pursuing opportunities for sustainable growth

Pursuing Opportunities for Sustainable Growth
Since becoming a public company in 2008, Chemanol has made steady progress, highlighted by improved profitability, higher production levels and strengthened institutional capability. In 2012, the Company placed particular focus on optimizing its ability to identify and capture new opportunities for long-term sustainable growth.
METhANOL ChEMiCALs COMPANy
P.O. Box 3139, Dammam 31471 Kingdom of Saudi Arabia Tel: +966 3 8144 694 Fax: +966 3 8144 678 Email: [email protected] www.chemanol.com
01 Profile
02 Financial Highlights
04 Board of Directors
06 Chairman’s Statement
08 CEO’s Report
25 Statement of Changes in Equity
26 Notes to the Financial Statements
Contents
Disclaimer This annual report contains forward-looking statements about the Company’s future plans, strategies, beliefs and performance that are not historical facts. They are based on current expectations, estimates, forecasts and projections about the industries in which the Company operates and beliefs and assumptions made by the management. As these expectations, estimates, forecasts and projections are subject to a number of risks, uncertainties and assumptions, actual results may differ materially from those projected. The Company, therefore, wishes to caution readers not to place undue reliance on forward-looking statements. Furthermore, the Company undertakes no obligation to update any forward-looking statements as a result of new information, future events or other developments. Risks, uncertainties and assumptions mentioned above include, but are not limited to, commodity prices; exchange rates and economic conditions; the outcome of pending and future litigation; and the continued availability of financing, financial instruments and financial resources. The information contained in this annual report and on the Company’s website includes information provided for the purpose of helping investors make informed decisions. It was not created to solicit investors to buy or sell Chemanol’s stock. The final decision and responsibility for investments rests solely with the reader of this annual report.
Profile, Vision, Mission and Values
Profile
Methanol Chemicals Company (Chemanol) is a major grass-root second generation petrochemicals company.
Chemanol manufactures premium-grade methanol derivatives including aqueous and urea formaldehydes, superplasticizers, amino resins, hexamethylene tetramine, paraformaldehyde, dimethyl formamide, methylamines, pentaerythritol, and sodium formate. These products have applications in industries as diverse as agriculture, automobiles, pharmaceuticals and construction.
Established in 1989 as the Saudi Formaldehyde Chemicals Company – the first private sector petrochemicals company in the GCC – the Company changed its name to Methanol Chemicals Company following a successful IPO in 2008. Today, Chemanol is one of the most integrated and low-cost methanol and derivatives producers globally; and one of the world’s largest formaldehyde producers situated in a single location, and the biggest in the GCC.
A closed Saudi joint-stock company with a paid-up capital of SAR 1.2 Billion, Chemanol’s major shareholders are leading industrialists from across the GCC. Located in Al Jubail Industrial City, the Company has a total annual production capacity of just about one million metric tons, and exports 26 product grades to over 50 countries in more than 21 different industries.
Vision
Chemanol aspires to be recognized as a major pioneering and reliable specialty petrochemicals company in the GCC.
Mission
The Business
To be a major supplier and cater to the clientele spread around the globe, at most competitive prices.
The Values
Chemanol is committed to a clean environment and holds tremendous value for human life and its safety.
1 METhANOL ChEMiCALs COMPANy 2012 Annual Report
2012 2011 2010 2009 2008+31%
Earnings per share (SAR) 0.76
0.58
Net Profit (SAR) 91,429
income from Operations (SAR)
Total Production (Metric Tons) 873.39
793.69 764.00
327.00 368,06
income statement (sR ‘000) 2012 2011 2010 2009 2008
Sales 920,747 829,737 589,495 402,302 570,669
Cost of Sales 703,297 637,924 470,579 304,954 448,684
Gross Profit 217,449 191,813 118,916 97,348 121,985
Operating Income 119,895 110,822 40,045 30,702 45,940
Financial Charges 37,643 39,942 29,007 8,048 12,362
Net Profit 91,429 70,212 6,041 22,055 38,236
Balance sheet (sR ‘000) 2012 2011 2010 2009 2008
Assets
Current Assets 533,865 505,242 438,569 484,097 612,226
Non-current Assets
Total Assets 2,924,209 3,025,452 3,092,773 3,032,727 2,639,920
Liabilities
Non-current Liabilities
Capital 1,206,000 1,206,000 1,206,000 1,206,000 1,206,000
Retained Earnings 260,702 180,019 118,403 114,811 96,780
Owners’ Equity 1,573,239 1,483,413 1,414,776 1,410,580 1,390,343
Cash Flow (sR ‘000) 2012 2011 2010 2009 2008
From Operating Activities 234,955 125,277 85,388 70,155 33,435
From Investing Activities -34,878 -85,472 -251,879 -473,547 -949,764
From Financing -7,337 -14,055 -134,271 -104,256 361,895
Key Ratios 2012 2011 2010 2009 2008
Current Ratio (%) 2.2 2.0 0.7 1.9 2.9
Gross Margin (%) 23.6 23.1 20.2 24.2 21.4
Net Profit Margin (%) 9.9 8.5 1.0 5.5 6.7
Operating Margin (%) 13.0 13.4 6.8 7.6 8.1
Return on Assets (%) 3.1 2.3 0.2 0.7 1.4
Return on Equity (%) 5.8 4.7 0.4 1.6 2.7
5 Year Financial Summary3 Methanol CheMiCals CoMpany 2012 Annual Report
To support its ambitious targets for strategic growth, Chemanol focused its efforts in 2012 on optimizing operational efficiency, reliability and productivity; and strengthening its capabilities in the critical support areas of human capital, information technology, quality, research and development, and marketing.
In addition, the Company enhanced its pioneering enterprise resource planning platform with an emphasis on maintenance and EHSS systems while capitalizing on the experience and expertise of its employees.
4 Methanol CheMiCals CoMpany 2012 Annual Report
During 2012, Chemanol entered new markets, and achieved higher penetration in high-priced markets such as Japan, South America and the USA.
Board of Directors
1. Abdullah M. Al Mazrui Chairman
Mr Abdullah Al Mazrui is Chairman of Emirates Insurance Company, Mazrui Holding Company, The National Investor, Aramex, Jashanmal National Company, Deepa United Group, Modecor, and the International School of Choueifat. He is a Board Member of National Investment Corporation, Dun & Bradstreet, Emirates Specialities Company, Abu Dhabi Education Council, and Abu Dhabi Economic Council. He is also an Advisory Board Member of Insead, Abu Dhabi; and EDHEC Business School, France. Mr Al Mazrui holds a BA (Honors) degree from Chapman University, California, USA.
2. Khaled A. A. Al Zamil Board Member Chairman of Executive Committee and Nomination & Remuneration Committee
Mr Khaled Al Zamil is President of Zamil Group Holding Company. He is Chairman of the Middle East Battery Company; and a Board Member of Zamil Industrial Investment Company, Dar Al Yaum Printing and Publishing, and Prince Sultan Rehabilitation Center. Mr Al Zamil holds a BSc in Civil Engineering from the University of Southern California, Los Angeles, USA.
3. Badr A. Kanoo Board Member
Mr Badr Kanoo is responsible for the Yusuf bin Ahmed Kanoo Group’s Commercial Division operations within the GCC. He is a Board Member of the Yusuf bin Ahmed Kanoo Group, with oversight of Investments and Joint Ventures; Barclay’s Saudi Arabia; and the Saudi Company for Ground Services. Mr Kanoo graduated from Mercer University, Georgia, USA, with a major in Management.
4. sami M. y. Jalal Board Member
Mr Sami Jalal is a Board Member of Mohammed Jalal and Sons. He is Chairman and Founder of the Bahrain Business Angels Holding Company (Tenmou); Chairman of Jalal Ionics, Bahrain; and Vice Chairman of Bahrain Electromechanical Services Company. He is a Board member of Intershield, Bahrain; United Paper Industry, Bahrain; TRAFCO, Bahrain; Modecor, Saudi Arabia; AIRMECH, Bahrain; and MCSC, Bahrain. He is also Founder and Treasurer of Al Rahma Centre Charity Organisation, Bahrain; and a Member of the Bahrain Management Society. Mr Jalal holds an MBA from the USA.
5. Adib A. h. Al Zamil Board Member Chairman of the Audit Committee
Mr. Adib Abdullah Al Zamil is Managing Director - Finance and Investments at Zamil Group Holding Company. He also serves on the Board of Directors and the Executive Committee of the Zamil Group; and is a Board Member of Zamil Industrial Investments Company. In addition to various Audit Committees, he is a Board Member of several Saudi joint stock companies, including banks and investments companies. Mr Al Zamil holds a degree in Business Administration from the USA.
6. hamad M. h. Al Manea Board Member
Mr. Hamad Al Manea is the Vice Chairman and Managing Director of Mohamed Al Manea Holding Company, having joined the family business in 1984. The Group’s extensive activities cover a range of sectors such as oil and gas, mining, real estate, trading and services. He is a Board Member of several companies listed on the Qatar Stock Exchange, including Doha Bank, Qatar General Insurance & Reinsurance and Qatar Navigation. Mr Al Manea holds a BSc degree in Industrial Administration from the University of Michigan, Ann Arbor, Michigan, USA.
7. Mishal h. A. Kanoo Board Member
Mr. Mishal Kanoo is the Deputy Chairman of the Kanoo Group. He is Chairman of Dubai Express, Johnson Arabia, BRC Arabia, and Kone Cranes Industrial Services; and Vice Chairman of United Arab Chemical Carriers. He is also a Board Member of several companies, including Middle East Container Repair Company, International Paint, Hydroturf, AXA Insurance, and Engineering FZC. Mr. Kanoo holds an MBA in Finance from the University of St Thomas, Texas, USA; and an Executive MBA from the American University of Sharjah, UAE.
8. Abdulmohsen F. Al Nafisi Board Member
Mr Abdulmohsen Al Nafisi is Chairman of Fahad A. Al Nafisi & Sons Group. He has been actively involved in contributing to the growth of the family business for the past 32 years. His diverse background in multicultural and global environments covers contracting, manufacturing, trading and investments. Mr Al Nafisi holds a degree in Electrical Engineering from the University of Southern California, Los Angeles, USA.
9. Abdullah Ali Al-sanea Board Member
Mr Abdullah Al-Sanea is the Owner and CEO of SAN Consult (KSA). For over 30 years, he has held senior management positions and acted as a consultant in the plastics and petrochemicals industries. He is a Board Member of the Higher Institute for Plastics (Riyadh) and the Saudi Standards, Metrology & Quality Organisation; and a Member of several industry bodies, including the Society of Plastics Engineers, and the National Plastics Industry Committee. Mr Al-Sanea holds a BSc degree in Industrial Management from the King Fahd University of Petroleum & Minerals, Saudi Arabia.
Chairman’s Statement
Abdullah M. Mazrui Chairman
“Our harmonious and professional team has once again demonstrated its commitment to pursue new opportunities for long-term sustainable growth.”
On behalf of the Board of Directors, I have the pleasure to present the annual report and financial statements of Methanol Chemicals Company (Chemanol) for the year ended 31 December 2012. With the grace of God, this proved to be another highly successful year for Chemanol, during which we reached new heights of profitability and production, and continued to strengthen our organizational capability.
I am pleased to report that Chemanol posted a record financial performance in 2012, with net profit increasing by 30.2 percent to SAR 91.4 million compared with SAR 70.2 million in 2011.
Owners’ equity grew to SAR 1.6 Billion, with return on equity of 6 percent; while earnings per share increased to SAR 0.76. As a result of this strong financial performance, I am delighted to announce that the Board is recommending a dividend distribution of 50H/share for 2012.
As the first dividend to be paid since our Company went public in 2008, this marks a significant financial milestone.
Driving this financial performance was an increase of 10 percent in total production to a record 873 thousand metric tons in 2012. This was the result of increased sales and higher margins; and improved operational efficiency, reliability and quality. It also illustrates the success of the many initiatives introduced during the year to enhance our organizational infrastructure, improve operational standards, and implement our Responsible Care Program.
Above all, it reflects the loyalty, dedication and hard work of our people, whom we recognize as the key drivers of Chemanol’s continued growth and development. Our harmonious and professional team has once again demonstrated its commitment to pursue new opportunities for long-term sustainable growth.
Our achievements during another year of volatile market conditions, has placed the Company in a strong position to take advantage of the potential improvement in the global economy in 2013. God willing, Chemanol will continue to scale new heights of profitability, production and market leadership. The Board has every confidence in Management’s ability to implement our ambitious strategic and business objectives, and to enhance returns to our shareholders.
In 2012, the current term of the Board of Directors expired, and all Directors were re-elected by the Shareholders. I would like to take this opportunity to welcome Mr Abdullah Ali Al-Sanea, who joined the Board during the year as an independent and non-executive director.
I am confident that the Board will benefit greatly from his extensive industrial experience.
On behalf of my fellow Directors, I would like to express my sincere appreciation to our shareholders for their continued encouragement and wise counsel. Their unwavering support provides us with renewed confidence and optimism in facing the challenges that lie ahead. With the grace of God, our improved performance in the coming years will reflect their trust and confidence; while contributing to the prosperity of all Chemanol’s stakeholders.
Abdullah M. Mazrui Chairman
Chemanol has identified new business opportunities in a number of key areas. These include product development, which involves the different grading and tailoring of existing products to meet customers’ exact specifications; together with creating new products based on alternative feedstock.
The Company also made plans to enter new niche markets that offer higher profit margins; as well as maximizing the business potential of the Kingdom of Saudi Arabia. This will be reinforced by transforming Chemanol into a world-class learning and performance-oriented organization.
During 2012, the Company successfully identified new areas for growth, including the innovative utilization of alternative feedstock for new specialty chemicals in niche markets that exhibit high, stable demand dynamics, such as pharmaceuticals
CEO’s Report
I am pleased to report that 2012 proved to be a highly successful year for Chemanol, during which we continued to build upon the record achievements of 2011. This is reflected in our improved financial results and production levels; and the success of new initiatives to further strengthen our organizational resources and core competencies.
Khalid ibrahim Al Rabiah Chief Executive Officer
“Based on our excellent performance during the year, we remain positive about the ability of the Chemanol team to implement our strategy and achieve our challenging business objectives.”
Chemanol reported record financial results for 2012. Revenues grew to SAR 920.7 million, an increase of 11 percent over 2011; while net profit increased by 30.2 percent to SAR 91.4 million from SAR 7.2 million the previous year. Our strong year-on-year performance results mainly from an increase in sales, higher margins and improved cost control.
During 2012, total production increased to a record 873 thousand metric tons, constituting 96 percent of the Company’s total available annual production capacity of just under one million metric tons. This reflects our ongoing commitment to adopt a systematic approach to improve operational efficiency, reliability and quality.
The success of concerted marketing campaigns in local and global markets constituted another important contributor to Chemanol’s performance in 2012. We were successful in enhancing sales in markets that offer higher margin potential, and entering new markets. We also grew our client base, responding promptly to customers’ specific requirements with customised product variations. At the same time, we focused on proactive planning, constantly keeping a watchful eye on market fluctuations and emerging trends, both locally and globally.
Our continued investment in market research and business intelligence, which provides us with a better understanding of regional and international demand patterns, is critical to successful forecasting by Chemanol.
Since the financial crisis of 2008, the world has witnessed a four- year downward trend, with all major economies in relative states of stagnation and stress, and the predicted global economic recovery for 2012 failing to materialize. The US economy remained stagnant; China and India – which are key strategic markets for Chemanol – witnessed a slowdown in economic growth; and the Eurozone crisis showed no signs of abating.
These factors contributed to the price of methanol falling by around US$ 50 compared with the previous year, contrary to industry forecasts pointing to a continued rise in methanol prices. With the interim resolution of the US fiscal cliff, and the Greece financial bail-out finally being agreed, the year ended on a slightly more optimistic note, underlined by nascent signs of renewed global economic recovery. However, concerns still remain about medium-term prospects for recovery of the US economy and its subsequent global impact; the continued economic slowdown in China and India; and the long-term financial issues facing Europe.
Against this scenario, Chemanol took proactive steps to pursue opportunities for sustainable growth. These include maintaining our leadership position as a major manufacturer of specialty chemicals though the innovative utilization of alternative feedstock for new products in niche markets that exhibit high, stable demand dynamics; as well as continuing to diversify the grading and range of applications of our existing product basket to meet customers’ specific requirements. Equally important is the exploration of new high-growth markets, and ensuring access to the right technologies through new strategic alliances and joint ventures.
To support these strategic imperatives, we conducted a major restructuring of our organization during the year to improve efficiency and productivity; continued to enhance our pioneering, industry-leading utilisation of ERP system-based applications; and further strengthened our management team with the recruitment of additional well-qualified, experienced and talented professionals. A key development in 2012 was the implementation of the Company’s new environment, health, safety and security (EHSS) management system, which underlines our corporate social responsibility commitment to act as a responsible and caring petrochemicals company. This represents a major step forward to achieving formal accreditation by the Gulf Petrochemicals & Chemicals Association as a ‘Responsible Care Company’.
Based on our excellent performance during the year, we remain positive about the ability of the Chemanol team to implement our strategy and achieve our challenging business objectives. We have made considerable progress in putting in place the key ingredients for continued future success; and will continue to exert the utmost effort to ensure the prosperity of all stakeholders. Underlying these considerable achievements in 2012 was the continued positive contribution of our people. They are the Company’s most important asset, and the key drivers of our long-term sustainable growth. Once again, our people demonstrated their willingness and ability to work together to embrace change, respond to new challenges, and meet business targets with a results-oriented and innovative attitude.
During the year, we supported the professional development and personal welfare of our people with the introduction of a number of important initiatives. These include a new salary and grading structure; new staff benefits such as a home ownership scheme; and a new succession planning policy. Priority was given to learning and development, with the introduction of new training programs for management and staff; together with the continued enhancement of the Company’s information technology infrastructure. We also made good progress in transforming Chemanol into a performance-driven organization, and aligning professional and career development with the Company’s vision, mission and strategy. A new incentive scheme was introduced, with the staff annual bonus now being based on a combination of company, departmental and individual performance, measured against key performance indicators.
In conclusion, I would like to thank our Board of Directors for its support and guidance; our clients for their loyalty and trust; our business partners for their cooperation and encouragement; and our management and staff for their professionalism and hard work.
Khalid ibrahim Al Rabiah Chief Executive Officer
Pursuing Opportunities for sustainable Growth
All aspects of the Company’s activities – including setting strategic and business plans; and developing new initiatives, programs and ideas – are based on a highly systematic approach under an industry-leading ERP platform. Regular audits and reviews are conducted to ensure there is no deviation from the strategic road map and business plan. An ideal example of this approach is Chemanol’s environmental, health, safety and security (EHSS) management system, which supports the strategic goal of becoming a ‘Responsible Care Company’.
A key development in 2012 was the implementation of the Company’s new environment, health, safety and security (EHSS) management system, which underlines our corporate social responsibility commitment to act as a responsible and caring petrochemicals company.
Operations
Production
Chemanol’s total production in 2012 increased by 10 percent to 873,390 metric tons, compared with 793,690 metric tons the previous year. This constituted 96 percent of the Company’s total available annual production capacity of 912,040 metric tons in a variety of product lines comprising feedstock, intermediates and finished goods.
During the year, the Company revised its production targets upwards following a fall in the price of methanol by almost US$ 50, which was contrary to industry forecasts pointing to a continued rise in methanol prices. As a result of ongoing process enhancements, improved reliability, and the optimization of human resources, production costs were further reduced in 2012.
Maintenance
Chemanol maintained a high degree of operating reliability in 2012, with all production plants running either in line with, or in excess of, their design capacities; despite some power-related technical challenges encountered during the year.
The Company has developed a highly systematic world- class maintenance organization, with preventive, corrective and predictive maintenance programs fully-integrated under a leading-edge enterprise resource planning (ERP) platform. Additional systems enhancement was carried out during 2012 to further enhance operating efficiency and reliability in certain areas.
Quality
During 2012, Chemanol continued to improve the effectiveness of its Quality Management System, with the Company’s 9001:2000 accreditation being re-certified to the new standard ISO 9001:2008. Quality control testing is carried out at every stage of the production cycle, involving raw materials, intermediates and finished products, to ensure the highest standards of customer satisfaction.
Through a team of highly trained quality personnel, a state- of-the-art laboratory, and computerized library resources, Chemanol continuously evaluates feedback from customers, and provides them with timely technical support.
During the year, the Company commenced the process of achieving accreditation to the ISO 17025 international laboratory standard in 2013.
Research & Development
Innovation is a key strategic driver for Chemanol’s long-term sustainable growth and competitiveness edge. In 2012, the Company developed new specialty products with diversified applications such as water treatment.
These are currently at a pilot stage of production, prior to going commercial in 2013. Enhancements were also made to existing product lines, including the customization of products to meet customers’ specific requirements.
Business Review16 Methanol CheMiCals CoMpany 2012 Annual Report
Exports by Key Markets 2012
Marketing
Concerted sales and marketing efforts during the year resulted in record sales and profitability for the Company in 2012, with margin improvements on most products. Key activities included improving marketing processes, with increased reliance on informed decision-making and the utilization of professional marketing tools; supported by strong market research, a focus on maximizing volumes and margins, and diversifying the customer base.
The Company constantly explores ways to open up new markets for its products, and to focus on high-margin areas as well as emerging markets. During 2012, Chemanol entered new markets, and achieved higher penetration in high-priced markets such as Japan, South America and the USA. Renewed emphasis was placed on customer relationship management, with the provision of value-added services such as technical support and advice; as well as tailor-made products to meet specific customer requirements.
Chemanol’s investment in sophisticated market research and business intelligence activities enables it to continually monitor and analyze trends and indicators, manage fluctuations, and perform more accurate forecasting. In 2012, the Company was successful in identifying markets for products with higher margins for which production was increased, thus maximizing its competitive advantage and profit.
New Project Development
Established as a specialty chemicals company, Chemanol’s strategy involves identifying niche products that will complement and diversify its current basket of products, and ensure enhanced competitiveness of its supply chain.
During 2012, the Company successfully identified new areas for growth, including the innovative utilization of alternative feedstock for new specialty chemicals in niche markets that exhibit high, stable demand dynamics, such as pharmaceuticals. This illustrates Chemanol’s policy of aligning its product development to the long-term industrial strategy of the Saudi Government, which seeks to optimize the use of feedstock allocation to the petrochemicals sector in the manufacture of high-value downstream products.
Environment, Health, Safety & Security (EHSS)
Chemanol is committed to protecting the environment; preserving the health and safety of its employees and communities; assuring the safe and secure operations of its processes; and complying with all applicable laws and regulations.
Accordingly, the Company is in the process of implementing the Responsible Care Program (RCP) of the Gulf Petrochemicals and Chemicals Association (GPCA), with full accreditation planned by 2015 at the latest.
RCP is based on seven codes of practice covering occupational health and safety, process safety management, product stewardship, security, distribution, and pollution. In order to achieve RCP status, the Company has developed a fully-integrated environmental, health, safety, security (EHSS) management system.
In 2012, a gap analysis for conformance with RCP requirements was conducted, together with development of a plan to bridge all identified gaps. These were presented to the GPCA, and resulted in approval for Chemanol to use the Responsible Care logo.
31% India
27% Others
2% Belgium
5% China
2% Thailand
2% Italy
4% Jordan
3% Pakistan
Business Review (continued)
To support the implementation of the EHSS management system, a number of key initiatives were introduced during the year. These include the establishment of a Responsible Care Committee; the regular auditing of new processes and procedures, with a subsequent corrective action plan; and the implementation of a communications process, and a recognition and rewards system. Six awareness campaigns were conducted during 2012, involving 125 awareness, training and safety sessions totalling 114,478 hours; together with 46 specialized EHS training courses comprising 11,455 hours.
Environment
An Environmental Management System was developed, incorporating the establishment of environmental risk identification procedures; and risk assessments were carried out at all plants, including the monitoring of emissions and leakages to ensure compliance with regulatory requirements.
A Waste Management System was also implemented to manage and monitor the treatment, recycling and disposal of all waste materials. With the majority of the Company’s processes now automated under a comprehensive SAP enterprise resource planning platform, the use of printers and paper has been significantly reduced. Chemanol is among a few select organizations in the MENA region to initiate and implement the ‘total paperless office’ concept, rendering it a committed ‘green’ company.
Additionally, the Company maintained compliance with the European Union’s bylaw concerning the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), for all products that it exports to European countries.
Health
Chemanol conducted a Health Assessment Noise Survey, and established a complementary Hearing Conservation program. A number of awareness campaigns were also conducted during the year. These included potential health hazards resulting from raw materials, chemicals production, and emissions; as well as diabetes and the need for regular health checks; hand and eye injuries; and safety while working at heights. Specialized training was carried out for First Aid, including cardiopulmonary resuscitation (CPR) techniques.
Safety
An EHSS risk matrix and criteria were established, while policies and procedures were developed and implemented for permit-to-work, hazard analysis, and incident management. During 2012, there was a significant reduction in the incident rate for employees and contractors, with all incidents being thoroughly investigated and reported. The direct hire incident rate decreased to 0.4 in 2012 from 1.2 the previous year, while the contractor incident rate dropped to 0.5 from 0.68. Accordingly, the overall incident rate fell to 0.46 for 2012 from 0.95 in 2011. The number of lost time injuries also declined, with three being recorded in 2012 compared with five the previous year. In addition, there was a significant improvement in number of near misses reported. A total of 2,310 near misses and unsafe conditions were reported in 2012, substantially above the Company target of 1,000 set at the beginning of the year. The rate of incidents and near misses was used to evaluate safety performance, which is now included as a key performance indicator in staff appraisals and the allocation of annual bonuses.
Security
Security was enhanced during the year with the development of new employee ID cards; the introduction of a new electronic gate pass system for visitors and materials delivery; and the erection of high-security perimeter fencing for the Formaldehyde plant. The Company’s emergency response team participated in 53 training sessions on rescue, first aid and dealing with major fires and leaks, totalling 8,513 hours. Seven emergency response mock drills were carried out by Chemanol; together with a separate drill in collaboration with Jubail Area Mutual Aid Association (JAMA’A), who rated the Company’s preparedness for emergencies as ‘very good’.
Human Capital Development
Chemanol considers its people to be the Company’s most important asset, and the key driver of long-term sustainable growth. Accordingly, in 2012, several new human capital development initiatives were introduced in response to the industry-wide challenge of attracting, developing, and retaining qualified and experienced staff.
In line with the ongoing development of the Human Resources Development division, a fully-automated human resources management system (HRMS) was installed and integrated with the Company’s SAP platform; and a new dedicated Learning & Development function was created. At the same time, in order to meet business needs and strategic growth objectives, and improve efficiency and productivity, a comprehensive restructuring of the Company’s manpower was carried out.
A new recruitment policy was developed during the year, including the innovative and successful use of social media channels to provide information about the Company, and source and attract suitable candidates.
At the end of 2012, the headcount totalled 485, with Saudi nationals constituting 46 percent of the workforce. Chemanol introduced new staff benefits, including a home ownership scheme for Saudi national staff, in order to enhance staff retention and provide security for employees’ families. The Company also conducted an independent employee engagement survey, and developed an action plan to follow up on the results.
Encouragingly, the survey revealed good levels of general satisfaction, and a higher level of satisfaction for internal communications and teamwork.
Chemanol placed particular emphasis on training and development during 2012. Selective in-house training was provided for senior management, covering key competency areas such as teamwork and team-building; learning needs analysis as part of annual staff appraisal; employee engagement and leadership development. Staff training was focused primarily on supporting the implementation of the new environment, health, safety and security management system; and the application of new IT systems.
Good progress was made during the year in transforming the Company into a performance-driven organization, and aligning professional and career development with Chemanol’s vision, mission and strategy.
A new incentive scheme was introduced, with the staff annual bonus now being based on a combination of company, departmental and individual performance against set key performance indicators (KPIs), including profitability, production targets and safety.
Information Technology
Chemanol views the utilization of leading-edge information and communications technology (ICT) as a key strategic driver, business enabler and competitive edge. The Company is recognized as a regional pioneer and leader in the application of widespread applications of SAP enterprise resource planning (ERP) software. All core company processes are fully automated and integrated under a single homogeneous platform. Importantly, decision-making is enhanced through the provision of daily updated information to management dashboards regarding financial, production, sales and business intelligence data. During 2012, Chemanol continued to upgrade its ICT infrastructure with the implementation of new systems and applications, enhanced information security, and improved end-user IT support.
A comprehensive range of in-house training programs was conducted for business process owners, core members and ‘train-the-trainers’ personnel. These covered key areas such as human resources and financial control; production planning, materials management, and plant maintenance; warehouse management and logistics; and quality management.
Corporate Social Responsibility
Chemanol is committed to playing a pivotal role in society as a responsible and caring petrochemicals company. In order to promote community and social welfare, the Company continued its active participation in programs and initiatives directed towards the development of educational, health and environmental awareness.
Corporate Governance
Chemanol aspires to the highest standards of corporate governance. The Company has implemented the provisions adopted in the List of Corporate Governance in the Kingdom of Saudi Arabia issued by the Council of the Capital Market Authority – in accordance with Resolution No. 1-212-2006 dated 21/10/1421AH (corresponding to 12/11/2006) and in compliance with the listing and inclusion regulations dated 22/01/2012 – and also in accordance with the Company’s bylaws.
4 5
1. Mr Khalid i. Al Rabiah Chief Executive Officer
Mr Khalid Rabiah has over 29 years’ professional experience, of which 19 have been spent in the areas of strategic and financial planning, and business development. Prior to joining Chemanol, he was Vice President - Finance at Saudi Arabian Amiantit Company. Mr Rabiah actively participated in executing Amiantit’s ambitious growth strategy and geographic expansion, setting up new manufacturing plants around the globe, including Egypt, Turkey, India, China, Germany, Spain and North and South America. He holds a Bachelor’s degree in Accounting from the University of Toledo, Ohio, USA.
2. Mr Mohammed Al safadi Vice President – Operations
Mr Mohammed Al Safadi has over 20 years’ experience in the fields of petrochemical plant operations, pre-commissioning, commissioning, trouble-shooting and start- up. Prior to joining Chemanol, he was General Manager of the newly-established Bakri International Energy Group. Previously, Mr Al Safadi spent 19 years with SABIC, where he started his career at Petrokemya. He holds a BSc degree in Chemical Engineering from the King Saud University, Saudi Arabia; and has attended the Leadership Development Programme at London Business School, UK.
3. Mr Moustafa M. Elkamash CPA Chief Financial Officer
Mr Moustafa Elkamash has over 20 years’ experience in finance, accounting, auditing and strategic planning. Prior to joining Chemanol, he was Group Finance Director & Group Controller at Orascom Construction Industries, Cairo, Egypt. Previously, Mr Elkamash was Finance Manager at Allianz Egypt; and Assistant Financial Controller at Garden Botanika, Seattle, USA. He also has four years’ experience with Big Four auditing firms in Egypt and the USA. A Certified Public Accountant from the California Board of Accountancy, USA; Mr Elkamash holds a BSC in Accounting from the University of Cairo, Egypt.
4. Mr Khalid Moharrum General Manager - Operations
Mr Khalid Moharrum has over 16 years’ experience spent working for Chemanol. He started as a Shift Engineer and then progressed through various supervisory and management roles in production, operations, maintenance and project management, to his present position. Mr Moharrum has played an instrumental role in increasing formaldehyde capacity At Chemanol by 150,000 tons per year through the modification of two series reactors. He holds a BSc honours degree in Applied Chemical Engineering from the King Fahd University of Petroleum & Minerals, Saudi Arabia.
5. Dr Gasem Falattah General Manager - Maintenance
Dr Gasem Falattah has over 20 years’ experience in the petrochemical industry. Prior to joining Chemanol, he was Maintenance & Reliability Manager at the Advanced Petrochemical Company. Previously, he was with Saudi Aramco for 13 years, after starting his career as a Research Engineer at the King Fahd University of Petroleum & Minerals. Dr Falattah holds a PhD in Composite Engineering from the University of Newcastle, UK; an MSc in Mechanical Engineering and a BSc in Applied Mechanical Engineering from the King Fahd University of Petroleum & Minerals, Saudi Arabia; and has attended the Management Acceleration Programme at INSEAD. He has been a Member of the US National Association of Corrosion Engineers (NACE) since 1995.
6. Mr sanjeev Gokhale General Manager - Marketing & Sales
Mr Sanjeev Gokhale has over 26 years’ experience in petrochemicals, specialty and fine chemicals, agrochemicals, pharmaceuticals and fragrance chemicals. Prior to joining Chemanol, he was General Manager - Exports at SI Group India Limited. Previously, he worked with Lupin Agrochemicals (now Cheminova), Excel Industries, and Godrej & Boyce Manufacturing Company. Mr Gokhale holds a Master of Management Studies degree from SP Jain Institute of Management & Research, Mumbai, India; and a BTech degree in Chemical Engineering from the Institute of Technology, Banaras Hindu University, Varanasi, India.
7. Dr Mohamed Abdullah Manager - Business Development
Dr Mohamed Abdullahi has over 31 years’ experience in chemicals and mining. Prior to joining Chemanol, he acted as a consultant for the development of several chemical and petrochemical projects in Saudi Arabia with international companies. Before this, he was Senior Vice President with APICORP, Project Development Manager with A. H. Algosaibi & Brothers Company, and a Research Scientist at King Fahd University of Petroleum & Minerals. Dr Abdullahi holds a PhD in Chemistry and a DIC in Physical Chemistry from Imperial College, University of London, UK; an MSc in Analytical Chemistry from Chelsea College, University of London, UK; and a BSc in Chemistry from Lafoole University, Somalia.
8. Mr Mohammed Al Ajmi Manager - Human Resources
Mr Mohammed Al Ajmi has 8 years’ experience in the fields of human resources, employee relations, benefits and compensation, administration and general services, and government relations; gained with manufacturing, steel and real estate companies. Prior to joining Chemanol, he was HR & Administration Superintendent with ArcelorMittal. Previously, he was HR & Administration Manager with Al-Oula Real Estate Company, and HR section head with Universal Metal Coating Company (UNICOIL). Certified as an HR professional by the UK Chartered Institute of Personnel & Development (CIPD), Mr Al Ajmi holds a Bachelor’s degree in Education, and a Higher Studies Diploma in Management.
9. Mr Maher Al-Dughaim Manager - Environment, Health, Safety & Security
Mr Maher Al-Dughaim has over 19 years’ experience in the field of industrial safety; and has been actively involved in integrated management system developments, global audits, accident investigations and risk assessments. Prior to joining Chemanol, he was Corporate Safety Head at SABIC; and previously worked at the Saudi Electricity Company as a Safety Engineer. Mr Al- Dughaim holds a BSc in Operations Research from the King Saud University, Saudi Arabia. He is certified as a Safety Management Systems Auditor / Lead Auditor by NICS (Australia) and as a Quality Safety Auditor by ROSPA (UK); and is a Member of the Gulf Petrochemicals & Chemicals Association (GPCA).
21 METhANOL ChEMiCALs COMPANy 2012 Annual Report
Chemanol has set ambitious and challenging targets for achieving sustainable long- term growth. These cover key areas such as growing the Company’s turnover and profitability, production levels and market share; and maintaining its status as a major leading manufacturer of specialty chemicals.
Through its systematic approach, and identification of new business opportunities, Chemanol is confident of achieving these targets, and thereby providing enhanced returns for shareholders, and greater security and prosperity for all stakeholders.
Based on our excellent performance during the year, we remain positive about the ability of the Chemanol team to implement our strategy and achieve our challenging business objectives.
Financial statements For The Year Ended 31 December 2012
24 Financial StatementsMethanol CheMiCals CoMpany 2012 Annual Report
25 Independent Auditors’ Report to the Shareholders
26 Balance Sheet
29 Statement of changes in equity
30 Notes to the financial statements
Contents
Independent Auditors’ Report
KPMG Al Fozan & Al Sadhan, a partnership registered in Saudi Arabia and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
KPMG Al Fozan & Al Sadhan
Al Subeaei Towers King Abdulaziz Road P O Box 4803 Al Khobar 31952 Kingdom of Saudi Arabia
Tel +966 3 887 7241 Fax +966 1 887 7254 www.kpmg.com.sa License No. 46/11/323 issued 11/3/1992
The Shareholders Methanol Chemicals Company Dammam, Kingdom of Saudi Arabia
We have audited the accompanying financial statements of Methanol Chemicals Company (“the Company”) which comprise the balance sheet as at December 31, 2012 and the related statements of income, cash flows and changes in equity for the year then ended and the attached notes 1 through 25 which form an integral part of the financial statements.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with generally accepted accounting standards in the Kingdom of Saudi Arabia and in compliance with article 123 of the Regulations for Companies and the Company’s Articles of Association and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Management has provided us with all the information and explanations that we require relating to our audit of these financial statements.
Auditors’ responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the Kingdom of Saudi Arabia. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
In our opinion, the financial statements taken as a whole:
1) present fairly, in all material respects, the financial position of the Company as at December 31, 2012, and the results of its operations and its cash flows for the year then ended in accordance with generally accepted accounting standards in the Kingdom of Saudi Arabia appropriate to the circumstances of the Company; and
2) comply with the requirements of the Regulations for Companies and the Company’s Articles of Association with respect to the preparation and presentation of financial statements.
For KPMG Al Fozan & Al Sadhan
Tareq Abdulrahman Al Sadhan License No. 352
Al Khobar, February 21, 2013 Corresponding to: Rabi’ Thani 11, 1434H
Balance Sheet As at December 31, 2012 Expressed in Saudi Arabian Riyals
Note 2012 2011
ASSETS Current assets Cash and cash equivalents 4 114,777,303 122,114,884 Margin deposits with bank 500,000 500,000 Trade receivables 251,468,777 226,301,554 Inventories 5 121,445,541 118,249,916 Prepayments and other current assets 6 45,673,579 38,075,696 Total current assets 533,865,200 505,242,050
Non-current assets: Intangible assets 7 13,781,250 14,568,750 Deferred charges 8 1,768,228 4,741,092 Long term prepaid expenses 9 30,992,729 36,545,584 Property, plant and equipment 10 2,343,802,441 2,464,354,999 Total non-current assets 2,390,344,648 2,520,210,425 Total assets 2,924,209,848 3,025,452,475
LIABILITY AND EQUITY Current liabilities: Trade payables 56,498,531 46,500,384 Short term loans 11 - 40,000,000 Current portion of long-term bank debts 11 142,625,000 124,790,000 Current portion of long term obligations 7 3,087,500 5,250,000 Accrued expenses and other current liabilities 12 40,289,265 33,133,819 Zakat provision 13 4,901,401 3,996,440 Total current liabilities 247,401,697 253,670,643
Non-current liabilities: Long-term bank debts 11 1,075,925,000 1,261,175,000 Long term obligations 7 - 3,087,500 Employees’ end of service benefits 27,643,478 24,106,278 Total non-current liabilities 1,103,568,478 1,288,368,778 Total liabilities 1,350,970,175 1,542,039,421
EQUITY Share capital 14 1,206,000,000 1,206,000,000 Share premium 15 72,850,071 72,850,071 Statutory reserve 33,686,753 24,543,813 Retained earnings 260,702,849 180,019,170 Total equity 1,573,239,673 1,483,413,054 Total liabilities and equity 2,924,209,848 3,025,452,475
The Interim Financial Statements appearing on pages 1 to 17 were approved by the management on behalf of Board of Directors of the Company on February 20, 2013, and have been signed on their behalf by:
Mustafa Mohamed El Kamash Khalid Al Rabiah Adeeb Abdullah Al Zamil Chief Financial Officer Chief Executive Officer Board Member
The accompanying notes 1 through 25 form an integral part of these financial statements.
Statement of Income For the year ended December 31, 2012 Expressed in Saudi Arabian Riyals
Note 2012 2011
Selling and distribution expenses 17 (68,991,497) (59,994,571) General and administrative expenses 18 (25,590,062) (18,041,480) Amortisation of deferred charges 8 (2,972,864) (2,955,265) Operating income 119,895,312 110,821,611
Other income, net 19 14,077,491 2,332,704 Financial charges (37,643,403) (39,942,354) Income before Zakat 96,329,400 73,211,961 Zakat 13 (4,900,000) (3,000,000) Net income 91,429,400 70,211,961
Earnings per share 20 0.76 0.58
Statement of Cash Flows For the year ended December 31, 2012 Expressed in Saudi Arabian Riyals
Note 2012 2011
Cash flow operating activities: Net income for the period 91,429,400 70,211,961 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation 10 150,587,184 151,433,588 Amortisation 9,313,219 10,009,558 Employees’ end of service benefits, net 3,537,200 2,832,073 Zakat charge 4,900,000 3,000,000 Gain from disposal of property, plant and equipment (406,523) (756,306)
259,360,480 236,730,874
Changes in operating assets and liabilities: Trade receivables and prepayments and other current assets (32,765,106) (45,720,095) Inventories (3,195,625) (34,217,813) Trade payables and accrues expenses and other current liabilities 15,550,812 (27,932,970) Zakat paid 13 (3,995,039) (3,583,418) Net cash provided by operating activities 234,955,522 125,276,578
Cash flow from investing activities: Additions to property, plant and equipment (30,071,351) (17,996,957) Proceeds from disposal of property, plant and equipment 443,248 1,057,438 Net movement in amounts due to project contractors - (53,176,129) Additions to long term prepaid expenses - (10,543,635) Payment of long term obligations (5,250,000) (4,812,500) Net cash used in investing activities (34,878,103) (85,471,783)
Cash flow from financing activities: Net movement in short term loans (40,000,000) (1,606,587) Net movement in long term loans (167,415,000) (52,252,834) Net cash used in by financing activities (207,415,000) (53,859,421)
Net decrease in cash and cash equivalents (7,337,581) (14,054,626)
Cash and cash equivalents at the beginning of the year 122,114,884 136,169,510 Cash and cash equivalent at the end of the year 4 114,777,303 122,114,884
Statement of Changes in Equity For the year ended December 31, 2012 Expressed in Saudi Arabian Riyals
Share capital
Share premium
Statutory reserve
Net income for the year - - - 70,211,961 70,211,961
Directors’ remuneration - - - (1,574,788) (1,574,788)
Balance at December 31, 2011 1,206,000,000 72,850,071 24,543,813 180,019,170 1,483,413,054
Net income for the year - - - 91,429,400 91,429,400
Directors’ remuneration - - - (1,602,781) (1,602,781)
Balance at December 31, 2012 1,206,000,000 72,850,071 33,686,753 260,702,849 1,573,239,673
30 Notes to the Financial Statements For the year ended December 31, 2012 Expressed in Saudi Arabian Riyals
Methanol CheMiCals CoMpany 2012 Annual Report
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Methanol Chemicals Company (“Chemanol” or “the Company”) is a Saudi Joint Stock Company registered in Saudi Arabia under Commercial Registration number 2055001870 dated Dhu Al-Hijjah 28, 1409H corresponding to July 31, 1989. It is licensed to engage in the production of formaldehyde liquid and urea formaldehyde liquid or their mixture with different concentrations, paraformaldehyde, formaldehyde resins, hexane methylene tetramine, phenol formaldehyde resins, concrete improvers, methanol, carbon monoxide, di-methylamine, mono-methylamine, tri-mon-methylamine, di-methyl formamide, di-methyl carbon, penta aritheretol, sodium formate and acetaldehyde, as per ministerial resolution number (616/Saud) dated Safar 12, 1429H, corresponding to February 19, 2008.
The Company was converted from a limited liability company into a joint stock company in accordance with Ministerial Resolution No. 286 dated Dhul al-Qa’dah 4, 1428H, corresponding November 14, 2007.
2. BASIS OF PREPARATION
(a) Statement of compliance
The accompanying financial statements have been prepared in accordance with the generally accepted accounting standards in Saudi Arabia issued by the Saudi Organization for Certified Public Accountants (SOCPA).
The financial statements were authorized for issue by the Board of Directors on February 20, 2013.
(b) Basis of measurement
The financial statements have been prepared on a historical cost basis using the accrual basis of accounting and the going concern concept.
(c) Functional and presentation currency
These financial statements are presented in Saudi Arabian Riyals (SR) which is the functional currency of the Company.
(d) Use of estimates and judgements
The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in future periods affected.
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in the financial statements. Certain comparative figures in notes 5, 6, 10 and 11 have been reclassified to conform to the current year’s presentation.
a. Trade receivables
Trade receivables are stated at original invoice amount less provisions made for amounts which in the opinion of the management may not be received. Bad debts are written off when identified.
b. Inventories
Inventories are measured at the lower of cost and net realisable value. The cost of inventories is principally based on the weighted average principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity.
Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
c. Property, plant and equipment
Property, plant and equipment are measured at cost, less accumulated depreciation and accumulated impairment. Cost includes expenditure that is directly attributable to the acquisition of the asset. Finance costs on borrowings to finance the construction of qualifying assets are capitalized during the period of time that is required to complete and prepare the asset for its intended use.
Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property, plant and equipment. All other expenditure is recognized in the Statement of Income when incurred.
Depreciation is charged to the Statement of Income on a straight-line basis over the estimated useful lives of individual items of property, plant and equipment.
The estimated useful lives of assets for current and comparative periods are as follows:
Years
Buildings 33.33 Improvements on leasehold lands 5 Furniture, fixtures and office equipments 7 to 10 Computers and software 4 to 8 Plant, equipment and capital spares 10 to 20 Motor vehicles 4 Catalysts 1 to 3
Capital work in progress is stated at cost less impairment losses, if any, and is not depreciated until the asset is brought into commercial operations.
d. Intangible assets
Estimated value of the right to use pipelines owned by other parties for transporting raw materials and finished goods are treated as intangible assets and are ammortised over the estimated period of future economic benefits.
e. Deferred charges
Costs relating to software licence fees and implementation thereof are treated as deferred charges and amortised over the estimated period of future economic benefits.
f. Long term prepaid expenses
Loan appraisal fees of the Saudi Industrial Development Fund (‘SIDF’) are treated as long term prepaid expenses and amortised over the period of the loan. Amortisation is capitalized up to the date the plant is available for its intended use.
g. Impairment of assets
Financial assets, property, plant and equipment and other non-current assets are reviewed at each reporting date to determine whether there is any indication of impairment. An impairment loss, if any, is recognized for the amount by which the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows.
h. Long term obligations
Long term obligations represent the amount payable in respect of the acquisition costs of intangible assets.
i. Trade payables and accruals
Liabilities are recognized for amounts to be paid in future for goods or services received, whether billed by the supplier or not.
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
j. Employees’ end of service benefits
Employees’ end of service benefits, calculated in accordance with Saudi Arabian labour regulations, are accrued and charged to the Statement of Income. The liability is calculated at the current value of the vested benefits to which the employee is entitled, should his services be terminated at the balance sheet date.
k. Share premium
Share premium represents the excess amount collected over the face value of shares issued and is shown net of expenses incurred in relation to the share issue.
l. Revenue recognition
Revenue from sales is recognized upon delivery or shipment of products and when the risks and rewards have passed to the customer. Revenue is recorded net of returns, trade discounts and volume rebates.
Any other income is recognized when the realization of income is virtually certain.
m. Operating leases
Payments under operating leases are recognized in the Statement of Income on a straight line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense over the term of the lease.
n. Expenses
Selling and distribution expenses are those arising from the Company’s efforts underlying the marketing, selling and distribution functions. All other expenses, excluding direct costs and financial charges, are classified as general and administrative expenses. Allocations of common expenses between cost of sales, selling and marketing and general and administrative expenses, when required, are made on a consistent basis.
o. Zakat
Zakat, computed in accordance with Saudi Arabia Tax and Zakat regulations, is accrued and charged to the Statement of Income.
p. Foreign currency translation
Transactions denominated in foreign currencies are translated to the functional currency of the Company at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currency at the balance sheet date are translated to the functional currency of the Company at the foreign exchange rate ruling at that date. Exchange differences arising on translation are recognized in the Statement of Income currently.
q. Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and cash at banks which is available to the Company without any restrictions.
r. Earnings per share
Earnings per share from net income are calculated by dividing the net income for the period by the weighted average number of shares outstanding during the period.
s. Segmental reporting
A segment is a distinguishable component of the Company that is engaged in providing products, services (a business segment) or in providing products or services within a particular economic environment (a geographic segment), which is subject to risks and rewards that are different from those of other segments. Because the management views the whole activities of the Company as one operating segment, reporting is provided by geographical segment only.
t. Dividends
Interim dividends are recorded as a liability in the period in which they are approved by the Board of Directors. Final dividends are recorded in the period in which they are approved by the shareholders.
u. Fair values
The fair value of commission-bearing items is estimated based on discounted cash flows using commission rates for items with similar terms and risk characteristics.
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31 comprise of the following:
2012 2011
Cash in hand 60,278 6,760 Cash at bank on current accounts 59,942,025 122,108,124 Short term bank deposits 54,775,000 -
114,777,303 122,114,884
The short term bank deposits have maturity period of 15 days and carry the interest rate in the range of 0.08% to 0.2%.
5. INVENTORIES
2012 2011
121,445,541 118,249,916
6. PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments and other current assets at December 31, comprise of the following:
2012 2011
Advances to suppliers 18,815,565 29,281,813 Amount due from insurers 14,900,000 - House rent allowance receivable from employees 5,723,324 2,422,694 Prepaid expenses 4,344,341 5,548,776 Other receivables 1,391,446 822,413 Amounts due from companies affiliated to shareholders 498,903 -
45,673,579 38,075,696
7. INTANGIBLE ASSETS On March 7, 2010, the Company entered into a Pipeline Services Agreement (‘PSA’) for three years, which provides the Company with a contractual right to use the pipeline for ammonia supply. Payments will be made over the 3 year period, commencing April 2010.
The Company has capitalised the estimated amount payable in respect of the Capital Investment Component, which amounts to SR 15.75 million. The intangible assets have been amortised over twenty years, on the basis that this is the estimated useful life of the asset. The Management believes that the ammonia supply will continue for the foreseeable future.
8. DEFERRED CHARGES
The movement in deferred charges for the year ended December 31, is as follows: 2012 2011
Cost At January 1 14,776,298 14,776,298 Additions during the year - - At December 31 14,776,298 14,776,298
Accumulated amortization At January 1 10,035,206 7,079,942 Charge for the year 2,972,864 2,955,264 At December 31 13,008,070 10,035,206 Net book value at December 31 1,768,228 4,741,092
Deferred charges represent software license and implementation costs and are amortised over the period of five years from the date of successful implementation.
9. LONG TERM PREPAID EXPENSES
The movement in long term prepaid expenses for the year ended December 31 is as follows: 2012 2011
Cost At January 1 55,543,635 45,000,000 Additions during the year - 10,543,635 At December 31 55,543,635 55,543,635
Accumulated amortization At January 1 18,998,051 13,125,008 Charge for the year 5,552,855 5,873,043 At December 31 24,550,906 18,998,051 Net book value at December 31 30,992,729 36,545,584
Long term prepaid expenses represent the mainly SIDF funding appraisal costs and also include Murabaha facility appraisal and restructuring costs and are being amortized over a period of six to nine years.
10. PROPERTY, PLANT AND EQUIPMENT The movement in property, plant and equipment during the year ended December 31, 2012 is analyzed as under:
Building and improvement on leasehold
land
Additions 149,500 1,552,644 1,345,484 19,058,482 1,516,424 6,448,817 30,071,351
Transfers from CWIP - 443,037 14,618 2,569,088 (3,026,743) - -
Disposals - (26,660) - (1,141,888) - - (1,168,548)
Accumulated depreciation
Eliminated on disposals - (26,660) - (1,105,163) - - (1,131,823)
Balance at December 31 43,294,044 10,890,177 11,324,876 535,960,226 - 31,478,994 632,948,317
Net book value
At December 31, 2012 313,490,783 7,096,618 4,348,892 2,011,720,272 5,532,381 1,613,495 2,343,802,441
At December 31, 2011 324,011,007 6,973,255 4,670,406 2,118,394,838 7,042,700 3,262,793 2,464,354,999
The Company’s factory premises are situated in the Jubail Industrial Area and have been constructed on land leased from the Royal Commission for Jubail and Yanbu (‘the Commission’) for a period of 25 years from April 16, 1990 corresponding to Ramadan 21, 1410H at an annual rent of SR 110,430. The Company has entered into land lease arrangement with Sea Ports Authority of King Fahad Industrial Port, Al – Jubai for a period of 20 years from April 11, 2006 corresponding to Shawwal 13, 1427H at an annual lease rent of SR 310,044. The Company has entered into another land lease arrangement with the Commission for a period of 30 years from July 20, 2007 corresponding to Rabi ll 3, 1428H at an annual rent of SR 290,728. The Company has the option of renewing the lease arrangement on expiry of the initial lease arrangement.
The term loans of the Saudi Industrial Development Fund (‘SIDF’) are secured by a mortgage over property, plant and equipment.
11. BANK DEBTS
a. Short-term bank debts
The Company has working capital facilities with local banks. Commission is charged on the short-term loans at commercial rates. The short-term loans were secured by promissory notes, which were fully repaid during the year.
b. Long-term bank loans Long-term bank loans at December 31 comprise of the following:
2012 2011
Saudi Industrial Development Fund (note a) 540,000,000 600,000,000 Murabaha facility from a syndicate of banks (note b) 528,550,000 635,965,000 Project cost overrun Murabaha Facility from a syndicate of banks (note b) 150,000,000 150,000,000
1,218,550,000 1,385,965,000
Current portion shown under current liabilities 142,625,000 124,790,000 Non-current portion shown under non-current liabilities 1,075,925,000 1,261,175,000
1,218,550,000 1,385,965,000
a) On May 15, 2011, the Company reached an agreement with the SIDF to restructure the existing outstanding debt balance. The restructured debt amounting to SR 600,000,000 will be payable in 15 installments, with the first and last installment due on January 9, 2012 and October 25, 2018, respectively.
The term loans of the Saudi Industrial Development Fund (‘SIDF’) are secured by a mortgage over property, plant and equipment.
b) In December 2007, the Company entered into a Murabaha Facility Agreement with a syndicate of banks, namely; Arab Banking Corporation (B.S.C), Riyadh Bank, Samba Financial Group, Saudi Hollandi Bank, National Commercial Bank and SABB (collectively called as “Murabaha Facility Participants”) to provide Project Murabaha Facility of SR 940 million, refinance Murabaha Facility of SR 37.5 million, and Working Capital Murabaha Facility and Standby Murabaha Sub-Facility of SR 150 million. The Project Murabaha Facility loan amounting to SR 525 million has been repaid on availment of the SIDF loan.
In October 2009, the Company entered into a Project Cost Overrun Murabaha Facility Agreement with a syndicate of banks, namely; Arab Banking Corporation (B.S.C), Riyadh Bank, Samba Financial Group, Saudi Hollandi Bank, National Commercial Bank and SABB (collectively called as “The Project Cost Overun Murabaha Facility Participants”) to provide Project Cost Overrun Murabaha Facility of SR 326 million to finance ongoing expansion projects. As per the agreement, the amounts drawn under this facility were originally repayable in two years from drawdown note i.e. November 18, 2011.
On June 5, 2011, the Company entered into a refinancing agreement with a syndicate of banks, namely; SABB, Riyadh Bank and Samba Financial Group (collectively called as “The Murabaha Facility Participants”) to refinance both i) the outstanding balance under the Project Murabaha Facility & the Working Capital Facility Agreement of SAR 506 million dated December 26, 2007, ii) the Cost Overrun Facility Agreement of SAR 326 million dated October 27, 2009.
As per the new Murabah Facility Agreement dated June 5, 2011, the Project Murabaha Facility amounting to SR 682 million will be payable in 14 semi-annual installments starting from July 2011 to December 2017. The Working Capital Murabaha Facility amounting to SR 150 million will be payable in 10 semi-annual installments starting from January 2013 to December 2017.
The facilities are secured by promissory notes. The Company is required to comply with certain covenants under all of above facilities. The installments due within one year from the balance sheet date are shown as current liabilities.
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as at December 31, comprise of the following:
2012 2011
Accrued expenses 38,592,661 31,945,144 Amount due to project contractor - 227,036 Amounts due to companies affiliated to shareholders 489,705 137,992 Advance from customers 1,206,899 823,647
40,289,265 33,133,819
13. ZAKAT
a) The Department of Zakat and Income Tax (“DZIT’) has raised final Zakat assessment for all years up to 31 December 2008. The Company has filed its Zakat declaration for all the years upto 2011 and paid Zakat accordingly and the assessment is awaited.
b) The Zakat charge for the year ended December 31 comprises of the following:
2012 2011
For current year 4,901,401 3,916,249 For previous year (1,401) (916,249) Balance at end of the year 4,900,000 3,000,000
c) Summary of the items included in the Zakat base for the year ended 31 December is as follows:
2012 2011
d) The movement in the Zakat provision is as follows:
2012 2011
Balance at beginning of the year 3,996,440 4,579,858 Charged during the year 4,900,000 3,000,000 Payment during the year (3,995,039) (3,583,418) Balance at end of the year 4,901,401 3,996,440
14. SHARE CAPITAL
Share capital is divided into 120,600,000 shares (2011: 120,600,000 shares) of SR 10 each.
15. SHARE PREMIUM
During the year ended December 31, 2008, 60,300,000 shares, having a face value of SR 10 each, were issued at a premium of SR 2 per share. Share premium amounted to SR 72,850,071 as at December 31, 2012 (2011: SR 72,850,071).
16. DIRECTORS’ REMUNERATION
The Board of Directors’ remuneration has been shown as an appropriation in the Statement of Changes in Equity in accordance with the Company’s by-laws.
17. SELLING AND DISTRIBUTION EXPENSES
Selling and distribution expenses during the year ended December 31, are summarized as follows:
2012 2011
68,991,497 59,994,571
18. GENERAL AND ADMINISTRTIVE EXPENSES
General and administrative expenses during the year ended December 31, are summarized as follows:
2012 2011
Employee costs 15,996,910 12,306,660 Depreciation 2,351,003 1,904,999 Travel and air fares 480,720 392,684 Professional fees 1,015,697 416,251 External services 822,299 839,118 Advertising 579,670 130,127 Utilities and common expenses 475,652 381,227 Rents 275,462 210,004 Consumables 71,568 122,593 Withholding tax 1,194,264 246,706 Others 2,326,817 1,091,111 25,590,062 18,041,480
19. OTHER INCOME, NET
Other income, net during the year ended December 31, are summarized as follows:
2012 2011
Insurance proceeds 14,900,000 - Foreign exchange (loss)/gain (1,889,100) 596,268 Gain on disposal of assets 406,523 756,306 Others 660,068 980,130 14,077,491 2,332, 704
20. EARNINGS PER SHARE
Earnings per share for the year ended December 31, 2012 have been computed by dividing the net income for such period by the weighted-average number of ordinary shares outstanding during the year ended December 31, 2012 of 120,600,000 shares.
21. CAPITAL COMMITMENTS
As at December 31, 2012, the Company had capital expenditure commitments of SR 4.84 million (2011: SR 4.77 million).
The future aggregate minimum lease commitments under non-cancellable operating leases are as follows:
2012 2011
Not later than 1 year 711,159 711,159 Later than 1 year but not later than 5 years 2,464,376 2,573,161 Later than 5 year till lease period 7,914,763 8,517,137
11,090,298 11,801,457
22. RELATED PARTY TRANSACTIONS AND BALANCES
In the ordinary course of business, the Company undertakes transactions with other companies that have certain common shareholders. All such transactions are executed on commercial terms that are approved by management.
There were no sales of finished goods during the current year to affiliated companies (2011: SR Nil).
The cost of sales and expenses include amounts of SR 3,826,814 (2011: SR 455,020) in respect of purchase of inventories and services provided by companies affiliated to shareholders.
Amounts receivable from companies affiliated to shareholders in respect of advances paid are included in trade receivables and prepayments under note 5.
Amounts payable to companies affiliated to shareholders are included in accounts payable and accruals under note 11.
23. CONTINGENT LIABILITY
At December 31, 2012, the Company has a contingent liability of SR 65,725,256 (2011: SR 43,978,168) in respect of bank guarantees and letter of credits issued by the Company’s banks in respect of bid bonds, contracts advance payments and performance bonds.
24. SEGMENT INFORMATION
The management of the Company views the whole business activities of the Company as one operating segment for performance assessment and resources allocation. Accordingly, reporting is provided by geographical segment only. SR 619 million (67%) of the sales are through export (2011: SR 571 million (69%)).
25. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial instruments carried on the balance sheet include cash and cash equivalents, margin deposits with the bank, trade receivables and prepayments, inventories, trade payables and accruals, short term loans, current portion of term loans and long term obligations and zakat provision.
Credit risk is the risk that one party will fail to discharge an obligation and will cause the other party to incur a financial loss. The Company has no significant concentration of credit risks. Cash and cash equivalents are placed with national and international banks with sound credit ratings. Trade and other accounts receivable are actively monitored by the management for recoverability and impairment and are stated at their estimated realizable values.
Fair value and cash flow interest rate risks are the exposures to various risks associated with the effect of fluctuations in the prevailing interest rates on the Company’s financial position and cash flows. The Company’s interest rate risk arise mainly from short-term borrowings and long term debts, which are at floating rates of interest. All deposits and debts are subject to re-pricing on a regular basis. Management monitors the changes in interest rates and believes that the fair value and cash flow interest rate risks to the Company could be significant.
Liquidity risk is the risk that an enterprise will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from the inability to sell a financial asset quickly at an amount close to its fair value.
Liquidity risk is managed by monitoring on a regular basis that sufficient funds are available to meet the Company’s future commitments.
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Company’s transactions are principally in Saudi Riyal, United States dollar and Euro. Transactions in Saudi Riyal and United States dollar are not considered to represent a significant risk to the Company.

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