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 eight divisions, with fixed and mobile
manufacturing and services facilities located around the world
employing over 6,000 people.
TABLE OF CONTENTS
1
Financial and Operating Highlights
2 Message to Shareholders
5
Financial Review
6 Management’s Discussion and Analysis
36 Management’s Responsibility for Financial Statements
37 Independent Auditor’s Report
39 Consolidated Financial Statements
44 Notes to the Consolidated Financial Statements
84 Six-year Review and Quarterly Information
85 Shawcor Directors
86 Primary Operating Locations
IBC Corporate Information
On the cover: FlexPipe, our 3″ spoolable composite pipe being installed
in southwest Colorado. FlexPipe is a quick and cost-effective transport
solution for a produced water application with a major US oil and gas
company. FlexPipe spoolable pipe is a non-corrosive product providing
installation and operating benefits to customers worldwide.
FINANCIAL AND OPERATING HIGHLIGHTS
SHAWCOR’S MISSION
To be the market leader and technology innovator with a primary focus
on the global pipeline industry and to use this base as a platform to build
an international energy services company while achieving Shawcor’s
performance objectives.
2018 HIGHLIGHTS
Financial Summary
Year ended December 31 (in thousands of Canadian dollars, except per share amounts)
Operating Result
Revenue
Adjusted EBITDA (note 1)
Income from Operations
Net Income (note 2)
Earnings per share – basic
Earnings per share – diluted
Cash Flow
Cash provided by operating activities
Financial Position
Working capital
Total assets
Equity per share
2018(b)
2017(a)
$
$
$
$
$
$
$
$
1,408,872
134,870
50,613
25,876
0.37
0.37
30,545
393,148
1,702,125
15.26
$
$
$
$
$
$
$
$
1,565,499
225,929
128,001
71,155
1.02
1.02
178,446
377,919
1,698,001
14.94
Note 1: Adjusted EBITDA is a non-GAAP measure defined as EBITDA adjusted for non-operational items or items which do not impact day to day operations. 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 financed or the tax impacts in various jurisdictions and for comparing its operating performance with the
performance of other companies that have different financing, capital or tax structures. 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 or day to day operations. Adjusted EBITDA is used by many analysts in the oil and
gas industry as one of several important analytical tools to evaluate financial performance and is a key metric in business valuations. It is also considered important
by lenders to the Company and is included in the financial covenants of the Company’s debt agreements.
Note 2: Attributable to shareholders’ of the Company, excluding non-controlling interests.
(a) Restated due to the adoption of IFRS 15, Revenue from Contracts with Customers that became effective as at January 1, 2018, but was implemented retrospectively to
January 1, 2017.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018.
1
ANNUAL REPORT 2018
MESSAGE TO SHAREHOLDERS
INTEGRITY, TECHNOLOGY
AND EXECUTION
SHAWCOR ACHIEVED A SOLID LEVEL OF PROFITABILITY IN 2018, WITHOUT THE CONTRIBUTION OF A LARGE PIPE COATING
PROJECT. THIS RESULT IS A TESTAMENT TO THE SUCCESS OF A STRATEGY TO EXPAND THE PORTFOLIO OF PRODUCTS AND
SERVICES WE OFFER OUR CUSTOMERS AND ENSURE THE LONG-TERM SUCCESS OF THE COMPANY. WITH A DEMONSTRATED
BASE BUSINESS AND PIPE COATING DEMAND THAT IS POISED TO STRENGTHEN, THE COMPANY IS WELL POSITIONED FOR
STRONGER RESULTS.
FINANCIAL RESULTS
Revenue for the year reached $1.41 billion, a 10 percent decrease
from 2017, reflecting the absence of work on a large (+$100 million)
pipe coating project for the first time in the Company’s recent history.
Despite the persistence of a global downturn in capital spending
on subsea energy infrastructure projects (and thus on pipe coating
systems), we benefited from strong revenue performance in the
balance of our Pipeline and Pipeline Services businesses in the
United States, and slow but steady growth in the Petrochemical and
Industrial segment. Adjusted EBITDA1 decreased to $134.9 million in
2018, compared to $225.9 million in the previous year, reflecting lower
revenues and margins as a result of depressed pipe coating activity,
and net earnings were $0.37 per share compared to $1.02 in 2017.
While we are not satisfied with these results, we believe they
demonstrate our progress in building a well-diversified energy service
business that can generate sustainable returns even during a year in
which our core pipe coating business did not contribute to profitability.
In fact, the cost of maintaining the readiness of idle facilities and the
pursuit of pipe coating awards represented approximately $15 million
per quarter of additional cost. We are confident this is a worthwhile
investment given the increasing visibility of pipe coating work to be
contracted in 2019 and into 2020, as represented in the growing scale
of our backlog and bid and budgeted work.
THE YEAR IN REVIEW
After more than four years into the current downturn, the industry is
yet to have certainty of a full recovery. After rising throughout most
of the year, volatility in the price of oil since then reminds us of
how quickly the industry can swing in the face of economic and
political uncertainty.
In 2018, activity in the U.S. unconventional energy basins continued
to gain traction as producers swung back into production in response
to rising commodity prices. Amid this environment, higher well
completion and midstream activity benefited sales in our composite
pipe, integrity management, and gathering line pipe coating
businesses. It was a different story in Western Canada where an acute
deficit in pipeline takeaway capacity caused a record discount to
WTI for Canadian producers, and a resultant low level of activity
across all our businesses.
The year also marked the low point in the slow recovery of investment
in subsea energy infrastructure that directly influences our pipe
coating activity. In October, Shawcor announced the conditional award
of a contract to provide thermal insulation and anti-corrosion coating
services for the Liza phase 2 deepwater development project located
off the coast of Guyana. In conjunction with work on the Liza phase 1
project, which commenced earlier in the year at our Channelview,
Texas and Veracruz, Mexico facilities, the larger Liza phase 2 contract
brought the total value of work on the project to $110 million. This
was the first major contract for Shawcor associated with a greenfield
oil development in several years.
There are several reasons why the world’s major energy producers are
beginning to return to international and offshore developments. These
include growing cash balances, reserve replacement requirements
and improved production terms with host countries. However, one
factor that appears to be new this time is an unprecedented effort to
reduce development costs through standardization, early engagement
and ownership of larger scopes of work that are conditionally
awarded subject to the project moving forward. This has resulted in
several changes. First, suppliers such as Shawcor are being engaged
much earlier in the field development process. Second is the rapid
filtering of prospective suppliers and the requirement to sign non-
disclosure agreements that govern project discussions. Third is
the introduction of awarded scopes of work that are conditional on
the prospective development’s final investment decision (FID). For
Shawcor, these changes are translating into earlier engagements and
closer relationships with producers and engineering, procurement and
construction companies (EPCs).
1. See Section 12.0 – Reconciliation of Non-GAAP Measures in the Company’s 2018 Management’s Discussion and Analysis for a reconciliation of EBITDA and Adjusted EBITDA.
2
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS MESSAGE TO SHAREHOLDERS
While we are not satisfied with these results, we
believe they demonstrate our progress in building
a well-diversified energy service business that can
generate sustainable returns even during a year
in which our core pipe coating business did not
contribute to profitability.
Steve Orr
Chief Executive Officer
Liza phase 2 followed this new process. Early last year we were given
an exclusive opportunity to directly discuss work requirements
under an NDA. An agreement was reached – without tender – that
provided the assurance we needed to commit required resources to
the project. With all parties working together, earlier and on larger
and more clearly defined scopes of work that considered the many
interfaces of such a complex project, and drawing from the experience
of Liza phase 1, Exxon was able to successfully reduce execution risk
and gain cost certainty.
Internationally, several markets have remained resilient and have had
stable activity throughout the cycle. This was particularly true for the
Middle East producing region. However, this region like many is also
experiencing change in the way products and services are sourced
and procured. In the near future, unless a supplier is local and can
demonstrate commitment to invest regionally through local content,
they will not be able to economically participate in the Middle Eastern
market. This is one of the reasons – in addition to having achieved
necessary qualifications and having built a proven installed base
in the region – that Shawcor moved to construct a composite pipe
manufacturing facility in the Middle East. We expect this facility to
be completed late this year.
Our Petrochemical and Industrial businesses continued to benefit
during the year from stable vehicle production, but more importantly
a continuing increase in electrical content per vehicle. A 25% increase
in heat shrink capacity added over the last three years allowed us to
capture our share of a growing market and offset the lack of Wire and
Cable demand in the historically strong oilfield infrastructure market
in Western Canada.
IMPROVING VISIBILITY
We know from experience that our pipe coating business is heavily
dependent on the late cycle capital spending of Exploration and
Production operators. Large commitments require confidence and
confidence requires time to gauge the future with reasonable certainty.
While the recovery of spending on major energy infrastructure projects
has taken longer than we had expected, we have gained increasing
confidence over the past year that there will be an increase in the
number of projects sanctioned as we move forward.
In 2018 it became apparent there were three areas in which the
increased sanctioning of projects would benefit our pipe coating
businesses. The first is related to takeaway constraints in North
America and investments needed for large diameter transmission
lines. This issue is being addressed today in the Permian but in
time will also have to be addressed in Western Canada. The second
area is offshore. Driven by the factors I have already mentioned,
projects for the offshore will likely continue to be sanctioned with
attendant demand for our high-value coating solutions. Pipe coating
is an activity that historically follows development drilling by 12-18
months and the projects we are tracking suggest this timeframe will
continue to be valid. The third area, and the one in which we have the
greatest confidence that investments will be made, is in infrastructure
required to service Liquefied Natural Gas (LNG). Gas reservoirs
require investment to address declining production; demand has also
increased, adding urgency to the development of new reserves. The
net impact is a forecasted gap between supply and demand as early
as 2021. The growth of the LNG market will require new gas sources,
particularly offshore where massive reserves have been proven, and
Shawcor is well positioned to benefit from this development given our
global footprint and leadership in high value pipe coating solutions.
Developments in each of these areas have given us increasing
confidence and have started to be reflected in our backlog, which
reached $459 million at the end of 2018. Project activity remains
very strong with over $1 billion in firm bids and almost $1.9 billion in
budgeted projects as the year drew to a close. We expect Shawcor will
be successful in capturing a significant portion of these projects as
they advance toward final investment decision.
THE SHAWCOR DIFFERENCE
While it is not possible to predict the commencement of major
infrastructure projects with certainty, we are confident that Shawcor
3
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS MESSAGE TO SHAREHOLDERS
Led by growing demand for new LNG infrastructure and the return of
major exploration and production companies to subsea development,
Shawcor is looking forward with increasing visibility to more than
$2.9 billion in opportunities worldwide.
will continue to convert a large share of the opportunities that come
our way into awarded contracts. Our track record of success has and
will continue to be based on the strong brand we have built after many
years in the business. The Shawcor Difference stands for: Integrity,
which stresses workplace safety, an Injury and Incident Free culture,
and the highest standards of quality and business ethics; Technology,
which is based on industry-leading material science that draws on
deep partnerships with researchers and customers and has resulted
in the 179 patents, 140 patents pending and 86 proprietary
formulations to date; and a hard-earned reputation for Execution,
which has come from working with major producers and EPCs in
every region of the world from an unrivalled global network of
manufacturing and service facilities.
OUTLOOK
Over the year ahead, we expect to benefit from continued strength in
the U.S. market, which continues to experience high levels of drilling
and completion activity and the build-out of pipeline infrastructure to
support increasing production from unconventional energy basins.
Such production is supported by a steady domestic market as well as
growing export demand for both U.S. oil and gas. This environment
should prove conducive for Shawcor’s broad product and service
offering in Pipeline Performance, Composite Production Systems and
Integrity Management. Activity in our Canadian operations is expected
to remain relatively subdued, despite growing rail capacity, until
lingering pipeline issues are resolved.
We expect that our Connection Systems businesses – which
provide reliable power, control and instrumentation connectivity for
the automotive, utility and transportation industries – will continue
to benefit from steady demand driven by the growing adoption of
electrical vehicles and the expansion and upgrading of public transit
systems worldwide.
While this diversified base of businesses is designed to help Shawcor
generate sustainable profitability throughout the major investment
cycles of the global energy industry, we also stand to benefit from
improving global prospects for our core pipe coating systems
business. Led by growing demand for new LNG infrastructure and
the return of major exploration and production companies to subsea
development, Shawcor is looking forward with increasing visibility to
more than $2.9 billion in opportunities worldwide.
In summary, we expect that our base business will remain supportive
and that the pipe coating activity we currently have under contract or
for which we currently have line of sight, will enable our pipe coating
business to make a positive contribution to the financial performance
of the Company in 2019. Equally important, we expect the backlog to
strengthen during the year and support improved results as we move
into 2020.
ZCL COMPOSITES ACQUISITION
Subsequent to year-end, on January 20, 2019, we announced the
proposed $308 million acquisition of ZCL Composites Inc., North
America’s largest manufacturer and supplier of environmentally
friendly fiberglass reinforced plastic underground storage tanks.
The proposed transaction, which is expected to close in the second
quarter of this year, reflects our strategy of acquiring businesses that
complement our current operations, broaden our product and service
portfolio for new and existing customers, and leverage Shawcor’s
industry-leading position in material science.
A WORD OF APPRECIATION
In closing, I would like to extend my thanks and appreciation to all
of Shawcor’s valued employees, business partners and investors.
With your support, we have delivered another profitable year and
successfully advanced our strategies, while better positioning Shawcor
to take advantage of growing opportunity in the year ahead. I look
forward to reporting on our progress.
Steve Orr
Chief Executive Officer
4
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL
REVIEW
MANAGEMENT’S DISCUSSION AND ANALYSIS
1.0 EXECUTIVE OVERVIEW
1.1 Core Businesses
1.2 Vision and Objectives
1.3 Key Performance Drivers
1.4 Key Performance Indicators
1.5 Capability to Deliver Results
2.0 FINANCIAL HIGHLIGHTS
2.1 Selected Financial Information
2.2 Foreign Exchange Impact
3.0 BUSINESS DEVELOPMENTS
4.0 RESULTS FROM OPERATIONS
4.1 Consolidated Information
4.2 Segment Information
5.0 LIQUIDITY AND CAPITALIZATION
5.1 Cash Provided by Operating Activities
5.2 Cash Used in Investing Activities
5.3 Cash Used in Financing Activities
5.4 Liquidity and Capital Resource Measures
5.5 Credit Facilities
5.6 Long-Term Debt
5.7 Commitments, Leases, Contingencies and
Off Balance Sheet Arrangements
5.8 Financial Instruments and Other Instruments
5.9 Outstanding Share Capital
5.10 Transactions with Related Parties
6.0 QUARTERLY SELECTED FINANCIAL INFORMATION
6.1 Fourth Quarter Highlights
7.0 DISCLOSURE CONTROLS AND INTERNAL
CONTROLS OVER FINANCIAL REPORTING
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8.0 CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND
ACCOUNTING POLICY DEVELOPMENTS
8.1 Critical Judgments
8.2 Critical Accounting Estimates
8.3 Accounting Standards Issued but Not Yet Applied
8.4 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 FINANCIAL REPORTING IN
HYPERINFLATIONARY ECONOMIES
14.0 FORWARD-LOOKING INFORMATION
15.0 ADDITIONAL INFORMATION
MANAGEMENT’S RESPONSIBILITY FOR
FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX-YEAR REVIEW AND QUARTERLY INFORMATION
SHAWCOR DIRECTORS
PRIMARY OPERATING LOCATIONS
CORPORATE INFORMATION
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IBC
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5
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 FINANCIAL
POSITION AND RESULTS OF OPERATIONS OF SHAWCOR LTD. (“SHAWCOR” OR THE “COMPANY”) FOR THE YEARS ENDED
DECEMBER 31, 2018 AND 2017 AND SHOULD BE READ TOGETHER WITH SHAWCOR’S AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES FOR THE SAME PERIODS. ALL DOLLAR AMOUNTS IN THIS MD&A ARE IN THOUSANDS
OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS OR UNLESS OTHERWISE STATED.
THIS MD&A AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND COMPARATIVE INFORMATION HAVE BEEN
PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”) AS ISSUED BY THE
INTERNATIONAL ACCOUNTING STANDARDS BOARD (“IASB”), WHICH ARE ALSO GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (“GAAP”) FOR PUBLICLY ACCOUNTABLE ENTERPRISES IN CANADA. THIS MD&A CONTAINS FORWARD-LOOKING
INFORMATION AND REFERENCE SHOULD BE MADE TO SECTION 14 HEREOF.
1.0 EXECUTIVE OVERVIEW
Shawcor is a growth oriented, global energy services company serving
the Pipeline and Pipe Services and the Petrochemical and Industrial
segments of the energy industry. The Company operates eight
divisions with over eighty manufacturing 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, flexible composite pipe,
onshore and offshore pipeline corrosion and thermal protection, state-
of-the-art ultrasonic and radiographic inspection services, tubular
management services, heat-shrinkable polymer tubing, and control and
instrumentation wire and cable.
The Company and its predecessors have designed, engineered,
marketed and sold these products and services worldwide for over 50
years. Shawcor has made substantial investments in research and
development 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 one of the world’s largest applicator of
pipeline coatings for the oil and gas industry for both onshore and
offshore pipelines.
The primary driver of demand for the Company’s products and services
is the level of energy industry investment in pipeline infrastructure for
hydrocarbon development and transportation around the globe. This
investment, in turn, is driven by global levels of economic activity and
the resulting growth in hydrocarbon demand, the impact of resource
depletion on the supply of hydrocarbons and the financial position
of the major energy companies. The relationship between global
hydrocarbon demand and supply and the level of energy industry
investment in infrastructure tends to be cyclical.
As at December 31, 2018, the Company operated its eight divisions
through two reportable operating segments: Pipeline and Pipe
Services; and Petrochemical and Industrial.
Pipeline and Pipe Services
The Pipeline and Pipe Services segment is the largest segment of the
Company and accounted for 86% of consolidated revenue for the year
ended December 31, 2018. This segment includes the Bredero Shaw,
Pipeline and Pipe Services Products, Flexpipe Systems, Guardian,
Shaw Pipeline Services, Shawcor Inspection Services (formerly “Desert
NDT”) and Lake Superior Consulting divisions.
•
•
•
Bredero Shaw’s product offerings include specialized internal
anti-corrosion and flow efficiency pipe coating systems, insulation
coating systems, weight coating systems and custom coating and
field joint application services for onshore and offshore pipelines.
Pipeline and Pipe Services Products includes Canusa-CPS, that
manufactures heat shrinkable sleeves, adhesives and liquid coatings
for pipeline joint protection applications and Dhatec, that designs
and assembles engineered pipe logistics products and services.
Flexpipe Systems manufactures spoolable and stick composite
pipe systems and high density polyethylene pipe used for oil and
gas gathering, water disposal, carbon dioxide injection pipelines
and other applications requiring corrosion resistance and high
pressure capabilities.
6
SHAWCOR LTD. •
•
•
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.
Shaw Pipeline Services provides ultrasonic and radiographic pipeline
girth weld inspection services to pipeline operators and construction
contractors worldwide for both onshore and offshore pipelines.
Shawcor Inspection Services (formerly “Desert NDT”) provides non-
destructive testing services for new oil and gas gathering pipelines
and oilfield infrastructure integrity management services.
•
Lake Superior Consulting provides pipeline engineering and integrity
management services to major North American pipeline operators.
Petrochemical and Industrial
The Petrochemical and Industrial segment, which consists of the
Connection Systems division, accounted for 14% of consolidated
revenue for the year ended December 31, 2018. 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. The Connection Systems division was formed from the 2015
integration of the DSG-Canusa and Shawflex divisions.
•
•
Connection Systems 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.
Connection Systems also manufactures 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 a market leader
and technology innovator with a primary focus on the global
pipeline industry and to use this base as a platform to build a global
integrated 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 finance energy
infrastructure investment;
•
•
•
•
•
the Company’s competitive position globally and its ability
to maintain operations in each of the major oil and gas
producing regions;
the Company’s technology and its ability to research and
commercialize innovative products that provide added value
to customers and provide competitive differentiation;
the Company’s operational effectiveness and its ability to
maintain efficient utilization of productive capacity at each
geographic location;
access to capital and maintenance of sufficient available liquidity
to support continuing operations and finance growth activities;
the ability to identify and execute successful business acquisitions
that result in strategic global growth; and
•
the ability to attract and retain key personnel.
1.4 Key Performance Indicators
Several of the drivers identified above are beyond the Company’s
control; however, there are certain key performance indicators that the
Company utilizes to monitor its progress in achieving its vision and
performance objectives. These indicators are detailed below.
Certain of the following key performance indicators used by Shawcor
are not measurements in accordance with GAAP, should not be
considered as an alternative to net income or any other measure of
performance under GAAP and may not necessarily be comparable
to similarly titled measures of other entities. Refer to Section 12 –
Reconciliation of Non-GAAP Measures, for additional information with
respect to Non-GAAP measures used by the Company.
Net Income Growth
As part of its performance objectives, the Company has set a goal
for average annual net income growth of 15% over the full business
cycle, as described in Section 1.2 – Vision and Objectives. Net income
(attributable to shareholders of the Company) decreased by
$45.3 million from a net income of $71.2 million for the year ended
December 31, 2017 to a net income of $25.9 million for the year
ended December 31, 2018. This was mainly due to the $77.4 million
decrease in operating income and a $4.8 million net monetary loss
in Argentina. This was partially offset by a $26.1 million decrease in
income tax expense, a $6.6 million decrease in loss from investment
in associates and a $4.7 million decrease in finance cost.
Return on Invested Capital
Return on Invested Capital (“ROIC”), a non-GAAP measure, is defined as
net income for the year adjusted for after tax interest expense divided
by average invested capital for the most recently completed year.
ROIC does not have a standardized meaning under GAAP and may
not necessarily be comparable to similarly titled measures used by
other entities. ROIC is used by the Company to assess the efficiency of
generating profits from each unit of invested capital. See Section 12.0 –
Reconciliation of Non-GAAP Measures. As part of its performance
objectives, the Company has set an ROIC target of 15%, as described in
Section 1.2 – Vision and Objectives. The Company’s ROIC for the years
ended December 31, 2018 and 2017 was 2.8% and 6.5%, respectively.
This decrease was primarily due to a decrease of $47.7 million
in net income for the most recent year, adjusted for after-tax
interest expense.
7
ANNUAL REPORT 2018 Safety and Environmental Stewardship
The Company maintains a comprehensive HSE management system
in place within each of its eight operating divisions and is committed
to be an IIF workplace with no damage to the environment. For the
years ended December 31, 2018 and December 31, 2017, the Company
had recordable injuries per million person hours worked of 6.2 and 4.5,
respectively. During 2018, the Company completed 11 HSE audits
at manufacturing and service locations across all eight divisions
and developed action plans to correct any deficiencies identified
in the audits.
1.5 Capability to Deliver Results
Capital Resources
The Company operates in the global energy industry and, as a result,
the operations of the Company tend to be cyclical. In addition, the
Company can undertake major pipe coating projects anywhere in the
world as part of its normal operations. These factors, as well as the
Company’s growth initiatives, can result in variations in the amount
of investment in property, plant and equipment, working capital and
project guarantees required to support the Company’s businesses.
The Company’s policy is to manage its financial resources, including
debt facilities, so as to maintain sufficient financial capacity to fund
these investment requirements.
Capital expenditures increased by $35.1 million from $41.1 million for
the year ended December 31, 2017 to $76.2 million for the year ended
December 31, 2018, mainly due to an increase in growth capital spend
in the Company’s pipe coating, composite products and integrity
inspection field services businesses, The Company believes it has
sufficient available resources and capacity to meet the market demand
for its products and services in the markets where the Company
operates. The Company may, however, incur new capital expenditures
to respond to market demand growth and to facilitate growth in
new markets.
The Company expects the current level of net working capital will be
sufficient to support the level of business activity projected in 2019;
however, unexpected increases in business activity or specific project
requirements may result in higher investment in working capital. Any
such increase in requirements will be financed from the Company’s
cash balances and available committed credit facilities. The Company
had cash and cash equivalents and short term investments of
$219.3 million and $289.1 million as at December 31, 2018 and
2017, respectively, and had unutilized lines of credit available of
$456.6 million and $389.1 million, as at December 31, 2018
and 2017, respectively.
Please refer to Section 5.0 – Liquidity and Capitalization, for
additional information with respect to the Company’s liquidity
and financial position.
Non-Capital Resources
The Company considers its people as the most significant non-
capital resource required in order to achieve the vision and objectives
identified above. The Company’s executives are comprised of senior
business leaders who bring a broad range of experience and skill sets
in the oil and gas industry, finance, tax, law and corporate governance.
The leadership team’s experience combined with the employees’
knowledge and dedication to excellence has resulted in a long history
of proven financial success and stability, with the resulting creation of
value for the Company’s stakeholders.
On an ongoing basis, the Company monitors its succession planning
program in order to mitigate the impact of planned or unplanned
departures of key personnel. As at December 31, 2018, the Company
believes it has sufficient human resources to continue to operate its
businesses 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, 2018 included systems and controls over project
bidding, capital expenditures, internal controls over financial reporting,
product development, HSE management and human resource
development. In addition, the Shawcor Management System program
has been implemented to increase operating efficiency and achieve
significant cost savings in each of the Company’s eight divisions.
As at December 31, 2018, the Company believes it has sufficient
systems and processes in place to continue to operate its businesses
and execute its strategic plan.
8
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS 2.0 FINANCIAL HIGHLIGHTS
2.1 Selected Financial Information
(in thousands of Canadian dollars)
Revenue
Cost of Goods Sold and Services Rendered
Gross Profit
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
Income (Loss) from Operations
Income (loss) from investments in associates
Finance costs, net
Costs associated with repayment and modification of long-term debt
Gain from arbitration award
Net monetary loss
Income (Loss) before Income Taxes
Income taxes
Net Income (Loss)
Net Income (Loss) Attributable to:
Shareholders of the Company
Non-controlling interests
Net Income (Loss)
Per Share Information:
Earnings (Loss) per Share
Basic
Diluted
Cash Dividend per Share:
Common Shares
(in thousands of Canadian dollars)
Total Assets
Total Non-Current Liabilities
Year Ended December 31,
2018(b)
2017(a)
2016
$ 1,408,872
$ 1,565,499
$ 1,209,259
974,795
434,077
300,294
11,876
(11,929)
64,789
18,434
–
–
50,613
282
(12,092)
–
–
(4,796)
34,007
7,828
980,021
585,478
342,991
10,536
(249)
77,267
19,170
(311)
8,073
128,001
(6,271)
(16,817)
–
–
–
104,913
33,885
816,775
392,484
320,643
13,239
(1,386)
57,255
23,035
(6,493)
157,311
(171,120)
(3,536)
(15,915)
(3,009)
19,221
–
(174,359)
6,207
$
$
$
$
$
$
26,179
$
71,028
$
(180,566)
25,876
$
71,155
$
(180,960)
303
(127)
394
26,179
$
71,028
$
(180,566)
0.37
0.37
0.600
$
$
$
1.02
1.02
0.600
$
$
$
(2.80)
(2.80)
0.600
December 31,
2018(b)
December 31,
2017(a)
December 31,
2016
$ 1,702,125
$ 1,698,001
$ 1,777,791
$
343,229
$
322,235
$
339,298
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 – New Accounting
Standards Adopted for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Section 13.0 – Financial Reporting in
Hyperinflationary Economies.
9
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS
2.2 Foreign Exchange Impact
The following table sets forth the significant currencies in which the Company operates and the average foreign exchange rates for these
currencies versus Canadian dollars, for the following periods:
US Dollar
Euro
British Pound
Year Ended December 31
2018
1.2958
1.5290
1.7273
2017
1.2999
1.4700
1.6829
The following table sets forth the impact on revenue, operating income and net income (attributable to shareholders of the Company), compared
with the prior year, as a result of foreign exchange fluctuations on the translation of foreign currency operations:
(in thousands of Canadian dollars)
Revenue
Income from operations
Net income (attributable to shareholders of the Company)
Year Ended December 31, 2018
$
(20,577)
(7,091)
(2,651)
In addition to the translation impact noted above, the Company
recorded a foreign exchange gain of $11.9 million in 2018, compared to
a foreign exchange gain of $0.2 million 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, primarily in Latin America.
3.0 BUSINESS DEVELOPMENTS
Shawcor to acquire ZCL Composites
On January 20, 2019, the Company announced that it had entered
into an arrangement agreement (“Arrangement”) to acquire all of the
shares of ZCL Composites Inc. (“ZCL”) for $10.00 per share in cash
and by way of a statutory plan of arrangement. The price per share
implies an aggregate fully diluted equity value for ZCL of approximately
$308 million. ZCL is North America’s largest manufacturer and supplier
of environmentally friendly fiberglass reinforced plastic underground
storage tanks. ZCL has two plants in Canada, four in the US and one in
The Netherlands serving the Fuel, Water & Wastewater and Oil & Gas
markets. The arrangement will be considered by ZCL shareholders
on March 26, 2019 and requires the approval of 66 2/3rd % of the
votes cast at the meeting. Subject to receipt of shareholder and court
approval, closing of the transaction is expected in early April 2019.
Shawcor has entered into a commitment letter with the Toronto-
Dominion Bank and National Bank of Canada as co-lead arrangers
providing a US$500 million, four-year senior unsecured revolving
credit facility (the “Credit Facility”). The Credit Facility will be used to
fund the Arrangement and replace Shawcor’s existing senior credit
facility. Shawcor anticipates that a portion of the Credit Facility will
be syndicated to other banks or financial institutions. It is anticipated
that the Credit Facility will be entered into prior to the end of the first
quarter of 2019.
On January 30, 2019, the Company gave notice to the Senior Note
holders that it will repay on March 7, 2019 the entire principal amount
outstanding with accrued interest, approximately US$199.8 million,
and a make whole amount estimated at approximately US$5.2 million.
Offshore Guyana Deepwater Projects
On October 4, 2018, the Company announced that its pipe coating
division had been assigned work from Saipem valued at approximately
C$110 million to provide thermal insulation and anticorrosion coating
services for the Liza I and II deepwater development projects located
offshore Guyana.
Coating work under the Liza I project commenced in March 2018
at Shawcor’s Channelview, Texas facility and additional work will be
completed at Shawcor’s Veracruz, Mexico facility. Work on Liza I is
expected to be completed during the first quarter of 2019. Coating
work under the larger Liza II project, which is conditional on a Final
Investment Decision, or “FID”, by the pipeline operator, is expected to
be executed at the Veracruz and Channelview facilities.
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(a)
Consolidated
2018(c)
2017(b)
Change
$ 1,208,247
$ 1,372,556
$
(164,309)
202,254
(1,629)
194,207
(1,264)
8,047
(365)
$ 1,408,872
$ 1,565,499
$
(156,627)
(a) Represents the elimination of the inter-segment sales between the Pipeline and Pipe Services segment and the Petrochemical and Industrial segment.
(b) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 — New Accounting
Standards Adopted for further details.
(c) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Section 13.0 — Financial Reporting in
Hyperinflationary Economies.
10
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS
Consolidated revenue decreased by $156.6 million, or 10%, from
$1,565.5 million for the year ended December 31, 2017 to
$1,408.9 million for the year ended December 31, 2018, reflecting
a decrease of $164.3 million, or 12%, in the Pipeline and Pipe
Services segment, partially offset by a $8.1 million, or 4%, increase
in revenue in the Petrochemical and Industrial segment.
Revenue for the Pipeline and Pipe Services segment during the year
ended December 31, 2018 was $1,208.3 million, or $164.3 million lower
than in the comparable period in 2017, primarily due to lower large
project activity in Latin America and decreased activity levels in Asia
Pacific and Europe, Middle East, Africa and Russia (“EMAR”), partially
offset by higher revenue in the North American region. In addition,
revenue was negatively impacted by the adoption of IAS 29, Financial
Reporting in Hyperinflationary Economies for Argentina as discussed
in Section 13.0. 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
$8.1 million in the year ended December 31, 2018 compared to the
same period in 2017, due to higher activity levels in EMAR and North
America, partially offset by lower revenue in Asia Pacific. 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 (“Operating Income”)
The following table sets forth operating income and operating margin for the following periods:
(in thousands of Canadian dollars)
Operating income
Operating margin(a)
2018(c)
2017(b)
Change
$
50,613
$
128,001
$
(77,388)
3.6%
8.2%
(4.6%)
(a) Operating margin is defined as operating income divided by revenue and is a non-GAAP measure. Non-GAAP measures do not have standardized meanings under GAAP and are
not necessarily comparable to similar measures provided by other companies. See Section 12.0 — Reconciliation of Non-GAAP Measures.
(b) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 — New Accounting
Standards Adopted for further details.
(c) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Section 13.0 — Financial Reporting in
Hyperinflationary Economies.
Operating income decreased by $77.4 million, from $128.0 million in
the year ended December 31, 2017, to $50.6 million in the year ended
December 31, 2018. Operating income was negatively impacted
by a year-over-year decrease in gross profit of $151.4 million and a
$1.3 million increase in research and development expenses. This was
partially offset by decreases of $42.7 million in selling, general and
administrative (“SG&A”) expenses and $13.2 million in amortization
of property, plant, equipment and intangible assets, a $11.7 million
increase in net foreign exchange gains and a $8.1 million impairment
charge recorded in the fourth quarter of 2017. In addition, operating
income was negatively impacted by the adoption of IAS 29, Financial
Reporting in Hyperinflationary Economies for Argentina as discussed
in Section 13.0.
The decrease in gross profit resulted from the lower revenue, as
explained above, and a 6.6 percentage point decrease in the gross
margin from the prior year. The decrease in the gross margin
percentage was primarily due to lower large project activity in Latin
America and lower utilization in EMAR and Asia Pacific facilities and
the related impact on the absorption of manufacturing overheads.
SG&A expenses decreased by $42.7 million in the year ended
December 31, 2018 compared to the comparable period in 2017,
primarily due to a $36.6 million decrease in compensation and other
personnel related costs, where the prior year period included an increase
in government mandated employee profit sharing on large project activity
in Latin America, a $2.2 million decrease in professional consulting
and legal fees and a $3.9 million decrease in insurance, management
information systems, product development and other costs.
Finance Costs, Net
The following table sets forth the components of finance costs, net for the following periods:
(in thousands of Canadian dollars)
Interest income on short-term deposits
Interest expense, other
Interest expense on long-term debt
Finance costs, net
2018(a)
2017
Change
$
(2,990)
$
(1,556)
$
(1,434)
5,986
9,096
5,539
12,834
447
(3,738)
$
12,092
$
16,817
$
(4,725)
(a) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Section 13.0 — Financial Reporting in
Hyperinflationary Economies.
For the year ended December 31, 2018, net finance costs were
$12.1 million, compared to $16.8 million in the prior year. The decrease
in net finance costs was primarily a result of $3.7 million in lower
interest expense on long term debt due to lower interest rates and
$1.4 million in higher interest income on short term deposits. This was
partially offset by a $0.5 million increase in other financing expenses.
11
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS
Income Taxes
The following table sets forth the income tax expenses for the following periods:
(in thousands of Canadian dollars)
Income tax expense
2018(b)
2017(a)
Change
$
7,828
$
33,885
$
(26,057)
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 — New Accounting
Standards Adopted for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Section 13.0 — Financial Reporting in
Hyperinflationary Economies.
The Company recorded an income tax expense of $7.8 million
(23% of income before income taxes) during the year ended
December 31, 2018, compared to an income tax expense of
$33.9 million (32% of income before income taxes) during the year
ended December 31, 2017. The effective tax rate for the year ended
December 31, 2018 was lower than the Company’s statutory income
tax rate of 27%, primarily due to the mix of jurisdictions where the
income was earned and the impact of improved results in jurisdictions
where the Company is benefiting from previously unrecognized
deferred tax assets.
Net Income (attributable to shareholders of the Company)
Net income decreased by $45.3 million, from $71.2 million during
the year ended December 31, 2017 to $25.9 million during the year
ended December 31, 2018, mainly due to the $77.4 million decrease
in operating income, as explained above, and a $4.8 million increase
in net monetary loss from hyperinflationary accounting. This was
partially offset by a $26.1 million decrease in income tax expense,
a $6.6 million increase in net gain from investments in associates
and a $4.7 million decrease in finance costs.
4.2 Segment Information
4.2.1 Pipeline and Pipe Services Segment
The following table sets forth, by geographic location, the revenue, operating income and operating margin for the Pipeline and Pipe Services
segment for the following periods:
(in thousands of Canadian dollars, except operating margin)
North America
Latin America
EMAR
Asia Pacific
Total Revenue
Operating income
Operating margin(a)
2018(c)
2017(b)
Change
$
822,465
$
621,825
$
200,640
118,102
181,240
86,440
383,538
203,437
163,756
$ 1,208,247
$ 1,372,556
$
29,129
$
125,446
2.4%
9.1%
$
$
(265,436)
(22,197)
(77,316)
(164,309)
(96,317)
(6.7%)
(a) Operating margin is defined as operating income divided by revenue and is a non-GAAP measure. Non-GAAP measures do not have standardized meanings under GAAP and are
not necessarily comparable to similar measures provided by other companies. See Section 12.0 – Reconciliation of Non-GAAP Measures.
(b) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 – New Accounting
Standards Adopted for further details.
(c) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Section 13.0 – Financial Reporting in
Hyperinflationary Economies.
Revenue in the Pipeline and Pipe Services segment for the year ended
December 31, 2018 was $1,208.3 million, a decrease of $164.3 million,
from $1,372.6 million in the prior year. Segment revenue was adversely
affected by the impact on translation of foreign operations, as noted in
Section 2.2 above, and by lower activity levels in Latin America, EMAR
and Asia Pacific, partially offset by higher revenue in North America:
•
•
•
In North America revenue increased by $200.6 million, or 32%,
primarily due to increased revenue from flexible composite pipe sales,
pipe weld inspection services, large diameter pipe coating in Canada,
small diameter pipe coating in the USA and engineering services.
This was partially offset by lower activity levels in large diameter pipe
coating in the USA and small diameter pipe coating in Canada.
Latin America revenue was lower by $265.4 million, or 69%, mainly due
to lower large project activity related to Sur de Texas-Tuxpan project,
partially offset by higher volumes at the Company’s Argentina and
Brazilian facilities.
Revenue in EMAR decreased by $22.2 million, or 11%, primarily due
to decreased pipe coating activity levels in the Orkanger, Norway and
Leith, Scotland facilities, and the absence of the Shah Deniz project
work in the Caspian. This was partially offset by higher volumes at the
Ras Al Khaimah UAE (“RAK”) and the Italian facilities and increased
revenue in pipe weld inspection services.
•
Asia Pacific revenue decreased by $77.3 million, or 47%, mainly due to
lower pipe coating project activity at the Kabil, Indonesia and Kuantan,
Malaysia facilities.
Operating income for the year ended December 31, 2018 was
$29.1 million compared to $125.5 million for the year ended
December 31, 2017, a decrease of $96.3 million. The decrease in
operating income is primarily due to the $151.6 million decrease in gross
profit as a result of the decrease in revenue, as explained above, and a
7.3 percentage point decrease in gross margin. The decrease in gross
margin percentage was primarily due to lower large project activity in
Latin America, lower utilization in EMAR and Asia Pacific facilities and
the related impact on the absorption of manufacturing overheads. This
was partially offset by decreases in amortization of property, plant and
equipment and SG&A expenses, as explained in Section 4.1 above,
and the $8.1 million impairment charge recorded in the fourth quarter
of 2017.
12
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS
4.2.2 Petrochemical and Industrial Segment
The following table sets forth, by geographic location, the revenue, operating income and operating margin for the Petrochemical and Industrial
segment for the following periods:
(in thousands of Canadian dollars, except operating margin)
North America
EMAR
Asia Pacific
Total Revenue
Operating income
Operating margin(a)
2018
2017
Change
$
115,069
$
113,973
$
76,070
11,115
202,254
32,658
16.1%
$
$
67,857
12,377
194,207
31,825
16.4%
$
$
$
$
1,096
8,213
(1,262)
8,047
833
(0.3%)
(a) Operating margin is defined as operating income divided by revenue and is a non-GAAP measure. Non-GAAP measures do not have standardized meanings under GAAP and are
not necessarily comparable to similar measures provided by other companies. See Section 12.0 — Reconciliation of Non-GAAP Measures.
Revenue increased in the year ended December 31, 2018 by
$8.1 million, or 4%, to $202.3 million compared to the comparable
period in 2017, due to increased shipments of heat shrink products in
EMAR and North America, partially offset by lower activity levels for
wire and cable products in North America.
due to an increase in gross profit of $0.2 million and a decrease in
SG&A expenses, as explained above. Gross profit was higher as a
result of the increase in revenue, as explained above, partially offset
by a 1.1 percentage point decrease in gross margin. The decrease in
gross margin was mainly due to unfavourable product mix.
Operating income increased $0.8 million for the year ended
December 31, 2018 to $32.7 million compared to the year ended
December 31, 2017. The increase in operating income was primarily
4.2.3 Financial and Corporate
Financial and corporate costs include corporate expenses not allocated to the operating segments and other non-operating items, including
foreign exchange gains and losses on foreign currency denominated cash and working capital balances. The corporate division of the Company
only earns revenue that is considered incidental to the activities of the Company. As a result, it does not meet the definition of a reportable
operating segment as defined under IFRS.
The following table sets forth the Company’s unallocated financial and corporate expenses, before foreign exchange gains and losses, for the
following periods:
(in thousands of Canadian dollars)
Financial and corporate expenses
2018
2017
Change
$
(23,103)
$
(29,830)
$
6,727
Financial and corporate costs decreased by $6.7 million from the
year ended December 31, 2017 to $23.1 million for the year ended
December 31, 2018. The decrease was primarily due to a $6.1 million
decrease in compensation and other related personnel costs and
a decrease of $1.3 million in professional consulting and legal
fees, partially offset by an increase of $0.6 million in building and
management information system costs.
5.0 LIQUIDITY AND CAPITALIZATION
The following table sets forth the Company’s cash flows by activity and cash balances for the following periods:
(in thousands of Canadian dollars)
Net Income
Non-cash items
Settlement of decommissioning liabilities
Settlement of other provisions
Net change in employee future benefits
Net change in non-cash working capital and foreign exchange
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Foreign exchange impact on cash and cash equivalents and net monetary loss
Net Change in Cash and Cash Equivalents
Cash and cash equivalents at beginning of Year
Cash and Cash Equivalents at End of Year
2018(b)
2017(a)
$
26,179
$
71,028
91,571
(435)
(10,478)
(183)
(76,109)
30,545
(73,331)
(41,012)
11,997
(71,801)
289,065
132,446
(765)
(3,791)
3,152
(23,624)
178,446
(31,958)
(44,960)
(7,287)
94,241
194,824
$
217,264
$
289,065
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 — New Accounting
Standards Adopted for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Section 13.0 — Financial Reporting in
Hyperinflationary Economies.
13
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS
The Company expects to generate sufficient cash flows and have
continued access to its credit facilities to meet contractual obligations
and planned development and growth initiatives as and when they are
required. Access to credit facilities is dependent on the Company’s
compliance with its debt covenants as outlined in Section 5.5. 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.
5.2 Cash Used in Investing Activities
Cash used in investing activities was $73.3 million, an increase of
$41.4 million compared to the prior year. This was primarily due
to increases of $35.1 million in the purchase of property, plant and
equipment, mainly due to an increase in growth capital spend in the
Company’s pipe coating, composite products and integrity inspection
field services businesses, $3.9 million in short term investment,
$2.8 million in other assets and $2.3 million in loan receivable. This
was partially offset by an increase of $2.8 million in proceeds on
disposal of property, plant and equipment.
5.1 Cash Provided by Operating Activities
Cash provided by operating activities was $30.5 million in 2018, a
reduction of $147.9 million compared to the prior year. The change in
cash provided by operating activities was primarily due to decreases
of $44.8 million in net income, $52.5 million in net change in non-cash
working capital and foreign exchange and $40.9 million in non-cash
items, a $6.7 million increase in settlements of other provisions and a
$3.3 million net change in employee future benefits.
5.4 Liquidity and Capital Resource Measures
5.3 Cash Used in Financing Activities
Cash used in financing activities during 2018 was $41.0 million, a
decrease of $3.9 million compared to the prior year. The change was
primarily due to a $2.5 million bank indebtedness payment made in the
first quarter of 2017 and a $1.1 million increase in the value of shares
issued related to executive compensation in 2018.
Accounts Receivables
The following table sets forth the Company’s average trade accounts receivable – net balance and days sales outstanding (“DSO”) in trade
accounts receivable as at December 31:
(in thousands of Canadian dollars, except DSO)
Average trade accounts receivable – net
DSO(a)
2018
2017
Change
$
221,911
$
208,104
$
13,807
56
44
12
(a) The Company calculates DSO as the average number of days that trade accounts receivables-net (which excludes contract assets and other receivables) are outstanding
based on a 90-day cycle. DSO is a non-GAAP measure and does not have a standardized meaning and the Company’s method of calculating may differ from that used by other
entities, and as a result may not necessarily be comparable to measures used by others. See Section 12.0 – Reconciliation of Non-GAAP Measures.
Average trade accounts receivables increased by $13.8 million or 6.6% as at December 31, 2018 compared to December 31, 2017, primarily as
a result of the timing of billing and collections related to large project activity in the fourth quarter of 2017. DSO increased by 12 days due to the
decrease in revenue in the fourth quarter of 2018 compared to the same period in the prior year, as explained in Section 6.1 – Fourth Quarter
Highlights, and the increase in the average trade accounts receivables as explained above.
Inventory
The following table sets forth the Company’s inventory balance as at December 31:
(in thousands of Canadian dollars)
Inventory
2018
2017(a)
Change
$
136,997
$
115,018
$
21,979
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 — New Accounting
Standards Adopted for further details.
Inventories increased by $22.0 million or 19% as at December 31, 2018 compared to December 31, 2017, due to increases of $12.0 million in
finished goods, $8.5 million in raw materials and supplies and $1.8 million in work in process, reflecting higher activity levels.
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 December 31:
(in thousands of Canadian dollars, except DPO)
Average accounts payable and accrued liabilities
DPO(a)
2018
2017
Change
$
197,695
$
203,497
$
(5,802)
70
69
1
(a) The Company calculates DPO as 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.
DPO is a non-GAAP measure and does not have a standardized meaning and the Company’s method of calculating may differ from that used by other entities, and as a result
may not necessarily be comparable to measures used by others. See Section 12.0 – Reconciliation of Non-GAAP Measures.
Average accounts payable and accrued liabilities decreased by $5.8 million or 3% as at December 31, 2018 compared to December 31, 2017. DPO
increased by 1 day from 2017 levels, due to the timing of purchases and payments in the fourth quarter of 2018 compared with the fourth quarter
of 2017.
14
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS
5.5 Credit Facilities
(in thousands of Canadian dollars)
Standard letters of credit for performance, bid and surety bonds
Total utilized credit facilities
Total available credit facilities(a)
Unutilized credit facilities
(a) The Company guarantees the bank credit facilities of its subsidiaries.
2018
2017
$
43,879
$
71,175
43,879
500,498
71,175
460,251
$
456,619
$
389,076
On March 20, 2013, the Company renewed its Unsecured Committed
Bank Credit Facility (“Existing Facility”) for a period of five 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 the 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 floating interest rate on this Existing
Facility that is a function of the Company’s Total Debt to Earnings
Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)
ratio. On December 6, 2016, the Company entered into amending
agreements with the holders of its Senior Notes and the syndicate of
lenders under the Existing Facility, the results of which amendments
included an extension of the term of the Existing Facility from
March 20, 2018 to December 6, 2019 and a reduction in the size of
the Existing Facility from US$325 million to US$317 million.
The Company is required to maintain an Interest Coverage Ratio of
more than 2.50 to 1.00 and a Leverage Ratio of less than 3.00 to 1.00.
The Company was in compliance with the covenants under the
Existing Facility as at December 31, 2018 and December 31, 2017.
The Credit Facility will replace the Existing Facility and is expected
to be completed in the first quarter of 2019. The financial covenants
under the Credit Facility are more favourable to the Company than
those under the Existing Facility.
5.6 Long-Term Debt
On March 20, 2013, the Company issued Senior Notes for total gross proceeds of US$350 million (CAD$358.3 million at the March 20, 2013
foreign exchange rate) to institutional investors. The principal balances outstanding at December 31, 2018 and 2017 are as follows:
(in millions of Canadian dollars)
Due Date
Interest Rate
Senior Notes, Series A
Senior Notes, Series B
Senior Notes, Series C
Senior Notes, Series D
March 31, 2020
March 31, 2023
March 31, 2025
March 31, 2028
2.98%
3.67%
3.82%
4.07%
December 31,
2018
(US$)
December 31,
2017
(US$)
December 31,
2018
(CAD$)
December 31,
2017
(CAD$)
62
57
52
26
197
62
57
52
26
197
84
78
71
36
269
77
71
66
33
247
The total long-term debt balance as at December 31, 2018 is
$267.8 million (US$196.8 million) (2017 – $246.2 million
(US$196.8 million)). The long-term debt has been designated
as a hedge of the Company’s net investment in its US dollar
functional currency subsidiary as described in note 7 of the
Consolidated Financial Statements.
In respect of the long-term debt, the Company is required to maintain
certain covenants that are consistent with the debt covenants
described in Section 5.5 above for the Credit Facility. The Company
was in compliance with these covenants as at December 31, 2018
and December 31, 2017.
On January 30, 2019, the Company gave notice to the Senior Note
holders that it will repay on March 7, 2019 the entire principal amount
outstanding with accrued interest, approximately US$199.8 million,
and a make whole amount estimated at approximately US$5.2 million.
5.7 Commitments, Leases, Contingencies and Off Balance Sheet Arrangements
(in thousands of Canadian dollars)
Purchase commitments
Accounts payable
Long-term debt
Finance costs on long-term debt
Obligations under finance lease
Operating leases
Other obligations
2019
$
96,914
95,794
–
9,526
1,696
21,953
1,875
2020
$
83
–
83,835
7,649
1,460
14,210
1,763
2021
$
14
–
–
7,027
1,446
11,164
1,517
2022
$
14
–
–
7,027
1,439
8,969
1,294
2023
$
28
–
77,551
4,884
1,439
6,196
944
Thereafter
$
–
–
107,121
9,605
7,271
11,957
4,118
Total
$
97,053
95,794
268,507
45,718
14,751
74,449
11,511
Total
227,758
109,000
21,168
18,743
91,042
140,072
607,783
15
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS
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 sets forth the Company’s future minimum finance lease payments as at December 31, 2018:
(in thousands of Canadian dollars)
Total future minimum lease payments
Less: imputed interest
Balance of obligations under finance leases
Less: current portion
Non-current obligations under finance leases
2018
$
14,751
(3,208)
11,543
1,155
$
10,388
Legal Claims
In the ordinary course of business activities, the Company may be
contingently liable for litigation and claims with customers, suppliers
and other third parties. Management believes that adequate provisions
have been recorded in the accounts where required. Although it is not
possible to estimate the extent of potential costs and losses, if any,
management believes, but can provide no assurance, that the ultimate
resolution of such contingencies would not have a material adverse
effect on the consolidated financial position of the Company.
Performance, Bid and Surety Bonds
The Company provides standby letters of credit for performance,
bid and surety bonds through financial intermediaries to various
customers in support of project contracts for the successful execution
of these contracts. If the Company fails to perform under the terms of
the contract, the customer has the ability to draw upon all or a portion
of the bond as compensation for the Company’s failure to perform. The
contracts which these performance bonds support generally have a
term of one to three years, but could extend up to four years. Bid bonds
typically have a term of less than one year and are renewed, if required,
over the term of the applicable contract. Historically, the Company
has not made and does not anticipate that it will be required to make
material payments under these types of bonds.
The Company utilizes the Existing Facility to support its bonds. The
Company has utilized total credit facilities of $43.9 million as at
December 31, 2018 (December 31, 2017 – $71.2 million) for support
of its bonds. In addition, as at December 31, 2018, the Company
had $66.3 million of outstanding surety bonds through insurance
companies (December 31, 2017 – $48.4 million).
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 that
reflect market data obtained from independent sources, while
unobservable inputs reflect the Company’s assumptions with respect
to how market participants would price an asset or liability. These two
inputs which are used to measure fair value fall into the following three
different levels of the fair value hierarchy:
Level 1 – Quoted prices in active markets for identical instruments
that are observable.
Level 2 – Quoted prices in active markets for similar instruments;
inputs other than quoted prices that are observable and
derived from or corroborated by observable market data.
Level 3 – Valuations derived from valuation techniques in which one
or more significant inputs are unobservable.
The hierarchy requires the use of observable market data when available.
The following table presents the fair value of financial assets and liabilities in the fair value hierarchy as at December 31, 2018:
(in thousands of Canadian dollars)
Assets
Cash and cash equivalents
Short-term investments
Loans receivable
Derivative financial instruments
Deposit guarantee
Liabilities
Long-term debt
Derivative financial instruments
16
Fair Value
Level 1
Level 2
Level 3
$
217,264
$
217,264
$
2,046
3,037
1,102
261
2,046
–
–
–
$
–
–
3,037
1,102
261
$
223,710
$
219,310
$
4,400
$
243,327
226
$
243,553
$
–
–
–
243,327
226
$
243,553
$
–
–
–
–
–
–
–
–
–
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS
The derivative financial instruments relate to foreign exchange forward
contracts entered into by the Company (as described below) and are
valued by comparing the rates at the time the derivatives are acquired
to the year-end rates quoted in the market.
Financial Risk Management
The Company’s operations expose it to a variety of financial risks
including market risk (including foreign exchange risk and interest
rate risk), credit risk and liquidity risk. The Company’s overall risk
management program focuses on the unpredictability of financial
markets and seeks to minimize potential adverse effects on the
Company’s financial position and financial performance. Risk
management is the responsibility of the Company’s management.
Material risks are monitored and are regularly reported to the
Board of Directors.
Market Risk
Foreign Exchange Risk
The majority of the Company’s business is transacted outside of
Canada through subsidiaries operating in several countries. The
net investments in these subsidiaries as well as their revenue,
operating expenses and non-operating expenses are based in foreign
currencies. As a result, the Company’s consolidated revenue, expenses
and financial position may be impacted by fluctuations in foreign
exchange rates as these foreign currency items are translated into
Canadian dollars. As at December 31, 2018, fluctuations of +/- 5% in
the Canadian dollar, relative to those foreign currencies, would impact
the Company’s consolidated revenue, income from operations, and
net income (attributable to shareholders of the Company) for the year
ended December 31, 2018 by approximately $46.6 million, $1.0 million
and $0.7 million, respectively, prior to foreign exchange forward
contract activities. In addition, such fluctuations would impact the
Company’s consolidated total assets, consolidated total liabilities and
consolidated total equity by approximately $56.2 million, $11.2 million
and $45.0 million, respectively, as at December 31, 2018. Please
also refer to Section 13.0 – Financial Reporting in Hyperinflationary
Economies, for the impact of adopting IAS 29 for Argentina.
The objective of the Company’s foreign exchange risk management
activities is to minimize transaction exposures associated with
the Company’s foreign currency denominated cash streams and
the resulting variability of the Company’s earnings. The Company
utilizes foreign exchange forward contracts to manage this foreign
exchange risk. The Company does not enter into foreign exchange
forward contracts for speculative purposes. With the exception of the
Company’s US dollar based operations, the Company does not hedge
translation exposures.
Foreign Exchange Forward Contracts
The Company utilizes financial instruments to manage the risk
associated with foreign exchange rates. The Company formally
documents all relationships between hedging instruments and the
hedged items, as well as its risk management objective and strategy
for undertaking various hedge transactions.
The following table sets out the notional amounts outstanding under foreign exchange contracts, the average contractual exchange rates and the
settlement of these contracts as at December 31, 2018:
(in thousands, except weighted average rate amounts)
US dollars sold for Euros
Less than one year
Weighted average rate
Euros sold for US dollars
Less than one year
Weighted average rate
Norwegian Kroners sold for US dollars
Less than one year
Weighted average rate
US$ 13,500
0.87
€ 18,013
1.19
NOK 87,184
0.11
The Company does not apply hedge accounting to account for its
foreign exchange forward contracts.
As at December 31, 2018, the Company had notional amounts of
$60.3 million of foreign exchange forward contracts outstanding
(December 31, 2017 – $83.8 million) with the fair value of the
Company’s net gain from all foreign exchange forward contracts
totalling $0.9 million (December 31, 2017 – $1.5 million net loss).
Net Investment Hedge
The US dollar denominated long-term debt has been designated as
a hedge of the net investment in one of the Company’s subsidiaries,
which has the US dollar as its functional currency. During the year
ended December 31, 2018, a loss of $21.6 million (2017 – gain of
$17.4 million) on the translation of the long-term debt was transferred
to other comprehensive income to offset the loss on translation of the
net investment in the subsidiary. There was no ineffectiveness of this
hedge for the year ended December 31, 2018.
17
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS
Interest Rate Risk
The following table summarizes the Company’s exposure to interest rate risk as at December 31, 2018
(in thousands of Canadian dollars)
Financial Assets
Cash equivalents
Loans receivable
Financial Liabilities
Standard letters of credit for performance, bid and surety bonds
Long-term debt
The Company’s interest rate risk arises primarily from the floating rate
on its Existing Facility and is not currently considered to be material.
Credit Risk
Credit risk arises from cash and cash equivalents held with banks,
foreign exchange forward contracts, as well as credit exposure of
customers, including outstanding accounts receivable. The maximum
credit risk is equal to the carrying value of the financial instruments.
For the year ended December 31, 2018, there was no customer who
generated more than 10% of total consolidated revenue (2017 –
one customer generated approximately 22% of total consolidated
revenue). As at December 31, 2018, no customer accounted for more
than 10% of the Company’s total trade accounts receivable (2017 –
no customer accounted for more than 10% of the Company’s total
trade accounts receivable).
Non-Interest
Bearing
Floating
Rate
Fixed
Interest
Rate
Total
$
$
–
36
36
$
$
–
$
47,560
$
47,560
3,001
–
3,037
3,001
$
47,560
$
50,597
$
43,879
$
–
$
43,879
$
–
–
–
$
–
$
43,879
267,781
267,781
$
267,781
$
311,660
The carrying value of accounts receivable is reduced through the use
of an allowance for doubtful accounts, and the amount of the loss is
recognized in the consolidated 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, 2018, $13.3 million, or 6%, of trade accounts
receivable was more than 90 days overdue, compared to $8.1 million,
or 5%, as at December 31, 2017. The Company expects to receive full
payment on accounts receivable that are neither past due nor impaired.
The following is an analysis of the change in the allowance for doubtful accounts for the years ended December 31:
(in thousands of Canadian dollars)
Balance – Beginning of Year
Bad debt expense
Recovery of amounts previously provided for
Bad debts written off
Impact of change in foreign exchange rates
Balance – End of Year
2018
2017
$
(2,809)
$
(4,865)
(2,402)
401
178
(139)
(910)
2,015
519
432
$
(4,771)
$
(2,809)
Liquidity Risk
The Company’s objective in managing liquidity risk is to maintain
sufficient, readily available cash reserves in order to meet its liquidity
requirements at any point in time. The Company achieves this by
maintaining sufficient cash and cash equivalents and through the
availability of funding from committed credit facilities. Access to
credit facilities is dependent on the Company’s compliance with its
debt covenants as outlined in Section 5.5 – Credit Facilities. As at
December 31, 2018, the Company had cash and cash equivalents
totalling $217.3 million (December 31, 2017 – $289.1 million) and
had unutilized lines of credit available to use of $456.6 million
(December 31, 2017 – $389.1 million).
5.9 Outstanding Share Capital
As at March 4, 2019, the Company had 70,127,386 common shares
outstanding and stock options and share units outstanding to
purchase up to 2,276,128 common shares.
5.10 Transactions with Related Parties
The Company had no material transactions with related parties in the
year ended December 31, 2018. All related party transactions were in
the normal course of business.
18
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS
6.0 QUARTERLY SELECTED FINANCIAL INFORMATION
The following tables set forth the Company’s summary of selected financial information for the four quarters of 2018 and 2017:
(in thousands of Canadian dollars, except per share amounts)
Q1-2018(c)
Q2-2018(c)
Q3-2018(d)
Q4-2018(d)
Operating Results
Revenue
Income from operations
Net income(a)
Earnings per share
Basic
Diluted
(in thousands of Canadian dollars, except per share amounts)
Operating Results
Revenue
Income from operations
Net income(a)
Earnings per share
Basic
Diluted
$
350,767
$
353,368
$
350,589
$
354,148
10,765
3,829
13,465
7,308
17,057
10,373
$
0.05
0.05
$
0.10
0.10
$
0.15
0.15
9,326
4,366
0.06
0.06
Q1-2017(b)
Q2-2017(b)
Q3-2017(b)
Q4-2017(b)
360,060
26,138
15,393
0.22
0.22
$
$
383,571
28,023
15,877
0.23
0.23
$
$
395,052
39,368
19,540
0.28
0.28
$
$
426,816
34,472
20,345
0.29
0.29
$
$
$
(a) Attributable to shareholders of the Company.
(b) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 — New Accounting
Standards Adopted for further details.
(c) Restated due to the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina effective July 1, 2018 but implemented retrospectively to January 1, 2018.
See Section 13.0 – Financial Reporting in Hyperinflation Economies.
(d) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina effective July 1, 2018 but implemented retrospectively to
January 1, 2018. See Section 13.0 — Financial Reporting in Hyperinflationary Economies.
The following are key factors affecting the comparability of quarterly
financial results.
•
•
The Company’s operations in the Pipeline and Pipe Services
segment, representing 86% of the Company’s consolidated revenue
in 2018, are largely project-based. The nature and timing of projects
can result in variability in the Company’s quarterly revenue and
profitability. In addition, certain of the Company’s operations are
subject to a degree of seasonality, particularly in the Pipeline and
Pipe Services segment.
Over 75% of the Company’s revenue in 2018 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 significant effect on the
amount of revenue when it is translated into Canadian dollars.
Please refer to Section 2.2 — Foreign Exchange Impact, for additional
information with respect to the effects of foreign exchange
fluctuations on the results of the Company.
6.1 Fourth Quarter Highlights
Highlights of the Company’s 2018 fourth quarter include:
Fourth Quarter 2018 versus Third Quarter 2018
•
Revenue: Consolidated revenue increased $3.6 million, from
$350.6 million during the third quarter of 2018 to $354.2 million
during the fourth quarter of 2018, due to a $4.8 million increase
in the Pipeline and Pipe Services segment, partially offset by a
$1.4 million decrease in the Petrochemical and Industrial segment.
Revenue increased by 2% in the Pipeline and Pipe Services segment,
or $4.8 million, from $302.0 million in the third quarter of 2018 to
$306.9 million in the fourth quarter of 2018. The increase is primarily
due to the positive impact from the adoption of IAS 29, Financial
Reporting in Hyperinflationary Economies for Argentina as discussed
in Section 13.0 and higher activity levels in Latin America. This
is partially offset by lower volumes in North America and EMAR
regions. 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.
In the Petrochemical and Industrial segment, revenue was lower
by $1.4 million, or 3%, in the fourth quarter of 2018, compared to
the third quarter of 2018, primarily due to lower activity levels in
the EMAR 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: Operating income decreased by $7.7 million,
from $17.1 million in the third quarter of 2018 to $9.3 million in the
fourth quarter of 2018. Operating income was negatively impacted
by a decrease of $3.7 million in gross profit, a $3.7 million increase
in selling, general and administrative (“SG&A”) expenses and a
$2.6 million increase in amortization of property, plant, equipment
and intangible assets, partially offset by a $2.2 million increase
in net foreign exchange gains. In addition, operating income was
positively impacted by the adoption of IAS 29, Financial Reporting
in Hyperinflationary Economies for Argentina as discussed in
Section 13.0.
The decrease in gross profit resulted from a 1.3 percentage point
decrease in the gross margin from the third quarter of 2018, partially
offset by the increase in revenue, as explained above. The decrease
in the gross margin percentage was primarily due to product and
project mix and lower utilization in EMAR and Asia facilities and the
related impact on the absorption of manufacturing overheads.
19
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS
SG&A expenses increased by $3.7 million, from $68.6 million in the
third quarter of 2018 to $72.3 million in the fourth quarter of 2018,
primarily due to increases of $0.3 million in compensation and other
personnel related costs, $2.9 million in advertisement, equipment
costs and professional consulting and legal fees and $0.5 million in
insurance and other costs.
$5.1 million decrease in amortization of property, plant, equipment,
and intangible assets primarily related to the substantial completion
of the Sur de Texas – Tuxpan project demobilization. In addition,
operating income was positively impacted by the adoption of IAS 29,
Financial Reporting in Hyperinflationary Economies for Argentina as
discussed in Section 13.0.
•
•
•
Finance costs: In the fourth quarter of 2018, net finance costs were
$3.6 million, compared to net finance costs of $2.9 million during
the third quarter of 2018. The increase in net finance costs was
primarily due to a $0.7 million increase in other financing expenses.
Income taxes: The Company recorded an income tax recovery
of $1.4 million (54% of income before income taxes) in the fourth
quarter of 2018, compared to an income tax expense of $3.2 million
(23% of income before income taxes) in the third quarter of 2018.
The effective tax rate in the fourth quarter of 2018 was lower than
the Company’s statutory income tax rate of 27% primarily due to
the mix of jurisdictions where the income is earned and improved
results in jurisdictions where the Company is benefiting from
previously unrecognized deferred tax assets.
Net Income: Net income decreased by $6.0 million, from
$10.4 million during the third quarter of 2018 to $4.4 million during
the fourth quarter of 2018. This was mainly due to the $7.7 million
decrease in operating income, as explained above and increases of
$1.9 million in net monetary loss from hyperinflationary accounting,
$0.8 million in net finance costs and $0.8 million in loss from
investment in associates. This was partially offset by a $4.7 million
decrease in income tax expense.
Fourth Quarter 2018 versus Fourth Quarter 2017
•
Revenue: Consolidated revenue decreased by $72.7 million, or
17%, from $426.8 million during the fourth quarter of 2017, to
$354.2 million during the fourth quarter of 2018, reflecting a
$75.7 million revenue decrease in the Pipeline and Pipe Services
segment, partially offset by a $3.3 million revenue increase in the
Petrochemical and Industrial segment.
In the Pipeline and Pipe Services segment, revenue in the fourth
quarter of 2018 was $306.9 million, or 20% lower than in the
fourth quarter of 2017, primarily due to lower large project activity
in Latin America and decreased activity levels in Asia Pacific and
EMAR, partially offset by higher revenue levels in North America. In
addition, this was partially offset by a positive impact on the quarter
by the adoption of IAS 29, Financial Reporting in Hyperinflationary
Economies for Argentina as discussed in Section 13.0. 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.
In the Petrochemical and Industrial segment, revenue was
$3.3 million higher during the fourth quarter of 2018, compared
to $44.4 million in the fourth quarter of 2017, primarily due to
increased activity levels in the North America and EMAR 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: Operating income decreased by $25.2 million,
from $34.5 million in the fourth quarter of 2017 to $9.3 million
during the fourth quarter of 2018. Operating income was negatively
impacted by a $62.1 million decrease in gross profit. This was
partially offset by a decrease of $21.0 million in SG&A expenses, a
$3.5 million increase in net foreign exchange gains, a $8.1 million
impairment charge recorded in the fourth quarter of 2017 and a
20
The decrease in gross profit resulted from the lower revenue, as
explained above, and a 9.7 percentage point decrease in the
gross margin from the fourth quarter of 2017. The decrease in
the gross margin percentage was primarily due to lower large
project activity in Latin America, lower utilization in EMAR and
Asia Pacific facilities and the related impact on the absorption
of manufacturing overheads.
SG&A expenses in the fourth quarter of 2018 decreased by
$21.0 million compared to the fourth quarter of 2017, primarily
due to a $16.3 million decrease in compensation and other
personnel related costs, where the prior year period included an
increase in government mandated employee profit sharing on large
project activity in Latin America, and decreases of $0.8 million in
professional consulting and legal fees and $3.9 million in insurance,
management information systems, product development and
other costs.
Finance costs: In the fourth quarter of 2018, net finance costs were
$3.6 million, in line with the finance costs in the fourth quarter of
2017. In the fourth quarter of 2018, interest income on short term
deposits increased by $0.4 million, partially offset by a $0.3 million
increase in other financing expenses compared to the fourth quarter
of 2017.
Income taxes: The Company recorded an income tax recovery
of $1.4 million (54% of income before income taxes) in the
fourth quarter of 2018, compared to an income tax expense of
$10.0 million (33% of income before income taxes) in the fourth
quarter of 2017. The effective tax rate in the fourth quarter of
2018 was lower than the Company’s statutory income tax rate of
27% primarily due to the mix of jurisdictions where the income is
earned and improved results in jurisdictions where the Company is
benefiting from previously unrecognized deferred tax assets.
Net Income: Net income decreased by $16.0 million, from
$20.3 million during the fourth quarter of 2017 to $4.4 million during
the fourth quarter of 2018. This was mainly due to the $25.2 million
decrease in operating income, as explained above, and a $2.7 million
increase in net monetary loss from hyperinflationary accounting.
This was partially offset by a decrease of $11.4 million in income
tax expense.
•
•
•
7.0 DISCLOSURE CONTROLS AND INTERNAL
CONTROLS OVER FINANCIAL REPORTING
The President and Chief Executive Officer and the Vice President,
Finance and Chief Financial Officer, together with the management
of the Company, have evaluated the effectiveness of the Company’s
Disclosure Controls and Procedures (“DC&Ps”) (as defined in the rules
of the Canadian Securities Administrators) and the effectiveness of
Internal Controls Over Financial Reporting (“ICFR”). Based on that
evaluation, they have concluded that the Company’s DC&Ps were
effective as at December 31, 2018. Furthermore, they have concluded
that the Company’s ICFR was effective as at December 31, 2018. There
were no changes in the Company’s ICFR during 2018 that had or are
reasonably likely to have a material impact on the Company’s ICFR.
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS
8.0 CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES
AND ACCOUNTING POLICY DEVELOPMENTS
8.1 Critical Judgments
The following are critical judgments management has made in the
process of applying accounting policies and that have the most
significant effect on the amounts recognized in the consolidated
financial statements.
Materiality
Management must make assessments about whether line items are
sufficiently material to warrant separate presentation in the primary
financial statements and, if not, whether they are sufficiently material
to warrant separate presentation in the financial statement notes.
Determination of Reportable Operating Segments
Management has exercised judgement in evaluating the defined
aspects of its operating segments, aggregation criteria, and
quantitative thresholds that form the reportable operating segments of
the Company. Management has also exercised professional judgement
in determining that the Company’s Chief Executive Officer (“CEO”) is
the Company’s Chief Operating Decision Maker (“CODM”).
Determination of Cash Generating Unit (“CGU”)
Management has exercised judgement in identifying the CGUs of the
Company. In performing impairment assessments of long-lived assets,
assets that cannot be assessed individually are grouped together into
the smallest group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets or groups of
assets. Determination of CGUs is also required for impairment testing
of goodwill.
Business Acquisitions
Significant judgements and assumptions are made in determining
the purchase price allocation for acquired companies. Management
has exercised professional judgement in determining the total
consideration paid in an acquisition, including any contingent
consideration, and in determining the assets and liabilities that should
be part of the purchase price accounting. Management has also
exercised judgement in identifying intangible assets and in choosing
the appropriate valuation models and techniques to determine their
fair values. Management has also exercised professional judgement in
characterizing the composition of any residual goodwill.
Provisions and Contingent Liabilities
As at December 31, 2018, the Company had $58.9 million of provisions;
of this amount $23.9 million was included in current liabilities and
$35.0 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 outflow of
economic benefits resulting from past operations or events and the
amount of the cash outflow can be reliably measured. The timing of
recognition and measurement of the provision requires the application
of judgement 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 into account changing
facts and circumstances.
The Company is required to determine whether a loss is probable
based on judgement 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
Management is required to apply judgement in determining whether
any legal or constructive obligations exist to dismantle, remove or
restore its assets, including any obligation to rehabilitate environmental
damage on its properties. Management is required to make significant
assumptions in determining the obligation for decommissioning
liabilities. There are numerous factors that will affect the liability
payable including the extent and costs of rehabilitation activities,
technological changes, regulatory changes, cost increases, and
changes in discount rates.
Income Taxes
The calculation of income taxes requires judgement in interpreting
tax rules and regulations. There are transactions and calculations for
which the ultimate tax determination is uncertain. The tax filings also
are subject to audits, the outcome of which could change the amount
of current and deferred tax assets and liabilities. Management believes
that it has sufficient amounts accrued for outstanding tax matters
based on information that is currently available.
Uncertainties exist with respect to the interpretation of complex tax
regulations, changes in tax laws, and the amount and timing of future
taxable income. Management judgement is used to determine the
amounts of deferred tax assets and liabilities to be recognized, based
upon the likely timing and the level of future taxable profit together with
future tax planning strategies. In particular, judgement is required when
assessing the timing of the reversal of temporary differences to which
future income tax rates are applied.
8.2 Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity
with IFRS requires management to make estimates and assumptions
that affect the amounts of assets, liabilities and contingencies
at the date of the financial statements, and the reported amounts
of revenue and expenses during the period. These estimates and
assumptions are made with management’s best judgement given
the information available at the time; however, actual results could
differ from the estimates.
Critical estimates used in preparing the consolidated financial
statements include:
Long-lived Assets and Goodwill
As at December 31, 2018, the Company had $948.8 million of long-
lived assets and goodwill. The Company evaluates the carrying values
of the CGUs’ goodwill on an annual basis on October 31 of each year
to determine whether or not impairment of these assets has occurred
and whether 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 flows generated by these assets
in determining the value-in-use and fair value less costs to sell
calculations. Actual results could differ from these assumptions
and estimates.
21
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS Employee Future Benefit Obligations
As at December 31, 2018, the Company had $15.2 million of employee
future benefit obligations. The Company provides future benefits
to its employees under a number of defined benefit arrangements.
The calculation of the defined benefit obligation recognized in the
consolidated financial statements includes a number of assumptions
regarding discount rates, rates of employee compensation increases,
rates of inflation, and life expectancies. The outcome of any of these
factors could differ from the estimates used in the calculations and
have an impact on operating expenses, non-current assets and non-
current liabilities.
Decommissioning Liabilities
As at December 31, 2018, the Company had decommissioning
liabilities in the amount of $30.7 million; of this amount $6.2 million
was included in the current provisions account and $24.5 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 consolidated
financial statements based on estimated future amounts required to
satisfy these obligations. The amount recognized is the present value
of estimated future expenditures required to settle the obligation using
a current pre-tax risk-free rate.
Financial Instruments
The Company has determined the estimated fair values of its financial
instruments not traded in an active market based on appropriate
valuation methodologies; however, considerable judgement is required
to develop these estimates, mainly based on market conditions
existing at the end of each reporting period. Accordingly, these
estimated fair values are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The estimated
fair value amounts can be materially affected by the use of different
assumptions or methodologies.
Income Taxes
The recording of income tax expense includes certain estimations
related to the impact in the current year of future events. Differences
between the estimated and actual impact of these events could impact
tax expense, current taxes payable or deferred taxes. In particular,
income and losses in foreign jurisdictions may be taxed at rates
different from those expected in Canada. Deferred income tax assets
are recognized to the extent that it is probable that future taxable
income will be available against which the losses can be utilized.
Given the wide range of international business relationships and the
long-term nature and complexity of existing contractual agreements,
differences 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 differing interpretations of tax regulations by the
taxable entity and the responsible tax authority. Such differences in
interpretation may arise for a wide variety of issues depending on the
conditions prevailing in the domicile of the respective entities.
8.3 Accounting Standards Issued but Not Yet Applied
IFRS 16, Leases
IFRS 16, issued by the IASB in January 2016, supersedes IAS 17,
Leases (and related interpretations). The standard is effective for
annual periods beginning on or after January 1, 2019, with earlier
application permitted for entities that have also adopted IFRS 15,
Revenue from Contracts with Customers. The new standard provides a
comprehensive model for the identification of lease arrangements and
their treatment in the financial statements of both lessees and lessors.
This standard eliminates the classification of leases as either operating
or finance lease for a lessee, and instead, all leases are capitalized by
recognizing the present value of lease payments and presenting them
as lease assets. The Company will elect to use the exemptions in the
standard on lease contracts for which the lease term ends within 12
months as of the date of initial application, and lease contracts for
which the underlying asset is of low value. The service component of
a lease agreement should be separated from the value of the asset
and is not reported on the consolidated balance sheet; however, there
is a practical expedient to combine lease and non-lease components.
Purchase, renewal and termination options which are reasonably
certain of being exercised are also included in the measurement of the
lease liability. Lease payment liabilities will not include variable lease
payments other than those that depend on an index or rate. The most
significant effect of the new requirements will be the recognition of
the right-of-use (“ROU”) leased assets and their corresponding lease
obligations on the consolidated balance sheet.
The Company has completed its implementation plan and process for
reviewing its lease contracts. A software subscription system has been
obtained, to assist the Company in compiling the lease information
and calculating the related accounting impacts to comply with the
requirements of the standard and manage its lease arrangements. On
initial adoption, the Company plans to apply the standard using the
modified retrospective approach, which does not require a restatement
of prior period financial information as it recognizes the cumulative
effect of applying the standard to prior periods as an adjustment to
opening retained earnings as at January 1, 2019.
The adoption of IFRS 16 will result in the recognition of operating
leases mainly related to real estate and land. As a result, the Company
expects to account for ROU assets of approximately $55 – $65 million,
lease liabilities of approximately $55 – $65 million and a reduction of
shareholders’ equity of approximately $2 – $3 million.
Long-term Interests in Associates and Joint Ventures
(Amendments to IAS 28)
In October 2017, the IASB issued Long-term Interests in Associates and
Joint Ventures (Amendments to IAS 28). The amendments clarify that
a company applies IFRS 9, Financial Instruments, to long-term interests
in an associate or joint venture that form part of the net investment
in the associate or joint venture. The amendments are effective from
January 1, 2019, with early application permitted. The Company
performed an impact assessment of the amendment to IAS 28 and
determined that there will be no material impact on its consolidated
financial statements on adoption of this standard.
IFRIC 23, Uncertainty over Income Tax Treatments
In June 2017, the IASB published IFRIC 23, Uncertainty over Income
Tax Treatments, effective for annual periods beginning on or after
January 1, 2019. The interpretation requires an entity to assess
22
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS whether it is probable that a tax authority will accept an uncertain tax
treatment used, or proposed to be used, by an entity in its income tax
filings and to exercise judgement in determining whether each tax
treatment should be considered independently or whether some tax
treatments should be considered together. The decision should be
based on which approach provides better predictions of the resolution
of the uncertainty. An entity also has to consider whether it is probable
that the relevant authority will accept each tax treatment, or group of
tax treatments, assuming that the taxation authority with the right to
examine any amounts reported to it will examine those amounts and
will have full knowledge of all relevant information when doing so. The
interpretation may be applied on either a fully retrospective basis or
a modified retrospective basis without restatement of comparative
information. The Company performed an impact assessment of all
aspects of IFRIC 23 and determined that there will be no material
impact on its consolidated financial statements on adoption of
this standard.
8.4 New Accounting Standards Adopted
IFRS 2, Share-based Payment
In June 2016, the IASB issued amendments to IFRS 2, Share-based
Payment, in relation to the classification and measurement of
share-based payment transactions. The amendments address
three main areas:
•
•
•
The effects of vesting conditions on the measurement of a cash-
settled share-based payment transaction;
The classification of a share-based payment transaction with net
settlement features for withholding tax obligations; and
The accounting where a modification to the terms and conditions
of a share-based payment transaction changes its classification
from cash-settled to equity-settled.
The amendments were effective for annual periods beginning
on or after January 1, 2018. On adoption, entities are required to
apply the amendments without restating prior periods, but
retrospective application is permitted if elected for all three
amendments and other criteria are met. The Company adopted
the new standard effective January 1, 2018. The Company
performed an impact assessment on the classification and
measurement of the amendments and determined that there
was no material impact of adopting this standard on its
consolidated financial statements.
IFRS 9, Financial Instruments
In July 2015, the IASB issued the final version of IFRS 9, Financial
Instruments, which replaces all phases of the financial instruments
project, IAS 39, Financial Instruments: Recognition and Measurement,
and all previous versions of IFRS 9. The standard introduces new
requirements for classification and measurement, impairment, and
hedge accounting. The new standard was effective for annual periods
beginning on or after January 1, 2018, with early adoption permitted.
The Company adopted the new standard effective January 1, 2018.
The Company performed an impact assessment of all aspects of
IFRS 9 and determined that there was no material impact on its
consolidated financial statements on adoption of this standard. The
Company elected to designate an investment in equity instruments as
Fair Value through Other Comprehensive Income (“FVOCI”).
IFRIC 22, Foreign Currency Transactions and Advance
Consideration
IFRIC 22, Foreign Currency Transactions and Advance Consideration,
clarifies that the date of foreign currency transactions for purposes
of determining the exchange rate to use on initial recognition of the
related asset, expense or income (or part of it) is the date on which
an entity initially recognizes the non-monetary asset or non-monetary
liability arising from the payment or receipt of advance consideration.
The interpretation was effective for periods beginning on or after
January 1, 2018 and may be applied either retrospectively or
prospectively. The Company adopted this standard on January 1, 2018
and has determined that there was no material impact of adopting this
standard on its consolidated financial statements.
IFRS 15, Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with
Customers, which establishes a single comprehensive model for
entities to use in accounting for revenue arising from contracts with
customers. Under IFRS 15, revenue is recognized at an amount that
reflects the consideration to which an entity expects to be entitled
to in exchange for transferring goods or services to a customer.
The principles in IFRS 15 provide a more prescriptive approach to
measuring and recognizing revenue. The standard was effective for
annual periods beginning on or after January 1, 2018. The Company
adopted the standard using the full retrospective method, effective
January 1, 2018.
The Company has performed contract reviews in all divisions to
identify the impact of the new standard and concluded that the sale of
goods will continue to be recognized at a point in time and rendering
of services will be recognized over time. The Company has identified
minor changes in how revenue is allocated to performance obligations
and the resulting timing of revenue recognition from some contracts
originating in the Pipeline and Pipe Services segment, primarily related
to field joint contracts. Previously, tasks associated with customer
contract requirements were recognized into revenue based on task
completion outlined in contracts. Under the new standard, some of
these tasks are not defined as distinct performance obligations but
rather are recognized as part of the primary performance obligation.
The Company also concluded that some costs incurred in those
contracts meet the definition of costs to fulfill.
To enhance clarity, comparability and utility of financial information
post-implementation of the standard, the Company applied the
standard retrospectively subject to permitted and elected practical
expedients including:
i. No restatement for contracts that began and ended within the same
annual reporting period.
ii. No restatement for contracts that were completed or modified prior
to January 1, 2017.
iii. No disclosure of the aggregate transaction prices allocated to the
remaining unfulfilled or partially unfulfilled performance obligations
for periods ended prior to January 1, 2018.
For the purposes of applying the new standard on an ongoing basis,
the Company will be using the practical expedient to not disclose the
transaction prices allocated to the remaining unfulfilled, or partially
unfulfilled performance obligations from contracts originally expected
to have a duration of one year or less.
23
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS The impact of the adoption of the standard on the Company’s
consolidated balance sheets primarily relates to reclassifications
among financial statement accounts to align with the new standard.
Most notably, contracts in process for which the Company has
rendered service in advance of billing are presented as contract assets
as opposed to unbilled revenue assets within accounts receivable.
Additionally, capitalized costs to fulfill contracts are included within
contract assets. Advance payments and deferred revenue are
combined and presented as contract liabilities.
The impact of adopting the standard on the year ended
December 31, 2017 for revenue, cost of goods sold, net loss and
basic and diluted EPS was as follows:
(in thousands of Canadian dollars, except per share amounts)
Revenue
Cost of Goods Sold and Services Rendered
Loss before Income Taxes
Income Taxes
Net Loss
Basic Earnings per Share
Diluted Earnings per Share
Year Ended
December 31, 2017
$
(1,153)
(898)
(255)
103)
(152)
0.00
0.00
The cumulative impact to retained earnings as at January 1, 2017 was
a reduction of $0.05 million.
Revenue Recognition
Revenue is recognized to the extent that it is probable that the
economic benefits will flow to the Company and the revenue can be
reliably measured, regardless of when the payment is being made.
Revenue is measured at the fair value of the consideration received or
receivable, taking into account contractually defined terms of payment
and net of taxes or duty.
The Company has concluded that it is the principal in its revenue
arrangements since it is the primary obligor, has pricing latitude
and is exposed to inventory and credit risks. Revenue is recognized
when or as control of a good or service is transferred to a customer
as satisfaction of a performance obligation. The majority of the
Company’s revenue is from short-term contracts associated with
the sale of goods or the rendering of services from pipe coating,
inspection, repair and other services provided in respect of customer-
owned property.
A performance obligation is a promise in a contract to transfer a
distinct good or service to the customer and is the unit of account
in IFRS 15. A contract’s price is allocated to distinct performance
obligations on a standalone selling price basis. The majority of the
Company’s contracts have a single performance obligation as the
promise to transfer the goods or services is not separately identifiable
from other promises in the contracts and, therefore, are not distinct.
For contracts with multiple performance obligations, the allocation of
the transaction price is done using management’s best estimate of the
standalone selling price of distinct goods or services in the contract
using a cost plus gross margin approach within typical and reasonable
variance ranges for similar contracts.
Sale of Goods
Revenue from the sale of goods is recognized when the control of
the goods has passed to the buyer, usually on delivery of the goods.
Revenue from the sale of goods is measured at the fair value of the
consideration received or receivable, net of returns and allowances,
trade discounts and volume rebates. Revenue for the sale of goods
is recognized at a point in time, upon transfer of control of the goods
based upon the specified delivery terms.
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 specific contracts and recognized
by reference to the stage of completion. Stage of completion is
determined based on surveys of work performed as measured by
units of production to date multiplied by contractually agreed-upon
rates. Revenue from the rendering of services is usually recognized
as the performance obligations are satisfied over time as the work
progresses. Substantially all of the revenue from the rendering of
services is recognized over time. Revenue recognized over time is done
using both input and output measures, depending upon the service
being provided. For input measures, the cost incurred to date relative
to the total estimated project costs at completion is used to measure
progress. For output measures, the units of pipe coating or hours of
service completed are used to measure progress.
Services performed in advance of billings are recorded as contract
assets pursuant to contractual terms. In general, amounts become
billable upon the achievement of contract milestones (such as the
commencement of coating) or in accordance with predetermined
payment schedules. Changes in the scope of work are not included
in net revenue unless the changes are probable and can be
reliably measured.
The Company records payments received in advance of revenue
recognition from customers as contract liabilities, which are then
recognized as revenue as goods are delivered and as services
are performed.
Contract Assets – Contract assets include unbilled amounts typically
resulting from sales under contracts when an input or output method
of revenue recognition is utilized and revenue recognized exceeds
the amount billed to the customer. Amounts may not exceed their
net realizable value. Additionally, capitalized costs to fulfill contracts
are included within contract assets. Contract assets are generally
classified as current.
Contract Liabilities – Contract liabilities consist of advance payments
and billings in excess of revenue recognized. Contract assets and
liabilities are reported on a net position on a contract by contract basis
at the end of each reporting period. Advance payments and deferred
revenue are combined and presented as contract liabilities under
current liabilities. Contract liabilities as at December 31, 2018 were
$23.6 million (December 31, 2017 – Deferred revenue of $44.8 million),
of which $70.0 million was deducted and recognized as revenue during
the year ended December 31, 2018, and $48.8 million was added
during the year ended December 31, 2018.
24
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS
Impacts of application of IFRS 15, Revenue from Contracts with Customers
a) IFRS 15, Revenue from Contracts with Customers, impacted the fiscal 2017 comparative amounts reported in the Company’s fiscal 2018
consolidated statement of income as follows:
(in thousands of Canadian dollars)
Revenue
Sale of products
Rendering of services
Cost of Goods Sold and Services Rendered
Year Ended
December 31,
2017
IFRS 15 —
Revenue
Effects
Restated
Year Ended
December 31,
2017
$
509,491
$
–
$
509,491
1,057,161
1,566,652
980,919
(1,153)
1,056,008
(1,153)
(898)
1,565,499
980,021
Gross Profit
585,733
(255)
585,478
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
Income from Operations
Loss from investment in associates
Finance costs, net
Income before Income Taxes
Income taxes
Net Income
Net Income (Loss) Attributable to:
Shareholders of the company
Non-controlling interests
Net Income
Earnings per Share
Basic
Diluted
Weighted Average Number of Shares Outstanding (000s)
Basic
Diluted
342,991
10,536
(249)
77,267
19,170
(311)
8,073
–
–
–
–
–
–
–
342,991
10,536
(249)
77,267
19,170
(311)
8,073
128,256
(255)
128,001
(6,271)
(16,817)
105,168
33,988
71,180
71,307
(127)
71,180
1.02
1.02
69,926
70,102
–
–
(6,271)
(16,817)
(255)
104,913
(103)
(152)
33,885
71,028
(152)
–
(152)
71,155
(127)
71,028
–
–
1.02
1.02
69,926
70,102
25
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS
b) IFRS 15, Revenue from Contracts with Customers, affected the fiscal 2017 comparative amounts reported in the Company’s fiscal 2018
consolidated balance sheet as follows:
(in thousands of Canadian dollars)
ASSETS
Current assets
Cash and cash equivalents
Short-term investments
Loans receivable
Accounts receivable
Contract assets
Income taxes receivable
Inventories
Prepaid expenses
Derivative financial instruments
Total current assets
Non-current assets
Loans Receivable
Property, plant and equipment
Intangible assets
Investments in associates
Deferred income tax assets
Other assets
Goodwill
Total non-current assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Current liabilities
Bank indebtedness
Accounts payable and accrued liabilities
Provisions
Income taxes payable
Derivative financial instruments
Contract liabilities
Obligations under finance lease
Other liabilities
Total current liabilities
Non-current liabilities
Long-term debt
Obligations under finance lease
Provisions
Employee future benefits
Deferred income tax liabilities
Other liabilities
Total non-current liabilities
Total liabilities
Equity
Share capital
Contributed surplus
Retained earnings
Non-controlling interests
Accumulated other comprehensive income
December 31,
2017
IFRS 15 –
Effects
December 31,
2017
Restated 2017
Excluding
Effects
of IFRS 15
December 31, 2017
IFRS 15 –
Effects
January 1, 2017
Pro
Forma
$
289,065
$
194,824
$
$
289,065
$
–
2,448
259,694
–
20,205
115,479
21,931
382
709,204
2,283
417,781
164,872
20,188
33,876
20,606
329,391
988,997
–
–
–
(65,255)
65,413
–
(461)
–
–
–
2,448
194,439
65,413
20,205
115,018
21,931
382
(303)
708,901
–
–
–
–
103
–
–
103
2,283
417,781
164,872
20,188
33,979
20,606
329,391
989,100
1,890
3,832
294,397
–
35,141
113,485
22,477
9,393
675,439
5,058
471,468
192,907
26,739
28,955
26,407
350,818
1,102,352
–
–
–
(84,233)
84,161
–
–
–
–
(72)
–
–
–
–
24
–
–
24
$
194,824
1,890
3,832
210,164
84,161
35,141
113,485
22,477
9,393
675,367
5,058
471,468
192,907
26,739
28,979
26,407
350,818
1,102,376
$ 1,698,201
$
(200)
$ 1,698,001
$ 1,777,791
$
(48)
$ 1,777,743
$
$
–
201,017
27,361
42,904
1,915
44,826
1,111
11,848
330,982
246,175
10,840
36,555
18,552
6,448
3,665
322,235
653,217
704,956
27,651
302,406
5,848
4,123
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(200)
–
–
$
–
201,017
27,361
42,904
1,915
44,826
1,111
11,848
330,982
246,175
10,840
36,555
18,552
6,448
3,665
322,235
653,217
704,956
27,651
302,206
5,848
4,123
$
2,463
212,539
21,104
39,011
3,759
103,584
950
12,043
395,453
263,528
11,019
35,304
20,727
7,484
1,236
339,298
734,751
703,316
23,379
273,045
5,892
37,408
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(48)
–
–
$
2,463
212,539
21,104
39,011
3,759
103,584
950
12,043
395,453
263,528
11,019
35,304
20,727
7,484
1,236
339,298
734,751
703,316
23,379
272,997
5,892
37,408
Total equity
1,044,984
(200)
1,044,784
1,043,040
(48)
1,042,992
TOTAL LIABILITIES AND EQUITY
$ 1,698,201
$
(200)
$ 1,698,001
$ 1,777,791
$
(48)
$ 1,777,743
26
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS
9.0 Outlook
Shawcor’s financial performance is correlated with oil and gas
infrastructure spending and the resultant demand for the Company’s
products and services. Adjusted EBITDA1 for the fourth quarter of 2018
was in line with expectations and reflected typical seasonal slowdowns
in several of the Company’s businesses along with the ongoing
investments in the pipe coating business for idle assets and project
pursuit costs in preparation for the expected increase in activity in the
second half of 2019 and beyond. The fourth quarter saw continued
momentum in North American demand for Shawcor’s products and
services, specifically in composite pipe technologies, pipe coating
products and integrity management field services. Full year 2018
results were slightly better than the expectations the Company
communicated a year ago, based on the annualized Adjusted EBITDA1
run rate of the fourth quarter of 2016.
2018 was a pivotal year as it demonstrated that the Company can
deliver profitable results on its diversified base business despite
having no contribution from the core pipe coating business or a large
pipe coating project. The Company expects that its operating results
in the first half of 2019 will be negatively impacted by the continued
lower pipe coating activity, higher costs for idle assets and large
project pursuits and a very soft winter drilling and completion season
in Western Canada. The Company expects revenues to sequentially
improve throughout 2019, particularly in the second half of the year,
and to deliver improved annual operating results over 2018. This
expectation reflects stable demand throughout the year for the base
business, particularly in North America, and increased activity in
pipe coating in the second half of the year from international and
offshore projects.
The Company believes that 2018 represented the bottom of the
offshore global oil & gas capex cycle and that this market is poised
for consistent growth over the next several years. The likelihood of
large projects being sanctioned to replace production in the near
to medium term is strengthening, driven by several years of absent
investment or short cycle investment prioritization in the industry now
coming to an end as key reservoirs are no longer able to sustain peak
production levels, the increase in high decline rate shale production
and geopolitical challenges which are affecting several important
producing regions. Additionally, the increased demand for greener
technology will be supportive of investments in gas, specifically LNG.
The Company continues to see demand growth in North America
land markets and an increased level of activity in the international
and offshore markets, as evidenced in its current bids outstanding.
The Company remains well positioned to capitalize on this continuing
positive trend in project activity through its global footprint, technology
portfolio and execution history.
The Company continued its strategic efforts to position itself as the
partner of choice in the pursuit of several large projects, which are
characterized as greater than $100 million in revenue. In the fourth
quarter of 2018, the Liza I & II awards, representing approximately
$110 million of work related to deep water development projects
located offshore Guyana, provided further evidence that the low
point in the offshore pipe coating cycle has been reached. Liza I and
II is a multi-phase project, and characteristic of the type of project
planning that the Company is seeing with greater frequency. In an
effort to reduce large project costs, operators are engaging large global
Engineering-Procurement-Contracting (EPC) companies, who are
utilizing standardized engineering approaches and selecting preferred
suppliers to participate in the planning process significantly earlier
than in the past. This new contracting approach gives Shawcor greater
visibility and awareness on future possible project wins. Recently,
this same process was followed in an as yet unsanctioned offshore
Australia project where a conditional, non-binding letter of award was
signed between the selected EPC company and Shawcor for a scope
of work that is estimated at over $100 million in revenue for 2020.
Although the exact timing of when large projects are sanctioned is
difficult to predict, the Company believes that there is still a strong
likelihood that some of these projects will be sanctioned in 2019
and beyond because they are not directly linked to oil and gas
commodity prices as they involve energy security or reservoir access
considerations. Based on this, the Company believes that its diversified
base business and expected higher pipe coating activity in 2019 will
deliver improved operating results, particularly in the second half of the
year. However, the Company has confidence to deliver stronger results
in 2020 from the expected build in backlog in 2019.
As confidence has increased that the investment in international
projects will be sanctioned with a positive impact on the offshore
pipe coating business, Shawcor continued its growth strategy
of diversifying the base business through organic and inorganic
initiatives. Investments in expanding the composite product offering
(both in operating envelope and geographic reach), deployment of
next generation inspection technology and capacity expansion in
the automotive heat shrink market have been made. In addition,
the Company announced that it had entered into an arrangement
agreement to acquire all of the shares of ZCL Composites Inc., North
America’s largest manufacturer and supplier of environmentally
friendly fiberglass reinforced plastic underground storage tanks. This
inorganic investment is supported by long-term fundamental drivers
similar to those which support Shawcor, such as aging infrastructure,
and it leverages Shawcor’s material science expertise in advanced
composite materials to provide customers with superior systems for
both their conveyance and storage needs. It further demonstrates
Shawcor’s commitment to diversifying its portfolio and increasing
its base business to provide a foundation for long-term technology
developments and profitable base business growth.
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
Market demand in Shawcor’s North American Pipeline segment
businesses is closely tied to well completions and the build out of new
and the repair/replacement of old transmission pipeline infrastructure.
These activities drive the demand for small diameter pipe coating
and joint protection, composite pipe for gathering line applications,
OCTG pipe inspection and refurbishment and gathering line girth weld
inspection. It is expected that demand in North American land activity
will continue in line with rig counts and wells completed, particularly
in the United States; however, the rate of growth will slow down in the
first half of 2019 due to the lack of take-away capacity in the Permian
basin and early indications that suggest a soft winter season in
Western Canada, and resume in the second half of 2019 as take-away
capacity in the Permian is addressed through several transmission
pipeline projects currently underway. The increased breadth of
1. EBITDA and Adjusted EBITDA are Non-GAAP measures and do not have standardized meanings under GAAP and are not necessarily comparable to similar measures provided by
other companies. See Section 12.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of EBITDA and Adjusted EBITDA.
27
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS the Company’s portfolio, as well as the continued adoption rate of
Shawcor’s composite pipe systems technology over traditional steel
products, is helping to absorb these slight headwinds. In addition, the
Company continues to experience strong demand for its pipe coating
capabilities from increased activity in the Gulf of Mexico and larger
diameter onshore transmission line projects, which is improving the
utilization of our U.S. based coating facilities.
Pipeline and Pipe Services Segment — Latin America
The Company continues to expect increased activity in the recently
reactivated facilities in Mexico and Brazil related to the continued
activity in the Gulf of Mexico and smaller offshore Brazilian projects.
This is supported by the Liza II project that is now under contract,
which is expected to be executed in the Company’s Veracruz facility
and contribute positive results in the second half of 2019.
Pipeline and Pipe Services Segment – EMAR
Shawcor’s EMAR Pipeline region continues to be negatively impacted
by reduced capital spending by national and international energy
companies. The Company will continue executing work on the
awarded contract to provide anti-corrosion and concrete weight
coatings related to an offshore Qatar pipeline. The Company continues
to pursue several large projects in the region that, if won, could provide
significant work beyond 2019.
Pipeline and Pipe Services Segment — Asia Pacific
The region’s project activity will continue to be depressed due to
the lack of offshore project investments. The Company is actively
pursuing several large projects that are related to the development of
gas reservoirs that could be awarded in 2019. In addition, composite
products have recommenced their penetration in the Australian
onshore market and are gaining traction in several other countries in
the region as composites gain further acceptance.
Petrochemical and Industrial Segment
Shawcor’s Petrochemical and Industrial segment businesses continue
to deliver solid revenue and operating income based on stable demand
in the global automotive market and European and North American
industrial markets. These markets generally follow GDP activity;
however, the Segment is well positioned to capture the growing trend
of electrification on automobiles with specified sealing, water blocking
and insulating systems along with customized application equipment
for Tier I assembly customers. Demand for wire and cable products
continues to be strong and supply chain constraints for drawn wire
from copper rods have eased from the third quarter of 2018.
Order Backlog
The Company’s order backlog consists of firm customer orders only
and represents the revenue the Company expects to realize on booked
orders over the succeeding twelve months. The Company reports the
twelve month billable backlog because it provides a leading indicator
of significant changes in consolidated revenue. The order backlog of
$459 million as at December 31, 2018 was above the $395 million
order backlog as at September 30, 2018, reflecting the inclusion of the
Liza II project and other awards moving from bid to backlog.
In addition to the backlog, the Company closely monitors its bidding
activity and the value of outstanding firm bids is over $1.0 billion,
up $160 million from last quarter due to increasing bidding activity
for pipe coating in the offshore and international markets. Included
in the firm bid is an as yet unsanctioned offshore Australia project
where a conditional, non-binding letter of award was signed between
the selected EPC company and Shawcor for a scope of work that is
estimated at over $100 million in revenue for 2020. The Company is
also working with customers on a number of other projects and the
budgetary estimates at the end of the fourth quarter were almost
$1.9 billion. Although the timing of these projects remains uncertain,
the Company’s bid and budgetary figures represent a diverse
portfolio of opportunities to sustain and build the backlog through
2019 and beyond.
10.0 RISKS AND UNCERTAINTIES
Operating in an international environment, servicing predominantly the
oil and gas industry, Shawcor faces a number of business risks and
uncertainties that could materially and adversely affect the Company’s
projections, business, results of operations and financial condition.
The following summarizes the Company’s risks and uncertainties and
how it manages and mitigates each risk:
10.1 Economic Risks
A decline in global drilling activity as a consequence of lower
global oil and gas prices would have a material adverse effect on
the Company’s projections, business, results of operations and
financial condition.
The Company’s business is materially dependent on the level of global
drilling activity, which, in turn depends on global oil and gas demand,
prices and production depletion rates. Lower drilling activity decreases
demand for the Company’s products and services, including small
diameter pipe coating, composite pipe, gathering line weld inspection
and tubular inspection and inventory management services. These
business activities represented approximately 35% of 2018 revenues.
An economic downturn or a continued global decline in energy
prices could materially adversely affect demand for the Company’s
products and services and, consequently, its projections, business,
results of operations and financial condition.
Demand for oil and natural gas is influenced by numerous factors,
including the North American and worldwide economies as well
as activities of the Organization of Petroleum Exporting Countries
(“OPEC”). Economic declines impact demand for oil and natural gas
and result in a softening of oil and gas prices and projected oil and gas
drilling activity. If economic conditions or international markets decline
to an extent or for a duration which is unexpected, the Company’s
projections, business, results of operations and financial condition
could be materially adversely affected. In addition, if actions by
OPEC and other oil producers to increase production of oil adversely
affect world oil prices 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 financial condition
could be materially adversely affected. Similarly, demand for the
products of the Petrochemical and Industrial segment’s businesses
is largely dependent on the level of general economic activity in
North America and Europe. Decreases in economic activity in
these regions could result in significant decreases in activity levels
in these businesses.
28
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS A cyclical decline in the level of global pipeline construction could
have a material adverse effect on the Company’s projections,
business, results of operations and financial condition.
The Company’s business is materially dependent on the level of global
pipeline construction activity which in turn relates to the growth in
demand for oil and natural gas and the availability of new supplies
to meet this increased demand. Reductions in capital spending by
producers could dampen demand for the Company’s products and
services supplied in pipeline markets.
Economic Risk Mitigation
The Company cannot completely mitigate economic risks. However,
the Company maintains a competitive geographical presence in a
diverse number of regions and has implemented several systems and
processes to manage operational risks and to achieve continuous
improvements in operational effectiveness, in addition to various cost
reduction initiatives. Through these efforts, economic risk is mitigated.
Refer to Section 1.5 — Capability to Deliver Results, for additional
information with respect to the Company’s systems and processes.
Revenue generated by the Company’s Pipeline and Pipe Services
segment accounted for 86% of consolidated sales in 2018. With this
proportion expected to continue, the Company’s revenue is materially
dependent on the global Pipeline and Pipe Services industry. Any
significant declines in pipeline market activity could have a material
adverse effect on the Company’s projections, business, results of
operations and financial condition.
Increases in the prices and/or shortages in the supply of raw
materials used in the Company’s manufacturing processes could
adversely affect the competitiveness of the Company, its ability to
serve its customers’ needs and its financial performance.
The Company purchases a broad range of materials and components
throughout the world in connection with its manufacturing activities.
Major items include polyolefin and other polymeric resins, iron ore,
cement, adhesives, sealants and copper and other nonferrous wire.
The ability of suppliers to meet performance and quality specifications
and delivery schedules is important to the maintenance of customer
satisfaction. While the materials required for the Company’s
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.
The Company’s material financing agreements contain financial and
other covenants that, if breached by the Company, may require the
Company to redeem, repay, repurchase or refinance its existing
debt obligations prior to their scheduled maturity. The Company’s
ability to refinance 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 financing agreements which
contain financial or other covenants. If the Company was to breach
the financial or other covenants contained in its financing agreements,
the Company may be required to redeem, repay, repurchase or
refinance 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 refinance any of the
Company’s debt obligations in such circumstances, its ability to make
capital expenditures and its financial condition and cash flows could
be adversely impacted. If future debt financing 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 refinance
maturing debt, any of which could have a material adverse effect on
the Company’s operating results and financial condition.
10.2 Litigation and Legal Risks
The Company could be subject to substantial liability claims, which
could adversely affect its projections, business, results of operations
and financial condition.
Some of the Company’s products are used in hazardous applications
where an accident or a failure of a product could cause personal injury,
loss of life, damage to property, equipment or the environment, as
well as the suspension of the end-user’s operations. If the Company’s
products were to be involved in any of these difficulties, the Company
could face litigation and may be held liable for those losses. The
Company’s insurance coverage may not be adequate in risk coverage
or policy limits to cover all losses or liabilities that it may incur.
Moreover, the Company may not be able in the future to maintain
insurance at levels of risk coverage or policy limits that management
deems adequate. Any claims made under the Company’s policies likely
will cause its premiums to increase. Any future damages deemed to be
caused by the Company’s products or services that are not covered by
insurance, or that are in excess of policy limits or subject to substantial
deductibles, could have a material adverse effect on the Company’s
projections, business, results of operations and financial condition.
The Company is subject to litigation and could be subject to future
litigation and significant potential financial liability.
From time to time, the Company is a party to litigation and legal
proceedings that it considers to be a part of the ordinary course of
business. Although none of the litigation or legal proceedings in which
the Company is currently involved could reasonably be expected
to have a material adverse effect on the Company’s projections,
business, results of operations or financial condition, the Company
may, however, become involved in material legal proceedings in the
future. Such proceedings may include, for example, product liability
claims and claims relating to the existence or use of hazardous
materials on the Company’s property or in its operations, as well as
intellectual property disputes and other material legal proceedings with
competitors, customers, employees and governmental entities. These
proceedings could arise from the Company’s current or former actions
and operations or the actions or operations of businesses and entities
acquired by the Company prior to acquisition. The Company maintains
insurance it believes to be commercially reasonable and customary;
however, such coverage may be inadequate for or inapplicable to
particular claims.
Litigation and Legal Risk Mitigation
The Company cannot completely mitigate legal risks. However, the
Company believes that it maintains adequate commercial insurance to
mitigate most adverse litigation and legal risks.
29
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS 10.3 HSE Risks
The Company is subject to Health, Safety and Environmental laws
and regulations that expose it to potential financial liability.
The Company’s operations are regulated under a number of federal,
provincial, state, local and foreign environmental laws and regulations,
which govern, among other things, the discharge of hazardous
materials into the ground, air and water as well as the handling,
storage and disposal of hazardous materials. Compliance with these
environmental laws is a major consideration in the manufacturing
of the Company’s products, as the Company uses, generates, stores
and disposes of hazardous substances and wastes in its operations.
The Company may be subject to material financial liability for any
investigation and clean-up of such hazardous materials. In addition,
many of the Company’s current and former properties are or have
been used for industrial purposes. Accordingly, the Company also
may be subject to financial liabilities relating to the investigation
and remediation of hazardous materials resulting from the actions
of previous owners or operators of industrial facilities on those
sites. Liability in certain instances may be imposed on the Company
regardless of the legality of the original actions relating to the
hazardous or toxic substances or whether or not the Company
knew of, or was responsible for, the presence of those substances.
The Company is also subject to various Canadian and US federal,
provincial, state and local laws and regulations as well as foreign
laws and regulations relating to safety and health conditions in its
manufacturing facilities. Those laws and regulations may also subject
the Company to material financial penalties or liabilities for any
non-compliance, as well as potential business disruption if any of its
facilities or a portion of any facility is required to be temporarily closed
as a result of any violation of those laws and regulations. Any such
financial liability or business disruption could have a material adverse
effect on the Company’s projections, business, results of operations
and financial condition.
Demand for the Company’s products and services could be adversely
affected by changes to Canadian, US or other countries’ laws or
regulations pertaining to the emission of Carbon Dioxide and other
Greenhouse Gases (“GHGs”) into the atmosphere.
Although the Company is not a large producer of GHGs, the products
and services of the Company’s production are mainly related to the
transmission of hydrocarbons including crude oil and natural gas,
whose ultimate consumption are major sources of GHG emissions.
Changes in the regulations concerning the release of GHGs into the
atmosphere, including the introduction of so-called carbon taxes
or limitations over the emissions of GHGs, may adversely impact
the demand for hydrocarbons and ultimately, the demand for the
Company’s products and services.
HSE Risk Mitigation
To minimize risks associated with HSE matters, the Company has
implemented a comprehensive audit program and has completed
detailed environmental audits at manufacturing and service locations
across all eight divisions. Furthermore, the Company is committed to
be 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 affect
the Company’s projections, business, results of operations and
financial condition.
During 2018, the Company derived over 18% of its total revenue from
its facilities outside Canada, the US and Western Europe. In addition,
part of the Company’s sales from its locations in Canada and the US
were for use in other countries. The Company’s operations in certain
international locations are subject to various political and economic
conditions existing in those countries that could disrupt operations.
These risks include:
•
•
•
•
•
currency fluctuations and devaluations;
currency restrictions and limitations on repatriation of profits;
political instability and civil unrest;
hostile or terrorist activities; and
restrictions on foreign operations.
In addition, the Company is specifically exposed to risks relating to
economic or political developments in Argentina, Mexico and other
developing countries.
The Company’s foreign operations may suffer disruptions and may
incur losses that would not be covered by insurance. In particular, civil
unrest in politically unstable countries may increase the possibility that
the Company’s operations could be interrupted or adversely affected.
The impact of such disruptions could include the Company’s inability
to ship products in a timely and cost effective manner, its inability to
place contractors and employees in various countries or regions, or
result in the need for evacuations or similar disruptions.
Any material currency fluctuations, devaluations or political unrest that
may disrupt oil and gas exploration and production or the movement
of funds and assets could materially adversely affect the Company’s
projections, business, results of operations and financial condition.
The Company’s operations could be affected by regulatory approval
processes that could delay or prevent the construction of new
pipeline infrastructure.
The Company’s projections, business, results of operations and
financial condition could be adversely affected by actions under
Canadian, US, European or other trade or tax laws.
The Company is a Canadian-based company with significant
operations in the United States. The Company also owns and operates
international manufacturing operations that support its Canadian, US
and European operations. If actions under Canadian, US, European
or other trade or tax laws were instituted that limited the Company’s
access to the materials or products necessary for such manufacturing
operations, the Company’s ability to meet its customers’ specifications
and delivery requirements would be reduced. Any such reduction in the
Company’s ability to meet its customers’ specifications and delivery
requirements could have a material adverse effect on the Company’s
projections, business, results of operations and financial condition.
The Company has various facilities that export products to the United
States and other countries. Any changes to trade or tax laws, including
amendments to or the cancellation of the North American Free
Trade Agreement, that negatively impact the competitiveness of the
Company’s exports or products could have a material adverse effect
on the Company’s projections, business, results of operations and
financial condition.
Political and Regulatory Risk Mitigation
The Company manages political and regulatory risks by working with
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.
30
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS 11.0 ENVIRONMENTAL MATTERS
As at December 31, 2018, the provisions on the annual consolidated
balance sheet related to environmental matters and included as
decommissioning liability obligations were $30.7 million. The Company
believes these provisions to be sufficient to fully satisfy all liabilities
related to known environmental matters.
The current pre-tax risk-free rates at which the estimated cash flows
have been discounted range between 0% and 20%. Settlement for all
decommissioning liabilities is expected to be funded by future cash
flows from the Company’s operations.
The Company expects the following cash outflows over the next five
years and thereafter for decommissioning liabilities:
The total undiscounted cash flows estimated to settle all
decommissioning liabilities were $40 million as at December 31, 2018.
(in thousands of Canadian dollars)
2019
2020
2021
2022
2023
More than five years
December 31, 2018
$
6,202
7,224
4,605
518
1,381
20,526
$
40,456
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 its capital structure.
These non-GAAP measures do not have standardized meanings under
IFRS and are not necessarily comparable to similar measures provided
by other companies. The Company discloses these measures because
it believes that they provide further information and assist readers in
understanding the results of the Company’s operations and financial
position. These measures should not be considered in isolation or
used in substitution for other measures of performance prepared in
accordance with GAAP. The following is a reconciliation of the non-
GAAP measures reported by the Company.
EBITDA and Adjusted EBITDA
EBITDA is a non-GAAP measure defined as earnings before interest,
income taxes, depreciation and amortization. Adjusted EBITDA is also
a non-GAAP measure defined as EBITDA adjusted for items which do
(in thousands of Canadian dollars)
Net Income
Add:
Income taxes
Finance costs, net
Amortization of property, plant, equipment and intangible assets
EBITDA(a)
Impairment
Gain on sale of land
Hyperinflation adjustment for Argentina(c)
ADJUSTED EBITDA(a)
not impact day to day operations. 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
financed or the tax impacts in various jurisdictions and for comparing
its operating performance with the performance of other companies
that have different financing, capital or tax structures. 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 or day to day operations. Adjusted EBITDA is used by
many analysts in the oil and gas industry as one of several important
analytical tools to evaluate financial performance and is a key metric in
business valuations. It is also considered important by lenders to the
Company and is included in the financial covenants of the Company’s
debt agreements.
Three Months Ended December 31,
Year Ended December 31,
2018
2017(b)
2018(c)
2017(b)
$
4,096
$
20,513
$
26,179
$
71,028
(1,434)
3,596
19,806
9,998
3,562
24,869
7,828
12,092
83,223
33,885
16,817
96,437
$
26,064
$
58,942
$
129,322
$
218,167
–
–
(1,841)
8,073
–
–
–
–
5,548
8,073
(311)
–
$
24,223
$
67,015
$
134,870
$
225,929
(a) Adjusted EBITDA and EBITDA are used by many analysts in the oil and gas industry as one of several important analytical tools.
(b) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 — New Accounting
Standards Adopted for further details.
(c) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as at January 1, 2018. See Section 13.0 — Financial Reporting in
Hyperinflationary Economies.
31
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS
Operating Margin
Operating margin is defined as operating income divided by revenue
and is a non-GAAP measure. The Company believes that operating
margin is a useful supplemental measure that provides meaningful
assessment of the business performance of the Company and its
Operating Segments. The Company uses this measure as a key
indicator of financial performance, operating efficiency and cost
control based on volume of business generated.
Return on Invested Capital
ROIC, a non-GAAP measure, is defined as net income adjusted for
after tax interest expense divided by average invested capital over
the year. Average invested capital is calculated as the average over
the year of bank indebtedness, long-term debt and equity and is used
by the Company to assess the efficiency of generating profits from
each unit of invested capital, independent of the Company’s financing
choice. Investors use this measure to evaluate how well the Company
is using its invested capital to generate returns and for comparing its
long term return performance to the performance of other companies.
The following table sets forth the calculation of the Company’s ROIC as at:
(in thousands of Canadian dollars, except percentage)
Net income(a)
Add: After-tax interest expense
Net income adjusted for after-tax interest expense
Average invested capital
ROIC
(a) Attributable to shareholders of the Company.
2018(c)
2017(b)
$
$
25,876
$
10,934
71,155
13,321
36,810
$
84,476
$ 1,305,660
$ 1,301,380
2.8%
6.5%
(b) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 — New Accounting
Standards Adopted for further details.
(c) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as at January 1, 2018. See Section 13.0 — Financial Reporting in
Hyperinflationary Economies.
Days Sales Outstanding (“DSO”)
DSO is defined 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. This measure is important in assessing the Company’s
ability to generate cash from its outstanding trade accounts
receivable. The Company monitors this measure to manage cash flow
from its operations. The following table sets forth the calculation for
the Company’s DSO as at:
(in thousands of Canadian dollars, except DSO)
Revenue for the fourth quarter
Average trade accounts receivable
DSO
2018(b)
2017(a)
$
$
354,148
221,911
$
$
426,816
208,104
56
44
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 — New Accounting
Standards Adopted for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as at January 1, 2018. See Section 13.0 — Financial Reporting in
Hyperinflationary Economies.
Days Payables Outstanding (“DPO”)
DPO is defined as the average number of days from when purchased
goods and services are received until payment is made to the
suppliers based on a 90-day cycle and is calculated by dividing the
average accounts payable and accrued liabilities for the quarter by
the cost of goods sold for that same quarter and multiplying by 90
days. DPO approximates average payment terms granted by the
Company’s suppliers, and an increase in DPO is generally considered
an improvement in the management of accounts payable and accrued
liabilities. This measure is important in assessing the Company’s
ability to ensure optimal cash flow management while meeting its
financial obligations in a timely manner. The Company monitors this
measure to manage cash flows from its operations. 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
2018(b)
2017(a)
$
$
254,360
197,695
$
$
264,959
203,497
70
69
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 — New Accounting
Standards Adopted for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as at January 1, 2018. See Section 13.0 — Financial Reporting in
Hyperinflationary Economies.
32
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS
Working Capital Ratio
Working capital ratio is defined as current assets divided by current liabilities. This metric provides management with an indication of the current
liquidity available to the Company before considering long-term debt. The following table sets forth the calculation for the Company’s working
capital ratio as at:
(in thousands of Canadian dollars)
Current assets
Current liabilities
Working capital ratio
2018(b)
2017(a)
$
$
682,394
289,246
$
$
708,901
330,982
2.36
2.14
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018 but was implemented retrospectively to January 1, 2017. See Section 8.4 — New Accounting
Standards Adopted for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as at January 1, 2018. See Section 13.0 — Financial Reporting in
Hyperinflationary Economies.
13.0 Financial Reporting in Hyperinflationary Economies
In July 2018, the Argentine three-year cumulative rate of inflation for consumer prices and wholesale prices reached a level in excess of 100%. As
a result, in accordance with IAS 29, Financial Reporting in Hyperinflationary Economies, Argentina was considered a hyperinflationary economy,
effective January 1, 2018. Accordingly, the presentation of IFRS financial statements includes adjustments and reclassifications for the changes
in the general purchasing power of the Argentine peso.
On the application of IAS 29, the Company used the conversion coefficient derived from the consumer price index (“CPI”) in the Greater
Buenos Aires area published by the National Statistics and Census Institution in Argentina. The CPIs for the current and the prior year and the
corresponding conversion coefficient since the year when the Argentine subsidiary was acquired were as follows:
Year
2012
2017
2018 — March
2018 — June
2018 — September
2018 — December
Index Conversion coefficient
CAD/ARS exchange rate
117.67
483.30
514.58
562.37
616.55
707.26
6.0105
1.4634
1.3744
1.2576
1.1471
1.0000
0.211471
0.067396
0.063925
0.045528
0.031353
0.036229
Monetary assets and liabilities are not restated because they are
already expressed in terms of the monetary unit current as at
December 31, 2018. Non-monetary assets, liabilities, equity, revenue
and expenses (items that are not already expressed in terms of the
monetary unit as at December 31, 2018) are restated by applying
the index at the end of the reporting period. The effect of inflation on
the Argentine subsidiary’s net monetary position is included in the
consolidated statements of income as a net monetary loss.
The application of IAS 29 results in the adjustment for the loss of
purchasing power of the Argentine peso recorded in the consolidated
statements of income. In a period of inflation, an entity holding an
excess of monetary assets over monetary liabilities loses purchasing
power, which results in a loss on the net monetary position. This loss/
gain is derived as the difference resulting from the restatement of non-
monetary assets, liabilities and equity.
As per IAS 21, The Effects of Changes in Foreign Exchange Rates, all
amounts (i.e. assets, liabilities, equity, revenue and expenses) are
translated at the closing foreign exchange rate at the date of the
most recent consolidated balance sheet, except that comparative
amounts are not adjusted for subsequent changes in the price level
or subsequent changes in exchange rates. Similarly, in the period
during which the functional currency of a foreign subsidiary becomes
hyperinflationary and applies IAS 29 for the first time, the parent’s
consolidated financial statements for the comparative period are not
restated for the effects of hyperinflation.
The opening equity adjustment of $4.3 million relates to the
hyperinflation adjustments for non-monetary assets, liabilities and
equity items in the consolidated balance sheet as at January 1, 2018.
This is as a result of an increase to total assets of $4.8 million, and an
increase to total liabilities of $0.5 million.
33
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS
The impact of IAS 29 for selected items on our consolidated statements of income for the year was as follows:
(in thousands of Canadian dollars, except per share amounts)
Revenue
Gross profit (loss)
Foreign exchange (gain) loss
(Loss) Income from operations
Net monetary loss
Loss before income taxes
Income tax expense (recovery)
Net Loss
Earnings per Share
Basic
Diluted
Three months ended
Year ended
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
December 31,
2018
$
248
66
(20)
(672)
(475)
(1,147)
234
(1,381)
(0.02)
(0.02)
$
(4,519)
$
(7,053)
$
(1,164)
1,206
(2,217)
(748)
(2,966)
(360)
(2,606)
(0.04)
(0.04)
(2,102)
2,772
(3,670)
(852)
(4,514)
(1,151)
(3,363)
(0.05)
(0.05)
8,645
2,820
(3,237)
2,498
(2,721)
(227)
1,062
(1,289)
(0.02)
(0.02)
$
(2,679)
(380)
721
(4,061)
(4,796)
(8,854)
(215)
(8,639)
(0.12)
(0.12)
14.0 FORWARD-LOOKING INFORMATION
This document includes certain statements that reflect management’s
expectations and objectives for the Company’s future performance,
opportunities and growth, which statements constitute “forward
looking information” and “forward looking statements” (collectively
“forward looking information”) under applicable securities laws. Such
statements, other than statements of historical fact, are predictive
in nature or depend on future events or conditions. Forward looking
information involves estimates, assumptions, judgments and
uncertainties. These statements may be identified by the use of
forward looking terminology such as “may”, “will”, “should”, “anticipate”,
“expect”, “believe”, “predict”, “estimate”, “continue”, “intend”, “plan” and
variations of these words or other similar expressions. Specifically, this
document includes forward looking information in the Outlook Section
and elsewhere in respect of, among other things, the establishment
of a manufacturing facility in the Middle East by the Flexpipe Systems
division, the level of investment therein, its impact on production
capacity and the timing thereof, the achievement of key performance
objectives, the completion of the acquisition by the Company of ZCL
and the timing thereof, the entering into of the new Credit Facility and
the terms and timing thereof, the voluntary repayment of the Senior
Notes and the timing thereof, the timing to complete the Liza I project,
the timing of Final Investment Decisions on Liza II and additional large
projects, the sanctioning of large projects in 2019 and the impact
thereof on the Company’s business, the level of financial performance
in the first quarter of 2019 and throughout the balance of 2019, the
effect of the Company’s diversified portfolio of products on revenue
and operating income, growth in revenue and operating income in the
Petrochemical and Industrial segment of the Company’s business, the
demand for the Company’s products in the North American Pipeline
and Pipe Services segment and the Petrochemical and Industrial
segment of the Company’s business, the sufficiency of resources,
capacity and capital to meet market demand, to meet contractual
obligations and to execute the Company’s development and growth
strategy, the sufficiency of the Company’s processes and systems
to operate its business and execute its strategic plan, the expected
development of the Company’s order backlog and the impact thereof
on the Company’s revenue and operating income, including the award
of contracts on outstanding bids, the impact of global economic
activity on the demand for the Company’s products, the impact
of continuing demand for oil and gas and prior years’ absence of
investments in larger projects on the level of industry investment in
oil and gas infrastructure, the impact of global oil and gas commodity
prices, 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 adequacy of the
Company’s existing accruals in respect of environmental compliance
and in respect of litigation and tax matters and other claims generally,
and the level of payments under the Company’s performance bonds.
Forward looking information involves known and unknown risks
and uncertainties that could cause actual results to differ materially
from those predicted by the forward looking information. We caution
readers not to place undue reliance on forward looking information as
a number of factors could cause actual events, results and prospects
to differ materially from those expressed in or implied by the forward
looking information. Significant risks facing the Company include, but
are not limited to: the impact on the Company of reduced demand for
its products and services, including the suspension or cancellation of
existing contracts, as a result of lower investment in global oil and gas
extraction and transportation activity following the previous declines in
the global price of oil and gas, long term changes in global or regional
economic activity and changes in energy supply and demand, which
with other factors, impact on the level of global pipeline infrastructure
construction; exposure to product and other liability claims; shortages
of or significant increases in the prices of raw materials used by the
Company; compliance with environmental, trade and other laws;
political, economic and other risks arising from the Company’s
international operations; and fluctuations in foreign exchange rates,
as well as other risks and uncertainties described under “Risks and
Uncertainties” in the Company’s annual MD&A and in the Company’s
Annual Information Form under “Risk Factors”.
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, including ,
increases in expenditures on natural gas infrastructures, modest global
economic growth, stable demand in the global automotive market
34
SHAWCOR LTD.MANAGEMENT’S DISCUSSION AND ANALYSIS
and in the European and North American industrial markets as such
apply to the Company’s Petrochemical and Industrial segment, the
Company’s ability to execute projects under contract, the continued
supply of and stable pricing for commodities used by the Company,
increases in rail and transportation costs, the availability of personnel
resources sufficient for the Company to operate its businesses, the
maintenance of operations in major oil and gas producing regions, the
successful completion of the acquisition of ZCL, the repayment of the
Senior Notes, the entering into of the Credit Facility on the anticipated
terms, and the ability of the Company to satisfy all covenants under
the Credit Facility. The Company believes that the expectations
reflected in the forward looking information are based on reasonable
assumptions in light of currently available information. However,
should one or more risks materialize or should any assumptions
prove incorrect, then actual results could vary materially from those
expressed or implied in the forward looking information included in
this document and the Company can give no assurance that such
expectations will be achieved.
When considering the forward looking information in making decisions
with respect to the Company, readers should carefully consider the
foregoing factors and other uncertainties and potential events. The
Company does not assume the obligation to revise or update forward
looking information after the date of this document or to revise it to
reflect the occurrence of future unanticipated events, except as may be
required under applicable securities laws.
To the extent any forward looking information in this document
constitutes future oriented financial information or financial 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 financial information and financial outlooks,
as with forward looking information generally, are based on the
assumptions and subject to the risks noted above.
15.0 ADDITIONAL INFORMATION
Additional information relating to the Company, including its
Annual Information Form, is available on SEDAR at www.sedar.com.
March 6, 2019
35
ANNUAL REPORT 2018MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT’S RESPONSIBILITY
FOR FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Shawcor Ltd. included in this Annual Report are the responsibility of management and
have been approved by the Board of Directors.
The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards, as
issued by the International Accounting Standards Board. When alternative accounting methods exist, management has selected those it deems
to be most appropriate in the circumstances. The consolidated financial statements include estimates based on the experience and judgment
of management in order to ensure that the financial statements are presented fairly, in all material respects. Financial information presented
elsewhere in the annual report is consistent with that in the consolidated financial statements.
The management of the Company and its subsidiaries developed and continues to maintain systems of internal accounting controls and
management practices designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and that the
Company’s assets are appropriately accounted for and adequately safeguarded.
The Board of Directors exercises its responsibilities for ensuring that management fulfils its responsibilities for financial reporting and internal
control with the assistance of its Audit Committee.
The Audit Committee is appointed by the Board and all of its members are Directors who are not officers or employees of Shawcor Ltd. or any of
its subsidiaries. The Committee meets periodically to review quarterly financial reports and to discuss internal controls over the financial reporting
process, auditing matters and financial reporting issues. The Committee reviews the Company’s annual consolidated financial statements and
recommends their approval to the Board of Directors.
These financial statements have been audited by Ernst & Young LLP, the external auditors, on behalf of the shareholders. Ernst & Young LLP has
full and free access to the Audit Committee.
Stephen M. Orr
President and Chief Executive Officer
Gaston A. Tano
Senior Vice-President, Finance and Chief Financial Officer
March 6, 2019
36
SHAWCOR LTD. INDEPENDENT
AUDITOR’S REPORT
TO THE SHAREHOLDERS OF SHAWCOR LTD.
Opinion
We have audited the consolidated financial statements of Shawcor Ltd. and its subsidiaries (the Group), which comprise the consolidated
balance sheets as at December 31, 2018 and 2017, the consolidated statements of income, consolidated statements of comprehensive income,
consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated
financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position
of the Group as at December 31, 2018 and 2017, and its consolidated financial performance and its consolidated cash flows for the years then
ended in accordance with International Financial Reporting Standards (IFRSs).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are
further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent
of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and
we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. The other information comprises:
•
•
Management’s Discussion and Analysis
The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance
conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so, consider
whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated.
We obtained Management’s Discussion & Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to
report in this regard.
The Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will perform on this
other information, we conclude there is a material misstatement of other information, we are required to report that fact to those charged
with governance.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and
for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends
to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
37
ANNUAL REPORT 2018 INDEPENDENT AUDITOR’S REPORT
CONSOLIDATED FINANCIAL STATEMENTS
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally
accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and
maintain professional skepticism throughout the audit. We also:
•
•
•
•
•
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate
to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the
Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention
in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However,
future events or conditions may cause the Group to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and
whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair
presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the
Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear
on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Don Linsdell.
Toronto, Canada
March 6, 2019
38
SHAWCOR LTD.
INDEPENDENT AUDITOR’S REPORT
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 Profit
Selling, general and administrative expenses
Research and development expenses
Foreign exchange gains
Amortization of property, plant and equipment (note 20)
Amortization of intangible assets (note 21)
Gain on sale of land
Impairment (note 25)
Income from Operations
Income (loss) from investments in associates
Finance costs, net (note 10)
Net monetary loss (note 5)
Income before Income Taxes
Income taxes (note 11)
Net Income
Net Income (Loss) Attributable to:
Shareholders of the Company
Non-controlling interests
Net Income
Earnings per Share (note 12)
Basic
Diluted
Weighted Average Number of Shares Outstanding (000s) (note 12)
Basic
Diluted
2018(b)
2017(a)
$
616,332
$
509,491
792,540
1,056,008
1,408,872
1,565,499
974,795
434,077
300,294
11,876
(11,929)
64,789
18,434
–
–
50,613
282
(12,092)
(4,796)
34,007
7,828
980,021
585,478
342,991
10,536
(249)
77,267
19,170
(311)
8,073
128,001
(6,271)
(16,817)
–
104,913
33,885
$
26,179
$
71,028
$
$
$
$
25,876
$
71,155
303
(127)
26,179
$
71,028
0.37
0.37
$
$
1.02
1.02
70,061
70,264
69,926
70,102
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Note 5 for further details.
The accompanying notes are an integral part of these consolidated financial statements.
39
ANNUAL REPORT 2018
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31:
(in thousands of Canadian dollars)
Net Income
Other Comprehensive Income (Loss) to be Reclassified to Net Income in Subsequent Periods
Exchange differences on translation of foreign operations
Other comprehensive loss attributable to investments in associates
Net Other Comprehensive Income (Loss) to be Reclassified to Net Income in Subsequent Periods
Other Comprehensive Income (Loss) not to be Reclassified to Net Income in Subsequent Periods
Actuarial gains on defined benefit plans (note 15)
Income tax expense (note 11)
Net Other Comprehensive Income not to be Reclassified to Net Income in Subsequent Periods
Other Comprehensive Income (Loss), Net of Income Taxes
Total Comprehensive Income
Comprehensive Income (Loss) Attributable to:
Shareholders of the Company
Non-controlling interests
Total Comprehensive Income
2018(b)
2017(a)
$
26,179
$
71,028
28,953
(251)
28,702
1,762
(475)
1,287
(33,446)
(280)
(33,726)
692
(168)
524
29,989
(33,202)
$
56,168
$
37,826
$
56,229
$
37,870
(61)
(44)
$
56,168
$
37,826
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Note 5 for further details.
The accompanying notes are an integral part of these consolidated financial statements.
40
SHAWCOR LTD.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
As at December 31:
(in thousands of Canadian dollars)
ASSETS
Current Assets
Cash and cash equivalents (note 16)
Short-term investments
Loans receivable (note 17)
Accounts receivable (note 18)
Contract assets
Income taxes receivable
Inventories (note 19)
Prepaid expenses
Derivative financial instruments (note 7)
Total current assets
Non-current Assets
Loans receivable (note 17)
Property, plant and equipment (notes 20 and 25)
Intangible assets (notes 21 and 25)
Investments in associates (note 23)
Deferred income tax assets (note 11)
Other assets (note 24)
Goodwill (notes 22 and 25)
Total non-current assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued liabilities (note 26)
Provisions (note 27)
Income taxes payable
Derivative financial instruments (note 7)
Contract liabilities
Obligations under finance lease (note 31)
Other liabilities (note 28)
Total current liabilities
Non-current Liabilities
Long-term debt (note 30)
Obligations under finance lease (note 31)
Provisions (note 27)
Employee future benefits (note 15)
Deferred income tax liabilities (note 11)
Other liabilities (note 28)
Total non-current liabilities
Total liabilities
Equity
Share capital (note 32)
Contributed surplus
Retained earnings
Non-controlling interests
Accumulated other comprehensive income
Total equity
TOTAL LIABILITIES AND EQUITY
2018(b)
2017(a)
$
217,264
2,046
2,492
241,497
31,404
27,476
136,997
22,116
1,102
682,394
545
442,941
155,454
30,219
31,290
8,880
350,402
1,019,731
$
289,065
–
2,448
194,439
65,413
20,205
115,018
21,931
382
708,901
2,283
417,781
164,872
20,188
33,979
20,606
329,391
989,100
$ 1,702,125
$ 1,698,001
$
206,860
23,924
26,139
226
23,603
1,155
7,339
289,246
267,781
10,388
34,979
15,190
4,632
10,259
343,229
632,475
708,833
30,187
271,429
5,418
53,783
$
201,017
27,361
42,904
1,915
44,826
1,111
11,848
330,982
246,175
10,840
36,555
18,552
6,448
3,665
322,235
653,217
704,956
27,651
302,206
5,848
4,123
1,069,650
1,044,784
$ 1,702,125
$ 1,698,001
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Note 5 for further details.
The accompanying notes are an integral part of these consolidated financial statements.
41
ANNUAL REPORT 2018
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the years ended December 31:
(in thousands of Canadian dollars)
Balance – January 1, 2017
Net income (loss)(a)
Other comprehensive income (loss)
Comprehensive income (loss)
Issued on exercise of stock options
Compensation cost on exercised stock options
Compensation cost on exercised restricted share units
Stock-based compensation expense
Dividends declared and paid to shareholders (note 32)
Share
Capital
Contributed
Surplus
Retained
Earnings(a)(b)
Non-controlling
Accumulated
Other
Comprehensive
Interests(b)
Income(b)
Total
Equity(a)(b)
$
703,316
$
23,379
$
272,997
$
5,892
$
37,408
$ 1,042,992
–
–
–
761
278
601
–
–
–
–
–
–
(278)
(601)
5,151
–
71,155
–
71,155
–
–
–
–
(41,946)
(127)
83
(44)
–
–
–
–
–
–
(33,285)
(33,285)
–
–
–
–
–
71,028
(33,202)
37,826
761
–
–
5,151
(41,946)
Balance – December 31, 2017
$
704,956
$
27,651
$
302,206
$
5,848
$
4,123
$ 1,044,784
Hyperinflation adjustments for Argentina(b) (note 5)
–
–
(14,624)
Adjusted Balance – January 1, 2018
704,956
27,651
Net income
Other comprehensive (loss) income
Comprehensive income (loss)
Issued on exercise of stock options
Compensation cost on exercised stock options
Compensation cost on exercised restricted share units
Stock-based compensation expense
Dividends declared and paid to shareholders (note 32)
–
–
–
1,897
735
1,245
–
–
–
–
–
–
(735)
(1,245)
4,516
–
287,582
25,876
–
25,876
–
–
–
–
(42,029)
(369)
5,479
303
(364)
(61)
–
–
–
–
–
19,307
23,430
–
30,353
30,353
–
–
–
–
–
4,314
1,049,098
26,179
29,989
56,168
1,897
–
–
4,516
(42,029)
Balance – December 31, 2018
$
708,833
$
30,187
$
271,429
$
5,418
$
53,783
$ 1,069,650
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Note 5 for further details.
The accompanying notes are an integral part of these consolidated financial statements.
42
SHAWCOR LTD.
CONSOLIDATED FINANCIAL STATEMENTS
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 affecting cash
Amortization of property, plant and equipment (note 20)
Amortization of intangible assets (note 21)
Amortization of long-term prepaid expenses
Impairment (note 25)
Decommissioning liabilities expense (recovery) (note 27)
Other provision expenses (note 27)
Share-based and other incentive-based compensation (note 14)
Loss (gain) on disposal of property, plant and equipment
Gain on sale of land
Unrealized (income) loss on derivative financial instruments
(Income) loss from investments in associates (note 23)
Deferred income taxes (note 11)
Other
Settlement of decommissioning liabilities (note 27)
Settlement of other provisions (note 27)
Net change in employee future benefits (note 15)
Change in non-cash working capital and foreign exchange
Cash Provided by Operating Activities
Investing Activities
Decrease in loans receivable
(Increase) decrease in short-term investments
Purchases of property, plant and equipment
Purchase of intangible assets
Proceeds on disposal of property, plant and equipment
Increase in other assets
Cash Used in Investing Activities
Financing Activities
Decrease in bank indebtedness (note 29)
Payment of obligations under finance lease (note 31)
Other liabilities – non-current
Issuance of shares (note 32)
Dividends paid to shareholders (note 32)
Cash Used in Financing Activities
Effect of Foreign Exchange on Cash and Cash Equivalents and Net Monetary Loss
Net (Decrease) Increase in Cash and Cash Equivalents for the Year
Cash and Cash Equivalents – Beginning of Year
Cash and Cash Equivalents – End of Year
Supplemental Cash Flow Information
Interest paid
Interest received
Income taxes paid
2018(b)
2017(a)
$
26,179
$
71,028
64,789
18,434
521
–
235
3,635
8,926
260
–
(2,409)
(282)
1,574
(4,112)
(435)
(10,478)
(183)
(76,109)
30,545
1,420
(2,046)
(76,201)
–
7,113
(3,617)
(73,331)
–
(880)
–
1,897
(42,029)
(41,012)
11,997
(71,801)
289,065
77,267
19,170
1,179
8,073
(746)
12,644
7,969
(27)
(311)
7,167
6,271
(6,210)
–
(765)
(3,791)
3,152
(23,624)
178,446
3,766
1,890
(41,068)
(71)
4,361
(836)
(31,958)
(2,463)
(1,090)
(222)
761
(41,946)
(44,960)
(7,287)
94,241
194,824
$
217,264
$
289,065
$
$
$
10,506
2,029
29,817
$
$
$
15,826
1,326
39,072
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Note 5 for further details.
The accompanying notes are an integral part of these consolidated financial statements.
43
ANNUAL REPORT 2018
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
Shawcor Ltd. is a publicly listed company incorporated in Canada with its shares listed on the Toronto Stock Exchange. Shawcor Ltd., together
with its subsidiaries (collectively referred to as the “Company” or “Shawcor”), is a growth oriented, global energy services company serving the
Pipeline and Pipe Services and the Petrochemical and Industrial segments of the energy industry. The Company operates eight divisions with over
80 manufacturing and service facilities located around the world. Further information as it pertains to the nature of operations is set out in note 8.
The head office, principal address and registered office of the Company is 25 Bethridge Road, Toronto, Ontario, M9W 1M7, Canada.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
DESCRIPTION
General Application
1. Basis of Financial Statement Preparation
2. Summary of Significant Accounting Policies
45
45
3. Accounting Standards Issued but Not Yet Applied
53
4. New Accounting Standards Adopted
5. Financial Reporting in Hyperinflationary Economies
6. Capital Management
7. Financial Instruments
Consolidated Results of Operations Focused
8. Segment Information
9. Employee Benefits Expense
10. Finance Costs
11. Income Taxes
12. Earnings Per Share
13. Key Management Compensation
54
58
58
59
61
63
63
63
65
65
14. Share-based and Other Incentive-based Compensation 66
15. Employee Future Benefits
Consolidated Financial Position Focused
16. Cash and Cash Equivalents
17. Loans Receivable
18. Accounts Receivable
19. Inventory
20. Property, Plant and Equipment
21. Intangible Assets
44
69
72
72
72
73
73
75
Summary of financial statement preparation
Summary of accounting policies and principles and the methods used in
their application
Summary of developments in generally accepted accounting principles that
will or may affect the Company
Summary of recently adopted generally accepted accounting principles
Summary of adjustment for the changes in the general purchasing power of
Argentine peso
Summary of objectives, policies and processes for managing the capital
structure
Summary of financial instruments, including fair values and the
management of associated risks
Summary disclosure of segmented information regularly reported to the
chief operating decision maker
Summary of employee benefits expense
Summary of items comprising finance costs
Summary of income tax expense, reconciliations of statutory rate income
tax expense to income tax expense and analyses of deferred income tax
liability
Summary of numerators and denominators used in calculating per share
amounts
Summary of key management compensation
Summary of compensation arising from share option awards, restricted
share units (RSUs), deferred share units (DSUs) and employee share
purchase plan
Summary of employee future benefits and related disclosures
Summary of cash and cash equivalents
Summary of items comprising loans receivable
Summary of items comprising accounts receivable
Summary of items comprising inventory
Summary of items comprising property, plant and equipment
Summary of items comprising intangible assets
SHAWCOR LTD.
22. Goodwill
23. Investments in Associates
24. Other Assets
25. Impairment
26. Accounts Payable and Accrued Liabilities
27. Provisions
28. Other Liabilities
29. Credit Facilities
30. Long-term Debt
31. Leases, Commitments and Contingencies
32. Share Capital
Other
33. Consolidated Financial Statements
34. Subsequent Event
76
78
78
78
78
79
80
80
81
81
82
83
83
Summary of items comprising goodwill
Summary of associates and related disclosures
Summary of items comprising other assets
Summary of impairment charges
Summary of items comprising accounts payable and accrued liabilities
Summary of items comprising provisions
Summary of items comprising other liabilities
Summary of borrowings and credit facilities
Summary of long-term debt and related disclosures
Summary of lease obligations, contingent liabilities, claims and lawsuits
Summary of authorized share capital
A note on comparative figures in the consolidated financial statements
Disclosure related to the acquisition of ZCL Composites Inc.
NOTE 1. BASIS OF FINANCIAL STATEMENT PREPARATION
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued
by the International Accounting Standards Board (“IASB”), applicable to the preparation of financial statements.
The policies applied in these consolidated financial statements are based on IFRS issued and outstanding as at December 31, 2018.
Basis of Presentation and Consolidation
The consolidated financial statements have been prepared on the historical cost basis, except for certain current assets and financial instruments,
which are measured at fair value, as explained in the accounting policies set out in note 2.
The consolidated financial statements are presented in Canadian dollars and all values are rounded to the nearest thousand, except when
otherwise stated.
The consolidated financial statements comprise the financial statements of the Company and the entities under its control and the Company’s
equity accounted interests in joint ventures and associates.
The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher
degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are
disclosed in note 2.
The results of the subsidiaries acquired during the year are included in the consolidated financial statements from the date of the acquisition.
Adjustments are made, where necessary, to the financial statements of the subsidiaries and joint arrangements and associates to ensure
consistency with those policies adopted by the Company. All intercompany transactions, balances, income, expenses and profits are eliminated
upon consolidation.
The audited consolidated financial statements and accompanying notes for the year ended December 31, 2018 were authorized for issue by the
Company’s Board of Directors (the “Board”) on March 6, 2019.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared by management in accordance with IFRS. The more significant accounting policies are
as follows:
a) Critical Judgements in Applying Accounting Policies
The following are the critical judgements that management has made in the process of applying accounting policies and that have the most
significant effect on the amounts recognized in the consolidated financial statements.
Materiality
Assessments about whether line items are sufficiently material to warrant separate presentation in the primary financial statements or in the
financial statement notes.
Determination of Reportable Operating Segments
Management has exercised judgement in evaluating the defined aspects of its operating segments, aggregation criteria, and quantitative
thresholds that form the reportable operating segments of the Company. Management has also exercised professional judgement in determining
that the Company’s Chief Executive Officer (“CEO”) is the Company’s Chief Operating Decision Maker (“CODM”). Operating segments are reported
in a manner consistent with the internal reporting provided to the CODM. The CODM is responsible for allocating resources and assessing the
performance of the operating segments.
45
ANNUAL REPORT 2018
Determination of Cash-Generating Units (“CGUs”)
Management has exercised judgement in identifying the CGUs of the Company. In performing impairment assessments of long-lived assets,
assets that cannot be assessed individually are grouped together into the smallest group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets. Determination of CGUs is also required for impairment testing of goodwill.
Business Acquisitions
Significant judgements and assumptions are made in determining the purchase price allocation for acquired companies. Management has
exercised professional judgement in determining the total consideration paid in an acquisition, including any contingent consideration, and
in determining the assets and liabilities that should be part of the purchase price accounting. Management has also exercised judgement in
identifying intangible assets and in choosing the appropriate valuation models and techniques to determine their fair values. Management has
also exercised professional judgement in characterizing the composition of any residual goodwill and its allocation to CGUs benefiting from
the goodwill.
Provisions and Contingent Liabilities
Provisions and liabilities for legal and other contingent matters are recognized in the period when it becomes probable that there will be a future
outflow of economic benefits resulting from past operations or events and the amount of the cash outflow can be reliably measured. The timing
of recognition and measurement of the provision requires the application of judgement 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 into account changing facts
and circumstances.
The Company is required to determine whether a loss is probable based on judgement 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
Management is required to apply judgement in determining whether any legal or constructive obligations exist to dismantle, remove or
restore its assets, including any obligations to rehabilitate environmental damage on its properties. Management is required to make
significant assumptions in determining the obligation for decommissioning liabilities. There are numerous factors that will affect the liability
payable including the extent and costs of rehabilitation activities, technological changes, regulatory changes, cost increases, and changes in
discount rates.
Income Taxes
The calculation of income taxes requires judgement in interpreting tax rules and regulations. There are transactions and calculations for which
the ultimate tax determination is uncertain. The tax filings also are subject to audits, the outcome of which could change the amount of current
and deferred income tax assets and liabilities. Management believes that it has sufficient amounts accrued for outstanding tax matters based on
information that is currently available.
Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable
income. Management judgement is used to determine the amounts of deferred income tax assets and liabilities to be recognized, based upon the
likely timing and the level of future taxable profit together with future tax planning strategies. In particular, judgement is required when assessing
the timing of the reversal of temporary differences to which future income tax rates are applied.
b) Use of Estimates
The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Critical estimates used in preparing the consolidated financial statements include:
Long-lived Assets and Goodwill
The Company evaluates the recoverable amounts of its CGUs with 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 recoverable amounts of CGUs with long-lived assets whenever circumstances arise that could indicate impairment or reversal of
impairment, at each reporting date. Further, at each reporting date, the Company evaluates whether there are indicators of impairment or reversal
of impairment for long-lived assets or groups of long-lived assets. If indicators are noted, the Company evaluates the recoverable amount of the
asset or CGU to which the asset belongs, to determine if an impairment charge or reversal of impairment is warranted. These impairment tests
include certain assumptions regarding discount rates and future cash flows generated by these assets in determining the value-in-use or fair
value less costs of disposal calculations. Actual results could differ from these assumptions and estimates.
Employee Future Benefit Obligations
The Company provides future benefits to its employees under a number of defined benefit arrangements. The calculation of the defined benefit
obligation recognized in the consolidated financial statements includes a number of assumptions regarding discount rates, rates of employee
compensation increases, rates of inflation, and life expectancies. The realized results of these factors could differ from the estimates used in the
calculations, which may have an impact on operating expenses, non-current assets and non-current liabilities.
46
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Decommissioning Liabilities
Decommissioning liabilities include legal and constructive obligations related to owned and leased facilities. These have been recorded in the
consolidated financial statements based on estimated future amounts required to satisfy these obligations. The amount recognized is the present
value of estimated future expenditures required to settle the obligation using a current pre-tax risk-free rate.
Financial Instruments
The Company has determined the estimated fair values of its financial instruments not traded in an active market based on appropriate valuation
methodologies; however, considerable judgement is required to develop these estimates, mainly based on market conditions existing at the end
of each reporting period. Accordingly, these estimated fair values are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies.
Income Taxes
The recording of income tax expense includes certain estimations related to the impact in the current year of future events. Differences between
the estimated and actual impact of these events could impact tax expense, current taxes payable or deferred taxes. In particular, income and
losses in foreign jurisdictions may be taxed at rates different from those expected in Canada. Deferred income tax assets are recognized to the
extent that it is probable that future taxable income will be available against which the losses can be utilized.
Given the wide range of international business relationships and the complexity and duration of contracts, differences 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 differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences in
interpretation may arise for a wide variety of issues depending on the conditions prevailing in the domicile of the respective entity.
c) Business Combinations
Business combinations are accounted for using the acquisition method of accounting. Identifiable assets, liabilities and contingent liabilities
acquired are measured at fair value at the acquisition date. The consideration transferred is measured at fair value and includes the fair value of
any contingent consideration. 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 profit or loss.
The excess of the aggregate consideration transferred over the fair value of the Company’s share of the identifiable net assets acquired is
recorded as goodwill.
d) Foreign Currency Translation
Functional and Presentation Currency
Amounts included in the financial 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 financial statements of
the Company are presented in Canadian dollars, which is the parent Company’s functional and presentation currency.
Foreign Currency Transactions
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of
monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statements of income, except when deferred
in other comprehensive income (“OCI”) as qualifying net investment hedges.
Translation of Foreign Operations
The results and financial position of all the Company’s entities that have a functional currency different 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 prevailing for the year.
On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other
currency instruments designated as hedges of such investments, are reclassified to OCI.
When a foreign operation is sold, exchange differences that were recorded in accumulated other comprehensive income 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.
47
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS e) Financial Instruments
Financial assets are recognized initially at fair value. On initial recognition, the Company classifies its financial assets as subsequently measured
at either amortized cost or fair value, depending on its business model for managing the financial assets and the contractual cash flow
characteristics of the financial assets. Financial assets are not reclassified subsequent to their initial recognition, unless the Company changes
its business model for managing financial assets.
All financial liabilities are initially recorded at fair value and designated upon inception as fair value through profit or loss, or measured at
amortized cost.
Financial liabilities classified as fair value through profit or loss include derivative financial 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 effective interest rate method.
The following is a summary of the classes of financial instruments included in the Company’s consolidated balance sheets as well as their
designation by the Company:
Balance Sheet Item
Designation
Cash and cash equivalents
Short-term investments
Accounts receivable
Contract assets
Loans receivable
Derivative financial instruments
Accounts payable
Long-term debt
Fair value through profit or loss
Fair value through profit or loss
Measured at amortized cost
Measured at amortized cost
Measured at amortized cost
Fair value through profit or loss
Measured at amortized cost
Measured at amortized cost
Derivative Financial Instruments
The Company’s policy is to document its risk management objectives and strategy for undertaking various derivative financial instrument
transactions. Derivative financial instruments designated as effective net investment hedges are reflected in the consolidated balance sheets
at fair value, with any gains or losses resulting from fair value changes included in OCI to the extent of hedge effectiveness. Derivative financial
instruments not designated as part of a formal hedging relationship are carried at fair value in the consolidated balance sheets, with gains or
losses resulting from changes in fair value during a period recognized in the consolidated statements of income.
Fair Value
Financial instruments measured at fair value are categorized into one of the following three levels in the fair value hierarchy for disclosure
purposes:
• Level 1 – Quoted prices in active markets for identical instruments that are observable.
• Level 2 – Quoted prices in active markets for similar instruments; inputs other than quoted prices that are observable and derived from or
corroborated by observable market data.
• Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
The hierarchy requires the use of observable market data when available.
Derecognition
Financial assets are derecognized when the contractual rights to the receipt of cash flows expire or the asset is transferred to another party
whereby the entity no longer has any significant continuing involvement in the risks and rewards associated with the asset.
Financial liabilities are derecognized when the related obligations are either discharged, cancelled, or expire. The difference between the carrying
value of the financial liability extinguished or transferred to another party and the fair value of the consideration paid, including the transfer of non-
cash assets acquired 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. The Company uses the “expected
credit loss” model for calculating impairment and recognizes expected credit losses as a loss allowance for assets measured at amortized cost.
If there is objective evidence that an impairment loss has occurred, the amount of the loss is measured as the difference between the carrying
amount and the present value of the estimated future cash flows discounted using the original effective interest rate. The carrying amount of the
asset is then reduced by the amount of the impairment and 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.
48
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Transaction Costs
Transaction costs associated with financial assets carried at fair value through profit or loss are expensed as incurred, while transaction costs
associated with all other financial assets are included in the initial carrying amount of the asset.
f) Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably
measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable,
taking into account contractually defined terms of payment and net of taxes or duty.
The Company has concluded that it is the principal in its revenue arrangements since it is the primary obligor, has pricing latitude and is exposed
to inventory and credit risks. Revenue is recognized when or as control of a good or service is transferred to a customer as satisfaction of a
performance obligation. The majority of the Company’s revenue is from short- term contracts associated with the sale of goods or the rendering
of services from pipe coating, inspection, repair and other services provided in respect of customer-owned property.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in IFRS 15.
A contract’s price is allocated to distinct performance obligations on a standalone selling price basis. The majority of the Company’s contracts
have a single performance obligation as the promise to transfer the goods or services is not separately identifiable from other promises in the
contracts and, therefore, are not distinct. For contracts with multiple performance obligations, the allocation of the transaction price is done using
management’s best estimate of the standalone selling price of distinct goods or services in the contract using a cost plus gross margin approach
within typical and reasonable variance ranges for similar contracts.
Sale of Goods
Revenue from the sale of goods is recognized when the control of the goods has passed to the buyer, usually on delivery of the goods. Revenue
from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts
and volume rebates. Revenue for the sale of goods is recognized at a point in time, upon transfer of control of the goods based upon the specified
delivery terms.
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 specific contracts and recognized by reference to the stage of completion. Stage of completion is determined based on surveys
of work performed as measured by units of production to date multiplied by contractually agreed-upon rates. Revenue from the rendering of
services is usually recognized as the performance obligations are satisfied over time as the work progresses. Substantially all of the revenue from
the rendering of services is recognized over time. Revenue recognized over time is done using both input and output measures, depending upon
the service being provided. For input measures, the cost incurred to date relative to the total estimated project costs at completion is used to
measure progress. For output measures, the units of pipe coating or hours of service completed are used to measure progress.
Services performed in advance of billings are recorded as contract assets pursuant to contractual terms. In general, amounts become billable
upon the achievement of contract milestones (such as the commencement of coating) or in accordance with predetermined payment schedules.
Changes in the scope of work are not included in net revenue unless the changes are probable and can be reliably measured.
The Company records payments received in advance of revenue recognition from customers as contract liabilities, which are then recognized as
revenue as goods are delivered and as services are performed.
Contract Assets – Contract assets include unbilled amounts typically resulting from sales under contracts when an input or output method of
revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Amounts may not exceed their net realizable
value. Additionally, capitalized costs to fulfill contracts are included within contract assets. Contract assets are generally classified as current.
Contract Liabilities – Contract liabilities consist of advance payments and billings in excess of revenue recognized. Contract assets and liabilities
are reported on a net position on a contract by contract basis at the end of each reporting period. Advance payments and deferred revenue are
combined and presented as contract liabilities under current liabilities.
g) 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.
h) Employee Future Benefits
The Company provides future benefits to its employees under a number of defined benefit and defined contribution arrangements. The employee
future benefits liability recognized on the consolidated balance sheets, in respect of the defined benefit pension plans, represents the deficit
position for those defined benefit plans, whose defined benefit obligation exceeds that pension plan’s assets. The Company has included in other
assets the net surplus position of those defined benefit plans whose pension plan assets exceed the defined benefit obligation.
The defined benefit obligation is determined by independent actuaries using the projected unit credit method pro-rated on service. The defined
benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that
49
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS have terms to maturity matching the terms of the related defined benefit 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 benefits are recognized, whichever comes first.
Actuarial gains and losses resulting from experience adjustments and the effect 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 OCI in the period in which they arise.
For the Company’s defined contribution plans, costs are determined based on the services provided by the Company’s employees and are
recognized in the consolidated statements of income as those services are provided.
i) 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 classified as liability instruments in accordance with IFRS.
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 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 consolidated 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 or other appropriate valuation technique.
j) 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 defined and the costs are separately identified and reliably measured;
• the technical feasibility of the project is demonstrated;
• the project will generate future economic benefit;
• 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 impairment losses, if any. Amortization of the asset commences
when development has been completed and the asset is available for use. It is amortized over the period of expected future benefit, generally
between three to ten years. During the period of development, the asset is tested for impairment annually. All other development costs are
charged to the consolidated statements of income.
k) Investments in Joint Ventures
The Company has interests in several 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 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.
50
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The aggregate of the Company’s share of income or loss of a joint venture is shown separately on 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 the
joint venture. If there is evidence that the investment in the joint venture is impaired, the Company calculates the amount of impairment as the
difference 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.
The Company had the following investments in joint ventures:
Hal Shaw Inc.
Shaw & Shaw Ltd.
Country of
Incorporation
Activity
December 31,
2018
Ownership
Interest
%
December 31,
2017
Ownership
Interest
%
USA
Pipe coating
Canada
Pipe coating
50
83
50
83
As of December 31, 2018, both joint ventures are inactive and do not generate income or expense.
l) Investments in Associates
The Company accounts for investments in which it has significant influence using the equity method, and these investments are initially
recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the income 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
the associate. If there is evidence that the investment in the associate is impaired, the Company calculates the amount of impairment as the
difference between the recoverable amount of the associate and its carrying value, and then recognizes the loss as “loss from investments in
associates” in the consolidated statements of income.
A listing of all associates is presented in note 23.
m) Income Taxes
Income tax expense 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 OCI.
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 differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted or substantively
enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred income 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 affects neither accounting nor taxable profit or
loss.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable income will be available against which the
temporary differences can be utilized.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax
liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same
taxable entity or different taxable entities where there is an intention to settle the 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 to income over the useful life of the asset.
n) Earnings Per Share (“EPS”)
Basic EPS is calculated using the weighted average number of shares outstanding during the year.
Diluted EPS is calculated using the treasury stock method for determining the dilutive effect of outstanding financial instruments issued under
the Company’s various stock-based compensation plans. Under this method, the conversion of dilutive financial instruments and related issue of
shares is assumed at the beginning of the period (or at the time of award, if later).
The proceeds from the conversion or exercise of dilutive financial instruments plus future period compensation expenses are assumed to be used
to purchase common shares at the average market price during the period, and the incremental number of shares (the difference between the
number of shares assumed issued and assumed purchased) is included in the denominator of the diluted EPS computation.
51
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
o) Cash and Cash Equivalents
Cash and cash equivalents consist of balances with banks and short-term, highly liquid investments with maturity dates on acquisition of 90 days
or less. The amounts presented in the consolidated balance sheets approximate the fair value of cash and cash equivalents.
p) Short-term Investments
Short-term investments consist of liquid investments with maturity dates on acquisition greater than 90 days and less than one year.
q) Trade and Other Receivables
Trade and other receivables are recorded at amortized cost. Impairment of trade and other receivables is constantly monitored. The Company
uses the “expected credit loss” model for calculating impairment and recognizes expected credit losses. The model is based on observed
customer solvency, the aging of trade and other receivables, historical values and customer-specific and industry risks; external credit ratings as
well as bank and trade references are reviewed when available.
r) Inventory
Inventory is measured at the lower of cost or net realizable value. Cost is determined on a first-in, first-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 fixed
manufacturing overheads. Net realizable value for finished goods, work-in-process and raw materials inventory 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 inventory is recognized at the time title passes to the Company.
s) Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost less accumulated amortization and any accumulated impairment losses. 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 benefits associated with the item will flow 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 financial period in which they are
incurred. The expected cost for the decommissioning and remediation of an asset is included in the cost of the respective asset if the recognition
criteria are met.
Property, plant and equipment, other than land and project-related facilities and equipment, are amortized over their estimated useful lives
commencing when the asset is available for use as follows:
• Land improvements are amortized over the estimated life of each site;
• 3% to 10% on buildings;
• 5% to 50% on machinery and equipment; and
• Project-related facilities are amortized over the estimated project life.
An item of property, plant and equipment is derecognized when no further economic benefits are expected from its use or disposal. Any gains or
losses arising on derecognition of the asset (calculated as the difference between the net disposal proceeds or the net recoverable amount, and
the carrying value of the asset) are included in the consolidated statements of income in the period 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.
t) Intangible Assets
Intangible assets acquired separately are measured at cost. The cost of intangible assets acquired in a business combination is the fair value at
the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated
impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized, and the expenditure is
reflected in the consolidated 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 lives 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, which
range from 2 years to 15 years. The amortization period and the amortization method are reviewed at least on an annual basis and adjusted
prospectively if appropriate.
Intangible Assets with Indefinite Lives
Intangible assets with indefinite 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 CGU level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life
continues to be supportable; if not, the change in useful life from indefinite to finite is made on a prospective basis.
52
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Gains or losses arising from the derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the
carrying amount of the asset and are recognized in the consolidated statements of income when the asset is derecognized.
u) Impairment of Non-financial Assets
Assets that have indefinite 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 at the end of each reporting period or 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 of disposal
and its value-in-use. For the purposes of assessing impairment, assets are grouped into CGUs at the lowest level for which there are separately
identifiable independent cash inflows. Non-financial assets, other than goodwill, that experienced an impairment are reviewed for possible reversal
of the impairment whenever reversal indicators exist.
v) Goodwill
Goodwill represents the excess of the purchase price of the Company’s interest in subsidiary entities over the fair value of the underlying net
identifiable tangible and intangible assets arising at the date of acquisition.
Goodwill is deemed to have an indefinite life and is tested annually for impairment or when there is an indicator of impairment. Goodwill is carried
at cost less accumulated impairment losses, if any. Impairment losses recognized on goodwill are not reversed.
Goodwill is allocated to CGUs for the purpose of impairment testing. The allocation is made to those CGUs or groups of CGUs that are expected
to benefit from the business combination in which the goodwill arose, but are not allocated above the operating segment level at which
management monitors the recovery of goodwill.
Gains or losses on the disposal of a CGU or component of a CGU include the carrying amount of goodwill relating to the entity sold.
w) Provisions
A provision is an accrued liability, legal or constructive, resulting from a past event with a high degree of uncertainty with respect to either the
timing or amount. Provisions must be probable and should be measurable to be recognized, and are determined by discounting the expected
future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The
increase in the provision due to the passage of time is recognized as finance costs in the consolidated statements of income.
x) Leases
Finance leases, which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalized
at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments.
Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the
remaining balance of the liability.
Leases in which substantially all of the benefits and risks of ownership are not transferred by the lessor are classified as operating leases.
Payments made under operating leases are charged to the consolidated statements of income on a straight-line basis over the term of the lease.
NOTE 3. ACCOUNTING STANDARDS ISSUED BUT NOT YET APPLIED
IFRS 16, Leases
IFRS 16, issued by the IASB in January 2016, supersedes IAS 17, Leases (and related interpretations). The standard is effective for annual periods
beginning on or after January 1, 2019, with earlier application permitted for entities that have also adopted IFRS 15, Revenue from Contracts with
Customers. The new standard provides a comprehensive model for the identification of lease arrangements and their treatment in the financial
statements of both lessees and lessors. This standard eliminates the classification of leases as either operating or finance lease for a lessee, and
instead, all leases are capitalized by recognizing the present value of lease payments and presenting them as lease assets. The Company will
elect to use the exemptions in the standard on lease contracts for which the lease term ends within 12 months as of the date of initial application,
and lease contracts for which the underlying asset is of low value. The service component of a lease agreement should be separated from the
value of the asset and is not reported on the consolidated balance sheet; however, there is a practical expedient to combine lease and non-lease
components. Purchase, renewal and termination options which are reasonably certain of being exercised are also included in the measurement
of the lease liability. Lease payment liabilities will not include variable lease payments other than those that depend on an index or rate. The
most significant effect of the new requirements will be the recognition of the right-of-use (“ROU”) leased assets and their corresponding lease
obligations on the consolidated balance sheet.
The Company has completed its implementation plan and process for reviewing its lease contracts. A software subscription system has
been obtained, to assist the Company in compiling the lease information and calculating the related accounting impacts to comply with the
requirements of the standard and manage its lease arrangements. On initial adoption, the Company plans to apply the standard using the
modified retrospective approach, which does not require a restatement of prior period financial information as it recognizes the cumulative effect
of applying the standard to prior periods as an adjustment to opening retained earnings as at January 1, 2019.
53
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The adoption of IFRS 16 will result in the recognition of operating leases mainly related to real estate and land. As a result, the Company expects
to account for ROU assets of approximately $55 – $65 million, lease liabilities of approximately $55 – $65 million and a reduction of shareholders’
equity of approximately $2 – $3 million.
Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28)
In October 2017, the IASB issued Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28). The amendments clarify that a
company applies IFRS 9, Financial Instruments, to long-term interests in an associate or joint venture that form part of the net investment in the
associate or joint venture. The amendments are effective from January 1, 2019, with early application permitted. The Company performed an
impact assessment of the amendment to IAS 28 and determined that there will be no material impact on its consolidated financial statements on
adoption of this standard.
IFRIC 23, Uncertainty over Income Tax Treatments
In June 2017, the IASB published IFRIC 23, Uncertainty over Income Tax Treatments, effective for annual periods beginning on or after
January 1, 2019. The interpretation requires an entity to assess whether it is probable that a tax authority will accept an uncertain tax treatment
used, or proposed to be used, by an entity in its income tax filings and to exercise judgement in determining whether each tax treatment
should be considered independently or whether some tax treatments should be considered together. The decision should be based on which
approach provides better predictions of the resolution of the uncertainty. An entity also has to consider whether it is probable that the relevant
authority will accept each tax treatment, or group of tax treatments, assuming that the taxation authority with the right to examine any amounts
reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. The interpretation may be
applied on either a fully retrospective basis or a modified retrospective basis without restatement of comparative information. The Company
performed an impact assessment of all aspects of IFRIC 23 and determined that there will be no material impact on its consolidated financial
statements on adoption of this standard.
NOTE 4. NEW ACCOUNTING STANDARDS ADOPTED
IFRS 2, Share-based Payment
In June 2016, the IASB issued amendments to IFRS 2, Share-based Payment, in relation to the classification and measurement of share-based
payment transactions. The amendments address three main areas:
• The effects of vesting conditions on the measurement of a cash-settled share-based payment transaction;
• The classification of a share-based payment transaction with net settlement features for withholding tax obligations; and
•
The accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from
cash-settled to equity-settled.
The amendments are effective for annual periods beginning on or after January 1, 2018. On adoption, entities are required to apply the
amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria
are met. The Company has adopted the new standard effective January 1, 2018. The Company performed an impact assessment on the
classification and measurement of the amendments and determined that there was no material impact of adopting this standard on its
consolidated financial statements.
IFRS 9, Financial Instruments
In July 2015, the IASB issued the final version of IFRS 9, Financial Instruments, which replaces all phases of the financial instruments project,
IAS 39, Financial Instruments: Recognition and Measurement, and all previous versions of IFRS 9. The standard introduces new requirements
for classification and measurement, impairment, and hedge accounting. The new standard is effective for annual periods beginning on or after
January 1, 2018, with early adoption permitted. The Company has adopted the new standard effective January 1, 2018. The Company performed
an impact assessment of all aspects of IFRS 9 and determined that there is no material impact on its consolidated financial statements on
adoption of this standard. The Company elected to designate an investment in equity instruments as Fair Value through Other Comprehensive
Income (“FVOCI”).
IFRIC 22, Foreign Currency Transactions and Advance Consideration
IFRIC 22, Foreign Currency Transactions and Advance Consideration, clarifies that the date of foreign currency transactions for purposes
of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an
entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. The
interpretation is effective for periods beginning on or after January 1, 2018 and may be applied either retrospectively or prospectively. The
Company adopted this standard on January 1, 2018 and has determined that there was no material impact of adopting this standard on its
consolidated financial statements.
IFRS 15, Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which establishes a single comprehensive model for entities
to use in accounting for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the
consideration to which an entity expects to be entitled to in exchange for transferring goods or services to a customer. The principles in IFRS 15
54
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS provide a more prescriptive approach to measuring and recognizing revenue. The standard is effective for annual periods beginning on or after
January 1, 2018. The Company has adopted the standard using the full retrospective method, effective January 1, 2018.
The Company has performed contract reviews in all divisions to identify the impact of the new standard and concluded that the sale of goods will
continue to be recognized at a point in time and rendering of services will be recognized over time. The Company has identified minor changes
in how revenue is allocated to performance obligations and the resulting timing of revenue recognition from some contracts originating in the
Pipeline and Pipe Services segment, primarily related to field joint contracts. Previously, tasks associated with customer contract requirements
were recognized into revenue based on task completion outlined in contracts. Under the new standard, some of these tasks are not defined as
distinct performance obligations but rather are recognized as part of the primary performance obligation. The Company also concluded that
some costs incurred in those contracts meet the definition of costs to fulfill.
To enhance clarity, comparability and utility of financial information post-implementation of the standard, the Company applied the standard
retrospectively subject to permitted and elected practical expedients including:
i. No restatement for contracts that began and ended within the same annual reporting period.
ii. No restatement for contracts that were completed or modified prior to January 1, 2017.
iii. No disclosure of the aggregate transaction prices allocated to the remaining unfulfilled or partially unfulfilled performance obligations for
periods ended prior to January 1, 2018.
For the purposes of applying the new standard on an ongoing basis, the Company will be using the practical expedient to not disclose the
transaction prices allocated to the remaining unfulfilled, or partially unfulfilled performance obligations from contracts originally expected to have
a duration of one year or less.
The impact of the adoption of the standard on the Company’s consolidated balance sheets primarily relates to reclassifications among financial
statement accounts to align with the new standard. Most notably, contracts in process for which the Company has rendered service in advance
of billing are presented as contract assets as opposed to unbilled revenue assets within accounts receivable. Additionally, capitalized costs to
fulfill contracts are included within contract assets. Advance payments and deferred revenue are combined and presented as contract liabilities.
The impact of adopting the standard on the year ended December 31, 2017 for revenue, cost of goods sold, net loss and basic and diluted EPS
was as follows:
(in thousands of Canadian dollars, except per share amounts)
Revenue
Cost of Goods Sold and Services Rendered
Loss before Income Taxes
Income Taxes
Net Loss
Basic Earnings per Share
Diluted Earnings per Share
Year Ended
December 31, 2017
$
(1,153)
(898)
(255)
(103)
(152)
0.00
0.00
$
The cumulative impact to retained earnings as at January 1, 2017 was a reduction of $0.05 million.
Contract liabilities as at December 31, 2018 were $23.6 million (December 31, 2017 – Deferred revenue of $44.8 million), of which $70.0 million
was deducted and recognized as revenue during the year ended December 31, 2018, and $48.8 million was added during the year ended
December 31, 2018.
Geographical Segment Revenue Information
The table below sets forth, by geographical region, revenue for the year ended December 31 for the Pipeline and Pipe Services segment:
(in thousands of Canadian dollars)
North America
Latin America
EMAR(c)
Asia Pacific
Total revenue
Year Ended December 31
2018(b)
2017(a)
$
822,465
118,102
181,240
86,440
$
621,825
383,538
203,437
163,756
$ 1,208,247
$ 1,372,556
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Note 5 for further details.
(c) Refers to the Europe, Middle East, Africa and Russia geographic region.
55
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The table below sets forth, by geographical region, revenue for the year ended December 31 for the Petrochemical and Industrial segment:
(in thousands of Canadian dollars)
North America
EMAR
Asia Pacific
Total revenue
Year Ended December 31
2018
2017
$
115,069
$
113,973
76,070
11,115
67,857
12,377
$
202,254
$
194,207
Impacts of application of IFRS 15, Revenue from Contracts with Customers
a) IFRS 15, Revenue from Contracts with Customers, impacted the fiscal 2017 comparative amounts reported in the Company’s fiscal 2018
consolidated statement of income as follows:
Year Ended
December 31,
2017
IFRS 15 –
Revenue
Effects
$
509,491
$
1,057,161
1,566,652
980,919
585,733
342,991
10,536
(249)
77,267
19,170
(311)
8,073
128,256
(6,271)
(16,817)
105,168
33,988
71,180
71,307
(127)
–
(1,153)
(1,153)
(898)
(255)
–
–
–
–
–
–
–
(255)
–
–
(255)
(103)
(152)
(152)
–
Restated
Year Ended
December 31,
2017
$
509,491
1,056,008
1,565,499
980,021
585,478
342,991
10,536
(249)
77,267
19,170
(311)
8,073
128,001
(6,271)
(16,817)
104,913
33,885
71,028
71,155
(127)
$
71,180
$
(152)
$
71,028
1.02
1.02
–
–
1.02
1.02
$
$
69,926
70,102
$
$
69,926
70,102
(in thousands of Canadian dollars, except per share amounts)
Revenue
Sale of products
Rendering of services
Cost of Goods Sold and Services Rendered
Gross Profit
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
Income from Operations
Loss from investment in associates
Finance costs, net
Income before Income Taxes
Income taxes
Net Income
Net Income (Loss) Attributable to:
Shareholders of the Company
Non-controlling interests
Net Income
Earnings per Share
Basic
Diluted
Weighted Average Number of Shares Outstanding (000s)
Basic
Diluted
56
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b) IFRS 15, Revenue from Contracts with Customers, affected the fiscal 2017 comparative amounts reported in the Company’s fiscal 2018
consolidated balance sheet as follows:
(in thousands of Canadian dollars)
ASSETS
Current assets
Cash and cash equivalents
Short-term investments
Loans receivable
Accounts receivable
Contract assets
Income taxes receivable
Inventories
Prepaid expenses
Derivative financial instruments
Total current assets
Non-current assets
Loans receivable
Property, plant and equipment
Intangible assets
Investments in associates
Deferred income tax assets
Other assets
Goodwill
Total non-current assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Current liabilities
Bank indebtedness
Accounts payable and accrued liabilities
Provisions
Income taxes payable
Derivative financial instruments
Contract liabilities
Obligations under finance lease
Other liabilities
Total current liabilities
Non-current liabilities
Long-term debt
Obligations under finance lease
Provisions
Employee future benefits
Deferred income tax liabilities
Other liabilities
Total non-current liabilities
Total liabilities
Equity
Share capital
Contributed surplus
Retained earnings
Non-controlling interests
Accumulated other comprehensive income
December 31, 2017
January 1, 2017
December 31,
2017
IFRS 15 –
Effects
December 31,
2017
Restated 2017
Excluding
Effects of
IFRS 15
IFRS 15 –
Effects
Pro Forma
$
289,065
$
194,824
$
$
289,065
$
–
2,448
259,694
–
20,205
115,479
21,931
382
709,204
2,283
417,781
164,872
20,188
33,876
20,606
329,391
988,997
–
–
–
(65,255)
65,413
–
(461)
–
–
–
2,448
194,439
65,413
20,205
115,018
21,931
382
(303)
708,901
–
–
–
–
103
–
–
103
2,283
417,781
164,872
20,188
33,979
20,606
329,391
989,100
1,890
3,832
294,397
–
35,141
113,485
22,477
9,393
675,439
5,058
471,468
192,907
26,739
28,955
26,407
350,818
1,102,352
–
–
–
(84,233)
84,161
–
–
–
–
(72)
–
–
–
–
24
–
–
24
$
194,824
1,890
3,832
210,164
84,161
35,141
113,485
22,477
9,393
675,367
5,058
471,468
192,907
26,739
28,979
26,407
350,818
1,102,376
$ 1,698,201
$
(200)
$ 1,698,001
$ 1,777,791
$
(48)
$ 1,777,743
$
–
$
201,017
27,361
42,904
1,915
44,826
1,111
11,848
330,982
246,175
10,840
36,555
18,552
6,448
3,665
322,235
653,217
704,956
27,651
302,406
5,848
4,123
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(200)
–
–
$
–
$
2,463
$
201,017
212,539
27,361
42,904
1,915
44,826
1,111
11,848
330,982
21,104
39,011
3,759
103,584
950
12,043
395,453
246,175
263,528
10,840
36,555
18,552
6,448
3,665
322,235
653,217
704,956
27,651
302,206
5,848
4,123
11,019
35,304
20,727
7,484
1,236
339,298
734,751
703,316
23,379
273,045
5,892
37,408
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(48)
–
–
$
2,463
212,539
21,104
39,011
3,759
103,584
950
12,043
395,453
263,528
11,019
35,304
20,727
7,484
1,236
339,298
734,751
703,316
23,379
272,997
5,892
37,408
Total equity
1,044,984
(200)
1,044,784
1,043,040
(48)
1,042,992
TOTAL LIABILITIES AND EQUITY
$ 1,698,201
$
(200)
$ 1,698,001
$ 1,777,791
$
(48)
$ 1,777,743
57
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES
In July 2018, the Argentine three-year cumulative rate of inflation for consumer prices and wholesale prices reached a level in excess of 100%. As
a result, in accordance with IAS 29, Financial Reporting in Hyperinflationary Economies, Argentina was considered a hyperinflationary economy,
effective January 1, 2018. Accordingly, the presentation of IFRS financial statements includes adjustments and reclassifications for the changes
in the general purchasing power of the Argentine peso.
On the application of IAS 29, the Company used the conversion coefficient derived from the consumer price index (“CPI”) in the Greater Buenos
Aires area published by the National Statistics and Census Institution in Argentina. The CPIs for the current and prior year and the corresponding
conversion coefficient since the year when the Argentine subsidiary was acquired were as follows:
Year
2012
2017
2018 – March
2018 – June
2018 – September
2018 – December
Index
117.67
483.30
514.58
562.37
616.55
707.26
Conversion
coefficient
6.0105
1.4634
1.3744
1.2576
1.1471
1.0000
CAD/ARS
exchange rate
0.211471
0.067396
0.063925
0.045528
0.031353
0.036229
Monetary assets and liabilities are not restated because they are already expressed in terms of the monetary unit current as at December 31,
2018. Non-monetary assets, liabilities, equity, revenue and expenses (items that are not already expressed in terms of the monetary unit as at
December 31, 2018) are restated by applying the index at the end of the reporting period. The effect of inflation on the Argentine subsidiary’s net
monetary position is included in the consolidated statements of income as a net monetary loss.
The application of IAS 29 results in the adjustment for the loss of purchasing power of the Argentine peso recorded in the consolidated
statements of income. In a period of inflation, an entity holding an excess of monetary assets over monetary liabilities loses purchasing power,
which results in a loss on the net monetary position. This loss/gain is derived as the difference resulting from the restatement of non-monetary
assets, liabilities and equity.
As per IAS 21, The Effects of Changes in Foreign Exchange Rates, all amounts (i.e. assets, liabilities, equity, revenue and expenses) are translated at
the closing foreign exchange rate at the date of the most recent consolidated balance sheet, except that comparative amounts are not adjusted
for subsequent changes in the price level or subsequent changes in exchange rates. Similarly, in the period during which the functional currency
of a foreign subsidiary becomes hyperinflationary and applies IAS 29 for the first time, the parent’s consolidated financial statements for the
comparative period are not restated for the effects of hyperinflation.
The opening equity adjustment of $4.3 million relates to the hyperinflation adjustments for non-monetary assets, liabilities and equity items in the
consolidated balance sheet as at January 1, 2018. This is as a result of an increase to total assets of $4.8 million and an increase to total liabilities
of $0.5 million.
NOTE 6. CAPITAL MANAGEMENT
The Company defines 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 finance expansion opportunities as they arise, and provide returns to its shareholders.
The following table sets forth the Company’s total managed capital as at:
(in thousands of Canadian dollars)
Long-term debt
Obligations under finance lease
Equity
December 31,
2018
December 31,
2017
$
267,781
$
246,175
11,543
11,951
1,069,650
1,044,784
$ 1,348,974
$ 1,302,910
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 issue or re-acquire
shares, acquire or dispose of assets, or adjust the amount of cash and cash equivalents, bank indebtedness or long-term debt balances. The
Company’s capital is not subject to any capital requirements imposed by any regulators; however, it is limited by the terms of its credit facility and
long-term debt agreements. Specifically, the Company has undertaken to maintain certain covenants in respect of its unsecured committed bank
credit facility and its long-term debt. The Company is in compliance with these covenants as at December 31, 2018. Please refer to note 29 for
further information pertaining to the Company’s debt covenant requirements.
58
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. FINANCIAL INSTRUMENTS
The Company has classified its financial instruments as follows:
(in thousands of Canadian dollars)
Loans and Receivables, Measured at Amortized Cost
Loans receivable (note 17)
Trade accounts receivable, net (note 18)
Deposit guarantee
Fair Value through Profit or Loss
Cash and cash equivalents (note 16)
Short-term investments
Derivative financial instruments – assets
Derivative financial instruments – liabilities
Fair Value through Other Comprehensive Income
Convertible preferred shares
Other Financial Liabilities, Measured at Amortized Cost
Accounts payable (note 26)
Deferred purchase consideration
Long-term debt (note 30)
December 31,
2018
December 31,
2017
$
3,037
$
4,731
210,009
261
217,264
2,046
1,102
226
179,105
109
289,065
–
382
1,915
–
10,000
95,794
–
267,781
72,466
3,914
246,175
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 that reflect market data obtained from independent sources, while unobservable inputs
reflect the Company’s assumptions with respect to how market participants would price an asset or liability. These two inputs used to measure
fair value fall into the three different levels of the fair value hierarchy:
•
•
Level 1 – Quoted prices in active markets for identical instruments that are observable.
Level 2 – Quoted prices in active markets for similar instruments; inputs other than quoted prices that are observable and derived from or
corroborated by observable market data.
•
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
The hierarchy requires the use of observable market data when available.
The following table presents the fair value of financial assets and liabilities in the fair value hierarchy as at December 31, 2018:
(in thousands of Canadian dollars)
Assets
Cash and cash equivalents
Short-term investments
Loans receivable
Derivative financial instruments
Deposit guarantee
Liabilities
Long-term debt
Derivative financial instruments
Fair Value
Level 1
Level 2
Level 3
$
217,264
$
217,264
$
2,046
3,037
1,102
261
2,046
–
–
–
$
–
–
3,037
1,102
261
$
223,710
$
219,310
$
4,400
$
243,327
226
$
243,553
$
–
–
–
243,327
226
$
243,553
$
–
–
–
–
–
–
–
–
–
The derivative financial instruments relate to foreign exchange forward contracts entered into by the Company (as described below) and are
valued by comparing the rates of the underlying contract (contracted rate for a forward contract or an exercise price for an option) to the year-end
rates quoted in the market.
Financial Risk Management
The Company’s operations expose it to a variety of financial risks including market risk (including foreign exchange risk and interest rate risk),
credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to
minimize potential adverse effects on the Company’s financial position and financial performance. Risk management is the responsibility of the
Company’s management. Material risks are monitored and are regularly reported to the Board of Directors.
59
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Market Risk
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 denominated in foreign currencies. As a result,
the Company’s consolidated revenue, expenses and financial position may be impacted by fluctuations in foreign exchange rates as these foreign
currency amounts are translated into Canadian dollars. As at December 31, 2018, fluctuations of +/- 5% in the Canadian dollar, relative to those
foreign currencies, would impact the Company’s consolidated revenue, income from operations, and net income (attributable to shareholders
of the Company) for the year then ended by approximately $46.6 million, $1.0 million and $0.7 million, respectively, prior to foreign exchange
forward contract activities. In addition, such fluctuations would impact the Company’s consolidated total assets, consolidated total liabilities and
consolidated total equity by $56.2 million, $11.2 million and $45.0 million, respectively, as at December 31, 2018.
The objective of the Company’s foreign exchange risk management activities is to minimize transaction exposures associated with the
Company’s foreign currency denominated cash streams and the resulting variability of the Company’s income. The Company utilizes foreign
exchange forward contracts to manage this foreign exchange risk. The Company does not enter into foreign exchange forward contracts for
speculative purposes. With the exception of the Company’s US dollar based operations, the Company does not hedge translation exposures.
Foreign Exchange Forward Contracts
The Company utilizes financial instruments to manage the risk associated with foreign exchange rates. The Company formally documents all
relationships between hedging instruments and the hedged items, as well as its risk management objective and strategy for undertaking various
hedge transactions.
The following table sets out the notional amounts outstanding under foreign exchange forward contracts, the average contractual exchange rates
and the settlement of these contracts as at December 31, 2018:
(in thousands, except weighted average rate amounts)
US Dollars Sold for Euros
Less than one year
Weighted average rate
Norwegian Kroner Sold for US Dollars
Less than one year
Weighted average rate
Euros Sold for US Dollars
Less than one year
Weighted average rate
US$ 13,500
0.87
NOK 87,184
0.11
€ 18,013
1.19
The Company does not apply hedge accounting to account for its foreign exchange forward contracts.
As at December 31, 2018, the Company had notional amounts of $60.3 million of foreign exchange forward contracts outstanding
(2017 – $83.8 million) with the fair value of the Company’s net gain from all foreign exchange forward contracts totalling $0.9 million
(2017 – $1.5 million net loss).
Net Investment Hedge
The US dollar denominated long-term debt has been designated as a hedge of the net investment in one of the Company’s subsidiaries, which
has the US dollar as its functional currency. During the year ended December 31, 2018, a loss of $21.6 million (2017 – gain of $17.4 million) on
the translation of the long-term debt was transferred to OCI to offset the loss on translation of the net investment in the subsidiary. There was no
ineffectiveness of this hedge for the year ended December 31, 2018.
Interest Rate Risk
The following table summarizes the Company’s exposure to interest rate risk as at December 31, 2018:
(in thousands of Canadian dollars)
Financial Assets
Cash equivalents
Loans receivable
Financial Liabilities
Standard letters of credit for performance, bid and surety bonds
Long-term debt
Non-interest
Bearing
Floating
Rate
Fixed Interest
Rate
Total
$
$
–
36
36
$
$
–
$
47,560
$
47,560
3,001
–
3,037
3,001
$
47,560
$
50,597
$
43,879
$
–
$
43,879
$
–
–
–
$
–
$
43,879
267,781
267,781
$
267,781
$
311,660
The Company’s interest rate risk arises primarily from the floating rate on its Credit facility and the long-term debt and is not currently considered
to be material.
60
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Credit Risk
Credit risk arises from cash and cash equivalents held with banks, foreign exchange forward contracts, as well as credit exposure of customers,
including outstanding accounts receivable. The maximum credit risk is equal to the carrying value of the financial instruments.
For the year ended December 31, 2018, there was no customer who generated more than 10% of total consolidated revenue (2017 – one customer
generated approximately 22% of total consolidated revenue). As at December 31, 2018, no customer accounted for more than 10% of the
Company’s total trade accounts receivable (2017 – no customer accounted for more than 10% of the Company’s total trade accounts receivable).
The carrying value of accounts receivable is reduced through the use of an allowance for doubtful accounts, and the amount of the loss is
recognized in the consolidated 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, 2018, $13.3 million, or 6%, of trade accounts receivable was more than 90 days overdue, compared to $8.1 million, or 5%, as
at December 31, 2017. The Company expects to receive full payment on accounts receivable that are neither past due nor impaired.
The following is an analysis of the change in the allowance for doubtful accounts for the years ended December 31:
(in thousands of Canadian dollars)
Balance – Beginning of Year
Bad debts expense
Recovery of amounts previously provided for
Bad debts written off
Impact of change in foreign exchange rates
Balance – End of Year
$
2018
(2,809)
(2,402)
401
178
(139)
2017
$
(4,865)
(910)
2,015
519
432
$
(4,771)
$
(2,809)
Liquidity Risk
The Company’s objective in managing liquidity risk is to maintain sufficient, readily available cash reserves in order to meet its liquidity
requirements at any point in time. The Company achieves this by maintaining sufficient cash and cash equivalents and through the availability of
funding from committed credit facilities. As at December 31, 2018, the Company had cash and cash equivalents totalling $217.3 million (2017 –
$289.1 million) and had unutilized lines of credit available to use of $456.6 million (2017 – $389.1 million).
The following are the contractual maturities of the Company’s purchase commitments and financial liabilities as at December 31, 2018:
(in thousands of Canadian dollars)
Purchase commitments
Accounts payable
Long-term debt
Finance costs on long-term debt
Obligations under finance leases
Operating leases
Other obligations
2019
$
96,914
95,794
–
9,526
1,696
21,953
1,875
2020
$
83
–
83,835
7,649
1,460
14,210
1,763
Total
227,758
109,000
2021
$
14
–
–
7,027
1,446
11,164
1,517
21,168
2022
$
14
–
–
7,027
1,439
8,969
1,294
2023
$
28
–
77,551
4,884
1,439
6,196
944
Thereafter
$
–
–
107,121
9,605
7,271
11,957
4,118
Total
$
97,053
95,794
268,507
45,718
14,751
74,449
11,511
18,743
91,042
140,072
607,783
NOTE 8. SEGMENT INFORMATION
Shawcor’s operating segments are being reported based on the financial information provided to the CEO, who has been identified 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 differently than income from operations in the consolidated financial statements. Income taxes are
managed at a consolidated level and are not allocated to the reportable operating segments.
As at December 31, 2018, 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 customers and markets that the Company services.
Pipeline and Pipe Services
The Pipeline and Pipe Services segment comprises the following divisions:
•
•
•
Bredero Shaw, which offers specialized internal anti-corrosion and flow efficiency pipe coating systems, insulation coating systems, weight
coating systems and custom coating and field joint application services for onshore and offshore pipelines;
Pipeline and Pipe Services Products includes Canusa-CPS, that manufactures heat shrinkable sleeves, adhesives and liquid coatings for
pipeline joint protection applications and Dhatec, that designs and assembles engineered pipe logistics products and services;
Shaw Pipeline Services, which provides ultrasonic and radiographic pipeline girth weld inspection services to pipeline operators and
construction contractors worldwide for both onshore and offshore pipelines;
61
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
•
•
•
Flexpipe Systems, which manufactures spoolable and stick composite pipe systems and high density polyethylene pipe used for oil and gas
gathering, water disposal, carbon dioxide injection pipelines and other applications requiring corrosion resistance and high pressure capabilities;
Guardian, which 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;
Shawcor Inspection Services, which provides non-destructive testing services for new oil and gas gathering pipelines and oilfield infrastructure
integrity management services; and
•
Lake Superior Consulting, which provides pipeline engineering and integrity management services to major North American pipeline operators.
Petrochemical and Industrial
The Petrochemical and Industrial segment comprises the Connection Systems division. The Connection Systems division was formed from the
2015 integration of:
•
•
ShawFlex, which manufactures wire and cable for process instrumentation and control applications; and
DSG-Canusa, which manufactures heat shrinkable tubing for automotive, electrical, electronic and utility applications.
Financial and Corporate
The financial and corporate division for Shawcor does not meet the definition of a reportable operating segment as defined under IFRS, as it does
not earn revenue.
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
2018(b)
$
2017(a)
$
2018
$
2017
$
2018
$
2017
$
2018
$
2017
$
2018(b)
$
2017(a)
$
Revenue
External
1,207,815
1,372,263
201,057
193,236
Inter-segment
432
293
1,197
Total Revenue
1,208,247
1,372,556
202,254
Operating expense
1,091,693
1,139,225
164,677
971
194,207
158,211
Research and
–
–
–
–
–
–
–
–
1,408,872
1,565,499
(1,629)
(1,264)
–
–
(1,629)
(1,264) 1,408,872
1,565,499
8,419
26,591
(1,629)
(1,264) 1,263,160
1,322,763
development expenses
9,712
8,464
1,255
993
909
1,079
Amortization of property,
plant and equipment
59,279
72,178
3,664
3,178
1,846
1,911
Amortization of
intangible assets
18,434
19,170
Gain on sale of land
Income (Loss) from
–
–
–
–
–
–
–
–
–
(311)
Operations for CODM
29,129
133,519
32,658
31,825
(11,174)
(29,270)
Impairment
Income (Loss)
–
8,073
–
–
–
–
from Operations
29,129
125,446
32,658
31,825
(11,174)
(29,270)
1,468
104,414
31,999
30,921
540
(30,422)
–
–
–
–
7,828
33,885
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11,876
10,536
64,789
77,267
18,434
19,170
–
(311)
50,613
136,074
–
8,073
50,613
128,001
34,007
104,913
7,828
33,885
Income Before
Income Taxes
Income Taxes
Additions to property,
plant and equipment,
net of disposals
Goodwill
Total assets(a)
61,053
331,967
1,757,832
31,272
311,619
1,825,811
6,177
18,435
140,866
4,016
17,772
120,933
557
1,598
–
–
1,319,235 1,272,387
–
–
68,828
350,402
(1,515,808) (1,521,130) 1,702,125
–
–
35,845
329,391
1,698,001
Total liabilities
809,338
886,915
(78,708)
(71,292) 232,256
144,786
(330,411)
(307,192) 632,475
653,217
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. Please see Note 4 for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Note 5 for further details.
62
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Geographical Information
The following table sets forth information by geographic region for the years ended December 31; the geographic region is determined by the
country or location of operation.
(in thousands of Canadian dollars)
2018(d)
Canada
USA
Latin America(d)
EMAR(a)
Asia Pacific
Eliminations
Total
Revenue
External
Inter-segment
Total revenue
Non-current assets(b)
$
405,398
$
530,507
$
118,102
$
257,310
$
97,555
$
–
$ 1,408,872
1,629
–
–
–
–
(1,629)
–
$
$
407,027
251,103
$
$
530,507
500,234
$
$
118,102
35,305
$
$
257,310
119,891
$
$
97,555
48,346
$
$
(1,629)
$ 1,408,872
–
$
954,879
(in thousands of Canadian dollars)
2017(c)
Canada
USA
Latin America
EMAR(a)
Asia Pacific
Eliminations
Total
Revenue
External
Inter-segment
Total revenue
Non-current assets(b)
$
336,891
$
397,643
$
383,538
$
271,294
$
176,133
$
–
$ 1,565,499
1,264
338,155
252,995
$
$
–
–
–
–
(1,264)
–
$
$
397,643
469,427
$
$
383,538
35,123
$
$
271,294
114,063
$
$
176,133
47,215
$
$
(1,264)
$ 1,565,499
–
$
918,823
(a) Refers to the Europe, Middle East, Africa and Russia geographic region.
(b) Excluding loans receivable, investment in associates, deferred income tax assets and accrued employee future benefit asset.
(c) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
(d) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Note 5 for further details.
NOTE 9. EMPLOYEE BENEFITS EXPENSE
The following table sets forth the Company’s employee benefits expense for the years ended December 31:
(in thousands of Canadian dollars)
Salaries, wages and employee benefits
Pension (note 15)
Share-based and other incentive-based compensation (note 14)
Total
NOTE 10. FINANCE COSTS
The following table sets forth the Company’s finance 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
$
2018
522,017
15,330
9,751
2017
$
504,772
13,776
8,050
$
547,098
$
526,598
2018(a)
2017
$
(2,990)
5,986
9,096
$
(1,556)
5,539
12,834
$
12,092
$
16,817
(a) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina effective as of January 1, 2018. See Note 5 for further details.
NOTE 11. 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 differences
Total Income Tax Expense
2018(b)
2017(a)
$
$
7,522
(1,268)
6,254
1,574
1,574
44,158
(4,063)
40,095
(6,210)
(6,210)
$
7,828
$
33,885
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Note 5 for further details.
63
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the Company’s income taxes on items recognized in OCI for the years ended December 31:
(in thousands of Canadian dollars)
Income tax expense on actuarial gains and losses on defined benefit plans
Income Tax Expense Charged to OCI
2018
475
475
$
$
2017
168
168
$
$
The following table sets forth a reconciliation of the Company’s effective income tax rate for the years ended December 31:
Expected income tax expense based on statutory rate
Tax rate differential on earnings of foreign subsidiaries
Benefit of previously unrecognized tax losses
Deferred tax not recognized
Impact of US tax reform
Adjustment to prior year provision
Non-deductible amounts
Withholding taxes
Argentina hyperinflation adjustment
Movement in uncertain tax positions
State tax and other
Effective Income Tax Rate
2018
%
26.9
0.9
(33.3)
33.1
—
(4.0)
8.1
4.9
6.8
(24.6)
4.2
23.0
2017(a)
%
26.8
(1.6)
(10.8)
7.2
0.8
(0.1)
(0.3)
6.4
—
1.8
2.1
32.3
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
The expected income tax rate is computed using the average Canadian federal and provincial income tax rates based on an estimated allocation
of income before income taxes 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
Property, plant and equipment
Provisions and future expenditures
Non-capital losses
Capital losses
Deferred Income Tax Liabilities
Property, plant and equipment
Provisions and future expenditures
Net Deferred Income Tax Asset
December 31,
2018
December 31,
2017(a)
$
$
606
19,145
28,568
976
49,295
(15,362)
(7,275)
(22,637)
4,328
25,263
27,496
897
57,984
(20,010)
(10,443)
(30,453)
$
26,658
$
27,531
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
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,
2018
December 31,
2017(a)
$
31,290
(4,632)
$
33,979
(6,448)
$
26,658
$
27,531
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
64
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company has recorded deferred income tax assets of $28.6 million as at December 31, 2018 (2017 – $27.5 million), pertaining to loss carry
forwards based on management’s financial projections and the relevant income tax legislation in each jurisdiction.
(in thousands of Canadian dollars)
Deferred Income Tax Assets
Property, plant and equipment
Provisions and future expenditures
Net operating losses
Capital losses
Change in deferred income tax assets
Deferred Income Tax Liabilities
Property, plant and equipment
Provisions and future expenditures
Change in deferred income tax liabilities
Change in Deferred Income Taxes
Deferred income taxes in OCI
Foreign exchange and other
Consolidated Statements
of Income (Loss)
2018
2017
$
$
3,722
6,118
(1,073)
(79)
8,688
(4,648)
(3,168)
(7,816)
872
(475)
1,177
(975)
(13)
(4,967)
–
(5,955)
(157)
155
(2)
(5,957)
(168)
(85)
Deferred Income Tax Expense (Recovery) in Net Income
$
1,574
$
(6,210)
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, 2018 and 2017, as the Company has determined that
the undistributed profits of its subsidiaries will not be distributed in the foreseeable future. The temporary difference associated with investments
in subsidiaries, associates and joint ventures, for which a deferred income tax liability has not been recognized, aggregated to $105.6 million and
$95.5 million for the years ended December 31, 2018 and 2017, respectively.
The Company has net operating losses of $326.7 million for the year ended December 31, 2018 (2017 – losses of $292.9 million) in various
jurisdictions for which no deferred income tax asset has been recognized. These losses expire subsequent to the 2034 fiscal year. The Company
has capital losses of $52.4 million and $48.9 million for the years ended December 31, 2018 and 2017, respectively, in various jurisdictions for
which no deferred income tax asset has been recognized. These capital losses can be carried forward indefinitely.
NOTE 12. EARNINGS PER SHARE
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 (000s)
Dilutive effect of stock options
Weighted average number of shares outstanding – diluted (000s)
Basic EPS
Diluted EPS
2018(b)
2017(a)
$
25,876
$
71,155
70,061
203
70,264
$
$
0.37
0.37
$
$
69,926
176
70,102
1.02
1.02
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
(b) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Note 5 for further details.
NOTE 13. KEY MANAGEMENT COMPENSATION
Key management includes directors (executive and non-executive) and corporate officers. The compensation paid or payable to key management
for employee and director services is shown below for the years ended December 31:
(in thousands of Canadian dollars)
Salaries and other short-term incentive compensation and employee benefits
Post-employment benefits – defined benefit plans
Share-based and other long-term incentive payments
Directors’ fees and other compensation
Total
$
$
2018
1,867
455
4,958
(329)
$
6,951
$
2017
3,147
484
3,141
447
7,219
65
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. SHARE-BASED AND OTHER INCENTIVE-BASED COMPENSATION
As at December 31, 2018, 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 five years, on a cumulative basis, commencing one year following the date of the grant. The grant price equals the closing
market 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 difference between the grant price and fair market value. All stock options granted under the Amended 2001 Employee Plan have the same
characteristics as stock options that were granted under the original 2001 Employee Plan with respect to vesting requirements, term, termination
and other provisions.
A summary of the status of the Company’s stock option plan and changes during the year is presented below:
Stock Options without Tandem Share Appreciation Rights
2018
2017
Weighted
Average
Exercise Price
Total Shares
Weighted
Average
Exercise Price
Total Shares
1,195,385
$
248,900
(122,280)
(57,620)
1,264,385
752,245
$
$
33.06
25.22
15.51
25.17
33.58
36.22
1,173,080
$
163,400
(23,095)
(118,000)
1,195,385
739,005
$
$
32.02
37.40
26.90
29.83
33.06
32.34
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (years)
Weighted
Average
Exercise Price
Exercisable
as at
December 31,
2018
Weighted
Average
Exercise Price
$
0.20
7.51
3.49
5.09
3.58
1.56
15.51
25.69
32.69
37.04
41.69
45.73
33.58
23,080
$
68,460
197,000
180,285
246,300
37,120
15.51
26.51
32.75
36.93
41.69
45.73
752,245
$
36.22
Outstanding
as at
December 31,
2018
23,080
392,460
224,000
332,145
246,300
46,400
1,264,385
5.04
$
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (years)
Weighted
Average
Exercise Price
Exercisable
as at
December 31,
2017
Weighted
Average
Exercise Price
$
1.00
8.00
4.80
6.79
5.00
6.00
15.51
26.51
32.69
37.00
41.69
45.73
161,320
$
33,080
188,000
131,725
197,040
27,840
15.51
26.51
32.78
36.95
41.69
45.73
Outstanding
as at
December 31,
2017
161,320
174,600
224,000
342,765
246,300
46,400
1,195,385
5.41
$
33.06
739,005
$
32.34
Balance Outstanding – Beginning of Year
Granted
Exercised
Expired
Balance Outstanding – End of Year
Options Exercisable
December 31, 2018
Range of Exercise Prices
$15.01 to $20.00
$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
December 31, 2017
Range of Exercise Prices
$15.01 to $20.00
$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
66
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Board approved the granting of 248,900 stock options (2017 – 163,400) during the year ended December 31, 2018 under the Amended 2001
Employee Plan. The total fair value of the stock options granted during the year ended December 31, 2018 was $1.3 million (2017 – $1.3 million)
and was calculated using the Black-Scholes option pricing model with the following assumptions:
Weighted average share price
Exercise price
Weighted average expected life of options
Weighted average expected stock price volatility
Weighted average expected dividend yield
Weighted average risk-free interest rate
$
$
$
$
2018
25.22
25.22
6.25
27.0%
2.41%
2.04%
2017
37.40
37.40
6.25
28.46%
1.60%
1.45%
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 five-year vesting
period of the options. The compensation cost from the amortization of granted stock options for the year ended December 31, 2018, included in
selling, general and administrative expenses, was $1.2 million (2017 – $1.3 million).
Stock Options with Tandem Share Appreciation Rights
Balance Outstanding – Beginning of Year
Granted
Exercised
Cancelled/forfeited
Balance Outstanding – End of Year
Options Exercisable
2018
2017
Total
Shares
407,100
$
127,800
–
(108,900)
426,000
210,380
$
$
Weighted
Average
Fair Value(a)
10.05
4.68
–
8.67
8.79
10.42
Total
Shares
367,300
$
44,800
(5,000)
–
407,100
194,760
$
$
Weighted
Average
Fair Value
10.23
8.61
10.30
–
10.05
10.53
(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, 2018 is $0.1 million (2017 – $1.5 million), all of which is included
in current and non-current other liabilities on the consolidated balance sheets.
On March 3, 2010, the Board approved a 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”), the Employee Share Unit Plan (“ESUP”), and the
Performance Incentive Plan (“PIP”).
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. In 2017, management amended the VGP to
include a Total Shareholder Return (TSR factor), which modifies the unit value based on Shawcor’s share performance compared to its peer group
over a three-year period. Compensation cost is recognized on a straight-line basis over the vesting period. All units granted under the VGP will be
classified as liability instruments in accordance with IFRS as their terms require that they be settled in cash.
The VGP liability as at December 31, 2018 is $10.3 million (2017 – $4.3 million).
ESUP
The ESUP authorizes the Board to grant awards of restricted share units (“RSUs”) and performance share units (“PSUs”) to employees of the
Company as a form of incentive compensation. All RSUs and PSUs are to be settled with common shares and are valued on the basis of the
underlying weighted average trading price of the common shares over the five 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 fixed at 1,000,000 common shares. The RSUs vest in two tranches over a period of one to five years and four to
seven years, respectively, and become exercisable once vesting is completed. Compensation cost is recognized over the vesting period in
accordance with IFRS. All RSUs and PSUs granted are classified as equity instruments in accordance with IFRS as their terms require that they
be settled in shares.
67
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the Company’s RSU/PSU reconciliation for the years ended December 31:
Balance Outstanding – Beginning of Year
Granted
Exercised
Forfeited /cancelled
Balance Outstanding – End of Year
RSUs/PSUs Exercisable
2018
Total
Shares
598,037
$
71,247
(38,419)
(19,025)
611,840
308,170
$
$
Weighted
Average
Grant Date
Fair Value(a)(b)
32.02
22.52
30.90
30.95
31.02
33.21
2017
Weighted
Average
Grant Date
Fair Value(a)
31.79
32.04
28.32
28.73
32.02
33.32
Total
Shares
541,441
$
91,364
(19,951)
(14,817)
598,037
237,895
$
$
(a) RSU awards do not have an exercise price; their weighted average grant date fair value is the weighted average trading price of the common shares over the five trading days
preceding the grant date.
(b) PSU awards do not have an exercise price; their weighted average grant date fair value is the weighted average trading price of the common shares over the five trading days
preceding the grant date.
PIP
On March 2, 2017, the Board approved the PIP under the Company’s LTIP. The PIP is a cash-based awards plan, which rewards designated
employees over a three-year performance period. Each unit granted to participants notionally represents one common share, and such units vest
at the end of the third year from the date they were granted. The value of units at the vesting date is based on the weighted average trading price
of the Company’s common shares over the five trading days preceding the vesting date. Compensation cost is recognized on a straight-line basis
over the vesting period. All units granted under the PIP will be classified as liability instruments in accordance with IFRS as their terms require that
they be settled in cash.
The PIP liability as at December 31, 2018 is $0.6 million (December 31, 2017 – $0.1 million).
DSUs
Under the Company’s DSU plan, all directors (other than the President and CEO) 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 five days
immediately preceding the date of the grant. DSUs are to be settled at the time that the director ceases to be a member of the Board and each
DSU entitles the holder to receive one 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 classified 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.
The following table sets forth the Company’s DSU reconciliation for the years ended December 31:
Balance Outstanding – Beginning of Year
Granted
Exercised
Balance Outstanding – End of Year
2018
Total
Shares
191,046
$
58,928
(31,476)
218,498
$
Weighted
Average
Grant Date
Fair Value(a)
33.86
21.90
25.11
31.89
2017
Weighted
Average
Grant Date
Fair Value(a)
Total
Shares
148,427
$
42,619
–
35.15
29.36
–
191,046
$
33.86
(a) DSU awards do not have an exercise price; their weighted average grant date fair value is the weighted average trading price of the common shares over the five trading days
preceding the grant date.
The mark-to-market liability for the DSUs as at December 31, 2018 is $3.6 million (2017 – $5.2 million), all of which is included in current and non-
current other liabilities on the consolidated balance sheets.
68
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 (recovery)
RSU expense
SAR (recovery)
PIP expense
$
$
2018
1,212
6,431
(826)
3,304
(1,388)
193
Total Share-based and Other Incentive-based Compensation Expense
$
8,926
$
2017
1,334
3,278
(81)
3,817
(486)
107
7,969
NOTE 15. EMPLOYEE FUTURE BENEFITS
The Company provides future benefits to its employees under a number of defined benefit and defined contribution arrangements. The defined
benefit pension plans are in Canada, the UK and Norway and include both flat-dollar plans for hourly employees and final earnings plans for
salaried employees. The Company also provides a post-employment life insurance benefit to its Canadian retirees and a post-employment benefit
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, defined benefit pension plans carry many types of financial risk. The main financial 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 insufficient assets to provide
for the benefits promised and/or requiring the Company to make additional contributions to fund the deficit;
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 benefits promised.
The total cash payments made by the Company to fund the defined benefit pension plans, the post-retirement insurance plans and the post-
employment benefit plan during 2018 were $4.8 million (2017 – $0.1 million). The total cash payments made by the Company to fund the defined
contribution pension arrangements during 2018 were $10.4 million (2017 – $9.2 million).
The Company measures the fair value of plan assets and the defined benefit obligation as at December 31 of each year. Actuarial valuations for
the Company’s registered defined benefit pension plans and the Supplementary Executive Retirement Plan (“SERP”) for Executives of Shawcor
Ltd. are generally required at least every three years. The most recent actuarial valuations of the plans were conducted as of August 1, 2018 (one
plan), December 31, 2017 (two plans), January 1, 2017 (two plans), December 31, 2016 (two plans) and August 1, 2016 (one plan).
The employee future benefit amounts recognized in the consolidated balance sheets are as follows:
(in thousands of Canadian dollars)
Accrued Employee Future Benefit Asset
Pension plans (note 24)
Accrued Employee Future Benefit Liability
Pension plans
Post-employment benefits
Post-retirement life insurance
December 31,
2018
December 31,
2017
$
$
$
$
$
$
2,798
2,798
(12,598)
(2,474)
(118)
3,827
3,827
(15,437)
(2,997)
(118)
$
(15,190)
$
(18,552)
69
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following was the composition of plan assets at the consolidated balance sheet dates, for the Canadian registered defined benefit
pension plans:
Investments Quoted in Active Markets:
Cash and cash equivalents
Equity instruments
Debt instruments
The following was the composition of invested plan assets at the consolidated balance sheet dates for the SERP:
Investments Quoted in Active Markets:
Equity instruments(a)
(a) The amounts in the above table exclude amounts held in the refundable tax account by the Canada Revenue Agency.
December 31,
2018
December 31,
2017
5%
61%
34%
100%
7%
61%
32%
100%
December 31,
2018
December 31,
2017
100%
100%
Actual Return on Plan Assets
The actual return on plan assets for the years ended December 31, 2018 and 2017 amounted to ($2.1) million and $7.7 million, respectively.
Employee Future Benefit Cost
The employee future benefit 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 benefits
Interest cost on defined benefit obligation
Interest income on plan assets
Impact of asset ceiling/minimum funding requirement
Defined benefit cost recognized
Defined contribution cost recognized
Employee Future Benefit Cost Recognized(a)
(a) The total amount is included in the consolidated statements of income in selling, general and administrative expenses.
The employee future benefit income recognized in OCI is as follows:
(in thousands of Canadian dollars)
Valuation effect
Return on plan assets (excluding amounts included in interest income)
Net actuarial (gains) losses recognized in the year
Other changes in asset ceiling/minimum funding requirement not included in net interest cost
Foreign exchange differences
Employee Future Benefit Income Recognized in OCI
Changes in the defined benefit obligation are as follows:
(in thousands of Canadian dollars)
Balance – Beginning of Year
Employer current service cost
Net interest cost
Past service costs and impact of settlements, curtailments and termination benefits
Benefit payments
Actuarial gains due to changes in demographic assumptions
Actuarial (gains) losses due to changes in economic assumptions
Experience gains
Foreign exchange differences
Balance – End of Year
70
December 31,
2018
December 31,
2017
$
$
2,692
1,128
4,206
(3,816)
4,210
56
4,266
11,064
3,204
281
4,388
(3,942)
3,931
9
3,940
9,836
$
15,330
$
13,776
December 31,
2018
December 31,
2017
$
$
447
5,902
(8,082)
(66)
37
$
(1,762)
$
51
(3,759)
1,435
1,744
(163)
(692)
December 31,
2018
December 31,
2017
$
139,334
2,692
4,206
1,128
(8,259)
(184)
(7,297)
(601)
489
$
136,561
3,204
4,388
281
(6,465)
(1,094)
5,960
(3,431)
(70)
$
131,508
$
139,334
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Changes in the fair value of the plan assets for the year ended December 31 are as follows:
(in thousands of Canadian dollars)
Balance – Beginning of Year
Valuation effect
Employer contributions
Benefit payments
Interest income on plan assets
Return on plan assets (excluding amoun ts included in interest income)
Foreign exchange differences
Balance – End of Year
The following are the principal assumptions for the actuarial valuation of the plans as at December 31:
Canada
Defined benefit obligation
Discount rate
Future salary increase
Future pension increase
Mortality
Benefit cost for the year ended December 31
Discount rate
Future salary increase
Norway
Defined benefit obligation
Discount rate
Future salary increase
Future pension increase
Mortality
Benefit cost for the year ended December 31
Discount rate
Future salary increase
United Kingdom
Defined benefit obligation
Discount rate
Future salary increase
Future pension increase
Mortality
Benefit cost for the year ended December 31
Discount rate
Future salary increase
Indonesia
Defined benefit obligation
Discount rate
Future salary increase
Future pension increase
Mortality
Benefit cost for the year ended December 31
Discount rate
Future salary increase
2018
2017
$
126,804
(447)
4,831
(8,259)
3,816
(5,902)
423
$
125,331
(51)
102
(6,465)
3,942
3,759
186
$
121,266
$
126,804
2018
2017
3.85%
3.00%
n/a
CPM 2014
Private with
scale CPM-B
3.38%
3.00%
n/a
CPM 2014
Private with
scale CPM-B
3.38%
3.00%
3.78%
3.50%
2.60%
2.75%
0.80%
K2013
2.40%
2.50%
2.40%
2.50%
0.50%
K2013
2.60%
2.50%
2.80%
n/a
2.50%
S2PA
(projected)
2.40%
n/a
2.60%
S2PA
(projected)
2.40%
n/a
2.60%
n/a
8.20%
8.1% (local),
5.5% (expat)
n/a
Indonesia’s
Table 2011
7.20%
7% (local),
4.5% (expat)
n/a
Indonesia’s
Table 2011
7.20%
7.00% (local),
4.50% (expat)
8.50%
10.00% (local),
6.00% (expat)
71
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Sensitivity Analysis
A quantitative sensitivity analysis for significant assumptions as at December 31, 2018 is as shown below:
Significant Assumptions
(in thousands of Canadian dollars)
Discount rate
Decrease of 50 basis points
Increase of 50 basis points
Future salary increase
Decrease of 50 basis points
Increase of 50 basis points
Mortality Assumption – Impact of Life Expectancy being one year longer
Impact of Sensitivity Analysis
on Defined Benefit Obligation
Change
% Change
8,918
(8,038)
(1,779)
1,880
3,737
6.8%
(6.1%)
(1.4%)
1.4%
2.8%
The sensitivity analysis noted above has been determined based on a method that extrapolates the impact on the defined benefit obligation as a
result of reasonable changes in key assumptions occurring during the year ended December 31, 2018.
Other Information
The Company expects to contribute $3.3 million to its defined benefit plans for the year ending December 31, 2019.
The average duration of the defined benefit plans as at December 31, 2018 is 14 years.
NOTE 16. 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
NOTE 17. LOANS RECEIVABLE
The following table sets forth the Company’s loans receivable as at:
(in thousands of Canadian dollars)
Current
Notes receivable
Non-current
Notes receivable(a)
Total
December 31,
2018
December 31,
2017
$
169,704
47,560
$
247,136
41,929
$
217,264
$
289,065
December 31,
2018
December 31,
2017
$
$
$
2,492
545
3,037
$
$
$
2,448
2,283
4,731
(a) Non-current notes receivable relate to a portion of an amount advanced by the Company to an external party to support the construction of port facilities at a Bredero Shaw
plant location in Kabil, Indonesia. Interest is payable semi-annually at US prime plus 0.25%, with principal repayments to be made in four semi-annual installments beginning on
March 31, 2018, as set out in the loan agreement terms. A portion of this amount has been classified as current as semi-annual installments are due during 2019. As at
December 31, 2018, the total amount of the notes receivable was US$2,200 million (December 31, 2017 – US$3,726 million).
72
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. ACCOUNTS RECEIVABLE
The following table sets forth the Company’s trade and other receivables as at:
(in thousands of Canadian dollars)
Trade accounts receivable
Allowance for doubtful accounts (note 7)
Other receivables
December 31,
2018
December 31,
2017(a)
$
214,780
$
181,914
(4,771)
31,488
(2,809)
15,334
$
241,497
$
194,439
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
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 19. INVENTORY
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,
2018
December 31,
2017
$
124,661
57,614
15,187
4,008
13,310
214,780
(4,771)
$
111,613
48,754
9,070
4,422
8,055
181,914
(2,809)
$
210,009
$
179,105
December 31,
2018
December 31,
2017(a)
$
87,987
10,039
61,312
(22,341)
$
79,495
8,281
49,278
(22,036)
$
136,997
$
115,018
(a) Restated due to the adoption of IFRS 15 that became effective as at January 1, 2018, but was implemented retrospectively to January 1, 2017. See Note 4 for further details.
During 2018, the Company recorded an increase of $0.3 million (2017 – decrease of $3.9 million) in the provision for inventory obsolescence, due
to an increase of overall inventory level.
73
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. PROPERTY, PLANT AND EQUIPMENT
The following table sets forth the Company’s property, plant and equipment as at the periods indicated:
(in thousands of Canadian dollars)
Cost
Balance – December 31, 2016
Exchange differences
Additions (transfers)
Disposals
Balance – December 31, 2017
Exchange differences
Additions
Disposals
Argentina hyperinflation adjustment(a)
Balance – December 31, 2018
(in thousands of Canadian dollars)
Accumulated Amortization
Balance – December 31, 2016
Exchange differences
Amortization
Disposals
Balance – December 31, 2017
Exchange differences
Amortization
Disposals
Argentina hyperinflation adjustment(a)
Balance – December 31, 2018
(in thousands of Canadian dollars)
Accumulated Impairment
Balance – December 31, 2016
Exchange differences
Impairment (note 25)
Eliminated on disposal
Balance – December 31, 2017
Exchange differences
Balance – December 31, 2018
Net book value
As at December 31, 2017
As at December 31, 2018
Land
and Land
Improvements
Machinery
and
Equipment
Capital
Projects-in
progress
Buildings
Total
$
83,097
$
211,442
$
821,928
$
69,534
$ 1,186,001
(23)
967
(769)
(584)
25,492
(731)
(23,514)
58,617
(30,214)
83,272
235,619
826,817
2,264
473
(2,259)
22
3,571
1,686
(30,480)
2,794
35,233
53,281
(30,696)
7,056
(764)
(42,782)
(1,225)
24,763
1,969
21,932
(71)
–
(24,885)
42,294
(32,939)
1,170,471
43,037
77,372
(63,506)
9,872
$
83,772
$
213,190
$
891,691
$
48,593
$ 1,237,246
Land
and Land
Improvements
Machinery
and
Equipment
Capital
Projects-in
progress
Buildings
$
(22,104)
$
(98,208)
$
(524,734)
$
643
(1,469)
632
1,851
(22,216)
967
17,040
(53,582)
26,117
(22,298)
(117,606)
(535,159)
(722)
(2,193)
2,259
(2)
(474)
(13,253)
30,019
(966)
(27,825)
(49,343)
23,855
(1,421)
$
(22,956)
$
(102,280)
$
(589,893)
$
–
–
–
–
–
–
–
–
–
–
Land
and Land
Improvements
Machinery
and
Equipment
Capital
Projects-in
progress
Buildings
$
(2,495)
$
(19,959)
$
(47,033)
$
20
(309)
–
(804)
(2,967)
–
(483)
(4,797)
1,200
(2,784)
(23,730)
(51,113)
$
21
(570)
(1,000)
$
(2,763)
$
(24,300)
$
(52,113)
$
–
–
–
–
–
–
–
Total
$
(645,046)
19,534
(77,267)
27,716
(675,063)
(29,021)
(64,789)
56,133
(2,389)
$
(715,129)
Total
$
(69,487)
(1,267)
(8,073)
1,200
(77,627)
(1,549)
$
(79,176)
$
$
58,190
58,053
$
$
94,283
86,610
$
$
240,545
249,685
$
$
24,763
48,593
$
$
417,781
442,941
(a) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Note 5 for further details.
74
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. 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, 2016
Exchange differences
Additions
Balance – December 31, 2017
Exchange differences
Argentina hyperinflation adjustment(d)
Balance – December 31, 2018
Accumulated Amortization
Balance – December 31, 2016
Exchange differences
Amortization
Balance – December 31, 2017
Exchange differences
Amortization
Argentina hyperinflation adjustment(d)
Balance – December 31, 2018
Accumulated Impairment
Balance – December 31, 2016
Exchange differences
Balance – December 31, 2017
Exchange differences
Balance – December 31, 2018
Net book value
As at December 31, 2017
As at December 31, 2018
Intellectual
Property, with
Limited Life(a)
Intangible
Assets, with
Limited Life(b)
Intangible
Assets, with
Indefinite Life(c)
Total
$
85,808
$
283,450
$
2,275
$
371,533
(1,561)
71
84,318
(6,763)
5,939
(15,143)
–
268,307
11,852
2,668
–
–
(16,704)
71
2,275
354,900
–
–
5,089
8,607
$
83,494
$
282,827
$
2,275
$
368,596
$
(39,949)
$
(60,780)
$
421
(4,994)
(44,522)
2,765
(5,058)
(2,703)
2,185
(14,176)
(72,771)
(394)
(13,376)
(641)
$
(49,518)
$
(87,182)
$
–
–
–
–
–
–
–
–
$
(100,729)
2,606
(19,170)
(117,293)
2,371
(18,434)
(3,344)
$
(136,700)
$
(11,321)
$
(65,901)
$
(675)
$
(77,897)
801
(10,520)
38
4,361
(61,540)
(3,745)
–
(675)
–
5,162
(72,735)
(3,707)
$
(10,482)
$
(65,285)
$
(675)
$
(76,442)
$
$
29,276
23,494
$
$
133,996
130,360
$
$
1,600
1,600
$
$
164,872
155,454
(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, which ranges from 10 years to 15 years.
(b) Intangible assets, with limited life, represent customer relationships, trademarks and non-compete agreements acquired directly or in conjunction with past business
combinations. The Company amortizes the cost of intangible assets with limited life over their estimated useful lives, which ranges from 2 to 5 years for trademarks and
non-compete agreements, and 10 years to 15 years for customer relationships. This estimate is based on expected customer attrition rates and considers the cyclicality of the
global energy market (or the oil & gas market). The net book value of customer relationships as at December 31, 2018 is $128.8 million (2017 – $131.7 million), and is included
in intangible assets, with limited life, in the table above.
(c) Intangible assets, with indefinite life, represent the value of brands obtained in previous acquisitions. As the Company has the exclusive right to use and benefit from the brands
of the acquired companies for an undefined period, certain acquired brands have been classified as intangible assets with indefinite life. As the cost of intangible assets, with
indefinite life, is not amortized, the Company assesses these intangible assets for impairment on an annual basis or when there is an indicator of impairment (please refer to
Note 25).
(d) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as of January 1, 2018. See Note 5 for further details.
75
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22. 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
Foreign exchange
Argentina hyperinflation adjustment(a)
Net Balance – End of Year
The following table summarizes the significant carrying amounts of goodwill by CGU:
(in thousands of Canadian dollars)
Bredero Shaw
Shawcor Inspection Services
Flexpipe Systems
Socotherm Americas (Argentina)
Pipeline and Pipe Services Products
DSG-Canusa GmbH
Lake Superior
December 31,
2018
December 31,
2017
$
483,548
(154,157)
329,391
17,241
3,770
$
515,872
(165,054)
350,818
(21,427)
–
$
350,402
$
329,391
December 31,
2018
December 31,
2017
$
203,981
50,943
49,730
4,522
8,566
18,435
14,225
$
188,209
46,846
49,730
5,495
8,258
17,772
13,081
$
350,402
$
329,391
(a) Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina effective as of January 1, 2018. See Note 5 for further details.
Impairment Testing for Each Cash-generating Unit Containing Goodwill
The Company performs a goodwill impairment test for each specified group of CGUs (“GCGU”) that contains goodwill at the Company’s annual
goodwill impairment testing date of October 31 (“Annual Goodwill Valuation Date”), or when indicators of impairment exist at its GCGUs. At the
Annual Goodwill Valuation Date of October 31, 2018, the Company concluded there was no impairment of goodwill in any of its GCGUs, as the
recoverable amount for these GCGUs was higher than their respective carrying amounts.
Recoverable Amount
The Company determines the recoverable amount for its GCGUs as the higher of Value in Use and the Fair Value Less Cost to Dispose (“FVLCD”).
In respect of the goodwill impairment tests in 2018, the FVLCD of each of the GCGUs was higher than the respective carrying amount and as
such no goodwill impairments have been recorded in 2018. The FVLCD measurement was categorized as a Level 3 fair value based on the inputs
in the valuation method used.
FVLCD calculations use post-tax cash flow projections based on three-year financial Business Plans approved by the Board, which are then
projected out for a further period of two years based on management’s best estimates. Cash flows beyond the five-year period are extrapolated
using estimated growth rates as applicable. The FVLCD is calculated net of selling costs that are estimated at 2%.
The FVLCD is determined by discounting the future free cash flows generated from the Company’s continuing use of the respective GCGUs. The
discount rates used are post-tax and reflect specific risks relating to the GCGUs. The discounted cash flow model employed by the Company
reflects the specific risks of each GCGU and their business environment. The model calculates the FVLCD as the present value of the projected
free cash flows and the Terminal Value of each GCGU.
The calculation of FVLCD for each GCGU is most sensitive to the following key assumptions:
•
•
•
•
Projected Cash Flows
Market Assumptions
Discount Rate
Terminal Value Growth Rate
76
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Projected Cash Flows
The Projected Cash Flows for each GCGU are derived from the most recently completed three-year Business Plan, which is projected out for a
further 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 property, plant and equipment. Estimating future income requires judgement, 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 or sales orders. A
change in the number of estimated projects or sales orders to be secured by a GCGU can have a material impact on the projected future cash
flows for that particular GCGU. The gross margin for each GCGU in the Business Plan is also dependent on assumptions made about the price of
raw materials in the future; a change in the assumptions of these key inputs can have a material impact on the projected future cash flows for a
particular GCGU.
Discount Rate
The discount rate represents the current market assessment of the risks specific to each GCGU, regarding the time value of money and the
individual risks of the underlying assets, which have not been incorporated in the cash flow estimates. The discount rate calculation is based on
the specific circumstances of the Company and its GCGUs and is derived from the weighted average cost of capital (“WACC”) for the consolidated
Company. The WACC takes into account both debt and equity. The cost of equity is derived from the expected return on investment by the
Company’s investors. The cost of debt is based on the interest bearing borrowings the Company is obliged to service. The GCGU specific risk is
incorporated by applying individual specific risk factors; these specific risk factors are evaluated annually.
The following are the discount rates used in the calculation of the valuations of the GCGUs:
(in thousands of Canadian dollars)
Bredero Shaw
Shawcor Inspection Services
Flexpipe Systems
Socotherm Americas (Argentina)
DSG-Canusa GmbH
Pipeline and Pipe Services Products
Lake Superior
October 31,
2018
October 31,
2017
11%
12%
12%
18%
12%
14%
12%
11%
12%
12%
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. A Terminal
Value Growth Rate of 2%–3% was used (for all goodwill impairment tests) reflecting terminal growth rate expectation of long-term growth in
energy infrastructure investment; this figure also reflects the Company’s best estimate of the economic conditions that are expected to exist
over the forecast period.
Sensitivity to Changes in Assumptions
With regard to the assessment of FVLCD of all of the Company’s GCGUs, management believes that no reasonably possible change in any
of the above key assumptions would cause the carrying value of each CGU to materially exceed its recoverable amount, as estimated by the
GCGU’s FVLCD.
77
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23. 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 field monitoring and related
data management solutions for the optimization of oil and gas well production. Shawcor’s equity investment in Zedi consists of an approximately
47% common share interest as at December 31, 2018 (2017– 38%), which is being accounted for using equity accounting. On March 26, 2018,
the Company exercised its right to convert the preferred shares held in Zedi Inc. to 11.2 million common shares with a fair value of $10 million,
which are also being accounted for using equity accounting.
On August 29, 2014, the Company completed an equity investment in Power Feed-Thru Systems and Connectors, LLC (“PFT”), a Houston, Texas,
US-based company engaged in designing and assembling of electric feed-thru connector systems specifically for artificial 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. Shawcor’s equity investment in PFT consists of an approximate 30% common share interest, which is being accounted for
using equity accounting.
NOTE 24. OTHER ASSETS
The following table sets forth the Company’s other assets as at:
(in thousands of Canadian dollars)
Long-term prepaid expenses
Convertible preferred shares (note 23)
Accrued employee future benefit asset (note 15)
December 31,
2018
December 31,
2017
$
$
6,082
–
2,798
6,779
10,000
3,827
$
8,880
$
20,606
NOTE 25. IMPAIRMENT
2018
The Company did not record any impairment charges for the year ended December 31, 2018.
2017
Impairment Testing for Bredero Shaw Regina Plants
The Company recorded a $8.1 million impairment charge on building, machinery and equipment at the Regina plant for the year ended
December 31, 2017. The Company performed an asset impairment test for its Regina plant as at December 31, 2017. This impairment test
was determined to be necessary as a result of two factors: i) uncertainties in securing future pipe coating project work to sustain operations at
current levels as a result of delays in projects being sanctioned and awarded in Western Canada; ii) the competition from additional pipe coaters
in the region. The Company adjusted its forecast to reflect these uncertainties, thereby impacting the estimate of future cash flows for the plant.
Due to the value-in-use (“VIU”) being lower than the carrying amount of the Regina plant, management assessed the method of allocating the
impairment charge to the individual assets. Individual assets were analyzed to ensure that the allocation of the impairment charge to each asset
did not reduce its carrying value below the greater of its FVLCD and VIU. The property, plant and equipment assets impaired were written down to
their FVLCD. The FVLCD of the building, machinery and equipment was based on management’s internal specialist assessments of the secondary
market. The fair value measurements are categorized as Level 3 fair value based on the inputs in the valuation method used.
NOTE 26. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table sets forth the Company’s accounts payable and accrued liabilities as at:
(in thousands of Canadian dollars)
Accounts payable
Accrued liabilities
December 31,
2018
December 31,
2017
$
95,794
111,066
$
72,466
128,551
$
206,860
$
201,017
78
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 27. PROVISIONS
The following table sets forth the Company’s provisions as at the periods indicated:
(in thousands of Canadian dollars)
Balance – December 31, 2016
Provision adjustments
Settlement of liabilities
Accretion expense
Foreign exchange differences
Loss on settlement
Balance – December 31, 2017
Provision adjustments
Settlement of liabilities
Accretion expense
Foreign exchange differences
Balance – December 31, 2018
December 31, 2017
Current
Non-current
December 31, 2018
Current
Non-current
Decommissioning
Liabilities
Warranties
Other
Provisions
$
29,706
$
6,768
$
19,934
$
104
(765)
465
(517)
193
29,186
867
(435)
538
587
(521)
(175)
–
(98)
–
5,974
3,217
(1,851)
–
53
12,903
(3,616)
263
(728)
–
28,756
416
(8,627)
–
222
Total
56,408
12,486
(4,556)
728
(1,343)
193
63,916
4,500
(10,913)
538
862
$
30,743
$
7,393
$
20,767
$
58,903
$
$
$
$
5,302
$
5,974
$
16,085
$
23,884
–
12,671
27,361
36,555
29,186
$
5,974
$
28,756
$
63,916
6,189
$
7,393
$
10,342
$
24,554
–
10,425
23,924
34,979
30,743
$
7,393
$
20,767
$
58,903
Decommissioning Liabilities
The total undiscounted cash flows estimated to settle all decommissioning liabilities is $40 million as at December 31, 2018. The current pre-tax
risk-free rates at which the estimated cash flows have been discounted range between 0% and 20%. Settlement for all decommissioning liabilities
is expected to be funded by future cash flows from the Company’s operations.
The Company expects the following cash outflows over the next five years and thereafter for remediating its decommissioning liability obligations.
(in thousands of Canadian dollars)
2019
2020
2021
2022
2023
Thereafter
$
6,202
7,224
4,605
518
1,381
20,526
$
40,456
Warranties
Project specific warranties are provided by various divisions in the normal course of business that are usually valid for a term of less than one year.
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.
79
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 28. 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, 2016
Adjustments
Settlement of liabilities
Foreign exchange differences
Balance – December 31, 2017
Adjustments
Settlement of liabilities
Foreign exchange differences
Balance – December 31, 2018
December 31, 2017
Current
Non-current
December 31, 2018
Current
Non-current
NOTE 29. CREDIT FACILITIES
The following table sets forth the Company’s total credit facilities as at:
(in thousands of Canadian dollars)
Standard letters of credit for performance, bid and surety bonds (note 31)
Total utilized credit facilities
Total available credit facilities(a)
Unutilized Credit Facilities
(a) The Company guarantees the bank credit facilities of its subsidiaries.
Incentive-based
Compensation
(note 14)
$
9,006
2,979
(808)
(19)
11,158
4,517
(1,309)
205
Other
Liabilities
Total
$
4,273
$
13,279
(62)
(27)
171
4,355
(1,584)
–
256
2,917
(835)
152
15,513
2,933
(1,309)
461
$
14,571
$
3,027
$
17,598
$
$
$
$
7,934
3,224
$
3,914
$
441
11,848
3,665
11,158
$
4,355
$
15,513
5,128
9,443
$
2,211
$
816
7,339
10,259
14,571
$
3,027
$
17,598
December 31,
2018
December 31,
2017
$
43,879
$
43,879
500,498
71,175
71,175
460,251
$
456,619
$
389,076
On March 20, 2013, the Company renewed its Unsecured Committed Bank Credit Facility (“Credit Facility”) for a period of five 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 the 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 floating 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. On December 6, 2016, the Company
entered into amending agreements with the holders of its Senior Notes and the syndicate of lenders under the Credit Facility, the results of
which amendments included an extension of the term of the Credit Facility from March 20, 2018 to December 6, 2019 and a reduction in the
size of the Credit Facility from US$325 million to US$317 million.
The Company is required to maintain an Interest Coverage Ratio of more than 2.50 to 1.00 and a Leverage Ratio of less than 3.00 to 1.00.
The Company was in compliance with the covenants as at December 31, 2018 and December 31, 2017.
80
SHAWCOR LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 30. LONG-TERM DEBT
On March 20, 2013, the Company issued Senior Notes for total gross proceeds of US$350 million (CAD$358.3 million at the March 20, 2013
foreign exchange rate) to institutional investors. The principal balances outstanding at December 31, 2018 and 2017 are as follows:
(in millions of Canadian dollars)
Senior Notes, Series A
Senior Notes, Series B
Senior Notes, Series C
Senior Notes, Series D
Due Date
March 31, 2020
March 31, 2023
March 31, 2025
March 31, 2028
Interest
Rate
2.98%
3.67%
3.82%
4.07%
December 31,
2018
(US$)
December 31,
2017
(US$)
December 31,
2018
(CAD$)
December 31,
2017
(CAD$)
62
57
52
26
197
62
57
52
26
197
84
78
71
36
269
77
71
66
33
247
The total long-term debt balance as at December 31, 2018 is $267.8 million (US$196.8 million) (2017 – $246.2 million (US$196.8 million)). The
long-term debt has been designated as a hedge of the Company’s net investment in its US dollar functional currency subsidiary as described in
note 7.
In respect of the long-term debt, the Company is required to maintain certain covenants that are consistent with the debt covenants described in
note 29 for the Credit Facility. The Company was in compliance with these covenants as at December 31, 2018 and December 31, 2017.
NOTE 31. 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.
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 five years
More than five years
December 31,
2018
$
21,953
40,539
11,957
$
74,449
The lease expenditure charged to the consolidated statements of income during the year was $37.9 million (2017 – $34.1 million).
b) Finance Leases
The Company has finance leases and purchase commitments in place for various items of property, plant and machinery. These leases have
renewal options but no purchase options. Renewals are at the option of the specific entity that holds the lease.
The following table presents the future minimum lease payments under finance leases with the present value of the minimum lease payments:
(in thousands of Canadian dollars)
Within one year
After one year but not more than five years
After more than five years
Total minimum lease payments
Less: Amounts representing interest charges
Present Value of Minimum Lease Payments
December 31, 2018
Minimum
Payments
$
$
$
1,696
5,784
7,271
14,751
(3,208)
11,543
$
$
$
Present
Value of
Payments
1,155
4,074
6,314
11,543
–
11,543
c) Legal Claims
In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with customers, suppliers and other
third parties. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not possible to
estimate the extent of potential costs and losses, if any, management believes, but can provide no assurance, that the ultimate resolution of such
contingencies would not have a material adverse effect on the consolidated financial position of the Company.
81
ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
d) Performance, Bid and Surety Bonds
The Company provides standby letters of credit for performance, bid and surety bonds through financial intermediaries to various customers in
support of project contracts for the successful execution of these contracts. If the Company fails to perform under the terms of the contract,
the customer has the ability to draw upon all or a portion of the bond as compensation for the Company’s failure to perform. The contracts 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 utilizes the Credit Facility to support its bonds. The Company has utilized total credit facilities of $43.9 million as at December 31,
2018 (2017 – $71.2 million for support of its bonds). In addition, as at December 31, 2018, the Company had $66.3 million of outstanding surety
bonds through insurance companies (2017 – $48.4 million).
NOTE 32. SHARE CAPITAL
There are an unlimited number of common shares authorized. Holders of common shares are entitled to one vote per share. All shares have been
issued and fully paid and have no par value.
The following table sets forth the changes in the Company’s shares for the years ended December 31:
2018
69,940,590
122,280
38,419
70,101,289
$
704,956
1,897
735
1,245
$
708,833
2017
69,892,544
28,095
19,951
69,940,590
$
703,316
761
278
601
$
704,956
2018
42,029
0.600
$
$
2017
41,946
0.600
$
$
(all dollar amounts in thousands of Canadian dollars)
Number of shares
Balance – December 31, 2017
Issued on exercise of stock options
Issued on exercise of RSUs
Balance – December 31, 2018
Stated value
Balance – December 31, 2017
Issued on exercise of stock options
Compensation cost on exercised options
Compensation cost on exercised RSUs
Balance – December 31, 2018
(all dollar amounts in thousands of Canadian dollars)
Number of shares
Balance – December 31, 2016
Issued on exercise of stock options
Issued on exercise of RSUs
Balance – December 31, 2017
Stated value
Balance – December 31, 2016
Issued on exercise of stock options
Compensation cost on exercised options
Compensation cost on exercised RSUs
Balance – December 31, 2017
Dividends declared and paid were as follows:
(in thousands of Canadian dollars, except per share amounts)
Dividends declared and paid to shareholders
Dividends declared and paid per share
82
SHAWCOR LTD.
NOTE 33. CONSOLIDATED FINANCIAL STATEMENTS
The comparative consolidated financial statements have been reclassified from consolidated financial statements previously presented to
conform to the presentation of the 2018 consolidated financial statements in accordance with IFRS.
NOTE 34. SUBSEQUENT EVENT
On January 20, 2019, the Company announced that it had entered into an arrangement agreement to acquire all of the shares of ZCL Composites
Inc. (“ZCL”) for $10.00 per share in cash and by way of a statutory plan of arrangement. The price per share implies an aggregate fully diluted
equity value for ZCL of approximately $308 million. ZCL is North America’s largest manufacturer and supplier of environmentally friendly
fiberglass reinforced plastic underground storage tanks. ZCL has two plants in Canada, four in the US and one in The Netherlands serving the
Fuel, Water & Wastewater and Oil & Gas markets. The arrangement will be considered by ZCL shareholders on March 26, 2019 and requires
the approval of 66 2/3rd % of the votes cast at the meeting. Subject to receipt of shareholder and court approval, closing of the transaction is
expected in early April 2019.
Shawcor has entered into a commitment letter with the Toronto-Dominion Bank and National Bank of Canada as co-lead arrangers providing a
US$500 million, four-year senior unsecured revolving credit facility (the “Credit Facility”). The Credit Facility will be used to fund the Arrangement
and replace Shawcor’s existing senior credit facility. Shawcor anticipates that a portion of the Credit Facility will be syndicated to other banks or
financial institutions. It is anticipated that the Credit Facility will be entered into prior to the end of the first quarter of 2019.
On January 30, 2019, the Company gave notice to the Senior Note holders that it will repay on March 7, 2019 the entire principal amount
outstanding with accrued interest, approximately US$199.8 million, and a make whole amount estimated at approximately US$5.2 million.
83
ANNUAL REPORT 2018 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 (NOTE 1)
Net Income (Loss) (NOTE 2)
CASH FLOW
Cash from operating activities
Purchase of property, plant, and equipment
FINANCIAL POSITION
Working capital (NOTE 3)
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 (NOTE 4)
2018
2017
2016
2015
2014
2013
(NOTE 6)
(NOTE 5)
1,408,872
1,565,499
1,209,259
1,810,648
1,890,029
1,847,549
134,870
25,876
225,929
71,155
56,452
(180,960)
228,478
98,244
336,701
94,861
391,223
219,862
30,545
76,201
178,446
41,068
131,893
89,252
281,041
61,153
187,985
77,645
32,264
76,729
393,148
267,781
377,919
246,175
279,986
263,528
1,069,650
1,044,784
1,043,040
1,702,125
1,698,001
1,777,791
446,405
485,147
1,125,201
2,145,705
378,733
406,926
980,613
267,489
374,381
658,581
1,939,970
1,651,928
0.37
0.37
0.600
–
–
15.26
1.02
1.02
0.600
–
–
14.94
(2.80)
(2.80)
0.600
–
–
14.92
1.52
1.52
0.600
–
–
17.44
1.55
1.53
0.575
–
–
15.20
3.55
3.51
1.375
0.100
0.091
10.98
QUARTERLY INFORMATION (UNAUDITED)
(in thousands of Canadian dollars except per share information)
First
Second
Third
Fourth
Total
Revenue
Net Income
Earnings per share (Diluted)
(NOTE 6)
(NOTE 5)
(NOTE 2) (NOTE 6)
(NOTE 5)
(NOTE 6)
(NOTE 5)
2018
2017
2018
2017
2018
2017
350,767
360,060
3,829
15,393
0.05
0.22
353,368
383,571
7,308
15,877
0.10
0.23
350,589
395,052
10,373
19,540
0.15
0.28
354,148
426,816
1,408,872
1,565,499
4,366
20,345
0.06
0.29
25,876
71,155
0.37
1.02
NOTE 1: Adjusted EBITDA is a non-GAAP measure defined as EBITDA adjusted for non-operational items or items which do not impact day to day operations. 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 financed or the tax impacts in various jurisdictions and for comparing its operating performance with the
performance of other companies that have different financing, capital or tax structures. 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 or day to day operations. Adjusted EBITDA is used by many analysts in the oil
and gas industry as one of several important analytical tools to evaluate financial performance and is a key metric in business valuations. It is also considered important
by lenders to the Company and is included in the financial covenants of the Company’s debt agreements.
NOTE 2: Attributable to shareholders of the Company, excluding non-controlling interests.
NOTE 3: Working capital has been calculated as current assets minus current liabilities.
NOTE 4: Equity per share is Non-GAAP measure calculated by dividing equity by the number of Common shares outstanding at the date of the balance sheet.
NOTE 5: Restated due to the adoption of IFRS 15, Revenue from Contracts with Customers that became effective as at January 1, 2018, but was implemented retrospectively
to January 1, 2017.
NOTE 6: Includes the impact of the adoption of IAS 29, Financial Reporting in Hyperinflationary Economies for Argentina as at January 1, 2018.
84
SHAWCOR LTD.
SHAWCOR
DIRECTORS
J.T. Baldwin
London, England
Mr. Baldwin retired in July
2014 as the Vice President
Communications & External
Affairs for the Southern Corridor
for BP, a position he held since
July 2012, and has been a
Director of Shawcor since
March 2010.
D.S. Blackwood
Houston, Texas
Mr. Blackwood retired in
June 2018 as Chief Executive
Officer of Vepica Group,
and has been a Director of
Shawcor since May 2011.
J.W. Derrick
Buffalo, New York
Mr. Derrick is the Executive
Chair and former Chief
Executive Officer of Derrick
Corporation, a position he
held since 1992, and has
been a Director of Shawcor
since August 2007.
K.J. Forbes
West Sussex, England
Mr. Forbes was a partner
at Epi-V LLP from 2009 to
2017, and has been a Director
of Shawcor since May 2014.
M.S. Hanley
Mount-Royal, Quebec
Mr. Hanley is a Chartered
Professional Accountant and
from 2009 to 2011, he was
the Senior Vice President
Operations and Strategy for
National Bank of Canada.
He has been a Director of
Shawcor since May 2015.
R. Mionis
Scottsdale, Arizona
Mr. Mionis is the Chief
Executive Officer of
Celestica Inc., a position
he has held since 2015,
and has been a Director
of Shawcor since
December 2018.
S.M. Orr
Toronto, Ontario
P.S. Pierce
Houston, Texas
Mr. Orr is the Chief Executive
Officer of Shawcor Ltd., a
position he has held since
May 2014, and has been a
Director of Shawcor since
May 2014.
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 since June 2014.
E.C. Valiquette
Pembroke, Ontario
Ms. Valiquette is a Chartered
Professional Accountant
and a former Senior Vice
President and Chief Financial
Officer of ING Canada Inc.
and has been a Director of
Shawcor since March 2005.
D.M. Wishart
Calgary, Alberta
Mr. Wishart is Chairman
of Shawcor and of Bruce
Power Inc. He retired as the
Executive Vice President
of Operations and Major
Projects for TransCanada
Corporation, a position he
held since 2005, and has
been a Director of Shawcor
since May 2015.
85
ANNUAL REPORT 2018 SUPPLEMENTARY INFORMATION
PRIMARY OPERATING
LOCATIONS
PIPELINE AND PIPE SERVICES
Bredero Shaw
5875 N. Sam Houston Pkwy.
W.Suite 200
Houston, Texas 77086
T: 281 886 2350
F: 281 886 2351
Dellaertweg 9-E, Gebouw
“Le Carrefour”
2316 WZ Leiden
The Netherlands
T: +31 71 80 802 70
F: +31 71 80 802 71
#17-01 United Square
101 Thomson Road
Singapore 307591
T: 65 6477 5300
F: 65 6732 9073
62 Viale Risorgimento
45011 Adria, Veneta
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
333 – 7 Avenue S.W.
Suite 2200
Calgary, Alberta T2P 2Z1
T: 403 503 0548
F: 403 503 0547
Shaw Pipeline Services
5875 N. Sam Houston Pkwy. W.
Suite 200
Houston, Texas 77086
T: 281 886 2350
F: 281 886 2351
Guardian
950 – 30th Avenue
Nisku, Alberta T9E 0S2
T: 780 955 3380
F: 780 955 2822
Shawcor Inspection Services
5875 N. Sam Houston Pkwy. W.
Suite 200
Houston, Texas 77086
T: 281 886 2350
F: 281 886 2351
Dhatec
Elskensakker 8
5571 SK Bergeijk
The Netherlands (NL)
T: +31 497 542 527l
Lake Superior Consulting, LLC
130 West Superior Street,
Suite 500
Duluth, Minnesota 55802
T: 218 727 3141
PETROCHEMICAL AND INDUSTRIAL
DSG-Canusa
25 Bethridge RoadToronto,
Ontario M9W 1M7
ShawFlex
25 Bethridge Road
Toronto, Ontario M9W 1M7
T: 416 743 7111
F: 416 743 7752
T: 416 743 7111
F: 416 743 2565
86
SHAWCOR LTD. CORPORATE
INFORMATION
CORPORATE OFFICERS
OPERATIONS MANAGEMENT
D.M. Wishart
Chair of the Board
S.M. Orr
President and
Chief Executive Officer
G.A. Tano
Senior Vice President, Finance
and Chief Financial Officer
D.R. Ewert
Corporate Secretary
C.V. Havern
Group President,
Integrity Management
J.A. Tabak
Group President, Composite
Production Systems
K.D. Reizer
Group President,
Pipeline Performance
H.A.A.M. Tausch
Senior Vice President,
Corporate Development
and Solutions
F. Cistrone
Group President,
Connection Systems
R.J. Dunn
Senior Vice President,
Research and Development
(R&D) and Operations
Shawcor
P.A. Pierroz
Senior Vice President,
Business Services and
Human Resources
Shawcor
T. Anderson
Senior Vice President,
Western Hemisphere
Pipeline Performance
S. Dewey
Senior Vice President,
Eastern Hemisphere
Pipeline Performance
C. Oudinot
Vice President,
Pipeline Performance Products
B. McDonald
Vice President and
General Manager
Shaw Pipeline Services
J.W. Johnson
Vice President and
General Manager
Shawcor Inspection Services
CORPORATE ADDRESS, STOCK INFORMATION AND ANNUAL MEETING
Head Office
25 Bethridge Road
Toronto, Ontario
Canada M9W 1M7
T: 416 743 7111
F: 416 743 7199
Transfer Agent
and Registrar
AST Trust Company (Canada)
P.O. Box 700, Station B
Montreal, Quebec
Canada H3B 3K3
T: 800 387 0825
416 682 3860
F: 888 249 6189
E: inquiries@astfinancial.com
Auditors
Ernst & Young LLP
Stock Listing
The Toronto Stock Exchange
Common Shares
Trading Symbol: SCL
Annual Meeting
Tuesday, May 14, 2019
4:00 p.m.
Intercontinental Toronto
Centre West
225 Front Street West
Toronto, Ontario M5V 2X3
www.shawcor.com
SHAWCOR.COM
25 Bethridge Road
Toronto, Ontario
M9W 1M7 Canada
+ 1 416 743 7111