ZCL Composites Reports Third Quarter Financial Results

EDMONTON, Nov. 9 /CNW/ - ZCL Composites Inc. (TSX: ZCL) today announced financial results for the third quarter and nine months ended September 30, 2010.

Q3 2010 compared to Q3 2009

• Revenue of $33.3 million, compared to $29.5 million
• Goodwill and intangible asset impairment write-down of $10.3 million, compared to $nil
• Net loss of $10.1 million or $0.36 per diluted share, compared to net income of $1.6 million or $0.06 per diluted share
• Adjusted income (net income (loss) before the impairment of goodwill and intangible assets and restructuring and other similar costs) of $0.8 million or $0.03 per diluted share, compared to $1.6 million or $0.06 per diluted share
• Backlog of $34.9 million, compared to $24.5 million

First Nine Months of 2010 compared to First Nine Months of 2009

• Revenue of $88.8 million, compared to $76.8 million
• Goodwill and intangible asset impairment write-down of $10.3 million, compared to $nil
• Net loss of $13.5 million or $0.48 per diluted share, compared to net income of $0.9 million or $0.04 per diluted share
• Adjusted loss of $2.3 million or $0.08 per diluted share, compared to adjusted income of $0.9 million or $0.04 per diluted share

"The loss for the third quarter was primarily attributable to a write-down of goodwill arising on the acquisition of Dualam Plastics Inc. that occurred earlier this year," said Roderick Graham, ZCL's President and Chief Executive Officer. "Excluding Dualam and certain one-time costs we operated profitably during the quarter and the financial performance from our traditional business lines was similar overall to that achieved in the third quarter last year."

"We continue to believe that Dualam's product and market diversity is a valuable complement to ZCL's core business lines. However, given the longer-term capital planning cycle associated with the division's customer base we don't expect Dualam to improve significantly before the second half of 2011. This reality, coupled with its significant operating losses, made the write off of Dualam's goodwill a necessity," added Mr. Graham.

"I am in the midst of conducting a complete strategic review of the portfolio of ZCL assets. It is my objective to lever off of the Company's core competencies to enhance profitability and deliver improved levels of return on capital employed."

Financial Results

Revenue

Revenue for the third quarter of 2010 was $33.3 million, up 13% from $29.5 million a year earlier. The increase reflected another strong quarter from the Canadian downstream petroleum business and traditional corrosion operations based in Western Canada. The revenue increase also reflected the acquisition of the Dualam operations effective January 4, 2010. Partially offsetting these factors was a decrease in the US to Canadian dollar conversion rate. 

For the first nine months of 2010, revenue was $88.8 million, up 16% from $76.8 million in the first nine months of 2009. The increase reflected the same factors noted above for the third quarter and strong growth in water and wastewater revenue through the first nine months of 2010.

Net Income (Loss)

The Company's net loss of $10.2 million or $0.36 per share for the third quarter of 2010, compared to net income of $1.5 million or $0.06 per diluted share a year earlier. The net loss for the third quarter of 2010 included:

• an impairment write-down of goodwill and intangible assets related to the recently acquired Dualam operations of $10.3 million,
• restructuring, integration and ERP implementation costs of $1.1 million, and
• a significant operating loss and additional interest and amortization related to Dualam.

Excluding these factors, the Company's financial results for the third quarter of 2010 were relatively consistent with the results achieved in the third of quarter of 2009. The consistency reflected strong performance by ZCL's traditional Canadian operations, offset by continued weakness in the US downstream petroleum market where independent service station owners sharply reduced capital spending beginning in early 2009 due to the recession and difficult credit markets.

For the first nine months of 2010, the Company's net loss was $13.4 million or $0.48 per diluted share, compared to net income of $0.7 million or $0.03 per diluted share a year earlier. The change in net income (loss) for the nine months primarily resulted from the same factors noted above for the third quarter.

Adjusted Income (Loss)

Adjusted income (loss) is defined as net income (loss) before the write-down of goodwill and intangible assets, restructuring and other similar costs. For additional information and a reconciliation of net income (loss) to adjusted income (loss) refer to the "Reconciliation of Non-GAAP Measures" section later in this release.

Adjusted income for the third quarter of 2010 was $0.8 million or $0.03 per diluted share, compared to adjusted income of $1.6 million or $0.06 per diluted share a year earlier. The quarter-over-quarter decrease in adjusted income resulted from the operating losses and additional interest and amortization related to the new Dualam operations and lower revenue and profitability from the US downstream petroleum business. Partially offsetting these factors was strong performances from the Canadian downstream petroleum business and traditional corrosion operations based in Western Canada.

For the first nine months of 2010, the Company's adjusted loss was $2.3 million or $0.08 per diluted share, compared to adjusted income of $0.9 million or $0.04 per diluted share a year earlier reflecting from the same factors noted above for the third quarter.

Impairment of Goodwill and Intangible Assets

The $10.3 million impairment write-down of goodwill and intangible assets resulted from the significant operating losses and additional debt incurred by the Dualam operations through the first nine months of 2010. The impairment write-down also resulted from the expectation that the Dualam business will not improve significantly until at least the second half of 2011 due to the longer-term capital planning cycle of the division's customer base.

Financial Position

As at September 30, 2010, the Company had positive working capital (current assets less current liabilities) of $19.7 million, compared to $18.2 million at June 30, 2010 and $23.3 million at December 31, 2009.

As at September 30, 2010, the Company was in violation of its debt to EBITDA bank covenant. The Company has received a waiver from the lender in respect of this breach. The Company has also received an amended credit agreement from the lender that is subject to certain condition precedents. The Company fully expects to meet the amended covenant requirements under the new agreement on an ongoing basis.

Backlog

ZCL's backlog totalled $34.9 million at September 30, 2010, up 5% from $33.2 million at June 30, 2010 and up 42% from $24.5 million at September 30, 2009. The $10.4 million increase from a year earlier included approximately $3.5 million for the new Dualam operations and strong growth of $6.9 million or 28% from ZCL's traditional operations. There was growth in both Canada and the US and across all three major market segments, which includes downstream petroleum, corrosion and water and wastewater.

Management Changes

The Company previously announced that on October 1, 2010, Mr. Roderick Graham would succeed Mr. Venence Côté, as ZCL's President and Chief Executive Officer ("CEO"). Mr. Côté retired effective September 30, 2010, after holding the position of President and CEO since he founded the Company in 1987. Mr. Côté will assist with the transition through January 31, 2011 and will be available as an advisor to Mr. Graham thereafter.

Mr. Graham's mandate is to undertake a strategic review of the portfolio of assets held within ZCL's corporate umbrella and to refocus the Company on those business units that lever off of ZCL's core competencies. Attention will be paid to enhancement of cost structure to aid in returning the Company to a trajectory of profitable growth. Introduction of key performance indicators and balance sheet returns will be implicit in the outcome of this exercise.

The Company today also announced that Mr. Darin Coutu is resigning as Chief Financial Officer ("CFO") of ZCL in December of this year to take another CFO position with a private company. ZCL has begun the process of identifying and selecting a new CFO.

Outlook

As a result of the change in President and CEO and the strategic review being conducted by Mr. Graham, the Company is providing a few general comments on the outlook for the fourth quarter of 2010:

• Management is cautiously optimistic that, with a solid backlog, US downstream petroleum revenue will improve compared to the fourth quarter last year. This would end a streak of seven consecutive quarter-over-quarter decreases in US downstream petroleum revenue.
• After strong growth through the first nine months of 2010, Canadian downstream petroleum revenue for the fourth quarter is expected to be down modestly from the strong results achieved in the fourth quarter of 2009.
• Water and wastewater revenue is expected to be up solidly compared to the fourth quarter of 2009.
• Revenue from the Company's traditional Western Canadian and US corrosion operations is expected to improve over the fourth quarter of 2009.
• The Dualam operations are expected to continue to show low revenue and produce an operating loss.
• Revenue mix and competitive pressures in certain markets are expected to continue to have a negative impact on ZCL's gross profit.
• Additional restructuring costs and asset write-downs or disposals may result from the strategic review and critical evaluation of all business activities currently by undertaken by ZCL's new President and CEO.
• Overall for the fourth quarter, revenue is anticipated to be up modestly and earnings (before any additional costs or asset write-downs) are expected to be positive, but down compared to the fourth quarter of 2009 due to the Dualam operations.

Summary Financial Results

	Third Quarter			Nine Months
(in thousands, except per share amounts)	2010 $		2009 $		2010 $		2009 $
Total revenue	33,253		29,541		88,763		76,787
Net income (loss)	(10,182)		1,487		(13,395)		690
Net income (loss) per share (basic and diluted)	(0.36)		0.06		(0.48)		0.03
Adjusted income (loss)	849		1,554		(2,341)		903
Adjusted income (loss) per share (basic and diluted)	0.03		0.06		(0.08)		0.04

MD&A and Financial Statements

The Company's management's discussion and analysis ("MD&A") and unaudited consolidated financial statements for the three and nine months ended September 30, 2010 are available on Sedar at www.sedar.com and the ZCL website at this link: www.zcl.com/investors/corpdisclosure.html.

Conference Call

ZCL Composites Inc. has scheduled an investor conference call for 9:30 a.m. Mountain Time (11:30 a.m. Eastern Time) on Wednesday, November 10^th, 2010, to discuss its financial and operating results for the third quarter of 2010.

To access the conference call by telephone, please call [phone] from the greater Toronto area, or dial toll free 1-888-231-8191 from elsewhere in North America. An audio webcast may be accessed through the investor events tab on the ZCL Composites website. Audio replays will be available on the ZCL Composites website shortly after the conclusion of the conference call.

The conference call will include prepared remarks by ZCL's President and Chief Executive Officer, Rod Graham, by ZCL's Chief Financial Officer, Darin Coutu, and by ZCL's Chief Operating Officer, Ron Bachmeier. After the prepared remarks, ZCL will accept questions from analysts and institutional investors. The public is invited to listen to the conference call in real time or by replay.

Note on Backlog, EBITDA and Adjusted Income (Loss)

The Company uses both GAAP (Canadian "Generally Accepted Accounting Principles") and non-GAAP measures to make strategic decisions and set targets and believes that these non-GAAP measures provide useful supplemental information to investors. Backlog, EBITDA and adjusted income (loss) do not have a standardized meaning prescribed by GAAP and may not be comparable to similar measures used by other companies.

Backlog is defined as the total value of orders that management has assessed as having a high certainty of being performed because of the existence of a contract or purchase order specifying the scope, value and timing of an order. EBITDA is defined as income from continuing operations before interest, income taxes, stock based compensation, amortization on property, plant and equipment, deferred development costs and intangible assets, gains or losses on sale of property, plant and equipment, impairment of assets, and costs not expected to recur on a regular basis. Adjusted income (loss) is defined as income from continuing operations before the write-down of goodwill and intangible assets and restructuring, integration and ERP implementation costs, net of income taxes. Readers are cautioned that EBITDA and adjusted income (loss) should not be construed as alternatives to net income as determined in accordance with GAAP. For additional information on Non-GAAP measures used by the Company see the MD&A for the three and nine months ended September 30, 2010 available on SEDAR at www.sedar.com.

Advisory Regarding Forward-Looking Statements

This document contains forward-looking statements under the heading "Outlook" and elsewhere concerning future events or the Company's future performance, including the Company's objectives or expectations for revenue and earnings growth, income taxes as a percentage of pre-tax income, business opportunities in the petroleum, water and wastewater, corrosion, international and other markets, efforts to reduce administrative and production costs, manage production levels, anticipated capital expenditure trends, activity in the petroleum, corrosion, water and wastewater and other industries and markets served by the Company and the sufficiency of cash flows and credit facilities available to cover normal operating and capital expenditures. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions. Actual events or results may differ materially from those reflected in the Company's forward-looking statements due to a number of known and unknown risks, uncertainties and other factors affecting the Company's business and the industries the Company serves generally.

These factors include, but are not limited to, fluctuations in the level of business activity and capital spending in the petroleum, water and wastewater and corrosion markets, drilling activity and oil and natural gas prices, and other factors that affect demand for the Company's products and services, industry competition, the need to effectively integrate acquired businesses, uncertainties as to the Company's ability to implement its business strategy effectively in Canada and the United States, political and economic conditions, the Company's ability to attract and retain key personnel, raw material and labour costs, fluctuations in the US and Canadian dollar exchange rates, and other risks and uncertainties described under the heading "Risk Factors" in the Company's most recent Annual Information Form, and elsewhere in this document and other documents filed with Canadian provincial securities authorities. These documents are available to the public at www.sedar.com.

In addition to the factors noted above, management cautions readers that the current economic environment could have a negative impact on the markets in which the Company operates and on the Company's ability to achieve its financial targets. Factors such as continuing economic weakness in the US and Canada, tighter lending standards, volatile capital markets, lower commodity prices, the US housing crisis and other factors could negatively impact the demand for the Company's products and the Company's ability to grow or sustain revenues and earnings. Fluctuations in the US to Canadian dollar conversion rate also have the potential to impact the Company's revenues and earnings.

The Company believes that the expectations reflected in the forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this report should not be unduly relied upon.

The forward-looking statements in this report speak only as of the date of this report. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by the Company or on the Company's behalf, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws. The forward-looking statements contained in this document are expressly qualified by this cautionary statement.

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