08.03.06

8.3.2006: Meldung: Zenon Environmental Inc.: Disappointing Fourth Quarter and Year-End Results

Zenon Reports Disappointing Fourth Quarter and Year-End Results
Tuesday March 7, 6:23 pm ET

OAKVILLE, ON, March 7 - Zenon, the leading innovator of membrane-based water filtration technologies, reported a disappointing quarter that was in line with the company"s statements made earlier in December 2005.

For the three months ended December 31:
2005 2004 Change
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($000"s)
Revenue 66,872 65,352 2%

Operating (loss) income before income taxes (11,389) 5,126 -322%

Net (loss) income (6,330) 6,611 -196%
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Net (loss) earnings per share:
Basic ($0.19) $0.20 -195%
Fully diluted ($0.19) $0.20 -195%
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For the twelve months ended December 31:
2005 2004 Change
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($000"s)
Revenue 238,290 233,795 2%

Operating (loss) income before income taxes (13,877) 17,791 -178%

Net (loss) income (8,414) 16,990 -150%
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Net (loss) earnings per share:
Basic ($0.26) $0.56 -146%
Fully diluted ($0.26) $0.55 -147%
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"There is no question that 2005 has been a challenging year for Zenon,"
said Andrew Benedek, Chairman and CEO of Zenon. "The manufacturing changes we
started earlier in the year extended far beyond our estimation and we were
faced with a number of unexpected issues in the fourth quarter that resulted
in a net loss of $6.3 million for the quarter and contributed to a net loss of
$8.4 million for the year.
"For the ZeeWeed 1000 version 3 product," continued Mr. Benedek, "our
targeted production rates continued to improve during the first two months of
this year and this month we expect to be close to our planned production
volume and product rejection rate. The quality of our products throughout this
period was never compromised and we are meeting all of our established quality
standards."
The ZeeWeed 1000 version 3 is the company"s latest innovation to treat
cleaner waters and its commercialization will allow Zenon to remain a
competitive player in the drinking water segment of the market. During the
quarter, Zenon received seven orders for drinking water systems incorporating
this membrane and the company expects this to grow in 2006.
Demand for Zenon"s premier product, the ZeeWeed 500 series of membranes,
is also growing as the company"s commitment to innovation continues.
Production of the next generation of this product will be underway in 2006,
which is expected to increase capacity by an additional 50% by year-end.
Due to the company"s significant technological advances, Zenon continues
to be the global leader in membrane based water and wastewater treatment. The
company reported a number of significant new orders received in December,
which brought the total bookings for the quarter to $74 million and resulted
in a backlog of $385 million, up from $301 million at the end of 2004.

MANAGEMENT"S DISCUSSION AND ANALYSIS
------------------------------------

The following is a discussion of the consolidated financial condition and
results of operations of Zenon Environmental Inc. for the period ended
December 31, 2005. This discussion should be read in conjunction with: the
Unaudited Interim Consolidated Financial Statements of the company and notes
thereto for March 31, 2005, June 30, 2005 and September 30, 2005;
"Management"s Discussion and Analysis" for December 31, 2004, included in the
Annual Report of the company for the year ended December 31, 2004; and with
the Audited Consolidated Financial Statements and notes thereto for the year
ended December 31, 2004. Zenon"s auditors have not carried out a review of the
quarterly financial information.
Certain information contained in this "Management"s Discussion and
Analysis" contains forward-looking statements based on the company"s estimates
and assumptions, which are subject to risks and uncertainties. This could
cause the company"s actual results to differ materially from the forward-
looking statements contained in this discussion.

Operating Results

The net loss in the quarter of $6.3 million was significantly above
management"s expectations at the beginning of the quarter, when it was
believed that the production problems relating to the ZeeWeed(R) 1000
version 3 (V3) had been resolved and that production was beginning to ramp up
to meet our customer demands. Unfortunately, we were plagued with intermittent
problems that were eventually worked through in December. We have been
continuing to ramp up production since then and rejection levels have been
reduced significantly. Current production levels are meeting our target levels
and we expect to be at our full targeted production capacity by the end of
March 2006.
In addition to our V3 problems, the fourth quarter was further impacted
by a $2.7 million loss relating to two orders for which sub-contract costs
exceeded expectations. In addition, the company incurred additional losses due
to the reorganization of manufacturing lines between Hungary and Canada,
disappointing Homespring(TM) sales, and orders delayed by customers.
Total new bookings in the quarter were $74 million, which increased our
backlog to $385 million. During the quarter, we reduced our opening backlog by
$7 million relating to the cancellation of an order. Revenue for the quarter
at $66.9 million was only 2.3 % above last year (1.9% for the full year). Our
lower than expected membrane production and certain order delays resulted in a
revenue shortfall of approximately $20 million.
Revenue in both our North American and International systems businesses
was flat compared to last year with North America being 2.6% below last year
for the quarter and International being up 2.5%. Revenue from direct membrane
shipments was $2 million higher than last year for the quarter and offset the
slight decrease in the North American systems business.
Gross profit for the quarter was disappointing as a result of the
problems that were experienced in the quarter. The major contributors to the
shortfall in gross profit were, as previously stated, the V3 production
issues, which reduced the gross margin by $3.5 million and the higher
sub-contract and project cost overruns that reduced the gross margin by an
additional $3.3 million.
The impact of these issues decreased the gross margin by over 9.0%. The
gross margin was also lower than our historical margin due to a higher
proportion of revenue realized from third party parts and components for
systems as compared to internally generated revenue relating to membranes and
labour costs. The strength of the Canadian dollar as it relates to export
sales also impacted our margin in the quarter.
Selling, general and administrative (SG&A) costs at 32.1% of revenue for
the quarter (31.2% YTD) were higher than management"s expectations as a result
of the low revenue. As previously mentioned in prior quarter discussions, we
also invested in new sales offices that are not fully recovering their costs
at this time. Management continues to be committed to achieving 25% or lower
SG&A as a percent of revenue. To improve our SG&A performance, we have
undertaken a program to reduce administrative and sales costs in 2006.
Also included in SG&A costs for the quarter is the legal cost for the
U.S. Filter lawsuit of $194,000 (2004 - $1.8 million) and for the year of
$1.9 million (2004 - $3.0 million). As advised in prior quarters, the
Enviroquip Inc. lawsuit has been settled. The total cost incurred for the year
relating to this suit is $1.6 million.
Compared to the third quarter, amortization expense increased in the
fourth quarter by $1.4 million. The increase resulted from the
commercialization of the V3 product line and the restructuring of our product
lines between our two manufacturing facilities in Hungary and Canada.
The tax rate for the quarter was 44.4% and 39.4% for the year. In the
fourth quarter, the company favourably resolved some tax issues which enabled
the release of certain reserves in the year, resulting in a tax recovery in
the quarter of $1.7 million. The tax rate prior to this adjustment was 29.8%
for the quarter and 27.3% for the year. The rate was higher than our expected
20% rate due to the significant losses incurred in a higher tax rate
jurisdiction in the fourth quarter. As a result, our net loss in the quarter
was $6.3 million ($0.19 per share).
With our production issues now under control, we are focused on returning
the company to profitability in 2006.

Liquidity and Capital Expenditures

Overall, cash and marketable securities decreased in the quarter by
$20.8 million and $74.7 million on a year-to-date basis. Working capital in
the quarter improved mainly as a result of an increase in customer advances of
$10.3 million and a decrease in inventory of $3.7 million. These working
capital reductions were offset by an increase in accounts receivable of
$7.0 million relating to year-end billings to our customers.
The major uses of funds in the quarter were: 1) the purchase of fixed
assets of $13.9 million relating to membrane production additions both in
Hungary and Canada, as well as further additions to pilots and our mobile
plant units; 2) the initial payment of $6.0 million for the acquisition of
Alpha Plan and 3) the net loss of $6.3 million.
The acquisition of Alpha Plan, which was accounted for in the first
quarter of 2005, is structured so that there could be future payments made
depending on certain valuations of building and inventory. As at December 31,
2005 the outcome cannot be reasonably determined. The value placed on these
payments for accounting purposes is approximately $7 million.
In part due to an operating loss, the company utilized a significant
amount of cash and marketable securities in the year. However, $38 million or
50% of the total approximate usage of $75 million has been used to invest in
capital and other assets to support our production growth and new product
development, and $9 million (12.1%) has been invested in acquisitions to both
enhance our product offerings and develop additional technologies. An
additional $12 million was invested in working capital during the year. The
competitiveness in the marketplace is not only being felt through lower
prices, it is also being seen in delayed payment terms. We do not see this
correcting in the near term however, we are confident that over the long term
the industry will revert to more normalized payment terms over the term of
customer contracts.
Although our operating issues have impacted our cash generation this
year, we remain confident that the company is well positioned to realize its
growth and performance targets going forward in 2006 and future years. Our
balance sheet continues to support the business with minimal long-term debt
and cash and marketable securities in excess of $40 million.

Accounting Policies

There has been no change to accounting policies throughout 2005 and the
consolidated financial statements have been prepared using the same accounting
policies as described in the company"s 2004 annual report.

Outlook

As a result of the difficulties faced by the company in 2005, management
has implemented a number of cost control initiatives to focus on profitability
in 2006. The mistakes of 2005 will not be repeated but management does
anticipate competitive market pressures to continue to affect the company"s
margins, at least in the short to mid-term.
The demand for membrane based water treatment systems is growing and
Zenon will ensure that it has the technology, the manufacturing capability and
the financial strength to be a supplier of choice in this market.
The company is continually monitoring the fluctuations among the
US dollar, Canadian dollar, and other currencies. Zenon has natural and
financial hedges in place to protect margins on existing orders. Management
continues to assess these changes in currency and to react to minimize the
financial impact to the company.

CONFERENCE CALL
---------------

Zenon will hold a conference call on Wednesday, March 8, 2006 at
10:00 a.m. (ET) to discuss the company"s financial results for the quarter and
to answer questions related to issues addressed in this release. To
participate in the call, please dial 416-644-3425 five minutes prior to the
10:00 a.m. start. If you are unable to participate in the call at the
scheduled time, you may listen to a replay by dialling 416-640-1917 then
entering the pass code number 21179461 followed by the number sign. This
service will be available through March 15, 2006.
The audio webcast will also be available over the Internet through
Zenon"s website at www.zenon.com. It will be archived there for future review.

Zenon is a world leader in providing advanced membrane products and
services for water purification, wastewater treatment and water reuse to
municipalities and industries worldwide.
Canada"s Top 100 Employers ranked Zenon in their top 100 list for the
last six years. An S&P/TSX Composite company, Zenon Environmental Inc. trades
on the Toronto Stock Exchange under the symbols ZEN and ZEN.NV.A; and on the
OTC under the symbols ZNEVF and ZNEAF. Additional information is available at
Zenon"s web site www.zenon.com.


For further information

Andrew Benedek, Chairman & CEO, (905) 465-3030
or Nazeli Clausen, Director, Investor Relations, (905) 465-3030 EXT. 3055


Source: Zenon Environmental Inc.
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