NISKU, AB, Aug. 8 /CNW/ -
Corporate Highlights
- Domestic Manufacturing Revenue increased during Q2.
- Domestic Equipment Contract in excess of $2.5 million 80% complete at
end of Q2.
- $3.3 Million Domestic Order received for fabrication during Q3/Q4.
<<
Summary of Results Three months ended Six months ended
(In thousands, except per June 30, June 30, June 30, June 30,
share data) 2005 2004 2005 2004
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Revenue $ 7,953 $ 4,303 $20,437 $16,051
Margin 596 (413) 3,398 2,796
Margin % 7.5% (9.6%) 16.6% 17.4%
Operating income (loss) (973) (1,815) 98 (270)
Loss before income taxes (1,095) (1,892) (95) (437)
Net loss (1,095) (1,685) (95) (437)
Earnings (loss) per share
- basic (0.10) (0.15) (0.01) (0.04)
Earnings (loss) per share
- diluted (0.10) (0.15) (0.01) (0.04)
This report includes forward looking statements that are based on the
Corporation's current expectations and therefore are subject to uncertainties
such as the level of industry drilling and coating activity, foreign exchange
fluctuations and world wide economic conditions that may cause actual results
to differ materially.
This analysis should be read in conjunction with the interim and annual
financial statements and Annual Management Discussion and Analysis.
Management Discussion and Analysis
Financial
June 30, 2005 second quarter revenue totaled $8.0 million, 86% above the
$4.3 million recorded for the comparative quarter ended June 30, 2004. Revenue
is significantly higher as the manufacturing activity included a major
equipment contract for $2.5 million whereas no major equipment contract
revenue had been generated in 2004. Year to date revenue for the period ended
June 30, 2005 totaled $20.4 million which is also above the June 30, 2004
comparative period total of $16.0 million and also a direct result of the
increase in manufacturing activity during 2005.
Pipeline revenues for the three month period ended June 30, 2005, totaled
$3.5 million, an increase of $1.3 million from the quarter ended June 30, 2004
as High Density Poly Pipe (HDPE) activity increased significantly during the
second quarter. Pipeline revenue for the six month period ended June 30, 2005
totaled $12.4 million, a 4% increase over the comparative period total of
$11.9 million and also the direct result of HDPE activity.
Manufacturing revenue for the three month period ended June 30, 2005
totaled $4.5 million, 104% above the $2.2 million recorded for June 30, 2004
comparative period as equipment contract work was very active during the
period. Year to date results also reflected the increase in contract work as
manufacturing revenue totaled $8.0 million for the six month period ended
June 30, 2005, $3.9 million above the $4.1 million recorded for 2004.
Margin for the three month period ended June 30, 2005 of $0.6 million is
above the -$0.4 million recorded for the comparative period. Overall margins
were improved based on increased manufacturing activity. Year to date margin
of $3.4 million (16.6%) is $0.6 million above the $2.8 million (17.4%)
recorded for the comparative six month period and reflects the improvement in
manufacturing performance.
Manufacturing margins for the three month period ended June 30, 2005
totaled $1.2 million (26.6%), $1.4 million above the -$0.2 million comparative
period total as 2005 manufacturing activity increased significantly. Year to
date margin of $2.0 million (24.9%) is $1.8 million above the 2004 six month
comparative period total of $0.2 million (4.4%) with overall margins
positively affected by higher activity levels.
Although Pipeline revenue increased during the period ended June 30,
2005, Pipeline margins for the three month period ended June 30, 2005 totaled
-$0.6 million compared to the -$0.2 million recorded in 2004. This is
attributed to an increase in HDPE revenue which had nominal margins together
with lower coating volumes generated in the second quarter which were not
sufficient to cover plant overhead costs. Year to date pipeline margins of
$1.4 million (11.3%) were $1.2 million below the $2.6 million (21.9%) recorded
for the comparative period, a result of lower volumes, plant inefficiencies
and competitive pressure on coating prices experienced in 2005.
The Corporation's selling, general and administrative expenses totaled
$926 thousand for the three month period ended June 30, 2005, a slight
increase of $10 thousand from the $916 thousand recorded for the three month
period ended June 30, 2004 and is attributed to increased wages experienced in
2005.
Amortization expense for the period ended June 30, 2005 totaled
$576 thousand, an increase of $116 thousand over the $460 thousand recorded
for the comparative period ended June 30, 2004. Utilization of the second
coating line in Camrose contributed to the increase.
Operating cash flow, representing net earnings (loss) adjusted for items
not involving cash, generated by the Corporation for the three month period
ended June 30, 2005 totaled -$0.5 million, an improvement of $0.9 million from
operations over the comparative period. This improvement is attributed to an
increase in operating gross margin over the comparative period. Year to date
operating cash flow at June 30, 2005, totaled $1.1 million, $0.4 million above
the $0.7 million generated over the comparative period.
Interest costs of $243 thousand for the six month period ended June 30,
2005 were $24 below the $267 thousand recorded for the period ended June 30,
2004.
The decrease in coating activity and overall decrease in revenue and
gross margin generated during the historically slow second quarter resulted in
net losses of $1.1 million for the three month period ended June 30, 2005 and
a loss of $0.1 million for the six month period. This compares to a loss of
$1.9 million for the three month period ended June 30, 2004 and net loss of
$0.4 million for the six month period ended June 30, 2004. The significant
improvement in operating performance year over year is attributed to the
significant increase in manufacturing activity, which is expected to remain
busy for the remainder of 2005.
Net earnings before tax for the Manufacturing division for the three
month period ended June 30, 2005 totaled $0.7 million as compared to the -
$0.5 million net losses for the comparative period.
Net losses before tax for the Pipeline division totaled $1.8 million for
the three month period ended June 30, 2005, $0.5 million above the
$1.3 million loss for the comparative period. Slow small diameter coating
demand and depressed pricing caused losses during the historically slow second
quarter. Year to date net losses before tax of $1.1 million is below the
$0.1 million net earnings recorded to June 30, 2004, attributed to downward
pressure on pricing, lower small diameter coating volumes and plant
inefficiencies experienced during the course of 2005.
Accounts receivable total $7.6 million at June 30, 2005, a decrease over
the $0.9 million recorded at December 31, 2004, and is attributed to the
collection of domestic coating revenue from the busy first quarter.
At June 30, 2005, operating and term loan credit facilities authorized to
the Corporation included a demand revolving operating line of credit of
$6.3 million, of which $5.5 million was available ($2.6 million utilized), a
demand revolving evergreen loan of $3.0 million ($2.6 million utilized), a
loan facility for $0.6 million pertaining to the manufacture of polyethylene
pipe and term loans in the amount of $3.1 million.
Additions to capital equipment were $21 thousand for the quarter ended
June 30, 2005, compared to $255 thousand for the quarter ended June 30, 2004.
Capital expenditures for the second quarter of 2005 were primarily related to
increased manufacturing equipment required to assist with increased activity.
The Corporation's bank working capital covenants have been adjusted to
remove principal payments due after 12 months from the working capital
covenant calculation. Working capital of -$1.1 million is recorded at June 30,
2005. Adjusted working capital totals $3.1 million, and is calculated by
deducting $4.2 million of loans payable, scheduled to be repaid after
12 months. The Corporation operated within all bank covenants at June 30,
2005.
Selected Quarterly Information
------------------------------
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Three Months Ended
-------------------------------------------------------------------------
June. Mar. Dec. Sept. June. Mar. Dec. Sept.
30/05 31/05 31/04 30/04 30/04 31/04 31/03 30/03
-------------------------------------------------------------------------
Total
Revenues $7,953 $12,484 $9,429 $7,127 $4,303 $11,748 $11,326 $7,793
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Net
Earnings
(Losses) (1,095) 1,071 (152) 181 (1,685) 1,248 1,529 (308)
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Basic
Earnings
(Loss)
per
Share (0.10) 0.09 (0.01) 0.02 (0.15) 0.11 0.14 (0.03)
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Diluted
Earnings
(Loss)
per
Share (0.10) 0.08 (0.01) 0.02 (0.15) 0.10 0.13 (0.03)
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Total
Assets 30,160 35,590 31,427 30,303 28,893 36,640 37,121 35,009
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Long Term
Capital
Lease
Obli-
gations 372 431 489 546 602 657 712 685
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The seasonality of the pipe coating business results in wide quarterly
fluctuations in revenue generated by the Corporation and net earnings (losses)
therefrom. The second quarter ended June 30 is historically the slowest period
for the Corporation with the first quarter the most active.
Share Information
Outstanding options issued by the Corporation totaled 968,525 at June 30,
2005, 860,150 of which are exercisable. During the second quarter of 2005, no
options were exercised. Common shares outstanding at June 30, 2005 total
11,455,902.
New Accounting Policies
There have been no new accounting policies adopted by the Corporation
this quarter.
Critical Accounting Estimates
The Corporation recognizes revenues related to equipment fabrication
contracts based on the percentage of completion of the individual contracts.
At June 30, 2005, fabrication contracts totaling approximately $1.3 million
were in progress and 76% complete.
The Corporation provides an estimate for depreciation of assets based on
expected useful life of the assets with coating and extrusion equipment
calculated based on utilization of the equipment to match revenues generated
by the equipment.
Disclosure of Contractual Obligations
At June 30, 2005, there were no significant changes to the contractual
obligations required to be made by the Corporation which were disclosed in the
December 31, 2004 annual report.
Business Risks
At June 30, 2005, there are no significant changes to the business risks
disclosed in the Garneau annual report for December 31, 2004. Letters of
credit and receivables are outstanding in United States dollars at June 30,
2005 for balances of contracts owing totaling approximately $555 thousand and
remain subject to foreign exchange fluctuations.
Letters of credit issued and outstanding at June 30, 2005 total
$299 thousand and will continue to have the potential risk of being encashed
until maturity.
Operational
Reduced coating activity during the historically slow second quarter
affected gross margins as plant efficiencies were negatively impacted by
smaller volumes. The plant operated well below capacity during the second
quarter of 2005. Recent improvement in small diameter coating orders has
resulted in the plant moving to two shifts.
Manufacturing remains very active with operations continuing to employ
two shifts working five/six days per week. A competitive employment
environment and labor shortage has restricted further growth however, the
Corporation continues to look for alternatives in attracting skilled
employees.
Outlook
Garneau has completed the Corporation's historically slow second quarter
for the Camrose coating plant and the Corporation's order book is now showing
signs of firming up.
Strong drilling forecasts for Western Canada based on forecasted oil and
gas prices are projected to have a positive impact on small diameter coating
revenue for the remainder of 2005.
Initial technical discussions and plant trials are now being conducted on
large diameter projects scheduled over the next two years. If Garneau is
successful in being awarded these large diameter contracts in the future,
these contracts would be expected to have a positive impact on future
financial performance of the Corporation.
Although International equipment bidding remains active, no large
contracts have been awarded to the Corporation to date in 2005.
The Domestic manufacturing division of the Corporation is very active and
continues to operate near capacity in the existing Nisku location. The recent
award of a contract in excess of $3 million is expected to keep the Nisku shop
busy into the fourth quarter.
Garneau continued to operate within all bank covenants during the second
quarter as established by the Corporation's bank.
Improved small diameter coating volumes will be required in the third
quarter to contribute positively to the Corporation's financial results.
On behalf of the Board of Directors
(signed)
Glen Garneau,
President and Chief Executive Officer
August 4, 2005
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
As at 2005 2004
(In thousands) (unaudited)
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ASSETS
Current Assets:
Accounts receivable $ 7,601 $ 8,722
Inventory 3,228 2,679
Prepaid expenses and deposits 200 45
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11,029 11,446
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Property, plant and equipment 19,131 19,981
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$30,160 $31,427
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Operating loan $ 2,585 $ 2,769
Accounts payable and accrued liabilities 3,246 3,838
Deferred revenue 428 215
Loans payable 5,655 6,196
Current portion of capital lease obligations 261 223
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12,175 13,241
Capital lease obligations 372 489
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12,547 13,730
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Shareholders' Equity:
Share capital 20,841 20,834
Contributed surplus 219 215
Deficit (3,447) (3,352)
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17,613 17,697
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$30,160 $31,427
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CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(In thousands, except per share Three Three Six Six
data, unaudited) months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
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Revenue $ 7,953 $ 4,303 $20,437 $16,051
Operating costs 7,357 4,716 17,039 13,255
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596 (413) 3,398 2,796
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Other operating expenses:
Selling, general and
administrative 926 916 1,984 1,878
Amortization 576 460 1,162 1,133
Research and development 67 26 154 55
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1,569 1,402 3,300 3,066
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Operating income (loss) (973) (1,815) 98 (270)
Financing:
Interest on loans payable 92 85 178 200
Interest on operating loan 28 21 65 67
Writedown of property, plant
& equipment - - 70 -
Other Income (10) (8) (90) (51)
Foreign exchange losses (gains) 12 (21) (30) (49)
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Loss before income taxes (1,095) (1,892) (95) (437)
Income taxes:
Future reduction - (207) - -
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- (207) - -
Net loss (1,095) (1,685) (95) (437)
Deficit, beginning of period (2,352) (1,696) (3,352) (2,944)
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Deficit, end of period $(3,447) $(3,381) $(3,447) $(3,381)
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Loss per share:
Basic $ (0.10) $ (0.15) $ (0.01) $ (0.04)
Diluted $ (0.10) $ (0.15) $ (0.01) $ (0.04)
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited) Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
-------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net loss $(1,095) $(1,685) $ (95) $ (437)
Items not involving cash:
Amortization 576 460 1,162 1,133
Writedown of property, plant
and equipment - - 70 -
Stock based compensation 2 4 4 8
Future income taxes - (207) - -
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(517) (1,428) 1,141 704
Changes in non-cash operating
working capital 4,366 6,751 38 4,089
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3,849 5,323 1,179 4,793
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Financing:
Proceeds from exercise of share
purchase options - 88 7 107
Repayment of loans payable and
capital leases (254) (309) (620) (657)
Decrease in operating loans (3,575) (4,847) (184) (4,991)
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(3,829) (5,068) (797) (5,541)
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Investments:
Additions to property, plant
and equipment (20) (255) (382) (666)
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(20) (255) (382) (666)
Decrease in cash - - - (1,414)
Cash, beginning of period - - - 1,414
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Cash, end of period $ - $ - $ - $ -
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NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited)
The Corporation is incorporated under the Business Corporations Act of
Alberta. Its principal business activities are the coating of pipe and
the manufacturing of equipment for use in the oil and gas industry. The
company is subject to seasonal fluctuations in operating results.
1. Significant Accounting Policies:
These unaudited consolidated interim financial statements follow the
same accounting policies and methods of application as the most recent
annual consolidated financial statements. Notes to the consolidated
interim financial statements for the period ended June 30, 2005 do not
include all disclosures required by Canadian Generally Accepted
Accounting Principles for annual financial statements. For further
detailed information, the reader is advised to refer to Garneau Inc.'s
2004 audited financial statements.
2. Segment Disclosures
Management has determined that the Corporation operates in two reportable
business segments which are Manufacturing and Pipeline.
Three months ended Three months ended
June 30, 2005 June 30, 2004
Manufacturing Pipeline Manufacturing Pipeline
Revenue $ 4,463 $ 3,490 $ 2,164 $ 2,139
Gross margin 1,187(26.6%) (591)(-16.9%) (170)(-7.8%) (243)(-11.4%)
Other expenses 503 1,188 377 1,102
Earnings (loss)
before income
taxes 684 (1,779) (547) (1,345)
Six months ended Six months ended
June 30, 2005 June 30, 2004
Manufacturing Pipeline Manufacturing Pipeline
Revenue $ 8,014 $ 12,423 $ 4,118 $ 11,933
Gross margin 1,992(24.9%) 1,406(11.3%) 180(4.4%) 2,616(21.9%)
Other expenses 999 2,494 734 2,499
Earnings (loss)
before income
taxes 993 (1,088) (554) 117
Substantially all of the carrying value of the property, plant and
equipment, and amortization expense relate to the Pipeline segment.
3. Share Data
At June 30, 2005, the Corporation had 11,455,902 outstanding common
shares and 968,525 outstanding options to acquire common shares. 860,150
of these options were vested and exercisable. During the quarter, no
options were exercised.
4. Loans Payable
Loans payable to the Corporation's bank are payable upon demand and are
classified as a current liability. Scheduled repayments are as follows:
June 30, 2005 December 31, 2004
Due within 12 months $ 1,467 $ 1,468
Due after 12 months $ 4,187 $ 4,728
5. Interest
Three Months Ended Six Months Ended
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June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
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Interest Paid $ 120 $ 106 $ 243 $ 267
About Garneau Inc.
------------------
Garneau Inc.'s primary business is the application of high performance
protective coatings and linings for oil and gas pipeline protection and
additionally designs and fabricates oilfield equipment for both domestic and
international markets. During more than 30 years of operating experience,
Garneau Inc. has developed significant expertise and innovative technology,
and has maintained a long-term focus on continuously improving the pipe
coating process with cost-effective, quality coatings. A talented and
effective management team provides the vision and experience for long-term
profitable growth and increasing shareholder value. The company's Website can
be accessed at: http://www.garneau-inc.com/
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