Annual Report
14
CONTENTS
______________________________________________
Message to Shareholders
Management’s Discussion and Analysis
Consolidated Financial Statements and Notes
Corporate Information
2
4
27
58
1
Message to Shareholders
I view 2014 as a year of achievement for ZCL. We set annual records with:
• Revenue of $170.8 million (a 6% increase over 2013)
• Net income of $16.3 million (a 13% increase over 2013)
• Earnings per share of $0.54 (a 10% increase over 2013)
• EBITDA of $27.1 million (a 6% increase over 2013)
Our balance sheet continues to be strong with a net cash position of $25.8 million and working capital of
$62.6 million. We also delivered a return on capital employed of 29%. Even with these achievements,
we remain focused on continuous improvement in our operations group to lower our costs.
Looking ahead, certain of our customers have expressed some uncertainty given the recent dramatic
decline in crude oil prices, and in the short term this might lead to indecision and inactivity. This is
already reflected in our current backlog and may lead to a weaker first quarter of 2015 compared with a
year earlier. However, we have both a diverse range of product offerings limiting our upstream energy
markets exposure to 10 to 15% of our overall revenue, and a strong financial position. The combination
of these factors should allow us to weather any near-term uncertainties and also capitalize on
opportunities arising from the current environment. Moreover, while exchange rates are hard to
predict, if the current rate of approximately $1.25 Canadian for a U.S. dollar were to prevail for the year,
our 2015 results would benefit compared with 2014, when our average Canadian-to-U.S. exchange rate
was approximately $1.10.
I would like to review each of our product groups with the backdrop of the lower energy price
environment expected throughout 2015.
The Petroleum Products group of our Underground operating segment, which has three sub-markets,
should deliver continued moderate growth.
• Downstream Petroleum (retail), which is both the largest sub-market of this segment and ZCL’s
largest overall revenue source, benefits from declining oil and hence gasoline prices, as retail
margins expand and cash flows increase to support new construction and tank upgrades and
replacements.
• Upstream Petroleum (exploration and production), will likely experience a negative impact as
cuts in capital spending programs by our customers in this area have already been announced
and will most likely continue until energy prices recover. However, any negative impact on ZCL
overall should be reduced as the Upstream Petroleum sub-market represents only 2% of our
annual revenues.
• Midstream Petroleum (underground tanks for pipeline systems), which also represents
approximately 2% of our revenue base, will likely have no negative impact in 2015. Takeaway
and delivery system expansions for this year are already well underway and capital is committed
to these projects.
For our Water Products group, also in the Underground operating segment, we expect to benefit from
the increased economic growth that many are forecasting will result from lower energy prices,
particularly in the US. As economic activity increases, moderate growth in construction activity should
continue to create increased demand for our Water Products group offerings.
For our Aboveground segment, lower energy prices will likely have a negative impact on the Oil Sands
markets and a positive impact on the Industrial Corrosion sub-markets. To minimize the impact of
2
potential lower revenues from the Oil Sands, we are redirecting our sales and marketing efforts into
other markets in Western Canada, including industrial chemicals, pulp and paper, mining, and
agriculture.
•
• Oil Sands sales will be negatively impacted as planned capacity expansion projects are delayed
or deferred. While this may materially impact 2015 Oil Sands customer revenue, the overall
impact on ZCL should be diminished, as the Oil Sands historically accounts for less than 10% of
our total annual revenues.
Industrial Corrosion, which makes up the majority of our Aboveground segment revenues,
should benefit as both the industrial chemical markets and the power generation markets will
see lower operating costs and lower raw material costs, providing increased profits and cash
flow for our customers to fund expansion projects. Industrial chemicals and power generation
are two of our major areas of emphasis within Industrial Corrosion.
ZCL has successfully navigated challenging periods in the past, and we are well positioned to face
current uncertainties. We are fortunate to have a great group of dedicated employees who will work
hard to ensure that ZCL prospers, and on behalf of the executive team and our Board, I want to thank
our employees for their contributions in 2014. I would also like to express my appreciation to our
shareholders, customers, and other ZCL stakeholders for their support. We look forward to our next
communication in early May when we report our first quarter 2015 results, as well as seeing many of
you at our upcoming Annual General and Special Meeting of Shareholders on May 8, 2015 in Edmonton.
Sincerely,
Ronald M. Bachmeier
President & CEO
3
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, 2014, should be read in conjunction with
the Company’s audited consolidated financial statements
and related notes for the year ended December 31, 2014.
at
The
www.sedar.com
at
www.zcl.com.
SEDAR
the Company’s website
statements
available
are
on
or
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
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
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.
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, adjusted EBITDA, adjusted EBITDA per
diluted share, funds from operations, working capital,
return on capital employed, net cash 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 5, 2015.
Underground Fluid Containment
Petroleum Products
ZCL is the leading provider of underground fuel storage
tanks for the downstream retail and commercial markets
in both Canada and the US. The Company is also a
provider of midstream petroleum tanks for pipelines as
well as upstream petroleum tanks for the oil and gas
exploration and production markets. The vast majority of
tanks supplied to these markets are double-wall tanks,
with single-wall and triple-wall models also available. In
addition, ZCL operates internationally through technology
licensing agreements.
As an alternative to the replacement of underground
storage tanks, ZCL also provides 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
Phoenix System® is Parabeam®, a three-dimensional glass
fabric that is manufactured and distributed from the
Company’s facility in The Netherlands.
4
Management's Discussion and Analysis
Water Products
ZCL’s lightweight, 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
detention systems.
OVERALL PERFORMANCE & OUTLOOK
Overall, 2014 was a year of achievement for ZCL. We
posted records for revenue of $170.8 million (a 6%
increase over 2013), net income of $16.3 million (a 13%
increase over 2013), adjusted EBITDA of $27.1 million (a
6% increase over 2013), and fully diluted earnings per
share of $0.54 (a 10% increase over 2013). In addition,
our balance sheet continues to be strong with working
capital of $62.6 million and a net cash balance position of
25.8 million. Return on capital employed remained strong
at 29%.
Financial Results
Revenue
Revenue for the year ended December 31, 2014 was a
record $170.8 million, up $9.1 million or 6% from $161.7
million for the year ended December 31, 2013. The
Underground operating segment grew 14% and both
Petroleum Products and Water Products achieved record
annual revenues. The Aboveground operating segment
revenue was down 21% from 2013.
Gross Profit
Gross profit for the year ended December 31, 2014 was
$34.5 million, up $1.0 million or 3% from $33.5 million a
year earlier. Gross margin was 20% of revenue for 2014,
down slightly from 21% a year earlier, with the decrease
attributable to the Aboveground operating segment.
Aboveground Fluid Containment
Corrosion Products
ZCL manufactures custom designed and engineered
aboveground FRP tanks, piping and related products and
accessories for industrial projects where corrosion and
abrasion resistance is high priority. ZCL’s capabilities
include the manufacture and
installation of custom
engineered FRP and dual-laminate composite products for
use in the power generation, chemical, chloralkali, pulp
and paper, agriculture, mining and Oil Sands industries.
Net Income
Net income for the year ended December 31, 2014 was
$16.3 million, up $1.9 million or 13% from $14.4 million a
year earlier. Net income per diluted share for 2014 was
$0.54, up $0.05 or 10% from $0.49 per diluted share a
year earlier. Net income included a foreign exchange gain
of $1.0 million that arose on the translation of US dollar
assets and liabilities held in the Canadian legal entities.
Net Cash
As at December 31, 2014, ZCL had a net cash and cash
equivalents
(“net cash”) balance of $25.8 million
compared to $12.5 million as at September 30, 2014 and
$15.1 million as at December 31, 2013.
Dividends
Given our financial strength and ability to generate cash
from operations, the Board declared a 13% increase in our
quarterly dividend to $0.045 per share for the fourth
quarter of 2014, up from $0.04 per share previously. The
dividend will be paid on April 15, 2015, to the
shareholders of record as of March 31, 2015.
5
Total backlog of $31.0 million decreased by $14.8 million
or 32%, over the $45.8 million backlog as at September
30, 2014. The decrease was attributable to both the
Underground and Aboveground operating segments. In
Underground, Water Products backlog decreased by 21%
from September 2014. The Petroleum Products group
backlog decreased by 35% over September 2014, due to
in part to the traditional seasonality of the Underground
business, but also due to the very strong revenue
achieved in the fourth quarter of 2014.
Conversion of backlog to revenue for the Underground
segment is generally realized in the following quarter. For
Aboveground, the conversion of backlog to revenue is less
predictable because of variable timelines for design,
engineering and production.
Backlog is a non-IFRS measure and does not have a
standardized meaning prescribed by IFRS and may not be
comparable to similar measures used by other companies.
For additional
information refer to the “Non-IFRS
measures” section later in this MD&A.
Management's Discussion and Analysis
Backlog
($millions)
2014
2013
% change
Underground
21.4
29.4
(27%)
Aboveground
9.6
9.5
1%
Dec 31
31.0
38.9
(20%)
As of December 31, 2014, backlog was $31.0 million,
down $7.9 million or 20% from $38.9 million a year
earlier. The overall decrease primarily resulted from a
reduction in the Underground backlog of $8.0 million,
in
which was partially offset by a small
Aboveground backlog.
increase
In the Aboveground operating segment, backlog from our
Oil Sands customers was down $2.3 million, compared to
December 31, 2013. This reduction was more than offset
by an increase in backlog from our Industrial Corrosion
customers of $2.5 million.
In the Underground operating segment, the Canadian
operations backlog was the primary reason for the year
over year reduction. Canadian backlog was down $7.6
million as compared to December 31, 2013. In the fourth
quarter of 2013, the Canadian sales group had a larger
number of orders through our pre-order program than
what was in place in the fourth quarter of 2014. We
believe the lower backlog reflects a combination of
temporary customer indecision due to the oil price drop
and an acceleration of product sales to certain customers
in the fourth quarter of 2014 that otherwise would have
been recorded as backlog at year end. Our Canadian sales
team is currently focused on obtaining pre-orders for the
first quarter of 2015. After achieving record 2014
revenues, the US Underground backlog was down 2% year
over year, including a $1.5 million positive impact due to
foreign exchange conversion of US dollar backlog to
Canadian dollars
reporting purposes. Overall,
Petroleum Products backlog was down $7.1 million or
29% from the same period a year earlier. Water Products
backlog was down $1.0 million or 21%, compared to a
year earlier.
for
6
Management's Discussion and Analysis
2015 Outlook
Water Products
As we enter 2015, we expect that we may initially see
lower levels of activity at ZCL due to the uncertainty in the
energy markets as a result of the recent dramatic declines
in energy prices.
Certain of our customers have
expressed some uncertainty and in the short term this
might lead to indecision and inactivity. This is already
reflected in our current backlog and may lead to a weaker
first quarter of 2015 compared with a year ago.
However, we remain encouraged about our prospects.
While we may initially see lower levels of activity, the
diverse range of our product offerings and our strong
financial position should allow us not only to weather any
near-term uncertainties, but also capitalize on the
opportunities arising from the current environment.
Moreover, while exchange rates are hard to predict, if the
current rate of approximately $1.25 Canadian for a US
dollar were to prevail for the year, our 2015 results would
benefit compared with 2014, when our average Canadian-
to-US exchange rate was $1.10.
the backdrop of
Given
lower energy price
environment in which we expect to operate throughout
2015, our outlook by product group is as follows:
the
Petroleum Products
Petroleum Products is our largest revenue group and the
most mature market. It has three sub-markets:
• Downstream Petroleum (retail), which is both the
largest sub-market of this segment and ZCL’s largest
overall revenue source, benefits from declining oil
and hence gasoline prices, as retail margins expand
and cash flows increase to support new construction
and tank upgrades and replacements.
• Upstream Petroleum (exploration and production),
will likely experience a negative impact as cuts in
capital spending programs by our customers in this
area have already been announced and will most
likely continue until energy prices recover. However,
any negative impact on ZCL should be reduced as the
Upstream Petroleum sub-market represents only 2%
of our annual revenues.
• Midstream Petroleum
tanks
for
pipeline
represents
approximately 2% of our revenue base, will likely
experience no negative impact in 2015. Takeaway
and delivery system expansions for 2015 are already
well underway and capital is committed to these
projects.
systems), which
(underground
also
Petroleum Products should deliver continued moderate
growth and should generally benefit from the decline in
oil and gas prices.
In our Water Products group, we expect to benefit from
the increased economic growth that many are forecasting
will result from lower energy prices, particularly in the US.
As economic activity
in
construction activity should continue to create increased
demand for our Water Products group offerings.
increases, moderate growth
Corrosion Products
In our Corrosion Products group, lower energy prices will
likely have a negative impact on the Oil Sands sub-market
and a positive impact on the Industrial Corrosion sub-
markets.
Sales to our customers in the Oil Sands will be negatively
impacted by lower energy prices as planned capacity
expansion projects are delayed or deferred. While this
may materially impact 2015 Oil Sands customer revenue,
the overall impact on ZCL should be diminished as the Oil
Sands historically accounts for less than 10% of our total
impact of
annual revenues.
potential lower revenues from the Oil Sands customers,
we are redirecting our sales and marketing efforts into
other markets in Western Canada, including industrial
chemicals, pulp and paper, mining, and agriculture.
Also, to minimize the
Industrial Corrosion markets, which make up the majority
of our Aboveground segment revenues, should benefit
from lower energy prices as both the industrial chemical
markets and the power generation markets should see
both lower operating costs and lower raw material costs,
increased profits and cash flow to fund
providing
expansion projects.
Industrial chemicals and power
generation are two of our major areas of emphasis within
Industrial Corrosion.
2015 Capital Investment Plan
lean
initiatives within our facilities.
capital
In 2015, our operations group plans to incur capital
investment at a level similar to 2014, in order to further
progress
ZCL’s
maintenance
requirements are historically
between $3 million to $5 million annually. For 2015,
similar to 2014, ZCL’s capital budget is planned to be at
the upper end of that range in order to continue to
upgrade certain of our existing facilities and equipment
with the intent to further improve lead times and process
flow.
7
Management's Discussion and Analysis
SELECTED FINANCIAL INFORMATION
(in thousands of dollars,
except per share amounts)
Underground Fluid Containment Revenue
Aboveground Fluid Containment Revenue
Total revenue
Gross profit (note 1)
Gross margin (note 1)
General and administration
Foreign exchange (gain) loss
Depreciation and amortization
Finance expense
Loss (gain) on disposal of assets
Gain on redemption of preferred shares
Impairment of assets
Other items
Income tax expense
Net income
Earnings per share
Basic
Diluted
Cash dividends declared per common share
Adjusted EBITDA (note 1)
Adjusted EBITDA as a % of revenue
Adjusted EBITDA per diluted share
Cash Flows
Funds from operations (note 1 & 2)
Changes in non-cash working capital
Net repayment of long term debt
Redemption of preferred shares
Issuance of common shares on exercise of stock options
Dividends paid
Purchase of capital and intangible assets, net of disposals
(in thousands of dollars)
Financial Position
2014
$
139,087
31,748
170,835
34,460
20%
9,076
(1,008)
3,748
383
50
-
-
-
5,895
16,316
0.54
0.54
0.15
27,077
16%
0.89
20,771
(3,458)
(1,415)
-
1,328
(4,193)
(3,775)
2014
$
Year Ended December 31
2013
$
121,692
40,012
161,704
33,482
21%
8,552
(46)
)
3,991
446
106
-
-
-
6,048
14,385
0.49
0.49
0.11
25,600
16%
0.86
18,413
(521)
(1,350)
-
2,934
(2,923)
(2,965)
As at December 31
2013
$
2012
$
114,442
55,917
170,359
29,919
18%
8,571
43
3,673
770
(246)
(670)
182
(638)
4,744
13,490
0.47
0.46
0.055
22,518
13%
0.76
15,152
(5,355)
(1,376)
(2,075)
847
(1,010)
(2,810)
2012
$
Working capital (note 1)
Total assets
Return on capital employed (note 1)
Net cash (note 1)
Total non-current liabilities
31,655
120,526
27%
84
8,618
Note 1: Gross profit, gross margin, adjusted EBITDA, adjusted EBITDA per diluted share, funds from operations, working capital, return on capital
employed, and net cash are non-IFRS measures and are defined later in the MD&A under "Non-IFRS Measures.”
Note 2: Funds from operations excludes changes in non-cash working capital.
47,844
134,315
29%
15,146
7,397
62,577
156,654
29%
25,788
6,576
8
Management's Discussion and Analysis
RESULTS OF OPERATIONS
Revenue
($000s)
2014
2013
%
change
Twelve Months
Underground Fluid
Containment:
Petroleum Products
Water Products
Aboveground Fluid
Containment:
Corrosion Products
120,437
18,650
139,087
104,878
16,814
121,692
15%
11%
14%
31,748
170,835
40,012
161,704
(21%)
6%
Record revenue of $170.8 million for the year ended
December 31, 2014, was up $9.1 million or 6% from
$161.7 million in the prior year. Record revenue was
generated by both the Petroleum and Water Product
groups, however this growth was partially offset by a
decrease in the Corrosion Products group. The change in
revenue reflects the factors noted below:
Underground Fluid Containment
Underground revenue of $139.1 million, was $17.4 million
or 14% higher for the year ended December 31, 2014,
compared with the year ended December 31, 2013.
The $15.6 million or 15% increase in Petroleum Products
revenue was attributable to the US market with an
increase of $10.7 million or 15%, prior to a positive
reporting
foreign exchange conversion
purposes of $6.2 million.
impact
for
In the US, sales to retail petroleum marketers were up
19% compared to 2013, while sales to distributors and
contractors were flat.
Canadian Petroleum Products revenue in 2014 was down
$1.9 million or 7% from 2013, attributable to a decrease
in sales to distributors, contractors and retail petroleum
marketers, and partially offset by an increase in sales to
major oil customers. The available capacity in the
Canadian production facilities was utilized to support the
substantial increase in sales to US customers noted
above.
Petroleum Products revenue also includes international
operations which were up $0.5 million, primarily due to
higher Parabeam® sales, as compared to 2013.
The $1.8 million, or 11% increase in Water Products
revenue in 2014 compared with 2013 was attributable to
US sales, which rose by $1.9 million or 16% compared to
2013. The US sales include a positive exchange impact of
$1.0 million on the conversion of US to Canadian dollar
sales for reporting purposes. Canadian Water Products
sales were comparable with 2013.
Aboveground Fluid Containment
Aboveground revenue of $31.7 million for 2014 was $8.3
million or 21% lower than $40.0 million a year earlier. Oil
Sands revenue increased by $2.0 million as compared to
2013. In the Industrial Corrosion market, revenue was
down $11.1 million prior to a $0.8 million positive foreign
exchange conversion impact for reporting purposes. A
$10.7 million decrease in field service revenue was the
primary contributor
revenue
the
compared to what was earned in 2013.
reduction
to
in
The Aboveground operating segment is more dependent
on larger orders that have a longer order cycle from
planning to order fulfilment than the Underground
operating segment, and the timing of revenue is impacted
accordingly.
Gross Profit
($000s)
Underground Fluid
Containment
Aboveground Fluid
Containment
Twelve Months
2014
2013
%
change
% of rev
2014
30,228
25,451
19%
22%
4,232
8,031
(47%)
34,460
33,482
3%
13%
20%
In 2014, gross profit of $34.5 million increased by $1.0
million or 3% compared to 2013. Gross margin decreased
to 20% from 21% in 2013, primarily due to results in the
Aboveground operating segment. The changes reflect the
factors discussed below:
Underground Fluid Containment
Underground gross profit of $30.2 million was up $4.8
million or 19% from $25.5 million in 2013. The increase in
gross profit was derived from the increase in sales to the
US Petroleum Products and Water Products markets.
Gross margin of 22%, a one percentage point increase
from 21% in 2013, was derived from the Canadian
The US operations gross margin was
operations.
comparable to 2013.
9
Management's Discussion and Analysis
Aboveground Fluid Containment
euro Conversion Rates
Aboveground gross profit was $4.2 million, down $3.8
million or 47% from $8.0 million in 2013. Gross margin of
13% decreased seven percentage points from 20% in
2013. The deterioration in gross margin was derived from
the Industrial Corrosion markets which were impacted by
lower margin orders in the current year, along with a
reduction in field service work in 2014, compared to 2013.
The gross profit reduction was partially offset by a $0.5
million improvement of gross profit in the Oil Sands
market in 2014.
General and Administration
($000s)
2014
2013
% change
Twelve Months
9,076
8,552
6%
General and administration (“G&A”) expense for the year
ended December 31, 2014 was up 6% compared to 2013.
The year over year increase was the result of inflationary
cost
the conversion of US dollar
denominated G&A to Canadian dollars for reporting
purposes.
increases and
Foreign Exchange Gain
($000s)
2014
2013
Twelve Months
(1,008)
(46)
The foreign exchange 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
2014
2013
Avg.
Close Avg.
Close
Q1
Q2
Q3
Q4
Annual
1.10
1.09
1.09
1.14
1.10
1.11 1.01
1.07 1.02
1.12 1.04
1.16 1.05
1.16 1.03
1.02
1.05
1.03
1.07
1.07
Avg.
Change
9%
7%
5%
9%
Close
Change
9%
2%
9%
8%
7%
8%
Year
Ended
2014
2013
Avg.
Close
Avg.
Close
Q1
Q2
Q3
Q4
Annual
1.51
1.50
1.44
1.42
1.47
1.52 1.33
1.46 1.34
1.42 1.38
1.41 1.43
1.41 1.37
1.31
1.37
1.39
1.47
1.47
Avg.
Change
14%
12%
4%
(1%)
7%
Close
Change
16%
7%
2%
(4%)
(4%)
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)
2014
2013
% change
Twelve Months
3,748
3,991
(6%)
The 6% year over year decrease in depreciation and
amortization expense primarily resulted from certain
intangible assets on the Xerxes acquisition which became
fully amortized during the first quarter of 2014. Overall,
annual capital expenditures were up $1.4 million in 2014,
to $4.4 million, compared to $3.0 million in the prior year.
Finance Expense
($000s)
2014
2013
% change
Twelve Months
383
446
(14%)
The 14% reduction in finance expense in 2014 compared
to 2013 resulted from the year over year reduction in long
term debt and the slight reduction of the lending rate that
occurred in the second quarter of 2013.
Income Taxes
Income tax expense for the year ended December 31,
2014, represented 26.5% of pre-tax income, compared to
29.6% of pre-tax income in 2013. Although there is a
higher percentage of earnings in the US versus Canada
which contribute to a higher effective tax rate, the
reduction in rate is primarily due to the foreign exchange
gain of $1.0 million incurred in 2014. This gain is not taxed
at the same rate as operating income, therefore reducing
the effective tax rate in 2014 compared to 2013.
10
Management's Discussion and Analysis
Comprehensive Income
Comprehensive income for each period is comprised of
net income and the effects of 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 the impact of the translation of
foreign operations on comprehensive income before the
impact of net income.
($000s)
2014
2013
Twelve Months
4,814
4,219
The foreign translation gain in the year ended December
31, 2014 was due to the strengthening of the US dollar
relative to the Canadian dollar throughout the year from
1.07 to 1.16. In 2013, the US dollar also strengthened
from 1.01 to 1.07 generating a gain on the translation of
foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Credit Arrangements
As at December 31, 2014, the Company
increased
working capital (current assets less current liabilities) by
$14.8 million to $62.6 million compared to $47.8 million
as at December 31, 2013. The majority of the increase
was attributed to positive funds from operations of $20.8
million combined with increased inventory. Increases in
accounts receivable also contributed to the improvement
in working capital. These increases were partially offset
by increases in accounts payable and dividends payable
when compared to 2013.
As at December 31, 2014, the Company had cash and cash
equivalents of $28.4 million (December 31, 2013 - $18.9
million) and net cash of $25.8 million (December 31, 2013
– net cash of $15.1 million). Net cash is defined later in
this MD&A under “Non-IFRS Measures.”
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.
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,
reduced by priority claims. The operating facility is due on
demand and matures on May 31, 2016.
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 US
dollars, with the balance due on maturity on May 31,
2016. The interest charged on the loan is the US dollar
based 30-day LIBOR plus 225 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.
Share Capital
During the year ended December 31, 2014, the company
issued 365,543 shares on the exercise of stock options.
11
Management's Discussion and Analysis
Cash Flows
($000’s)
Operating activities
Financing activities
Investing activities
Foreign exchange(1)
Twelve Months
2014
2013
17,313
(4,280)
(3,775)
249
17,892
(1,339)
(2,965)
448
9,507
14,036
(1) Foreign exchange gain on cash held in foreign currency.
Operating Activities
The cash flows from operating activities reflect the net
impact of
i) funds from operations (for additional
information see the “Non-IFRS Measures” section later in
this MD&A) and ii) changes in non-cash working capital.
Funds from operations totalled $20.8 million for the year
ended December 31, 2014, up $2.4 million from $18.4
million for the year ended December 31, 2013. The
increase relative to 2013
is due primarily to the
improvement in net income.
Changes in non-cash working capital totalled negative
$3.5 million for the year ended December 31, 2014
compared to negative $0.5 million for the year ended
December 31, 2013. The increase in inventory was the
major contributing factor for the growth in non-cash
working capital requirements relative to 2013 along with
an increase in accounts receivable. These inventory and
accounts receivable increases were partially offset by an
increase in accounts payable and accrued liabilities as at
December 31, 2014 compared to December 31, 2013.
Financing Activities
Cash flows used in financing activities were $4.3 million
for the year ended December 31, 2014 compared to $1.3
million for the year ended December 31, 2013. Dividends
paid in 2014 were $4.2 million, a $1.3 million increase
over 2013. The exercise of stock options in 2014
generated $1.3 million in cash inflows compared to the
$2.9 million generated in 2013.
Investing Activities
The cash flows used in investing activities were $3.8
million for the year ended December 31, 2014 compared
to $3.0 million for 2013. Purchases of property, plant and
equipment and intangible assets were $1.3 million higher
in 2014 than 2013, however these purchases were
partially offset by higher proceeds on disposal of
property, plant and equipment in 2014 relative to 2013.
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 $0.3 million US 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 $1.0
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,
2014, the performance letters of credit issued totalled
$0.5 million.
As at December 31, 2014, ZCL’s minimum annual lease
commitments under all non-cancellable operating leases
for production facilities, office space and automotive and
equipment totalled $11.2 million.
The following table details the Company’s contractual
obligations due over the next five years and thereafter:
($000s)
Long Term Debt
2015
2016
2017
2018
2019
Thereafter
Total
1,498
1,103
-
-
-
-
2,601
Operating
Leases
2,517
1,962
1,553
1,126
776
3,292
11,226
Total
4,015
3,065
1,553
1,126
776
3,292
13,827
12
Management's Discussion and Analysis
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, particularly in the
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 Canadian to
US dollar conversion rate has ranged from a low of 1.01 in
the first quarter of 2013 to a high of 1.16 in the fourth
quarter of 2014.
For the three months ended
(in thousands of dollars,
except per share amounts)
Revenue
Net income
Adjusted EBITDA (note 1)
Basic earnings per share
Diluted earnings per share
Adjusted EBITDA per diluted share (note 1)
2014
2013
Dec 31
$
48,195
4,895
7,702
0.16
0.16
0.25
Sep 30
$
49,361
5,557
8,834
0.19
0.18
0.29
Jun 30 Mar 31
$
41,687
4,492
7,382
0.15
0.15
0.24
$
31,592
1,372
3,159
0.05
0.05
0.10
Dec 31
$
37,715
1,769
3,975
0.06
0.06
0.13
Sep 30
$
43,931
4,993
8,512
0.17
0.17
0.28
Jun 30 Mar 31
$
47,250
5,087
8,316
0.17
0.17
0.28
$
32,809
2,536
4,797
0.09
0.09
0.16
Dividends declared per share
Note 1: Adjusted EBITDA and adjusted EBITDA per diluted share are non-IFRS measures and are defined later in this MD&A under "Non-IFRS
Measures."
0.035
0.035
0.025
0.025
0.04
0.03
0.04
0.03
13
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)
Gross margin (note 1)
General and administration
Foreign exchange gain
Depreciation and amortization
Finance expense
Loss on disposal of assets
Income tax expense
Net income
Earnings per share
Basic
Diluted
Cash dividends declared per common share
Adjusted EBITDA (note 1)
Adjusted EBITDA as a % of revenue
Adjusted EBITDA per diluted share
Fourth Quarter Ended December 31
2014
$
37,616
10,579
48,195
9,138
19%
2,156
(568)
1,000
97
104
1,454
4,895
0.16
0.16
0.04
7,702
16%
0.25
2013
$
32,074
5,640
37,714
5,755
15%
1,989
(52)
1,077
97
106
769
1,769
0.06
0.06
0.03
3,975
11%
0.13
Cash Flows
Funds from operations (note 1 & 2)
2,667
Changes in non-cash working capital
9,174
Net repayment of long term debt
(338)
Issuance of common shares on exercise of stock options
1,302
Dividends paid
(885)
Purchase of capital and intangible assets
(1,026)
125
Disposal of assets
Note 1: Gross profit, gross margin, adjusted EBITDA, adjusted EBITDA per diluted share and funds from operations are non-IFRS measures
and are defined later in the MD&A under “Non-IFRS Measures.”
Note 2: Funds from operations excludes changes in non-cash working capital.
6,582
8,705
(375)
827
(1,200)
(1,794)
33
14
Management's Discussion and Analysis
Overall Fourth Quarter Performance
Net income in the fourth quarter of 2014 was $4.9 million,
up 177% or $3.1 million from $1.8 million a year earlier.
Earnings per diluted share in the fourth quarter of 2014
were $0.16, up $0.10 or 167% from $0.06 per diluted
share a year earlier. The increase in net income was
primarily a result of higher revenues from the both the
Underground and Aboveground operating segments along
with a foreign exchange gain of $0.6 million.
Revenue
($000s)
2014
2013
%
change
Fourth Quarter
Underground Fluid
Containment:
Petroleum Products
Water Products
Aboveground Fluid
Containment:
Corrosion Products
31,669
5,947
37,616
27,634
4,440
32,074
15%
34%
17%
10,579
48,195
5,640
37,714
88%
28%
Revenue for the fourth quarter ended December 31,
2014, was $48.2 million, up $10.5 million or 28% from
$37.7 million in the fourth quarter of 2013. Increased
revenue was derived from both the Underground and
Aboveground operating segments. The change in revenue
reflects the factors noted below:
Underground Fluid Containment
Underground revenue of $37.6 million was $5.5 million or
17% higher in the fourth quarter of 2014, compared with
$32.1 million in the fourth quarter of 2013.
In the fourth quarter of 2014, Petroleum Products
revenue was $31.7 million, up $4.0 million or 15% from
$27.6 million in the same period last year. The increase
was attributable to the US market, which was up $2.9
million prior to a positive impact on the US to Canadian
dollar translation for reporting purposes. In the US, sales
to retail petroleum marketers were up 25%, while sales to
distributors and contractors were comparable to the
fourth quarter a year earlier.
In the Canadian Petroleum Products market, revenue was
down $0.9 million for the fourth quarter of 2014, due to a
decrease in sales to distributors and retail stations,
partially offset by increased sales to major oil customers.
Petroleum Products also
from
international operations, which was comparable to the
fourth quarter of 2014.
revenue
includes
Water Products revenue for the fourth quarter of 2014 of
$5.9 million was up $1.5 million or 34% from $4.4 million
in the fourth quarter of 2013. The
increase was
attributable to the US market which was up $1.4 million
over the fourth quarter of 2013 prior to a positive foreign
exchange translation adjustment for reporting purposes.
The Canadian market was down $0.3 million, compared to
the fourth quarter of 2013.
Aboveground Fluid Containment
Aboveground revenue of $10.6 million in the fourth
quarter of 2014 was $4.9 million or 88% higher than $5.6
million in the same quarter a year earlier, with the
increase attributable to both US and Canadian markets.
Revenue
from our Western Canadian Corrosion
customers was up $1.8 million as compared to the same
quarter in 2013. In Industrial Corrosion, revenue from our
field service operations was up 32% and product revenue
was up $3.2 million compared to the fourth quarter of
2013.
The Aboveground operating segment is more dependent
on larger orders that have a longer order cycle from
planning to order fulfilment than the Underground
operating segment, and the timing of revenue is impacted
accordingly.
Gross Profit
($000s)
Underground Fluid
Containment
Aboveground Fluid
Containment
Fourth Quarter
2014
2013
%
change
% of rev
2014
7,587
5,673
34%
20%
1,551
82
1,789%
9,138
5,755
59%
15%
19%
In the fourth quarter of 2014, gross profit of $9.1 million
increased by $3.4 million or 59% compared to $5.8 million
for the same quarter in 2013. Gross margin increased four
percentage points to 19% from 15% in the same quarter
of 2013. These changes reflect the factors discussed
below:
Underground Fluid Containment
Underground gross profit of $7.6 million was up $1.9
million or 34% from $5.7 million in the same quarter of
2013. Gross margin for the fourth quarter increased two
percentage points year over year to 20%, up from 18%.
Gross margin increased in both the US and Canadian
Underground operations compared to the same quarter
in 2014.
15
Management's Discussion and Analysis
Aboveground Fluid Containment
Depreciation and Amortization
Aboveground gross profit was $1.6 million, up $1.5 million
from $0.1 million for the quarter ended December 31,
2013. Gross margin of 15% was up 13 percentage points
from 2% in the fourth quarter of 2013. The year over year
increases in both gross margin and gross profit were due
to an increase in sales volume. The prior year did not
have enough revenue to adequately support the fixed
manufacturing cost base in the Aboveground operating
segment. The increase in the gross profit and gross
margin in the fourth quarter of 2014 was derived from
both US and Canadian Aboveground markets.
($000s)
2014
2013
% change
Fourth Quarter
1,000
1,077
(7%)
The 7% decrease
in depreciation and amortization
expense for the quarter ended December 31, 2014
compared to the quarter ended December 31, 2013,
primarily resulted from certain intangible assets on the
Xerxes acquisition which became fully amortized during
the first quarter of 2014.
General and Administration
($000s)
2014
2013
% change
Fourth Quarter
2,156
1,989
8%
Finance Expense
($000s)
2014
2013
% change
Fourth Quarter
97
97
nil
General and administration (“G&A”) expense of $2.2
million for the fourth quarter ended December 31, 2014
was up $0.2 million or 8% over the fourth quarter of 2013.
The increase was primarily a result of inflationary cost
pressures, when compared to the same quarter of 2013.
Foreign Exchange Gain
($000s)
2014
2013
Fourth Quarter
(568)
(52)
The foreign exchange gain for each quarter was 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 relative to the Canadian dollar.
US Dollar and euro Conversion Rates
Fourth
Quarter
2014
2013
Avg.
Close Avg.
Close
USD
euro
1.14
1.42
1.16 1.05
1.41 1.43
1.07
1.47
Finance expense was comparable, quarter over quarter.
Income Taxes
Income tax expense for the three months ended
December 31, 2014, represented 23% of pre-tax income,
compared to 30% of pre-tax income in the same quarter
of 2013. The decrease in the 2014 annual effective tax
rate to 26.5% is a result of the foreign exchange gain of
$0.6 million incurred in 2014. This gain is not taxed at the
same rate as operating income, therefore reducing the
effective tax rate in 2014 compared to 2013.
Comprehensive Income
Comprehensive income for each period is comprised of
net income and the effects of 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 the impact of the translation of
foreign operations on comprehensive income before the
impact of net income.
Avg.
Change
9%
(1%)
Close
Change
8%
(4%)
($000s)
2014
2013
Fourth Quarter
2,637
2,319
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.
The foreign translation gain in the fourth quarter of 2014
was due to strengthening of the US dollar relative to the
Canadian dollar throughout the three months from 1.12
to 1.16. In the fourth quarter of 2013, the US dollar also
strengthened from 1.03 to 1.07.
16
Management's Discussion and Analysis
Financial Position/Cash Flows
The Company’s working capital (current assets
less
current liabilities) of $62.6 million as at December 31,
2014 was an improvement over the $57.2 million at
September 30, 2014. Positive cash flows from operations
of $6.6 million, were the primary driver
in the
improvement in working capital as compared to the prior
quarter.
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, 2014.
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 on the Company. The
financial
Company does not currently hold any
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, 2014, was prime plus 75 basis
points, 3.75% (December 31, 2013 - prime plus 75 basis
points, 3.75%) adjusted quarterly based on certain
financial indicators of the Company. The effective interest
rate on the term loan balance as at December 31, 2014,
was the 30 day US LIBOR rate plus 225 basis points, 2.42%
(December 31, 2013 – US LIBOR rate plus 225 basis
points, 2.41%), 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, 2014 would have a minimal impact on net
income for the year ended December 31, 2014.
Foreign Exchange Risk
in
The Company operates on an international basis and is
exposed to foreign exchange risk arising from transactions
denominated
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 and considers
long term
forecasts to assess the potential cash flow impact on 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, 2014. 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 related to financial assets, net of
financial liabilities, at December 31, 2014, was as follows:
(in thousands of US dollars)
Foreign operations
Domestic operations
Net balance sheet exposure
$
11,936
7,091
19,027
17
Management's Discussion and Analysis
Operating exposure for the twelve months ended
December 31, 2014, was as follows:
(in thousands of US dollars)
Sales
Operating expenses
Net operating exposure
$
109,246
93,243
16,003
The weighted average US to Canadian dollar translation
rate was 1.10 for the year ended December 31, 2014. The
translation rate as at December 31, 2014, was 1.16.
Based on the foreign currency exposures noted above,
with other variables unchanged, a 20% decrease in the
Canadian dollar would have impacted net income for the
twelve months ended December 31, 2014, as follows:
(in thousands of US dollars)
$
Net balance sheet exposure of domestic operations 1,057
1,926
Net operating exposure of foreign operations
2,983
Change in net income
Other comprehensive income would have changed $1.5
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
Company perceives the customer has a higher level of
risk.
receivable are managed
The Company has a concentration of customers in the
upstream and downstream oil and gas and industrial
corrosion sectors. The concentration risk is mitigated by
the number of customers, growth and diversification of
the customer base and by a significant portion of the
customers being large international organizations. As at
December 31, 2014, no customer exceeded 10% of the
consolidated trade accounts receivable balance. 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.
its trade accounts receivable
The Company reviews
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 $27.1 million
as at December 31, 2014 (December 31, 2013 - $24.7
million). On a geographic basis as at December 31, 2014,
approximately 48% (December 31, 2013 – 22%) of the
balance of trade accounts receivable was due from
Canadian and non-US customers and 52% (December 31,
2013 – 78%) was due from US customers. The change in
geographic accounts receivable
is mainly due to a
disputed significant receivable existing on December 31,
2013 of $3.9 million US that was settled at the beginning
of 2014.
Payment terms are generally net 30 days.
As at
December 31, 2014, the percentages of trade accounts
receivable were as follows:
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
December 31,
2014
58%
23%
13%
3%
December 31,
2013
45%
24%
19%
3%
3%
100%
9%
100%
18
Management's Discussion and Analysis
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
lines of credit. Management believes that
available
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.
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
authorities which are available
the public at
www.sedar.com.
to
TRANSACTIONS WITH RELATED PARTIES
components purchased
Certain manufacturing
for
$90,000 (2013 - $27,000) for the year ended December
31, 2014, included in manufacturing and selling costs in
the consolidated statements of income or inventories
were provided by a corporation whose Executive
Chairman is a director of the Company. The transactions
were incurred in the normal course of operations and
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.
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.
ZCL manages its environmental risks by appropriately
dealing with chemicals and waste material
in an
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 partially 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
liabilities.
recorded at
the exchange amount being normal
commercial rates for the products. Accounts payable and
accrued
included
liabilities at December 31, 2014,
$11,000 (December 31, 2013 - $1,000) owing to the
corporation. There are no ongoing contractual or other
commitments resulting from these transactions.
19
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, 2014 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.”
indicators of
impairment exist, and at
Where
least
annually for goodwill and certain intangible assets, the
recoverable amount of the asset or group of assets (cash
is compared against the carrying
generating units)
amount. Any excess of 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
the
rates and other estimates used
determination of fair values at the time of impairment
tests may vary materially from those realized in future
periods.
in
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.
20
Management's Discussion and Analysis
Project Cost Forecasting
The Company routinely enters into large field service and
manufacturing projects in the Aboveground operating
segment. On an ongoing basis and at every reporting
period, management performs an analysis on these
projects to estimate if the total expected project costs are
recoverable relative to the purchase order value of the
project. The actual outcome of these projects may differ
from those estimates, and the difference may be material.
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 specified liquids. In Canada,
until January 31, 2015, the Company marketed a storage
system under the Prezerver® trademark that carried an
enhanced protection program. The Prezerver system
included 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
its own
December 1, 2006, the Company formed
insurance captive to
insure the Prezerver program.
Effective January 31, 2015, the Company ceased offering
the Canadian Prezerver program due to changing market
conditions.
NEW ACCOUNTING STANDARDS
Standards effective January 1, 2014
During the year, the Company applied certain standards
and amendments that did not significantly impact the
consolidated financial statements of the Company. These
include Investment Entities (Amendments to IFRS 10, IFRS
12 and IAS 27), Offsetting Financial Assets and Financial
Liabilities
IAS 32, Novation of
Derivatives and Continuation of Hedge Accounting –
Amendments to IAS 39, Recoverable Amount Disclosures
for Non-Financial Assets – Amendments to IAS 36 and
IFRIC 21 Levies.
- Amendments to
Standards issued but not yet effective
The listing below includes standards, amendments, and
interpretations that the Company reasonably expects to
be applicable at a future date and intends to adopt when
they become effective. The Company is in the process of
analysing the impact of these standards on the statement
of financial position and results of operations of the
Company:
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 program, 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
the 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.
•
•
IASB
In December 2013,
issued Annual
the
Improvements (2010-2012 Cycle) to make necessary
but non-urgent amendments to IFRS 2 Share-based
Payments; IFRS 3 Business Combinations (IFRS 3);
IFRS 8 Operating Segments; IFRS 13 Fair Value
Measurement (IFRS 13); IAS 16 Property, Plant, and
Equipment; IAS 24 Related Party Disclosures; and IAS
38
Intangible Assets. These amendments are
effective for annual periods beginning on or after July
1, 2014.
In May 2014, the IASB issued IFRS 15 Revenue from
Contracts with Customers (IFRS 15). IFRS 15 applies
to all revenue contracts with customers and provides
a model for the recognition and measurement of the
sale of some non-financial assets such as property,
plant, and equipment and intangible assets. This new
standard sets out a five-step model for revenue
recognition and applies to all industries. The core
principle is that revenue should be recognized to
depict the transfer of promised goods or services to
customers
the
consideration that the entity expects to be entitled to
in an amount
reflects
that
21
Management's Discussion and Analysis
such as
in exchange for those goods or services. IFRS 15
requires numerous disclosures,
the
disaggregation of total revenue, disclosures about
performance obligations, changes in contract asset
and liability account balances, and key judgments
and estimates. This new standard, effective January
1, 2017, may be adopted using a full retrospective or
modified retrospective approach.
•
In July 2014, the IASB
issued IFRS 9 Financial
Instruments (IFRS 9) to replace IAS 39 Financial
Instruments: Recognition and Measurement. IFRS 9
provides a revised model for the recognition and
measurement of financial assets, financial liabilities,
and some contracts to buy or sell non-financial items.
In addition,
includes a single expected-loss
impairment model and a reformed approach to
hedge accounting. This standard is effective January
1, 2018, on a retrospective basis subject to certain
exceptions.
it
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures
(“DC&P”) are
designed to provide reasonable assurance that all
relevant information is gathered and reported to senior
management, including the President & 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.
As at December 31, 2014, the CEO and the CFO have
evaluated the effectiveness of the design and operation
of our DC&P as defined by National Instrument 52-109,
Certification of Disclosure in Issuers’ Annual and Interim
Filings. Based on this evaluation, the CEO and the CFO
have concluded that, as at December 31, 2014, our DC&P
were effective to ensure that the material information
relating to ZCL and its consolidated subsidiaries would be
made known to them by others within those entities,
particularly during the period in which the MD&A and the
consolidated financial statements were being prepared.
Internal Controls over Financial Reporting
Internal control over financial reporting (“ICFR”)
is
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance
with IFRS. Management is responsible for establishing
and maintaining adequate ICFR. Management have
assessed the effectiveness of our ICFR at December 31,
•
•
IASB
In September 2014,
issued Annual
the
Improvements (2012-2014 Cycle) to make necessary
but non-urgent amendments to IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations;
IFRS 7 Financial Instrument: Disclosures (IFRS 7); and
IAS
These
amendments are effective January 1, 2016, on a
retrospective basis with the exception of IAS 34
which is effective on a prospective basis.
Financial Reporting.
Interim
34
IASB
IAS 1).
(Amendments to
In December 2014, the
issued Disclosure
It provides
Initiative
amended guidance on materiality and on the order of
financial statements. These
the notes to
amendments can be applied
immediately, and
become mandatory for periods beginning on or after
January 1, 2016.
the
2014, based on the criteria set forth in Internal Control –
Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). Based on
this assessment, management
concluded that, as at December 31, 2014, our ICFR was
effective, and expect to certify ZCL’s annual filings with
the Canadian securities regulatory authorities.
Changes in Internal Control over Financial Reporting
Management has evaluated whether there were changes
in the Company’s ICFR during the year ended December
31, 2014 that have materially affected, or are reasonably
likely to materially affect, the Company’s ICFR. No
material changes were identified.
Limitations on the Effectiveness of Disclosure Controls
and Procedures and Internal Control over Financial
Reporting
While management of the Company has evaluated the
effectiveness of DC&P and ICFR as at December 31, 2014,
and have concluded that these controls and procedures
are being maintained as designed, they expect that the
DC&P 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.
22
Management’s Discussion and Analysis
OUTSTANDING SHARE DATA
As at March 5, 2015, there were 30,245,828 common
shares and 1,484,350 share options outstanding. Of the
options outstanding, 1,019,633 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,
adjusted EBITDA, adjusted EBITDA per diluted share,
funds from operations, working capital, net cash, return
on capital employed 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
Adjusted EBITDA is defined as income from operations
income taxes, share-based
before finance expense,
compensation, depreciation of property, plant and
equipment, amortization of deferred development costs
and intangible assets, gains or losses on sale of assets, and
impairment of assets. Readers are cautioned that
adjusted EBITDA should not be construed as an
alternative to net income as determined in accordance
with IFRS.
Adjusted EBITDA per diluted share is defined as adjusted
EBITDA divided by weighted average diluted shares
outstanding.
Funds from 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 cash is defined as cash and cash equivalents less long
term debt, current portion of long term debt and bank
indebtedness.
Return on capital employed is defined as adjusted EBITDA
divided by average capital employed, being average
shareholders’ equity, plus average
long term debt,
including current portion, plus average preferred shares,
including current portion, less average cash and cash
equivalents.
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.
23
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 margin
Fourth Quarter Ended
December 31
2014
$
48,195
39,057
9,138
19%
2013
$
37,714
31,959
5,755
15%
Year Ended
December 31
2013
$
161,704
128,222
33,482
21%
2014
$
170,835
136,375
34,460
20%
2012
$
170,359
140,440
29,919
18%
The following table reconciles net income in accordance with IFRS to EBITDA and adjusted EBITDA.
(in thousands of dollars)
Net income from operations
Adjustments:
Depreciation and amortization
Finance expense
Income tax expense
EBITDA
Share-based compensation
Loss (gain) on disposal of property, plant & equipment
Gain on settlement of preferred shares
Impairment of assets
Adjusted EBITDA
Fourth Quarter Ended
December 31
2014
$
4,895
2013
$
1,769
Year Ended
December 31
2013
$
2012
$
2014
$
16,316
14,385
13,490
1,000
97
1,454
7,446
152
104
-
-
7,702
1,077
97
769
3,712
157
106
-
-
3,975
3,748
383
5,895
26,342
685
50
-
-
27,077
16%
3,991
446
6,048
24,870
624
106
-
-
25,600
16%
3,673
770
4,744
22,677
575
(246)
(670)
182
22,518
13%
Adjusted EBITDA as a percentage of revenue
16%
11%
The following table presents the calculation of adjusted EBITDA per diluted share.
Numerator (in thousands of dollars)
Adjusted EBITDA
Denominator (in thousands)
Weighted average shares outstanding - basic
Effect of dilutive securities:
Stock options
Weighted average shares outstanding - diluted
Adjusted EBITDA per diluted share
Fourth Quarter Ended
December 31
2014
$
7,702
2013
$
3,975
2014
$
27,077
Year Ended
December 31
2013
$
25,600
2012
$
22,518
30,038
29,655
29,963
29,308
28,963
432
30,470
0.25
686
30,341
0.13
416
30,379
0.89
399
29,707
0.86
637
29,600
0.76
24
Management’s Discussion and Analysis
The following table presents the calculation of funds from operations.
(in thousands of dollars)
Net income from operations
Add (deduct) items not affecting cash:
Depreciation and amortization
Deferred tax (recovery) expense
Loss (gain) on disposal of property, plant & equipment
Gain on settlement of preferred shares
Share-based compensation
Impairment of assets
Non-cash proceeds on settlement of claims
Other
Funds from operations
Fourth Quarter Ended
December 31
2014
$
4,895
1,000
431
104
-
152
-
-
-
6,582
2013
$
1,769
1,077
(442)
106
-
157
-
-
-
2,667
Year Ended
December 31
2013
$
14,385
3,991
(693)
106
-
624
-
-
-
18,413
2014
$
16,316
3,748
(28)
50
-
685
-
-
-
20,771
2012
$
13,490
3,673
(412)
(246)
(670)
575
182
(1,348)
(92)
15,152
The following table presents the calculation of working capital.
(in thousands of dollars)
Current assets
Current liabilities
Working capital
December 31, 2014
$
89,259
26,682
62,577
As at
December 31, 2013
$
70,004
22,160
47,844
December 31, 2012
$
57,728
26,073
31,655
The following table presents the calculation of net cash.
(in thousands of dollars)
Cash and cash equivalents
Less: Bank indebtedness
Less: Long term debt (including current portion)
Net cash
December 31, 2014
$
28,389
-
(2,601)
25,788
As at
December 31, 2013
$
18,882
-
(3,736)
15,146
December 31, 2012
$
4,846
-
(4,762)
84
The following table presents the calculation of return on capital employed.
(in thousands of dollars)
Adjusted EBITDA
Average capital employed:
Shareholders’ equity
Long term debt (including current portion)
Preferred shares (including current portion)
Less: cash and cash equivalents
Average capital employed
Return on capital employed
(Adjusted EBITDA/Average Capital Employed)
December 31, 2014
$
27,077
As at
December 31, 2013
$
25,600
December 31, 2012
$
22,518
114,077
3,169
-
(23,635)
93,611
29%
95,297
4,249
-
(11,864)
87,682
29%
80,010
5,518
2,591
(3,277)
84,842
27%
25
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, tight 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 dollar 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
securities
statements
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,”
“forecast,” “may,” “will,” “project,” “predict,” “potential,”
“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.
“intend,”
“might,”
“could,”
implement
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
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 dollar,
euro and Canadian dollar exchange rates, and other risks
and uncertainties described under the heading “Risk
Factors”
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.
financial
The
statements have been prepared
in accordance with
International Financial Reporting Standards and the
reporting currency is in Canadian dollars.
the Company’s most
consolidated
in
26
Consolidated Financial Statements
ZCL Composites Inc.
Consolidated Financial Statements and Notes
For the years ended December 31, 2014 and 2013
27
Consolidated Financial Statements
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of ZCL Composites Inc.
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of ZCL Composites Inc., which comprise the
consolidated balance sheets as at December 31, 2014, and 2013, and the consolidated statements of income,
comprehensive income, and shareholders’ equity and cash flows for the years ended December 31, 2014 and 2013, 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 auditor considers 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, 2014, and 2013, and its financial performance and its cash flows for the years then
ended in accordance with International Financial Reporting Standards.
Edmonton, Canada
March 5, 2015
Chartered accountants
28
Consolidated Financial Statements
March 5, 2015
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 CEO
“Kathy Demuth”
Katherine L. Demuth
Chief Financial Officer
29
Consolidated Financial Statements
Consolidated Balance Sheets
As at
(in thousands of dollars)
ASSETS
Current
Cash and cash equivalents
Accounts receivable [note 20]
Inventories [note 5]
Income taxes recoverable
Prepaid expenses
Property, plant and equipment [note 7]
Intangible assets [note 8]
Goodwill [note 24]
Restricted cash
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities [note 20]
Dividends payable [note 13]
Income taxes payable
Deferred revenue
Current portion of provisions [notes 10 and 20]
Current portion of long term debt [note 11]
Deferred tax liabilities [note 16]
Long term portion of provisions [notes 10 and 20]
Long term debt [note 11]
TOTAL LIABILITIES
Shareholders' equity
Share capital [note 14]
Contributed surplus [note 15]
Accumulated other comprehensive income (loss)
Retained earnings
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes
December 31,
2014
$
December 31,
2013
$
28,389
27,793
31,028
980
1,069
89,259
29,143
3,819
33,950
291
192
156,654
19,045
1,208
278
3,600
1,053
1,498
26,682
4,220
1,253
1,103
33,258
76,592
2,568
1,006
43,230
123,396
156,654
18,882
25,083
23,810
1,379
850
70,004
27,254
4,934
31,547
268
308
134,315
14,671
896
73
3,779
1,391
1,350
22,160
4,075
936
2,386
29,557
74,846
2,301
(3,808)
31,419
104,758
134,315
On behalf of the Board: Director Director
30
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 gain
Depreciation and amortization [notes 7 and 8]
Finance expense [note 19]
Loss on disposal of property, plant and equipment
Income before income taxes
Income tax expense (recovery) [note 16]
Current
Deferred
Net income
Earnings per share [note 17]
Basic
Diluted
See accompanying notes
2014
$
170,835
136,375
34,460
9,076
(1,008)
3,748
383
50
12,249
22,211
5,923
(28)
5,895
2013
$
161,704
128,222
33,482
8,552
(46)
3,991
446
106
13,049
20,433
6,741
(693)
6,048
16,316
14,385
$0.54
$0.54
$0.49
$0.49
31
Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
For the years ended December 31,
(in thousands of dollars)
Net income
Translation of foreign operations
Total items that will be reclassified subsequently to net income
Comprehensive income
Consolidated Statements of Shareholders’ Equity
For the years ended December 31,
2014
$
16,316
4,814
4,814
21,130
2013
$
14,385
4,219
4,219
18,604
(in thousands)
Balance, December 31, 2013
Share-based payments
[note 15]
Shares issued on exercise of
stock options [notes 14 and 15]
Reclassification of fair value of
stock options previously
expensed [note 15]
Translation of foreign operations
Dividends declared [note 13]
Net income
Balance, December 31, 2014
Balance, December 31, 2012
Share-based payments
[note 15]
Shares issued on exercise of
stock options [notes 14 and 15]
Reclassification of fair value of
stock options previously
expensed [note 15]
Translation of foreign operations
Dividends declared [note 13]
Net income
Balance, December 31, 2013
See accompanying notes
Common
Shares
#
Share
Capital
$
Accumulated
Other
Contributed Comprehensive Retained
Earnings
Income (Loss)
$
$
Surplus
$
Total
$
29,848
74,846
2,301
(3,808)
31,419
104,758
—
366
—
1,328
—
—
—
—
30,214
418
—
—
—
76,592
685
—
(418)
—
—
—
2,568
—
—
—
4,814
—
—
1,006
—
—
685
1,328
—
—
(4,505)
16,316
43,230
—
4,814
(4,505)
16,316
123,396
29,035
70,980
2,609
(8,027)
20,273
85,835
—
813
—
2,934
—
—
—
—
29,848
932
—
—
—
74,846
624
—
(932)
—
—
—
2,301
—
—
—
—
624
2,934
—
4,219
—
—
(3,808)
—
—
(3,239)
14,385
31,419
—
4,219
(3,239)
14,385
104,758
32
Consolidated Financial Statements
Consolidated Statements of Cash Flows
For the years ended December 31,
(in thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income from operations
Add (deduct) items not affecting cash:
Depreciation and amortization [notes 7 and 8]
Deferred tax recovery
Share-based compensation expense [note 15]
Loss on disposal of property, plant and equipment
Funds from operations
Changes in non-cash working capital:
(Increase) decrease in accounts receivable
Increase in inventories
(Increase) decrease in prepaid expenses
Increase (decrease) in accounts payable, accrued liabilities and provisions
(Decrease) increase in deferred revenue
Increase (decrease) in income taxes payable
Total changes in non-cash working capital
Cash flows from operating activities
CASH FLOWS FROM FINANCING ACTIVITIES
Issue of common shares on the exercise of stock options [notes 14 and 15]
Dividends paid [note 13]
Repayment of long term debt
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]
Cash flows used in investing activities
Foreign exchange gain on cash held in foreign currency
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
See accompanying notes
2014
$
16,316
3,748
(28)
685
50
20,771
(605)
(5,826)
(190)
2,972
(454)
645
(3,458)
17,313
1,328
(4,193)
(1,415)
(4,280)
(4,346)
597
(26)
(3,775)
249
9,507
18,882
28,389
2013
$
14,385
3,991
(693)
624
106
18,413
4,931
(24)
95
(3,780)
134
(1,877)
(521)
17,892
2,934
(2,923)
(1,350)
(1,339)
(3,010)
125
(80)
(2,965)
448
14,036
4,846
18,882
33
Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
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, services 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 are reported in Canadian dollars which is the functional currency of the Company, ZCL
Composites Inc.
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 5, 2015.
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 (“Parabeam”), Radigan Insurance Inc., ZCL International SRL, ZCL-Dualam Inc.
(“ZCL Dualam”), C.P.F. Dualam (U.S.A.) Inc. (“CPF”), Troy Mfg. (Texas), Inc. (“Troy Texas”) 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 guaranteed investment certificates 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.
34
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
30%
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 or more frequently if events or changes in circumstances indicate that the carrying amount may not be
recoverable. 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 of disposal and value in use. The Company estimates the recoverable amount by using the fair value less
costs of disposal approach. It estimates fair value using an income approach based on discounted after-tax cash flow
projections and validated by using a market approach, deriving market multiples from comparable public companies and
comparable company transactions. Costs for disposing the asset are deducted to derive fair value less costs of disposal. The
recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected
future cash flows 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 24.
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;
35
Notes to the Consolidated Financial Statements
•
•
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.
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 amortization
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-patented technology. The costs 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.
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.
36
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 for materials and workmanship, and for up to
30 years for corrosion on Petroleum tanks, if the products are properly installed and used solely for storage of specified
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. Effective January 31, 2015, the Company ceased offering the Canadian Preserver program due to
changing market conditions.
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 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 subsidiary companies.
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. Parabeam’s functional currency is the euro and the functional currency of all other subsidiaries is the US
dollar with the exception 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
37
Notes to the Consolidated Financial Statements
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.
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 with respect to 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 and other assets. These assets are measured initially at
fair value on the consolidated balance sheets and subsequently they are carried at amortized cost using the effective interest
method less any related impairment losses.
Held to maturity investments:
As at December 31, 2014 and 2013, the Company did not have any held to maturity investments on the consolidated balance
sheets.
Available for sale financial instruments:
As at December 31, 2014 and 2013, the Company did not have any available for sale financial instruments on the consolidated
balance sheets.
Derivatives designated as hedging instruments:
As at December 31, 2014 and 2013, the Company did not have any derivatives designated as hedging instruments on the
consolidated balance sheets.
38
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.
Loans and borrowings:
The Company’s loans and borrowings consist of accounts payable and long term debt. These liabilities are measured initially
at fair value plus transaction costs on the consolidated balance sheets and subsequently 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 recognized amounts and there is an intention to settle on a net basis, to
realize 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
and employees of 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 15.
The cost of equity-settled transactions is recognized in the consolidated statements 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
statements of income in that period.
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 and it is probable that the temporary
difference will not reverse in the foreseeable future.
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.
All deferred tax 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.
39
Notes to the Consolidated Financial Statements
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 recognized over the lease term on the same basis as rental income.
4. NEW ACCOUNTING STANDARDS
During the year, the Company applied certain standards and amendments that did not significantly impact the consolidated
financial statements of the Company. These include Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27),
Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32, Novation of Derivatives and Continuation of
Hedge Accounting – Amendments to IAS 39, Recoverable Amount Disclosures for Non-Financial Assets – Amendments to IAS
36 and IFRIC 21 Levies.
Standards issued but not yet effective:
The listing below includes standards, amendments, and interpretations that the Company reasonably expects to be applicable
at a future date and intends to adopt when they become effective. The Company is in the process of analysing the impact of
these standards on the statement of financial position and results of operations of the Company:
•
•
•
•
In December 2013, the IASB issued Annual Improvements (2010-2012 Cycle) to make necessary but non-urgent
amendments to IFRS 2 Share-based Payments; IFRS 3 Business Combinations (IFRS 3); IFRS 8 Operating Segments; IFRS 13
Fair Value Measurement (IFRS 13); IAS 16 Property, Plant, and Equipment; IAS 24 Related Party Disclosures; and IAS 38
Intangible Assets. These amendments are effective for annual periods beginning on or after July 1, 2014.
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (IFRS 15). IFRS 15 applies to all revenue
contracts with customers and provides a model for the recognition and measurement of the sale of some non-financial
assets such as property, plant, and equipment and intangible assets. This new standard sets out a five-step model for
revenue recognition and applies to all industries. The core principle is that revenue should be recognized to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects
to be entitled to in exchange for those goods or services. IFRS 15 requires numerous disclosures, such as the
disaggregation of total revenue, disclosures about performance obligations, changes in contract asset and liability
account balances, and key judgments and estimates. This new standard, effective January 1, 2017, may be adopted using
a full retrospective or modified retrospective approach.
In July 2014, the IASB issued IFRS 9 Financial Instruments (IFRS 9) to replace IAS 39 Financial Instruments: Recognition
and Measurement. IFRS 9 provides a revised model for the recognition and measurement of financial assets, financial
liabilities, and some contracts to buy or sell non-financial items. In addition, it includes a single expected-loss impairment
model and a reformed approach to hedge accounting. This standard is effective January 1, 2018, on a retrospective basis
subject to certain exceptions.
In September 2014, the IASB issued Annual Improvements (2012-2014 Cycle) to make necessary but non-urgent
amendments to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations; IFRS 7 Financial Instrument:
Disclosures (IFRS 7); and IAS 34 Interim Financial Reporting. These amendments are effective January 1, 2016, on a
retrospective basis with the exception of IAS 34 which is effective on a prospective basis.
40
Notes to the Consolidated Financial Statements
•
In December 2014, the IASB issued Disclosure Initiative (Amendments to IAS 1). It provides amended guidance on
materiality and on the order of the notes to the financial statements. These amendments can be applied immediately,
and become mandatory for periods beginning on or after January 1, 2016.
5.
INVENTORIES
As at
(in thousands of dollars)
Raw materials
Work in progress
Finished goods
December 31,
2014
$
December 31,
2013
$
11,729
6,097
13,202
31,028
9,989
3,107
10,714
23,810
During the year ended December 31, 2014 there was a write-down of $68,000 (December 31, 2013 - $56,000) 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
2014
$
57,961
31,520
52,372
2013
$
51,617
29,753
47,084
(5,478)
136,375
(232)
128,222
A reclassification between raw materials and consumables used and other costs was performed for the comparative year in
order to conform to the current year’s classification and presentation.
41
Notes to the Consolidated Financial Statements
7. PROPERTY, PLANT AND EQUIPMENT
Land
$
Buildings
$
Manufacturing Office
Equip.
$
Equip.
$
Leaseholds
$
6,475
7,358
3,702
21,563
3,484
361
—
113
7,832
474
(702)
109
7,713
312
—
150
4,164
459
—
192
4,815
1,980
(204)
783
24,122
2,938
(456)
808
27,412
290
(465)
62
3,371
336
(137)
80
3,650
Auto
Equip.
$
359
67
—
34
460
139
(97)
33
535
Total
$
42,941
3,010
(669)
1,146
46,428
4,346
(1,613)
1,224
50,385
2,023
1,746
10,276
2,733
70
16,848
212
—
20
2,255
209
(76)
25
2,413
399
—
69
2,214
401
—
77
2,692
1,214
(75)
334
11,749
1,358
(374)
127
12,860
359
(361)
53
2,784
375
(137)
13
3,035
88
—
14
172
79
(28)
19
242
2,272
(436)
490
19,174
2,422
(615)
261
21,242
(in thousands of dollars)
Cost
As at December 31, 2012
Additions
Disposals
Foreign exchange
As at December 31, 2013
Additions
Disposals
Foreign exchange
As at December 31, 2014
Accumulated Depreciation
As at December 31, 2012
Depreciation
Disposals
Foreign exchange
As at December 31, 2013
Depreciation
Disposals
Foreign exchange
As at December 31, 2014
Carrying Amount
As at December 31, 2013
As at December 31, 2014
—
—
4
6,479
—
(221)
2
6,260
—
—
—
—
—
—
—
—
—
6,479
6,260
5,577
5,300
1,950
2,123
12,373
14,552
587
615
288
293
27,254
29,143
Capital work in progress of $655,000 (December 31, 2013 - $306,000) is included above and not subject to depreciation.
Included in this figure is $622,000 for manufacturing equipment and $33,000 in leasehold improvements.
42
Notes to the Consolidated Financial Statements
8.
INTANGIBLE ASSETS
(in thousands of dollars)
Cost
As at December 31, 2012
Additions
Foreign exchange
As at December 31, 2013
Additions
Foreign exchange
As at December 31, 2014
Accumulated Amortization
As at December 31, 2012
Amortization
Foreign exchange
As at December 31, 2013
Amortization
Foreign exchange
As at December 31, 2014
Carrying Amount
As at December 31, 2013
As at December 31, 2014
Customer
Relationships
$
Brands
$
Internally
Developed
ERP
Software
$
Other
$
Total
$
6,413
3,526
3,239
4,666
17,844
—
433
6,846
—
555
7,401
—
213
3,739
—
273
4,012
80
122
3,441
—
156
3,597
—
71
4,737
26
91
4,854
80
839
18,763
26
1,075
19,864
5,443
2,114
864
3,062
11,483
608
391
6,442
190
534
7,166
399
136
2,649
421
203
3,273
356
43
1,263
350
73
1,686
356
57
3,475
365
80
3,920
1,719
627
13,829
1,326
890
16,045
404
235
1,090
739
2,178
1,911
1,262
934
4,934
3,819
Other intangible assets include licenses, patents, air permits, non-patented technology and certification costs.
9. BANK INDEBTEDNESS – OPERATING CREDIT FACILITY
The Company’s operating credit facility was not in use at December 31, 2014 and December 31, 2013. 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, 2016 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 75 basis points. The rate of interest charged on the operating credit facility for US dollar balances is US prime plus
75 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, 2014, the Company was in
compliance with all restrictive covenants relating to the operating credit facility.
43
Notes to the Consolidated Financial Statements
10. PROVISIONS AND CONTINGENCIES
a) Provisions
(in thousands of dollars)
As at December 31, 2012
Amounts used against the provision
Additional provision
Foreign exchange
As at December 31, 2013
Amounts used against the provision
Additional (reversal of) provision
Foreign exchange
As at December 31, 2014
Warranty
$
Self-insured
liabilities
$
916
(390)
380
33
939
(635)
460
42
806
609
(45)
315
57
936
—
220
97
1,253
Other
$
1,077
(811)
162
24
452
(121)
(106)
22
247
Total
$
2,602
(1,246)
857
114
2,327
(756)
574
161
2,306
Of the $2,306,000 (2013 - $2,327,000) in provisions described above, the Company expects $1,053,000 (2013- $1,391,000) to
settle within 12 months of the balance sheet date. The remaining $1,253,000 (2013 - $936,000) 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 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.
44
Notes to the Consolidated Financial Statements
11. LONG TERM DEBT
As at
(in thousands of dollars)
Term loan
Total long term debt
Less current portion
December 31,
2014
$
December 31,
2013
$
2,601
2,601
1,498
1,103
3,736
3,736
1,350
2,386
Excluding financing costs, the principal balance of the term loan as at December 31, 2014 is $2,253,000 US dollars (December
31, 2013 – $3,521,000 US dollars) which is a reasonable estimate of its fair value.
The term loan requires monthly interest payments and quarterly principal repayments of $322,000 US dollars, with the
balance due on maturity on May 31, 2016. The interest charged on the loan is US LIBOR rate plus 225 basis points (effective
rate of 2.42% as at December 31, 2014). 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, unless waived by the
Company’s bank.
The term loan is secured through a collateral mortgage over three properties owned by the Company. The carrying amount
of these three properties as at December 31, 2014 is $11,673,000.
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 20.
12. COMMITMENTS
Lease Commitment
The Company’s minimum annual payments under the terms of all operating leases are as follows:
(in thousands of dollars)
2015
2016
2017
2018
2019
Thereafter
Other Contractual Obligations
$
2,517
1,962
1,553
1,126
776
3,292
11,226
The Company has provided a letter of credit in the amount of $0.3 million (2013 - $1.0 million) to secure a line of credit for
the same amount for the US operations. The Company has also provided two letters of credit for a total of $1.0 million (2013
- $0.7 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, 2014, the issued
performance letters of credit totalled $0.5 million (2013 - $1.4 million).
45
Notes to the Consolidated Financial Statements
13. DIVIDENDS
Dividends declared for years ended December 31,
(in thousands of dollars, except per share amounts)
Declared
March 7, 2014
May 5, 2014
August 5, 2014
November 3, 2014
2014
Paid to
Per
Total
share
shareholders
$
$0.035 April 15, 2014
1,048
1,049
July 15, 2014
$0.035
$0.040 October 15, 2014 1,200
1,208
$0.040
January 15, 2015
4,505
$0.150
For the years ended December 31,
Payable, beginning of period
Declared
Paid in cash
Payable, end of period
2013
Declared
March 7, 2013
May 3, 2013
August 8, 2013
November 7, 2013 0.030
0.110
Paid to
shareholders
Per
share
0.025 April 15, 2013
July 15, 2013
0.025
0.030 October 15, 2013
January 15, 2014
Total
$
729
729
885
896
3,239
2014
$
896
4,505
(4,193)
1,208
2013
$
580
3,239
(2,923)
896
On March 5, 2015, the Company’s Board of Directors declared a dividend of $0.045 per common share to be paid on April 15,
2015 to the shareholders of record as of March 31, 2015.
14. SHARE CAPITAL
Authorized
Unlimited number of common shares with no par or stated value.
Issued and outstanding
During the year ended December 31, 2014, the Company issued 365,543 (2013 – 812,917) common shares at an average rate
of $3.63 per share for stock options exercised resulting in cash proceeds to the Company of $1,328,000 (2013 - $2,934,000).
As at December 31, 2014, the Company had 30,213,462 common shares outstanding (December 31, 2013 – 29,847,919).
15. 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.
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.
46
Notes to the Consolidated Financial Statements
As at December 31, 2014, the Company has 1,516,716 (2013 – 1,929,261) options outstanding, which expire on dates
between January 2015 and December 2018. The outstanding options vest evenly over a three-year period commencing on
the anniversary of the original grant date. As at December 31, 2014, 1,051,999 (2013 – 796,360) 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,
2014
2013
Stock
options
#
1,929,261
—
(365,543)
(47,002)
—
1,516,716
Weighted
average
exercise price
$
4.56
—
3.63
4.42
—
4.79
2014
Options Outstanding
Weighted
Average
Exercise
Price
$
Weighted Average
Remaining
Contractual
Life in Years
#
3.87
4.09
3.05
3.23
3.15
4.72
7.09
4.79
.02
.19
1.19
1.40
1.93
2.93
3.93
2.68
2013
Stock
options
#
2,424,349
444,000
(812,917)
(126,171)
—
1,929,261
Weighted
average
exercise price
$
3.74
7.09
3.61
3.72
—
4.56
Options Exercisable
Weighted
Average
Exercise
Price
$
3.87
4.09
3.05
3.23
3.15
4.72
7.09
4.17
Stock
options
#
20,900
16,400
217,603
2,501
340,739
307,224
146,632
1,051,999
Options Outstanding
Options Exercisable
Weighted Weighted Average
Average
Exercise
Price
$
Remaining
Contractual
Life in Years
#
3.87
4.09
3.05
3.23
3.15
4.72
7.09
4.56
1.02
1.19
2.19
2.40
2.93
3.95
4.93
3.34
Weighted
Average
Exercise
Price
$
3.87
4.09
3.05
3.23
3.15
4.72
—
3.66
Stock
options
#
202,000
17,500
160,984
—
250,161
165,715
—
796,360
Balance, as at January 1
Granted
Exercised
Forfeited
Expired
Balance, as at December 31
Exercise
Price
$
3.87
4.09
3.05
3.23
3.15
4.72
7.09
3.05 – 7.09
Exercise
Price
$
3.87
4.09
3.05
3.23
3.15
4.72
7.09
3.05 – 7.09
Stock
options
#
20,900
16,400
217,603
2,501
340,739
482,573
436,000
1,516,716
Stock
options
#
202,000
17,500
304,346
2,501
424,175
534,739
444,000
1,929,261
47
Notes to the Consolidated Financial Statements
No options were granted during the year ended December 31, 2014. During the year ended December 31, 2013, 444,000
options were granted at an exercise price of $7.09.
During the year ended December 31, 2014, 365,543 stock options (2013 – 812,917) were exercised with a weighted average
exercise price of $3.63 (2013 – $3.61) resulting in cash proceeds to the Company of $1,328,000 (2013 – $2,934,000).
Compensation expense previously included in contributed surplus of $418,000 (2013 – $932,000) 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 and directors. 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, 2014, share-based compensation expense of
$685,000 (2013 - $624,000) was recorded in manufacturing and selling costs and general and administration expenses in the
consolidated statements of income.
No stock options were issued during the year ended December 31, 2014. The estimated fair values of stock options granted
during the year ended December 31, 2013 were 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 $1.80.
Risk-free interest rate (%)
Expected hold period to exercise (years)
Volatility in the price of the Company’s shares (%)
Forfeiture rate (%)
Dividend yield (%)
2014
n/a
n/a
n/a
n/a
n/a
2013
1.4
3.9
35.7
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.
16. INCOME TAXES
The Company's effective income tax expense has been determined as follows:
(in thousands of dollars)
Net income before tax
Statutory federal and provincial taxes at 25.50% (2013 – 25.51%)
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% (2013 – 30%)
A reconciliation of the Company’s deferred tax liabilities is as follows:
(in thousands of dollars)
Balance, beginning of the year
Tax recovery during the year recognized in net income
Tax expense during the year recognized in other
comprehensive income
At the effective income tax rate of 26% (2013 – 30%)
2014
$
2013
$
22,211
20,433
5,664
1,216
(802)
(183)
5,895
2014
$
4,075
(28)
173
4,220
5,213
1,426
(765)
174
6,048
2013
$
4,597
(693)
171
4,075
48
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
Other
17. EARNINGS PER SHARE
2014
$
3,598
343
586
317
46
(685)
15
4,220
2013
$
3,186
343
893
360
102
(805)
(4)
4,075
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 years ended December 31,
Numerator (in thousands of dollars)
Net income
Denominator (in thousands)
Weighted average shares outstanding - basic
Effect of dilutive securities:
Stock options
Weighted average shares outstanding - diluted
18. RELATED PARTY TRANSACTIONS
a) Transactions in the normal course of operations:
2014
$
2013
$
16,316
14,385
2014
#
29,963
416
30,379
2013
#
29,308
399
29,707
Certain manufacturing components purchased for $90,000 (2013 - $27,000) for the year ended December 31, 2014, included
in the consolidated financial statements as cost of goods sold or inventories, were provided by a corporation whose Executive
Chairman 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, 2014
included $11,000 (December 31, 2013 - $1,000) 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 years ended December 31,
(in thousands of dollars)
Salaries, benefits and director fees
Share-based payments
Total
2014
$
1,614
303
1,917
2013
$
1,538
252
1,790
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
49
Notes to the Consolidated Financial Statements
and administrative expenses for the years ended December 31, 2014 and 2013. Share-based payments are the amount of
expense recognized in the consolidated statements of income relating to the identified key management and directors.
19. FINANCE EXPENSE
For the years ended December 31,
(in thousands of dollars)
Short term interest, net of interest income
Interest, long term obligations
20. FINANCIAL INSTRUMENTS
Financial risk management
2014
$
279
104
383
2013
$
334
112
446
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, 2014 and 2013.
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 on 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, 2014 was prime plus 75 basis points, 3.75%
(December 31, 2013 - prime plus 75 basis points, 3.75%), adjusted quarterly based on certain financial indicators of the
Company. The effective interest rate on the term loan balance at December 31, 2014 was US LIBOR rate plus 225 basis
points, 2.42% (December 31, 2013 – US LIBOR rate plus 225 basis points, 2.41%), 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 rates would have a minimal impact on the net income for the year ended December 31, 2014.
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 considers long term forecasts to assess the potential cash flow impact on the
Company. During the year ended December 31, 2014, the Company converted US dollar cash to Canadian dollar cash to help
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.
50
Notes to the Consolidated Financial Statements
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, 2014. 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, 2014,
(in thousands of US dollars)
Cash and cash equivalents
Accounts receivable
Restricted cash
Accounts payable and accrued liabilities
Trade balances between foreign and domestic operations
Long term debt
Net balance sheet exposure
Operating exposure for the year ended December 31, 2014,
(in thousands of US dollars)
Sales
Operating expenses
Net operating exposure
Foreign
Operations
$
Domestic
Operations
$
13,800
13,955
250
(8,847)
(7,222)
—
11,936
1,744
1,915
—
(1,537)
7,222
(2,253)
7,091
Total
$
15,544
15,870
250
(10,384)
—
(2,253)
19,027
$
109,246
93,243
16,003
The weighted average US to Canadian dollar translation rate was 1.10 for the year ended December 31, 2014. The translation
rate as at December 31, 2014 was 1.16.
Based on the Company’s foreign currency exposures noted above, with other variables unchanged, a twenty percent
decrease in the Canadian dollar would have impacted net income as follows:
For the year ended December 31, 2014,
(in thousands of US dollars)
Net balance sheet exposure of other operations
Net operating exposure of foreign operations
Change in net income
$
1,057
1,926
2,983
Other comprehensive income would have changed $1,528,000 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
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.
51
Notes to the Consolidated Financial Statements
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, 2014, no customer exceeded 10% of the consolidated trade accounts receivable balance. 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 $27,066,000 as at
December 31, 2014 (December 31, 2013 - $24,723,000). On a geographic basis as at December 31, 2014, approximately 48%
(December 31, 2013 – 22%) of the balance of trade accounts receivable was due from Canadian and non-US customers and
52% (December 31, 2013– 78%) was due from US customers. The change in geographic accounts receivable is mainly due to
a disputed significant receivable existing on December 31, 2013 for $3,927,000 USD that was settled at the beginning of 2014.
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
2014
58%
23%
13%
3%
3%
100%
2013
45%
24%
19%
3%
9%
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 $727,000 which include funds
receivable from various sales tax refunds, insurance refunds and rebates (December 31, 2013 - $360,000).
The Company had recorded an allowance for doubtful accounts of $125,000 as at December 31, 2014 (December 31, 2013 -
$542,000). The allowance is an estimate of the December 31, 2014 trade receivable balances that are considered
uncollectible. The allowance increased for bad debt expense of $129,000 (2013 - $462,000), offset by payments of $41,000
(2013 - $2,000), write offs of $528,000 (2013 - $209,000) and a translation adjustment of $23,000 (2013 - $16,000) for the
year ended December 31, 2014.
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:
(in thousands of dollars)
Carrying
Amount
$
Accounts payable, accrued liabilities and provisions
Dividends payable
Long term debt
Total
21,176
1,208
2,601
24,985
e) Fair value of financial instruments
2015
$
19,923
1,208
1,498
22,629
2016
$
Thereafter
$
1,253
—
1,103
2,356
—
—
—
—
The Company holds financial instruments consisting of cash and cash equivalents, restricted cash, accounts receivable,
accounts payable and accrued liabilities, and long term debt.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued
liabilities approximates their fair value due to their short term nature.
The carrying value of long term debt approximates its fair value as changes in interest rates are not expected to significantly
impact the value of the loan. In addition, the interest rates are the market rates at each reporting period.
21. STATEMENTS OF CASH FLOWS
For the years ended December 31,
(in thousands of dollars)
Net interest paid
Income taxes paid
2014
$
373
5,701
6,074
2013
$
452
8,922
9,374
53
Notes to the Consolidated Financial Statements
22. CAPITAL RISK MANAGEMENT
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.
a)
Long term debt and adjusted capital employed:
As at December 31,
(in thousands of dollars)
Current portion of long term debt [note 11]
Long term debt [note 11]
Total long term debt
Share capital
Contributed surplus
Retained earnings
Adjusted shareholders’ equity
Adjusted capital employed
2014
$
1,498
1,103
2,601
76,592
2,568
43,230
122,390
124,991
2013
$
1,350
2,386
3,736
74,846
2,301
31,419
108,566
112,302
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 2% as at December 31, 2014 (December 31, 2013 – 3%) to be low. Adjusted capital employed
is defined as long term debt plus total shareholders’ equity excluding accumulated other comprehensive income (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 net tangible worth ratio and a
fixed charge coverage 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:
Dec 31,
2014
Actual
Dec 31,
2014
Required
Dec 31,
2013
Actual
Dec 31,
2013
Required
Minimum equity value
Debt to tangible net worth
Fixed charge coverage ratio
$123 million
0.03
4.0
>$50 million
<2.0
>1.5
$105 million
0.06
5.8
>$50 million
<2.0
>1.5
On an ongoing basis, management expects to continue meeting all financial covenants under its current credit facility.
54
Notes to the Consolidated Financial Statements
23. 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 years ended December 31,
(in thousands of dollars)
Revenue
Manufacturing and
selling costs
Gross profit
Underground
Aboveground
Total
2014
$
2013
$
2014
$
2013
$
2014
$
2013
$
139,087
121,692
31,748
40,012
170,835
161,704
108,859
30,228
96,241
25,451
27,516
4,232
31,981
8,031
136,375
34,460
128,222
33,482
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
As at
(in thousands of dollars)
Underground
Aboveground
Total
Dec 31,
2014
$
26,442
4,586
31,028
Dec 31,
2013
$
20,874
2,936
23,810
Dec 31,
2014
$
23,689
5,454
29,143
Dec 31,
2013
$
21,197
6,057
27,254
Intangible assets
and goodwill
Dec 31,
2014
$
34,297
3,472
37,769
Dec 31,
2013
$
32,735
3,746
36,481
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 and
distributors in Canada and provides products for distributors and retail oil and gas companies in the US. For the years ended
December 31, 2014 and 2013, 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
2014
$
56,101
110,969
3,765
170,835
Revenues
2013
$
56,454
102,135
3,115
161,704
Property, plant and
equipment, intangible
assets and goodwill
Dec 31,
2014
$
25,577
40,417
918
66,912
Dec 31,
2013
$
24,825
37,803
1,107
63,735
Dec 31,
2013
$
62,552
90,377
3,725
156,654
Total assets
Dec 31,
2013
$
54,893
76,562
2,860
134,315
24. IMPAIRMENT TESTING OF GOODWILL
Goodwill acquired through business combinations has been allocated to three groups of 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,
2014
$
1,377
Oct 1,
2013
$
1,377
Oct 1,
2014
$
28,720
Oct 1,
2013
$
25,319
Oct 1,
2014
$
2,641
Oct 1,
2013
$
2,641
The Company performed its annual goodwill impairment test as at October 1, 2014. 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, 2014, 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.
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, 2014 figures above may differ from the
October 1, 2013 carrying amount, along with the year end December 31, 2013 and 2014 carrying amounts.
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 is 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 on 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 (11.7% to 12.5%), Underground US (13.6% to
14.4%) and Aboveground (23.6% to 24.4%).
Growth rate estimates:
Growth rates for beyond 2014 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 2014 operating budget and the Strategic Plan were
calculated using current prospects and 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 US 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
and variable costs. 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 83% and with the Aboveground CGU, the specific risk premium would need to
increase 25% 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 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 92% of our current expectations; the
Underground US CGU would have to fall to 86%; and the gross profit for the Aboveground CGU would have to fall to 92% of
its current expectations before a deficiency would result in the respective carrying amounts.
As at October 1, 2014, the total recoverable amount of the Company's CGUs exceeded their carrying amounts.
57
CORPORATE INFORMATION
________________________________________________________________________________
Board of Directors
Anthony (Tony) P. Franceschini, Chair of the Board
Ronald M. Bachmeier, President, CEO, Director
D. Bruce Bentley, Director
Leonard A. Cornez, Director
Allan S. Olson, Director
Harold A. Roozen, Director
Ralph B. Young, Director
Annual General & Special Meeting
1:30 p.m. on Friday, May 8, 2015
at The Sandman Signature Edmonton South
in The Great Room 3
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 5, 2015
Total outstanding: 30,245,828
Investor Relations
Copies of this Annual Report may be obtained
by calling Investor Relations at (780) 466-6648
or e-mailing IR@zcl.com
Transfer Agent & Registrar
CST Trust Company
600, The Dome Tower
333 – 7th Avenue SW
Calgary, Alberta
Canada T2P 2Z1
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
58
1420 Parsons Road SW | Edmonton | Alberta | Canada | T6X 1M5
Tel 780.466.6648 Fax 780.466.6126 Toll Free 1.800.661.8265 Web www.zcl.com