UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 6-K
REPORT OF FOREIGN PRIVATE
ISSUER PURSUANT TO
RULE 13a-16
OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of November, 2009
Commission File Number
001-04192
KHD Humboldt Wedag
International Ltd.
(Translation of
registrants name into English)
Suite 1620 400 Burrard Street, Vancouver,
British Columbia, Canada V6C 3A6
(Address of principal
executive office)
Indicate by check mark whether the registrant files or will file
annual reports under cover of
Form 20-F or
Form 40-F. Form 20-F
þ
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in paper as permitted by
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Rule 101(b)(1) only permits the submission in paper of a
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if submitted solely to provide an attached annual report to
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Indicate by check mark if the registrant is submitting the
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if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public
under the laws of the jurisdiction in which the registrant is
incorporated, domiciled or legally organized (the
registrants home country), or under the rules
of the home country exchange on which the registrants
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is not a press release, is not required to be and has not been
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submission or other Commission filing on EDGAR.
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under the Securities Exchange Act of
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If Yes is marked, indicate below the file number
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82 -
o
KHD HUMBOLDT
WEDAG INTERNATIONAL LTD.
DEAR
SHAREHOLDERS
We are pleased to report that the third quarter showed some
signs of improvement in both order intake and in operating
income, and that this quarter will be the last to include the
results from our coal and minerals customer group and workshop
in Cologne. As previously announced, we completed the disposal
of these operations in early October.
The disposal of the coal and minerals operations and the
workshop in Cologne to McNally Bharat Engineering allows us to
focus on our core competencies and significantly reduces the
fixed cost base of our business. We retained the rights to our
roller press, a proprietary KHD design with its genesis in the
cement business, when we divested our coal and minerals customer
group as it has many successful applications in the minerals
processing industry and is a cornerstone of our service
business. This is a significant step in moving towards becoming
a customer focused service company, providing environmentally
friendly technologies.
It has also been a year since we began to see the impact of the
dramatic slowdown in our main cement market and started to
develop our restructuring plans. We are making good progress
with the implementation of our new operating structure and now
have a clear direction for KHD to create a business that is
sustainable over the longer term.
At December 31, 2008, we classified $159.2 million of
the contracts in our order backlog as at risk.
During the third quarter of 2009, after critical analysis of
these contracts and continued negotiations with the respective
customers, we determined that contracts aggregating
$95.8 million would not be proceeding and such contracts
were removed from our order backlog at September 30, 2009.
The remainder of contracts previously identified as at risk are
now considered to be normal contracts and remain in our order
backlog.
Before describing our results from and through the third
quarter, wed like to explain a change in the format of the
quarterly letter to KHD shareholders. Previous letters have
presented results in a format very similar to that required in
the management discussion and analysis section of the regulatory
filing which follows this letter. Some shareholders have let the
company know they found this to be of limited value, especially
considering that the very same material was presented in our
quarterly shareholder conference calls.
We agree; so weve made some changes. Starting this
quarter, we will be making a shareholder presentation available
on our website simultaneously with the release of our financial
results. The materials made available in this manner will
include informative and
easy-to-follow
graphic presentations of the results and trends. Our quarterly
investor calls will use this material as a basis for shareholder
discussions. This investor presentation eliminates the need for
graphics within the shareholder letter.
Another change in the material included in the shareholder
letter deals with our quarterly results. In prior letters, and
as required in the financial presentation of the regulatory
filing that accompanies this letter, we described our quarterly
results using year over year comparisons.
Considering the dramatic changes in economic conditions, we
believe the comparison of 2009 quarters to 2008 quarters to be
of limited value. We believe a more informative presentation is
quarter over quarter as this more accurately
portrays the improvement, or lack thereof, in KHDs
business during this recovery period. The year over year
comparison of the individual quarters is still provided in the
regulatory filing. All presentations of year to date results
utilize a year over year comparison.
We hope that our shareholders will consider these format changes
as improvements. If not, be sure to let us know.
PRESIDENTS
REPORT
1
KHD HUMBOLDT
WEDAG INTERNATIONAL LTD.
THIRD
QUARTER OPERATING RESULTS
Order intake in the third quarter, excluding the terminated
customer contracts, was $113.0 million compared with
$31.1 million in the prior quarter. Of this,
$76.8 million related to cement orders and
$36.2 million to coal and minerals. Cement order intake was
more than three times the level of the previous quarter and 9.4%
higher than the order intake in the first quarter.
Order backlog as of September 30, 2009 was
$626.3 million, a decrease of 14.4% from the second quarter
of 2009. Of this, $542.7 million is associated with cement
projects and $15.6 million is associated with our roller
press technologies and capabilities, which will together
comprise our order backlog going forward.
During the quarter, the Euro strengthened against the US dollar
to 1.46 from 1.40 at the end of the second quarter of 2009.
Revenues were $148.2 million in the quarter, which
represents an increase of 40.0% compared with the second quarter
of 2009.
Gross profit increased by 33.0% to $29.0 million, from
$21.8 million in the second quarter of 2009. Excluding the
reversal of restructuring costs and terminated customer
contracts, gross profit margins fell to 17.4% compared with
23.0% in the previous quarter. Gross margins in the third
quarter were adversely affected by our recognition of losses on
a limited number of projects, as contract performance is
reviewed monthly and any anticipated losses are recognized
immediately. Overall, however, the overwhelming majority of our
projects are on schedule and are anticipated to be profitable.
Operating income increased to $11.5 million from
$2.5 million in the previous quarter. This was due to
higher gross profit, higher income from our royalty interest in
the Wabush iron ore mine, and lower selling, general and
administrative costs.
Earnings per share on a diluted basis for the third quarter were
$0.25 as compared to a loss per share of $0.25 on a diluted
basis in the prior quarter.
Net cash flow during the quarter was strong due to positive
working capital movements. Cash and cash equivalents at the end
of the period were $407.4 million compared with
$355.2 million at the end of the previous quarter.
NINE
MONTHS OPERATING RESULTS
On a nine month basis, revenues were $366.2 million, a
decline of 22.9% from $474.7 million for the same period in
2008. This reflects the phasing of some projects, as well as, to
a certain extent, a slowdown in business activity. Gross profit
during the same period declined to $70.1 million from
$90.1 million, excluding the effect of restructuring costs
and terminated customer contracts. Gross profit margins
increased slightly to 19.1% from 19.0%. This reflects good
project execution and we are pleased that we have managed to
maintain this level of profitability.
Operating income, however, decreased to $12.6 million from
$70.6 million in the nine month period. This was due to
several factors: a significant decrease in the level of royalty
income from KHDs royalty interest in the Wabush iron ore
mine, higher selling, general and administrative expenses and
restructuring costs of $10.8 million.
Earnings per share on a diluted basis for the nine month period
were $0.04 as compared to $1.89 per share for the same period in
2008.
PRESIDENTS
REPORT
2
KHD HUMBOLDT
WEDAG INTERNATIONAL LTD.
OUTLOOK
The global market for our equipment and services is effectively
linked to demand for cement and the investment plans of cement
producers. The significant volume declines that we have seen in
many regions, particularly in the more mature markets, such as
the US and parts of Western Europe, have now started to
stabilize and in some cases have begun to increase from these
lower levels. The major cement producers have also started the
process of repairing their balance sheets and we have recently
seen successful equity raisings from a number of these producers.
This may be an indication that we may expect to see some gradual
improvement in market conditions. Furthermore, we have not seen
any significant new project cancellations. Our customers remain
cautious on capital expenditure plans but, in general, we have
seen some improvement in confidence over the past few months.
However, this does not mean that we believe that we will return
to the extremely buoyant market conditions of the recent
periods, of a so-called super-cycle, in the short to
medium term. While we remain cautiously optimistic about market
recovery and we believe that order intake is the best measure of
this, we remain realistic in our expectations that 2010 and 2011
will still be difficult years for sales volumes. Since the
fourth quarter of 2008, KHDs focus has been, and remains,
on preserving cash and positioning the company to capitalize on
a recovery. Our opinion of the horizon for this recovery has not
changed.
We continue to see good levels of enquiries from emerging
regions such as India, North Africa and the Middle East. India
is our second largest location by number of employees, and we
have built up a strong market presence in this emerging economy.
We see this market as one of the key growth drivers for KHD in
the future and we will continue to work to strengthen our
competitive position in this market.
Our restructuring program is progressing well. While we
presently envision that the restructuring program will only
involve the current phase, we recognize that, in the future,
market conditions may require us to undertake additional
restructuring initiatives.
As our restructuring program progresses, we believe that KHD is
well positioned for the future. We have a significant net cash
position and this means we have the financial strength to
complete our restructuring plans and take advantage of any
opportunities that may emerge. We also intend to invest in
developing technology to differentiate ourselves from our
competitors. Furthermore, with the divestment of our
manufacturing facility in Cologne, we are now much more strongly
positioned than some of our larger peers, as well as our smaller
competitors, due to both our financial strength and our
operational flexibility.
This has been a very difficult year for our shareholders, our
employees and our customers. Initially, the changed environment
was unsettling. However, with a solid plan in place and
measurable progress on its implementation, we now sense the
excitement over meeting the clearly visible challenges of
enhancing shareholder value through helping our customers
produce cement and process minerals in a much more energy
efficient and environmentally friendly manner.
Respectfully submitted,
Jouni Salo
President and Chief Executive Officer
PRESIDENTS
REPORT
3
KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
Form 51-102F1
MANAGEMENTS
DISCUSSION AND ANALYSIS
(November 16, 2009)
The following discussion and analysis of our financial condition
and results of operations for the three- and nine-month periods
ended September 30, 2009 should be read in conjunction with
our 2008 annual (as contained in our 2008 annual report on
Form 20-F)
and quarterly consolidated financial statements and related
notes. Our financial statements were prepared in accordance with
Canadian generally accepted accounting principles
(GAAP). For a reconciliation of our 2008 audited
consolidated financial statements to U.S. GAAP, see
Note 31 to our 2008 audited consolidated financial
statements in our 2008 annual report on
Form 20-F.
We are a foreign private issuer with a class of securities
registered under Section 12(b) of the United States
Securities Exchange Act of 1934
, as amended. As a result,
the following discussion and analysis of our financial condition
and results of operations for the two years ended
December 31, 2008 and 2007 has been extracted from our
annual report on
Form 20-F,
as filed with the United States Securities and Exchange
Commission on March 27, 2009.
Disclaimer
for Forward-Looking Information
Certain statements in this quarterly report are forward-looking
statements, which reflect our managements expectations
regarding our future growth, results of operations, performance
and business prospects and opportunities. Forward-looking
statements consist of statements that are not purely historical,
including any statements regarding beliefs, plans, expectations
or intentions regarding the future. While these forward-looking
statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding
the direction of our business, actual results will almost always
vary, sometimes materially, from any estimates, predictions,
projections, assumptions or other future performance suggested
herein. No assurance can be given that any of the events
anticipated by the forward-looking statements will occur or, if
they do occur, what benefits we will obtain from them. These
forward-looking statements reflect managements current
views and are based on certain assumptions and speak only as of
November 16, 2009. These assumptions, which include
managements current expectations, estimates and
assumptions about certain projects and the markets we operate
in, the global economic environment, interest rates, exchange
rates and our ability to attract and retain customers and to
manage our assets and operating costs, may prove to be
incorrect. A number of risks and uncertainties could cause our
actual results to differ materially from those expressed or
implied by the forward-looking statements, including: (1) a
continued downturn in general economic conditions in Asia,
Europe, Russia, Eastern Europe, the Middle East, the United
States and internationally, including as a result of the
worldwide economic downturn resulting from the general credit
market crises, volatile energy costs, decreased consumer
confidence and other factors, (2) continuing decreased
demand for our products, including the renegotiation, delay
and/or
cancellation of projects by our customers and the reduction in
the number of project opportunities, (3) a continuing
decrease in the demand for cement, minerals and related
products, (4) the number of competitors with competitively
priced products and services, (5) product development or
other initiatives by our competitors, (6) shifts in
industry capacity, (7) fluctuations in foreign exchange and
interest rates, (8) fluctuations in availability and cost
of raw materials or energy, (9) delays in the start of
projects included in our forecasts, (10) delays in the
implementation of projects included in our forecasts and
disputes regarding the performance of our services,
(11) the uncertainty of government regulation and politics
in Asia and the Middle East and other markets,
(12) potential negative financial impact from regulatory
investigations, claims, lawsuits and other legal proceedings and
challenges, (13) the timing and extent of our restructuring
program and the restructuring charges to be incurred in
connection therewith, and (14) other factors beyond our
control.
There is a significant risk that our forecasts and other
forward-looking statements will not prove to be accurate.
Investors are cautioned not to place undue reliance on these
forward-looking statements. No forward-looking statement is a
guarantee of future results. Except as required by law, we
disclaim any intention or obligation to update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise.
4
Additional information about these and other assumptions, risks
and uncertainties are set out in the section entitled Risk
Factors and Uncertainties below.
Nature of
Business
During the period ended September 30, 2009, we operated in
two reportable segments consisting of (i) an industrial
plant engineering and equipment supply business and
(ii) our royalty interest in the Wabush iron ore mine. The
segments are managed separately because each requires different
management skills. The industrial plant engineering and
equipment supply segment is our active core business, requiring
a variety of production and marketing strategies. Our royalty
interest in the Wabush iron ore mine is a passive investment,
requiring diligent monitoring to assure the royalties we receive
are correct and our interests are protected.
Description
of our Industrial Plant Engineering and Equipment Supply
Business
Founded in 1856, we are a leader in supplying technologies,
engineering and equipment for cement and mineral processing.
During the nine-month period ended September 30, 2009, the
two major customer groups of our industrial plant engineering
and equipment supply segment were in the cement and coal and
minerals industries. Services to these two customer groups
shared the use of the same pool of human and capital resources
with respect to finance, accounting, general support and risk
management. As a result of the divestment of our interest in our
coal and minerals customer group, exclusive of our roller press
technologies and capabilities, in early October, 2009, the
primary customer group of our industrial plant engineering and
equipment supply segment will be the cement industry. We will
also continue to market our roller press technologies and
capabilities. Our roller press is a proprietary technology which
was initially developed for our cement customer group but has
been subsequently and successfully used in mineral processing
applications. We anticipate that we will continue to supply our
roller press equipment to the mineral processing industry. For
more information, please see below under the heading
Divestment of Coal and Minerals Customer Group and
Workshop in Cologne.
We supply plant systems as well as machinery and equipment
worldwide for the manufacture of cement and the processing of
minerals, whether for new plants, redevelopments of existing
plants or capacity increases for existing plants. We design and
provide equipment that produces clinker and cement and processes
minerals, such as copper and precious metals. The scope of our
activities ranges from the examination and analysis of deposits,
scale-up
tests in our own test center, technical and economic consulting,
engineering for plants that produce clinker and cement and
process minerals, and systems, plant and equipment for complete
plants and plant sections, including modernization and capacity
increase measures, as well as automation and process control
equipment. We also offer services in the areas of project
planning, feasibility studies, raw material testing, research
and development, financing, erection and commissioning,
personnel training and pre and post sales service. As of
November 16, 2009, we have operations in India, China,
Russia, Germany, the Middle East, Australia and the United
States.
Royalty
Interest Wabush Iron Ore Mine
We participate in a royalty interest which consists of a mining
sub-lease
of
the lands upon which the Wabush iron ore mine is situated, which
sub-lease
commenced in 1956 and expires in 2055. The lessor is Knoll Lake
Minerals Ltd., which holds a mining lease from the Province of
Newfoundland, Canada. The lease requires the payment of
royalties to Knoll Lake Minerals of Cdn$0.22 per ton on
shipments of iron ore from the Wabush iron ore mine. Iron ore is
shipped from the Wabush iron ore mine to Pointe Noire, Quebec,
Canada, where it is pelletized. In 2008, 2007 and 2006,
3.9 million, 4.8 million and 4.1 million tons of
pellets of iron ore, respectively, were shipped from the Wabush
iron ore mine.
The Wabush iron ore mine is currently operated by an
unincorporated joint venture consisting of Wabush Iron Co.
Limited, Dofasco Inc., U.S. Steel Canada Inc. and Cliffs
Natural Resources Inc., which pays royalties to the holder of
the royalty interest based upon the amount of iron ore shipped
from the Wabush iron ore mine. Pursuant to the terms of the
mining
sub-lease,
this royalty payment by the joint venture is not to be less than
Cdn$3.25 million per annum until the expiry of the mining
sub-lease
in
2055. In 1987, the royalty rate specified in the base price was
amended to require a base royalty rate of Cdn$1.685 per ton with
escalations as defined by agreement.
On October 12, 2009, Cliffs Natural Resources announced
that it plans to exercise its right of first refusal to acquire
the interests of U.S. Steel Canada and Dofasco in the joint
venture. Closing of the acquisition is expected to occur by the
end of 2009 and, going forward, Cliffs Natural Resources will be
the sole owner of the Wabush iron ore mine. Our participation in
the royalty interest is not expected to be affected as a result
of the change in ownership of the mine.
5
Iron ore is typically sold either as a concentrate, whereby the
iron ore is in granular form, or as a pellet, whereby iron ore
concentrate has been mixed with a binding agent, formed into a
pellet and then fired in a furnace. Iron ore pellets can be
charged directly into blast furnaces without further processing
and are primarily used to produce pig iron which is subsequently
transformed into steel. As such, the demand and, consequently,
the pricing of iron ore is dependent upon the raw material
requirements of integrated steel producers. Demand for blast
furnace steel is, in turn, cyclical in nature and is influenced
by, among other things, the level of general economic activity.
Production from the mine has been generally maintained at
relatively consistent levels. Although no assurance as to future
production levels can be provided, as Cliffs Natural Resources
has been the managing partner of the mine since it began
operations, there is not expected to be any material change in
the production of the mine as a result of Cliffs Natural
Resources acquisition of the joint venture interests of
Dofasco and U.S. Steel Canada.
In December, 2005, we commenced a lawsuit against Wabush Iron
Co. Limited, Dofasco Inc., Stelco Inc. and Cliffs Mining Company
Inc. claiming that such parties breached their contractual and
fiduciary duties by inaccurately reporting and substantially
underpaying the royalties properly due under the lease. We are
also claiming reimbursement for the substantial costs that we
have incurred in connection with our investigation into such
matters. The parties have proceeded to arbitration in connection
with the outstanding issues related to the substantial
underpayment of royalties. The arbitration panel began hearing
the arbitration in March, 2009 and completed hearing the
arbitration in early August, 2009. We anticipate that a decision
will be rendered by the end of 2009 or early in 2010.
Discontinued
Operations
Disposition
of Financial Services Operations
In December, 2005, our board of directors passed a resolution to
distribute the majority of our financial services business to
our shareholders. Our board of directors determined that the
separation of our financial services business from our
industrial plant engineering and equipment supply business would
enhance the success of both businesses and maximize shareholder
value over the long term by enabling each company to pursue its
own focussed strategy and enable investors to evaluate the
financial performance, strategies and other characteristics of
each business in comparison to other companies within their
respective industries. In connection with the distribution, we
ensured that we preserved our entitlement to Mass Financial
Corp.s exempt surplus earned in respect of our company and
that inter-corporate indebtedness between our company and Mass
Financial be eliminated in a tax-efficient basis. Pursuant to
this resolution, we entered into a restructuring agreement, a
share exchange agreement, an amending agreement, a loan
agreement, a pledge agreement, a set-off agreement and a letter
agreement with Mass Financial. At the time of the share
exchange, the carrying amount of our investment in the Mass
Financial group was $191.3 million (Cdn$218.8 million)
(including a currency translation adjustments loss of
$22.7 million). Our equity interest in Mass Financial was
exchanged for preferred shares in Mass Financial and one of its
subsidiaries with an exchange value of $168.6 million
(Cdn$192.9 million).
Upon the closing of the restructuring and share exchange
agreements, Mass Financial held all the financial services
business of our company, except for MFC Corporate Services AG
and our royalty interest in the Wabush iron ore mine, and our
company held all Class B preferred shares and Class A
common shares in the capital of Mass Financial.
On January 31, 2006, we completed the distribution of the
Class A common shares of Mass Financial to our shareholders
by way of a stock dividend of a nominal amount. This resulted in
our financial services business being held by Mass Financial as
a separate company.
For more information about the disposition of our financial
services operations, please see information under the section
entitled Discontinued Operations Disposition
of Financial Services Operations in our annual report on
Form 20-F.
On May 12, 2009, we entered into and completed a definitive
agreement with Mass Financial regarding the realization of the
economic value of the preferred shares by way of redemption of
the preferred shares by Mass Financial. For more information,
see the section entitled Settlement of Preferred Shares of
Mass Financial and its Former Subsidiary.
Real
Estate and Other Interests
In March, 2007, and amended on June 29, 2007, we entered
into an arrangement agreement with SWA Reit and Investments
Ltd., a corporation governed by the laws of Barbados,
contemplating an arrangement whereby we agreed to transfer
certain non-core real estate interests and other assets
indirectly held by us to SWA Reit and then
6
distribute all of the Austrian depositary certificates
representing the common shares of SWA Reit held by us to our
shareholders in exchange for a reduction of the paid up capital
with respect to our common shares. September 25, 2007 was
set as the record date for the distribution to our shareholders
of the Austrian depository certificates representing the common
shares of SWA Reit, at which time we effectively distributed, by
way of reduction of capital, our ownership interest in SWA Reit.
Since then, we no longer hold any real estate interests. On the
distribution date, the fair value of the net assets of SWA Reit
amounted to $56.3 million (Cdn$56.2 million), which
also equalled their book value. The real estate interests and
other assets transferred to SWA Reit were not complimentary to
our industrial plant engineering and equipment supply business.
The distribution of Austrian depositary certificates did not
significantly change the economic interests of our shareholders
in the assets of our company.
Results
of Operations
Overview
of Impact of the Economic Crisis, Terminated Customer Contracts
and Restructuring Activities
In general, the effects of the economic crisis on our business
have slowed and appear to be improving. We have experienced some
improvements in new order intake. Although our customers remain
cautious with respect to capital expenditures, we have seen some
improvement in customer confidence over the past few months. In
particular, we have been receiving a number of new enquiries
from potential customers in emerging regions such as India,
North Africa and the Middle East. We see India as a key market
for our company in the future and we expect to continue to work
to strengthen our competitive position in that market. While we
remain realistic as to expectations for fiscal 2010 and 2011, we
are cautiously optimistic about market recovery after 2011. Our
restructuring program is progressing well and we now have a
clear direction to create a business that is sustainable over
the long term. We have a significant net cash position which
will enable us to take advantage of opportunities that emerge as
the economy recovers and we intend to invest in the development
of technology to differentiate ourselves from our competitors.
We believe we are well positioned to move towards our goal of
becoming a customer focused service company providing
environmentally friendly technology to the cement industry.
In early October, 2009, we completed the previously announced
sale of our coal and minerals customer group and our workshop in
Cologne, Germany. The sale allows us to focus on our core
competencies as well as to significantly reduce the fixed cost
base of our business. In addition, it has resulted in our
previously estimated restructuring costs of $30.0 million
being reduced by approximately $18.0 million. Although we
have divested our coal and minerals customer group, we have
retained our interest in our proprietary roller press
technology, which had a genesis in the cement business but has
many successful applications in the mineral processing industry
and is a cornerstone of our service business.
As at December 31, 2008, we classified $159.2 million
of the contracts in our order backlog as at risk.
The at risk contracts in our order backlog primarily fell into
two categories: (i) projects where the clients were
considering changes in the scope of such projects, and
(ii) projects where clients required additional financing
to continue to completion. During 2009, we continued to assess
the likelihood of whether such at risk contracts would
ultimately be terminated. We considered whether it was likely
that a customer would continue with a contract in the future or,
alternatively, proceed with a different contract or the same
contract on a smaller scale. These assessments considered, among
other factors, whether the customer had financing in place to
support its payment obligations and whether such financing was,
or would be, affected by the global economic crisis. If we
determined that a customer was unlikely to proceed with a
contract, such at risk contract was designated as a
terminated customer contract. We then considered
whether the customer was likely to pay the cancellation costs
due under the contract.
At December 31, 2008, we determined that the provision for
our commitments to suppliers was $23.7 million based on
terminated customer contracts. As a result of further critical
analysis and continued customer negotiations relating to such
contracts in the current quarter ended September 30, 2009,
we determined that more at risk contracts should be terminated.
As a result, we increased our provision for the terminated
contracts by $4.4 million, although the provision was
reduced by $4.2 million as a result of negotiations with
suppliers. On September 30, 2009, these terminated customer
contracts, aggregating $95.8 million, were officially
cancelled and removed from the order backlog. The orders from
these terminated customer contracts were received in either 2007
or 2008. The remainder of the at risk contracts, as identified
as of December 31, 2008, will proceed, either as originally
proposed or with a change of scope. They remain in our order
backlog.
Order backlog, reduced by terminated customer contracts, at
September 30, 2009 was $626.3 million compared to
$1.1 billion as at September 30, 2008. Going forward,
we expect a further reduction in order backlog of approximately
$68.0 million as a result of the divestment of our coal and
minerals customer group discussed below.
7
Order intake for the nine-month period ended September 30,
2009 was $225.2 million compared to $689.9 million for
the nine-month period ended September 30, 2008. We received
approximately $113.0 million in new orders in the current
quarter ended September 30, 2009, and cement order intake
was more than three times the level of the second quarter.
During the nine months ended September 30, 2009, when a
contract was classified as terminated as a result of the further
critical analysis and continued negotiations discussed above, we:
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(a)
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updated our estimates of amounts recognized at December 31,
2008;
|
|
|
|
|
(b)
|
recorded our purchase obligations to the contracts
suppliers at the full amount we were contractually committed to
pay such suppliers;
|
|
|
(c)
|
determined the amounts that we expected to recover from the sale
of any inventory related to such supplier contracts on the basis
of the net realizable value of such inventory and recorded this
amount as inventory in transit from suppliers;
|
|
|
|
|
(d)
|
recorded a claim for the amount that we are owed by the customer
as a result of not proceeding with the contract, including
cancellation costs due under the contract, less the amounts of
any advance payments received; and
|
|
|
(e)
|
created a provision for those amounts that we believe we are
unlikely to collect from the customer.
|
We are now focused on managing the claims we have raised against
the customers of the terminated contracts and pursuing our
rights under our contracts with such customers as well as
maximizing our recovery from the inventory related to such
contracts. For further information, please see below under the
heading Provisions for Terminated Customer Contracts.
In the last quarter of 2008, we developed an action plan to
minimize costs, maximize profitability and preserve shareholder
value through the period of severe economic slowdown. We
evaluated our current structure and made determinations to
ensure that we are in a position to capitalize on opportunities
that become available as conditions improve. Further, as
disclosed in our annual report on
Form 20-F,
we implemented a restructuring program that we expect to
continue into 2010. When initially announced, we expected
restructuring costs in connection with the program to be
approximately $30.0 million, primarily due to the
contemplated shutdown of our workshop in Cologne, Germany.
However, as a result of the divestment of our Cologne workshop,
which was completed in early October, 2009, we now expect these
restructuring costs to be closer to $12.0 million. We will
also experience an impact on our order intake and backlog as a
result of the divestment of the coal and minerals customer
group. For more information, please see below under the headings
Restructuring Activity and Divestment of Coal
and Minerals Customer Group and Cologne Workshop.
In summary, although we anticipate challenging market conditions
to continue as we move into fiscal 2010, as customers
willingness to invest in new projects continue to be limited and
demand for new capacity is not growing as strongly as in the
recent past, economic conditions appear to be stabilizing at
current levels. While our order backlog has been reduced as a
result of the recognition of certain contracts as terminated
contracts and the divestment of our coal and minerals customer
group, there have been no significant new requests for contract
cancellations or delays and the costs we expected to incur in
connection with our restructuring program have been greatly
reduced as a consequence of the sale of our Cologne workshop. In
the event that the economic environment again declines or the
economic downturn continues, we may experience a renewed
reduction in the demand for our products and services. However,
we are currently taking the necessary actions to preserve our
cash balances and to enable our company to take a strong
position as market conditions improve.
Provisions
for Terminated Customer Contracts
Throughout the economic downturn, we have had, and continue to
maintain, ongoing discussions with our customers with respect to
the status of their contracts. We continue to evaluate our legal
and commercial positions with respect to each potentially
affected contract.
Our typical business project involves three parties, being our
company, the customer and the respective subcontractor(s) and
supplier(s). Under our business model, we have contracts with
our customers and contracts with the respective subcontractor(s)
and/or
supplier(s). If a customer defaults on a contract with us, we
are still liable to the subcontractor(s)
and/or
supplier(s) as the result of our contract(s) with the
subcontractor(s)
and/or
supplier(s). However, as our contracts with customers have
cancellation clauses in place, in the event that we become
liable to a subcontractor or supplier as a result of a customer
defaulting on a contract with us, we have the right to pursue
the defaulting customer for cancellation costs pursuant to the
cancellation clauses.
8
In the event of the cancellation of a contract, we are typically
contractually entitled to pursue the defaulting customer for
some or all of: (a) compensation for the actual costs and
expenses that we incur or are charged by subcontractor(s) or
supplier(s) for work performed and purchase orders placed to the
date of the cancellation of the contract; (b) any
engineering costs directly attributable to the contract;
(c) the costs for removing our equipment from the contract
site and the return of equipment to us
and/or
the
subcontractor(s) as well as the cost of the repatriation of our
and/or
the
subcontractor(s) personnel; (d) a percentage of the total
amount due under the contract to the extent that such amount has
not already been paid to us in sums already invoiced; and
(e) a percentage of the total cancellation costs as
overhead.
After the onset of the financial crisis in third quarter of
2008, one of our customers entered into proceedings under the
Companies Creditors Arrangement Act
(Canada) (the
CCAA), a creditors relief statute. In
addition, certain customers approached us requesting
cancellations or modifications of their contracts. These
requests were generally of three types: (1) requests that
contracts be cancelled; (2) requests that contracts be
delayed; or (3) requests for modification of the scope of a
contract (for example, a contract that was initially proposed to
be three phases might be reduced to only two phases). In these
cases, our engineers, project managers, finance managers and
lawyers reviewed the project work and the terms of the contracts
and subcontracts to determine our liabilities, including the
potential liabilities under the purchase orders which had been
committed.
During the fourth quarter of 2008 when this review was
undertaken, contracts having a total value of
$100.2 million were officially cancelled by customers
defaulting on their contracts, and were removed from the order
backlog as at December 31, 2008. Provisions of
$6.0 million were established for the losses resulting from
these contract cancellations as there was significant
uncertainty as to whether we would receive the contractual
cancellation costs under certain of these contracts. We are
currently pursuing our legal rights against the defaulting
customers under these contracts.
We also determined that certain revenue contracts included in
the remaining order backlog were at risk as at December 31,
2008. These at risk contracts amounted to $159.2 million,
comprised of: (1) $76.5 million relating to contracts
that customers asked be delayed; (2) $2.7 million due
to the customer entering proceedings under the CCAA; and
(3) $80 million due to customers asking for changes in
contract scope. We immediately suspended work on these contracts
and instructed our suppliers to stop work on such contracts. In
addition, we established a provision of $2.8 million for
the contract classified as at risk due to the customer entering
proceedings under the CCAA.
For two contracts that customers had requested be delayed, we
determined that the respective customers were unlikely to
proceed with the contracts and that there was significant
uncertainty as to whether the customers would pay the
cancellation costs due under such contracts, even if we pursued
our legal rights to recover cancellation costs. As a result of
this significant uncertainty, we established a provision of
$14.9 million for such contracts as at December 31,
2008. We also recorded an impairment charge of $8.2 million
for inventory and accounts receivable related to the delayed
contract.
As such, we recognized a $32.0 million charge to the income
statement in the fourth quarter of 2008 with respect to the
cancelled contracts and the terminated customer contracts.
In the nine months ended September 30, 2009, we performed
further critical analysis and continued negotiations relating to
such at risk contracts and, as a result, determined that more at
risk contracts should be terminated. Therefore, we increased our
provision for the terminated contracts by $4.4 million,
although the provision was reduced by $4.2 million as a
result of our negotiations with suppliers. On September 30,
2009, these terminated customer contracts, aggregating
$95.8 million, were officially cancelled and removed from
the order backlog.
During the nine months ended September 30, 2009, when
contracts were classified as terminated as a result of the
further critical analysis and continued negotiations discussed
above, we: (i) updated our estimates of amounts recognized
at December 31, 2008; (ii) recorded our purchase
obligations to the contracts suppliers at the full amount
we were contractually committed to pay such suppliers;
(iii) determined the amounts that we expected to recover
from the sale of any inventory related to such supplier
contracts on the basis of the net realizable value of such
inventory and recorded this amount as inventory in transit from
suppliers; (iv) recorded a claim for the amount that we are
owed by the customer as a result of not proceeding with the
contracts, including cancellation costs due under the contract,
less the amounts of any advance payments received; and
(v) created a provision for those amounts that we believe
we are unlikely to collect from the customer.
9
The following is a summary of the changes in the provisions for
supplier commitments for terminated customer contracts during
the nine-month period ended September 30, 2009:
|
|
|
|
|
|
|
(United States
|
|
|
|
dollars in thousands)
|
|
|
Balance as at December 31, 2008
|
|
$
|
23,729
|
|
Provisions during the period
|
|
|
4,391
|
|
Paid and payable
|
|
|
(4,541
|
)
|
Reductions through negotiations with suppliers
|
|
|
(4,203
|
)
|
Reclassification to inventory reserve
|
|
|
2,225
|
|
Currency translation adjustments
|
|
|
945
|
|
|
|
|
|
|
Balance as at September 30, 2009
|
|
$
|
22,546
|
|
|
|
|
|
|
The following is a summary of the income statement effects
recorded with respect to terminated customer contracts during
the nine-months ended September 30, 2009:
|
|
|
|
|
|
|
(United States
|
|
|
|
dollars in thousands)
|
|
|
Provision during the period
|
|
$
|
4,391
|
|
Reduction through negotiations with suppliers
|
|
|
(4,203
|
)
|
Change in inventory reserve
|
|
|
(264
|
)
|
|
|
|
|
|
Reduction in loss on terminated customer contracts
|
|
$
|
(76
|
)
|
|
|
|
|
|
Restructuring
Activity
In our annual report on
Form 20-F,
we announced that we had initiated a restructuring program,
aligning capacities to changes in market demands, allocating
resources depending on geographical needs and focusing on
markets and equipment that will meet our objective of offering
cost effective solutions to our customers. As disclosed in our
report on
Form 6-K
for the six-month period ended June 30, 2009, as part of
the program, we have undertaken several initiatives to transform
the structural efficiency of our operations worldwide and to
create a streamlined organization focused on operational
excellence with the goal of establishing an integrated global
team offering competitive products and services to both new and
existing customers.
As part of our restructuring initiatives, we determined to merge
our roller press technologies and capabilities in the minerals
market with our cement roller business worldwide and to divest
our coal and minerals customer group located in Germany, India,
China, South Africa and Russia. We also contemplated the
shutdown of our workshop, located in Cologne, Germany, that
manufactures equipment for the cement and coal and minerals
industries.
In our report on
Form 6-K
for the three-month period ended March 31, 2009, we stated
that we expected the restructuring initiatives to cost
approximately $30.0 million. Of this $30.0 million,
approximately $17.9 million pertained to the contemplated
closing of the Cologne workshop, comprised of:
(i) approximately $3.1 million pertaining to the
downsizing of employees of the workshop, (ii) approximately
$4.0 million pertaining to asset and inventory impairments
and other costs associated with the closure of the workshop, and
(iii) approximately $10.8 million related to severance
payments we expected to pay to employees of the workshop.
Another $12.4 million pertained to estimated costs related
to involuntary employment terminations, with the majority
pertaining to severance payments for employees in our Cologne
facilities other than the workshop. As of June 30, 2009, we
had recognized approximately $7.9 million in restructuring
costs. During the nine-month period ended September 30,
2009, we recognized restructuring costs of $10.8 million.
We anticipate that we will recognize approximately
$1.2 million in additional restructuring costs in future
periods, such that our total restructuring costs will be
approximately $12.0 million for this phase of our
restructuring program. While this is presently the only phase of
our restructuring program that is contemplated, market
conditions may require us to undertake additional restructuring
initiatives in the future.
As a result of the sale of the Cologne workshop, as described
below under the heading, Divestment of Coal and Minerals
Customer Group and Workshop in Cologne, rather than the
shutdown we had contemplated prior to the sale, we reversed
certain provisions that had previously been set up for the
workshop closure. In addition, we set up provisions with respect
to our estimated costs related to our remaining employees in our
other Cologne facilities
10
not connected to the workshop. The following is a summary of the
changes in the provision for restructuring costs during the
nine-month period ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
|
|
|
Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Associated with
|
|
|
Associated with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
Employee
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
Terminations
|
|
|
Terminations
|
|
|
Facility
|
|
|
Lease Termination
|
|
|
Translation
|
|
|
Total
|
|
|
|
(Workshop)
|
|
|
(Non-Workshop)
|
|
|
Closure
|
|
|
and other Costs
|
|
|
Adjustment
|
|
|
Provision
|
|
|
|
(United States dollars in thousands)
|
|
|
Provisions during the six months ended June 30, 2009
|
|
$
|
3,092
|
|
|
$
|
824
|
|
|
$
|
1,302
|
|
|
$
|
1,328
|
|
|
$
|
|
|
|
$
|
6,546
|
|
Currency translation adjustment during the six months ended
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502
|
|
|
|
502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions as at July 1, 2009
|
|
|
3,092
|
|
|
|
824
|
|
|
|
1,302
|
|
|
|
1,328
|
|
|
|
502
|
|
|
|
7,048
|
|
Transactions during the quarter ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal resulting from the sale of the Cologne workshop
|
|
|
(3,092
|
)
|
|
|
|
|
|
|
(1,302
|
)
|
|
|
(1,328
|
)
|
|
|
|
|
|
|
(5,722
|
)
|
Incremental provision
|
|
|
|
|
|
|
9,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,785
|
|
Paid and payable
|
|
|
|
|
|
|
(489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(489
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(218
|
)
|
|
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions as at September 30, 2009
|
|
$
|
|
|
|
$
|
10,120
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
284
|
|
|
$
|
10,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
of Preferred Shares of Mass Financial and its Former
Subsidiary
Our previous investment in the preferred shares of Mass
Financial and one of its former subsidiaries, that was offset by
indebtedness owed to Mass Financial, was a legacy asset and was
recorded at its estimated fair value of Cdn$23.42 million
as at both March 31, 2009 and December 31, 2008. We
recognized a fair value loss of $55.1 million on the
preferred shares as at December 31, 2008 that we determined
to be an other than temporary decline in value as, at that
point, we expected to negotiate a settlement of the net position
of our investment in the preferred shares.
The fair value of the preferred shares was based on certain
significant assumptions, including: time value; yield curve; the
issuing counterpartys ability
and/or
intent to redeem; and that the preferred shares of Mass
Financial and its former subsidiary would be retracted or
redeemed in accordance with their terms. The preferred shares
were classified as
available-for-sale
securities and quoted market prices were not available. As such,
we were required to consider the lack of a liquid, active market
in our determination of the fair value of the shares. The fact
that there was no liquid, active market for the shares, there
was a limited pool of potential buyers and quoted market prices
were not available were of key importance in our determination
of the fair value of the shares. We determined the fair value of
the preferred shares using a discounted cash flow model and
considering the quoted market prices of securities with similar
characteristics in conjunction with the assumptions discussed
above. At December 31, 2008, as disclosed in our annual
report on
Form 20-F,
the primary assumption used in our discounted cash flow model
was a discount rate of 30% based on observable current market
transactions in instruments with similar characteristics, with
modifications for market liquidity and the features of the
preferred shares.
In our annual report on
Form 20-F,
we announced that as part of the continued realignment of our
business to focus on the expansion of our industrial plant
engineering and equipment supply business, we had entered into
negotiations with Mass Financial in an effort to come to an
agreement regarding the immediate realization of the economic
value of the preferred shares of Mass Financial and one of its
former subsidiaries by way of redemption of these shares. For
more information, please see Item 5
Operating Results Fair Value Loss on Preferred
Shares of Mass Financial and its Former Subsidiary in our
annual report on
Form 20-F.
On May 12, 2009, we entered into and completed an agreement
with Mass Financial for the settlement of the non-transferable
preferred shares of Mass Financial and its former subsidiary for
net consideration of Cdn$12.28 million, which represented
the gross settlement amount of the preferred shares of
Cdn$49.28 million offset by the indebtedness of
Cdn$37.00 million owed to Mass Financial. The payment of
the Cdn$12.28 million was settled as follows:
|
|
|
|
(a)
|
Cdn$8.28 million being satisfied by Mass Financial agreeing
to transfer 788,201 of our common shares to us. The number of
shares to be delivered was calculated by dividing
Cdn$8.28 million by the book value of our common shares as
at December 31, 2008. 262,734 of our common shares, valued
at Cdn$2.76 million, were delivered to us on May 12,
2009 and the remainder (having a value equivalent to
|
11
|
|
|
|
|
Cdn$5.52 million) were to be delivered no later than
July 20, 2009. In July 2009, Mass Financial failed to
deliver the remainder of the common shares and, as permitted
under the terms of the agreement, made a cash payment to us in
lieu of delivery of the remainder of the common shares;
|
|
|
|
|
(b)
|
Cdn$1.71 million being satisfied by way of cash payment by
Mass Financial to our company on May 12, 2009;
|
|
|
(c)
|
Cdn$1.75 million being satisfied by way of issuance to our
company of an assignable promissory note having a principal
amount of Cdn$1.75 million, a term of 24 months and an
interest rate of 4% per annum payable annually in cash. The note
is repayable at the option of the issuer by the issuance of
common shares of Mass Financial based on the number of common
shares of Mass Financial equalling the amount being repaid
divided by the
30-day
volume weighted average trading price for the Mass Financial
common shares. The promissory note can be repaid or be redeemed
at any time in cash at the option of the issuer; and
|
|
|
(d)
|
Cdn$539,697 being satisfied by setting-off of accrued and unpaid
interest on our indebtedness to Mass Financial pursuant to a
loan agreement with Mass Financial dated January 31, 2006.
|
As a result of the negotiated settlement of the preferred
shares, we recognized a subsequent loss of $9.5 million in
the second quarter of 2009. In our report on
Form 6-K
for the six-month period ended June 30, 2009, we determined
that there was no change in the fair value of the shares between
December 31, 2008 and the settlement date. We came to this
conclusion after determining that there was no significant
change in market conditions for similar securities between
December 31, 2008 and the settlement date.
The settlement of the preferred shares allowed us to meet our
objective of liquidating or realizing on the economic value of
the preferred shares, which, due to the limited market for the
preferred shares, we might not otherwise be able to do. This was
one of the primary reasons why we agreed to settle the preferred
shares at an amount less than their fair value.
In addition, we considered a variety of entity-specific factors,
including material tax consequences, the importance of
maximizing cash holdings given the current economic situation,
the ability to reduce the number of our outstanding common
shares, the impact of the transaction on creditors, lenders,
shareholders and other interested parties, the fact that the
preferred shares were not core assets and the current economic
value of the preferred shares, that were not taken into account
when we determined the fair market value of the preferred shares
as at December 31, 2008. After considering these factors,
our independent directors, as recommended by our audit
committee, concluded that the advantages to shareholders of
proceeding with the transaction outweighed the disadvantages
stemming from the additional $9.5 million loss that we
would recognize on the settlement of the preferred shares, which
resulted in our decision to proceed with the negotiated
settlement and record the additional loss.
Divestment
of Coal and Minerals Customer Group and Workshop in
Cologne
As previously disclosed, on May 5, 2009, we entered into a
memorandum of understanding that contemplated both the
divestment of our interests in our coal and minerals customer
group and the sale of the Cologne workshop. In early October, we
completed various agreements with McNally Bharat Engineering
Ltd. and certain of its subsidiaries whereby we agreed to divest
our coal and minerals customer group and our workshop in
Cologne, exclusive of our roller press technologies and
capabilities, to McNally Bharat. Our order intake for the three
and nine-month periods ended September 30, 2009 would have
been reduced by $32.9 million and $44.6 million,
respectively, as a result of the divestment of the coal and
minerals customer group. Order backlog will be reduced by
$68.0 million as at October 1, 2009.
The carrying amounts of the assets and liabilities subject to
the transaction were classified as held for sale as at
September 30, 2009. The coal and minerals customer group,
excluding the roller press revenues, accounted for 6.3%, or
$9.4 million, and 7.1%, or $26.1 million,
respectively, of our total revenues for the three and nine-month
periods ended September 30, 2009. Pursuant to the sale
agreement, we received cash of $7.5 million and may receive
contingent payments based on unutilized severance payments for
the workshops employees and certain other contingencies.
We also agreed to grant the buyer the right to continue to
manufacture the roller press for us for a period of three years
from the closing date, provided this is done on normal
commercial terms. Further, for a period of three years, we will
offer the Cologne workshop contracts to manufacture equipment
required for our cement business that have traditionally been
manufactured at the workshop and the buyer has agreed to
undertake such orders on a priority basis. The buyer has also
agreed to assume certain liabilities from us, including pension
obligation.
12
The following table shows the net assets and liabilities
classified as held for sale, on a consolidated basis, as at
September 30, 2009:
|
|
|
|
|
|
|
(United States
|
|
|
|
dollars in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
3,932
|
|
Restricted cash
|
|
|
4
|
|
Receivables
|
|
|
12,587
|
|
Inventories
|
|
|
6,881
|
|
Contract deposits, prepaid and other
|
|
|
3,147
|
|
Future income tax assets
|
|
|
49
|
|
|
|
|
|
|
Current assets
|
|
|
26,600
|
|
Property, plant and equipment
|
|
|
227
|
|
Future income tax assets
|
|
|
75
|
|
|
|
|
|
|
Non-current assets
|
|
|
302
|
|
|
|
|
|
|
Total assets
|
|
|
26,902
|
|
Accounts payable and accrued expenses
|
|
|
9,820
|
|
Progress billings above costs and estimated earnings on
uncompleted contracts
|
|
|
2,949
|
|
Advance payments received from customers
|
|
|
5,523
|
|
Income tax liability
|
|
|
189
|
|
Provision for warranty costs
|
|
|
3,093
|
|
|
|
|
|
|
Current liabilities
|
|
|
21,574
|
|
Accrued pension liabilities
|
|
|
1,204
|
|
Provision for warranty costs
|
|
|
108
|
|
Future income tax liability
|
|
|
808
|
|
Other long-term liabilities
|
|
|
284
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
2,404
|
|
|
|
|
|
|
Total liabilities
|
|
|
23,978
|
|
|
|
|
|
|
Minority interest
|
|
|
163
|
|
|
|
|
|
|
Net assets held for sale
|
|
$
|
2,761
|
|
|
|
|
|
|
Summary
of Three-Month and Nine-Month Results
The following table provides selected financial information for
the three- and nine-month periods ended September 30, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
September 30
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
(United States dollars in thousands, except per share
amounts,
|
|
|
in accordance with Canadian GAAP)
|
|
Revenues
|
|
$
|
148,233
|
|
|
$
|
193,596
|
|
|
$
|
366,208
|
|
|
$
|
474,672
|
|
Gross profit
|
|
|
29,048
|
|
|
|
36,574
|
|
|
|
70,124
|
|
|
|
90,113
|
|
Restructuring costs, excluding inventory write-down
|
|
|
(4,063
|
)
|
|
|
|
|
|
|
(10,836
|
)
|
|
|
|
|
Operating income
|
|
|
11,459
|
|
|
|
31,933
|
|
|
|
12,583
|
|
|
|
70,625
|
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
(9,538
|
)
|
|
|
|
|
Net income
|
|
|
7,475
|
|
|
|
30,804
|
|
|
|
1,226
|
|
|
|
57,905
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.25
|
|
|
|
1.01
|
|
|
|
0.04
|
|
|
|
1.91
|
|
Diluted
|
|
|
0.25
|
|
|
|
1.01
|
|
|
|
0.04
|
|
|
|
1.89
|
|
13
Summary
of Quarterly Results
The following tables provide selected financial information for
the most recent eight quarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
December 31,
|
|
|
2009
|
|
2009
|
|
2009
|
|
2008
|
|
|
(United States dollars in thousands, except per share
amounts,
|
|
|
in accordance with Canadian GAAP)
|
|
Revenues
|
|
$
|
148,233
|
|
|
$
|
105,847
|
|
|
|
$112,128
|
|
|
|
$163,682
|
|
Gross profit
|
|
|
29,048
|
|
|
|
21,835
|
|
|
|
19,241
|
|
|
|
(356
|
)
|
Restructuring costs, excluding inventory write-down
|
|
|
(4,063
|
)
|
|
|
(17
|
)
|
|
|
(6,756
|
)
|
|
|
|
|
Operating income (loss)
|
|
|
11,459
|
|
|
|
2,461
|
|
|
|
(1,337
|
)
|
|
|
(16,080
|
)
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
|
|
|
|
(9,538
|
)
|
|
|
|
|
|
|
|
|
Fair value loss on investment in preferred shares of former
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,076
|
)
|
Income (loss) from continuing operations
|
|
|
7,475
|
|
|
|
(7,454
|
)
|
|
|
1,205
|
|
|
|
(64,857
|
)
|
Income (loss) from continuing operations, per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.25
|
|
|
|
(0.25
|
)
|
|
|
0.04
|
|
|
|
(2.12
|
)
|
Diluted
|
|
|
0.25
|
|
|
|
(0.25
|
)
|
|
|
0.04
|
|
|
|
(2.12
|
)
|
Net income (loss)
|
|
|
7,475
|
|
|
|
(7,454
|
)
|
|
|
1,205
|
|
|
|
(64,857
|
)
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.25
|
|
|
|
(0.25
|
)
|
|
|
0.04
|
|
|
|
(2.12
|
)
|
Diluted
|
|
|
0.25
|
|
|
|
(0.25
|
)
|
|
|
0.04
|
|
|
|
(2.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
December 31,
|
|
|
2008
|
|
2008
|
|
2008
|
|
2007
|
|
|
(United States dollars in thousands, except per share
amounts,
|
|
|
in accordance with Canadian GAAP)
|
|
Revenues
|
|
$
|
193,596
|
|
|
$
|
144,240
|
|
|
|
$136,836
|
|
|
|
$163,498
|
|
Gross profit
|
|
|
36,574
|
|
|
|
28,332
|
|
|
|
25,207
|
|
|
|
25,875
|
|
Restructuring costs, excluding inventory write-down
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
31,933
|
|
|
|
23,427
|
|
|
|
15,265
|
|
|
|
14,456
|
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value loss on investment in preferred shares of former
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
30,804
|
|
|
|
19,670
|
|
|
|
7,431
|
|
|
|
12,854
|
|
Income from continuing operations, per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.01
|
|
|
|
0.65
|
|
|
|
0.25
|
|
|
|
0.43
|
|
Diluted
|
|
|
1.01
|
|
|
|
0.64
|
|
|
|
0.24
|
|
|
|
0.42
|
|
Net income
|
|
|
30,804
|
|
|
|
19,670
|
|
|
|
7,431
|
|
|
|
11,611
|
(1)
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.01
|
|
|
|
0.65
|
|
|
|
0.25
|
|
|
|
0.39
|
(1)
|
Diluted
|
|
|
1.01
|
|
|
|
0.64
|
|
|
|
0.24
|
|
|
|
0.38
|
(1)
|
|
|
|
(1)
|
|
Including extraordinary gain.
|
Nine-Month
Period Ended September 30, 2009 Compared to Nine-Month
Period Ended September 30, 2008
Based upon the period average exchange rates for the nine-month
period ended September 30, 2009, the United States dollar
increased by approximately 11.5% in value against the Euro and
14.9% in value against the Canadian dollar compared to the
period average exchange rates in 2008. As at September 30,
2009, the United States dollar had decreased by approximately
4.9% against the Euro and by 12.4% against the Canadian dollar
since December 31, 2008.
In the nine-month period ended September 30, 2009, total
revenues from our industrial plant engineering and equipment
supply business decreased by 22.9% to $366.2 million from
$474.7 million in 2008, due to the phasing of project
completion and a slowdown in business activity. Revenues earned
were primarily the result of ongoing progress toward the
completion of contracts resulting from the high demand in prior
periods for cement plants in emerging markets including Russia
and Eastern Europe, Asia and the Middle East driven by GDP
growth rates and
14
infrastructure investments. New order intake for the nine-month
period ended September 30, 2009 decreased to
$225.2 million compared to $689.9 million for the
nine-month period ended September 30, 2008. The majority of
this order intake is in the cement business and originates from
orders for spare parts globally and other orders for capital
equipment in the emerging markets, particularly in India. Order
backlog at the close of 2008 decreased by 8.3% to
$842.8 million (reduced by terminated customer contracts)
from $919.3 million at the close of 2007. Order backlog,
reduced by terminated customer contracts, at September 30,
2009 was $626.3 million compared to $1.1 billion as at
September 30, 2008. Historically, approximately 70% to 80%
of order backlog has been converted into revenues within a
12-month
period.
In the nine-month period ended September 30, 2009, cost of
revenues for our industrial plant engineering and equipment
supply business decreased by 23.0% to $296.2 million from
$384.6 million in 2008. The decrease in expenses reflects
the decrease in our revenues. Our gross profit margin, excluding
the loss on terminated customer contracts and restructuring
costs, was 19.1% and 19.0% for the nine-month periods ended
September 30, 2009 and 2008, respectively. This margin is
reflective of continuing efficient execution and delivery of
projects in accordance with the financial, scheduling and
quality parameters set for such projects.
We also earned income of $8.6 million from our royalty
interest in the Wabush iron ore mine in the nine-month period
ended September 30, 2009, as compared to $23.7 million
for the same period in 2008. The decrease in income was
primarily due to a decrease in shipments and average price.
Selling, general and administrative expenses, excluding stock
based compensation, increased by 39.6% to $55.5 million for
the nine-month period ended September 30, 2009 from
$39.7 million in 2008. The increase is primarily linked to
a decrease in the number of project awards in our industry.
While there are still a high number of requests for bids and
tenders, the number of projects actually awarded after
completion of the tendering process was down due to a
combination of financing constraints and market conditions that
have impacted customers decisions as to whether to proceed
with projects. This resulted in an increase in our sales,
marketing and tendering costs as we continued to invest time in
the preparation of proposals and bids for opportunities that
were not subsequently awarded (such costs only being chargeable
to projects in the event that bids are successful).
We are also experiencing a lower absorption of overhead expenses
as a result of the stage of completion of our projects in
progress, as the design hours of our engineers, who are highly
utilized at the beginning stages of a project, are decreasing as
projects move into the procurement, erection and commissioning
phases. We are taking measures to align our selling, general and
administrative expenses with changes in market demand. For
further details, please refer to the section entitled
Restructuring Activity.
Stock-based compensation was $0.2 million recovery in the
nine months ended September 30, 2009 due to the forfeiture
of 847,778 unvested stock options as a result of employee
terminations, as compared to $3.4 million expense during
the nine months ended September 30, 2008.
Restructuring costs amounting to $10.8 million were
recorded during the nine months ended September 30, 2009.
For further details, please refer to the section entitled
Restructuring Activity.
In the nine-month period ended September 30, 2009, net
interest income decreased to $3.9 million (interest income
of $5.9 million less interest expense of $2.0 million)
as compared to $14.8 million (interest income of
$16.6 million less interest expense of $1.8 million)
for the same period in 2008. The decrease in net interest income
was a result of lower returns earned on cash deposits and on
financial instruments.
We recognized a loss of $9.5 million on the settlement of
our investment in the preferred shares of our former
subsidiaries in the nine-month period ended September 30,
2009. We did not recognize interest income on the preferred
shares of our former subsidiaries in 2009. For further details,
please refer to the section entitled Settlement of
Preferred Shares of Mass Financial and its Former
Subsidiary.
Other income was $3.0 million for the nine-month period
ended September 30, 2009 compared to other expense of
$5.2 million for the same period in 2008. In the nine-month
period ended September 30, 2009, other income included
unrealized gains on trading securities of $2.7 million.
Minority interests decreased for the nine-month period ended
September 30, 2009 to $0.5 million from
$0.7 million for the same period in 2008.
In the nine-month period ended September 30, 2009, we had
net income of $1.2 million, or $0.04 per share on a basic
and diluted basis, compared to net income of $57.9 million,
or $1.91 per share on a basic basis ($1.89 per share on a
diluted basis), in the same period in 2008.
15
Three-Month
Period Ended September 30, 2009 Compared to Three-Month
Period Ended September 30, 2008
Based upon the period average exchange rates for the three-month
period ended September 30, 2009, the United States dollar
increased by approximately 4.8% in value against the Euro and
5.3% in value against the Canadian dollar, compared to the
period average exchange rates in 2008. As at September 30,
2009, the United States dollar had decreased by approximately
4.9% against the Euro and by 12.4% against the Canadian dollar
since December 31, 2008.
In the three-month period ended September 30, 2009, total
revenues from our industrial plant engineering and equipment
supply business decreased by 23.4% to $148.2 million from
$193.6 million in 2008, due to the phasing of project
completion and a slowdown in business activity. Revenues earned
were primarily the result of ongoing progress toward the
completion of contracts resulting from the high demand in prior
periods for cement plants in emerging markets, including Russia
and Eastern Europe, Asia and the Middle East, driven by GDP
growth rates and infrastructure investments. Excluding the
effects of terminated contracts, order intake for the
three-month period ended September 30, 2009 increased to
$113.0 million compared to $81.0 million for the
three-month period ended September 30, 2008.
The majority of this order intake is in the cement business and
originates from orders for spare parts globally and other orders
for capital equipment in the emerging markets, particularly in
India. Backlog at the close of 2008 decreased by 8.3% to
$842.8 million (reduced by terminated customer contracts)
from $919.3 million at the close of 2007. Order backlog,
reduced by terminated customer contracts, at September 30,
2009 was $626.3 million compared to $1.1 billion as at
September 30, 2008. Historically, approximately 70% to 80%
of our order backlog has been converted into revenues within a
12-month
period.
In the three-month period ended September 30, 2009, cost of
revenues for our industrial plant engineering and equipment
supply business decreased by 22.0% to $122.4 million from
$157.0 million in 2008. The decrease in expenses reflects
the decrease in our revenues. Our gross profit margin, excluding
the loss on terminated customer contracts, was 17.4% and 18.9%
for the three-month periods ended September 30, 2009 and
2008, respectively. Gross profit margins in the third quarter
were adversely affected as a result of our recognizing expected
losses on a limited number of projects. Contract performance is
reviewed monthly and in the event that we anticipate we may
realize a loss on a project, such losses are recognized
immediately. Overall, however, the majority of our projects are
on schedule and are anticipated to be profitable.
The reduction in loss on terminated customer contracts of
$2.1 million had a 1.4% positive impact on our gross profit
margin in the third quarter of 2009. We also reversed a
write-down of inventories of $1.1 million. The reserve was
set up in the three-month period ended March 31, 2009 when
we contemplated the shutdown of our workshop located in Cologne,
Germany. As a result of the sale of the workshop rather than the
contemplated shutdown, we reversed the inventory reserve, having
a positive impact of 0.8% on our gross profit margin in the
third quarter of 2009.
We also earned income of $4.6 million from our royalty
interest in the Wabush iron ore mine in the three-month period
ended September 30, 2009, as compared to $9.5 million
for the same period in 2008. The decrease in income was
primarily due to a decrease in average price.
Selling, general and administrative expenses, excluding stock
based compensation, increased by 40.0% to $18.0 million for
the three-month period ended September 30, 2009 from
$12.8 million in 2008. As discussed above, the increase is
primarily linked to sales, marketing and tendering costs
incurred preparing bids for projects that were not subsequently
awarded and lower absorption of overhead expenses due to
decreasing design hours for our engineers resulting from the
phase of completion of our projects. This increase was partially
offset by overall cost management and the first benefits of the
realignment of our operational structure.
Stock-based compensation was $0.2 million expense in the
three-month period ended September 30, 2009, as compared to
$1.3 million expense during the three months ended
September 30, 2008. The decline in the current quarter was
due to the forfeiture of 847,778 unvested stock options as a
result of employee terminations during 2009.
In the three-month period ended September 30, 2009, net
interest income decreased to $1.4 million (interest income
of $2.0 million less interest expense of $0.6 million)
as compared to $4.9 million (interest income of
$5.7 million less interest expense of $0.8 million)
for the same period in 2008. The decrease in net interest income
was a result of lower returns earned on cash deposits and on
financial instruments.
16
Other income was $2.0 million for the three-month period
ended September 30, 2009, compared to other expense of
$2.2 million for the same period in 2008. In the
three-month period ended September 30, 2009, other income
included unrealized gains on trading securities of
$1.9 million.
Minority interests increased for the three-month period ended
September 30, 2009 to $0.5 million from
$0.4 million for the same period in 2008.
In the three-month period ended September 30, 2009, we had
net income of $7.5 million, or $0.25 per share on a basic
and diluted basis, compared to net income of $30.8 million,
or $1.01 per share on a basic and diluted basis, in the same
period in 2008.
Liquidity
and Capital Resources
The following table is a summary of selected financial
information concerning our company for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
(United States dollars in millions)
|
|
Cash and cash equivalents
|
|
$
|
407.4
|
|
|
$
|
409.1
|
|
Total assets
|
|
|
764.2
|
|
|
|
765.7
|
|
Long-term debt, less current portion
|
|
|
11.9
|
|
|
|
11.3
|
|
Shareholders equity
|
|
|
279.8
|
|
|
|
261.9
|
|
We maintain a high level of liquidity, with a substantial amount
of our assets held in cash and cash equivalents. The highly
liquid nature of these assets provides us with flexibility in
managing our business and financing. Our cash is deposited in
highly rated banks located principally in Austria and Germany.
The largest portion of the cash is denominated in Euros, the
currency of our major operating subsidiaries, and the balance is
predominantly held in United States dollars, Indian rupees and
Canadian dollars.
As at September 30, 2009, our total assets decreased
marginally to $764.2 million from $765.7 million as at
December 31, 2008. At September 30, 2009, our cash and
cash equivalents were $407.4 million, compared to
$409.1 million at December 31, 2008. As at
September 30, 2009, the market value of short-term
securities amounted to $6.0 million, compared to
$3.0 million as at December 31, 2008. This represents
an unrealized gain on the marketable securities that we hold. As
at September 30, 2009, our long-term debt, less current
portion, was $11.9 million, compared to $11.3 million
as at December 31, 2008.
As at September 30, 2009, we had credit facilities of up to
a maximum of $490.0 million with banks which issue bonds
and bank guarantees for our industrial plant engineering and
equipment supply contracts. As of September 30, 2009,
$213.5 million (December 31, 2008:
$241.9 million) of the available credit facilities amount
had been utilized and there are no claims outstanding against
these credit facilities. As at September 30, 2009, cash of
$27.1 million has been collateralized against these credit
facilities and the banks charge 0.7% to 0.8% per annum on
outstanding amounts.
The financial covenants in our credit facilities require us to
maintain certain ratios, compliance with which is analyzed on an
annual basis. We are expected to remain in compliance with these
covenants. If we are not in compliance with one or more of the
covenants, the banks have the right to declare that all amounts
outstanding under the credit facilities are immediately due and
payable. The following table shows a summary of the ratios, the
minimum value required to be maintained under the credit
facilities and the actual value of the ratios as at
December 31, 2008:
|
|
|
|
|
|
|
|
|
Ratio
|
|
Minimum Value
|
|
Actual Value
|
|
Adjusted EBIT/Total Revenue
|
|
|
3.0
|
|
|
|
7.9
|
|
Adjusted EBIT/Interest Expenses
|
|
|
3.5
|
|
|
|
22.0
|
|
Adjusted Equity/Adjusted Total Assets* 100
|
|
|
25
|
|
|
|
38.1
|
|
Billing to Date/Contracts in Progress* 100
|
|
|
75
|
|
|
|
111.1
|
|
17
As at September 30, 2009, we had debt maturities (including
interest payments) of $0.3 million due in 12 months
and $12.0 million due in 12 to 24 months. We expect
such maturing debt to be satisfied primarily from the industrial
plant engineering and equipment supply business, cash on hand
and cash flow from operations. For more information, see
Note 17 to our audited consolidated financial statements
included in our annual report on
Form 20-F.
Management believes that our company has adequate capital
resources and liquidity for operations and capital expenditures
for the short to long-term.
Changes
in Financing and Capital Structure
We finished the nine-month period ended September 30, 2009
with a cash balance of $407.4 million and working capital
of $308.8 million. There were no share issuances nor
long-term debt financings during the nine-month period ended
September 30, 2009.
Operating
Activities
During the nine-month period ended September 30, 2009,
operating activities used cash of $21.9 million, as
compared to providing cash of $36.8 million in the
comparative period in 2008. The primary reason for this is
related to the decrease in our net income of $56.7 million.
During the current period, increases in receivables and
decreases in accounts payable and accrued expenses and progress
billings above costs and estimated earnings on uncompleted
contracts were the principal uses of cash. Decreases in
restricted cash and inventories and increases in advance
payments received from customers and provisions for warranty
costs and restructuring costs were the primary providers of cash
in the current period.
We expect to satisfy our working capital and other requirements
in the next twelve months through cash flow from operations and
the utilization of a portion of our cash reserves.
In 2008, operating activities provided cash of
$84.1 million, as compared to $130.1 million in 2007.
Net income after adding back losses on short-term securities,
fair value loss on investments in preferred shares of former
subsidiaries, future income taxes plus increases in accounts
payable and accrued expenses and provision for terminated
customer contracts and a decrease in inventories were the prime
contributors to the cash provided by operating activities in
2008. During 2008, increases in restricted cash, receivables and
contract deposits and prepaid and a decrease in income tax
liabilities were the principal uses of cash.
Changes in operating assets and liabilities resulted in a source
of funds of $8.4 million in 2008, reflecting business
development and the stage of completion of many of our projects.
During 2008, we invested $15.1 million in trade and other
receivables and increased our investment in contract deposits,
prepaids and other by $27.9 million, which is reflective of
the stage of completion of our customer contracts. Income tax
liabilities declined by $11.1 million, giving rise to a use
of funds. Our primary sources of funds from operating assets and
liabilities in 2008 arose from an increase in accounts payable
that provided cash of $44.0 million and the provision for
loss on supplier commitments and terminated customer contracts
that provided cash of $22.4 million.
Changes in operating assets and liabilities resulted in a source
of funds of $69.3 million in 2007, reflecting increased
progress billings, decreased inventories and general business
development. During 2007, trade and other receivables provided
cash of $11.3 million and we increased our investment in
contract deposits, prepaid and other by $6.7 million, which
was reflective of the stage of completion of our customer
contracts. Income tax liabilities in 2007 provided cash of
$7.8 million as a result of an increase in such
liabilities. Our primary source of funds from operating assets
and liabilities in 2007 arose from an increase in progress
billings that provided cash of $76.9 million.
Investing
Activities
During the nine-month period ended September 30, 2009,
investing activities, primarily as a result of the settlement of
the preferred shares of Mass Financial and one of its former
subsidiaries, provided cash of $4.5 million, as compared to
using cash of $4.4 million in the comparative period in
2008. We did not have significant investing activities in either
period.
During the year ended December 31, 2008, investing
activities used cash of $6.2 million, as compared to
$11.7 million in 2007. We did not have significant
investing activities in either period. We used $1.5 million
to acquire increased shareholdings in subsidiaries in 2008,
compared to $7.8 million in 2007. Capital expenditures were
$3.0 million and $3.5 million in 2008 and 2007,
respectively.
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Financing
Activities
During the nine-month period ended September 30, 2009,
financing activities provided cash of $nil, compared to
$3.9 million in the comparative period in 2008. We received
$nil as a result of the exercise of stock options in the
nine-month period ended September 30, 2009, compared to
$4.4 million in the same period in 2008.
In 2008, financing activities provided cash of
$2.3 million, as compared to $0.6 million in 2007. We
received $4.4 million as a result of the exercise of stock
options in 2008, as compared to $8.8 million in 2007. In
2007, we used $5.4 million in connection with the
distribution of the Austrian depository certificates of SWA
Reit. Net debt repayment used cash of $2.1 million in 2008,
compared to $2.8 million in 2007.
We had no material commitments to acquire assets or operating
businesses at December 31, 2008 or September 30, 2009.
We anticipate that there will be acquisitions of businesses or
commitments to projects in the future.
Foreign
Currency
Substantially all of our operations are conducted in
international markets and our consolidated financial results are
subject to foreign currency exchange rate fluctuations.
We translate assets and liabilities of our foreign subsidiaries
whose functional currencies are other than United States dollars
into United States dollars at the rate of exchange on the
balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the period.
Unrealized gains or losses from these translations, or currency
translation adjustments, are recorded under the
shareholders equity section on the balance sheet and do
not affect the net earnings as reported in our consolidated
statements of income. Foreign currency translation losses or
gains that arise from exchange rate fluctuations on transactions
denominated in a currency other than the local functional
currency are included in the consolidated statements of income.
As our revenues are also received in Euros, Indian rupees and
Canadian dollars, our financial position for any given period,
when reported in United States dollars, can be significantly
affected by the fluctuation of the exchange rates for Euros and
Canadian dollars during that period.
In the nine-month period ended September 30, 2009, we
reported a net $19.2 million currency translation
adjustment gain, compared to a net $21.3 million currency
translation adjustment loss for the nine-month period ended
September 30, 2008 and, as a result, our accumulated other
comprehensive income at September 30, 2009 was
$67.8 million, compared to $48.6 million at
December 31, 2008. The currency translation adjustment gain
or loss did not have an impact on our consolidated income
statement.
We periodically use derivative foreign exchange contracts to
manage our exposure to certain foreign currency exchange rate
risks. For more information, see the section entitled
Quantitative and Qualitative Disclosures About Market
Risk in our annual report on
Form 20-F.
Derivative
Instruments
Derivatives are financial instruments, the payments of which are
linked to the prices, or relationships between prices, of
securities or commodities, interest rates, currency exchange
rates or other financial measures. Derivatives are designed to
enable parties to manage their exposure to interest rates and
currency exchange rates, and security and other price and cash
flow risks. We use derivatives to manage certain foreign
currency exchange exposure for our own account. Currently, all
of our foreign currency derivative contracts are classified as
held for trading. We had foreign currency derivative contracts
with notional amounts totalling $7.4 million as of
September 30, 2009 and a net loss of $0.6 million on
the foreign currency derivatives was included in our other
expense during the nine months ended September 30, 2009.
For more information, see the section entitled
Quantitative and Qualitative Disclosures About Market
Risk in our annual report on
Form 20-F.
Inflation
We do not believe that inflation has had a material impact on
our revenues or income over the past three fiscal years.
However, increases in inflation could result in increases in our
expenses, which may not be readily recoverable in the price of
services provided to our clients. To the extent inflation
results in rising interest rates and has other adverse effects
on capital markets, it could adversely affect our financial
position and profitability.
Application
of Critical Accounting Policies
The preparation of financial statements in conformity with GAAP
requires our management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and
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liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods.
Our management routinely makes judgments and estimates about the
effects of matters that are inherently uncertain. As the number
of variables and assumptions affecting the probable future
resolution of the uncertainties increase, these judgments become
even more subjective and complex. Actual results could differ
from these estimates and such differences could be material. We
have identified certain accounting policies, described below,
that are the most important to the portrayal of our current
financial condition and results of operations. Our significant
accounting policies are disclosed in Note 1 to our audited
annual consolidated financial statements included in our annual
report on
Form 20-F.
Revenue
Recognition
The majority of the contracts and services in our industrial
plant engineering and equipment supply business are long-term
and we use the
percentage-of-completion
method as required by Canadian Institute of Chartered
Accountants (CICA) Handbook Section 3400,
Revenue
, which requires the
percentage-of-completion
method be used when performance consists of the execution of
more than one act, and revenue be recognized proportionately by
reference to the performance of each act. The
percentage-of-completion
method is also permitted under Accounting Research
Bulletin 45,
Long-Term Construction Type Contracts
(ARB 45), to measure and recognize revenue and
related costs. ARB 45 and American Institute of Certified Public
Accountants Statement of Position
81-1
(SOP 81-1)
indicate that the
percentage-of-completion
method may be used in lieu of the completed contract method when
all of the following are present:
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1.
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reasonably reliable estimates can be made of revenue and costs;
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2.
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the construction contract specifies the parties rights as
to the goods, consideration to be paid and received, and the
resulting terms of payment or settlement;
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3.
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the contract purchaser has the ability and expectation to
perform all contractual duties; and
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4.
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the contract contractor has the same ability and expectation to
perform.
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We derive our revenues from providing industrial plant
engineering services and specifically designed equipment to
build cement processing facilities. Typically, our project
contract is a construction-type contract which takes more than
one year to complete. The contracts for such projects specify
the work to be performed by us; the timing; the amount and the
method of the interim and final billings for the projects; and
the other legal rights and obligations of our company and our
customers.
We have a reliable management information system in place to
reasonably estimate the costs to complete a contract and the
extent of progress made towards completion of each contract.
Prior to executing a contract, we usually perform a credit check
on the customer and in certain cases take payment security from
the customer. We follow internal compliance review and
monitoring procedures prior to executing contracts and during
project execution to ensure that we and our customers have the
ability and expectation to perform all contractual duties.
Accordingly, we are of the opinion that the criteria of both
Canadian and U.S. GAAP are met for the application of the
percentage-of-completion
method.
Revenues from change orders are recognized only after the change
orders are approved by our customers, which results in our
company having a legal and enforceable right to payment for the
work performed on contracts that have been modified.
The major challenges in using the
percentage-of-completion
method of accounting are to accurately measure the extent to
which the contracts are being finished, and to assess
collectibility of the revenue
and/or
the
recoverability of the costs incurred. Generally, we rely on our
in-house technical specialists to estimate the progress of the
contract, our finance and engineering departments to work out
the cost analysis and the budget, particularly with respect to
costs incurred to date and total estimated costs of completion,
and our credit department to assess the credit of the customers.
All these analyses involve estimates and value judgments. The
accurate profit amount is not known until the contract is
completed and the bill is collected.
If a loss is expected on a
contract-in-progress
from our teamwork analysis, such loss will be recognized in the
income statement immediately.
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Inventories
Our inventories consist of construction raw materials,
inventory-in-transit,
work-in-progress,
contracts-in-progress
and finished goods. Our management must make estimates about
their pricing when establishing the appropriate provisions for
inventories.
For the construction raw materials,
inventory-in-transit
and
work-in-progress,
we make estimates and assess their pricing on an individual
contract basis using the teamwork approach. Please refer to
Revenue Recognition under Application of
Critical Accounting Policies. For the finished goods, the
estimated net selling price is the most important determining
factor. However, our management also considers whether there are
any alternatives to enhance the value of the finished goods, for
example, by using the finished goods in another product or
contract so as to increase the value of such other product or
contract.
Receivables
Typically, receivables are financial instruments which are not
classified as held for trading or available for sale. They are
net of an allowance for credit losses, if any. We perform
ongoing credit evaluation of customers and adjust our allowance
accounts for specific customer risks and credit factors.
Receivables are considered past due on an individual basis based
on the terms of the contracts. Our allowance for credit losses
is maintained at an amount considered adequate to absorb
estimated credit-related losses. Such allowance reflects
managements best estimate of the losses in our receivables
and judgments about economic conditions.
As of September 30, 2009, we determined that the gross
amount of our trade receivables was $81.7 million and we
recorded an allowance for credit losses of $3.8 million for
the receivables. We may be required to record further
impairments in the future should the global economy continue to
deteriorate. See Note 6 to our audited annual consolidated
financial statements included in our annual report on
Form 20-F.
Valuation
of Securities
Securities held for trading are carried at current market value.
Any unrealized gains or losses on securities held for trading
are included in the results of operations.
Available-for-sale
securities are also carried at current market value when current
market value is available. Any unrealized gains or losses are
included in other comprehensive income. When there has been a
loss in value of an
available-for-sale
security that is other than a temporary decline, the security
will be written down to recognize the loss in the determination
of income. In determining whether the decline in value is other
than temporary, quoted market price is not the only deciding
factor, particularly for thinly traded securities, large block
holdings and restricted shares. We consider, but such
consideration is not limited to, the following factors: trend of
the quoted market price and trading volume; financial position
and results for a period of years; liquidity or going concern
problems of the investee; changes in or reorganization of the
investee
and/or
its
future business plan; outlook of the investees industry;
the current fair value of the investment (based upon an
appraisal thereof) relative to its carrying value; and our
business plan and strategy to divest the security or to
restructure the investee.
Our previous investment in the preferred shares of Mass
Financial and one of its former subsidiaries was created in
January, 2006 as a result of the spin-off of our financial
services business. The preferred shares were classified as
available-for-sale
securities and quoted market prices were not available. Since
quoted market prices were not available, we determined the fair
value of these preferred shares using a discounted cash flow
model and considered the quoted market prices of securities with
similar characteristics. Our determination of fair value
considered various assumptions, including time value, yield
curve and other relevant economic measures. At December 31,
2008, we used a discount rate of 30% in our financial valuation
model, based on observable current market transactions in
instruments with similar characteristics, with modifications for
market liquidity and the features of the preferred shares. As a
result of this process, we recognized a fair value loss of
$55.1 million on our investment in the preferred shares in
2008.
The unrealized fair value loss of $55.1 million on our
investment in the preferred shares of Mass Financial and one of
its former subsidiaries reflects the significant weakness in the
global credit and equity markets experienced in the fourth
quarter of 2008. We considered the fair value loss to be an
other than temporary decline in value as we expected to
negotiate a settlement of the net position of our investment in
the preferred shares.
On May 12, 2009, we entered into and completed an agreement
with Mass Financial for the redemption of the preferred shares
of Mass Financial and its former subsidiary and the payment of
accrued dividends on the preferred shares of Mass Financial. As
a result of the settlement of the preferred shares, we
recognized a subsequent loss of $9.5 million in the second
quarter of 2009. However, we concluded that there was no change
in the fair value of the
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shares between December 31, 2008 and the settlement date as
there was no significant change in market conditions for similar
securities between December 31, 2008 and the settlement
date. For more information, please see the section entitled
Settlement of Investment in Preferred Shares of Mass
Financial and its Former Subsidiary.
Recent market volatility has made it extremely difficult to
value certain securities. Subsequent valuations, in light of
factors prevailing at such time, may result in significant
changes in the values of these securities in future periods. Any
of these factors could require us to recognize further
impairments in the value of our securities portfolio, which may
have an adverse effect on our results of operations in future
periods.
Warranty
Costs
We provide a warranty to our customers for the contracts and
services in our industrial plant engineering and equipment
supply business. The amount of the warranty liability reflects
the estimate of the expected future costs of our obligations
under the warranty, which is based on the historical material
replacement costs and the labor costs, the past history of
similar work, the opinion of our legal counsel and technical
specialists and their interpretation of the contracts. If any of
these factors change, revision to the estimated warranty
liability may be required. Certain warranty costs are included
in long-term portion as the warranty is for a period longer than
12 months.
Pension
Benefits
Our industrial plant engineering and equipment supply business
in Europe maintains defined benefits plans for its employees who
were employed prior to 1997. Employees hired after 1996 are
generally not entitled to such benefits. The employees are not
required to make contribution to the plans. We rely on an
actuarial report to record the pension costs and pension
liabilities. The actuarial reports are prepared every year as at
December 31. The reports are compiled and prepared, based
on certain assumptions, namely, demographic assumptions and
financial assumptions. The variables in the actuarial
computation include, but are not limited to, the following:
demographic assumptions about the future characteristics of the
employees (and their dependants) who are eligible for benefits,
the discount rate and future salary. Certain variables are
beyond our control and any change in one of these variables may
have a significant impact on the estimate of the pension
liability.
Under German law, the pension liability is an unsecured claim
and does not rank in priority to any other unsecured creditors.
The pension liability is non-recourse to our company.
As a consequence of the sale of our coal and minerals customer
group and our Cologne workshop, we will reduce our total pension
liabilities by approximately $1.2 million.
Income
Taxes
Management believes that it has adequately provided for income
taxes based on all of the information that is currently
available. The calculation of income taxes in many cases,
however, requires significant judgment in interpreting tax rules
and regulations, which are constantly changing.
Our tax filings are also subject to audits, which could
materially change the amount of current and future income tax
assets and liabilities. Any change would be recorded as a charge
or a credit to income tax expense. Any cash payment or receipt
would be included in cash from operating activities.
We currently have deferred tax assets which are comprised
primarily of tax loss carryforwards and deductible temporary
differences, both of which will reduce taxable income in the
future. The amounts recorded for deferred tax are based upon
various judgments, assumptions and estimates. We assess the
realization of these deferred tax assets on a periodic basis to
determine whether a valuation allowance is required. We
determine whether it is more likely than not that all or a
portion of the deferred tax assets will be realized, based on
currently available information, including, but not limited to,
the following:
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the history of the tax loss carryforwards and their expiry dates;
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future reversals of temporary differences;
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our projected earnings; and
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tax planning opportunities.
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If we believe that it is more likely than not that some of these
deferred tax assets will not be realized, based on currently
available information, an income tax valuation allowance is
recorded against these deferred tax assets.
If market conditions improve or tax planning opportunities arise
in the future, we will reduce our valuation allowances,
resulting in future tax benefits. If market conditions
deteriorate in the future, we will increase our
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valuation allowances, resulting in future tax expenses. Any
change in tax laws, particularly in Germany, will change the
valuation allowances in future periods.
Provisions
for Supplier Commitments on Terminated Customer
Contracts
Throughout the economic downturn we have had, and continue to
maintain, ongoing discussions with our customers with respect to
the status of their contracts. We continue to evaluate our legal
and commercial positions with respect to each potentially
affected contract. As discussed above, as at December 31,
2008, we classified $159.2 million of the contracts in our
order backlog as at risk. The at risk contracts in our order
backlog primarily fell into two categories: (i) projects
where the clients were considering changes in the scope of such
projects, and (ii) projects where clients required
additional financing to continue to completion. During 2009, we
continued to assess the likelihood of whether such at risk
contracts would ultimately be terminated. We considered whether
it was likely that a customer would continue with a contract in
the future or, alternatively, proceed with a different contract
or the same contract on a smaller scale. These assessments
considered, among other factors, whether the customer had
financing in place to support its payment obligations, and
whether such financing was, or will be, affected by the global
economic crisis. If we determined that a customer was unlikely
to proceed with a contract, such at risk contract was designated
as a terminated customer contract. We then
considered whether the customer was likely to pay the
cancellation costs due under the contract.
At December 31, 2008, we determined that the provision for
our commitments to suppliers was $23.7 million based on
terminated customer contracts. As a result of further critical
analysis and continuing customer negotiations relating to such
contracts in the current quarter ended September 30, 2009,
we determined that more at risk contracts should be terminated
and therefore increased our provision for the terminated
contracts by $4.4 million, though the provision was reduced
by $4.2 million as a result of our negotiations with
suppliers. At September 30, 2009, these terminated customer
contracts, aggregating $95.8 million, were officially
cancelled and removed from the order backlog. The orders from
these terminated customer contracts were received in either 2007
or 2008. The remainder of the at risk contracts, as identified
as of December 31, 2008, will proceed, either as originally
proposed or with a change of scope. They remain in our order
backlog.
During the nine months ended September 30, 2009, when
contracts were classified as terminated as a result of the
further critical analysis and negotiations discussed above, we:
(i) updated our estimates of amounts recognized at
December 31, 2008; (ii) recorded our purchase
obligations to suppliers at the full amounts we are
contractually committed to pay such suppliers;
(iii) determined the amounts that we expect to recover from
the sale of any inventory related to such contracts on the basis
of the net realizable value of such inventory and recorded this
amount as inventory in transit from suppliers;
(iv) recorded claims for the amounts that we are owed by
customers as a result of not proceeding with their contracts,
including cancellation costs due under the contract, less the
amounts of any advance payments received; and (v) created a
provision for those amounts that we believe we are unlikely to
collect from the customer. For more information, please see the
section entitled, Provisions for Terminated Customer
Contracts.
Provisions
for Restructuring Costs
As a result of the 2008 financial crisis, we expect the dramatic
changes in world credit markets and the global recession will
continue to have a negative impact on our customers future
expenditure programs. In anticipation of expected lower order
intake, we have fundamentally restructured our business model.
Our restructuring program will align capacities to changes in
market demands, allocate resources depending on geographical
needs and focus on markets and equipment that will meet our
objective of offering cost effective solutions to our customers.
In connection with our restructuring program, on October 7,
2009, we completed the divestment of our coal and minerals
customer group, exclusive of our roller press technologies and
capabilities, and our workshop in Cologne, Germany. In the first
half of 2009, a provision was set up for restructuring costs
related to the shut-down of the workshop in Cologne. As a result
of the divestment transaction, certain of the provisions set up
in the first quarter of 2009 for restructuring costs related to
the closure of the Cologne workshop were reversed as at
September 30, 2009. For more information, please see the
section entitled, Restructuring Activity.
Long-Lived
Assets Held for Sale
In connection with our restructuring program, in early October,
2009, we divested our coal and minerals customer group,
exclusive of our roller press technologies and capabilities, and
our workshop in Cologne, Germany. CICA Handbook
Section 3475,
Disposal of Long-Lived Assets and
Discontinued Operations
(CICA 3475), requires
that a long-lived asset should be classified as held for sale if
all of the following criteria are met: (a) management,
having the authority to approve the action, commits to a plan to
sell; (b) the asset is available for
23
immediate sale in its present condition subject only to terms
that are usual and customary for sales of such assets;
(c) an active program to locate a buyer and other actions
required to complete the sale plan have been initiated;
(d) the sale is probable and is expected to qualify for
recognition as a completed sale within one year, except as
permitted by CICA 3475; (e) the asset is being actively
marketed for sale at a price that is reasonable in relation to
its fair value; and (f) actions required to complete the
plan indicate that it is unlikely that significant changes to
the plan will be made or that the plan will be withdrawn.
We did not adopt CICA 3475 in the first half of 2009 because we
were not certain that we would complete the divestment of our
coal and minerals customer group and the Cologne workshop within
one year. In the event that we could not divest the assets, we
contemplated shutting down those operations. As such, we did not
meet the conditions described above as required by CICA 3475.
However, as of September 30, 2009, as the uncertainty of
selling within one year was removed, all of the above conditions
were met and, therefore, we determined to apply CICA 3475 as of
September 30, 2009. As a result, the assets and related
liabilities are presented separately as held for sale in our
balance sheet for the current period.
We have concluded that the disposition of our workshop and coal
and minerals customer group, exclusive of our roller press
technologies and capabilities, does not result in the disposal
group being classified as discontinued operations for accounting
purposes under Canadian GAAP. The divestment of the coal and
minerals customer group and the workshop, exclusive of the
roller press technologies and capabilities, is not presented as
discontinued operations as it cannot be clearly distinguished
from our ongoing operations and we will continue to have
involvement in the business through retaining our roller press
technologies and capabilities subsequent to closing. Going
forward, revenues from our roller press technologies and
capabilities will be classified as part of our cement customer
group rather than our coal and minerals customer group,
notwithstanding that we will continue to supply roller presses
to customers in the coal and minerals industries. Pursuant to
the sale agreement, we agreed to grant the buyer the right to
continue to manufacture the roller press for us for a period of
three years from the closing date, provided this is done on
normal commercial terms. Further, for a period of three years,
we will offer the Cologne workshop contracts to manufacture
equipment required for our cement business that have
traditionally been manufactured at the workshop and the buyer
has agreed to undertake such orders on a priority basis.
Changes
in Accounting Policies including Initial Adoption
International
Financial Reporting Standards
In 2006, Canadas Accounting Standards Board
(AcSB) ratified a strategic plan that will result in
Canadian GAAP, as used by publicly accountable enterprises,
being fully converged with International Financial Reporting
Standards (IFRS) as issued by the International
Accounting Standards Board over a transitional period to be
completed by 2011. We will be required to report using the
converged standards effective for interim and annual financial
statements relating to fiscal years beginning no later than on
or after January 1, 2011.
Canadian GAAP will be fully converged with IFRS through a
combination of two methods: as current joint-convergence
projects of the United States Financial Accounting
Standards Board and the International Accounting Standards Board
are agreed upon, they will be adopted by Canadas
Accounting Standards Board and may be introduced in Canada
before the publicly accountable enterprises transition
date to IFRS; and standards not subject to a joint-convergence
project will be exposed in an omnibus manner for introduction at
the time of the publicly accountable enterprises
transition date to IFRS.
The International Accounting Standards Board currently, and
expectedly, has projects underway that are expected to result in
new pronouncements that continue to evolve IFRS, and, as a
result, IFRS as at the transition date is expected to differ
from its current form.
In June 2008, Canadian Securities Administrators issued a staff
notice which states that staff recognize that some issuers might
want to prepare their financial statements in accordance with
IFRS for periods beginning prior to January 1, 2011, the
mandatory date for changeover to IFRS for Canadian publicly
accountable enterprises, and staff are prepared to recommend
exemptive relief on a case by case basis to permit a domestic
issuer to prepare its financial statements in accordance with
IFRS for financial periods beginning before January 1, 2011.
The eventual changeover to IFRS represents changes due to new
accounting standards. The transition from current Canadian GAAP
to IFRS is a significant undertaking that may materially affect
our reported financial position and results of operations.
We have not completed development of our IFRS changeover plan,
which will include project structure and governance, resourcing
and training, analysis of key GAAP differences and a phased plan
to assess accounting policies under IFRS as well as potential
IFRS 1 exemptions. We expect to complete our project scoping,
which will
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include a timetable for assessing the impact on data systems,
internal controls over financial reporting, and business
activities, such as financing and compensation arrangements, by
December 31, 2009.
We are required to qualitatively disclose the implementation
impacts in conjunction with our 2009 financial reporting. As
activities progress, disclosure on pre- and post-IFRS
implementation accounting policy differences is expected to
increase. We are continuing to assess the financial reporting
impacts of the adoption of IFRS and, at this time, the impact on
our future financial position and results of operations is not
reasonably determinable or estimable. Further, we anticipate a
significant increase in disclosure resulting from the adoption
of IFRS and are continuing to assess the level of this
disclosure required and any necessary systems changes to gather
and process the information.
Adoption
of New GAAP in 2009
Effective January 1, 2009, we adopted CICA Handbook
Section 3064,
Goodwill and Intangible Assets
. The
adoption of this new accounting standard did not have any
material impact on our financial position as of January 1,
2009.
During the current period, we also adopted amendments to CICA
Handbook Section 3855,
Financial Instruments
Recognition and Measurement.
The adoption of these
amendments did not have any material impact on our financial
position as of January 1, 2009.
Business
Combinations
AcSB issued CICA Handbook Section 1582,
Business
Combinations
, in January 2009 to replace Section 1581.
This new standard applies prospectively to business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
January 1, 2011. Earlier application is permitted. CICA
Handbook Sections 1582, 1601,
Consolidated Financial
Statements,
and 1602,
Non-controlling Interests,
should be applied at the same time. We are reviewing the
requirements of these new standards.
Off-balance
Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures
or capital resources that are material to investors.
We did not have any guarantees (which meet the definition of a
guarantee pursuant to AcSBs AcG 14,
Disclosure of
Guarantees
) outstanding as of September 30, 2009 or
December 31, 2008.
As at September 30, 2009, we had credit facilities of up to
a maximum of $490.0 million with banks which issue bonds
and bank guarantees for our industrial plant engineering and
equipment supply contracts. As of September 30, 2009,
$213.5 million of the available credit facilities amount
has been committed and there are no bonding claims outstanding
against such credit facilities.
Tabular
Disclosure of Contractual Obligations
Payments
Due by Period
(United States dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations as at
|
|
Less than
|
|
|
2 3
|
|
|
4 5
|
|
|
More than
|
|
|
|
|
December 31,
2008
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Long-term debt obligations
|
|
$
|
277
|
|
|
$
|
11,728
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,005
|
|
Operating lease obligations
|
|
|
3,772
|
|
|
|
2,694
|
|
|
|
2,580
|
|
|
|
828
|
|
|
|
9,874
|
|
Purchase
obligations
(1)
|
|
|
293,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293,547
|
|
Other long-term liabilities reflected on our balance sheet under
GAAP
(2)
|
|
|
|
|
|
|
8,344
|
|
|
|
|
|
|
|
|
|
|
|
8,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
297,596
|
|
|
$
|
22,766
|
|
|
$
|
2,580
|
|
|
$
|
828
|
|
|
$
|
323,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Purchases to complete our industrial plant engineering and
equipment supply contracts which are accounted for by the
percentage-of-completion
accounting method.
|
|
(2)
|
|
Not including pension obligations.
|
25
There were no material changes in the contractual obligations
(summarized in the above table of contractual obligations as at
December 31, 2008) during the nine-month period ended
September 30, 2009 that are outside the ordinary course of
our business.
Capital
Resources
We believe that cash flow from operating activities, together
with cash on hand and borrowings available under available
credit facilities, will be sufficient to fund currently
anticipated working capital, planned capital spending, and debt
service requirements for the next 12 months. Historically,
we have funded our operations from cash generated from
operations.
Our short term investment objectives are to preserve principal
and to maximize yields without significantly increasing risk,
while at the same time not materially restricting our short term
access to cash. To achieve these objectives, we maintain a
portfolio consisting of a variety of securities, including
government and corporate obligations and certificates of deposit.
Transactions
with Related Parties
Other than as disclosed herein, to the best of our knowledge,
there have been no material transactions or loans, between
January 1, 2009 and September 30, 2009, between our
company and (a) enterprises that directly or indirectly
through one or more intermediaries, control or are controlled
by, or are under common control with, our company;
(b) associates; (c) individuals owning, directly or
indirectly, an interest in the voting power of our company that
gives them significant influence over our company, and close
members of any such individuals family; (d) key
management personnel of our company, including directors and
senior management of our company and close members of such
individuals families; and (e) enterprises in which a
substantial interest in the voting power is owned, directly or
indirectly, by any person described in (c) or (d) or
over which such a person is able to exercise significant
influence.
On May 12, 2009, we entered into and completed an agreement
with Mass Financial for the redemption of the preferred shares
of Mass Financial and its former subsidiary and the payment of
accrued dividends on the preferred shares of Mass Financial. For
more information, please see the section entitled
Settlement of Investment in Preferred Shares of Mass
Financial and its Former Subsidiary.
In the normal course of operations, we enter into transactions
with related parties which include, among others, affiliates in
which we have a significant equity interest (10% or more) or
have the ability to influence the affiliates or our
operating and financing policies through significant
shareholding, representation on the board of directors,
corporate charter
and/or
bylaws. These related party transactions are measured at the
exchange value, which represents the amount of consideration
established and agreed to by all the parties.
Continuing
Operations
Transactions with related parties during the current nine-month
period:
|
|
|
|
|
|
|
(United States
|
|
|
dollars in thousands)
|
|
Dividend income on common
shares
(1)
|
|
$
|
154
|
|
Royalty expense paid and
payable
(1)
|
|
|
(374
|
)
|
Fee expense for managing resource property
|
|
|
(539
|
)
|
Fee expense for management services, including expense
reimbursements
|
|
|
(1,890
|
)
|
Management fee to a corporation in which our former Chief
Executive Officer has an ownership interest
|
|
|
(166
|
)
|
Interest income
|
|
|
173
|
|
Interest expense
|
|
|
(447
|
)
|
Fee and other income
|
|
|
494
|
|
|
|
|
(1)
|
|
Included in income from interest in resource property.
|
Balances with related parties at September 30, 2009:
|
|
|
|
|
Notes receivable, non-current
|
|
$
|
12,214
|
|
Accrued interest receivable
|
|
|
207
|
|
Due from related parties
|
|
|
517
|
|
Due to related parties
|
|
|
467
|
|
26
Financial
Instruments and Other Instruments
We are exposed to market risks from changes in interest rates,
foreign currency exchange rates and equity prices, which may
affect our results of operations and financial condition and,
consequently, our fair value. Generally, our management believes
that our current financial assets and financial liabilities, due
to their short-term nature, do not pose significant financial
risks. We use various financial instruments to manage our
exposure to various financial risks. The policies for
controlling the risks associated with financial instruments
include, but are not limited to, standardized company procedures
and policies on matters such as hedging of risk exposures,
avoidance of undue concentration of risk and requirements for
collateral (including letters of credit) to mitigate credit
risk. We have risk managers and internal auditors to perform
audits and checking functions to ensure that company procedures
and policies are complied with.
We use derivative instruments to manage certain exposures to
currency exchange rate risks. The use of derivative instruments
depends on our managements perception of future economic
events and developments. These types of derivative instruments
are generally highly speculative in nature. They are also very
volatile as they are highly leveraged given that margin
requirements are relatively low in proportion to notional
amounts. In the period ended September 30, 2009, we were
predominantly entering into conservative hedging instruments
such as forwarding contracts in order to mitigate currency
fluctuations.
Many of our strategies, including the use of derivative
instruments and the types of derivative instruments selected by
us, are based on historical trading patterns and correlations
and our managements expectations of future events.
However, these strategies may not be fully effective in all
market environments or against all types of risks. Unexpected
market developments may affect our risk management strategies
during this time, and unanticipated developments could impact
our risk management strategies in the future. If any of the
variety of instruments and strategies we utilize are not
effective, we may incur losses.
For more information about specific market risks we are exposed
to, please see information under the section entitled
Quantitative and Qualitative Disclosures About Market
Risk in our annual report on
Form 20-F.
Outstanding
Share Data
Our shares are listed on the New York Stock Exchange under the
symbol KHD. Effective September 10, 2007, we
effected a forward stock-split of our issued and outstanding
common shares on the basis of two (2) common shares for
every existing one (1) common share. As at
November 16, 2009, the share capital of our company was as
follows:
|
|
|
|
|
|
|
|
|
|
|
Class of shares
|
|
Par Value
|
|
|
Number Authorized
|
|
Number Issued
|
|
|
Common
|
|
|
No Par Value
|
|
|
Unlimited
|
|
|
30,259,911
(1
|
)
|
|
|
|
(1)
|
|
Based on our consolidated financial statements. This number does
not include 5,875,617 common shares owned by five wholly-owned
subsidiaries.
|
As at November 16, 2009, our company had the following
options granted and outstanding:
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Number
|
|
|
Exercise Price
|
|
|
Expiry Date
|
|
Options
|
|
|
126,116
|
|
|
$
|
13.06
|
|
|
May 17, 2016
|
Options
|
|
|
200,002
|
|
|
$
|
26.85
|
|
|
May 17, 2017
|
Options
|
|
|
66,664
|
|
|
$
|
29.25
|
|
|
June 28, 2017
|
Options
|
|
|
199,996
|
|
|
$
|
31.81
|
|
|
May 19, 2018
|
Options
|
|
|
66,664
|
|
|
$
|
31.53
|
|
|
June 30, 2018
|
In 2008, our compensation committee retained the services of an
international compensation consultant to assist with the
redesign of our executive compensation program. As a result, our
board of directors has approved certain changes with respect to
executive compensation for fiscal year 2009. One of the changes
is the establishment of a uniform compensation program, based on
industry comparatives, developed by our compensation committee
in consultation with the consultant. In connection with the
establishment of the uniform compensation program, on
October 25, 2009, we entered into employment agreements
with our executive officers that replaced prior employment
agreements or more informal employment offer letters that, until
now, have governed the terms of the compensation of the
respective officers. The agreements are effective as of
January 1, 2009. Our new executive compensation program
consists of short-term, operational and strategic targets set by
our company against which executive incentive compensation will
be determined. As a result of the implementation of the new
incentive program, 72,500 options previously granted to
executives under our old equity compensation plan were
voluntarily forfeited as of October 25, 2009.
27
Disclosure
Controls and Procedures
We maintain a set of disclosure controls and procedures designed
to ensure that information required to be disclosed is recorded,
processed, summarized and reported within the time periods
specified in provincial securities legislation. We evaluated our
disclosure controls and procedures as defined under National
Instrument
52-109
as at
September 30, 2009. This evaluation was performed by our
Chief Executive Officer and Chief Financial Officer with the
assistance of other employees to the extent necessary and
appropriate. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that the design
and operation of these disclosure controls and procedures were
effective.
Changes
in Internal Controls Over Financial Reporting
We maintain internal controls over financial reporting which
have been designed to provide reasonable assurance of the
reliability of external financial reporting in accordance with
U.S. GAAP as required by National Instrument
52-109.
There were no changes in our internal control over financial
reporting that occurred during the nine-month period ended
September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
Risk
Factors and Uncertainties
An investment in our company involves a number of risks. You
should carefully consider the following risks and uncertainties
in addition to other information in this quarterly report in
evaluating our company and our business before making any
investment decision in regards to the shares of our
companys common stock. Our business, operating and
financial condition could be harmed due to any of the following
risks.
Risk
Factors Relating to Our Business
The
worldwide macroeconomic downturn has reduced and could continue
to reduce the demand for our industrial plant engineering and
equipment supply business, the amount of royalty we receive from
the Wabush iron ore mine and the value of our financial assets,
and therefore may have a continuing material adverse effect on
our financial results. The recent industry trends of demand
growth, consolidation and capital expenditures have moderated.
Many of our customers are facing liquidity problems and some are
revisiting their capital expenditure plans. As a result, the
market price of our common shares has declined and may continue
to decline.
The ongoing economic crisis has had a significant negative
impact on virtually every segment of the world economy due to
many factors including the effects of the subprime lending and
general credit market crises, volatile but generally declining
energy costs, slower economic activity, decreased consumer
confidence and commodity prices, reduced corporate profits and
capital spending, adverse business conditions, increased
unemployment and liquidity concerns. The industrial plant
engineering and equipment supply industry is cyclical in nature.
It tends to reflect and be amplified by general economic
conditions, both domestically and abroad. Historically, in
periods of recession or periods of minimal economic growth, the
operations underlying industrial plant engineering and equipment
supply companies have been adversely affected. Certain end-use
markets for clinker and cement experience demand cycles that are
highly correlated to the general economic environment, which are
sensitive to a number of factors outside of our control. If such
end-use markets for clinker and cement significantly deteriorate
due to these macroeconomic effects, our business, financial
condition and results of operations will likely be materially
and adversely affected. In addition, these macroeconomic
effects, including the resulting recession in various countries
and slowing of the global economy, will likely result in a
continued decrease in commercial and industrial demand for our
services and products, which will have a material adverse effect
on our financial results. In addition, during recessions or
periods of slow growth, the construction industries typically
experience major cutbacks in production which may result in
decreased demand for our products and services. Because we
generally have high fixed costs, our profitability is
significantly affected by decreased output and decreases in the
demand for the design and construction of plant systems or
equipment that produce or process clinker and cement. Reduced
demand for our products and services and pricing pressures will
adversely affect our financial condition and results of
operations. In addition, in periods of recession or periods of
minimal economic growth, the demand for steel and iron ore
usually decreases significantly and results in a drop in the
price for iron ore. Such decreases in the demand for iron ore
and the resulting decrease in price for iron ore will lead to a
decrease in the royalty we receive from the Wabush iron ore mine
and could have a material adverse effect on our financial
results. We cannot predict the timing or duration of the current
economic slowdown or the timing or strength of a subsequent
economic recovery, worldwide or in the industrial plant
engineering and equipment supply industry, and cannot predict
the extent to
28
which the current economic slowdown and macroeconomic events
will impact our business. However, the uncertainty regarding the
financial markets and worldwide political and economic climates
are expected to continue to affect the demand for our products
and services during the coming months. The market price of our
common shares may decrease if investors have concerns that our
business, financial condition and results of operations will
continue to be negatively impacted by the worldwide
macroeconomic downturn.
The
worldwide macroeconomic downturn has resulted in the prolonging
or cancellation of some of our customers projects and may
negatively affect our customers ability to make timely
payment to us. Further, it may result in a further decrease in
the demand for our products or services. Any of these may have a
material adverse effect on our operating results and financial
condition.
Any downturn in the industrial plant engineering and equipment
supply industry or in the demand for cement or other related
products may be severe and prolonged, and any failure of the
industry or associated markets to fully recover from a downturn
could seriously impact our revenue and harm our business,
financial condition and results of operations. During a
downturn, the timing and implementation of some of our larger
customer projects may be affected. Some projects may be
prolonged or even discontinued or cancelled. As at
December 31, 2008, we classified $159.2 million of the
contracts in our order backlog as at risk. The at risk contracts
in our order backlog primarily fell into two categories:
(i) projects where the clients were considering changes in
the scope of such projects, and (ii) projects where clients
required additional financing to continue to completion. As a
result of further critical analysis and continuing customer
negotiations in the current quarter ended September 30,
2009, we determined that more at risk contracts should be
terminated. At September 30, 2009, these terminated
contracts, aggregating $95.8 million, were officially
cancelled and removed from the order backlog. We may receive
indications from other customers that contract variations or
cancellations are a possibility, although we cannot provide any
assurance as to the eventual amounts of such contracts due to
the uncertainty of current and future economic conditions and
other factors which are beyond our control.
Furthermore, our customers may face deterioration of their
business, cash flow shortages, and difficulty gaining timely
access to sufficient credit, which could result in an impairment
of their ability to make timely payments to us. In certain
emerging markets, customers have obtained bank guarantees or
credit insurance to support credit extended to them. As these
expire, there can be no assurance that such customers will be
able to renew or extend the credit support previously made
available. If we fail to understand the financial position or
strategic intent of our key customers, there is a risk that such
customers could cancel their contracts or default on project
payments which could have a negative impact on our business and
results of operations. In addition, our suppliers may be
experiencing similar conditions, which may adversely affect
their ability to fulfill their obligations to us, which could
result in product delays, increased accounts receivable defaults
and inventory challenges. If any of these things occur, there
could be an adverse impact on our financial results, we may be
required to increase our allowance for doubtful accounts and our
revenues would be negatively impacted. Additionally, some of our
competitors may become more aggressive in their pricing
practices, which could adversely impact our gross margin.
Accordingly, our operating results may vary significantly as a
result of the general conditions in the industrial plant
engineering and equipment supply industry, which could cause
large fluctuations in our share price. Additionally, the
combination of our lengthy sales cycle coupled with challenging
macroeconomic conditions could have a negative impact on the
results of our operations.
Due to
the worldwide economic downturn, we have undertaken a
restructuring program to improve the profitability,
competitiveness and efficiency of our business. We may not be
able to effectively complete our restructuring program and our
restructuring program may not result in the expected benefits,
which may have a material adverse effect on our operating
results.
In the first quarter of 2009, we announced the implementation of
a restructuring program to streamline our organization and
reduce operating costs in order to address the worldwide
economic downturn and its expected effects on our and our
customers businesses. As part of this restructuring
program, we have divested our coal and minerals customer group,
exclusive of our roller press technologies and capabilities, and
our workshop in Cologne, Germany, which will, together with our
other restructuring efforts, reduce our workforce over the next
15 months to a level commensurate with our business
activity. There are several risks inherent in our efforts to
complete our restructuring program. The program may involve
higher costs or a longer timetable than we currently anticipate.
The program may impair our ability to remain competitive in the
markets in which we compete and to operate effectively. In
addition, the program may have other consequences, such as
attrition beyond our planned reduction in workforce or a
negative effect on employee morale and our competitors may seek
to gain a competitive advantage over us. We may not be able to
effectively complete our restructuring program as planned and
the program may not result in the expected benefits, any of
which may have a material adverse effect on our operating
results.
29
Failure
to manage our market, product and service portfolio effectively
and to develop an effective marketing and sales strategy to
leverage market position in key geographical regions may
adversely affect our financial condition and results of
operations.
We have a global portfolio of products and opportunities.
Failure to manage this portfolio effectively could have a
material impact on our business. We conduct regular reviews of
our market, product and service portfolio balance, as
appropriate, looking at numerous factors, including market
weighting, geographical weighting and political risk.
Nevertheless, we may still be exposed to risk factors such as
shifts in the demand for our products and services in certain
geographies; adverse changes in the business environment;
increased taxes; and government regulation. Failure to
successfully develop or implement a marketing and sales strategy
could have an adverse effect on our business. This marketing
strategy includes opportunity identification, identifying key
customer requirements and targeting key opportunities and
quality projects that fit within our strategy. Inability to
leverage our market position in key countries and segments could
also have a material adverse effect on our strategy in the
long-term.
Failure
to successfully deliver and implement major projects in line
with established project and business plans may adversely affect
our results of operation and financial condition.
Our future revenues and profits are, to a significant extent,
dependent upon the successful completion of major projects
within budget, cost and specifications. The delivery of such
projects is subject to health and safety,
sub-surface,
technical, commercial, legal, contractor and economic risks.
During the pre-tender and tender phases, projects are subject to
a number of
sub-surface,
engineering, stakeholder, commercial and regulatory risks. The
principal risk prior to tender is failure to accurately assess a
projects schedule and cost, leading to margin erosion or
negative returns. Development projects may be delayed or
unsuccessful for many reasons, including: cost and time overruns
of projects under construction; failure to comply with legal and
regulatory requirements; equipment shortages; availability,
competence and capability of human resources and contractors;
and mechanical and technical difficulties. Projects may also
require the use of new and advanced technologies, which can be
expensive to develop, purchase and implement and which may not
function as expected. In the event that we fail to successfully
deliver and implement major projects in line with project and
business plans, our results of operations and financial
condition may be adversely affected.
Any
significant disruption of our operations may harm our business
reputation and cause an adverse effect on our financial
results.
Breakdown of equipment or other events, including catastrophic
events such as health and safety incidents or natural disasters,
leading to interruptions at any of our facilities or at any of
the facilities or areas at which we are providing services,
could have a material adverse effect on our financial results.
Further, because many of our customers are, to varying degrees,
dependent on planned deliveries, customers that are forced to
reschedule their own production due to such delays could pursue
financial claims against us. We may incur costs to correct any
of these events, in addition to facing claims from customers or
third parties dependent upon the delivery of our services or
products. Further, if any of these events occur and we are
forced to delay the delivery of our services, then our
reputation among actual and potential customers may be harmed,
potentially resulting in a loss of business. While we maintain
insurance policies covering, among other things, physical
damage, business interruptions and product liability, these
policies may not cover all of our losses and we could incur
uninsured losses and liabilities arising from such events,
including damage to our reputation, loss of customers and
substantial losses in operational capacity, any of which could
have a material adverse effect on our financial results.
Changes
in the cost of raw materials could have a material adverse
effect on our financial condition and results of
operations.
We may be significantly affected by changes in the prices of and
demand for cement and other related products and the supply of
materials necessary to make clinker and cement. The prices and
demand for these products and materials can fluctuate widely as
a result of various factors beyond our control such as supply
and demand, exchange rates, inflation, changes in global
economics, political and social unrest and other factors. Any
substantial increases in the cost of such materials, or the
transportation
and/or
availability of such materials, could adversely affect the
demand for cement and other related products. If the demand for
cement and other related products decreases, then the demand for
our industrial plant engineering and equipment supply business
will decrease, which will in turn adversely impact upon our
financial condition and results of operations. Our ability,
therefore, to maintain or increase our revenues may be adversely
affected by a sustained material reduction in the demand or
price for such products and materials.
30
We are
subject to risks associated with changing technology and
manufacturing techniques, which could place us at a competitive
disadvantage.
The successful implementation of our business strategy requires
us to continuously evolve our existing products and services and
introduce new products and services to meet customers
needs. Our designs and products are characterized by stringent
performance and specification requirements that mandate a high
degree of manufacturing and engineering expertise. We believe
that our customers rigorously evaluate our services and products
on the basis of a number of factors, including quality, price
competitiveness, technical expertise and development capability,
innovation, reliability and timeliness of delivery, product
design capability, operational flexibility, customer service,
and overall management. Our success depends on our ability to
continue to meet our customers changing requirements and
specifications with respect to these and other criteria. There
can be no assurance that we will be able to address
technological advances or introduce new designs or products that
may be necessary to remain competitive within the industrial
plant engineering and equipment supply business.
Failure
to attract, motivate and retain skilled personnel may have a
material adverse effect on our business and results of
operations.
Our future direction and success depends on the constant review
and development of an appropriate business model and strategy
that is aligned with the current business environment and the
strengths of our company. The development, communication and
implementation of the strategy will depend on generating
sustainable options for the future and alignment between various
stakeholders, including our customer service centers and our
regional strategies. This will require the right management
skills and leadership to deliver success. Our performance and
ability to mitigate these and other significant risks within our
control depend on the skills and efforts of our employees and
management teams. Future success will depend to a large extent
on the continued ability to attract, retain, motivate and
organize highly skilled and qualified personnel. This in turn
will be impacted by competition for human resources. Loss of the
services of key people or an inability to attract and retain
employees with the right capabilities and experience, may have a
material adverse effect on our business and results of
operations.
Our
competitors include firms traditionally engaged in the
industrial plant engineering and equipment supply business and
failure to understand the competitive landscape could lead to a
decrease of our market share.
We conduct our business in a global environment that is highly
competitive and unpredictable. Our primary competitors are
international companies with greater resources, capital and
access to information than us. Our competition includes other
entities who provide industrial and process engineering services
and/or
products related to cement technology, including feasibility
studies, raw material testing, basic and detail plant and
equipment engineering, financing concepts, construction and
commissioning, and personnel training. Increased competition may
lead to a decline in the demand for our industrial plant
engineering and equipment supply business and failure to
understand the competitive landscape, which includes competitors
with greater resources and capital than us, could lead to a
decrease of our market share.
We are
exposed to political, economic, legal, operational and other
risks as a result of our global operations, which may negatively
affect our business, results of operations, financial condition
and cash flow.
In conducting our business in major markets around the world, we
are, and will continue to be, subject to financial, business,
political, economic, legal, operational and other risks that are
inherent in operating in other countries. We operate on a global
basis, in both developed and underdeveloped countries. In
addition to the business risks inherent in developing a
relationship with a newly emerging market, economic conditions
may be more volatile, legal and regulatory systems less
developed and predictable, and the possibility of various types
of adverse governmental action more pronounced. Other business
risks include warranty claims that may be made in connection
with warranties that we provide to our customers in connection
with the industrial and engineering products and services that
we provide. If we receive a significant number of warranty
claims, then our resulting warranty costs could be substantial
and we could incur significant legal expenses evaluating or
disputing such claims. In addition, inflation, fluctuations in
currency and interest rates, competitive factors, civil unrest
and labour problems could affect our revenues, expenses and
results of operations. Our operations could also be adversely
affected by acts of war, terrorism or the threat of any of these
events as well as government actions such as expropriation,
controls on imports, exports and prices, tariffs, new forms of
taxation or changes in fiscal regimes and increased government
regulation in the countries in which we operate or offer our
services. We also face the risk that exchange controls or
similar restrictions imposed by foreign governmental authorities
may restrict our ability to convert local currency received or
held by us in their countries or to take those other currencies
out of those countries. Unexpected or uncontrollable events or
circumstances in any of these markets could have a material
adverse effect on our financial results.
31
Failure
to identify and interpret correctly global or local regulations
and legislation may impact our financial position or the
reputation of our company.
Our business activities are conducted in many different
countries and are therefore subject to a broad range of
legislation and regulation. We face value erosion if we do not
identify or interpret correctly these regulations, respond to
changes in market rules and ensure compliance with same. Many of
the countries in which we conduct, and expect to conduct,
business have recently developed, or are in the process of
developing, new regulatory and legal structures. These
regulatory and legal structures, and their interpretation and
application by administrative agencies, may be untested and
specific to a given market. Any changes in the regulatory
climate in which our company operates may potentially have a
material impact on our business. Failure to meet regulatory and
legislative requirements may have a material adverse effect on
our reputation and may expose our company to financial penalties.
Transactions
with parties in countries designated by the United States State
Department as state sponsors of terrorism may lead some
potential customers and investors in the United States and other
countries to avoid doing business with us or investing in our
shares.
We currently engage and may continue to engage in business with
parties in Iran, Sudan, Cuba and Syria, countries that the
United States State Department has designated as state sponsors
of terrorism. This business primarily relates to the provision
of spare parts. United States law generally prohibits United
States persons from doing business with such countries. In the
case of these designated countries, there are prohibitions on
certain activities and transactions, and penalties for violation
of these prohibitions include criminal and civil fines and
imprisonment. We are a company incorporated in British Columbia,
Canada and, to our knowledge, our activities with respect to
these countries have not involved any United States person in
either a managerial or operational role. While we seek to comply
with applicable legal requirements in our dealings in these
countries, it is possible that our company or persons employed
by us could be found to be subject to sanctions or other
penalties under this legislation in connection with the
activities in these countries.
We are aware, through press reports and other means, of
initiatives by governmental entities in the United States and by
United States institutions such as universities and pension
funds, to adopt laws, regulations or policies prohibiting
transactions with or investment in, or requiring divestment
from, entities doing business with these countries. It is
possible that such initiatives may result in our being unable to
gain or retain entities subject to such prohibitions as
customers or as investors in our shares. In addition, our
reputation may suffer due to our association with these
countries. Such a result may have adverse effects on our
business.
We are
exposed to unidentified or unanticipated risks which could
impact our risk management strategies in the future and could
negatively affect our results of operations and financial
condition.
We use a variety of instruments and strategies to manage
exposure to various types of risks. For example, we may use
derivative foreign exchange contracts to manage our exposure to
foreign currency exchange rate risks. If any of the variety of
instruments and strategies that we utilize to manage our
exposure to various types of risk are not effective, we may
incur losses. Unexpected market developments may affect our risk
management strategies and unanticipated developments could
impact our risk management strategies in the future.
Any
significant inflation or deflation may negatively affect our
business, results of operations and financial
condition.
Inflation may result in increases in our expenses related to the
provision of industrial plant engineering and equipment supply
business, which may not be readily recoverable in the price of
such services provided to our clients. Increases in inflation in
overseas countries could result in a reduction in our revenues
when reported in United States currency. To the extent that
inflation results in rising interest rates and has other adverse
effects on capital markets, it may adversely affect our
business, results of operations and financial condition.
Deflation is the risk that prices throughout the economy may
decline, which may reduce the amount of royalty we receive from
our interest in the Wabush iron ore mine. Deflation may also
result in the decrease of the price of cement which may result
in our customers delaying or cancelling projects. Any such
delays or cancellations could result in reduced demand for our
products and services, which may adversely affect our business,
results of operations and financial condition.
32
Some of
our subsidiaries operating in the industrial plant engineering
and equipment supply business are staffed by a unionized
workforce, and union disputes and other employee relations
issues may materially and adversely affect our financial
results.
Some of the employees of our operating subsidiaries are
represented by labour unions under collective bargaining
agreements with varying durations and expiration dates. We may
not be able to satisfactorily renegotiate our bargaining
agreements when such agreements expire. In addition, existing
bargaining agreements may not prevent a strike or work stoppage
in the future, and any such work stoppage may have a material
adverse effect on our financial results.
We may
not be able to protect the confidential or unique aspects of our
technology, which would reduce our competitive
advantage.
We rely on a combination of patents and patent applications,
trade secrets, confidentiality procedures and contractual
provisions to protect our technology. Despite our efforts to
protect our technology, unauthorized parties may attempt to copy
aspects of the products we design or build or to obtain and use
information that we regard as proprietary. Policing unauthorized
use of our technology and products is difficult and expensive.
In addition, our competitors may independently develop similar
technology or intellectual property. If our technology is copied
by unauthorized parties, violates the intellectual property of
others or if our competitors independently develop competing
technology, we may lose existing customers and our business may
suffer.
We are
exposed to various counterparty risks which may adversely impact
our financial position, results of operations, cash flows and
liquidity.
The challenging credit environment since 2008 has highlighted
the importance of governance and management of credit risk. Our
exposure to credit risk takes the form of a loss that would be
recognized in the event that counterparties failed to, or were
unable to, meet their payment obligations. Such risk may arise
in certain agreements in relation to amounts owed for physical
product sales, the use of derivative instruments, the investment
of surplus cash balances and amounts owed to us by one of our
former subsidiaries pursuant to two promissory notes. The
current credit crisis could also lead to the failure of
companies in our sector, potentially including partners,
contractors and suppliers.
We have exposure to the financial condition of our various
lending, investment and derivative counterparties. With respect
to derivative counterparties, we are periodically party to
derivative instruments to hedge our exposure to foreign currency
exchange rate fluctuation. As of September 30, 2009, we
were party to foreign currency contracts with a notional value
of approximately $7.4 million. The counterparties to these
contracts are commercial banks. On the maturity dates of these
contracts, the counterparties are potentially obligated to pay
us the net settlement value. If any of the counterparties to
these derivative instruments were to liquidate, declare
bankruptcy or otherwise cease operations, they may not satisfy
their obligations under these derivative instruments. In
addition, we may not be able to cost effectively replace the
derivative position depending on the type of derivative and the
current economic environment. If we were not able to replace the
derivative position, we would be exposed to a greater level of
foreign currency exchange rate risk which could lead to
additional losses.
With respect to lending and investment counterparties, current
market conditions may increase counterparty risks related to our
cash equivalents, restricted cash, short-term cash deposits,
receivables and equity securities (including preferred shares).
We have deposited our cash and cash equivalents (including
restricted cash) and term deposits with reputable financial
institutions with high credit ratings. As at September 30,
2009, our company and its subsidiaries had cash and cash
equivalents aggregating $293.5 million with one bank in
Austria. If any such counterparties are unable to perform their
obligations, we may, depending on the type of counterparty
arrangement, experience a significant loss of liquidity or a
significant economic loss. Changes in the fair value of these
items may adversely impact our financial position, results of
operations, cash flows and liquidity.
Our bonding facility is provided by a syndicate of six banks.
All banks in the syndicate are highly rated, with three located
in Austria and three in Germany. The bonding facility is secured
for one year and utilization rates are well below available
limits. We do not have significant unutilized credit lines. The
counterparties to our derivative contracts are highly rated
Austrian and Indian banks. The Austrian, German and Indian
governments all have announced that resources are available to
support their banking systems.
Our ability to utilize financial resources may be restricted
because of tightening
and/or
elimination of unsecured credit availability with
counterparties. If we are unable to utilize such financial
resources, we may be exposed to greater risk with respect to our
ability to manage exposures to fluctuations in foreign
currencies, interest rates, and lead prices.
33
General
Risks Faced by Our Company
Investors
interests will be diluted and investors may suffer dilution in
their net book value per share if we issue additional shares or
raise funds through the sale of equity securities.
Our constating documents authorize the issuance of common shares
and class A preferred shares. In the event that we are
required to issue any additional shares or enter into private
placements to raise financing through the sale of equity
securities, investors interests in our company will be
diluted and investors may suffer dilution in their net book
value per share depending on the price at which such securities
are sold. If we issue any such additional shares, such issuances
will also cause a reduction in the proportionate ownership of
all other shareholders. Further, any such issuance may result in
a change of control of our company.
Our
constating documents contain indemnification provisions and we
have entered into agreements indemnifying our officers and
directors against all costs, charges and expenses incurred by
them.
Our constating documents contain indemnification provisions and
we have entered into agreements with respect to the
indemnification of our officers and directors against all costs,
charges and expenses, including amounts payable to settle
actions or satisfy judgments, actually and reasonably incurred
by them, and amounts payable to settle actions or satisfy
judgments in civil, criminal or administrative actions or
proceedings to which they are made a party by reason of being or
having been a director or officer of our company. Such
limitations on liability may reduce the likelihood of litigation
against our officers and directors and may discourage or deter
our shareholders from suing our officers and directors based
upon breaches of their duties to our company, though such an
action, if successful, might otherwise benefit us and our
shareholders.
Certain
factors may inhibit, delay or prevent a takeover of our company
which may adversely affect the price of our common
stock.
Certain provisions of our charter documents and the corporate
legislation which govern our company may discourage, delay or
prevent a change of control or changes in our management that
shareholders may consider favourable. Such provisions include
authorizing the issuance by our board of directors of preferred
stock in series, providing for a classified board of directors
with staggered, three-year terms and limiting the persons who
may call special meetings of shareholders. In addition, the
Investment Canada Act
imposes certain limitations on the
rights of non-Canadians to acquire our common shares, although
it is highly unlikely that this will apply. If a change of
control or change in management is delayed or prevented, the
market price of our common stock could decline.
Fluctuations
in interest rates and foreign currency exchange rates may affect
our results of operations and financial condition.
Fluctuations in interest rates may affect the fair value of our
financial instruments sensitive to interest rates. An increase
in market interest rates may decrease the fair value of our
fixed interest rate financial instrument assets and a decrease
in market interest rates may increase the fair value of our
fixed interest rate financial instrument liabilities, thereby
resulting in a reduction in the fair value of our equity. See
section entitled Financial and Other Instruments for
additional information with respect to our exposure to interest
rate risk.
Similarly, fluctuations in foreign currency exchange rates may
affect the fair value of our financial instruments sensitive to
foreign currency exchange rates. Our reporting currency is the
United States dollar. A depreciation of such currencies against
the United States dollar will decrease the fair value of our
financial instrument assets denominated in such currencies and
an appreciation of such currencies against the United States
dollar will increase the fair value of our financial instrument
liabilities denominated in such currencies, thereby resulting in
a reduction in our equity. See the section entitled
Financial and Other Instruments for additional
information with respect to our exposure to foreign currency
exchange rate risk.
Additional
Information
We file annual and other reports, proxy statements and other
information with certain Canadian securities regulatory
authorities and with the Securities and Exchange Commission (the
SEC) in the United States. The documents filed with
the SEC are available to the public from the SECs website
at
http://www.sec.gov.
The documents filed with the Canadian securities regulatory
authorities are available at
http://www.sedar.com.
34
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
UNAUDITED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
35
UNAUDITED
INTERIM FINANCIAL STATEMENTS
In accordance with National Instrument
51-102
released by the Canadian Securities Administrators, KHD Humboldt
Wedag International Ltd. discloses that its auditors have not
reviewed the unaudited financial statements for the period ended
September 30, 2009.
NOTICE TO
READER OF THE INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
The accompanying interim consolidated balance sheet of KHD
Humboldt Wedag International Ltd. as at September 30, 2009
and the related consolidated statements of operations and
retained earnings, comprehensive income and cash flows for the
three- and nine-month periods then ended are the responsibility
of management. These consolidated financial statements have not
been reviewed on behalf of the shareholders by the independent
external auditors of KHD Humboldt Wedag International Ltd.
The interim consolidated financial statements have been prepared
by management and include the selection of appropriate
accounting principles, judgments and estimates necessary to
prepare these financial statements in accordance with Canadian
GAAP.
36
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
September 30, 2009 and December 31, 2008
(Unaudited)
(United States Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
407,423
|
|
|
$
|
409,087
|
|
Securities
|
|
|
6,034
|
|
|
|
2,987
|
|
Restricted cash
|
|
|
27,135
|
|
|
|
32,008
|
|
Accounts receivable, trade
|
|
|
77,904
|
|
|
|
62,760
|
|
Other receivables
|
|
|
22,864
|
|
|
|
28,313
|
|
Inventories
|
|
|
78,112
|
|
|
|
110,161
|
|
Contract deposits, prepaid and other
|
|
|
55,610
|
|
|
|
58,694
|
|
Future income tax assets
|
|
|
6,238
|
|
|
|
7,679
|
|
Assets held for sale
|
|
|
26,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
707,920
|
|
|
|
711,689
|
|
Non-current Assets
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
12,214
|
|
|
|
|
|
Property, plant and equipment
|
|
|
1,738
|
|
|
|
2,489
|
|
Interest in resource property
|
|
|
26,975
|
|
|
|
24,861
|
|
Equity method investments
|
|
|
43
|
|
|
|
325
|
|
Future income tax assets
|
|
|
14,099
|
|
|
|
6,339
|
|
Investment in preferred shares of former subsidiaries
|
|
|
|
|
|
|
19,125
|
|
Other non-current assets
|
|
|
872
|
|
|
|
830
|
|
Assets held for sale
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
56,243
|
|
|
|
53,969
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
764,163
|
|
|
$
|
765,658
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
138,484
|
|
|
$
|
178,582
|
|
Progress billings above costs and estimated earnings on
uncompleted contracts
|
|
|
148,964
|
|
|
|
171,843
|
|
Advance payments received from customers
|
|
|
13,033
|
|
|
|
11,331
|
|
Income tax liabilities
|
|
|
8,671
|
|
|
|
9,112
|
|
Deferred credit, future income tax assets
|
|
|
2,676
|
|
|
|
4,212
|
|
Accrued pension liabilities, current portion
|
|
|
2,119
|
|
|
|
2,158
|
|
Provision for warranty costs, current portion
|
|
|
27,294
|
|
|
|
30,856
|
|
Provision for restructuring costs
|
|
|
10,404
|
|
|
|
|
|
Provision for supplier commitments on terminated customer
contracts
|
|
|
22,546
|
|
|
|
23,729
|
|
Liabilities related to assets held for sale
|
|
|
21,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
395,765
|
|
|
|
431,823
|
|
Long-term Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
11,891
|
|
|
|
11,313
|
|
Accrued pension liabilities, less current portion
|
|
|
29,652
|
|
|
|
29,209
|
|
Provision for warranty costs, less current portion
|
|
|
16,208
|
|
|
|
7,524
|
|
Deferred credit, future income tax assets
|
|
|
4,389
|
|
|
|
4,176
|
|
Future income tax liability
|
|
|
12,092
|
|
|
|
7,646
|
|
Other long-term liabilities
|
|
|
6,809
|
|
|
|
8,344
|
|
Liabilities related to assets held for sale
|
|
|
2,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
83,445
|
|
|
|
68,212
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
479,210
|
|
|
|
500,035
|
|
Minority Interests
|
|
|
5,177
|
|
|
|
3,709
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock, without par value; authorized unlimited number
|
|
|
143,826
|
|
|
|
143,826
|
|
Treasury stock
|
|
|
(96,157
|
)
|
|
|
(93,793
|
)
|
Contributed surplus
|
|
|
7,413
|
|
|
|
7,623
|
|
Retained earnings
|
|
|
156,907
|
|
|
|
155,681
|
|
Accumulated other comprehensive income
|
|
|
67,787
|
|
|
|
48,577
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
279,776
|
|
|
|
261,914
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
764,163
|
|
|
$
|
765,658
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
37
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For Nine Months Ended September 30, 2009 and 2008
(Unaudited)
(United States Dollars in Thousands, Except Earnings per
Share)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
366,208
|
|
|
$
|
474,672
|
|
Cost of revenues
|
|
|
296,160
|
|
|
|
384,559
|
|
Reduction in loss on terminated customer contracts
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
70,124
|
|
|
|
90,113
|
|
Income from interest in resource property
|
|
|
8,552
|
|
|
|
23,654
|
|
Selling, general and administrative expense
|
|
|
(55,467
|
)
|
|
|
(39,735
|
)
|
Stock-based compensation recovery (expense) selling,
general and administrative
|
|
|
210
|
|
|
|
(3,407
|
)
|
Restructuring costs
|
|
|
(10,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
12,583
|
|
|
|
70,625
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,962
|
|
|
|
16,595
|
|
Interest expense
|
|
|
(2,024
|
)
|
|
|
(1,780
|
)
|
Foreign currency transaction losses, net
|
|
|
(733
|
)
|
|
|
(1,369
|
)
|
Share of loss of equity method investee
|
|
|
(278
|
)
|
|
|
(40
|
)
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
(9,538
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
3,038
|
|
|
|
(5,181
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests from
continuing operations
|
|
|
9,010
|
|
|
|
78,850
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
(5,374
|
)
|
|
|
(15,150
|
)
|
Resource property revenue taxes
|
|
|
(1,941
|
)
|
|
|
(5,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,315
|
)
|
|
|
(20,254
|
)
|
|
|
|
|
|
|
|
|
|
Income before minority interests from continuing operations
|
|
|
1,695
|
|
|
|
58,596
|
|
Minority interests
|
|
|
(469
|
)
|
|
|
(691
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,226
|
|
|
|
57,905
|
|
Retained earnings, beginning of the period
|
|
|
155,681
|
|
|
|
162,633
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, end of the period
|
|
|
156,907
|
|
|
|
220,538
|
|
Accumulated other comprehensive income
|
|
|
67,787
|
|
|
|
74,415
|
|
|
|
|
|
|
|
|
|
|
Total of retained earnings and accumulated other comprehensive
income
|
|
$
|
224,694
|
|
|
$
|
294,953
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.04
|
|
|
$
|
1.91
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.04
|
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
basic
|
|
|
30,385,985
|
|
|
|
30,360,179
|
|
diluted
|
|
|
30,385,985
|
|
|
|
30,628,990
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
38
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For Three Months Ended September 30, 2009 and 2008
(Unaudited)
(United States Dollars in Thousands, Except Earnings per
Share)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
148,233
|
|
|
$
|
193,596
|
|
Cost of revenues
|
|
|
122,433
|
|
|
|
157,022
|
|
Reduction in loss on terminated customer contracts
|
|
|
(2,127
|
)
|
|
|
|
|
Restructuring costs, reversal of write-down of inventories
|
|
|
(1,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29,048
|
|
|
|
36,574
|
|
Income from interest in resource property
|
|
|
4,630
|
|
|
|
9,460
|
|
Selling, general and administrative expense
|
|
|
(17,950
|
)
|
|
|
(12,820
|
)
|
Stock-based compensation expense selling, general
and administrative
|
|
|
(206
|
)
|
|
|
(1,281
|
)
|
Restructuring costs
|
|
|
(4,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
11,459
|
|
|
|
31,933
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,014
|
|
|
|
5,720
|
|
Interest expense
|
|
|
(610
|
)
|
|
|
(819
|
)
|
Foreign currency transaction (losses) gains, net
|
|
|
(1,413
|
)
|
|
|
7,652
|
|
Share of (loss) gain of equity method investee
|
|
|
(257
|
)
|
|
|
9
|
|
Other income (expense), net
|
|
|
1,973
|
|
|
|
(2,219
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests from
continuing operations
|
|
|
13,166
|
|
|
|
42,276
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
(4,110
|
)
|
|
|
(9,044
|
)
|
Resource property revenue taxes
|
|
|
(1,052
|
)
|
|
|
(2,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,162
|
)
|
|
|
(11,057
|
)
|
|
|
|
|
|
|
|
|
|
Income before minority interests from continuing operations
|
|
|
8,004
|
|
|
|
31,219
|
|
Minority interests
|
|
|
(529
|
)
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7,475
|
|
|
|
30,804
|
|
Retained earnings, beginning of the period
|
|
|
149,432
|
|
|
|
189,734
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, end of the period
|
|
|
156,907
|
|
|
|
220,538
|
|
Accumulated other comprehensive income
|
|
|
67,787
|
|
|
|
74,415
|
|
|
|
|
|
|
|
|
|
|
Total of retained earnings and accumulated other comprehensive
income
|
|
$
|
224,694
|
|
|
$
|
294,953
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.25
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.25
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
basic
|
|
|
30,259,911
|
|
|
|
30,514,255
|
|
diluted
|
|
|
30,259,911
|
|
|
|
30,649,899
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
39
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For Nine Months Ended September 30, 2009 and 2008
(Unaudited)
(United States Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net income for the period
|
|
$
|
1,226
|
|
|
$
|
57,905
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
Unrealized gains and losses on translating financial statements
of self-sustaining foreign operations
|
|
|
19,210
|
|
|
|
(21,261
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
19,210
|
|
|
|
(21,261
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the period
|
|
$
|
20,436
|
|
|
$
|
36,644
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
40
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For Three Months Ended September 30, 2009 and 2008
(Unaudited)
(United States Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net income for the period
|
|
$
|
7,475
|
|
|
$
|
30,804
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
Unrealized gains and losses on translating financial statements
of self-sustaining foreign operations
|
|
|
14,227
|
|
|
|
(21,780
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
14,227
|
|
|
|
(21,780
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the period
|
|
$
|
21,702
|
|
|
$
|
9,024
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Nine Months Ended September 30, 2009 and 2008
(Unaudited)
(United States Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from continuing operating activities
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1,226
|
|
|
$
|
57,905
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Amortization and depreciation
|
|
|
2,733
|
|
|
|
2,677
|
|
Foreign currency transaction losses, net
|
|
|
733
|
|
|
|
1,369
|
|
Minority interests
|
|
|
469
|
|
|
|
691
|
|
(Gain) loss on short-term securities
|
|
|
(2,733
|
)
|
|
|
7,707
|
|
Stock-based compensation (recovery)
|
|
|
(210
|
)
|
|
|
3,407
|
|
Future income taxes
|
|
|
(1,915
|
)
|
|
|
10,902
|
|
Reduction in loss on terminated customer contracts
|
|
|
(76
|
)
|
|
|
|
|
Restructuring costs, asset impairment charges
|
|
|
227
|
|
|
|
|
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
9,538
|
|
|
|
|
|
Changes in operating assets and liabilities,
|
|
|
|
|
|
|
|
|
net of effects of acquisitions and dispositions
|
|
|
|
|
|
|
|
|
Short-term cash deposits
|
|
|
|
|
|
|
(28,624
|
)
|
Short-term securities
|
|
|
(1
|
)
|
|
|
(1,134
|
)
|
Restricted cash
|
|
|
6,061
|
|
|
|
(8,715
|
)
|
Receivables
|
|
|
(30,591
|
)
|
|
|
(22,500
|
)
|
Inventories
|
|
|
36,809
|
|
|
|
14,736
|
|
Contract deposits, prepaid and other
|
|
|
2,771
|
|
|
|
(33,041
|
)
|
Accounts payable and accrued expenses
|
|
|
(37,250
|
)
|
|
|
18,907
|
|
Progress billings above costs and estimated earnings on
uncompleted contracts, net
|
|
|
(26,736
|
)
|
|
|
26,206
|
|
Advance payments received from customers
|
|
|
6,197
|
|
|
|
2,270
|
|
Income tax liabilities
|
|
|
(850
|
)
|
|
|
(13,636
|
)
|
Provision for warranty costs
|
|
|
5,494
|
|
|
|
(2,350
|
)
|
Provision for restructuring costs
|
|
|
10,404
|
|
|
|
|
|
Provision for supplier commitments on terminated customer
contracts
|
|
|
(4,644
|
)
|
|
|
|
|
Other
|
|
|
482
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by continuing operating activities
|
|
|
(21,862
|
)
|
|
|
36,831
|
|
Cash flows from continuing investing activities
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment, net
|
|
|
(970
|
)
|
|
|
(1,633
|
)
|
Purchases (disposition) of subsidiaries, net of cash acquired
(disposed)
|
|
|
(771
|
)
|
|
|
(1,102
|
)
|
Settlement of investment in preferred shares of former
subsidiaries
|
|
|
6,195
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(1,709
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) continuing investing activities
|
|
|
4,454
|
|
|
|
(4,444
|
)
|
Cash flows from continuing financing activities
|
|
|
|
|
|
|
|
|
Debt repayments
|
|
|
|
|
|
|
(503
|
)
|
Issuance of shares
|
|
|
|
|
|
|
4,370
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by continuing financing activities
|
|
|
|
|
|
|
3,867
|
|
Exchange rate effect on cash and cash equivalents
|
|
|
19,676
|
|
|
|
(17,667
|
)
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
2,268
|
|
|
|
18,587
|
|
Cash and cash equivalents, beginning of period
|
|
|
409,087
|
|
|
|
354,397
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
411,355
|
|
|
$
|
372,984
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period consisted of:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
392,665
|
|
|
$
|
372,984
|
|
Money market funds
|
|
|
18,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
411,355
|
|
|
$
|
372,984
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
407,423
|
|
|
$
|
372,984
|
|
Held for sale
|
|
|
3,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
411,355
|
|
|
$
|
372,984
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Three Months Ended September 30, 2009 and 2008
(Unaudited)
(United States Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from continuing operating activities
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
7,475
|
|
|
$
|
30,804
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Amortization and depreciation
|
|
|
824
|
|
|
|
911
|
|
Foreign currency transaction (gains) losses, net
|
|
|
1,413
|
|
|
|
(7,652
|
)
|
Minority interests
|
|
|
529
|
|
|
|
415
|
|
(Gain) loss on short-term securities
|
|
|
(1,940
|
)
|
|
|
4,056
|
|
Stock-based compensation
|
|
|
206
|
|
|
|
1,281
|
|
Future income taxes
|
|
|
(2,070
|
)
|
|
|
5,634
|
|
Reduction in loss on terminated customer contracts
|
|
|
(2,127
|
)
|
|
|
|
|
Restructuring costs, reversal of inventory write-down
|
|
|
(1,121
|
)
|
|
|
|
|
Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions
|
|
|
|
|
|
|
|
|
Short-term cash deposits
|
|
|
1,591
|
|
|
|
(20,394
|
)
|
Short-term securities
|
|
|
(1
|
)
|
|
|
(2,364
|
)
|
Restricted cash
|
|
|
1,516
|
|
|
|
(1,977
|
)
|
Receivables
|
|
|
(30,884
|
)
|
|
|
(6,692
|
)
|
Inventories
|
|
|
23,408
|
|
|
|
(4,429
|
)
|
Contract deposits, prepaid and other
|
|
|
(249
|
)
|
|
|
(9,735
|
)
|
Accounts payable and accrued expenses
|
|
|
23,598
|
|
|
|
20,136
|
|
Progress billings above costs and estimated earnings on
uncompleted contracts, net
|
|
|
(801
|
)
|
|
|
(22,099
|
)
|
Advance payments received from customers
|
|
|
5,625
|
|
|
|
(11,923
|
)
|
Income tax liabilities
|
|
|
2,738
|
|
|
|
(738
|
)
|
Provision for warranty costs
|
|
|
5,380
|
|
|
|
1,123
|
|
Provision for restructuring costs
|
|
|
3,858
|
|
|
|
|
|
Provision for supplier commitments on terminated customer
contracts
|
|
|
(4,644
|
)
|
|
|
|
|
Other
|
|
|
184
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) continuing operating activities
|
|
|
34,508
|
|
|
|
(23,127
|
)
|
Cash flows from continuing investing activities
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment, net
|
|
|
(348
|
)
|
|
|
(571
|
)
|
Purchases (disposition) of subsidiaries, net of cash acquired
(disposed)
|
|
|
(77
|
)
|
|
|
(181
|
)
|
Settlement of investment in preferred shares of former
subsidiaries
|
|
|
4,730
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(924
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) continuing investing activities
|
|
|
4,305
|
|
|
|
(1,676
|
)
|
Cash flows from continuing financing activities
|
|
|
|
|
|
|
|
|
Debt repayments
|
|
|
|
|
|
|
(308
|
)
|
Issuance of shares
|
|
|
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in continuing financing activities
|
|
|
|
|
|
|
(91
|
)
|
Exchange rate effect on cash and cash equivalents
|
|
|
17,381
|
|
|
|
(27,896
|
)
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
56,194
|
|
|
|
(52,790
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
355,161
|
|
|
|
425,774
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
411,355
|
|
|
$
|
372,984
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period consisted of:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
392,665
|
|
|
$
|
372,984
|
|
Money market funds
|
|
|
18,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
411,355
|
|
|
$
|
372,984
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
407,423
|
|
|
$
|
372,984
|
|
Held for sale
|
|
|
3,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
411,355
|
|
|
$
|
372,984
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
|
|
Note 1.
|
Basis of
Presentation
|
The consolidated financial statements contained herein include
the accounts of KHD Humboldt Wedag International Ltd. and its
subsidiaries (collectively, the Company). The notes
are stated in United States dollars (unless otherwise
indicated), as rounded to the nearest thousands (except per
share amounts).
The interim period consolidated financial statements have been
prepared by the Company in accordance with Canadian generally
accepted accounting principles (GAAP). The
preparation of financial data is based on accounting principles
and practices consistent with those used in the preparation of
the most recent annual financial statements. Certain information
and footnote disclosure normally included in consolidated
financial statements prepared in accordance with GAAP have been
condensed or omitted. These interim period statements should be
read together with the audited consolidated financial statements
and the accompanying notes included in the Companys latest
annual report on
Form 20-F.
In the opinion of the Company, its unaudited interim
consolidated financial statements contain all normal recurring
adjustments necessary in order to present a fair statement of
the results of the interim periods presented. The results for
the periods presented herein may not be indicative of the
results for the entire year.
Certain reclassifications have been made to the prior period
financial statements to conform to the current period
presentation.
|
|
Note 2.
|
Nature of
Operations
|
The Company operates internationally in the industrial plant
engineering and equipment supply business and specializes in the
cement, coal and mineral industries. The Company also holds an
indirect interest in the Wabush iron ore mine in Canada.
|
|
Note 3.
|
Accounting
Policy Developments
|
In 2006, Canadas Accounting Standards Board ratified a
strategic plan that will result in Canadian GAAP, as used by
publicly accountable enterprises, being fully converged with
International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board over a
transitional period to be completed by 2011. The Company will be
required to report using the converged standards effective for
interim and annual financial statements relating to fiscal years
beginning no later than on or after January 1, 2011.
Canadian GAAP will be fully converged with IFRS through a
combination of two methods: as current joint-convergence
projects of the United States Financial Accounting
Standards Board and the International Accounting Standards Board
are agreed upon, they will be adopted by Canadas
Accounting Standards Board and may be introduced in Canada
before the publicly accountable enterprises transition
date to IFRS; and standards not subject to a joint-convergence
project will be exposed in an omnibus manner for introduction at
the time of the publicly accountable enterprises
transition date to IFRS.
The International Accounting Standards Board currently, and
expectedly, has projects underway that are expected to result in
new pronouncements that continue to evolve IFRS, and, as a
result, IFRS as at the transition date is expected to differ
from its current form.
In June 2008, Canadian Securities Administrators issued a staff
notice which states that staff recognize that some issuers might
want to prepare their financial statements in accordance with
IFRS for periods beginning prior to January 1, 2011, the
mandatory date for changeover to IFRS for Canadian publicly
accountable enterprises, and staff are prepared to recommend
exemptive relief on a case by case basis to permit a domestic
issuer to prepare its financial statements in accordance with
IFRS for financial periods beginning before January 1, 2011.
The Company is required to qualitatively disclose its
implementation impacts in conjunction with its 2008 and 2009
financial reporting. As activities progress, disclosure on pre-
and post-IFRS implementation accounting policy differences is
expected to increase. The Company is in the process of assessing
the impacts of the Canadian convergence initiative on its
financial statements
Effective January 1, 2009, the Company adopted Canadian
Institute of Chartered Accountants (CICA)
Handbook Section 3064,
Goodwill and Intangible Assets.
During the current period, the Company also adopted
44
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amendments to Handbook Section 3855,
Financial
Instruments Recognition and Measurement.
The
adoption of this new accounting standard and amendments does not
have any material impact on the Companys financial
position as of January 1, 2009.
|
|
Note 4.
|
Earnings
per Share
|
Earnings per share data for the periods ended September 30 from
operations is summarized as follows:
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30
|
|
2009
|
|
|
2008
|
|
|
Earnings from continuing operations available to common
shareholders
|
|
$
|
1,226
|
|
|
$
|
57,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
2009
|
|
|
2008
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
30,385,985
|
|
|
|
30,360,179
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
268,811
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding diluted
|
|
|
30,385,985
|
|
|
|
30,628,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
2009
|
|
|
2008
|
|
|
Earnings from continuing operations available to common
shareholders
|
|
$
|
7,475
|
|
|
$
|
30,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
2009
|
|
|
2008
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
30,259,911
|
|
|
|
30,514,255
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
135,644
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
30,259,911
|
|
|
|
30,649,899
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5.
|
Stock-based
Payments
|
The Company has a stock option plan and an equity incentive
plan. Following is a summary of the changes in stock options
during the current period:
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
1,579,720
|
|
Granted
|
|
|
|
|
Forfeited
|
|
|
(847,778
|
)
|
Exercised
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
|
731,942
|
|
|
|
|
|
|
During the current period, employees forfeited 847,778 stock
options as a result of employment terminations. Accordingly, the
estimated value of the stock-based compensation is adjusted to
reflect differences between expected and actual forfeitures.
Accordingly, the forfeiture of a significant quantity of
unvested stock options resulted in a net recovery of stock-based
compensation of $210 in the nine months ended September 30,
2009.
|
|
Note 6.
|
Settlement
with Mass Financial with respect to Investment in Preferred
Shares of Former Subsidiaries
|
As at December 31, 2008, the Company held all of the
Series 2 Class B preferred shares in Mass Financial
Corp. (Mass Financial) and preferred shares in one
of its former subsidiaries having an aggregate face value of
Cdn$127,866 and a financial liability of Cdn$37,000 owing to
Mass Financial. The Company and Mass Financial had a legally
enforceable right to set off the recognized amounts and
determined to settle on a net basis or simultaneously.
Accordingly, the financial asset and the financial liability
were offset and the net amount was reported in the consolidated
balance sheet. As at December 31, 2008, the net amount was
written down to its estimated fair value of Cdn$23,420 (or
$19,125). There was no change in fair value in terms of Canadian
dollars between December 31, 2008 and the settlement date.
45
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On May 12, 2009, the Company entered into and completed an
agreement with Mass Financial for the settlement of the
non-transferable preferred shares of Mass Financial and its
former subsidiary for net consideration of Cdn$12,284, which
represented the gross settlement amount of the preferred shares
of Cdn$49,284 offset by the indebtedness of Cdn$37,000 owed by
the Company to Mass Financial. The payment of the Cdn$12,284 was
settled as follows:
|
|
(a)
|
Cdn$8,284 being satisfied by Mass Financial agreeing to transfer
to the Company 788,201 of the Companys common shares.
262,734 of the Companys common shares, valued at
Cdn$2,762, were delivered to the Company on May 12, 2009
and the remainder (which was equivalent to Cdn$5,522) would be
delivered no later than July 20, 2009. In July 2009, Mass
Financial, as permitted in the agreement, elected to deliver the
remainder in cash to the Company;
|
|
|
(b)
|
Cdn$1,710 being satisfied by way of cash payment by Mass
Financial to the Company on May 12, 2009;
|
|
|
(c)
|
Cdn$1,750 being satisfied by way of issuance by Mass Financial
to the Company of a promissory note having a principal amount of
Cdn$1,750, a term of 24 months and an interest rate of 4%
per annum payable annually in cash. The note is repayable at the
option of the issuer by the issuance of common shares of Mass
Financial based on the number of common shares of Mass Financial
equaling the amount being repaid divided by the
30-day
volume weighted average trading price for the Mass Financial
common shares. The promissory note can be repaid or be redeemed
at any time in cash at the option of the issuer; and
|
|
|
(d)
|
Cdn$540 being satisfied by setting-off accrued and unpaid
interest on indebtedness owed by the Company to Mass Financial
pursuant to a loan agreement with Mass Financial dated
January 31, 2006.
|
Mass Financial also settled Cdn$11,346 in respect of the accrued
dividends on the preferred shares of Mass Financial by way of
the issuance of a promissory note having a principal amount of
Cdn$11,346, a term of 24 months and an interest rate of 4%
per annum payable annually in cash. The note is repayable at the
option of the issuer by the issuance of common shares of Mass
Financial based on the number of common shares of Mass Financial
equaling the amount being repaid divided by the
30-day
volume weighted average trading price for the Mass Financial
common shares. The promissory note can be repaid or be redeemed
at any time in cash at the option of the issuer.
As a result of the settlement of the preferred shares of Mass
Financial and one of its former subsidiaries, the Company
recognized a loss of $9,538 (Cdn$11,136) in the second quarter
of 2009.
The notes receivable due from Mass Financial are reclassified
under non-current assets in the consolidated balance sheet.
|
|
Note 7.
|
Defined
Benefit Cost
|
The Company maintains defined benefit plans that provide pension
benefits for the employees of certain KHD companies in Europe.
The Company recognized the following amounts of defined benefit
cost:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Nine months ended September 30
|
|
$
|
1,156
|
|
|
$
|
1,285
|
|
Three months ended September 30
|
|
|
343
|
|
|
|
580
|
|
|
|
Note 8.
|
Provision
for Restructuring Costs and Assets Held for Sale
|
As a result of the 2008 financial crisis, the Company expects
the dramatic changes in world credit markets and the global
recession will continue to have a negative impact on the
Companys customers future expenditure programs. In
anticipation of expected lower order intake, the Company is
fundamentally restructuring its business model.
The Company has initiated a restructuring program to align
capacities to changes in market demands, allocate resources
depending on geographical needs and focus on markets and
equipment that will meet the Companys objective of
offering cost effective solutions to its customers.
On March 24, 2009, the Company announced its intention to
shut down the workshop in Cologne, Germany and had given
official notice of shutdown to the workers council which
represents the employees of the Companys German
subsidiary. The initiatives under the restructuring program were
also to include a reduction in the international headcount and
the intended divestiture of the coal and minerals customer
group. Management estimated that the
46
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
restructuring program was likely to cost approximately $30,000
in total which primarily would relate to employee severance
costs, asset impairments and lease termination costs. The
Company expected to recognize the loss and expenses in 2009 and
2010. As at June 30, 2009, the Company recorded a provision
for restructuring costs of $7,048 which comprised $3,916 in
costs associated with involuntary employment terminations,
$2,630 in facilities closure and related costs (including lease
termination) and $502 in currency translation adjustments.
Effective September 30, 2009, management, as duly
authorized by the board of directors, committed to a plan to
sell the workshop in Cologne and the Companys coal and
minerals customer group, each in their respective present
conditions, to a third party subject only to terms usual and
customary for sales of such assets. The sale was completed and
executed in early October, 2009 and there were no significant
changes to the sale plan prior to closing. Accordingly, the
Company revised the estimates and reversed its provisions for
facilities closure and related costs and reduced its provision
for costs associated with involuntary workshop employment
terminations which were recorded upon employee notification
earlier in 2009. Management also revisited the 2009 and 2010
estimates for the total restructuring costs and reduced it to
$12,000 (including the restructuring costs recognized to date).
Management will continue to monitor the progress of the
restructuring program.
In September, 2009, the Company also reached an agreement with
the German workers council as to the target level of
reduction in the number of employees, the job classifications or
functions, and the specifics of the benefit arrangement which
enable the employees to determine the type and amount of
benefits they will receive when their employment is terminated.
Management, duly authorized by the board of directors, has
approved and committed the Company to the plan of termination
and it is not likely that there will be significant changes to
the plan. Accordingly, the Company recognized the one-time
special termination benefits aggregating $9,785 in the current
period.
The restructuring costs for the nine-month period ended
September 30, 2009 were as follows:
|
|
|
|
|
Provisions:
|
|
|
|
|
Costs associated with involuntary employment terminations
|
|
$
|
824
|
|
One-time special termination benefits
|
|
|
9,785
|
|
|
|
|
|
|
|
|
|
10,609
|
|
Impairment of fixed assets
|
|
|
227
|
|
|
|
|
|
|
Total restructuring costs
|
|
$
|
10,836
|
|
|
|
|
|
|
Following is a summary of the changes in the provision for
restructuring costs during the nine-month period ended
September 30, 2009:
|
|
|
|
|
Balance as at December 31, 2008
|
|
$
|
|
|
Provision during the period, excluding inventory and fixed asset
write-downs
|
|
|
16,331
|
|
Paid and payable
|
|
|
(489
|
)
|
Reversal resulting from the sale of the Cologne workshop
|
|
|
(5,722
|
)
|
Currency translation adjustments
|
|
|
284
|
|
|
|
|
|
|
Balance as at September 30, 2009
|
|
$
|
10,404
|
|
|
|
|
|
|
Following is a summary of the changes in the provision for
restructuring costs during the three-month period ended
September 30, 2009:
|
|
|
|
|
Balance as at June 30, 2009
|
|
$
|
7,048
|
|
Provision
|
|
|
9,785
|
|
Paid and payable
|
|
|
(489
|
)
|
Reversal resulting from the sale of the Cologne workshop
|
|
|
(5,722
|
)
|
Currency translation adjustments
|
|
|
(218
|
)
|
|
|
|
|
|
Balance as at September 30, 2009
|
|
$
|
10,404
|
|
|
|
|
|
|
As at September 30, 2009, as a result of the subsequent
disposal of the workshop and the coal and minerals customer
group, the assets and liabilities were reclassified as held for
sale as at September 30, 2009.
The divestment of the coal and minerals customer group and the
workshop, exclusive of the roller press technologies and
capabilities, is not presented as a discontinued operation as it
cannot be clearly distinguished
47
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from the Companys ongoing operations and the Company will
continue to have involvement in the business, through its
retention of its roller press technologies and capabilities,
subsequent to closing. Pursuant to the sale agreement, the
Company will receive cash of $7,500 and may receive contingent
payments based on unutilized severance payments for the
workshops employees and certain other contingencies. The
Company also agreed to grant the buyer the right to continue to
manufacture the roller press for the Company for a period of
three years from the closing date, provided this is done on
normal commercial terms. Further, for a period of three years,
the Company will offer the Cologne workshop contracts to
manufacture equipment required for the Companys cement
business that have traditionally been manufactured at the
workshop and the buyer has agreed to undertake such orders on a
priority basis. The buyer has also agreed to assume certain
liabilities, including pension obligations, from the Company.
The disposal group has been reported in the industrial plant
engineering and supply business segment.
|
|
Note 9.
|
Provision
for Supplier Commitments on Terminated Customer
Contracts
|
As a result of changes in the market conditions and business
environment due to the 2008 financial crisis and its continuing
impacts in 2009, the Company terminated work on certain customer
contracts and recognized losses on the terminated customer
contracts. Contracts which will not proceed have been officially
cancelled and removed from the Companys project profile.
Following is a summary of the changes in the provision for
supplier commitments on the terminated customer contracts during
the nine-month period ended September 30, 2009:
|
|
|
|
|
Balance as at December 31, 2008
|
|
$
|
23,729
|
|
Provisions during the period
|
|
|
4,391
|
|
Paid and payable
|
|
|
(4,541
|
)
|
Reductions through negotiations with suppliers
|
|
|
(4,203
|
)
|
Reclassification to inventory reserve
|
|
|
2,225
|
|
Currency translation adjustments
|
|
|
945
|
|
|
|
|
|
|
Balance as at September 30, 2009
|
|
$
|
22,546
|
|
|
|
|
|
|
The following is a summary of the income statement effects
recorded with respect to terminated customer contracts during
the nine-months ended September 30, 2009:
|
|
|
|
|
Provision during the period
|
|
$
|
4,391
|
|
Reductions through negotiations with suppliers
|
|
|
(4,203
|
)
|
Change in inventory reserve
|
|
|
(264
|
)
|
|
|
|
|
|
Reduction in loss on terminated customer contracts
|
|
$
|
(76
|
)
|
|
|
|
|
|
The provision for supplier commitments is continuously monitored
and adjusted when necessary. The final amount will be settled
based on negotiations with customers and suppliers.
|
|
Note 10.
|
Segment
Information
|
The Company currently operates two reportable business segments:
industrial plant engineering and equipment supply, and resource
property.
Summarized financial information concerning the segments is
shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2009
|
|
|
Industrial plant
|
|
|
|
|
|
|
|
|
engineering and
|
|
Resource
|
|
Corporate
|
|
|
|
|
equipment supply
|
|
property
|
|
and other
|
|
Total
|
|
Revenues from external customers
|
|
$
|
366,208
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
366,208
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
|
|
|
1,554
|
|
|
|
|
|
|
|
470
|
|
|
|
2,024
|
|
Internal
|
|
|
|
|
|
|
|
|
|
|
342
|
|
|
|
342
|
|
Income (loss) from continuing operations before income taxes and
minority interests
|
|
|
24,619
|
|
|
|
5,720
|
|
|
|
(21,329
|
)
|
|
|
9,010
|
|
48
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2008
|
|
|
Industrial plant
|
|
|
|
|
|
|
|
|
engineering and
|
|
Resource
|
|
Corporate
|
|
|
|
|
equipment supply
|
|
property
|
|
and other
|
|
Total
|
|
Revenues from external customers
|
|
$
|
474,672
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
474,672
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
|
|
|
1,694
|
|
|
|
|
|
|
|
86
|
|
|
|
1,780
|
|
Internal
|
|
|
|
|
|
|
|
|
|
|
1,015
|
|
|
|
1,015
|
|
Income (loss) from continuing operations before income taxes and
minority interests
|
|
|
67,272
|
|
|
|
20,634
|
|
|
|
(9,056
|
)
|
|
|
78,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2009
|
|
|
Industrial plant
|
|
|
|
|
|
|
|
|
engineering and
|
|
Resource
|
|
Corporate
|
|
|
|
|
equipment supply
|
|
property
|
|
and other
|
|
Total
|
|
Revenues from external customers
|
|
$
|
148,233
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
148,233
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
|
|
|
602
|
|
|
|
|
|
|
|
8
|
|
|
|
610
|
|
Internal
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
80
|
|
Income (loss) from continuing operations before income taxes and
minority interests
|
|
|
13,443
|
|
|
|
3,621
|
|
|
|
(3,898
|
)
|
|
|
13,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2008
|
|
|
Industrial plant
|
|
|
|
|
|
|
|
|
engineering and
|
|
Resource
|
|
Corporate
|
|
|
|
|
equipment supply
|
|
property
|
|
and other
|
|
Total
|
|
Revenues from external customers
|
|
$
|
193,596
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
193,596
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
|
|
|
802
|
|
|
|
|
|
|
|
17
|
|
|
|
819
|
|
Internal
|
|
|
|
|
|
|
|
|
|
|
386
|
|
|
|
386
|
|
Income (loss) from continuing operations before income taxes and
minority interests
|
|
|
36,189
|
|
|
|
8,429
|
|
|
|
(2,342
|
)
|
|
|
42,276
|
|
The total assets were $764,163 and $765,658 as at
September 30, 2009 and December 31, 2008,
respectively. There was no material change of total assets since
December 31, 2008.
The two major customer groups of industrial plant engineering
and equipment supply segment are in the cement, and coal and
minerals industries. For further information, see Note 8
Assets Held for Sale. The revenues of the industrial
plant engineering and equipment supply segment can be further
broken down as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cement
|
|
$
|
316,488
|
|
|
$
|
407,252
|
|
Coal and minerals
|
|
|
49,720
|
|
|
|
67,420
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
366,208
|
|
|
$
|
474,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cement
|
|
$
|
128,449
|
|
|
$
|
165,448
|
|
Coal and minerals
|
|
|
19,784
|
|
|
|
28,148
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
148,233
|
|
|
$
|
193,596
|
|
|
|
|
|
|
|
|
|
|
49
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 11.
|
Related
Party Transactions
|
In the normal course of operations, the Company enters into
transactions with related parties which include affiliates in
which the Company has a significant equity interest (10% or
more) or which have the ability to influence the
affiliates or the Companys operating and financing
policies through significant shareholding, representation on the
board of directors, corporate charter
and/or
bylaws. These related party transactions are measured at the
exchange value, which represent the amounts of consideration
established and agreed to by the parties. In addition to
transactions disclosed elsewhere in the financial statements,
the Company had the following transactions with related parties
during the nine months ended September 30, 2009:
Nine months ended September 30, 2009:
|
|
|
|
|
Dividend income on common shares*
|
|
$
|
154
|
|
Royalty expense paid and payable*
|
|
|
(374
|
)
|
Fee expense for managing resource property
|
|
|
(539
|
)
|
Fee expense for management services, including expense
reimbursements
|
|
|
(1,890
|
)
|
Management fee to a corporation in which the former Chief
Executive Officer has an ownership interest
|
|
|
(166
|
)
|
Interest income
|
|
|
173
|
|
Interest expense
|
|
|
(447
|
)
|
Fee income
|
|
|
494
|
|
|
|
|
*
|
|
included in income from interest in resource property.
|
As at
September 30,
2009
:
|
|
|
|
|
Notes receivable, non-current
|
|
$
|
12,214
|
|
Accrued interest and dividend income receivable
|
|
|
207
|
|
Due from related parties
|
|
|
517
|
|
Due to related parties
|
|
|
467
|
|
50
News
Release
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
REPORTS 2009 THIRD QUARTER AND NINE-MONTH RESULTS
New order intake of $113.0 million in the
third quarter
NEW YORK (November 16, 2009) . . . KHD Humboldt Wedag
International Ltd. (NYSE: KHD) today announced results for the
third quarter and nine months ended September 30, 2009. All
dollar figures are in U.S. dollars.
For the three months ended September 30, 2009, KHD reported
revenues of $148.2 million with a net income of
$7.5 million, or $0.25 per share on a diluted basis, which
included restructuring charges. This compares to revenues in the
third quarter of 2008 of $193.6 million and net income for
that period of $30.8 million, or $1.01 per share on a
diluted basis. Our margins, excluding special charges, for the
third quarter of 2009 were 17 percent as compared to
19 percent in the third quarter of 2008.
For the nine months ended September 30, 2009, KHD reported
revenues of $366.2 million with a net income of
$1.2 million, or $0.04 per share on a diluted basis. This
compares to revenues in the first nine months of 2008 of
$474.7 million and net income for that period of
$57.9 million, or $1.89 per share on a diluted basis. Our
margins were 19 percent for both the first nine months of
2009 and 2008.
KHDs balance sheet remains strong. As of
September 30, 2009, our cash and cash equivalents increased
to $407.4 million (as compared to $356.8 at the end of the
second quarter); working capital was $312.2 million; and
shareholders equity was $279.8 million (as compared
to $257.9 million at the end of the second quarter).
KHDs current ratio was 1.79 and its long-term
debt-to-equity
ratio was 0.04.
MORE
|
|
|
|
|
Contact Information:
|
|
Allen & Caron Inc.
Joseph Allen (investors)
1 (212) 691-8087
joe@allencaron.com
or
Brian Kennedy (media)
1 (212) 691-8087
brian@allencaron.com
|
|
Rene Randall
KHD Humboldt Wedag International Ltd.
1 (604) 683-8286 ex 224
rene.randall@khd.com
|
51
CEO Jouni Salo commented, We are pleased to report that
the third quarter showed signs of improvement both in order
intake and in operating income as compared to the second
quarter. The sale of the coal and minerals customer group and
the Cologne workshop in early October allows us to focus on our
core competencies and significantly reduces the fixed-cost base
of our business. In connection with the sale, we retained the
rights to our proprietary roller press technologies and
capabilities which are an important part of our service
business. This is a significant step in moving towards becoming
a customer-focused service company providing environmentally
friendly technologies.
It has also been a year since we began to see the impact of the
dramatic slowdown in our main cement market and started to
develop our restructuring plans. We are making good progress
with the implementation of our new operating structure and now
have a clear direction for KHD to create a business that is
sustainable over the longer term.
For comparative purposes, all of the following amounts for order
intake and backlog were translated directly from Euros to US
dollars at 1.46, the exchange rate prevailing on
September 30, 2009.
Order intake is defined as the total value of all orders
received during the respective period, while order backlog is
defined as the value of orders received but not yet fulfilled.
Order intake for the quarter ended September 30, 2009, was
$113.0 million, an increase of 39 percent from 2008. Of
this total, 31 percent came from Russia and Eastern Europe,
25 percent came from Asia, 18 percent came from the
Middle East, 15 percent came from Europe and
11 percent came from Africa. Of the third quarter 2009
order intake, $76.8 million came from cement and
$36.2 million from coal and minerals.
CEO Jouni Salo continued, We are also pleased to note that
cement order intake was more than three times the level of the
second quarter of 2009 and 19 percent higher than the
cement order intake in the third quarter of 2008.
Order backlog as of September 30, 2009 was
$626.3 million, a decrease of 41 percent from
September 30, 2008. Of this, $542.7 million is
associated with cement projects, which will primarily comprise
our order backlog going forward.
CFO Alan Hartslief added, At December 31, 2008, we
classified $159.2 million of the contracts in our order
backlog as at risk. During the third quarter of
2009, after critical analysis of these contracts and continued
negotiations with the respective customers we determined that
contracts aggregating $95.8 million would not be proceeding
and such contracts were removed from our order backlog at
September 30, 2009. The remainder of contracts previously
identified as at risk are now considered to be normal contracts
and remain in our order backlog.
In addition, as a result of the divestment of our Cologne
workshop, we now expect that our previously estimated
restructuring costs of $30.0 million will be reduced by
approximately $18.0 million for this phase of
restructuring. While this is presently the only phase of the
restructuring program that is contemplated, future market
conditions may necessitate our undertaking additional
restructuring initiatives.
Mr. Salo concluded, There are some indications that
we may expect to see some gradual improvement in market
conditions. Furthermore, we have not seen any significant new
project cancellations. Our customers remain cautious on capital
expenditure plans, but in general we have seen some improvement
in confidence over the past few months. However, this does not
mean that we believe that we will return to the extremely
buoyant market conditions of recent periods in the short to
medium term.
We continue to see good levels of enquiries from emerging
regions such as India, North Africa and the Middle East. While
we remain cautiously optimistic about market recovery and we
believe that order intake is the best measure of this, we remain
realistic in our expectations that 2010 and 2011 will continue
to be difficult years for sales volumes. Since the fourth
quarter of 2008, KHDs focus has been, and remains, on
preserving cash and positioning the company to capitalize on a
recovery.
Our restructuring programs are progressing well. We have a
significant net cash position and this means we have the
financial strength to complete our restructuring plans and take
advantage of any opportunities that may emerge as global
economies recover. We also intend to invest in developing
technology to differentiate ourselves from our competitors.
This has been a very difficult year for our shareholders, our
employees and our customers. Initially the changed environment
was unsettling. However, with a solid plan in place and
measurable progress on its implementation, we are working to
meet the challenges of enhancing shareholder value through
helping our customers produce cement and process minerals in a
much more energy efficient and environmentally friendly
manner.
MORE
52
Shareholders are encouraged to read the entire
Form 6-K,
which has been filed with the SEC, for a greater understanding
of KHD. The
Form 6-K
is also available on the Companys website.
Today at 10:00 a.m. EST (7:00 a.m. PST), a
conference call will be held to review the Companys
results. This call, with a powerpoint presentation prepared for
the call, will be broadcast live over the Internet at
www.khdhumboldt.com
or
www.earnings.com
. For those
wishing to access the presentation, we suggest logging in a bit
early to be safe. An online archive will be available
immediately following the call and will continue for seven days
or to listen to the audio replay by phone, dial: 1
(888) 286 8010 using conference ID number: 43188967.
International callers should dial: 1 (617) 801 6888.
About KHD
Humboldt Wedag International Ltd.
KHD Humboldt Wedag International Ltd. owns companies that
operate internationally in the industrial plant engineering and
equipment supply industry, and specializes in the cement and
mineral processing industries. To obtain further information on
the Company, please visit our website at
http://www.khdhumboldt.com
Disclaimer
for Forward-Looking Information
Certain statements in this release are forward-looking
statements, which reflect the expectations of management
regarding the Companys future growth, results of
operations, performance and business prospects and
opportunities. The worldwide macroeconomic downturn has resulted
in the prolonging or cancellation of some of some of our
customers projects and may negatively affect our
customers ability to make timely payment to us. Further,
it may result in a further decrease in the demand for our
products or services. Any of these may have a material adverse
effect on our operating results and financial condition.
Forward-looking statements consist of statements that are not
purely historical, including any statements regarding beliefs,
plans, expectations or intentions regarding the future. No
assurance can be given that any of the events anticipated by the
forward-looking statements will occur or, if they do occur, what
benefits the Company will obtain from them. These
forward-looking statements reflect managements current
views and are based on certain assumptions. These assumptions,
which include managements current expectations, estimates
and assumptions about certain projects and the markets the
Company operates in, the global economic environment, interest
rates, exchange rates and our ability to attract and retain
customers and to manage our assets and operating costs, may
prove to be incorrect. A number of risks and uncertainties could
cause our actual results to differ materially from those
expressed or implied by the forward-looking statements,
including: (1) a continued downturn in general economic
conditions in Asia, Europe, Russia, Eastern Europe, the Middle
East, the United States and internationally including, the
continued worldwide economic downturn resulting from the effects
of the
sub-prime
lending and general credit market crises, volatile energy costs,
decreased consumer confidence and other factors, (2)continuing
decreased demand for our products, including the renegotiation,
delay and/or cancellation of projects by our customers and the
reduction in the number of project opportunities, (3) a
decrease in the demand for cement, minerals and related
products, (4) the number of competitors with competitively
priced products and services, (5) product development or
other initiatives by our competitors, (6) shifts in
industry capacity, (7) fluctuations in foreign exchange and
interest rates, (8) fluctuations in availability and cost
of raw materials or energy, (9) delays in the start of
projects included in our forecasts, (10) delays in the
implementation of projects included in our forecasts and
disputes regarding the performance of our services,
(11) the uncertainty of government regulation and politics
in Asia and the Middle East and other markets,
(12) potential negative financial impact from regulatory
investigations, claims, lawsuits and other legal proceedings and
challenges, (13) the timing and extent of our restructuring
program and the restructuring charges to be incurred in
connection therewith, and (14) other factors beyond our
control. Additional information about these and other
assumptions, risks and uncertainties are set out in the
Risk Factors section in our
Form 6-K
filed with the Securities and Exchange Commission and the
Risks and Uncertainties section in our MD&A
filed with Canadian security regulators.
UNAUDITED INTERIM FINANCIAL TABLES FOLLOW
53
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
September 30, 2009 and December 31, 2008
(Unaudited)
(U.S. Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
407,423
|
|
|
$
|
409,087
|
|
Securities
|
|
|
6,034
|
|
|
|
2,987
|
|
Restricted cash
|
|
|
27,135
|
|
|
|
32,008
|
|
Accounts receivable, trade
|
|
|
77,904
|
|
|
|
62,760
|
|
Other receivables
|
|
|
22,864
|
|
|
|
28,313
|
|
Inventories
|
|
|
78,112
|
|
|
|
110,161
|
|
Contract deposits, prepaid and other
|
|
|
55,610
|
|
|
|
58,694
|
|
Future income tax assets
|
|
|
6,238
|
|
|
|
7,679
|
|
Assets held for sale
|
|
|
26,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
707,920
|
|
|
|
711,689
|
|
Non-current Assets
|
|
|
|
|
|
|
|
|
Notes receivables
|
|
|
12,214
|
|
|
|
|
|
Property, plant and equipment
|
|
|
1,738
|
|
|
|
2,489
|
|
Interest in resource property
|
|
|
26,975
|
|
|
|
24,861
|
|
Equity method investments
|
|
|
43
|
|
|
|
325
|
|
Future income tax assets
|
|
|
14,099
|
|
|
|
6,339
|
|
Investment in preferred shares of former subsidiaries
|
|
|
|
|
|
|
19,125
|
|
Other non-current assets
|
|
|
872
|
|
|
|
830
|
|
Assets held for sale
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,243
|
|
|
|
53,969
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
764,163
|
|
|
$
|
765,658
|
|
|
|
|
|
|
|
|
|
|
MORE
54
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS (contd)
September 30, 2009 and December 31, 2008
(Unaudited)
(U.S. Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
138,484
|
|
|
$
|
178,582
|
|
Progress billing above costs and estimated earnings on
uncompleted contracts
|
|
|
148,964
|
|
|
|
171,843
|
|
Advance payments received from customers
|
|
|
13,033
|
|
|
|
11,331
|
|
Income tax liabilities
|
|
|
8,671
|
|
|
|
9,112
|
|
Deferred credit, future income tax assets
|
|
|
2,676
|
|
|
|
4,212
|
|
Accrued pension liabilities, current portion
|
|
|
2,119
|
|
|
|
2,158
|
|
Provision for warranty costs, current portion
|
|
|
27,294
|
|
|
|
30,856
|
|
Provision for restructuring costs
|
|
|
10,404
|
|
|
|
|
|
Provision for supplier commitments on terminated customer
contracts
|
|
|
22,546
|
|
|
|
23,729
|
|
Liabilities related to assets held for sale
|
|
|
21,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395,765
|
|
|
|
431,823
|
|
Long-term Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
11,891
|
|
|
|
11,313
|
|
Accrued pension liabilities, less current portion
|
|
|
29,652
|
|
|
|
29,209
|
|
Provision for warranty costs, less current portion
|
|
|
16,208
|
|
|
|
7,524
|
|
Deferred credit, future income tax assets
|
|
|
4,389
|
|
|
|
4,176
|
|
Future income tax liability
|
|
|
12,092
|
|
|
|
7,646
|
|
Other long-term liabilities
|
|
|
6,809
|
|
|
|
8,344
|
|
Liabilities related to assets held for sale
|
|
|
2,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,445
|
|
|
|
68,212
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
479,210
|
|
|
|
500,035
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTERESTS
|
|
|
5,177
|
|
|
|
3,709
|
|
|
SHAREHOLDERS EQUITY
|
Common stock, without par value
|
|
|
143,826
|
|
|
|
143,826
|
|
Treasury stock
|
|
|
(96,157)
|
|
|
|
(93,793)
|
|
Contributed surplus
|
|
|
7,413
|
|
|
|
7,623
|
|
Retained earnings
|
|
|
156,907
|
|
|
|
155,681
|
|
Accumulated other comprehensive income
|
|
|
67,787
|
|
|
|
48,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279,776
|
|
|
|
261,914
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
764,163
|
|
|
$
|
765,658
|
|
|
|
|
|
|
|
|
|
|
MORE
55
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 30, 2009 and 2008
(Unaudited)
(U.S. Dollars in Thousands, Except per Share Data)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
148,233
|
|
|
$
|
193,596
|
|
Cost of revenues
|
|
|
122,433
|
|
|
|
157,022
|
|
Reduction in loss on terminated customer contracts
|
|
|
(2,127)
|
|
|
|
|
|
Restructuring costs, reversal of write-down of inventories
|
|
|
(1,121)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29,048
|
|
|
|
36,574
|
|
|
|
|
|
|
|
|
|
|
Income from interest in resource property
|
|
|
4,630
|
|
|
|
9,460
|
|
Selling, general and administrative expense
|
|
|
(17,950)
|
|
|
|
(12,820)
|
|
Stock-based compensation selling, general and
administrative
|
|
|
(206)
|
|
|
|
(1,281)
|
|
Restructuring costs
|
|
|
(4,063)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
11,459
|
|
|
|
31,933
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,014
|
|
|
|
5,720
|
|
Interest expense
|
|
|
(610)
|
|
|
|
(819)
|
|
Foreign currency transaction (losses), gains net
|
|
|
(1,413)
|
|
|
|
7,652
|
|
Share of loss of equity method investee
|
|
|
(257)
|
|
|
|
9
|
|
Other income (expense), net
|
|
|
1,973
|
|
|
|
(2,219)
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
13,166
|
|
|
|
42,276
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
(4,110)
|
|
|
|
(9,044)
|
|
Resource property revenue taxes
|
|
|
(1,052)
|
|
|
|
(2,013)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,162)
|
|
|
|
(11,057)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
8,004
|
|
|
|
31,219
|
|
Minority interests
|
|
|
(529)
|
|
|
|
(415)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,475
|
|
|
$
|
30,804
|
|
|
|
|
|
|
|
|
|
|
Basic earning per share
|
|
$
|
0.25
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.25
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of common shares outstanding
|
|
|
|
|
|
|
|
|
basic
|
|
|
30,259,911
|
|
|
|
30,514,255
|
|
diluted
|
|
|
30,259,911
|
|
|
|
30,649,899
|
|
MORE
56
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
(U.S. Dollars in Thousands, Except per Share Data)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
366,208
|
|
|
$
|
474,672
|
|
Cost of revenues
|
|
|
296,160
|
|
|
|
384,559
|
|
Reduction in loss on terminated customer contracts
|
|
|
(76)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
70,124
|
|
|
|
90,113
|
|
Income from interest in resource property
|
|
|
8,552
|
|
|
|
23,654
|
|
Selling, general and administrative expense
|
|
|
(55,467)
|
|
|
|
(39,735)
|
|
Stock-based compensation recovery (expense) selling general and
administrative
|
|
|
210
|
|
|
|
(3,407)
|
|
Restructuring costs
|
|
|
(10,836)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
12,583
|
|
|
|
70,625
|
|
Interest income
|
|
|
5,962
|
|
|
|
16,595
|
|
Interest expense
|
|
|
(2,024)
|
|
|
|
(1,780)
|
|
Foreign currency transaction losses, net
|
|
|
(733)
|
|
|
|
(1,369)
|
|
Share of loss of equity method investee
|
|
|
(278)
|
|
|
|
(40)
|
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
(9,538)
|
|
|
|
|
|
Other income (expense), net
|
|
|
3,038
|
|
|
|
(5,181)
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
9,010
|
|
|
|
78,850
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
(5,374)
|
|
|
|
(15,150)
|
|
Resource property revenue taxes
|
|
|
(1,941)
|
|
|
|
(5,104)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,315)
|
|
|
|
(20,254)
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
1,695
|
|
|
|
58,596
|
|
Minority interests
|
|
|
(469)
|
|
|
|
(691)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,226
|
|
|
$
|
57,905
|
|
|
|
|
|
|
|
|
|
|
Basic earning per share
|
|
$
|
0.04
|
|
|
$
|
1.91
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.04
|
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of common shares outstanding
|
|
|
|
|
|
|
|
|
basic
|
|
|
30,385,985
|
|
|
|
30,360,179
|
|
diluted
|
|
|
30,385,985
|
|
|
|
30,628,990
|
|
MORE
57
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
FINANCIAL SUMMARY
As of September 30, 2009
(Unaudited)
(U.S. Dollars in Thousands, Except per Share Data and Ratios)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
407,423
|
|
Securities
|
|
|
6,034
|
|
Restricted cash
|
|
|
27,135
|
|
Working capital
|
|
|
312,155
|
|
Total assets
|
|
|
764,163
|
|
Shareholders equity
|
|
|
279,776
|
|
Book value per share
|
|
|
9.25
|
|
Current ratio
|
|
|
1.79
|
|
Long-term debt to equity ratio
|
|
|
0.04
|
|
# # #
#
58
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
Jouni Salo, President and Chief Executive Officer
Date: November 16, 2009
59