2017 Annual Report
Preserving and protecting the environment for future generations Who we are
40
Mission
Experience
Service
Deliver peace of mind through
corrosion-resistant solutions that
preserve and protect
the environment
Nearly 40 years of industry
experience with more than 200,000
underground storage tanks installed
Six manufacturing facilities
throughout North America to
consistently deliver unsurpassed
capabilities to meet customer needs
Sustained performance
+$74.9 million returned to
shareholders in dividends
paid since 2012
+9% compound annual growth
rate in revenues from continuing
operations since Jan. 1, 2011
$100 initially invested
Jan. 1, 2011 would be
worth $434.23
$
+27% compound annual growth
rate in total shareholder
return since Jan. 1, 2012
Our workers’ compensation
insurance experience modification
rate reduced from 1.12 in 2013
to 0.82 in 2017
Earnings per share growth of
+262% since Jan. 1, 2011
Peace of mind
The phrase is found throughout ZCL’s mission, website and advertising. But it’s not just a catchphrase to us. When we
think about peace of mind, we think about eliminating risk for our customers by preventing hazardous substances
from contaminating the environment. We think about protecting precious groundwater aquifers from pollution. We
think about the property we might save from a fire. We think about the rainwater collected to recycle in a drought.
We think about the financial savings associated with harvesting runoff to use as irrigation and using collected
greywater in plumbing.
As we manufacture underground storage tanks for these and other applications, preserving and protecting the
environment for future generations is, and will continue to be, top of mind.
Contents
_______________________________________________
Message to shareholders
Management’s discussion and analysis
Consolidated financial statements and notes
Corporate information
3
6
29
61
2017 Results
Revenue
Net income
Earnings
per share
$188.2 million
$18.0 million
$0.58
2016: $184.1 million
2016: $15.0 million
2016: $0.49
Adjusted
EBITDA
$31.2 million
(17% of revenue)
2016: $33.0 million
(18% of revenue)
$33.7 million in cash dividends paid in 2017,
a 40% increase compared to 2016 and
six-fold since 2015
12.5% increase in our quarterly dividend,
to $0.135 per share per quarter
$150,000 in community investment
Revenue by business unit
Oil & Gas
(4%)
Water
(13%)
Fuel
(83%)
PAGE 2
Message to shareholders
2017 Year in Review
ZCL Brand Promise
ZCL ended 2017 with a strong fourth quarter. Revenue
in Q4 2017 of $50.7 million was up 8.8% over the same
period of 2016, and up 12.6% on a source currency basis
before restatement for foreign exchange. On a full year-
over-year basis, in 2017 ZCL booked record revenue from
continuing operations of $188.2 million, up $4 million
or 2.2% compared to 2016, and up 4.2% on a source
currency basis before restatement for foreign exchange.
ZCL also set new records for consolidated net income of
$18.0 million, up $3.0 million or +20% from 2016, and
consolidated fully diluted earnings per share of $0.58, up
$0.09 or +18% from 2016.
In the North American retail fuel underground storage
tank market, ZCL is the true trusted brand. Over the past
30 years, ZCL’s three-pronged brand promise of quality
(the best tank in the market), accuracy (we ship what you
order, every time), and timeliness (we have the shortest
lead times in the industry and we will get your order to
you when you expect it) has resulted in ZCL achieving
this trusted brand status. Our objectives moving forward
are to continue to capitalize on our trusted brand
status in the retail fuel market, while at the same time
leveraging this status to generate growth in the Water
and Wastewater markets.
Achieving the record 2017 revenue was not evenly spread
throughout the year as we saw an unusually high level of
quarter-to-quarter volatility when compared to 2016. As
we have described several times, ZCL ships our product
directly to an active construction site and our tanks are
frequently installed underground on the very same day.
We do not ship our tanks to our customer’s inventory or
to a holding yard where our tanks may be temporarily
stored prior to installation. This practice is quite unique
in many respects. Accordingly, our revenue recognition in
any particular quarter can be materially impacted by the
myriad of variables that can affect scheduling at an active
underground construction site. When these site delays
occur, ZCL’s revenue recognition is often deferred as tank
shipments are delayed until the site is ready to accept
our tank.
The factors above, coupled with deferred spending in the
second half of the year by several of our larger customers
due to a historically high level of retail fuel industry
consolidation activity, resulted in a higher than normal
degree of quarter-to-quarter revenue volatility for ZCL
in 2017. For instance, when compared with ZCL’s 2016
quarterly revenues from continuing operations, Q1 2017
was down 9.2%, Q2 2017 was up 19.2%, Q3 2017
was down 9.5%, and Q4 2017 was up 8.8%. Even with
this unusual volatility, we successfully grew our revenues
from continuing operations for the sixth consecutive
year, and we have consistently posted profits over 27
consecutive quarters. Over the past several months, we
have implemented changes to our forecasting procedures
to enable management to better plan for quarter-to-
quarter revenue volatility.
Delivering on ZCL Promise to Shareholders
All in all, 2017 was a good year for ZCL, and we were able
to share that with our shareholders, with $33.7 million in
cash dividends (both quarterly and special) paid in 2017,
a 40% increase compared with 2016 and five-fold since
2015. In addition, we utilized ZCL’s Normal Course Issuer
Bid to repurchase 290,500 shares for $3.2 million.
As we enter 2018, we are pleased to demonstrate our
continued commitment to sharing ZCL’s success with
our shareholders in the form of a 12.5% increase in
our quarterly dividend, to $0.135 per share per quarter
($0.54 per share annually). And we believe we can and
will do even better going forward.
Succession Planning Update
One of the most important responsibilities of a Board of
Directors and a CEO is managing succession planning,
and specifically planning for CEO succession. As
previously announced, I am retiring as ZCL’s President
and CEO. Together with our Board of Directors, we
have been engaged in a new CEO search. This process is
ongoing and we will need a little more time to complete
it successfully. As a result, the Board of Directors and I
have agreed to delay my retirement date until June 30,
2018 from March 31, 2018.
I remain optimistic about ZCL’s future and I am supremely
confident that the entire ZCL team is prepared for the
coming leadership transition.
Ron Bachmeier
President & CEO
PAGE 3
Giving back through community engagement
In 2017, we launched a community engagement program to help us build meaningful relationships within our
local communities.
Many of our employees are already involved in fundraising, volunteering and awareness initiatives for various
charities. Over the course of the year, employees raised thousands of dollars for causes throughout North America.
To support their efforts, we held a monthly community engagement photo contest and donated additional funds
to the contest winners’ causes.
We cosponsored an event that raised more than $500,000 to help children learn about work readiness, entrepreneurship and
financial literacy through experiential educational programs.
We also cosponsored an event that raised $1.25 million to support cancer research programs.
Finally, we donated $25,000 to food banks from funds raised at our customer and supplier appreciation events.
Altogether, ZCL made $150,000 in charitable donations distributed throughout North America -- in addition to the
thousands of dollars raised by our employees.
In 2018, we plan to explore new opportunities to invest in the health and well-being of our communities.
The Inside Ride,
Edmonton, Oct. 21, 2017
The team raised $1,190 for the Kids with Cancer Society
in support of children with cancer and their families.
Pictured left to right: Kathy Demuth, Jennifer Power,
Loren Jacula, Stefanie Korzan, Werner Prelle and Joe
Santoro and Daniel Santoro.
YWCA Walk a Mile in Her Shoes,
Edmonton, Sept. 20, 2017
This event aims to raise awareness and money for
domestic violence prevention programs. Pictured left to
right: Mike Pejs, Scott Gilbert, Marc St. Martin, Rene
Aldana, Shawn Roach, Werner Prelle, Joe Santoro and
Loren Jacula raised $7,065.
PAGE 4
Peace of mind
delivering on our brand promise
Fire protection water storage at Toronto College
When Centennial College aviation students go to class in the fall of 2018, they will enter a learning center directly
connected to aeronautic history. The new Centre for Aerospace and Aviation will be in the renovated de Havilland
of Canada aircraft manufacturing building. The education and research facility will house a hangar large enough for
commercial jets, a library, classrooms, labs, workshops and offices.
As Stantec developed the water service design, they realized the fire protection water flow did not meet the city’s
building code requirements. ZCL’s underground storage tanks provided the necessary onsite water source needed.
“The tanks were set and leveled in about three to four hours” says Kent Frame of GeoStorm Inc., who supplied the
tanks for the project. “All we needed was a small crane. If we’d been working with precast concrete tanks, we would
have needed a large crane. And placement of the tanks would have taken much longer.” As a result, ZCL fiberglass
tanks lowered shipping and installation costs.
“It comes down to peace of mind.
ZCL has a reputation for providing
reliable, structurally strong tanks.”
- Kent Frame, GeoStorm Inc.
“Fiberglass was the more efficient choice,” says Mario
Bon of Stantec. “Time was of the essence, and these
tanks are easier to handle and install, and it’s easier to
make the connections between the tanks and piping
required for the fire suppression system.” Mario says
this last feature is a significant benefit.
In addition, concrete is vulnerable to cracking, corrosion
and leaking. “When you have a watertight tank that’s
built to be long-lasting, you don’t have to worry about
water seeping away,” says Kent.
ZCL’s fiberglass tanks have larger capacities than concrete tanks – up to 227,000 liters of volume in a single tank. This
project would have required six to eight concrete tanks to supply the water volume required. Only three fiberglass
tanks were needed for this project.
Stantec has worked with ZCL before, and once Stantec decided to specify fiberglass tanks for the project, they were
the only company Mario thought of.
“The team is very easy to deal with and very accommodating,” he says. “Whenever we have a question, we always
get the information and support we need.”
PAGE 5
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, 2017, should be read in conjunction with
the Company’s audited consolidated financial statements
and related notes for the year ended December 31, 2017.
The statements are available on SEDAR at www.sedar.com
or the Company’s website at www.zcl.com.
The Company’s audited consolidated financial statements
are prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board. All figures presented in this
MD&A are in Canadian dollars unless otherwise specified.
Forward‐Looking Statements
This MD&A contains forward‐looking information based on
certain expectations, projections and assumptions. This
is subject to a number of risks and
information
CORPORATE PROFILE
ZCL is North America’s largest manufacturer and supplier
of environmentally friendly fibreglass reinforced plastic
two
(“FRP”) underground storage
manufacturing facilities in Canada, four in the US and one
in The Netherlands.
tanks. ZCL has
Fuel is the Company’s largest segment and serves a
relatively mature market. Water & Wastewater and Oil &
Gas are smaller emerging segments. The Company
operates under the brands ZCL, Xerxes, ZCL‐Xerxes, and
Parabeam.
Fuel Markets
ZCL is the leading provider of Underwriters Laboratories
(“UL”) and Underwriters Laboratories of Canada (“ULC”)
listed underground fuel storage tanks for the downstream
retail and commercial markets in both Canada and the US.
The vast majority of tanks supplied to these markets are
double wall tanks, with single wall and triple wall models
also available. In addition, ZCL operates internationally
through technology licensing agreements.
As an alternative to the replacement of underground
storage tanks, ZCL also provides the Phoenix System®. This
unique UL and 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.
PAGE 6
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
the “Advisory Regarding Forward‐Looking
refer
Statements” section later in this MD&A.
to
Non‐IFRS Measures
The Company uses both IFRS and non‐IFRS measures to
make strategic decisions and to set targets. Adjusted
EBITDA, adjusted EBITDA per diluted share and working
capital are non‐IFRS measures that are used by the
Company. They do not have a standardized meaning
prescribed by IFRS and may not be comparable to similar
measures used by other companies. For additional
information refer to the "Non‐IFRS Measures" section later
in this MD&A.
This MD&A is dated as of March 7, 2018.
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.
Water & Wastewater Markets
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
include onsite
the Water and Wastewater Markets
wastewater
treatment and municipal wastewater
collection, dry hydrant cisterns and sprinkler systems,
rainwater collection and storm water detention and
interceptors and
filtration, grease, oil and solids
decontamination systems, wash down drainage and
leachate treatment and potable water storage.
Oil & Gas Markets
ZCL also provides products for other market segments
including Oil & Gas.
Within Oil & Gas, the Company serves both midstream and
upstream markets. The Company supplies tanks for
pipelines (midstream markets) and for oil and gas
production companies (upstream markets).
Management's Discussion and Analysis
OVERALL PERFORMANCE & OUTLOOK
ZCL ended 2017 on a high note as revenue rose 9% for the
fourth quarter of 2017 compared with a year earlier. That
was a significant improvement from the first nine months
of 2017, in which revenue was approximately unchanged
from a year earlier. Gross profit and net income were also
up in the fourth quarter, compared with a year earlier.
For the full year, revenue was $188.2 million up 2%
compared to a year earlier (up 4% on a source currency
basis). Gross profit was $41.4 million, or 22% of revenue,
compared with $43.3 million or 24% of revenue a year
earlier. The reduction in 2017 gross profit was attributable
to
investments supporting manufacturing, sales and
marketing initiatives, and employee safety and hygiene;
we believe these strategic initiatives will benefit the
Company and benefit profitability in 2018 and beyond.
We remain committed to being prudent stewards of the
capital we have been entrusted to manage, preserving our
strong balance sheet while at the same time maintaining
the necessary flexibility to take advantage of future growth
opportunities as they arise. While continuing to search out
profitable
again
growth opportunities, we
demonstrating our commitment to sharing ZCL’s success
with our shareholders in the form of a 13% increase in our
quarterly dividend to $0.135 per share ($0.54 per share
annualized) from $0.12 per share ($0.48 per share
annualized) during 2017.
are
As an update to the previously announced retirement of
Ron Bachmeier, ZCL’s President and CEO, he and the Board
of Directors have agreed to delay his retirement date
beyond March 31, 2018. Mr. Bachmeier will remain
President and CEO until June 30, 2018, if the additional
time is needed to complete the succession process.
Financial Results
Revenue
Revenue from continuing operations for the year ended
December 31, 2017 was $188.2 million, up $4.1 million, or
2%, from $184.1 million for the year ended December 31,
2016. Our core Fuel Markets grew by 2% (4% on a source
currency basis). Our emerging Water & Wastewater
Markets grew by 6% (8% on a source currency basis) and
Oil & Gas Markets grew by $2.3 million, or 68% compared
with 2016. This revenue growth was partially offset by a
decrease in Industrial Markets revenue of $2.6 million. ZCL
decided to cease offering products to Industrial Markets in
2017 due to projected low demand in this market segment
for the foreseeable future.
Gross Profit
Gross profit from continuing operations for the year ended
December 31, 2017 was $41.1 million, down $1.9 million,
or 4%, from $43.3 million a year earlier. Gross margin from
continuing operations was 22% of revenue for 2017, down
from 24% a year earlier.
Adjusted EBITDA
Adjusted EBITDA from continuing operations for the year
ended December 31, 2017 was $31.1 million, down $1.9
million, or 6%, from $33.0 million a year earlier. Adjusted
EBITDA as a percentage of revenue was 17% for 2017,
down from 18% a year earlier.
Net Income from Continuing Operations
Net income from continuing operations for the year ended
December 31, 2017 was $18.4 million, down $1.6 million,
or 8%, from $20.0 million a year earlier. The reduction was
primarily due to lower gross profit and gross margin,
compared with a year earlier.
Earnings per share from continuing operations for the year
ended December 31, 2017 were $0.59, down $0.06, or 9%,
from $0.65 per share a year earlier.
Net Income
Net income for the year ended December 31, 2017 was
$18.0 million, up $3.0 million, or 20%, from $15.0 million a
year earlier. Earnings per share for the year ended
December 31, 2017 were $0.58, up $0.09, or 18%, from
$0.49 per share a year earlier.
Net income from continuing operations was larger than net
income because of losses on discontinued operations in
both 2017 and 2016.
losses on discontinued
The
operations, being the ZCL Dualam operations exited in the
third quarter of 2016, were much smaller in 2017 than
2016.
Cash
As at December 31, 2017, ZCL had a cash and cash
equivalents (“cash”) balance of $25.6 million compared to
$24.7 million as at September 30, 2017 and $43.2 million
as at December 31, 2016. The cash decrease in 2017
primarily resulted from dividends paid of $33.7 million,
partially offset by cash generated on funds from continuing
operations of $23.0 million.
PAGE 7
Management's Discussion and Analysis
Capital Allocation Strategy
3. Distribute Cash Dividends to Shareholders
In 2017, ZCL distributed $33.7 million in dividends to
Shareholders. The dividends included both quarterly
dividend payments of $13.6 million and a special dividend
of $20.1 million.
For 2018, the Board has declared a 13% further increase in
our quarterly dividend to $0.135 per share, up from $0.12
per share previously, to be paid on April 16, 2018, to the
shareholders of record as of March 31, 2018. With this
increase, we estimate the annualized cash cost of the
quarterly dividend to be approximately $16.7 million,
compared with $14.9 million declared
in quarterly
dividends in 2017. The increase in the quarterly dividend
reflects confidence in our ability to deliver consistent and
sustainable funds from operations.
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.
Normal Course Issuer Bid
In 2017, ZCL purchased 290,500 shares at an average price
of $10.92 per share, for $3.2 million, through the utilization
of our Normal Course Issuer Bid (“NCIB”).
For 2018, ZCL plans to continue our 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 continue to be opportunistic in buying
back our shares.
ZCL has developed a consistently profitable business
model, and will continue to act in a disciplined and
investing and
strategic manner when
distributing capital.
focused on growing
We are
shareholder value through a reasonable increase in the
quarterly distributions while preserving our balance sheet
strength to allow us to act on opportunities as they arise.
it comes to
The key levers of our capital allocation strategy are:
1.
2.
Fund all profitable organic growth opportunities that
support the objectives of our strategic plan.
Continue to evaluate and pursue non‐organic growth
opportunities.
3.
Continue to distribute cash dividends to shareholders.
For the year ended December 31, 2017, ZCL generated
funds from continuing operations, before working capital
requirements, of $23.0 million dollars. These funds from
continuing operations support our capital allocation
strategy.
1. Funding Organic Growth: Capital Investment Plan
The 2017 capital investment plan of $5 million, including
maintenance capital, was fully utilized in the year with the
bulk of the spending occurring in the second half of 2017.
Investments were made in all of our North American
manufacturing facilities
integrating
advanced materials into the production process, upgrading
our quality control and safety systems, and improving the
physical condition and work environment of our facilities.
in areas such as
For 2018, ZCL again has planned approximately $5 million
for capital expenditures (including maintenance capital).
Although we have made significant improvements in
operational efficiencies in our manufacturing facilities
through our ongoing capital investment programs, there
are still continuous improvement opportunities available
to us in 2018 and beyond.
2. Non‐Organic Growth Opportunities
continues
ZCL
opportunities,
particularly
Wastewater.
to
evaluate non‐organic
growth
including mergers and acquisitions,
in our emerging markets of Water and
PAGE 8
Management's Discussion and Analysis
Backlog
2018 Outlook
Backlog is defined as the total value of orders that have not
yet been included in revenue but which have a contract or
purchase order specifying the scope, value and timing of an
order.
Backlog by Market
($millions)
Fuel
Water & Wastewater
Oil & Gas/Industrial
Total
Dec 31,
2017
26.7
3.6
0.7
31.0
Dec 31,
2016
28.9
3.9
2.8
35.6
%
Change
(8%)
(6%)
(74%)
(13%)
Backlog was $31.0 million as at December 31, 2017, down
$4.6 million or 13% from $35.6 million a year earlier, and
reflected a negative foreign exchange translation impact.
Fuel backlog of $26.7 million was down $2.2 million or 8%
compared to a year earlier. Contributing to the decrease
was a foreign exchange adjustment of $1.7 million that
resulted from the US dollar exchange rate decreasing from
1.34 at December 31, 2016 to 1.26 at December 31, 2017.
On a source currency basis, overall Fuel backlog was
comparable to the prior year. US Fuel backlog was down
$1.8 million (source currency) while Canadian Fuel backlog
increased by $1.4 million. Also included in the Fuel backlog
is International operations. Backlog for the International
group increased by $0.4 million relative to the prior year.
Water & Wastewater backlog of $3.6 million was down
$0.3 million or 6% compared with a year earlier, due to a
reduction in the US dollar exchange rate, compared with a
year earlier. On a source currency basis, Water &
Wastewater backlog was comparable to the prior year.
Oil & Gas/Industrial backlog of $0.7 million was down $2.1
million from $2.8 million a year earlier. ZCL ceased offering
products to Industrial & Oil Sands Markets in 2017,
resulting in a $2.5 million reduction in Oil & Gas/Industrial
backlog.
The total backlog decreased by $12.3 million or 28% from
$35.6 million at September 30, 2017. On a source currency
basis, overall backlog decreased $10.3 million or 29% from
the prior quarter, primarily due to the normal seasonal
nature of the business.
The following represents forward looking information and
readers are cautioned that actual results may differ from
expectations.
At this point, we anticipate first quarter 2018 revenue will
be comparable with the first quarter of 2017. However,
due to the combination of rising resin prices, negative
foreign exchange translation and spending on operational
improvement programs that are expected to benefit future
periods, we anticipate first quarter 2018 results to be down
from 2017.
For the full year 2018, we expect organic growth to
increase from the modest growth levels achieved in 2017,
particularly on a source currency basis. We expect this
growth to come from a combination of market growth in
our core Fuel Markets with the continued replacement of
the aged infrastructure and new to industry construction,
market share gains against steel in our existing Fuel and Oil
& Gas Markets, and market share gains against concrete in
Water & Wastewater Markets. We also expect to achieve
growth by expanding our product offerings across all
revenue segments, and by developing new or adjacent
markets for our current products.
We are implementing some important improvements on
how we operate as a company as we strive toward
operational excellence. These improvements include the
real time capturing and reporting of market and business
intelligence data to make timely, data‐based decisions that
will increase our sales pipeline, improve our operational
efficiency, and better serve our customer needs.
In addition, continual product and process innovation
efforts are expected to improve manufacturing efficiencies
and throughput. We have also prioritized an increased
focus on health and safety for our employees within our
manufacturing facilities. These initiatives are necessary to
support our long term profitable growth strategy.
As our normal business cycle results in increasing revenues
beyond the first quarter, we expect these operational
improvement investments will deliver higher profitability
in 2018 and beyond.
We are still assessing the impact of the US tax reform, but
initial indications are that the Company’s effective tax rate
will be reduced by approximately four percentage points in
2018.
PAGE 9
existing market. We believe that ZCL’s FRP products have
a compelling life cycle value proposition, including water
tightness and lower costs. This is true both at installation
and, even more significantly, throughout the life of the
tanks, as FRP tanks typically require no post‐installation
ongoing maintenance. The incumbent product, build‐in
place concrete, is a site construction project and requires
ongoing maintenance and repairs over the life‐cycle of the
system. The advantages of our products will drive the
creation of this substitute demand and allow ZCL to expand
its market share. Our objective is to complete the
implementation of a revised “go to market” strategy that
properly place our products into the right sales channels at
the earliest possible time in the sales cycle. Among other
things, specific initiatives include searching out established
W&WW Market agents and distributors to represent our
lines, refocusing account management and
product
technical sales support on the importance of specification
writing, developing
technical support
inside sales
resources to manage longer cycle opportunities, expanding
existing processes to generate higher quality leads, and
increasing the overall sales and marketing resources that
support this business unit.
Oil & Gas Markets
Oil and Gas Markets comprise approximately 5% of our
total revenues. Although challenges in this segment remain
due to depressed commodity prices, there are areas of
opportunity for our product portfolio,
including the
potential to displace incumbent steel tank providers, both
at the wellhead and in pipeline infrastructure.
Specific initiatives for our Oil & Gas Markets include our
Sales and Product Innovation teams collaborating to create
new product designs that better address customer needs,
creating an established agent and distributor network
throughout North America and refocusing sales efforts to
obtain a greater share of business of our existing
customers.
Management's Discussion and Analysis
Our outlook for 2018 by segment is as follows:
Fuel Markets
The Fuel Markets are our most mature business and our
largest revenue segment. We are seeing growth in sales to
smaller independent retail petroleum marketers through
our North American leading distributor network and
larger retail fuel
increased sales to certain
expect
marketers who deferred spending
in 2017 due to
historically high levels of industry consolidation. The
industry consolidators are expected to complete the
integration of newly acquired stores and return to their
longer term strategy of upgrading and replacing their aged
infrastructure of underground storage tanks, along with
construction of new to industry sites as they battle for
market share.1
We continue to view industry consolidation as a long term
positive for ZCL given that consolidators are committed to
retail fuel and typically devote new capital to expand their
operations and grow their market share. Looking at long
term horizons, we believe this, along with our multi‐year
trend of increased sales to smaller independent retailers,
will be a net benefit to ZCL as the industry looks for solution
providers they can trust to serve them throughout the
entire North American geography.
Water & Wastewater Markets
Though we have participated in the Water & Wastewater
(“W&WW”) Markets for several years now, we continue to
view W&WW as part of our emerging business with the
most potential for significant relative growth in the future.
These markets are a fundamental part of our long term
growth strategy.
During 2017, we completed extensive independent market
research2 in order to open new markets and identify
opportunities for growth. This market research supports
our optimism about longer term growth opportunities and
indicates that the addressable market for the tanks that
ZCL currently supplies, is in the range of $400 – $600
million annually. Concrete currently dominates this space,
commanding north of 70% market share, while Fibreglass
Reinforced Plastics (FRP) solutions make up less than 10%.
The results of these research activities not only serves to
validate our previous assumptions on the W&WW
Markets, but also serves to indicate the large growth
opportunity W&WW Markets presents to ZCL.
As we have described previously, our challenge in the
W&WW Markets is to create substitute demand to replace
the concrete products that currently dominate this large
1 Sources
from
Association of Convenience Stores (NACS).
include publications
the National
2 Source – Lucintel “Growth Opportunities for ZCL in Tanks
for the Water / Wastewater Industry,” July 2017.
PAGE 10
Management's Discussion and Analysis
SELECTED FINANCIAL INFORMATION
(in thousands of dollars,
except per share amounts)
Operating Results
Revenue
Gross profit
Gross margin
General and administration
Foreign exchange loss (gain)
Depreciation and amortization
Finance expense
Loss on disposal of assets
Impairment of assets
Income tax expense
Net income from continuing operations
Net loss from discontinued operations
Net income
Earnings per share from continuing operations
Basic
Diluted
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
2017
$
188,169
41,371
22%
9,824
683
3,196
243
96
1,124
7,784
18,421
(437)
17,984
0.59
0.59
0.58
0.58
1.13
31,185
17%
1.00
Year Ended December 31
2016
$
184,123
43,319
24%
10,499
147
3,393
273
938
46
8,005
20,018
(5,038)
14,980
0.66
0.65
0.49
0.49
0.82
32,976
18%
1.07
2015
$
164,942
35,191
21%
9,116
(1,665)
3,374
319
32
‐
6,502
17,513
(4,514)
12,999
0.58
0.58
0.43
0.43
0.185
28,147
17%
0.93
2017
$
As at December 31
2016
$
2015
$
(in thousands of dollars)
Financial Position
Cash and cash equivalents
Working capital (note 1)
Total assets
Total non‐current liabilities
Note 1: Adjusted EBITDA, adjusted EBITDA per diluted share and working capital are non‐IFRS measures and are defined later in the MD&A under
"Non‐IFRS Measures.”
25,556
52,920
140,728
3,928
40,770
76,781
177,544
5,015
43,208
73,737
163,928
4,088
PAGE 11
Management's Discussion and Analysis
RESULTS OF OPERATIONS
Revenue
($000s)
2017
2016
Twelve months
Revenue by Market:
Fuel
Water & Wastewater
Oil & Gas/Industrial
155,779
24,293
8,097
188,169
152,791
22,946
8,386
184,123
%
change
2%
6%
(3%)
2%
Revenue from continuing operations for the year ended
December 31, 2017 was $188.2 million, up $4.0 million, or
2%, from $184.1 million in the prior year.
The change in revenue reflects the factors noted below:
Fuel
Fuel revenue of $155.8 million was up $3.0 million or 2%
from $152.8 million in the prior year. In the US, on a source
currency basis, Fuel Markets revenue for the year ended
December 31, 2017, was up $3.8 million, or 4% compared
to 2016. A $4.7 million or 15% increase in sales to
distributors relative to 2016 was partially offset by a $1.5
million decrease
larger retail petroleum
marketers, due in part to a deferral in spending by certain
of our high volume customers as a result of the historically
industry consolidation that has been
high
occurring.
in sales to
level of
Canadian Fuel revenue in 2017 was comparable to 2016.
Sales to major oil companies were up $2.1 million or 46%
compared to a year earlier, and sales to distributors were
up $1.1 million or 11% compared to a year earlier. These
increases were partially offset by decreases in sales to large
retail petroleum marketers compared to a year earlier.
Fuel Markets also includes revenue from International
operations which were up 5% compared to 2016 due
primarily to increased royalties on licensed technology.
Water & Wastewater
Water & Wastewater revenue for the year ended
December 31, 2017 was $24.3 million, up $1.3 million or
6%, compared to 2016. On a source currency basis, Water
& Wastewater revenue was up 8% compared with a year
earlier. Increases in sales for Wastewater, Fire Protection
and Grease Interceptor markets of $3.8 million (source
currency) were partially offset by decreases in sales for
Potable Water and Water Collection applications.
PAGE 12
US Water & Wastewater Market sales were up $1.2 million
or 8% on a source currency basis while Canadian Water
sales were up 4% relative to the 2016 year.
Oil & Gas/Industrial
Oil & Gas/Industrial revenue of $8.1 million for 2017 was
down $0.3 million or 3% compared to $8.4 million a year
earlier. A $2.6 million or 82% increase in Oil & Gas revenue
in 2017 was more than offset by a $2.9 million decrease in
Industrial Markets revenue compared to a year earlier.
During the third quarter of 2017, the Company decided to
cease offering products to Industrial Markets, including
aboveground chemical storage tanks used in Oil Sands
applications. A required investment in equipment was not
supported by projected low demand in this market
segment for the foreseeable future.
Gross Profit
($000s)
Gross profit
Gross margin
Twelve Months
2017
2016
41,371
43,319
22%
24%
%
change
(4%)
In 2017, gross profit from continuing operations was $41.4
million, down $1.9 million or 4% from $43.3 million in 2016.
Gross margin from continuing operations was 22% in 2017,
down from 24% in 2016.
The gross profit and gross margin decrease relative to 2016
were attributable to a number of factors including the
impact of additional expenditures incurred relative to 2016
with regard to investment in manufacturing innovation,
sales and marketing initiatives, employee safety and plant
physical condition that are expected to benefit the
Company and positively impact profitability over the
longer term.
Gross profit and gross margin were also impacted in the
current year due to higher resin costs as a result of
disruptions that occurred in 2017 on US gulf coast
petrochemicals production that have negatively impacted
profitability. A resin surcharge implemented in 2017 did
not fully cover the increased resin supply costs and
negatively impacted gross profit by $0.6 million.
Management's Discussion and Analysis
General and Administration
euro Conversion Rates
($000s)
2017
2016
% change
Twelve Months
9,824
10,499
(6%)
General and administration (“G&A”) expense for the year
ended December 31, 2017, was down $0.7 million or 6%
compared to 2016. The year over year decrease was
primarily due to reductions in both short and long term
incentive compensation.
Long term compensation has decreased due to the
decrease of the market value of the ZCL share price as at
the end of December, 2017 compared with a year earlier.
Directors are partially compensated through deferred
share unites (DSUs) which are “marked to market” every
quarter and were down $0.3 million compared to 2016. As
well, performance based compensation recorded in G&A
decreased compared with a year earlier. Short term
incentive compensation also decreased $0.3 million
compared with 2017.
Foreign Exchange Loss
($000s)
2017
2016
Twelve Months
683
147
The foreign exchange loss for each year related to the
combination of fluctuations in the US dollar and euro
conversion rate and the US dollar and euro denominated
monetary assets and liabilities held by the Company’s
Canadian operations.
The following tables detail the US dollar and euro
conversion rates.
US Dollar Conversion Rates
Year
Ended
2017
2016
Avg.
Close Avg.
Close
Q1
Q2
Q3
Q4
Annual
1.32
1.35
1.25
1.27
1.30
1.33 1.37
1.30 1.29
1.25 1.30
1.26 1.34
1.26 1.33
1.30
1.30
1.31
1.34
1.34
Avg.
Change
(4%)
5%
(4%)
(5%)
Close
Change
2%
nil
(5%)
(6%)
(2%)
(6%)
Year
Ended
2017
2016
Avg.
Close
Avg.
Close
Q1
Q2
Q3
Q4
Annual
1.41
1.48
1.47
1.50
1.47
1.42 1.51
1.48 1.46
1.47 1.46
1.50 1.44
1.50 1.47
1.47
1.44
1.47
1.42
1.42
Avg.
Change
(7%)
1%
1%
4%
nil
Close
Change
(3%)
(3%)
nil
6%
6%
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)
2017
2016
% change
Twelve Months
3,196
3,393
(6%)
Depreciation and amortization expense is comparable to a
year earlier.
Loss on Disposal of Assets
($000s)
2017
2016
Twelve Months
96
938
During 2016, the $0.9 million loss on disposal of assets was
a result of a change in operational strategy, resulting in the
cancellation of certain capital projects and discontinued
use of equipment. Due to changes implemented in certain
processes to improve productivity, selected manufacturing
assets were no longer required and were disposed of in
2016.
Loss on Impairment of Property, Plant and Equipment and
Intangibles
($000s)
2017
2016
Twelve Months
1,124
46
During 2017, the Company decided to cease offering
products to Industrial Markets, including aboveground
chemical storage tanks at Oil Sands facilities. A required
investment in equipment was not supported by projected
low demand in this market segment for the foreseeable
future.
PAGE 13
Management's Discussion and Analysis
The $1.1 million non‐cash impairment of assets was a
result of this decision. The Company is exiting the leased
Edmonton Corrosion facility during the first quarter of
2018.
Income Taxes
Income tax expense for the year ended December 31, 2017
represented 29.7% of pre‐tax income, compared to 28.6%
of pre‐tax income in 2016. The increase relative to the
prior year is due to withholding tax payments on cash
repatriations from the Company’s US subsidiaries, offset
partially by reductions in enacted future tax rates.
Discontinued Operations
During 2016, the Company divested certain assets and
ceased operations of the former ZCL Dualam operations.
The financial results from the former ZCL Dualam
operations are included in “Discontinued Operations” in
this MD&A.
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)
2017
2016
Twelve Months
(5,465)
(3,050)
The foreign translation loss in the year ended December
31, 2017 was due to the weakening of the US dollar relative
to the Canadian dollar throughout the year from 1.34 to
1.26. In 2016, the US dollar weakened from 1.39 to 1.34
generating a loss on the translation of foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Share Capital
As at December 31, 2017, working capital (current assets
less current liabilities) of $52.9 million was down $20.8
million from $73.7 million as at December 31, 2016. The
majority of the decrease was a result of a decrease in cash
and cash equivalents and inventory, along with increases
in accounts payable and accrued liabilities, partially offset
by an increase in accounts receivable and a decrease in
deferred revenue.
During the year ended December 31, 2017, the Company
issued 387,623 shares on the exercise of stock options
(2016 – 506,885 shares). Also during the year, ZCL
refreshed the Normal Course Issuer Bid (“NCIB”) initially
implemented in March, 2015. The Company purchased a
total of 290,500 shares (December 31, 2016 – nil) at an
average price of $10.92 per share. The shares purchased
through the NCIB were not cancelled until January 3, 2018,
and were owned by the Company as at December 31, 2017.
As at December 31, 2017, the Company had cash and cash
equivalents of $25.6 million (December 31, 2016 ‐ $43.2
million).
Cash Flows
Management believes that
internally generated cash
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.
Credit Arrangements
The Company’s operating credit facility is provided by a
Canadian chartered bank. The maximum available under
this facility is $20.0 million. The operating facility is due on
demand and matures on May 31, 2018.
The Company fully repaid the remaining balance on the
term loan during the third quarter of 2016.
PAGE 14
($000’s)
Operating activities
Financing activities
Investing activities
Foreign exchange(1)
Discontinued operations
Twelve Months
2017
2016
22,929
28,994
(34,454)
(23,083)
(5,191)
(2,587)
(329)
(607)
(573)
(313)
(17,652)
2,438
(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 continuing operations and ii)
changes in non‐cash working capital.
Management's Discussion and Analysis
Funds from continuing operations totalled $23.0 million for
the year ended December 31, 2017, down $0.6 million
from $23.6 million for the year ended December 31, 2016.
The decrease from 2016 is primarily due to decreased
earnings in 2017 compared to the prior year.
Changes in non‐cash working capital totalled negative $0.1
million for the year ended December 31, 2017 compared
to $5.4 million for the year ended December 31, 2016. The
decrease relative to 2016 was primarily due to increases in
accounts receivable and reductions in deferred revenue,
offset by increases in accounts payable relative to the prior
year.
Financing Activities
Cash flows used in financing activities were $34.5 million
for the year ended December 31, 2017 compared to $23.1
million for the year ended December 31, 2016. The
increase in cash used in financing activities in 2017
compared to a year earlier was due to an increase of $9.7
million in dividends paid along with $3.2 million in
repurchases of shares through the NCIB. The repayment of
long term debt of $1.3 million in 2016 did not occur in 2017
as the loan was fully repaid in the prior year.
Investing Activities
The cash flows used in investing activities were $5.2 million
for the year ended December 31, 2017 compared to $2.6
million for 2016. The increase was due to increased
purchases of property, plant and equipment and intangible
assets relative to 2016.
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 three letters of credit for a total of $1.6 million to
secure
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.
claims
for
As at December 31, 2017, ZCL’s minimum annual lease
commitments under all non‐cancellable operating leases
for production facilities, office space and automotive and
equipment totalled $13.3 million.
The following table details the Company’s contractual
obligations due over the next five years and thereafter:
($000s)
2018
2019
2020
2021
2022
Thereafter
Total
Operating
Leases
2,367
2,279
2,132
2,150
1,770
2,635
13,333
TRANSACTIONS WITH RELATED PARTIES
components purchased
Certain manufacturing
for
$100,000 (2016 ‐ $36,000) for the year ended December
31, 2017, included in the consolidated financial statements
as cost of goods sold or inventories, were provided by a
corporation whose Executive Chairman was a director of
the Company until May 4, 2017. 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, 2017 included $11,000 (December 31, 2016
‐ $nil) owing to the corporation. There are no ongoing
contractual or other commitments resulting from these
transactions.
PAGE 15
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 US to Canadian
dollar conversion rate has ranged from a low of 1.25 in the
third quarter of 2017 to a high of 1.34 in the fourth quarter
of 2016.
For the three months ended
2017
2016
(in thousands of dollars,
except per share amounts)
Revenue by Market:
Fuel
Water & Wastewater
Oil & Gas/Industrial
Total revenue
Net income
Dec 31
Sep 30
Jun 30 Mar 31
Dec 31
Sep 30
Jun 30
$
$
$
$
$
$
$
Mar
31
$
40,354
45,536
42,975
26,914
39,030
49,664
34,978
29,119
7,593
2,754
5,811
1,074
6,688
3,643
4,201
626
6,433
1,139
5,902
2,319
6,213
3,528
4,398
1,400
50,701
52,421
53,306
31,741
46,602
57,885
44,719
34,917
Continuing operations
6,114
5,357
6,031
Discontinued operations (note 1)
26
(52)
(374)
5,749
7,741
4,396
2,132
146
(1,249)
(2,842)
(1,094)
Total net income
Adjusted EBITDA (note 2)
Basic and diluted earnings per share
Continuing operations
Total
Adjusted EBITDA per diluted share (note
2)
Dividends declared per share
6,140
9,241
5,305
9,306
5,657
9,467
5,895
6,492
3,172
9,418
12,125
1,554
7,387
1,038
4,048
0.19
0.19
0.17
0.17
0.30
0.30
0.12
0.12
0.19
0.18
0.30
0.12
0.03
0.03
0.10
0.77
0.19
0.19
0.30
0.08
0.25
0.21
0.39
0.08
0.14
0.05
0.24
0.08
0.07
0.03
0.13
0.58
919
(37)
882
Note 1: The discontinued operations are the ZCL Dualam operations which were exited in the third quarter of 2016, due to continued and expected
future operating losses.
Note 2: Adjusted EBITDA and adjusted EBITDA per diluted share are non‐IFRS measures and are defined later in this MD&A under "Non‐IFRS
Measures."
PAGE 16
Management's Discussion and Analysis
FOURTH QUARTER RESULTS
Selected Financial Information
(in thousands of dollars,
except per share amounts)
Operating Results
Revenue
Gross profit
Gross margin (note 1)
General and administration
Foreign exchange loss (gain)
Depreciation and amortization
Finance expense
Loss on disposal of property, plant and equipment
Loss on impairment of property, plant and equipment and intangibles
Income tax expense
Net income from continuing operations
Net income from discontinued operations
Net income
Earnings per share from continuing operations
Basic and diluted
Earnings per share
Basic and 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
2017
$
50,701
11,945
24%
2,417
380
795
92
25
97
2,025
6,114
26
6,140
0.20
0.20
0.12
9,241
18%
0.30
2016
$
46,602
11,633
25%
2,784
(496)
858
51
943
‐
1,744
5,749
146
5,895
0.19
0.19
0.08
9,418
20%
0.30
Note 1: Gross margin, adjusted EBITDA, and adjusted EBITDA per diluted share are non‐IFRS measures and are defined later in the MD&A under
“Non‐IFRS Measures.”
PAGE 17
Management's Discussion and Analysis
Overall Fourth Quarter Performance
Revenue from continuing operations for the fourth quarter
ended December 31, 2017, was up $4.1 million, or 9%,
from the fourth quarter of 2016. The increase in revenue
in 2017 came from all market segments.
Net income from continuing operations in the fourth
quarter of 2017 was $6.1 million, up $0.4 million or 6%
from $5.7 million a year earlier. Earnings per diluted share
from continuing operations in the fourth quarter of 2017
were $0.20, up $0.01 over the prior year.
Net income in the fourth quarter of 2017 was $6.1 million,
up $0.2 million or 4% compared to $5.9 million a year
earlier. Earnings per share were $0.20, up $0.01 from
$0.19 a year earlier.
Revenue
Fourth Quarter
($000s)
2017
2016
Fuel
Water & Wastewater
Oil & Gas/Industrial
40,354
7,593
2,754
50,701
39,030
6,433
1,139
46,602
%
change
3%
18%
142%
9%
Revenue from continuing operations for the fourth quarter
ended December 31, 2017, was $50.7 million, up $4.1
million, or 9%, from $46.6 million in the fourth quarter of
2016. The increase in revenue in 2017, was led by sales in
the emerging markets of Water & Wastewater and Oil &
Gas.
The change in revenue reflects the factors noted below:
Fuel
In the fourth quarter of 2017, Fuel revenue was $40.4
million, up $1.3 million or 3% from $39.0 million in the prior
year. The increase was attributable to the US Fuel markets,
which were up $4.0 million (source currency) compared
with a year earlier, led by a $2.3 million or 17% increase in
sales to retail petroleum marketers and a 16% increase in
sales to distributors. These increases were partially offset
by a $0.4 million negative impact on the translation of US
dollar denominated sales to Canadian dollars for reporting
purposes.
Canadian Fuel revenue was down $1.6 million relative to
the fourth quarter of 2016 primarily due to a $1.5 million
decrease in distributor sales compared with a year earlier.
Fuel Markets also includes revenue from international
operations, which was down $0.6 million compared to the
fourth quarter of 2016. The reduction over the prior year
PAGE 18
was due to a decrease in sales of Parabeam® to licensees,
partially offset by an increase in royalty revenue.
Water & Wastewater
Water & Wastewater revenue for the fourth quarter of
2017 of $7.6 million was up $1.2 million, or 18%, from $6.4
million in the fourth quarter of 2016. In the US, Water &
Wastewater revenue was up $0.6 million or 14% on a
source currency basis, primarily due to
increased
wastewater market sales.
In Canada, revenue was up $0.7 million or 120% relative to
the prior year, also due to increased wastewater and fire
protection sales.
Oil & Gas/Industrial
Oil & Gas/Industrial Products revenue of $2.8 million in the
fourth quarter of 2017 was $1.6 million, or 124%, higher
than $1.1 million in the same quarter a year earlier with the
increase attributable to the Canadian Oil & Gas Markets.
Oil & Gas revenues in the US were comparable to the prior
year.
During the third quarter of 2017, the Company decided to
cease offering products to Industrial Markets, including
aboveground chemical storage tanks used in Oil Sands
applications. A required investment in equipment was not
supported by projected low demand in this market
segment for the foreseeable future.
Gross Profit
($000s)
Gross profit
Gross margin
Fourth Quarter
2017
2016
11,945
11,633
24%
25%
%
change
3%
In the fourth quarter of 2017, gross profit from continuing
operations was $11.9 million, up $0.3 million, or 3%, from
$11.6 million in the fourth quarter of 2016. Gross margin
from continuing operations was 24%, down one
percentage point from 25% in the fourth quarter of 2016.
A decrease in gross margin in the fourth quarter of 2017
relative to the prior year was primarily a result of increased
spending on manufacturing and engineering projects
compared with a year earlier.
Management's Discussion and Analysis
General and Administration
Loss on Disposal of Assets
($000s)
2017
2016
% change
Fourth Quarter
2,417
2,784
(13%)
($000s)
2017
2016
Fourth Quarter
25
943
General and administration (“G&A”) expense of $2.4
million for the fourth quarter ended December 31, 2017
was down $0.4 million or 13% over the fourth quarter of
2016. The decrease was primarily the result of a reduction
in performance based compensation recorded in G&A in
the fourth quarter of 2017, down $0.4 million compared
with a year earlier.
Foreign Exchange Loss (Gain)
($000s)
2017
2016
Fourth Quarter
380
(496)
The foreign exchange loss (gain) for each quarter related to
the combination of fluctuations in the US dollar and euro
conversion rate and the US and euro denominated
monetary assets and liabilities held by the Company’s
Canadian operations.
The following table details the US dollar and euro
conversion rates relative to the Canadian dollar.
US Dollar and euro Conversion Rates
Fourth
Quarter
2017
2016
Avg.
Close Avg.
Close
USD
euro
1.27
1.50
1.26 1.34
1.50 1.44
1.34
1.42
Avg.
Change
(5%)
4%
Close
Change
(6%)
6%
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)
2017
2016
% change
Fourth Quarter
795
858
(7%)
Depreciation and amortization expense for the fourth
quarter ended December 31, 2017 of $0.8 million was
comparable to the fourth quarter ended December 31,
2016.
During 2016, the $0.9 million loss on disposal of assets was
a result of a change in operational strategy, resulting in the
cancellation of certain capital projects and discontinued
use of equipment. Due to changes implemented in certain
processes to improve productivity, selected manufacturing
assets were no longer required and were disposed of in
2016.
Income Taxes
Income tax expense for the three months ended December
31, 2017, represented 25% of pre‐tax income, compared to
23% of pre‐tax income in the same quarter of 2016. The
increase in the income tax rate relative to the prior year is
primarily attributable to withholding tax payments on cash
repatriations from US subsidiaries, partially offset by
reductions in enacted future tax rates.
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)
2017
2016
Fourth Quarter
71
1,841
The foreign translation gain in the fourth quarter of 2017
was due to strengthening of the US dollar relative to the
Canadian dollar throughout the three months from 1.25 to
1.26. In the fourth quarter of 2016, the US dollar also
strengthened from 1.31 to 1.34.
Financial Position/Cash Flows
The Company’s working capital (current assets less current
liabilities) of $52.9 million as at December 31, 2017, was
down $1.9 million compared to $54.8 million at September
30, 2017. The quarter over quarter working capital
reduction was primarily the result of a decrease in
inventories, partially offset by a reduction in deferred
revenue.
PAGE 19
Management's Discussion and Analysis
FINANCIAL INSTRUMENTS
The Company’s activities expose it to a variety of financial
risks including market risk (foreign exchange risk), liquidity
risk and credit 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, 2017.
Foreign Exchange Risk
The Company operates on an international basis and is
exposed to foreign exchange risk 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 and considers long term forecasts
to assess the potential cash flow impact on the Company.
The tables that follow provide an indication of the
Company’s exposure to changes in the value of the US
dollar relative to the Canadian dollar, as at and for the year
ended December 31, 2017. 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, 2017, was as follows:
(in thousands of US dollars)
Foreign operations
Domestic operations
Net balance sheet exposure
$
21,888
11,883
33,771
PAGE 20
Operating exposure for the twelve months ended
December 31, 2017, was as follows:
(in thousands of US dollars)
Sales
Operating expenses
Net operating exposure
$
121,812
96,759
25,053
The weighted average US to Canadian dollar translation
rate was 1.30 for the year ended December 31, 2017. The
translation rate as at December 31, 2017, was 1.26.
Based on the foreign currency exposures noted above,
with other variables unchanged, a 20% change in the
Canadian dollar would have impacted net income for the
twelve months ended December 31, 2017, as follows:
(in thousands of US dollars)
$
Net balance sheet exposure of domestic operations 1,773
3,118
Net operating exposure of foreign operations
4,891
Change in net income
Other comprehensive income would have changed $2.8
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 and
accounts receivable. The Company manages the credit risk
associated with its cash and cash equivalents 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 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
international
organizations. As at December 31, 2017, no customer
large
Management's Discussion and Analysis
exceeded 10% of the consolidated trade accounts
receivable balance. The creditworthiness of new and
existing customers is subject to review by management by
considering such items as the type of customer, prior order
history and the size of the order. Decisions to extend credit
to new customers are approved by management and the
creditworthiness of existing customers is monitored.
its trade accounts receivable
The Company reviews
regularly and amounts are written down to their expected
realizable value when the account is determined not to be
fully collectable. This generally occurs when the customer
has indicated an inability to pay, the Company is unable to
communicate with the customer over an extended period
of time, and other methods to obtain payment have been
considered and have not been successful. The bad debt
expense is charged to net income in the period that the
account is determined to be doubtful. Estimates for the
allowance for doubtful accounts are determined on a
customer‐by‐customer evaluation of collectability at each
reporting date, taking into account the amounts which are
past due and any available relevant information on the
customers’ liquidity and going concern status. After all
efforts of collection have failed, the accounts receivable
balance not collected is written off with an offset to the
allowance for doubtful accounts, with no impact on net
income.
The Company’s maximum exposure to credit risk for trade
accounts receivable is the carrying value of $27.3 million as
at December 31, 2017 (December 31, 2016 ‐ $25.0 million).
On a geographic basis as at December 31, 2017,
approximately 24% (December 31, 2016 – 16%) of the
balance of trade accounts receivable was due from
Canadian and non‐US customers and 76% (December 31,
2016 – 84%) 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 2016.
Payment terms are generally net 30 days. As at December
31, 2017, the percentages of trade accounts receivable
were as follows:
December 31,
2017
57%
22%
11%
7%
December 31,
2016
50%
26%
13%
9%
3%
100%
2%
100%
Current
Past due 1 to 30 days
Past due 31 to 60 days
Past due 61 to 90 days
Past due greater than
90 days
Total
Liquidity Risk
The Company’s objective related to liquidity risk is to
effectively manage cash flows to minimize the exposure
that the Company will not be able to meet its obligations
associated with financial liabilities. On an ongoing basis,
liquidity risk is managed by maintaining adequate cash 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 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.
PAGE 21
Management's Discussion and Analysis
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 Fuel,
Water and Wastewater, and Oil & Gas markets; drilling
activity and oil and natural gas prices, environmental
trends and other factors that affect demand for the
Company’s products and services; industry competition;
the need to effectively integrate acquired businesses; the
ability of management to implement the Company’s
business strategy effectively; political and general
economic conditions; the ability to attract and retain key
personnel; raw material and labour costs; fluctuations in
the US and Canadian dollar exchange rates; accounts
receivable risk; the ability to generate capital or maintain
liquidity and credit agreements necessary to fund future
operations; and other risks and uncertainties described
under the heading “Risk Factors” in the Company’s most
recent Annual Information Form and elsewhere in other
documents filed with Canadian provincial securities
the public at
authorities which are available
www.sedar.com.
to
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
requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities,
revenues and expenses. Such estimates and assumptions
have been made using careful judgments, which in
management’s opinion, are reasonable and conform to the
in
significant accounting policies summarized
the
December 31, 2017 annual consolidated
financial
statements. Actual results may vary from those estimated.
Impairment
The Company assesses impairment at each reporting
period by evaluating the circumstances specific to the
organization that may lead to an impairment of assets. In
addition to the quarterly assessment, the Company also
performs an annual impairment test on goodwill and
certain intangible assets in accordance with IAS 36:
“Impairment of Assets.”
Where indicators of impairment exist, and at least annually
for goodwill and certain intangible assets, the recoverable
PAGE 22
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.
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 rates and
other estimates used in the determination of fair values at
the time of impairment tests may vary materially from
those realized in future periods.
Property, Plant and Equipment, Intangible Assets and
Goodwill
lives are recorded at cost
Property, plant and equipment and intangible assets with
finite
less accumulated
depreciation and amortization. Goodwill and indefinite life
intangible assets are 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.
Management's Discussion and Analysis
Depreciation and amortization of property, plant and
equipment and intangible assets with finite lives is based
on estimates of the useful lives of the assets. The useful
lives are estimated, and a method of depreciation and
amortization is selected at the time the assets are initially
acquired and then re‐evaluated each reporting period.
Judgment is required to determine whether events or
circumstances warrant a revision to the remaining periods
of depreciation and amortization. The estimates of cash
flows used to assess the potential impairment of these
assets are subject to measurement uncertainty. A
significant change in these estimates and judgments could
result
to depreciation and
amortization expense or impairment charges.
in a material change
Allowance for Doubtful Accounts
The Company’s accounts receivable balance is a significant
portion of overall assets. Credit is spread among many
customers and the Company has not experienced
significant accounts receivable collection problems in the
past. The Company performs ongoing credit evaluations
and maintains allowances for doubtful accounts based on
the assessment of individual customer receivable balances,
credit information, past collection history and the overall
financial strength of customers. A change in these factors
could impact the estimated allowance and the provision
for bad debts recorded in the accounts. The actual
collection of accounts receivable and the resulting bad
debts may differ from the estimated allowance for
doubtful accounts and the difference may be material.
Self‐insured Liabilities
The Company self‐insures certain risks related to pollution
protection provided on certain product sales, general
liability claims and US workers compensation through
Radigan Insurance Inc., its captive insurance company. The
provision for self‐insured liabilities includes estimates of
the costs of reported and expected claims based on
estimates of loss using assumptions determined by an
independent actuary. The actual costs of claims may vary
from those estimates, and the difference may be material.
Warranties
The Company generally warrants its products for a period
of one year after sale, and for up to 30 years for corrosion,
if the products are properly installed and are used solely
for storage of specified liquids. In Canada, until January 31,
2015, the Company marketed a storage system under the
Prezerver® trademark that carried an enhanced protection
program. The Prezerver system included an enhanced 10
year limited warranty covering product replacement, third‐
party pollution protection, site clean‐up and defence costs
up to the limits allowed under the warranty. Until
December 1, 2006, the Canadian Prezerver program was
covered by
insurance underwritten by a major
international insurer. Effective 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.
PAGE 23
Management's Discussion and Analysis
NEW ACCOUNTING STANDARDS
Standards issued but not yet effective:
(ii)
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:
IFRS 15: Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a five‐step
model to account for revenue arising from contracts with
customers. Under IFRS 15, revenue is recognised at an
amount that reflects the consideration to which an entity
expects to be entitled in exchange for transferring goods or
services to a customer.
The new revenue standard will supersede all current
revenue recognition requirements under IFRS. Either a full
retrospective application or a modified retrospective
application is required for annual periods beginning on or
after January 1, 2018. The Company plans to adopt the
new standard on January 1, 2018 using the modified
retrospective method
. During 2017, the Company
performed a preliminary assessment of IFRS 15, which is
subject to changes arising from a more detailed ongoing
analysis. Furthermore, the Company is considering the
clarifications issued by the IASB in April 2017 and will
monitor any further developments.
Sale of tanks and related products:
(a)
Contracts with customers in which the sale of tanks and
accessories are generally expected to be the only
performance obligation are not expected to have any
impact on the Company’s profit or loss. The Company
expects the revenue recognition to occur at a point in time
when control of the goods is transferred to the customer,
generally on delivery of the goods. In preparing for IFRS
15, the Company is considering the following:
(i) Warranty obligations
The Company generally warrants its product for a
period of one year after sale for manufacturing
defects. As such, the Company expects that such
warranties will be assurance‐type warranties which
will continue to be accounted for under IAS 37
Provisions, Contingent Liabilities and Contingent
Assets consistent with current practice. The Company
is currently evaluating the effect IFRS 15 will have on
longer term warranty arrangements.
PAGE 24
Pre‐buy orders and bill and hold arrangements
The Company enters
into several “pre‐buy”
arrangements with major customers where the
customer orders and pays for tanks during the winter
months, when shipments are slow, with the
expectation that the Company will manufacture the
tanks and hold them on premise under a bill and hold
contract. Typically these tanks are shipped in the
spring and summer months. The Company continued
its evaluation of the effect IFRS 15 will have on pre‐
buy arrangements during the fourth quarter of 2017,
specifically whether the purchase order for the tank
and bill and hold contract should be combined and
the impacts on allocating the transaction price
between
of
performance
manufacturing the product and the service of storing
the product.
obligations
the
in
Royalty revenue:
the Company’s
intellectual property
(b)
The Company earns royalty revenue from licensees who
use
their
manufacturing processes for double‐wall tanks. The
royalty agreements involve minimum royalty payments as
well as royalty payments based off a percentage of the
licensee’s third party sales of product. As such the
Company expects such royalties will be treated as usage‐
based royalties and revenue from the royalties will be
recognized as the licensees sell their product to third
parties. This is consistent with the Company’s current
revenue recognition policy for royalty revenue.
Presentation and disclosure requirements:
(c)
The presentation and disclosure requirements in IFRS 15
are more detailed than under current IFRS. The Company
will be required to disclose significant judgments made
when determining the transaction price, the allocation of
the transaction price and specific performance obligations.
In addition, the Company expects to
increase the
disclosure of disaggregated revenue by region, market
segment and product lines. During the fourth quarter of
2017, the Company continued its evaluation of the impact
of the increased disclosures including updating procedures
necessary to collect and disclose such information.
IFRS 16: Leases
In January 2016, IFRS 16 Leases was issued and replaced
IAS 17 Leases. IFRS 16 sets out principles for the
recognition, measurement, presentation and disclosure of
leases and requires lessees to account for all leases under
a single on‐balance sheet model. The standard includes
two recognition exemptions for lessees – leases of ’low‐
value’ assets (e.g., personal computers) and short‐term
leases (i.e., leases with a lease term of 12 months or less).
Management's Discussion and Analysis
At the commencement date of a lease, the lessee will
recognize a liability to make lease payments and an asset
representing the right to use the underlying asset during
the lease term (i.e., the right‐of‐use asset). The standard
requires the Lessee to separately recognize the interest
expense on the lease liability and the depreciation expense
on the right‐of‐use asset. IFRS 16 is effective January 1,
2019, on either a
full retrospective or modified
retrospective approach. In 2018, the Company will
continue its assessment of the impact of the IFRS 16 on its
consolidated financial statements and internal control
processes.
IFRS 9 Amendments: Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9:
Financial Instruments that replaces IAS 39 Financial
Instruments – Recognition and Measurement and all
previous versions of IFRS 9. IFRS 9 brings together all three
aspects of the accounting for financial
instruments:
classification and measurement, impairment and hedge
accounting. IFRS 9 is effective after January 1, 2018. The
Company will adopt the new standard and will not restate
the comparative information. The Company is currently
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
is gathered and
Disclosure controls and procedures (“DC&P”) are designed
to provide reasonable assurance that all relevant
information
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.
reported
to
As at December 31, 2017, 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, 2017, 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
assessing the impacts of the new standard and expects no
significant impact to the consolidated statements of
income and the balance sheets
IFRS 2 Amendments: Share‐based Payments
The IASB issued amendments to IFRS 2 Share‐based
Payment that address three main areas: the effects of
vesting conditions on the measurement of a cash‐settled
share‐based payment transaction; the classification of a
share‐based payment transaction with net settlement
features for withholding tax obligations; and accounting
where a modification to the terms and conditions of a
share‐based payment transaction changes its classification
from cash settled to equity settled. On adoption, the
Company is required to apply the amendments without
restating prior periods, but retrospective application is
permitted if elected for all three amendments and other
criteria are met. The amendments are effective for annual
periods beginning on or after January 1, 2018, with early
application permitted. The Company is assessing the
potential effect of the amendments on its consolidated
financial statements.
the effectiveness of our ICFR at December 31, 2017, 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, 2017, 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,
2017 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,
2017, 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, 2017, and have concluded that
these controls and procedures are being maintained as
designed, they recognize that the disclosure controls and
procedures and ICFR may not prevent all errors and fraud.
A control system, no matter how well conceived or
operated, can only provide reasonable, not absolute
assurance that the objectives of the control system are
met.
PAGE 25
Management’s Discussion and Analysis
OUTSTANDING SHARE DATA
As at March 7, 2018, there were 30,871,078 common
shares and 699,823 share options outstanding. Of the
options outstanding, 190,126 are currently exercisable into
common shares. In 2017, ZCL repurchased 290,500 shares
through the Normal Course Issuer Bid (“NCIB”). The
290,500 repurchased shares were cancelled on January 3,
2018. In the prior year ended December 31, 2016, nil
shares were repurchased and cancelled through the NCIB.
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
in non‐IFRS measures
This MD&A includes references to and uses measures and
terms that are not specifically defined in IFRS and do not
have any standardized meaning prescribed by IFRS.
is adjusted EBITDA,
Included
adjusted EBITDA per diluted share and working capital. The
Company uses non‐IFRS measures to make strategic
decisions and set targets and believes that these non‐IFRS
measures are useful for providing securities analysts,
investors, and other interested parties with additional
information to assist them in understanding components
of our financial results. This includes a more complete
factors and trends affecting our
understanding of
operating performance. Non‐IFRS measures also provide
supplemental measures of operating performance, thus
highlighting trends that may not otherwise be apparent
when relying solely on IFRS financial measures.
Tables calculating or reconciling these non‐IFRS measures,
where applicable, have been included on the next page.
finance expense,
Adjusted EBITDA is defined as income from continuing
operations before
taxes,
depreciation of property, plant and equipment,
amortization
share‐based
compensation, gains or losses on sale of assets, and
impairment of assets.
intangible
income
assets,
of
Adjusted EBITDA per diluted share is defined as adjusted
EBITDA divided by weighted average diluted shares
outstanding.
PAGE 26
Readers are cautioned that adjusted EBITDA and adjusted
EBITDA per diluted share should not be construed as an
alternative to net income and net income per diluted share
as determined in accordance with IFRS. The Company
discloses adjusted EBITDA and adjusted EBITDA per diluted
share as management considers that these measures
provide additional clarity of the Corporation’s operational
performance to the readers of the MD&A. These
adjustments to EBITDA include, among other things, non‐
cash gains and losses on disposal of assets, non‐cash
impairment
share‐based
and
compensation. The exclusion of these items does not
indicate that they are non‐recurring; management
considers them to be non‐operational. By removing non‐
operational items, readers of the MD&A will have a more
complete understanding of factors and trends affecting
ZCL’s operating performance, thus highlighting trends that
may not otherwise be apparent when relying solely on IFRS
financial measures.
non‐cash
charges
Working capital is defined as current assets less current
liabilities. The Company discloses working capital in order
to provide users of the MD&A a measure of the Company’s
liquidity and ability to pay current liabilities.
Management’s Discussion and Analysis
RECONCILIATION OF NON‐IFRS MEASURES
The following table reconciles net income from continuing operations in accordance with IFRS to adjusted EBITDA.
(in thousands of dollars)
Net income from continuing operations
Adjustments:
Depreciation and amortization
Finance expense
Income tax expense
Share‐based compensation
Loss on disposal of property, plant & equipment
Loss on impairment of property, plant and
equipment
Adjusted EBITDA
Adjusted EBITDA as a percentage of revenue
Fourth Quarter Ended
December 31
2017
$
6,114
795
92
2,025
93
25
97
9,241
18%
2016
$
5,749
858
51
1,744
73
943
‐
9,418
20%
Year Ended
December 31
2016
$
20,018
3,393
273
8,005
303
938
46
2017
$
18,421
3,196
243
7,784
321
96
1,124
2015
$
17,513
3,374
319
6,502
407
32
‐
31,185
32,976
28,147
17%
18%
17%
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
2017
$
9,241
2016
$
9,418
Year Ended
December 31
2017
$
31,185
2016
$
32,976
2015
$
28,147
31,097
30,682
30,999
30,515
30,200
137
31,234
0.30
332
31,013
0.30
161
31,160
1.00
233
30,748
1.07
165
30,365
0.93
The following table presents the calculation of working capital.
(in thousands of dollars)
Current assets
Current liabilities
Working capital
December 31, 2017
$
78,482
25,562
52,920
As at
December 31, 2016
$
99,482
25,745
73,737
December 31, 2015
$
105,032
28,251
76,781
PAGE 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 laws.
this
The
document are expressly qualified by this cautionary
statement
forward‐looking statements contained
in
Management’s Discussion and Analysis
ADVISORY REGARDING FORWARD‐LOOKING STATEMENTS
legislation
(collectively,
This document contains forward‐looking statements and
forward‐looking information as defined under applicable
“forward‐looking
securities
statements”) under the heading “Outlook” and elsewhere
concerning future events or the Company’s future
performance. All statements other than statements of
historical fact are forward‐looking statements 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 Fuel, Water &
Wastewater, Oil & Gas and International markets, efforts
to reduce administrative and production costs, manage
production levels, anticipated capital expenditure trends,
activity in the fuel 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. The use of any of the words such as
“seek,” “anticipate,” “plan,” “contemplate,” “continue,”
“estimate,” “expect,” “intend,” “propose,” “forecast,”
“may,” “will,” “shall,” “project,” “predict,” “potential,”
“targeting,” “intend,” “could,” “might,” “should,” “believe”
and similar expressions are intended to identify forward‐
looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may
cause actual results or events to differ materially from
those anticipated in such forward‐looking statements. No
assurance can be given that these expectations will prove
to be correct and such forward‐looking statements
included in this document should not be unduly relied
upon.
These factors include, but are not limited to, fluctuations
in the level of capital expenditures in the Fuel, Water &
Wastewater, and Oil & Gas 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 to the Company’s ability to
implement its business 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”
in the
Company’s most recent Annual Information Form, and
elsewhere in this document and other documents filed
with Canadian provincial securities authorities. These
documents are available to the public at www.sedar.com.
The consolidated financial statements have been prepared
in accordance with International Financial Reporting
Standards and the reporting currency is in Canadian
dollars.
PAGE 28
Consolidated Financial Statements
ZCL Composites Inc.
Consolidated Financial Statements and Notes
For the years ended December 31, 2017 and 2016
PAGE 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, 2017 and 2016, and the consolidated statements of income, comprehensive
income, shareholders’ equity and cash flows for the years then ended, 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 audits to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of ZCL
Composites Inc. as at December 31, 2017 and 2016, and its financial performance and its cash flows for the years then ended
in accordance with International Financial Reporting Standards.
Edmonton, Canada
March 7, 2018
PAGE 30
Consolidated Financial Statements
March 7, 2018
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 Canadian 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
PAGE 31
December 31,
2017
$
December 31,
2016
$
25,556
27,633
21,285
2,380
1,628
78,482
169
27,241
1,155
33,681
140,728
18,042
3,705
485
1,814
1,516
25,562
2,569
1,359
29,490
79,143
1,731
6,701
23,663
111,238
140,728
43,208
25,308
27,214
1,589
2,163
99,482
—
27,001
1,466
35,979
163,928
15,769
2,462
625
5,384
1,505
25,745
2,822
1,266
29,833
79,310
1,987
12,166
40,632
134,095
163,928
Consolidated Financial Statements
Consolidated Balance Sheets
As at
(in thousands of dollars)
ASSETS
Current
Cash and cash equivalents [note 10]
Accounts receivable [note 19]
Inventories [note 5]
Income taxes recoverable
Prepaid expenses
Deferred tax assets [note 16]
Property, plant and equipment [note 7]
Intangible assets [note 8]
Goodwill [note 22]
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities
Dividends payable [note 12]
Income taxes payable
Deferred revenue
Current portion of provisions [note 10]
Deferred tax liabilities [note 16]
Long term portion of provisions [note 10]
TOTAL LIABILITIES
Shareholders' equity
Share capital [note 13]
Contributed surplus [note 14]
Accumulated other comprehensive income
Retained earnings
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes
On behalf of the Board:
Director
Director
PAGE 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 [notes 14 & 18b]
Foreign exchange loss
Depreciation and amortization [notes 7 & 8]
Finance expense
Loss on disposal of property, plant and equipment [note 7]
Loss on impairment of property, plant and equipment and intangibles [notes 7 & 8]
Income before income taxes
Income tax expense (recovery) [note 16]
Current
Deferred
Net income from continuing operations
Net loss from discontinued operations [note 15]
Net income
Earnings per share from continuing operations [note 17]
Basic
Diluted
Loss per share from discontinued operations [note 17]
Basic
Diluted
Earnings per share [note 17]
Basic
Diluted
See accompanying notes
2017
$
188,169
146,798
41,371
9,824
683
3,196
243
96
1,124
15,166
26,205
7,933
(149)
7,784
18,421
(437)
17,984
$0.59
$0.59
($0.01)
($0.01)
$0.58
$0.58
2016
$
184,123
140,804
43,319
10,499
147
3,393
273
938
46
15,296
28,023
9,065
(1,060)
8,005
20,018
(5,038)
14,980
$0.66
$0.65
($0.17)
($0.16)
$0.49
$0.49
PAGE 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 that will be reclassified subsequently to net income
Comprehensive income
Consolidated Statements of Shareholders’ Equity
For the years ended December 31,
2017
$
17,984
(5,465)
(5,465)
12,519
2016
$
14,980
(3,050)
(3,050)
11,930
Accumulated
Other
Contributed Comprehensive Retained
Earnings
$
Surplus
$
Income
$
Total
$
1,987
321
12,166
—
40,632
—
134,095
321
—
—
(577)
—
—
—
1,731
—
—
—
(5,465)
—
—
6,701
—
—
—
—
(34,953)
17,984
23,663
2,429
(3,173)
—
(5,465)
(34,953)
17,984
111,238
Common
Shares
#
30,774
—
Share
Capital
$
79,310
—
388
2,429
—
(3,173)
577
—
—
—
79,143
—
—
—
—
31,162
30,267
—
76,066
—
2,357
303
15,216
—
50,639
—
144,278
303
507
2,571
—
—
—
—
—
30,774
673
—
—
—
79,310
(673)
—
—
—
1,987
—
—
(3,050)
—
—
12,166
—
2,571
—
—
(24,987)
14,980
40,632
—
(3,050)
(24,987)
14,980
134,095
(in thousands)
Balance, December 31, 2016
Share‐based payments [note 14]
Shares issued on exercise of stock
options [notes 13 & 14]
Shares purchased through normal
course issuer bid [note 13]
Reclassification of fair value of stock
options previously expensed [note 14]
Translation of foreign operations
Dividends declared [note 12]
Net income
Balance, December 31, 2017
Balance, December 31, 2015
Share‐based payments [note 14]
Shares issued on exercise of
stock options [notes 13 & 14]
Reclassification of fair value of stock
options previously expensed [note 14]
Translation of foreign operations
Dividends declared [note 12]
Net income
Balance, December 31, 2016
See accompanying notes
PAGE 34
Consolidated Financial Statements
Consolidated Statements of Cash Flows
For the years ended December 31,
(in thousands of dollars)
CASH FLOWS FROM CONTINUING OPERATIONS
Net income from continuing operations
Add (deduct) items not affecting cash:
Depreciation and amortization [notes 7 & 8]
Deferred tax recovery
Share‐based compensation expense [note 14]
Loss on disposal of property, plant and equipment
Loss on impairment of property, plant and equipment and intangibles
Funds from continuing operations
Changes in non‐cash working capital:
Increase in accounts receivable
Decrease in inventories
Decrease (increase) in prepaid expenses
Increase (decrease) in accounts payable, accrued liabilities and provisions
(Decrease) increase in deferred revenue
Decrease in income taxes payable and recoverable
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 13 & 14]
Repurchase of shares through Normal Course Issuer Bid [note 13]
Dividends paid [note 12]
Repayment of long term debt
Repayment of finance lease
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 loss on cash held in foreign currency
Cash flows used in discontinued operations [note 15]
(Decrease) 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
2017
$
18,421
3,196
(149)
321
96
1,124
23,009
(3,937)
4,582
469
3,271
(3,708)
(757)
(80)
22,929
2,429
(3,173)
(33,710)
—
—
(34,454)
(4,945)
37
(283)
(5,191)
(329)
(607)
(17,652)
43,208
25,556
2016
$
20,018
3,393
(1,060)
303
938
46
23,638
(212)
6,833
(424)
(1,402)
812
(251)
5,356
28,994
2,571
—
(24,038)
(1,258)
(358)
(23,083)
(2,536)
23
(74)
(2,587)
(573)
(313)
2,438
40,770
43,208
PAGE 35
Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
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 storage tanks and related products and accessories. The Company also produces and sells in‐situ
fibreglass tank and tank lining systems and three dimensional glass fabric material.
2.
BASIS OF PRESENTATION
The consolidated financial statements 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 7, 2018.
Basis of consolidation
The consolidated financial statements of the Company include the accounts of ZCL Composites Inc. and its subsidiaries
including Parabeam Industries BV, Radigan Insurance Inc., ZCL International SRL, ZCL‐Dualam Inc., C.P.F. Dualam (U.S.A.) Inc.,
Troy Mfg. (Texas), Inc. and Xerxes Corporation.
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.
Significant accounting judgements, estimates and assumptions
The preparation of the Company’s consolidated financial statements requires management to make judgements, estimates
and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying
disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in
outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. In the
process of applying the Company’s accounting policies, management has made various judgements. Those which
management has assessed to have the most significant effect on the amounts recognised in the consolidated financial
statements have been discussed in the individual notes of the related financial statement line items. The key assumptions
concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are also
described in the individual notes of the related financial statement line items below. The Company based its assumptions and
estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and
assumptions about future developments, however, may change due to market changes or circumstances arising that are
beyond the control of the Company. Such changes are reflected in the assumptions when they occur.
PAGE 36
Notes to the Consolidated Financial Statements
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.
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
Land improvements
Manufacturing equipment
Office equipment
Automotive equipment
4%
10%
10%
20%‐40%
30%
An item of property, plant and equipment and any significant component initially recognized is derecognized upon disposal or
when no future economic benefits are expected from its use or disposal. Any gain or loss arising from derecognition is
included in the consolidated statements of income when the asset is derecognized. The useful lives, residual values and
methods of depreciation of property, plant and equipment are reviewed at each year end and adjusted prospectively, if
appropriate.
Impairment of non‐financial assets
Assets that have an indefinite useful life, for example, goodwill, are not subject to amortization and are tested annually for
impairment or more frequently if events or changes in circumstances indicate that the carrying amount may not be
recoverable. Assets that are subject to depreciation are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by
which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair
value less costs of disposal and value in use. The Company estimates the recoverable amount by using the fair value less
costs of disposal approach. It estimates fair value using an income approach based on discounted after‐tax cash flow
projections and 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
PAGE 37
Notes to the Consolidated Financial Statements
the recoverable amount for the different cash‐generating units (“CGUs”), including a sensitivity analysis, are disclosed and
further explained in note 22.
For the purposes of assessing impairment, assets are grouped into 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;
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 expenditures 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
PAGE 38
Notes to the Consolidated Financial Statements
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 CGU 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.
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 independent 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.
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 Inc.
PAGE 39
Notes to the Consolidated Financial Statements
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 the reporting period with the differences being recorded in
the consolidated statements of income. Non‐monetary assets and liabilities are measured in terms of historical costs and are
translated using the exchange rates in existence at the date of the initial transaction.
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 or 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.
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, 2017 and 2016, the Company did not have any held to maturity investments on the consolidated balance
sheets.
Available for sale financial instruments:
As at December 31, 2017 and 2016, the Company did not have any available for sale financial instruments on the consolidated
balance sheets.
PAGE 40
Notes to the Consolidated Financial Statements
Derivatives designated as hedging instruments:
As at December 31, 2017 and 2016, the Company did not have any derivatives designated as hedging instruments on the
consolidated balance sheets.
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 accrued liabilities. 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. 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 related 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 and
granted 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 14.
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.
Cash‐settled transactions:
Cash‐settled share‐based payments consist of Performance Share Units (“PSU”) granted to named executive officers of the
Company and Deferred Share Units (“DSU”) granted to directors of the Company. PSUs granted vest over a three year period
and are amortized over the vesting period. DSUs granted are recorded at fair value at the date of issuance and the liability is
measured at fair value at each balance sheet date.
Income taxes
Current income taxes:
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be
recovered from or paid to the taxation authorities.
Deferred taxes:
Deferred tax is accounted for using the liability method on temporary differences at the reporting date between the tax basis
of assets and liabilities and the carrying value for accounting purposes. Deferred tax liabilities are recorded for all temporary
differences other than:
Where the temporary difference arises from the initial recognition of goodwill; or
Where the temporary difference is associated with investments in subsidiaries and it is probable that the temporary
difference will not reverse in the foreseeable future.
PAGE 41
Notes to the Consolidated Financial Statements
Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused
losses to the extent that it is probable that the taxable income will be available against the deductible temporary difference
and can be utilized.
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.
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.
As a lessee:
Leases in which the Company does not receive substantially all the risks and benefits of ownership of an asset are classified as
operating leases. Where a lease transfers substantially all the risks and benefits of ownership to the Company, a finance lease
obligation is recognized at the present value of the minimum future lease payments or the fair value of the leased property,
whichever is lower. Future minimum lease payments are apportioned between reducing the finance lease obligation and
finance expenses at the implied rate of interest for the finance lease.
4. NEW ACCOUNTING STANDARDS
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:
IFRS 15: Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a five‐step model to account for revenue arising from contracts with
customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be
entitled in exchange for transferring goods or services to a customer.
The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective
application or a modified retrospective application is required for annual periods beginning on or after January 1, 2018. The
Company plans to adopt the new standard on January 1, 2018 using the modified retrospective method. During 2017, the
Company performed a preliminary assessment of IFRS 15, which is subject to changes arising from a more detailed ongoing
analysis. Furthermore, the Company is considering the clarifications issued by the IASB in April 2017 and will monitor any
further developments.
(a) Sale of tanks and related products:
Contracts with customers in which the sale of tanks and accessories are generally expected to be the only
performance obligation are not expected to have any impact on the Company’s profit or loss. The Company expects
the revenue recognition to occur at a point in time when control of the goods is transferred to the customer,
generally on delivery of the goods. In preparing for IFRS 15, the Company is considering the following:
PAGE 42
Notes to the Consolidated Financial Statements
(i) Warranty obligations
The Company generally warrants its product for a period of one year after sale for manufacturing defects. As
such, the Company expects that such warranties will be assurance‐type warranties which will continue to be
accounted for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets consistent with current
practice. The Company is currently evaluating the effect IFRS 15 will have on longer term warranty
arrangements.
(ii) Pre‐buy orders and bill and hold arrangements
The Company enters into several “pre‐buy” arrangements with major customers where the customer orders and
pays for tanks during the winter months, when shipments are slow, with the expectation that the Company will
manufacture the tanks and hold them on premise under a bill and hold contract. Typically these tanks are
shipped in the spring and summer months. The Company continued its evaluation of the effect IFRS 15 will have
on pre‐buy arrangements during the fourth quarter of 2017, specifically whether the purchase order for the tank
and bill and hold contract should be combined and the impacts on allocating the transaction price between the
performance obligations of manufacturing the product and the service of storing the product.
(b) Royalty revenue:
The Company earns royalty revenue from licensees who use the Company’s intellectual property in their
manufacturing processes for double‐wall tanks. The royalty agreements involve minimum royalty payments as well
as royalty payments based off a percentage of the licensee’s third party sales of product. As such the Company
expects such royalties will be treated as usage‐based royalties and revenue from the royalties will be recognized as
the licensees sell their product to third parties. This is consistent with the Company’s current revenue recognition
policy for royalty revenue.
(c) Presentation and disclosure requirements:
The presentation and disclosure requirements in IFRS 15 are more detailed than under current IFRS. The Company
will be required to disclose significant judgments made when determining the transaction price, the allocation of the
transaction price and specific performance obligations. In addition, the Company expects to increase the disclosure
of disaggregated revenue by region, market segment and product lines. During the fourth quarter of 2017, the
Company continued its evaluation of the impact of the increased disclosures including updating procedures
necessary to collect and disclose such information.
IFRS 16: Leases
In January 2017, IFRS 16 Leases was issued and replaced IAS 17 Leases. IFRS 16 sets out principles for the recognition,
measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on‐balance
sheet model. The standard includes two recognition exemptions for lessees – leases of ’low‐value’ assets (e.g., personal
computers) and short‐term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease,
the lessee will recognize a liability to make lease payments and an asset representing the right to use the underlying asset
during the lease term (i.e., the right‐of‐use asset). The standard requires the Lessee to separately recognize the interest
expense on the lease liability and the depreciation expense on the right‐of‐use asset. IFRS 16 is effective January 1, 2019, on
either a full retrospective or modified retrospective approach. In 2018, the Company will continue its assessment of the
impact of the IFRS 16 on its consolidated financial statements and internal control processes.
IFRS 9: Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9: Financial Instruments that replaces IAS 39 Financial Instruments –
Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting
for financial instruments: classification and measurement, impairment and hedge accounting. IFRS 9 is effective after January
1, 2018. The Company will adopt the new standard and will not restate the comparative information. The Company is
currently assessing the impacts of the new standard and expects no significant impact to the consolidated statements of
income and the balance sheets.
PAGE 43
Notes to the Consolidated Financial Statements
IFRS 2 Amendments: Share‐based Payments
The IASB issued amendments to IFRS 2 Share‐based Payment that address three main areas: the effects of vesting conditions
on the measurement of a cash‐settled share‐based payment transaction; the classification of a share‐based payment
transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms
and conditions of a share‐based payment transaction changes its classification from cash settled to equity settled. On
adoption, the Company is required to apply the amendments without restating prior periods, but retrospective application is
permitted if elected for all three amendments and other criteria are met. The amendments are effective for annual periods
beginning on or after January 1, 2018, with early application permitted. The Company is assessing the potential effect of the
amendments on its consolidated financial statements.
5.
INVENTORIES
As at
(in thousands of dollars)
Raw materials
Work in progress
Finished goods
December 31,
2017
$
December 31,
2016
$
7,597
4,154
9,534
21,285
9,931
3,589
13,694
27,214
During the year ended December 31, 2017 there was a write‐down of $366,000 (December 31, 2016 ‐ $690,000) 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
2017
$
59,672
30,288
53,243
3,595
146,798
2016
$
63,421
29,626
44,336
3,421
140,804
PAGE 44
Notes to the Consolidated Financial Statements
7.
PROPERTY, PLANT AND EQUIPMENT
(in thousands of dollars)
Cost
As at December 31, 2015
Additions
Disposals
Foreign exchange
As at December 31, 2016
Additions
Disposals
Foreign exchange
As at December 31, 2017
Accumulated Depreciation
As at December 31, 2015
Depreciation
Disposals
Impairment
Foreign exchange
As at December 31, 2016
Depreciation
Disposals
Impairment
Foreign exchange
As at December 31, 2017
Carrying Amount
As at December 31, 2016
As at December 31, 2017
Land
$
Buildings
$
Leaseholds
$
Manufacturing Office
Equip.
$
Equip.
$
Auto
Equip.
$
Total
$
5,821
7,206
5,672
31,917
4,038
880
55,534
—
—
—
5,821
—
—
—
5,821
—
—
—
—
—
—
—
—
—
—
—
51
(5)
(78)
7,174
602
—
(107)
7,669
502
(1,581)
(92)
4,501
174
(156)
(174)
4,345
1,669
(5,273)
(559)
27,754
3,661
(2,035)
(573)
28,807
249
(1,896)
(39)
2,352
236
(418)
(17)
2,153
245
(729)
(35)
361
272
(49)
(14)
570
2,716
(9,484)
(803)
47,963
4,945
(2,658)
(885)
49,365
2,524
3,455
14,498
3,355
497
24,329
189
(1)
—
(11)
2,701
200
—
8
(30)
2,879
369
(1,581)
780
(69)
2,954
436
(156)
76
(139)
3,171
1,708
(3,522)
990
(249)
13,425
1,563
(1,830)
1,013
(67)
14,104
341
(1,843)
16
(35)
1,834
358
(372)
6
17
1,843
105
(658)
119
(15)
48
106
(20)
1
(8)
127
2,712
(7,605)
1,905
(379)
20,962
2,663
(2,378)
1,104
(227)
22,124
5,821
5,821
4,473
4,790
1,547
1,174
14,329
14,703
518
310
313
443
27,001
27,241
Capital work in progress of $1,309,000 (December 31, 2016 ‐ $623,000) includes $960,000 for manufacturing equipment,
$160,000 for buildings, $153,000 for leasehold improvements and $36,000 for office equipment.
During the year ended December 31, 2017, the Company decided to cease offering products to Industrial Markets, which
primarily included large diameter aboveground tanks. An impairment analysis on the manufacturing equipment and
leasehold improvements used in the production of these large diameter tanks was conducted during the quarter. As a result,
impairment charges of $925,000 on manufacturing equipment and $91,000 on leasehold improvements and other equipment
were recognized during the year to reduce the carrying amount of the assets to their fair value less costs of disposal, which
was determined to be $nil. The Company expects to only recover scrap value for these assets which will likely offset the costs
of dismantling and transporting these assets for disposal. The Company used a level 3 fair value hierarchy in determining the
expected fair value of the asset as there are no readily observable markets for assets of this nature. There were no discount
rates factored into any fair value assumptions or disposal costs.
In addition, the Company performed an impairment analysis on the manufacturing equipment used in the tank lining services
which resulted in an impairment charge of $88,000 to reduce the carrying value of the lining equipment to zero. The
Company used a level 3 fair value hierarchy in determining the expected fair value of the asset as there are no readily
observable markets for assets of this nature.
PAGE 45
Notes to the Consolidated Financial Statements
8.
INTANGIBLE ASSETS
(in thousands of dollars)
Cost
As at December 31, 2015
Additions
Foreign exchange
As at December 31, 2016
Additions
Foreign exchange
As at December 31, 2017
Accumulated Amortization
As at December 31, 2015
Amortization
Impairment
Foreign exchange
As at December 31, 2016
Amortization
Impairment
Foreign exchange
As at December 31, 2017
Carrying Amount
As at December 31, 2016
As at December 31, 2017
Customer
Relationships
$
Brands
$
Internally
Developed
ERP
Software
$
Other
$
Total
$
8,736
4,668
3,972
5,098
22,474
—
(253)
8,483
—
(532)
7,951
—
(125)
4,543
—
(262)
4,281
—
(71)
3,901
—
(149)
3,752
74
(41)
5,131
283
(87)
5,327
74
(490)
22,058
283
(1,030)
21,311
8,584
4,193
2,271
4,432
19,480
106
24
(248)
8,466
16
—
(531)
7,951
388
—
(104)
4,477
63
—
(259)
4,281
383
56
(39)
2,671
374
—
(112)
2,933
105
481
(40)
4,978
80
20
(87)
4,991
982
561
(431)
20,592
533
20
(989)
20,156
17
—
66
—
1,230
819
153
336
1,466
1,155
Other intangible assets include licenses, patents, software, air permits, non‐patented technology and certification costs.
9.
BANK INDEBTEDNESS – OPERATING CREDIT FACILITY
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, 2018 and is typically renewed on an
annual basis with the Company’s primary lender. The rate of interest charged on the borrowings under the operating credit
facility for Canadian dollar balances is prime plus 25 basis points. The rate of interest charged on the borrowings under
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, and an unlimited guarantee supported by a general security agreement from Xerxes
Corporation, the Company’s subsidiary. 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, 2017, the Company was in compliance with all restrictive covenants relating to the operating
credit facility.
PAGE 46
Notes to the Consolidated Financial Statements
10. PROVISIONS AND CONTINGENCIES
a)
Provisions
(in thousands of dollars)
As at December 31, 2015
Amounts used against the provision
Additional provision
Foreign exchange
As at December 31, 2016
Amounts used against the provision
Additional (reversal of) provision
Foreign exchange
As at December 31, 2017
Warranty
$
Self‐Insured
Liabilities
$
876
(1,270)
1,624
(16)
1,214
(1,017)
1,232
(39)
1,390
1,086
(244)
450
(26)
1,266
(185)
424
(146)
1,359
Other
$
148
(241)
388
(4)
291
(135)
(29)
(1)
126
Total
$
2,110
(1,755)
2,462
(46)
2,771
(1,337)
1,627
(186)
2,875
Of the $2,875,000 (2016 ‐ $2,771,000) in provisions described above, the Company expects $1,516,000 (2016 ‐ $1,505,000) to
settle within 12 months of the balance sheet date. The remaining $1,359,000 (2016 ‐ $1,266,000) 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 independent 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 sheets, management does not expect these amounts to materially exceed the provisions accrued for self‐insured
liabilities.
Included in cash and cash equivalents is $4,650,000 US dollars (2016 ‐ $4,204,000 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 financial 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 year, 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.
PAGE 47
Notes to the Consolidated Financial Statements
11. COMMITMENTS
Lease Commitments
The Company’s future minimum annual payments under the terms of all operating leases are as follows:
(in thousands of dollars)
2018
2019
2020
2021
2022
Thereafter
Other Contractual Obligations
$
2,367
2,279
2,132
2,150
1,770
2,635
13,333
The Company has provided a letter of credit in the amount of $0.3 million (2016 ‐ $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 $1.6 million (2016
‐ $1.5 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, 2017, the issued
performance letters of credit totalled $0.02 million (2016 ‐ $0.5 million).
PAGE 48
Notes to the Consolidated Financial Statements
12. DIVIDENDS
Dividends declared for years ended December 31,
(in thousands of dollars, except per share amounts)
Declared
Per
share
Paid to
shareholders
Total
$
Declared
Per
share
Paid to
shareholders
Total
$
2017
2016
March 8, 2017
March 8, 2017
May 3, 2017
August 3, 2017
November 2, 2017
$0.65 March 31, 2017 20,069
3,717
April 17, 2017
$0.12
July 17, 2017
$0.12
3,725
October 16, 2017 3,737
$0.12
January 15, 2018 3,705
$0.12
34,953
$1.13
$0.50 March 31, 2016
March 2, 2016
$0.08
May 2, 2016
$0.08
May 4, 2016
August 4, 2016
$0.08
November 2, 2016 $0.08
$0.82
15,195
2,438
April 15, 2016
July 15, 2016
2,444
October 17, 2016 2,448
2,462
January 16, 2017
24,987
For the years ended December 31,
Payable, beginning of the year
Declared
Paid in cash
Payable, end of the year
2017
$
2,462
34,953
(33,710)
3,705
2016
$
1,513
24,987
(24,038)
2,462
On March 7, 2018, the Company’s Board of Directors declared a dividend of $0.135 per common share to be paid on April 16,
2018 to the shareholders of record as of March 31, 2018.
13. SHARE CAPITAL
Authorized
Unlimited number of common shares with no par or stated value.
Issued and outstanding
During the year ended December 31, 2017, the Company issued 387,623 (2016 – 506,885) common shares at an average rate
of $6.27 per share for stock options exercised resulting in cash proceeds to the Company of $2,429,000 (2016 ‐ $2,571,000).
In March 2017, the Company refreshed the Normal Course Issuer Bid (“NCIB”) with the ability to re‐purchase and cancel up to
1,500,000 shares from the open market. During the year ended December 31, 2017, the Company purchased total of 290,500
shares (December 31, 2016 – nil) at an average price of $10.92 per share. The shares purchased through the NCIB were not
cancelled until January 3, 2018, and were owned by the Company as at December 31, 2017.
As at December 31, 2017, the Company had 31,161,578 common shares outstanding (December 31, 2016 – 30,773,955).
PAGE 49
Notes to the Consolidated Financial Statements
14. 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, 2017, the Company has 699,823 (2016 – 841,581) options outstanding, which expire on dates between
December 2018 and March 2022. The outstanding options vest evenly over a three‐year period commencing on the
anniversary of the original grant date. As at December 31, 2017, 190,126 (2016 – 419,088) 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
2017
2016
Stock
Options
#
841,581
297,869
(387,623)
(46,004)
(6,000)
699,823
Weighted
Average
Exercise Price
$
6.82
13.29
6.27
9.23
4.72
9.78
2017
Stock
Options
#
1,156,436
295,069
(506,885)
(103,039)
—
841,581
Weighted
Average
Exercise Price
$
5.83
7.85
5.07
7.46
—
6.82
Exercise
Price
$
7.09
6.74
7.85
13.29
6.74 ‐ 13.29
Stock
Options
#
83,667
139,073
188,714
288,369
699,823
Options Outstanding
Options Exercisable
Weighted Weighted Average
Average
Exercise
Price
$
Remaining
Contractual
Life in Years
#
7.09
6.74
7.85
13.29
9.78
0.93
2.24
3.24
4.24
3.18
Weighted
Average
Exercise
Price
$
7.09
6.74
7.85
13.29
7.12
Stock
Options
#
83,667
67,392
39,067
—
190,126
PAGE 50
Notes to the Consolidated Financial Statements
Options Outstanding
Options Exercisable
2016
Stock
Options
#
146,001
227,370
213,741
254,469
841,581
Weighted Weighted Average
Average
Exercise
Price
$
Remaining
Contractual
Life in Years
#
4.72
7.09
6.74
7.85
6.82
0.95
1.93
3.24
4.24
2.79
Weighted
Average
Exercise
Price
$
4.72
7.09
6.74
7.85
5.49
Stock
Options
#
146,001
227,370
45,717
—
419,088
Exercise
Price
$
4.72
7.09
6.74
7.85
4.72 – 7.85
During the year ended December 31, 2017, 297,869 stock options (2016 – 295,069) were granted at an exercise price of
$13.29.
During the year ended December 31, 2017, 387,623 stock options (2016 – 506,885) were exercised with a weighted average
exercise price of $6.27 (2016 – $5.07) resulting in cash proceeds to the Company of $2,429,000 (2016 – $2,571,000).
Compensation expense previously included in contributed surplus of $577,000 (2016 – $673,000) 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, 2017, share‐based compensation expense of
$321,000 (2016 ‐ $303,000) 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, 2017 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 $1.53 (2016 ‐ $1.18).
Risk‐free interest rate (%)
Expected hold period to exercise (years)
Volatility in the price of the Company’s shares (%)
Forfeiture rate (%)
Dividend yield (%)
2017
1.1
3.7
27.7
8.7
6.0
2016
0.6
3.8
29.5
8.1
4.1
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 year ended December 31, 2017, the Company awarded 11,912 PSUs (2016 –
23,286) and cancelled nil PSUs (2016 ‐ nil). Compensation expense of $38,000 for the year ended December 31, 2017 (2016 ‐
$156,000) was recognized in general and administrative expenses. As at December 31, 2017, the amortized fair value of the
PSUs on the Company’s balance sheet was $215,000 (December 31, 2016 ‐ $177,000).
PAGE 51
Notes to the Consolidated Financial Statements
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, 2017, the Company awarded 15,909 DSUs
(2016 – 26,790), paid out $145,000 in DSU compensation (2016 ‐ $73,000) and recognized $179,000 of compensation expense
(2016 ‐ $496,000) in general and administrative expenses. As at December 31, 2017, the fair value of the DSUs on the
Company’s balance sheet was $648,000 (December 31, 2016 ‐ $614,000).
15. DISCONTINUED OPERATIONS
On September 30, 2016, the Company disposed of the property, plant and equipment, assets held for sale and inventory held
in the former ZCL‐Dualam Inc. operations for total consideration of $2,508,000 including cash proceeds of $2,071,000. The
revenues and costs shown in the discontinued operations schedule below include only those revenues and costs directly
attributable to the business units for which operations have ceased and do not include any cost allocations or costs indirectly
attributable to the discontinued operations.
a)
The results of the discontinued operations are as follows:
(in thousands of dollars)
Revenue
Manufacturing and selling costs
Gross loss
Depreciation
General and administration
Loss on disposal of equipment
Loss on impairment of assets
Foreign exchange loss (gain)
Loss before income taxes
Income tax recovery
Net loss from discontinued operations
b)
The carrying amounts of the assets disposed of were as follows:
(in thousands of dollars)
Inventory
Property, plant and equipment
Total carrying values of assets disposed of
2017
$
5
327
(322)
—
—
—
—
172
172
(494)
(57)
(437)
2017
$
—
—
—
2016
$
4,366
8,425
(4,059)
301
100
101
2,420
135
3,057
(7,116)
(2,078)
(5,038)
2016
$
794
2,012
2,806
PAGE 52
Notes to the Consolidated Financial Statements
c)
Cash used in discontinued operations are as follows:
(in thousands of dollars)
Net loss from discontinued operations
Add (deduct) items not affecting cash:
Depreciation and amortization expense [notes 7 & 8]
Deferred tax recovery
Loss on disposal of equipment [note 7]
Loss on impairment of equipment and intangibles [notes 7 & 8]
Purchase of property, plant and equipment [note 7]
Proceeds on disposal of assets
Cash used in discontinued operations
16.
INCOME TAXES
The Company's effective income tax expense has been determined as follows:
(in thousands of dollars)
Net income before tax
Statutory federal and provincial taxes at 27% (2016 – 27%)
Increase (decrease) in income taxes resulting from:
Rate differences for foreign jurisdictions
Effect of permanent differences
Withholding taxes on inter‐company dividends
Enacted changes in income tax laws and other
At the effective income tax rate of 30% (2016 – 29%)
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 recovery during the year recognized in other
comprehensive income
At the effective income tax rate of 27% (2016 – 27%)
Significant components of the Company’s deferred tax liabilities are as follows:
(in thousands of dollars)
Property, plant and equipment
Land
Intangible assets
Inventories
Non‐deductible reserves and accrued liabilities
Other
2017
$
2016
$
(437)
(5,038)
—
(170)
—
—
—
—
(607)
301
—
101
2,420
(180)
2,083
(313)
2017
$
26,205
7,075
1,099
(1,046)
1,092
(436)
7,784
2017
$
2,822
(149)
(104)
2,569
2017
$
2,661
363
(52)
291
(694)
—
2,569
2016
$
28,023
7,566
1,652
(1,221)
—
8
8,005
2016
$
3,929
(1,060)
(47)
2,822
2016
$
3,444
363
(12)
97
(1,086)
16
2,822
PAGE 53
Notes to the Consolidated Financial Statements
17. 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 from continuing operations
Net loss from discontinued operations
Net income
Denominator (in thousands)
Weighted average shares outstanding ‐ basic
Effect of dilutive securities:
Stock options
Weighted average shares outstanding ‐ diluted
18. RELATED PARTY TRANSACTIONS
a)
Transactions in the normal course of operations:
2017
$
18,421
(437)
17,984
2017
#
30,999
161
31,160
2016
$
20,018
(5,038)
14,980
2016
#
30,514
234
30,748
Certain manufacturing components purchased for $100,000 (2016 ‐ $36,000) for the year ended December 31, 2017, included
in the consolidated financial statements as cost of goods sold or inventories, were provided by a corporation whose Executive
Chairman was a director of the Company until May 4, 2017. 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, 2017 included $11,000 (December 31, 2016 ‐ $nil) owing to the corporation. There are no ongoing
contractual or other commitments resulting from these transactions.
b)
Transactions with key management and directors:
For the years ended December 31,
(in thousands of dollars)
Salaries, benefits and director fees
Share‐based payments
Total
2017
$
1,672
301
1,973
2016
$
1,825
700
2,525
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, 2017 and 2016. Share‐based payments are the amount of
expense recognized in the consolidated statements of income relating to the identified key management and directors.
PAGE 54
Notes to the Consolidated Financial Statements
19. FINANCIAL INSTRUMENTS
Financial risk management
The Company’s activities expose it to a variety of financial risks including market risk (foreign exchange 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, 2017 and 2016.
a)
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, 2017, 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, 2017. The analysis is based on financial assets and liabilities
denominated in US dollars at the end of the year (“balance sheet exposure”), which are separated by domestic and foreign
operations, and US dollar denominated revenue and operating expenses during the year (“operating exposure”).
Balance sheet exposure as at December 31, 2017,
(in thousands of US dollars)
Cash and cash equivalents
Accounts receivable
Accounts payable and accrued liabilities
Trade balances between foreign and domestic operations
Net balance sheet exposure
Operating exposure for the year ended December 31, 2017,
Foreign
Operations
$
Domestic
Operations
$
23,136
16,478
(7,129)
(10,597)
21,888
1,418
779
(911)
10,597
11,883
(in thousands of US dollars)
Revenue
Operating expenses
Net operating exposure
Total
$
24,554
17,257
(8,040)
—
33,771
$
121,812
96,759
25,053
The weighted average US to Canadian dollar translation rate was 1.30 for the year ended December 31, 2017. The translation
rate as at December 31, 2017 was 1.26.
PAGE 55
Notes to the Consolidated Financial Statements
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, 2017,
(in thousands of US dollars)
Net balance sheet exposure of domestic operations
Net operating exposure of domestic operations
Change in net income
$
1,773
3,118
4,891
Other comprehensive income would have changed by approximately $2,802,000 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.
b) 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 and accounts receivable.
The Company manages the credit risk associated with its cash and cash equivalents 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 market concentration in the downstream retail fuel sectors. The market 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, 2017, there were no customers that exceeded 10% of the consolidated trade accounts receivable balance. The
creditworthiness of new and existing customers is subject to review by management by considering such items as the type of
customer, prior order history and the size of the order. Decisions to extend credit to new customers are approved by
management and the creditworthiness of existing customers is monitored.
The Company reviews its trade accounts receivable regularly and amounts are written down to their expected realizable value
when the account is determined not to be fully collectable. This generally occurs when the customer has indicated an inability
to pay, the Company is unable to communicate with the customer over an extended period of time, and other methods to
obtain payment have been considered and have not been successful. The bad debt expense is charged to net income in the
period that the account is determined to be doubtful. Estimates for the allowance for doubtful accounts are determined on a
customer‐by‐customer evaluation of collectability at each reporting date, taking into account the amounts which are past due
and any available relevant information on the customers’ liquidity and going concern status. After all efforts of collection have
failed, the accounts receivable balance not collected is written off with an offset to the allowance for doubtful accounts, with
no impact on net income.
The Company’s maximum exposure to credit risk for trade accounts receivable is the carrying value of $27,281,000 as at
December 31, 2017 (December 31, 2016 ‐ $25,013,000). On a geographic basis as at December 31, 2017, approximately 24%
(December 31, 2016 ‐ 16%) of the balance of trade accounts receivable was due from Canadian and non‐US customers and
76% (December 31, 2016 ‐ 84%) was due from US customers.
PAGE 56
Notes to the Consolidated Financial Statements
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
2017
57%
22%
11%
7%
3%
100%
2016
50%
26%
13%
9%
2%
100%
Despite the established payment terms, customers in the retail fuel markets, 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 $352,000 which include funds
receivable from various sales tax refunds, insurance refunds and rebates (December 31, 2016 ‐ $295,000).
The Company had recorded an allowance for doubtful accounts of $215,000 as at December 31, 2017 (December 31, 2016 ‐
$105,000). The allowance is an estimate of the December 31, 2017 trade receivable balances that are considered
uncollectible. The allowance increased for bad debt expense of $279,000 (2016 ‐ $353,000), offset by payments of $58,000
(2016 ‐ $530,000), write offs of $101,000 (2016 ‐ $48,000) and a translation adjustment of $10,000 (2016 ‐ $3,000) for the
year ended December 31, 2017.
c)
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 a general security agreement
on present and future assets, guarantees from each present and future direct and indirect subsidiary of the Company
supported by a first registered security over all present and future assets, and pledge of their shares. The Company is not
permitted to sell or re‐pledge significant assets held under collateral without consent from the lenders.
The following are the undiscounted contractual maturities of financial liabilities excluding future interest:
(in thousands of dollars)
Carrying
Amount
$
Accounts payable, accrued liabilities and provisions
Dividends payable
Total
20,917
3,705
24,622
2017
$
19,558
3,705
23,263
2018
$
1,359
—
1,359
Thereafter
$
—
—
—
PAGE 57
Notes to the Consolidated Financial Statements
d)
Fair value of financial instruments
The Company holds financial instruments consisting of cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities.
The carrying value of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities and
provisions approximates their fair value due to their short term nature.
20. STATEMENTS OF CASH FLOWS
For the years ended December 31,
(in thousands of dollars)
Net interest paid
Income taxes paid
21. SEGMENTED INFORMATION
2017
$
243
8,895
9,138
2016
$
273
7,654
7,927
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. Based on management’s judgement and applying the
aggregation criteria in IFRS 8.12, the Company’s operations fall under a single reportable segment.
a)
Information about major customers
The Company has long term contracts and alliance arrangements with many North American retail petroleum marketers and
distributors in Canada and provides products for distributors and retail oil and gas companies in the US. For the years ended
December 31, 2017 and 2016, no single customer exceeded 10% of total revenue.
b)
Information about geographic areas
For the years ended December 31,
(in thousands of dollars)
Canada
United States
International
2017
$
31,953
148,687
7,529
188,169
Revenue
2016
$
28,389
148,245
7,489
184,123
PAGE 58
Notes to the Consolidated Financial Statements
As at
(in thousands of dollars)
Canada
United States
International
Dec 31,
2017
$
28,445
109,868
2,415
140,728
Total Assets
Dec 31,
2016
$
36,327
124,871
2,730
163,928
Property, Plant and
Equipment, Intangible
Assets and Goodwill
Dec 31,
2017
$
18,121
43,629
327
62,077
Dec 31,
2016
$
19,093
44,856
497
64,446
22.
IMPAIRMENT TESTING OF GOODWILL
Goodwill acquired through business combinations has been allocated to two cash‐generating units (“CGUs”) as follows:
Canada
US
The carrying amount of goodwill as at October 1, 2017 was $33,489,000 (2016 ‐ $35,199,000). The Company performed its
annual impairment test on the remaining balance of goodwill as at October 1, 2017. Among other factors, the Company
considers the relationship between the Fair Value Less Costs of Disposal (“FVLCD”) of its CGUs, to their carrying amounts,
when reviewing for indicators of impairment. As at October 1, 2017, 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 Canada and US CGUs were combined reflecting the way the operations are managed on a day to
day basis.
Goodwill carried in the 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, 2017 figures above may differ from the October 1, 2016
carrying amount, along with the years ended December 31, 2017 and 2016 carrying amounts.
Key assumptions used in the FVLCD calculations
The calculation of the FVLCD for the two 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. The discount rate ranges utilized by the CGU group is (12.3% to 13.1%).
Growth rate estimates:
Growth rates for beyond 2017 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 2017 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).
PAGE 59
Notes to the Consolidated Financial Statements
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.
As at October 1, 2017, the total recoverable amount of the Company's CGUs exceeded their carrying amounts.
23. PRIOR YEAR RECLASSIFICATION
Certain of the prior year’s balances were reclassified to conform to the current year’s presentation.
PAGE 60
Corporate information
________________________________________________________________________________
Transfer Agent & Registrar
AST Trust Company (Canada)
600 The Dome Tower
333 – 7 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) Franceschini, Chair of the Board
Ronald Bachmeier, President, CEO, Director
Bruce Bentley, Director
Diane Brickner, Director
Leonard Cornez, Director
Darcy Morris, Director
Ralph Young, Director
Annual General & Special Meeting
2 p.m. on Friday, May 4, 2018
at the Four Points by Sheraton
in The Conference Room
10010 - 12 Avenue SW
Edmonton, Alberta
Canada T6X 0P9
Corporate Office
1420 Parsons Road SW
Edmonton, Alberta
Canada T6X 1M5
Common Shares Outstanding
As of March 16, 2018
Total outstanding: 30,877,679
Investor Relations
Copies of this annual report may be obtained
by calling Investor Relations at (780) 466-6648
or emailing investor.relations@zcl.com
PAGE 61
1420 Parsons Road SW
Edmonton, AB T6X 1M5
Canada
Phone: 780.466.6648
Toll Free: 1.800.661.8265
www.zcl.com | TSX: ZCL