Zentek Ltd V.ZEN

Nice numbers

[mark5698]

ZENON reports highest first quarter revenue and profit to date OAKVILLE, ON, May 13 /CNW/ - ZENON's first quarter 2003 results reflect the Company's commitment to growth and profitability. For the period ended March 31, 2003, ZENON posted its highest first quarter financial results on record with a 21% increase in revenue and in excess of 350% growth in profit year-over-year. << Financial Highlights -------------------- For the three months ended March 31: Three months 2003 2002 -------------------------------------------------------------------- ($000s) Revenue 36,147 29,774 Operating income before income taxes 2,521 603 Net earnings 1,954 428 -------------------------------------------------------------------- Net earnings per share: Basic $0.07 $0.02 Fully diluted $0.07 $0.02 -------------------------------------------------------------------- Net earnings of $2.0 million is a historical record for a first quarter and the corresponding earnings per share of $0.07 represents a 250% increase over the same period last year of $0.02 per share. "We are seeing the positive results of our additional membrane capacity and improved revenue and cost efficiencies now flowing to the bottom line," said Andrew Benedek, Chairman and Chief Executive Officer. Backlog at the end of the first quarter stands at $148 million, which is a 24% improvement from the first quarter of 2002, but a decrease of approximately 10% over 2002 year-end. "We do expect the backlog to pick up in the next quarter," said Mr. Benedek. "This slight decrease is due solely to regular municipal administrative delays in the closing of orders and is strictly an issue of timing. Once we have closed these orders, we will see continued growth of our backlog." ZENON's pipeline of orders remains large, with well over $150 million in projects. These include orders where ZENON has received a "Letter of Intent" and orders where ZENON has been selected as the preferred supplier, for which the company expects to receive a purchase order shortly after completion of the engineering of these systems. One such order is for a water reclamation plant in Georgia. ZENON announced during the quarter that it was selected by Gwinnett County to supply its technology for the largest water reclamation plant in North America. The Company is currently completing the engineering work for this $30 million project and anticipates receiving the signed purchase order by the summer. A year ago, ZENON made a significant investment in supplying its technology to a water reuse plant in Singapore. A year later, we had the pleasure of seeing the official opening of this state-of-the-art water reclamation facility, which is being visited by people throughout Asia and the rest of the world. Coined as the NEWater Reclamation Plant, this impressive building is a showcase for membrane technology, highlighting ZeeWeed(R) membranes in a display that sits in the main walkway. The facility is open to the public with tours going through on a daily basis. This is only one of the many planned sites that will be using membrane technology in Singapore. The country is fast becoming the global leader in the use of membrane technology with two ZENON plants (the second underway) and with the commitment to build a number of other new membrane facilities for water treatment. Other water short countries in the area are expected to continue to drive the growth of membrane technology in this region and ZENON's initial sites will prove beneficial for future market penetration. Bidding and sales activity are on the rise in all of ZENON's geographic regions, particularly in Europe where over $10 million in new orders were booked in the quarter, out of a total of $24 million in bookings for the Company. Orders for water and wastewater treatment plants came from Germany, Hungary, Poland, The Netherlands, the United Kingdom along with the first ZeeWeed(R) drinking water plant to be built in Switzerland. ZENON is starting to reap the benefits of its investments in Europe over the years and complementing this business growth is the new membrane manufacturing plant in Hungary. This new facility was producing high quality membranes by the end of 2002 and is currently running at its designed capacity. Management Discussion and Analysis ---------------------------------- The following is a discussion of the consolidated financial condition and results of operations of ZENON Environmental Inc. for the period ended March 31, 2003. This discussion should be read in conjunction with: the Unaudited Interim Consolidated Financial Statements of the Company and notes thereto for March 31, 2003; "Management's Discussion and Analysis" for December 31, 2002, included in the Annual Report of the Company for the year ended December 31, 2002; and with the Audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2002. Certain information contained in this "Management's Discussion and Analysis" contains forward-looking statements based on the Company's estimates and assumptions, which are subject to risks and uncertainties. This could cause the Company's actual results to differ materially from the forward- looking statements contained in this discussion. Operating Results ----------------- First quarter revenue at $36.1 million is 21% higher than the 2002 first quarter revenue of $29.8 million. This is the highest first quarter revenue the Company has ever recorded. The revenue growth came from business generated in the United States and internationally. North America revenue is down in total as a result of low revenue in Canada. Revenue for the quarter in Canada was $712,000 compared to $8.7 million for the previous year. This decrease is a timing issue. The Company has a strong backlog position for Canadian business. Total orders booked in the quarter were $24 million resulting in a backlog at the end of the quarter of $148 million. The lower orders booked in the quarter does not reflect the total activity of the Company. Over the last year, the Company has received several "engineering only" orders, which will materialize into full-scale projects on completion of the engineering design. These projects, when combined with the "Letters of Intent" the Company has received, amount to over $150 million of potential revenue for the Company. Gross profit as a percent of revenue for the first quarter was 45.3% compared to 33.1% for the first quarter of 2002. The increase was due to the product mix produced in the quarter. The major factors that increased the margin were the result of a higher proportion of membrane sales and engineering only projects. Over the balance of the year as the product mix moves towards a more normal mix, the margin percent should revert back to more traditional levels. Selling general and administrative (SG&A) costs are 29.1% of revenue in the quarter. The overall cost of SG&A at $10.5 million in the quarter is in line with the fourth quarter 2002 amount of $10.1 million. For the first quarter of 2002, the SG&A as a percent of revenue was 23.9% and for the full year of 2002 the rate was 23.2%. Management expects the SG&A percentage rate to revenue to decrease over the balance of the year to levels similar to the year-end 2002 rate. Amortization at $3.4 million is $1.2 million higher than the first quarter of 2002. The major portion of the increase is the direct result of the commissioning of the Hungarian membrane manufacturing facility in late 2002. This facility, which is now producing at capacity, represents the Company's ongoing commitment to invest in membrane technology and capacity. Operating Income of $2.5 million is the highest income ever posted by the Company in a first quarter and is a significant increase over the $603,000 posted for the first quarter of 2002. This improvement is a result of the product mix in the quarter and managements continued emphasis on cost control and profit improvement processes. Provision for income taxes at 22.5% are in line with the 2002 fiscal year-end rate of 24.7%. Continued improvement in the geographical distribution of profits is the major reason for this lower tax rate. This resulted in a net income for the quarter of $2.0 million ($0.07 per share), compared to $428,000 ($0.02 per share) last year. The per share calculation is based on 27,469,000 average shares outstanding for the 2003 quarter and 25,744,000 average shares outstanding for 2002. Capital Expenditure and Liquidity --------------------------------- At the end of the quarter the Company continues to be in a strong financial position to support growth with no current bank indebtedness and cash and cash equivalents of $11.0 million compared to $15.8 million at the beginning of the quarter. Cash of $5.0 million was used in the quarter to fund non-cash working capital increases. The major areas of working capital uses were in unbilled revenue ($6.9 million) and inventory ($3.9 million). The major offset to the uses came from an increase in customer advances of $5.5 million. These working capital changes are a result of the current product mix within the Company. The Company continued to invest in its proprietary membrane technology by purchasing $4.8 million of net capital assets in the quarter. The major areas of expenditure were a result of investments in membrane manufacturing productivity improvements in both the North American and European manufacturing facilities and the ongoing investment in pilot costs to enable the Company to further promote its products in the market place. In the first quarter of 2002, ZENON completed the sale of two million non-voting Class A shares and one million common shares for aggregate proceeds of $42.5 million. During 2002, these proceeds were used to repay a revolving term facility of $10 million and the balance to finance capital expenditures. Accounting Policies ------------------- The Consolidated Financial Statements have been prepared using the same accounting policies as described in the Company's 2002 annual report except for the following item: In February 2003, the Canadian Institute of Chartered Accountants (CICA) issued Accounting Guideline 14, Disclosure of Guarantees (AcG -14), which clarifies disclosure requirements for certain guarantees. The Company adopted the new recommendations effective January 1, 2003 as noted in the notes to the quarterly consolidated statements. Organizational Changes ---------------------- To enhance and build on the Company's international sales, Diana Mourato has transitioned from the Municipal division to head ZENON's International division as Vice President, International. She will work to replicate her success in the growth of ZENON's North American municipal operations. Dr. Mourato was successful in building this division from $0 in sales to becoming the largest municipal membrane system supplier in North America over the last six years. To replace her in her previous role is Steve Watzeck as Vice President, Municipal. Mr. Watzeck has been with ZENON for the last eight years and has extensive experience in municipal sales in Canada and the United States. Outlook ------- The momentum for ZENON's technology is on an upward trend as communities and industries prepare to meet the challenges of both water supply and quality. In addition, more and more jurisdictions are seeing the need to become increasingly self-reliant on developing their own water resources. These factors combined with the decreasing cost of membrane technology will ensure that ZENON remains a technology as well as a market leader. The Company is closely monitoring the recent weakness in the U.S. dollar. ZENON is not currently affected and has financial and natural hedges in place to protect margins on existing orders. Management is assessing and reacting to minimize the financial impact from the strengthening of the Canadian dollar to the U.S. dollar. ZENON is a world leader in providing advanced membrane products and services for water purification, wastewater treatment and water reuse to municipalities and industries worldwide. With hundreds of installations in over 30 countries, ZeeWeed(R) is Everywhere! Chosen as Canada's Top Exporter of the year, ZENON is also proud to be ranked as the country's Number One Corporate Citizen by Corporate Knights, a business publication addressing corporate social responsibility. For the third consecutive year, ZENON has been chosen as one of Canada's Top 100 Employers. The ZENON group of companies employs over 800 people who operate from seven locations in North America, six in Europe, and one in each of Asia, Latin America, and the Middle East. A S&P/TSX Composite company, ZENON Environmental Inc. trades under the symbols ZEN and ZEN.A. Additional information is available at the Company's web site www.zenon.com. ZENON Environmental Inc. Consolidated Balance Sheets March 31 December 31 2003 2002 $ (000s) $ --------------------- ASSETS Current Assets Cash and cash equivalents 10,979 15,842 Restricted cash 387 688 Accounts receivable 32,250 32,754 Accounts receivable - government funding 1,203 2,427 Unbilled revenue 37,945 31,054 Inventories 16,863 12,938 Prepaid expenses and deposits 1,776 3,192 Future income taxes 2,150 1,733 ------------------------------------------------------------------------- Total current assets 103,553 100,628 Capital assets, net 91,453 90,943 Patents and other assets 13,093 13,191 Goodwill 4,506 4,506 Future income taxes 1,562 1,393 ------------------------------------------------------------------------- Total assets 214,167 210,661 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Accounts payable and accrued liabilities 38,230 40,869 Customer advances 29,232 23,720 Current portion of long-term debt 51 160 ------------------------------------------------------------------------- Total current liabilities 67,513 64,749 Long-term debt 374 395 Deferred technology credit 5,000 5,000 ------------------------------------------------------------------------- Total liabilities 72,887 70,144 ------------------------------------------------------------------------- Shareholders' equity Capital stock 116,564 115,277 Retained earnings 22,184 20,250 Unrealized translation adjustment 2,532 4,990 ------------------------------------------------------------------------- Total shareholders' equity 141,280 140,517 ------------------------------------------------------------------------- Total liabilities and shareholders' equity 214,167 210,661 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ZENON Environmental Inc. Consolidated Statements of Income For the three months ended March 31 2003 2002 (000s except earnings $ per share) $ Revenue 36,147 29,774 Cost of sales and services 19,769 19,906 ------------------------------------------------------------------------- Gross profit 16,378 9,868 ------------------------------------------------------------------------- Expenses Selling, general and administrative 10,510 7,118 Amortization 3,400 2,167 Net interest (53) (20) ------------------------------------------------------------------------- 13,857 9,265 ------------------------------------------------------------------------- Operating income before income taxes 2,521 603 Provision for income taxes 567 175 ------------------------------------------------------------------------- Net earnings for the period 1,954 428 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share: Basic 0.07 0.02 ------------------------------------------------------------------------- Fully diluted 0.07 0.02 ------------------------------------------------------------------------- Weighted average number of outstanding shares: Basic 27,469 25,744 ------------------------------------------------------------------------- Fully diluted 28,376 26,542 ------------------------------------------------------------------------- ZENON Environmental Inc. Consolidated Statements of Retained Earnings ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months ended March 31 2003 2002 $ (000s) $ ------------------------------------------------------------------------- Retained earnings - beginning of period 20,250 13,795 Net earnings for the period 1,954 428 Interest on share purchase loans - 96 Dividends on preference shares (20) (20) ------------------------------------------------------------------------- Retained earnings - end of period 22,184 14,299 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ZENON Environmental Inc. Consolidated Statements of Cash Flows For the three months ended March 31 2003 2002 $ (000s) $ ------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income for the period 1,954 428 Add (Deduct) items not affecting cash Amortization 3,400 2,167 Future income tax provision (586) (1,727) Gain on disposal of assets (62) - ------------------------------------------------------------------------- 4,706 868 Net change in non-cash working capital balances related to operations (4,993) 3,716 ------------------------------------------------------------------------- Cash flows (used in) provided by operating activities (287) 4,584 ------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of capital assets (4,848) (11,476) Proceeds on disposal of capital assets 100 - Increase in patents and other assets (635) (584) Decrease (Increase) in restricted cash 301 (700) ------------------------------------------------------------------------- Cash flows used in investing activities (5,082) (12,760) ------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of Common and non-voting Class A Shares - 42,550 Issue Cost - (1,432) Share purchase loan - 831 Increase in bank indebtedness - 526 Repayment of long-term debt (43) (10,009) Repayment of capital leases (87) (28) Interest on share purchase loans - 96 Stock options exercised Common and non-voting Class A 1,287 942 ------------------------------------------------------------------------- Cash flows provided by financing activities 1,157 33,476 ------------------------------------------------------------------------- Effect of exchange rate changes on cash (651) (69) ------------------------------------------------------------------------- Net increase (decrease) in cash during the period (4,865) 25,231 Cash and cash equivalents, beginning of period 15,842 5,517 ------------------------------------------------------------------------- Cash and cash equivalents, end of period 10,979 30,748 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information Cash taxes paid 56 74 Cash interest paid 26 100 ------------------------------------------------------------------------- ZENON Environmental Inc. Segmented information For the periods ended March 31, 2003 and 2002 The Company operates in Canada, the United States, Europe, Asia, and the Middle East, in the water treatment industry. Its reportable operating segments are strategic business units that offer membrane based systems for water and wastewater treatment. These segments are managed separately as each business unit requires different market strategy. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company accounts for intersegment sales at agreed upon prices, which recognizes the research and development cost incurred in the development of membranes. Operations and identifiable assets by operating segment are presented below. External sales are allocated on the basis of sales to external customers. Operating Segments Technology, North Europe, Middle (All Membranes America East and figures in and Corporate Systems Asia Systems Total Total $ 000's) 2003 2002 2003 2002 2003 2002 2003 2002 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue from external customers 176 142 17,245 21,897 18,726 7,735 36,147 29,774 Intersegment revenue 10,636 6,396 120 32 205 84 10,961 6,512 Amortization of capital assets 2,274 1,726 897 201 229 240 3,400 2,167 Segment income before interest and taxes (1,155) (145) 416 1,287 3,207 (459) 2,468 683 Total assets 151,732 124,317 31,371 45,540 31,064 12,191 214,167 182,048 Capital assets, patents and other asset expend- itures 3,898 5,224 85 3,183 1,500 3,653 5,483 12,060 Reconciliation of Income 2003 2002 -------------------------- -------------------------- Total income for reportable segments 2,468 683 Elimination of intersegment profit - (100) Net interest 53 20 Provision for income taxes (567) (175) -------------------------- Net income for the year 1,954 428 -------------------------- -------------------------- Additional Europe, Middle Information Canada United States East and Asia Total Total 2003 2002 2003 2002 2003 2002 2003 2002 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue 712 8,666 16,553 13,373 18,882 7,735 36,147 29,774 Capital assets, patents, goodwill and other assets 68,635 66,686 665 1,197 39,752 9,003 109,052 76,886 ------------------------------------------------------------------------- ZENON Environmental Inc. Notes to Financial Statements 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared following the accounting policies as set out in the fiscal 2002 annual consolidated financial statements, except as described in note 2. These unaudited condensed notes to the consolidated statements should be read in conjunction with the audited financial statements and notes included in the company's 2002 Annual Report. 2. New Accounting Standards Guarantees ---------- In February 2003, the Canadian Institute of Chartered Accountants ("CICA") issued Accounting Guideline 14, Disclosure of Guarantees (AcG-14), which clarifies disclosure requirements for certain guarantees. The Company adopted the new recommendations effective January 1, 2003. AcG-14 defines a guarantee to be a contract (including an indemnity) that contingently requires the Company to make payments to a third party based on (i) changes in an underlying that is related to an asset, a liability or an equity of the guaranteed party or (ii) failure of another party to perform under an obligating agreement. The only significant guarantee the Company has provided to third parties is: Director/Officer indemnification -------------------------------- Under its by-laws, the Company indemnifies its directors/officers, former directors/officers and individuals who have acted at the Company's request to be a director/officer of an entity in which the Company is a shareholder, to the extent permitted by law, against any and all charges, costs, expenses, amounts paid in settlement and damages incurred by the directors and officers as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which the directors and officers are sued as a result of their service. Indemnification claims will be subject to any statutory or other legal limitation period. There are no indemnification claims known to the company at this time. The Company has purchased directors' and officers' liability insurance. No amount has been accrued in the consolidated balance sheet with respect to any indemnifications. 3. Stock Based Compensation The Company does not recognize compensation expense for stock options granted to employees and directors. The table below presents pro-forma net income and basic and diluted income per common share and non- voting Class A share as if stock options granted to employees and directors had been determined based on the fair value method. The table includes all stock options granted by the Company during the three months ended March 31, 2003 and 2002. Stock Options Granted 2003 ($000s) 2002 ---------------------------------------------------------------- Income for the year 1,954 428 Compensation expense 122 16 ---------------------------------------------------------------- Pro-forma income for the year 1,832 412 ---------------------------------------------------------------- Basic income per share $ $ As reported 0.07 0.02 Pro-forma 0.07 0.02 Diluted income per share As reported 0.07 0.02 Pro-forma 0.06 0.02 ---------------------------------------------------------------- The fair value of the options granted was estimated at the date of the grant using the Black Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5%, expected dividend yield of 0%, expected volatility of 46.4% (2002 - 58.9%) and expected option life of five years. The weighted average fair value of the options granted during the quarter is $5.08 (2002 - $10.48). 4. Capital Stock The following details the changes in the issued common shares, non-voting Class A shares and the Series 1 preference shares for the period of January 1, 2002 to March 31, 2003. Common Shares Number $ (000's) ---------------------------------------------------------------------- Balance as at January 1, 2002 20,413,752 21,901 ---------------------------------------------------------------------- Public offering 1,000,000 16,652 Exercise of options during the year 153,238 1,155 Shares cancelled (7,794,584) (105,149) Shares issued 7,794,584 105,149 ---------------------------------------------------------------------- Balance as at December 31, 2002 21,566,990 39,708 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Exercise of options during the quarter 132,840 1,287 ---------------------------------------------------------------------- Balance as at March 31, 2003 21,699,830 40,995 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Non-Voting Class A Shares Number $ (000's) ---------------------------------------------------------------------- Balance as at January 1, 2002 3,900,000 47,859 Public offering 2,000,000 24,403 Exercise of options during the year 11,000 77 ---------------------------------------------------------------------- Sub-Total 5,911,000 72,339 ---------------------------------------------------------------------- Share purchase loan receivable (70,000) (770) (2001 - 180,000 shares - $1,711) ---------------------------------------------------------------------- Balance as at December 31, 2002, March 31, 2003 5,841,000 71,569 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Series 1 Preference Shares Number $ (000's) ---------------------------------------------------------------------- Balance as at January 1, 2002, December 31, 2002, March 31, 2003 300,000 4,000 ---------------------------------------------------------------------- ---------------------------------------------------------------------- As at March 31, 2003 the Company has outstanding stock options for 832,371 common shares of which 550,856 are vested and 187,700 non-voting Class A shares outstanding of which 146,080 are vested. 5. Earnings Per Common Share Three Months Ended March 31 2003 2002 Numerator for basic and diluted earnings per common share Net earnings attributable to common shareholders ($000s) 1,954 428 ---------------------- Denominator (number of common shares in thousands) Denominator for basic earnings per common share - Weighted average of outstanding shares 27,469 25,744 Effect of dilutive stock options and preference shares 907 798 ---------------------- Denominator for diluted earnings per common share - Adjusted weighted average of outstanding shares 28,376 26,542 ---------------------- Earnings per common share - basic 0.07 0.02 ---------------------------------------------------------------------- Earnings per common share - diluted 0.07 0.02 ---------------------------------------------------------------------- 6. Bank Credit Facilities During the quarter, the company and its subsidiaries renewed agreements with certain of its bankers, which together with existing agreements, provide credit facilities that total $106.4 million. These facilities are made up as follows: March 31 December 31 ($ 000's) 2003 2002 ---------------------------------------------------------------------- 364-day committed extendable operating credit facility 40,000 40,000 Demand facilities 9,600 7,900 Revolving term facility 300 300 Letter of credit facility 40,300 43,000 Foreign exchange hedging facility 16,200 16,000 ---------------------------------------------------------------------- 106,400 107,200 7. Foreign Exchange Gains and Losses Included in the selling, general and administrative expenses is a foreign exchange gain of $40,000 (2002 - foreign exchange loss of $46,000). >> %SEDAR: 00001698E -30- For further information: Andrew Benedek, Chairman & CEO, [phone] or Nazeli Seferian, Corporate Communications & Investor Relations, [phone] EXT. 3055 ZENON ENVIRONMENTAL INC. has 55 releases in this database. --------------------------------------------------------------------------------