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 August, 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
Form 40-F
o
Indicate by check mark if the registrant is submitting the
Form 6-K
in paper as permitted by
Regulation S-T
Rule 101(b)(1)
o
Note:
Regulation S-T
Rule 101(b)(1) only permits the submission in paper of a
Form 6-K
if submitted solely to provide an attached annual report to
security holders.
Indicate by check mark if the registrant is submitting the
Form 6-K
in paper as permitted by
Regulation S-T
Rule 101(b)(7)
o
Note:
Regulation S-T
Rule 101(b)(7) only permits the submission in paper of a
Form 6-K
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
securities are traded, as long as the report or other document
is not a press release, is not required to be and has not been
distributed to the registrants security holders, and, if
discussing a material event, has already been the subject of a
Form 6-K
submission or other Commission filing on EDGAR.
Indicate by check mark whether by furnishing the information
contained in this Form, the registrant is also thereby
furnishing the information to the Commission pursuant to
Rule 12g3-2(b)
under the Securities Exchange Act of
1934. Yes
o
No
þ
If Yes is marked, indicate below the file number
assigned to the registrant in connection with
Rule 12g3-2(b):
82 -
o
KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
DEAR SHAREHOLDERS
As we continue through 2009, our focus remains on managing our assets in a manner that preserves
shareholder value and structuring our company to capitalize on opportunities that will emerge in
the short to medium term as the global economies begin to emerge from the dramatic slowdown that we
have experienced over the last year.
In the first half of 2009, KHD has continued to implement its operational restructuring plans
in order to mitigate the impact of slowing order intake and reduction in order backlog. The biggest
impact on revenues due to this reduction in order intake is likely to be in 2010 and beyond. Market
conditions remain difficult as our largest customers focus on cost reduction and rebuilding their
balance sheets, although there are pockets of stronger activity in India, the Middle East and North
Africa.
The results of the first half and second quarter of 2009 are discussed in more detail below.
In overall terms, the results reflect the late-cycle nature of KHDs business. Revenues remain at
a good level due to the strength of the order backlog, but order intake has slowed down
significantly. Gross profit levels demonstrate continued efficient project execution despite the
negative effects of restructuring costs associated with a write-down of inventories and losses on
terminated contracts.
In our March letter to shareholders, we explained that as part of our restructuring efforts we
would be forming groups responsible on a company-wide basis for all bidding, engineering,
procurement and project management, and that this group would be developing standardized designs,
bidding processes and procurement teams. In the second quarter, as part of this streamlining of our
organization in connection with our global restructuring initiative, we redeployed certain of our
engineers to establish a separate group, exclusively dedicated to sales and marketing, which is no
longer involved in project execution and delivery functions. This will allow us to better monitor
and control our sales and marketing costs. As a result of the shift of our sales and marketing
focus in the current period, higher sales and marketing costs are included in selling, general and
administrative expenses in the current period.
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KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
In the past, our operational model was structured around an integrated project delivery
approach that included all aspects of the project process, including tendering, engineering and
sales and marketing.
Through the second quarter of 2009, there has been no material change in the contracts at
risk category of our backlog. KHDs operating income has been significantly impacted by a
substantial reduction in the income derived from its interest in a resource property. The decline
is attributed to lower production by the operators and reduced commodity prices. In addition, we
have incurred restructuring costs as we react to the current environment and outlook. Operating
income has also been adversely impacted by the operational gearing of the business as a result of
the reduction in sales during the period.
FIRST-HALF OPERATING RESULTS
For the six months ended June 30, 2009, KHD reported a decrease in
revenues of 23% to $218.0 million as compared to revenues of $281.1 million for the six months
ended June 30, 2008. Cement revenues fell by 22% to $188.0 million and coal and minerals revenues
fell by 24% to $29.9 million for the six months ended June 30, 2009, as compared to $241.8 million
and $39.3 million, respectively, for the six months ended June 30, 2008.
Gross profit margin, excluding losses on terminated customer contracts and restructuring costs
associated with the write-down of inventories, was 20% compared to 19% for the same period in 2008.
The slight increase in gross profit margin in the six-month period ended June 30, 2009 can be
attributed to our continuing efficient execution and delivery of projects in accordance with the
financial, scheduling and quality parameters set for such projects, and the reduction of sales and
marketing costs included in project costs as a result of the shift of sales and marketing focus.
Selling, general and administrative expenses, excluding stock-based compensation, increased
from $26.9 million to $37.5 million during the period. This was due in part to including higher
sales and marketing costs.
KHDs net loss for the six months ended June 30, 2009 was $6.2 million, as compared to a net
profit of $27.1 million for the same period in 2008. This includes a total of $19.4 million (before
tax) of one-off costs, consisting of a loss on terminated contracts of $2.1 million, restructuring
costs relating to the write-down of inventories of $1.1 million, other restructuring costs of $6.8
million, and $9.5 million relating to the settlement of the investment in the preferred shares of
KHDs former subsidiaries. On a diluted basis, losses per share were $0.21 in
the first half of 2009, compared with earnings per share of $0.89 in the first half of 2008.
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KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
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KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
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ORDER BACKLOG BY REGION Q2.09
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ORDER INTAKE BY REGION Q2.09
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KHDs balance sheet remains strong: at the end of the second quarter of 2009, KHD had $356.8
million in cash, cash equivalents and short-term cash deposits. The reduction in the level of cash
reflects the effects of working capital movements as our order backlog decreases. Shareholders
equity was $257.9 million as at June 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 six months ended June 30, 2009 was $112.2 million, a decrease of 82%
compared with the first six months of 2008. This reflects the current low level of demand for new
cement capacity as well as the strong performance in the comparative period. Approximately 57% of
the total order intake in the first six months of 2009 came from the Asian region, primarily India.
Of the total order intake, cement order intake was $92.6 million in the first half of 2009, a
decrease of 84% from order intake of $561.2 million in the first half of 2008. Coal and minerals
order intake decreased by 59% in the first half of 2009 from $47.6 million to $19.6 million.
Order backlog as of June 30, 2009 was $731.7 million, which represents a decrease of 44%
compared with the same period in 2008. The majority of the order backlog is in the worlds emerging
economies: 44% in Russia and Eastern Europe, 38% in Asia and 13% in the Middle East. Of the total
order backlog, approximately 17% is categorized as at risk.
Cement order backlog as at June 30, 2009 was $664.8 million. This represents a decrease of 44%
from the corresponding period in 2008. Approximately 5% of this decrease can be
attributed to cancelled contracts. Over 90% of this contracted backlog is in the emerging economies
of Russia and Eastern Europe, Asia and the Middle East. Coal and minerals backlog was $66.9 million
as at June 30, 2009, a reduction of 36% from June 30, 2008.
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KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
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KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
SECOND QUARTER OPERATING RESULTS
For the quarter ended June 30, 2009, KHD reported revenues
of $105.8 million, a 27% decrease from the $144.2 million reported for the second quarter of 2008.
Cement revenues were $91.3 million in the quarter, a 28% decrease as compared to
cement revenues of $127.0 million for the second quarter of 2008. Coal and minerals revenues
decreased by 15% from $17.2 million to $14.6 million in the quarter ended June 30, 2008.
Gross profit margin, excluding losses on terminated customer contracts and restructuring costs
associated with the write-down of inventories, improved to 23% in the second quarter of 2009 from
20% in the comparable period of 2008. The increase in gross profit margin in the quarter ended June
30, 2009 can be attributed to our continuing efficient execution and delivery of projects in
accordance with the financial, scheduling and quality parameters set for such projects. As
discussed above, portions of this increase are also attributable to the shift in our sales and
marketing focus, resulting in fewer sales and marketing costs included in project costs.
Selling, general and administrative expenses, excluding stock-based compensation, increased by 60%
to $22.5 million during the current quarter from $14.1 million for the second quarter of 2008. As
previously discussed, this was due in part to including higher sales and marketing costs, due to
our shift of our sales and marketing focus.
The net loss for the second quarter of 2009 was $7.5 million, compared to a net profit of
$19.7 million for the same period in 2008. On a diluted basis, losses per share were $0.25 in the
current quarter, compared with earnings per share of $0.64 in the second quarter of 2008.
Order intake for the quarter ended June 30, 2009 was very disappointing. Order intake was
$31.1 million, representing only 10% of the level achieved in the comparable quarter in 2008.
However, this was against a very difficult comparable period. Order intake in the second quarter of
2008 was the highest ever recorded by KHD.
Cement order intake was $22.4 million and coal and minerals order intake was $8.7 million in
the second quarter of 2009. These represent declines of 93% and 56%, respectively, as compared with
the second quarter of 2008.
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KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
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KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
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KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
PROGRESS OF THE 2009 FOCUS
We continue to plan for a significant reduction in the level of
activity in 2010 and beyond. We are refocusing on our core cement operations and proceeding as
planned with our restructuring program. As described in greater detail in our recent shareholder
communications, we are 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 part of the program, we are undertaking
several initiatives to transform the structural efficiency of our operations worldwide and to
create a streamlined organization focused on operational excellence.
Our new operational model has been designed to meet the needs of our new and existing
customers. It features a central office which will serve as our global support and management
center, providing standardized and efficient support services including finance, engineering, sales
and marketing, product and project management, procurement and research and development, and whose
main role will be to develop, manage and support the
implementation of our operative business strategies. In addition, we have created four regional customer service
centers to serve our customers located in the respective regions. These centers will allow us to
provide services to our customers to target their specific regional needs, enabling price
competitiveness, global integration, alignment with customer needs and a focus on excellence.
This new operating structure has now become effective with the creation of four customer
service centers serving the regions of Europe, the Middle East and Africa (EMEA), Russia/CIS, India
and the Americas, with KHD Central serving as our global support and management center. Despite the
current market conditions, we continue to invest in research and development to maintain our
competitive position and aim to build up our service offerings so that we can increase the
proportion of our revenues from less cyclical and more stable revenue streams.
We continue to negotiate the terms of
a proposed transaction for the divestment of our coal and minerals business and our workshop in
Cologne, Germany.
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KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
Based on the current global market conditions and uncertainty in project financing, we
believe that the business environment will remain challenging in the short term. Many countries
have established stimulus packages that should boost demand for construction and construction
materials. This is likely to have a positive effect on the demand for our products and services in
the short to medium term. We continue our efforts to explore the current business opportunities.
Our focus will be in the areas that show significant sales opportunities, most notably in India and
North Africa. In these areas we estimate
that the short-term demand for our products and services will be satisfactory; elsewhere the
short-term demand will remain weak. Opportunities for larger projects such as new greenfield
capacity have become scarce, with these opportunities at perhaps around a third of the level of the
previous year. The main opportunities for KHD are in smaller projects that are typically focused on
upgrades and efficiency improvements. We are still seeing a significant number of enquiries in this
latter area. In general, however, customers remain reluctant to make firm commitments to new
projects of any size.
Respectfully Submitted,
Jouni Salo
President and Chief Executive Officer
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KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
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TABLE OF CONTENTS
KHD HUMBOLDT WEDAG INTERNATIONAL LTD.
Form 51-102F1
MANAGEMENTS
DISCUSSION AND ANALYSIS
(August 13, 2009)
The following discussion and analysis of our financial condition
and results of operations for the three- and six-month periods
ended June 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
August 13, 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 the continued worldwide
economic downturn resulting from the effects of the subprime
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 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.
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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 June 30, 2009, we operated in two
reportable segments consisting of (i) an industrial plant
engineering and equipment supply business and (ii) our
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 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, coal and mineral
processing. The two major customer groups of our industrial
plant engineering and equipment supply segment are in the cement
and coal and minerals industries. Services to these two customer
groups share the use of the same pool of human and capital
resources with respect to finance, accounting, general support
and risk management. We supply plant systems as well as
machinery and equipment worldwide for the manufacture of cement
and the processing of coal and 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 coal and minerals such as
copper and precious metals. We offer detail engineering, plant
and equipment for complete plants and plant sections including
modernization and capacity increase measures, as well as
automation and process control equipment. We have operations in
India, China, Russia, Germany, the Middle East, Australia, South
Africa and the United States.
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 coal and minerals, such as copper and other precious
metals 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,
project planning, feasibility studies, raw material testing,
research and development, financing, erection and commissioning,
personnel training and pre and post sales service.
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 operated by an unincorporated joint
venture consisting of Wabush Iron Co. Limited, Dofasco Inc.,
U.S. Steel Canada Inc. and Cliffs Mining Company 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. 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.
Although no assurance as to future production levels can be
provided, since the operator of the Wabush iron ore mine is
owned by the joint venture of steel producers and traders,
production from the mine has been generally maintained at
relatively consistent levels.
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
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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.
Examinations for discovery have been completed and 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 in 2009.
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 of 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.
In connection with the preparation of our financial statements
for the year ended December 31, 2008, we took steps to
determine the fair value of the preferred shares of Mass
Financial and one of its former subsidiaries. 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. As a result, we
recognized a fair value loss of $55.1 million on our
investment in the preferred shares of the former subsidiaries at
December 31, 2008. There was no change in fair value in
terms of Canadian dollars in the first or second quarters of
2009. We entered into negotiations with Mass Financial in an
effort to come to an agreement regarding the realization of the
economic value of the preferred shares by way of redemption of
the shares and on May 12, 2009, we entered into and
completed a definitive agreement with 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 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
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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
Impact
of the Current Economic Conditions
The economies in many of our principal markets, including Asia,
Russia, Eastern Europe and the Middle East, continue to undergo
a period of uncertainty related to the tightening of credit
markets worldwide. This has resulted in numerous adverse
effects, including unprecedented volatility in financial markets
and stock prices, slower economic activity, decreased consumer
confidence and commodity prices, reduced corporate profits and
capital spending, increased unemployment, liquidity concerns and
volatile but generally declining energy prices. A significant
portion of our business includes selling capital equipment to
cement producers. Many of our customers have been affected by
the current economic situation, primarily by experiencing a
reduction in their ability to secure long-term financing for
their infrastructure projects and by a reduction in the demand
for clinker and cement.
The current economic conditions and the credit shortage have
had, and we anticipate will continue to have, an adverse impact
on the construction and related industries in many of our
markets, as construction projects are dependent on the
availability of long-term financing. While some of our regional
markets, such as India and North Africa, are generating new
business, the majority of our principal markets appear to have
stabilized at a much lower level of activity than existed prior
to the economic crisis. Although cement prices remain at
relatively consistent levels as compared to 2007, the economic
uncertainty, the reduction in the availability of long-term
credit and the reduction in the demand for clinker and cement
have resulted in a significant reduction in new infrastructure
investments for increases in the production of clinker and
cement. Many of our customers are reliant upon access to credit
and equity capital markets to finance the projects for which
they use our products and services. If the economic environment
continues to be less favourable than it has been in recent
years, we may experience a continued reduction in the demand for
our products and services. These slower economic conditions
could lead to lower revenues for our company in future years.
We continue to experience an impact from the slowdown of the
global economy as our order intake for the six-month period
ended June 30, 2009 decreased by 81.6% from the six-month
period ended June 30, 2008. This decrease in order intake
was a result of delays in project awards by customers reviewing
their financing alternatives in light of the prevailing tight
credit markets and the cancellation of planned projects due to
concerns about future demand.
We continue to critically review every project in our backlog on
a regular basis. Such reviews assess whether project execution,
customer billing and collections are progressing according to a
projects contractual terms and include discussions with
our customers and suppliers. As at December 31, 2008, we
determined that the amount of contracts at risk included in our
order intake and backlog was $159.2 million. There were no
significant additional contract cancellations during the
six-month period ended June 30, 2009. As at June 30,
2009, our order intake decreased to $112.2 million compared
to $608.4 million for the six-month period ended
June 30, 2008. Order backlog at June 30, 2009 was
$731.7 million compared to $1.3 billion as at
June 30, 2008.
As at June 30, 2009, the amount of contracts at risk
included in our order backlog was $126.8 million. The at
risk projects in our backlog fall into two categories:
(i) projects where the clients are considering changes in
the scope of such projects, and (ii) projects where clients
require additional financing to continue to completion. We are
actively working with our customers to evaluate the revised
costs and completion schedules for projects with scope changes.
We are still in discussions with customers who require
additional financing to complete their projects, while
continually assessing whether formal contract terminations are
economically more attractive than contract delays with uncertain
outcomes. Costs incurred to date and commitments to suppliers
for uncompleted purchase orders relating to the at risk
contracts amount to $92.2 million. Payments received from
customers, including advance payments relating to the at risk
contracts, amount to $54.5 million. Provisions of
$19.2 million have been established and we have incurred
$10.2 million of costs, mainly during 2008. In addition to
contracts at risk in our order backlog as at June 30, 2009,
certain cancelled contracts were removed from the order backlog
during 2008. We incurred costs of $16 million on cancelled
contracts and have received payments of $6.7 million. In
addition, we established provisions amounting to
$5.7 million. We cannot provide any assurance as to the
eventual amounts of contracts that may be at risk due to the
uncertainty of the current and future economic conditions and
other factors
15
which are beyond our control. For further information, please
see below under the heading Provisions for Supplier
Commitments on 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 crisis period. 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. In connection with this evaluation, we
determined to divest our interest in the preferred shares of
Mass Financial and one of its former subsidiaries. See below
under the heading Settlement of Preferred Shares of Mass
Financial and its Former Subsidiary. Further, as disclosed
in our annual report on
Form 20-F,
we have implemented a restructuring program that we expect to
continue into 2010 and we expect to incur restructuring charges
in connection with this program. See below under the heading
Restructuring Activity.
In summary, challenging market conditions are anticipated to
continue in 2009 as customers willingness to invest in new
projects is expected to continue to decline because access to
liquidity and credit has become tighter and demand for new
capacity is not growing as strongly as in the recent past. These
factors may continue to have a negative impact on our results
for fiscal year 2009 and subsequent years.
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. Provisions have been recorded for all
non-cancellable supplier purchase obligations and doubtful
receivables and all work in progress on these contracts is
expensed immediately. We are working with our legal advisors,
customers and suppliers to determine the best course of action
as we continue through fiscal year 2009.
The provision for supplier commitments is based on negotiations
with customers and suppliers and a determination of the net
realizable value of work in progress. The provision is regularly
monitored and adjusted when necessary based on negotiations with
customers and suppliers and updated assessments of the net
realizable value of work in progress. A re-evaluation of the
provision for supplier commitments as of June 30, 2009
showed that certain items needed to be adjusted to reflect our
assessment as of that date. The final amount will be settled
based on negotiations with customers and suppliers. The
following is a summary of the changes in the provision for
supplier commitments on the terminated customer contracts during
the first half of 2009:
|
|
|
|
|
|
|
(United States dollars
|
|
|
|
in thousands)
|
|
|
Balance at beginning of period
|
|
$
|
23,729
|
|
Provisions during the period
|
|
|
1,447
|
|
Paid
|
|
|
|
|
Reversal
|
|
|
(612
|
)
|
Reclassification to inventory reserve
|
|
|
(941
|
)
|
Currency translation adjustments
|
|
|
277
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
23,900
|
|
|
|
|
|
|
Further, an additional impairment on inventories of
$1.2 million was recognized during the first half of 2009
due to a decrease of net realizable value for items in inventory.
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 part of the
program, we are undertaking several initiatives to transform the
structural efficiency of our operations worldwide and to create
a streamlined organization focused on operational excellence. We
are continuing with our previously disclosed restructuring
program, including the planned closure of our workshop in
Cologne, Germany, the divestment of our coal and minerals
business and the reduction of our global workforce. This program
is being undertaken with the goal of establishing an integrated
global team offering competitive products and services to both
new and existing customers.
Our new operational model has been designed to meet the needs of
our new and existing customers. It features a central office
which will serve as our global support and management center,
providing standardized and efficient support services including
finance, engineering, sales and marketing, product and project
management, procurement and research and development, and whose
main role will be to develop, manage and support the
implementation of our
16
business strategies. In addition, we have created four regional
customer service centers to serve our customers located in the
respective regions. These centers will allow us to provide
services to our customers that target their specific regional
needs, enabling price competitiveness, global integration,
alignment with customer needs and a focus on excellence. In
connection with our restructuring program, we have decided to
close our Hong Kong office and move the head office of our
company from Hong Kong to Vancouver, British Columbia, Canada.
Our new head office will be located at
Suite 1620 400 Burrard Street, Vancouver,
British Columbia, Canada V6C 3A6.
Moving forward, we plan to invest in the growth of our service
business and to focus on research and development, including
with respect to the development of green technologies. In
addition, as part of the streamlining of our organization in
connection with our global restructuring initiative, we have
established a separate group by redeploying certain of our
engineers that is exclusively dedicated to sales and marketing
and is no longer involved in project execution and delivery
functions. This will allow us to better monitor and control our
sales and marketing costs. During the current period, we
refocused our sales and marketing efforts on improving our
market intelligence, strengthening our key account management
capability, upgrading our customer relationship management
systems and developing a more systematic opportunity
prioritization process. A higher amount of sales and marketing
efforts are, as a consequence, expensed and included in selling,
general and administrative expenses. Sales and marketing costs
directly attributable to the successful execution of customer
project contracts are included in project costs.
We recognized the restructuring costs in the first half of 2009
as follows:
|
|
|
|
|
|
|
(United States dollars
|
|
|
|
in thousands)
|
|
|
Provisions:
|
|
|
|
|
Costs associated with involuntary employment terminations
|
|
$
|
3,916
|
|
Facilities closure
|
|
|
1,302
|
|
Lease termination and other costs
|
|
|
1,328
|
|
|
|
|
|
|
|
|
|
6,546
|
|
Impairment of fixed assets
|
|
|
227
|
|
|
|
|
|
|
Restructuring costs excluding inventory write-down
|
|
|
6,773
|
|
Write-down of inventories
|
|
|
1,121
|
|
|
|
|
|
|
Total
|
|
$
|
7,894
|
|
|
|
|
|
|
The following is a summary of the changes in the provision for
restructuring costs during the six-month period ended
June 30, 2009:
|
|
|
|
|
|
|
(United States dollars
|
|
|
|
in thousands)
|
|
|
Balance at beginning of period
|
|
$
|
|
|
Provision during the period, excluding inventory and fixed asset
write-downs
|
|
|
6,546
|
|
Paid
|
|
|
|
|
Reversal
|
|
|
|
|
Currency translation adjustments
|
|
|
502
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
7,048
|
|
|
|
|
|
|
The initiatives under the restructuring program will also
include a reduction in the international headcount and the
intended divestiture of the coal and minerals customer group.
Management estimates that the restructuring program is likely to
cost approximately $30 million (including the restructuring
costs recognized in the first half of 2009), which primarily
relates to employee severance costs, asset impairments and lease
termination costs. We expect to recognize the loss and expenses
in 2009 and 2010. Management will continue to monitor the
progress of the restructuring program.
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 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. 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.
17
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
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 Mass Financial 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 the 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.
|
Mass Financial also settled Cdn$11.35 million owing to us
in respect of the accrued dividends on the preferred shares,
which was paid by way of the issuance of a promissory note
having a principal amount of Cdn$11.35 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 Mass
Financial 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 Mass Financial.
The settlement of the preferred shares was approved by our
independent directors, as recommended by our audit committee,
which took into account a variety of factors prior to granting
such approval, 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. The directors
and the audit committee also engaged, and considered the advice
of, an independent financial advisor and outside independent
legal counsel. The directors and the audit committee also
considered the advantages, disadvantages and risks of proceeding
with the transaction and concluded that proceeding with the
transaction was in the best interests of our company and its
shareholders. This transaction substantially completes the
disposition of our financial services operations which commenced
in 2005 and enables KHD and Mass Financial to focus on their
respective core businesses.
As a result of the settlement of the preferred shares of Mass
Financial and one of its former subsidiaries, we recognized a
loss of $9.5 million in the second quarter of 2009.
18
Summary
of Three-Month and Six-Month Results
The following table provides selected financial information for
the three- and six-month periods ended June 30, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
)
|
|
|
|
(United States dollars in thousands, except per
share amounts)
|
|
|
Revenues
|
|
$
|
105,847
|
|
|
$
|
144,240
|
|
|
$
|
217,975
|
|
|
$
|
281,076
|
|
Gross profit
|
|
|
21,835
|
|
|
|
28,332
|
|
|
|
41,076
|
|
|
|
53,539
|
|
Restructuring costs, excluding inventory write-down
|
|
|
(17
|
)
|
|
|
|
|
|
|
(6,773
|
)
|
|
|
|
|
Operating income
|
|
|
2,461
|
|
|
|
23,427
|
|
|
|
1,124
|
|
|
|
38,692
|
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
(9,538
|
)
|
|
|
|
|
|
|
(9,538
|
)
|
|
|
|
|
Net income (loss)
|
|
|
(7,454
|
)
|
|
|
19,670
|
|
|
|
(6,249
|
)
|
|
|
27,101
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.25
|
)
|
|
|
0.65
|
|
|
|
(0.21
|
)
|
|
|
0.89
|
|
Diluted
|
|
|
(0.25
|
)
|
|
|
0.64
|
|
|
|
(0.21
|
)
|
|
|
0.89
|
|
Summary
of Quarterly Results
The following tables provide selected financial information for
the most recent eight quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
(United States dollars in thousands, except per share
amounts, in accordance with Canadian GAAP)
|
|
|
Revenues
|
|
$
|
105,847
|
|
|
$
|
112,128
|
|
|
|
$163,682
|
|
|
|
$193,596
|
|
Gross profit (loss)
|
|
|
21,835
|
|
|
|
19,241
|
|
|
|
(356
|
)
|
|
|
36,574
|
|
Restructuring costs, excluding inventory write-down
|
|
|
(17
|
)
|
|
|
(6,756
|
)
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
2,461
|
|
|
|
(1,337
|
)
|
|
|
(16,080
|
)
|
|
|
31,933
|
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
(9,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(7,454
|
)
|
|
|
1,205
|
|
|
|
(64,857
|
)
|
|
|
30,804
|
|
Income (loss) from continuing operations, per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.25
|
)
|
|
|
0.04
|
|
|
|
(2.12
|
)
|
|
|
1.01
|
|
Diluted
|
|
|
(0.25
|
)
|
|
|
0.04
|
|
|
|
(2.12
|
)
|
|
|
1.01
|
|
Net income (loss)
|
|
|
(7,454
|
)
|
|
|
1,205
|
|
|
|
(64,857
|
)
|
|
|
30,804
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.25
|
)
|
|
|
0.04
|
|
|
|
(2.12
|
)
|
|
|
1.01
|
|
Diluted
|
|
|
(0.25
|
)
|
|
|
0.04
|
|
|
|
(2.12
|
)
|
|
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
(United States dollars in thousands, except per share
amounts, in accordance with Canadian GAAP)
|
|
|
Revenues
|
|
$
|
144,240
|
|
|
$
|
136,836
|
|
|
|
$163,498
|
|
|
|
$150,441
|
|
Gross profit
|
|
|
28,332
|
|
|
|
25,207
|
|
|
|
25,875
|
|
|
|
20,551
|
|
Restructuring costs, excluding inventory write-down
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
23,427
|
|
|
|
15,265
|
|
|
|
14,456
|
|
|
|
14,530
|
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
19,670
|
|
|
|
7,431
|
|
|
|
12,854
|
|
|
|
19,727
|
|
Income from continuing operations, per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.65
|
|
|
|
0.25
|
|
|
|
0.43
|
|
|
|
0.65
|
|
Diluted
|
|
|
0.64
|
|
|
|
0.24
|
|
|
|
0.42
|
|
|
|
0.64
|
|
Net income
|
|
|
19,670
|
|
|
|
7,431
|
|
|
|
11,611
|
(1)
|
|
|
11,782
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.65
|
|
|
|
0.25
|
|
|
|
0.39
|
(1)
|
|
|
0.39
|
|
Diluted
|
|
|
0.64
|
|
|
|
0.24
|
|
|
|
0.38
|
(1)
|
|
|
0.38
|
|
|
|
|
(1)
|
|
Including extraordinary gain.
|
19
Six-Month
Period Ended June 30, 2009 Compared to Six-Month Period
Ended June 30, 2008
Based upon the period average exchange rates for the six-month
period ended June 30, 2009, the United States dollar
increased by approximately 14.9% in value against the Euro and
19.8% in value against the Canadian dollar, compared to the
period average exchange rates in 2008. As at June 30, 2009,
the United States dollar had decreased by approximately 0.7%
against the Euro and by 5.1% against the Canadian dollar since
December 31, 2008.
In the six-month period ended June 30, 2009, total revenues
from our industrial plant engineering and equipment supply
business decreased by 22.5% to $218.0 million from
$281.1 million in 2008 due to the phasing of project
completion and a slowdown in business activity as a result of
the economic crisis. 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. Order intake for the six-month period ended
June 30, 2009 decreased to $112.2 million compared to
$608.4 million for the six-month period ended June 30,
2008. This reduction was due to a decrease in new orders. 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
South Asia. Backlog at the close of 2008 decreased by 8.3% to
$842.8 million from $919.3 million at the close of
2007. Order backlog at June 30, 2009 was
$731.7 million compared to $1.3 billion as at
June 30, 2008.
In the six-month period ended June 30, 2009, cost of
revenues for our industrial plant engineering and equipment
supply business decreased by 23.6% to $173.7 million from
$227.5 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 20.3% and 19.0% for the six-month periods ended
June 30, 2009 and 2008, respectively. The slight increase
in gross profit margin in the six-month period ended
June 30, 2009 can be attributed to our continuing efficient
execution and delivery of projects in accordance with the
financial, scheduling and quality parameters set for such
projects. In addition, as a result of the shift of our sales and
marketing focus to improve customer relations and opportunity
management, more sales and marketing costs are included in
selling, general and administrative expenses in the current
period and fewer are included in customer project costs.
We also earned income of $3.9 million from our interest in
the Wabush iron ore mine in the six-month period ended
June 30, 2009, as compared to $14.2 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 39.4% to $37.5 million for
the six-month period ended June 30, 2009 from
$26.9 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 such projects. This resulted in an increase in our 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 incurring underutilized overhead expenses as a
result of the stage of completion of the 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. In
addition, as discussed above, higher sales and marketing costs,
as a result of the shift of our sales and marketing focus, are
included in selling, general and administrative expenses in the
current six-month period. Furthermore, we increased the credit
allowance reserve to reflect the collectability of risk for some
of our accounts receivable. However, the increase was partially
offset by managing other costs, such as third party professional
fees, and the first benefits of the operational realignments we
are making to create our new management and organizational
structures. We are also 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 $0.4 million recovery in the
six months ended June 30, 2009 due to the forfeiture of a
significant number of unvested stock options as a result of
employee terminations, as compared to $2.1 million expense
during the six months ended June 30, 2008.
Restructuring costs amounting to $6.8 million, relating to
the closure of our engineering workshop in Germany, were
recorded during the six months ended June 30, 2009. For
further details please refer to the section entitled
Restructuring Activity.
In the six-month period ended June 30, 2009, net interest
income decreased to $2.5 million (interest income of
$3.9 million less interest expense of $1.4 million) as
compared to $9.9 million (interest income of
$10.9 million less
20
interest expense of $1.0 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. 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 $1.1 million for the six-month period
ended June 30, 2009, compared to other expense of
$3.0 million for the same period in 2008. In the six-month
period ended June 30, 2009, other income included
unrealized gains on trading securities of $0.8 million,
which were partially offset by a $0.3 million net loss on
derivatives.
Minority interests credit increased for the six-month period
ended June 30, 2009 to $60,000 from $0.3 million
negative for the same period in 2008.
In the six-month period ended June 30, 2009, we had a net
loss of $6.2 million, or $0.21 per share on a basic and
diluted basis, compared to net income of $27.1 million, or
$0.89 per share on a basic and diluted basis in the same period
in 2008.
Three-Month
Period Ended June 30, 2009 Compared to Three-Month Period
Ended June 30, 2008
Based upon the period average exchange rates for the three-month
period ended June 30, 2009, the United States dollar
increased by approximately 14.7% in value against the Euro and
15.6% in value against the Canadian dollar, compared to the
period average exchange rates in 2008. As at June 30, 2009,
the United States dollar had decreased by approximately 0.7%
against the Euro and by 5.1% against the Canadian dollar since
December 31, 2008.
In the three-month period ended June 30, 2009, total
revenues from our industrial plant engineering and equipment
supply business decreased by 26.6% to $105.8 million from
$144.2 million in 2008 due to the phasing of project
completion and a slowdown in business activity as a result of
the economic crisis. 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. Order intake for the three-month period ended
June 30, 2009 decreased to $31.1 million compared to
$320.1 million for the three-month period ended
June 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 South Asia. Backlog at the close of
2008 decreased by 8.3% to $842.8 million from
$919.3 million at the close of 2007. Order backlog at
June 30, 2009 was $731.7 million compared to
$1.3 billion as at June 30, 2008.
In the three-month period ended June 30, 2009, cost of
revenues for our industrial plant engineering and equipment
supply business decreased by 29.7% to $81.5 million from
$115.9 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 23.0% and 19.6%
for the three-month periods ended June 30, 2009 and 2008,
respectively. As discussed above, the increase in gross profit
margin can be attributed to efficient project execution and the
inclusion of fewer sales and marketing costs in project costs in
the current quarter as a result of the shift of our sales and
marketing focus. The loss on terminated customer contracts of
$2.6 million had a 2.4% negative impact on our gross profit
margin in the second quarter of 2009.
We also earned income of $1.8 million from our interest in
the Wabush iron ore mine in the three-month period ended
June 30, 2009, as compared to $10.2 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 59.6% to $22.5 million for
the three-month period ended June 30, 2009 from
$14.1 million in 2008. As discussed above, the increase is
primarily linked to costs incurred preparing bids for projects
that were not subsequently awarded and underutilized overhead
expenses due to decreasing design hours for our engineers
resulting from the phase of completion of our projects. In
addition, as discussed above, higher sales and marketing costs
as a result of the shift of our sales and marketing focus are
included in selling, general and administrative expenses in the
current quarter. This increase was partially offset by overall
cost management, including a reduction in third party
professional fees, and the first benefits of the realignment of
our operational structure.
21
Stock-based compensation was $1.3 million recovery in the
three-month period ended June 30, 2009 due to the
forfeiture of a significant number of unvested stock options as
a result of employee terminations, as compared to
$1.1 million expense during the three months ended
June 30, 2008.
In the three-month period ended June 30, 2009, net interest
income decreased to $0.9 million (interest income of
$1.6 million less interest expense of $0.7 million) as
compared to $5.4 million (interest income of
$5.8 million less interest expense of $0.4 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. 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 $0.3 million for the three-month period
ended June 30, 2009, compared to other expense of
$1.6 million for the same period in 2008. In the
three-month period ended June 30, 2009, other income
included unrealized gains on trading securities of
$0.5 million.
Minority interests credit increased for the three-month period
ended June 30, 2009 to $56,000 from $0.2 million
negative for the same period in 2008.
In the three-month period ended June 30, 2009, we had a net
loss of $7.5 million, or $0.25 per share on a basic and
diluted basis, compared to net income of $19.7 million, or
$0.65 per share on a basic basis ($0.64 per share on a 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.
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June 30,
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December 31,
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|
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2009
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2008
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(United States dollars
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in millions)
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Cash and cash equivalents
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$355.2
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$409.1
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Total assets
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678.9
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765.7
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Long-term debt, less current portion
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11.4
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11.3
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Shareholders equity
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257.9
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261.9
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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 and short-term
deposits are 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. We
continuously monitor both the credit rating of such banks and
the public commitments from the Austrian and German governments
regarding financial support for their banks. In 2008, the
Austrian and German governments announced their commitment to
support their banking systems in the event that such support
should be necessary as a result of the current economic
uncertainty.
As at June 30, 2009, our total assets decreased to
$678.9 million from $765.7 million as at
December 31, 2008, primarily as a result of lower current
assets. At June 30, 2009, our cash and cash equivalents
were $355.2 million, compared to $409.1 million at
December 31, 2008. The decrease in our cash position is
primarily due to the phase of completion of certain major
projects. We also had short-term cash deposits of
$1.7 million at June 30, 2009, which have original
maturities of greater than 90 days but are to mature within
the next 12 months, compared to $nil at December 31,
2008. As at June 30, 2009, the market value of short-term
securities amounted to $3.8 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 June 30, 2009, our long-term debt, less current portion,
was $11.4 million, compared to $11.3 million as at
December 31, 2008.
As at June 30, 2009, we had credit facilities of up to a
maximum of $477.8 million with banks which issue bonds for
our industrial plant engineering and equipment supply contracts.
As of June 30, 2009, $202.6 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 June 30, 2009, cash
of $27.5 million has been collateralized
22
against these credit facilities and the banks charge 0.7% to
0.8% per annum on outstanding amounts. We are in, and are
expected to remain in, compliance with covenants as stipulated
in the credit facilities.
As at June 30, 2009, we had debt maturities (including
interest payments) of $0.3 million due in 12 months
and $11.8 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 six-month period ended June 30, 2009 with a
cash balance of $355.2 million and working capital of
$284.0 million. There were no share issuances nor long-term
debt financings during the six-month period ended June 30,
2009.
Operating
Activities
During the six-month period ended June 30, 2009, operating
activities used cash of $56.4 million, as compared to
providing cash of $60.0 million in the comparative period
in 2008. The primary reason for this is the phase of completion
of certain projects. During the current period, the decreases in
accounts payable and accrued expenses, progress billings above
costs and estimated earnings on uncompleted contracts, and
income tax liabilities were the principal uses of cash.
Reductions in inventory and restricted cash 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 the decrease in inventories were the
prime contributors to the cash provided by operating activities
in 2008. During 2008, the increases in restricted cash,
receivables and contract deposits and prepaid and the 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 and reflects 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 six-month period ended June 30, 2009, investing
activities provided cash of $0.1 million, as compared to
using cash of $2.8 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
in acquiring 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.
23
Financing
Activities
During the six-month period ended June 30, 2009, financing
activities provided cash of $nil, compared to $4.0 million
in the comparative period in 2008. We received $nil as a result
of the exercise of stock options in the six-month period ended
June 30, 2009, compared to $4.2 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 June 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 six-month period ended June 30, 2009, we reported a
net $5.0 million currency translation adjustment gain,
compared to net $0.5 million for the six-month period ended
June 30, 2008 and, as a result, our accumulated other
comprehensive income at June 30, 2009 was
$53.6 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 $9.7 million as of
June 30, 2009 and the net loss of $0.4 million on the
foreign currency derivatives was included in our other expense
during the six months ended June 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 liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods.
24
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. 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 to measure and recognize the revenue and related costs.
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.
Inventories
Our inventories consist of construction raw materials,
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 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.
Assets acquired in satisfaction of receivables are recorded at
the lesser of their fair value at the date of transfer or the
carrying value of the receivables. Any excess of the carrying
value of the receivables over the fair value of the assets
acquired is written off and is included in the determination of
the income. As of June 30, 2009, we determined that the
gross amount of our trade receivables was $66.6 million and
we recorded an allowance for credit losses of $2.9 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
25
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. There was no change in fair value in terms of Canadian
dollars in the first and second quarters of 2009.
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. 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.
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.
26
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:
|
|
|
|
|
the history of the tax loss carryforwards and their expiry dates;
|
|
|
|
future reversals of temporary differences;
|
|
|
|
our projected earnings; and
|
|
|
|
tax planning opportunities.
|
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 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
As a result of changes in the market conditions and business
environment affected by the current financial crisis, beginning
in the fourth quarter of 2008 and continuing into the second
quarter of 2009, we have received requests from a limited number
of customers to modify the terms of existing contracts. These
requests included extension of credit terms, delays or
cancellation of contracts. In addition, one of our customers has
gone into voluntary liquidation.
In the last quarter of 2008, a provision was set up for
terminated customer contracts including the unavoidable costs to
be paid to suppliers less economic benefits expected to be
received. Unavoidable costs to be paid to suppliers include
purchase obligations whose nature has changed from contingent
liability to provision. Economic benefits expected to be
received have been calculated based on the estimated net
recoverable value of respective material. Accounts receivable
and the contracts-in-progress recorded for these contracts have
been impaired.
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 are fundamentally restructuring our business model.
We have 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 our objective of offering cost effective solutions to our
customers. On March 24, 2009, we announced our intention to
shut down our workshop in Cologne, Germany and have given
official notice of the shutdown to the workshops
workers council.
In the first half of 2009, a provision was set up for
restructuring costs related to the shut-down of the workshop in
Cologne. The provision includes salary costs based on
contractual obligations for employment contracts terminated or
being terminated which are estimated to not result in economic
benefits for the company, as the employees are no longer
providing services to our company. Facilities closure costs,
lease termination costs and other miscellaneous shut-down costs
have been accrued at the estimated fair value of the expenditure
required to settle our present obligation at the balance sheet
date. Furthermore, fixed assets and inventory were impaired to
reflect their estimated recoverable value.
Changes
in Accounting Policies including Initial Adoption
International
Financial Reporting Standards
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
27
(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 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 Canadian Institute of
Chartered Accountants (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
Recogntion 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 Accounting Standards Boards AcG 14,
Disclosure of Guarantees
) outstanding as of June 30,
2009 or December 31, 2008.
28
As at June 30, 2009, we had credit facilities of up to a
maximum of $477.8 million with banks which issue bonds for
our industrial plant engineering and equipment supply contracts.
As of June 30, 2009, $202.6 million of the available
credit facilities amount has been utilized and there are no
claims outstanding against these credit facilities.
Tabular
Disclosure of Contractual Obligations
Payments
Due by Period
(United States dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations as
|
|
Less than
|
|
|
2 3
|
|
|
4 5
|
|
|
More than
|
|
|
|
|
at 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.
|
There were no material changes in the contractual obligations
(summarized in the above table of contractual obligations as at
December 31, 2008) during the six-month period ended
June 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 June 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
whereby we have a significant equity interest (10% or more) in
the affiliates 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.
29
Continuing
Operations
Transactions with related parties during the current period:
|
|
|
|
|
|
|
(United States
|
|
|
|
dollars in thousands)
|
|
|
Dividend income on common
shares
(1)
|
|
$
|
154
|
|
Royalty expense paid and
payable
(1)
|
|
|
(144
|
)
|
Fee expense for managing resource property
|
|
|
(253
|
)
|
Fee expense for management services, including expense
reimbursements
|
|
|
(1,284
|
)
|
Management fee to a corporation in which our former Chief
Executive Officer has an ownership interest
|
|
|
(166
|
)
|
Impairment charge on a receivable
|
|
|
(313
|
)
|
Interest income
|
|
|
58
|
|
Interest expense
|
|
|
(447
|
)
|
Fee income
|
|
|
3
|
|
|
|
|
(1)
|
|
Included in income from interest in resource property
|
Balances with related parties at June 30, 2009:
|
|
|
|
|
Notes receivable, non-current
|
|
$
|
11,265
|
|
Accrued interest receivable
|
|
|
85
|
|
Due from affiliates
|
|
|
5,067
|
|
Due to affiliates
|
|
|
211
|
|
Proposed
Transactions
As part of a series of initiatives we have undertaken in
response to the current economic situation, we have determined
to merge our roller press business in the minerals market with
our cement roller business worldwide and divest our coal and
minerals customer group located in Germany, India, China, South
Africa and Russia.
As previously disclosed, on May 5, 2009, our company
entered into a memorandum of understanding with a potential
buyer that contemplates the divestment of our interests in our
coal and minerals customer group and our workshop, located in
Cologne, Germany, for the manufacturing of equipment for the
cement and coal and minerals industries.
We have also agreed to use our best efforts to cause the
transfer of certain staff that are employed in the field of coal
and minerals by our group of companies, particularly in Russia
and China , and to grant the potential buyer the right to
continue to manufacture our roller press product for a period of
three years from the closing date, provided that is done on
normal commercial terms. Further, for a period of three years
from the date of closing, we will offer the workshop contracts
to manufacture equipment required for our cement business that
the workshop has been manufacturing up to this time, and the
potential buyer will undertake to accept such orders on a
priority basis.
The memorandum of understanding is non-binding apart from
certain provisions with respect to exclusivity, confidentiality,
termination and certain other miscellaneous terms. Closing of
the transaction is subject to completion of a satisfactory due
diligence review, which is still in progress. We continue to
negotiate the terms of the proposed transaction but have yet to
enter into a definitive agreement regarding the divestment of
our coal and mineral customer group.
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.
30
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
June 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 August 13,
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 did
not include 5,875,617 common shares owned by five wholly-owned
subsidiaries.
|
As at August 13, 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
|
|
|
31,112
|
|
|
$
|
15.90
|
|
|
December 14, 2016
|
Options
|
|
|
200,002
|
|
|
$
|
26.85
|
|
|
May 17, 2017
|
Options
|
|
|
66,664
|
|
|
$
|
29.25
|
|
|
June 28, 2017
|
Options
|
|
|
50,000
|
|
|
$
|
31.28
|
|
|
December 4, 2017
|
Options
|
|
|
46,666
|
|
|
$
|
30.31
|
|
|
December 14, 2017
|
Options
|
|
|
22,500
|
|
|
$
|
30.89
|
|
|
May 15, 2018
|
Options
|
|
|
199,996
|
|
|
$
|
31.81
|
|
|
May 19, 2018
|
Options
|
|
|
66,664
|
|
|
$
|
31.53
|
|
|
June 30, 2018
|
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
June 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
GAAP as required by National Instrument
52-109.
There were no changes in our internal control over financial
reporting that occurred during the six-month period ended
June 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
31
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. The risks described below are not the only ones facing
our company. Additional risks not presently known to us may also
impair our business operations.
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, which materially worsened in the
fourth quarter of 2008, 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,
cement, coal and minerals 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, cement, coal and minerals
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, cement,
coal and various minerals. 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 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, minerals, coal 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. During the fourth
quarter of 2008, we received requests from a limited number of
customers to modify the terms of existing
32
contracts. These requests included the extension of credit
terms, delays or cancellation of the contracts. In addition, one
of our customers went into voluntary liquidation. We have
reviewed the financial impact of these variation requests and
recognized an additional loss on terminated contracts of
$2.1 million in the first half of 2009. During the current
period, contract cancellations were not significant and the
amount of contracts at risk included in our order intake and
backlog was reduced to $126.8 million as at June 30,
2009. We estimate that other contracts may be at risk, meaning
we may receive indications from customers that contract
variations or cancellations are a possibility, although we
cannot provide any assurance as to the eventual amounts of
contracts that may be at risk 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 developed a
restructuring program to improve the profitability,
competitiveness and efficiency of our business. We may not be
able to effectively implement 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 intend to reduce our workforce by approximately
50 percent over the next 18 months and either divest
or shut down our international coal and minerals customer group.
There are several risks inherent in our efforts to implement 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 implement
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.
Our
annual and quarterly operating results vary from period to
period and therefore may have a material adverse effect on our
financial results.
Our annual and quarterly operating results vary from period to
period as a result of the level and timing of customer orders,
fluctuations in materials and other costs, completion of
contracts and the relative mix of revenue. The level and timing
of customers orders will vary due to customer budgets,
variation in demand for their products and general economic
conditions. Our annual and quarterly operating results are also
affected by capacity utilization and other factors, including
price competition, operational effectiveness and efficiency, the
degree of automation used, the ability to manage labour and
assets effectively, the timing of expenditures in anticipation
of forecasted sales levels, the timing of acquisitions and
related integration costs, customer delivery requirements,
shortages of components or labour, the impact of foreign
exchange fluctuations and other factors. Any substantial
variation in any of our annual or quarterly operating results
may have a material adverse effect on our financial results.
33
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.
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. 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.
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 certain countries that the United States State
Department has designated as state sponsors of terrorism. 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.
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, minerals, coal 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
34
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, minerals, coal and other related products. If
the demand for cement, minerals, coal 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.
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.
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, mineral processing and
coal 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 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.
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.
35
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.
Failure
to attract, motivate and retain skilled personnel may have a
material adverse effect on our business and results of
operations.
Our performance and ability to mitigate 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.
We are
exposed to legal risks in our business which are often difficult
to assess or quantify. We may incur significant legal expenses
in defending against any litigation.
We are exposed to legal risks in our business, including
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.
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
36
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 June 30, 2009, we were
party to foreign currency contracts with a notional value of
approximately $9.7 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 June 30, 2009,
our company and its subsidiaries had cash and cash equivalents
aggregating $293.4 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 instruments may be restricted
because of tightening
and/or
elimination of unsecured credit availability with
counterparties. If we are unable to utilize such instruments, 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.
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
37
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 decrease 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.
38
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
UNAUDITED
INTERIM FINANCIAL STATEMENTS
JUNE 30,
2009
39
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
June 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 June 30, 2009 and
the related consolidated statements of operations and retained
earnings, comprehensive income and cash flows for the three- and
six-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
generally accepted accounting principles.
40
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
June 30, 2009 and December 31, 2008
(United States Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
355,161
|
|
|
$
|
409,087
|
|
Short-term cash deposits
|
|
|
1,675
|
|
|
|
|
|
Securities
|
|
|
3,804
|
|
|
|
2,987
|
|
Restricted cash
|
|
|
27,450
|
|
|
|
32,008
|
|
Accounts receivable, trade
|
|
|
63,650
|
|
|
|
62,760
|
|
Other receivables
|
|
|
23,402
|
|
|
|
28,313
|
|
Inventories
|
|
|
93,425
|
|
|
|
110,161
|
|
Contract deposits, prepaid and other
|
|
|
55,956
|
|
|
|
58,694
|
|
Future income tax assets
|
|
|
6,130
|
|
|
|
7,679
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
630,653
|
|
|
|
711,689
|
|
Non-current Assets
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
11,265
|
|
|
|
|
|
Property, plant and equipment
|
|
|
1,904
|
|
|
|
2,489
|
|
Interest in resource property
|
|
|
25,316
|
|
|
|
24,861
|
|
Equity method investments
|
|
|
283
|
|
|
|
325
|
|
Future income tax assets
|
|
|
8,692
|
|
|
|
6,339
|
|
Investment in preferred shares of former subsidiaries
|
|
|
|
|
|
|
19,125
|
|
Other non-current assets
|
|
|
836
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
48,296
|
|
|
|
53,969
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
678,949
|
|
|
$
|
765,658
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
117,179
|
|
|
$
|
178,582
|
|
Progress billings above costs and estimated earnings on
uncompleted contracts
|
|
|
145,759
|
|
|
|
171,843
|
|
Advance payments received from customers
|
|
|
12,012
|
|
|
|
11,331
|
|
Income tax liabilities
|
|
|
5,400
|
|
|
|
9,112
|
|
Deferred credit, future income tax assets
|
|
|
3,500
|
|
|
|
4,212
|
|
Accrued pension liabilities, current portion
|
|
|
2,173
|
|
|
|
2,158
|
|
Provision for warranty costs, current portion
|
|
|
29,689
|
|
|
|
30,856
|
|
Provision for restructuring costs
|
|
|
7,048
|
|
|
|
|
|
Provision for supplier commitments on terminated customer
contracts
|
|
|
23,900
|
|
|
|
23,729
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
346,660
|
|
|
|
431,823
|
|
Long-term Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
11,395
|
|
|
|
11,313
|
|
Accrued pension liabilities, less current portion
|
|
|
29,285
|
|
|
|
29,209
|
|
Provision for warranty costs, less current portion
|
|
|
9,086
|
|
|
|
7,524
|
|
Deferred credit, future income tax assets
|
|
|
4,206
|
|
|
|
4,176
|
|
Future income tax liability
|
|
|
9,083
|
|
|
|
7,646
|
|
Other long-term liabilities
|
|
|
6,797
|
|
|
|
8,344
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
69,852
|
|
|
|
68,212
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
416,512
|
|
|
|
500,035
|
|
Minority Interests
|
|
|
4,568
|
|
|
|
3,709
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock, without par value
|
|
|
143,826
|
|
|
|
143,826
|
|
Treasury stock
|
|
|
(96,157
|
)
|
|
|
(93,793
|
)
|
Contributed surplus
|
|
|
7,208
|
|
|
|
7,623
|
|
Retained earnings
|
|
|
149,432
|
|
|
|
155,681
|
|
Accumulated other comprehensive income
|
|
|
53,560
|
|
|
|
48,577
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
257,869
|
|
|
|
261,914
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
678,949
|
|
|
$
|
765,658
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For Six Months Ended June 30, 2009 and 2008
(Unaudited)
(United States Dollars in Thousands, Except Earnings (Loss) per
Share)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
217,975
|
|
|
$
|
281,076
|
|
Cost of revenues
|
|
|
173,727
|
|
|
|
227,537
|
|
Loss on terminated customer contracts
|
|
|
2,051
|
|
|
|
|
|
Restructuring costs, write-down of inventories
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
41,076
|
|
|
|
53,539
|
|
|
|
|
|
|
|
|
|
|
Income from interest in resource property
|
|
|
3,922
|
|
|
|
14,194
|
|
Selling, general and administrative expense
|
|
|
(37,517
|
)
|
|
|
(26,915
|
)
|
Stock-based compensation recovery (expense) selling,
general and administrative
|
|
|
416
|
|
|
|
(2,126
|
)
|
Restructuring costs
|
|
|
(6,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,124
|
|
|
|
38,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,948
|
|
|
|
10,875
|
|
Interest expense
|
|
|
(1,414
|
)
|
|
|
(961
|
)
|
Foreign currency transaction gains (losses), net
|
|
|
680
|
|
|
|
(9,021
|
)
|
Share of loss of equity method investee
|
|
|
(21
|
)
|
|
|
(49
|
)
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
(9,538
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
1,065
|
|
|
|
(2,962
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interests from
continuing operations
|
|
|
(4,156
|
)
|
|
|
36,574
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
(1,264
|
)
|
|
|
(6,106
|
)
|
Resource property revenue taxes
|
|
|
(889
|
)
|
|
|
(3,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,153
|
)
|
|
|
(9,197
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interests from continuing
operations
|
|
|
(6,309
|
)
|
|
|
27,377
|
|
Minority interests
|
|
|
60
|
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(6,249
|
)
|
|
|
27,101
|
|
Retained earnings, beginning of the period
|
|
|
155,681
|
|
|
|
162,633
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, end of the period
|
|
|
149,432
|
|
|
|
189,734
|
|
Accumulated other comprehensive income
|
|
|
53,560
|
|
|
|
96,195
|
|
|
|
|
|
|
|
|
|
|
Total of retained earnings and accumulated other comprehensive
income
|
|
$
|
202,992
|
|
|
$
|
285,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.21
|
)
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.21
|
)
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
basic
|
|
|
30,450,067
|
|
|
|
30,282,295
|
|
diluted
|
|
|
30,450,067
|
|
|
|
30,617,689
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For Three Months Ended June 30, 2009 and 2008
(Unaudited)
(United States Dollars in Thousands, Except Earnings (Loss) per
Share)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
105,847
|
|
|
$
|
144,240
|
|
Cost of revenues
|
|
|
81,454
|
|
|
|
115,908
|
|
Loss on terminated customer contracts
|
|
|
2,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
21,835
|
|
|
|
28,332
|
|
Income from interest in resource property
|
|
|
1,792
|
|
|
|
10,228
|
|
Selling, general and administrative expense
|
|
|
(22,454
|
)
|
|
|
(14,070
|
)
|
Stock-based compensation recovery (expense) selling,
general and administrative
|
|
|
1,305
|
|
|
|
(1,063
|
)
|
Restructuring costs
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,461
|
|
|
|
23,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,631
|
|
|
|
5,813
|
|
Interest expense
|
|
|
(720
|
)
|
|
|
(442
|
)
|
Foreign currency transaction losses, net
|
|
|
(903
|
)
|
|
|
(596
|
)
|
Share of loss of equity method investee
|
|
|
|
|
|
|
(49
|
)
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
(9,538
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
250
|
|
|
|
(1,620
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interests from
continuing operations
|
|
|
(6,819
|
)
|
|
|
26,533
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
(293
|
)
|
|
|
(4,415
|
)
|
Resource property revenue taxes
|
|
|
(398
|
)
|
|
|
(2,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(691
|
)
|
|
|
(6,630
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interests from continuing
operations
|
|
|
(7,510
|
)
|
|
|
19,903
|
|
Minority interests
|
|
|
56
|
|
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(7,454
|
)
|
|
|
19,670
|
|
Retained earnings, beginning of the period
|
|
|
156,886
|
|
|
|
170,064
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, end of the period
|
|
|
149,432
|
|
|
|
189,734
|
|
Accumulated other comprehensive income
|
|
|
53,560
|
|
|
|
96,165
|
|
|
|
|
|
|
|
|
|
|
Total of retained earnings and accumulated other comprehensive
income
|
|
$
|
202,992
|
|
|
$
|
285,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.25
|
)
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.25
|
)
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
basic
|
|
|
30,378,286
|
|
|
|
30,330,462
|
|
diluted
|
|
|
30,378,286
|
|
|
|
30,707,222
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For Six Months Ended June 30, 2009 and 2008
(Unaudited)
(United States Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net income (loss) for the period
|
|
$
|
(6,249
|
)
|
|
$
|
27,101
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
Unrealized gains and losses on translating financial statements
of self-sustaining foreign operations
|
|
|
4,983
|
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
4,983
|
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) for the period
|
|
$
|
(1,266
|
)
|
|
$
|
27,620
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
44
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For Three Months Ended June 30, 2009 and 2008
(Unaudited)
(United States Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net income (loss) for the period
|
|
$
|
(7,454
|
)
|
|
$
|
19,670
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
Unrealized gains and losses on translating financial statements
of self-sustaining foreign operations
|
|
|
15,590
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
15,590
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the period
|
|
$
|
8,136
|
|
|
$
|
19,700
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
45
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Six Months Ended June 30, 2009 and 2008
(Unaudited)
(United States Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from continuing operating activities
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(6,249
|
)
|
|
$
|
27,101
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Amortization and depreciation
|
|
|
1,909
|
|
|
|
1,766
|
|
Foreign currency transaction (gains) losses, net
|
|
|
(680
|
)
|
|
|
9,021
|
|
Minority interests
|
|
|
(60
|
)
|
|
|
276
|
|
(Gain) loss on short-term securities
|
|
|
(793
|
)
|
|
|
3,651
|
|
Stock-based compensation (recovery)
|
|
|
(416
|
)
|
|
|
2,126
|
|
Future income taxes
|
|
|
155
|
|
|
|
5,268
|
|
Loss on terminated customer contracts
|
|
|
2,051
|
|
|
|
|
|
Restructuring costs, asset impairment charges
|
|
|
1,348
|
|
|
|
|
|
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
|
|
|
(1,591
|
)
|
|
|
(8,230
|
)
|
Short-term securities
|
|
|
|
|
|
|
1,230
|
|
Restricted cash
|
|
|
4,545
|
|
|
|
(6,738
|
)
|
Receivables
|
|
|
293
|
|
|
|
(15,808
|
)
|
Inventories
|
|
|
13,401
|
|
|
|
19,165
|
|
Contract deposits, prepaid and other
|
|
|
3,020
|
|
|
|
(23,306
|
)
|
Accounts payable and accrued expenses
|
|
|
(60,848
|
)
|
|
|
(1,229
|
)
|
Progress billings above costs and estimated earnings on
uncompleted contracts, net
|
|
|
(25,935
|
)
|
|
|
48,305
|
|
Advance payments received from customers
|
|
|
572
|
|
|
|
14,193
|
|
Income tax liabilities
|
|
|
(3,588
|
)
|
|
|
(12,898
|
)
|
Provision for warranty costs
|
|
|
114
|
|
|
|
(3,473
|
)
|
Provision for restructuring costs
|
|
|
6,546
|
|
|
|
|
|
Other
|
|
|
298
|
|
|
|
(462
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by continuing operating activities
|
|
|
(56,370
|
)
|
|
|
59,958
|
|
Cash flows from continuing investing activities
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment, net
|
|
|
(622
|
)
|
|
|
(1,062
|
)
|
Purchases (disposition) of subsidiaries, net of cash acquired
(disposed)
|
|
|
(694
|
)
|
|
|
(921
|
)
|
Settlement of investment in preferred shares of former
subsidiaries
|
|
|
1,465
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(785
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) continuing investing activities
|
|
|
149
|
|
|
|
(2,768
|
)
|
Cash flows from continuing financing activities
|
|
|
|
|
|
|
|
|
Debt repayments
|
|
|
|
|
|
|
(195
|
)
|
Issuance of shares
|
|
|
|
|
|
|
4,153
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by continuing financing activities
|
|
|
|
|
|
|
3,958
|
|
Exchange rate effect on cash and cash equivalents
|
|
|
2,295
|
|
|
|
10,229
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(53,926
|
)
|
|
|
71,377
|
|
Cash and cash equivalents, beginning of period
|
|
|
409,087
|
|
|
|
354,397
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
355,161
|
|
|
$
|
425,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period consisted of:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
336,869
|
|
|
$
|
425,774
|
|
Money market funds
|
|
|
18,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
355,161
|
|
|
$
|
425,774
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
46
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Three Months Ended June 30, 2009 and 2008
(Unaudited)
(United States Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from continuing operating activities
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(7,454
|
)
|
|
$
|
19,670
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Amortization and depreciation
|
|
|
927
|
|
|
|
896
|
|
Foreign currency transaction losses, net
|
|
|
903
|
|
|
|
596
|
|
Minority interests
|
|
|
(56
|
)
|
|
|
233
|
|
(Gain) loss on short-term securities
|
|
|
(539
|
)
|
|
|
412
|
|
Stock-based compensation (recovery)
|
|
|
(1,305
|
)
|
|
|
1,063
|
|
Future income taxes
|
|
|
(902
|
)
|
|
|
4,438
|
|
Loss on terminated customer contracts
|
|
|
2,558
|
|
|
|
|
|
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
|
|
|
1,305
|
|
|
|
996
|
|
Short-term securities
|
|
|
|
|
|
|
25
|
|
Restricted cash
|
|
|
4,871
|
|
|
|
(5,133
|
)
|
Receivables
|
|
|
18,002
|
|
|
|
(12,478
|
)
|
Inventories
|
|
|
5,677
|
|
|
|
15,172
|
|
Contract deposits, prepaid and other
|
|
|
4,063
|
|
|
|
(21,145
|
)
|
Accounts payable and accrued expenses
|
|
|
(37,816
|
)
|
|
|
7,986
|
|
Progress billings above costs and estimated earnings on
uncompleted contracts, net
|
|
|
(24,262
|
)
|
|
|
4,524
|
|
Advance payments received from customers
|
|
|
(4,500
|
)
|
|
|
7,825
|
|
Income tax liabilities
|
|
|
53
|
|
|
|
(1,234
|
)
|
Provision for warranty costs
|
|
|
1,216
|
|
|
|
4,180
|
|
Provision for restructuring costs
|
|
|
17
|
|
|
|
|
|
Other
|
|
|
(98
|
)
|
|
|
(462
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by continuing operating activities
|
|
|
(27,802
|
)
|
|
|
27,564
|
|
Cash flows from continuing investing activities
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment, net
|
|
|
(178
|
)
|
|
|
(374
|
)
|
Purchases (disposition) of subsidiaries, net of cash acquired
(disposed)
|
|
|
(25
|
)
|
|
|
(136
|
)
|
Settlement of investment in preferred shares of former
subsidiaries
|
|
|
1,465
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(475
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) continuing investing activities
|
|
|
1,262
|
|
|
|
(985
|
)
|
Cash flows from continuing financing activities
|
|
|
|
|
|
|
|
|
Debt repayments
|
|
|
|
|
|
|
(80
|
)
|
Issuance of shares
|
|
|
|
|
|
|
4,022
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by continuing financing activities
|
|
|
|
|
|
|
3,942
|
|
Exchange rate effect on cash and cash equivalents
|
|
|
18,621
|
|
|
|
(2,880
|
)
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(7,919
|
)
|
|
|
27,641
|
|
Cash and cash equivalents, beginning of period
|
|
|
363,080
|
|
|
|
398,133
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
355,161
|
|
|
$
|
425,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period consisted of:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
336,869
|
|
|
$
|
425,774
|
|
Money market funds
|
|
|
18,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
355,161
|
|
|
$
|
425,774
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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. 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 generally accepted
accounting principles 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
48
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amendments to Handbook Section 3855,
Financial
Instruments Recogntion 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
(Loss) per Share
|
Earnings (loss) per share data for the periods ended June 30
from operations is summarized as follows:
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
2009
|
|
|
2008
|
|
|
(Loss) earnings from continuing operations available to common
shareholders
|
|
$
|
(6,249
|
)
|
|
$
|
27,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
2009
|
|
|
2008
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
30,450,067
|
|
|
|
30,282,295
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
335,394
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
30,450,067
|
|
|
|
30,617,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
2009
|
|
|
2008
|
|
|
(Loss) earnings from continuing operations available to common
shareholders
|
|
$
|
(7,454
|
)
|
|
$
|
19,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
2009
|
|
|
2008
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
30,378,286
|
|
|
|
30,330,462
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
376,760
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
30,378,286
|
|
|
|
30,707,222
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(770,000
|
)
|
Exercised
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009
|
|
|
809,720
|
|
|
|
|
|
|
During the current period, employees forfeited 770,000 stock
options as a result of employment terminations. Pursuant to
Handbook Section 3870,
Stock-based Compensation and
Other Stock-based Payments,
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 $416
and $1,305 in the six months and three months ended
June 30, 2009, respectively.
|
|
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
49
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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, as determined by CICA Handbook
Section 3461,
Employee Future Benefits,
the
following amounts of defined benefit cost:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Six months ended June 30
|
|
$
|
813
|
|
|
$
|
705
|
|
Three months ended June 30
|
|
|
361
|
|
|
|
353
|
|
|
|
Note 8.
|
Provision
for Restructuring Costs
|
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 the customers.
50
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. The
restructuring costs relating to the shut-down of the workshop
were summarized as follows:
|
|
|
|
|
Provisions:
|
|
|
|
|
Costs associated with involuntary employment terminations
|
|
$
|
3,916
|
|
Facilities closure
|
|
|
1,302
|
|
Lease termination and other costs
|
|
|
1,328
|
|
|
|
|
|
|
|
|
|
6,546
|
|
Impairment of fixed assets
|
|
|
227
|
|
|
|
|
|
|
Restructuring costs, excluding inventory write-down
|
|
|
6,773
|
|
Write-down of inventories
|
|
|
1,121
|
|
|
|
|
|
|
Total restructuring costs
|
|
$
|
7,894
|
|
|
|
|
|
|
Following is a summary of the changes in the provision for
restructuring costs during the six-month period ended
June 30, 2009:
|
|
|
|
|
Balance, beginning of period
|
|
$
|
|
|
Provision during the period, excluding inventory and fixed asset
write-downs
|
|
|
6,546
|
|
Paid
|
|
|
|
|
Reversal
|
|
|
|
|
Currency translation adjustments
|
|
|
502
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
7,048
|
|
|
|
|
|
|
The initiatives under the restructuring program will also
include a reduction in the international headcount and the
intended divestiture of the coal and mineral customer group.
Management estimates that the restructuring program is likely to
cost approximately $30,000 (including the restructuring costs
recognized in the first half of 2009) which primarily
relates to employee severance costs, asset impairments and lease
termination costs. The Company expects to recognize the loss and
expenses in 2009 and 2010. Management will continue to monitor
the progress of the restructuring program.
|
|
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, the Company
received requests from a limited number of customers to modify
the terms of existing contracts, which resulted in the
termination of the Companys work on certain customer
contracts and the Company recognized the losses on the
terminated customer contracts in 2008.
Following is a summary of the changes in the provision for
supplier commitments on the terminated customer contracts during
the six-month period in 2009:
|
|
|
|
|
Balance, beginning of period
|
|
$
|
23,729
|
|
Provisions during the period
|
|
|
1,447
|
|
Paid
|
|
|
|
|
Reversal
|
|
|
(612
|
)
|
Reclassification to inventory reserve
|
|
|
(941
|
)
|
Currency translation adjustments
|
|
|
277
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
23,900
|
|
|
|
|
|
|
An impairment on inventories of $1,216 was also recognized
during the first half of 2009. 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.
51
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized financial information concerning the segments is
shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009
|
|
|
|
Industrial plant
|
|
|
|
|
|
|
|
|
|
|
|
|
engineering and
|
|
|
Resource
|
|
|
Corporate
|
|
|
|
|
|
|
equipment supply
|
|
|
property
|
|
|
and other
|
|
|
Total
|
|
|
Revenues from external customers
|
|
$
|
217,975
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
217,975
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
|
|
|
952
|
|
|
|
|
|
|
|
462
|
|
|
|
1,414
|
|
Internal
|
|
|
|
|
|
|
|
|
|
|
262
|
|
|
|
262
|
|
Income (loss) from continuing operations before income taxes and
minority interests
|
|
|
11,176
|
|
|
|
2,099
|
|
|
|
(17,431
|
)
|
|
|
(4,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2008
|
|
|
|
Industrial plant
|
|
|
|
|
|
|
|
|
|
|
|
|
engineering and
|
|
|
Resource
|
|
|
Corporate
|
|
|
|
|
|
|
equipment supply
|
|
|
property
|
|
|
and other
|
|
|
Total
|
|
|
Revenues from external customers
|
|
$
|
281,076
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
281,076
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
|
|
|
892
|
|
|
|
|
|
|
|
69
|
|
|
|
961
|
|
Internal
|
|
|
|
|
|
|
|
|
|
|
629
|
|
|
|
629
|
|
Income (loss) from continuing operations before income taxes and
minority interests
|
|
|
31,083
|
|
|
|
12,205
|
|
|
|
(6,714
|
)
|
|
|
36,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2009
|
|
|
|
Industrial plant
|
|
|
|
|
|
|
|
|
|
|
|
|
engineering and
|
|
|
Resource
|
|
|
Corporate
|
|
|
|
|
|
|
equipment supply
|
|
|
property
|
|
|
and other
|
|
|
Total
|
|
|
Revenues from external customers
|
|
$
|
105,847
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
105,847
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
|
|
|
597
|
|
|
|
|
|
|
|
123
|
|
|
|
720
|
|
Internal
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
103
|
|
Income (loss) from continuing operations before income taxes and
minority interests
|
|
|
5,543
|
|
|
|
1,043
|
|
|
|
(13,405
|
)
|
|
|
(6,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2008
|
|
|
|
Industrial plant
|
|
|
|
|
|
|
|
|
|
|
|
|
engineering and
|
|
|
Resource
|
|
|
Corporate
|
|
|
|
|
|
|
equipment supply
|
|
|
property
|
|
|
and other
|
|
|
Total
|
|
|
Revenues from external customers
|
|
$
|
144,240
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
144,240
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
|
|
|
421
|
|
|
|
|
|
|
|
21
|
|
|
|
442
|
|
Internal
|
|
|
|
|
|
|
|
|
|
|
315
|
|
|
|
315
|
|
Income (loss) from continuing operations before income taxes and
minority interests
|
|
|
21,470
|
|
|
|
8,973
|
|
|
|
(3,910
|
)
|
|
|
26,533
|
|
The total assets were $678,949 and $765,658 as at June 30,
2009 and December 31, 2008, respectively. There was no
material change of total assets since December 31, 2008.
52
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The two major customer groups of industrial plant engineering
and equipment supply segment are in the cement, and coal and
minerals industries. The revenues of the industrial plant
engineering and equipment supply segment can be further broken
down as follows:
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cement
|
|
$
|
188,039
|
|
|
$
|
241,804
|
|
Coal and minerals
|
|
|
29,936
|
|
|
|
39,272
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
217,975
|
|
|
$
|
281,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cement
|
|
$
|
91,276
|
|
|
$
|
127,000
|
|
Coal and minerals
|
|
|
14,571
|
|
|
|
17,240
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
105,847
|
|
|
$
|
144,240
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11.
|
Related
Party Transactions
|
In the normal course of operations, the Company enters into
transactions with related parties which include affiliates which
the Company has a significant equity interest (10% or more) in
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 affiliates
during the six months ended June 30, 2009:
Six
months ended June 30, 2009:
|
|
|
|
|
Dividend income on common shares*
|
|
$
|
154
|
|
Royalty expense paid and payable*
|
|
|
(144
|
)
|
Fee expense for managing resource property
|
|
|
(253
|
)
|
Fee expense for management services, including expense
reimbursements
|
|
|
(1,284
|
)
|
Management fee to a corporation in which the former Chief
Executive Officer has an ownership interest
|
|
|
(166
|
)
|
Impairment charge on a receivable
|
|
|
(313
|
)
|
Interest income
|
|
|
58
|
|
Interest expense
|
|
|
(447
|
)
|
Fee income
|
|
|
3
|
|
|
|
|
*
|
|
included in income from interest in resource property.
|
As at
June 30,
2009
:
|
|
|
|
|
Notes receivable, non-current
|
|
$
|
11,265
|
|
Accrued interest and dividend income receivable
|
|
|
85
|
|
Due from affiliates
|
|
|
5,067
|
|
Due to affiliates
|
|
|
211
|
|
53
News
Release
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD. REPORTS
2009 SECOND QUARTER AND SIX-MONTH RESULTS
Backlog at
$731.7 million
NEW YORK (August 13, 2009) . . . KHD Humboldt Wedag
International Ltd. (NYSE: KHD) today announced results for the
second quarter and six-months ended June 30, 2009. All
dollar figures are in U.S. dollars.
For the six months ended June 30, 2009, KHD reported
revenues of $218.0 million, with a net loss of
$6.2 million or $0.21 per share diluted. This includes a
loss on terminated contracts of $2.1 million, restructuring
costs relating to the write-down of inventories of
$1.1 million, restructuring costs of $6.8 million and
a $9.5 million loss resulting from the settlement of
KHDs investment in the preferred shares of its former
subsidiaries. This compares with revenues of $281.1 million
and a net income of $27.1 million, or $0.89 per share
diluted, for the same period of 2008.
KHDs operating income has also been significantly impacted
by a substantial reduction in the income derived from its
interest in a resource property that is attributed to lower
production by the operators and reduced commodity prices.
Cement revenues fell by 22 percent to $188.0 million
in the first half of 2009 and coal and minerals revenues were
also down by 24 percent to $29.9 million in the same
period.
For the quarter ended June 30, 2009, KHD reported revenues
of $105.8 million with a net loss of $7.5 million, or
$0.25 diluted, compared with revenues of $144.2 million and
net income of $19.7 million, or $0.64 per share diluted,
for the same period in 2008.
Cement revenues were $91.3 million in the quarter, a
28 percent decrease as compared to cement revenues of
$127.0 million for the second quarter of 2008. Coal and
minerals revenues were $14.6 million, a decrease of
15 percent from coal and minerals revenues of
$17.2 million for the quarter ended June 30, 2008.
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
randall.r@khd.de
|
54
Gross profit margin, excluding losses on terminated customer
contracts and restructuring costs, was 20 percent compared
to 19 percent for the same period in 2008. The slight
increase in gross profit margin in the six-month period ended
June 30, 2009 can be attributed to our continuing efficient
execution and delivery of projects in accordance with the
financial, scheduling and quality parameters set for such
projects, and the reduction of sales and marketing costs
included in project cost as a result of our shift in sales and
marketing focus.
Selling, general and administrative expenses in the six-month
period ended June 30, 2009 increased to $37.5 million
from $26.9 million in the six-month period ended
June 30, 2008. This was due in part to the inclusion of
higher sales and marketing costs as a result of our shift in
sales and marketing focus and the under-utilization of staff due
to the decrease in market activity.
KHDs balance sheet remains strong and at the end of the
second quarter of 2009, KHD had $356.8 million in cash,
cash equivalents and short term cash deposits. The reduction in
the level of cash reflects the effects of working capital
movements as our order backlog decreases. Shareholders
equity was $257.9 million as at June 30, 2009.
Order intake for the six months ended June 30, 2009 was
$112.2 million, a decrease of 82 percent from the
first six months of 2008. This reflects the current low level of
demand for new cement capacity. Approximately 57 percent of
the total order intake in the first six months of 2009 came from
the Asian region, primarily India. Of the total order intake,
cement order intake was $92.6 million in the first half of
2009, a decrease of 84 percent from order intake of
$561.2 million in the first half of 2008, and coal and
minerals order intake was $19.6 million in the first half
of 2009, a decrease of 59 percent from order intake of
$47.6 million for the same period in 2008.
Order intake for the quarter ended June 30, 2009 was very
disappointing. Order intake was $31.1 million, representing
only 10 percent of the level achieved in the comparable
quarter in 2008. However, this was against a very difficult
comparable period. Order intake in the second quarter of 2008
was the highest ever recorded by KHD.
Cement order intake was $22.4 million and coal and minerals
order intake was $8.7 million in the second quarter of
2009. These represent declines of 93 percent and
57 percent, respectively, as compared with the second
quarter of 2008.
Order backlog as of June 30, 2009 was $731.7 million,
which represents a decrease of 44 percent from the same
period in 2008. The majority of the order backlog is in the
worlds emerging economies: 44 percent in Russia and
Eastern Europe, 38 percent in Asia and 13 percent in
the Middle East. Of the total order backlog, approximately
17 percent is categorized as at risk. Through the second
quarter of 2009, there has been no material change in the
contracts at risk category of our backlog.
Mr. Salo commented, Our new operating structure has
now become effective with the creation of four customer service
centers serving the regions of Europe, the Middle East and
Africa; Russia/CIS; India; and the Americas, with KHD Central
serving as our global support and management center. We continue
to negotiate the terms of a proposed transaction regarding the
divestment of our coal and minerals business and our workshop in
Cologne, Germany but have yet to enter into a definitive
agreement.
Mr. Hartslief commented, We continue to plan for a
significant reduction in the level of activity in 2010 and
beyond. We are refocusing on our core cement operations and
proceeding as planned with our restructuring program. We are
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. Despite the current
market conditions, we continue to invest in research and
development to maintain our competitive position and aim to
build up our service offerings so that we may increase the
proportion of our revenues from less cyclical and more stable
revenue streams.
Mr. Salo concluded, Based on the current global
market conditions and uncertainty in project financing, we
believe that the business environment will remain challenging in
the short term. Many countries have established stimulus
packages that should boost demand for construction and
construction materials. We continue our efforts to explore the
current business opportunities. Our focus will be in the areas
that show significant sales opportunities, most notably in India
and North Africa. In these areas we estimate that the short term
demand for our products and services will be satisfactory,
elsewhere the short term demand will remain weak. Opportunities
for larger projects such as new greenfield capacity have become
scarce, with these opportunities perhaps around a third of the
level of the previous year. The main opportunities for KHD are
in smaller projects which are typically focused on upgrades and
efficiency improvements. We are still seeing a significant
number of enquiries in this latter area. In general, however,
customers remain reluctant to make firm commitments to new
projects of any size.
MORE
55
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. EDT (7:00 a.m. PDT), a
conference call will be held to review the Companys
results; this call will be broadcast live over the Internet at
www.khdhumboldt.com
or
www.earnings.com.
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:
97571927. 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, coal
and minerals 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
56
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
June 30, 2009 and December 31, 2008
(U.S.
Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
355,161
|
|
|
$
|
409,087
|
|
Short-term cash deposits
|
|
|
1,675
|
|
|
|
|
|
Securities
|
|
|
3,804
|
|
|
|
2,987
|
|
Restricted cash
|
|
|
27,450
|
|
|
|
32,008
|
|
Accounts receivable, trade
|
|
|
63,650
|
|
|
|
62,760
|
|
Other receivables
|
|
|
23,402
|
|
|
|
28,313
|
|
Inventories
|
|
|
93,425
|
|
|
|
110,161
|
|
Contract deposits, prepaid and other
|
|
|
55,956
|
|
|
|
58,694
|
|
Future income tax assets
|
|
|
6,130
|
|
|
|
7,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
630,653
|
|
|
|
711,689
|
|
Non-current Assets
|
|
|
|
|
|
|
|
|
Notes receivables
|
|
|
11,265
|
|
|
|
|
|
Property, plant and equipment
|
|
|
1,904
|
|
|
|
2,489
|
|
Interest in resource property
|
|
|
25,316
|
|
|
|
24,861
|
|
Equity method investments
|
|
|
283
|
|
|
|
325
|
|
Future income tax assets
|
|
|
8,692
|
|
|
|
6,339
|
|
Investment in preferred shares of former subsidiaries
|
|
|
|
|
|
|
19,125
|
|
Other non-current assets
|
|
|
836
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,296
|
|
|
|
53,969
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
678,949
|
|
|
$
|
765,658
|
|
|
|
|
|
|
|
|
|
|
MORE
57
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS (cont)
June 30, 2009 and December 31, 2008
(U.S.
Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
117,179
|
|
|
$
|
178,582
|
|
Progress billing above costs and estimated earnings on
uncompleted contracts
|
|
|
145,759
|
|
|
|
171,843
|
|
Advance payments received from customers
|
|
|
12,012
|
|
|
|
11,331
|
|
Income tax liabilities
|
|
|
5,400
|
|
|
|
9,112
|
|
Deferred credit, future income tax assets
|
|
|
3,500
|
|
|
|
4,212
|
|
Accrued pension liabilities, current portion
|
|
|
2,173
|
|
|
|
2,158
|
|
Provision for warranty costs, current portion
|
|
|
29,689
|
|
|
|
30,856
|
|
Provision for restructuring costs
|
|
|
7,048
|
|
|
|
|
|
Provision for supplier commitments on terminated customer
contracts
|
|
|
23,900
|
|
|
|
23,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
346,660
|
|
|
|
431,823
|
|
Long-term Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
11,395
|
|
|
|
11,313
|
|
Accrued pension liabilities, less current portion
|
|
|
29,285
|
|
|
|
29,209
|
|
Provision for warranty costs, less current portion
|
|
|
9,086
|
|
|
|
7,524
|
|
Deferred credit, future income tax assets
|
|
|
4,206
|
|
|
|
4,176
|
|
Future income tax liability
|
|
|
9,083
|
|
|
|
7,646
|
|
Other long-term liabilities
|
|
|
6,797
|
|
|
|
8,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,852
|
|
|
|
68,212
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
416,512
|
|
|
|
500,035
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTERESTS
|
|
|
4,568
|
|
|
|
3,709
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common stock, without par value
|
|
|
143,826
|
|
|
|
143,826
|
|
Treasury stock
|
|
|
(96,157
|
)
|
|
|
(93,793
|
)
|
Contributed surplus
|
|
|
7,208
|
|
|
|
7,623
|
|
Retained earnings
|
|
|
149,432
|
|
|
|
155,681
|
|
Accumulated other comprehensive income
|
|
|
53,560
|
|
|
|
48,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257,869
|
|
|
|
261,914
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
678,949
|
|
|
$
|
765,658
|
|
|
|
|
|
|
|
|
|
|
MORE
58
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Six Months Ended June 30, 2009
and 2008
(U.S.
Dollars in Thousands, Except per Share Data)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
217,975
|
|
|
$
|
281,076
|
|
Cost of revenues
|
|
|
173,727
|
|
|
|
227,537
|
|
Loss on terminated customer contracts
|
|
|
2,051
|
|
|
|
|
|
Restructuring costs, write-down of inventories
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
41,076
|
|
|
|
53,539
|
|
|
|
|
|
|
|
|
|
|
Income from interest in resource property
|
|
|
3,922
|
|
|
|
14,194
|
|
Selling, general and administrative expense
|
|
|
(37,517
|
)
|
|
|
(26,915
|
)
|
Stock-based compensation recovery (expenses)
selling, general and administrative
|
|
|
416
|
|
|
|
(2,126
|
)
|
Restructuring costs
|
|
|
(6,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,124
|
|
|
|
38,692
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,948
|
|
|
|
10,875
|
|
Interest expense
|
|
|
(1,414
|
)
|
|
|
(961
|
)
|
Foreign currency transactions (losses), net
|
|
|
680
|
|
|
|
(9,021
|
)
|
Share of loss of equity method investee
|
|
|
(21
|
)
|
|
|
(49
|
)
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
(9,538
|
)
|
|
|
|
|
Other income (expenses), net
|
|
|
1,065
|
|
|
|
(2,962
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interests
|
|
|
(4,156
|
)
|
|
|
36,574
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
(1,264
|
)
|
|
|
(6,106
|
)
|
Resource property revenue taxes
|
|
|
(889
|
)
|
|
|
(3,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,153
|
)
|
|
|
(9,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interests
|
|
|
(6,309
|
)
|
|
|
27,377
|
|
Minority interests
|
|
|
60
|
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(6,249
|
)
|
|
$
|
27,101
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earning per share
|
|
$
|
(0.21
|
)
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.21
|
)
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
Weighted average of common shares outstanding
|
|
|
|
|
|
|
|
|
basic
|
|
|
30,450,067
|
|
|
|
30,282,295
|
|
diluted
|
|
|
30,450,067
|
|
|
|
30,617,689
|
|
MORE
59
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (cont)
For the Three Months Ended June 30, 2009
and 2008
(U.S.
Dollars in Thousands, Except per Share Data)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
105,847
|
|
|
$
|
144,240
|
|
Cost of revenues
|
|
|
81,454
|
|
|
|
115,908
|
|
Loss on terminated customer contracts
|
|
|
2,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
21,835
|
|
|
|
28,332
|
|
Income from interest in resource property
|
|
|
1,792
|
|
|
|
10,228
|
|
Selling, general and administrative expense
|
|
|
(22,454
|
)
|
|
|
(14,070
|
)
|
Stock-based compensation recovery (expenses)
selling, general and administrative
|
|
|
1,305
|
|
|
|
(1,063
|
)
|
Restructuring costs
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,461
|
|
|
|
23,427
|
|
Interest income
|
|
|
1,631
|
|
|
|
5,813
|
|
Interest expense
|
|
|
(720
|
)
|
|
|
(442
|
)
|
Foreign currency transactions losses, net
|
|
|
(903
|
)
|
|
|
(596
|
)
|
Share of loss of equity method investee
|
|
|
|
|
|
|
(49
|
)
|
Loss on settlement of investment in preferred shares of former
subsidiaries
|
|
|
(9,538
|
)
|
|
|
|
|
Other income (expenses), net
|
|
|
250
|
|
|
|
(1,620
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interests
|
|
|
(6,819
|
)
|
|
|
26,533
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
(293
|
)
|
|
|
(4,415
|
)
|
Resource property revenue taxes
|
|
|
(398
|
)
|
|
|
(2,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(691
|
)
|
|
|
(6,630
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interests
|
|
|
(7,510
|
)
|
|
|
19,903
|
|
Minority interests
|
|
|
56
|
|
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,454
|
)
|
|
$
|
19,670
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earning per share
|
|
$
|
(0.25
|
)
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.25
|
)
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
Weighted average of common shares outstanding
|
|
|
|
|
|
|
|
|
basic
|
|
|
30,378,286
|
|
|
|
30,330,462
|
|
diluted
|
|
|
30,378,286
|
|
|
|
30,707,222
|
|
MORE
60
KHD
HUMBOLDT WEDAG INTERNATIONAL LTD.
FINANCIAL SUMMARY
As of June 30, 2009
(U.S.
Dollars in Thousands, Except per Share Data and Ratios)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
355,161
|
|
Short-term deposits
|
|
|
1,675
|
|
Securities
|
|
|
3,804
|
|
Restricted cash
|
|
|
27,450
|
|
Working capital
|
|
|
283,993
|
|
Total assets
|
|
|
678,949
|
|
Shareholders equity
|
|
|
257,869
|
|
Book value per share
|
|
|
8.52
|
|
Current ratio
|
|
|
1.82
|
|
Long-term debt to equity ratio
|
|
|
0.04
|
|
# # #
#
61
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: August 13, 2009
62
Khd Humboldt Wedag International Ltd (NYSE:KHD)
과거 데이터 주식 차트
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Khd Humboldt Wedag International Ltd (NYSE:KHD)
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