2013 Annual Report

Transcription

2013 Annual Report

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
Overview of Armtec 2
Caution Regarding Forward-Looking
Statements 3
Overview 4
Financial Performance Summary of Results Full Year Results Results by Segment Finance Expense Income Taxes Net Loss Changes in Financial Condition 4
4
5
5
7
7
8
8
Liquidity 9
Summary of Cash Flows 9
Fourth Quarter Results 10
Outlook10
Accounting Policy Developments
including Initial Adoptions Initial Adoptions and Applications
of Accounting Pronouncements Recently Issued Accounting
Pronouncements 18
18
19
Controls and Procedures Disclosure Controls and Procedures Internal Control over Financial
Reporting 19
19
Risks and Uncertainties Risk Controls Risks Related to the Business and
the Industry 20
20
19
20
CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report to Shareholders 29
Independent Auditor’s Report 30
Consolidated Statements of
Financial Position 31
Consolidated Statements of Earnings 32
Comprehensive Earnings 32
Capital Resources Credit Facilities Outstanding Share Data Financial Instruments Contractual Obligations Off Balance Sheet Arrangements 13
13
13
14
14
14
Selected Financial Information Three Year Data Summary of Quarterly Results 15
15
16
Consolidated Statements of Changes
in Shareholders’ Deficiency 33
Non-GAAP Measure
Earnings Before Interest, Taxes,
Depreciation and Amortization
Critical Accounting Estimates Revenue Recognition Inventories Impairment and Reversal
of Impairment Indicators Income Taxes Provisions and Contingencies Post-Employment Obligations 16
Cash Flows 34
Notes to Consolidated Financial
Statements 35
16
17
17
17
17
17
18
18
Armtec Infrastructure Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended December 31, 2013 and December 31, 2012
1
Management’s Discussion and Analysis
For the year ended December 31, 2013 and December 31, 2012
The following Management’s Discussion and Analysis (“MD&A”) of Armtec Infrastructure Inc. for the year ended
December 31, 2013 and December 31, 2012 should be read in conjunction with the audited annual consolidated
financial statements and accompanying notes thereto and other public disclosures available. In this MD&A, the terms
“Armtec” and the “Company” mean Armtec Infrastructure Inc. together with its portion of the joint venture, FixonArmtec Ltd. and its subsidiaries: Armtec Holdings Limited (“AHL”), Armtec Limited Partnership Corp., Armtec Limited
Partnership (“ALP”), Durisol Consulting Services Inc. and Armtec US Limited, Inc.
The Company was incorporated on May 5, 2010 under the Business Corporations Act (Ontario) as a wholly owned
subsidiary of Armtec Infrastructure Income Fund (the “Fund”). The Company is the successor to the Fund following
the completion of a reorganization of the Fund from an income trust structure into a corporate structure effective
January 1, 2011, by way of a court approved plan of arrangement.
As required by the Canadian Accounting Standards Board, Armtec has reported its financial results under
International Financial Reporting Standards (“IFRS”). References to the term ‘GAAP’ refer to information contained
herein being prepared under revised IFRS as adopted.
Armtec has included earnings before finance (income) expense – net, income taxes, depreciation and amortization,
certain non-recurring expenses and certain other non-cash amounts (“EBITDA”) as a non-GAAP measure, which is
used by management as a measure of financial performance. This measure is not necessarily comparable to
similarly titled measures used by other companies and should not be construed as an alternative to net earnings or
cash flow from operating activities as determined in accordance with GAAP. See the section entitled “Non-GAAP
Measure” for further information.
Unless indicated otherwise all dollar amounts, except share or per share amounts, are expressed in thousands of
Canadian dollars. All prior period results have been reclassified to conform to the current presentation.
This MD&A has been prepared as at March 18, 2014. Additional information regarding Armtec, including continuous
disclosure materials such as the Annual Information Form, is available on Armtec’s website at www.armtec.com or
through SEDAR at www.sedar.com. Armtec’s Common Shares trade on the Toronto Stock Exchange (“TSX”) under
the symbol ARF. Armtec’s convertible debentures (“Debentures”) trade on the TSX under the symbol ARF.DB.
Overview of Armtec
Armtec is a manufacturer and marketer of a comprehensive range of infrastructure products and engineered
construction solutions for customers in a diverse cross-section of industries that are located in every region of
Canada, as well as in selected markets globally. These markets include Canada's national and regional public
infrastructure markets and private sector markets in agricultural drainage, commercial building, residential
construction and natural resources. Effective January 1, 2013, Armtec started operating within its new organizational
structure which realigned the business away from the four geographic regions to two product-focused business units
(“BU or BUs”): Drainage Solutions (“Drainage”) and Precast Concrete Solutions (“Precast”). Armtec operates
through a network of offices and production facilities across the country. Drainage manufactures and markets
corrugated high-density polyethylene pipe, corrugated steel pipe and other drainage related products including small
bridge structures. Precast manufactures and markets highly engineered precast systems such as parking garages,
bridges, sport venues and building envelopes as well as standard precast products such as steps, paving stones and
utility vaults.
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Caution Regarding Forward-Looking Statements
This MD&A contains "forward-looking" statements (including those set out under the headings “Overview”, “Precast
Concrete Solutions – Earnings from operations”, “Finance Expense”, “Income Taxes”, “Liquidity”, “Outlook”, and
“Selected Financial Information”) within the meaning of applicable securities legislation which involve known and
unknown risks, uncertainties and other factors which may cause the actual results, events, performance or
achievements of Armtec or industry results, to be materially different from any future results, events, performance or
achievements expressed or implied by such forward-looking statements. Forward-looking statements typically
contain such words or phrases as "may", "outlook", "objective", "intend", "estimate", "anticipate", "should", “could”,
“would”, "will", "expect", "believe", "plan" and other similar terminology suggesting future outcomes or events.
Forward-looking statements reflect current expectations regarding future results, events, performance and
achievements and are based on information currently available to Armtec's management, anticipated operating and
financial results of Armtec and current and anticipated market conditions.
Forward-looking statements involve numerous assumptions and should not be read as guarantees of future results,
events, performance or achievements. Such statements will not necessarily be accurate indications of whether or not
such future results, events, performance or achievements will be achieved. You should not unduly rely on forwardlooking statements as a number of factors, many of which are beyond the control of Armtec, could cause actual
results, events, performance or achievements to differ materially from the results, events, performance or
achievements discussed in the forward-looking statements, including, but not limited to the factors discussed in
Armtec's materials filed with the Canadian securities regulatory authorities from time to time. These factors also
include, but are not limited to, known and unknown risks with respect to: restrictive covenants and obligations under
the Senior Notes, the 2012 Brookfield Facility and the Revolving Credit Facility; access to bonding and letters of
credit; market competition, including potential new market entrants; cost estimates vs. actual profit in respect of large
projects; credit risk in respect of Armtec’s receivables; fluctuations in operating results; seasonality and adverse
weather; relationships with suppliers of raw materials and the availability and volatile pricing of such materials;
uncertainties with respect to short-term customer and supplier agreements; the outcome of pending and future claims
and litigation; industry cyclicality; ineffective change management, the ability to attract and retain key personnel and
competition for labour; acquisition and expansion risk and associated geographical risks related thereto; current
global financial conditions, currency and interest rate fluctuations; a reduction in demand for Armtec’s products;
current and future environmental obligations pursuant to federal, provincial and municipal environmental laws and
regulations; product liability in respect of both Armtec’s products and the products incorporated from third parties;
expiration of rights under license and distribution arrangements and potential infringement in respect of Armtec’s
intellectual property and any of Armtec’s licensed intellectual property; operating hazards; collective bargaining;
pension plans; information management; current insurance coverage, uninsured and underinsured losses with
respect to Armtec’s insurance policies; changes to securities laws and corporate governance standards; changes in
and Armtec’s compliance with respect to income tax and other tax laws; and geopolitical risk. For a description of
these risks, see the section “Risks and Uncertainties” below.
Although the forward-looking statements contained in this MD&A are based upon what management of Armtec
believes are reasonable assumptions, Armtec cannot assure investors that actual results, events, performance or
achievements will be consistent with these forward-looking statements. All forward-looking statements in this MD&A
are qualified by these cautionary statements. These forward-looking statements are made as of the date of this
MD&A and, except as required by applicable law, Armtec assumes no obligation to update or revise them to reflect
new events or circumstances.
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Overview
2013 was a year of transition for Armtec. Emerging from the Turnaround Plan of 2012, the Company realigned its
organizational structure away from four geographic regions to two product-focused business units: Drainage
Solutions and Precast Concrete Solutions. The Turnaround Plan was announced by Armtec in November of 2011 by
setting targeted EBITDA improvements of $20 million over a 12 to 24 month period. The Turnaround Plan was
successful in delivering $22 million of improvement and increasing EBITDA from $16.7 million in 2011 to $41.1 million
in 2012. The Company’s overall financial performance in 2013 of $40.1 million in EBITDA remained consistent with
2012 at $41.1 million. Solid gains in revenue and EBITDA achieved in the Precast BU were offset by less favourable
results in the Drainage BU that did not recover from the adverse weather conditions in the first half of the year.
The gains in Precast were driven by engineered precast with strong performance in the Pacific and Soundwall market
areas. The Kitimat smelter modernization project in the Pacific market area was a key contributor to the favourable
Precast results in 2013. Armtec’s portion of the Kitimat smelter modernization project was announced in December
of 2011 to supply precast components to expand and upgrade Rio Tinto Alcan’s aluminum smelter in Kitimat, British
Columbia. The Drainage shortfall was largely due to lower demand across all market areas driven by a weathershortened construction season. In addition, lower municipal spending, reduced forestry grants and the Charbonneau
Commission Inquiry in Quebec impacted Eastern Canada and increased competitive pressures were experienced in
Western Canada. The Charbonneau Commission Inquiry is a public inquiry in Quebec into alleged corruption in the
management of public construction contracts. Demand from international markets was also lower than the prior year.
During the third quarter of 2013, Armtec reached an agreement in principle to settle all previously disclosed proposed
class action proceedings commenced by investors who purchased shares of the Company during the period of
March 24, 2011 through June 8, 2011. The agreement in principle provides for a payment of approximately
$12.9 million, inclusive of all taxes, fees, interest and costs, by Armtec’s insurers and as such the settlement would
not impact the Company’s cash resources. The proposed settlement is made without any admission of liability by the
Company or any of its current or former officers and directors. In February of 2014, the parties entered into a
definitive settlement agreement in accordance with the foregoing terms. A court-approved notice will be issued
regarding the settlement approval process and the settlement terms. The settlement is subject to the fulfillment of
customary conditions including opt-out thresholds and court approval. There is no assurance that these conditions
will be fulfilled. (Note that the foregoing information is forward-looking information. Please see the section entitled
“Caution Regarding Forward-Looking Statements”.)
Financial Performance
Summary of Results
(in thousands of Canadian dollars except per share amounts)
December
31, 2013
Year Ended
December
31, 2012
Revenue
$ 107,964 $ 111,581 $ 455,522 $ 457,415
Gross margin
$
17,278 $
19,478 $
84,112 $
85,718
Selling, general and administrative
$
14,337 $
17,646 $
56,001 $
59,259
Earnings from operations
$
2,852 $
1,102 $
28,022 $
26,900
Finance expense
$
8,003 $
36,458 $
31,087 $
74,507
Net loss attributable to owners of the Company
$
(4,495) $
(27,320) $
(2,907) $
(36,108)
Basic and diluted loss per share
$
(0.19) $
(1.14) $
(0.12) $
(1.50)
EBITDA
$
5,926 $
4,822 $
40,073 $
41,084
As a % of revenue
As a % of revenue
As a % of revenue
As a % of revenue
As a % of revenue
As a % of revenue
4
Three Months Ended
December December
31, 2013
31, 2012
Armtec
16.0%
13.3%
2.6%
7.4%
(4.2)%
5.5%
17.5%
15.8%
1.0%
32.7%
(24.5)%
4.3%
Infrastructure
18.5%
12.3%
6.2%
6.8%
(0.6)%
8.8%
Inc.
–
18.7%
13.0%
5.9%
16.3%
(7.9)%
9.0%
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3
(in thousands of Canadian dollars)
Three Months Ended
December December
31, 2013
31, 2012
December
31, 2013
Year Ended
December
31, 2012
Breakdown of depreciation and amortization by financial statement line item:
Cost of sales
$
1,651 $
1,423
1,525 $
1,445
6,471 $
5,580
7,266
6,438
Total depreciation and amortization
2,970 $
12,051 $
13,704
$
3,074 $
Full Year Results
Revenue
Armtec recorded revenue of $455.5 million in 2013 which was slightly lower than 2012 levels at $457.4 million.
Revenue from transportation related projects increased, however, municipal government projects continued to lag
prior year levels. Agricultural drainage product revenue was impacted by the unfavourable installation conditions due
to poor weather during the first half of 2013 and while revenue improved in the second half of the year, the shortfall
was not fully recovered. The softness in the infrastructure and agricultural markets was offset by improved
engineered precast volumes, with year-over-year growth in natural resource and commercial building applications.
Earnings from Operations
The earnings from operations for 2013 were $28.0 million compared to $26.9 million in 2012. Depreciation and
amortization was $12.1 million or $1.6 million lower than 2012 levels of approximately $13.7 million.
Gross margin was $84.1 million, consistent with the prior year as a percentage of revenue at 18.5%. Improvements
in operational performance and the favourable mix of engineered precast projects especially in the Pacific and
Soundwall market areas offset the impact of softer volumes of standard precast products and the depressed
construction activity in Eastern Canada. The impact of the reduced demand for drainage products was compounded
by the competitive corrugated steel pipe pricing pressures in the Prairies and a slight increase in raw material costs.
Selling, general and administrative expenses for 2013 were $56.0 million, compared to $59.3 million in 2012. This
reduction was the result of lower annual incentives for employees in 2013, which offset the investment in human
resources made primarily to support sales functions.
EBITDA of $40.1 million was below the prior year by $1.0 million or 2.4%. The $8.4 million decline in EBITDA for the
Drainage BU and the Corporate administration cost increase of $1.2 million were partially offset by the $8.6 million
improvement in EBITDA from the Precast BU.
Results by Segment
Drainage Solutions
Three Months Ended
December December
31, 2013
31, 2012
December
31, 2013
Year Ended
December
31, 2012
Revenue
$
39,112 $
$
2,608 $
3,459 $
16,594 $
24,644
Depreciation and amortization
$
535 $
533 $
2,130 $
2,468
EBITDA
$
3,992 $
18,724 $
27,112
As a % of revenue
As a % of revenue
As a % of revenue
6.7%
1.4%
3,143 $
8.0%
41,558 $ 162,607 $ 184,225
8.3%
1.3%
9.6%
10.2%
1.3%
11.5%
13.4%
1.3%
14.7%
Revenue
Revenue for Drainage in 2013 was $162.6 million, a decrease of $21.6 million, or 11.7%, from the same period in
2012. While certain areas improved during the second half of the year, this did not offset the softness experienced
throughout the first half of the year. The agricultural, residential, natural resource and infrastructure application
Armtec
Infrastructure
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5
markets were impacted across each market area by the shortened installation season in 2013. In addition, the
release of new municipal projects in Eastern Canada has slowed as a result of the ongoing investigation by the
Charbonneau Commission into the Quebec construction market. Demand in Quebec was further depressed by the
suspension of forestry grants by the provincial government. Also in the Prairies, increased competition in the
corrugated steel pipe market, driven largely by a new entrant, impacted selling prices. The Drainage BU derives its
International revenue primarily through exports to Russia. With government spending diverted to the Sochi Olympics,
International revenue was lower than prior year. By comparison in 2012, installation conditions were favourable
resulting in stronger demand and Eastern and Western Canada were not experiencing the challenges noted in 2013.
On a year to date basis, earnings from operations for the Drainage BU decreased $8.1 million, or 32.7%, relative to
the prior year. Volume declines, competitive pricing in the corrugated steel pipe market in the Prairies, and the
investment in additional sales and operations personnel, offset by lower annual incentives for employees were the
main drivers of the lower year-over-year performance. Depreciation and amortization were consistent with 2012 as a
percentage of revenue. EBITDA for the Drainage BU of $18.7 million was $8.4 million below 2012.
Precast Concrete Solutions
Three Months Ended
December December
31, 2013
31, 2012
December
31, 2013
Revenue
$
68,852 $
$
5,223 $
3,357 $
$
2,156 $
EBITDA
$
7,379 $
As a % of revenue
As a % of revenue
As a % of revenue
7.6%
3.1%
10.7%
Year Ended
December
31, 2012
70,023 $ 292,915 $ 273,190
$
20,152
2,070 $
8,419 $
9,564
5,427 $
38,301 $
29,716
4.8%
3.0%
7.8%
29,882
10.2%
2.9%
13.1%
7.4%
3.5%
10.9%
Revenue
Precast revenue for 2013 at $292.9 million was up $19.7 million, or 7.2%, over the $273.2 million of 2012.
Engineered precast project volume improvements continued to offset the slightly softer standard precast product
revenue which was impacted by the unfavourable installation conditions in the first half of 2013 and overall lower
market demand, especially in the Prairies. Engineered precast revenue increased by $20.1 million, or 9.8%, and was
attributable to growth in the Pacific and Soundwall market areas. Revenue in the Pacific market was driven by the
Kitimat smelter modernization project. The Prairie market area saw increased activity related to parking structures
used in commercial applications and the Soundwall gains were a function of a number of projects, predominantly in
the highway infrastructure segment in Ontario. In the Central Market area, gains from the build-up to the Pan
American games with demand for new venues, parking garages and other engineered structures were more than offset by the completion of other projects from 2012 such as the Toronto Transit Commission (“TTC”) tunnel liner
contract. The TTC tunnel liner contract was announced by Armtec in December of 2009 to supply and deliver precast
segmental rings for construction of the Toronto-York Spadina subway extension in Toronto and Vaughan, Ontario.
The Eastern market area experienced lower demand where a reduction in government spending levels and project
delays were influenced by the construction scandal and ongoing Charbonneau Commission Inquiry.
Overall, earnings from operations in Precast improved in 2013 by $9.7 million over 2012. In addition to the improved
engineered precast project volumes, operational performance continued to improve in 2013 driven by a more
favourable mix of projects. These improvements offset the impact of the softer standard precast volumes which were
impacted by poor weather in the first half of the year and softer demand in the single family residential market
resulting in lower margin performance on these products. Depreciation and amortization was slightly higher than the
prior year as a result of the generative capital expenditures made to support the Highway 407 East expansion project,
which is now expected to commence production early in 2014 (note that this is forward-looking information and for
more information please see the section entitled “Caution Regarding Forward-Looking Statements”). In June of 2013,
Armtec announced it had been awarded a contract to supply and deliver precast girders for new bridge structures
being constructed in the Greater Toronto Area as part of the Highway 407 East expansion project. The resulting
EBITDA for the year ended December 31, 2013 improved over 2012 levels by $8.6 million.
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Finance Expense
For the year ended December 31, 2013, total finance expense was $31.1 million compared to $74.5 million for 2012.
Interest and other finance expenses, excluding accretion, were $28.7 million in 2013 compared to $33.1 million in
2012 due mainly to the lower interest rates associated with Armtec’s new financing arrangements.
Finance expense is comprised of interest and other finance expenses, accreted interest and income as follows:
2013
For the years ended December 31 (in thousands of Canadian dollars)
Finance (income) expense - net comprised of:
Revolving Credit Facility
2012 Brookfield Facility
Senior Notes
Debentures
Finance lease liabilities
Interest on net post-employment obligations
Other charges
Finance (income) expense – net comprised of:
Interest and other finance expenses
Accreted interest
2012
$
1,863 $
10,968
13,945
3,252
202
464
393
35
327
55,210
13,910
3,199
214
789
823
$
31,087 $
74,507
$
28,679 $
2,408
33,106
41,401
$
31,087 $
74,507
The primary reason for the decrease of $43.4 million in finance expense year-over-year was the accretion and
extinguishment costs incurred in 2012 which were associated with the 2011 Brookfield Facility (defined below). The
remaining decrease was attributable to the changed composition of Armtec’s borrowings. On December 21, 2012,
Armtec entered into new financing arrangements that provided a revolving asset based loan (“Revolving Credit
Facility“) with the Canadian Imperial Bank of Commerce (“CIBC”), as amended in February 2014, and a term loan
facility (“2012 Brookfield Facility”) with Brookfield Capital Partners Fund III LP (“Brookfield”), effectively
extinguishing Armtec’s previous term loan facility with Brookfield Capital Partners Ltd. (“2011 Brookfield Facility”).
Extinguishment costs associated with the 2011 Brookfield Facility were approximately $23.7 million and were
comprised of costs that would have been accreted to the loan over the balance of the original term (approximately
$11.2 million), the exit fee ($2.5 million), the prepayment fee (approximately $7.4 million) and the balance related to
the financing fee (approximately $2.6 million). Management estimates that approximately $3.6 million of costs
associated with the new facilities, related to commitment fees and legal and other professional fees will be accreted
to finance expense over the expected life of the facilities (note that this is forward-looking information and for more
information please see the section entitled “Caution Regarding Forward-Looking Statements”). As a result, accreted
interest for the year ended December 31, 2013 was $39.0 million lower than 2012.
Interest and other finance expenses, excluding accreted interest, during the year ended December 31, 2013
decreased by $4.4 million from 2012 levels. With the Revolving Credit Facility in place, Armtec draws on the facility
as required. During the same period of 2012, the Company had drawn the full amount under the 2011 Brookfield
Facility. The effective cash interest rate of 8.3% in 2013 on the combined Revolving Credit Facility and 2012
Brookfield Facility was also lower than the 2011 Brookfield Facility at 12.2%. In March of 2012, Armtec elected to
defer the cash payments of interest on the 2011 Brookfield Facility. As a result the interest rate increased from
10.2% to 12.2% for the remainder of the facility.
Income Taxes
The Company’s income tax recovery for the year ended December 31, 2013 was $0.2 million. The recovery
approximated the estimated effective rate of 25.0% for the year net of adjustments for certain non-deductible
expenses such as the expense for stock options recognized in the year. The Company does not have current income
taxes payable due to the availability of certain tax pools and loss carry forward balances. Armtec does not anticipate
paying cash taxes during 2014 (note that this is forward-looking information and for more information please see the
section entitled “Caution Regarding Forward-Looking Statements”).
The Company’s income tax recovery for the year ended December 31, 2012 was $11.0 million. The recovery
approximated the estimated effective rate of 25.4% for 2012 net of adjustments for certain non-deductible expenses.
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Net Loss
The net loss attributable to the owners of the Company for 2013 was $2.9 million compared to $36.1 million in 2012.
The basic and diluted loss attributable to the owners of the Company for 2013 was $0.12 as compared to a loss of
$1.50 per share for 2012. The decrease of the net loss primarily reflects improved results from operations and
reduced finance expenses.
Changes in Financial Condition
Significant changes in the financial condition of the Company at December 31, 2013, when compared to the financial
condition of the Company at December 31, 2012, were as follows:
December
31, 2013
As at:
December
31, 2012
Change
Explanation
Current assets
Cash and current
restricted cash
$
Accounts receivable
4,067
$
7,462
$
(3,395)
(45.5)% Reflects excess of cash deposits at the year-end over
repayments of the Revolving Credit Facility.
126,428
124,660
1,768
1.4% Increase due to the timing of billings and increased
volume of engineered precast projects (higher
unbilled revenue and holdbacks) offset by lower trade
receivables, which reflects the seasonal slow-down of
the drainage and standard precast products.
41,796
40,513
1,283
3.2% Represents increased finished goods related to the
Drainage BU.
3,117
3,582
(465)
53,848
62,521
(8,673)
Borrowings – current
1,212
2,060
(848)
Other
3,806
8,658
(4,852)
Inventories
Prepaid expenses and
other assets
(13.0)% Immaterial change year over year.
Current liabilities
Accounts payable and
accrued liabilities
Current assets less current
liabilities
$
Non-current assets
Non-current restricted
cash
$
Property, plant and
equipment
$
13,564
13.2%
4,055
$
4,055
$
-
-%
369
(67)
Intangible assets
41,481
45,888
(4,407)
Deferred income tax
assets
21,799
21,944
(145)
308,250
295,230
13,020
11,741
13,354
(1,613)
Other
Shareholders’ deficiency
8
102,978
302
Post-employment
obligations
$
(56.0)% Represents a decrease in deferred contract revenue
and provisions.
$
113,227
Non-current liabilities
Borrowings
116,542
114,259
Investment accounted for
using the equity method
(13.9)% Reflects a lower annual incentive plan accrual and the
timing of material and service purchases.
(21,553) $
70
(20,193) $
1,032
(70)
(1,360)
0.9% Primarily relates to additions made during 2013 in
excess of depreciation on property, plant and
equipment.
(9.6)% Primarily reflects amortization during 2013.
4.4% Primarily relates to the draw on the Revolving Credit
Facility due to the increase in working capital
associated with engineered precast projects.
(12.1)% Decrease primarily due to changes in the discount
rate used to determine the defined benefit obligation
of certain defined benefit plans.
(100)% Immaterial change year over year.
6.7%
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Liquidity
Management is of the opinion that the Company’s level of working capital is sufficient to meet its expected short-term
obligations (note that this is forward-looking information and for more information please see the section entitled
“Caution Regarding Forward-Looking Statements”). Management regularly reviews its compliance with financial
covenants and cash flow forecasts to ensure adequate liquidity is available to service its debt and meet its other fixed
obligations. Various alternatives which could enhance liquidity may include use of cash on hand and drawing on the
unused portion of the Revolving Credit Facility (approximately $26 million at December 31, 2013), the interest accrual
option available under the 2012 Brookfield Facility whereby $10.0 million would become available (described in
greater detail in the separately issued audited annual consolidated financial statements for the year ended
December 31, 2013), the sale of non-core assets, cost reductions, and the issuance of new debt and equity.
Please refer to the section entitled “Capital Resources” below for further information regarding the 2012 Brookfield
Facility and Revolving Credit Facility.
Armtec operates primarily through an operating partnership, ALP, with debt facilities held by the general partner,
AHL. There are currently no legal or practical restrictions on the ability of ALP or AHL to transfer funds among the
various Armtec entities as required for Armtec to meet its obligations.
Please see the notes to the Company’s separately issued audited annual consolidated financial statements for the
year ended December 31, 2013 for disclosure of Armtec’s sensitivity to various market risks (including currency and
interest risks), credit risk and liquidity risk. Also please see the section entitled “Risks and Uncertainties” below.
Summary of Cash Flows
2013
For the years ended December 31
Cash provided by (used in):
Operating activities:
Operating activities before the undernoted
Change in investment in restricted cash
Non-cash working capital
$ 12,503
250
(16,581)
Operating activities
Investing activities
Financing activities
Net decrease in cash
Cash – Beginning of year
Cash – End of year
$
2012
$
7,941
9,323
10,275
(3,828)
(8,670)
9,353
27,539
(877)
(50,627)
(3,145)
7,087
(23,965)
31,052
3,942
$
7,087
Operating Activities
Cash used in operating activities for the year ended December 31, 2013 was $3.8 million compared to $27.5 million
provided in 2012. Cash from operations of $12.5 million was provided before the change in non-cash working capital
and restricted cash for the year ended December 31, 2013 compared to $7.9 million provided in 2012. Cash
provided from operations in 2013 improved over 2012 levels with reduced finance expenses (excluding accreted
interest) while earnings from operations (excluding depreciation) was consistent year over year. Armtec’s change in
restricted cash provided $0.3 million in 2013 as compared to $9.3 million in 2012. The change in 2012 related to the
ability to provide letters of credit under the new credit facilities to support surety requirements which were not
previously available under the 2011 Brookfield Facility.
The net increase in non-cash working capital of $16.6 million in 2013 relates primarily to lower year-over-year
accrued liabilities (associated with the annual incentive plan) and deferred contract revenue. In addition, accounts
receivable increased over 2012 due to the engineered precast projects which typically have a longer cash cycle
because of the nature of unbilled revenue and holdbacks. These additional elements create higher working capital
requirements for the Company than the Drainage business.
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Investing Activities
Cash used in investing activities for the year ended December 31, 2013 was $8.7 million compared to $0.9 million in
2012. During 2013, the Company invested in sustaining machinery and equipment to maintain the operating capacity
in the Company as well as generative additions in Precast, primarily related to the Highway 407 East expansion
project awarded in 2013 and additional product offerings in the Prairies. During 2012, the Company had a reduced
requirement for maintenance, property, plant and equipment and the Company completed the planned disposal of
certain redundant equipment, which were primarily related to a completed project in the Precast business.
Financing Activities
Cash provided by financing activities for the year ended December 31, 2013 was $9.4 million compared to
$50.6 million used in 2012. The increase in non-cash working capital was partially funded by the Company’s
$11.0 million draw on its Revolving Credit Facility. The $49.8 million net repayment in 2012 is primarily due to the
December 2012 refinancing of the 2011 Brookfield Facility. The full amount under the 2011 Brookfield Facility was
drawn whereas the new facilities offer Armtec greater flexibility related to increases in credit provided and the ability
to advance and repay when required. Armtec also made a $0.8 million contribution during the first quarter of both
2013 and 2012 to fund its post-employment obligation as part of the wind-up of the Company’s Salaried Defined
Benefit Pension Plan. The plan was transferred to Armtec as part of the 2009 acquisition of Pre-Con Inc.
Fourth Quarter Results
Revenue
Armtec recorded revenue of $108.0 million for the three months ended December 31, 2013, a $3.6 million or a 3.2%
decrease over the three months ended December 31, 2012. Improved engineered precast volumes in the Pacific,
Prairie and Soundwall market areas offset the softness in Central Canada in the quarter. Revenue from standard
precast products improved slightly with stronger volumes noted for the first time in Eastern Canada in 2013 as
compared to the same period of 2012. Revenue from the Drainage BU was slightly lower than the prior year resulting
from the continued competitive pricing environment in the Prairie provinces and the premature closure of many
infrastructure projects with the early onset of winter.
Earnings from Operations
The earnings from operations for the fourth quarter of 2013 were $2.9 million, or 2.6% of revenue, as compared to
$1.1 million, or 1.0% of revenue, for the 2012 comparative period. Depreciation and amortization in the quarter of
$3.0 million was consistent with 2012 levels.
The gross margin for the three months ended December 31, 2013 was $17.3 million, a decrease of $2.2 million, from
$19.5 million in the same period of 2012. As a percentage of revenue, the gross margin in the quarter was 16.0%,
compared with 17.5% in the same period of 2012. Despite similar revenue levels, operating results for the Drainage
BU were lower than the prior year mainly due to lower pricing experienced in the Prairie provinces and a slight
increase in raw material costs as compared to 2012. Performance in the Precast BU was consistent with the prior
year.
Selling, general and administrative expenses, before depreciation and amortization, for the three months ended
December 31, 2013 were $12.9 million as compared to $16.2 million in 2012. The decrease in expenses in the
quarter related to the reduced provision of annual incentive costs net of the planned investment in additional
resources, which primarily support the sales function.
EBITDA performance for the quarter of $5.9 million was favourable when compared to the prior year of $4.8 million.
Although the Precast BU performed consistently with the prior year, the continued lower results in the Drainage BU
resulted in a reduction of annual incentives in 2013 for the Company when compared to 2012, thus impacting the
results for the quarter.
Outlook
This section contains forward-looking information. For more information please see the section entitled “Caution
Regarding Forward-Looking Statements”.
The long term outlook for Armtec’s markets remains favourable; driven by a stable macro-economic climate in
Canada and ongoing infrastructure investment required across the country. In the near term, the demand for
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Armtec’s products is expected to remain flat to slightly favourable. However, Armtec is pursuing new opportunities in
both the Precast and Drainage BUs to broaden its product depth and strengthen its market coverage, which
management believes should support revenue growth in 2014.
A stronger customer focus is expected to regain some, but not all, of the revenue softness experienced in the
Drainage BU across Canada in 2013. Steady demand is anticipated from provincial-level government spending while
improvement is anticipated in the natural resource end use markets, offset by the potential slowdown in agricultural
drainage installations, which are heavily impacted by crop prices. Although the Charbonneau Commission Inquiry is
expected to continue into 2015, some improvement is expected in the Quebec infrastructure market in the second
half of 2014 as legislation has been passed by the provincial government to mitigate the alleged level of corruption
previously experienced in the awarding and management of public construction contracts. The demand from
municipalities outside Quebec is anticipated to remain at lower than historic levels as local governments continue to
carefully manage capital and maintenance programs in efforts to balance their budgets.
Precast market activity is expected to remain steady with the current level of building construction and infrastructure
projects announced throughout Canada over the next two years. Improved demand is anticipated in Western
Canada as increased investment in the oil and gas sector should directly and indirectly impact infrastructure
investment. In addition, the forestry industry in the Pacific market should see increased demand from the United
States (“US”) housing recovery. For Armtec, these gains will be largely off-set by the completion of the engineered
precast work at the Kitimat smelter modernization project in BC. The demand for Armtec’s engineered precast
products in Ontario in 2014 is expected to be less than the prior year as investments in bridge and transit construction
will be more than offset by reduced spending on infrastructure related to parking garages and the Pan American
games. The total backlog of engineered precast work was $129 million at December 31, 2013 and was consistent
with the $132 million one year earlier. Despite relatively flat to slightly favourable overall demand, Armtec has been
investing in talent and resources to pursue additional products and solutions for both standard and engineered
precast. Management believes these efforts should start to result in incremental revenues in 2014 and benefit future
years.
Although it is typical to experience an EBITDA loss in the first quarter, management anticipates a significant decline
in 2014 first quarter earnings relative to prior years. Harsh winter weather conditions, predominantly in Ontario and
Manitoba, and unexpected project delays are expected to lead to lower precast revenue and higher precast costs.
The continued below average temperatures have adversely impacted precast production facilities with outdoor
manufacturing processes. The Drainage Business Unit will similarly be adversely affected by the weather conditions,
but to a much lesser extent.
As a result, management estimates a first quarter 2014 EBITDA loss of approximately $8 million as compared to
EBITDA of $0.1 million in the same period of 2013. A portion of the revenue and associated earnings foregone in the
first quarter is expected to be recovered prior to the end of 2014. Management believes that these unfavourable
market conditions will persist through March and into the second quarter of 2014. The Company intends to access
the Brookfield interest accrual option as required to ensure it will have sufficient liquidity for the operations of the
business. Despite the challenging start to the year, the Company remains focused on executing its performance
improvement plans with an aim of delivering improved earnings in the second half of 2014 over the same period in
2013.
The successful transition to the new BU structure in 2013 positions the Company well in order to benefit from the
sharing of best practices and leveraging of the core competencies in each of Precast and Drainage. Management
has established performance improvement plans within each BU and Market Area designed to grow revenue and
improve key execution capabilities in 2014.
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Elevate 2015
In 2013, Armtec announced its next mission, Elevate 2015 (“e|15”). As the name implies, the Company is determined
to improve its performance and provide a stronger foundation for future growth. The following outlines the goals and
ambitions of e|15:
People
Health & Safety
Customers
Financial Success
Be amongst
the safest places to work
in our industry
Be a supplier
of choice
Improve earnings and
reduce debt
Achieve a Total Injury
Rate (TIR) of 15 or less
and a Lost Time Injury
Rate (LTIR) of 3 or less
Rated in the top 2 in our
relevant Business Units
by at least 75% of our
customers
Achieve total Debt-toEBITDA ratio of less than
5 to 1
Ambition
Create a great place to
work
Goal
Achieve a
‘Best Employer’
employee engagement
score of 66%
or better
A business planning cycle was introduced to develop the initial plans and a continuous improvement process that is
essential to deliver e|15. The following is an update on progress made during 2013 on each of the four priorities of
e|15:
People
With the realignment of the business in January 2013, a talent plan was completed in the first quarter to assess the
human resource needs across the organization. The assessment resulted in an incremental investment in people
across several areas of the organization. In addition to talent planning, efforts were undertaken to improve
communications at all levels of the organization.
In 2013, the primary focus around employee engagement was through increased communications and conducting the
TM
employee engagement survey across the business. The survey is based on a Great Place to Work and measures
the percentage of employees who are ‘engaged’ in the organization as compared to those who are indifferent or
disengaged. Despite the financial challenges of 2011, the Turnaround Plan executed in 2012, and the significant
effort to realign the Company into product-based BUs in early 2013, employee engagement scores remained
consistent with 2011 levels at 60%.
Armtec believes that people are the greatest competitive advantage. Having talented and engaged people will be the
most important factor in achieving e|15 and building a strong foundation for Armtec’s future success.
Health & Safety
Significant effort has been applied to Health & Safety in 2013. The Company has adopted an annual Health & Safety
Improvement Plan (“HSIP”) with the aim of reducing the frequency and severity of injuries by improving the safety
culture and establishing an effective Health & Safety Management System. In 2013 the primary emphasis was
incident investigation, evaluating underlying root causes and commencing hazard identification and risk analysis.
The Company developed leading indicators regarding incident investigation and HSIP implementation to increase
visibility and drive behavioural change.
While the Total Injury Rate for 2013 was slightly higher than prior year, reporting practices improved and should
establish a solid comparative on a go-forward basis. The Lost Time Injury Rate showed a strong improvement over
prior years and reflects lower incident severity due to a heightened awareness of safety hazards in addition to
improved incident management. Management believes that solid improvements to the injury rates should occur in
2014 as the benefits of the focused efforts start to materialize.
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Customers
Management believes that future growth in profitability must be driven through stronger revenue performance. With
leading market positions in both Drainage and Precast concrete in Canada, revenue gains must be made by
delivering excellent products and services and further developing the infrastructure solutions offered by the Company.
A strategic market analysis with revenue improvement actions was developed by each BU in 2013. Where required,
additional sales and marketing personnel will continue to be added in both BUs to support the execution of the
identified plans. Customer feedback surveys were completed in certain markets across the country. In each survey,
customers were asked whether they would rank Armtec amongst the top 2 in the products and services it provides.
For the market areas surveyed, the lowest average score on this question was 85%, indicating that Armtec is
perceived well relative to its competition.
Financial Success
Armtec’s ambition is to ‘improve earnings and reduce debt’ in order to achieve a total Debt-to-EBITDA goal of 5 to 1
or better by the end of 2015. A Debt-to-EBITDA result of 5 to 1 or better should place the Company in an improved
position to refinance the various debt instruments as they come due in 2016 and 2017. In 2013, EBITDA levels
remained relatively flat to 2012 while total Debt levels increased slightly. The lower demand for drainage and
standard precast products were off-set by higher demand for engineered precast concrete. The Engineered precast
business by its nature has a higher working capital requirement, thus driving an increase in total Company working
capital and increasing borrowings over the prior year. These factors resulted in a total Debt-to-EBITDA of 7.8 to 1 for
the full year 2013, slightly higher than 2012 levels. Management believes that the best option to drive stakeholder
returns is through a continued focus on higher earnings and reduced debt. The investment in talent combined with
the execution of performance improvement plans for both revenue enhancement and cost optimization are intended
to elevate financial performance and eventually improve the Debt-to-EBITDA ratio.
Capital Resources
Credit Facilities
In December 2012, Armtec entered into new financing agreements for a four year term that provided lower interest
rates, greater flexibility related to advances and repayments and increased the aggregate availability of credit. The
Company entered into the 2012 Brookfield Facility which is a $110.0 million term credit facility and the Revolving
Credit Facility which is a revolving credit facility in the maximum principal amount of $60.0 million. The maximum
availability under the Revolving Credit Facility is subject to a borrowing base which is a percentage of the Company’s
eligible accounts receivable and inventory less a permanent availability reserve, which was amended in February
2014 from $5 million to $2 million until the end of May 2014, and an amount equal to priority payables. Each of the
2012 Brookfield Facility and the Revolving Credit Facility is described in greater detail in the Company’s audited
annual consolidated financial statements for the year ended December 31, 2013.
In combination with the Revolving Credit Facility, the new fully drawn 2012 Brookfield Facility allowed the Company to
repay in full the 2011 Brookfield Facility including accrued interest, the prepayment fee, the exit fee, and the financing
fee and to pay fees and transaction costs related to the new credit facilities. For accounting purposes, the 2011
Brookfield Facility was treated as being extinguished on the closing date of the new credit facilities. In connection
with the refinancing, the 4,564,960 warrants to acquire Common Shares of the Company previously issued to
Brookfield were cancelled for no consideration.
The effective interest rate on the 2012 Brookfield Facility had two components (i) cash interest cost of 9.2% and (ii)
the non-cash accretion of related financing fees and costs. At December 31, 2013, the effective interest rate was
estimated at 10.1% inclusive of all related finance fees amortized over the expected term of the debt. The effective
cash interest rate on the Revolving Credit Facility was approximately 4.8%.
Outstanding Share Data
The Company is authorized to issue an unlimited number of Common Shares. Each Common Share entitles the
holder to one vote at all meetings of shareholders and represents an interest in any dividends declared by the
Company and an undivided interest in the net assets of the Company. The total number of outstanding and issuable
Common Shares in the following table assumes full conversion of any outstanding options and Debentures as at
December 31, 2013.
During the first quarter of 2013, the Board of Directors approved the issuance of stock options to acquire 535,000
Common Shares to certain officers and other senior management employees at a weighted average exercise price of
$2.46. Also during the first quarter of 2013, Armtec granted stock options to purchase 50,000 Common Shares to
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Mr. Dennis Lattimore, President, Precast Concrete Solutions; exercisable at $2.31, as an inducement to accept an
offer of full time employment. During the fourth quarter of 2013, Armtec granted stock options to purchase 50,000
Common Shares to Mr. Jason Redman, President, Drainage Solutions; exercisable at $1.92, as part of his offer of full
time employment. During 2013 and until March 18, 2014, 70,268 and 54,802 options, respectively, were forfeited.
Subsequent to December 31, 2013, the Board of Directors approved the grant of stock options to acquire Common
Shares to certain members of management of the Company. The effective date of the grant is March 26, 2014. The
aggregate number of Common Shares to be issued upon the exercise of the options will be determined by dividing
the aggregate value of the grant by the value of each option determined in accordance with the binomial fair value
option pricing model. It is anticipated that approximately 270,000 to 295,000 Common Shares will be issuable upon
exercise of these options.
Exercise price
per instrument
As at:
Outstanding Common Shares
Outstanding stock options
Debentures
December
31, 2013
March 18,
2014
- 24,054,623 24,054,623
$1.92 - $16.43
1,009,482
954,680
1,486,988
1,486,988
Outstanding and issuable Common Shares
26,551,093 26,496,291
Financial Instruments
Armtec classifies its cash, restricted cash, trade and holdback receivables as ‘loans and receivables’. Armtec
measures trade payables and certain liabilities, distributions or dividends payable, and borrowings at ‘amortized cost’.
The Company currently doesn’t enter into any interest rate swap contracts. Accordingly, Armtec is exposed to
movements in interest rates in Canada through its 30-day Canadian bankers’ acceptance floating rate used in the
2012 Brookfield Facility and its prime lending rates and/or Canadian bankers’ acceptance floating rates used in the
Revolving Credit Facility.
Please refer to the separately issued audited annual consolidated financial statements for the year ended
December 31, 2013 for further information regarding the Company’s policy with regards to the Company’s financial
instruments, a discussion of the significant assumptions made in determining the fair value of its financial
instruments, if applicable, and disclosure of Armtec’s sensitivity to various market risks, credit risk and liquidity risk.
Contractual Obligations
The following table includes the principal due at maturity for each contractual obligation and rentals for operating
leases and excludes interest and fees on the obligations and financial instruments.
Between
Less than
one and
one year three years
Senior Notes
Debentures
Operating leases
Commitments for capital expenditures
Pension plan funding obligation
Between
three and
five years
More than
five years
Total
$
- $ 111,100 $
- $
150,000
40,000
1,212
1,566
213
5,040
9,232
7,464
228
766
-
- $ 111,100
150,000
40,000
2,991
18,213
39,949
228
766
$
7,246 $ 121,898 $ 197,677 $
18,213 $ 345,034
Armtec’s post-employment obligations were $11,741 and $13,354 at December 31, 2013 and 2012, respectively.
Off Balance Sheet Arrangements
Armtec’s off balance sheet arrangements consist primarily of operating leases for facilities and equipment with market
terms. Please see the notes to the separately issued December 31, 2013 audited annual consolidated financial
statements of Armtec for disclosure of these operating leases and other contingencies and commitments.
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Selected Financial Information
Three Year Data
2013
(in thousands of Canadian dollars except per share or unit amounts)
Revenue
Net loss from continuing operations attributable to owners of the Company
Basic and diluted loss per share – continuing operations
Dividends declared per share
Total assets
Total borrowings – non-current
2012
2011
$ 455,522 $ 457,415 $ 453,605
(2,907)
(36,570)
(269,793)
(2,907)
(36,108)
(269,793)
(0.12)
(1.52)
(11.74)
(0.12)
(1.50)
(11.74)
0.40
357,304
361,700
402,277
308,250
295,230
284,961
During 2011, Armtec’s performance deteriorated despite consistent revenue levels impacting all areas of the
business. Drainage and standard precast product performance was impacted by adverse installation conditions
causing lower volumes in the first half of the year and resulting in unabsorbed costs. In addition, raw material costs
increased throughout the year and Armtec was not as successful in passing on the increased costs in 2011 as in prior
years. The engineered precast projects experienced the continued delay of new project awards, resulting in facilities
running significantly below anticipated capacity. In addition, operationally, certain projects faced execution
challenges. Losses were incurred on the TTC tunnel liner project which represented a significant portion of the 2011
engineered precast revenue.
In April 2011, Armtec completed the issuance of 3,565,000 additional Common Shares of the Company at a share
price of $16.20. Declining operational performance resulted in Armtec suspending its quarterly dividend. Armtec
must meet certain ratios in the Senior Notes involving leverage and earnings tests to permit it to pay dividends. This
ratio was not achieved in the second quarter of 2011.
In August 2011, Armtec entered into the 2011 Brookfield Facility which provided the Company with a $125.0 million
term credit facility. However, the 2011 Brookfield Facility carried approximately $32.5 million in initial costs that were
accreted to finance expense over the term of the loan, further impacting the loss in 2011.
As a result of the continued decline of the market value of the Company’s Common Shares, Debentures and debt
instruments throughout 2011, the Company recognized a non-cash impairment charge of $268.6 million against
goodwill, certain intangible assets and certain property, plant and equipment.
Armtec announced a Turnaround Plan at the end of 2011 to address the deteriorating performance. The Turnaround
Plan delivered approximately $22.0 million in improvements in 2012, mainly through operational process
improvements, labour rationalization and discretionary spending reductions. Performance in 2012, from a gross
margin and earnings from operations perspective, improved significantly over the results of 2011, particularly on the
Precast side of the business. The Company was able to gain better visibility into the impact of raw material costs on
Drainage products and as a result pricing strategies were improved throughout 2012.
In December 2012, Armtec refinanced the 2011 Brookfield Facility. The 2012 Brookfield Facility and the Revolving
Credit Facility allowed the Company to repay the 2011 Brookfield Facility including accrued interest, the deferred
financing fee, the exit fee, the prepayment fee and transaction costs related to the new credit facilities. In addition to
the exit fee paid, the balance of the initial costs was recognized in finance expense in December 2012. The
incremental 2012 finance expense of approximately $40.7 million over 2011 levels offset the operational gains made
during 2012, resulting in a net loss for the year.
Armtec’s results in 2013 were consistent with 2012 at both revenue and earnings from operations levels. During the
year, the Drainage BU was negatively impacted by weather across the country, reductions in municipal spend levels,
the Charbonneau Commission in Quebec and increased competition in Western Canada. This decline in
performance in the Drainage BU was offset by improved revenue and operational results in the Precast BU. Finance
expenses improved over 2012 levels as a result of the refinancing that was completed at the end of 2012. The new
facilities had improved flexibility in the levels drawn and the effective interest rate.
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Summary of Quarterly Results
Three months ended
December September
31, 2013
30, 2013
(unaudited)
Revenue
$ 107,964 $ 144,725
Gross margin
$
17,278 $
30,277
Gross margin percentage
16.0%
20.9%
Net earnings (loss) from
continuing operations
attributable to owners of
the Company
$
(4,495) $
6,089
Net earnings (loss)
attributable to owners of
the Company
$
(4,495) $
6,089
EBITDA
$
5,926 $
19,025
Basic and diluted earnings
(loss) per share –
continuing operations
$
(0.19) $
0.25
Basic earnings (loss) per
share
$
(0.19) $
0.25
Diluted earnings (loss) per
share
$
(0.19) $
0.25
$
$
June
30, 2013
123,897 $
26,412 $
21.3%
March December September
31, 2013
31, 2012
30, 2012
78,936 $ 111,581 $ 135,330 $
10,145 $
19,478 $
29,212 $
12.9%
17.5%
21.6%
June
30, 2012
127,408 $
27,740 $
21.8%
March
31, 2012
83,096
9,288
11.2%
$
3,228 $
(7,729) $
(27,320) $
2,064 $
1,506 $
(12,820)
$
$
3,228 $
15,057 $
(7,729) $
65 $
(27,320) $
4,822 $
2,526 $
18,033 $
1,506 $
18,092 $
(12,820)
137
$
0.13 $
(0.32) $
(1.14) $
0.09 $
0.06 $
(0.53)
$
0.13 $
(0.32) $
(1.14) $
0.11 $
0.06 $
(0.53)
$
0.13 $
(0.32) $
(1.14) $
0.10 $
0.06 $
(0.53)
Armtec’s business, particularly the revenue derived from Drainage and Standard Precast products, is seasonal in
nature, with sales normally increasing in the spring months and generally reaching peak levels in the summer
months. As such, losses at the beginning of a year are not unexpected with Armtec historically generating positive
earnings throughout the remainder of the year (note that this is forward-looking information and for more information
please see the section entitled “Caution Regarding Forward-Looking Statements”). During 2013, the Company’s
finance expense exceeded its earnings from operations as a result of the level of debt held during the year relative to
performance. During 2012, the Company’s finance expenses exceeded its earnings from operations as a result of
the increased interest, accretion and extinguishment costs associated with the 2011 Brookfield Facility.
Non-GAAP Measure
EBITDA
References to EBITDA are to earnings before finance (income) expense – net, income taxes, depreciation and
amortization, certain non-recurring expenses and certain other non-cash amounts. Management believes that in
addition to net earnings, EBITDA is a useful supplemental measure of cash available prior to debt service, changes in
working capital, capital expenditures and income taxes. However, EBITDA is not a recognized measure under
GAAP. Investors are cautioned that EBITDA should not be construed as an alternative to net and comprehensive
earnings determined in accordance with GAAP as an indicator of Armtec’s performance or as an alternative to cash
flows from operating, investing and financing activities as a measure of Armtec’s liquidity and cash flows. Armtec’s
method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, Armtec’s EBITDA
may not be comparable to similarly named measures used by other issuers.
Three Months Ended
Year Ended
December December December December
31, 2013
31, 2012
31, 2013
31, 2012
(unaudited) (unaudited)
16
Depreciation of property, plant and equipment
Amortization of intangible assets
Financing (income) expense – net
Income tax recovery
Gain on settlement of provision from discontinued operation
Change in fair value of derivative financial instrument –
financing fee
$
EBITDA
$
(4,495) $
1,934
1,140
8,003
(656)
-
Armtec
5,926
(27,320) $
1,819
1,151
36,458
(8,036)
-
(2,907) $
7,471
4,580
31,087
(158)
-
750
$
4,822
Infrastructure
(36,108)
8,166
5,538
74,507
(11,037)
(462)
$
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$
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Critical Accounting Estimates
Management’s discussion and analysis of its financial condition and results of operations, including the discussion on
liquidity and capital resources, is based upon Armtec’s audited annual consolidated financial statements, which have
been prepared in accordance with IFRS unless otherwise noted. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates and judgments, particularly those related to the determination of the estimated
recoverable amount of accounts receivable, inventory, property, plant and equipment, intangible assets, deferred
income taxes, provisions, accrued benefit liabilities and share-based awards. Management bases its estimates on
historical experience and on various other assumptions, which are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Armtec believes the following critical accounting policies
affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
No known trends, commitments, events or other uncertainties are currently believed to materially affect the
assumptions used. Please see the separately issued consolidated financial statements of Armtec for the estimates
discussed and if applicable, changes in these estimates.
Revenue recognition
The Company makes judgments, estimates and assumptions that affect the application of accounting policies for
construction contracts. Revenue from construction contracts is recognized using the percentage-of-completion
method which is calculated based on relating the actual units of work performed to the estimated total units of the
respective contract. Revenue and estimated costs to complete each contract are updated and reviewed by
management at least once each financial reporting period. In making such estimates, judgments are required to
evaluate issues related to scheduling, material costs, labour costs, productivity and sub-contractor costs. Due to the
nature of construction contracts, these estimates may change significantly from one accounting period to the next.
Inventories
Inventories are valued at the lower of cost or net realizable value for raw materials and finished goods. Cost is
determined based on standards, which approximate actual cost as determined on an average cost basis. While
management has applied judgment based upon assumptions believed to be reasonable in the circumstances, actual
results may vary from these assumptions.
Impairment and reversal of impairment indicators
The Company assesses at each financial reporting date whether there is an indication that a non-financial asset, that
is subject to amortization or a cash-generating unit, is impaired. The Company uses judgment in determining
whether any events or changes in circumstances indicate that an impairment may have occurred. External and
internal factors must be considered, including whether the asset’s market value has declined more than would be
expected with normal use or the passage of time; whether increases in interest rates are likely to have caused a
material decline in the asset’s value in use; whether the carrying value of the net assets of the Company exceed its
market capitalization; and whether there is evidence of obsolescence or physical damage to an asset. The
determination as to whether there is any indication that an asset may be impaired will determine whether the
recoverable amount is to be estimated, and the potential for the recognition of an impairment provision in the
consolidated financial statements.
In addition, the Company assesses at each financial reporting date whether there is an indication that an impairment
loss recognized in prior periods for an asset other than goodwill may no longer exist, or may have decreased. The
Company uses judgment in determining whether any events or changes in circumstances indicate that an impairment
reversal may have occurred. External and internal factors are considered, including whether the asset’s market value
has increased significantly during the period, and whether decreases in interest rates are likely to have caused a
material increase in the asset’s value in use. The determination as to whether there is any indication that an
impairment loss recognized in prior periods for an asset other than goodwill may no longer exist, or may have
decreased, will determine whether the recoverable amount is to be estimated, and the potential for the recognition of
a reversal of impairment provision in the consolidated financial statements.
Income Taxes
The Company is subject to income taxes in all provinces of Canada and significant judgment is required in
determining the provision for income taxes. The Company recognizes liabilities for anticipated tax audit issues based
on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from
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the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and
liabilities in the period in which such determination is made.
Deferred income tax assets and liabilities are measured using substantively enacted rates and laws that are expected
to be in effect when the temporary differences are estimated to reverse. Unknown future events and circumstances,
such as changes in tax rates and laws, may materially affect the assumptions and estimates made from one period to
the next and affect the consolidated financial statements.
Provisions and contingencies
The Company estimates provisions such as legal contingencies based on information at each reporting date. See
Armtec’s separately issued audited annual consolidated financial statements for a summary of the Company’s
estimated provisions. The Company makes changes to these estimates based on information provided during the
period. When material, the provisions are determined by discounting the estimated future cash flows, along with an
estimate of when settlement is expected to occur. Unknown future events and circumstances including changes in
estimates of cash flows and the timing of settlement may materially affect the estimated provision from one period to
the next.
Post-employment obligations
The Company has a number of funded and unfunded defined benefit programs. These post-employment benefits are
accounted for on an actuarial basis. The expected costs of employees' post-employment benefits are expensed
during the years that employees render services and an accumulated post-employment obligation is recognized. The
Company’s obligation under such plans is determined annually by independent actuaries using management's
assumptions and the attribution method. Actual post-employment benefit costs incurred may differ materially from
these management estimates. The Company’s separately issued audited annual consolidated financial statements
have a summary of Armtec’s post-employment obligations and have a sensitivity analysis of the effect of a change in
the trend rates on the benefit obligation.
Armtec reviews data provided by actuaries when developing assumptions used in the determination of defined benefit
costs and accrued benefit obligations. Assumptions used in determining defined benefit costs, accrued benefit
obligations and, if applicable, plan assets include, but are not limited to: discount rates, rates of future compensation,
life expectancy and health care cost trends. Actual defined benefit costs, accrued benefit obligations and, if
applicable, plan assets incurred may differ materially from management’s estimates due to updated historical
information and updated economic conditions used in the material assumptions underlying these estimates.
Accounting Policy Developments Including Initial Adoptions
Initial Adoptions and Applications of Accounting Pronouncements
The Company has adopted the following new and revised accounting standards, along with any consequential
amendments, effective January 1, 2013. Where material, these changes were made in accordance with the
applicable transitional provisions.
The International Accounting Standards Board (“IASB”) published a package of new and revised standards that
addressed the scope of the reporting entity. The new standards in the package were IFRS 10 ‘Consolidated financial
statements’, IFRS 11 ‘Joint arrangements’ and IFRS 12 ‘Disclosure of interests in other entities’. The revised
standards were International Accounting Standard (“IAS”) 27 ‘Separate financial statements’ and IAS 28 ‘Investments
in associates and joint ventures’. The requirements contained in the package of five standards were effective for the
Company on January 1, 2013 and had no impact on the Company’s consolidated financial position and earnings.
The IASB issued IFRS 13, ‘Fair value measurement’. This standard established a single source of guidance for fair
value measurements under IFRS. IFRS 13 defines fair value, provides guidance on its determination and introduces
consistent requirements for disclosures on fair value measurements. IFRS 13 does not include requirements on
when fair value measurement is required; but it prescribes how fair value is to be measured if another standard
requires it. The Company adopted IFRS 13 on January 1, 2013 on a prospective basis. The Company determined
that the new standard had no impact on the Company’s consolidated financial position as the Company currently has
no instruments subject to fair value measurement under IFRS 13. On adoption of IFRS 13, the Company’s own
credit risk was incorporated into fair value disclosures of financial liabilities.
Amendments to IAS 36, ‘Impairment of assets’, on the recoverable amount disclosures for non-financial assets. This
amendment removed certain disclosures of the recoverable amount of cash-generating units which had been
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included in IAS 36 by the issue of IFRS 13. The amendment is not mandatory for the Company until January 1,
2014, however the Company has decided to early adopt the amendment in 2013.
The IASB amended IAS 1, ‘Presentation of financial statements’. The standard was amended primarily around the
presentation of items within other comprehensive income. Certain items of other comprehensive income that may be
reclassified to earnings in the future are to be presented separately from those items that would never be reclassified
in the future. The Company reclassified comprehensive income items of the comparative period. These changes did
not result in any adjustments to other comprehensive income or comprehensive income.
The IASB amended IAS 19, ‘Employee Benefits’. The standard was amended with key changes including that all
actuarial gains and losses be immediately recognized to other comprehensive income, the expected return of plan
assets recognized to earnings is now based on the rate used to discount the defined benefit obligation, and additional
disclosures for defined benefit plans. Other amendments include revised definitions of short-term versus long-term
employee benefits and potential changes to the timing of recognition of termination benefits. The Company continues
to immediately recognize in retained earnings all pension adjustments recognized in other comprehensive income.
The Company has determined the adoption of the amended IAS 19 had no effect on its consolidated shareholders’
deficiency as at December 31, 2013, December 31, 2012 and January 1, 2012, and an insignificant effect on its
consolidated earnings for the periods ended December 31, 2013 and December 31, 2012.
Recently Issued Accounting Pronouncements
The IASB has issued IFRS 9, ‘Financial instruments’. This standard is the first step in the process to replace IAS 39,
‘Financial instruments: recognition and measurement’. IFRS 9 has two measurement categories: amortized cost and
fair value. All equity investments are measured at fair value. An investment in a debt instrument is measured at
amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal
and interest, otherwise it is recognized at fair value through profit or loss. IFRS 9 was also updated to include
guidance on financial liabilities and derecognition of financial instruments. This guidance is similar to the guidance
included in IAS 39 relating to financial liabilities and derecognition of financial instruments. In November 2013, the
IASB introduced a new hedge accounting model, and allowed early adoption of the own credit provisions of IFRS 9.
It also removed the mandatory effective date of January 1, 2015 and has not proposed a future effective date. The
Group has not yet determined the impact that IFRS 9 will have on its consolidated financial position.
Controls and Procedures
Management of Armtec does not expect that the disclosure and internal controls and procedures will prevent or
detect all misstatements due to error or fraud. Management has used the Internal Control – Integrated Framework
published by the Committee of Sponsoring Organization of the Treadway Commission (COSO) as the control
framework in designing its internal controls over financial reporting.
Based on management’s design and effectiveness testing of Armtec’s internal controls over financial reporting,
Armtec’s Chief Executive Officer and Chief Financial Officer have concluded that the design and operating
effectiveness of the internal controls over financial reporting were effective as at December 31, 2013, and provide
reasonable assurance that the financial information being reported is materially accurate.
Management has evaluated whether there were changes in the Company’s internal controls over financial reporting
during the year ended December 31, 2013 that would have materially affected, or are reasonably likely to materially
affect, Armtec’s internal controls over financial reporting. Management has determined no material changes occurred
in the fourth quarter.
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining disclosure controls and procedures. These procedures
have been designed to ensure that information requiring disclosure is recorded, processed, summarized and reported
on a timely basis as well as accumulated and communicated to Armtec’s management team as appropriate to allow
for timely required disclosures. Based on the evaluation conducted, the Chief Executive Officer and Chief Financial
Officer have concluded that the design and effectiveness of the disclosure controls and procedures is operating
effectively in all material respects at the end of the year, as certified in the annual filings.
Internal Control over Financial Reporting
Management is responsible for the design of internal controls over financial reporting within Armtec in order to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
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statements for external purposes in accordance with IFRS. Internal control systems, no matter how well designed,
have inherent limitations and therefore can only provide reasonable assurance as to the effectiveness of internal
controls over financial reporting, including the possibility of human error and the circumvention or overriding of
internal procedures.
Risks and Uncertainties
Armtec is subject to certain risks and uncertainties that could have a material adverse effect on Armtec’s results of
operations, business prospects, financial condition, and the trading price of Armtec’s shares. These risks and
uncertainties are largely derived from Armtec’s business environment.
The following section summarizes the key risks and uncertainties that could materially and adversely affect Armtec’s
future results going forward and could cause actual events to differ materially from those described in forward-looking
statements relating to Armtec.
Risk Controls
Armtec has several components to its risk control process.
Organizational Tone
Armtec’s values are articulated throughout the organization. Employees sign agreements outlining their commitment
to Armtec’s code of conduct.
Policies
Armtec maintains a set of policies that has been established to address key risks. These policies establish delegated
authorities and limits for business transactions.
Reporting
Management of Armtec regularly reports exposures to decision makers, including the Audit Committee. This
reporting includes a summary of the key risks to the business, changes in the assessment of the risks and processes
and projects underway to mitigate the risks to Armtec.
Whistleblower System
Armtec has a system in place where stakeholders, including employees, may report any potential ethical concerns.
These concerns are directed to the Chair of Armtec’s Audit Committee who has the authority to engage the resources
required in determining the appropriate course of action.
Risks Related to the Business and the Industry
Capital and Liquidity Risk
Armtec faces a number of challenges in its business, including restrictive covenants under the Senior Notes, the 2012
Brookfield Facility and the Revolving Credit Facility and the need to maintain significant liquidity to operate in the
ordinary course.
Armtec's borrowings mature as follows: the Senior Notes mature on September 22, 2017; the Debentures mature on
June 30, 2017; and each of the 2012 Brookfield Facility and the Revolving Credit Facility matures on December 21,
2016.
The Senior Notes, the 2012 Brookfield Facility and the Revolving Credit Facility contain restrictive covenants or tests
that limit the discretion of Armtec’s management with respect to certain business matters. Many restrictive covenants
in the Senior Notes are triggered if Armtec cannot achieve the consolidated coverage ratio set out in the Senior
Notes. As at December 31, 2013 this ratio was not achieved. These covenants place significant restrictions on,
among other things, the ability of Armtec to incur additional indebtedness, to create liens or other encumbrances, to
pay dividends on its Common Shares or make certain other payments, investments, loans and guarantees and to sell
or otherwise dispose of assets and merge or consolidate with another entity. Additionally, the 2012 Brookfield Facility
requires Armtec to comply with certain financial covenants. There can be no assurance of Armtec’s ability to comply
with the financial covenants in the Senior Notes or the 2012 Brookfield Facility.
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The financial covenants under the Senior Notes are calculated using previous Canadian GAAP (prior to IFRS), which
may affect the ability of Armtec to maintain the information necessary to track compliance with Armtec's financial
covenants in the Senior Notes and the Debentures.
There can be no assurance of Armtec’s ability to continue to comply with the financial covenants, to appropriately
service its debt or obtain continued commitments from debt providers, given unforeseen events. Any failure by
Armtec to comply with its obligations under the Senior Notes, the 2012 Brookfield Facility, the Revolving Credit
Agreement or the Debentures may permit acceleration of the repayment of the relevant indebtedness. If the
repayment of the indebtedness under the Senior Notes, the 2012 Brookfield Facility, the Revolving Credit Facility or
the Debentures were to be accelerated, there can be no assurance that the assets of Armtec would be sufficient to
repay in full that indebtedness.
As part of Armtec’s efforts to meet business challenges and to support Armtec’s business strategy, significant liquidity
is, and will in the future be, required. There can be no assurance that Armtec will continue to be able to obtain on a
timely basis sufficient funds on terms acceptable to Armtec to provide adequate liquidity and to finance the operating
and capital expenditures necessary to overcome challenges and support its business strategy if cash flows from
operations and cash on hand are insufficient.
Armtec’s credit ratings influence its ability to access capital markets and its liquidity. There can be no assurance that
Armtec’s credit ratings will not be downgraded, which could add to Armtec’s borrowing and insurance costs, hamper
its ability to attract capital, adversely impact its liquidity, and limit its ability to operate its business, all of which could
have a material adverse effect on Armtec, its business, results from operations and financial condition.
The inability to generate additional funds, whether from operations or additional debt or equity financings, could
require Armtec to delay or abandon some or all of its anticipated expenditures or to modify its business strategy and
could have a material adverse effect on Armtec, its business, results from operations and financial condition.
Furthermore, competitors with greater liquidity or the ability to raise money more easily and on less onerous terms
could create a competitive disadvantage for Armtec.
The ratio of Armtec's debt to Armtec's assets and shareholder equity could have important consequences to the
holders of its securities, including: (i) limiting Armtec’s ability to obtain additional financing for working capital, capital
expenditures or acquisitions in the future; (ii) dedicating a significant portion of Armtec’s cash flow from operations to
the payment of principal and interest on Armtec's indebtedness, reducing the funds available for future operations; (iii)
exposing Armtec to the risk of increased interest rates as certain of Armtec’s borrowings are and will continue to be at
variable rates of interest; and (iv) making Armtec more vulnerable to economic downturns and limiting its ability to
withstand competitive pressures.
Access to Bonding and Letters of Credit
Many of Armtec’s engineered precast contracts may require either bonding or letters of credit. The surety industry
has undergone significant consolidation in recent years, which has constrained overall industry capacity. The surety
industry has also endured a certain degree of instability and uncertainty arising from economic conditions, the longterm effects of which, if any, are difficult to predict. The issuance of bonds under surety facilities is at the sole
discretion of the surety company on a project by project basis. The limit on a cost to complete basis under Armtec’s
current surety facility is set at $50 million. Even sizeable surety facilities are no guarantee of surety support on any
specific individual project. Armtec periodically reviews its surety capacity and believes it will be able to continue to
maintain surety capacity adequate to satisfy its requirements. However, should those requirements be materially
greater than anticipated, or should sufficient surety capacity not be available to Armtec for any reason or should the
cost of bonding rise substantially, this may have an adverse effect on the ability of Armtec to operate its Precast
business or take advantage of all market opportunities. Armtec also believes that it has sufficient capacity with
respect to letters of credit to satisfy its requirements, but should these requirements be materially greater than
anticipated or should industry capacity be materially impacted by conditions unrelated to Armtec, this may have an
adverse effect on the ability of Armtec to operate its business and would increase Armtec’s liquidity risk.
Competition
Management believes that Armtec is a market leader in the corrugated high-density polyethylene pipe, corrugated
steel pipe and related engineered steel product markets in Canada. New competitors have or are expected to enter
the Western and Central Canadian marketplaces and it is not known to what extent these competitors will influence
the demand for and pricing of Armtec’s products. There are several large companies based in the US that offer
similar products in comparable markets. Certain of these companies currently compete in Canada in the same
regional markets but currently lack the network of facilities across Canada close to Armtec’s customers to compete
on a broader scale. However, a rising Canadian dollar exchange rate or a change in regulations may make the
Canadian market more attractive to these companies.
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Armtec has been providing structures and concrete products to customers for many years and is a respected, proven
quality supplier. With its proximity to customers and established supplier and customer relationships, Armtec
believes that it can continue to compete successfully. However, to the extent that alternatives to precast and
pre-stressed concrete are developed by competitors that offer similar construction qualities, the business of Armtec
could be materially affected.
Armtec believes that the success of its business depends on its ability to continue to anticipate and respond to
changing customer demands and market conditions by offering an array of solutions with an emphasis on quality and
value-added products and services. However, there can be no assurance that competing products will not be
developed or introduced by Armtec's competitors without a material impact on the performance of Armtec.
Large Project Risk
A significant portion of Armtec's revenue is derived from large projects. These projects provide opportunities for
improved revenue and profit contributions but, by their nature, carry risk and, as such, can result in significant losses.
The risks associated with such large scale infrastructure and industrial projects are often proportionate to their size
and complexity, which places a premium on risk assessment and project execution. The contract price on large
projects is based on cost estimates using a number of assumptions. Given the size of these projects, if these
assumptions prove incorrect, whether due to faulty estimates, unanticipated circumstances, or a failure to properly
assess risk, profit may be materially lower than anticipated or the project may result in a loss. The recording of the
results of large project contracts can distort revenue and earnings on both a quarterly and an annual basis and may
make it difficult to compare the financial results between reporting periods.
Credit Risk
Armtec's financial assets that are exposed to credit risk consist primarily of cash, restricted cash, trade receivables
and holdback receivables. Armtec’s credit risk for cash and restricted cash is reduced as balances are held with
major financial institutions.
Armtec is dependent on the viability of its customers for collections of trade and holdback receivables. Exposure to
credit risk with respect to its receivables is minimized by Armtec’s large customer base, which covers a diverse range
of business sectors primarily in Canada. Armtec follows a program of credit evaluations of customers and limits the
amount of credit extended to certain customers when deemed necessary. Armtec maintains provisions for potential
credit losses, and any such losses to date have been within management's expectations. Armtec cannot ensure that
its customers will not experience financial difficulties in the future and therefore Armtec may not be able to collect all
of its receivables.
Fluctuations in Operating Results
Armtec’s operating results have undergone fluctuations in the past and, in management's view, are likely to do so in
the future (note that this is forward-looking information and for more information please see the section entitled
“Caution Regarding Forward-Looking Statements”). Operating results may fluctuate in the future as a result of many
factors including those discussed under this section “Risks Related to the Business and the Industry”, as well as
changes in the demand for the Company’s products, the development and availability of substitute products,
variations in the level and timing of customer orders, the ability to develop innovative products, the mix of revenue
derived in each of the Company's BUs and the ability to derive cost savings and other benefits from cost reduction
programs. Any of these factors or a combination of these factors could have a material adverse effect on the
business, results of operations and financial condition of the Company.
Seasonality and Adverse Weather
Construction projects are susceptible to delays as a result of extended periods of poor weather, which can have an
adverse effect on profitability and related cash flows arising from either late completion penalties imposed under
certain contracts or from the incremental costs arising from loss of productivity, compressed schedules, or overtime
work used to offset the time lost due to adverse weather.
Relationships with Suppliers
Armtec currently relies on a limited number of suppliers for its raw materials. Armtec has maintained long-term
relationships with key suppliers of raw materials, which have resulted in a competitive advantage in procurement and
reliability of supply.
There is no assurance that Armtec’s raw material suppliers will be able to continue supplying it with the same quantity
or quality of materials, or on the same terms, under existing arrangements. There can be no assurance that, in the
event Armtec is required to change its current suppliers (whether as a result of a significant deterioration in the
suppliers' financial position or otherwise), alternative sources of supply will be available on terms comparable to
existing arrangements.
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Lack of Long-Term Agreements
Historically, Armtec has typically not entered into long-term written agreements with customers or suppliers. As a
result, customers or suppliers may, with little or no notice or penalty, terminate their relationship with Armtec at any
time. In addition, even if customers or suppliers should decide to continue their relationship with Armtec, there can be
no guarantee that customers will purchase or suppliers will provide the same amount of product as in the past, or that
the purchase or supply, as the case may be, will be on similar terms.
Existing Legal Proceedings
If any of the existing proposed class action proceedings were to be successful and were not covered or fully covered
by the insurance policies maintained by Armtec, the relief claimed could have a significant material adverse effect on
Armtec's business. At this time, the quantum of a potential loss, if any, cannot be readily determined. Although an
agreement has been reached to settle these proposed class actions, the settlement remains subject to various
conditions. Armtec is monitoring the risks associated with these settlement proceedings and the potential exposure
to Armtec of a potential loss. The risks associated with the settlement include, among other things, contingencies
such as whether investors opt-out of the settlement and whether the court will approve the settlement. If the
settlement were not approved, the proposed representative plaintiffs would be required to seek certification of the
proceeding as a class proceeding and litigate the merits of the claims. No loss provision has been made. Regarding
other ongoing legal matters for which Armtec has not taken a loss provision, management does not consider these to
be material at this time.
Risk of Future Legal Proceedings
Armtec may be threatened from time to time in the ordinary course of conducting its business with, or may be named
as a defendant in, various legal and regulatory proceedings, including securities, environmental or occupational
health and safety regulatory proceedings, as well as lawsuits based upon product liability, personal injury, breach of
contract and lost profits or other consequential damages claims. A significant judgment against Armtec, or the
imposition of a significant fine or penalty as a result of a finding that Armtec has failed to comply with laws or
regulations could have a material adverse effect on Armtec.
Industry Cyclicality
The demand for Armtec’s products is cyclical and is driven by public infrastructure spending, commercial
development, natural resources activity, residential construction and agricultural drainage requirements. The diverse
factors driving infrastructure investment activity in these end-markets result in relative stability of demand for
suppliers such as Armtec. To the extent that these investments decline or these markets experience a downturn, it is
likely that a negative impact will be felt by the infrastructure industry and Armtec’s financial condition.
Change Management
Ineffective change management or inexperienced team members could result in disruptions to the operations of the
business or affect the ability of the Company to implement and achieve its long-term strategic objectives. This could
result from a lack of clear accountabilities, communication, training or lack of requisite knowledge. Additionally, the
impairment of visibility into the operations could impact management’s decision making ability. Failure to execute the
various processes involved in the operations of Armtec’s business may increase the risk of customer dissatisfaction,
which could adversely affect the reputation, operations and financial performance of Armtec. The failure to properly
integrate several large, complex initiatives in a timely manner will adversely impact the operations of the Company. If
team members are not able to develop and perform new roles, processes and disciplines, the Company may not
always achieve the financial and operational benefits of its initiatives.
Availability and Price Volatility of Raw Materials
Raw material supply factors such as allocations, economic cyclicality, seasonality, pricing, quality, timeliness of
delivery, transportation and warehousing costs may affect the raw material sourcing decisions made by Armtec. In
the event of significant unanticipated increase in demand for Armtec’s products, Armtec may in the future be unable
to manufacture certain products in a quantity sufficient to meet customer demand in any particular period without an
adequate supply of raw materials.
Various raw materials are used in the products manufactured by Armtec. In particular, the primary raw materials used
in Armtec’s products are various types and grades of resins and steel as well as cement, aggregates, rebar and steel
strand. These raw materials are sourced and traded throughout the world and are subject to pricing volatility.
Consistent with past and current practices within the industry, Armtec manages its exposure to raw material price
volatility by considering this impact in its pricing strategy. However, there can be no assurance that the industry
dynamics will allow Armtec to continue to reduce its exposure by passing on raw material price increases to its
customers.
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Acquisition and Expansion Risk
Armtec has previously expanded and may in the future expand its operations by acquiring additional businesses,
products or technologies. The integration of any acquisition raises a variety of issues including, without limitation,
identification and execution of synergies, elimination of cost duplication, systems integration (including accounting
and information technology), execution of the pre-deal business strategy in an uncertain economic market,
development of common corporate culture and values, integration and retention of key staff, retention of current
customers as well as a variety of issues that may be specific to Armtec and the industries in which it operates.
There can be no assurance that Armtec will be able to identify, acquire or profitably manage additional businesses, or
successfully integrate any acquired business, products or technologies into the business without substantial
expenses, delays or other operational or financial difficulties. There can be no assurance that acquired businesses,
products or technologies, if any, will achieve anticipated revenues and income.
In connection with acquisitions completed by Armtec, there may be liabilities and contingencies that Armtec failed to
discover or was unable to quantify during due diligence, which it conducted prior to the completion of the acquisition,
and Armtec may not be indemnified for some or all of such liabilities and contingencies. The existence of any material
liabilities or contingencies could have a material adverse effect on Armtec’s business, financial condition and results
of operations. Furthermore, acquisitions may involve a number of special risks including diversion of management’s
attention, failure to retain key personnel and unanticipated events or circumstances, some or all of which could have
a material adverse effect on Armtec’s performance.
The failure of Armtec to manage its acquisition or expansion strategy successfully could have a material adverse
effect on Armtec’s results of operations and financial condition.
Current Global Financial Conditions
Armtec’s profitability is closely tied to the general state of the economy in those geographic areas in which it
operates. More specifically, the demand for infrastructure, which is the principal component of Armtec’s operations, is
the largest single driver of Armtec’s growth and profitability.
Challenging global financial conditions have contributed to a reduction in liquidity among financial institutions and
have reduced the availability of credit to those institutions and to the issuers who borrow from them. These factors
may impact the ability of Armtec to obtain equity or debt financing on terms favourable to Armtec. In addition, the
sustained global economic crisis may have an unpredictable adverse impact on Armtec’s customers and suppliers,
which in turn may have a negative impact on the availability and cost of raw materials and manufacturing equipment.
Continued increased levels of volatility and market turmoil may impact Armtec’s operations and adversely affect the
price of its Common Shares and/or Debentures.
Reduction in Demand for Products
Armtec derives revenue from customers in a diverse cross-section of industries, including the public infrastructure
markets and private sector markets in Canada such as natural resources, commercial development, residential
construction and agricultural drainage. Armtec's sales to the public infrastructure markets could be adversely affected
by changes in government, reductions in government spending or changes in governmental policies, regulations or
standards, including changes made by the Canadian Standards Association. With respect to the private sector
markets, there is a risk that Armtec will not continue to receive the level of order volumes from customers in such
markets in the future due to a general economic downturn, delays in government infrastructure spending, increased
competition or other factors. In addition, demand for Armtec's products in a particular period may be adversely
affected if the weather conditions experienced in the period are not conducive to the installation of such products.
Reliance on Key Personnel
Armtec's operations are dependent on the abilities, experience and efforts of its senior management and key sales
and support personnel. While Armtec has entered into employment agreements and/or confidentiality and noncompete agreements with some of its key employees, should any of its key employees be unable or unwilling to
continue his or her employment with Armtec, the financial performance of Armtec could be significantly adversely
affected until a suitable replacement is retained. Armtec may be unable to attract, assimilate, retrain or train other
necessary qualified employees, which may restrict growth potential and disrupt operations.
Labour Markets
The success of Armtec is dependent on retaining qualified experienced people to operate its manufacturing facilities.
Competition for labour in Canada and within the industry as a whole may limit the ability of Armtec to retain the
required people, which may limit the ability of Armtec to take advantage of opportunities otherwise available or
alternatively may affect the profitability of such endeavours going forward.
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Environmental
Armtec is subject to a wide range of federal, provincial and municipal environmental laws and regulations that govern
the discharge of materials into the environment and the investigation and clean-up of environmental contamination.
Armtec believes that the conduct of its operations is currently in material compliance with existing environmental laws
and regulations. In conjunction with independent engineering firms, Armtec has examined its manufacturing facilities
to identify potential clean-up obligations and other environmental issues. To date, the costs incurred in complying with
environmental laws and regulations, including the cost of clean-up and remediation, have not had an adverse effect
on Armtec's financial condition.
Management believes that Armtec has appropriately provided for expected environmental obligations that it may
incur. However, estimating environmental liabilities at any site is complex and is dependent on the nature and extent
of the information that is available about the site, the complexity and nature of any contamination and other matters.
Armtec cannot predict with certainty the future costs that may be incurred to satisfy its environmental obligations.
Changes in laws and regulations are ongoing and may make environmental compliance, such as emission control
and clean-up obligations, increasingly expensive.
Currency Fluctuations
Armtec is exposed to currency risk primarily of cash, restricted cash, accounts receivable, accounts payable and
accrued liabilities. There is a risk to Armtec’s earnings that arises from fluctuations in foreign exchange rates and the
degree of volatility of these rates. Armtec’s financial results are reported in Canadian dollars. Armtec’s exposure to
foreign currency risk is primarily related to fluctuations in the value of the Canadian dollar relative to that of the US
dollar as a portion of Armtec’s transactions occur with customers and suppliers in US dollars.
Product Liability
Defects in product design, manufacture, performance and reliability could result in lost revenue or lawsuits and could
be detrimental to Armtec’s market reputation. Armtec's products and the products incorporated from third parties may
not be defect-free. Undetected defects or performance problems may be discovered in the future. Armtec may not be
able to successfully complete the development of planned or future products in a timely manner or to adequately
address product defects, which could harm Armtec’s business and prospects. In addition, product defects may
expose Armtec to product liability claims, for which it may not have sufficient product liability insurance.
Expiration of Rights under Licence and Distribution Arrangements
A portion of Armtec's revenue is generated from the sale of products which are subject to licence arrangements or
which are distributed by Armtec pursuant to distribution arrangements. Armtec will need to take steps to either
negotiate the renewal or extension of its current licence and distribution arrangements when they expire or to
otherwise compensate for the lost revenue from the sale of such products.
There can be no assurance that Armtec will be able to successfully negotiate extensions or renewals of the relevant
licence or distribution arrangements or develop alternate sources of revenue under any licence or distribution
arrangements, which may be terminated or not renewed.
Operating Hazards
Armtec's revenue is dependent on the continued operation of its facilities. The operation of facilities involves risks,
including the failure or substandard performance of equipment, natural disasters, suspension of operations and new
governmental statutes, regulations, guidelines and policies. The operations of Armtec are also subject to various
hazards incidental to the production, use, handling, processing, storage and transportation of certain hazardous
materials, including industrial chemicals. Armtec has safety policies and programs in place across all locations,
however, these hazards can cause death or injury, severe damage to and destruction of property and equipment and
environmental damage. There can be no assurance that as a result of past or future operations, there will not be
claims of injury by employees or members of the public due to exposure, or alleged exposure, to these materials.
There can be no assurance as to the actual amount of these liabilities or the timing of them.
Intellectual Property
Armtec uses various manufacturing processes to produce drainage products, precast and pre-stressed concrete
products, highway noise barriers, as well as other engineered solutions for infrastructure applications. There can be
no assurances that such processes and products do not violate any third-party intellectual property rights. If they do,
Armtec may be liable for potentially substantial damages relating to a patent or other intellectual property
infringement action against it or may be prohibited from using the affected processes and producing the affected
products unless it obtains an appropriate licence from the relevant party. Armtec cannot be assured of obtaining any
such licence on commercially favourable terms, if at all.
25
Armtec relies on a combination of patent and trademark laws, trade secrets, confidentiality procedures, licences and
agreements to protect its proprietary rights and certain proprietary rights licensed to Armtec (collectively, the
"Proprietary Technologies"). Despite efforts to protect the Proprietary Technologies by Armtec or the licensor of any
of the Proprietary Technologies (the "Licensor"), unauthorized parties may attempt to copy aspects of Armtec’s
products or obtain information that Armtec regards as proprietary. Policing unauthorized use of the Proprietary
Technologies may be difficult, time-consuming and costly. There can be no assurance that Armtec's or the Licensor's
means of protecting the Proprietary Technologies will be adequate. Furthermore, the Proprietary Technologies may
be challenged, invalidated or circumvented and may not provide proprietary protection or a competitive advantage to
Armtec.
Collective Bargaining
Certain employees at Armtec’s manufacturing plants are subject to collective bargaining agreements. While
management believes that Armtec's relations with its employees are in good standing, there are no assurances that a
strike or other disruption by its unionized employees will not occur and adversely affect the results of the operations
of Armtec.
Pension Plans
Armtec has funding obligations for various pension and other post-employment benefit arrangements that are
affected by factors outside Armtec’s control. Armtec's obligation under such plans is determined annually by
independent actuaries using management's assumptions and the attribution method. Assumptions used in
determining defined benefit pension costs, accrued pension benefit obligations and pension plan assets include, but
are not limited to: discount rates, life expectancy, rates of future compensation and health care cost trends. Armtec
reviews data provided by actuaries when developing assumptions used in the determination of defined benefit
pension costs and accrued pension benefit obligations. While management believes that these assumptions are
appropriate given current economic conditions, significant differences in results or significant changes in assumptions
may materially affect pension plan and post-retirement benefit obligations and related future expenses.
Interest Rates
Each of the 2012 Brookfield Facility and the Revolving Credit Facility is subject to fluctuations in interest rates.
Interest rate fluctuations are beyond Armtec’s control and there can be no assurance that interest rate fluctuations will
not have a significant adverse effect on Armtec's financial performance. Armtec is subject to interest rate risk on the
outstanding balance of the 2012 Brookfield Facility and the Revolving Credit Facility. Armtec is permitted at any time
to make a one-time irrevocable election to fix the interest rate on up to $50.0 million of the 2012 Brookfield Facility.
Information Management
The integrity, reliability and security of information in all its forms are critical to Armtec’s daily and strategic
operations. Inaccurate, incomplete or unavailable information and/or inappropriate access to information could lead to
incorrect financial and/or operational reporting, poor decisions, privacy breaches, inappropriate disclosure and/or
leaks of sensitive information.
Uninsured and Underinsured Losses
Armtec maintains insurance policies with insurers in amounts and with coverages and deductibles that management
of Armtec believes are reasonable and prudent. Armtec maintains directors' and officers' liability insurance, which
provides insurance to Armtec and its directors and officers with respect to certain losses from specified wrongful acts
of its directors and officers. In addition, Armtec maintains comprehensive property, casualty and liability insurance
with coverages and amounts that it believes are sufficient to repair or replace any assets that are physically damaged
or destroyed, or cover resultant business interruption losses or extra expenses sustained, and to cover claims with
respect to bodily injury or property damage arising from assets or operations. However, not all risks are covered by
insurance and no assurance can be given that insurance will be consistently available or will be consistently available
on an economically feasible basis or that the amounts of insurance will at all times be sufficient to cover each and
every loss or claim that may occur involving the assets or operations of Armtec. Failure to obtain such insurance
could lead to uninsured losses or limit Armtec’s ability to pursue some projects, both of which could have a material
adverse effect on Armtec.
Insurance Coverage
Management believes that Armtec’s current insurance coverage addresses all material insurable risks and is subject
to deductibles, limits and exclusions that are customary or reasonable given the cost of procuring insurance and
current operating conditions. However, there can be no assurance that such insurance will continue to be offered on
an economically feasible basis or at current premium levels, that the Company will be able to pass through any
increased premium costs or that all events that could give rise to a loss or liability are insurable, or that the amounts
of insurance will at all times be sufficient to cover each and every loss or claim that may occur involving the assets or
operations of the Company.
26
Arm tec
Infrastructure
Inc.
–
Page
25
Securities Laws Compliance and Corporate Governance Standards
The securities laws in Canada may be subject to change at any time. The impact on Armtec of any such changes
cannot be predicted.
Income Tax and Other Taxes
The tax laws in Canada and abroad are continuously changing and no assurance can be given that Canadian federal
or provincial income tax law or the tax law of a foreign jurisdiction will not be changed in a manner that adversely
affects Armtec. Armtec’s operations in other countries subject Armtec to tax regimes that may change based on
political or social conditions.
Armtec is subject to income and other taxes in Canada and foreign jurisdictions. Significant judgment is required in
determining Armtec’s provision for income taxes and other taxes. In the ordinary course of business, there are many
situations where the ultimate tax determination is uncertain. Although Armtec believes its tax estimates are
reasonable, there can be no assurance that the final determination of any tax balances will not be materially different
from that reflected in historical tax provisions and accruals. Although management believes it has adequately
provided for any additional taxes that may be assessed as a result of an audit or litigation, the occurrence of either of
these events could have a material adverse effect on Armtec’s current and future results and financial condition.
Geographical Risk
As a result of past acquisitions, Armtec has expanded its presence across Canada. It is possible that the economic
activity across the country could slow down and due to the nature of Armtec’s products and the associated freight
costs; it is unlikely that a significant national slowdown in activity could be offset by exporting product outside the
traditional service areas.
Geopolitical
Changes in the domestic and international political environment could affect Armtec’s strategic and operational
capabilities. Armtec’s ability to source products and services could be compromised. These risks can arise from
domestic and foreign trade agreements, policies, laws and regulations and other political events and could result in
significant material losses or damage to Armtec’s reputation. Armtec also monitors political changes that could affect
its ability to remain competitive.
Armtec
Infrastructure
Inc.
–
Page
26
27
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2013 and December 31, 2012
28
MANAGEMENT’S REPORT TO SHAREHOLDERS
The accompanying consolidated financial statements of Armtec Infrastructure Inc. (the “Company” or “Armtec”) and
Management’s Discussion and Analysis for the year ended December 31, 2013 have been prepared by management
and approved by the Board of Directors of the Company. The consolidated financial statements were prepared in
conformity with International Financial Reporting Standards and, where necessary, reflect management’s estimates
and judgments.
The management of Armtec and of its subsidiaries, in furtherance of the integrity and objectivity of the data in the
consolidated financial statements, has developed and maintains internal control systems. Management believes that
these internal accounting control systems provide reasonable assurance that financial records are reliable and form a
proper basis for the preparation of the consolidated financial statements and that assets are properly accounted for
and safeguarded, and that the preparation of other financial information is consistent with the consolidated financial
statements.
The Board of Directors carries out its responsibility for the financial statements primarily through its Audit Committee
consisting of independent directors who are neither employees nor officers of Armtec. The Audit Committee meets
with management and with external auditors to satisfy themselves that management is properly discharging its
financial reporting responsibilities and to review the consolidated financial statements and the Auditor’s Report. The
Audit Committee formulates the appropriate recommendations to the directors regarding all financial matters. The
external auditors have direct access to the Audit Committee, with and without management present.
The consolidated financial statements have been independently audited by PricewaterhouseCoopers LLP on behalf
of the shareholders in accordance with Canadian generally accepted auditing standards. The Auditor’s Report
outlines the nature of their audit and expresses their opinion on the consolidated financial statements of Armtec.
/s/ Mark D. Anderson
Mark D. Anderson
President and Chief Executive Officer
/s/ Malcolm Buxton-Forman
Malcolm Buxton-Forman
Chief Financial Officer
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of
We have audited the accompanying consolidated financial statements of Armtec Infrastructure Inc. and its
subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2013 and
December 31, 2012 and the consolidated statements of earnings, comprehensive earnings, changes in shareholders’
deficiency and cash flows for the years then ended, and the related notes, which comprise 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.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and
fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
Armtec Infrastructure Inc. and its subsidiaries as at December 31, 2013 and December 31, 2012 and their financial
performance and their cash flows for the years then ended in accordance with International Financial Reporting
Standards.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Waterloo, Canada
March 18, 2014
30 Armtec Infrastructure Inc.
2
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of Canadian dollars unless otherwise noted)
As at December 31
2013
Note
2012
Assets
Current assets
Cash
Restricted cash
Accounts receivable
Inventories
Prepaid expenses and other assets
6
7
8
Restricted cash
Property, plant and equipment
Investment accounted for using the equity method
Intangible assets
Deferred income tax assets
$
6
9
3,942
125
126,428
41,796
3,117
175,408
$
4,055
114,259
302
41,481
21,799
10
11
7,087
375
124,660
40,513
3,582
176,217
4,055
113,227
369
45,888
21,944
$
357,304
$
361,700
12 $
53,848
109
2,667
1,212
1,030
58,866
$
62,521
210
6,483
2,060
1,965
73,239
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Income taxes payable
Deferred contract revenue
Borrowings
Provisions
13
14
15
Borrowings
Provisions
Share capital
Other reserves
Deficit
14
16
15
308,250
11,741
378,857
295,230
13,354
70
381,893
17
17
271,650
1,338
(294,541)
(21,553)
271,650
676
(292,519)
(20,193)
$
357,304
$
361,700
The above statements of financial position should be read in conjunction with the accompanying notes.
3
CONSOLIDATED STATEMENTS OF EARNINGS
2013
Note
Revenue
Cost of sales
Gross margin
28 $
Other (gains) losses – net
19
Finance (income) expense – net
Loss before taxes
20
Income tax recovery
11
Net loss from continuing operations attributable to owners of the Company
15
$
457,415
371,697
85,718
56,001
89
28,022
59,259
(441)
26,900
31,087
(3,065)
74,507
(47,607)
158
11,037
(2,907)
-
(36,570)
462
$
(2,907) $
(36,108)
21 $
21 $
21 $
(0.12) $
$
(0.12) $
(1.52)
0.02
(1.50)
2013
2012
Basic and diluted loss per share – continuing operations
Basic and diluted earnings per share – discontinued operation
455,522
371,410
84,112
2012
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
Note
$
Other comprehensive income, net of tax:
Items that are not reclassified subsequently to net income:
Actuarial gains (losses) (net of income tax expense of $328, 2012 – income
tax recovery of $283)
Change in minimum funding requirement on certain post-employment benefit
plans (net of income tax recovery of $25, 2012 – income tax expense of
$289)
Items that may be reclassified subsequently to net income:
Cumulative translation adjustment
17
Other comprehensive income, net of tax
(2,907) $
958
(828)
(73)
846
28
19
913
Comprehensive loss attributable to owners of the Company
$
(36,108)
(1,994) $
37
(36,071)
The above statements of earnings and comprehensive earnings should be read in conjunction with the accompanying
notes.
4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIENCY
Other
Reserves
Share Capital
Balance – January 1, 2013
$
Total comprehensive income (loss) for the year:
Actuarial gains (losses) – net
Change in minimum funding requirement on certain postemployment benefit plans
271,650
$
676
Deficit
$
Total
(292,519) $
(20,193)
(2,907)
(2,907)
-
-
-
-
958
958
-
-
(73)
(73)
-
28
-
28
-
28
885
913
Total comprehensive income (loss) attributable to owners of the
Company
-
28
Transactions with owners, recorded directly to equity:
Stock-based compensation (Note 17)
-
634
-
634
Total contributions by owners
-
634
-
634
Total other comprehensive income attributable to owners of the
Company
Balance – December 31, 2013
$
271,650
$
$
Total comprehensive income (loss) for the year:
Change in minimum funding requirement on certain postemployment benefit plans
271,650
$
(294,541) $
Other
Reserves
Share Capital
1,338
(2,022)
$
226
Deficit
$
(256,429) $
(1,994)
(21,553)
Total
15,447
-
-
(36,108)
(36,108)
-
-
(828)
(828)
-
-
846
846
-
19
-
19
-
19
18
37
Total comprehensive income (loss) attributable to owners of the
Company
-
19
Transactions with owners, recorded directly to equity:
Stock-based compensation (Note 17)
-
431
-
431
Total contributions by owners
-
431
-
431
Total other comprehensive income attributable to owners of the
Company
$
271,650
$
676
(36,090)
$
(292,519) $
(36,071)
(20,193)
The above statements of changes in shareholders’ deficiency should be read in conjunction with the accompanying
notes.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
2013
Note
Operating activities
Items not affecting cash:
Depreciation of property, plant and equipment
Finance expense – accretion
Fair value loss on financial assets and liabilities
Income tax recovery
Other
$
(2,907) $
(36,108)
7,471
4,580
2,408
(158)
1,109
12,503
(16,581)
250
8,166
5,538
41,401
480
(11,037)
(462)
(37)
7,941
10,275
9,323
(3,828)
27,539
(8,932)
(173)
435
(2,541)
(95)
1,759
Net cash used in investing activities
(8,670)
(877)
Financing activities
Net proceeds from borrowings and financing fee
Funding of post-employment obligation deficit
10,164
(811)
(49,815)
(812)
9,353
(50,627)
(3,145)
(23,965)
7,087
31,052
Net (increase) decrease in non-cash working capital
Change in investment in restricted cash
9
10
20
2012
11
22
Net cash (used in) provided by operating activities
Investing activities
Purchase of property, plant and equipment
Purchase of intangible assets
Proceeds from sale of property, plant and equipment
9
10
Net cash provided by (used in) financing activities
Net decrease in cash
Cash – Beginning of year
Cash – End of year
$
3,942
The above statements of cash flows should be read in conjunction with the accompanying notes.
6
$
7,087
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Organization and nature of the business
Armtec Infrastructure Inc. (the “Company”) and its subsidiaries, including a jointly controlled entity, (together
“Armtec” or the “Group”) is a manufacturer and marketer of a comprehensive range of infrastructure products and
engineered construction solutions for customers in a diverse cross-section of industries that are located in every
region of Canada, as well as in selected markets globally.
The Company, incorporated and domiciled in Canada, is listed on the Toronto Stock Exchange under the symbols
ARF and ARF.DB. The Company’s address is 3300 Highway 7 West, Suite 500, Concord, Ontario, Canada.
Note 2.
Basis of preparation
(a) Statement of compliance
These consolidated financial statements have been prepared in compliance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The consolidated financial statements were approved for issuance on March 18, 2014 by the Company’s Board
of Directors.
(b) Basis of measurement
The Company’s consolidated financial statements are prepared under the historical cost convention, except for
the following:




Financial instruments at fair value through profit or loss are measured at fair value;
Provisions are measured at the best estimate of the expenditure required to settle the obligation;
Post-employment obligations are recognized as the net total of the fair value of plan assets and the present
value of the benefit obligation; and
Share-based payment awards are measured at fair value.
(c) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the
primary economic environment in which the entity operates called the functional currency. The consolidated
financial statements are presented in Canadian dollars, which is the Company’s functional and the Group’s
presentation currency. All financial information presented in Canadian dollars has been rounded to the nearest
thousand unless otherwise noted.
(d) Use of estimates and judgments
The preparation of financial statements in conformity with IFRS requires management to make judgments,
estimates and assumptions that affect the application of accounting policies and the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Estimates and underlying assumptions are reviewed on an ongoing basis. Changes to accounting estimates are
recognized in the period in which the estimates are revised and in any future periods affected. Information about
estimate and assumption uncertainties that have a significant risk of resulting in a material adjustment within the
next financial year are included in Note 4. Information about significant areas of critical judgments in applying
accounting policies that have the most significant effect on the amounts recognized in the consolidated financial
statements is included in Note 5.
Note 3.
Summary of significant accounting policies
These accounting policies have been applied consistently by the Group.
(a) Basis of consolidation
(i)
Subsidiaries
Subsidiaries are all entities controlled directly or indirectly by the Company. Control exists when the
Company has the power to govern the financial and operating policies of an entity so as to obtain benefits
7
from its activities. The financial statements of subsidiaries are included in the consolidated financial
statements from the date that control commences until the date that control ceases. The accounting policies
of the subsidiaries are aligned with the policies adopted by the Company.
All significant intercompany transactions and balances, and any unrealized income and expenses arising
from intercompany transactions, are eliminated upon preparation of the consolidated financial statements.
(ii) Jointly controlled entity
The Group has partial ownership of a joint venture over whose activities the Group has joint control,
established by a contractual agreement and requiring unanimous consent for strategic, financial and
operating decisions.
The Group accounts for the jointly controlled entity using the equity method whereby the Group’s investment
is originally recognized at cost. The consolidated financial statements include the Group’s share of the
income and expenses and equity movements of the jointly controlled entity, after adjustments to align the
accounting policies with those of the Group, from the date that significant influence or joint control
commences until the date that significant influence or joint control ceases.
Unrealized gains on transactions between the Group and the jointly controlled entity are eliminated to the
extent of the Group’s interest in the joint venture. Unrealized losses are eliminated unless the transaction
provides evidence of an impairment.
The Group assesses every reporting period whether there is any evidence that its interest in the jointly
controlled entity is impaired. If impaired, the carrying value of the Group’s share of the underlying assets is
written down to its estimated recoverable amount and charged to the Group’s statement of earnings.
(b) Foreign currency
(i)
Translation transactions and balances in foreign currencies
Income and expenses in foreign currencies are translated into Canadian dollars at rates approximating the
average rates of exchange during the period. Monetary assets and liabilities denominated in foreign
currencies are translated at the period-end rate. Exchange gains and losses arising from translation are
included within selling, general and administrative in the Group’s statement of earnings for the period.
(ii) Foreign operations
For entities that have a functional currency different from the Group’s presentation currency (“foreign
operations”), assets and liabilities are translated into Canadian dollars at period-end exchange rates.
Revenues and expenses are translated at average rates during the period which is a reasonable
approximation to actual rates. The resulting exchange gains and losses arising from the translation of the
financial statements of these foreign operations are deferred and recognized in the cumulative translation
account within other comprehensive income. The Group’s jointly controlled entity is measured in the Korean
Won functional currency and its Armtec US Limited, Inc. subsidiary is measured in the United States (“US”)
dollar functional currency.
(c) Revenue recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services
in the ordinary course of the Group’s activities. Revenue is shown net of sales tax, returns, rebates and
discounts and after eliminating sales within the Group.
(i)
Construction contracts
Construction contracts include design, engineering, project management, manufacturing and installation
services. Revenue from construction contracts is recognized using the percentage-of-completion method.
The percentage of completion is determined by relating the actual units of work performed to the estimated
total units of the respective contract. If the current estimated costs to complete indicate a loss on a contract,
the loss is recognized immediately. Revisions in costs, and earnings or loss estimates during the course of
the contract are reflected during the accounting period in which the facts that cause the revision become
known. Contract revenues are recognized and costs are adjusted on change orders when the likelihood of
collection becomes probable, revenue, cost and stage of completion can be measured reliably and contract
costs can be reliably compared to prior estimates. Unbilled revenue represents the excess of revenue
recognized under the percentage-of-completion method over billings rendered. Deferred contract revenue
represents billings in excess of revenue recognized.
8
Contract costs are recorded as incurred and include all amounts that relate directly to the specific contract,
are attributable to contract activity, and are specifically chargeable to the customer under the terms of the
contract.
(ii) Goods sold
Revenue for all other products is recognized upon shipment when title transfers, all significant obligations
have been satisfied and collection is reasonably assured.
Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales
agreement, that the significant risks and rewards of ownership have been transferred to the customer,
recovery of the consideration is probable, the associated costs and possible return of goods can be reliably
estimated, there is no continuing management involvement with the goods, and the amount of revenue can
be reliably measured.
(d) Financial instruments
(i)
Financial assets
The Group has the following financial assets:



Cash;
Restricted cash; and
Trade and holdback receivables.
The Group classifies its financial assets in the following categories: at fair value through earnings or loss,
loans and receivables, and available-for-sale. The classification depends on the purpose for which the
financial assets are acquired. The Group determines the classification of its financial assets at initial
recognition.
Financial assets are classified as financial assets at fair value through earnings or loss if they are held for
trading or are designated as such upon initial recognition. Such assets are initially measured and
subsequently carried at fair value with changes recognized within ‘other (gains) losses – net’ in the Group’s
statement of earnings.
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an
active market. Such assets are recognized initially at fair value including any directly attributable transaction
costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the
effective interest method, less any provision for impairment losses. The Group has designated its cash,
restricted cash, and trade and holdback receivables into the loan and receivable category.
The Group currently has no financial assets classified as at fair value through earnings or loss or as
available-for-sale.
The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset
expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in
which substantially all the risks and rewards of ownership of the financial asset are transferred.
(ii) Financial liabilities
The Group has the following financial liabilities:


Trade payables and certain accrued liabilities; and
Borrowings.
The Group classifies its financial liabilities in the following categories: at fair value through earnings or loss
or other financial liabilities. The Group determines the classification of its financial liabilities at initial
recognition.
These financial liabilities are recognized initially at fair value plus any directly attributable transaction costs
with the exception of financial liabilities at fair value where transaction costs are expensed. Subsequent to
initial recognition these financial liabilities are measured at the amortized cost using the effective interest
method, except for financial liabilities at fair value that are measured at fair value.
9
The Group currently has no financial liabilities classified as at fair value through earnings or loss.
The Group derecognizes a financial liability when its contractual obligations are discharged, cancelled or
expired.
(iii) Share capital
Common shares and common share warrants have been classified as equity. Incremental costs directly
attributable to the issue of common shares, dividend reinvestment programs, warrants classified as equity
instruments, and share-based payment awards are recognized as a deduction from equity, net of tax, if
applicable.
(iv) Derivative financial instruments including hedge accounting
A derivative is a financial instrument or a contract whose value changes in response to the change in a
specified index or other variable; which requires an insignificant initial investment relative to other contracts
that would be expected to have a similar response in relation to changes in market factors; and which is
settled at a future date. Embedded derivatives are components of other instruments that also contain a
non-derivative host contract, with the effect that some of the cash flows of the combined contract vary in a
way similar to a stand-alone derivative. Financial and non-financial contracts are assessed at inception to
determine whether they represent derivatives, or contain embedded derivatives. In certain cases,
embedded derivatives are separated from the host contract and accounted for as if they were stand-alone
derivatives.
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are
subsequently re-measured at fair value each reporting period. The gain or loss related to derivative financial
instruments measured at fair value each reporting period, other than designated hedging instruments, is
recognized within ‘other (gains) losses – net’ in the Group’s statement of earnings. The method of
recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging
instrument, and if so, the nature of the item being hedged. The Group may elect to designate certain
derivatives as fair value hedges or as cash flow hedges. The effective portion of changes in the fair value of
derivatives designated as fair value hedges are recorded in the Group’s statement of earnings together with
any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The
effective portion of changes in the fair value of derivatives designated as cash flow hedges are recognized in
the Group’s statement of comprehensive income. The gain or loss relating to the ineffective portion of either
fair value or cash flow hedges are recognized within ‘other (gains) losses – net’ in the Group’s statement of
earnings.
The Group may from time to time enter into forward contracts to reduce its exposure to fluctuations in
foreign exchange rates. The Group may also enter into interest rate swaps to reduce its exposure to
fluctuations in interest rates. The Group may elect to apply hedge accounting for these forward foreign
exchange contracts and interest rate swaps if certain qualitative criteria are met. The Group must also
document its quantitative assessment, both at hedge inception and on an ongoing basis, of whether the
derivatives used in hedging transactions are highly effective in offsetting changes in fair values or cash flows
of hedged items.
The Group may, at its discretion, decide to discontinue hedge accounting for a specific hedging relationship
by terminating the designation of that relationship. If the Group opts not to use hedge accounting,
terminates the designation of a hedging relationship, or the hedging relationship no longer meets the criteria
for hedge accounting for forward foreign exchange contracts and interest rate swaps, the cumulative gain or
loss on the derivative instrument previously recognized in other comprehensive income is reclassified to the
Group’s statement of earnings as the previously hedged cash flows are recognized. Subsequent changes in
the fair values of these derivative instruments are immediately recognized within ‘other (gains) losses – net’
in the Group’s statement of earnings. The fair values of these instruments, if any, are included in ‘financial
assets and liabilities at fair value’ on the Group’s statement of financial position.
(v) Compound financial instruments
Convertible debentures (“Debentures”) issued by the Group can be converted to common shares at the
option of the holder, and the number of shares to be issued does not vary with changes in fair value.
The liability component of the Debentures was initially determined based on the net present value of future
payments at the time of the issuance using market rates for instruments of similar term and risk. The
10
difference between the face value and the liability component of the Debentures was allocated to the
conversion option, and treated as equity. Directly attributable transaction costs were allocated to the liability
and conversion option components in proportion to their initial carrying amounts. The conversion option was
determined not to be a derivative liability instrument, since it does not allow a holder a choice to settle the
instrument with equity or net in cash. Accordingly the conversion option was classified as an equity
instrument and is not re-measured subsequent to initial recognition.
Interest expense on the Debentures is determined using the effective interest rate method, and comprises
interest calculated on the face value of the Debentures and accreted interest. The accretion of interest
causes the carrying value of the liability at maturity to equal the face value of the then outstanding
Debentures.
The liability component of the Debentures is recognized within ‘borrowings’ and the conversion option is
recognized within ‘share capital’ in the Group’s statement of financial position. The liability component is
classified as current unless the Group has an unconditional right to defer cash settlement of the liability for at
least 12 months after the end of the reporting period. Interest is recognized within ‘finance (income)
expense – net’ in the Group’s statement of earnings.
(vi) Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position
when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle
on a net basis, or realize the asset and settle the liability simultaneously. Currently the Group has no
significant offsetting financial assets and liabilities.
(e) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, cash balances with major financial institutions and highly
liquid investments with original maturities of three months or less.
(f)
Inventories
Inventories are measured at the lower of cost and net realizable value. The cost of inventories is determined
based on standard costs, which approximate actual cost as determined on an average cost basis, and includes
expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in
bringing them to their existing location and condition. In the case of manufactured inventories, cost includes an
appropriate share of production overheads based on normal operating capacity. The cost of inventories
excludes borrowing costs.
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of
completion and selling expenses.
(g) Property, plant and equipment
(i)
Recognition and measurement
Property, plant and equipment are measured using the cost model in which assets are carried at cost less
accumulated depreciation and accumulated impairment losses.
Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of selfconstructed assets includes the cost of materials and direct labour and any other costs directly attributable
to bringing the assets to a working condition for their intended use. Borrowing costs related to the
acquisition, construction or production of qualifying assets are capitalized as part of the cost of the assets.
When parts of an item of property, plant and equipment have different useful lives, they are accounted for as
separate items, or major components, of property, plant and equipment.
Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the
proceeds from disposal with the carrying amount of property, plant and equipment, and are recognized
within ‘other (gains) losses – net’ in the Group’s statement of earnings.
11
(ii) Subsequent expenditures
Subsequent expenditures related to a replacement item of property, plant and equipment are recognized in
the carrying amount of the original item, or recognized as a separate asset, as appropriate, if it is probable
that the future economic benefits embodied within the item will flow to the Group and its cost can be
measured reliably. The carrying amount of the replaced item of property, plant and equipment is
derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in the
Group’s statement of earnings as incurred.
(iii) Depreciation
Depreciation is charged to the Group’s statement of earnings on a straight-line basis over the estimated
useful lives of each item of property, plant and equipment to residual value as follows:




Land improvements, buildings and leaseholds
Machinery and equipment
Machinery and equipment under finance lease
Furniture and fixtures
3 – 31 years
1 – 50 years
1 – 30 years
3 – 10 years
The depreciation method, useful life and residual value of property, plant and equipment are reviewed
annually and adjusted, as appropriate.
(h) Leased assets
Leases with terms where the Group assumes substantially all the risks and rewards of ownership are classified
as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its
fair value and the present value of the minimum lease payments. Initial direct costs and other incremental costs
are capitalized and amortized over the lease term. Subsequent to initial recognition, the asset is accounted for in
accordance with the accounting policy applicable to that asset.
Leases other than finance leases are referred to as operating leases and are not recognized on the Group’s
statement of financial position. Payments made under operating leases (net of any incentives received from the
lessor) are charged to the Group’s statement of earnings on a straight-line basis over the term of the lease.
(i)
Intangible assets
Intangible assets are assets acquired, or internally generated, that lack physical substance and meet the
specified criteria for recognition apart from goodwill. Intangible assets that are acquired by the Group and have
finite useful lives are measured at cost less accumulated amortization and accumulated impairment losses. The
cost of self-constructed intangible assets includes costs directly attributable to bringing the assets to a working
condition for their intended use. Borrowing costs related to the acquisition, construction or production of
qualifying assets are capitalized as part of the cost of the assets.
(i)
Subsequent expenditures
Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in
the specific asset to which they relate. All other expenditures, including expenditures on internally
generated goodwill and brands, are recognized in the Group’s statement of earnings as incurred.
(ii) Amortization
Amortization is charged to the Group’s statement of earnings on a straight-line basis over the estimated
useful lives of intangible assets from the date that they are available for use as follows:





Trademarks and tradenames
Customer lists
Customer contracts
Licenses and non-compete agreements
Enterprise resource planning (“ERP”) systems
15 – 25 years
10 – 15 years
Over the contractual terms
5 – 20 years
7 years
The amortization method and useful life of finite-life intangible assets are reviewed annually and adjusted, as
appropriate.
12
(j)
Assets (or disposal groups) held for sale and discontinued operations
Assets (or disposal groups) are classified as assets held for sale when their carrying amount is to be recovered
principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of
carrying amount and fair value less costs to sell if their carrying amount is to be recovered principally through a
sale transaction rather than through continuing use and a sale is considered highly probable. Impairment losses
on initial classification and subsequent gains or losses on re-measurement of these assets as held for sale are
recognized within costs of goods sold or selling, general and administrative in the Group’s statement of earnings.
Gains are not recognized in excess of any cumulative impairment loss.
A discontinued operation is a component of the Group’s business that represents a separate major line of
business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary
acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or
when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified
as a discontinued operation, the Group’s comparative statement of earnings is re-presented as if the operation
had been discontinued from the start of the comparative period.
(k) Impairment
(i)
Financial assets at amortized cost
A financial asset is assessed at each reporting date to determine whether there is any objective evidence
that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or
more events have had a negative effect on the estimated future cash flows of that asset. Evidence of
impairment may include indications that a debtor is experiencing significant financial difficulty, default or
delinquency in interest payments, the probability that they will enter bankruptcy or other financial
reorganization, and where observable data indicate that there is a measurable decrease in the estimated
future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference
between its carrying amount, and the present value of the estimated future cash flows discounted at the
original effective interest rate. All impairment losses are recognized in the Group’s statement of earnings
and for receivables are reflected in an allowance account.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the
impairment loss was recognized. For financial assets measured at amortized cost the reversal is recognized
in the Group’s statement of earnings.
(ii) Non-financial assets
The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets,
are periodically reviewed to determine whether there is any indication of impairment. Non-financial assets
that have an indefinite useful life or are not ready for use are not subject to amortization and are tested
annually for impairment. Non-financial assets that are subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate impairment. An impairment loss is recognized for
the amount by which the asset’s carrying amount exceeds its recoverable amount.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair
value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their
present value using a pre-tax discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped
together into the smallest group of assets, known as the cash-generating unit, that generate cash inflows
from continuing use that are largely independent of the cash inflows of other assets or group of assets. The
goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to groups of
cash-generating units that are expected to benefit from the synergies of the combination.
Impairment losses are recognized in the Group’s statement of earnings. Impairment losses recognized in
respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to
the units and then to reduce the carrying amounts of the other assets in the unit, or group of units, on a pro
rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment
losses recognized in prior periods are assessed at each reporting date for any indications that the loss has
decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates
used to determine the recoverable amount. An impairment loss is reversed only to the extent that the
13
asset’s carrying amount does not exceed the carrying amount that would have been determined, net of
depreciation or amortization, if no impairment loss had been recognized.
(l)
Current and deferred income taxes
Income tax expense comprises current and deferred tax. Current and deferred tax are recognized in the Group’s
statement of earnings except to the extent that they relate to items in other comprehensive income or in equity.
Current income tax is the expected tax payable or receivable on the taxable income or loss for the year, using
tax rates enacted or substantively enacted at the reporting date, and any adjustment to taxes payable or
receivable in respect of previous years.
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax
basis of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is
not recognized for the following temporary differences: the initial recognition of assets or liabilities in a
transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and
differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable
that they will not reverse in the foreseeable future. Deferred income taxes are measured using substantively
enacted rates and laws that are expected to be in effect when the temporary differences are estimated to
reverse. The effect of any changes in tax rates on the deferred income tax balance is recognized in the Group’s
statement of earnings, other comprehensive income or equity, as appropriate, in the period of change. Deferred
income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets
against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes
levied by the same taxation authority on either the taxable entity or different taxable entities where there is an
intention to settle the balances on a net basis. A deferred tax asset is recognized to the extent that it is probable
that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax
assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the
related tax benefit will be realized.
(m) Borrowings
Non-revolving borrowings are recognized initially at fair value, net of transaction costs incurred. These
borrowings are subsequently carried at amortized cost; any difference between the initial carrying value and the
value at maturity is recognized as part of interest expense within ‘finance (income) expense – net’ in the Group’s
statement of earnings over the period of the borrowings using the effective interest method.
Fees and transaction costs paid on the establishment of revolving loan facilities are deferred and presented in
intangible assets for that portion estimated to remain undrawn, and in prepaid expenses and other assets for that
portion estimated to be drawn over the duration of the loan. The intangible asset portion is amortized over the
remaining term of the facility. As the revolving loan facility is drawn, the prepaid portion is amortized and
recognized as part of interest expense within ‘finance (income) expense – net’ in the Group’s statement of
earnings over the period of the borrowings using the effective interest method.
(n) Employee benefits
(i)
Defined benefit and defined contribution post-retirement benefit plans
Certain employees are entitled to post-employment benefits such as medical, dental, life insurance and
pension benefits. The Group maintains three defined benefit pension plans for its employees: Salary Plan,
Supplemental Employee Retirement Plans (“SERP/SNERP”) and the Canadian Autoworker’s Union (“CAW”)
Plan. The Group’s Salaried and SERP/SNERP Plans were wound up with an effective date of December
31, 2009. Pension plan assets, liabilities and changes in net assets are reported in the respective financial
statements of these plans. The assets of the funded pension plans are held by an independent custodian.
The Group also maintains three other extended health care plans to retirees and their eligible dependents
on a cost-sharing basis: Post Retirement Health Plan, Long-term Employee Benefit and Short-term
Employee Benefit Plans.
The benefit obligations and service costs of the defined benefit pension plans and the Short-term Employee
Benefit Plan are determined using the projected unit credit method. For the Post Retirement Health and
Long-term Employee Benefit plans, the benefit obligation is equal to the present value of projected health
and dental care payments, as well as the value of life insurance in certain cases for employees on long-term
disability or workers compensation.
14
The liability recognized in the balance sheet in respect of post-employment benefits is the present value of
the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The
discount rate used to compute the benefit obligations is the yield at the reporting date on AA credit-rated
bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated
in the same currency in which the benefits are expected to be paid. This calculation is performed annually
by a qualified actuary. In order to calculate the present value of economic benefits, consideration is given to
any minimum funding requirements that apply to any plan in the Group. An economic benefit is available to
the Group if it is realizable during the life of the plan, or on settlement of the plan liabilities.
Past service costs are recognized immediately in the Group’s statement of earnings. Actuarial gains and
losses arising from experience adjustments and changes in actuarial assumptions are recorded in other
comprehensive income with an immediate allocation to ‘deficit’.
The Group also maintains a defined contribution pension plan for certain eligible employees. The pension
expense for this plan is equal to the Group's funding contribution for the year.
(ii) Termination benefits
Termination benefits are payable when employment is terminated by the Group before the normal retirement
date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group
recognizes termination benefits at the earlier of the following dates: (a) when the Group can no longer
withdraw the offer of those benefits; and (b) when the Group recognizes costs for a termination that is within
the scope of International Accounting Standard (“IAS”) 37 and involves the payment of termination benefits.
In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured
based on the number of employees expected to accept the offer. Benefits falling due more than 12 months
after the end of the reporting period are discounted to their present value.
(iii) Share-based payment awards
Transactions involving share-based payment awards are recognized as compensation expense over their
various vesting periods. Equity-settled share-based payment awards, such as stock options, are measured
at their grant date fair value over the period that recipients unconditionally become entitled to the awards
with a corresponding increase in ‘other reserves’ in the Group’s statement of changes in shareholders’
deficiency. The total amount recognized as a compensation expense for equity-settled share-based
payment awards factors in the number of options expected to vest over time. Upon exercise the
corresponding balance in ‘other reserves’ is reclassified to ‘share capital’ in the Group’s statement of
changes in shareholders’ deficiency.
Cash-settled share-based payment awards, such as restricted share units with an option to receive cash,
are measured at their grant date fair value with a corresponding increase in ‘accrued liabilities’ in the
Group’s statement of financial position. In the case of restricted share units with an option to receive cash
the notional balance of any dividends paid are recorded as additional issuances of restricted share units
during the life of the units. The liability is remeasured at each balance sheet date and at the date of
settlement, with changes in fair value recognized as compensation expense in the Group’s statement of
earnings.
(iv) Incentive plans
The Group recognizes a provision where contractually obliged or where there is a past practice that has
created a constructive obligation.
(o) Provisions
A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation
that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the
obligation. The provisions are generally determined by discounting the expected future cash flows at a pre-tax
rate that reflects current market assessments of the time value of money and the risks specific to the liability. If
applicable, the unwinding of the discount is recognized within ‘finance (income) expense – net’ in the Group’s
statement of earnings.
(p) Finance income and expense
Finance income comprises interest income on funds invested, gains on unwinding of discounts and expected
returns on post-employment benefit plan assets. Interest income is recognized as it accrues in earnings or loss,
using the effective interest method.
15
Finance expense comprises interest expense on borrowings including accretive interest on borrowings, losses
on unwinding of discounts, and interest costs on post-employment benefit plan obligations. All borrowing costs
are recognized in earnings or loss using the effective interest method, except for those amounts capitalized as
part of the cost of qualifying property, plant and equipment or other intangible assets.
(q) Earnings per share
The Group presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is
calculated by dividing the earnings or loss attributable to common shareholders of the Company by the weighted
average number of common shares outstanding during the period, adjusted if applicable for own shares held.
Diluted EPS is determined by adjusting the earnings or loss attributable to common shareholders and the
weighted average number of common shares outstanding, for own shares held and for the effects of all
potentially dilutive financial instruments and share-based payment awards.
For the purposes of diluted weighted average number of common shares outstanding, the Debentures issued are
treated as if they are converted to equivalent common shares of the Group.
The average market value of the Company’s shares for purposes of calculating dilutive EPS is based on quoted
market prices for the period potentially dilutive financial instruments and share-based payment awards are
outstanding.
(r) Segment reporting
During the fourth quarter of 2012, the Group announced a reorganization of its management structure that was
effective January 1, 2013. As part of this reorganization the Group realigned around a business unit structure
and the Group is now reporting these operating units as two reporting segments in 2013.
The Group operates in two principal business unit segments within the construction infrastructure industry:
Drainage Solutions (“Drainage”) and Precast Concrete Solutions (“Precast”). The Corporate and other category
in the tables as part of the segment information Note 28 include corporate costs and other activities not directly
allocable to these segments. The business units were established based on product groups therefore no
significant inter-segment transactions occur.
Drainage manufactures and markets corrugated high-density polyethylene pipe, corrugated steel pipe and other
drainage related products including small bridge structures. Precast manufactures and markets highly
engineered precast systems such as parking garages, bridges, sport venues and building envelopes as well as
standard precast products such as steps, paving stones and utility vaults.
The chief operating decision-maker, identified as the chief executive officer, assesses performance of the
business unit segments based on a measure of earnings before finance (income) expense – net, income taxes,
depreciation and amortization, certain non-recurring expenses and certain other non-cash amounts (“EBITDA”).
EBITDA does not have a standardized meaning under IFRS, and therefore may not be comparable to similar
measures used by other companies. Finance (income) expense – net is not disclosed by reportable segment as
this activity is driven by a centralized shared services function which manages the cash position of the Group.
For the year ended December 31, 2012, the Group has estimated an allocation to each of its Drainage and
Precast reportable segments, as it relates to selling, general and administrative expenses, for the purposes of
determining a comparable EBITDA. Salaries and benefits comprise the majority of the selling, general and
administrative costs. These costs were reallocated, based on the revised organizational structure.
(s) New standards, amendments and interpretations to existing standards that are not yet effective and have
not been early adopted by the Group
The IASB has issued IFRS 9, ‘Financial instruments’. This standard is the first step in the process to replace IAS
39, ‘Financial instruments: recognition and measurement’. IFRS 9 has two measurement categories: amortized
cost and fair value. All equity investments are measured at fair value. An investment in a debt instrument is
measured at amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows
represent principal and interest, otherwise it is recognized at fair value through profit or loss. IFRS 9 was also
updated to include guidance on financial liabilities and derecognition of financial instruments. This guidance is
similar to the guidance included in IAS 39 relating to financial liabilities and derecognition of financial
instruments. In November 2013, the IASB introduced a new hedge accounting model, and allowed early
adoption of the own credit provisions of IFRS 9. It also removed the mandatory effective date of January 1, 2015
and has not proposed a future effective date. The Group has not yet determined the impact that IFRS 9 will have
on its consolidated financial position.
16
(t)
New and amended standards adopted by the Group
The Group has adopted the following new and revised accounting standards, along with any consequential
amendments, effective January 1, 2013. Where material, these changes were made in accordance with the
applicable transitional provisions.
The IASB published a package of new and revised standards that addressed the scope of the reporting entity.
The new standards in the package were IFRS 10 ‘Consolidated financial statements’, IFRS 11 ‘Joint
arrangements’ and IFRS 12 ‘Disclosure of interests in other entities’. The revised standards were IAS 27
‘Separate financial statements’ and IAS 28 ‘Investments in associates and joint ventures’. The requirements
contained in the package of five standards were effective for the Group on January 1, 2013 and had no impact
on the Group’s consolidated financial position and earnings.
The IASB issued IFRS 13, ‘Fair value measurement’. This standard established a single source of guidance for
fair value measurements under IFRS. IFRS 13 defines fair value, provides guidance on its determination and
introduces consistent requirements for disclosures on fair value measurements. IFRS 13 does not include
requirements on when fair value measurement is required; but it prescribes how fair value is to be measured if
another standard requires it. The Group adopted IFRS 13 on January 1, 2013 on a prospective basis. The
Group determined that the new standard had no impact on the Group’s consolidated financial position as the
Group currently has no instruments subject to fair value measurement under IFRS 13. On adoption of IFRS 13,
the Group’s own credit risk was incorporated into fair value disclosures of financial liabilities.
Amendments to IAS 36, ‘Impairment of assets’, on the recoverable amount disclosures for non-financial assets.
This amendment removed certain disclosures of the recoverable amount of cash-generating units which had
been included in IAS 36 by the issue of IFRS 13. The amendment is not mandatory for the Group until
January 1, 2014, however the Group has decided to early adopt the amendment in 2013.
The IASB amended IAS 1, ‘Presentation of financial statements’. The standard was amended primarily around
the presentation of items within other comprehensive income. Certain items of other comprehensive income that
may be reclassified to earnings in the future are to be presented separately from those items that would never be
reclassified in the future. The Group reclassified comprehensive income items of the comparative period. These
changes did not result in any adjustments to other comprehensive income or comprehensive income.
The IASB amended IAS 19, ‘Employee Benefits’. The standard was amended with key changes including that all
actuarial gains and losses be immediately recognized to other comprehensive income, the expected return of
plan assets recognized to earnings is now based on the rate used to discount the defined benefit obligation, and
additional disclosures for defined benefit plans. Other amendments include revised definitions of short-term
versus long-term employee benefits and potential changes to the timing of recognition of termination benefits.
The Group continues to immediately recognize in retained earnings all pension adjustments recognized in other
comprehensive income. The Group has determined the adoption of the amended IAS 19 had no effect on its
consolidated shareholders’ deficiency as at December 31, 2013, December 31, 2012 and January 1, 2012, and
an insignificant effect on its consolidated earnings for the periods ended December 31, 2013 and December 31,
2012.
Note 4.
Critical accounting estimates and assumptions
Information about estimate and assumption uncertainties that have a significant risk of resulting in a material
adjustment within the next financial year include the following:
(a) Income taxes
The Group is subject to income taxes in all provinces of Canada and significant judgment is required in
determining the provision for income taxes. The Group recognizes liabilities for anticipated tax audit issues
based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is
different from the amounts that were initially recorded, such differences will impact the current and deferred
income tax assets and liabilities in the period in which such determination is made.
Deferred income tax assets and liabilities are measured using substantively enacted rates and laws that are
expected to be in effect when the temporary differences are estimated to reverse. Unknown future events and
circumstances, such as changes in tax rates and laws, may materially affect the assumptions and estimates
made from one period to the next and affect the consolidated financial statements.
17
(b) Provisions and contingencies
The Group estimates provisions such as termination benefits, and legal contingencies based on information at
each reporting date. See Note 15 for a summary of the Group’s estimated provisions. The Group makes
changes to these estimates based on information provided during the period. When material, the provisions are
determined by discounting the estimated future cash flows, along with an estimate of when settlement is
expected to occur. Unknown future events and circumstances including changes in estimates of cash flows and
the timing of settlement may materially affect the estimated provision from one period to the next.
(c) Measurement of post-employment obligations
Post-employment benefits are accounted for on an actuarial basis. The expected costs of employees' postemployment benefits are expensed during the years that employees render services and an accumulated postemployment obligation is recognized. The Group’s obligation under such plans is determined annually by
independent actuaries using management's assumptions and the attribution method. Actual post-employment
benefit costs incurred may differ materially from these management estimates. The Group’s consolidated
financial statements have a summary of the Group’s post-employment obligations and have a sensitivity analysis
of the effect of a change in the trend rates on the benefit obligation and benefit cost.
Note 5.
Critical judgments in applying the Group’s accounting policies
Information about significant areas of critical judgments in applying accounting policies that have the most significant
effect on the amounts recognized in the consolidated financial statements include the following:
(a) Revenue recognition
The Group makes judgments, estimates and assumptions that affect the application of accounting policies for
construction contracts. Revenue from construction contracts is recognized using the percentage-of-completion
method which is calculated based on relating the actual units of work performed to the estimated total units of the
respective contract. Revenue and estimated costs to complete each contract are updated and reviewed by
management at least once each financial reporting period. In making such estimates, judgments are required to
evaluate issues related to scheduling, material costs, labour costs, productivity and sub-contractor costs. Due to
the nature of construction contracts, these estimates may change significantly from one accounting period to the
next.
(b) Impairment and reversal of impairment indicators
The Group assesses at each financial reporting date whether there is an indication that a non-financial asset,
that is subject to amortization or a cash-generating unit, is impaired. The Group uses judgment in determining
whether any events or changes in circumstances indicate that an impairment may have occurred. External and
internal factors must be considered, including whether the asset’s market value has declined more than would be
expected with normal use or the passage of time; whether increases in interest rates are likely to have caused a
material decline in the asset’s value in use; whether the carrying value of the net assets of the Group exceed its
market capitalization; and whether there is evidence of obsolescence or physical damage to an asset. The
determination as to whether there is any indication that an asset may be impaired will determine whether the
recoverable amount is to be estimated, and the potential for the recognition of an impairment provision in the
consolidated financial statements.
In addition, the Group assesses at each financial reporting date whether there is an indication that an impairment
loss recognized in prior periods for an asset other than goodwill may no longer exist, or may have decreased.
The Group uses judgment in determining whether any events or changes in circumstances indicate that an
impairment reversal may have occurred. External and internal factors are considered, including whether the
asset’s market value has increased significantly during the period, and whether decreases in interest rates are
likely to have caused a material increase in the asset’s value in use. The determination as to whether there is
any indication that an impairment loss recognized in prior periods for an asset other than goodwill may no longer
exist, or may have decreased, will determine whether the recoverable amount is to be estimated, and the
potential for the recognition of a reversal of impairment provision in the consolidated financial statements.
(c) Inventories
Inventories are valued at the lower of cost or net realizable value for raw materials and finished goods. Cost is
determined based on standards, which approximate actual cost as determined on an average cost basis. While
management has applied judgment based upon assumptions believed to be reasonable in the circumstances,
actual results may vary from these assumptions.
18
Note 6.
Restricted cash
The Group has restricted cash of $4,180 as at December 31, 2013 (2012 – $4,430) related to letters of credit required
primarily for support of certain projects in the Group’s Precast business.
Note 7.
Accounts receivable
2013
As at December 31
Trade receivables
Less: provision for impairment of trade receivables
$
2012
73,933 $
(596)
83,428
(763)
73,337
28,998
24,093
82,665
21,810
20,185
$ 126,428
$ 124,660
Trade receivables – net
Unbilled revenue
Holdback receivables
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable included
above. The Group does not hold any collateral as security on accounts receivable. Movements on the Group’s
provision for impairment of trade receivables are as follows:
2013
Balance – Beginning of year
Provision for receivables impairment
Receivables written off during the period as uncollectible
Unused amounts reversed
$
Balance – End of year
$
2012
763 $
959
(486)
(640)
596
$
1,484
788
(1,039)
(470)
763
The Group’s exposure to credit and currency risks, and impairment losses related to trade and other receivables,
excluding unbilled revenue, is disclosed in Note 25.
Note 8.
Inventories
2013
As at December 31
Raw materials
Finished goods
2012
$
13,089
28,707
$
15,568
24,945
$
41,796
$
40,513
The amount of inventory recognized as an expense through cost of sales during the year ended December 31, 2013
is $181,088 (2012 – $199,275). The amount of inventory write-downs recognized as an expense through cost of
sales during the year ended December 31, 2013 is $Nil (2012 – $153).
19
Note 9.
Net book value
Additions
Reclassification
Disposals
Depreciation
Land,
building and
leaseholds
$
Net book value comprised of:
Cost
Accumulated depreciation and
impairment
Net book value
Additions
Reclassification
Disposals
Depreciation
$
31,630 $
2,118
2,896
(9)
(4,241)
76,568
32,394
2,644
1,065
1,588
114,259
100,198
128,973
8,256
6,830
1,588
245,845
(23,630)
(96,579)
(5,612)
(5,765)
76,568
$
$
Cost
Accumulated depreciation and
impairment
$
32,394 $
2,657 $
1,755
(420)
(1,348)
2,644 $
560 $
140
591
(226)
Total
77,631 $
193
400
(1,656)
749 $ 113,227
4,726
8,932
(3,887)
(429)
(7,471)
-
1,065 $
34,593 $
1,387
672
(378)
(4,644)
77,631
31,630
2,657
560
749
113,227
99,605
124,051
8,265
6,099
749
238,769
(21,974)
(92,421)
(5,608)
(5,539)
$
31,630 $
2,657 $
805 $
68
(313)
Total
79,261 $
175
100
(206)
(1,699)
77,631
3,815 $
635
(283)
(1,510)
(131,586)
1,588 $ 114,259
Machinery
and
Machinery
equipment
and under finance Furniture and Constructionequipment
lease
fixtures in-progress
Land,
building and
leaseholds
Machinery
and
Machinery
equipment
and under finance Furniture and Constructionequipment
lease
fixtures in-progress
1,245 $ 119,719
276
2,541
(772)
(867)
(8,166)
-
560 $
(125,542)
749 $ 113,227
Depreciation of property, plant and equipment has been allocated to the Group’s statement of earnings as follows:
2013
Cost of sales
2012
$
6,111 $
1,360
6,795
1,371
$
7,471 $
8,166
The Group leases various vehicles under cancellable finance lease agreements and machinery primarily under
non-cancellable finance lease agreements. Specific machinery is pledged as security for finance leases. The leased
equipment secures lease obligations (see Note 14 (e)). The leases mature over various dates from 2014 to 2018.
20
Note 10. Intangible assets
Net book value
Additions – externally developed
Amortization
Trademarks
and
tradenames
$
Cost
Accumulated amortization and impairment
Net book value
Additions – externally developed
Amortization
$
Cost
Accumulated amortization and impairment
14,705 $
(1,057)
25,659 $
(2,515)
4,418 $
(664)
13,648
23,144
3,754
50,940
(37,292)
85,209
(62,065)
37,527
(33,773)
13,648 $
Trademarks
and
tradenames
$
$
Customer Licenses and
lists and non-compete
contracts agreements ERP systems
23,144 $
935
8,693
(7,758)
3,754 $
935 $
Customer Licenses and
lists and non-compete
contracts agreements ERP systems
15,909 $
(1,204)
28,463 $
(2,804)
14,705
25,659
50,940
(36,235)
85,209
(59,550)
14,705 $
1,106 $
173
(344)
25,659 $
5,592 $
(1,174)
Total
45,888
173
(4,580)
41,481
182,369
(140,888)
41,481
Total
1,367 $
95
(356)
51,331
95
(5,538)
4,418
1,106
45,888
37,527
(33,109)
8,520
(7,414)
182,196
(136,308)
4,418 $
1,106 $
45,888
Amortization of intangibles has been allocated to the Group’s statement of earnings as follows:
2013
Cost of sales
2012
$
360 $
4,220
471
5,067
$
4,580 $
5,538
As at December 31, 2013, the following intangible assets have individually significant carrying amounts for the Group:
Remaining
amortization
period
Description
Customer relationship recognized within the Precast business unit
Tradename recognized within the Precast business unit
License recognized within the Drainage business unit
105 months $
132 months
124 months
114 months
127 months
21
Carrying
amount
7,976
7,591
4,077
3,786
2,670
Note 11. Income taxes
(a) Reconciliations of income tax recovery
2013
Current tax on earnings for the period
$
-
2012
$
-
Origination and reversal of temporary differences
Adjustments with respect to prior periods
219
(61)
11,768
(731)
Total deferred tax
158
11,037
158 $
11,037
Income tax recovery
$
Income taxes differ from the provision computed at statutory rates as follows:
2013
Loss before taxes
Combined basic corporate tax rate
$
Expected income tax recovery at a combined basic corporate tax rates
Expenses not deductible for income taxes
Adjustments with respect to prior periods
Income tax recovery
$
2012
(3,065) $
25.00%
(47,607)
25.42%
766
(547)
(61)
12,102
(334)
(731)
158 $
11,037
(b) Income taxes applied to other statements
The income tax expense relating to components of other comprehensive income are as follows:
Before tax
Tax
(expense)
recovery
$
Change in minimum funding
requirement on certain postemployment benefit plans
Cumulative translation
adjustment
1,286 $
28
-
$
1,216 $
(303) $
(98)
(328) $
25
22
2013
After tax
Before tax
958 $
(73)
28
913 $
Tax
(expense)
recovery
(1,111) $
1,135
19
43 $
283 $
(289)
(6) $
2012
After tax
(828)
846
19
37
(c) Deferred income taxes
The significant components of the deferred tax assets and liabilities as recognized in the Group’s statement of
financial position are as follows:
2013
As at December 31
2012
Accruals and reserves
Intangible assets
Financing costs
Loss carry forwards
Earnings taxed in future periods
Other
$
790 $
(1,154)
(147)
3,009
7,226
12,228
(338)
185
462
(1,450)
260
3,406
9,829
16,365
(6,945)
17
Net deferred income tax assets
$
21,799 $
21,944
The gross movement of the deferred income tax accounts are as follows:
2013
2012
Asset – beginning of year
Recovery to continuing operations in the statement of earnings
Expense to discontinued operations in the statement of earnings
Expense to the statement comprehensive income
$
21,944 $
158
(303)
11,070
11,037
(157)
(6)
Asset – end of year
$
21,799
21,944
$
The Group has recognized all deductible temporary differences including unused tax losses or tax credits. The
utilization of the resulting deferred tax asset of $21,799 is dependent upon the Group earning sufficient taxable
income in the future. Management has determined that it is probable that the asset will be utilized given
management’s expectations of future profitability and the 20 year period in which losses for tax purposes may be
carried forward in Canada.
The movement in deferred income tax accounts during the year by type of temporary difference, tax loss and tax
credit are as follows:
Asset (liability)
– beginning of
year
For the year ended December 31, 2013
Accelerated tax depreciation
Deductible deferred costs
Deductible reserves
Loss carry forwards
Other
Recovery
Expense to
(expense) to
statement of
statement of comprehensive Asset (liability)
earnings
income
– end of year
$
(1,190) $
9,829
4,198
16,365
(6,945)
(313)
(111) $
(2,603)
260
(4,137)
6,607
142
- $
(303)
-
(1,301)
7,226
4,155
12,228
(338)
(171)
$
21,944 $
158 $
(303) $
21,799
23
Accelerated tax depreciation
Deductible deferred costs
Deductible reserves
Loss carry forwards
Financing fee
Other
Asset (liability)
– beginning of
year
Recovery
Expense to
(expense) to
statement of
statement of comprehensive
earnings
income
Expense to
discontinued Asset (liability)
operations
– end of year
$
(1,396) $
(3,781)
6,329
4,161
4,475
1,282
206 $
13,610
(1,968)
12,204
(6,945)
(4,475)
(1,595)
- $
(6)
-
- $
(157)
-
(1,190)
9,829
4,198
16,365
(6,945)
(313)
$
11,070 $
11,037 $
(6) $
(157) $
21,944
Note 12. Accounts payable and accrued liabilities
2013
As at December 31
Trade payables
Other accounts payable and accrued liabilities
2012
$
31,755
22,093
$
30,523
31,998
$
53,848
$
62,521
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in Note 25.
Note 13. Construction contracts
2013
As at December 31
2012
Unbilled revenue
Holdback receivables
$
28,998 $
24,093
(2,667)
21,810
20,185
(6,483)
Net position for ongoing contracts
$
50,424
35,512
$
Deferred contract revenue is comprised of billings in advance of contract work.
2013
2012
Aggregate costs incurred and recognized profits, net of losses
Less: Progress billings
$ 206,336 $ 163,088
(155,912)
(127,576)
Net position for ongoing contracts
$
24
50,424
$
35,512
Note 14. Borrowings
As at December 31
2013
Note
Current:
Other notes
(e) $
Current borrowings
Non-current:
Brookfield Facility
Senior Notes
Debentures
1,212
-
2012
$
1,393
667
1,212
2,060
11,000
109,412
147,951
38,108
1,779
108,908
147,319
37,456
1,547
308,250
295,230
$ 309,462
$ 297,290
(a)
(b)
(c)
(d)
(e)
Non-current borrowings
Borrowings subject to accretion are recognized on the statement of financial position of the Group as follows:
Brookfield
Facility
Issuance date
Face value
Conversion option component
Senior
Notes Debentures
December
21, 2012
September
22, 2010
$ 111,100
-
$ 150,000
-
June 30,
2010
$
40,000
(2,060)
Transaction costs related to the liability or liability component
111,100
(2,431)
150,000
(3,921)
37,940
(1,892)
Liability or liability component before cumulative accretive interest
Cumulative accretive interest
108,669
743
146,079
1,872
36,048
2,060
$ 109,412
$ 147,951
Liability – December 31, 2013
$
38,108
(a) Revolving Credit Facility
In December 2012, the Group entered into a revolving asset based loan agreement (“Revolving Credit
Facility”) with the Canadian Imperial Bank of Commerce, as agent and lender, which provided a facility up to
$60.0 million. The maximum availability under the Revolving Credit Facility is subject to a borrowing base which
is a percentage of the Group’s accounts receivable and inventory less a permanent availability reserve of
$5.0 million and less an amount equal to priority payables.
The Revolving Credit Facility is due in December 2016 and accrues interest at rates which vary in accordance
with borrowing rates in Canada and the US, plus a margin of 1.75% for prime rate and base rate loans and a
margin of 3.25% for bankers’ acceptance and London interbank offered rate loans. The Revolving Credit Facility
is secured by a first charge on certain current assets of the Group and a second charge on the remaining assets
of the Group except for other specified permitted encumbrances. The Revolving Credit Facility does not contain
any financial covenants. The provisions under the Revolving Credit Facility provide for certain restrictions on the
operations and activities of the Group.
(b) Brookfield Facility
In December 2012, the Group entered into an amended and restated loan agreement (“Brookfield Facility”)
with Brookfield Capital Partners Fund III LP (“Brookfield”) for a $110.0 million term credit facility. In combination
with the Revolving Credit Facility the new fully drawn Brookfield Facility allowed the Group to repay in full the
previous Brookfield Facility which was treated as being extinguished on the closing date of the new credit
25
facilities. In connection with the refinancing, the 4,564,960 warrants to acquire common shares of the Company
previously issued were cancelled for no consideration.
The Brookfield Facility bears interest at the 30-day Canadian bankers’ acceptance rate (subject to a floor rate of
1%) plus 8%. The Group is permitted at any time to make a one-time irrevocable election to fix the interest rate
(at the rate in effect at the election date plus 1%) on up to $50.0 million of the Brookfield Facility. The Brookfield
Facility is due in December 2016. The Brookfield Facility is secured by a first charge on the Group's assets
except for certain assets held as security for the new Revolving Credit Facility and for other specified permitted
encumbrances. The Brookfield Facility contains one financial covenant, being a maximum senior secured debt
to EBITDA test of (i) 5.5:1.0 from the closing of the Brookfield Facility to the first anniversary thereof, (ii) 5.25:1.0
from the first anniversary of the Brookfield Facility to the second anniversary thereof, and (iii) 5.0:1.0 thereafter.
The provisions under the Brookfield Facility provide for certain restrictions on the operations and activities of the
Group including restrictions related to permitted acquisitions, investments, distributions and dividends, asset
dispositions, granting of liens, incurrence of debt and certain hedging. At the closing date of the refinancing, the
Brookfield Facility contained a commitment fee of 1% or $1.1 million which was deferred to the maturity date of
the Brookfield Facility thereby increasing the balance due on maturity to $111.1 million. The Brookfield Facility
also includes a prepayment fee on all voluntary and certain mandatory principal repayments, made within the
first 24 months of the loan, at the 30-day Canadian bankers’ acceptance rate (subject to a floor rate of 1%) plus
8% and based on the number of days remaining to the second anniversary.
The Brookfield Facility contains a reversible accrual option until December 21, 2014 whereby the Group may
elect on any number of occasions subject to an aggregate limit for all elections of $10.0 million and subject to the
terms of the Brookfield Facility to (i) receive a cash refund in respect of cash interest previously paid to Brookfield
(or, in certain circumstances as set out in the Brookfield Facility, in respect of cash interest not yet accrued)
pursuant to the Brookfield Facility for up to 12 months from the date of such election, and/or (ii) defer payments
of interest on the Brookfield Facility for up to a total of 12 months. Such cash refunds and interest deferral may
be repaid at any time by the Group. In the event the Group elects to receive a cash refund or defer interest
pursuant to the reversible accrual option, (a) interest on the Brookfield Facility shall accrue at an additional 2%
above the interest rate otherwise applicable, and (b) for so long as such refund or deferred interest remains
outstanding, the Group shall not be permitted to incur capital expenditures (other than in the ordinary course) or
complete acquisitions.
In addition, the Brookfield Facility contains a permanent accrual option whereby the Group may elect to defer
payments of interest on the Brookfield Facility. This option is available from the earlier of the date on which the
$10.0 million limit on the reversible accrual option is reached and December 21, 2014. Such interest deferral is
irrevocable. In the event the Group elects to defer interest pursuant to the permanent accrual option, interest
shall accrue at an additional 2% above the interest rate otherwise applicable until the loan is fully repaid.
At December 31, 2013, the effective interest rate on the new Brookfield Facility had two components (i) cash
interest cost of 9.2% and (ii) the non-cash accretion of related financing fees and costs. At December 31, 2013,
the effective interest rate was estimated at 10.1% inclusive of all related finance fees amortized over the
expected term of the debt.
(c) Senior unsecured notes (“Senior Notes”)
In September 2010, the Group issued 8.875% Senior Notes for gross proceeds of $150.0 million. Interest is
payable on the Senior Notes semi-annually in arrears on March 22 and September 22 of each year until maturity.
The Senior Notes mature on September 22, 2017 and, at the Group’s option, are redeemable at an amount
equal to accrued and unpaid interest, and a redemption premium that diminishes to face value on
September 21, 2016. Upon the occurrence of a change of control of the Group, the Group is required to make
an offer to purchase all of the Senior Notes at a price equal to 101% of the principal amount of such Senior
Notes plus accrued and unpaid interest. Under the terms of the Senior Notes, many restrictive covenants are
triggered if the Group cannot achieve a ratio primarily linked to the trailing four quarter operating earnings before
interest, taxes, depreciation and amortization, adjusted for certain inclusions, such as the pro-forma earnings
related to acquisitions, and certain exclusions. From and after the Group's four fiscal quarters ending June 30,
2011, the Group has not achieved this ratio. These covenants place significant restrictions on, among other
things, the ability of the Group to incur additional indebtedness or to issue disqualified capital stock, to create
liens or other encumbrances, to pay dividends on the common shares, to make certain payments, investments,
loans and guarantees, to sell or otherwise dispose of assets and to merge or consolidate with another entity.
26
As the Senior Notes are unsecured, they rank pari passu with all other existing and future unsecured
indebtedness of the Group, other than the Debentures (which are subordinate to the Senior Notes) and any other
indebtedness of the Group expressly stated to be subordinated to the Senior Notes.
(d) Convertible unsecured subordinated debentures
On June 30, 2010, the Group issued 40,000 6.5% convertible unsecured subordinated debentures for gross
proceeds of $40.0 million pursuant to a convertible debenture indenture between the Group and Computershare
Trust Company (the "Debenture Indenture"). Interest is payable on the Debentures semi-annually in arrears on
June 30 and December 31 of each year until maturity. The Debentures are unsecured and are subordinated to
the full and final payment of all other indebtedness of the Group other than indebtedness expressly stated to be
subordinated or pari passu with the Debentures.
The Debentures mature on June 30, 2017 and, at the holder’s option, are convertible into shares of the Company
at any time prior to the earlier of (i) the maturity date and (ii) the date of redemption specified by the Company at
a conversion price of $26.90 per share using a conversion rate of 37.1747 shares per $1,000 dollar principle
amount of debenture. Prior to July 1, 2015, the Company may, at its option and upon meeting a minimum
volume weighted average trading price of its shares, redeem the Debentures, in whole or in part at par plus
accrued and unpaid interest. On or after July 1, 2015 and prior to the maturity date, the Company may, at its
option, redeem the Debentures, in whole or in part, at par plus accrued and unpaid interest.
Upon the occurrence of a change of control (as described in the Debenture Indenture) of the Company, the
Company is required to make an offer to purchase all of the Debentures at a price equal to 101% of the principal
amount of such Debentures plus accrued and unpaid interest. If 90% or more of the principal amount of all
Debentures outstanding have been tendered for purchase pursuant to the terms of the Debenture Indenture and
not withdrawn, the Company has the right to redeem all the remaining outstanding Debentures, subject to the
terms and conditions described in the Debenture Indenture.
The Company, can at its option and subject to any applicable regulatory approval, elect to satisfy the obligation
to repay all or any portion of the principal amount of the Debentures due on their maturity, together with all
accrued and unpaid interest thereon, by issuing common shares pursuant to and subject to the terms of the
Debenture Indenture. In addition, the Company may elect to issue and solicit bids to sell sufficient common
shares in order to raise funds to satisfy its obligation to pay interest on the Debentures, pursuant to and subject
to the terms and conditions described in the Debenture Indenture.
The Group has determined that the conversion option of these compound financial instruments is an equity
instrument and is not re-measured subsequent to initial recognition. The value of the liability and equity
components was determined upon initial recognition of the Debentures on June 30, 2010. The difference
between the face value and the liability component of the Debentures was allocated to equity.
The effective interest rate used to determine the amortized cost of the liability component of the Group’s
Debentures is 8.6%. A continuity of the liability component of the Debentures is as follows:
2013
As at December 31
2012
Balance of liability component – Beginning of period
Accretive interest
$
37,456 $
652
36,857
599
Balance of liability component – End of year
$
38,108 $
37,456
27
(e) Finance leases
Payments under finance lease liabilities are as follows:
2013
As at December 31
Less than one year
Between one and five years
More than five years
$
Total minimum payments
Future finance charges on finance leases
Present value of finance lease liabilities
$
2012
1,345 $
1,895
-
1,543
1,640
-
3,240
(249)
3,183
(243)
2,991 $
2,940
The present value of finance leases liabilities are as follows:
2013
As at December 31
(f)
2012
Less than one year
Between one and five years
More than five years
$
1,212 $
1,779
-
1,393
1,547
-
Present value of finance lease liabilities
$
2,991 $
2,940
Undrawn facilities
The Group has undrawn facilities available of $26,371 based on the current availability with its asset based
lender as at December 31, 2013 (2012 – $35,502).
(g) Fair value
The carrying amounts and fair values (Note 25) of the non-current borrowings are as follows:
Carrying value
2013
2012
As at December 31
Brookfield Facility
Senior Notes
Debentures
$
11,000 $
109,412
108,908
147,951
147,319
38,108
37,456
1,779
1,547
$ 308,250 $ 295,230
Fair value
2012
2013
$
11,000 $
110,342
110,010
120,866
119,293
22,000
29,904
1,779
1,547
$ 265,987 $ 260,754
Note 15. Provisions
Legal
obligations
Restructuring
Provisions used during the period
$
Comprised of:
Current
Non-current
$
28
748 $
(748)
1,007 $
(47)
Onerous
contract
Total
280 $
(210)
2,035
(1,005)
-
960
70
1,030
-
960
-
70
-
1,030
-
960 $
70
-
$
$
1,030
Legal
obligations
Restructuring
Provisions used during the period
Provisions reversed during the period
$
Comprised of:
Current
Non-current
$
4,327 $
(3,579)
-
Onerous
contract
1,763 $
(137)
(619)
Total
487 $
(207)
-
6,577
(3,923)
(619)
748
1,007
280
2,035
748
-
1,007
-
210
70
1,965
70
748
$
1,007
$
280
$
2,035
(a) Restructuring
During 2011, the Group announced the 2011 turnaround plan. The reorganization costs associated with the
restructuring primarily related to severance costs. The severance portion of the restructuring was completed
during the fourth quarter of 2011 and final costs of the severance portion were paid out by the end of the fourth
quarter of 2013.
(b) Legal obligations
The amount represents a provision for certain legal claims brought against the Group through certain
acquisitions or dispositions. The claims have arisen either from customers alleging defects on products supplied
to them prior to the business acquisition by the Group or disputes surrounding licenses. The majority of the
claims are limited to the balances provided due to indemnification agreements entered into by the Group during
the transactions.
During the third quarter of 2012, the provision for the claim against the Group, related to its disposition of the
cement packaging operation (“the Packaging Business”) originally established during the fourth quarter of
2010, has been settled for an amount less than originally provided resulting in a gain of $462 (net of deferred
income taxes of $157) and has been recorded in discontinued operations.
At this juncture no time period to resolution can be estimated on the remaining claims brought against the Group.
Changes in legal obligation provisions, on these remaining claims, have been recognized in selling, general and
administrative.
(c) Onerous contract
The amount primarily represents a provision for a portion of an onerous lease contract held by the Group on land
and building to the purchasers of the Packaging Business. The lease and sub-lease on the land and building is
set to come due in May 2014 at which time the Group’s commitment may be passed to the purchasers. The
remeasurement of the provision related to the sub-lease is recognized in cost of sales to offset the Group’s lease
commitment.
Note 16. Post-employment obligations
The Group has a number of funded and unfunded defined benefit and defined contribution programs that provide
pension and other post-employment benefits to its employees and qualifying retirees.
2013
As at December 31
Present value of funded or partially funded obligations
Fair value of plan assets
$
Deficit of funded or partially funded plans
Liability arising from minimum funding requirement
Present value of unfunded obligations
2012
19,410 $
(19,161)
249
981
10,511
$
29
11,741
20,679
(19,082)
1,597
850
10,907
$
13,354
(a) Description and information on the Group’s defined benefit plans
The Group’s Salaried and SERP/SNERP Plans are final-pay defined benefit pension plans and the CAW Plan is
a flat-dollar benefit pension plan. During 2012, the former Post Retirement Welfare Plan was combined with the
Group’s Post Retirement Health Plan. The SERP/SNERP, Post Retirement Health Plan, Long-term Employee
Benefit and Short-term Employee Benefit Plans are not pre-funded benefit plans. The Group’s Post Retirement
Health Plan was grandfathered for retirees with combined years of age and service of 75 who were employed as
at January 1, 2003.
The Group’s Salaried and SERP/SNERP Plans were wound up with an effective date of December 31, 2009.
The next triennial valuation due to be completed as at December 31, 2013 for the Group’s CAW defined benefit
plan and the Group’s Long-term Employee Benefit and Short-term Employee Benefit Plans; and September 30,
2015 for the Group’s Post Retirement Health Plan. A financial review will be conducted in 2014 for the Salaried
Plan due to the wind up.
As at December 31, 2012, the aggregate solvency deficit in the Group’s funded Salaried Plan amounted to
$1,502 resulting in special payments for past service of $766 per year ending in 2014, to fund the Salaried Plan’s
deficit. Total expected contributions to post-employment benefit plans for the year ending December 31, 2014
(including the past service contributions) are $1,460.
The weighted average duration of the defined benefit obligation for the Salaried Plan, SERP/SNERP Plan, CAW
Plan and other benefit plans is respectively 14.3, 13.2, 17.3, and 14.4 years (2012 – 14.3, 12.5, 17.3, and 14.4
years).
(b) Movement in the present value of the defined benefit obligations
Impact of
minimum
funding
requirement/
Total asset ceiling
Postemployment
benefits
Defined
pension
benefits
Benefit obligation – January 1, 2013
Service cost
Interest cost
Remeasurements:
Gain from change in financial
assumptions
Loss from change in demographic
assumptions
Experience losses
Change in asset ceiling, excluding
amounts included in interest expense
Benefits paid
$
21,691 $
402
841
31,586 $
541
1,232
(2,455)
(3,474)
Benefit obligation – December 31, 2013
$
9,895 $
139
391
(1,019)
532
685
24
(382)
(823)
9,556 $
30
20,365 $
685
556
(1,205)
29,921 $
Total
850 $
33
32,436
541
1,265
-
(3,474)
98
981 $
685
556
98
(1,205)
30,902
Postemployment
benefits
Defined
pension
benefits
Benefit obligation – January 1, 2012
Service cost
Interest cost
Remeasurements:
Loss from change in financial
assumptions
Gain from change in demographic
assumptions
Experience losses
Change in asset ceiling, excluding
amounts included in interest expense
Benefits paid
$
20,064 $
104
1,045
Benefit obligation – December 31, 2012
$
9,468 $
160
239
993
1,207
Impact of
minimum
funding
requirement/
Total asset ceiling
29,532 $
264
1,284
2,200
(672)
-
(5)
175
(677)
175
(293)
(899)
(1,192)
9,895 $
21,691 $
1,985 $
(1,135)
-
31,586 $
850 $
Total
31,517
264
1,284
2,200
(677)
175
(1,135)
(1,192)
32,436
(c) Movement in the present value of the plan assets
2013
Fair value of plan assets – beginning of year
Expected return on plan assets
Remeasurement:
Return on plan assets, excluding amounts included in interest income
Employer contributions
Administration costs
Benefits paid
$
Fair value of plan assets – end of year
$
2012
19,082 $
768
17,781
495
(947)
1,554
(91)
(1,205)
587
1,411
(1,192)
19,161 $
19,082
(d) Net benefit expense recognized in the Group’s statement of earnings
2013
2012
Service cost – employer recognized in cost of sales
Service cost – employer recognized in selling, general and administrative
Interest cost recognized in finance (income) expense – net
Expected return on plan assets recognized in finance (income) expense – net
Interest on irrecoverable surplus
Other cost
$
437 $
104
1,232
(768)
33
91
223
40
1,284
(495)
-
Net benefit expense
$
1,129 $
1,052
(e) Actuarial gains (losses) – net and change in minimum funding requirement on certain post-employment
benefit plans recognized in the Group’s statement of comprehensive income
2013
2012
Balance accumulated in deficit – beginning of year
Recognized during the year
$
1,131 $
1,188
1,107
24
Balance accumulated in deficit – end of year
$
2,319 $
1,131
31
(f)
Asset allocation of funded pension plans
2013
As at December 31
Investment funds
Bond funds
Canadian equity
Global equity
Balanced funds
2012
$
15,162 $
479
834
2,686
14,995
428
740
2,919
$
19,161 $
19,082
The fair value of the investments funds were determined from quoted market prices. The Group’s funded
pension plans do not directly own any of the Company’s common shares, Senior Notes or Debentures.
(g) Actuarial assumptions
The following are the significant actuarial assumptions on the Group’s benefit obligation:
2013
2012
Discount rate used to determine defined benefit obligations:
Salaried and SERP/SNERP Plans
CAW Plan
Post Retirement Health Plan
4.70%
4.75%
4.75%
3.90%
4.00%
4.00%
Assumptions for the health care cost trend rates of the Post Retirement Health Plan:
Medical inflation
Dental inflation
8.50%
5.00%
8.50%
5.00%
Medical inflation is assumed to be 8.5% in 2013, declining 0.5% per year to ultimate rate of 5.0%.
Assumptions regarding future mortality for 2013 are set based on actuarial advice in accordance with published
statistics and experience using the mortality table published by the Canadian Institute of Actuaries, based on
private sector data (2012 – 1994 uninsured pensioner table projected to 2020).
(h) Sensitivity analysis on defined benefit plans
The following is the effect of a change in key assumptions on the Group’s benefit obligation:
Change in
assumption
Increase in
assumption
Discount rate:
Salaried
SERP/SNERP Plans
CAW Plan
Other benefit plans
0.50% $
0.50%
0.50%
0.50%
Life expectancy:
Salaried and SERP/SNERP Plans
CAW Plan
Other benefit plans
1 year
1 year
1 year
32
Decrease in
assumption
(1,066) $
(61)
(297)
(550)
393
120
462
1,004
57
396
677
(409)
(117)
(432)
The following is the effect of a change in the trend rates on the Group’s Post Retirement Health Plan:
2013
Effect of change in health care cost trend rate:
1% Increase
Defined benefit obligation
$
1% Decrease
Defined benefit obligation
$
1,354
2012
$
(1,099) $
1,638
(1,313)
The sensitivity analysis disclosed is based on changing one assumption while holding all other assumptions
constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated.
When calculating the sensitivity of the defined benefit obligation to variations in significant actuarial assumptions,
the same method (present value of the defined benefit obligation calculated with the projected unit credit method
at the end of the reporting period) has been applied as for calculating the liability recognized in the statement of
financial position.
(i)
Defined benefit plan risks
Through its defined benefit plans, the Group is exposed to a number of risks, the most significant of which are
detailed below:
(i)
Asset volatility
The plan liabilities are calculated using a discount rate set with reference to corporate bond yields; if plan
assets underperform this yield, this will create a deficit. The Group’s CAW Plan holds a significant
proportion of equities through investment funds, which are expected to outperform corporate bonds in the
long-term while contributing volatility and risk in the short-term. As the plans mature, the Group intends to
reduce the level of investment risk by investing more in assets that better match the liabilities. The plan’s
investment in bond funds are comprised primarily of Canadian government and corporate investment grade
bonds.
However, the Group believes that due to the long-term nature of the plan liabilities a level of continuing
equity investment is an appropriate element of the Group’s long-term strategy to effectively manage the
plans. The Group monitors how the duration and the expected yield of the investments are matching the
expected cash outflows arising from the pension obligations. The Group does not use derivatives to
manage its risk. Investments are well diversified, such that the failure of any single investment would not
have a material impact on the overall level of assets. The Group believes that equities offer the best returns
over the long-term with an acceptable level of risk. The majority of equities within its pooled investment
funds are in a portfolio of Canadian and international blue chip companies. The assets within the plans are
not exposed to significant foreign currency risk.
(ii) Changes in bond yields
A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an
increase in the value of the plans’ bond holdings.
(iii) Inflation risk
The majority of the plan’s assets are in fixed interest funds which are unaffected by or loosely correlated with
inflation, meaning that an increase in inflation will also increase the net post-employment benefit obligation.
(iv) Life expectancy
The majority of the plans’ obligations are to provide benefits for the life of the member, so increases in life
expectancy will result in an increase in the plans’ liabilities.
33
Note 17. Share capital and other reserves
Number of
common Number of
shares
warrants
Shares and units issued and outstanding
24,054,623
Cancellation of warrants
24,054,623
-
24,054,623
-
Amount
$ 271,650
4,564,960 $ 271,650
(4,564,960)
-
$ 271,650
During the fourth quarter of 2012, the Group cancelled the warrants previously issued in connection with the 2012
financing transaction with Brookfield (Note 14).
(a) Authorized shares of the Company
An unlimited number of common shares may be issued by the Company. Each share entitles the holder to one
vote at all meetings of shareholders and represents an interest in dividends by the Company and an undivided
interest in the net assets of the Company. Each common share has no par value and each common share
issued is fully paid.
(b) Other reserves
Accumulated
other
comprehensive
income Cumulative
translation
adjustment
Contributed
surplus
Total other
reserves
Stock-based compensation
$
18 $
28
658 $
634
-
676
634
28
$
46 $
1,292 $
1,338
Stock-based compensation
$
(1) $
19
227 $
431
-
226
431
19
$
18 $
658 $
676
Note 18. Expenses by nature
Note
Raw material and consumables used
Wages and benefits
Transportation
Facilities costs
Foreign exchange loss
Other expenses
23
Total cost of sales and selling, general and administrative
34
2013
2012
$ 202,998 $ 214,743
143,012
137,781
12,051
13,704
27,992
26,696
24,542
22,651
235
144
16,581
15,237
$ 427,411 $ 430,956
Note 19. Other (gains) losses – net
2013
Change in fair value of derivative financial instrument – financing fee
Loss (earnings) on investments accounted for using the equity method
Gain on disposal of property, plant and equipment
2012
$
- $
95
(6)
480
(29)
(892)
$
89 $
(441)
Note 20. Finance (income) expense – net
2013
Finance expense comprised of:
Brookfield Facility
Previous Brookfield Facility
Senior Notes
Debentures
Interest on net post-employment obligations
Other charges
Finance (income) expense – net comprised of:
Interest and other finance expenses
Accreted interest
2012
$
1,863 $
10,968
13,945
3,252
202
464
393
35
327
55,210
13,910
3,199
214
789
823
$
31,087 $
74,507
$
28,679 $
2,408
33,106
41,401
$
31,087 $
74,507
Note 21. Earnings (loss) per share
2013
Net loss from continuing operations attributable to owners of the Company – basic and
diluted
$
Gain on settlement of provision from discontinued operation – basic and diluted
(2,907) $
-
Net loss attributable to owners of the Company – basic and diluted
(2,907)
2012
(36,570)
462
(36,108)
Weighted average number of shares outstanding – basic and diluted
24,054,623 24,054,623
(Loss) earnings attributable to owners of the Company per share
Basic and diluted – continuing operations
Basic and diluted – discontinued operations
Basic and diluted
$
$
$
(0.12) $
$
(0.12) $
(1.52)
0.02
(1.50)
None of the Debentures or stock options were dilutive for the years ended December 31, 2013 and
December 31, 2012.
35
Note 22. Supplementary cash flow information
2013
2012
$
(1,768) $
(1,283)
65
(9,678)
(101)
(3,816)
326
4,972
967
607
(155)
3,558
$
(16,581) $
10,275
$
(28,987) $
(32,778)
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accrued liabilities and provisions
Cash interest paid
Note 23. Personnel expenses
2013
2012
Note
Personnel compensation in the Group’s statement of earnings are as follows:
Wages and benefits
Annual incentive
Contributions to defined contribution pension plans
Post-employment net benefit expense
Equity-settled share-based compensation expense
Cash-settled share-based compensation expense
$ 138,153 $ 128,157
1,008
6,557
2,093
1,526
16 (d)
1,129
1,052
634
431
(5)
58
Personnel expenses for key management are as follows:
Wages and short-term employee benefits
Annual incentive
Other long-term benefits
Termination benefits
Equity-settled and cash-settled share-based compensation expense
$ 143,012
$ 137,781
$
2,732
159
575
509
$
3,921
1,221
144
373
$
3,975
$
5,659
Key management is considered by the Group to include the Group’s Board of Directors and executive officers
reporting to, and including, the chief executive officer of the Company. All equity-settled and cash-settled
compensation expenses are recognized in selling, general and administrative.
Note 24. Share-based payment awards
Liabilities arising from share-based payment awards have been allocated to the Group’s statements of financial
position as follows:
2013
As at December 31
Carrying value of liabilities arising from share-based payment awards
$
22
2012
$
27
(a) Stock options
The Group uses stock options as a form of retention and incentive compensation. The options currently issued
under the Group’s Amended and Restated Stock Option Plan are equity-settled and therefore are accounted for
as equity instruments.
The aggregate number of common shares that can be issued under the Amended and Restated Stock Option
Plan shall not exceed 2,342,000. Each option issuance under the Amended and Restated Stock Option Plan
36
specifies the vesting period during which the option is exercisable, the exercise price and the expiry date of the
option. On the date of the option grant the Company’s Board of Directors determine the recipient of the option,
the vesting period and the expiry date of option grants. The exercise price of option grants equals the volumeweighted average trading price of the common shares of the Company on the TSX on the five trading days
preceding the grant date. The Group uses the graded method of accounting to recognize the Amended and
Restated Stock Option Plan.
Movements in the number of stock options outstanding, their related weighted average exercise price per option
and the balance exercisable are as follows:
2013
Weighted
average Number of
exercise
stock
price
options
For the year ended December 31
Number of
stock
options
Balance outstanding – Beginning of year
Granted
Forfeited
444,750 $
635,000
(70,268)
2012
Weighted
average
exercise
price
6.00
2.41
(3.35)
261,733 $
414,000
(230,983)
16.43
2.42
(11.40)
Balance outstanding – End of year
1,009,482 $
3.92
444,750 $
6.00
Balance exercisable – End of year
188,462 $
7.18
41,394 $
16.43
Options currently outstanding have the following weighted average contractual life and exercise price:
Weighted
average
Number of contractual
options
life
Range of exercise prices per option
$1.00 to $2.99
$16.00 to $16.99
900,250
109,232
8.53
5.86
1,009,482
8.24
Weighted
average
exercise
price
$
2.40
16.43
3.92
For options granted, fair values were estimated on the date of grant using the binomial fair value option pricing
model. The weighted average fair value of stock options granted and the weighted average assumptions are as
follows:
2013
Weighted average fair value on measurement date
Weighted average share price on measurement date
Weighted average risk free interest rate on measurement date
Weighted average expected life in years on measurement date
Expected volatility
Dividend yield
$
1.47
2.30
1.4%
5.86
75.0%
Nil%
2012
$
1.53
2.41
1.5%
6.25
70.0%
Nil%
The maximum contractual term of the stock options granted for the year ended December 31, 2013 was 10
years. These options have a weighted average exercise price of $2.41 (2012 – $2.42) and vest over a maximum
period of four years. The expected volatility considers the historical volatility of the Company’s shares over five
years.
(b) Restricted share units for management and directors
The Group uses restricted share units as a form of retention and incentive compensation. The units currently
issued under the Group’s 2011 Restricted Share Unit Plan for Management and the Group’s 2011 Restricted
Share Unit Plan for Directors, are cash-settled and therefore are accounted for as liability instruments.
37
The restricted share units are fair valued on the date of grant using the volume-weighted average trading price of
the common shares of the Company on the TSX on the five trading days preceding the grant date, with related
compensation expense recognized over the remaining vesting period. In subsequent measurement periods, the
fair value of the restricted share units is re-measured using the trading price of the Company’s common shares,
with adjustments to compensation expense recognized over the remaining vesting period. Notional dividends
are recorded as additional issuances of restricted share units during the life of the restricted share unit. The
restricted share units, for management, typically vest after the third anniversary following the grant date, unless
determined otherwise by the Company’s Board of Directors, and are payable immediately. The restricted share
units, for directors, vest and are payable on the first anniversary of when the director ceases to be a director.
Movements in the number of restricted share units outstanding are as follows:
2013
2012
Number of restricted share units for management:
Granted
Forfeited
Exercised
14,582
(1,807)
20,947
(5,478)
(887)
12,775
14,582
Number of restricted share units for directors:
Granted
14,610
-
14,610
-
14,610
14,610
Note 25. Financial instruments
(a) Financial instruments
As at December 31
Fair value
hierarchy (b)
Carrying
value
Financial liabilities carried at amortized cost and fair values disclosed:
Brookfield Facility
Level 2 $ 109,412 $
Senior Notes
Level 2
147,951
Debentures
Level 1
38,108
Level 2
2,991
Other notes
Level 2
-
2013
Fair value
110,342
120,866
22,000
2,991
-
2012
Carrying
value
$
108,908
147,319
37,456
2,940
667
Fair value
$
110,010
119,293
29,904
2,940
667
Fair values are based on cash flows discounted using a rate based on the market borrowing rate of 17.1%
(2012 – 16.0%) for the Senior Notes and a market price of 55.0 for the Debentures (2012 – 74.8). The fair value
of the Brookfield Facility, finance lease liabilities and other notes approximate their carrying value, after adjusting
for transaction costs and the Group’s credit risk, if applicable.
Other financial assets and financial liabilities carried at amortized cost include cash, restricted cash, trade
receivables – net, holdback receivables, accounts payable and accrued liabilities, and Revolving Credit Facility.
Their fair values approximate their carrying values due to their short-term nature.
(b) Fair value hierarchy
For the Group’s estimates of fair value relating to financial instruments, the Group classifies these measurements
within the fair value hierarchy. The different levels within the fair value hierarchy have been defined as follows:


Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either
directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
38

Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs)
(level 3).
As at December 31, 2013 and December 31, 2012 the Group has no recurring or non-recurring measurements of
financial instruments at fair value the statement of financial position.
(c) Financial risk management
The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate
risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability
of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.
When necessary, and when able, the Group uses derivative financial instruments to hedge certain risk
exposures.
Risk management is carried out by the Group’s central services department and treasury under policies
approved by the Board of Directors. The central services department and treasury identify, evaluate and strive to
mitigate financial risks in co-operation with the Group’s business units.
(i)
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because
of changes in market prices, such as foreign exchange rates, interest rates and equity prices. The objective
of market risk management is to manage and control market risk exposures within acceptable parameters,
while optimizing return.
Currency risk
The Group is exposed to currency risk comprised primarily of balance sheet exposures. Risk arises to the
Group’s earnings through fluctuations in foreign exchange rates and the degree of volatility of these rates.
The Group’s financial results are reported in Canadian dollars and as a result the Group’s exposure to
foreign currency risk is primarily related to transaction based fluctuations in the value of the Canadian dollar
relative to that of the US dollar, as a portion of the Group’s transactions occur with customers or suppliers in
US dollars. Transaction exposure is managed through monitoring the Group’s natural hedge position and
when required using approved derivative financial instruments including forward foreign exchange contracts
and the purchase or sale of foreign currencies. The Group’s balance sheet is exposed to the translation
from foreign currencies through the following financial instruments: cash, restricted cash, trade receivables,
holdback receivables, trade payables and certain accrued liabilities. The Group does not currently utilize
derivative financial instruments to manage this risk.
If the Canadian dollar were to depreciate or appreciate five percent against the US dollar at
December 31, 2013, with all other variables held constant, the impact of the foreign currency change on the
Group’s US dollar denominated financial instruments would lead to an increase or decrease in earnings of
$66.
Interest rate risk
The Group’s interest rate risk arises from long-term borrowings and interest sensitive derivative financial
instruments. Borrowings issued at variable rates (such the Group’s Brookfield Facility and the new
Revolving Credit Facility) expose the Group to changes in cash flows and borrowings issued at fixed rates
(such as the Group’s Senior Notes and Debentures) expose the Group to changes in fair value due to
changes in interest rates. Interest rate risk is managed by monitoring the ratio of borrowings at variable
rates versus fixed rates. When necessary, and when able, the Group uses floating-to-fixed interest rate
swaps to manage its risk of changes in cash flows. Such interest rate swaps have the economic effect of
converting borrowings from floating rates to fixed rates. The Group does not currently utilize derivative
financial instruments to manage this risk.
The Group is exposed to changes in cash flows due to the floating interest rate on its Brookfield Facility.
The change in interest expense for a full year on the floating rate is estimated to amount to $1,111 for each
1% change in the floating interest rate. When drawn, the Group is subject to changes in cash flows due to a
floating interest rate on its Revolving Credit Facility.
(ii) Credit risk
Credit risk is the risk that a counterparty to one of the Group’s financial instruments will cause a loss to the
Group by failing to discharge its obligations. The Group's financial assets that are exposed to credit risk
consist primarily of cash, restricted cash, trade receivables, and holdback receivables. The Group’s credit
39
risk for cash and restricted cash is reduced as balances are held with major financial institutions. When
applicable, the Group’s credit risk on its derivative financial instruments is reduced as these contracts are
held with major financial institutions and the Group expects these counterparties would satisfy their
obligations under the contracts.
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure
to credit risk at the reporting date are the Group’s financial assets balances on its balance sheet for which
fair values approximate carrying values. Generally the Group holds no collateral for its financial instruments.
The Group has a large customer base, which covers a diverse range of business sectors primarily in
Canada. The Group follows a program of customer credit evaluations and limits the amount of credit
extended when deemed necessary. If customers are independently rated, these ratings are used for credit
evaluations. If there is no independent rating, management assesses the credit quality of the customer,
taking into account its financial position, past experience and other factors. The Group maintains provisions
for potential credit losses, and any such losses to date have been within management's expectations. Of
the Group’s trade receivables, $42,088 are past due as at December 31, 2013 (2012 – $45,602). The
definition of items that are past due is determined by reference to terms agreed to with individual customers.
Of the accounts past due at December 31, 2013, $34,444 or 81.8% has been subsequently collected. See
Note 7 for the movements on the Group’s provision for impairment of trade receivables.
The balances past due are aged as follows:
2013
As at December 31
0 – 30 days
31 – 60 days
61 – 90 days
Greater than 91 days past due
2012
$
22,006 $
8,672
5,113
6,297
24,414
11,330
4,611
5,247
$
42,088 $
45,602
The Group believes that the unimpaired amounts that are past due by more than 30 days are still collectible,
based on historic payment behavior and extensive analysis of the underlying customer credit ratings.
(iii) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting its obligations associated with
financial liabilities that are settled by delivering cash or another financial asset. The Group’s objective in
managing liquidity risk is to maintain sufficient readily available resources in order to meet its financial
obligations as they come due. Management monitors rolling forecasts of expected cash flows in order to
monitor the Group’s liquidity position. In order to meet its financial obligations, the Group relies on collecting
its trade receivables and holdback receivables in a timely manner and by maintaining sufficient funds in
excess of anticipated needs. Management is of the opinion that the Group’s level of working capital is
sufficient to meet its expected short-term obligations.
40
The tables below summarize the maturity profile of the Group’s financial liabilities based on contractual
undiscounted payments. The amount of interest, where applicable, is estimated using the Group’s
applicable borrowing rates at December 31, 2013 and December 31, 2012.
Between
Less than
one and
As at December 31, 2013
Non-derivative financial liabilities:
Trade payables and certain accrued liabilities
Brookfield Facility
Senior Notes
Debentures
Non-derivative financial liabilities:
Trade payables and certain accrued liabilities
Brookfield Facility
Senior Notes
Debentures
Other notes
Total
$
53,444 $
- $
- $ 53,444
10,249
131,317
141,566
13,313
26,625
159,984
199,922
2,600
5,200
41,300
49,100
1,345
1,674
221
3,240
$
80,951 $ 164,816 $ 201,505
Between
Less than
one and
As at December 31, 2012
Between
three and
five years
Between
three and
five years
$ 447,272
Total
$
62,118 $
10,249
13,313
2,600
1,543
687
- $
- $ 62,118
20,498
121,068
151,815
26,625
173,297
213,235
5,200
43,900
51,700
1,305
335
3,183
687
$
90,510 $
53,628 $ 338,600
$ 482,738
Note 26. Capital management
In the context of managing its capital, the objective of the Group is to maintain a capital structure that allows multiple
options to finance its development and growth along with providing shareholders with an acceptable return on their
investment. The Group’s total capitalization is defined as (i) net borrowings, which is non-current borrowings, less
cash, and (ii) shareholders’ deficiency.
2013
As at December 31
Borrowings – non current
Less: cash
2012
$ 308,250 $ 295,230
(3,942)
(7,087)
Net borrowings
304,308
(21,553)
Total capitalization
$ 282,755
Net borrowings as a percentage of total capitalization
107.6%
288,143
(20,193)
$ 267,950
107.5%
The Group’s objective for managing capital is to maximize long-term shareholder value by:


Ensuring that capital is available for the continuing management of productive capacity by investing in capital
expenditures that maintain the Group’s manufacturing ability.
Ensuring that capital is available to expand productive capacity by making investments in capital expenditures
and business acquisitions that add to manufacturing capacity and further diversify the Group’s product offerings
and geographic presence.
41

Reviewing, when appropriate, dividend levels and frequency of funds that are not required for financing
operations or capital investment growth opportunities that may offer shareholders better value.
The Group, upon approval by its Board of Directors, will balance its overall capital structure through share issuances,
the payment of dividends, the issuance of debt, or by undertaking other activities as deemed appropriate under the
specific circumstances. Certain of these activities are prohibited under the terms of the Group’s lending agreements.
The Group continually monitors its capital structure. The Group’s objectives, policies and processes with respect to
capital management remained unchanged for the year ended December 31, 2013.
The Group regularly monitors current and forecasted debt levels to ensure any required covenants are achieved.
The most significant financing restrictions are discussed in Note 14. The Group is in compliance with all required
covenants for the year ended December 31, 2013.
Note 27. Contingencies and commitments
(a) Commitments under operating leases
The operating leases are of a rental nature and are primarily for property and equipment. The Group leases
various retail outlets, offices and warehouses under non-cancellable operating lease agreements. The lease
terms are between one and 10 years, and the majority of lease agreements are renewable at the end of the
lease period at market rates.
Commitments under non-cancellable operating leases are due as follows:
2013
As at December 31
Less than one year
Greater than one year and less than five years
Greater than five years
2012
$
5,040 $
16,696
18,213
4,277
15,105
20,257
$
39,949 $
39,639
Operating lease costs have been allocated to earnings or loss as follows:
2013
Cost of sales
2012
$
4,951
1,090
$
4,098
1,231
$
6,041
$
5,329
(b) Capital commitments
As at December 31, 2013, outstanding commitments for capital expenditures under purchase orders and
contracts amounted to approximately $228. Of this amount, $177 relates to the purchase of machinery and
equipment and $51 relates to building improvements due in 2014.
(c) Contingent liabilities
In the normal course of its business activities, the Group is subject to a number of claims and legal actions that
may be made by customers, suppliers and others in respect of which either an adequate provision has been
made or for which no material liability is expected.
During the third quarter of 2013, Armtec reached an agreement in principle to settle all previously disclosed
proposed class action proceedings commenced by investors who purchased shares of the Company during the
period of March 24, 2011 through June 8, 2011. The agreement in principle provides for a payment of
approximately $12.9 million, inclusive of all taxes, fees, interest and costs, by Armtec’s insurers and as such the
settlement would not impact the Company’s cash resources. The proposed settlement is made without any
admission of liability by the Company or any of its current or former officers and directors. In February of 2014,
the parties entered into a definitive settlement agreement in accordance with the foregoing terms. A courtapproved notice will be issued regarding the settlement approval process and the settlement terms. The
settlement is subject to the fulfillment of customary conditions including opt-out thresholds and court approval.
There is no assurance that these conditions will be fulfilled.
42
Note 28. Segment information
(a) Earnings (loss) disclosures
Drainage
Solutions
2013
Precast
Concrete
Solutions
Corporate
and other
Revenue from external customers $ 162,607 $ 292,915 $
EBITDA
$
18,724 $
Depreciation of property, plant and
equipment
Change in fair value of derivative
financial instrument – financing fee
Total
Drainage
Solutions
2012
Precast
Concrete
Solutions
Corporate
and other
- $ 455,522 $ 184,225 $ 273,190 $
38,301 $ (16,952) $
40,073 $
27,112 $
Total
- $ 457,415
29,716 $ (15,744) $
41,084
1,358
772
5,176
3,243
937
565
7,471
4,580
1,511
957
5,641
3,923
1,014
658
8,166
5,538
16,594
29,882
(18,454)
28,022
24,644
20,152
480
(17,896)
480
26,900
Financing (income) expense – net
Loss before taxes
Income tax recovery
Net loss from continuing operations attributable to owners of the
Company
$
31,087
(3,065)
74,507
(47,607)
158
11,037
(2,907)
-
(36,570)
462
(2,907)
$
(36,108)
(b) Asset and liability disclosures
2013
As at December 31
Assets
Drainage Solutions
Precast Concrete Solutions
Corporate and other
$
Segment total
Unallocated:
Cash and current restricted cash
Prepaid expenses and other
assets
Investment accounted for using the
equity method
Deferred income tax assets
Accounts payable and accrued
liabilities
Borrowings
Provisions
$
72,283
247,545
8,191
Liabilities
2,667
-
$
1,248
4,777
3,080
328,019
2,667
$
9,105
4,067
Assets
609
1,266
761
328,343
6,483
$
2,636
-
7,462
-
3,117
-
3,582
-
302
21,799
-
369
21,944
-
-
53,848
109
309,462
11,741
1,030
-
62,521
210
297,290
13,354
2,035
378,857
$
71,865
247,163
9,315
Liabilities
$
$
$
Additions to
non-current
assets
6,483
-
357,304
$
2012
Additions to
non-current
assets
361,700
$
$
43
381,893
(c) Geographic revenues to external customers
2013
Canada
International
2012
$
436,142
19,380
$
436,391
21,024
$
455,522
$
457,415
(d) Economic reliance
During the year ended December 31, 2013, no single customer accounted for more than 10% of total revenues.
Note 29. Subsequent event
Stock option issuance
Subsequent to December 31, 2013, the Board of Directors approved the grant of stock options to acquire common
shares to certain members of management of the Group. The effective date of the grant is March 26, 2014. The
aggregate number of common shares to be issued upon the exercise of the options will be determined by dividing the
aggregate value of the grant by the value of each option determined in accordance with the binomial fair value option
pricing model. It is anticipated that approximately 270,000 to 295,000 common shares will be issuable upon exercise
of these options.
44

2013 Annual Report

Transcription

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