or 8.3% of trade
accounts receivable, were more than 90 days overdue, which is
consistent with prior period aging analyses. The Company expects to
receive full payment on all 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:
(in thousands of Canadian dollars)
Balance – Beginning of year
Bad debt expense
Acquisition
Recovery of previously written-off
bad debts
Impact of change in foreign
exchange rates
$
$
2014
11,732
748
693
(156)
(501)
2013
9,409
3,016
–
(24)
(669)
Balance – End of year
$
12,516
$
11,732
Liquidity Risk
The Company’s objective in managing liquidity risk is to maintain
suffi cient, readily available cash reserves in order to meet its liquidity
requirements at any point in time. The Company achieves this by
maintaining suffi cient cash and cash equivalents and through the
availability of funding from committed credit facilities. As at
December 31, 2014, the Company had cash and cash equivalents
totalling $116.6 million (December 31, 2013 – $79.4 million) and
had unutilized lines of credit available to use of $381.0 million
(December 31, 2013 – $209.5 million).
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MANAGEMENT’S DISCUSSION AND ANALYSIS
5.9 Outstanding Share Capital
As at February 27, 2015, the Company had 64,497,369 common
shares outstanding. In addition, as at February 27, 2015, the Company
had stock options and share units outstanding to purchase up to
1,430,558 common shares.
5.10 Transactions with Related Parties
The Company had no material transactions with related parties in the
year ended of 2014. All related party transactions were in the normal
course of business.
During 2013, 11,716,235 Class B multiple voting shares of the
Company’s controlling shareholder were acquired by the Company for
cash and shares pursuant to the Arrangement which became eff ective
on March 20, 2013. Refer to Note 29 of the audited fi nancial statements
for the year ended December 31, 2014, for additional information
regarding this transaction. In connection with the closing of the
Arrangement, the employment terms of the Company’s Chair of the
Board of Directors (V. Shaw) and indirect controlling shareholder, and
of the Company’s Vice Chair of the Board of Directors (L. Hutchinson),
were amended to provide that their employment with a Company’s
subsidiary would terminate and they would receive severance and other
benefi ts of approximately $3.4 million and $3.7 million, respectively.
For additional information regarding these transactions, refer to the
section entitled Termination & Change of Control Benefi ts in the
Company’s Management Proxy Circular dated March 25, 2013, which
is fi led on SEDAR at www.sedar.com
6.0
QUARTERLY SELECTED FINANCIAL INFORMATION
The following tables set forth the Company’s summary of selected fi nancial information for the four quarters of 2014 and 2013:
(in thousands of Canadian dollars except per share amounts)
Q1-2014
Q2-2014
Q3-2014
Q4-2014
Operating Results
Revenue
Income (loss) from operations
Net income (loss) (attributable to shareholders of the Company)
Net income (loss) per share
Basic
Diluted
(in thousands of Canadian dollars except per share amounts)
Operating Results
Revenue
Income from operations
Net income (attributable to shareholders of the Company)
Net income per share
Basic
Diluted
$
$
$
$
479,082
89,419
61,947
1.03
1.03
$
$
441,386
69,193
47,949
0.80
0.79
$
$
469,597
10,932
5,617
0.09
0.09
$
$
499,964
(20,868)
(20,652)
(0.32)
(0.32)
Q1-2013
Q2-2013
Q3-2013
Q4-2013
454,681
88,622
70,595
1.02
1.01
$
$
457,261
80,331
53,914
0.91
0.90
$
$
525,848
106,146
72,956
1.22
1.21
$
$
409,759
48,358
22,397
0.37
0.37
The following are key factors aff ecting the comparability of quarterly
fi nancial results.
•
•
The Company’s operations in the Pipeline and Pipe Services segment,
representing 91% of the Company’s consolidated revenue in 2014,
are largely project-based. The nature and timing of projects can result
in variability in the Company’s quarterly revenue and profi tability. In
addition, certain of the Company’s operations are subject to a degree
of seasonality, particularly in the Pipeline and Pipe Services segment.
Over 83% of the Company’s revenue in 2014 was 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 signifi cant eff ect 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 eff ects of foreign exchange fl uctuations on the
results of the Company.
6.1 Fourth Quarter Highlights
Highlights of the Company’s 2014 fourth quarter include:
Fourth Quarter 2014 Versus Fourth Quarter 2013
•
Revenue: Consolidated revenue increased by $90.2 million, or
22%, from $409.8 million during the fourth quarter of 2013, to
$500.0 million during the fourth quarter of 2014, due to an increase
of $88.1 million in the Pipeline and Pipe Services segment and an
increase of $2.3 million in the Petrochemical and Industrial segment.
Consolidated revenue benefi tted from the impact on translation of
foreign operations from the weakening Canadian dollar as noted in
section 2.2 above. Pipeline and Pipe Services segment revenue in the
fourth quarter of 2014 was $458.6 million, or 24% higher than in the
fourth quarter of 2013, due to increased activity in North America,
Latin America and EMAR, partially off set by lower revenue in Asia
Pacifi c. 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.
Petrochemical and Industrial segment revenue increased by
$2.3 million, or 6%, during the fourth quarter of 2014 compared to
the fourth quarter of 2013, due to higher activity levels in all three
regions. 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.
•
Operating Income: During the third and fourth quarters of 2014,
the Company recorded impairment charges of $41.4 million and
$79.0 million, respectively. Excluding these charges, Adjusted
Operating Income increased by $9.8 million, from $48.4 million in
the fourth quarter of 2013 to $58.1 million during the fourth quarter
of 2014. Adjusted Operating Income benefi tted from an increase
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in gross profi t of $14.6 million, a decrease in SG&A expenses of
$2.7 million, lower amortization of property, plant, equipment and
intangible assets of $1.0 million and a decrease in research and
development expenses of $1.9 million. These gains were partially
off set by a decrease in net foreign exchange gains of $5.9 million and
lower gain on sale of land of $4.5 million. The increase in gross profi t
resulted from the increase in revenue of $90.2 million, as explained
above, partially off set by a 4.2 percentage point decrease in gross
margin, attributable to lower gross margin in the Pipeline and Pipe
Services segment’s EMAR region as noted above and changes in
product and project mix in the Pipeline and Pipe Services segment’s
Asia Pacifi c region, which had benefi tted from high gross margins
on the Inpex Ichthys projects in 2013. SG&A expenses decreased by
$2.7 million in the fourth quarter of 2014 compared to the fourth
quarter of 2013. The reduction in SG&A expenses was due to the
inclusion in the fourth quarter of 2013 of restructuring costs and
amended executive retirement arrangements of $10.7 million and, due
to a year over year reduction in management incentive compensation
of $13.9 million. This was partially off set by increases of $4.7 million
from the Desert NDT acquisition, restructuring costs related to
personnel reductions and facility closures of $3.5 million, higher
personnel related costs of $5.1 million, higher rental and building
costs primarily associated with the increased activity in EMAR of
$4.4 million and higher legal, professional consulting and licensing
fees of $2.4 million.
Finance Costs: In the fourth quarter of 2014, net fi nance cost was
$3.8 million, compared to a net fi nance cost of $5.4 million during the
fourth quarter of 2013. The decrease in net fi nance cost was primarily
a result of lower interest expenses on bank loans and overdrafts, due
to the repayment of bank loans and overdrafts from the proceeds of
common shares issued in September and October of 2014, partially
off set by higher interest on long term debt due to the strengthening
of the US dollar.
Income Taxes: The Company recorded an income tax recovery of
$22.3 million in the fourth quarter of 2014 compared to an income
tax expense of $10.3 million in the fourth quarter of 2013. Excluding
the impact of impairment charges ($97.9 million, deferred tax of
$27.9 million), the Company recorded an income tax expense of
$5.7 million (11% of income before income taxes) in the fourth quarter
of 2014 compared to an income tax expense of $10.3 million (28%
of income before income taxes) in the fourth quarter of 2013. This
eff ective tax rate in the fourth quarter of 2014 was lower than the
Company’s expected eff ective income tax rate of 27%, primarily due
to a portion of the Company’s taxable income being earned in the
Middle East and other jurisdictions where the tax rate is 25% or less
combined with tax losses in certain jurisdictions where the tax rate is
higher than 35%.
Net Income: Net income decreased by $43.0 million, from
$22.4 million during the fourth quarter of 2013 to a net loss of
$20.7 million during the fourth quarter of 2014. This decrease was
mainly due to the impairment charges recorded in the fourth quarter
of 2014 of $79.0 million and the increase in loss from investment
in joint ventures of $13.5 million, driven mainly by the Venezuela
impairment. This was partially off set by the higher Adjusted Operating
Income in the fourth quarter of 2014, as explained in section 4.1
above, lower net fi nance costs of $1.6 million, lower income tax
•
•
•
expense of $32.5 million and the impact of changes in non controlling
interest of $4.6 million.
Fourth Quarter 2014 Versus Third Quarter 2014
•
Revenue: Consolidated revenue increased 6%, or $30.4 million, from
$469.6 million during the third quarter of 2014 to $500.0 million
during the fourth quarter of 2014, due to increases of $33.9 million
in the Pipeline and Pipe Services segment, partially off set by a
decrease of $3.5 million in the Petrochemical and Industrial segment.
Consolidated revenue benefi tted from the impact on translation of
foreign operations from the weakening Canadian dollar as noted
in section 2.2 above. Pipeline and Pipe Services segment revenue
increased by 8%, or $33.9 million, from $424.7 million in the third
quarter of 2014 to $458.6 million in the fourth quarter of 2014, due
to higher activity levels in EMAR, partially off set by decreased activity
in Asia Pacifi c, North America and Latin America. 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. Petrochemical and Industrial segment revenue was lower
by $3.5 million, or 8%, in the fourth quarter of 2014, compared to the
third quarter of 2014, mainly due to lower revenues of $2.5 million
in North America and $1.3 million in EMAR, partially off set by higher
activity in the Asia Pacifi c region. 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.
•
Operating Income: During the third and fourth quarters of 2014,
the Company recorded impairment charges of $41.4 million and
$79.0 million, respectively. Excluding these charges, Adjusted
Operating Income increased by $5.8 million, from $52.3 million during
the third quarter of 2014 to $58.1 million in the fourth quarter of
2014. Adjusted Operating Income benefi tted from an increase in
gross profi t of $8.3 million, a decrease in research and development
expenses of $0.8 million, lower amortization of property, plant,
equipment and intangible assets of $0.7 million and a gain on sale
of land of $0.6 million, but was impacted by an increase in SG&A
expenses of $3.8 million and a decrease in net foreign exchange gains
of $0.8 million. The increase in gross profi t resulted from the increase
in revenue of $30.4 million, as explained above, partially off set by
a 0.5 percentage point decrease in the gross margin from the third
quarter of 2014. The decrease in the gross margin percentage was
primarily due to lower gross margin in the Pipeline and Pipe Services
segment’s EMAR region as a result of project launch costs and
revenue earned under a cost recovery contract from BP to upgrade
a facility in Azerbaijan for the execution in 2015 of the $200 million
Shah Deniz project described in Section 3.0 – Business Developments.
SG&A expenses increased by $3.8 million, from $96.5 million in
the third quarter of 2014 to $100.3 million in the fourth quarter of
2014, due in part to higher rental and building costs related to the
new facilities in the Caspian of $2.2 million, an increase in legal,
professional consulting, advertisement and communication expenses
of $2.7 million and higher travel, inventory obsolescence, customs
and other expenses of $4.2 million. In addition, in the third quarter of
2014, recoveries were recorded for deferred consideration, research
tax credits and other items of $2.1 million. These sources of SG&A
increases were partially off set by lower long term management
incentive compensation of $7.0 million.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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Finance Costs: In the fourth quarter of 2014, net fi nance cost was
$3.8 million, compared to a net fi nance cost of $6.2 million during the
third quarter of 2014. The decrease in net fi nance cost was primarily
a result of lower interest expenses on bank loans and overdrafts, due
to the repayment of bank loans and overdrafts from the proceeds of
common shares issued in September and October of 2014 and higher
interest income on short term deposits.
Income Taxes: The Company recorded an income tax recovery of
$22.3 million in the fourth quarter of 2014 compared to an income
tax expense of $2.7 million in the third quarter of 2014. Excluding
the impact of impairment charges ($97.9 million, deferred tax of
$27.9 million in the fourth quarter of 2014 compared to $41.4
million, deferred tax of $12.0 million in the third quarter of 2014), the
Company recorded an income tax expense of $5.7 million (11% of
income before income taxes) compared to an income tax expense of
$14.7 million (29% of income before income taxes) in the third quarter
of 2014. This eff ective tax rate in the fourth quarter of 2014 was
lower than the Company’s expected eff ective income tax rate of 27%,
primarily due to a portion of the Company’s taxable income being
earned in the Middle East and other jurisdictions where the tax rate
is 25% or less combined with tax losses in certain jurisdictions where
the tax rate is higher than 35%.
Net Income: Net income decreased by $26.3 million, from $5.6 million
during the third quarter of 2014 to a net loss of $20.7 million during
the fourth quarter of 2014. This decrease was mainly due to the higher
impairment charges recorded in the fourth quarter of $37.6 million,
the increase in loss from investment in joint ventures pertaining to
the Venezuela impairment of $18.9 million and the higher net loss
on assets held for sale of $5.1 million. This was partially off set by the
higher Adjusted Operating Income, as explained in section 4.1 above,
lower net fi nance costs of $2.4 million and lower income tax expense
of $25.0 million.
7.0
DISCLOSURE CONTROLS AND INTERNAL
CONTROLS OVER FINANCIAL REPORTING
The President and Chief Executive Offi cer and the Vice President,
Finance and Chief Financial Offi cer, together with the management
of the Company, have evaluated the eff ectiveness of the Company’s
Disclosure Controls and Procedures (“DC&Ps”) (as defi ned in the rules
of the Canadian Securities Administrators) and the eff ectiveness of
Internal Controls over Financial Reporting (“ICFRs”). Based on that
evaluation, they have concluded that the Company’s DC&Ps were
eff ective as at December 31, 2014. Furthermore, they have concluded
that the Company’s ICFRs were eff ective as at December 31, 2014. There
were no material changes in either the Company’s DC&Ps or its ICFRs
during 2014.
8.0
CRITICAL ACCOUNTING ESTIMATES AND
ACCOUNTING POLICY DEVELOPMENTS
8.1 Critical Accounting Estimates
The preparation of the consolidated fi nancial statements in conformity
with IFRS requires management to make estimates and assumptions that
aff ect the amounts of assets, liabilities and contingencies at the date
of the fi nancial 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 diff er from the estimates.
Critical estimates used in preparing the consolidated fi nancial
statements include:
Long-lived Assets and Goodwill
As at December 31, 2014, the Company had $1,034 million of long-lived
assets and goodwill. The Company evaluates the carrying values of
the Cash Generating Units’ (“CGU”) goodwill on an annual basis on
October 31 of each year to determine whether or not impairment of
these assets has occurred and whether write downs 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 fl ows generated by these assets in
determining the value-in-use and fair value less costs to sell calculations.
Actual results could diff er from these assumptions.
Employee Future Benefi t Obligations
As at December 31, 2014, the Company had $26.0 million of employee
future benefi t obligations. The Company provides future benefi ts
to its employees under a number of defi ned benefi t arrangements.
The calculation of the accrued benefi t obligations recognized in the
consolidated fi nancial 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 infl ation, and
life expectancies. The outcome of any of these factors could diff er 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
As at December 31, 2014, the Company had $52.3 million of provisions;
of this amount $15.0 million was included in current liabilities and
$37.3 million was included in non-current 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 outfl ow
of economic benefi ts resulting from past operations or events and the
amount of the cash outfl ow 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
As at December 31, 2014, the Company had decommissioning liabilities
in the amount of $24.1 million; of this amount $3.6 million was included
in the current provisions account and $20.5 million was recorded
in the non-current provisions account. Decommissioning liabilities
include legal and constructive obligations related to owned and leased
facilities. These have been recorded in the annual consolidated fi nancial
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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 fi nance 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 fi nancial
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 aff ected by the use of diff erent 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. Diff erences 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 diff erent from
those expected in Canada.
Deferred tax assets are recognized for unused tax losses to the extent
that it is probable that taxable profi t will be available against which the
losses can be utilized. Signifi cant management judgment is required to
determine the amount of deferred tax assets that can be recognized,
based upon the likely timing and the level of future taxable profi ts
together with future tax planning strategies.
Uncertainties exist with respect to the interpretation of complex
tax regulations, changes in tax laws, and the amount and timing of
future taxable income. Given the wide range of international business
relationships and the long-term nature and complexity of existing
contractual agreements, diff erences arising between the actual results
and the assumptions made, or future changes to such assumptions,
could necessitate future adjustments to tax income and expense
already recorded. The Company establishes provisions, based on
reasonable estimates, for possible consequences of audits by the
tax authorities of the respective countries in which it operates.
The amount of such provisions is based on various factors, such as
experience of previous tax audits and diff ering interpretations of tax
regulations by the taxable entity and the responsible tax authority.
Such diff erences in interpretation may arise for a wide variety of
issues depending on the conditions prevailing in the respective
domicile of the respective companies.
8.2 Accounting Standards Issued but Not Yet Applied
IFRS 9, Financial Instruments
IFRS 9, as issued, by the International Accounting Standards Board
(“IASB”) replaces IAS 39 regarding the recognition and measurement
of fi nancial assets and fi nancial liabilities. The standard is eff ective for
annual periods beginning on or after January 1, 2018. The Company
has not yet determined the impact of this standard on the consolidated
fi nancial statements.
IFRS 15 – Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, which covers principles for
reporting about the nature, amount, timing and uncertainty of revenue
and cash fl ows arising from contracts with customers. IFRS 15 is eff ective
for annual periods beginning on or after January 1, 2017. The Company is
in the process of reviewing the standard to determine the impact on the
consolidated fi nancial statements.
IAS 16 – Property, Plant and Equipment and IAS 38 – Intangibles
In May 2014, the IASB issued amendments to IAS 16 and IAS 38,
prohibiting the use of revenue based depreciation for property, plant
and equipment and signifi cantly limiting the use of revenue based
amortization for intangible assets. These amendments are eff ective
for annual periods beginning on or after January 1, 2016, and are to
be applied prospectively. The Company is in the process of reviewing
the amendments to determine the impact on the consolidated
fi nancial statements.
8.3 New Accounting Standards Adopted
IFRIC Interpretation 21 Levies (IFRIC 21)
IFRIC 21 clarifi es that an entity recognises a liability for a levy when the
activity that triggers payment, as identifi ed by the relevant legislation,
occurs. For a levy that is triggered upon reaching a minimum threshold,
the interpretation clarifi es that no liability should be anticipated before
the specifi ed minimum threshold is reached. IFRIC 21 is eff ective for
annual periods beginning on or after January 1, 2014. The Company’s
adoption of IFRIC 21 did not have a material fi nancial impact on the
Company’s consolidated fi nancial statements.
9.0 OUTLOOK
Following the record revenue achieved in 2014, the decline in global oil
prices that started in the fourth quarter of 2014 will cause a decline in
drilling and well completions in 2015 which will likely cause ShawCor’s
revenue to decline on a year over year basis. The impact of the downturn
will be primarily focused on the Company’s activity in North America as
described more fully below. Outside of North America, the Company’s
performance will largely be determined by its execution of the projects
that are in the order backlog. ShawCor enters 2015 with a very strong
backlog at $766 million, which provides support for 2015 activity levels,
particularly in the Company’s EMAR region which accounts for over
60% of the current order backlog. The growth in revenue in this region
will help reduce the impact on revenue of the North American oilfi eld
downturn. However, on a year over year basis, there is risk that income
from operations could decrease at a greater rate than revenue. Any
decrease in North American small diameter pipe coating, composite
pipe, or gathering line weld inspection revenue would be expected to
have an overall dilutive eff ect on consolidated operating margins given
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MANAGEMENT’S DISCUSSION AND ANALYSIS
prevailing margin levels in these businesses and due to the negative
eff ects of facility and crew utilization on the absorption of fi xed costs.
To mitigate this eff ect as much as possible, the Company will monitor
activity levels and undertake further measures to reduce its cost
structure in these businesses as activity levels decline.
Beyond 2015, the Company continues to believe that global oil and
gas infrastructure investment will increase to bridge the increasing gap
between global energy supply and growing energy demand in developing
economies. Further support for global energy infrastructure investment
will emerge as existing infrastructure ages. Finally, the curtailment
in investment as a result of the global oil price decline will reverse as
the inevitable impact of hydrocarbon reservoir depletion reduces the
current excess of global supply over demand. In this environment, the
Company’s businesses that are impacted by the downturn in 2015
should recover. This expected recovery, coupled with the continued fl ow
of large pipe coating project activity and execution of the Company’s
strategy to expand its pipeline products and services off ering, should
create the conditions for the Company’s long term growth in revenue
and shareholder returns to continue.
Further detail on the outlook for the Pipeline and Pipe Services
segment by region and in the Petrochemical and Industrial segment
is set out below:
Pipeline and Pipe Services Segment – North America
In 2014, ShawCor’s North American Pipeline segment businesses
generated solid revenue growth over 2013 levels. Much of this growth
was attributable to growth in businesses that are closely related to the
completion of new oil and gas wells. These businesses include Canadian
and US small diameter pipe coating and joint protection, Flexpipe
composite pipe, Guardian OCTG pipe inspection and refurbishment
and the Desert NDT gathering line girth weld inspection service. Desert
NDT was acquired in early July 2014. If its revenue was considered on
a full year basis, then ShawCor’s activities that are leveraged to well
completions would have contributed approximately $500 million in
annualized revenue. A decrease in the number of wells completed can be
expected to have an impact on this revenue level and with the number
of drilling rigs active in North America projected to decrease by up to
50%, we must expect that our North American Pipeline segment will be
impacted signifi cantly. Also aff ecting North America Pipeline segment
revenue will be a decrease in activity at the Company’s Channelview
Gulf of Mexico deepwater insulation coating plant, which is currently
completing several large projects, and the likelihood that activity in
2015 and 2016 will be limited to smaller tie-back projects as energy
companies defer larger greenfi eld projects pending more certainty
on oil prices.
The one area of North American activity that is expected to show
continued strength is the build out of large diameter transmission
pipeline infrastructure and the increasing investment on the
refurbishment of existing infrastructure. The Company’s pipe coating
and pipeline integrity management businesses are well positioned to
benefi t from this trend.
Pipeline and Pipe Services Segment – Latin America
During 2014, the Company’s Latin America region benefi ted from
increased off shore and large diameter gas transmission pipeline projects
in Mexico, over $20 million in revenue from the execution of the
Sapinhoa deepwater insulation coating project in Brazil, and increased
shipments of Flexpipe composite pipe to Latin America. In 2015, these
sources of revenue are expected to weaken modestly, although the
impact on overall region revenue will be partially mitigated by growth
in Argentina expected from the execution of a series of large diameter
pipe coating projects that are expected to contribute up to $40 million
in revenue.
Pipeline and Pipe Services Segment – EMAR
The Company expects that its EMAR region will produce strong revenue
and operating earnings growth in 2015 over 2014 levels, with revenue
potentially reaching the $500 million level. Primary drivers of growth will
be the large pipe coating projects that have been booked for BP’s Shah
Deniz gas fi eld development in Azerbaijan combined with pipe coating
and joint protection projects for the two South Stream gas pipelines
in the Black Sea. The Shah Deniz projects are expected to provide over
US$500 million in pipe coating revenue to ShawCor with revenue of
over $280 million planned for execution in 2015 and over $200 million
planned for execution in 2016 and beyond. Expected revenue in 2015
from the South Stream pipeline projects is approximately $114 million.
This work is presently under suspension pursuant to the contract terms.
The timing of the execution of this work is subject to signifi cant risk,
including the risk that the project may be cancelled.
Pipeline and Pipe Services Segment – Asia Pacifi c
With the completion in 2014 of the Inpex Ichthys fl owlines project, the
Company has now completed all pipe coating activity associated with
the large Ichthys and Wheatstone Australian LNG projects that produced
over $640 million in revenue, including over $130 million in 2014. With
this work now largely complete, the Company expects that until new
large projects develop, the Asia Pacifi c region will revert to historical
levels of revenue in the annual range of $200 million. Although the
Company has visibility on a number of large projects in the region, these
projects are not expected to become production opportunities in 2015
and thus we can expect a decline in revenue versus 2014 levels for 2015
and possibly 2016.
Petrochemical and Industrial Segment
ShawCor’s Petrochemical and Industrial segment businesses are
signifi cantly exposed to demand in the North American and European
automotive, industrial and nuclear refurbishment markets. The Company
expects that demand in the global industrial markets served by the
Petrochemical and Industrial segment businesses will enable the
Company to achieve modest growth in both revenue and operating
income in 2015 compared with 2014 as a result of growth in global
automotive and industrial markets off setting weakness in Western
Canadian wire and cable shipments for oil sands developments.
Order Backlog
The Company’s order backlog consists of fi rm 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 signifi cant changes in consolidated revenue. The order backlog at
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December 31, 2014 increased to $766 million from $739 million at
September 30, 2014 and from $617 million at the beginning of the year.
In addition to the backlog, the Company currently holds booked orders
of approximately $232 million for execution beyond twelve months
and thus excluded from the backlog. The majority of these orders relate
to the fl ow assurance pipe coating scope of work for the Shah Deniz
project. Note that the backlog includes booked orders relating to pipe
coating and joint protection for the South Stream pipelines that are
currently under suspension. The value of these orders included in
the backlog is approximately $114 million and the risk exists that the
orders could be cancelled or that project execution could be delayed
beyond 2015.
In addition to the backlog, the Company closely monitors its bidding
activity with the value of outstanding fi rm bids currently in excess of
$800 million. Although the Company continues to work with customers
on projects with aggregate values exceeding $2 billion, the amount of
fi rm bids outstanding has declined modestly from the start of the quarter
as infrastructure projects globally are increasingly being reassessed
by global energy companies who are seeking to reduce capital costs
and project execution risks. The Company remains optimistic that the
additional time being invested to ensure project success will ultimately
enable these projects to proceed with a corresponding positive impact
on ShawCor’s large project activity beyond 2015.
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 aff ect the Company’s
projections, business, results of operations and fi nancial condition.
The following summarizes the Company’s risks and uncertainties and
how it manages and mitigates each risk:
10.1 Economic Risks
A decline in global drilling activity as a consequence of lower global oil
and gas prices would have a material adverse eff ect on the Company’s
projections, business, results of operations and fi nancial 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, gathering line weld inspection
and tubular inspection and inventory management services. These
business activities represented approximately 25% of 2014 revenues.
Cancellation of South Stream Off shore Pipeline Project
During the year ended December 31, 2014, ShawCor was awarded
several contracts in connection with the South Stream Off shore Pipeline
Project. Expected revenue from the South Stream pipeline projects is
approximately $125 million. This work is presently under suspension
pursuant to the contract terms. The timing of the execution of this work
is subject to signifi cant risk and the contracts could be cancelled.
An economic downturn or a continued global decline in energy
prices could adversely aff ect demand for the Company’s products
and services and, consequently, its projections, business, results of
operations and fi nancial condition.
Demand for oil and natural gas is infl uenced 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 fi nancial
condition could be materially adversely aff ected. In addition, if actions
by OPEC and other oil producers to increase production of oil adversely
aff ect world oil prices or result in the maintenance of existing prices,
additional declines in rig counts could result, and the Company’s
projections, business, results of operations and fi nancial condition could
be materially adversely aff ected. 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 signifi cant decreases in activity levels in these businesses.
A cyclical decline in the level of global pipeline construction could
have a material adverse eff ect on the Company’s projections, business,
results of operations and fi nancial 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 91% of consolidated sales in 2014. 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 eff ect on the Company’s projections, business,
results of operations and fi nancial condition.
Increases in the prices and/or shortages in the supply of raw materials
used in the Company’s manufacturing processes could adversely aff ect
the competitiveness of the Company, its ability to serve its customers’
needs and its fi nancial performance.
The Company purchases a broad range of materials and components
throughout the world in connection with its manufacturing activities.
Major items include polyolefi n and other polymeric resins, iron ore,
cement, adhesives, sealants and copper and other nonferrous wire.
The ability of suppliers to meet performance and quality specifi cations
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.
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The Company’s material fi nancing agreements contain fi nancial and
other covenants that, if breached by the Company, may require the
Company to redeem, repay, repurchase or refi nance its existing debt
obligations prior to their scheduled maturity. The Company’s ability
to refi nance such obligations may be restricted due to prevailing
conditions in the capital markets, available liquidity and other factors.
The Company is party to a number of fi nancing agreements which
contain fi nancial or other covenants. If the Company was to breach the
fi nancial or other covenants contained in its fi nancing agreements, the
Company may be required to redeem, repay, repurchase or refi nance
its existing debt obligations prior to their scheduled maturity and the
Company’s ability to do so may be restricted or limited by the prevailing
conditions in the capital markets, available liquidity and other factors.
If the Company is unable to refi nance any of the Company’s debt
obligations in such circumstances, its ability to make capital expenditures
and its fi nancial condition and cash fl ows could be adversely impacted.
If future debt fi nancing is not available to the Company when required
or is not available on acceptable terms, the Company may be unable to
grow its business, take advantage of business opportunities, respond
to competitive pressure or refi nance maturing debt, any of which could
have a material adverse eff ect on the Company’s operating results and
fi nancial condition.
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 eff ectiveness in addition to various cost reduction initiatives.
Through these eff orts, 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.
10.2 Litigation and Legal Risks
The Company could be subject to substantial liability claims, which
could adversely aff ect its projections, business, results of operations
and fi nancial 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 diffi culties, 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 eff ect on the Company’s projections,
business, results of operations and fi nancial condition.
The Company is subject to litigation and could be subject to future
litigation and signifi cant potential fi nancial 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 eff ect on the Company’s projections, business, results
of operations or fi nancial 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 fi nancial 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 fi nancial 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 fi nancial 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 fi nancial 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 fi nancial liability or business
disruption could have a material adverse eff ect on the Company’s
projections, business, results of operations and fi nancial condition.
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Demand for the Company’s products and services could be adversely
aff ected 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 nine divisions. Furthermore, the Company is committed to
being an IIF workplace.
10.4 Political and Regulatory Risks
The Company’s operations may experience interruptions due to
political, economic or other risks, which could adversely aff ect
the Company’s projections, business, results of operations and
fi nancial condition.
During 2014, the Company derived over 34% 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 fl uctuations and devaluations;
• currency restrictions and limitations on repatriation of profi ts;
• political instability and civil unrest;
• hostile or terrorist activities; and
• restrictions on foreign operations.
In addition, the Company is specifi cally exposed to risks relating to
economic or political developments in Argentina, Azerbaijan, Venezuela,
and other developing countries.
The Company’s foreign operations may suff er 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 aff ected. The
impact of such disruptions could include the Company’s inability to
ship products in a timely and cost eff ective 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 fl uctuations or devaluations or political unrest
that may disrupt oil and gas exploration and production or the
movement of funds and assets could materially adversely aff ect
the Company’s projections, business, results of operations and
fi nancial condition.
The Company’s North American operations could be aff ected by
regulatory approval processes that could delay or prevent the
construction of new pipeline infrastructure.
The Company’s projections, business, results of operations and
fi nancial condition could be adversely aff ected by actions under
Canadian, US, European or other trade laws.
The Company is a Canadian-based company with signifi cant operations
in the United States. The Company also owns and operates international
manufacturing operations that support its Canadian, US and European
operations. If actions under Canadian, US, European 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’ specifi cations and delivery requirements
would be reduced. Any such reduction in the Company’s ability to meet
its customers’ specifi cations and delivery requirements could have a
material adverse eff ect on the Company’s projections, business, results
of operations and fi nancial condition.
Political and Regulatory Risk Mitigation
The Company manages political and regulatory risks by working with
government, 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.
11.0 ENVIRONMENTAL MATTERS
As at December 31, 2014, the provisions on the annual consolidated
balance sheet related to environmental matters and included as
decommissioning liability obligations were $24.1 million. The Company
believes these provisions to be suffi cient to fully satisfy all liabilities
related to known environmental matters.
The total undiscounted cash fl ows estimated to settle all
decommissioning liabilities is $42.0 million as at December 31, 2014.
The current pre-tax risk-free rates at which the estimated cash fl ows
have been discounted range between 0.45% and 9.95%. Settlement
for all decommissioning liabilities is expected to be funded by future
cash fl ows from the Company’s operations. The Company expects
the following cash outfl ows on the next fi ve years and thereafter for
decommissioning liabilities.
(in thousands of Canadian dollars)
2015
2016
2017
2018
2019
More than fi ve years
December 31,
2014
$
3,627
4,573
907
4,464
1,165
27,232
$
41,968
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MANAGEMENT’S DISCUSSION AND ANALYSIS
12.0 RECONCILIATION OF NON-GAAP MEASURES
The Company reports on certain non-GAAP measures that are used to evaluate its performance and segments, as well as to determine compliance
with debt covenants and to manage the capital structure. Non-GAAP measures do not have standardized meanings prescribed by GAAP and are not
necessarily comparable to similar measures provided by other companies. The following is a reconciliation of the non-GAAP measures reported by
the Company.
EBITDA, Adjusted EBITDA and Adjusted Net Income, Adjusted EPS and Adjusted Operating Income
Three Months Ended
December 31,
Year Ended
December 31,
(in thousands of Canadian dollars)
Net (loss) income for the period(b)
Add:
Income taxes (recovery) expense
Finance costs, net
Amortization of property, plant, equipment and intangible assets
Gain on sale of land
Impairment
Impairment of investments in joint ventures
EBITDA(a)
Non-controlling interests
Loss (gain) on assets held for sale
ADJUSTED EBITDA(a)
Net (loss) income for the period(b)
Add:
Impairment
Impairment of investment in joint ventures
Deduct:
Deferred Tax Recovery
Adjusted Net Income
Adjusted EPS (Diluted)(c)
2014
2013
2014
2013
$
(20,652)
$
22,397
$
94,861
$
219,862
(22,253)
3,813
18,389
(609)
78,999
18,948
10,278
5,387
19,354
(5,156)
–
–
21,010
18,401
70,806
(609)
120,378
18,948
78,402
14,912
76,796
(5,156)
–
–
$
76,635
$
52,260
$
343,795
$
384,816
(849)
593
76,379
(20,652)
78,999
18,948
(27,931)
49,364
0.76
$
$
$
$
$
$
$
$
3,757
1,122
57,139
22,397
–
–
–
22,397
0.37
(667)
(6,427)
336,701
94,861
120,378
18,948
(39,925)
194,262
3.14
$
$
$
$
2,724
3,683
391,223
219,862
$
$
–
–
–
$
$
219,862
3.51
(a) Adjusted EBITDA and EBITDA is used by many analysts in the oil and gas industry as one of several important analytical tools.
(b) Attributable to shareholders of the Company.
(c) Adjusted EPS is Adjusted Net Income divided by the weighted average number of shares outstanding (diluted).
EBITDA and ADJUSTED EBITDA
EBITDA is a non-GAAP measure defi ned as earnings before interest,
income taxes, depreciation and amortization. Adjusted EBITDA is also
a non-GAAP measure defi ned as EBITDA adjusted for non-operational
items and non-controlling interest. The Company believes that EBITDA
and Adjusted EBITDA are useful supplemental measures that provide a
meaningful indication of the Company’s results from principal business
activities prior to the consideration of how these activities are fi nanced
or the tax impacts in various jurisdictions. The Company presents
Adjusted EBITDA as a measure of EBITDA that excludes the impact of
transactions that are outside the Company’s normal course of business
and adjusted for non-controlling interest.
Adjusted Operating Income
(in thousands of Canadian dollars)
(Loss) Income from Operations
Add:
Impairment
Adjusted Operating Income
Three Months Ended
December 31,
Year Ended
December 31,
2014
2013
2014
2013
$
(20,868)
$
48,358
$
148,676
$
323,457
78,999
58,131
$
–
48,358
120,378
269,054
$
$
–
$
323,457
Return on Invested Capital (“ROIC”)
ROIC, a non-GAAP measure, is defi ned as net income adjusted for after
tax interest expense divided by average invested capital over the year
and is used by the Company to assess the effi ciency of generating
profi ts from each unit of invested capital.
The following table sets forth the calculation of the Company’s ROIC
as at:
(in thousands of Canadian dollars)
2014
2013
Net income for the year adjusted
for after-tax interest expense
Average invested capital
ROIC
109,093
$
$ 1,277,684
$
$
8.5%
231,752
987,819
23.5%
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Days Sales Outstanding (“DSO”)
DSO is defi ned as the 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:
(in thousands of Canadian dollars, except DSO)
2014
Revenue for the fourth quarter
Average trade accounts receivable
$
$
499,964
341,218
$
$
DSO
61
2013
409,759
248,944
55
Days Payables Outstanding (“DPO”)
DPO is defi ned 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:
(in thousands of Canadian dollars, except DPO)
Cost of goods sold for the fourth quarter
Average accounts payable
and accrued liabilities
$
$
DPO
2014
322,725
261,088
73
$
$
2013
247,114
240,639
88
Working Capital Ratio
Working capital ratio is defi ned 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:
(in thousands of Canadian dollars)
2014
Current assets
Current liabilities
Working capital ratio
$
$
813,628
434,895
$
$
1.87
2013
718,558
451,069
1.59
13.0 FORWARD-LOOKING INFORMATION
This document includes certain statements that refl ect 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 identifi ed 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. Specifi cally, this document includes forward
looking information in the Outlook section and elsewhere in respect of,
among other things, the timing of major project activity, the suffi ciency
of resources, capacity and capital to meet market demand, to meet
contractual obligations and to execute the Company’s development and
growth strategy, the suffi ciency of the Company’s human resources,
systems and processes to operate its business and execute its strategic
plan, the impact of the existing order backlog and other factors on the
Company’s revenue and Operating Income in 2015, the impact of any
potential cancellation of contracts included in the order backlog, and in
the longer term, the impact of global economic activity on the demand
for the Company’s products, the impact of the decline in global oil and
gas commodity prices on the level of industry investment in oil and gas
infrastructure, the impact of the SAIS acquisition on the market position
of the SPS division, the impact of the Desert acquisition on future
earnings per share, 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
instability in Argentina, Azerbaijan, and Venezuela and the adequacy of
the Company’s existing accruals in respect of environmental compliance
and in respect of litigation matters and other claims 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 diff er 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 diff er materially from those expressed in or implied by the forward
looking information. Signifi cant risks facing the Company include, but
are not limited to: the impact on the Company of reduced demand for
its products and services as a result of lower investment in global oil
and gas extraction and transportation activity following the signifi cant
decline in the global price of oil and gas in the fourth quarter of 2014
and early 2015, long term changes in global or regional economic activity
and changes in energy supply and demand, which impact on the level
of global pipeline infrastructure construction; exposure to product and
other liability claims; shortages of or signifi cant 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; fl uctuations in foreign exchange
rates, as well as other risks and uncertainties, as more fully described
under the heading “Risks and Uncertainties” and included in the
Company’s annual MD&A.
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 global oil and gas prices, global economic recovery, increased
investment in global energy infrastructure, the Company’s ability to
execute projects under contract, the reactivation of the South Stream
contracts, the continued supply of and stable pricing for commodities
used by the Company, the availability of personnel resources suffi cient
for the Company to operate its businesses, the maintenance of
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MANAGEMENT’S DISCUSSION AND ANALYSIS
operations in major oil and gas producing regions and the ability of
the Company to satisfy all covenants under its credit facilities and the
Senior Notes. The Company believes that the expectations refl ected 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
refl ect the occurrence of future unanticipated events, except as may be
required under applicable securities laws.
To the extent any forward looking information in this document
constitutes future oriented fi nancial information or fi nancial outlooks,
within the meaning of securities laws, such information is being provided
to demonstrate the potential of the Company and readers are cautioned
that this information may not be appropriate for any other purpose.
Future oriented fi nancial information and fi nancial outlooks, as with
forward looking information generally, are based on the assumptions
and subject to the risks noted above.
14.0 ADDITIONAL INFORMATION
Additional information relating to the Company, including its Annual
Information Form, is available on SEDAR at www.sedar.com.
March 4th, 2015
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MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
MANAGEMENT’S
RESPONSIBILITY FOR
FINANCIAL STATEMENTS
The accompanying consolidated fi nancial 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 fi nancial 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 fi nancial statements include estimates based on the experience and judgment of management
in order to ensure that the fi nancial statements are presented fairly, in all material respects. Financial information presented elsewhere in the annual
report is consistent with that in the consolidated fi nancial 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 fi nancial 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 fulfi ls its responsibilities for fi nancial 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 offi cers or employees of ShawCor Ltd. or any of
its subsidiaries. The Committee meets periodically to review quarterly fi nancial reports and to discuss internal controls over the fi nancial reporting
process, auditing matters and fi nancial reporting issues. The Committee reviews the Company’s annual consolidated fi nancial statements and
recommends their approval to the Board of Directors.
These fi nancial 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.
Stephen M. Orr
Gary S. Love
President and Chief Executive Offi cer
Vice-President, Finance and Chief Financial Offi cer
March 4, 2015
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INDEPENDENT AUDITOR’S REPORT
INDEPENDENT
AUDITORS’ REPORT
TO THE SHAREHOLDERS OF SHAWCOR LTD.
We have audited the accompanying consolidated fi nancial statements of ShawCor Ltd., which comprise the consolidated balance sheets as at
December 31, 2014 and 2013, and the consolidated statements of income, comprehensive income, changes in equity and cash fl ows for the years
ended December 31, 2014 and 2013, and a summary of signifi cant 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 fi nancial statements in accordance with International
Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated
fi nancial 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 fi nancial 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
audits to obtain reasonable assurance about whether the consolidated fi nancial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated fi nancial statements. The
procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated fi nancial
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 fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the eff ectiveness 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 fi nancial statements.
We believe that the audit evidence we have obtained in our audits is suffi cient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated fi nancial statements present fairly, in all material respects, the fi nancial position of ShawCor Ltd. as at December 31,
2014 and 2013, and its fi nancial performance and its cash fl ows for the years ended December 31, 2014 and 2013 in accordance with International
Financial Reporting Standards.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
March 4, 2015
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CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED
BALANCE SHEETS
As at December 31:
(in thousands of Canadian dollars)
Assets
Current Assets
Cash and cash equivalents (note 8)
Short-term investments
Loans receivable (note 9)
Accounts receivable (note 10)
Income taxes receivable
Inventories (note 11)
Prepaid expenses
Derivative fi nancial instruments (note 26)
Assets held for sale (note 19)
Non-current Assets
Loans receivable (note 9)
Property, plant and equipment (note 12)
Intangible assets (note 13)
Investments in joint ventures (note 14)
Investments in associates (note 15)
Deferred income taxes (note 35)
Other assets (note 16)
Goodwill (note 17)
Liabilities and Equity
Current Liabilities
Bank indebtedness (note 20)
Accounts payable and accrued liabilities (note 21)
Provisions (note 22)
Income taxes payable
Derivative fi nancial instruments (note 26)
Deferred revenue
Obligations under fi nance lease (note 28)
Other current liabilities (note 23)
Liabilities directly associated with the assets classifi ed as held for sale (note 19)
Non-current Liabilities
Long-term debt (note 24)
Obligations under fi nance lease (note 28)
Provisions (note 22)
Employee future benefi ts (note 25)
Deferred income taxes (note 35)
Other non-current liabilities (note 23)
Equity
Share capital (note 29)
Contributed surplus
Retained earnings
Non-controlling interests
Accumulated other comprehensive loss
The accompanying notes are an integral part of these consolidated fi nancial statements.
John F. Petch, Director
Stephen M Orr Di
Stephen M. Orr, Director
2014
2013
$
116,556
550
–
457,610
11,232
194,732
27,370
5,578
813,628
–
813,628
7,021
435,311
202,736
–
19,165
39,019
26,889
396,201
1,126,342
$
79,395
6,618
1,780
363,984
9,919
180,876
19,176
624
662,372
56,186
718,558
7,462
413,287
130,216
17,276
–
48,480
17,830
298,819
933,370
$ 1,939,970
$ 1,651,928
$
$
4,685
252,443
14,974
33,944
794
102,005
1,222
24,828
434,895
–
434,895
406,926
12,273
37,350
26,008
24,007
17,898
524,462
959,357
533,660
14,625
433,177
7,254
(8,103)
980,613
5,229
230,974
15,971
61,911
1,632
84,396
487
33,852
434,452
16,617
451,069
374,381
13,827
37,646
25,678
68,857
21,889
542,278
993,347
303,327
13,093
373,574
2,419
(33,832)
658,581
$ 1,939,970
$ 1,651,928
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CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS
OF INCOME
For the years ended December 31:
(in thousands of Canadian dollars, except per share amounts)
Revenue
Sale of products
Rendering of services
Cost of Goods Sold and Services Rendered
Gross Profi t
Selling, general and administrative expenses
Research and development expenses
Foreign exchange gains
Amortization of property, plant and equipment (note 12)
Amortization of intangible assets (note 13)
Gain on sale of land
Impairment (note 18)
Income from Operations
Gain (loss) on assets held for sale
Loss from investments in joint ventures (note 14)
Income from investments in associates (note 15)
Finance costs, net (note 33)
Income Before Income Taxes
Income taxes (note 35)
Net Income
Net Income Attributable to:
Shareholders of the Company
Non-controlling interests
Net Income
Earnings per Share
Basic (note 34)
Diluted (note 34)
Weighted Average Number of Shares Outstanding (000s)
Basic (note 34)
Diluted (note 34)
The accompanying notes are an integral part of these consolidated fi nancial statements.
2014
2013
613,067
$
1,276,962
1,890,029
1,166,319
723,710
375,153
13,053
(3,747)
55,219
15,587
(609)
120,378
148,676
6,427
(22,375)
877
(18,401)
115,204
21,010
94,194
$
$
451,833
1,395,716
1,847,549
1,058,946
788,603
382,755
15,687
(4,936)
66,484
10,312
(5,156)
–
323,457
(3,683)
(3,874)
–
(14,912)
300,988
78,402
$
222,586
$
$
$
94,861
(667)
94,194
1.55
1.53
61,374
61,819
$
$
$
219,862
2,724
222,586
3.55
3.51
61,972
62,646
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CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
For the years ended December 31:
(in thousands of Canadian dollars)
Net Income
Other Comprehensive Income
Other Comprehensive Income to be Reclassifi ed to Net Income in Subsequent Periods
Exchange diff erences on translation of foreign operations
Other comprehensive income (loss) attributable to investments in joint ventures
Other comprehensive income attributable to investments in associates
Loss on cash fl ow hedge
Net Other Comprehensive Income to be Reclassifi ed to Net Income in Subsequent Periods
Other Comprehensive (Loss) Income not to be Reclassifi ed to Net Income in Subsequent Periods
Actuarial (loss) gain on defi ned employee future benefi t plans (note 25)
Income tax recovery (expense)
Net Other Comprehensive (Loss) Income not to be Reclassifi ed to Net Income in Subsequent Periods
Other Comprehensive Income, Net of Income Taxes
Total Comprehensive Income
Comprehensive Income Attributable to:
Shareholders of the Company
Non-controlling interests
Total Comprehensive Income
The accompanying notes are an integral part of these consolidated fi nancial statements.
2014
2013
$
94,194
$
222,586
22,462
3,657
334
–
26,453
(633)
152
(481)
25,972
120,166
14,819
(3,998)
–
(6,880)
3,941
16,311
(4,103)
12,208
16,149
$
238,735
120,590
(424)
120,166
235,985
2,750
$
238,735
$
$
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CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS
OF CHANGES IN EQUITY
For the years ended December 31, 2014 and 2013:
(in thousands of Canadian dollars)
Share
Capital
Contributed
Surplus
Retained
Earnings
Non-controlling
Interests
Accumulated
Other
Comprehensive
Loss
Total
Equity
Balance – December 31, 2012
Net income
Other comprehensive income
Comprehensive income
Proceeds from exercise of stock options
Compensation cost on exercised options
Compensation cost on exercised RSUs
Stock-based compensation expense
Cancellation of Class B shares
Shares cancellation costs (net of income
tax benefi t of $1.5 million) (note 29)
Dividends paid to shareholders (note 29)
Balance – December 31, 2013
Net income (loss)
Other comprehensive income
Comprehensive income
Proceeds from issuance of shares (net of
commissions and share issuance costs
of $9.7 million) (note 29)
Proceeds from exercise of stock options
Compensation cost on exercised options
Compensation cost on exercised RSUs
Stock-based compensation expense
Dividends paid to shareholders (note 29)
Disposal of non-controlling interests in subsidiary
Purchase of non-controlling interests
Balance – December 31, 2014
$
221,687
$
17,525
$
799,741
$
(331)
$
(49,955)
$
988,667
–
–
–
19,599
7,579
24
–
54,438
–
–
–
–
–
–
(7,579)
(24)
3,171
–
–
–
219,862
–
219,862
–
–
–
–
(553,215)
(4,312)
(88,502)
2,724
26
2,750
–
–
–
–
–
–
–
–
16,123
16,123
–
–
–
–
–
–
–
222,586
16,149
238,735
19,599
–
–
3,171
(498,777)
(4,312)
(88,502)
$
303,327
$
13,093
$
373,574
$
2,419
$
(33,832)
$
658,581
–
–
–
220,524
7,167
2,590
52
–
–
–
–
–
–
–
–
–
(2,590)
(52)
4,174
–
–
–
94,861
–
94,861
–
–
–
–
–
(35,258)
–
–
(667)
243
(424)
–
–
–
–
–
–
5,548
(289)
–
25,729
25,729
–
–
–
–
–
–
–
–
94,194
25,972
120,166
220,524
7,167
–
–
4,174
(35,258)
5,548
(289)
$
533,660
$
14,625
$
433,177
$
7,254
$
(8,103)
$
980,613
The accompanying notes are an integral part of these consolidated fi nancial statements.
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CONSOLIDATED STATEMENTS
OF CASH FLOWS
For the years ended December 31:
(in thousands of Canadian dollars)
Operating Activities
Net income for the year
Add (deduct) items not aff ecting cash
Amortization of property, plant and equipment (note 12)
Amortization of intangible assets (note 13)
Amortization of long-term prepaid expenses
Impairment (note 18)
Decommissioning obligations expense (note 22)
Other provision expenses (note 22)
Stock-based and incentive-based compensation (note 30)
Deferred income taxes (note 35)
Loss on disposal of property, plant and equipment
Gain on sale of land
Unrealized (income) loss on derivative fi nancial instruments
Loss from investments in joint ventures
Income from investments in associates
(Income) loss on assets held for sale (note 19)
Other
Settlement of decommissioning liabilities (note 22)
Settlement of other provisions (note 22)
Decrease in non-current deferred revenue
Net change in employee future benefi ts (note 25)
Change in non-cash working capital and foreign exchange
Cash Provided by Operating Activities
Investing Activities
Decrease (increase) in loans receivable (note 9)
Decrease in short-term investments
Purchases of property, plant and equipment (note 12)
Proceeds on disposal of property, plant and equipment
Purchases of intangible assets (note 13)
Investments in joint ventures (note 14)
Proceeds from sale of assets held for sale
Payment of deferred purchase consideration
Investments in associates
Increase in other assets (note 16)
Purchase of non-controlling interest
Business acquisitions (note 7)
Cash Used in Investing Activities
Financing Activities
Decrease in bank indebtedness (note 20)
Decrease in loans payable
Payment of obligations under fi nance lease (note 28)
Proceeds from long-term debt (note 24)
Proceeds from interest rate swap
Issuance of shares (note 29)
Repurchase of shares (note 29)
Dividends paid to shareholders (note 29)
Cash Provided by (Used in) Financing Activities
Eff ect 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 fi nancial statements.
2014
2013
$
94,194
$
222,586
55,219
15,587
1,319
120,378
462
14,470
15,487
(37,430)
1,018
(609)
(5,792)
22,375
(877)
(6,427)
(640)
(215)
(16,824)
–
33
(83,743)
66,484
10,312
807
–
395
22,136
23,594
(14,959)
538
(5,156)
3,070
3,874
–
3,683
825
(817)
(19,449)
(64,392)
(20,994)
(200,273)
$
187,985
$
32,264
(2,630)
71,332
(76,729)
8,539
(522)
(7,398)
–
–
–
(495)
–
(30,163)
(38,066)
(461)
(772)
(900)
356,280
2,111
19,599
(503,089)
(88,502)
2,978
6,068
(77,645)
3,462
(480)
–
46,411
(18,830)
(18,031)
(10,495)
(289)
(280,955)
$
(347,806)
$
(544)
(65)
(1,361)
–
–
227,691
–
(35,258)
190,463
6,519
37,161
79,395
116,556
16,727
1,049
99,756
$
$
$
$
$
$
(215,734)
15,950
(205,586)
284,981
79,395
10,241
1,180
59,845
$
$
$
$
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 nine divisions with over
90 manufacturing and service facilities located around the world. Further information as it pertains to the nature of operations is set out in note 6.
The head offi ce, principal address and registered offi ce of the Company is 25 Bethridge Road, Toronto, Ontario, M9W 1M7, Canada.
NOTE 2. BASIS OF PREPARATION
These consolidated fi nancial 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 fi nancial statements.
The policies applied in these consolidated fi nancial statements are based on IFRS issued and outstanding as at December 31, 2014.
Basis of Presentation and Consolidation
The consolidated fi nancial statements have been prepared on the historical cost basis, except for certain current assets and fi nancial instruments,
which are measured at fair value, as explained in the accounting policies set out in note 3.
The consolidated fi nancial statements are presented in Canadian dollars and all values are rounded to the nearest thousand, except when
otherwise stated.
The consolidated fi nancial statements comprise the fi nancial statements of the Company and the entities under its control and the Company’s equity
accounted interests in joint ventures and associates.
The preparation of consolidated fi nancial 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 signifi cant to the consolidated fi nancial statements are disclosed in note 3.
The results of the subsidiaries acquired during the period are included in the consolidated fi nancial statements from the date of the acquisition.
Adjustments are made, where necessary, to the fi nancial statements of the subsidiaries and joint arrangements and associates to ensure consistency
with those policies adopted by the Company. All intercompany transactions, balances, income and expenses are eliminated upon consolidation.
The audited consolidated fi nancial statements and accompanying notes for the year ended December 31, 2014 were authorized for issue by the
Company’s Board of Directors on March 4, 2015.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated fi nancial statements have been prepared by management in accordance with IFRS. The more signifi cant accounting policies are
as follows:
a) Foreign Currency Translation
Functional and Presentation Currency
Items included in the fi nancial statements of each of the Company’s subsidiaries, joint arrangements and associates are measured using the currency
of the primary economic environment in which the entity operates (the “functional currency”). The consolidated fi nancial statements of the Company
are presented in Canadian dollars, which is the parent company’s presentation and functional currency.
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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 statements of income, except when deferred
in other comprehensive income as qualifying net investment hedges.
Translation of Foreign Operations
The results and fi nancial position of all the Company’s entities that have a functional currency diff erent from the presentation currency are translated
into the presentation currency as follows:
• assets and liabilities for each consolidated balance sheet presented are translated at the closing rate at the date of that balance sheet; and
•
income and expenses for each consolidated statement of income are translated at the average exchange rates for the period.
On consolidation, exchange diff erences 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.
When a foreign operation is partially disposed of or sold, exchange diff erences that were recorded in accumulated other comprehensive income (loss)
are recognized in the consolidated statements 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.
b) Business Combinations
Business combinations are accounted for using the acquisition accounting method. Identifi able 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. Acquisition transaction costs and any restructuring costs are charged to the consolidated statements of income in the period in which
they are incurred.
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 profi t or loss.
The excess of the aggregate consideration transferred over the fair value of the Company’s share of the identifi able net assets acquired is recorded
as goodwill.
c) Interest in Joint Ventures
The Company has interests in joint arrangements, whereby joint control of the respective legal entity has been established by contractual
agreements that establish joint control over the economic activities of the entity. The Company accounts for its interests in its joint ventures
using the equity method.
Under the equity method, the investment in a joint venture is initially recognized at cost. The carrying amount of the investment is adjusted to
recognize changes in the Company’s share of net assets of the joint venture since the acquisition date. Goodwill relating to the joint venture is
included in the carrying amount of the investment and is neither amortized nor individually tested for impairment.
The aggregate of the Company’s share of profi t or loss of a joint venture is shown on the face of the consolidated statements of income and is
excluded from income from operations. Adjustments are made where necessary to bring the accounting policies in line with those of the Company.
After application of the equity method, the Company determines whether it is necessary to recognize an impairment loss on its investment in its joint
venture. If there is evidence that the investment in the joint venture is impaired, the Company calculates the amount of impairment as the diff erence
between the recoverable amount of the joint venture and its carrying value, and then recognizes the loss as “loss from investments in joint ventures”
in the consolidated statements of income.
A listing of all joint ventures is presented in note 14.
d) Investments in Associates
The Company accounts for investments in which it has signifi cant infl uence 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 profi t or loss of the investee, after the date
of acquisition.
After application of the equity method, the Company determines whether it is necessary to recognize an impairment loss on its investment in its
associates. If there is evidence that the investment in the associate is impaired, the Company calculates the amount of impairment as the diff erence
between the recoverable amount of the associate and its carrying value, and then recognizes the loss as “loss on investment in associate” in the
consolidated statements of income.
A listing of all associates is presented in note 15.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
e) Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefi ts will fl ow 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 defi ned terms of payment and net of taxes or duty.
Sale of Goods
Revenue from the sale of goods is recognized when the signifi cant 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 are
performed under specifi c contracts. Revenue on these contracts is recognized using the percentage-of-completion method using output as a measure
of performance. Losses, if any, on these contracts are provided for in full at the time such losses are identifi ed.
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.
f) 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 fi nancial statements approximate the fair value of cash and cash equivalents.
g) Short-term Investments
Short-term investments consist of liquid fi nancial instruments with a maturity date greater than 90 days and less than one year.
h) Inventories
Inventories are measured at the lower of cost or net realizable value. Cost is determined on a fi rst-in, fi rst-out 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 fi xed manufacturing
overheads. Net realizable value for fi nished 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.
i) 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, such as borrowing costs for long-term construction projects, major inspections and component replacements, as
appropriate, only when it is probable that future economic benefi ts associated with the item will fl ow to the Company and the cost of the item can
be measured reliably. For component replacements, the carrying amount of the replaced part is derecognized.
All other repair and maintenance costs are recognized in the consolidated statements of income during the fi nancial 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;
• 3% to 10% on buildings;
• 5% to 50% on machinery and equipment; and
• Project related facilities and equipment are amortized over the estimated project life.
An item of property, plant and equipment is derecognized when no further economic benefi ts are expected from its use or disposal. Any gains or
losses arising on derecognition of the asset (calculated as the diff erence between the net disposal proceeds or the net recoverable amount, and the
carrying value of the asset) is included in the consolidated statements 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.
j) 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.
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k) 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
refl ected in the consolidated statements 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 their useful 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 are reviewed at least at each year-end and adjusted prospectively if appropriate.
Intangible Assets with Indefi nite Lives
Intangible assets with indefi nite 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 indefi nite life is reviewed annually to determine
whether the indefi nite life continues to be supportable; if not, the change in useful life from indefi nite to fi nite is made on a prospective basis.
Gains or losses arising from the derecognition of an intangible asset are measured as the diff erence between the net disposal proceeds and the
carrying amount of the assets and are recognized in the consolidated statements of income when the asset is derecognized.
l) Impairment of Non-fi nancial Assets
Assets that have indefi nite 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 into CGUs at the lowest levels for which there are separately identifi able independent cash fl ows. Non-fi nancial assets, other than goodwill,
that suff ered impairment are reviewed for possible reversal of the impairment whenever reversal indicators exist.
m) 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
identifi able tangible and intangible assets arising at the date of acquisition.
Goodwill is deemed to have an indefi nite 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
benefi t from the business combination in which the goodwill arose, but are not allocated above the operating segment level at which management
monitors the recovery of goodwill.
Gains and losses on the disposal of a CGU or component of a CGU include the carrying amount of goodwill relating to the entity sold.
n) Employee Future Benefi ts
The Company provides future benefi ts to its employees under a number of defi ned benefi t and defi ned contribution arrangements. The employee
future benefi ts liability recognized on the consolidated balance sheets, in respect of the defi ned benefi t pension plans, represents the defi cit position
for those defi ned benefi t plans, whose defi ned benefi t obligation exceeds that pension plan’s assets. The Company has included in other assets the
net surplus position of those defi ned benefi t plans whose pension plan assets exceed the defi ned benefi t obligation.
The defi ned benefi t obligation is determined by independent actuaries using the projected benefi t method pro-rated on service. The defi ned benefi t
obligation is determined by discounting the estimated future cash outfl ows using interest rates of high-quality corporate bonds that have terms to
maturity matching the terms of the related defi ned benefi t arrangements. Plan assets are valued at quoted market prices at the consolidated balance
sheet dates.
Past service costs arising from plan amendments are fully recognized in income when the plan amendment or curtailment occurs, or when related
restructuring costs or termination benefi ts are recognized, whichever comes fi rst.
Actuarial gains and losses resulting from experience adjustments and the eff ect of changes in actuarial assumptions, and actual returns on plan
assets, as compared to returns using interest rates of high quality corporate bonds, are recognized in other comprehensive income in the period
in which they arise.
For the Company’s defi ned contribution plans, costs are determined based on the services provided by the Company’s employees and are recognized
in the consolidated statements of income as those services are provided.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
o) Leases
Finance leases, which transfer to the Company substantially all the risks and benefi ts 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 fi nance 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 benefi ts and risks of ownership are not transferred by the lessor are classifi ed as operating leases. Payments
made under operating leases are charged to the consolidated statements 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 specifi c and industry risks. External credit ratings as well as bank and trade references are reviewed
when available.
q) Provisions
A provision is an accrued liability, legal or constructive, resulting from a past event and 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 fl ows at a
pre-tax rate that refl ects current market assessments of the time value of money and the risks specifi c to the liability. The increase in the provision
due to the passage of time is recognized as fi nance costs in the consolidated statements of income.
r) Financial Instruments
Financial assets recorded at fair value through profi t or loss include fi nancial assets held for trading or meeting specifi ed criteria and designated upon
initial recognition at fair value through profi t or loss as appropriate.
Held-to-maturity fi nancial assets, loans and receivables and other liabilities not held for trading are accounted for at amortized cost.
Available-for-sale fi nancial assets are those non-derivative fi nancial assets that are designated as available-for-sale by the Company or do not fall into
another category. Available-for-sale fi nancial assets are carried on the consolidated balance sheets at fair value with gains or losses from changes in
fair value in a period included in other comprehensive income.
Financial assets are recognized initially at fair value.
All fi nancial liabilities are initially recorded at fair value and designated upon inception as fair value through profi t or loss, or loans and borrowings.
Financial liabilities classifi ed as fair value through profi t or loss includes derivative fi nancial instruments. Any changes in fair value are recognized
through the consolidated statements of income.
Loans and borrowings are initially recorded at fair value less any directly attributable transaction costs. After initial recognition, these liabilities are
subsequently measured at amortized cost using the eff ective interest rate method.
The following is a summary of the classes of fi nancial instruments included in the Company’s consolidated balance sheets as well as their designation
by the Company:
Balance Sheet Item
Cash and cash equivalents
Short-term investments
Trade accounts receivable
Loans receivable
Convertible preferred shares
Guaranteed deposits
Derivative fi nancial instruments
Bank indebtedness
Loans payable
Accounts payable
Deferred purchase consideration
Long-term debt
Designation
Fair value through profi t or loss
Held-to-maturity
Loans and receivables
Loans and receivables
Available-for-sale
Available-for-sale
Fair value through profi t or loss
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 fi nancial instrument
transactions. Derivative fi nancial instruments designated as eff ective net investment hedges are refl ected in the consolidated balance sheets at
fair value, with any gains or losses resulting from fair value changes included in other comprehensive income to the extent of hedge eff ectiveness.
Derivative fi nancial instruments not designated as part of a formal hedging relationship are carried at fair value in the consolidated balance sheets,
with gains or losses resulting from changes in fair value in a period charged or credited to net income in the consolidated statements of income.
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Fair Value
Financial instruments measured or disclosed 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 signifi cant inputs are unobservable
The hierarchy requires the use of observable market data when available.
Derecognition
Financial assets are derecognized where the contractual rights to the receipt of cash fl ows expire or the asset is transferred to another party whereby
the entity no longer has any signifi cant 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 diff erence between the carrying
value of the fi nancial 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 statements 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 occurred, the amount of the loss is measured as the diff erence between the carrying amount and the present value of estimated
future cash fl ows discounted using the original eff ective interest rate. The carrying amount of the asset is then reduced by the amount of the
impairment and the impairment loss is recognized in the consolidated statements 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 statements of income.
Transaction Costs
Transaction costs associated with fi nancial assets carried at fair value through profi t or loss are expensed as incurred, while transaction costs
associated with all other fi nancial assets are included in the initial carrying amount of the asset.
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 for equity settled awards 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 as the
expense is recognized and transferred to share capital if and when the option, unit or right is exercised.
Consideration received on the exercise of a stock option, right or unit is credited to share capital, when additional equity instruments are issued.
Options, units or rights that are settled with cash are classifi ed as liability instruments in accordance with IFRS, as their terms require that they be
settled in cash.
Awards where the employee has the right to choose whether a share-based transaction is settled in cash or by issuing equity are accounted for as
liabilities on the consolidated balance sheets.
For cash-settled awards, the fair value of the liability is recalculated at each consolidated 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 consolidated 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 statements of income. The fair value is recalculated using an option pricing model.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
t) Research and Development Costs
In accordance with IAS 38, Intangible Assets, research and development costs are charged to the consolidated statements of income, except for
development costs, which are capitalized as an intangible asset when the following criteria are met:
• the project is clearly defi ned and the costs are separately identifi ed and reliably measured;
• the technical feasibility of the project is demonstrated;
• the project will generate future economic benefi t;
• resources are available to complete the project; and
• the project is intended to be completed.
The intangible assets are 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 benefi t,
generally between three to ten years. During the periods following completion of development, the asset is tested for impairment annually. All
other development costs are charged to the consolidated statements of income.
u) Income Taxes
Income tax expense for the period comprises current and deferred income taxes. Income taxes are recognized in the consolidated statements of
income, except to the extent that they relate to items recognized in other comprehensive income.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the consolidated balance sheet dates
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 diff erences between the fi nancial 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 eff ect when the diff erences are expected to reverse. Deferred tax liabilities are not recognized if they arise
from the initial recognition of goodwill; deferred income taxes are not accounted for if they arise from initial recognition of an asset or liability in a
transaction, other than a business combination, that at the time of the transaction aff ects neither accounting nor taxable profi t or loss.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profi t will be available against which the temporary
diff erences can be utilized.
Deferred income tax assets and liabilities are off set when there is a legally enforceable right to off set 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 diff erent taxable entities where there is an intention to settle the current income tax 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.
v) 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 eff ect of outstanding fi nancial instruments issued under the
Company’s various stock-based compensation plans. Under this method, the conversion of dilutive fi nancial 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 fi nancial 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 diff erence between the number
of shares assumed issued and assumed purchased) is included in the denominator of the diluted EPS computation.
w) Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision-Maker (“CODM”).
The CODM is responsible for allocating resources and assessing the performance of the operating segments, and has been identifi ed as the Chief
Executive Offi cer of the Company.
x) Use of Estimates
The preparation of consolidated fi nancial statements in conformity with IFRS requires management to make estimates and assumptions that aff ect
the amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated fi nancial statements and the
reported amounts of revenue and expenses during the reporting period. Actual results could diff er from those estimates.
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Critical estimates used in preparing the consolidated fi nancial statements include:
Long-lived Assets and Goodwill
The Company evaluates the carrying values of the groups of CGUs containing goodwill on an annual basis on October 31 of each year to determine
whether or not impairment of these assets has occurred and whether write-downs 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 assumptions regarding discount rates and future cash fl ows generated by these assets
in determining the value-in-use and fair value less costs to sell calculations. Actual results could diff er from these assumptions.
Employee Future Benefi t Obligations
The Company provides future benefi ts to its employees under a number of defi ned benefi t arrangements. The calculation of the defi ned benefi t
obligation recognized in the consolidated fi nancial statements includes a number of assumptions regarding discount rates, rates of employee
compensation increases, rates of infl ation, and life expectancies. The outcome of any of these factors could diff er 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
outfl ow of economic benefi ts resulting from past operations or events and the amount of the cash outfl ow 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 statements 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 fi nancial 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 fi nance cost in the consolidated
statements of income.
Actual expenditures incurred are charged against the accumulated decommissioning liability.
Income Taxes
The recording of income tax expense includes certain estimations related to the impact in the current year of future events. Diff erences 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 diff erent from those expected in Canada.
Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profi t will be available against which the losses
can be utilized. Signifi cant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the
likely timing and the level of future taxable profi ts together with future tax planning strategies.
Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable
income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements,
diff erences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future
adjustments to taxable income and tax expense already recorded. The Company establishes liabilities, based on reasonable estimates, for possible
consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such liabilities is based on various
factors, such as experience of previous tax audits and diff ering interpretations of tax regulations by the taxable entity and the responsible tax
authority. Such diff erences in interpretation may arise for a wide variety of issues depending on the conditions prevailing in the respective domicile of
the respective companies.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. ACCOUNTING STANDARDS ISSUED BUT NOT YET APPLIED
IFRS 9 – Financial Instruments
IFRS 9, as issued, by the International Accounting Standards Board (“IASB”) replaces IAS 39 regarding the recognition and measurement of fi nancial
assets and fi nancial liabilities. The standard is eff ective for annual periods beginning on or after January 1, 2018. The Company has not yet determined
the impact of this standard on the consolidated fi nancial statements.
IFRS 15 – Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, which covers principles for reporting about the nature, amount, timing and uncertainty of revenue and cash
fl ows arising from contracts with customers. IFRS 15 is eff ective for annual periods beginning on or after January 1, 2017. The Company is in the
process of reviewing the standard to determine the impact on the consolidated fi nancial statements.
IAS 16 – Property, Plant and Equipment and IAS 38 – Intangible Assets
In May 2014, the IASB issued amendments to IAS 16 and IAS 38, prohibiting the use of revenue-based depreciation for property, plant and equipment
and signifi cantly limiting the use of revenue-based amortization for intangible assets. These amendments are eff ective for annual periods beginning
on or after January 1, 2016, and are to be applied prospectively. The Company is in the process of reviewing the amendments to determine the impact
on the consolidated fi nancial statements.
NOTE 5. NEW ACCOUNTING STANDARDS ADOPTED
IFRIC Interpretation 21 Levies (IFRIC 21)
IFRIC 21 clarifi es that an entity recognizes a liability for a levy when the activity that triggers payment, as identifi ed by the relevant legislation, occurs.
For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifi es that no liability should be anticipated before the specifi ed
minimum threshold is reached. IFRIC 21 is eff ective for annual periods beginning on or after January 1, 2014. The Company’s adoption of IFRIC 21 did
not have a material fi nancial impact on the Company’s consolidated fi nancial statements.
NOTE 6. SEGMENT INFORMATION
ShawCor’s operating segments are being reported based on the fi nancial information provided to the Chief Executive Offi cer, who has been identifi ed
as the CODM in monitoring segment performance and allocating resources between segments. The CODM assesses segment performance based on
segment operating income or loss, which is measured diff erently than income from operations in the consolidated fi nancial statements. Income taxes
are managed at a consolidated level and are not allocated to the reportable operating segments.
As at December 31, 2014, 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.
The aggregation of the reportable segments is based on the customer and markets that the Company serves.
Pipeline and Pipe Services
The Pipeline and Pipe Services segment comprises the following business units:
• Bredero Shaw, which provides pipe coating, lining and insulation products;
• Socotherm, which provides pipe coating, lining and insulation products;
• Canusa – CPS, which manufactures heat shrinkable sleeves, adhesives and liquid coatings for pipeline joint protection applications;
• Flexpipe Systems, which provides spoolable composite pipe systems;
• Guardian, which provides oilfi eld tubular management services and inspection, testing and refurbishment of oilfi eld tubular products;
• Shaw Pipeline Services, which provides ultrasonic and radiographic weld inspection services for land and marine pipeline construction; and
•
Desert NDT, which provides non-destructive testing services for new oil and gas gathering pipelines and infrastructure integrity
management services.
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 fi nancial and corporate division for ShawCor does not meet the defi nition of a reportable operating segment as defi ned in IFRS, as it does not
earn revenue.
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Revenue
External
Inter-segment
Operating expense
Research and
development expenses
Amortization of property,
plant and equipment
Amortization of
intangible assets
Gain on sale of land
Income (loss) from
operations
for CODM
Impairment
Income (loss)
Segment
The following table sets forth information by segment for the years ended December 31:
(in thousands of Canadian dollars)
Pipeline and
Pipe Services
Petrochemical
and Industrial
Financial
and Corporate
Eliminations
and Adjustments
Total
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
$ 1,713,363
3,426
1,686,381 $ 176,666
367
1,387
161,168 $
1,281
$ 1,716,789
1,687,768 $ 177,033
162,449 $
–
–
–
– $
–
– $
–
(3,793)
– $ 1,890,029
–
(2,668)
1,847,549
–
(3,793)
(2,668) $ 1,890,029
1,847,549
$ 1,360,464
1,238,862 $ 146,505
138,085 $
34,549
62,486 $
(3,793)
(2,668) $ 1,537,725
1,436,765
10,794
12,446
1,136
1,452
1,123
1,789
50,085
62,499
3,251
2,336
1,883
1,649
15,587
–
10,312
(5,156)
–
(609)
–
–
–
–
–
–
$ 279,859
368,805 $
26,750
20,576 $
(37,555)
(65,924) $
120,378
–
–
–
–
–
from operations
$ 159,481
368,805 $
26,750
20,576 $
(37,555)
(65,924) $
Gain (loss) on assets
held for sale
Loss from investments
in joint ventures
Income from
investments
in associates
Interest income
Interest expense and
other fi nance costs
Income (loss) before
income taxes
Income tax expense
6,427
(3,683)
(22,375)
(3,874)
57
839
–
727
–
–
–
2
–
–
–
2
–
–
–
–
820
388
–
427
(3,069)
(5,355)
(12)
(86)
(16,549)
(10,627)
141,360
–
356,620
–
26,740
–
20,492
–
(52,896)
(21,010)
(76,124)
(78,402)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13,053
15,687
55,219
66,484
15,587
(609)
10,312
(5,156)
– $ 269,054
323,457
–
120,378
–
– $ 148,676
323,457
–
–
–
–
–
–
–
6,427
(3,683)
(22,375)
(3,874)
877
1,229
–
1,156
(19,630)
(16,068)
115,204
(21,010)
300,988
(78,402)
(in thousands of Canadian dollars)
Pipeline and
Pipe Services
Petrochemical
and Industrial
Financial
and Corporate
Eliminations
and Adjustments
Total
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
Additions to property,
plant and equipment,
net of disposals
Goodwill
Total assets
Total liabilities
$
70,041
379,510
2,267,366
910,030
59,688 $
281,431
1,975,028
960,223
1,767
16,691
158,936
86,879
14,422 $
17,388
180,055
60,299
1,966
–
1,177,262
460,734
2,081 $
–
796,816
425,193
73,774
396,201
(1,663,594) (1,299,971) 1,939,970
959,357
(498,286)
(452,368)
– $
–
–
–
76,191
298,819
1,651,928
993,347
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)
Revenue
External
Inter-segment
Total Revenue
Non-current assets(a)
(in thousands of Canadian dollars)
Revenue
External
Inter-segment
Total Revenue
Non-current assets(a)
Canada
USA
Latin America
EMAR
Asia Pacifi c
Eliminations
2014
Total
$
$
$
$
$
$
590,446
1,774
592,220
331,559
Canada
520,920
2,604
523,524
316,626
$
$
$
$
$
$
302,770
157
302,927
417,246
$
$
$
183,196
1,861
185,057
28,253
USA
Latin America
248,846
64
248,910
124,982
$
$
$
161,627
–
161,627
71,786
$
$
$
$
$
$
463,108
1
463,109
245,524
$
$
$
350,509
–
350,509
83,267
$
$
$
–
(3,793)
$ 1,890,029
–
(3,793)
$ 1,890,029
(44,133)
$ 1,061,716
EMAR
Asia Pacifi c
Eliminations
2013
Total
247,271
–
247,271
257,931
$
$
$
668,885
–
668,885
81,365
$
$
$
–
(2,668)
$ 1,847,549
–
(2,668)
$ 1,847,549
15,343
$
868,033
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(a) Excluding fi nancial instruments, deferred tax assets and post-employment benefi ts.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. ACQUISITION
Desert NDT
On July 8, 2014, the Company completed the acquisition of all of the outstanding shares of Desert NDT, LLC (“Desert”), for total consideration of
approximately $281.7 million (US$263.9 million), including an adjustment for changes in working capital. Desert is a Houston-based provider of
non-destructive testing (“NDT”) services for new oil and gas gathering pipelines and infrastructure integrity management services. Desert operates
through 18 branches located in major U.S. oil and gas basins. The acquisition was funded with cash and through available revolving credit facilities.
Signifi cant judgments and assumptions made in the purchase price allocation in the course of the acquisition of Desert include the following:
•
•
For intangible assets associated with customer relationships, the Company based its valuation on the expected future cash fl ows using the
multi-period excess earnings approach. This method employed a discounted cash fl ow analysis using the present value of the estimated
after-tax cash fl ows expected to be generated from the purchased customer relationships using risk adjusted discount rates and revenue forecasts,
as appropriate, based upon management’s best estimate.
The goodwill acquired represents the acquired human capital and the benefi ts 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 identifi able intangible assets. Approximately
$101.8 million (US$95.4 million) of the goodwill recognised at the date of acquisition is expected to be deductible for income tax purposes.
The following table shows the preliminary purchase price allocation for the acquisition of Desert:
(in thousands of Canadian dollars)
Consideration
Cash (net of cash acquired of $2,429)
Assets acquired at fair value:
Current assets (excluding cash acquired of $2,429)
Property, plant and equipment
Intangible assets
Current liabilities assumed
Deferred income tax liabilities
Total identifi able net assets at fair value
Goodwill
$
279,266
28,114
8,976
126,807
(11,105)
(2,193)
150,599
128,667
$
279,266
The Company is currently fi nalizing the values associated with the current liabilities and deferred income tax assets and liabilities.
From the date of acquisition, Desert contributed approximately $60.7 million of revenue and $8.2 million of income before interest and income tax to
the Company. If the acquisition had been from the beginning of the year, the revenue would have been approximately $121.3 million and the income
before interest and income tax, net of intangible amortization of $10.6 million, would have been $16.3 million.
Socotherm Gulf of Mexico
On April 15, 2013, the Company completed the acquisition of the remaining 49% of Socotherm S.p.A.’s joint venture in the U.S.A. for total
consideration of approximately $23 million, excluding the forgiveness of inter-company debt. The joint venture has a strategically located facility in
Channelview, Texas which provides anticorrosion and advanced insulation coatings for global off shore applications, including in the Gulf of Mexico
and West African markets.
The carrying value of the Company’s investment immediately prior to the acquisition of the remaining 49% approximated its fair value.
On acquisition of the remaining 49% of Socotherm’s S.p.A.’s joint venture in the U.S.A., on a 100% level, the approximate value of the tangible assets
acquired and tangible liabilities assumed was $34.8 million and $9.1 million, respectively. The approximate value of the intangible assets acquired and
intangible liabilities assumed was $68.3 million and $13.2 million, respectively.
NOTE 8. CASH AND CASH EQUIVALENTS
The following table sets forth the Company’s cash and cash equivalents as at:
(in thousands of Canadian dollars)
Cash
Cash equivalents
Total
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December 31
2014
December 31
2013
$
$
112,452
4,104
116,556
$
$
78,843
552
79,395
NOTE 9. LOANS RECEIVABLE
The following table details the long-term loans receivable as at:
(in thousands of Canadian dollars)
Current
Loan receivable
Non-current
Notes receivable(a)
Loan receivable
Total
December 31
2014
December 31
2013
$
$
$
–
–
4,434
2,587
7,021
7,021
$
$
$
1,780
1,780
4,014
3,448
7,462
9,242
(a) 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 U.S. 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. As at December 31, 2014, the amount of the note receivable was U.S.$3,813 (December 31, 2013 – U.S.$3,752).
NOTE 10. ACCOUNTS RECEIVABLE
The following table sets forth the Company’s trade and other receivables as at:
(in thousands of Canadian dollars)
Trade accounts receivables
Allowance for doubtful accounts (note 26)
Unbilled revenue and other receivables
The following table sets forth the aging of the Company’s trade accounts receivable as at:
(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
Total trade accounts receivable
Less: allowance for doubtful accounts
Trade accounts receivable – net
NOTE 11.
INVENTORIES
The following table sets forth the Company’s inventories as at:
(in thousands of Canadian dollars)
Raw materials and supplies
Work-in-progress
Finished goods
Inventory obsolescence
December 31
2014
December 31
2013
$
$
339,990
(12,516)
130,136
457,610
$
249,612
(11,732)
126,104
$
363,984
December 31
2014
December 31
2013
$
$
188,545
93,123
21,677
8,591
28,054
339,990
(12,516)
327,474
$
122,445
54,456
25,952
16,518
30,241
249,612
(11,732)
$
237,880
December 31
2014
December 31
2013
$
$
126,763
15,003
72,900
(19,934)
194,732
$
134,216
13,019
51,498
(17,857)
$
180,876
During 2014, the Company recorded an increase of $2.1 million (December 31, 2013 – $5.8 million) in the provision for inventory obsolescence, due
to the build-up of certain excess raw materials.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. PROPERTY, PLANT AND EQUIPMENT
The following table sets forth the Company’s property, plant and equipment as at the periods indicated:
Land and Land
Improvements
Buildings
Machinery and
Equipment
Capital
Projects-in-
Progress
$
$
$
$
60,178
991
2,055
1,325
–
(1,344)
(338)
164,380
15,286
28,069
7,316
96
(18)
(2,286)
581,802
21,637
57,876
16,238
–
(21)
(16,281)
$
34,981
665
(11,271)
63
–
–
(447)
Total
841,341
38,579
76,729
24,942
96
(1,383)
(19,352)
$
62,867
$
212,843
$
661,251
$
23,991
$
960,952
(3,103)
1,554
–
2,504
–
(2,690)
4,483
352
122
(1,477)
23,685
55,368
10,867
105
(8,297)
(2,437)
16,240
–
–
–
15,455
77,645
11,219
2,731
(9,774)
$
63,822
$
213,633
$
742,979
$
37,794
$ 1,058,228
Land and Land
Improvements
Buildings
Machinery and
Equipment
Capital
Projects-in-
Progress
$
$
(16,928)
(243)
(364)
150
71
$
(79,917)
(6,024)
(6,286)
(110)
1,597
$
(341,456)
(19,625)
(58,664)
(296)
11,223
$
(17,314)
$
(90,740)
$
(408,818)
$
(147)
(409)
(653)
–
2,077
(5,529)
(147)
528
(10,325)
(49,281)
(73)
5,374
$
(18,523)
$
(93,811)
$
(463,123)
$
–
–
–
–
–
–
–
–
–
–
–
Land and Land
Improvements
Buildings
Machinery and
Equipment
$
$
$
$
$
$
$
(2,496)
1
–
$
(7,196)
44
638
(21,764)
(347)
327
$
(2,495)
$
(6,514)
$
(21,784)
$
–
–
(2,495)
40,754
43,058
42,804
125
(2,664)
(9,053)
77,267
115,589
110,769
$
$
$
$
141
(14,269)
(35,912)
218,582
230,649
243,944
$
$
$
$
$
$
$
$
Capital
Projects-in-
Progress
–
–
–
–
–
–
–
34,981
23,991
37,794
$
Total
(438,301)
(25,892)
(65,314)
(256)
12,891
$
(516,872)
(8,395)
(55,219)
(873)
5,902
$
(575,457)
Total
(31,456)
(302)
965
(30,793)
266
(16,933)
(47,460)
371,584
413,287
435,311
$
$
$
$
$
$
(in thousands of Canadian dollars)
Cost
Balance – December 31, 2012
Exchange diff erences
Additions
Acquisitions
Assets held for sale
Decommissioning liabilities and others
Disposals
Balance – December 31, 2013
Exchange diff erences
Additions
Acquisitions
Decommissioning liabilities and others
Disposals
Balance – December 31, 2014
(in thousands of Canadian dollars)
Accumulated Amortization
Balance – December 31, 2012
Exchange diff erences
Amortization expense
Decommissioning liabilities and others
Eliminated on disposal
Balance – December 31, 2013
Exchange diff erences
Amortization expense
Decommissioning liabilities and others
Eliminated on disposal
Balance – December 31, 2014
(in thousands of Canadian dollars)
Accumulated Impairment
Balance – December 31, 2012
Exchange diff erences
Eliminated on disposal
Balance – December 31, 2013
Exchange diff erences
Impairment
Balance – December 31, 2014
Net book value
As at December 31, 2012
As at December 31, 2013
As at December 31, 2014
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NOTE 13.
INTANGIBLE ASSETS
The following table sets forth the Company’s intangible assets as at the periods indicated:
(in thousands of Canadian dollars)
Cost
Balance – December 31, 2012
Exchange diff erences
Additions
Acquisition of a subsidiary
Balance – December 31, 2013
Exchange diff erences
Additions
Acquisition of a subsidiary
Balance – December 31, 2014
Accumulated Amortization
Balance – December 31, 2012
Exchange diff erences
Amortization
Balance – December 31, 2013
Exchange diff erences
Amortization
Balance – December 31, 2014
Accumulated Impairment
Balance – December 31, 2013
Exchange diff erences
Impairment
Balance – December 31, 2014
Net book value
As at December 31, 2012
As at December 31, 2013
As at December 31, 2014
Intellectual
Property, with
Limited Life(a)
Intangible
Assets, with
Limited Life(b)
Intangible
Assets, with
Indefi nite Life(c)
$
$
78,705
680
96
–
79,481
1,098
128
225
$
$
42,271
1,099
616
36,608
80,594
14,346
352
127,032
$
$
$
$
5,664
248
–
–
5,912
317
–
–
Total
126,640
2,027
712
36,608
165,987
15,761
480
127,257
$
80,932
$
222,324
$
6,229
$
309,485
(18,269)
62
(5,325)
(6,916)
(336)
(4,987)
$
(23,532)
$
(12,239)
$
(94)
(4,882)
(321)
(10,705)
$
(28,508)
$
(23,265)
$
–
382
(4,138)
(3,756)
60,436
55,949
48,668
–
211
(51,431)
(51,220)
35,355
68,355
147,839
$
$
$
$
$
$
$
$
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
5,664
5,912
6,229
(25,185)
(274)
(10,312)
(35,771)
(415)
(15,587)
$
$
(51,773)
–
593
(55,569)
(54,976)
101,455
130,216
202,736
$
$
$
$
(a) Intellectual property, with limited life, represents the cost of certain technology, know-how and patents obtained mainly through acquisitions. The Company amortizes the cost of intellectual
property over its estimated useful life of up to 15 years.
(b) Intangible assets, with limited life, represent customer relationships, trademarks, 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 their respective estimated useful lives of up to 15 years. The net book value of customer relationships as at December 31,
2014 is $138.0 million (December 31, 2013 – $67.6 million), and is included in intangible assets with limited life in the table above.
(c) Intangible assets, with indefi nite life, represent the value of brands obtained in previous acquisitions. As the Company has the exclusive right to use and benefi t from the brands of the acquired
companies for an undefi ned period, certain acquired brands have been classifi ed as intangible assets with indefi nite life. As the cost of intangible assets with indefi nite life is not amortized, the
Company assesses these intangible assets for impairment on an annual basis or when there is an indicator of impairment.
NOTE 14.
INVESTMENTS IN JOINT VENTURES
The Company uses the equity method to account for the following joint venture interests of the Company as at December 31, 2014 and 2013.
Hal Shaw Inc.
Shaw & Shaw Ltd.
Helicone Holdings Limited
Socotherm Brasil S.A.(a)
Atlantida Socotherm S.A.(b)
Country of
Incorporation
U.S.A.
Canada
Russia
Brazil
Venezuela
Activity
Pipe coating
Pipe coating
Pipe coating
Pipe coating
Pipe coating
December 31
2014
Proportion of
Interest Held
%
December 31
2013
Proportion of
Interest Held
%
50
83
–
(a)
50
50
83
25
50
50
(a) As of December 4, 2013, Socotherm Brasil S.A. has been accounted for as a held-for-sale investment. Socotherm Brasil S.A. was sold on September 3, 2014.
(b) During the fourth quarter of 2014, the Company recorded an impairment of $18.9 million related to its joint venture interest in Venezuela and is included in loss from investments in joint
ventures. The investment in the Company’s Venezuela joint venture was impaired due to the accelerated devaluation of the local currency in Venezuela, deteriorating business environment
and the signifi cant increase in the uncertainty of the Company to realize cash fl ows from this joint venture in the future.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the Company’s share of the assets, liabilities, income and expenses of the joint ventures described above for the years
ended and as at December 31, excluding those joint ventures classifi ed as held-for-sale:
(in thousands of Canadian dollars)
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total Liabilities
Carrying amount of the investments in joint ventures
(in thousands of Canadian dollars)
Revenue
Cost of goods sold
Selling, general and administrative expenses
Foreign exchange losses
Amortization expenses
Finance costs
Net loss before income taxes
Income tax recovery
Net loss for the year
$
$
$
2014
–
–
–
–
–
–
–
2014
9,143
6,713
1,825
2,498
1,465
443
(3,801)
(374)
$
2013
13,625
10,937
24,562
(5,895)
(1,391)
(7,286)
$
17,276
$
2013
53,553
40,884
10,204
47
6,357
1,083
(5,022)
(1,148)
(3,874)
$
(3,427)
$
NOTE 15.
INVESTMENTS IN ASSOCIATES
On February 20, 2014, ShawCor completed an equity investment in Zedi Inc. (“Zedi”), a Calgary, Alberta based company engaged in end-to-end
solutions for production operations management in the oil and gas industry. Zedi has developed and deployed remote fi eld monitoring and related
data management solutions for the optimization of oil and gas well production and has recently completed a management buyout through an Alberta
court and shareholder approved plan of arrangement. ShawCor’s equity investment in Zedi consists of approximately 25% common share interest
totalling $13.8 million, which is being accounted for using equity accounting and an investment of $10.0 million in convertible preferred shares, which
is accounted for as an available-for-sale investment and classifi ed in other assets on the Company’s consolidated balance sheets.
On August 29, 2014, the Company completed an equity investment for a 20% interest in Power Feed-Thru Systems and Connectors, LLC (“PFT”) for
approximately $2.9 million (U.S. $2.6 million). PFT is a designer and assembler of electric feed-thru connector systems specifi cally for artifi cial lift
installations in the global Oil and Gas market. Its products are used in oil wells equipped with Electric Submersible Pumps to connect the down-hole
oil pump with a surface power supply and it is based in Houston, Texas, U.S.
NOTE 16. OTHER ASSETS
The following table details the other assets as at:
(in thousands of Canadian dollars)
Long-term prepaid expenses
Deposit guarantee
Long-term investment
Convertible preferred shares (note 15)
Defi ned Pension Plans employee future benefi t asset (note 25)
NOTE 17. GOODWILL
The changes in the carrying amount of goodwill are shown below:
(in thousands of Canadian dollars)
Gross amount of goodwill
Accumulated impairment of goodwill
Net Balance – Beginning of year
Acquisition (note 7)
Impairment (note 18)
Foreign exchange
Net Balance – End of year
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December 31
2014
December 31
2013
$
$
8,302
893
–
10,000
7,694
8,615
81
1,104
–
8,030
$
26,889
$
17,830
December 31
2014
December 31
2013
$
$
298,819
–
298,819
128,667
(47,078)
15,793
396,201
$
256,296
–
256,296
31,267
–
11,256
$
298,819
The following table summarizes the signifi cant carrying amounts of goodwill:
(in thousands of Canadian dollars)
Bredero Shaw (excluding BSRTL as defi ned below)
Thermotite Brasil Ltda & BS Servicios de Injecao (collectively, “BSRTL”)
Desert NDT
Flexpipe Systems
Socotherm S.p.A.
Socotherm Americas (Argentina)
Socotherm Gulf of Mexico, LLC
ShawCor CSI
Guardian
DSG-Canusa GmbH
December 31
2014
December 31
2013
$
173,102
–
140,179
49,730
9,525
5,094
–
1,880
–
16,691
$
172,406
12,331
–
49,730
8,762
4,685
31,332
1,880
305
17,388
$
396,201
$
298,819
a) Impairment Testing for Each Cash Generating Unit Containing Goodwill
The Company performs a goodwill impairment test for each specifi ed group of CGUs (“GCGU”) that contains goodwill at the Company’s annual
goodwill impairment testing date of October 31 (“Annual Goodwill Valuation Date”). On August 31, 2014, the Company also performed an
impairment test for its BSRTL CGU (“BSCGU”) and concluded that its goodwill was fully impaired. At the Annual Goodwill Valuation Date of
October 31, 2014, the Company concluded that there was no impairment of goodwill in any of its GCGUs other than the goodwill in the Company’s
Socotherm Gulf of Mexico division, which was fully impaired.
b) Recoverable Amount
The Company determines the recoverable amount for its GCGUs as the higher of Value in Use (“VIU”) and the Fair Value Less Cost to sell (“FVLCS”).
For the goodwill impairment tests, the FVLCS of each of the GCGUs (other than those mentioned in note 17(a) above) was higher than its carrying
amount. The fair value measurement was categorized as a level 3 fair value based on the inputs in the valuation method used.
FVLCS calculations use post-tax cash fl ow projections based on three-year fi nancial 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 fl ows beyond the fi ve-year period are
extrapolated using estimated growth rates as applicable. The FVLCS is calculated net of selling costs that are estimated at 2%.
The FVLCS is determined by discounting the future free cash fl ows generated from the Company’s continuing use of the respective GCGUs. The
discount rates used are post-tax and refl ect specifi c risks relating to the GCGUs. The discounted cash fl ow model employed by the Company refl ects
the specifi c risks of each GCGU and their business environment. The model calculates the FVLCS as the present value of the projected free cash fl ows
and the Terminal Value of each group of GCGU.
The calculation of FVLCS for each GCGU is most sensitive to the following key assumptions:
• Projected Cash Flows
• Market Assumptions
• Discount Rate
• Growth Rate and Terminal Value
Projected Cash Flows
The Projected Cash Flow for each GCGU is derived from the most recently completed three-year 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 fl ows 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 fl ows for a particular GCGU.
Discount Rate
Discount rates represent the current market assessment of the risks specifi c 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 fl ow estimates. The discount rate calculation is based on the specifi c
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 specifi c risk is incorporated by applying individual
specifi c risk factors; these specifi c risk factors are evaluated annually.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following are the discount rates used in the calculation of the impairment tests:
(in thousands of Canadian dollars)
Bredero Shaw (excluding BSRTL)
BSRTL
Desert NDT
Flexpipe Systems
Socotherm S.p.A. (Italy)
Socotherm Americas (Argentina)
Socotherm Gulf of Mexico, LLC
ShawCor CSI
DSG-Canusa GmbH
October 31
2014
October 31
2013
10%
14%
11%
11%
14%
18%
12%
14%
12%
10%
14%
n/a
11%
14%
18%
12%
14%
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 fi ve years.
A Terminal Value Growth Rate of 3.0% was used (for all goodwill impairment tests) refl ecting terminal growth rate expectation of long-term growth
in energy infrastructure investment; this fi gure also refl ects the Company’s best estimate of the set of economic conditions that are expected to exist
over the forecast period.
Sensitivity to Changes in Assumptions
With regard to the assessment of FVLCS of all of the Company’s GCGUs, except for Socotherm S.p.A. and Socotherm Americas (Argentina),
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.
IMPAIRMENT
The following table sets forth the Company’s impairment charges for the year ended December 31, 2014:
(in thousands of Canadian dollars)
Impairment of inventory
Impairment of property, plant and equipment
Impairment of intangible assets
Impairment of goodwill
Impairment
Bredero Shaw
Brasil(a)
Socotherm(b)
Brigden(c)
Other
$
$
798
7,554
19,156
12,941
$
–
4,261
35,795
33,825
$
40,449
$
73,881
$
–
5,118
–
–
5,118
$
$
–
–
618
312
930
$
Total
798
16,933
55,569
47,078
$
120,378
(a) Bredero Shaw Brasil consists of the business entities Bredero Shaw Rev de Tubos Ltda., Bredero Shaw Brasil Participacoes Ltda. and BS Servicios de Injecao Ltda. (collectively, “BSRTL”).
(b) Socotherm consists of the business entity Socotherm Gulf of Mexico, LLC.
(c) Brigden consists of a mobile plant in the Gulf of Mexico region.
Impairment Testing for the Bredero Shaw Brasil Cash Generating Unit
The Company performed an impairment test for its BSRTL CGU (“BSCGU”) as at August 31, 2014. Currently, the BSCGU has been unsuccessful in
securing project work to sustain operations at current levels and will have no backlog in Brazil at the beginning of 2015. Beyond 2015, uncertainty
regarding Petrobras’ development plans for the pre-salt Santos basin has impacted the Company’s outlook for the deepwater insulation pipe coating
market in Brazil and thus the recoverable amount for BSCGU.
Impairment Testing for the Socotherm Gulf of Mexico Cash Generating Unit
The Company performed an impairment test for its Socotherm Gulf of Mexico CGU (“SGOMCGU”) as at October 31, 2014. The write-down of
goodwill and intangible assets associated with the Socotherm Gulf of Mexico facility was based primarily on two factors: (i) anticipated market
developments in the Gulf of Mexico including the likelihood of project delays as a result of the recent global decline in oil prices, and (ii) the
Company’s intention to shift non-Gulf of Mexico production from the Channelview, Texas operations to Pozzallo, Italy following the successful launch
of production at the Pozzallo facility which is better positioned logistically to service project activity in Europe, the Middle East and Africa.
Impairment of Bridgen Plant in the Gulf of Mexico region
The Company operates a fl eet of mobile coating plants in the Pipeline and Pipe Services segment. The Brigden mobile coating plant, has served the
Gulf of Mexico from its current location in Beaumont, Texas since its initial commissioning in 2011. While the mobile nature of this plant provides
certain cost saving logistical advantages to the customer (versus a fi xed base plant), ultimate utilization of this plant within the segment is dependent
on having a suffi cient level of project backlog. Due to the likelihood of project delays as a result of the recent global decline in oil prices, the carrying
amount of the property, plant and equipment was assessed and based on an independent appraisal of fair market value was deemed to be
partially impaired.
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Recoverable Amount
The Company determined the recoverable amount for its BSCGU and SGOMCGU as the higher of Value in Use (“VIU”) and the FVLCS. For the
BSCGU and SGOMCGU impairment tests, the FVLCS was higher than its VIU.
FVLCS calculations use post-tax cash fl ow projections based on three-year fi nancial Business Plans prepared by the Company’s management,
which are then projected out for a further period of two years based on management’s best estimates. Cash fl ows beyond the fi ve-year period
are extrapolated using estimated growth rates as applicable. The FVLCS is calculated net of selling costs that are estimated at 2%.
The FVLCS is determined by discounting the future free cash fl ows to be generated from the Company’s continuing use of the BSCGU and
SGOMCGU. The discount rate used is post-tax and refl ects specifi c risks relating to the BSCGU and the SGOMCGU. The discounted cash fl ow
model employed by the Company refl ects the specifi c risks of the BSCGU and the SGOMCGU and its business environment. The model calculates
the FVLCS as the present value of the projected free cash fl ows and the Terminal Value of the BSCGU and the SGOMCGU.
The calculation of FVLCS for the BSCGU and the SGOMCGU is most sensitive to the following key assumptions:
• Projected Cash Flows
• Market Assumptions
• Discount Rate
• Growth Rate and Terminal Value
Projected Cash Flows
The Projected Cash Flow for the BSCGU and the SGOMCGU is derived from the most recently completed three-year 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 BSCGU’s and SGOMCGU respective markets and in the overall macroeconomic environment.
Market Assumptions
The forecasted revenue for the BSCGU and the SGOMCGU in the three-year Business Plan is based on securing an estimated number of projects.
A change in the number of projects estimated to be secured by the BSCGU and the SGOMCGU can have a material impact on the projected future
cash fl ows. The gross margin for the BSCGU and the SGOMCGU 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 fl ows.
Discount Rate
The Discount rate represents the current market assessment of the risks specifi c to the BSCGU and the SGOMCGU, regarding the time value of
money and the individual risks of the underlying assets, which have not been incorporated in the cash fl ow estimates. The discount rate calculation
is based on the specifi c circumstances of the Company and the BSCGU and the SGOMCGU 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. The
BSCGU and the SGOMCGU specifi c risk is incorporated by applying individual specifi c risk factors and for the above impairment test a 14% discount
rate has been applied for BSCGU and 12% for SGOMCGU.
Growth Rate and Terminal Value
The Terminal Value Growth Rate is used to calculate the Terminal Value of the BSCGU and the SGOMCGU at the end of the Projected Free Cash
Flow period of fi ve years. A Terminal Value Growth Rate of 3.0% was used refl ecting an expectation of long-term growth in energy infrastructure
investment in its market; this fi gure also refl ects the Company’s best estimate of the set of economic conditions that are expected to exist over
the forecast period.
Sensitivity to Changes in Assumptions
A two percent increase in the discount rate would have caused the fair value of the BSCGU to decrease by $0.9 million. A one percent increase in
the Terminal Value Growth Rate increases the fair value of the BSCGU by $0.1 million.
A two percent increase in the discount rate would have caused the fair value of the SGOMCGU to decrease by $6.1 million. A one percent increase
in the Terminal Value Growth Rate increases the fair value of the SCGU by $0.9 million.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. ASSETS CLASSIFIED AS HELD FOR SALE
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. As at December 31, 2013, the Company’s investment in the joint venture has been
classifi ed as assets held for sale and liabilities held for sale, respectively.
In the fourth quarter of 2013, the Company entered into an agreement to sell its interest in Socotherm Brasil to its joint venture partner. As a result,
its investment in joint venture has been classifi ed as held for sale as at December 31, 2013. A net loss of $5.5 million (including $2.7 million of income
tax expense and $1.9 million in non-controlling interest expense) was recorded related to expected proceeds from the sale of Socotherm Brasil.
In 2014, the Company completed the sales of APCO and Socotherm Brasil to its joint venture partners.
The following table shows the major classes of assets and liabilities classifi ed as held for sale as at:
(in thousands of Canadian dollars)
Assets
Cash
Accounts receivables
Prepaid expenses
Inventory
Income taxes receivable
Property, plant and equipment
Intangible assets
Investments in joint venture
Deferred tax assets
Goodwill
Assets classifi ed as held for sale
Liabilities
Accounts payable
Accrued liabilities
Income taxes payable
Provisions
Deferred income tax liability
Liabilities directly associated with assets classifi ed as held for sale
Net assets directly associated with disposal groups
NOTE 20. CREDIT FACILITIES
The following table sets forth the Company’s total credit facilities as at:
(in thousands of Canadian dollars)
Bank indebtedness
Standard letters of credit for performance, bid and surety bonds (note 28)
Total utilized credit facilities
Total available credit facilities(a)
Unutilized Credit Facilities
(a) The Company guarantees the bank credit facilities of its subsidiaries.
December 31
2014
December 31
2013
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
$
8,036
9,031
1,040
3,177
40
1,968
16,530
9,428
12
6,924
56,186
(5,061)
–
(5,712)
(1,129)
(4,715)
(16,617)
$
39,569
December 31
2014
December 31
2013
$
4,685
137,667
142,352
523,305
$
5,229
106,206
111,435
320,910
$
380,953
$
209,475
On March 20, 2013, the Company renewed its Unsecured Committed Bank Credit Facility (“Credit Facility”) for a period of fi ve years, with terms
and conditions similar to the prior agreement, except that the maximum borrowing limit was raised by US$100 million from US$150 million to
US$250 million, with an option to increase the credit limit to US$400 million with the consent of lenders. On June 16, 2014, the option to increase the
credit limit to US$400 million was exercised with the consent of the lenders and a new option to increase the credit limit to US$550 million with the
consent of the lenders was added. The Company pays a fl oating interest rate on this credit facility that is a function of the Company’s total debt to
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) ratio. Allowable credit utilization outside of this facility is US$50 million.
Debt Covenants
The Company has undertaken to maintain certain covenants in respect of the Unsecured Committed Bank Credit Facility. Specifi cally, the Company is
required to maintain an Interest Coverage Ratio (EBITDA plus rental payments divided by interest expense plus rental payments) of more than 2.50 to
1 and a debt to total EBITDA ratio of less than 3.00 to 1. The Company was in compliance with these covenants as at December 31, 2014 and 2013.
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NOTE 21. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table sets forth the Company’s accounts payables and accrued liabilities as at:
(in thousands of Canadian dollars)
Accounts payables
Accrued liabilities
NOTE 22. PROVISIONS
The following table sets forth the Company’s provisions as at the periods indicated:
(in thousands of Canadian dollars)
Balance – December 31, 2012
Provision adjustments
Acquisition
Settlement of liabilities
Accretion expense
Foreign exchange diff erences
Loss on settlement
Balance – December 31, 2013
Provision adjustments
Settlement of liabilities
Accretion expense
Foreign exchange diff erences
Gain on settlement
Balance – December 31, 2014
(in thousands of Canadian dollars)
December 31, 2012
Current
Non-current
December 31, 2013
Current
Non-current
December 31, 2014
Current
Non-current
December 31
2014
December 31
2013
$
$
89,077
163,366
252,443
$
$
$
$
91,215
139,759
230,974
Total
52,309
10,512
245
(12,424)
357
2,552
66
53,617
15,197
(17,039)
503
1,084
(1,038)
Decommissioning
Liabilities
Warranties
Other
Provisions
$
$
$
$
21,414
(1,401)
245
(817)
357
787
66
20,651
2,911
(215)
477
391
(77)
$
$
4,247
4,833
–
(2,767)
–
71
–
6,384
2,142
(4,331)
–
260
–
26,648
7,080
–
(8,840)
–
1,694
–
26,582
10,144
(12,493)
26
433
(961)
$
24,138
$
4,455
$
23,731
$
52,324
Decommissioning
Liabilities
Warranties
Other
Provisions
$
$
3,155
18,259
21,414
3,412
17,239
20,651
3,627
20,511
$
$
$
24,138
$
4,247
–
4,247
6,384
–
6,384
4,455
–
4,455
$
$
9,426
17,222
26,648
6,175
20,407
26,582
6,892
16,839
$
$
$
23,731
$
Total
16,828
35,481
52,309
15,971
37,646
53,617
14,974
37,350
52,324
Decommissioning Liabilities
The total undiscounted cash fl ows estimated to settle all decommissioning liabilities is $42.0 million as at December 31, 2014. The current pre-tax
risk-free rates at which the estimated cash fl ows have been discounted range between 0.45% and 9.95%. Settlement for all decommissioning liabilities
is expected to be funded by future cash fl ows from the Company’s operations.
The Company expects the following cash outfl ows on the next fi ve years and thereafter for decommissioning liability remediation.
(in thousands of Canadian dollars)
2015
2016
2017
2018
2019
More than fi ve years
December 31
2014
$
$
3,627
4,573
907
4,464
1,165
27,232
41,968
Warranties
Project specifi c warranties are provided by various divisions in the normal course of business that are usually valid for a term of less than one year.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Other Provisions
The other provisions are comprised of current and non-current employee related provisions (required by local law in international jurisdictions),
provisions for lawsuits and other accrued liabilities related to operations for which there is a higher degree of uncertainty with respect to either the
amount or timing of the underlying payment.
NOTE 23. OTHER LIABILITIES
The following table sets forth the Company’s other liabilities as at the periods indicated:
(in thousands of Canadian dollars)
Balance – December 31, 2012
Adjustments
Settlement of liabilities
Accretion expense
Foreign exchange diff erences
Balance – December 31, 2013
Adjustments
Settlement of liabilities
Foreign exchange diff erences
Balance – December 31, 2014
December 31, 2012
Current
Non-current
December 31, 2013
Current
Non-current
December 31, 2014
Current
Non-current
Deferred Purchase
Consideration
Incentive-based
Compensation
(note 30)
Loans payable
$
$
$
$
19,374
–
–
697
1,547
21,618
1,236
(18,830)
849
$
$
17,705
20,422
(4,721)
–
530
33,936
11,313
(8,629)
1,112
$
$
287
–
(121)
–
21
187
–
(65)
(1)
Total
37,366
20,422
(4,842)
697
2,098
55,741
12,549
(27,524)
1,960
$
4,873
$
37,732
$
121
$
42,726
19,374
–
19,374
21,618
–
21,618
4,873
–
4,873
$
$
$
$
$
12,605
5,100
17,705
12,173
21,763
33,936
19,897
17,835
$
$
$
$
67
220
287
61
126
187
58
63
$
37,732
$
121
$
32,046
5,320
37,366
33,852
21,889
55,741
24,828
17,898
42,726
NOTE 24. LONG-TERM DEBT
On March 20, 2013, the Company issued Senior Notes for total gross proceeds of US$350 million (CDN$358.3 million at the March 20, 2013 foreign
exchange rate) to institutional investors as follows:
(i)
(ii)
(iii)
(iv)
US$100 million (CDN$102.4 million at the March 20, 2013 foreign exchange rate) aggregate principal amount of 2.98% Senior Notes, Series A,
due March 31, 2020 (the “Series A Notes”);
US$100 million (CDN$102.4 million at the March 20, 2013 foreign exchange rate) aggregate principal amount of 3.67% Senior Notes, Series B,
due March 31, 2023 (the “Series B Notes”);
US$100 million (CDN$102.4 million at the March 20, 2013 foreign exchange rate) aggregate principal amount of 3.82% Senior Notes, Series C,
due March 31, 2025 (the “Series C Notes”);
US$50 million (CDN$51.2 million at the March 20, 2013 foreign exchange rate) aggregate principal amount of 4.07% Senior Notes, Series D,
due March 31, 2028 (the “Series D Notes”; and together with the Series A Notes, the Series B Notes, the Series C Notes, collectively, the
“Senior Notes”).
The total long-term debt balance as at December 31, 2014 is $406.9 million (US$350.0 million) {December 31, 2013 – $374.4 million (US$350.0
million)}. The long-term debt has been designated as a hedge of the Company’s net investment in U.S. dollar functional currency subsidiary as
described in note 26.
The Company has undertaken to maintain certain covenants in respect of the long-term debt that are consistent with the debt covenants described in
note 20 for the Company’s Unsecured Committed Bank Credit Facility.
The Company was in compliance with these covenants as at December 31, 2014 and December 31, 2013.
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NOTE 25. EMPLOYEE FUTURE BENEFITS
The Company provides future benefi ts to its employees under a number of defi ned benefi t and defi ned contribution arrangements. The defi ned
benefi t pension plans are in Canada, the U.K. and Norway and include both fl at-dollar plans for hourly employees and fi nal earnings plans for salaried
employees. The Company also provides a post-employment life insurance benefi t to its Canadian retirees and a post-employment benefi t to its hourly
and salaried employees in Indonesia.
The Company’s funding policy for the Canadian registered pension plans is to fund in accordance with the requirements of applicable pension
legislation. The determination of the required funding is made on the basis of periodic actuarial valuations as required under applicable pension
legislation. The Company is responsible for the governance of the pension plans, including overseeing investment decisions. The Company has also
appointed experienced independent professional experts such as investment managers, actuaries and consultants to assist in the management of
the pension plans.
By their nature, defi ned benefi t pension plans carry many types of fi nancial risk. The main fi nancial risks faced by the Company’s pension plans can be
summarized as follows:
• Longevity risk: the risk that retirees will, on average, collect a pension for a longer period of time than expected based on the mortality assumption.
•
•
Investment risk: the risk that the invested assets of the plan will not yield the assumed rate of return, resulting in insuffi cient assets to provide for
the benefi ts promised and / or requiring the Company to make additional contributions to fund the defi cit.
Interest rate risk: the risk from changing market interest rates. A decrease in corporate bond yields will increase plan liabilities. This risk is greater
to the extent that there is a mismatch between the characteristics of the assets and liabilities.
•
Regulatory/legal risk: the risk of regulatory/jurisprudence changes that can alter the benefi ts promised.
The total cash payments made by the Company to fund the defi ned benefi t pension plans, the post-retirement insurance plans and the post-
employment benefi t plan during 2014 were $4.9 million (2013 – $5.7 million). The total cash payments made by the Company to fund the defi ned
contribution pension arrangements during 2014 were $5.4 million (2013 – $6.7 million).
The Company measures the fair value of assets and the defi ned benefi t obligation as at December 31. Actuarial valuations for the Company’s
registered defi ned benefi t pension plans and the Supplementary Executive Retirement Plan (“SERP”) for Executives of ShawCor Ltd. arrangement
are generally required at least every three years. The most recent actuarial valuations of the plans were conducted as at August 1, 2013 (one plan),
December 31, 2013 (four plans), January 1, 2014 (two plans) and August 1, 2014 (one plan).
The employee future benefi t amounts recognized in the consolidated balance sheets are as follows:
(in thousands of Canadian dollars)
Accrued employee future benefi t asset
Pension plans (note 16)
Accrued employee future benefi t liability
Pension plans
Post-employment benefi ts
Post-retirement life insurance
Net accrued employee future benefi t liability
December 31
2014
December 31
2013
$
$
$
7,694
7,694
8,030
8,030
(23,776)
(2,124)
(108)
(26,008)
(18,314)
$
(23,648)
(1,930)
(100)
(25,678)
(17,648)
The following was the composition of plan assets at the balance sheet dates, for the Canadian registered defi ned benefi t pension plans:
(in thousands of Canadian dollars)
Investments quoted in active markets:
Cash and cash equivalents
Equity instruments
Debt instruments
The following was the composition of invested plan assets at the balance sheet dates for the SERP plan(a):
(in thousands of Canadian dollars)
Investments quoted in active markets:
Cash and cash equivalents
Equity instruments
(a) The amounts in the above table exclude amounts sitting in the refundable tax account held by the CRA.
December 31
2014
December 31
2013
5%
64%
31%
100%
4%
66%
30%
100%
December 31
2014
December 31
2013
–
100%
100%
–
100%
100%
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Actual Return on Plan Assets
The actual return on plan assets for the years ended December 31, 2014 and 2013 amounted to $11.1 million and $15.1 million, respectively.
Employee Future Benefi t Cost
The employee future benefi t cost recognized in the consolidated statements of income is as follows:
(in thousands of Canadian dollars)
Current service costs
Past service costs and impact of settlements, curtailments and termination benefi ts
Interest cost on defi ned benefi t obligation
Interest income on plan assets
Impact of asset ceiling / minimum funding requirement
Defi ned benefi t cost recognized
Defi ned contribution cost recognized
Employee future benefi t cost recognized(a)
(a) The total amount is included in the consolidated statements of income as selling, general and administrative expenses.
The employee future benefi t cost (income) recognized in other comprehensive income (“OCI”) is as follows:
(in thousands of Canadian dollars)
Valuation eff ect
Return on plan assets (excluding amounts included in interest income)
Net actuarial losses (gains) recognized in the year
Other changes in asset ceiling / minimum funding requirement not included in net interest
Foreign currency exchange rate changes
Employee future benefi t cost (income) recognized in OCI
Changes in the defi ned benefi t obligation are as follows:
(in thousands of Canadian dollars)
Balance – Beginning of year
Valuation eff ect
Employer current service cost
Net interest cost
Past service costs and impact of settlements, curtailments and termination benefi ts
Benefi t payments
Actuarial losses due to changes in demographic assumptions
Actuarial losses (gains) due to changes in economic assumptions
Experience gains
Foreign exchange diff erences
Balance – End of year
Changes in the fair value of the plan assets are as follows:
(in thousands of Canadian dollars)
Balance – Beginning of year
Valuation eff ect
Employer contributions
Employee contributions
Settlements
Benefi t payments
Interest income on plan assets
Return on plan assets (excluding amounts included in interest income)
Foreign exchange diff erences
Balance – End of year
December 31
2014
December 31
2013
$
$
3,856
254
5,434
(4,996)
4,548
368
4,916
5,442
10,358
$
$
4,274
4,833
4,755
(3,630)
10,232
104
10,336
6,746
17,082
December 31
2014
December 31
2013
$
$
29
(6,095)
12,395
(5,619)
(77)
$
633
$
(202)
(11,443)
(9,311)
4,938
(293)
(16,311)
December 31
2014
December 31
2013
$
$
116,569
–
3,856
5,434
254
(4,872)
627
12,806
(1,038)
(441)
133,195
$
116,178
–
4,274
4,755
4,833
(4,392)
3,950
(11,436)
(1,825)
232
$
116,569
December 31
2014
December 31
2013
$
$
106,644
(29)
4,883
–
–
(4,872)
4,996
6,095
(265)
117,452
$
89,262
202
5,654
–
–
(4,392)
3,630
11,443
845
$
106,644
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Amounts for the current and previous period are as follows:
(in thousands of Canadian dollars)
Defi ned benefi t obligation
Fair value of plan assets
Net liability before impact of asset ceiling / minimum funding requirement
Impact of asset ceiling / minimum funding requirement
Net employee future benefi t liability
The following are the principal assumptions for the actuarial valuation of the plans as at December 31:
Canada
Defi ned benefi t obligation
Discount rate
Future salary increase
Future pension increase
Mortality(a)
Benefi t cost for year ended December 31
Discount rate
Future salary increase
Norway
Defi ned benefi t obligation
Discount rate
Future salary increase
Future pension increase
Mortality
Benefi t cost for year ended December 31
Discount rate
Future salary increase
United Kingdom
Defi ned benefi t obligation
Discount rate
Future salary increase
Future pension increase
Mortality
Benefi t cost for year ended December 31
Discount rate
Future salary increase
Indonesia
Defi ned benefi t obligation
Discount rate
Future salary increase
Future pension increase
Mortality
Benefi t cost for year ended December 31
Discount rate
Future salary increase
December 31
2014
December 31
2013
$
$
133,195
117,452
15,743
2,571
18,314
$
116,569
106,644
9,925
7,723
$
17,648
2014
2013
3.90%
3.50%
n/a
CPM 2014
Private with
scale CPM-B
4.70%
4.00%
n/a
UP94
Generational
4.70%
4.00%
2.30%
2.75%
0.00%
K2013
4.10%
3.75%
4.00%
4.00%
4.10%
3.75%
0.90%
K2013
3.90%
3.50%
3.70%
n/a
2.30%
S1PA
(projected)
4.70%
n/a
2.70%
S1PA
(projected)
4.70%
n/a
4.40%
n/a
8.40%
8.80%
10.00% (local), 10.00% (local),
6.00% (expat)
6.00% (expat)
n/a
n/a
Indonesia’s
CSO80
Table 2011
8.80%
6.00%
10.00% (local), 10.00% (local),
6.00% (expat)
6.00% (expat)
(a) In light of results of a Canadian pension mortality experience study conducted by the Canadian Institute of Actuaries in 2013 indicating improved pensioner mortality not refl ected in the above
table for the 2013, the defi ned benefi t obligation as at December 31, 2013 for the Canadian pension plans was increased by 3.5%; the 2014 assumptions include the results of this study, and no
similar fi nal adjustment was made to the defi ned benefi t obligation as at December 31, 2014.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Sensitivity Analysis
A quantitative sensitivity analysis for signifi cant assumptions as at December 31, 2014 is as shown below:
Signifi cant Assumptions
(in thousands of Canadian dollars)
Discount rate
Decrease of 50bp
Increase of 50bp
Future salary increase
Decrease of 50bp
Increase of 50bp
Mortality Assumption – Impact of Life Expectancy being 1 year longer
Impact of Sensitivity Analysis on
Defi ned Benefi t Obligation
Change
% Change
10,894
(9,725)
(2,819)
3,009
2,577
8.2%
(7.3%)
(2.1%)
2.3%
1.9%
The sensitivity analysis noted above has been determined based on a method that extrapolates the impact on defi ned benefi t obligation as a result of
reasonable changes in key assumptions occurring as at December 31, 2014.
Other Information
The Company expects to contribute $4.9 million to its defi ned benefi t plans for the year ended December 31, 2015.
The average duration of the defi ned benefi t obligation plans as at December 31, 2014 is 16 years.
NOTE 26. FINANCIAL INSTRUMENTS
The Company has classifi ed its fi nancial instruments as follows:
(in thousands of Canadian dollars)
Loans and receivables, measured at amortized cost
Loans receivable
Trade accounts receivable, net
Held-to-maturity
Short-term investments
Fair value through profi t or loss
Cash and cash equivalents
Derivative fi nancial instruments – assets
Derivative fi nancial instruments – liabilities
Available-for-sale
Convertible preferred shares
Deposit guarantee
Other fi nancial liabilities, measured at amortized cost
Bank indebtedness
Loans payable
Accounts payable
Deferred purchase consideration
Long-term debt
December 31
2014
December 31
2013
$
7,021
327,474
$
9,242
237,880
550
116,556
5,578
794
10,000
893
4,685
121
89,077
4,873
406,926
$
6,618
79,395
624
1,632
–
81
5,229
187
91,215
21,618
374,381
$
Fair Value
IFRS 13, Fair Value – Measurement, provides a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are
observable or unobservable. Observable inputs are those which refl ect market data obtained from independent sources, while unobservable inputs
refl ects 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 diff erent 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 signifi cant inputs are unobservable.
The hierarchy requires the use of observable market data when available.
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The following table presents the fair value hierarchy levels for the fi nancial assets and liabilities as at December 31, 2014:
(in thousands of Canadian dollars)
Assets
Cash and cash equivalents
Short-term investments
Derivative fi nancial instruments
Convertible preferred shares
Deposit guarantee
Liabilities
Bank indebtedness
Deferred purchase consideration
Long-term debt
Derivative fi nancial instruments
Fair Value
Level 1
Level 2
Level 3
$
$
$
$
$
$
116,556
550
5,578
10,000
893
133,577
4,685
4,873
406,926
794
$
417,278
$
116,556
550
–
–
–
117,106
4,685
–
–
–
4,685
$
$
$
$
$
$
–
–
5,578
–
893
6,471
–
4,873
406,926
794
$
412,593
$
–
–
–
10,000
–
10,000
–
–
–
–
–
The derivative fi nancial 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.
Financial Risk Management
The Company’s operations expose it to a variety of fi nancial 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 fi nancial markets and seeks to minimize
potential adverse eff ects on the Company’s fi nancial position and fi nancial 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 fi nancial position may be impacted by fl uctuations in foreign exchange rates as these foreign currency items are
translated into Canadian dollars. As at December 31, 2014, fl uctuations 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 $61.7 million, $8.6 million and $6.8 million, respectively, prior to hedging activities. In addition, such fl uctuations
would impact the Company’s consolidated total assets, consolidated total liabilities and consolidated total equity by $76.3 million, $20.0 million
and $56.3 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 U.S. dollar based operations, the Company does not hedge translation exposures.
Foreign Exchange Forward Contracts
The Company utilizes fi nancial 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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 2014:
(in thousands, except weighted average rate amounts)
Canadian dollars sold for US dollars
Less than one year
Weighted average rate
US dollars sold for Canadian dollars
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 pounds sold for US dollars
Less than one year
Weighted average rate
Norwegian Kroners sold for US dollars
Less than one year
Weighted average rate
Australian dollars sold for US dollars
Less than one year
Weighted average rate
Malaysian ringgits sold for US dollars
Less than one year
Weighted average rate
CAD$14,025
1.13
US$13,200
1.11
US$2,800
3.50
€44,020
1.31
£3,430
1.57
NOK 112,697
0.13
AUD$1,554
0.85
MYR 32,500
0.28
The Company does not apply hedge accounting to account for its foreign exchange forward contracts.
As at December 31, 2014, the Company had notional amounts of $130.9 million of forward contracts outstanding (2013 – $115.2 million) with the fair
value of the Company’s net gain from all foreign exchange forward contracts totalling $4.7 million (2013 – $1.0 million net benefi t).
Net Investment Hedge
The Senior Notes have been designated as a hedge of the net investment in one of the Company’s subsidiaries, which has the U.S. dollar as its
functional currency. During the year ended December 31, 2014, a loss of $32.5 million on the translation of the Senior Notes was transferred to other
comprehensive income to off set the losses on translation of the net investment in the subsidiary. There was no ineff ectiveness of this hedge for the
year ended December 31, 2014.
Interest Rate Risk
The following table summarizes the Company’s exposure to interest rate risk as at December 31, 2014:
(in thousands of Canadian dollars)
Financial assets
Cash equivalents
Short-term investments
Loans receivable
Convertible preferred shares
Financial liabilities
Bank indebtedness
Loans payable
Long term debt
Non-interest
Bearing
Floating Rate
Fixed
Interest Rate
$
$
$
$
–
550
215
10,000
10,765
–
121
–
121
$
$
$
$
–
–
4,434
–
4,434
4,685
–
–
4,685
$
$
$
$
$
$
4,104
–
2,372
–
6,476
–
–
406,926
Total
4,104
550
7,021
10,000
21,675
4,685
121
406,926
$
406,926
$
411,732
The Company’s interest rate risk arises primarily from its fl oating 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 fi nancial instruments.
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The objective of managing counterparty credit risk is to prevent losses in fi nancial 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 aff ected to a large extent by the same
macroeconomic conditions and risks. The Company manages this credit risk by assessing the credit quality of all counterparties, taking into account
their fi nancial position, past experience and other factors. Management also establishes and regularly reviews credit limits of counterparties and
monitors utilization of those credit limits on an ongoing basis.
For the year ended December 31, 2014, the Company had no customer who generated revenue greater than 10% of total consolidated revenue.
For the year ended December 31, 2013, there was one customer who generated approximately 22% of total consolidated revenue. This revenue
resulted primarily from a single contract for which a substantial upfront payment was received in 2012 and which was recorded as deferred revenue
at that time.
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 statements 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, 2014, $28.1 million, or 8.3%, 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 receivables 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:
(in thousands of Canadian dollars)
Balance – Beginning of year
Bad debt expense
Acquisition
Recovery of previously written-off bad debts
Impact of change in foreign exchange rates
Balance – End of year
2014
11,732
748
693
(156)
(501)
12,516
$
$
$
2013
9,409
3,016
–
(24)
(669)
$
11,732
Liquidity Risk
The Company’s objective in managing liquidity risk is to maintain suffi cient, readily available cash reserves in order to meet its liquidity requirements
at any point in time. The Company achieves this by maintaining suffi cient cash and cash equivalents and through the availability of funding from
committed credit facilities. As at December 31, 2014, the Company had cash and cash equivalents totalling $116.6 million (2013 – $79.4 million)
and had unutilized lines of credit available to use of $381.0 million (2013 – $209.5 million).
The following are the contractual maturities of the Company’s purchase commitments and fi nancial liabilities as at December 31, 2014:
(in thousands of Canadian dollars)
Purchase commitments
Bank indebtedness
Loans payable
Accounts payable
Deferred purchase consideration
Long-term debt
Finance costs on long-term debt
Obligations under fi nance lease
Operating leases
Less than 1 year
1 – 3 years
3 – 5 years
Thereafter
$
$
71,363
4,685
58
89,077
4,873
–
13,835
1,891
20,711
$
–
–
63
–
–
–
27,670
2,735
24,340
–
–
–
–
–
–
27,670
2,672
10,787
$
–
–
–
–
–
406,926
72,076
11,640
9,969
$
Total
71,363
4,685
121
89,077
4,873
406,926
141,251
18,938
65,807
$
206,493
$
54,808
$
41,129
$
500,611
$
803,041
NOTE 27. CAPITAL MANAGEMENT
The Company defi nes capital that it manages as the aggregate of its equity and interest bearing liabilities. 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 fi nance 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
Long-term debt
Obligations under fi nance lease
Equity
December 31
2014
$
4,685
121
406,926
13,495
980,613
$ 1,405,840
December 31
2013
$
5,229
187
374,381
14,314
658,581
$ 1,052,692
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
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. Specifi cally, the Company has undertaken to maintain certain covenants in respect of its Unsecured Committed Bank Credit Facility and
Senior Notes. The Company is in compliance with these covenants as at December 31, 2014.
NOTE 28. LEASES, COMMITMENTS AND CONTINGENCIES
a) Operating Leases
The Company has entered into various commercial leases for motor vehicles, machinery, equipment, 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:
(in thousands of Canadian dollars)
Within one year
After one year but not more than fi ve years
More than fi ve years
December 31
2014
$
$
20,711
35,127
9,969
65,807
The lease expenditure charged to the consolidated statements of income during the year is $32.2 million (December 31, 2013 – $25 million).
b) Finance Leases
The Company has fi nance 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 specifi c entity that holds the lease. The following table presents the future minimum lease
payments under fi nance 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 fi ve years
After more than fi ve years
Total minimum lease payments
Less: Amounts representing interest charges
Present value of minimum lease payments
December 31
2014
Present Value
of Payments
$
$
$
1,222
3,116
9,157
13,495
–
13,495
Minimum
Payments
1,891
5,407
11,640
18,938
(5,443)
13,495
$
$
$
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 eff ect on the consolidated fi nancial position of the Company.
d) Performance, Bid and Surety Bonds
The Company provides standby letters of credit for performance, bid and surety bonds through fi nancial 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 that 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’s utilizes its credit facilities to support the Company’s bonds. The Company has utilized credit facilities of $142.4 million as at
December 31, 2014 (December 31, 2013 – $111.4 million).
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NOTE 29. SHARE CAPITAL
On March 20, 2013, the Company eliminated its dual class share structure pursuant to a shareholder and court approved Plan of Arrangement
(the “Arrangement”) through the purchase of all of the Class A and Class B shares of the Company by a newly formed Canadian corporation. The
Arrangement, a transaction with a related party, eliminated the Company’s dual-class share structure through:
• The purchase of all of the issued and outstanding Class A shares in exchange for new common shares (“common shares”) on a 1:1 basis; and
•
The purchase of all of the issued and outstanding Class B shares in exchange for consideration of $43.43 in cash or 1.1 common shares per
Class B share, such that 90% of the total consideration for the Class B shares was paid in cash and 10% was paid in common shares. All Class A and
B shares were removed from the authorized capital of the Company.
Upon closing, the new corporation and the Company amalgamated, under the name ShawCor Ltd., with the common shares as its only class of share
capital. Upon closing, a special dividend of $1.00 per share was declared on all outstanding common shares which were paid on April 19, 2013.
The Company recognized transaction costs charged directly to retained earnings of $553.2 million, which was comprised of the $498.8 million cash
payment to the Class B shareholders and the issuance of 1,403,684 common shares to the Class B shareholders with a fair value of $55.4 million,
partially off set by the book value of the Class B shares of $1.0 million.
In connection with the closing of the Arrangement, the employment terms of the Company’s Chair of the Board and indirect controlling shareholder,
and of the Company’s Vice Chair of the Board, were amended to provide that their employment with the Company’s subsidiary would terminate and
they would receive severance and other benefi ts of approximately $3.4 million and $3.7 million, respectively.
Under the Arrangement, any stock option outstanding as at March 20, 2013, that had not been duly exercised prior to that date, whether vested or
unvested, represents an option (a “New ShawCor Option”) to purchase the same number of common shares at the same exercise price. The exercise
price, term to expiry, conditions to and manner of exercising, vesting schedule and all other terms and conditions of such New ShawCor Option
remain unchanged from the previously issued options with respect to the Class A shares, and any document or agreement previously evidencing the
original options is deemed to evidence such New ShawCor Options.
Any award granted under the employee share unit plan (“Company ESUP Award”) that had not been settled prior to March 20, 2013, whether vested
or unvested, represents a grant (a “New ShawCor ESUP Award”) in respect of the same number of common shares as applied to the acquisition of
Class A shares pursuant to the Company ESUP Award. All other terms and conditions of such New ShawCor ESUP Award remain unchanged from the
previously issued Company ESUP Awards with respect to the Class A shares, and any document or agreement previously evidencing a Company ESUP
Award is deemed to evidence such New ShawCor ESUP Award.
Any grant of deferred share units issued pursuant to the deferred share unit plan (“Company DSU Grant”) that had not been settled prior to
March 20, 2013, represents a unit (a “New ShawCor DSU Grant”) in respect of the same number of common shares as applied to the acquisition of
Class A shares pursuant to the Company DSU Grant. All other terms and conditions of such New ShawCor DSU Grant remain unchanged from the
previously issued Company DSU Grants with respect to the Class A shares, and any document or agreement previously evidencing a Company DSU
Grant is deemed to evidence such New ShawCor DSU Grant.
On September 19, 2014, the Company issued 3,650,000 common shares at a price of $54.85 per share through a bought public off ering for gross
proceeds of $200.2 million (the “Off ering”). On October 3, 2014, the syndicate of underwriters to the Off ering exercised their over-allotment option
in full, which resulted in the Company issuing an additional 547,500 common shares of the Company at a price of $54.85 per common share, for
additional gross proceeds of $30.0 million.
The following table sets forth the changes in the Company’s shares for the years ending December 31:
(all dollar amounts in thousands of Canadian dollars)
Number of shares
Balance, December 31, 2013
Issued through public off ering (net of commissions and share issuance costs of $9.7 million)
Issued on exercise of stock options
Issued on exercise of Restricted Stock Units (“RSUs”)
Balance, December 31, 2014
Stated value:
Balance, December 31, 2013
Issued through public off ering
Proceeds from exercise of stock options
Compensation cost on exercised options
Compensation cost on exercised RSUs
Balance, December 31, 2014
Total
59,991,202
4,197,500
303,450
1,697
64,493,849
$
303,327
220,524
7,167
2,590
52
$
533,660
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all dollar amounts in thousands of Canadian dollars)
Class A
Class B
Common
Total
Number of Shares
Balance, December 31, 2012
Issued on exercise of stock options
Issued on exercise of RSUs
Purchase and cancellation of Class A shares
Purchase and cancellation of Class B shares
Balance, December 31, 2013
Stated Value
Balance, December 31, 2012
Proceeds from exercise of stock options
Compensation cost on exercised options
Compensation cost on exercised RSUs
Cancellation of Class A Shares
Cancellation of Class B Shares
Balance, December 31, 2013
57,491,070
72,440
200
(57,563,710)
–
12,760,635
–
–
–
(12,760,635)
–
1,023,220
588
57,563,710
1,403,684
70,251,705
1,095,660
788
–
(11,356,951)
–
–
59,991,202
59,991,202
$
$
220,706
1,372
531
5
(222,614)
–
$
981
–
–
–
–
(981)
–
18,227
7,048
19
222,614
55,419
$
221,687
19,599
7,579
24
–
54,438
$
–
$
–
$
303,327
$
303,327
All shares have been issued and fully paid and have no par value. There are an unlimited number of common shares authorized. Holders of common
shares are entitled to one vote per share.
Dividends declared and paid were as follows:
(Dollar amounts per share)
New Common shares
Class A
Class B
$
2014
0.575
–
–
$
2013
1.375
0.100
0.091
The dividends paid on the Class A and Class B shares were before the elimination of the dual class share structure under the Arrangement.
NOTE 30. SHARE-BASED AND OTHER INCENTIVE-BASED COMPENSATION
As at December 31, 2014, the Company had the following stock option plan, which was initiated in 2001:
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 of stock options are permitted on the basis of 20% of the optioned shares per
year over fi ve years, on a cumulative basis, commencing one year following the date of the grant. The grant price equals the closing sale price of the
common shares on the day prior to the grant.
On March 3, 2010, the Board approved the amended 2001 Employee Plan (the “Amended 2001 Employee Plan”). All stock options granted in 2010,
and certain options granted thereafter, 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 diff erence 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.
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
2014
Weighted
Average
Exercise Price
$
$
$
29.20
45.73
23.63
26.41
–
32.25
26.73
2013
Weighted
Average
Exercise Price
$
$
$
21.83
41.68
17.89
30.97
15.94
29.20
24.95
Total Shares
2,106,140
251,900
(1,095,660)
(6,000)
(480)
1,255,900
716,244
Total Shares
1,255,900
86,500
(303,450)
(8,980)
–
1,029,970
594,706
Balance outstanding – Beginning of year
Granted
Exercised
Forfeited
Expired
Balance outstanding – End of year
Options exercisable
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Range of Exercise Price
$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
$40.01 to $45.00
$45.01 to $50.00
Range of Exercise Price
$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
$40.01 to $45.00
Outstanding
as at
December 31,
2014
181,850
2,000
228,960
182,100
102,260
246,300
86,500
1,029,970
Options Outstanding
December 31, 2014
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (years)
Weighted
Average
Exercise Price
Exercisable
as at
December 31,
2014
Weighted
Average
Exercise Price
3.89
3.98
2.53
6.98
5.98
7.98
8.98
5.75
$
$
15.55
21.95
27.70
32.81
37.32
41.69
45.73
32.25
$
181,850
2,000
228,960
71,280
61,356
49,260
–
594,706
$
15.55
21.95
27.70
32.81
37.32
41.69
–
26.73
December 31, 2013
Options Exercisable
Options Outstanding
Outstanding
as at
December 31,
2013
302,020
5,400
400,920
197,000
102,260
248,300
1,255,900
Weighted
Average
Remaining
Contractual
Life (years)
Weighted
Average
Exercise Price
Exercisable
as at
December 31,
2013
Weighted
Average
Exercise Price
4.58
3.10
3.58
7.78
6.99
8.99
5.83
$
$
15.70
21.22
27.94
32.76
37.32
41.68
29.20
$
223,620
3,400
400,920
47,400
40,904
–
716,244
$
15.77
20.79
27.94
32.59
37.32
–
24.95
The Board of Directors approved the granting of 86,500 stock options (2013 – 251,900) during the year ended December 31, 2014 under the 2001
Employee Plan. The total fair value of the stock options granted during the year ended December 31, 2014 was $1.1 million (2013 – $3.3 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
$
$
$
$
2014
45.73
45.73
6.25
32.00%
1.20%
2.00%
2013
41.68
41.68
6.25
34.00%
0.90%
1.89%
The volatility measured at the standard deviation of continuously compounded share returns is based on the statistical analysis of daily share prices
over the expected life of the options.
The fair value of options granted under the Amended 2001 Employee Plan will be amortized to compensation expense over the fi ve-year vesting period
of options. The compensation cost from the amortization of granted stock options for the year ended December 31, 2014, included in selling, general
and administrative expenses, was $2.0 million (2013 – $1.9 million).
Stock Options with Tandem Share Appreciation Rights
Balance outstanding – Beginning of period
Granted
Exercised in cash
Expired
Balance outstanding – End of period
Options exercisable
2014
Weighted
Average
Fair Value(a)
11.16
13.75
–
12.94
11.55
15.69
Total Shares
120,800
21,600
–
(400)
142,000
77,260
$
$
$
2013
Weighted
Average
Fair Value(a)
12.56
13.35
14.01
–
11.16
15.09
Total Shares
223,200
32,300
(134,700)
–
120,800
53,100
$
$
$
(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.
The mark-to-market liability for the stock options with SARs as at December 31, 2014 is $1.4 million (2013 – $1.3 million), all of which is included in
current and non-current other liabilities on the consolidated balance sheets.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 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 revenue and income 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 classifi ed as liability instruments in accordance with IFRS as their terms require that they
be settled in cash.
The VGP liability as at December 31, 2014 is $32.1 million (2013 – $27.2 million).
ESUP
The ESUP authorizes the Board to grant awards of 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 common shares and are valued on the basis of the underlying weighted average trading price
of the common shares over the fi ve trading days preceding the grant date. The valuation is not subsequently adjusted for changes in the market price
of the common shares prior to the settlement of the award. Each RSU and PSU granted under the ESUP represents one common share. The ESUP
provides that the maximum number of common shares that are reserved for issuance from time to time shall be fi xed at 1,000,000 common shares.
The RSUs vest in two tranches over a period of one to fi ve 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 classifi ed as equity instruments in
accordance with IFRS as their terms require that they be settled in shares.
The following table sets forth the Company’s RSU/PSUs reconciliation for the years ended December 31:
Balance outstanding – Beginning of year
Granted
Exercised
Cancelled
Balance outstanding – End of year
RSUs/PSUs exercisable
2014
Weighted
Average
Grant Date
2013
Weighted
Average
Grant Date
Total Shares
Fair Value(a)(b)
Total Shares
Fair Value(a)
209,307
74,438
(1,697)
(20,340)
261,708
57,799
$
$
$
33.91
43.96
29.25
35.31
36.69
30.80
134,987
80,998
(788)
(5,890)
209,307
29,594
$
$
$
30.79
39.10
30.90
34.06
33.91
29.38
(a) RSU awards do not have an exercise price; their weighted average grant date fair value is the closing stock price on the reporting date.
(b) PSU awards do not have an exercise price; their weighted average grant date 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 Offi cer) 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 dollar amount to be paid in DSUs divided by the weighted average trading price of the common shares over the fi ve
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 common 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 common 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 classifi ed as liability instruments on the date of the grant in accordance with IFRS as the unitholder has the option to settle
in cash or in shares.
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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
2014
Weighted
Average
Grant Date
2013
Weighted
Average
Grant Date
Total Shares
Fair Value(a)
Total Shares
Fair Value(a)
$
124,980
26,120
(51,425)
99,675
$
34.60
48.84
35.16
38.04
$
97,421
38,299
(10,740)
124,980
$
31.61
41.60
32.40
34.60
(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, 2014 is $4.2 million (2013 – $5.3 million), all of which is included in current and non-
current other liabilities on the consolidated balance sheets.
Incentive-based Compensation
The following table sets forth the incentive-based compensation expense for the years ended December 31:
(in thousands of Canadian dollars)
Stock option expense
VGP expense
DSU expense
RSU expense
SAR expense
Total share-based and other incentive-based compensation expense
NOTE 31. KEY MANAGEMENT COMPENSATION
2014
1,956
9,428
1,737
2,218
148
15,487
$
$
$
$
2013
1,885
17,469
1,899
1,286
1,055
23,594
Key management includes directors (executive and non-executive) and corporate offi cers. The compensation paid or payable to key management for
employee and director services is shown below for the years ended December 31:
(in thousands of Canadian dollars)
Salaries and other short-term incentive compensation and employee benefi ts
Post-employment benefi ts – Defi ned Benefi t Plans
Share-based and other long-term incentive payments
Director fees and other compensation
Total
NOTE 32. EMPLOYEE BENEFITS EXPENSE
The following table sets forth the Company’s employee benefi ts expense for the years ended December 31:
(in thousands of Canadian dollars)
Salaries, wages and employee benefi ts
Pension (note 25)
Share-based and other incentive-based compensation (note 30)
Total
NOTE 33. FINANCE COSTS
The following table sets forth the Company’s fi nance costs for the years ended December 31:
(in thousands of Canadian dollars)
Interest income on short-term deposits
Interest expense, other
Interest expense on long term debt
Finance costs – net
2014
3,714
630
5,271
2,368
11,983
2014
539,606
10,680
15,487
565,773
$
$
$
2013
9,050
6,394
5,874
6,591
27,909
2013
475,595
17,082
23,594
$
516,271
2014
(1,229)
6,210
13,420
$
18,401
$
2013
(1,156)
5,949
10,119
14,912
$
$
$
$
$
$
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NOTE 34. EARNINGS PER SHARE (“EPS”)
The following table details the weighted-average number of shares outstanding for the purposes of calculating basic and diluted EPS for the years
ended December 31:
(in thousands of Canadian dollars except share and per share amounts)
Net income used to calculate EPS
Net income (attributable to the shareholders of the Company)
Weighted average number of shares outstanding – basic (000’s)
Dilutive eff ect of stock options
Weighted average number of shares outstanding – diluted (000’s)
Basic EPS
Diluted EPS
NOTE 35.
INCOME TAXES
The following table sets forth the Company’s income tax expense for the years ended December 31:
(in thousands of Canadian dollars)
Current Income Taxes
Based on taxable income of current year
Adjustment to prior year provision
Deferred Income Taxes
Reversal of temporary diff erences
Total Income Tax Expense
2014
2013
94,861
61,374
445
61,819
1.55
1.53
$
219,862
61,972
674
62,646
3.55
3.51
$
$
2014
2013
56,539
1,901
58,440
(37,430)
(37,430)
21,010
$
$
93,620
(259)
93,361
(14,959)
(14,959)
78,402
$
$
$
$
$
The following table sets forth the Company’s income taxes on items recognized in other comprehensive income (loss) for the years ended December 31:
(in thousands of Canadian dollars)
Income tax expense on actuarial gain and losses on defi ned employee future benefi t plans
Income Tax Expense (Recovery) Charged to Other Comprehensive Income
2014
(152)
(152)
$
$
2013
4,103
4,103
$
$
The following table sets forth a reconciliation of the Company’s eff ective income tax rate for the years ended December 31:
Expected income tax expense based on statutory rate
Tax rate diff erential on earnings of foreign subsidiaries
Benefi t of previously unrecognized tax losses
Unrecognized tax losses of foreign subsidiaries
Adjustment to prior year provision
Other
Eff ective Income Tax Rate
2014
26.5%
(14.9%)
(0.2%)
1.1%
1.7%
4.0%
18.2%
2013
27.0%
(8.2%)
(0.6%)
4.5%
(0.1%)
3.4%
26.0%
The expected income tax rate is computed using average Canadian federal and provincial income tax rates based on an estimated allocation of net
income before tax to the various provinces.
Recognized Deferred Income Tax Assets and Liabilities
The following table sets forth the Company’s deferred income tax assets and liabilities as at:
(in thousands of Canadian dollars)
Deferred Income Tax Assets
Amortizable property, plant and equipment
Provisions and future expenditures
Non-capital losses
Deferred Income Tax Liabilities
Amortizable property, plant and equipment
Provisions and future expenditures
Net Deferred Income Tax Liability
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December 31
2014
December 31
2013
$
$
10,490
40,154
11,508
62,152
(39,926)
(7,214)
(47,140)
15,012
$
$
17,953
18,984
11,543
48,480
(18,972)
(49,885)
(68,857)
(20,377)
The following table sets forth the Company’s deferred income tax assets and liabilities as presented in the Consolidated Balance Sheets as at:
(in thousands of Canadian dollars)
Deferred income tax assets
Deferred income tax liabilities
December 31
2014
December 31
2013
$
$
39,019
(24,007)
15,012
48,480
(68,857)
(20,377)
The Company has recorded deferred income tax assets of $11.5 million as at December 31, 2014 (December 31, 2013 – $11.5 million), pertaining to
loss carryforwards based on management’s fi nancial projections and the relevant income tax legislation in each jurisdiction.
(in thousands of Canadian dollars)
Deferred Income Tax Assets
Amortizable property, plant and equipment
Provisions and future expenditures
Net operating losses
Change in deferred income tax assets
Deferred Income Tax Liabilities
Amortizable property, plant and equipment
Provisions and future expenditures
Change in deferred income tax liabilities
Change in Deferred Income Taxes
Deferred income taxes in other comprehensive income
Deferred income taxes acquired through acquisitions
Deferred income taxes moved to assets held for sale
Deferred Income Tax Recovery in Net Income
December 31
2014
December 31
2013
$
$
7,463
(21,170)
35
(13,672)
20,954
(42,671)
(21,717)
(35,389)
152
(2,193)
–
$
(37,430)
$
(6,001)
(4,335)
(1,997)
(12,333)
4,368
3,010
7,378
(4,955)
(4,103)
(10,644)
4,743
(14,959)
The Company has not recognized a deferred income tax liability for taxes that would be payable on the unremitted earnings of certain of the
Company’s subsidiaries, associates and joint ventures for the years ended December 31, 2014 and 2013, as the Company has determined that
the undistributed profi ts of its subsidiaries will not be distributed in the foreseeable future. The temporary diff erence associated with investments
in subsidiaries, associates and joint ventures, for which a deferred income tax liability has not been recognized, aggregates to $162.2 million and
$189.9 million for the years ended December 31, 2014 and 2013, respectively.
The Company has net operating losses of $131.4 million for the year ended December 31, 2014 (December 31, 2013 – $123.0 million), in various
jurisdictions for which no deferred income tax asset has been recognized. These losses expire subsequent to the 2018 fi scal year. The Company has
capital losses of $15.3 million and $6.9 million for the years ended December 31, 2014 and 2013, respectively, in various jurisdictions for which no
deferred income tax asset has been recognized. These capital losses carry forward indefi nitely.
NOTE 36. SUBSEQUENT EVENT
The Company completed the acquisition of Dhatec B.V. (“Dhatec”) on January 5, 2015. Dhatec is a Netherlands based company which designs,
assembles and markets engineered pipe logistics products and services which mitigate damage and enhance safety and effi ciency in the
manufacturing, coating, handling, transportation, preservation and storage of pipe. Dhatec’s revenue in 2014 is approximately US$25 million.
NOTE 37. COMPARATIVE FIGURES
The comparative audited consolidated fi nancial statements have been reclassifi ed from consolidated fi nancial statements previously presented to
conform to the presentation of the current year consolidated fi nancial statements in accordance with IFRS.
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SUPPLEMENTARY INFORMATION
SIX-YEAR REVIEW AND
QUARTERLY INFORMATION
SIX-YEAR REVIEW (UNAUDITED)
For the year ended December 31
(in thousands of Canadian dollars
except per share information)
Operating Results
Revenue
Adjusted EBITDA(a)
Net Income(b)
2014
IFRS
2013
IFRS
2012
IFRS(e)
2011
IFRS
2010
IFRS
2009
CGAAP(f)
1,890,029
336,701
94,861
1,847,549
391,223
219,862
1,469,187
265,254
178,310
1,157,265
128,168
56,280
1,034,163
186,035
95,072
1,183,978
254,143
131,450
Cash Flow
Cash from operating activities
Purchase of property, plant and equipment
187,985
77,645
32,264
76,729
530,512
73,505
45,325
55,982
53,244
48,723
299,333
34,358
Financial Position
Working capital(c)
Long-term debt
Equity
Total assets
Per Share Information
(Common, Class A & Class B)
Net income
Basic
Diluted
Dividends
Common share
Class A
Class B
Equity per share(d)
QUARTERLY INFORMATION (UNAUDITED)
(in thousands of Canadian dollars except per share information)
Revenue
Net income(b)
Net income per share (Common, Class A and Class B)
Diluted
378,733
406,926
980,613
1,939,970
267,489
374,381
658,581
1,651,928
325,412
–
988,667
1,888,873
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
1.55
1.53
0.575
–
–
15.20
2014
2013
2014
2013
2014
2013
3.55
3.51
1.375
0.100
0.091
10.98
2.53
2.50
N/A
0.380
0.345
14.08
0.79
0.78
N/A
0.315
0.286
12.28
1.35
1.33
N/A
0.295
0.268
11.79
1.86
1.85
N/A
0.535
0.486
11.21
First
479,082
454,681
61,947
70,595
Second
441,386
457,261
47,949
53,914
Third
469,597
525,848
5,617
72,956
Fourth
499,964
409,759
(20,652)
22,397
Total
1,890,029
1,847,549
94,861
219,862
1.03
1.01
0.79
0.90
0.09
1.21
(0.32)
0.37
1.53
3.51
(a) Adjusted EBITDA is a non-GAAP measure calculated by adding back to net income the sum of net fi nance costs, income taxes, depreciation/amortization of property, plant, equipment and
intangible assets, gains/losses from assets held for sale, gain from sale of land, impairment of assets and joint ventures and non-controlling interest. 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.
(b) Attributable to shareholders of the Company, excluding non-controlling interests.
(c) Working capital has been calculated as current assets minus current liabilites.
(d) Equity per share is non-GAAP measure calculated by dividing equity by the number of Common, Class A & Class B shares outstanding at the date of the balance sheet.
(e) Restated due to the adoption of certain new IFRS standards that became eff ective as at January 1, 2013, but were implemented retrospectively to January 1, 2012.
(f) Restated due to adoption of CICA Handbook section 3064.
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SHAWCOR
DIRECTORS
J.T. BALDWIN
London, England
Mr. Baldwin recently retired
as the Vice President
Communications & External
Aff airs for the Southern
Corridor for BP, a position he
held since January 2014, and
has been a Director of ShawCor
Ltd. since March 2010.
D.S. BLACKWOOD
Houston, Texas
Mr. Blackwood recently
retired as President
(Americas), Wood Group
PSN, a position he held since
April 2011, and has been a
Director of ShawCor Ltd.
since May 2011.
W.P. BUCKLEY
Toronto, Ontario
Mr. Buckley recently retired
as the CEO of ShawCor Ltd.,
a position he held since
June 2005, and has been a
Director of the Company
since August 2005.
J.W. DERRICK
Buff alo, New York
Mr. Derrick is Chief
Executive Offi cer of Derrick
Corporation, a position he
has held since 1992, and has
been a Director of ShawCor
Ltd. since August 2007.
K.J. FORBES
West Sussex, England
Mr. Forbes is a partner in
Epi-V LLP, a position he has
held since September 2009,
and has been a Director of
ShawCor Ltd. since May 2014.
D.H. FREEMAN
Toronto, Ontario
Mr. Freeman is a Chartered
Professional Accountant
and from 1983 to 2011 was a
partner at KPMG LLP. He has
been a Director of ShawCor
Ltd. since October 2011.
S.M. ORR
Toronto, Ontario
Mr. Orr is CEO of ShawCor Ltd.,
a position he has held since
May 2014, and has been a
Director of ShawCor Ltd.
since May 2014.
J.F. PETCH Q.C.
Toronto, Ontario
Mr. 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.
P.S. PIERCE
Houston, Texas
Ms. Pierce is the Executive
Vice President of and
a partner in Ztown
Investments, a position she
has held since 2005, and has
been a Director of ShawCor
Ltd. since June 2014.
P.G. ROBINSON
Toronto, Ontario
Mr. Robinson is a Chartered
Professional Accountant and
President and Chief Executive
Offi cer of Litens Automotive
Group, a position he has held
since August 2013, and has
been a Director of ShawCor
Ltd. since August 2001.
E.C. VALIQUETTE
Pembroke, Ontario
Ms. Valiquette is a Chartered
Professional Accountant
and a former Senior Vice
President and Chief Financial
Offi cer of ING Canada Inc.
and has been a Director
of ShawCor Ltd. since
March 2005.
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SUPPLEMENTARY INFORMATION
CORPORATE
GOVERNANCE
The Board of Directors (the “Board”) and management of the Company
recognize that eff ective 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 aff airs 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 identifi ed by management
and monitoring the Company’s practices and policies for dealing with
these risks, management succession planning, the monitoring of business
practices and the 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 annual
special purpose Board meetings 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 identifi es 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 Board also receives, reviews and discusses a
quarterly risk management report from management which identifi es
the key risks facing the Company, their potential impact on operating
income and mitigation actions which are being taken. In addition,
the Audit Committee regularly reviews fi nancial and health, safety
and environmental (“HSE”) risk issues and the Compensation and
Organizational Development Committee reviews compensation related
risk issues on an annual basis. A discussion of the key risks facing the
Company is set out in the Company’s Annual Information Form for the
year ended December 31, 2014 and in the Management Discussion and
Analysis accompanying the Company’s consolidated fi nancial statements
for the year ended December 31, 2014 and 2013, both of which are fi led
on SEDAR at www.sedar.com.
The corporate governance practices and policies of the Company have
been developed under the general stewardship of the Nominating and
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 Nominating and
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 Company as part of the ongoing process of enhancing its
corporate governance:
•
instituted and updated mandatory share ownership guidelines for all
Directors, the Chief Executive Offi cer and other designated executives;
• reviewed and revised the mandate of the Board of Directors;
•
•
•
•
•
•
•
•
•
•
•
reviewed and revised the charters for the Audit, Compensation
and Organizational Development, and Nominating and
Governance Committees and appointed only independent
directors to these Committees;
completed evaluations of the Board’s performance as well
as individual director peer performance reviews and developed
a new Board/Committee/Director performance assessment process
and form;
developed a new Board experience/skills matrix;
reviewed and updated the Company’s Code of Conduct for directors,
offi cers 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;
instituted a majority voting policy for directors and an “advance-
notice” by-law;
instituted a DSU plan for directors and terminated the directors’
stock option plan;
reviewed and updated the Company’s Confi dentiality, Insider
Trading and Disclosure policies;
eliminated the Company’s dual class share structure through a
shareholder and court approved plan of arrangement (this included
an amalgamation and some associated changes in 2013 to the
Company’s articles and by-laws, which can be found on SEDAR,
including an advance notice by-law);
developed a new director retirement policy, new Board and Senior
Management Diversity policies and an Executive Compensation
Clawback policy; and
enhanced Board continuing education by enrolling two directors in
the Director Education Program off ered by the Institute of Corporate
Directors (the “ICD”) and enrolling all directors as members of the ICD.
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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
Shaw Pipe Protection
3200, 450 1st Street S.W.
Calgary, Alberta T2P 5H1
T: 403 263 2255
F: 403 264 3649
SOCOTHERM
SHAW PIPELINE SERVICES
Bredero Shaw International B.V.
Dellaertweg 9-E, Gebouw
“Le Carrefour”
2316 WZ Leiden
The Netherlands
T: +31 71 80 802 70
F: +31 71 80 802 71
Bredero Shaw
#17-01/02 United Square
101 Thomson Road
Singapore 307591
T: 65 6732 2355
F: 65 6732 9073
Viale Risorgimento 62
45011 Adria (RO) Italy
T: 39 0426 941000
F: 39 0426 901055
CANUSA-CPS
25 Bethridge Road
Toronto, Ontario M9W 1M7
T: 416 743 7111
F: 416 743 5927
FLEXPIPE SYSTEMS
3501 54th Avenue S.E.
Calgary, Alberta T2C 0A9
T: 403 503 0548
F: 403 503 0547
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
DESERT NDT
4250 N. Sam Houston Pkwy. E.
Suite 180
Houston, Texas 77032
T: 713 568 3513
F: 832 460 5205
PETROCHEMICAL AND INDUSTRIAL
DSG-CANUSA
SHAWFLEX
25 Bethridge Road
Toronto, Ontario M9W 1M7
25 Bethridge Road
Toronto, Ontario M9W 1M7
T: 416 743 7111
F: 416 743 7752
T: 416 743 7111
F: 416 743 2565
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SUPPLEMENTARY INFORMATION
CORPORATE
INFORMATION
M.L. GARCES
Vice President
ShawCor Manufacturing System
ShawCor Ltd.
D.R. GIBB
Vice President
Information Technology
ShawCor Ltd.
T.L. HUTZUL
Vice President, Legal
ShawCor Ltd.
G.G. PASSLER
Vice President
QHSE
ShawCor Ltd.
CORPORATE OFFICERS
OPERATIONS MANAGEMENT
J.F. PETCH
Chair of the Board
S.M. ORR
President & CEO
G.S. LOVE
Vice President, Finance and
Chief Financial Offi cer
D.R. EWERT
Vice President, Corporate Aff airs
and Secretary
J.D. TIKKANEN
Executive Vice President
Strategic Planning
ShawCor Ltd.
M.J. SIMMONS
President
Integrity Management
D.L. BROUSSARD
President
Flexpipe Systems
H.A.A.M. TAUSCH
President
Bredero Shaw
T. ANDERSON
Senior Vice President
Western Hemisphere
Bredero Shaw
K.D. REIZER
Senior Vice President
Eastern Hemisphere
Bredero Shaw
J.A. TABAK
President
Connectivity
F. CISTRONE
Vice President and
General Manager
Guardian
J.R. BRONSON
Vice President and
General Manager
Canusa-CPS
R.J. DUNN
Vice President
Research & Development
ShawCor Ltd.
P.A. PIERROZ
Vice President
Human Resources
ShawCor Ltd.
N. YOUNG
Vice President
Operations
ShawCor Ltd.
CORPORATE ADDRESS, STOCK INFORMATION AND ANNUAL MEETING
TRANSFER AGENT
AND REGISTRAR
CST Trust Company
P.O. Box 700, Station B
Montreal, Quebec
Canada H3B 3K3
T: 800 387 0825
416 682 3860
F: 800 249 6189
E-mail: inquiries@canstockta.com
AUDITORS
Ernst & Young LLP
STOCK LISTING
The Toronto Stock Exchange
Common Shares
Trading Symbol: SCL
ANNUAL MEETING
Tuesday, May 12, 2015
4:00 p.m.
Glenn Gould Studio
Toronto, Ontario
Canada
www.shawcor.com
HEAD OFFICE
25 Bethridge Road
Toronto, Ontario
Canada M9W 1M7
T: 416 743 7111
F: 416 743 7199
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WHY
SHAWCOR?
STRONG INDUSTRY FUNDAMENTALS
Long-term energy demand and rapid depletion of existing reserves will drive continued
investment in new energy infrastructure.
UNRIVALLED GLOBAL NETWORK
More than 105 manufacturing and service facilities in 20 countries give ShawCor
unrivalled proximity to every major energy-producing region.
TECHNOLOGICAL LEADERSHIP
Industry-leading research and product development capabilities are helping global
clients overcome the technological barriers on new energy frontiers.
SUPERIOR EXECUTION
The industry’s most advanced management system helps us execute the most complex
and demanding projects safely, on time and on budget.
BROAD PRODUCT OFFERING
We provide a growing range of end-to-end product and service solutions in all major
energy segments including deepwater, shale plays, LNG and pipeline rehabilitation.
STRONG FOUNDATIONS
ShawCor’s scale and fi nancial strength give it unequalled capability to ensure supply
for the world’s largest energy infrastructure projects.
PROVEN PERFORMANCE
In the past 20 years, ShawCor’s common shares have delivered a total return to
shareholders of 1,106%, equivalent to a compound annual return of 13.3%.
INTEGRATED GROWTH STRATEGY
We are creating a fully integrated energy services company with a leadership position
in fi ve major platforms for growth.