Annual Report
1 5
Our Mission
To deliver piece of mind through corrosion resistant solutions
that preserve and protect the environment.
CONTENTS
______________________________________________
Message to Shareholders
Management’s Discussion and Analysis
Consolidated Financial Statements and Notes
Corporate Information
2
5
29
61
1
Message to Shareholders-Q4 2015
ZCL delivered another successful year in 2015. In a year in which certain of our markets
experienced some of the most challenging economic conditions ever encountered, we posted
record revenue of $185.7 million, a 9% increase over 2014. This performance was led by our
Underground operating segment which grew by 16%, and both Petroleum Products and Water
Products achieved record annual revenues. We also achieved increases in gross profit and
gross margin in our largest revenue source, the Underground operating segment, with
Underground gross margins increasing for the fifth consecutive year. Our balance sheet
remained strong and we recorded a return on capital employed ratio of 26%.
Strategic Review and Value Enhancing Initiatives
During the fourth quarter of 2015, we completed our annual review of ZCL’s strategic plan,
including a comprehensive review of our capital allocation program. To address current and
expected changes in our markets, we plan to allocate the majority of our resources to our
largest revenue source, being the Underground operating segment, which accounted for 87% of
our revenues in 2015. This segment remains strong and gives us the ability to grow and remain
profitable.
As a further result of this strategic review, the Company has determined it is prudent to
maintain a strong balance sheet to provide the flexibility to take advantage of opportunities as
they arise. However, we do not currently require all of the cash on our balance sheet to
support operations and execute on our strategic plan. Therefore, due to the strength of both
our business and our balance sheet, ZCL’s board has decided to significantly increase its
distribution to shareholders through two initiatives. First, a one-time special dividend of $0.50
per share. Second, an increase of our quarterly dividend by 60% to $0.08 per share. The
increase in our quarterly dividend is a reflection of our confidence in our ability to generate
future funds from operations.
In addition, ZCL will continue our NCIB at the TSX maximum allowed amount of 5% of our
outstanding shares (or approximately 1.5 million shares). We intend to be active in buying back
our shares, but only when the right value opportunities arise.
2016 Outlook
ZCL expects continued revenue growth in 2016 in the Petroleum and Water product groups;
however, this will be partially offset by flat or lower revenues in the Aboveground operating
segment due to continued low energy prices. For the first quarter of 2016, we anticipate the
Underground operating segment will generate seasonally strong results, partially offset by low
revenue and a negative margin in our Aboveground operating segment and increased general
and administrative expenses due to higher professional fees. Over the last five years, ZCL has
generated compound annual growth rates in revenue and earnings of 10% and we expect to
sustain this performance going forward, although achievement of these growth rates in any
individual year is not assured.
2
We believe our downstream Petroleum Products group has a long term compound annual
organic growth rate in the high single digits, supported by three key dynamics: (1) the larger
U.S. retail petroleum marketers continue to expand as they compete for market share, (2) the
aging of the installed tank base leading to an increased rate of tank replacement, and (3) ZCL’s
FRP tanks continued market share gains over steel tanks. While the retail petroleum market in
Canada is encountering slower activity levels due to reductions in capital spending by the
integrated major oil companies that control the purchasing decisions in this market, our much
larger U.S. retail petroleum market does not have the same capital spending constraints.
Spending decisions in the U.S. are dominated by petroleum retailers who are enjoying higher
volumes, higher margins, and higher cash flows in the low energy price environment; these
customers have plenty of capital available for investment.
Similarly, we believe that the Water Products group of our Underground operating segment will
be able to achieve long term compound annual organic growth rates in the 10%-20% range.
Growing awareness of water as the next scarce resource, and the recognition of water as an
economic input that is increasing in value, are leading to water conservation initiatives that
increasingly include our storage tanks as part of the solution. The gradually improving
construction markets across North America, and the evolving regulatory environment
pertaining to water usage and water quality, will further support our anticipated growth in the
Water Products market.
Longer term opportunities
We also believe that we have longer term opportunities to organically grow our Aboveground
segment in the +10% range annually. However, this part of our business is quite cyclical as
much of it is directly linked to global energy prices and associated capital spending levels in the
broad industrial markets. Although we do not expect revenues in this segment to increase in
2016, we believe revenues will start to recover over the next 12 to 24 months and we have
decided to maintain our presence in the Aboveground markets. This strategy provides us with
the best opportunity to take advantage of a recovery in the Aboveground end markets as they
occur.
Operational improvements
Operationally, we have delivered improvements that translated into five consecutive years of
increases in gross margins in our largest revenue source, the Underground operating segment.
We believe we have some runway left for additional gross margin improvements in both our
Underground and Aboveground segments, albeit most likely with declining marginal returns.
We believe that we can achieve both Underground and Aboveground operational gains within
our expected capital expenditures of approximately $5 million annually.
We are also keenly focused on expense management initiatives. In reaction to lower levels of
activity within our Aboveground segment, we have closed our Montreal, QC facility
(consolidating its operations with our Brockville, ON plant), we have made overhead and
3
salaried staff reductions in all Aboveground facilities, and we have implemented job sharing
programs for our hourly workers in certain markets where those programs are available.
Additionally, as recently announced, we have appointed Rene Aldana as our Chief Operating
Officer, effective January 19, 2016. Rene is a strong and experienced operator, and this
strengthening of our management team will allow us to continue to pursue greater efficiency
gains and profitable growth.
These steps will allow ZCL to reward our shareholders who have demonstrated patience in
what ZCL has successfully achieved, while we retain the flexibility to grow our revenues and
earnings and diligently pursue even greater shareholder value creation over the longer term.
I would like to extend my sincere personal gratitude and thanks to all of ZCL’s dedicated
employees for their contributions throughout 2015, for without them none of ZCL’s success
would have been possible. I also want to thank the ZCL board and our shareholders for your
continued support. We look forward to our next communication in early May when we will
report our first quarter 2016 results. Additionally, we look forward to seeing as many of our
shareholders as possible at our upcoming Annual General Meeting of Shareholders in
Edmonton on May 5, 2016.
Sincerely,
Ronald M. Bachmeier
President & CEO
4
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, 2015, should be read in conjunction with
the Company’s audited consolidated financial statements
and related notes for the year ended December 31, 2015.
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 five 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 2, 2016.
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 also supplies
tanks for pipelines (midstream petroleum markets) and
for oil and gas exploration companies
(upstream
petroleum 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
licensing
internationally through technology
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.
5
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
ZCL delivered another successful year in 2015. In a year in
which certain of our markets experienced some of the
most challenging conditions ever encountered, we posted
record revenue of $185.7 million, a 9% increase over
2014. We also achieved increases in gross profit and gross
margin in our largest revenue source, the Underground
operating segment, aided by a strong US dollar. These
gains more than offset difficult market conditions for our
Aboveground operating segment, particularly in the Oil
Sands where we recorded significantly declining revenues
and negative gross margins. Our balance sheet remained
strong, with working capital of $76.8 million and a net
cash balance position of $39.1 million. Return on capital
employed also remained strong at 26%.
During the fourth quarter of 2015, the Company
completed its annual review of the strategic plan which
included a comprehensive review of our capital allocation
program. To address current and expected changes in our
markets, we plan to allocate the majority of our resources
to our largest revenue source, being the Underground
operating segment, which accounted for 87% of our
revenues in 2015. This segment remains strong and gives
us the ability to continue to grow and remain profitable.
As a result of our strategic discussions, we have decided
to maintain our presence in the Aboveground operating
segment. Although we do not expect revenues in this
segment to increase in 2016, we believe revenues will
start to recover over the next 12 to 24 months. This
strategy provides us with the best opportunity to take
advantage of a recovery in the Aboveground end markets
as they occur.
As part of this strategy, the Company has determined it is
prudent to maintain a strong balance sheet to provide the
flexibility to take advantage of opportunities as they arise.
However, we do not currently require all of the cash on
our balance sheet to support operations and execute on
our strategy. Therefore, due to the strength of both our
business and our balance sheet, ZCL’s board has decided
to significantly increase its distribution to shareholders
Aboveground Fluid Containment
Corrosion Products
ZCL manufactures custom designed and engineered
aboveground 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.
through two initiatives. First, a one-time special dividend
of $0.50 per share. Second, an increase of our quarterly
dividend by 60% to $0.08 per share. The increase in our
quarterly dividend is a reflection of our confidence in our
ability to generate future funds from operations.
Financial Results
Revenue
Revenue for the year ended December 31, 2015 was a
record $185.7 million, up $14.8 million or 9% from $170.8
million for the year ended December 31, 2014. The
Underground operating segment grew 16% and both
Petroleum Products and Water Products achieved record
annual revenues and benefited from a positive impact on
the conversion of US dollar revenue to Canadian dollars
for reporting purposes. The Aboveground operating
segment revenue was down 21% from 2014.
Gross Profit
Gross profit for the year ended December 31, 2015 was
$33.2 million, down $1.3 million or 4% from $34.5 million
a year earlier. Gross margin was 18% of revenue for 2015,
down from 20% a year earlier. Decreases experienced in
the Aboveground margin more than offset margin
increases in the Underground operating segment. Gross
margin in the Underground operating segment increased
for the fifth consecutive year.
Net Income
Net income before certain one-time impairment charges
and costs associated with the plant closure in Montreal
was $16.2 million compared to $16.3 million a year
earlier, resulting in earnings per share of $0.53, compared
to $0.54 a year earlier.
Net income for the year ended December 31, 2015 was
$13.0 million, down $3.3 million or 20% from $16.3
million a year earlier. Net income per diluted share for
2015 was $0.43, down $0.11 or 20% from $0.54 per
diluted share a year earlier.
6
Management's Discussion and Analysis
Impairment of Assets
As previously disclosed, during the third quarter of 2015,
the Company performed an impairment analysis on the
Aboveground operating segment due to the near term
low activity levels and resulting low profitability. As a
result, in our third quarter disclosure we recorded a $2.7
million impairment charge against the carrying value of
goodwill, reducing the remaining balance of Aboveground
operating segment goodwill to $nil. In addition, in our
third quarter disclosure we recorded an equipment
impairment charge of $0.2 million against the carrying
costs of equipment relating to the decommissioning of
the Montreal manufacturing facility, as discussed later in
the outlook section. There were no further impairments
in the fourth quarter of 2015.
The impairment to goodwill and equipment is a non-cash
accounting adjustment and has no on-going impact to the
business.
Net Cash
As at December 31, 2015, ZCL had a net cash and cash
equivalents
(“net cash”) balance of $39.1 million
compared to $21.8 million as at September 30, 2015 and
$26.1 million as at December 31, 2014.
Value Enhancing Initiatives
Given the significant net cash balance of $39.1 million at
the end of 2015, we have elected to make some changes
to our capital allocation strategy. These changes are
supported by our proven historical ability over the past
three years to generate funds from operations between
$18.4 million and $20.8 million annually, without the
need for significant re-investment in maintenance capital.
The Company maintains cash and cash equivalents of
approximately $10 million in order to effectively manage
its self-insurance obligations and fund the operational
needs in foreign jurisdictions. The complexities of running
international operations results in challenges obtaining
debt outside of North America and therefore these
operations are financed through cash.
With our December 31, 2015 net cash position of almost
$40 million, reflecting ZCL’s strong performance in recent
years, the Board has decided to declare a special dividend
of $0.50 per share, or approximately $15 million in total,
to be paid out on March 31, 2016, to the shareholders of
record as of March 15, 2016.
Additionally, the Board declared a 60% increase in our
quarterly dividend to $0.08 per share, up from $0.05 per
share previously, to be paid on April 15, 2016, to the
shareholders of record as of March 31, 2016. The Board
decided to
increase the quarterly dividend due to
confidence in our ability to deliver funds from operations.
Increases to distributions will be dependent upon the
future outlook.
Normal Course Issuer Bid
ZCL plans to continue our Normal Course Issuer Bid
(“NCIB”), subject to TSX approval, at the TSX maximum
allowed amount of 5% of our outstanding shares
(approximately 1.5 million shares) and we intend to be
opportunistic in buying back our shares.
Backlog
($millions)
2015
2014
% change
Underground
38.4
21.4
79%
Aboveground
1.2
9.6
(88%)
Dec 31
39.6
31.0
28%
increase
As of December 31, 2015, backlog was $39.6 million, up
$8.6 million or 28% from $31.0 million a year earlier. The
overall
is attributable to the Underground
Products group and a positive foreign exchange impact of
US dollar denominated backlog, partially offset by a
decrease in the Aboveground Products group backlog.
in 2014.
In the Underground operating segment, backlog of $38.4
million was up $17.0 million or 79% compared to the
same period
Both the Canadian and US
operations saw significant increases in backlog relative to
the prior year on a source currency basis. Canadian
backlog was up 83% over the prior year and in the US,
Underground operating segment backlog was up $8.6
million or 49% over the prior year prior to translation to
Canadian dollars for reporting purposes which further
boosted the increase by $7.3 million.
Both Water and Petroleum Products groups contributed
to the increase in Underground backlog with Petroleum
being the biggest contributor. Petroleum backlog was up
$16.6 million or 94% over the prior year and Water
backlog was up $0.4 million or 10%. The increase in
Petroleum backlog is driven almost entirely out of the US
where we continue to see a strong increase in demand for
our products as retail petroleum marketers are benefiting
from declining oil prices which drive higher retail
profitability. The increase in Water backlog is primarily
due to the translation of US dollar denominated orders to
Canadian dollars for reporting purposes. On a source
currency basis, Water Products backlog is consistent year
over year.
In the Aboveground operating segment, backlog is down
significantly compared to a year earlier. Our Oil Sands
customer backlog was very low at the end of December
2015 with only a few orders in backlog. Contributing to
the decrease is a $1.2 million order that has been
postponed indefinitely by one of our customers, and
7
Management's Discussion and Analysis
although the order has not been cancelled, we have
removed it from our Aboveground backlog. Backlog from
Industrial Corrosion markets and field services were down
$4.2 million compared to the prior year due to lower
activity in both the Oil Sands and industrial markets.
Compared to the September 30, 2015 backlog of $50.6
million, the December 31, 2015 backlog decreased by
$11.0 million or 22%. The decrease was attributable to
both the Underground and Aboveground operating
segments. The Underground segment was down $6.2
million or 14% due to normal seasonal fluctuations in our
Underground operations and due to the fact that
Canadian pre-orders of $6.6 million were received in early
2016 as opposed to traditionally being received
in
December of the preceding year. In fact, backlog at
January 31, 2016 was $48.3 million, with the bulk of the
increase over December 31, 2015 derived from the
Petroleum Products group, which was $42.5 million.
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.
information refer to the “Non-IFRS
For additional
Measures” section later in this MD&A.
Capital Allocation & Value Enhancing Initiatives
ZCL has developed a consistently profitable, high free cash
flow business model and will continue to act in a
measured and strategic manner when
it comes to
investing and distributing our capital. The key levers of
our capital allocation strategy are:
1. Fund all organic growth opportunities that meet the
objectives of our strategic plan.
2. Continue to evaluate and pursue opportunities to
grow through mergers and acquisitions.
3. Continue to distribute cash to shareholders in the
form of dividends.
2016 Capital Investment Plan
In addition to continuing to generate organic revenue
growth, we still have some room for improvement left in
our drive to advance our operational execution and
increase our margins. Although we have already attained
significant improvements in operational efficiencies in our
Underground segment
in particular, there are still
continuous improvement opportunities, albeit most likely
with declining marginal returns.
There are also
opportunities for
low cost operational and margin
improvement within our Aboveground segment. We
believe that we can achieve both Underground and
Aboveground operational gains within our expected
capital (including maintenance capital) expenditures of
approximately $5 million annually.
As recently announced, we appointed Rene Aldana as our
Chief Operating Officer, effective January 19, 2016. Rene
is an experienced operator, and will add further strength
to our management team as we continue to pursue
greater efficiency and profitable growth.
8
Management's Discussion and Analysis
2016 Outlook
Water Products
With growing awareness in North America that water is
the next scarce resource, and the recognition of water as
an economic input that is increasing in value, we believe
this will result in water conservation initiatives that will
increasingly include ZCL’s storage tanks as part of the
solution.
improving
construction market across North America, we expect this
revenue segment will achieve future annual compound
organic growth rates in the 10% - 20% range.
Coupled with
the gradually
Corrosion Products
Given the current market conditions surrounding oil
prices, we do not expect a recovery in revenue in 2016 for
our Corrosion Products group, which accounted for 13%
of our revenue in 2015. However, we believe that
revenues will recover over the next 12-24 months and
that we can grow the Corrosion Products group in the
10% range annually over the longer term. This part of our
business is quite cyclical as much of it, particularly in the
Oil Sands, is directly linked to global energy prices and
associated capital spending levels in the broad industrial
markets.
In reaction to what we view as the current low point in
the cycle in the Corrosion Product markets, we are
aggressively cutting costs. The cost cutting initiatives
include the closure of our Montreal, QC facility (and
consolidation of this unit with our Brockville, ON plant),
across the board overhead and salaried staff reductions in
all Aboveground facilities, and the implementation of job
sharing programs for our hourly workers
in certain
markets where those programs are available. We are also
redirecting certain of our sales activities into non-energy
sensitive markets to make up for the Oil Sands revenue
shortfall.
The following represents forward looking information and
readers are cautioned that actual results may differ from
expectations.
ZCL expects continued growth opportunities in 2016 in
the Petroleum and Water Products groups; however, this
will be partially offset by flat or lower revenue in the
Aboveground segment due to low energy prices. For the
first quarter of 2016, we anticipate the Underground
operating segment will have seasonally strong first
quarter results, partially offset by low revenue and a
negative margin in our Aboveground operating segment,
and increased general and administration expenses due
to higher professional fees.
Over the last five years, the Company has been able to
grow revenue and earnings at a compound annual growth
rate of 10%. We expect this is a sustainable trend;
however achievement of this growth rate in any individual
year is not assured.
Our outlook by product group is as follows:
Petroleum Products
ZCL’s recent success
is mostly attributable to the
Petroleum Products group, particularly the downstream
(retail) sub-market, which we believe has a long term
compound annual organic growth rate of high single
digits. The three dynamics of larger U.S. retail petroleum
marketers competing to expand their market share; an
aging installed tank base that is leading to an increased
rate of tank replacement; and ZCL’s market share gains
over steel tanks, support our forecast for continued
moderate growth in our largest revenue segment.
in Canada are comparable
We expect this growth to be driven by the US
Downstream market where retail petroleum marketers
are enjoying high margins and increased cash flow from
higher gasoline sales due to low oil prices. While
petroleum retailers
in
profitability to their US counterparts, the capital spending
decisions made in Canada are curtailed by the fact that a
large portion of the Canadian retail market is controlled
by integrated major oil companies. Certain oil companies
in Canada are experiencing significant slow-downs in the
Upstream segment of their businesses and have reacted
by announcing across the board reductions in their 2016
the
capital spending plans,
profitable retail segment.
including spending
in
9
Management's Discussion and Analysis
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
Impairment 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 % 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 and finance lease obligations
Issuance of common shares on exercise of stock options
Repurchase of common shares
Dividends paid
Purchase of capital and intangible assets, net of disposals
Foreign exchange
(in thousands of dollars)
Financial Position
2015
$
Year Ended December 31
2014
$
2013
$
160,685
24,990
185,675
33,191
18%
9,287
(2,173)
3,955
319
32
2,878
5,894
12,999
0.43
0.43
0.185
26,484
14%
0.87
19,577
2,710
(2,041)
2,103
(3,247)
(5,285)
(3,914)
2,187
2015
$
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)
272
As at December 31
2014
$
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)
468
2013
$
Working capital (note 1)
Total assets
Return on capital employed (note 1)
Net cash (note 1)
Total non-current liabilities
48,112
134,315
29%
15,414
7,397
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.
62,868
156,654
29%
26,079
6,576
76,781
177,544
26%
39,095
5,015
10
Management's Discussion and Analysis
RESULTS OF OPERATIONS
Revenue
($000s)
2015
2014
%
change
Twelve Months
Underground Fluid
Containment:
Petroleum Products
Water Products
Aboveground Fluid
Containment:
Corrosion Products
136,909
23,776
160,685
120,437
18,650
139,087
14%
28%
16%
24,990
185,675
31,748
170,835
(21%)
9%
Record revenue of $185.7 million for the year ended
December 31, 2015, was up $14.8 million or 9% from
$170.8 million in the prior year. Record revenue was
generated in both the Petroleum and Water Product
groups, both of which benefited from a strong US dollar,
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 $160.7 million, was $21.6 million
or 16% higher for the year ended December 31, 2015,
compared with the year ended December 31, 2014.
The $16.5 million or 14% increase in Petroleum Products
revenue was attributable to the US market with an
increase of $4.6 million or 6%, prior to a positive foreign
exchange conversion impact for reporting purposes of
$16.1 million.
In the US, sales to distributors and
contractors were up 19% compared to 2014, while sales
to retail petroleum marketers were up 4%.
Canadian Petroleum Products revenue in 2015 was down
$5.0 million or 18% from 2014. The decrease was
primarily a result of a decrease in sales to the upstream
and midstream sectors which were down $4.0 million
compared to a year earlier. In addition, sales to major oil
customers in the downstream market were also down
compared to 2014.
Canadian Petroleum Products
customers, a large part of which are integrated major oil
companies, are being impacted by the low energy prices
that have been ongoing throughout 2015. The available
capacity in the Canadian production facilities was utilized
in sales to US
to support the substantial
customers noted above.
increase
Petroleum Products revenue also includes international
operations which were up $0.7 million, primarily due to
higher Parabeam® sales, as compared to 2014.
Water Products revenue was up $5.1 million, or 28%
compared with 2014 and the increase was attributable to
sales to US Water Products customers which rose by $6.1
million or 44% compared to 2014. The US sales include a
positive foreign exchange impact of $3.0 million on the
conversion of US to Canadian dollar sales for reporting
purposes. Canadian Water Products sales were down
$1.0 million or 20% from the prior year, reflecting lower
activity levels in energy market related infrastructure
projects, including man-camps.
Aboveground Fluid Containment
Aboveground revenue of $25.0 million was $6.8 million or
21% lower than $31.7 million a year earlier. Oil Sands
revenue decreased by $8.4 million as compared to 2014.
In the Industrial Corrosion market, revenue was up $1.7
million compared to 2014. While US field service sales
were down $0.3 million on a source currency basis, they
were up $0.6 million when converted to Canadian dollars
for reporting purposes. Industrial Corrosion Product
sales, manufactured in our Canadian facilities, were up
$1.0 million compared to a year earlier.
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
Twelve Months
($000s)
2015
2014
%
change
% of rev
2015
Underground Fluid
Containment
Aboveground Fluid
Containment
36,492
30,228
21%
23%
(3,301)
4,232
(178%)
(13%)
33,191
34,460
(4%)
18%
In 2015, gross profit of $33.2 million decreased by $1.3
million or 4% compared to 2014. Gross margin decreased
to 18% from 20% in 2014. Increases in the Underground
operating segment gross profit and gross margin were
more than offset by decreases in the Aboveground
operating segment gross profit and gross margin. The
changes reflect the factors discussed below:
11
Management's Discussion and Analysis
Underground Fluid Containment
Underground gross profit of $36.5 million was up $6.3
million or 21% from $30.2 million in 2014. The increase in
gross profit was primarily derived from the increase in
sales to the US Petroleum Products and Water Products
markets. Gross margin of 23%, a one percentage point
increase from 22% in 2014, was also derived from the US
operations. Gross margins in our Underground operating
segment increased for the fifth consecutive year.
Aboveground Fluid Containment
Aboveground gross profit was negative $3.3 million, down
$7.5 million or 178% from $4.2 million in 2014. Gross
margin of negative 13% decreased 26 percentage points
from 13% in 2014. As previously reported in our 2015
quarterly disclosures, the deterioration in gross profit and
gross margin was derived from certain negative margin
industrial corrosion projects that occurred early in the
year and low sales volume in all Corrosion Products
markets which impacted the ability to cover the fixed cost
base
segment
manufacturing operations. In addition, $0.5 million in
the Montreal
costs
to
manufacturing facility negatively
impacted the gross
profit and gross margin in 2015, compared to a year
earlier.
the Aboveground
closure of
operating
related
the
of
General and Administration
($000s)
2015
2014
% change
Twelve Months
9,287
9,076
2%
General and administration (“G&A”) expense for the year
ended December 31, 2015 was comparable to 2014.
Foreign Exchange Gain
($000s)
2015
2014
Twelve Months
(2,173)
(1,008)
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
the Company’s Canadian
and
operations.
liabilities held by
The following tables detail the US dollar and euro
conversion rates.
US Dollar Conversion Rates
Year
Ended
2015
2014
Avg.
Close Avg.
Close
Q1
Q2
Q3
Q4
Annual
1.24
1.23
1.31
1.34
1.28
1.26 1.10
1.24 1.09
1.34 1.09
1.39 1.14
1.39 1.10
1.11
1.07
1.12
1.16
1.16
euro Conversion Rates
Year
Ended
2015
2014
Avg.
Close
Avg.
Close
Q1
Q2
Q3
Q4
Annual
1.40
1.36
1.45
1.46
1.42
1.37 1.51
1.37 1.50
1.51 1.44
1.51 1.42
1.51 1.47
1.52
1.46
1.42
1.41
1.41
Avg.
Change
12%
13%
20%
18%
Close
Change
14%
16%
20%
20%
16%
20%
Avg.
Change
(7%)
(9%)
1%
3%
(3%)
Close
Change
(10%)
(6%)
6%
7%
7%
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)
2015
2014
% change
Twelve Months
3,955
3,748
6%
The 6% year over year increase in depreciation and
amortization expense primarily resulted from the higher
capital asset value in 2015 compared to the prior year due
to an increase in the 2014 capital spending program
compared to 2013.
As well, the depreciation and
amortization on US dollar denominated fixed assets are
translated to Canadian dollars for reporting purposes at a
higher value due to the increase in the value of the US
dollar, compared with a year earlier. The increase was
partially offset by a decrease in amortization of certain
intangible assets on the ZCL-Dualam acquisition which
became fully amortized at the beginning of the first
quarter of 2015. Overall, annual capital expenditures
were up $0.3 million in 2015, to $4.7 million, compared to
$4.4 million in the prior year.
12
Management's Discussion and Analysis
Finance Expense
($000s)
2015
2014
% change
Twelve Months
319
383
(17%)
The 17% reduction in finance expense in 2015 compared
to 2014 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 2015.
Impairment of Assets
During the year, the Company performed an impairment
analysis on the Aboveground operating segment due to
the near term low activity levels and resulting low
profitability. As a result, and as reported in our third
quarter 2015 disclosure, a $2.7 million impairment charge
was recorded against the carrying value of Aboveground
goodwill, reducing the balance to $nil. In addition, an
impairment charge of $0.2 million was
equipment
recorded against the carrying value of equipment relating
to the decommissioning of the Montreal manufacturing
facility.
The
is an
impairment to goodwill and equipment
accounting adjustment which is a non-cash item and has
no on-going impact to the business.
Income Taxes
Income tax expense for the year ended December 31,
2015, represented 31.2% of pre-tax income, compared to
LIQUIDITY AND CAPITAL RESOURCES
26.5% of pre-tax income in 2014. The increase in 2015
compared with a year earlier, is primarily due to the
goodwill impairment of $2.7 million incurred in 2015,
which is not deductible for tax purposes, nor does it
represent a temporary difference between the calculation
of accounting net income and taxable income.
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)
2015
2014
Twelve Months
14,210
4,814
The foreign translation gain in the year ended December
31, 2015 was due to the strengthening of the US dollar
relative to the Canadian dollar throughout the year from
1.16 to 1.39. In 2014, the US dollar also strengthened
from 1.07 to 1.16 generating a gain on the translation of
foreign operations.
Working Capital
Credit Arrangements
As at December 31, 2015, the Company
increased
working capital (current assets less current liabilities) by
$13.9 million to $76.8 million compared to $62.9 million
as at December 31, 2014. The majority of the increase
was attributed to positive funds from operations of $19.6
million and an increase in inventory, partially offset by a
reduction in accounts receivable.
As at December 31, 2015, the Company had cash and cash
equivalents of $40.8 million (December 31, 2014 - $28.7
million) and net cash of $39.1 million (December 31, 2014
– net cash of $26.1 million). Net cash is defined later in
this MD&A under “Non-IFRS Measures.”
internally generated cash
Management believes that
flows, along with the available revolving operating credit
facility, will be sufficient to cover the Company’s
anticipated 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. The operating facility is
due on demand and matures on May 31, 2017.
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,
2017. The interest charged on the loan is the US dollar
based 30-day LIBOR plus 175 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.
13
Management's Discussion and Analysis
Share Capital
Investing Activities
The cash flows used in investing activities were $3.9
million for the year ended December 31, 2015 compared
to $3.8 million for 2014. Purchases of property, plant and
equipment and intangible assets were $0.4 million lower
in 2015 than a year earlier. However, proceeds on
disposal of property, plant and equipment were $0.6
million lower in 2015 compared to 2014, which increased
the overall cash flows used in investing activities when
compared to a year earlier.
Contractual Obligations
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 $1.3
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,
2015, the performance letters of credit issued totalled
$1.1 million.
As at December 31, 2015, ZCL’s minimum annual lease
commitments under all non-cancellable operating leases
for production facilities, office space and automotive and
equipment totalled $13.4 million.
The following table details the Company’s contractual
obligations due over the next five years and thereafter:
($000s)
2016
2017
2018
2019
2020
Thereafter
Total
Long Term Debt
and Finance Lease
1,675
-
-
-
-
-
1,675
Operating
Leases
2,930
2,136
1,606
1,187
1,001
4,558
13,418
Total
4,605
2,136
1,606
1,187
1,001
4,558
15,093
During the year ended December 31, 2015, the company
issued 584,108 shares on the exercise of stock options.
Also during the year, ZCL repurchased and cancelled
530,500 shares through the Normal Course Issuer Bid
implemented in March, 2015.
Cash Flows
($000’s)
Operating activities
Financing activities
Investing activities
Foreign exchange(1)
Twelve Months
2015
2014
22,287
(8,470)
(3,914)
2,187
17,313
(4,280)
(3,775)
272
12,090
9,530
(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 $19.6 million for the year
ended December 31, 2015, down $1.2 million from $20.8
million for the year ended December 31, 2014. The
decrease relative to 2014 is due primarily to the reduction
in gross profit.
Changes in non-cash working capital totalled $2.7 million
for the year ended December 31, 2015 compared to
negative $3.5 million for the year ended December 31,
2014. The major contributing factor to the increase
relative to 2014 was the reduction of accounts receivable.
Cash collected from accounts receivable was partially
offset by a reduction in accounts payable and accrued
liabilities as at December 31, 2015.
Financing Activities
Cash flows used in financing activities were $8.5 million
for the year ended December 31, 2015 compared to $4.3
million for the year ended December 31, 2014. The
increase in cash outflows relating to financing activities in
2015 compared to a year earlier, was primarily due to the
$3.2 million used to repurchase shares through the
Normal Course Issuer Bid implemented in March, 2015.
In addition, dividends paid in 2015 were $5.3 million, a
$1.1 million increase over 2014. The exercise of stock
options in 2015 generated $2.1 million in cash inflows
compared to the $1.3 million generated in 2014.
14
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 1.07 in
the second quarter of 2014 to a high of 1.39 in the fourth
quarter of 2015.
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)
2015
2014
Dec 31
$
46,974
3,885
6,005
0.13
0.13
0.20
Sep 30
$
59,842
5,205
12,627
0.17
0.17
0.41
Jun 30 Mar 31
$
46,664
3,400
6,052
0.11
0.11
0.20
$
32,195
509
1,800
0.02
0.02
0.06
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
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."
0.045
0.035
0.045
0.045
0.035
0.05
0.04
0.04
15
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
2015
$
42,324
4,650
46,974
7,822
17%
2,281
(348)
1,078
73
3
850
3,885
0.13
0.13
0.05
6,005
13%
0.20
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
Cash Flows
Funds from operations (note 1 & 2)
6,582
Changes in non-cash working capital
8,705
Net repayment of long term debt and finance lease obligations
(375)
Issuance of common shares on exercise of stock options
827
Dividends paid
(1,200)
Purchase of capital and intangible assets, net of disposals
(1,761)
260
Foreign exchange
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.
4,515
13,431
555
1,363
1,345
1,228
688
16
Management's Discussion and Analysis
Overall Fourth Quarter Performance
Net income in the fourth quarter of 2015 was $3.9 million,
down $1.0 million or 21% from $4.9 million a year earlier.
Earnings per diluted share in the fourth quarter of 2015
were $0.13, down $0.03 or 20% from $0.16 per diluted
share a year earlier. The decrease in net income was
primarily a result of lower revenues and profitability in
the Aboveground operating segment partially offset by an
increase
the
Underground operating segment.
the revenue and profitability of
in
Revenue
($000s)
2015
2014
%
change
Fourth Quarter
Underground Fluid
Containment:
Petroleum Products
Water Products
Aboveground Fluid
Containment:
Corrosion Products
35,567
6,757
42,324
31,669
5,947
37,616
12%
14%
13%
4,650
46,974
10,579
48,195
(56%)
(3%)
Revenue for the fourth quarter ended December 31,
2015, was $47.0 million, compared to $48.2 million in the
fourth quarter of 2014. Underground operating segment
revenue was up $4.7 million compared to a year earlier,
but this increase was more than offset by a decrease in
the Aboveground operating segment revenue.
The
change in revenue reflects the factors noted below:
Underground Fluid Containment
Underground revenue of $42.3 million was $4.7 million or
13% higher in the fourth quarter of 2015, compared with
$37.6 million in the fourth quarter of 2014.
In the fourth quarter of 2015, Petroleum Products
revenue was $35.6 million, up $3.9 million or 12% from
$31.7 million in the same period last year. The increase
was attributable to the US market, which was up $1.9
million prior to a positive impact on the US to Canadian
dollar translation for reporting purposes. In the US, sales
to distributors and contractors were up 27%, while sales
to retail petroleum marketers were up 2% compared to
the fourth quarter of 2014.
In the Canadian Petroleum Products market, revenue was
down $3.4 million for the fourth quarter of 2015, due to a
decrease in upstream sales of $1.2 million, as well as a
$1.9 million reduction in sales to major oil customers in
The Canadian pre-order
the downstream market.
program was lower in the fourth quarter, compared with
a year earlier.
includes
from
Petroleum Products also
international operations, which was up $0.7 million
compared to the fourth quarter of 2014, primarily due to
increased sales of Parabeam compared with a year
earlier.
revenue
Water Products revenue for the fourth quarter of 2015 of
$6.8 million was up $0.8 million or 14% from $5.9 million
in the fourth quarter of 2014. The increase in US Water
sales was offset by a decrease in Canadian Water sales,
however the translation of the US sales to Canadian
dollars for reporting purposes resulted in the overall
increase in revenue over 2014.
Aboveground Fluid Containment
Aboveground revenue of $4.7 million
in the fourth
quarter of 2015 was $5.9 million or 56% lower than $10.6
million in the same quarter a year earlier, with the
decrease attributable to both US and Canadian markets.
Revenue
from our Western Canadian Corrosion
customers was down $1.9 million as compared to the
same quarter in 2014. In Industrial Corrosion, revenue
from our field service operations was down $1.3 million
and product revenue was down $2.7 million compared to
the fourth quarter of 2014.
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
2015
2014
%
change
% of rev
2015
9,344
7,587
23%
22%
(1,522)
1,551
(198%)
(33%)
7,822
9,138
(14%)
17%
In the fourth quarter of 2015, gross profit of $7.8 million
decreased by $1.3 million or 14% compared to $9.1
million for the same quarter in 2014. Gross margin
decreased two percentage points to 17% from 19% in the
same quarter of 2014. These changes reflect the factors
discussed below:
17
Management's Discussion and Analysis
Underground Fluid Containment
Underground gross profit of $9.3 million was up $1.7
million or 23% from $7.6 million in the same quarter of
2014. Gross margin for the fourth quarter increased two
percentage points year over year to 22%, up from 20%,
driven by increases in the US Underground operations
compared to the same quarter in 2014.
Aboveground Fluid Containment
Aboveground gross profit was negative $1.5 million, down
$3.1 million from $1.6 million for the quarter ended
December 31, 2014. Gross margin of negative 33% was
down 46 percentage points from 13% in the fourth
quarter of 2014. The year over year decreases in both
gross margin and gross profit were due to a significant
decrease in sales volume. The current year did not have
enough revenue
fixed
manufacturing cost base in the Aboveground operating
segment. In addition, costs of $0.4 million relating to the
Montreal operating facility closure were incurred during
the fourth quarter and contributed to the loss. The
decrease in the gross profit and gross margin in the fourth
quarter of 2015 was derived from both US and Canadian
Aboveground markets.
to adequately support
the
General and Administration
($000s)
2015
2014
% change
Fourth Quarter
2,281
2,156
6%
General and administration (“G&A”) expense of $2.3
million for the fourth quarter ended December 31, 2015
was up $0.1 million or 6% over the fourth quarter of 2014.
The increase was due in part to US dollar denominated
G&A that increased as a result of the foreign exchange
conversion to Canadian dollars for reporting purposes.
Foreign Exchange Gain
($000s)
2015
2014
Fourth Quarter
(348)
(568)
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
2015
2014
Avg.
Close Avg.
Close
USD
euro
1.34
1.46
1.39 1.14
1.51 1.42
1.16
1.41
Avg.
Change
18%
3%
Close
Change
20%
7%
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)
2015
2014
% change
Fourth Quarter
1,078
1,000
8%
The 8% increase in depreciation and amortization expense
for the quarter ended December 31, 2015 compared to
the quarter ended December 31, 2014, primarily resulted
from the depreciation and amortization on US dollar
denominated fixed assets. The US assets are translated to
Canadian dollars for reporting purposes at a higher value
due to the increase in the value of the US dollar,
compared with a year earlier.
Finance Expense
($000s)
2015
2014
% change
Fourth Quarter
73
97
(2%)
The reduction of the finance expense relative to the prior
year is the result of the decrease in the principal balance
of the term loan.
Income Taxes
Income tax expense for the three months ended
December 31, 2015, represented 18% of pre-tax income,
compared to 23% of pre-tax income in the same quarter
of 2014. The decrease in the 2015 annual effective tax
rate to 18% is a result of our jurisdictional income
allocation differing from expectations in previous quarters
as well as the impact of the foreign exchange gains which
are not taxed at the same rates as business income.
18
Management's Discussion and Analysis
Comprehensive Income
Financial Position/Cash Flows
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)
2015
2014
Fourth Quarter
2,999
2,637
The foreign translation gain in the fourth quarter of 2015
was due to strengthening of the US dollar relative to the
Canadian dollar throughout the three months from 1.34
to 1.39. In the fourth quarter of 2014, the US dollar also
strengthened from 1.12 to 1.16.
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, 2015.
Interest Rate Risk
The Company’s objective in managing interest rate risk is
to monitor expected volatility in interest rates while also
levels.
minimizing the Company’s financing expense
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
impact on the Company. The
potential cash flow
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 at December 31, 2015 was prime plus 25 basis
points, 2.95% (December 31, 2014 - prime plus 75 basis
The Company’s working capital (current assets
less
current liabilities) of $76.8 million as at December 31,
2015 was an increase over the $71.7 million at September
30, 2015. Reductions in short term liabilities, including
accounts payable and accrued liabilities and deferred
revenue, was the primary driver in the increase in working
capital as compared to the prior quarter.
points, 3.75%). The effective interest rate on the term
loan balance at December 31, 2015 was US LIBOR rate
plus 175 basis points, 2.18% (December 31, 2014 – US
LIBOR rate plus 225 basis points, 2.42%). 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, 2015.
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
long term
currency exchange rates and considers
19
Management's Discussion and Analysis
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, 2015. 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, 2015, was as follows:
(in thousands of US dollars)
Foreign operations
Domestic operations
Net balance sheet exposure
$
19,242
10,830
30,072
Operating exposure for the twelve months ended
December 31, 2015, was as follows:
(in thousands of US dollars)
Sales
Operating expenses
Net operating exposure
$
119,405
96,480
22,925
The weighted average US to Canadian dollar translation
rate was 1.28 for the year ended December 31, 2015. The
translation rate as at December 31, 2015, was 1.39.
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, 2015, as follows:
(in thousands of US dollars)
$
Net balance sheet exposure of domestic operations 1,614
2,815
Net operating exposure of foreign operations
4,429
Change in net income
Other comprehensive income would have changed $2.5
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
through
other accounts
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
downstream retail 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,
2015, 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.
20
Management's Discussion and Analysis
The Company’s maximum exposure to credit risk for trade
accounts receivable is the carrying value of $24.5 million
as at December 31, 2015 (December 31, 2014 - $27.1
million). On a geographic basis as at December 31, 2015,
approximately 22% (December 31, 2014 – 48%) of the
balance of trade accounts receivable was due from
Canadian and non-US customers and 78% (December 31,
2014 – 52%) was due from US customers. The geographic
change in accounts receivable reflects the changes in
geographic sources of revenue for the last quarter of the
year relative to 2014.
As at
Payment terms are generally net 30 days.
December 31, 2015, 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,
2015
51%
26%
11%
6%
December 31,
2014
58%
23%
13%
3%
6%
100%
3%
100%
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
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.
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
is not
assets, and pledge of shares. The Company
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.
21
Management's Discussion and Analysis
TRANSACTIONS WITH RELATED PARTIES
included
components purchased
Certain manufacturing
for
$23,000 (2014 - $90,000) for the year ended December
financial
31, 2015,
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
the consolidated
in
CRITICAL ACCOUNTING ESTIMATES & JUDGEMENTS
The Company’s financial statements have been prepared
following IFRS. The measurement of certain assets and
liabilities
is dependent upon future events and the
outcome will not be fully known until future periods.
Therefore, the preparation of the financial statements
and
requires management
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, 2015 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
generating units)
is compared against the carrying
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
Property, plant and equipment and intangible assets with
finite
less accumulated
depreciation and amortization. Goodwill and indefinite
lives are recorded at cost
value being normal commercial rates for the products.
Accounts payable and accrued liabilities at December 31,
2015 included $6,000 (December 31, 2014 - $11,000)
owing to the corporation. There are no ongoing
contractual or other commitments resulting from these
transactions.
intangible assets are
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
to depreciation and
result
amortization expense or impairment charges.
in a material change
Allowance for Doubtful Accounts
receivable balance
is a
The Company’s accounts
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.
22
underwritten by a major international insurer. Effective
December 1, 2006, the Company formed
its own
insurance captive to
insure the Prezerver program.
Effective January 31, 2015, the Company ceased offering
the Canadian Prezerver program due to changing market
conditions.
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.
Management's Discussion and Analysis
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 an
actuary. The actual costs of claims may vary from those
estimates, and the difference may be material.
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
NEW ACCOUNTING STANDARDS
Standards effective January 1, 2015
Standards issued but not yet effective
During the year, the Company applied certain standards
and amendments that did not significantly impact the
consolidated financial statements of the Company. These
include amendments to IFRS 2 Share-based Payments;
IFRS 3 Business Combinations;
IFRS 13 Fair Value
Measurement; IAS 16 Property, Plant, and Equipment; IAS
24 Related Party Disclosures; and IAS 38 Intangible Assets.
IFRS 8
The Company also applied amendments to
Operating Segments which
the
judgments made by management in applying aggregation
criteria
Specific
disclosures on management’s judgment can be found in
note 24 of these Consolidated Financial Statements.
for similar operating segments.
include disclosing
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:
•
supersede all current
In May 2014, the IASB issued IFRS 15 Revenue from
Contracts with Customers (IFRS 15). The new revenue
standard will
revenue
recognition requirements under IFRS. 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
23
Management's Discussion and Analysis
that
reflects
such as
in an amount
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 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, 2018, 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.
includes a single expected-loss
In addition,
impairment model and a reformed approach to
hedge accounting. This standard is effective January
it
•
•
•
34
IASB
Interim
Financial Reporting.
1, 2018, on a retrospective basis subject to certain
exceptions.
In September 2014,
issued Annual
the
Improvements (2012-2015 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.
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.
(Amendments to
IAS 1).
IASB
the
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, 2015, 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, 2015, 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,
2015, based on the criteria set forth in Internal Control –
Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). Based on
this assessment, management
concluded that, as at December 31, 2015, 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, 2015 that have materially affected, or are reasonably
likely to materially affect, the Company’s ICFR. No
material changes were identified. There were also no
material weaknesses relating to the design of ICFR at
December 31, 2015, and no limitations on the scope of
design of ICFRs. While management of the Company has
evaluated the effectiveness of disclosure controls and
procedures and ICFR as of December 31, 2015, and have
concluded that these controls and procedures are being
maintained as designed,
the
disclosure controls and procedures and ICFR may not
prevent all errors and fraud.
recognize
they
that
24
Management’s Discussion and Analysis
OUTSTANDING SHARE DATA
As at March 2, 2016, there were 30,267,070 common
shares and 1,156, 436 share options outstanding. Of the
options outstanding, 721,748 are currently exercisable
into common shares. ZCL repurchased and cancelled
530,500 shares through the Normal Course Issuer Bid
implemented in March, 2015.
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
direct materials and
fixed
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
before finance expense,
income taxes, share-based
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, finance
lease and bank
lease, current portion of
indebtedness.
finance
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, 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.
25
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
2015
$
46,974
39,152
7,822
17%
2014
$
48,195
39,057
9,138
19%
Year Ended
December 31
2014
$
170,835
136,375
34,460
2015
$
185,675
152,484
33,191
18%
20%
2013
$
161,704
128,222
33,482
21%
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 on disposal of property, plant & equipment
Loss on impairment of goodwill
Loss on impairment of property, plant and
equipment
Adjusted EBITDA
Adjusted EBITDA as a percentage of revenue
Fourth Quarter Ended
December 31
2015
$
3,885
1,078
73
850
5,886
116
3
-
-
6,005
13%
2014
$
4,895
1,000
97
1,454
7,446
152
104
-
-
7,702
16%
Year Ended
December 31
2014
$
16,316
3,748
383
5,895
26,342
685
50
-
2013
$
14,385
3,991
446
6,048
24,870
624
106
-
-
-
2015
$
12,999
3,955
319
5,894
23,167
407
32
2,656
222
26,484
27,077
25,600
14%
16%
16%
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
2015
$
6,005
2014
$
7,702
Year Ended
December 31
2015
$
26,484
2014
$
27,077
2013
$
25,600
30,018
30,038
30,200
29,963
29,308
185
30,203
0.20
432
30,470
0.25
165
30,365
0.87
416
30,379
0.89
399
29,707
0.86
26
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 on disposal of property, plant & equipment
Share-based compensation
Impairment of assets
Funds from operations
Fourth Quarter Ended
December 31
2015
$
3,885
1,078
(567)
3
116
-
4,515
2014
$
4,895
1,000
431
104
152
-
6,582
Year Ended
December 31
2014
$
16,316
3,748
(28)
50
685
-
20,771
2015
$
12,999
3,955
(694)
32
407
2,878
19,577
2013
$
14,385
3,991
(693)
106
624
-
18,413
The following table presents the calculation of working capital.
(in thousands of dollars)
Current assets
Current liabilities
Working capital
December 31, 2015
$
105,032
28,251
76,781
As at
December 31, 2014
$
89,550
26,682
62,868
December 31, 2013
$
70,272
22,160
48,112
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)
Less: Finance lease (including current portion)
Net cash
December 31, 2015
$
40,770
-
(1,317)
(358)
39,095
As at
December 31, 2014
$
28,680
-
(2,601)
-
26,079
December 31, 2013
$
19,150
-
(3,736)
-
15,414
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)
Less: cash and cash equivalents
Average capital employed
Return on capital employed
(Adjusted EBITDA/Average Capital Employed)
December 31, 2015
$
26,484
As at
December 31, 2014
$
27,077
December 31, 2013
$
25,600
133,837
2,138
(34,725)
101,250
26%
114,077
3,169
(23,915)
93,331
29%
95,297
4,249
(12,123)
87,423
29%
27
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
28
Consolidated Financial Statements
ZCL Composites Inc.
Consolidated Financial Statements and Notes
For the years ended December 31, 2015 and 2014
29
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, 2015, and 2014, and the consolidated statements of income, comprehensive
income, shareholders’ equity and cash flows for the years ended December 31, 2015 and 2014, 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, 2015, and 2014, and its financial performance and its cash flows for the years then ended
in accordance with International Financial Reporting Standards.
Edmonton, Canada
March 2, 2016
30
Consolidated Financial Statements
March 2, 2016
MANAGEMENT’S REPORT
The Financial 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
Professional 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
31
Consolidated Financial Statements
Consolidated Balance Sheets
As at
(in thousands of dollars)
ASSETS
Current
Cash and cash equivalents [note 10]
Accounts receivable [note 21]
Inventories [note 5]
Income taxes recoverable
Prepaid expenses
Property, plant and equipment [note 7]
Assets held for sale [note 7]
Intangible assets [note 8]
Goodwill [note 25]
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities [note 21]
Dividends payable [note 14]
Income taxes payable
Deferred revenue
Current portion of provisions [notes 10 and 21]
Current portion of long term debt [note 11]
Current portion of finance lease [note 12]
Deferred tax liabilities [note 17]
Long term portion of provisions [notes 10 and 21]
Long term debt [note 11]
TOTAL LIABILITIES
Shareholders' equity
Share capital [note 15]
Contributed surplus [note 16]
Accumulated other comprehensive income
Retained earnings
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes
December 31,
2015
$
December 31,
2014
$
40,770
25,414
35,124
1,932
1,792
105,032
31,205
1,236
2,994
37,077
—
177,544
18,285
1,513
1,430
4,324
1,024
1,317
358
28,251
3,929
1,086
—
33,266
76,066
2,357
15,216
50,639
144,278
177,544
28,680
27,793
31,028
980
1,069
89,550
29,143
—
3,819
33,950
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
On behalf of the Board: Director Director
32
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 20]
Loss on disposal of property, plant and equipment [note 7]
Loss on impairment of goodwill [note 25]
Loss on impairment of property, plant and equipment [note 7]
Income before income taxes
Income tax expense (recovery) [note 17]
Current
Deferred
Net income
Earnings per share [note 18]
Basic
Diluted
See accompanying notes
2015
$
185,675
152,484
33,191
9,287
(2,173)
3,955
319
32
2,656
222
14,298
18,893
6,588
(694)
5,894
2014
$
170,835
136,375
34,460
9,076
(1,008)
3,748
383
50
—
—
12,249
22,211
5,923
(28)
5,895
12,999
16,316
$0.43
$0.43
$0.54
$0.54
33
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,
2015
$
12,999
14,210
14,210
27,209
2014
$
16,316
4,814
4,814
21,130
(in thousands)
Balance, December 31, 2014
Share-based payments
[note 16]
Shares issued on exercise of
stock options [notes 15 and 16]
Shares repurchased through normal course
issuer bid [notes 15]
Reclassification of fair value of
stock options previously
expensed [note 16]
Translation of foreign operations
Dividends declared [note 14]
Net income
Balance, December 31, 2015
Balance, December 31, 2013
Share-based payments
[note 16]
Shares issued on exercise of
stock options [notes 15 and 16]
Reclassification of fair value of
stock options previously
expensed [note 16]
Translation of foreign operations
Dividends declared [note 14]
Net income
Balance, December 31, 2014
See accompanying notes
Common
Shares
#
Share
Capital
$
Accumulated
Other
Contributed Comprehensive Retained
Earnings
Income (Loss)
$
$
Surplus
$
Total
$
30,214
76,592
2,568
1,006
43,230
123,396
—
407
—
584
2,103
(531)
(3,247)
—
—
—
—
30,267
618
—
—
—
76,066
—
—
—
—
—
—
407
2,103
(3,247)
—
14,210
—
—
15,216
—
—
(5,590)
12,999
50,639
—
14,210
(5,590)
12,999
144,278
—
—
(618)
—
—
—
2,357
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
34
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 16]
Loss on disposal of property, plant and equipment [note 7]
Loss on impairment of property, plant and equipment [note 7]
Loss on impairment of goodwill [note 25]
Funds from operations
Changes in non-cash working capital:
Decrease (increase) in accounts receivable
Decrease (increase) in inventories
Increase in prepaid expenses
(Decrease) increase in accounts payable, accrued liabilities and provisions
Increase (decrease) in deferred revenue
Increase 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 15 and 16]
Repurchase of shares through Normal Course Issuer Bid [notes 15 and 16]
Dividends paid [note 14]
Repayment of long term debt [note 11]
Repayment of financing lease [note 12]
Cash flows used in financing activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment [note 7]
Disposal of property, plant and equipment [note 7]
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
2015
$
12,999
3,955
(694)
407
32
222
2,656
19,577
6,525
171
(577)
(3,784)
98
277
2,710
22,287
2,103
(3,247)
(5,285)
(1,684)
(357)
(8,470)
(3,902)
13
(25)
(3,914)
2,187
12,090
28,680
40,770
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)
272
9,530
19,150
28,680
35
Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
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 2, 2016.
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.
36
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 de-recognition 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 is validated by using a market approach, deriving market multiples from comparable public companies and
comparable company transactions. Costs for disposing of 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 25.
For the purposes of assessing impairment, assets are grouped into cash-generating units (“CGUs”) or groups of 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;
37
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 or groups of 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) or groups of CGUs. 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.
38
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 an actuary.
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 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
39
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. 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, 2015 and 2014, the Company did not have any held to maturity investments on the consolidated balance
sheets.
Available for sale financial instruments:
As at December 31, 2015 and 2014, 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, 2015 and 2014, the Company did not have any derivatives designated as hedging instruments on the
consolidated balance sheets.
40
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 approved 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 16.
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.
41
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 amendments to IFRS 2 Share-based Payments; IFRS 3 Business
Combinations; IFRS 13 Fair Value Measurement; IAS 16 Property, Plant, and Equipment; IAS 24 Related Party Disclosures; and
IAS 38 Intangible Assets. The Company also applied amendments to IFRS 8 Operating Segments which include disclosing the
judgments made by management in applying aggregation criteria for similar operating segments. Specific disclosures on
management’s judgment can be found in note 24 of these Consolidated Financial Statements.
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 May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (IFRS 15). The new revenue standard will
supersede all current revenue recognition requirements under IFRS. 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, 2018, 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 (2012-2015 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.
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.
42
Notes to the Consolidated Financial Statements
5.
INVENTORIES
As at
(in thousands of dollars)
Raw materials
Work in progress
Finished goods
December 31,
2015
$
December 31,
2014
$
14,420
4,051
16,653
35,124
11,729
6,097
13,202
31,028
During the year ended December 31, 2015 there was a write-down of $18,000 (December 31, 2014 - $68,000) 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
2015
$
61,997
36,867
55,025
2014
$
57,961
31,250
52,372
(1,405)
152,484
(5,478)
136,375
43
Notes to the Consolidated Financial Statements
7. PROPERTY, PLANT AND EQUIPMENT
(in thousands of dollars)
Cost
As at December 31, 2013
Additions
Disposals
Foreign exchange
As at December 31, 2014
Additions
Disposals
Reclassified as held for sale
Foreign exchange
As at December 31, 2015
Accumulated Depreciation
As at December 31, 2013
Depreciation
Disposals
Foreign exchange
As at December 31, 2014
Depreciation
Disposals
Impairment
Reclassified as held for sale
Foreign exchange
As at December 31, 2015
Carrying Amount
As at December 31, 2014
As at December 31, 2015
Land
$
Buildings
$
Manufacturing Office
Equip.
$
Equip.
$
Leaseholds
$
Auto
Equip.
$
Total
$
6,479
7,832
4,146
24,122
3,371
460
46,428
—
(221)
2
6,260
3
—
(442)
—
5,821
474
(702)
109
7,713
229
—
(958)
222
7,206
459
—
192
4,815
411
(15)
—
461
5,672
2,938
(456)
808
27,412
3,486
(1,118)
—
2,137
31,917
336
(137)
80
3,650
415
(166)
—
139
4,038
139
(97)
33
535
115
—
—
110
760
4,346
(1,613)
1,224
50,385
4,659
(1,299)
(1,400)
3,069
55,414
2,255
2,214
11,749
2,784
172
19,174
—
—
—
—
—
—
—
—
—
—
—
209
(76)
25
2,413
215
—
—
(164)
60
2,524
401
—
77
2,692
468
(14)
—
—
309
3,455
1,358
(374)
127
12,860
1,663
(999)
222
—
752
14,498
375
(137)
13
3,035
359
(121)
—
—
82
3,355
6,260
5,821
5,300
4,682
2,123
2,217
14,552
17,419
615
683
79
(28)
19
242
81
—
—
—
54
377
293
383
2,422
(615)
261
21,242
2,786
(1,134)
222
(164)
1,257
24,209
29,143
31,205
Capital work in progress of $181,000 (December 31, 2014 - $655,000) is included above and not subject to depreciation.
Included in this figure is $87,000 for manufacturing equipment, $73,000 for office equipment and $21,000 in leasehold
improvements.
During the year ended December 31, 2015, the Company decided to permanently discontinue operations in the Montreal
facility, which is included in the Aboveground operating segment, and sell the land and building. As at December 31, 2015,
the land had a carrying value of $442,000 and the building had a carrying value of $794,000 for a total of $1,236,000, which is
being presented as assets held for sale on the consolidated balance sheet. The carrying value is estimated to be less than the
fair market value less costs to sell.
44
Notes to the Consolidated Financial Statements
8.
INTANGIBLE ASSETS
(in thousands of dollars)
Cost
As at December 31, 2013
Additions
Foreign exchange
As at December 31, 2014
Additions
Foreign exchange
As at December 31, 2015
Accumulated Amortization
As at December 31, 2013
Amortization
Foreign exchange
As at December 31, 2014
Amortization
Foreign exchange
As at December 31, 2015
Carrying Amount
As at December 31, 2014
As at December 31, 2015
Customer
Relationships
$
Brands
$
Internally
Developed
ERP
Software
$
Other
$
Total
$
6,846
3,739
3,441
4,737
18,763
—
555
7,401
—
1,335
8,736
—
273
4,012
—
656
4,668
—
156
3,597
—
375
3,972
26
91
4,854
25
219
5,098
26
1,075
19,864
25
2,585
22,474
6,442
2,649
1,263
3,475
13,829
190
534
7,166
111
1,307
8,584
421
203
3,273
374
546
4,193
350
73
1,686
379
206
2,271
365
80
3,920
305
207
4,432
1,326
890
16,045
1,169
2,266
19,480
235
152
739
475
1,911
1,701
934
666
3,819
2,994
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, 2015 and December 31, 2014. 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, 2017 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 25 basis points. The rate of interest charged on the operating credit facility for US dollar balances is US prime plus
25 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, 2015, the Company was in
compliance with all restrictive covenants relating to the operating credit facility.
45
Notes to the Consolidated Financial Statements
10. PROVISIONS AND CONTINGENCIES
a) Provisions
(in thousands of dollars)
As at December 31, 2013
Amounts used against the provision
Additional (reversal of) provision
Foreign exchange
As at December 31, 2014
Amounts used against the provision
Additional (reversal of) provision
Foreign exchange
As at December 31, 2015
Warranty
$
Self-insured
liabilities
$
939
(635)
460
42
806
(752)
727
95
876
936
—
220
97
1,253
—
(387)
220
1,086
Other
$
452
(121)
(106)
22
247
(589)
474
16
148
Total
$
2,327
(756)
574
161
2,306
(1,341)
814
331
2,110
Of the $2,110,000 (2014 - $2,306,000) in provisions described above, the Company expects $1,024,000 (2014- $1,053,000) to
settle within 12 months of the balance sheet date. The remaining $1,086,000 (2014 - $1,253,000) 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 an actuary 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.
Included in cash and cash equivalents is $3,719,000 US dollars (2014 - $3,438,000 US dollars) held by Radigan Insurance Inc.
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.
46
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,
2015
$
December 31,
2014
$
1,317
—
1,317
—
2,601
2,601
1,498
1,103
Excluding financing costs, the principal balance of the term loan as at December 31, 2015 is $965,000 US dollars (December
31, 2014 – $2,253,000 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 scheduled to be paid in full on September 30, 2016. The interest charged on the loan is a 30 day US LIBOR rate plus
175 basis points, effective rate of 2.18% as at December 31, 2015 (December 31, 2014 – 30 day US LIBOR plus 225 basis
points, effective rate of 2.42%). 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, 2015 is $8,967,000 (December 31, 2014 $8,983,333).
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 21.
12. FINANCE LEASE
During the year ended December 31, 2015, the Company entered into a finance lease to acquire a crane with a market value
of $715,000. The lease is non-interest bearing for a period of 20 months and expires in November, 2016 at which point title
will pass to the Company. The carrying value of the crane as at December 31, 2015 is $655,000 which is included in property,
plant and equipment on the Company’s balance sheet.
13. COMMITMENTS
Lease Commitment
The Company’s minimum annual payments under the terms of all operating leases are as follows:
(in thousands of dollars)
2016
2017
2018
2019
2020
Thereafter
$
2,930
2,136
1,606
1,187
1,001
4,558
13,418
47
Notes to the Consolidated Financial Statements
Other Contractual Obligations
The Company has provided a letter of credit in the amount of $0.3 million (2014 - $0.3 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 $1.3 million (2014
- $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, 2015, the issued
performance letters of credit totalled $1.1 million (2014 - $0.5 million).
14. DIVIDENDS
Dividends declared for years ended December 31,
(in thousands of dollars, except per share amounts)
Declared
March 5, 2015
May 7, 2015
July 30, 2015
November 2, 2015
2015
Total
Paid to
Per
$
share
shareholders
1,365
$0.045 April 15, 2015
1,367
July 15, 2015
$0.045
$0.045 October 15, 2015 1,345
1,513
$0.050
January 15, 2016
5,590
$0.185
For the years ended December 31,
Payable, beginning of period
Declared
Paid in cash
Payable, end of period
2014
Declared
March 7, 2015
May 5, 2014
August 5, 2014
November 3, 2014 0.040
0.150
Paid to
shareholders
Total
Per
$
share
1,048
0.035 April 15, 2015
1,049
July 15, 2015
0.035
0.040 October 15, 2014 1,200
1,208
January 15, 2015
4,505
2015
$
1,208
5,590
(5,285)
1,513
2014
$
896
4,505
(4,193)
1,208
On March 2, 2016, the Company’s Board of Directors declared a dividend of $0.08 per common share to be paid on April 15,
2016 to the shareholders of record as of March 31, 2016. The Company’s Board of Directors also declared a special dividend
of $0.50 per common share to be paid on March 31, 2016 to shareholders of record as of March 15, 2016.
15. SHARE CAPITAL
Authorized
Unlimited number of common shares with no par or stated value.
Issued and outstanding
During the year ended December 31, 2015, the Company issued 584,108 (2014 – 365,543) common shares at an average rate
of $3.60 per share for stock options exercised resulting in cash proceeds to the Company of $2,103,000 (2014 - $1,328,000).
As at December 31, 2015, the Company had 30,267,070 common shares outstanding (December 31, 2014 – 30,213,462).
In March 2015, the Company entered into a Normal Course Issuer Bid (“NCIB”) with the intent to re-purchase and cancel up
to 750,000 shares from the open market. During the twelve months ended December 31, 2015, the Company purchased and
cancelled a total of 530,500 shares at an average price of $6.10 per share.
48
Notes to the Consolidated Financial Statements
16. SHARE-BASED PAYMENTS
a) Stock options
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.
As at December 31, 2015, the Company has 1,156,436 (2014 – 1,516,716) options outstanding, which expire on dates
between March 2016 and March 2020. The outstanding options vest evenly over a three-year period commencing on the
anniversary of the original grant date. As at December 31, 2015, 723,415 (2014 – 1,051,999) of the outstanding options were
vested and exercisable into common shares. The following table presents the changes to the options outstanding during each
of the fiscal years:
For the years ended December 31,
Balance, as at January 1
Granted
Exercised
Forfeited
Expired
Balance, as at December 31
2015
2014
Stock
options
#
1,516,716
343,000
(584,108)
(119,172)
—
1,156,436
Weighted
average
exercise price
$
4.79
6.74
3.60
6.15
—
5.83
2015
Stock
options
#
1,929,261
—
(365,543)
(47,002)
—
1,516,716
Weighted
average
exercise price
$
4.56
—
3.63
4.42
—
4.79
Exercise
Price
$
3.05
3.23
3.15
4.72
7.09
6.74
3.05 – 7.09
Stock
options
#
47,500
1,667
113,219
299,951
391,099
303,000
1,516,436
Options Outstanding
Options Exercisable
Weighted Weighted Average
Average
Exercise
Price
$
3.05
3.23
3.15
4.72
7.09
6.74
5.83
Remaining
Contractual
Life in Years
#
0.19
0.40
0.93
1.93
2.93
4.25
2.71
Weighted
Average
Exercise
Price
$
3.05
3.23
3.15
4.72
7.09
6.74
5.22
Stock
options
#
47,500
1,667
113,219
299,951
261,078
—
723,415
49
Notes to the Consolidated Financial Statements
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
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
Options Exercisable
Stock
options
#
20,900
16,400
217,603
2,501
340,739
307,224
146,632
1,051,999
Weighted
Average
Exercise
Price
$
3.87
4.09
3.05
3.23
3.15
4.72
7.09
4.17
During the year ended December 31, 2015, 343,000 stock options (2015 – nil) were granted at an exercise price of $6.74.
During the year ended December 31, 2015, 584,108 stock options (2014 – 365,543) were exercised with a weighted average
exercise price of $3.60 (2014 – $3.63) resulting in cash proceeds to the Company of $2,103,000 (2014 – $1,328,000).
Compensation expense previously included in contributed surplus of $618,000 (2014 – $418,000) 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, 2015, share-based compensation expense of
$407,000 (2014 - $685,000) was recorded in manufacturing and selling costs and general and administration expenses in the
consolidated statements of income.
The estimated fair values of stock options granted during the year ended December 31, 2015 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 $1.25.
Risk-free interest rate (%)
Expected hold period to exercise (years)
Volatility in the price of the Company’s shares (%)
Forfeiture rate (%)
Dividend yield (%)
2015
0.7
3.8
30.5
7.6
2.7
2014
n/a
n/a
n/a
n/a
n/a
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.
b) Performance share units
Under the Company’s 2015 Incentive Plan, named executive officers may be awarded performance share units (“PSU”) equal
to the cash equivalent of one common share of ZCL stock. These PSUs vest over a three year period and are contingent on
the Company achieving certain performance objectives. For the PSUs that vest, the unit holders will receive a cash payment
based on the closing price of the Company’s common shares on the expiry date of the units. Dividend equivalent rights are
granted in tandem with the PSUs. For the twelve months ended December 31, 2015, the Company awarded 14,825 PSUs
(2014 – nil) and canceled 4,500 PSUs (2014 – nil). Compensation expense of $21,000 for the twelve months ended December
50
Notes to the Consolidated Financial Statements
31, 2015 (2014 - $nil) was recognized in general and administrative expenses. As at December 31, 2015, the amortized fair
value of the PSUs on the Company’s balance sheet was $21,000 (December 31, 2014 - $nil).
c) Deferred share units
Under the Company’s 2015 Incentive Plan, directors may be awarded Deferred Share Units (“DSU”) equal to the cash
equivalent of one common share of ZCL stock. The DSUs vest on their grant date and are paid in cash to the holder upon
retirement from the Company based on the market value of ZCL stock on the date of their retirement. Dividend equivalent
rights are granted in tandem with the DSUs. During the year ended December 31, 2015, the Company awarded 26,000 DSUs
(2014 – nil) and $191,000 of compensation expense (2014 - $nil) was recognized in general and administrative expenses. As
at December 31, 2015, the fair value of the DSUs on the Company’s balance sheet was $191,000 (December 31, 2014 - $nil).
17. 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 26.30% (2014 – 25.50%)
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 31% (2014 – 27%)
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% (2014 – 30%)
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
2015
$
2014
$
18,893
22,211
4,968
1,269
(521)
178
5,894
2015
$
4,220
(694)
403
3,929
2015
$
4,261
363
344
(65)
—
(973)
(1)
3,929
5,664
1,216
(802)
(183)
5,895
2014
$
4,075
(28)
173
4,220
2014
$
3,598
343
586
317
46
(685)
15
4,220
51
Notes to the Consolidated Financial Statements
18. EARNINGS PER SHARE
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
19. RELATED PARTY TRANSACTIONS
a) Transactions in the normal course of operations:
2015
$
2014
$
12,999
16,316
2015
#
30,200
165
30,365
2014
#
29,963
416
30,379
Certain manufacturing components purchased for $23,000 (2014 - $90,000) for the year ended December 31, 2015, 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, 2015
included $6,000 (December 31, 2014 - $11,000) 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
2015
$
1,458
416
1,874
2014
$
1,614
303
1,948
The Company has identified the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer as key
management to the Company in addition to the members of the board of directors. The figures above are included in general
and administrative expenses for the years ended December 31, 2015 and 2014. Share-based payments are the amount of
expense recognized in the consolidated statements of income relating to the identified key management and directors.
20. FINANCE EXPENSE
For the years ended December 31,
(in thousands of dollars)
Short term interest, net of interest income
Interest, long term obligations
2015
$
232
87
319
2014
$
279
104
383
52
Notes to the Consolidated Financial Statements
21. FINANCIAL INSTRUMENTS
Financial risk management
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, 2015 and 2014.
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 any bank indebtedness balance at December 31, 2015 was prime plus 25 basis points, 2.95%
(December 31, 2014 - prime plus 75 basis points, 3.75%). The effective interest rate on the term loan balance at December
31, 2015 was US LIBOR rate plus 175 basis points, 2.18% (December 31, 2014 – US LIBOR rate plus 225 basis points, 2.42%).
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, 2015.
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, 2015, 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.
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, 2015. 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”).
53
Notes to the Consolidated Financial Statements
Balance sheet exposure as at December 31, 2015,
(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, 2015,
(in thousands of US dollars)
Sales
Operating expenses
Net operating exposure
Foreign
Operations
$
Domestic
Operations
$
19,966
15,634
250
(8,367)
(8,241)
—
19,242
3,908
1,339
—
(1,693)
8,241
(965)
10,830
Total
$
23,874
16,973
250
(10,060)
—
(965)
30,072
$
119,405
96,480
22,925
The weighted average US to Canadian dollar translation rate was 1.28 for the year ended December 31, 2015. The translation
rate as at December 31, 2015 was 1.39.
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, 2015,
(in thousands of US dollars)
Net balance sheet exposure of other operations
Net operating exposure of foreign operations
Change in net income
$
1,614
2,815
4,429
Other comprehensive income would have changed $2,463,000 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.
The Company has a concentration of customers in the downstream retail 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, 2015, 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.
54
Notes to the Consolidated Financial Statements
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 $24,481,000 as at
December 31, 2015 (December 31, 2014 - $27,066,000). On a geographic basis as at December 31, 2015, approximately 22%
(December 31, 2014 – 48%) of the balance of trade accounts receivable was due from Canadian and non-US customers and
78% (December 31, 2014– 52%) was due from US customers. The geographic change in accounts receivable reflects the
changes in geographic sources of revenue for the last quarter of the year relative to 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
2015
51%
26%
11%
6%
6%
100%
2014
58%
23%
13%
3%
3%
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 $933,000 which include funds
receivable from various sales tax refunds, insurance refunds and rebates (December 31, 2014 - $727,000).
The Company had recorded an allowance for doubtful accounts of $327,000 as at December 31, 2015 (December 31, 2014 -
$125,000). The allowance is an estimate of the December 31, 2015 trade receivable balances that are considered
uncollectible. The allowance increased for bad debt expense of $288,000 (2014 - $129,000), offset by payments of $97,000
(2014 - $41,000), write offs of $5,000 (2014 - $528,000) and a translation adjustment of $16,000 (2014 - $23,000) for the year
ended December 31, 2015.
55
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)
Accounts payable, accrued liabilities and provisions
Dividends payable
Long term debt
Finance lease
Total
e) Fair value of financial instruments
Carrying
Amount
$
20,395
1,513
1,317
358
23,583
2016
$
19,309
1,513
1,317
358
22,497
2017
$
1,086
—
—
1,086
Thereafter
$
—
—
—
—
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.
22. STATEMENTS OF CASH FLOWS
For the years ended December 31,
(in thousands of dollars)
Net interest paid
Income taxes paid
2015
$
309
6,552
6,861
2014
$
373
5,701
6,074
56
Notes to the Consolidated Financial Statements
23. 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]
Finance lease
Total long term debt
Share capital
Contributed surplus
Retained earnings
Adjusted shareholders’ equity
Adjusted capital employed
2015
$
1,317
—
358
1,675
76,066
2,357
50,639
129,062
130,737
2014
$
1,498
1,103
—
2,601
76,592
2,568
43,230
122,390
124,991
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 1% as at December 31, 2015 (December 31, 2014 – 2%) to be low. Adjusted capital employed
is defined as long term debt plus total shareholders’ equity excluding accumulated other comprehensive income.
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:
Minimum equity value
Debt to tangible net worth
Fixed charge coverage ratio
Current ratio
Dec 31,
2015
Actual
$144 million
0.02
3.8
3.8
Dec 31,
2015
Required
>$50 million
<2.0
>1.5
>1.25
Dec 31,
2014
Actual
$123 million
0.03
4.0
3.4
Dec 31,
2014
Required
>$50 million
<2.0
>1.5
N/A
On an ongoing basis, management expects to continue meeting all financial covenants under its current credit facility.
57
Notes to the Consolidated Financial Statements
24. 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 has applied the aggregation criteria in
IFRS 8.12 and aggregated individual manufacturing operations whose production process, products, distribution methods and
industry markets are similar. Based on management’s judgment, the aggregation criteria result in two reportable segments,
Underground Fluid Containment (“Underground”) and Aboveground Fluid Containment (“Aboveground”). Other operating
segments whose assets, revenue and profit are less than 10% of the overall assets, revenue and profit of the consolidated
group have been grouped into the Underground operating segment for reporting purposes.
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
2015
$
2014
$
2015
$
2014
$
2015
$
2014
$
160,685
139,087
24,990
31,748
185,675
170,835
124,193
36,492
108,859
30,228
28,291
(3,301)
27,516
4,232
152,484
33,191
136,375
34,460
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,
2015
$
32,792
2,332
35,124
Dec 31,
2014
$
26,442
4,586
31,028
Dec 31,
2015
$
26,901
4,304
31,205
Dec 31,
2014
$
23,689
5,454
29,143
Intangible assets
and goodwill
Dec 31,
2015
$
39,409
662
40,071
Dec 31,
2014
$
34,297
3,472
37,769
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, 2015 and 2014, no single customer exceeded 10% of total revenue.
58
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
2015
$
43,304
137,864
4,507
185,675
Revenues
2014
$
56,101
110,969
3,765
170,835
Property, plant and
equipment, intangible
assets and goodwill
Dec 31,
2015
$
22,097
48,411
768
71,276
Dec 31,
2014
$
25,577
40,417
918
66,912
Dec 31,
2015
$
52,788
121,159
3,597
177,544
Total assets
Dec 31,
2014
$
62,552
90,377
3,725
156,654
25. 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,
2015
$
1,377
Oct 1,
2014
$
1,377
Oct 1,
2015
$
34,511
Oct 1,
2014
$
28,720
Oct 1,
2015
$
—
Oct 1,
2014
$
2,641
During the year ended December 31, 2015, certain factors indicated that the goodwill balance relating to the Aboveground
CGU may be impaired. These factors included low profitability and continued low activity levels that are expected in the near
term. As a result, a $2,656,000 impairment loss was recognized during the year ended December 31, 2015 pertaining to the
Aboveground CGU. The recoverable amount of the Aboveground CGU, defined as the fair value less cost of disposal
(“FVLCD”) was $17,845,000 at the time the impairment test was performed.
Subsequent to the impairment test performed on the Aboveground CGU, the Company performed its annual impairment test
on the remaining balance of goodwill as at October 1, 2015. Among other factors, the Company considers the relationship
between the FVLCD of its CGUs, to their carrying amounts, when reviewing for indicators of impairment. As at October 1,
2015, the FVLCD of the CGUs were above the carrying amounts, indicating there was not an impairment of goodwill in any of
the CGUs identified above. For the purposes of testing goodwill impairment, the Underground Canada and Underground US
CGUs were combined reflecting the way the Underground operating segment is managed on a day to day basis.
59
Notes to the Consolidated Financial Statements
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, 2015 figures above may differ from the
October 1, 2014 carrying amount, along with the year end December 31, 2014 and 2015 carrying amounts.
Key assumptions used in the FVLCD calculations
The calculation of the FVLCD 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 or group of CGUs, 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 CGU groups are as follows: Underground CGU group
(12.4% to 13.2%) and Aboveground (24.3% to 25.1%).
Growth rate estimates:
Growth rates for beyond 2015 are established using the board approved budgeted growth rate by CGU or groups of CGUs.
Longer term growth rates are established using the Strategic Plan for each CGU. Both the 2015 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 FVLCD of the CGU or groups of CGUs. This, in turn, would
change the excess or deficiency values over the carrying amounts of the CGU. For the Underground CGU group, the specific
risk premium would need to increase 45% in the low end of the premium range before a deficiency would be created. For
Aboveground CGU, the specific risk premium would need to increase 21% in the low end of the premium range 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
FVLCD of the overall CGUs or group of CGUs. Similarly, gross profits as a percentage of revenues used were in line with
historical rates realized by the CGUs. For the Underground CGU group, gross profit would have to fall to 84% of our current
expectations and the gross profit for the Aboveground CGU would have to fall to 90% of its current expectations before a
deficiency would result in the respective carrying amounts.
As at October 1, 2015, the total recoverable amount of the Company's CGUs exceeded their carrying amounts.
26. PRIOR YEAR RECLASSIFICATION
Certain of the prior years’ balances were reclassified to conform to the current year’s presentation.
60
CORPORATE INFORMATION
________________________________________________________________________________
Transfer Agent & Registrar
CST Trust Company
600, The Dome Tower
333 – 7th Avenue SW
Calgary, Alberta
Canada T2P 2Z1
Auditors
Ernst & Young LLP
EPCOR Tower, 10423 – 101 Street
Suite 1400, PO Box 44
Edmonton, Alberta
Canada T5H 0E7
General Counsel
Bennett Jones LLP
3200 Telus House, South Tower
10020 – 100 Street
Edmonton, Alberta
Canada T5J 0N3
Stock Listing and Share Symbol
Toronto Stock Exchange: ZCL
Board of Directors
Anthony (Tony) P. Franceschini, Chair of the Board
Ronald M. Bachmeier, President, CEO, Director
D. Bruce Bentley, Director
Leonard A. Cornez, Director
Allan S. Olson, Director
Harold A. Roozen, Director
Ralph B. Young, Director
Annual General Meeting
2:00 p.m. on Thursday, May 5, 2016
at the Hampton Inn by Hilton
in The Meeting Room
10020 12 Ave., SW,
Edmonton, Alberta
Canada T6X 0P9
Corporate Office
1420 Parsons Road, SW
Edmonton, Alberta
Canada T6X 1M5
Common Shares Outstanding
As of March 2, 2016
Total outstanding: 30,268,737
Investor Relations
Copies of this Annual Report may be obtained
by calling Investor Relations at (780) 466-6648
or e-mailing IR@zcl.com
61
1420 Parsons Road SW • Edmonton • Alberta • Canada • T6X 1M5
780.466.6648 • 1.800.661.8265 • zcl.com
© ZCL Composites Inc. • All Rights Reserved • March 2016