CONTENTS
______________________________________________
Message to Shareholders
Management’s Discussion and Analysis
Consolidated Financial Statements
Corporate Information
2
3
25
58
Message to Shareholders
As we bring 2012 to a close, a year in which ZCL celebrated its 25th Anniversary, we are pleased
to report that ZCL achieved annual records for both revenues ($170.4 million) and earnings (net
income of $13.5 million or EPS of $0.47 per share). These numbers are a visible demonstration
of the successful execution on our “simplify to grow” strategy and all of us at ZCL are proud to
deliver these results for our shareholders.
All of our product groups – Petroleum, Water, and Corrosion – and all of the ZCL brands – ZCL,
Xerxes, Parabeam, ZCL Troy, and ZCL Dualam – contributed to our strong 2012 results. Specific
areas of achievement in 2012 were noted in a doubling of our Corrosion Products group’s sales
into the Oil Sands market, 130% growth of our Corrosion Products group’s sales into the
chemical processing and power generation markets, 27% growth in our Petroleum Products
group’s sales into the US downstream market, and 24% growth in our Water Products group’s
sales in Canada.
The ZCL Board of Directors continues to review ZCL’s dividend policy, with a steadfast
philosophy of maintaining a balance between fiscal prudence and the sharing of improved
results. I am pleased to report that the Board has elected to increase the quarterly dividend
payment by 25% to $0.025 per share, up from $0.02 per share in the previous quarter.
I would like to take this opportunity to extend my personal thanks to Rod Graham, ZCL’s
President and CEO through August 8th of this year, for being the agent for change that ZCL
needed at a time when we were struggling. His clear message of the need to deliver increased
profitability, and the strong leadership he exhibited during his tenure as President and CEO,
contributed greatly to the record results ZCL achieved in 2012.
As we look forward to 2013, our focus will be on continued profitable growth through our
“simplify to grow” strategy. We continue to have a special focus on reducing our
manufacturing costs in the areas of indirect labor, indirect materials, and overtime. We met
our 2012 goal of increasing gross margins by a minimum of two percent, and we have set a
similar goal for gross margin improvement in 2013. Although we remain committed to our core
product groups and our core markets, we also continue to search out new challenges and
opportunities for innovation. Our success over the past two years with Diesel Exhaust Fluid
(DEF) bulk underground storage tanks is a prime example of how ZCL has innovated to bring
new product solutions to our customers.
The coming year will not be without challenge as certain of our markets have some uncertainty
facing them, particularly in the Oil Sands. However, all of us at ZCL embrace the challenges
ahead and we are confident that we will stay on course in 2013.
Ron Bachmeier
2 Management’s Discussion and Analysis
Management’s Discussion and Analysis
INTRODUCTION
Inc.’s
(“ZCL” or
ZCL Composites
the "Company")
Management's Discussion and Analysis ("MD&A") of the
results of operations, cash flows and financial position as
at December 31, 2012, should be read in conjunction with
the Company’s audited consolidated financial statements
and related notes for the year ended December 31, 2012.
The
SEDAR
are
statements
the Company’s website
at www.sedar.com or
at www.zcl.com.
available
on
The Company’s audited consolidated financial statements
are prepared in accordance with International Financial
the
Reporting Standards
International Accounting Standards Board. All figures
presented in this MD&A are in Canadian dollars unless
otherwise specified.
(“IFRS”) as
issued by
CORPORATE PROFILE
ZCL is North America’s largest manufacturer and supplier
of environmentally friendly fibreglass reinforced plastic
(“FRP”) underground storage tanks. We also provide
custom engineered aboveground FRP and dual-laminate
composite storage tanks, piping and lining systems, and
related products and accessories where corrosion
resistance is a high priority. ZCL has six plants in Canada,
six in the US and one in The Netherlands.
The Company has three product groups, Petroleum
Products, Water Products and Corrosion Products and
continues to leverage off the strong brand identities of
ZCL, Xerxes, Parabeam, ZCL Dualam and ZCL Troy.
The Petroleum and Water Products groups are
components of the Underground Fluid Containment
(“Underground”) operating segment, use a similar
production process, and use the brand identities of ZCL,
Xerxes, and Parabeam. Corrosion Products are included in
the Aboveground Fluid Containment (“Aboveground”)
operating segment and use the brand identities of ZCL
Corrosion, ZCL Dualam and ZCL Troy.
Forward-Looking Statements
This MD&A contains forward-looking information based
on certain expectations, projections and assumptions.
This information is subject to a number of risks and
uncertainties, many of which are beyond the Company’s
control. Users of this information are cautioned that
actual results may differ materially. For additional
information refer to the “Advisory Regarding Forward-
Looking Statements” section later in this MD&A.
Non-IFRS Measures
The Company uses both IFRS and non-IFRS measures to
make strategic decisions and to set targets. Gross profit,
gross margin, EBITDA, cash from continuing operations,
working capital, net debt and backlog are non-IFRS
measures that are used by the Company. They do not
have a standardized meaning prescribed by IFRS and may
not be comparable to similar measures used by other
companies. For additional information refer to the "Non-
IFRS Measures" section later in this MD&A.
This MD&A is dated as of March 7, 2013.
Underground Fluid Containment
Petroleum Products
ZCL is the leading provider of underground fuel storage
tanks for the retail service station market in both Canada
and the US. ZCL manufactures both single wall, and for
secondary containment, double wall FRP tanks.
In
addition, ZCL operates internationally through technology
licensing agreements.
As an alternative to the replacement of underground
storage tanks, ZCL has developed the Phoenix System®.
This unique Underwriters Laboratories
(“UL”) and
Underwriters Laboratories of Canada (“ULC”) listed tank
system allows in-situ upgrades of steel or fibreglass tanks
to either a secondary containment system or a fully self-
supporting double wall tank. It is an effective alternative
to tank replacement.
A key component of both ZCL’s double wall tank and the
is Parabeam®, a patented, three-
Phoenix System®
is manufactured and
dimensional glass fabric that
distributed
in The
from
Netherlands.
the Company’s
facility
3
Management's Discussion and Analysis
Water Products
ZCL’s watertight and easily installed fibreglass tanks are
an ideal alternative to the concrete products that have
traditionally dominated this market.
Applications for ZCL’s underground FRP storage tanks in
the Water Products market include onsite wastewater
treatment systems, fire protection systems, potable water
storage, rainwater collection, large diameter wet wells
and lift stations, grease interceptors and storm water
retention systems.
OVERALL PERFORMANCE & OUTLOOK
ZCL celebrated its 25th anniversary in 2012 with a very
strong year, achieving record revenue, net income and
earnings per share for the year ended December 31,
2012. As a result of the strong performance in 2012, our
Board has elected to increase the quarterly dividend by
25%, or $0.005 per share, to $0.025 per share.
Financial Results
Revenue
Revenue for the year ended December 31, 2012 was
$170.4 million, up $43.3 million or 34% from $127.0
million for the year ended December 31, 2011. The
increase was attributable to both the Underground and
Aboveground operating segments. The Petroleum and
Corrosion Products groups achieved record revenue with
Petroleum Products up 14% from a year earlier and
Corrosion Products up 120% from a year earlier. The
Water Products group realized moderate revenue growth
in 2012 with a 5% increase over the revenue earned in
2011.
Gross Profit
Gross profit for the year ended December 31, 2012 was
$29.9 million, up $10.5 million or 54% from $19.5 million
a year earlier. Gross margin increased to 18% of revenue
for 2012, up from 15% a year earlier, with the increase
from the Aboveground operating
coming primarily
segment and from
improved production efficiencies
overall.
Net Income
Net income for the year ended December 31, 2012 was
$13.5 million, up $10.2 million or 310% from $3.3 million
a year earlier. Net income per diluted share for 2012 was
$0.46, up $0.35 from $0.11 per diluted share a year
earlier. The improvement was attributable to a significant
increase in revenue, increased gross profit, lower general
and administration expenses, reduced finance expenses
Aboveground Fluid Containment
Corrosion Products
ZCL manufactures custom designed and engineered
fibreglass tanks, piping and related products and
accessories for industrial projects where corrosion and
abrasion resistance is a high priority. ZCL’s capabilities
installation of custom
include the manufacture and
engineered FRP and dual-laminate composite products for
use in the power generation, chemical, chloralkali, pulp
and paper, mining and Oil Sands industries.
and certain non-recurring items relating to the preferred
share redemption that occurred in the second quarter of
2012.
Net Debt
Net debt was eliminated as at December 31, 2012, as cash
and cash equivalents more than offset debt, a significant
improvement over the $4.6 million net debt balance as at
December 31, 2011. In addition, the preferred shares on
hand at December 31, 2011 of $5.1 million, which were
not a calculated component of net debt, were redeemed
in full during 2012.
Management expects the net debt balance to continue to
fluctuate due to the inherent seasonality and timing of
working capital requirements of the business.
Dividends
With the continued improvement in the financial results,
the Board elected to increase the quarterly dividend
payment by 25% to $0.025 per share, up from $0.02 per
share in the previous quarter. The dividend will be paid
on April 15, 2013, to the shareholders of record as of
March 28, 2013.
Backlog
($millions)
2012
2011
% change
December 31
35.2
42.2
(17%)
The December 31, 2012 backlog of $35.2 million is down
$7.0 million or 17% from $42.2 million a year earlier. The
decrease is attributable to a decline in the Aboveground
segment, which more than offset a small gain
in
Underground backlog.
The main factor in the Aboveground backlog decrease is
the completion of a
low margin order that
large
accounted for $6.9 million of the December 31, 2011
4
Management's Discussion and Analysis
backlog. As mentioned in previous MD&As, the nature of
revenues in the Aboveground operating segment is more
dependent on
leads to higher
larger orders which
volatility in the backlog when comparing points in time.
In the Underground segment, the US operations saw an
increase in backlog of $3.4 million prior to a negative
foreign exchange conversion impact of $0.4 million. For
Canadian Underground operations, backlog decreased by
$2.6 million from 2011, primarily due to the timing of
accepting certain significant pre-orders. The December
31, 2011 Canadian Underground backlog included two
large pre-orders for the 2012 year. At December 31,
2012, similar orders were still being negotiated and were
obtained in the first quarter of 2013.
On a sequential basis, the total backlog declined by $12.3
million from $47.5 million at September 30, 2012 due to
the traditional seasonal factors affecting ZCL’s business
and the variability in order bookings of the Corrosion
Products group noted above.
Conversion of backlog to revenue for the Underground
segment is generally realized in the following quarter. For
Aboveground, the conversion of backlog to revenue is less
predictable because of variable timelines for design,
engineering and production.
Outlook
ZCL’s sales in 2012 increased by 34%, thereby exceeding
our annual revenue growth targets previously disclosed
for 2012. ZCL also achieved an EBITDA margin of 13%,
attaining the lower end of the company’s previously
disclosed target range for EBITDA as a percentage of
revenue. For 2013, we continue to focus on profitable
growth through our “simplify to grow” strategy. Our
strategic priorities are now more directly focused on
improving profitability.
The five key aspects of the 2013 strategic plan include:
•
Focus on quality:
o
Improve our quality control processes through
lean initiatives in order to reduce rework and
disruptions in the production flow.
•
Improve profitability:
o
Exceed the 13% EBITDA achieved in 2012 and
improve gross margins as a percentage of revenue
by 2%.
• Meet deliveries and reduce lead times:
o Meet 100% of the customer delivery requirements
and shorten lead times by 25% in order to improve
the flexibility of the plants and responsiveness to
customers.
•
Expand employee integration:
o Refine our employee compensation package to
further align employee goals and objectives with
our strategic priorities and shareholder interests.
•
Continued focus on safety:
o Continuation of the standardization of our safety
policies, procedures and metrics.
The changes made to high-grade our customer mix,
improve our raw materials procurement strategy, level
load our plants,
increase plant efficiencies, tighten
discretionary spending and incent our employees on the
metric of EBITDA are still in place and are being built upon
with improvements our new COO is introducing to the
operations.
Our outlook by product groups is as follows:
Petroleum Products
Petroleum Products is our largest revenue group and
is still strong and
most mature market.
management expects to see moderate growth in this
product group, particularly with our US customers.
Backlog
Water Products
Management expects Water Products to continue to
recover throughout 2013 and we expect to see modest
revenue growth in this product group. However, this
market
in the
is dependent on continued recovery
construction industry, particularly in the US, and has been
affected by a reduction in infrastructure spending at all
levels of government.
Corrosion Products
Corrosion Products continues to represent the largest
long term opportunity for growth due to forecasted
future capital spending in the Oil Sands market and
the power generation and
continued recovery
industrial chemical markets driven by low natural gas
pricing. However, we do not expect short term growth to
replicate the very strong 2012 year due to global
economic uncertainty.
in
Short term growth in the Oil Sands market may be
constrained due to the current high differential for oil
produced in Western Canada. For Industrial Corrosion,
after eliminating the impact of approximately $11.5
million of very low margin revenue earned in 2012, in
2013 management expects Corrosion Products revenue
growth and increased profitability as we refine our
production processes. The low margin jobs produced and
delivered throughout 2012 were accepted with the
understanding that the low margin products orders would
lead to higher margin field work. This expectation has
come to fruition.
5
Management's Discussion and Analysis
SELECTED FINANCIAL INFORMATION
(in thousands of dollars,
except per share amounts)
Operating Results
Underground Fluid Containment revenue
Aboveground Fluid Containment revenue
Total revenue
Gross profit (note 1)
% of revenue
General and administration
Foreign exchange loss (gain)
Depreciation, amortization and finance expense
(Gain) loss on disposal of assets
Gain on redemption of preferred shares
Impairment of assets
Other items
Income tax expense (recovery)
Net income (loss) from continuing operations
Net loss from discontinued operations
Net income (loss)
Earnings (loss) per share from continuing operations
Basic
Diluted
Cash dividends declared per common share
EBITDA (note 1)
% of revenue
Cash Flows
Funds from continuing operations (note 1 & 2)
Changes in non-cash working capital
Net advance (repayment) of:
Bank indebtedness
Long term debt
Redemption of preferred shares
Issuance of common shares
Dividends paid
Purchase of capital and intangible assets
Disposal of assets
Business acquisition, net of disposals
(in thousands of dollars)
Financial Position
Working capital (note 1)
Total assets
Net debt (note 1)
Net cash and cash equivalents (note 1)
Total non-current liabilities
Year Ended December 31
2012
$
114,442
55,917
170,359
29,919
18%
8,571
43
4,443
(246)
(670)
182
(638)
4,744
13,490
-
13,490
0.47
0.46
0.055
22,518
13%
15,152
(5,355)
-
(1,376)
(2,075)
847
(1,010)
(3,057)
247
-
2012
$
31,655
120,526
-
84
8,618
2011
$
101,590
25,456
127,046
19,454
15%
9,986
(373)
5,589
(356)
-
-
-
1,154
3,454
(164)
3,290
0.12
0.12
-
10,349
8%
8,417
4,782
(8,565)
(4,824)
-
-
-
(1,778)
633
1,336
As at December 31
2011
$
23,387
113,899
4,567
-
15,229
2010
$
97,618
23,956
121,574
11,658
10%
11,394
496
6,155
10
-
14,293
-
(3,990)
(16,700)
(149)
(16,849)
(0.59)
(0.59)
-
2,539
2%
891
(374)
6,092
828
-
-
-
(2,063)
1,940
(7,868)
2010
$
17,816
117,629
17,591
-
18,025
Note 1: Gross profit, EBITDA, funds from continuing operations, working capital, net debt and net cash and cash equivalents are non-IFRS
measures and are defined later in the MD&A under "Non-IFRS Measures".
Note 2: Funds from continuing operations excludes changes in non-cash working capital.
6
Management's Discussion and Analysis
RESULTS OF OPERATIONS
Revenue
($000s)
2012
2011
%
change
Twelve Months
Underground Fluid
Containment:
Petroleum Products
Water Products
Aboveground Fluid
Containment:
Corrosion Products
98,601
15,841
114,442
86,468
15,122
101,590
14%
5%
13%
55,917
170,359
25,456
127,046
120%
34%
Revenue was up $43.3 million or 34% for the year ended
December 31, 2012, as compared to the prior year. The
increase in revenue was broad based across all three
product groups, but the majority of the increase came
from Corrosion Products. The increase in revenue from
the prior year reflects the factors noted below:
Underground Fluid Containment
Underground revenue of $114.4 million, was $12.9 million
or 13% higher for the year ended December 31, 2012,
compared with the year ended December 31, 2011.
The $12.1 million or 14% increase in Petroleum Products
revenue was attributable to the US operations with an
increase of $14.2 million or 26%, prior to a positive
foreign exchange conversion
reporting
purposes. In the US, sales to independent service station
customers were up 42% over 2011 revenue, due to
increased demand for FRP petroleum tanks, particularly in
the north-eastern US. Sales to US distributors for 2012
were down slightly compared to 2011.
impact
for
Canadian Petroleum Products revenue in 2012 was down
10% from 2011 with the majority of the reduction
incurred in the fourth quarter of 2012. Lower sales to
independent service station customers and contractors
were the major cause for this decrease. Sales to major oil
customers and distributors were consistent year over
year.
Petroleum Products revenue also includes revenue from
international operations which was $0.7 million higher in
2012 than 2011.
The 5% increase in Water Products revenue in 2012
compared with 2011 was attributable to Canadian sales,
which rose by $0.7 million or 24% compared with 2011.
US Water Products sales were flat.
Aboveground Fluid Containment
Aboveground revenue of $55.9 million was $30.5 million
or 120% higher than a year earlier, with the increase
coming from both Canada and the US. Specific areas of
achievement in the Corrosion Products group in 2012
included a doubling of sales into the Oil Sands market and
130% growth of sales
industrial corrosion
markets, as compared to 2011.
into the
The Aboveground Corrosion Products are more
dependent on larger orders that are longer term in nature
than the Underground operating segment.
Gross Profit
($000s)
Underground Fluid
Containment
Aboveground Fluid
Containment
Twelve months
2012
2011
%
change
% of rev
2012
20,423
17,356
18%
18%
9,496
2,098
353%
29,919
19,454
54%
17%
18%
In 2012, gross profit of $29.9 million increased by $10.5
million or 54% compared to 2011. Gross margin increased
to 18% from 15% in 2011. The changes reflected the
factors discussed below:
Underground Fluid Containment
Underground gross profit of $20.4 million increased $3.1
million or 18% in the year ended December 31, 2012 as
compared to the year ended December 31, 2011. Gross
profit as a percentage of sales increased to 18%, up from
17% a year earlier.
The US Underground operations were responsible for the
bulk of gross profit increase. The increase in revenue
without a correlating
in fixed costs as a
increase
percentage of revenue accounted for part of the increase,
but was dampened due to customer mix issues.
In the Canadian Underground operations, gross profit and
gross margin were flat with margins earned in 2011
reflecting customer mix factors and competitive pricing
pressures. Profitability in the Canadian operations was
also affected by management’s deliberate decision to
shift manufacturing of some lower margin tanks for US
customers to the Canadian operations. This was done to
meet short lead time deliveries and to optimize the
overall revenue and gross profit of the Underground
operating segment.
7
Management's Discussion and Analysis
Aboveground Fluid Containment
euro Conversion Rates
The Aboveground gross profit of $9.5 million was an
increase of $7.4 million or 353% over the year ended
December 31, 2011. Gross margin of 17% improved from
8% in 2011. The year over year improvement in gross
profit was derived from both the Canadian and US
operations. While the Aboveground operations for 2012
showed a significant improvement over the low margins
realized in 2011, they were still impacted by a significant
low margin order that was recognized in 2012.
General and Administration
($000s)
2012
2011
% change
Twelve months
8,571
9,986
(14%)
General and administration (“G&A”) expense for the year
ended December 31, 2012, decreased $1.4 million or 14%
over the year ended December 31, 2011. The reduction in
G&A for 2012 compared to 2011 reflected the result of a
continued focus on cost controls and cost saving
initiatives management implemented in 2011.
Foreign Exchange Loss (Gain)
($000s)
2012
2011
Twelve months
43
(373)
The foreign exchange loss (gain) for each year primarily
related to the combination of fluctuations in the US dollar
conversion rate and the US denominated monetary assets
and
the Company’s Canadian
operations.
liabilities held by
The following tables detail the US dollar and euro
conversion rates.
US Dollar Conversion Rates
Year
Ended
2012
2011
Avg.
Close
Avg.
Close
1.00
1.01
1.00
0.99
1.00 0.99
1.03 0.97
0.98 0.98
1.00 1.02
0.97
0.98
1.03
1.02
Avg.
Change
1%
4%
2%
(3%)
Close
Change
3%
5%
(5%)
(2%)
Q1
Q2
Q3
Q4
Year
Ended
2012
2011
Avg.
Close
Avg.
Close
1.31
1.30
1.25
1.29
1.33 1.35
1.29 1.39
1.27 1.39
1.32 1.38
1.37
1.41
1.40
1.32
Avg.
Change
(3%)
(6%)
(10%)
(7%)
Close
Change
(3%)
(9%)
(9%)
-
Q1
Q2
Q3
Q4
For additional information on the Company’s exposure to
fluctuations in foreign exchange rates see the “Financial
Instruments” section included later in this MD&A.
Depreciation and Amortization
($000s)
2012
2011
% change
Twelve months
3,673
4,317
(15%)
The 15% reduction in depreciation and amortization
expense for the year ended December 31, 2012 compared
to the year ended December 31, 2011, primarily resulted
from a lower cost base in intangible assets. The Xerxes
acquisition occurred more than five years ago, and certain
of the
fully
amortized.
intangible assets purchased are now
Finance Expense
($000s)
2012
2011
% change
Twelve months
770
1,272
(39%)
The $0.5 million or 39% reduction in finance expense in
2012 as compared to 2011, resulted from a reduction in
net debt as compared to 2011, and a reduction in the
borrowing rate on the term loan achieved through
converting the term loan to a US based LIBOR loan in the
third quarter of 2011. In addition, the cost of financing
was reduced through the early repayment of the Business
Development Bank of Canada (“BDC”) loan that occurred
during the first quarter of 2012 and the redemption of the
preferred shares that occurred in June of 2012.
Disposal of Assets, Redemption of Preferred Shares and
Other Items
During the year ended December 31, 2012, management
entered into an agreement with the former owner of DPI,
now ZCL-Dualam Inc., dealing with matters that had
arisen subsequent to the purchase of DPI. The agreement
resulted in the redemption of the preferred shares for a
gain of $0.7 million, the sale back of two former DPI
8
Management's Discussion and Analysis
properties for a gain of $0.3 million and the settlement of
claims for proceeds of $1.3 million. Certain of the claims
had been previously expensed resulting in a recovery of
other items. The balance of the settlement of claims is
included in provisions.
Impairment of assets
internally developed mold
During the year ended December 31, 2012, the carrying
value of an
the
Underground operating segment was recorded as an
impairment loss of $0.2 million. The mold was unable to
produce a tank that met ZCL’s stringent internal product
quality standards required for underground petroleum
storage.
for
Income Taxes
Income tax expense for the year ended December 31,
2012, represented 26% of pre-tax income, compared to
25% of pre-tax income in 2011. The effective tax rate has
increased in 2012 as a result of the change in the mix of
taxable
income between the Canadian and US tax
jurisdictions. This increase was partially offset by the gain
on disposal of assets and redemption of preferred shares
incurred in 2012, as these gains are taxed at a lower rate
than the operating income.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
As at December 31, 2012, the Company
increased
working capital (current assets less current liabilities) by
$8.2 million to $31.7 million compared to $23.4 million as
at December 31, 2011. This improvement is the result of
increases
in accounts receivable, offset partially by
decreases in inventory, increases in accounts payable and
accrued liabilities, dividends payable and income taxes
payable.
As at December 31, 2012, the Company had cash and cash
equivalents of $4.8 million (December 31, 2011 - $1.7
million).
Management believes that
internally generated cash
flows, along with the available revolving operating credit
facility, will be sufficient to cover the Company’s normal
operating and capital expenditures for the foreseeable
future.
Credit Arrangements
The Company’s operating credit facility is provided by a
Canadian chartered bank. The maximum available funds
under this facility is $20.0 million, subject to prescribed
margin requirements related to a percentage of accounts
receivable and inventory balances at a point in time and
Other Comprehensive (Loss) Income
Other comprehensive (loss) income for each year resulted
from the translation of foreign operations with functional
currencies denominated in US dollars and euros. For
accounting purposes, assets and liabilities of these foreign
operations are translated at the exchange rate in effect
on the balance sheet date.
The table below details other comprehensive (loss)
income before the impact of net income in the period.
($000s)
2012
2011
Twelve months
(954)
787
The other comprehensive loss in 2012 was due to the
weakening of the US dollar relative to the Canadian dollar
throughout the twelve months from 1.02 to 1.00. By
contrast, in 2011, the US dollar strengthened from 1.00 to
1.02 and therefore generated other comprehensive
income.
reduced by priority claims. The operating facility is due on
demand and matures on May 31, 2014.
The Company’s term loan is provided by a Canadian
chartered bank and requires monthly interest payments
and quarterly principal repayments of $0.3 million
Canadian dollars, with the balance due on maturity on
May 31, 2014. The interest charged on the loan is the US
dollar based 30 day LIBOR plus 250 basis points. The
Company is also subject to mandatory repayments of
outstanding principal equal to 100% of any net proceeds
on asset disposals and insurance proceeds received by the
Company.
During the year ended December 31, 2012, the Company
repaid $1.9 million of long term debt outstanding on the
BDC loan by increasing its existing term loan. This had the
effect of lowering total borrowing costs, reducing the
repayment term, as well as, providing additional natural
hedges against the Company’s net foreign exchange
exposure to the US dollar.
9
Management's Discussion and Analysis
The Company also redeemed all outstanding preferred
shares during the second quarter of 2012.
This
redemption reduced the corporate cost of capital by
settling the $5.1 million long term liability associated with
the preferred shares through a net $2.1 million increase in
the Company’s operating credit facility. In addition, the
preferred shares carried a fixed 4.4% non-tax deductible
cumulative dividend. The interest on the credit facility is
tax deductible and carries an interest rate of prime plus
100 basis points.
Share Capital
During the year ended December 31, 2012, the company
issued 232,983 shares on the exercise of stock options.
Cash Flows
($000’s)
Operating activities
Financing activities
Investing activities
Foreign exchange(1)
Discontinued operations
Twelve Months
2012
9,797
2011
13,199
(3,614)
(13,389)
(2,810)
(234)
-
3,139
191
(223)
(176)
(398)
(1) Foreign exchange loss on cash held in foreign currency.
Operating Activities
The cash flows from operating activities reflect the net
i) cash from continuing operations (for
impact of
additional
information see the “Non-IFRS Measures”
section later in this MD&A) and ii) changes in non-cash
working capital.
Funds from continuing operations totalled $15.2 million
for the year ended December 31, 2012 compared to $8.4
million for the year ended December 31, 2011. The
increase relative to 2011
is due primarily to the
improvement in net income from continuing operations in
both operating segments.
During the year ended December 31, 2012, the Company
redeemed the preferred shares issued on the acquisition
of ZCL Dualam. The settlement of certain claims formed
part of the consideration on the redemption of the
preferred shares. The fair value of settled items totalled
$1.3 million, and is adjusted in the cash from operations
section of the cash flow statement as these were non-
income and working
cash transactions effecting net
capital.
For additional details on the convertible
preferred share redemption, refer to note 12 of the
consolidated financial statements.
Changes in non-cash working capital totalled negative
$5.4 million for the year ended December 31, 2012,
compared to $4.8 million for the year ended December
31, 2011. The increase in accounts receivable for the year
ended December 31, 2012 was the major contributing
factor for the decrease when compared to the year ended
December 31, 2011. This was partially offset by an
in
increase
inventories.
in accounts payable and a decrease
Financing Activities
Cash flows from financing activities totaled negative $3.6
million for the year ended December 31, 2012, due to the
redemption of the preferred shares, a net repayment of
long term debt and payment of dividends. In the year
ended December 31, 2011, cash flows from financing
to
activities
repayments of bank indebtedness and repayment of long
term debt of $4.8 million during the year then ended.
totalled negative $13.4 million due
Investing Activities
The cash flows from investing activities were negative
$2.8 million in 2012 compared to $0.2 million during
2011. The 2011 year included $1.3 million in cash
proceeds on the repatriation of a loan receivable relating
to the Home Heating Oil Tank division sale which occurred
in 2010. Additions of property, plant and equipment
were also $1.2 million higher in 2012 relative to 2011.
Contractual Obligations
The Company’s captive
insurance company, Radigan
Insurance Inc. (“Radigan”) provides insurance protection
for product warranties and general liability coverage for
the US operations.
Radigan holds restricted cash
equivalents of $0.25 million US as collateral on a contract
performance guarantee.
The Company has provided a letter of credit in the
amount of $1.0 million to secure a line of credit for the
same amount for our US operations. The Company has
also provided two letters of credit for a total of $0.4
million to secure claims for the Company’s US workers’
compensation program. In the normal course of business,
the Company provides letters of credit as collateral for
contract performance guarantees. As at December 31,
2012 the issued performance letters of credit totalled
$1.5 million.
10
Management's Discussion and Analysis
As at December 31, 2012, ZCL’s minimum annual lease
commitments under all non-cancellable operating leases
for production facilities, office space and automotive and
equipment totalled approximately $7.8 million.
The following table details the Company’s contractual
obligations due over the next five years and thereafter:
SUMMARY OF QUARTERLY RESULTS
The table below presents selected financial information
for the eight most recent quarters which should be read
in conjunction with the applicable interim unaudited and
annual audited consolidated financial statements and
accompanying notes.
The Company’s financial results have historically been
affected by seasonality with the lowest levels of activity
occurring in the first half of the year and, particularly, the
($000s)
2013
2014
2015
2016
2017
Thereafter
Total
Long Term
Debt
1,350
3,412
-
-
-
-
4,762
Operating
Leases
2,558
2,156
1,314
997
514
292
7,831
Total
3,908
5,568
1,314
997
514
292
12,593
first quarter. In addition, the Company is subject to
fluctuations in the US to Canadian dollar exchange rate
since a significant portion of its revenue is denominated in
US dollars. Over the past eight quarters, the US to
Canadian dollar conversion rate has ranged from a low of
0.97 in the first quarter of 2011 to a high of 1.03 in the
third quarter of 2011 and second quarter of 2012.
For the three months ended
(in thousands of dollars,
except per share amounts)
Revenue
Net income (loss)
Continuing operations
Discontinued operations1
Total
Basic earnings (loss) per share
Continuing operations
Total
Diluted earnings (loss) per share
Continuing operations
Total
2012
Dec 31
$
44,866
Sep 30
$
50,067
Jun 30 Mar 31 Dec 31
$
32,576
$
37,716
$
42,850
2011
Sep 30
$
36,352
Jun 30 Mar 31
$
29,820
$
23,158
2,876
4,805
4,207
1,602
1,840
1,892
-
-
-
-
-
-
2,876
4,805
4,207
1,602
1,840
1,892
969
(181)
788
(1,247)
17
(1,230)
0.10
0.10
0.10
0.10
0.17
0.17
0.16
0.16
0.15
0.15
0.15
0.15
0.06
0.06
0.06
0.06
0.06
0.06
0.06
0.06
0.07
0.07
0.07
0.07
0.03
0.02
0.03
0.02
(0.04)
(0.04)
(0.04)
(0.04)
Dividends declared per share
(1) The discontinued operation is the steel tank division which was sold May 31, 2011 because it was not part of ZCL’s core business.
0.015
0.02
0.01
0.01
-
-
-
-
11
Management's Discussion and Analysis
FOURTH QUARTER RESULTS
Selected Financial Information
(in thousands of dollars,
except per share amounts)
Operating Results
Revenue
Underground fluid containment
Aboveground fluid containment
Total Revenue
Gross profit (note 1)
% of revenue
General and administration
Foreign exchange loss
Depreciation and amortization
Finance expense
Loss on disposal of assets
Impairment of assets
Income tax expense
Net income
Earnings per share
Basic
Diluted
EBITDA (note 1)
% of revenue
Cash Flows
Funds from continuing operations (note 1 & 2)
Changes in non-cash working capital
Net advance (repayment) of:
Bank indebtedness
Long term debt
Issuance of common shares
Dividends paid
Fourth Quarter Ended December 31
2012
$
29,231
15,635
44,866
7,662
17%
2,406
15
931
153
10
182
1,089
2,876
0.10
0.10
5,386
12%
4,167
5,421
2011
$
29,670
8,046
37,716
6,188
16%
2,120
16
1,212
256
16
-
728
1,840
0.06
0.06
4,172
11%
4,011
4,926
(5,454)
(337)
463
(434)
(1,222)
182
(8,924)
(763)
-
-
(503)
-
Purchase of capital and intangible assets
Disposal of assets
Note 1: Gross profit, EBITDA, and funds from continuing operations are non-IFRS measures and are defined later in the MD&A under
“Non-IFRS Measures.”
Note 2: Funds from continuing operations excludes changes in non-cash working capital.
12
Management's Discussion and Analysis
Overall Fourth Quarter Performance
Net income in the fourth quarter of 2012 was $2.8 million,
up 56% from $1.8 million a year earlier. Earnings per
diluted share in the fourth quarter of 2012 were $0.10, up
$0.04 from $0.06 per diluted share a year earlier. The
increase reflected higher revenues, an improvement in
gross profit and a reduction in depreciation, amortization
and finance expenses, partially offset by increased general
and administration costs and a $0.2 million one-time
impairment charge.
Revenue
Fourth Quarter
Products
Petroleum
international
revenue
operations rose by $0.5 million over the fourth quarter of
2011.
from
The $1.0 million decrease in Water Products revenue was
mainly attributable to the US Water Products market.
Canadian Water Products sales were down slightly in the
fourth quarter of 2012 as compared to a year earlier.
When compared to the fourth quarter of 2011, US Water
Products sales were down $0.8 million or 24% including a
negative
for
reporting purposes. We attribute the weakness in the US
Water Products mainly to timing of orders and lower US
government spending on construction projects.
foreign exchange conversion
impact
($000s)
2012
2011
%
change
Aboveground Fluid Containment
Underground Fluid
Containment:
Petroleum Products
Water Products
Aboveground Fluid
Containment:
Corrosion Products
25,543
3,687
29,231
25,020
4,650
29,670
2%
(21%)
(2%)
15,635
44,866
8,046
37,716
94%
19%
Revenue of $44.9 million was up $7.2 million or 19% for
the fourth quarter of 2012, as compared to the fourth
quarter of 2011. The increase in revenue was a result of
the Aboveground segment and reflect the factors noted
below:
Underground Fluid Containment
Within the Underground segment, an increase of $0.5
million for Petroleum Products revenue was more than
offset by a decline in of $1.0 million for Water Products.
Petroleum Products revenue of $25.5 million was up
slightly from the same quarter of 2011. The increase in
revenue was attributable to the US operations with an
increase of $3.0 million or 20%, prior to a negative foreign
exchange conversion impact for reporting purposes. In
the US, sales to independent service station customers
were up 18% and sales to US distributors were up 16%
over the same quarter in 2011, reflecting broad-based
geographic demand that benefited all of our US
Underground plants.
Canadian Petroleum Products revenue, down $2.4 million
or 29%, offset most of the increase in US Petroleum sales.
Specifically, lower sales to independent oil customers and
contractors and lower pre-orders in the fourth quarter of
2012, as compared to 2011, contributed to the decrease.
Aboveground revenue of $15.6 million was $7.6 million or
94% higher than the fourth quarter of 2011, with the
increase coming from both Canadian and US operations.
The Aboveground Corrosion Products are more
dependent on larger orders that are longer term in nature
than the Underground operating segment. Revenue in the
the
Corrosion Products operations benefited
in prior
completion of several
quarters and started in the fourth quarter, which were
completed in the current quarter when compared to the
prior year.
larger orders begun
from
Gross Profit
($000s)
Underground Fluid
Containment
Aboveground Fluid
Containment
Fourth Quarter
2012
2011
%
change
% of rev
2012
5,167
5,399
(4%)
18%
2,495
789
216%
7,662
6,188
24%
16%
17%
For the three months ended December 31, 2012, gross
profit of $7.7 million increased by $1.5 million or 24%
compared to the three months ended December 31,
2011. Gross margin increased to 17% from 16% in the
fourth quarter of 2011. The change reflected the factors
discussed below:
Underground Fluid Containment
Underground gross profit of $5.2 million decreased $0.2
million or 2% in the fourth quarter of 2012 over the fourth
quarter of 2011. Gross profit as a percentage of sales held
steady at 18% compared to the same period a year
earlier.
13
Management's Discussion and Analysis
Aboveground Fluid Containment
Depreciation and Amortization
The Aboveground gross profit of $2.5 million was an
increase of $1.7 million or 216% compared with the
fourth quarter of 2011. Gross margin of 16% was up
significantly from 10% in the fourth quarter of 2011 due
to a strong revenue quarter and production efficiencies
realized through spreading the fixed costs base over
increased production.
General and Administration
($000s)
2012
2011
% change
Fourth Quarter
2,406
2,120
13%
General and administration (“G&A”) expense for the
three months ended December 31, 2012, increased $0.3
million or 13% over the same period in 2011. The quarter
over quarter increase in G&A reflected restructuring
charges of $0.4 million incurred in the fourth quarter of
2012. Excluding these restructuring charges, G&A would
have decreased 6% from the fourth quarter of 2011 and
would have been 4% of revenue compared to 6% of
revenue in 2011.
Foreign Exchange Loss
($000s)
2012
2011
Fourth Quarter
15
16
The foreign exchange loss for each period primarily
related to the combination of fluctuations in the US dollar
conversion rate and the US denominated monetary assets
and
the Company’s Canadian
operations.
liabilities held by
The following table details the US dollar and euro
conversion rates.
US Dollar and Euro Conversion Rates
Fourth
Quarter
2012
2011
Avg.
Close
Avg.
Close
USD
Euro
0.99
1.29
1.00 1.02
1.32 1.38
1.02
1.32
Avg.
Change
(3%)
(7%)
Close
Change
(2%)
-
For additional information on the Company’s exposure to
fluctuations in foreign exchange rates see the “Financial
Instruments” section included later in this MD&A.
($000s)
2012
2011
% change
Fourth Quarter
931
1,212
(23%)
The reduction in depreciation and amortization expense
primarily resulted from a lower cost base in intangible
assets as compared to the same quarter of 2011. The
Xerxes acquisition occurred more than five years ago, and
certain of the intangible assets purchased are now fully
amortized.
Finance Expense
($000s)
2012
2011
% change
Fourth Quarter
153
256
(40%)
The lower finance expense primarily resulted from the
early repayment of the BDC loan that occurred during the
first quarter of 2012 and the redemption of the preferred
shares that occurred in June of 2012.
Impairment of assets
During the three months ended December 31, 2012, the
carrying value of an internally developed mold for the
Underground operating segment was recorded as an
impairment loss of $0.2 million. The mold was unable to
produce a tank that met ZCL’s stringent internal product
quality standards required for underground petroleum
storage.
Income Taxes
Income tax expense for the three months ended
December 31, 2012, represented 28% of pre-tax income,
equivalent to 28% of pre-tax income in 2011.
Other Comprehensive Income (Loss)
income (loss) for each period
Other comprehensive
resulted from the translation of foreign operations with
functional currencies denominated in US dollars and
euros. For accounting purposes, assets and liabilities of
these foreign operations are translated at the exchange
rate in effect on the balance sheet date.
14
Management's Discussion and Analysis
The table below details other comprehensive income
(loss) before the impact of net income in the period.
($000s)
2012
2011
Fourth Quarter
793
(789)
The other comprehensive income in the fourth quarter of
2012 was due to the strengthening of the US dollar
relative to the Canadian dollar throughout the quarter
from 0.98 to 1.00. In the fourth quarter of 2011, the US
dollar conversion rate decreased from 1.03 to 1.02
generating other comprehensive loss.
FINANCIAL INSTRUMENTS
rate
liquidity
risk and
risk), credit
The Company’s activities expose it to a variety of financial
risks including market risk (foreign exchange risk and
interest
risk.
Management reviews these risks on an ongoing basis to
ensure they are appropriately managed. The Company
may use foreign exchange forward contracts to manage
exposure to fluctuations in foreign exchange from time to
time. The Company does not currently have a practice of
trading derivatives and had no derivative instruments
outstanding at December 31, 2012.
Interest Rate Risk
The Company’s objective in managing interest rate risk is
to monitor expected volatility in interest rates while also
minimizing the Company’s financing expense
levels.
Interest rate risk mainly arises from fluctuations of
interest rates and the related impact on the return earned
on cash and cash equivalents, restricted cash and the
expense on floating rate debt. On an ongoing basis,
management monitors changes in short term interest
rates and considers long term forecasts to assess the
potential cash flow impact to the Company. The Company
does not currently hold any financial instruments to
mitigate its interest rate risk. Cash and cash equivalents
and restricted cash earn interest based on market interest
rates. Bank indebtedness balances and long term debt
have floating interest rates which are subject to market
fluctuations.
The effective interest rate on the bank indebtedness
balance as at December 31, 2012, was prime plus 100
basis points, 4.00% (December 31, 2011 - prime plus 100
basis points, 4.00%) adjusted quarterly based on certain
financial indicators of the Company. The effective interest
rate on the term loan balance as at December 31, 2012,
was US LIBOR rate plus 250 basis points, 2.71%
(December 31, 2011 – US LIBOR rate plus 250 basis
points, 2.75%), adjusted quarterly based on certain
financial indicators of the Company. With other variables
unchanged, an increase or decrease of 100 basis points in
Financial Position/Cash Flows
The Company’s working capital (current assets
less
current liabilities) of $31.7 million as at December 31,
2012 was an improvement over the $28.7 million at
September 30, 2012. Positive cash flows from operations,
as well as decreases in accounts receivable and inventory,
contributed to the repayment of the bank indebtedness
and the improvement in working capital.
the US LIBOR and Canadian prime interest rate as at
December 31, 2012 would have impacted net income for
the period ended December 31, 2012, by $0.1 million.
Foreign Exchange Risk
The Company operates on an international basis and is
subject to foreign exchange risk exposures arising from
transactions denominated
in foreign currencies. The
Company’s objective with respect to foreign exchange risk
is to minimize the impact of the volatility related to
financial assets and liabilities denominated in a foreign
currency where possible through effective cash flow
management. Foreign currency exchange risk is limited to
the portion of the Company’s business transactions
denominated in currencies other than Canadian dollars.
The Company’s most significant foreign exchange risk
arises primarily with respect to the US dollar. The
revenues and expenses of the Company’s US operations
are denominated in US dollars. Certain of the revenue and
expenses of
the Canadian operations are also
denominated in US dollars. The Company is also exposed
to foreign exchange risk associated with the euro due to
in The Netherlands, however, these
its operations
amounts are not
the Company’s
to
significant
consolidated financial results. On an ongoing basis,
management monitors changes
in foreign currency
exchange rates and considers long term forecasts to
assess the potential cash flow impact to the Company.
The tables that follow provide an indication of the
Company’s exposure to changes in the value of the US
dollar relative to the Canadian dollar, as at and for the
year ended, December 31, 2012. The analysis is based on
financial assets and liabilities denominated in US dollars at
the end of the period (“balance sheet exposure”), which
are separated by domestic and foreign operations, and US
dollar denominated revenue and operating expenses
during the period (“operating exposure”).
15
Management's Discussion and Analysis
Balance sheet exposure related to financial assets, net of
financial liabilities, at December 31, 2012, was as follows:
Company perceives the customer has a higher level of
risk.
(in thousands of US dollars)
Foreign operations
Domestic operations
Net balance sheet exposure
$
7,949
(1,950)
5,999
Operating exposure for the twelve months ended
December 31, 2012, was as follows:
(in thousands of US dollars)
Sales
Operating expenses
Net operating exposure
$
115,027
92,994
22,033
The weighted average US to Canadian dollar translation
rate was 1.00 for the year ended December 31, 2012. The
translation rate as at December 31, 2012, was 1.00.
Based on the foreign currency exposures noted above,
with other variables unchanged, a 20% change in the
Canadian dollar would have impacted net income for the
year ended December 31, 2012, as follows:
(in thousands of US dollars)
$
Net balance sheet exposure of domestic operations (250)
2,820
Net operating exposure of foreign operations
2,570
Change in net income
Other comprehensive (loss) income would have changed
$1.0 million due to the net balance sheet exposure of
financial assets and liabilities of foreign operations. The
timing and volume of the above transactions, as well as
the timing of their settlement, could impact the sensitivity
of the analysis.
Credit Risk
Credit risk is the risk of a financial loss to the Company if a
customer or counterparty to a financial instrument fails to
meet its contractual obligations. The Company is exposed
to credit risk through its cash and cash equivalents,
restricted cash and accounts receivable. The Company
manages the credit risk associated with its cash and cash
equivalents and restricted cash by holding its funds with
reputable financial institutions and investing only in highly
rated securities that are traded on active markets and are
capable of prompt liquidation. Credit risk for trade and
other accounts
through
established credit monitoring activities. The Company also
mitigates its credit risk on trade accounts receivable by
obtaining a cash deposit from certain customers with no
prior order history with the Company, or where the
receivable are managed
industrial
corrosion
The Company has a concentration of customers in the oil
and gas and
sectors. The
concentration risk
is mitigated by the number of
customers and by a significant portion of the customers
being large international organizations. As at December
31, 2012, no single customer exceeded 10% of the
consolidated trade accounts receivable balance. Losses
under trade accounts receivable have not historically
been significant. The creditworthiness of new and existing
is subject to review by management by
customers
considering such items as the type of customer, prior
order history and the size of the order. Decisions to
extend credit to new customers are approved by
the creditworthiness of existing
management and
customers is monitored.
The Company reviews
its trade accounts receivable
regularly and amounts are written down to their expected
realizable value when the account is determined not to be
fully collectable. This generally occurs when the customer
has indicated an inability to pay, the Company is unable to
communicate with the customer over an extended period
of time, and other methods to obtain payment have been
considered and have not been successful. The bad debt
expense is charged to net income in the period that the
account is determined to be doubtful. Estimates for the
allowance for doubtful accounts are determined on a
customer-by-customer evaluation of collectability at each
reporting date, taking into account the amounts which
are past due and any available relevant information on
the customers’ liquidity and going concern status. After all
efforts of collection have failed, the accounts receivable
balance not collected is written off with an offset to the
allowance for doubtful accounts, with no impact on net
income.
The Company’s maximum exposure to credit risk for trade
accounts receivable is the carrying value of $27.3 million
as at December 31, 2012 (December 31, 2011 - $19.5
million). Included in accounts receivable are balances not
considered trade receivables of $1.1 million (December
31, 2011 - $0.4 million) which include various sales tax
refunds, insurance refunds and rebates. On a geographic
basis as at December 31, 2012, approximately 48%
(December 31, 2011 – 47%) of the balance of trade
accounts receivable was due from Canadian and non-US
customers and 52% (December 31, 2011 – 53%) was due
from US customers.
16
Management's Discussion and Analysis
Payment terms are generally net 30 days.
As at
December 31, 2012, the percentages of trade accounts
receivable were as follows:
December 31,
2012
60%
27%
6%
2%
December 31,
2011
51%
27%
12%
8%
5%
100%
2%
100%
Current
Past due 1 to 30 days
Past due 31 to 60 days
Past due 61 to 90 days
Past due greater than
90 days
Total
Liquidity Risk
The Company’s objective related to liquidity risk is to
effectively manage cash flows to minimize the exposure
that the Company will not be able to meet its obligations
associated with financial liabilities. On an ongoing basis,
liquidity risk is managed by maintaining adequate cash
RISKS AND UNCERTAINTIES
The Company is subject to a number of known and
unknown risks, uncertainties and other factors that could
cause the Company’s actual future results to differ
materially from those historically achieved and those
reflected in forward-looking statements made by the
Company. These factors include, but are not limited to,
fluctuations in the level of capital expenditures in the
Petroleum Products, Water Products and Corrosion
Products markets; drilling activity and oil and natural gas
prices and other factors that affect demand for the
Company’s products and services; industry competition;
the need to effectively integrate acquired businesses; the
ability of management to implement the Company’s
business strategy effectively; political and general
economic conditions; the ability to attract and retain key
personnel; raw material and labour costs; fluctuations in
the US and Canadian dollar exchange rates; accounts
receivable risk; the ability to generate capital or maintain
liquidity and credit agreements necessary to fund future
operations; and other risks and uncertainties described
under the heading “Risk Factors” in the Company’s most
recent Annual Information Form and elsewhere in other
documents filed with Canadian provincial securities
the public
authorities which
at www.sedar.com.
available
are
to
Environmental Risks
To conduct business operations, the Company owns or
leases properties and is subject to environmental risks
due to the use of chemicals in the manufacturing process.
and cash equivalent balances and appropriately utilizing
available
lines of credit. Management believes that
forecasted cash flows from operating activities, along with
the available lines of credit, will provide sufficient cash
requirements to cover the Company’s forecasted normal
operating activities, commitments and budgeted capital
expenditures.
The Company has pledged as general collateral for
advances under the operating credit facility and the bank
term loan a general security agreement on present and
future assets, guarantees from each present and future
direct and indirect subsidiary of the Company supported
by a first registered security over all present and future
assets, and pledge of shares. The Company
is not
permitted to sell or re-pledge significant assets held under
collateral without consent from the lenders.
For information on contractual maturities on long term
obligations, please refer to the Liquidity and Capital
Resources section of this MD&A.
This risk is limited to exposure post acquisition for
properties obtained through the Xerxes acquisition as the
purchase agreements hold the vendor responsible for any
environmental issues prior to ZCL ownership. With the
ZCL Dualam acquisition, phase two assessments were
undertaken and, as a result, the Company was aware of
environmental issues on two of the properties. During
the twelve months ended December 31, 2012, the
Company sold one of the ZCL Dualam properties subject
to remediation, back to the vendor. The other ZCL
Dualam property has been fully remediated and no clean-
up costs have been accrued in these financial statements.
ZCL manages its environmental risks by appropriately
in an
dealing with chemicals and waste material
environmentally safe and responsible manner, and in
accordance with applicable regulatory requirements. In
addition, the Company has a Health, Safety and
Environment Committee that meets regularly to review
and monitor environmental issues, compliance, risks and
mitigation strategies. However, it is unknown whether
specific environmental conditions and
incidents will
impact ZCL operations in the future.
The Company elects to self-insure against risk of
environmental contamination at its production facilities
as it has determined the risk to be low. The Company is
not aware of any unrecorded material environmental
exposures other than the items noted above.
17
Management's Discussion and Analysis
CRITICAL ACCOUNTING ESTIMATES & JUDGEMENTS
The Company’s financial statements have been prepared
following IFRS. The measurement of certain assets and
is dependent upon future events and the
liabilities
outcome will not be fully known until future periods.
Therefore, the preparation of the financial statements
requires management
and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Such estimates and
assumptions have been made using careful judgments,
which in management’s opinion, are reasonable and
conform to the significant accounting policies summarized
in the December 31, 2012 annual consolidated financial
statements. Actual
those
estimated.
results may vary
to make
estimates
from
Impairment
The Company assesses impairment at each reporting
period by evaluating the circumstances specific to the
organization that may lead to an impairment of assets. In
addition to the quarterly assessment, the Company also
performs an annual impairment test on goodwill and
certain intangible assets in accordance with IAS 36:
“Impairment of Assets.”
Where indicators of impairment exist, and annually for
goodwill and certain intangible assets, the recoverable
amount of the asset or group of assets (cash generating
units) is compared against the carrying amount. Any
excess in the carrying amount over the recoverable
amount will be recognized as an impairment loss in the
income statement. The recoverable amount is calculated
as the higher of the assets’ (or group of assets) value in
use or fair value less cost to sell. The actual growth rates
and other estimates used in the determination of fair
values at the time of
impairment tests may vary
materially from those realized in future periods.
Property, Plant and Equipment, Intangible Assets and
Goodwill
intangible assets are
lives are recorded at cost
Property, plant and equipment and intangible assets with
finite
less accumulated
depreciation and amortization. Goodwill and indefinite
life
recorded at cost. The
unamortized balances, or carrying values, are regularly
reviewed for recoverability or tested for impairment
whenever events or circumstances indicate that these
amounts exceed their fair values. The valuation of these
assets is based on estimated future net cash flows, taking
into account current and future industry and other
conditions. An impairment loss would be recognized for
the amount that the carrying value exceeds the fair value.
Depreciation and amortization of property, plant and
equipment and intangible assets with finite lives is based
on estimates of the useful lives of the assets. The useful
lives are estimated, and a method of depreciation and
amortization is selected at the time the assets are initially
acquired and then re-evaluated each reporting period.
Judgment is required to determine whether events or
circumstances warrant a revision to the remaining periods
of depreciation and amortization. The estimates of cash
flows used to assess the potential impairment of these
assets are subject to measurement uncertainty. A
significant change in these estimates and judgments could
result
to depreciation and
amortization expense or impairment charges.
in a material change
Allowance for Doubtful Accounts
receivable balance
The Company’s accounts
is a
significant portion of overall assets. Credit is spread
among many customers and the Company has not
experienced significant accounts receivable collection
problems in the past. The Company performs ongoing
credit evaluations and maintains allowances for doubtful
accounts based on the assessment of individual customer
receivable balances, credit information, past collection
history and the overall financial strength of customers. A
change in these factors could impact the estimated
allowance and the provision for bad debts recorded in the
accounts. The actual collection of accounts receivable and
the resulting bad debts may differ from the estimated
allowance for doubtful accounts and the difference may
be material.
Self-insured Liabilities
The Company self-insures certain risks related to pollution
protection provided on certain product sales, general
liability claims and US workers compensation through
Radigan Insurance Inc., its captive insurance company.
The provision for self-insured liabilities includes estimates
of the costs of reported and expected claims based on
estimates of loss using assumptions determined by a
certified loss reserve analyst. The actual costs of claims
may vary from those estimates, and the difference may
be material. As at December 31, 2012, the Company has
set aside restricted cash of $0.3 million US for such claims.
Warranties
The Company generally warrants its products for a period
of one year after sale, and for up to 30 years for
corrosion, if the products are properly installed and are
used solely for storage of listed liquids. The Company
markets a storage system under
the Prezerver®
trademark that carries an enhanced protection program.
18
Management's Discussion and Analysis
In Canada, the Prezerver system includes an enhanced 10
year limited warranty covering product replacement,
third-party pollution protection, site clean-up and defence
costs up to the limits allowed under the warranty. Until
December 1, 2006, the Canadian Prezerver program was
covered by
insurance underwritten by a major
international insurer. Effective December 1, 2006, the
Company formed its own insurance captive to insure the
Prezerver program. No substantiated claims have been
registered since the Prezerver program’s inception in
1996. Additionally, a number of component materials and
parts are similarly warranted by their manufacturers,
thereby reducing the Company’s exposure to warranty
claims.
The Company also began marketing the Prezerver system
in the US in 2008. Under this program, the customer is
offered a 10 year non-cancellable master program of
insurance by a third-party
insurance provider which
covers third-party property damage, onsite cleanup of
costs and product
pollution
warranty/replacement up to limits allowed under the
conditions, defence
UPCOMING CHANGES IN ACCOUNTING POLICIES
Amendments to IFRS 7 and IAS 32 - Offsetting Financial
Assets and Financial Liabilities
to
(e.g.,
rights
set-off and
agreements).
Amendments to IFRS 7 require an entity to disclose
related
information about
arrangements
The
collateral
disclosures would provide users with information that is
useful in evaluating the effect of netting arrangements on
an entity’s financial position. The new disclosures are
required for all recognised financial instruments that are
set off in accordance with IAS 32: “Financial Instruments:
Presentation”. The disclosures also apply to recognized
financial instruments that are subject to an enforceable
master netting arrangement or similar agreement,
irrespective of whether they are set off in accordance
with IAS 32. These amendments will become effective for
annual periods beginning on or after January 1, 2013 and
the Company has determined that the adoption of this
amendment will not have an impact on the consolidated
financial statements.
Amendments to IAS 32 clarify the meaning of “currently
These
legally enforceable right to set-off”.
has a
amendments become effective
for annual periods
beginning on or after January 1, 2014 and the Company
has determined that the adoption of this amendment will
impact on the consolidated financial
not have an
statements.
policy. The tank warranty/replacement portion of the
coverage
insurance
is reinsured by the third party
provider to ZCL’s insurance captive.
The Company provides for warranty obligations based on
a review of products sold and historical warranty costs
experienced. Provisions for warranty costs are charged to
manufacturing and selling costs and revisions to the
estimated provision are charged to earnings in the period
in which they occur. While the Company maintains high
quality standards and has a limited history of liability or
warranty problems under its standard warranties or
Prezerver programs, there can be no guarantee that the
warranty provision recorded, self-insurance provided by
ZCL's captive insurance company or third party insurance
will be sufficient to cover all potential claims. Excluding
enhanced Prezerver warranty, the maximum exposure to
the Company for warranty claims is, at the Company’s
sole discretion, to repair or replace the product giving rise
to the claim. The actual costs of warranties may vary from
those estimated, and the difference may be material.
IFRS 12: “Disclosure of Interests with Other Entities”
The standard becomes effective for annual periods
beginning on or after January 1, 2013. It includes all of the
disclosures that were previously included in IAS 27:
“Consolidated and Separate Financial Statements”, IAS
31: “Interests in Joint Ventures” and IAS 28: “Investment
in Associates”. These disclosures relate to an entity’s
interests in subsidiaries, joint arrangements, associates
and structured entities. The Company has determined
that the adoption of this standard will not have an impact
on the consolidated financial statements.
IFRS 13: “Fair Value Measurement”
IFRS 13:
(“IASB”) published
In May 2011, the International Accounting Standards
Board
“Fair Value
Measurement”, which
is effective prospectively for
annual periods beginning on or after January 1, 2013.
IFRS 13 does not change the requirements of using fair
value, but rather, provides guidance on how to measure
the fair value of financial and non-financial assets and
liabilities when required or permitted by IFRS. There are
also additional disclosure requirements. Adoption of the
standard is not expected to have a material impact on the
financial position or performance of the Company.
19
Management's Discussion and Analysis
IAS 34: “Interim Financial Reporting”
The amendment aligns the disclosure requirements for
total segment assets with total segment liabilities in
financial statements. This clarification also
interim
ensures that interim disclosures are aligned with annual
disclosures. These improvements are effective for annual
periods beginning on or after January 1, 2013.
IFRS 10: “Consolidated Financial Statements”
In May 2011, the IASB issued IFRS 10: “Consolidated
Standing
Financial
Interpretations Committee 12: "Consolidation-Special
Statements,” which
replaces
the
Company’s
Purpose Entities", and parts of IAS 27: "Consolidated and
Separate Financial Statements". The new standard builds
on existing principles by identifying the concept of control
as the determining factor in whether an entity should be
included
financial
statements. The standard provides additional guidance to
assist in the determination of control where it is difficult
to assess. Based on a preliminary analysis, this new
standard is not expected to change the consolidation
conclusion for the Company's current subsidiaries. This
standard becomes effective for annual periods beginning
on or after January 1, 2013.
consolidated
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Internal Controls over Financial Reporting (“ICFR”)
Management has evaluated whether there were changes
in the Company’s disclosure controls and procedures
during the year ended December 31, 2012 that have
materially affected, or are reasonably likely to materially
affect, the Company’s Internal Controls over Financial
Reporting (“ICFR”). No material changes were identified.
As at December 31, 2012, there were no material
weaknesses relating to the design of ICFR.
Disclosure controls and procedures are designed to
provide reasonable assurance that material information is
gathered and reported to senior management, including
the Chief Executive Officer (“CEO”) and the Chief Financial
Officer (“CFO”) of ZCL on a timely basis so that
appropriate decisions can be made regarding public
disclosure. In accordance with National Instrument 52-
109: “Certification of Disclosure in Issuers’ Annual and
Interim Filings,” the CEO and CFO have evaluated the
effectiveness of the Company’s disclosure controls and
procedures as of the period ended December 31, 2012.
Based on that evaluation, the CEO and CFO have
concluded that the disclosure control procedures are
effective and provide reasonable assurance that: (a)
information required to be disclosed by the Company in
its quarterly interim filings or other reports filed and
submitted under applicable securities
is
recorded, processed, summarized and reported within the
prescribed time periods, and (b) material information
and
regarding
communicated to management, including its CEO and CFO
in a timely manner.
accumulated
legislation
Company
the
is
The CEO and CFO have designed or managed the design
of internal controls over financial reporting to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with Canadian generally
accepted accounting principles. In accordance with NI 52-
109, management
the
designed
effectiveness of internal controls over financial reporting
as of December 31, 2012, based on the criteria set forth in
Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on that assessment, management
concluded that, as of December 31, 2012, internal control
over financial reporting was effective based on the criteria
established in Internal Control – Integrated Framework.
assessed
and
Management has evaluated whether there were changes
in the Company’s ICFR during the year ended December
31, 2012 that have materially affected, or are reasonably
likely to materially affect, the Company’s ICFR. No
material changes were identified. There were also no
material weaknesses relating to the design of ICFR at
December 31, 2012, and no limitations on the scope of
design of ICFRs.
While management of the Company has evaluated the
effectiveness of disclosure controls and procedures and
ICFR as of December 31, 2012, and have concluded that
these controls and procedures are being maintained as
designed, they expect that the disclosure controls and
procedures and ICFR may not prevent all errors and fraud.
A control system, no matter how well conceived or
operated, can only provide reasonable, not absolute
assurance that the objectives of the control system are
met.
20
Management’s Discussion and Analysis
TRANSACTIONS WITH RELATED PARTIES
components purchased
Certain manufacturing
for
$31,000 (2011 - $30,000) for the year ended December
31, 2012, included in manufacturing and selling costs in
the consolidated statements of income or inventories
were provided by a corporation whose Chairman and CEO
is a director of the Company. The transactions were
incurred in the normal course of operations and recorded
OUTSTANDING SHARE DATA
As at March 7, 2013, there were 29,121,209 common
shares and 2,326,476 share options outstanding. Of the
options outstanding, 912,482 are currently exercisable
into common shares.
OTHER INFORMATION
Additional information relating to the Company, including
the Annual Information Form (AIF), is filed on SEDAR at
www.sedar.com.
NON-IFRS MEASURES
The Company uses both IFRS and non-IFRS measures to
make strategic decisions and set targets and believes that
these non-IFRS measures provide useful supplemental
information to investors. Gross profit, gross margin,
EBITDA, funds from continuing operations, working
capital, net debt, net cash and cash equivalents and
backlog are measures used by the Company that do not
have a standardized meaning prescribed by IFRS and may
not be comparable to similar measures used by other
companies. Included below are tables calculating or
reconciling these non-IFRS measures where applicable.
Gross profit is defined as revenue less manufacturing and
selling costs. Manufacturing and selling costs include
fixed
direct materials and
manufacturing overhead and marketing and selling
expenses and exclude depreciation and amortization,
general and administration and financing expenses.
labour, variable and
Gross margin
revenue.
is defined as gross profit divided by
EBITDA is defined as income from continuing operations
income taxes, share-based
before finance expense,
compensation, depreciation on property, plant and
equipment, amortization on deferred development costs
at the exchange amount being normal commercial rates
for the products. Accounts payable and accrued liabilities
at December 31, 2012, included $3,000 (December 31,
2011 - $nil) owing to the corporation. There are no
ongoing contractual or other commitments resulting from
these transactions.
and intangible assets, gains or losses on sale of assets, and
impairment of assets. Readers are cautioned that EBITDA
should not be construed as an alternative to net income
as determined in accordance with IFRS.
Funds from continuing operations are defined as cash
flows from operating activities before changes in non-
cash working capital.
Working capital is defined as current assets less current
liabilities.
Net debt is defined as long term debt, including current
portion, plus bank indebtedness, less cash and cash
equivalents. Preferred shares are not a component of net
debt.
Net cash and cash equivalents are defined as cash and
cash equivalents less long term debt, current portion of
long term debt and bank indebtedness.
Backlog is defined as the total value of orders that have
not yet been included in revenue and that management
has assessed as having a high certainty of being
performed because of the existence of a contract or
purchase order specifying the scope, value and timing of
an order.
21
Management’s Discussion and Analysis
RECONCILIATION OF NON-IFRS MEASURES
The following table presents the calculation of gross profit and gross margin.
(in thousands of dollars)
Revenue
Manufacturing and selling costs
Gross profit
Gross profit as a % of revenue
Fourth Quarter Ended
December 31
2012
$
44,866
37,204
7,662
17%
2011
$
37,716
31,528
6,188
16%
Year Ended
December 31
2011
$
127,046
107,592
19,454
15%
2012
$
170,359
140,440
29,919
18%
2010
$
121,574
109,916
11,658
10%
The following table reconciles net income from continuing operations in accordance with IFRS to EBITDA.
(in thousands of dollars)
Net income (loss) from continuing operations
Adjustments:
Depreciation and amortization
Finance expense
Income tax expense (recovery)
Share-based compensation
Loss (gain) on disposal of assets
Gain on redemption of preferred shares
Impairment of assets
EBITDA
Fourth Quarter Ended
December 31
2012
$
2,876
2011
$
1,840
931
153
1,089
145
10
-
182
5,386
1,212
256
728
120
16
-
-
4,172
Year Ended
December 31
2011
$
3,454
4,317
1,272
1,154
508
(356)
-
-
10,349
2012
$
13,490
3,673
770
4,744
575
(246)
(670)
182
22,518
EBITDA as a percentage of revenue
Note 1: The 2010 comparative calculation has been restated to remove costs associated with restructuring, integration and ERP costs.
12%
13%
11%
8%
20101
$
(16,700)
4,792
1,363
(3,990)
791
10
-
14,293
559
0.5%
The following table presents the calculation of funds from continuing operations.
(in thousands of dollars)
Net income (loss) from continuing operations
Add (deduct) items not affecting cash:
Depreciation and amortization
Deferred income tax expense (recovery)
Loss (gain) on disposal of assets
Gain on redemption of preferred shares
Share-based compensation expense
Impairment of assets
Non-cash proceeds on settlement of claims
Other
Funds from continuing operations
Fourth Quarter Ended
December 31
2012
$
2,876
931
120
10
-
145
182
-
(97)
4,167
2011
$
1,840
1,212
748
16
-
120
-
-
75
4,011
Year Ended
December 31
2011
$
3,454
4,317
185
(356)
-
508
-
-
309
8,417
2010
$
(16,700)
4,792
(1,400)
10
-
791
13,363
-
35
891
2012
$
13,490
3,673
(412)
(246)
(670)
575
182
(1,348)
(92)
15,152
22
Management’s Discussion and Analysis
The following table presents the calculation of working capital.
(in thousands of dollars)
Current assets
Current liabilities
Working capital
The following table presents the calculation of net debt.
December 31, 2012
$
57,728
26,073
31,655
As at
December 31, 2011
$
47,873
24,486
23,387
December 31, 2010
$
47,821
30,005
17,816
December 31, 2012
$
As at
December 31, 2011
December 31, 2010
(in thousands of dollars)
Long term debt (including current portion, excluding
preferred shares where applicable)
Bank indebtedness
Less: cash and cash equivalents
Net debt
Note 1: When cash and cash equivalents exceed debt balances, the amount is considered net cash and cash equivalents.
-
(1,707)
4,567
(4,846)
(84)1
4,762
6,274
$
-
$
11,131
8,565
(2,105)
17,591
23
In addition to the factors noted above, management
cautions readers that the current economic environment
could have a negative impact on the markets in which the
Company operates and on the Company’s ability to
achieve its financial targets. Factors such as continuing
global economic uncertainty, tighter lending standards,
volatile capital markets, fluctuating commodity prices,
and other factors could negatively impact the demand for
the Company’s products and the Company’s ability to
grow or sustain revenues and earnings. Fluctuations in
conversion rates of the US to Canadian dollar and euro to
Canadian dollar also have the potential to impact the
Company’s revenues and earnings.
The Company believes that the expectations reflected in
the forward-looking statements are reasonable, but no
assurance can be given that these expectations will prove
to be correct and such forward-looking statements
included in this report should not be unduly relied upon.
The forward-looking statements in this report speak only
as of the date of this report. The Company does not
undertake to update any forward-looking statement,
whether written or oral, that may be made from time to
time by the Company or on the Company’s behalf,
whether as a result of new information, future events, or
otherwise, except as may be required under applicable
statements
securities
contained in this document are expressly qualified by this
cautionary statement.
forward-looking
laws.
The
Management’s Discussion and Analysis
ADVISORY REGARDING FORWARD-LOOKING STATEMENTS
This document contains
forward-looking statements
under the heading “Outlook” and elsewhere concerning
future events or the Company’s future performance,
including the Company’s objectives or expectations for
revenue and earnings growth,
income taxes as a
percentage of pre-tax income, business opportunities in
the Petroleum Products, Water Products, Corrosion
Products markets, efforts to reduce administrative and
production costs, manage production levels, anticipated
capital expenditure trends, activity in the petroleum and
other industries and markets served by the Company and
the sufficiency of cash flows and credit facilities available
to cover normal operating and capital expenditures.
Forward-looking statements are often, but not always,
identified by the use of words such as “seek,”
“anticipate,” “plan,” “continue,” “estimate,” “expect,”
“potential,”
“may,”
“targeting,”
“should,”
“believe” and similar expressions. Actual events or results
in the
may differ materially from those reflected
Company’s forward-looking statements due to a number
of known and unknown risks, uncertainties and other
factors affecting the Company’s business and the
industries the Company serves generally.
“project,”
“predict,”
“intend,”
“might,”
“could,”
“will,”
These factors include, but are not limited to, fluctuations
in the level of capital expenditures in the Petroleum
Products, Water Products, and Corrosion Products
markets, drilling activity and oil and natural gas prices,
and other factors that affect demand for the Company’s
products and services, industry competition, the need to
effectively integrate acquired businesses, uncertainties as
its business
to the Company’s ability to implement
strategy effectively, political and economic conditions, the
Company’s ability to attract and retain key personnel, raw
material and labour costs, fluctuations in the US, euro and
Canadian dollar exchange rates, and other risks and
uncertainties described under the heading “Risk Factors”
in the Company’s most recent Annual Information Form,
and elsewhere in this document and other documents
filed with Canadian provincial securities authorities. These
documents are available to the public at www.sedar.com.
Unless otherwise indicated, the consolidated financial
statements have been prepared
in accordance with
International Financial Reporting Standards and the
reporting currency is in Canadian dollars.
24
Consolidated Financial Statements
ZCL Composites Inc.
Consolidated Financial Statements and Notes
For the years ended December 31, 2012 and 2011
25
Consolidated Financial Statements
March 7, 2013
MANAGEMENT’S REPORT
The Annual Report, including the consolidated financial statements and other financial information, is the responsibility of the
management of the Company. The consolidated financial statements were prepared by management in accordance with
International Financial Reporting Standards. When alternative accounting methods exist, management has chosen those it
considers most appropriate in the circumstances. The significant accounting policies used are described in note 3 to the
consolidated financial statements. The integrity of the information presented in the financial statements, including estimates
and judgments relating to matters not concluded by year end, is the responsibility of management. Financial information
presented elsewhere in this Annual Report has been prepared by management and is consistent with the information in the
consolidated financial statements.
Management is responsible for the establishment and maintenance of systems of internal accounting and administrative
controls which are designed to provide reasonable assurance that the financial information is accurate and reliable, and that
the Company's assets are appropriately accounted for and adequately safeguarded. The internal control system also includes
an established business conduct policy that applies to all employees. Management believes the system of internal controls,
review procedures, and established policies provide reasonable assurance as to the reliability and relevance of the financial
reports.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities and for final approval of the
annual consolidated financial statements. The Board appoints an Audit Committee consisting of unrelated, non-management
directors that meets at least four times each year under a written mandate from the Board. The Audit Committee meets with
management and with the independent auditors to satisfy itself that they are properly discharging their responsibilities,
reviews the consolidated financial statements and the Auditors' Report, including the quality of the accounting principles and
significant judgments applied, and examines other auditing and accounting matters. The Committee also recommends the
firm of external auditors to be appointed by the shareholders. The independent auditors have full and unrestricted access to
the Audit Committee, with and without management being present. The consolidated financial statements and other financial
information have been reviewed by the Audit Committee and approved by the Board of Directors of ZCL Composites Inc.
The consolidated financial statements have been audited by the Company’s external auditors, Ernst & Young LLP, Chartered
Accountants, in accordance with generally accepted auditing standards on behalf of the shareholders. The Auditors' Report
outlines the nature of their examination and their opinion on the consolidated financial statements of the Company.
“Ron Bachmeier”
Ronald M. Bachmeier
President and
Chief Executive Officer
“Kathy Demuth”
Katherine L Demuth, CA, CMA, CIA
Chief Financial Officer
26
Consolidated Financial Statements
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of ZCL Composites Inc.
We have audited the accompanying consolidated financial statements of ZCL Composites Inc., which
comprise the consolidated balance sheets as at December 31, 2012, and 2011, and the consolidated
statements of income, comprehensive income, and shareholders’ equity and cash flows for the years ended
December 31, 2012 and 2011, and a summary of significant accounting policies and other explanatory
information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control as
management determines is necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, the auditors consider internal control relevant to the
entity's preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of ZCL Composites Inc. as at December 31, 2012, and 2011, and its financial performance and its
cash flows for the years ended December 31, 2012 and 2011, in accordance with International Financial
Reporting Standards.
Edmonton, Canada
March 7, 2013
Chartered Accountants
27
Consolidated Financial Statements
Consolidated Balance Sheets
As at
(in thousands of dollars)
ASSETS
Current
Cash and cash equivalents
Accounts receivable [note 22]
Inventories [notes 5]
Income taxes recoverable
Prepaid expenses
Property, plant and equipment [note 7]
Assets held for sale [note 7]
Intangible assets [note 8]
Goodwill [note 26]
Restricted cash
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities
Dividends payable [note 14]
Income taxes payable
Deferred revenue
Current portion of provisions [note 10]
Current portion of long term debt [note 11]
Current portion of preferred shares
Deferred income tax liabilities [note 17]
Long term portion of provisions [note 10]
Long term debt [note 11]
Preferred shares [note 12]
TOTAL LIABILITIES
Shareholders' equity
Share capital [note 15]
Contributed surplus [note 16]
Equity component of preferred shares [note 12]
Accumulated other comprehensive loss
Retained earnings
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes
December 31,
2012
$
December 31,
2011
$
4,846
28,469
22,657
841
915
57,728
26,093
—
6,361
29,671
249
424
120,526
17,274
580
1,467
3,409
1,993
1,350
—
26,073
4,597
609
3,412
—
34,691
70,980
2,609
—
(8,027)
20,273
85,835
120,526
1,707
19,908
24,271
1,082
905
47,873
26,083
952
8,029
30,263
255
444
113,899
15,435
—
797
5,325
1,185
1,687
57
24,486
5,068
449
4,587
5,125
39,715
69,862
2,177
845
(7,073)
8,373
74,184
113,899
On behalf of the Board: Director Director
28
Consolidated Financial Statements
Consolidated Statements of Income
For the years ended December 31,
(in thousands of dollars, except per share amounts)
Revenue
Manufacturing and selling costs [note 6]
Gross profit
General and administration
Foreign exchange loss (gain)
Depreciation and amortization [notes 7 and 8]
Finance expense [note 21]
Gain on disposal of property, plant and equipment
Impairment of property, plant and equipment [note 7]
Gain on redemption of preferred shares [note 12]
Other items [note 12]
Income before income taxes
Income tax expense (recovery) [note 17]
Current
Deferred
Net income from continuing operations
Net loss from discontinued operations [note 18]
Net income
Earnings per share from continuing operations [note 19]
Basic
Diluted
Loss per share from discontinued operations [note 19]
Basic
Diluted
Earnings per share [note 19]
Basic
Diluted
See accompanying notes
2012
$
170,359
140,440
29,919
8,571
43
3,673
770
(246)
182
(670)
(638)
11,685
18,234
5,156
(412)
4,744
13,490
—
13,490
$0.47
$0.46
—
—
$0.47
$0.46
2011
$
127,046
107,592
19,454
9,986
(373)
4,317
1,272
(356)
—
—
—
14,846
4,608
969
185
1,154
3,454
(164)
3,290
$0.12
$0.12
($0.01)
($0.01)
$0.11
$0.11
29
Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
For the years ended December 31,
(in thousands of dollars)
Net income
Translation of foreign operations
Comprehensive income
Consolidated Statements of Shareholders’ Equity
For the years ended December 31,
2012
$
13,490
(954)
12,536
2011
$
3,290
787
4,077
Common
Shares
#
Share
Capital
$
Contributed
Surplus
$
Equity
Component
of Pref.
Shares
$
Accumulated
Other
Comprehensive Retained
Earnings
$
Loss
$
Total
$
28,802
69,862
2,177
845
(7,073)
8,373
74,184
—
847
575
—
271
(271)
—
—
—
—
70,980
69,862
—
—
—
69,862
128
—
—
—
2,609
1,669
508
—
—
2,177
—
—
—
(845)
—
—
—
—
845
—
—
—
845
—
—
—
—
(954)
—
—
(8,027)
(7,860)
—
787
—
(7,073)
—
—
—
—
—
(1,590)
13,490
20,273
5,083
—
—
3,290
8,373
575
847
—
(717)
(954)
(1,590)
13,490
85,835
69,599
508
787
3,290
74,184
(in thousands)
Balance, December 31, 2011
Share-based payments
[note 16]
—
233
Shares issued on exercise of
options [note 15]
Reclassification of fair value of
stock options previously
expensed [note 16]
Redemption of preferred
shares [note 12]
—
Translation of foreign operations —
Dividends declared [note 14]
—
—
Net income
29,035
Balance, December 31, 2012
—
Balance, December 31, 2010
28,802
Share-based payments [note 16] —
Translation of foreign operations —
—
Net income
Balance, December 31, 2011
28,802
See accompanying notes
30
Consolidated Financial Statements
Consolidated Statements of Cash Flows
For the years ended December 31,
(in thousands of dollars)
CASH FLOWS FROM CONTINUING OPERATIONS
Net income from continuing operations
Add (deduct) items not affecting cash:
Depreciation and amortization [notes 7 and 8]
Deferred tax (recovery) expense
Share-based compensation expense [note 16]
Gain on disposal of property, plant and equipment
Impairment of property, plant and equipment [note 7]
Gain on redemption of preferred shares [note 12]
Non-cash proceeds on settlement of claims [note 12]
Other
Funds from continuing operations
Changes in non-cash working capital:
(Increase) decrease in accounts receivable
Decrease (increase) in inventories
(Increase) decrease in prepaid expenses
Increase in accounts payable, accrued liabilities and provisions
(Decrease) increase in deferred revenue
Increase in income taxes payable
Cash flows from continuing operations
CASH FLOWS FROM FINANCING ACTIVITIES
Issue of common shares on the exercise of stock options, net of issuance costs [note 15]
Net repayment of bank indebtedness
Dividends paid [note 14]
Advance on long term debt, net of financing charges
Repayment of long term debt
Redemption of preferred shares [note 12]
Cash flows used in financing activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment [note 7]
Disposal of property, plant and equipment
Purchase of intangible assets [note 8]
Disposal of other assets [note 18]
Cash flows (used in) from investing activities
Foreign exchange loss on cash held in foreign currency
Cash used in discontinued operations [note 18]
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
See accompanying notes
2012
$
13,490
3,673
(412)
575
(246)
182
(670)
(1,348)
(92)
15,152
(8,802)
1,319
(21)
3,064
(1,857)
942
(5,355)
9,797
847
—
(1,010)
2,000
(3,376)
(2,075)
(3,614)
(2,982)
247
(75)
—
(2,810)
(234)
—
3,139
1,707
4,846
2011
$
3,454
4,317
185
508
(356)
—
—
—
309
8,417
2,825
(5,345)
31
1,025
3,403
2,843
4,782
13,199
—
(8,565)
—
—
(4,824)
—
(13,389)
(1,753)
633
(25)
1,336
191
(223)
(176)
(398)
2,105
1,707
31
Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
1. CORPORATE INFORMATION
ZCL Composites Inc. (the “Company”) is a public company incorporated and domiciled in Canada and its common stock trades
on the Toronto Stock Exchange. The address of the Company’s registered office is 1420 Parsons Road S.W., Edmonton,
Alberta, Canada, T6X 1M5. The Company is principally involved in the manufacturing and distribution of liquid storage
systems, including fibreglass underground and aboveground storage tanks, dual-laminate composite tanks and related
products and accessories. The Company also produces and sells in-situ fibreglass tank and tank lining systems and three
dimensional glass fabric material.
2. BASIS OF PRESENTATION
The consolidated financial statements have been prepared on a historical cost basis except for cash and cash equivalents
which are recorded at fair value through profit and loss.
Statement of Compliance
The consolidated financial statements of the Company have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and were authorized for
issue by the Board of Directors on March 7, 2013.
Basis of Consolidation
The consolidated financial statements of the Company include the accounts of ZCL Composites Inc. and its wholly-owned
subsidiaries including Parabeam Industries BV, Radigan Insurance Inc., ZCL International SRL (formerly VRB & Associates SRL),
ZCL-Dualam Inc. (“ZCL Dualam”) and Xerxes Corporation (“Xerxes”).
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and
continue to be consolidated until the date that such control ceases. On acquisition, the assets, liabilities and contingent
liabilities of a subsidiary are measured at their fair values. Any excess of the cost over the fair values of the identifiable net
assets acquired is recognized as goodwill. The financial statements of the subsidiaries are prepared for the same reporting
period as the parent company using consistent accounting policies. All intra-group balances, income and expenses, unrealized
gains and losses and dividends resulting from intra-group transactions are eliminated in full.
3. SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
Cash and cash equivalents consist of cash balances and highly liquid investments with original maturities of three months or
less. Cash equivalents are invested in money market funds and are readily convertible into a known amount of cash and are
subject to an insignificant risk of change in value.
Inventories
Inventories are valued at the lower of cost and net realizable value. Costs incurred in bringing each product to its present
location and condition are accounted for as follows:
•
•
Raw materials: purchase cost determined on an average cost basis.
Finished goods and work in progress: cost of direct materials, labour and a proportionate share of variable and fixed
production overhead expenses allocated based on a normal operating capacity for direct labour hours.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and
the estimated costs necessary to make the sale.
32
Notes to the Consolidated Financial Statements
Property, plant and equipment
Property, plant and equipment are stated at historical cost, net of accumulated depreciation and accumulated impairment
losses, if any. Such costs include the cost of replacing property, plant and equipment as well as capitalized interest costs on
qualifying assets. When significant parts of property, plant and equipment are required to be replaced in intervals or major
inspections are required, the Company recognizes such costs as individual components of an asset and depreciates them
according to their specific useful lives.
Land is not depreciated and leasehold improvements are depreciated using the straight-line method over the term of the
lease. Depreciation for the remainder of property, plant and equipment is calculated using the declining balance method
using the following rates:
Buildings 4%
Land improvements 10%
Manufacturing equipment 10%
Office equipment 20%
30%
Automotive equipment
An item of property, plant and equipment and any significant component initially recognized is derecognized upon disposal or
when no future economic benefits are expected from its use or disposal. Any gain or loss arising from derecognition is
included in the consolidated statements of income when the asset is derecognized. The useful lives, residual values and
methods of depreciation of property, plant and equipment are reviewed at each year end and adjusted prospectively, if
appropriate.
Impairment of non-financial assets
Assets that have an indefinite useful life, for example, goodwill, are not subject to amortization and are tested annually for
impairment. Assets that are subject to depreciation are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by
which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair
value less costs to sell and value in use. The fair value less costs to sell calculation is based on available data from binding
sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs for
disposing of the asset. The value in use calculation is based on a discounted cash flow model. The recoverable amount is
most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash-inflows and
the growth rate used for extrapolation purposes. The key assumptions used to determine the recoverable amount for the
different CGUs, including a sensitivity analysis, are disclosed and further explained in Note 26.
For the purposes of assessing impairment, assets are grouped into cash-generating units (“CGUs”). Non-financial assets other
than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. CGUs
are the smallest identifiable group of assets that generate cash flows that are independent of the cash flows of other groups
of assets. The determination of CGUs was based on management’s judgments in regard to the geographic location of
operating divisions, product groups and shared infrastructure.
Intangible assets
Internally developed intangible assets – deferred development costs:
Development costs that are directly attributable to the design and testing of identifiable and unique products controlled by
the Company are recognized as intangible assets when the following criteria are demonstrated:
The technical feasibility of completing the intangible asset so it will be available for use or sale;
The intention to complete the intangible asset and use or sell it;
The ability to use or sell the intangible asset;
•
•
•
• How the intangible asset will generate probable future economic benefits;
•
The availability of adequate technical, financial and other resources to complete the development and to use or sell the
intangible asset; and
The ability to measure reliably the expenditure attributable to the intangible asset during its development.
•
33
Notes to the Consolidated Financial Statements
Expenditures on research activities are recognized as an expense in the period in which they are incurred.
The amount initially recognized for internally developed intangible assets is the sum of the expenditures incurred from the
date when the intangible asset first meets the recognition criteria listed above. Where no internally developed intangible
asset can be recognized, development expenditures are recognized as an expense in the period in which they are incurred.
Subsequent to initial recognition, internally developed intangible assets are reported at cost less accumulated depreciation
and impairment losses, if any. Internally developed software is amortized over the expected life of ten years.
Acquired intangible assets:
Acquired intangible assets include non-contractual customer relationships, brands, licenses, patents, customer backlog, air
permits and non-patent technology. The cost of intangible assets acquired in a business combination are their fair values at
the dates of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization
and accumulated impairment losses, if any. The estimated useful lives are as follows:
Non-contractual customer relationships
Brands
Licenses
Patents
Air permits
Non-patented technology
Software
Estimated life of the relationship (three to ten years)
Expected life of the brand (ten years)
Term of the license agreement (three to nine years)
Life of the patent (six years)
Life of the permit (five years)
Expected life of related products (five years)
Expected life of the software system (ten years)
Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is
an indication that the intangible asset may be impaired. The amortization period and method for an intangible asset with a
finite useful life is reviewed at the end of each reporting period. Changes in the expected useful life or the expected pattern
of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or
method, as appropriate, and are treated as changes in accounting estimates.
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, 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. Gains or losses arising
from de-recognition 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.
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured at the
aggregate of the consideration transferred, measured at the acquisition date in addition to the fair value of any non-
controlling interest in the acquired. All acquisition costs are expensed as incurred. Any contingent consideration expected to
be paid will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent
consideration will be recognized in accordance with IAS 39 “Financial Instruments: Recognition and Measurement”. When
the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and
designation in accordance with contractual terms, economic circumstances and pertinent conditions as at the acquisition
date.
Goodwill is initially measured at cost being the excess of the consideration transferred over the Company’s net identifiable
assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary
acquired, the difference is recognized as a gain for the period.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is assigned to the
Company’s CGUs that are expected to benefit from the combination, irrespective of whether the assets and liabilities of the
acquired are assigned to that (those) CGU(s). If a business unit is disposed of, goodwill disposed of is measured based on the
relative values of the operation disposed of and the portion of the CGU retained.
34
Notes to the Consolidated Financial Statements
Provisions
General:
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is
probable that an outflow of resources will occur and a reliable estimate of the obligation can be made. Where the Company
expects to be reimbursed for any part of a provision, the reimbursement is recognized as a separate asset only when the
reimbursement is virtually certain, otherwise the circumstances of the reimbursement are disclosed as a contingency.
Expenses relating to a provision are presented in the consolidated statements of income net of any recognized
reimbursement.
Self-insured liabilities:
The Company self-insures certain risks related to pollution protection provided on certain product sales, general liability
claims and US workers’ compensation through Radigan Insurance Inc., its captive insurance company. The provision for self-
insured liabilities includes estimates of the costs of reported and expected claims based on estimates of losses using
assumptions determined by a certified reserve analyst.
Warranty:
The Company generally warrants its products for a period of one year after sale, and for up to 30 years for corrosion, if the
products are properly installed and used solely for storage of listed liquids. A number of component materials and parts are
similarly warranted by their manufacturers, thereby offsetting the Company’s exposure to warranty claims.
The Company’s complete storage systems marketed under the Prezerver trademark carry an enhanced 10 year, insurance-
backed warranty covering product replacement and pollution protection up to the limits of the policy. The Prezerver
warranty is covered by insurance underwritten by a major international insurer for Prezerver storage systems installed before
December 1, 2006. The Prezerver warranty for qualifying storage systems installed thereafter is insured through the
Company’s captive insurance company, Radigan Insurance Inc. The Company also carries general liability insurance including
product pollution coverage.
The Company’s warranty provision is based on a review of products sold and historical warranty cost experienced. Provisions
for warranty costs are charged to the consolidated statements of income and revisions to the estimated provision are
charged to the consolidated statements of income in the period in which they occur.
Foreign currency translation
The Company’s consolidated financial statements are presented in Canadian dollars and this is also the parent Company’s
functional currency. The functional currency of each of the Company’s subsidiaries is determined and the financial
statements of each entity are measured using that functional currency. The determination of functional currency is based on
management’s judgments with regard to the main settlement currency for the entity’s sales, labour costs and major
materials. In addition, management also considers factors such as the currency of the entity’s financing activities, the
autonomy of foreign operations and the proportion of the foreign operation’s transactions that are with the parent company.
Subsidiaries:
The assets and liabilities of foreign subsidiaries whose functional currencies are not denominated in Canadian dollars are
translated into Canadian dollars at the rate of exchange prevailing at the reporting date and their statements of income are
translated at the exchange rates prevailing at the date of the transactions. Exchange differences arising on the translation of
foreign subsidiaries are recognized in other comprehensive income. Any goodwill arising on the acquisition of a foreign
subsidiary and any fair value adjustments to the carrying value of assets and liabilities arising on acquisition and are treated as
assets and liabilities of the foreign subsidiary and are translated into Canadian dollars at the rate of exchange prevailing on
the reporting date. The Parabeam subsidiary’s functional currency is the euro and the functional currency of all other
subsidiaries is US dollars with the exception of the Canadian operations of ZCL Dualam.
Foreign transactions and balances:
When the Company or one of its subsidiaries transacts in a currency other than its functional currency, the transaction is
measured initially at the closing rate at the date of the transaction. Monetary assets and liabilities denominated in foreign
currencies are translated at the functional currency closing rate at a reporting period with the differences being recorded in
the consolidated statements of income. Non-monetary assets and liabilities are measured in terms of historical costs and are
translated using the exchange rates in existence at the date of the initial transaction.
35
Notes to the Consolidated Financial Statements
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. Revenue is measured at the fair value of the consideration received.
Sale of tanks and related products:
Revenue from the sale of tanks and related products is recognized when the significant risks and rewards of ownership of the
goods have passed to the buyer. Risks and rewards are generally transferred upon delivery of the goods, however there are
circumstances where the buyer accepts the risks and rewards of ownership prior to accepting delivery of the goods which
also triggers revenue recognition.
Installation and field service contracts:
Revenue from installation and field service contracts is accounted for using the percentage of completion method. The stage
of completion of a transaction qualifying for percentage of completion revenue recognition is determined by the proportion
of costs incurred to date relative to the estimated total costs to complete the contract. Anticipated losses on transactions are
recognized as soon as they can be reliably estimated.
Up-front non-refundable license fees and royalty revenue:
Revenue from up-front non-refundable license fees is recognized on a straight-line basis over the term of the Company’s
obligation of the related deliverables unless there is evidence that another method is more representative of the stage of
completion. Royalty revenue from the third party use of the Company’s technology is recognized in accordance with the
royalty agreement and when the revenue can be reliably measured.
Financial instruments
Financial assets:
The Company classifies financial assets as either fair value through profit or loss, held to maturity investments, loans and
receivables, available for sale financial assets or as derivatives designated as hedging instruments in effective hedge
arrangements as appropriate. The classification of a financial asset is determined at the time of initial recognition of the
asset. All financial assets are recognized initially at fair value plus transaction costs, except in the case of financial assets
recorded at fair value through profit and loss.
Financial assets at fair value through profit or loss:
The Company’s financial assets held at fair value through profit or loss consist of cash and cash equivalents and restricted
cash.
Loans and receivables:
The Company’s loans and receivables consist of accounts receivable, other assets and income taxes recoverable. These assets
are measured initially at fair value on the consolidated balance sheet, then they are carried at amortized cost using the
effective interest method less any related impairment losses.
Held to maturity investments:
As at December 31, 2012 and 2011, the Company did not have any held to maturity investments on the consolidated balance
sheet.
Available for sale financial instruments:
As at December 31, 2012 and 2011, the Company did not have any available for sale financial instruments on the consolidated
balance sheet.
Derivatives designated as hedging instruments:
As at December 31, 2012 and 2011, the Company did not have any derivatives designated as hedging instruments on the
consolidated balance sheet.
36
Notes to the Consolidated Financial Statements
Financial liabilities:
The Company classifies financial liabilities at fair value through profit or loss, loans and borrowings or as derivatives
designated as hedging instruments in effective hedge arrangements. The classification of a financial liability is determined at
the time of initial recognition.
Financial liabilities at fair value through profit and loss:
The Company’s financial liabilities carried at fair value through profit or loss consist of liabilities for cash-settled share-based
payment arrangements under the Company’s Restricted Share Unit Plan. See note 16 for further details.
Loans and borrowings:
The Company’s loans and borrowings consist of accounts payable, income taxes payable, long term debt and preferred
shares. These liabilities are measured initially at fair value plus transaction costs on the consolidated balance sheet, then they
are carried at amortized cost using the effective interest method less any related impairment losses. Transaction costs are
incremental costs directly related to the acquisition of a financial asset or the issuance of a financial liability. The Company
incurs transaction costs primarily through the issuance of debt and classifies these costs with the long term debt. These costs
are amortized using the effective interest method over the life of the related debt instrument.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated balance sheets if there is
a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to
realise the assets and settle the liabilities simultaneously.
Share-based payments
Equity-settled transactions:
Equity-settled share-based payments consist of stock options issued by the Board of Directors of the Company to directors,
employees or other people who provide management services to the Company. The cost of the stock options granted are
measured at their fair value at the date on which they were granted. Management has determined that the Black-Scholes
option pricing model is the most appropriate option pricing model to use given the nature of the Company’s stock options.
For more information on the estimates and inputs made by the Company, refer to note 16.
The cost of equity-settled transactions is recognized in the consolidated statement of income over the period in which the
service condition is fulfilled with the corresponding adjustment added to the contributed surplus account. No expense is
recognized for awards that do not vest. Where equity-settled transactions are cancelled by the Company, they are treated as
if they had vested and any unrecognized expense relating to the cancelled options is recognized in the consolidated
statement of income in that period.
Cash-settled transactions:
Restricted Share Unit (“RSU”) plans are granted to senior management of the Company and each unit entitles the holder to
the cash equivalent of one notional common share. The cost of the RSUs is measured at fair value which is determined by the
Company’s stock price on the grant date. At each reporting period, the RSUs are re-measured to fair value based on the
trading price of the Company’s stock at the reporting date.
Income taxes
Current income taxes:
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be
recovered from or paid to the taxation authorities.
Deferred taxes:
Deferred tax is accounted for using the liability method on temporary differences at the reporting date between the tax basis
of assets and liabilities and the carrying value for accounting purposes. Deferred tax liabilities are recorded for all temporary
differences other than:
• Where the temporary difference arises from the initial recognition of goodwill, or
• Where the temporary difference is associated with investments in subsidiaries can be controlled and it is probable that
the temporary difference will not reverse in the foreseeable future.
37
Notes to the Consolidated Financial Statements
Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused
losses to the extent that it is probable that the taxable income will be available against the deductible temporary difference
and can be utilized.
The carrying amount of deferred tax assets is reviewed at each reporting date and if necessary, reduced to the extent that it is
no longer probable that the future taxable income will be sufficient to utilize the deferred tax asset. Unrecognized deferred
tax assets are reassessed at each reporting period and if it is probable that the asset will be recovered, a deferred tax asset is
recognized to that extent.
All deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period in which the asset
is realized or the liability is settled, based on tax rates which have been enacted or substantively enacted by the end of the
reporting period.
Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and
timing of future taxable income. Given the wide range of international business relationships and the 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 income tax expense already recorded.
Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the
inception date. The arrangement is assessed for whether fulfilment of the arrangement is dependent on the use of a specific
asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an
arrangement.
As a lessor
Leases in which the Company does not transfer substantially all the risks and benefits of ownership of an asset are classified
as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the
leased asset and recognised over the lease term on the same basis as rental income.
Gains on sale and lease back transaction, where fair value of lease is below sale value, is recognized in the income statement
when they are incurred.
4. UPCOMING CHANGES IN ACCOUNTING POLICIES
Amendments to IFRS 7 and IAS 32: Offsetting Financial Assets and Financial Liabilities
Amendments to IFRS 7 require an entity to disclose information about rights to set-off and related arrangements (e.g.,
collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting
arrangements on an entity’s financial position. The new disclosures are required for all recognised financial instruments that
are set off in accordance with IAS 32: “Financial Instruments: Presentation”. The disclosures also apply to recognised financial
instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether
they are set off in accordance with IAS 32. These amendments will become effective for annual periods beginning on or after
January 1, 2013 and the Company has determined that the adoption of this amendment will not have an impact on the
consolidated financial statements.
Amendments to IAS 32 clarify the meaning of “currently has a legally enforceable right to set-off”. These amendments
become effective for annual periods beginning on or after January 1, 2014 and the Company has determined that the
adoption of this amendment will not have an impact on the consolidated financial statements.
IFRS 12: “Disclosure of Interests with Other Entities”
The standard becomes effective for annual periods beginning on or after 1 January 2013. It includes all of the disclosures that
were previously included in IAS 27 “Consolidated and Separate Financial Statements”, IAS 31: “Interests in Joint Ventures”
and IAS 28: “Investment in Associates”. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements,
associates and structured entities. The Company has determined that the adoption of this standard will not have an impact
on the consolidated financial statements.
38
Notes to the Consolidated Financial Statements
IFRS 13: “Fair Value Measurement”
In May 2011, the International Accounting Standards Board (“IASB”) published IFRS 13: “Fair Value Measurement”, which is
effective prospectively for annual periods beginning on or after January 1, 2013. IFRS 13 does not change the requirements
of using fair value, but rather, provides guidance on how to measure the fair value of financial and non-financial assets and
liabilities when required or permitted by IFRS. There are also additional disclosure requirements. Adoption of the standard is
not expected to have a material impact on the financial position or performance of the Company.
IAS 34: “Interim Financial Reporting”
The amendment aligns the disclosure requirements for total segment assets with total segment liabilities in interim financial
statements. This clarification also ensures that interim disclosures are aligned with annual disclosures. These improvements
are effective for annual periods beginning on or after January 1, 2013.
IFRS 10: “Consolidated Financial Statements”
In May 2011, the IASB issued IFRS 10: “Consolidated Financial Statements,” which replaces Standing Interpretations
Committee 12: "Consolidation-Special Purpose Entities", and parts of IAS 27: "Consolidated and Separate Financial
Statements". The new standard builds on existing principles by identifying the concept of control as the determining factor in
whether an entity should be included the Company’s consolidated financial statements. The standard provides additional
guidance to assist in the determination of control where it is difficult to assess. Based on a preliminary analysis, this new
standard is not expected to change the consolidation conclusion for the Company's current subsidiaries. This standard
becomes effective for annual periods beginning on or after January 1, 2013.
5.
INVENTORIES
As at
(in thousands of dollars)
Raw materials
Work in progress
Finished goods
December 31,
2012
$
December 31,
2011
$
9,068
4,048
9,541
22,657
8,846
5,950
9,475
24,271
During the year ended December 31, 2012 there was a write-down of $170,000 (December 31, 2011 - $175,000) of inventory
to its net realizable value.
6. MANUFACTURING AND SELLING COSTS
For the years ended December 31,
(in thousands of dollars)
Raw materials and consumables used
Labour costs
Other costs
Net change in inventories of finished goods and
work in progress
2012
$
58,150
31,152
49,302
1,836
140,440
2011
$
45,345
24,357
43,858
(5,968)
107,592
39
Notes to the Consolidated Financial Statements
7. PROPERTY, PLANT AND EQUIPMENT
(in thousands of dollars)
Cost
As at December 31, 2010
Land
$
Buildings
$
Manufacturing Office
Equip.
$
Equip.
$
Leaseholds
$
Auto
Equip.
$
Total
$
6,311
7,673
2,942
20,851
3,402
417
41,596
Additions
Disposals
Foreign exchange
As at December 31, 2011
—
—
2
6,313
Additions
Disposals
Impairment
Reclassification of assets from
held for sale
Foreign exchange
As at December 31, 2012
—
(91)
—
255
(2)
6,475
278
—
101
8,052
88
(1,434)
—
691
(39)
7,358
310
(61)
35
3,226
517
—
—
—
(41)
3,702
950
(1,740)
87
20,148
2,100
(375)
(182)
—
(128)
21,563
200
(67)
11
3,546
119
(167)
—
—
(14)
3,484
15
(30)
6
408
158
(198)
—
—
(9)
359
1,753
(1,898)
242
41,693
2,982
(2,265)
(182)
946
(233)
42,941
Accumulated Depreciation
As at December 31, 2010
Depreciation
Disposals
Foreign exchange
As at December 31, 2011
Depreciation
Disposals
Reclassification of assets from
held for sale
Foreign exchange
As at December 31, 2012
Carrying Amount
As at December 31, 2011
As at December 31, 2012
—
—
—
—
—
—
—
—
—
—
1,590
992
9,753
2,299
91
14,725
275
—
(38)
1,827
227
(202)
178
(7)
2,023
338
(12)
128
1,446
316
—
—
(16)
1,746
1,131
(1,321)
17
9,580
1,111
(375)
—
(40)
10,276
346
(51)
5
2,599
297
(153)
—
(10)
2,733
78
(17)
6
158
82
(163)
—
(7)
70
2,168
(1,401)
118
15,610
2,033
(893)
178
(80)
16,848
6,313
6,475
6,225
5,335
1,780
1,956
10,568
11,287
947
751
250
289
26,083
26,093
Capital work in progress of $321,000 (December 31, 2011 - $524,000) is included above and not subject to depreciation.
Included in this figure is $300,000 for manufacturing equipment and $21,000 in buildings (improvements).
During the year ended December 31, 2012, land and buildings with a net book value of $768,000 were reclassified back to
property, plant and equipment as the assets, previously classified as held for sale, were not sold within a year. The Company
did sell land and a building during the year ended December 31, 2012 that was previously classified as held for sale with a net
book value of $179,000.
The $182,000 impairment loss recognized during the year ended December 31, 2012 relates to an internally developed mold
for the Underground operating segment. This mold was initially designed to be lighter and more mobile than the existing
molds used by the Company, however the mold was not able to produce a tank that met ZCL’s stringent quality standards.
Management of the Company determined that this asset would not be usable, nor is it sellable to a third party, therefore the
entire carrying value of $182,000 was recorded as an impairment loss.
40
Notes to the Consolidated Financial Statements
8.
INTANGIBLE ASSETS
Customer
Relationships
$
Brands
$
Internally
Developed
ERP
Software
$
Deferred
Development
Costs
$
Product
Certifications
$
Other
$
Total
$
6,432
3,535
3,244
1,194
70
3,375
17,850
—
—
117
6,549
—
—
(136)
6,413
—
—
58
3,593
—
—
(67)
3,526
895
97
4,912
635
(104)
5,443
411
31
1,757
390
(33)
2,114
—
—
33
3,277
—
—
(38)
3,239
240
322
9
571
301
(8)
864
—
—
—
1,194
—
—
—
1,194
1,024
170
—
1,194
—
—
1,194
1,637
970
1,836
1,412
2,706
2,375
—
—
—
(70)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25
—
19
3,419
75
—
(22)
3,472
25
(70)
227
18,032
75
—
(263)
17,844
1,185
7,684
370
14
1,569
314
(15)
1,868
2,168
151
10,003
1,640
(160)
11,483
1,850
1,604
8,029
6,361
(in thousands of dollars)
Cost
As at December 31, 2010
Additions
Disposals
Foreign exchange
As at December 31, 2011
Additions
Disposals
Foreign exchange
As at December 31, 2012
Amortization
Foreign exchange
As at December 31, 2011
Amortization
Foreign exchange
As at December 31, 2012
Carrying Amount
As at December 31, 2011
As at December 31, 2012
Accumulated Depreciation
As at December 31, 2010
3,920
1,315
Other intangible assets include licenses, patents, air permits, non-patented technology and costs related to an RTP-1
certification.
9. BANK INDEBTEDNESS – OPERATING CREDIT FACILITY
The Company’s operating credit facility was not in use at December 31, 2012 and December 31, 2011. Bank indebtedness
consists of amounts drawn under available credit facilities and cheques issued in excess of related cash and cash equivalent
balances; the Company has a maximum of $20 million of available credit under this operating credit facility. The operating
credit facility is repayable on demand and expires on May 31, 2014 however it is typically renewed on an annual basis with
the Company’s primary lender. The rate of interest charged on the operating credit facility for Canadian dollar balances is
prime plus 100 basis points. The rate of interest charged on the operating credit facility for US dollar balances is US prime
plus 100 basis points.
The Company has pledged as general collateral for advances under the operating credit facility a general security agreement
on present and future assets, guarantees from each present and future direct and indirect subsidiary of the Company
supported by a first registered security over all present and future assets, and pledge of shares. The Company is not
permitted to sell or re-pledge significant assets held under collateral without consent from the lenders. The Company is
required to meet certain covenants as a condition of the debt agreements. At December 31, 2012, the Company was in
compliance with all restrictive covenants relating to the operating credit facility.
41
Notes to the Consolidated Financial Statements
10. PROVISIONS AND CONTINGENCIES
a) Provisions
(in thousands of dollars)
As at December 31, 2010
Amounts used against the provision
Additional provision
Foreign exchange
As at December 31, 2011
Amounts used against the provision
Additional provision
Foreign exchange
As at December 31, 2012
Warranty
$
Self-insured
liabilities
$
407
(521)
650
7
543
(522)
904
(9)
916
319
—
121
10
450
(30)
200
(11)
609
Other
$
27
(227)
824
17
641
(146)
593
(11)
1,077
Total
$
753
(748)
1,595
34
1,634
(698)
1,697
(31)
2,602
Of the $2,602,000 (2011 - $1,634,000) in provisions described above, the Company expects $1,993,000 (2011- $1,185,000) to
settle within 12 months of the balance sheet date, the remaining $609,000 (2011 - $449,000) of provisions are classified as
long term liabilities on the balance sheet.
The Company self-insures certain risks related to product liability, general liability coverage and US workers’ compensation
exposures through Radigan Insurance Inc., its captive insurance company. Management has accrued provisions related to its
self-insured liabilities based on reports from a certified reserve analyst as well as previous experience in dealing with similar
provisions. Although actual settlement amounts may differ from the provisions included in the Company’s consolidated
balance sheet, management does not expect these amounts to materially exceed the provisions accrued for self-insured
liabilities.
b) Contingencies
In the normal conduct of operations, various legal claims or actions are pending against the Company in connection with its
products and/or other commercial matters. The Company carries liability insurance, subject to certain deductibles and policy
limits, against such claims. Based on advice and information provided by legal counsel and the Company’s previous
experience with similar claims management records provisions, if any, in the period in which uncertainty regarding such
matters is resolved and the amount of the loss can be reasonably estimated.
Due to the uncertainties in the nature of the Company's legal claims, such as the range of possible outcomes and the progress
of the litigation, the provisions accrued involve estimates and the ultimate cost to resolve these claims may exceed or be less
than those recorded in the consolidated financial statements. Management believes that the ultimate cost to resolve these
claims will not materially exceed the insurance coverage or provisions accrued and, therefore, would not have a material
adverse effect on the Company’s consolidated statements. Management reviews the timing of the outflows of these
provisions on a regular basis. Cash outflows for existing provisions are expected to occur within the next one to five years,
although this is uncertain and depends on the development of the specific circumstances. These outflows are not expected to
have a material impact on the Company’s cash flows.
42
Notes to the Consolidated Financial Statements
11. LONG TERM DEBT
As at
(in thousands of dollars)
Term loan
Other long term debt
Total long term debt
Less current portion
December 31,
2012
$
December 31,
2011
$
4,762
—
4,762
1,350
3,412
4,168
2,106
6,274
1,687
4,587
Excluding financing costs, the principal balance of the term loan as at December 31, 2012 is $4,818,000 USD (December 31,
2011 – $4,144,000 USD) which is a reasonable estimate of its fair value.
During the year ended December 31, 2012, the Company increased its term loan by $2,009,000 USD as a result of paying out
an existing loan with the Business Development Bank of Canada. With the increase in principal on the term loan, the terms
and conditions on the term loan remained unchanged. The term loan requires monthly interest payments and quarterly
principal repayments of $337,500 Canadian dollars, with the balance due on maturity on May 31, 2014. The interest charged
on the loan is the US dollar based 30 day LIBOR rate plus 250 basis points. The Company is also subject to mandatory
prepayments of outstanding principal equal to 100% of any net proceeds on asset disposals and insurance proceeds received
by the Company. The Company’s bank has waived the repayment requirement on the disposal of the land and buildings
discussed in note 12.
The term loan is secured through a collateral mortgage over four properties owned by the Company. The carrying amount of
these four properties as at December 31, 2012 is $6,746,000. As part of the term loan renewal process, an appraisal of the
four properties was performed on December 31, 2010 which indicated an estimated fair value of $12,965,000 for the secured
properties. Given the recent valuation of these properties, these appraisals fairly represent the fair values of the secured
properties as at December 31, 2012.
The Company’s operating and term credit facilities are utilized as required throughout the year. Both credit facilities bear
interest at floating rates and changes in interest rates would affect the Company’s exposure to interest rate risk in servicing
the facilities. For additional information regarding the Company’s exposure to market fluctuations in interest rates, refer to
note 22.
12. PREFERRED SHARES
On June 15, 2012, the Company redeemed all outstanding convertible preferred shares that were issued by a subsidiary of
the Company to the vendor on the acquisition of ZCL Dualam on January 4, 2010. A total of 1,078,947 convertible preferred
shares, which had a repayment term of five years and a cumulative preferred dividend of 4.4%, were redeemed. When
issued, the Company recognized a liability of $5,125,000, its fair value, on the balance sheet as well as an $845,000 addition
to shareholders’ equity, which represented the fair value of the conversion options at the time the convertible preferred
shares were issued.
The preferred shares were redeemed for consideration of $5,173,000. The consideration was issued through cash
disbursement and by applying proceeds on the sale of properties and settlement of outstanding claims against the vendor.
The break-down of the consideration is as follows:
Cash payment to the vendor
Fair value of land and buildings transferred
Applied proceeds on the settlement of outstanding claims with the vendor
Total consideration issued
$2,075,000
1,750,000
1,348,000
$5,173,000
43
Notes to the Consolidated Financial Statements
At the time of the settlement, the estimated fair value of the convertible preferred shares was $6,362,000; $5,354,000
related to the fair value of the liability portion and $1,008,000 related to the fair value of the conversion option on the
convertible preferred shares. The Company allocated the consideration against both the liability and equity components of
the convertible preferred shares using the same methodology as was used when initially establishing the accounting for the
liability and equity components. This resulted in a gain of $670,000 in the consolidated statement of income for the year
ended December 31, 2012 and an increase to contributed surplus of $128,000.
The land and buildings had a carrying value of $1,502,000 and the disposal resulted in a gain of $248,000 in the consolidated
statement of income for the year ended December 31, 2012. One of the properties disposed of as part of this transaction
was previously recorded as an asset held for sale on the Company’s consolidated balance sheet.
The applied proceeds on the settlement of outstanding claims represented amounts that the Company had claimed in
relation to past or future anticipated cash disbursements that were incurred, or may be incurred by the Company on issues
relating to periods prior to the acquisition of ZCL Dualam. The amounts that were previously paid in prior periods, that have
now been recovered, have been recorded as a recovery of expenses in the other items line in the consolidated statement of
income for the year ended December 31, 2012. The remainder is included in provisions as at December 31, 2012.
13. COMMITMENTS
Lease Commitment
The Company’s minimum annual payments under the terms of all operating leases are as follows:
(in thousands of dollars)
2013
2014
2015
2016
2017
Thereafter
Other Contractual Obligations
$
2,558
2,156
1,314
997
514
292
7,831
The Company has provided a letter of credit in the amount of $1.0 million to secure a line of credit for the same amount for
our US operations. The Company has also provided two letters of credit for a total of $0.4 million to secure claims for the
Company’s US workers’ compensation program. In the normal course of business, the Company provides letters of credit as
collateral for contract performance guarantees. As at December 31, 2012 the issued performance letters of credit totalled
$1.5 million.
44
Notes to the Consolidated Financial Statements
14. DIVIDENDS
Dividends declared for year ended December 31,
2012
Declared
March 7, 2012
May 8, 2012
August 3, 2012
November 8, 2012
Per share
$0.010
$0.010
$0.015
$0.020
$0.055
Paid to
shareholders
April 2, 2012
July 16, 2012
Oct 15, 2012
Jan 15, 2013
Total
$288,000
$288,000
$434,000
$580,000
$1,590,000
Declared
—
—
—
—
—
2011
Per share
—
—
—
—
—
Paid to
shareholders
—
—
—
—
—
Total
—
—
—
—
—
For the year ended December 31, 2012,
Payable, beginning of period
Declared
Paid in cash
Payable, end of period
2012
$
—
1,590,000
(1,010,000)
580,000
2011
$
—
—
—
—
On March 7, 2013, the Company’s Board of Directors declared a dividend of $0.025 per common share to be paid on April 15,
2013 to the shareholders of record as of March 28, 2013.
15. SHARE CAPITAL
Authorized
Unlimited number of common shares with no par or stated value.
Issued and outstanding
During the year ended December 31, 2012, the Company issued 233,000 (2011 - nil) common shares at an average rate of
$3.63 per share for options exercised resulting in cash proceeds to the Company of $847,000 (2011 - $nil). As at December
31, 2012, the Company had 29,035,003 common shares outstanding (December 31, 2011 – 28,802,020).
16. SHARE BASED PAYMENTS
The Black-Scholes option pricing model, used by the Company to calculate the values of options, as well as other currently
accepted option valuation models, was developed to estimate the fair value of freely-tradeable, fully-transferable options
without vesting restrictions. These models require subjective assumptions, including future share price volatility and expected
time until exercise, which affect the calculated values.
Under the Company’s stock option plan, options to purchase common shares may be granted by the Board of Directors to
directors, employees, and persons who provide management or consulting services to the Company. The shareholders
authorized the number of options that may be granted under the plan to not exceed 10% of the issued and outstanding
shares of the Company on a non-diluted basis provided that the number of listed securities that may be reserved for issuance
under stock options granted to any one individual or insiders of the Company not exceed 5% of the Company’s issued and
outstanding securities. The exercise price of options granted cannot be less than the closing market price of the Company’s
common shares on the last trading day preceding the grant. The Company’s Board of Directors may determine the term of
the options but such term cannot be greater than five years from the date of issuance. Vesting terms, eligibility of qualifying
individuals to receive options and the number of options issued to individual participants are determined by the Company’s
Board of Directors. The plan has no cash settlement features. Options generally expire 90 days from the date on which a
participant ceases to be a director, officer, employee, management company employee or consultant of the Company.
45
Notes to the Consolidated Financial Statements
As at December 31, 2012, the Company has 2,424,349 (2011 – 2,207,498) options outstanding, which expire on dates
between December 2013 and December 2017. The outstanding options vest evenly over a three-year period commencing on
the anniversary of the original grant date. As at December 31, 2012, 959,269 (2011 – 747,769) of the outstanding options
were vested and exercisable into common shares. The following table presents the changes to the options outstanding
during each of the fiscal years:
For the years ended December 31,
Balance, as at January 1
Granted
Exercised
Forfeited
Expired
Balance, as at December 31
2012
2011
Stock
options
2,207,498
597,000
(232,983)
(147,166)
—
2,424,349
Weighted
average
exercise price
3.44
4.72
3.63
3.54
—
3.74
2012
Stock
options
1,414,000
1,195,000
—
(351,502)
(50,000)
2,207,498
Weighted
average
exercise price
4.01
3.10
—
4.39
4.55
3.44
Exercise
Price
$
3.75
3.87
4.09
3.05
3.23
3.15
4.72
3.05 – 4.72
Exercise
Price
$
3.75
3.87
4.09
3.05
3.23
3.15
3.05 – 4.09
Options Outstanding
Weighted
Average
Exercise
Price
$
Weighted Average
Remaining
Contractual
Life in Years
#
3.75
3.87
4.09
3.05
3.23
3.15
4.72
3.74
0.94
2.02
2.19
3.19
3.40
3.93
4.95
3.24
2011
Options Outstanding
Weighted
Average
Exercise
Price
$
Weighted Average
Remaining
Contractual
Life in Years
#
3.75
3.87
4.09
3.05
3.23
3.15
3.44
1.94
3.02
3.19
4.19
4.40
4.93
3.55
Stock
options
#
395,300
378,672
20,000
453,372
7,500
572,505
597,000
2,424,349
Stock
options
#
579,999
464,999
22,500
510,000
7,500
622,500
2,207,498
Options Exercisable
Weighted
Average
Exercise
Price
$
3.75
3.87
4.09
3.05
3.23
3.15
—
3.58
Stock
options
#
395,300
238,645
13,330
133,347
2,499
176,148
—
959,269
Options Exercisable
Weighted
Average
Exercise
Price
$
3.75
3.87
4.09
—
—
—
3.78
Stock
options
#
579,999
159,972
7,498
—
—
—
747,769
46
Notes to the Consolidated Financial Statements
During the year ended December 31, 2012, 597,000 options were granted at an exercise price of $4.72. During the year
ended December 31, 2011, 1,195,000 options were granted. 622,500 options were granted on December 6, 2011 at an
exercise price of $3.15, 565,000 options were granted on March 11, 2011 at an exercise price of $3.05 and 7,500 options were
granted on May 25, 2011 at an exercise price of $3.23.
During the year ended December 31, 2012, $232,983 stock options (2011 – nil) were exercised with a weighted average
exercise price of $3.63 resulting in cash proceeds to the Company of $847,000. Compensation expense previously included in
contributed surplus of $271,000 was credited to share capital on the exercise of stock options.
The Company uses the fair value method of accounting for all stock options granted to employees. The fair value of stock
options at the date of grant or transfer is determined using the Black-Scholes option pricing model with assumptions for risk-
free interest rates, dividend yield, volatility factors of the expected market prices of the Company’s common shares, expected
forfeitures and an expected life of the instrument. Share-based compensation expense is recognized using a graded vesting
model. During the year ended December 31, 2012, share-based compensation expense of $575,000 (2011 - $508,000) was
recorded in manufacturing and selling costs and general and administration expenses in the consolidated statements of
income.
The estimated fair values of stock options granted are determined at the date of the grant using the Black-Scholes option
pricing model with the following weighted average assumptions resulting in a fair value per option of $1.37 ($0.90, $1.21 and
$0.97 during the year ended December, 2011 respectively).
Risk-free interest rate (%)
Expected hold period to exercise (years)
Volatility in the price of the Company’s shares (%)
Forfeiture rate (%)
Dividend yield (%)
2012
1.2
3.8
41.5
5.0
1.6
2011
1.7
3.2
49.8
5.0
1.7
The expected hold period, volatility, forfeiture rate and dividend yield are based on management’s judgments in regard to the
Company’s past history and expectations for the future. The above figures reflect the parameters used in grant during the
2012 year and the average parameters for all three grants during the 2011 year.
17. INCOME TAXES
The Company's effective income tax expense has been determined as follows:
(in thousands of dollars)
Statutory federal and provincial taxes at 25.47% (2011 – 27.03%)
Increase (decrease) in income taxes resulting from:
Rate differences for foreign jurisdictions
Effect of permanent differences
Non-taxable foreign income, other tax exempt income and other items
At the effective income tax rate of 26% (2011 – 25%)
A reconciliation of the Company’s deferred tax liabilities is as follows:
(in thousands of dollars)
Balance, beginning of the year
Tax (recovery) expense during the year recognized in net income
Tax (recovery) expense during the year recognized in other
Comprehensive loss
At the effective income tax rate of 26% (2011 – 25%)
2012
$
4,644
663
(624)
61
4,744
2012
$
5,068
(412)
(59)
4,597
2011
$
1,246
39
257
(388)
1,154
2011
$
4,848
185
35
5,068
47
Notes to the Consolidated Financial Statements
Significant components of the Company’s deferred tax liabilities are as follows:
(in thousands of dollars)
Property, plant and equipment
Land
Intangible assets
Inventories
Refundable insurance premiums
Non-deductible reserves and accrued liabilities
Loss carry forward
Scientific research and experimental development credits
Other
2012
$
3,060
343
1,344
565
110
(871)
—
—
46
4,597
2011
$
3,239
343
1,862
571
118
(603)
(308)
(161)
7
5,068
The Company has utilized all of loss carry forwards for both Canadian and U.S. tax purposes. As at December 31, 2012, there
was no loss carry forwards available to reduce taxable income in the future (2011 loss carry forwards – US federal
US$264,000; US state US$1,538,000; Canada $603,000).
18. DISCONTINUED OPERATIONS
On May 31, 2011, the Company disposed of the steel tank division for cash proceeds of $800,000. On June 14, 2010, the
Company disposed of the Home Heating Oil Tank (“HHOT”) division which included all related inventory and equipment for
cash proceeds of $300,000 and a loan payable to the Company with a face value of $1,700,000 as at December 31, 2010. The
loan was paid out in cash proceeds of $1,336,000 on March 16, 2011.
a) The results of the discontinued operations are as follows:
(in thousands of dollars)
Revenue
Manufacturing and selling costs
Depreciation
General and administration
Gain on disposal of equipment
Loss on impairment of property, plant and equipment
Loss before income taxes
Income tax recovery
Net loss from discontinued operations
b) The carrying amounts of the assets disposed are as follows:
(in thousands of dollars)
Inventory
Equipment
Total carrying values of assets disposed
2012
$
—
—
—
—
—
—
—
—
—
—
—
2011
$
2,066
2,277
(211)
19
26
(31)
—
14
(225)
(61)
(164)
May 31,
2011
$
530
397
927
48
Notes to the Consolidated Financial Statements
c) Cash used in discontinued operations are as follows:
(in thousands of dollars)
Cash flows from continuing operations
Net loss
Add items not affecting cash:
Depreciation
Gain on disposal of assets
Cash used in discontinued operations
19. EARNINGS PER SHARE
2012
$
—
—
—
—
2011
$
(164)
19
(31)
(176)
The following table sets forth the net income available to common shareholders and weighted-average number of common
shares outstanding for the computation of basic and diluted earnings per share:
For the year ended December 31,
Numerator (in thousands of dollars)
Net income from continuing operations
Net loss from discontinued operations
Net income
Denominator (in thousands)
Weighted average shares outstanding - basic
Effect of dilutive securities:
Stock options
Weighted average shares outstanding - diluted
20. RELATED PARTY TRANSACTIONS
a) Transactions in the normal course of operations:
2012
$
13,490
—
13,490
2012
#
28,860
265
29,125
2011
$
3,454
(164)
3,290
2011
#
28,802
—
28,802
Certain manufacturing components purchased for $31,000 (2011 - $30,000) for the year ended December 31, 2012, included
in manufacturing and selling costs in the consolidated statements of income or inventories were provided by a corporation
whose Chairman and CEO is a director of the Company. The transactions were incurred in the normal course of operations
and recorded at fair value being normal commercial rates for the products. Accounts payable and accrued liabilities at
December 31, 2012 included $3,000 (December 31, 2011 - $nil) owing to the corporation. There are no ongoing contractual or
other commitments resulting from these transactions.
b) Transactions with key management and directors:
For the year ended December 31,
(in thousands of dollars)
Salaries, benefits and director fees
Share-based payments
Total
2012
$
1,129
210
1,339
2011
$
1,126
164
1,290
49
Notes to the Consolidated Financial Statements
The Company has identified the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer as key
management to the Company in addition to the members of the board of directors. The figures above are included in general
and administrative expenses for the years ended December 31, 2012 and 2011. Share-based payments are the amount of
expense recognized in the consolidated statement of income relating to the identified key management and directors.
21. FINANCE EXPENSE
For the year ended December 31,
(in thousands of dollars)
Short-term interest, net of interest income
Interest, long term obligations
22. FINANCIAL INSTRUMENTS
Financial risk management
2012
$
573
197
770
2011
$
940
332
1,272
The Company’s activities expose it to a variety of financial risks including market risk (foreign exchange risk and interest rate
risk), credit risk and liquidity risk. Management reviews these risks on an ongoing basis to ensure that the risks are
appropriately managed. The Company may use foreign exchange forward contracts to manage exposure to fluctuations in
foreign exchange from time to time. The Company does not currently have a practice of trading derivatives and had no
derivative instruments outstanding at December 31, 2012 and 2011.
a)
Interest rate risk
The Company’s objective in managing interest rate risk is to monitor expected volatility in interest rates while also minimizing
the Company’s financing expense levels. Interest rate risk mainly arises from fluctuations of interest rates and the related
impact on the return earned on cash and cash equivalents, restricted cash and the expense on floating rate debt. On an
ongoing basis, management monitors changes in short term interest rates and considers long term forecasts to assess the
potential cash flow impact to the Company. The Company does not currently hold any financial instruments to mitigate its
interest rate risk. Cash and cash equivalents and restricted cash earn interest based on market interest rates. Bank
indebtedness balances and long term debt have floating interest rates which are subject to market fluctuations.
The effective interest rate on the bank indebtedness balance at December 31, 2012 was prime plus 100 basis points, 4%
(December 31, 2011 - prime plus 100 basis points, 4%) adjusted quarterly based on certain financial indicators of the
Company. The effective interest rate on the term loan balance at December 31, 2012 was US LIBOR rate plus 250 basis
points, 2.71% (December 31, 2011 – US LIBOR rate plus 250 basis points, 2.75%), adjusted quarterly based on certain financial
indicators of the Company. With other variables unchanged, an increase or decrease of 100 basis points in the US LIBOR and
Canadian prime interest rate as at December 31, 2012 would have impacted net income before tax for the year then ended
by approximately $85,000.
b) Foreign exchange risk
The Company operates on an international basis and is subject to foreign exchange risk exposures arising from transactions
denominated in foreign currencies. The Company’s objective with respect to foreign exchange risk is to minimize the impact
of the volatility related to financial assets and liabilities denominated in a foreign currency, where possible, through effective
cash flow management. Foreign currency exchange risk is limited to the portion of the Company’s business transactions
denominated in currencies other than Canadian dollars. The Company’s most significant foreign exchange risk arises primarily
with respect to the US dollar. The revenues and expenses of the Company’s US operations are denominated in US dollars.
Certain of the revenue and expenses of the Canadian operations are also denominated in US dollars. The Company is also
exposed to foreign exchange risk associated with the euro due to its operations in The Netherlands, however these amounts
are not significant to the Company’s consolidated financial results. On an ongoing basis, management monitors changes in
foreign currency exchange rates as well as considering long term forecasts to assess the potential cash flow impact to the
Company. During the year ended December 31, 2012, the Company converted US dollar cash to Canadian dollar cash to help
50
Notes to the Consolidated Financial Statements
mitigate foreign exchange exposures resulting from fluctuations in exposed monetary assets and liabilities. The Company
continues to monitor its foreign exchange exposure on monetary assets.
The tables that follow provide an indication of the Company’s exposure to changes in the value of the US dollar relative to the
Canadian dollar as at and for the year ended December 31, 2012. The analysis is based on financial assets and liabilities
denominated in US dollars at the end of the period (“balance sheet exposure”), which are separated by domestic and foreign
operations, and US dollar denominated revenue and operating expenses during the period (“operating exposure”).
Balance sheet exposure as at December 31, 2012,
(in thousands of US dollars)
Cash and cash equivalents
Accounts receivable
Restricted cash
Accounts payable and accrued liabilities
Trade balances with self-sustaining foreign entities
Long term debt
Net balance sheet exposure
Operating exposure for the year ended December 31, 2012,
(in thousands of US dollars)
Sales
Operating expenses
Net operating exposure
Foreign
Operations
$
Domestic
Operations
$
2,656
13,514
250
(8,471)
—
—
7,949
1,127
4,284
—
(1,234)
(1,309)
(4,818)
(1,950)
Total
$
3,783
17,798
250
(9,705)
(1,309)
(4,818)
5,999
$
115,027
92,994
22,033
The weighted average US to Canadian dollar translation rate was 1.00 for the year ended December 31, 2012. The translation
rate as at December 31, 2012 was 1.00.
Based on the Company’s foreign currency exposures noted above, with other variables unchanged, a twenty percent change
in the Canadian dollar would have impacted net income as follows:
For the year ended December 31, 2012,
(in thousands of US dollars)
Net balance sheet exposure of other operations
Net operating exposure of foreign operations
Change in net income
$
(250)
2,820
2,570
Other comprehensive income (loss) would have changed $1,017,000 if the value of the Canadian dollar fluctuated by 20% due
to the net balance sheet exposure of financial assets and liabilities of foreign operations. The timing and volume of the above
transactions as well as the timing of their settlement could impact the sensitivity analysis.
c) Credit risk
Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its
contractual obligations. The Company is exposed to credit risk through its cash and cash equivalents, restricted cash and
accounts receivable. The Company manages the credit risk associated with its cash and cash equivalents and restricted cash
by holding its funds with reputable financial institutions and investing only in highly rated securities that are traded on active
markets and are capable of prompt liquidation. Credit risk for trade and other accounts receivable are managed through
established credit monitoring activities. The Company also mitigates its credit risk on trade accounts receivable by obtaining a
51
Notes to the Consolidated Financial Statements
cash deposit from certain customers with no prior order history with the Company or where the Company perceives the
customer has a higher level of risk.
The Company has a concentration of customers in the oil and gas and corrosion sectors. The concentration risk is mitigated by
the large number of customers and by a significant portion of the customers being large international organizations. As at
December 31, 2012 and 2011, no single customer exceeded 10% of the consolidated trade accounts receivable balance.
Losses under trade accounts receivable have not historically been significant. The creditworthiness of new and existing
customers is subject to review by management by considering such items as the type of customer, prior order history and the
size of the order. Decisions to extend credit to new customers are approved by management and the creditworthiness of
existing customers is monitored.
The Company reviews its trade accounts receivable regularly and amounts are written down to their expected realizable value
when the account is determined not to be fully collectable. This generally occurs when the customer has indicated an inability
to pay, the Company is unable to communicate with the customer over an extended period of time, and other methods to
obtain payment have been considered and have not been successful. The bad debt expense is charged to net income in the
period that the account is determined to be doubtful. Estimates for the allowance for doubtful accounts are determined on a
customer-by-customer evaluation of collectability at each reporting date, taking into account the amounts which are past due
and any available relevant information on the customers’ liquidity and going concern status. After all efforts of collection have
failed, the accounts receivable balance not collected is written off with an offset to the allowance for doubtful accounts, with
no impact on net income.
The Company’s maximum exposure to credit risk for trade accounts receivable is the carrying value of $27,338,000 as at
December 31, 2012 (December 31, 2011 - $19,472,000). On a geographic basis as at December 31, 2012, approximately 48%
(December 31, 2011 – 47%) of the balance of trade accounts receivable was due from Canadian and non-US customers and
52% (December 31, 2011 – 53%) was due from US customers.
Payment terms are generally net 30 days. The aging of trade accounts receivable prior to including the allowance for doubtful
accounts were as follows:
As at December 31,
Current
Past due 1 to 30 days
Past due 31 to 60 days
Past due 61 to 90 days
Past due greater than 90 days
2012
60%
27%
6%
2%
5%
100%
2011
51%
27%
12%
8%
2%
100%
Despite the established payment terms, customers in the oil and gas industry, who represent a significant portion of the
customer base for the Company, typically pay amounts within 60 days of the invoice date. Accordingly, it is management’s
view that amounts outstanding from these customers up to 60 days from the invoice date have a low risk of not being
collected.
Included in the accounts receivable balance are balances not considered trade receivables of $1,131,000 which include funds
receivable from various sales tax refunds, insurance refunds and rebates (December 31, 2011 - $436,000).
The Company had recorded an allowance for doubtful accounts of $275,000 as at December 31, 2012 (December 31, 2011 -
$355,000). The allowance is an estimate of the December 31, 2012 trade receivable balances that are considered
uncollectible. The allowance increased for bad debt expense of $110,000 (2011 - $145,000), offset by payments of $110,000
(2011 - $95,000), write offs of $76,000 (2011 - $47,000) and a translation adjustment of $4,000 (2011 - $8,000) for the year
ended December 31, 2012.
52
Notes to the Consolidated Financial Statements
d) Liquidity risk
The Company’s objective related to liquidity risk is to effectively manage cash flows to minimize the exposure that the
Company will not be able to meet its obligations associated with financial liabilities. On an ongoing basis, liquidity risk is
managed by maintaining adequate cash and cash equivalent balances and appropriately utilizing available lines of credit.
Management believes that forecasted cash flows from operating activities, along with the available lines of credit, will provide
sufficient cash requirements to cover the Company’s forecasted normal operating activities, commitments and budgeted
capital expenditures.
The Company has pledged as general collateral for advances under the operating credit facility and the bank term loan a
general security agreement on present and future assets, guarantees from each present and future direct and indirect
subsidiary of the Company supported by a first registered security over all present and future assets, and pledge of their
shares. The Company is not permitted to sell or re-pledge significant assets held under collateral without consent from the
lenders.
The following are the undiscounted contractual maturities of financial liabilities excluding future interest:
Carrying
Amount
$
19,876
580
4,762
25,218
(in thousands of dollars)
Accounts payable,
accrued liabilities
and provisions
Dividends payable
Long term debt
Total
23. STATEMENT OF CASH FLOWS
For the year ended December 31,
(in thousands of dollars)
Net interest paid
Income taxes paid
24. CAPITAL RISK MANAGEMENT
2013
$
2014
$
2015
$
Thereafter
$
19,267
580
1,350
21,197
609
—
3,412
4,021
—
—
—
—
2012
$
823
4,616
5,439
—
—
—
—
2011
$
1,206
133
1,339
Management’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern, to
provide an adequate return to shareholders, to meet external capital requirements on the Company’s debt and credit
facilities and preserve financial flexibility in order to benefit from potential opportunities that may arise. The Company
defines capital that it manages as the aggregate of its long term debt and shareholders’ equity, which is comprised of issued
capital, contributed surplus and retained earnings.
53
Notes to the Consolidated Financial Statements
a)
Long term debt and adjusted capital employed:
As at December 31,
(in thousands of dollars)
Current portion of long term debt [note 11]
Current portion of preferred shares [note 12]
Long term debt [note 11]
Preferred shares [note 12]
Total long term debt
Share capital
Contributed surplus
Equity component of preferred shares [note 12]
Retained earnings
Adjusted shareholders’ equity
Adjusted capital employed
2012
$
1,350
—
3,412
—
4,762
70,980
2,609
—
20,273
93,862
98,624
2011
$
1,687
57
4,587
5,125
11,456
69,862
2,177
845
8,373
81,257
92,713
Management considers changes in economic conditions, risks that impact the consolidated operations and future significant
capital investment opportunities in managing its capital and considers adjustments to its ratio of long term debt to adjusted
capital employed when significant changes in these factors are expected. Management considers the ratio of long term debt
to adjusted capital employed of 5% as at December 31, 2012 (December 31, 2011 – 12%) to be low. Adjusted capital
employed is defined as long term debt plus total shareholders’ equity excluding accumulated other comprehensive loss.
b) Debt management
Under its long term credit facilities, the Company must maintain a number of financial covenants on a quarterly basis. These
covenants include, but are not limited to, a minimum shareholders’ equity value, a debt to tangible net worth ratio, a fixed
charge coverage ratio and a current ratio. These ratios are calculated in accordance with the credit facility and are not
necessarily consistent with figures presented in these consolidated financial statements under International Financial
Reporting Standards.
The following summarizes the financial ratios mentioned above calculated in accordance with the Company’s credit facility:
Minimum equity value
Debt to tangible net worth
Fixed charge coverage ratio
Current ratio
Dec 31,
2012
Actual
$86 million
0.10
5.07
2.16
Dec 31,
2012
Required
>$50 million
<2.0
>1.5
>1.25
Dec 31,
2011
Actual
$74 million
0.15
3.93
1.92
Dec 31,
2011
Required
>$50 million
<2.0
>1.5
>1.25
On an ongoing basis, management expects to continue meeting all financial covenants under its current credit facility.
54
Notes to the Consolidated Financial Statements
25. SEGMENTED INFORMATION
Operating segments are defined as components of the Company for which separate financial information is available that is
evaluated regularly by the chief operating decision maker in allocating resources and assessing performance. The chief
operating decision maker of the Company is the Chief Executive Officer. The Company operates substantially all of its
activities in two reportable segments, Underground Fluid Containment (“Underground”) and Aboveground Fluid Containment
(“Aboveground”).
a)
Information about reportable segments
For the year ended December 31,
(in thousands of dollars)
Revenue
Manufacturing and
selling costs
Gross profit
Underground
Aboveground
Total
2012
$
2011
$
2012
$
2011
$
2012
$
2011
$
114,442
101,590
55,917
25,456
170,359
127,046
94,019
20,423
84,234
17,356
46,421
9,496
23,358
2,098
140,440
29,919
107,592
19,454
Manufacturing and selling costs are the only costs that are directly attributable to the Underground and Aboveground
operating segments. All other costs are not specifically identifiable to an individual segment and management has
determined that there is no rational basis on which to allocate general and administration and other expenses. Only a gross
profit measure is reported to the Chief Executive Officer on a regular basis; therefore gross profit is disclosed as the measure
of profit.
Inventories
Property,
plant and
equipment
Intangible assets
and goodwill
As at
(in thousands of dollars)
Underground
Aboveground
Total
Dec 31,
2012
$
18,908
3,749
22,657
Dec 31,
2011
$
18,311
5,960
24,271
Dec 31,
2012
$
20,265
5,828
26,093
Dec 31,
2011
$
20,292
5,791
26,083
Dec 31,
2012
$
32,092
3,940
36,032
Dec 31,
2011
$
34,081
4,211
38,292
The only assets that can be identified by reportable segments are inventories, property, plant and equipment, intangible
assets and goodwill. All other current and long term assets, as well as current and long term liabilities are not segregated into
the reportable segments.
b)
Information about major customers
The Company has long term contracts and alliance arrangements with many of the major oil and gas companies in Canada
and provides products for distributors and retail oil and gas companies in the US. For the year ended December 31, 2012 and
2011, no single customer exceeded 10% of total revenue.
55
Notes to the Consolidated Financial Statements
c)
Information about geographic areas
For the years ended December 31,
(in thousands of dollars)
Canada
United States
International
As at
(in thousands of dollars)
Canada
United States
International
2012
$
79,317
87,865
3,177
170,359
Revenues
2011
$
55,034
68,382
3,630
127,046
Property, plant and
equipment, intangible
assets and goodwill
Dec 31,
2012
$
24,981
35,983
1,161
62,125
Dec 31,
2011
$
26,220
36,604
1,551
64,375
Dec 31,
2012
$
54,510
63,233
2,783
120,526
Total assets
Dec 31,
2011
$
52,218
58,898
2,783
113,899
26. IMPAIRMENT TESTING OF GOODWILL
Goodwill acquired through business combinations has been allocated to three groups cash-generating units (“CGUs”) as
follows:
• Underground Canada
• Underground US
•
Aboveground
Carrying amount of goodwill allocated to each CGU
As at
(in thousands of dollars)
Goodwill
Underground Canada
Underground US
Aboveground
Oct 1,
2012
$
1,377
Oct 1,
2011
$
1,377
Oct 1,
2012
$
25,319
Oct 1,
2011
$
26,586
Oct 1,
2012
$
2,641
Oct 1,
2011
$
2,641
The Company performed its annual goodwill impairment test as at October 1, 2012. Among other factors, the Company
considers the relationship between the fair values less cost to sell (“FVLCS”) of its CGUs, to their carrying amounts, when
reviewing for indicators of impairment. As at October 1, 2012, the FVLCS of the CGUs were above the carrying amounts,
indicating there was not an impairment of goodwill in any of the CGUs identified above.
The balances relating to goodwill disclosed above are as at October 1, 2012, the date of the impairment test. Goodwill
carried in the Underground US CGU is denominated in US dollars and the carrying amount is subject to fluctuations in the US
dollar to Canadian dollar exchange rate, which is why the October 1, 2012 figures above may differ from the October 1, 2011
carrying amount. There has been no impairment of goodwill recognised in the 2012 or 2011 year.
56
Notes to the Consolidated Financial Statements
Key assumptions used in the FVLCS calculations
The calculation of the FVLCS for the three CGUs is most sensitive to the following assumptions:
• Discount rates
• Growth rate used to extrapolate cash flows beyond the budget period
• Gross profit
Discount rates:
Discount rates represent the current market assessment of the risks specific to each CGU, regarding the time value of money
and individual risks of the underlying assets which have not been incorporated in the cash flow estimates. The discount rate
calculation is based on the market risks and specific circumstances of the Company and its operating segments and derived
from its weighted average cost of capital (WACC). The WACC takes into account both debt and equity. The cost of equity is
derived from the expected return of investment by investors. The cost of debt is based on market conditions and the
Company’s interest bearing borrowings. Segment-specific risk is incorporated by applying individual beta factors. The beta
factors are evaluated annually based on publicly available market data. Specific risk premiums are calculated after
consideration for the volatility in the revenue streams and the risk factors affecting the predictability of the particular CGU.
Discount rate ranges utilized by CGUs are as follows: Underground Canada (13.6% to 14.4%), Underground U.S. (16.4% to
17.2%) and Aboveground (23.5% to 24.3%).
Growth rate estimates:
Growth rates for 2013 are established using the board approved budgeted growth rate by CGU. Longer term growth rates are
established using the Strategic Plan for each CGU. Both the 2013 operating budget and the Strategic Plan were calculated
using our current prospects and our planned strategic changes expected to be implemented. The growth rate used to
extrapolate cash flows beyond the budget period used (five years) is based on Government of Canada target inflation rates
and U.S. Federal Reserve long term inflation expectations (2% for all CGUs).
Gross profit:
Gross profit is based on historical values and is adjusted upwards or downwards depending on expected changes in revenues.
As fixed costs remain relatively constant over the short term while revenues increase, gross profits improve over this same
period.
Sensitivity to changes in assumptions
Discount rates:
Most rates used within the WACC calculation do not change significantly year to year; however, if the specific risk premium
were adjusted in either direction, it would have an effect on the FVLCS of the CGU. This, in turn, would change the excess or
deficiency values over the carrying amounts of the CGU. For the Underground Canada CGU, the specific risk premium would
need to increase 48% in the worst case scenario before a deficiency would be created. For the Underground US CGU, the
specific risk premium would need to increase 25% and with the Aboveground CGU, the specific risk premium would need to
increase 79% over the current worst case scenario before a deficiency over the carrying value would be created.
Growth rate and gross profit assumptions:
Sales growth rates used were very modest; however, any reduction in the sales growth rate would have a negative impact on
the FVLCS of the overall CGUs. Similarly, gross profits as a percentage of revenues used were in line with historical rates
realized by the CGUs. For the Underground Canada CGU, gross profit would have to fall to 85% of our current expectations;
the Underground U.S. CGU would have to fall to 89%; and the gross profit for the Aboveground CGU would have to fall to 65%
of its current expectations before a deficiency would result in the respective carrying amounts.
As at October 1, 2012, the recoverable amount of the Company's CGUs exceeded their carrying amounts by a substantial
amount. With regard to the assessment of fair value less costs to sell, management believes that no reasonably possible
change in any of the above key assumptions would have caused the carrying amount of the CGUs to materially exceed its
recoverable amount.
57
CORPORATE INFORMATION
________________________________________________________________________________
Transfer Agent & Registrar
Valiant Trust Company
3000, 10303 Jasper Avenue
Edmonton, Alberta
Canada T2J 3X6
Auditors
Ernst & Young LLP
2200 Telus House, South Tower
10020 – 100 Street
Edmonton, Alberta
Canada T5J 0N3
General Counsel
Bennett Jones LLP
3200 Telus House, South Tower
10020 – 100 Street
Edmonton, Alberta
Canada T5J 0N3
Stock Listing and Share Symbol
Toronto Stock Exchange: ZCL
Board of Directors
Anthony (Tony) P. Franceschini, Chair of the Board
Ronald M. Bachmeier, President, CEO, Director
Leonard A. Cornez, Director
Roderick W. Graham, Director
Allan S. Olson, Director
Harold A. Roozen, Director
D. Bruce Bentley, Director
Annual General and Special Meeting
1:30 p.m. on Friday, May 10, 2013
at The Sandman Inn (Great Room 1)
10111 Ellerslie Road, SW
Edmonton, Alberta
Canada T6X 0J3
Corporate Office
1420 Parsons Road, SW
Edmonton, Alberta
Canada T6X 1M5
Common Shares Outstanding
As of March 7, 2013
Total Outstanding: 29,121,209
Investor Relations
Copies of this Annual Report may be obtained
by calling Investor Relations at 780-466-6648
or e-mailing IR@zcl.com
58