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(TSX: SCL.A, SCL.B)
TORONTO, May 11 /CNW/ -
Financial Summary
Three Months Ended Mar. 31
(In thousands of Canadian dollars
except per share amounts) 2009 2008
Restated
(note 1)
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Operating Results
Revenue $ 307,464 $ 293,357
EBITDA (note 2) 66,671 54,291
Operating income from continuing operations 50,434 40,919
Income from continuing operations 31,520 26,921
Income (loss) from discontinued operations 21 (69)
Net income 31,541 26,852
Net income (loss) per share (Class A and B)
- Basic
Continuing operations 0.45 0.38
Discontinued operations 0.00 0.00
Total 0.45 0.38
Net income (loss) per share (Class A and B)
- Diluted
Continuing operations 0.45 0.37
Discontinued operations 0.00 0.00
Total 0.45 0.37
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Cash Flow
Cash from (used in) operating activities 38,745 (11,568)
Additions to property, plant and equipment 14,143 12,261
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Financial Position
Working capital 262,389 281,215
Total assets 1,221,270 1,018,685
Shareholders' equity per share (Class A and B)
(note 3) $ 10.90 $ 8.62
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Note 1: Restated for change in accounting policy. Refer to note 1 to the
interim consolidated financial statements for the three months ended
March 31, 2009.
Note 2: EBITDA is a non-GAAP measure calculated by adding back to income
from continuing operations, the sum of interest (income)/expense, taxes
and depreciation/amortization of property, plant and equipment and
intangible assets. EBITDA does not have a standardized meaning prescribed
by GAAP and is not necessarily comparable to similar measures prescribed
by other companies. EBITDA is used by many analysts in the oil and gas
industry as one of several important analytical tools. The following is
the calculation of EBITDA for the periods presented above:
Income from continuing operations 31,520 26,921
Add (deduct):
Income taxes 17,251 14,340
Interest (income) expense 1,663 87
Amortization of property, plant and equipment 15,142 12,943
Amortization of intangible assets 1,095 -
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EBITDA 66,671 54,291
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Note 3: Shareholders' equity per share is a non-GAAP measure calculated
by dividing shareholders' equity by the number of Class A and Class B
shares outstanding at the date of the balance sheet.
ShawCor Ltd. ("ShawCor" or the "Company") is a growth-oriented, global energy services company specializing in technology-based products and services for the Pipeline and Pipe Services and the Petrochemical and Industrial markets. The Company operates seven divisions with over seventy manufacturing, sales and service facilities located around the world.
Consolidated revenue from continuing operations for the first quarter of 2009 totaled $307.5 million, 4.8% higher than the first quarter of 2008, and reflected increased revenue in the Pipeline and Pipe Services segment of the Company primarily as a result of the impact of the weaker Canadian dollar on the translation of the Company's U.S. dollar denominated revenue partially offset by lower revenue from the Company's Petrochemical and Industrial segment. During the first quarter of 2009, the Canadian dollar was 22.9% weaker versus the U.S. dollar, on average, than in the first quarter of last year. The weakening of Canadian dollar on the translation of foreign currency operating results had a net favourable impact on revenue, income from continuing operations and net income of approximately $26.9 million, $9.9 million and $8.3 million, respectively.
Net income in the quarter totaled $31.5 million ($0.45 per diluted share), compared to $26.9 million ($0.37 per diluted share) in the first quarter of last year, with the improvement reflecting the increased revenue in the quarter together with improved operating margins (operating income from continuing operations divided by revenue from continuing operations). Operating margins in the quarter improved 2.5 percentage points from the first quarter of last year as a result of strong performance in the Pipeline and Pipe Services segment where higher sales combined with lower fixed costs.
The Company's backlog at March 31 2009 of $402.4 million, declined 11.7% from the level at the beginning of the quarter as strong revenue exceeded new order bookings. While the backlog may decline further in subsequent quarters, bidding activity remains high and the Company continues to pursue several large offshore pipe coating projects. These projects, if awarded to the Company, could generate significant revenue growth in 2010 and beyond. Overall, consolidated revenue in 2009 is expected to be slightly below the record levels achieved in 2008; however, the Company expects that operating margins in 2009 will meet or exceed those achieved in 2008 as a result of several initiatives including programs to reduce costs and improve efficiencies.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's interim discussion and analysis of operations and financial position and should be read in conjunction with the Consolidated Financial Statements and Management's Discussion and Analysis included in the Company's 2008 Annual Report.
Revenue, Income from Operations and Net Income
Consolidated Results
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Three months ended Mar. 31 Dec. 31 Mar. 31
(in thousands of Canadian dollars) 2009 2008 2008
Restated Restated
(note) (note)
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Revenue from continuing operations 307,464 433,853 293,357
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Operating income from continuing
operations 50,434 75,588 40,919
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Operating margin 16.4% 17.4% 13.9%
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Note: restated for change in accounting policy - refer to note 1 to the
interim consolidated financial statements for the three months ended
March 31, 2009.
Current Quarter versus Q1 2008
Consolidated revenue from continuing operations for the first quarter of 2009 totaled $307.5 million, 4.8% higher than in the first quarter of 2008 due to the impact of the weaker Canadian dollar which was partially offset by market declines in the Petrochemical and Industrial segment. During the first quarter of 2009, the Canadian dollar was, on average, 22.9% weaker compared with the U.S. dollar, than in the first quarter of last year, which on translating foreign currency operating results, favourably impacted revenue, income from continuing operations and net income by approximately $26.9 million, $9.9 million and $8.3 million, respectively.
Operating income from continuing operations totaled $50.4 million (16.4% of revenue from continuing operations) in the first quarter, representing a 23.3% increase over $40.9 million (13.9% of revenue from continuing operations) achieved in the first quarter of last year, with the improvement reflecting the increased revenue in the period together with improved operating margins in the Pipeline and Pipe Services segment.
Net income in the quarter totaled $31.5 million ($0.45 per share, diluted) compared to $26.9 million ($0.37 per share, diluted) in the first quarter of 2008, with the improvement in earnings per share due to the higher net income together with the benefit of the reduction in shares outstanding due to the repurchase of 602 thousand Class A Subordinate Voting shares under the Normal Course Issuer Bid over the preceding twelve months.
Current Quarter versus Q4 2008
Consolidated revenue from continuing operations in the first quarter of 2009 was 70.9% of the record level achieved in the prior quarter, and resulted from reduced pipeline project activity in the Pipeline and Pipe Services segment from the record level achieved in the prior quarter as well as a continued deterioration in the industrial markets served by the Petrochemical and Industrial segment.
Operating income from continuing operations in the first quarter was 66.7% of the level achieved last quarter and reflected the impact of the lower revenue together with a significant decrease in operating margins in the Petrochemical and Industrial segment as a result of low factory utilization.
Net income in the quarter decreased $25.1 million or $0.34 per share diluted, from the record $56.6 million ($0.79 per share, diluted) in the fourth quarter of 2008, in line with the lower operating income from continuing operations generated during the quarter.
ShawCor classifies its revenue and income from operations in two industry segments: Pipeline and Pipe Services, and Petrochemical and Industrial. Discussion of the operating results of each of these segments follows:
Pipeline and Pipe Services
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Three months ended Mar. 31 Dec. 31 Mar. 31
(in thousands of Canadian dollars) 2009 2008 2008
Restated Restated
(note) (note)
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Revenue from continuing operations $ 279,951 $ 401,768 $ 255,794
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Operating income from continuing
operations $ 56,646 $ 75,636 $ 37,822
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Operating margin 20.2% 18.8% 14.8%
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Note: restated for change in accounting policy - refer to note 1 to the
interim consolidated financial statements for the three months ended
March 31, 2009.
Current Quarter versus Q1 2008
In the Pipeline and Pipe Services segment, revenue in the first quarter of 2009 totaled $280.0 million and was 9.4% higher than in the first quarter of last year, driven by strong results at Canusa-CPS and Guardian and the inclusion of $16.8 million in revenue from Flexpipe Systems which was acquired on June 27, 2008. At Bredero Shaw, revenue in the first quarter of the year was unchanged from the first quarter of 2008 with the favourable impact of the weaker Canadian dollar on the translation of the division's mainly U.S. dollar-based revenue as well as growth in the division's Asia Pacific region offsetting a weakening of activity in the division's other regions. In the Asia Pacific region, revenue in the first quarter increased by 60.7% over the first quarter of the prior year as a result of the Pluto and Kumang Cluster pipe coating projects executed at the region's plant in Kuantan, Malaysia. In the America's region, revenue in the first quarter declined by 20.0% from the first quarter of last year. Key factors impacting revenue included small diameter pipe coating activity in Western Canada and the United States which declined by 41% and 19% respectively, and lower volumes of Canadian and U.S. transmission pipeline projects, partially offset by growth in Mexico. In the Europe, Africa and Russia region, and in the Middle East region, revenue in the quarter was 16.6% and 17.1% lower, respectively, than in the first quarter of 2008, reflecting reduced pipe coating project activity in those regions.
In the segment's other business units, revenue in the first quarter at Canusa-CPS increased 24.8% from the first quarter of 2008, on very strong project activity in markets outside of North America, while at Guardian, revenue increased 37.1% over levels in the first quarter of last year as a result of increased market share for Guardian's drill pipe inspection and refurbishment services in Western Canada. Revenue at Shaw Pipeline Services in the first quarter was 22.9% lower than in the same quarter of last year due to lower offshore pipeline weld inspection activity partially offset by stronger U.S. onshore activity.
Operating income from continuing operations in the quarter for the segment totaled $56.6 million (20.2% of revenue from continuing operations) and increased 49.8% from the first quarter of 2008. The improvement resulted from higher revenue combined with operating margins that increased 5.4 percentage points over the 14.8% achieved in the first quarter of last year, a result of the favourable movement in the foreign currency to Canadian dollar translation rate, improved manufacturing efficiencies associated with higher factory utilization, and a $7 million reduction in fixed costs at Bredero Shaw's Europe, Africa and Russia region.
Current Quarter versus Q4 2008
Revenue in the first quarter of the year in the Pipeline and Pipe Services segment was 30.3% lower than the record levels achieved in the prior quarter as a 35.7% increase at Canusa-CPS and a 1.2% increase at Guardian were offset by quarter-over-quarter decreases at the other divisions in the segment. Revenue in the quarter at Bredero Shaw decreased 35.6% from the fourth quarter of last year as a result of lower small diameter pipe coating volumes in North America and the impact of the winding down of several large diameter pipe coating projects in the Middle East and Europe, Africa and Russia regions. Revenue in the quarter at Shaw Pipeline Services decreased 45.3% from the prior quarter reflecting lower levels of offshore pipe girth weld inspection activity while at Flexpipe Systems, revenue in the quarter decreased 47.3% from the prior quarter, the result of lower demand for the division's small diameter composite pipe systems due to lower drilling activity in Western Canada and the United States and the build up of excessive inventories of small diameter steel line pipe throughout North America.
Operating income from continuing operations in the quarter was 25.1% lower than the level achieved in the prior quarter as a result of the reduction in revenue in the quarter partially offset by a quarter over quarter 1.4 percentage point improvement in operating margins. The first quarter operating margin of 20.2%, compared to 18.8% in the fourth quarter of 2008, was achieved despite the significant decrease in revenue with the improvement attributable to increased pipe coating project contribution margins at Bredero Shaw, the result of raw materials price reductions and improved manufacturing efficiencies, together with lower fixed costs and a $6.8 million decrease in property plant and equipment amortization expense.
Petrochemical and Industrial ------------------------------------------------------------------------- Three months ended Mar. 31 Dec. 31 Mar. 31 (In thousands of Canadian dollars) 2009 2008 2008 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue from continuing operations $ 29,318 $ 33,001 $ 38,137 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating income from continuing operations $ 325 $ 2,527 $ 6,075 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating margin 1.1% 7.7% 15.9% -------------------------------------------------------------------------
Current Quarter versus Q1 2008
In the Petrochemical and Industrial segment, revenue in the first quarter of 2009 totaled $29.3 million and was 76.9% of the level in the first quarter of last year, due to reduced business activity levels at both DSG-Canusa and ShawFlex as a result of deteriorating conditions in industrial and automotive markets in North America and Western Europe. Operating income from continuing operations in the quarter for the segment totaled $325 thousand (1.1% of revenue from continuing operations) compared to $6.1 million (15.9% of revenue from continuing operations) in the first quarter of 2008 and reflected the impact of the lower revenue in the period.
Current Quarter versus Q4 2008
Revenue for the segment in the quarter was 11.2% lower than the level in the fourth quarter of last year reflecting the lower levels of business activity in the quarter. Operating income in the quarter decreased $2.2 million from the prior quarter due to the impact of the decrease in revenue to near break-even levels, partially offset by $1.1 million of fixed cost reductions in the quarter.
Financial and Corporate
Financial and corporate costs consist of corporate office costs not charged to the operating divisions and other non-operating items including foreign exchange gains and losses on cash balances. Financial and corporate costs for the quarter, before net foreign exchange gains of $1.4 million, totaled $7.9 million compared to $6.1 million in the first quarter of last year, before net foreign exchange gains of $3.1 million. The increase in corporate costs reflects compensation and other costs associated with an increase in personnel active in the deployment of the Company's improvement programs.
Interest Expense
Net interest expense totaled $1.7 million in the quarter, compared to interest expense of $87 thousand in the first quarter of 2008. The increase in expense from the first quarter of 2008 was a result of lower average cash balances due to the significant cash flows used in investing activities over the preceding twelve months.
Income Taxes
Income tax expense related to continuing operations in the quarter was $17.3 million, an effective rate of 35.4%, compared to $14.3 million or an effective rate of 35.1% in the first quarter of last year and $17.5 million, an effective rate of 23.8%, in the fourth quarter of 2008. The effective tax rate in the quarter was higher than the Company's expected tax rate of 31.0% as a result of foreign exchange capital losses for which the tax benefit was not recognized, together with the impact of a $1.4 million increase to the Company's income tax reserve relating to potential tax liabilities associated with certain foreign jurisdictions.
Cash Flow
Cash provided by continuing operating activities in the quarter totaled $38.7 million, compared to $76.8 million in the fourth quarter of 2008 and cash used in continuing operating activities of $11.6 million in the first quarter of 2008 with the changes reflecting the changes in income from continuing operations as well as the movement in net working capital. During the quarter, the change in non-cash working capital and foreign exchange was an increase of $11.9 million primarily as a result of increased prepaid project expenses and reduced taxes payable and deferred revenue.
Cash used in continuing investing activities in the quarter totaled $14.0 million, compared to $29.1 million last quarter and $12.2 million in the first quarter of 2008, and was comprised of capital expenditures of $14.1 million partially offset by proceeds received on the disposal of property, plant and equipment of $98 thousand. Major capital additions in the quarter included $1.8 million to expand Guardian's drill pipe threading and machining capacity, a $1.8 million capacity expansion at Flexpipe Systems, a $1.3 million insulation pipe coating upgrade in Kuantan, Malaysia, and $1.4 million related to DSG-Canusa's new facility in China.
Cash used in continuing financing activities in the quarter totaled $18.7 million, compared to $50.4 million last quarter and $16.2 million in the first quarter of 2008, and consisted of dividends paid to shareholders of $4.5 million and the repayment in bank indebtedness of $14.2 million.
Other Comprehensive Income
Other comprehensive income in the quarter totaled $7.3 million and was comprised of an unrealized foreign currency translation gain, net of hedging activities, resulting from the 0.8% weakening of the Canadian dollar versus the U.S. dollar from the beginning of the quarter.
Liquidity and Capitalization
At March 31, 2009, the Company recorded a working capital ratio (the ratio of current assets to current liabilities) of 1.85 to 1 compared to 1.65 to 1 at December 31, 2008. Operating working capital, excluding cash, cash equivalents, bank indebtedness, the current portion of long-term debt, current future taxes and working capital of discontinued operations, increased $13.4 million during the quarter to $194.2 million, reflecting increased prepaid project expenses and lower taxes payable, and deferred revenue balances.
Change in Accounting Policies
The following are changes in the Company's accounting policies which came into effect in the first quarter of 2009:
a) Goodwill and Intangible Assets
On January 1, 2009, the Company adopted CICA Handbook section 3064, Goodwill and Intangible Assets. Also as of this date, as is required on adoption of this section, the Company no longer applies Emerging Issues Committee Abstract EIC-27, Revenues and Expenditures During the Pre-operating Period. As required, this accounting standard has been adopted retrospectively with restatement of prior year figures. The following adjustments were made to the Company's consolidated financial statements as a result of adopting this accounting standard:
Change in Consolidated Balance Sheets:
As at As at
(in thousands of Canadian dollars) Dec. 31, Dec. 31,
2008 2007
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Increase in inventories $ 1,678 $ 2,501
Decrease in other assets (3,285) (5,067)
Increase in future taxes 484 770
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Decrease in total assets $ (1,123) $ (1,796)
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Future income taxes $ - $ -
Decrease in retained earnings (1,123) (1,796)
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Change in Consolidated Statement of Income:
Three Months Ended
(in thousands of Canadian dollars) March 31, 2008
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Increase in cost of goods sold $ 300
Decrease in income taxes (90)
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Increase in income from continuing operations $ 210
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Increase in net income $ 210
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Earnings per share
Basic
Continuing operations $ 0.00
Total $ 0.00
Diluted
Continuing operations $ 0.00
Total $ 0.00
The following is a description of the revised accounting policy adopted by the Company as a result of implementing this accounting change:
Costs incurred in the mobilization of project-specific plants for fixed term projects are included in work-in-process inventories and are charged to costs of goods sold on a percentage of completion basis. Such costs are to be included in inventories only if incurred after the Company is awarded the project and if directly related to the performance of the contract.
b) Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
On January 1, 2009, the Company adopted EIC-173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. The adoption of this accounting standard had no effect on the Company's consolidated financial statements.
International Financial Reporting Standards
During 2008, the AcSB confirmed that publicly accountable enterprises, including the Company, will be required to adopt International Financial Reporting Standards ("IFRS") in place of GAAP for interim and annual reporting purposes. The required changeover date is for fiscal years beginning on or after January 1, 2011.
The Company has commenced the process to transition to IFRS and has developed a project plan, which was described in the Company's 2008 Annual Report to Shareholders.
The Company is currently engaged in the solution development phase of the project, which involves the training of project team members and the development of new IFRS accounting policies and implementation guidance. This phase of the project is expected to be completed by the end of the fourth quarter of 2009.
During the implementation phase, the Company will execute the changes to business processes, financial systems, accounting policies, disclosure controls and internal controls over financial reporting that will be required to implement IFRS. This phase of the project is expected to be completed by the end of the second quarter of 2010.
At this time, the impact on the Company's consolidated financial statements is not reasonably determinable.
Financial Instruments
The following table sets out the notional amounts outstanding under foreign exchange contracts, the average contractual exchange rates and the settlement of these contracts as at March 31, 2009:
Maturity Mar 31, 2009 (in thousands) U.S. dollars sold for Canadian dollars Less than one year US$12,000 Weighted average rate 1.1099 One year to two years US$1,000 Weighted average rate 1.2006 Euros sold for U.S. dollars One year to two years Euro 2,150 Weighted average rate 1.4490 Two year to three years Euro 2,200 Weighted average rate 1.4465
At March 31, 2009, the Company had notional amounts of $23.3 million of forward contracts outstanding (December 31, 2008 - $25.5 million) with the fair value of the Company's net obligation from all foreign exchange forward contracts totaling $1.0 million (December 31, 2008 - $1.5 million).
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with Canadian Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. These estimates and assumptions are made with management's best judgment given the information available at the time; however, actual results could differ from the estimates. Critical estimates used in preparing the consolidated financial statements were materially unchanged during the quarter, as compared to those disclosed in the Company's last annual Management's Discussion and Analysis contained in the Company's 2008 Annual Report.
Risks and Uncertainties
Operating in an international environment, servicing predominantly the oil and gas industry, ShawCor faces a number of business risks and uncertainties that could materially adversely affect the Company's projections, businesses, results of operations and financial condition. There were no material changes in the nature or magnitude of such business risks during the quarter. A more complete outline of the risks and uncertainties facing the Company are included in the annual Management's Discussion and Analysis contained in the Company's 2008 Annual Report.
Contractual Obligations
There were no material changes to the Company's contractual obligations during the quarter, other than those that would be expected in the ordinary course of business.
Summary of Quarterly Results
The following is a summary of selected financial information for the nine most recently completed quarters:
(In thousands of Canadian dollars except per share amounts) First Second Third Fourth Full Year ------------------------------------------------------------------------- Revenue (Restated - see note below) 2009 $ 307,464 $ - $ - $ - $ - 2008 293,357 295,118 357,249 433,853 1,379,577 2007 221,329 276,440 264,892 285,438 1,048,099 Operating income from continuing operations (Restated - see note below) 2009 50,434 - - - - 2008 40,919 27,189 52,315 75,588 196,011 2007 27,074 39,764 52,149 43,081 162,068 Income from continuing operations (Restated - see note below) 2009 31,520 - - - - 2008 26,952 17,825 33,962 56,013 134,722 2007 22,679 25,177 34,845 36,565 119,266 Income (loss) from discontinued operations (Restated - see note below) 2009 21 - - - - 2008 (69) 10,553 (82) 609 11,011 2007 (55) (48) (59) (30,300) (30,462) Net income (Restated - see note below) 2009 31,541 - - - - 2008 26,852 28,378 33,880 56,623 145,733 2007 22,624 25,129 34,786 6,265 88,804 Operating income from continuing operations per share (Classes A and B) (Restated - see note below) Basic 2009 0.72 - - - - 2008 0.57 0.38 0.74 1.07 2.76 2007 0.37 0.55 0.73 0.60 2.23 Diluted 2009 0.72 - - - - 2008 0.57 0.38 0.73 1.07 2.74 2007 0.36 0.54 0.72 0.59 2.21 Income from continuing operations per share (Classes A and B) (Restated - see note below) Basic 2009 0.45 - - - - 2008 0.38 0.25 0.48 0.79 1.90 2007 0.31 0.35 0.49 0.51 1.64 Diluted 2009 0.45 - - - - 2008 0.37 0.25 0.47 0.78 1.88 2007 0.30 0.34 0.48 0.51 1.62 Income (loss) from discontinued operations per share (Classes A and B) (Restated - see note below) Basic 2009 0.00 - - - - 2008 0.00 0.15 0.00 0.01 0.16 2007 0.00 0.00 0.00 (0.42) (0.42) Diluted 2009 0.00 - - - - 2008 0.00 0.15 0.00 0.01 0.15 2007 0.00 0.00 0.00 (0.42) (0.41) Net income per share (Classes A and B) (Restated - see note below) Basic 2009 0.45 - - - - 2008 0.38 0.40 0.48 0.80 2.06 2007 0.31 0.35 0.49 0.09 1.22 Diluted 2009 0.45 - - - - 2008 0.37 0.40 0.47 0.79 2.03 2007 0.30 0.34 0.48 0.09 1.21 Note: Quarterly revenue and operating income from continuing operations figures have been restated to reflect the change in accounting policy for deferred project costs adopted in Q1 2009. Refer to note 1 to the interim consolidated financial statements for the three months ended March 31, 2009.
The following are key factors affecting the comparability of quarterly financial results.
The Company's operations in the Pipeline and Pipe Services segment, representing more than 90% of the Company's consolidated revenue, are largely project-based. The nature and timing of projects can result in variability in the Company's quarterly revenue and profitability. In addition, certain of the Company's operations are subject to a degree of seasonality, particularly in the Pipeline and Pipe Services market segment. The following are additional key factors impacting the comparability of the quarterly information disclosed above:
The majority of the Company's revenue is transacted in currencies
other than Canadian dollars, with a majority transacted in U.S.
dollars. Changes in the rates of exchange between the Canadian dollar
and other currencies could have a significant effect on the amount of
this revenue when it is translated into Canadian dollars.
Outstanding Share Capital
As at April 30, 2009, the Company had 57,366,937 Class A Subordinate Voting Shares ("Class A") outstanding and 13,060,209 Class B Multiple Voting Shares ("Class B") outstanding. Each Class B share is convertible into a Class A share at the option of the holder. In addition, as at April 30, 2009, the Company had stock options outstanding to purchase up to 2,978,266 Class A shares.
Management's Health, Safety and Environmental Commitment
The Company is committed to providing a safe and healthy workplace and ensuring that all business activities are conducted in a manner that protects the environment. This commitment includes designing and operating its plants and individual processes in compliance with applicable government requirements regulating the discharge of substances into the environment or otherwise relating to the protection of the environment. The Company's program for health, safety and environmental management is further described in the Company's Annual Information Form under Health, Safety, and Environmental Policy.
Outlook
The Company's consolidated order backlog at March 31, 2009, representing the value of firm customer purchase orders expected to be completed within one year, totaled $402.4 million, 11.7% lower than at the beginning of the quarter, and reflected the completion of some large diameter pipe coating projects in the quarter as well as the general softening in activity levels in certain of the markets served by the Company. While the backlog may decline further in subsequent quarters, bidding activity remains high and the Company continues to pursue several large offshore pipe coating projects. These projects, if awarded to the Company, could generate significant revenue growth in 2010 and beyond.
The Company's current outlook is for pipeline activity to decline somewhat from the levels experienced in 2008 with full year 2009 consolidated revenues for the Company expected to be slightly below the record levels achieved in the prior year. However, the Company expects that operating margins in 2009 will meet or exceed those achieved in 2008 as a result of several initiatives including programs to reduce costs and improve efficiencies.
Forward Looking Information
This document includes certain statements that reflect management's expectations and objectives for ShawCor's future performance, opportunities and growth which constitute forward-looking information under applicable securities laws. Such statements, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. These statements may be identified by the use of forward-looking terminology such as "may," "will," "should", "anticipate," "expect", "believe", "predict", "estimate," "continue," "intend," "plan," and variations of these words or other similar expressions. These statements are based on assumptions, estimates and analysis made by ShawCor in light of its experience and perception of trends, current conditions and expected developments as well as other factors believed to be reasonable and relevant in the circumstances. Although ShawCor believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions in light of currently available information, ShawCor can give no assurance that such expectations will be achieved.
Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those predicted, expressed or implied by the forward-looking statements. Significant risks facing ShawCor include, but are not limited to: changes in global economic activity and changes in energy supply and demand which impact on the level of drilling activity and pipeline construction; political, economic and other risks arising from ShawCor's international operations; compliance with environmental, trade and other laws; liability claims; fluctuations in foreign exchange rates; fluctuations in prices of raw materials, as well as other risks and uncertainties.
Other information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com.
ShawCor will be hosting a Shareholder and Analyst conference call and webcast on May 12, 2009 at 10:00 am ET to discuss the Company's first quarter 2009 financial results. Please visit our website at www.shawcor.com for future details.
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars except per share data)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31
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2009 2008
Restated
- note 1
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Revenue $ 307,464 $ 293,357
Cost of goods sold 183,949 187,954
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Gross profit 123,515 105,403
Selling, general and administrative expenses
(notes 2 and 3) 55,865 53,008
Amortization of property, plant and equipment 15,142 12,943
Amortization of intangible assets 1,095 -
Foreign exchange losses (gains) (1,371) (3,145)
Research and development expenses 2,350 1,678
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Operating income from continuing operations 50,434 40,919
Interest income on short-term deposits 235 1,452
Interest expense on bank indebtedness (571) (356)
Interest expense on long-term debt (1,327) (1,183)
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Income before income taxes and non-controlling
interest 48,771 40,832
Income taxes 17,251 14,340
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Income before non-controlling interest 31,520 26,492
Non-controlling interest - 429
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Income from continuing operations 31,520 26,921
Income (loss) from discontinued operations
(note 4) 21 (69)
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Net income $ 31,541 $ 26,852
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Earnings per shares, (note 19)
Basic
Continuing operations $ 0.45 $ 0.38
Discontinued operations - -
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Total $ 0.45 $ 0.38
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Diluted
Continuing operations $ 0.45 $ 0.37
Discontinued operations - -
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Total $ 0.45 $ 0.37
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SEGMENTED INFORMATION Three Months Ended
March 31
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2009 2008
Restated
- note 1
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Revenue
Pipeline and Pipe Services $ 279,951 $ 255,794
Petrochemical and Industrial 29,318 38,137
Intersegment Eliminations (1,805) (574)
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$ 307,464 $ 293,357
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Income (loss) from operations
Pipeline and Pipe Services $ 56,646 $ 37,822
Petrochemical and Industrial 325 6,075
Financial and Corporate (6,537) (2,978)
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$ 50,434 $ 40,919
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------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended
March 31
-------------------------
2009 2008
Restated
- note 1
------------ ------------
Balance at beginning of period $ 601,407 $ 489,836
Transitional adjustment (note 1) - (1,796)
------------ ------------
Adjusted balance at beginning of year 601,407 488,040
Net income 31,541 26,852
------------ ------------
632,948 514,892
Excess of purchase price paid over stated value
of shares (note 11) - (11,235)
Dividends declared (4,500) (4,015)
------------ ------------
Balance at end of period $ 628,448 $ 499,642
------------ ------------
------------ ------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
March 31
-------------------------
2009 2008
Restated
- note 1
------------ ------------
Net income $ 31,541 $ 26,852
Other comprehensive income (loss), net of
income taxes:
Unrealized gain on translating financial
statements of self-sustaining foreign
operations 7,886 22,103
Loss on hedges of unrealized foreign currency
translation (727) (3,278)
Income tax benefit 124 -
------------ ------------
Unrealized foreign currency translation gain,
net of hedging activites 7,283 18,825
------------ ------------
Unrealized loss on available-for-sale
financial assets arising during the period (336) (911)
Unrealized loss on available-for-sale
financial assets transferred to net income in
the current period 336 1,498
Income tax expense transferred to net income
in the period - 253
------------ ------------
Change in unrealized loss on available-for-sale
financial assets - 840
------------ ------------
Gain on derivatives designated as cash flow
hedges in prior periods transferred to net
income in the current period - (1,508)
Income tax expenses transferred to net income
in the current period - 512
------------ ------------
Change in loss on derivatives designated as cash
flow hedges - (996)
------------ ------------
Other comprehensive income 7,283 18,669
------------ ------------
Comprehensive income $ 38,824 $ 45,521
------------ ------------
------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended
March 31
2009 2008
Restated
- note 1
------------ ------------
Operating activities:
Income from continuing operations $ 31,520 $ 26,921
Items not requiring an outlay of cash:
Amortization of property, plant and
equipment 15,142 12,943
Amortization of intangible assets 1,095 -
Amortization of transaction costs 110 110
Asset retirement obligation expense (note 10) 1,788 1,066
Stock-based compensation (note 2) 848 887
Future income taxes 563 (3,734)
Loss (gain) on disposal of property, plant
and equipment 144 (9)
Impairment of available-for-sale financial
asset (note 7) 336 1,498
Non-controlling interest in earnings of
subsidiaries - (429)
Settlement of asset retirement obligations
(note 10) (1,947) (959)
Change in employee future benefits 1,085 766
Change in non-cash working capital and foreign
exchange (11,939) (50,629)
------------ ------------
Cash provided by (used in) continuing operating
activities 38,745 (11,569)
------------ ------------
Investing activities:
Purchases of property, plant and equipment (14,143) (12,261)
Proceeds on disposal of property, plant and
equipment 98 32
------------ ------------
Cash used in continuing investing activities (14,045) (12,229)
------------ ------------
Financing activities:
Increase (decrease) in bank indebtedness (14,247) 9
Issue of shares (note 11) 29 459
Purchase of shares for cancellation - (12,642)
Dividends paid to shareholders (4,500) (4,015)
------------ ------------
Cash used in continuing financing activities (18,718) (16,189)
------------ ------------
Foreign exchange on foreign cash and cash
equivalents 521 5,718
------------ ------------
Net cash provided by (used in) continuing
operations 6,503 (34,269)
Net cash provided by (used in) discontinued
operations (note 4) (112) 1,260
Cash and cash equivalents at beginning of period 78,932 175,017
------------ ------------
Cash and cash equivalents at end of period $ 85,323 $ 142,008
------------ ------------
------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED BALANCE SHEETS
March 31 December 31
2009 2008
Restated
- Note 1
------------ ------------
Assets
Current assets
Cash and cash equivalents (note 5) $ 85,323 $ 78,932
Accounts receivable 287,707 307,933
Taxes receivable 9,488 9,261
Inventories 153,588 152,284
Prepaid expenses 18,399 14,635
Derivative financial instruments 338 523
Current future income taxes 3,002 3,532
Current assets of discontinued operation
(note 4) 12,354 12,256
------------ ------------
570,199 579,356
Property, plant and equipment, net 306,539 307,735
Goodwill 234,564 229,549
Intangible assets (note 6) 66,057 66,452
Future income taxes 31,780 31,173
Derivative financial instruments 307 -
Other assets (note 7) 11,824 13,024
------------ ------------
$ 1,221,270 $ 1,227,289
------------ ------------
------------ ------------
Liabilities
Current liabilities
Bank indebtedness (note 8) $ 1,171 $ 15,418
Accounts payable and accrued liabilities 173,775 193,675
Taxes payable 51,390 53,405
Derivative financial instruments 1,623 2,049
Deferred revenues 48,517 54,692
Current portion of long-term debt 30,914 30,672
Current liabilities of discontinued operation
(note 4) 420 455
------------ ------------
307,810 350,366
Long-term debt 61,150 60,554
Future income taxes 74,789 73,939
Derivative financial instruments 33 -
Other non-current liabilities (note 9) 9,835 9,978
------------ ------------
453,617 494,837
------------ ------------
Shareholders' Equity
Capital stock (note 11) 202,111 202,073
Contributed surplus (note 12) 15,351 14,512
Retained earnings 628,448 601,407
Accumulated other comprehensive loss (note 13) (78,257) (85,540)
------------ ------------
767,653 732,452
------------ ------------
$ 1,221,270 $ 1,227,289
------------ ------------
------------ ------------
ShawCor Ltd.
Notes to the Consolidated Financial Statements (Unaudited)
1. Accounting policies
The accompanying unaudited interim consolidated financial statements of
ShawCor Ltd. (the "Company") have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP") for the
preparation of interim financial statements. They do not include all of
the information and disclosures required by GAAP for annual consolidated
financial statements. Except as noted below, these unaudited interim
consolidated financial statements have been prepared in accordance with
accounting policies outlined in the Company's audited consolidated
financial statements for the year ended December 31, 2008. Accordingly,
these interim consolidated financial statements should be read in
conjunction with the Company's annual consolidated financial statements.
a) Goodwill and Intangible Assets
On January 1, 2009, the Company adopted CICA Handbook section 3064,
Goodwill and Intangible Assets. Also as of this date, as is required on
adoption of this section, the Company no longer applies Emerging Issues
Committee Abstract EIC-27, Revenues and Expenditures During the
Pre-operating Period. As required, this accounting standard has been
adopted retrospectively with restatement of prior year figures. The
following adjustments were made to the Company's consolidated financial
statements as a result of adopting this accounting standard:
Change in Consolidated Balance Sheets:
As at As at
Dec. 31, Dec. 31,
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Increase in inventories $ 1,678 $ 2,501
Decrease in other assets (3,285) (5,067)
Increase in future taxes 484 770
-------------------------
Decrease in total assets $ (1,123) $ (1,796)
-------------------------
-------------------------
Future income taxes $ - $ -
Decrease in retained earnings (1,123) (1,796)
-------------------------
Decrease in total liabilities and shareholders'
equity $ (1,123) $ (1,796)
-------------------------
-------------------------
Change in Consolidated Statement of Income:
Three Months Ended
(in thousands of Canadian dollars) March 31, 2008
------------------------------------------------------------
Increase in cost of goods sold $ 300
Decrease in income taxes (90)
------------
Increase in income from continuing operations $ 210
------------
------------
Increase in net income $ 210
------------
------------
Earnings per share
Basic
Continuing operations $ 0.00
Total $ 0.00
Diluted
Continuing operations $ 0.00
Total $ 0.00
The following is a description of the revised accounting policy adopted
by the Company as a result of implementing this accounting change:
Costs incurred in the mobilization of project-specific plants for fixed
term projects are included in work-in-process inventories and are charged
to costs of goods sold on a percentage of completion basis. Such costs
are to be included in inventories only if incurred after the Company is
awarded the project and if directly related to the performance of the
contract.
b) Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
On January 1, 2009, the Company adopted EIC-173, Credit Risk and the Fair
Value of Financial Assets and Financial Liabilities. The adoption of this
accounting standard had no effect on the Company's consolidated financial
statements.
2. Stock-based compensation
The Board of Directors approved the granting of 490,200 stock options on
February 24, 2009 and 20,000 on March 12, 2009 under the 2001 Employee
Plan. The total fair value of the stock options granted during the three
months ended March 31, 2009 was $2.6 million and the weighted average
fair value of the options was $5.58 (2008 - $10.57), calculated using the
Black-Scholes pricing model with the following assumptions:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Expected life of options ....................... 6.25 years 6.25 years
-------------------------------------------------------------------------
Expected stock price volatility ................ 34.68% 29.30%
-------------------------------------------------------------------------
Expected dividend yield ........................ 1.55% 0.75%
-------------------------------------------------------------------------
Risk-free interest rate ........................ 2.38% 3.68%
-------------------------------------------------------------------------
The fair value of options granted under the 2001 Employee Plan will be
amortized to compensation expense over the 5 year vesting period of
options. The compensation cost from the continuing amortization of
granted stock options for the three months ended March 31, 2009, included
in selling, general and administrative expenses, is $848 thousand,
(March 31, 2008 - $887 thousand).
3. Employee future benefits
The Company's cost under both defined benefit and defined contribution
arrangements included in selling, general and administrative expenses for
the three months ended March 31, 2009 is $2.8 million (March 31, 2008 -
$2.4 million).
4. Discontinued operations
On November 2, 2004, the Company announced its decision to close the
Mobile, Alabama pipe coating facility (the "Mobile Facility") and by
December 31, 2005, operations at the Mobile Facility had ceased. The
Company adopted discontinued operation accounting treatment for the
Mobile Facility in 2005. The Mobile Facility was part of the Pipeline and
Pipe Services market segment.
The following table summarizes the financial results and cash flows from
discontinued operations for the three months ended March 31, 2009 and
2008 and the asset and liabilities as of those dates:
Three Months Ended Mar. 31
(in thousands of Canadian dollars) 2009 2008
-------------------------------------------------------------------------
Revenue $ - $ -
-------------------------
Income (loss) from operations 21 (69)
Interest expense -
-------------------------
Income (loss) from discontinued operations
before income taxes 21 (69)
Income tax recovery - -
-------------------------
Income (loss) from discontinued operations $ 21 $ (69)
-------------------------
-------------------------
Cash flow used in operating activities $ (112) $ 1,260
Cash flow from (used in) investing activities - -
-------------------------
Cash flow used in operating activities $ (112) $ 1,260
-------------------------
-------------------------
Current assets 12,354 17,029
Property, plant and equipment, net - -
Current liabilities 420 53,318
5. Cash and cash equivalents
Mar. 31 Dec. 31
(in thousands of Canadian dollars) 2009 2008
-------------------------------------------------------------------------
Cash $ 85,323 $ 78,932
Cash equivalents - -
-------------------------
$ 85,323 $ 78,932
-------------------------
-------------------------
6. Intangible assets
Mar. 31 Dec. 31
2009 2008
Restated
(in thousands of Canadian dollars) - note 1
-------------------------------------------------------------------------
Cost
Intellectual property with limited life $ 57,576 $ 57,576
Intangible assets with limited life 9,547 8,847
Intangible assets with indefinite life 1,931 1,931
-------------------------
$ 69,054 $ 68,354
-------------------------
Accumulated amortization 2,997 1,902
-------------------------
$ 66,057 66,452
-------------------------
-------------------------
Intellectual property represents the costs of certain technology and
know-how and patents obtained in acquisitions. Intangible assets include
trademarks, brand names and customer relationships obtained in
acquisitions.
7. Other assets
Mar. 31 Dec. 31
2009 2008
Restated
(in thousands of Canadian dollars) - note 1
-------------------------------------------------------------------------
Long-term investment $ 24 $ 360
Long-term prepaid expenses 5,806 5,931
Accrued employee future benefit asset 5,994 6,733
-------------------------
$ 11,824 $ 13,024
-------------------------
-------------------------
Long-term investment at March 31, 2009 represents an investment in
Garneau Inc., a Canadian-based, publicly traded pipe coating company. The
Company has reviewed the 2008 financial performance of Garneau, as
outlined in its public filings, and the protracted decline in its share
price and has concluded that the decrease in fair value, based on quoted
market prices, of the investment from original cost is other than
temporary. The Company has recorded a charge to selling, general and
administrative expenses, in the financial and corporate segment, during
the three months ended March 31, 2009 of $336 thousand (March 31, 2008 -
$1.5 million).
8. Bank indebtedness
At March 31, 2009, the Company had total operating credit lines of
$295.8 million (December 31, 2008 - $293.5 million), of which $79.9
million has been drawn for various standby letters of credit for
performance, bid and surety bonds (December 31, 2008 - $81.5 million) and
bank indebtedness of $1.2 million (December 31, 2008 - $15.4), to yield
unutilized credit facilities of $215.9 million (December 31, 2008 -
$198.0 million), excluding the Company's proportionate share of the bank
indebtedness of its joint venture, Arabian Pipecoating Company Limited.
9. Other non-current liabilities
Mar. 31 Dec. 31
(in thousands of Canadian dollars) 2009 2008
-------------------------------------------------------------------------
Non-current asset retirement obligations
(note 10) $ 6,190 $ 6,680
Accrued employee future benefit obligations 3,645 3,298
-------------------------
$ 9,835 $ 9,978
-------------------------
-------------------------
10. Assets retirement obligations
Three Months Ended Mar. 31
(in thousands of Canadian dollars) 2009 2008
-------------------------------------------------------------------------
Balance, at beginning of year $ 22,606 $ 14,082
Liabilities settled in year (1,947) (959)
Liabilities incurred in year 902 0
Revisions to cash flow estimates 597 888
Accretion expense 289 178
Translation of self-sustaining foreign
operations 886 432
-------------------------
$ 23,333 $ 14,621
-------------------------
-------------------------
Asset retirement obligations are included in the consolidated balance
sheets as follows:
Mar. 31 Dec. 31
(in thousands of Canadian dollars) 2009 2008
-------------------------------------------------------------------------
Account payable and accrued liabilities $ 17,143 $ 15,926
Other non-current liabilities 6,190 6,680
-------------------------
$ 23,333 $ 22,606
-------------------------
-------------------------
The total undiscounted cash flows which are estimated to be required to
settle all asset retirement obligations is $26.5 million (December 31,
2008 - $24.0 million) and the credit-adjusted risk-free rates at which
the estimated cash flows have been discounted range between 5.11% and
7.0%.
11. Capital stock
The following shares were outstanding as at March 31, 2009 and
December 31, 2008:
Captial Stock
(in thousands of Canadian dollars except number of share information)
-------------------------------------------------------------------------
Mar. 31 2009 Dec. 31 2008
-------------------------------------------------------------------------
Number of shares: Class A
Balance, begining of the period 57,358,537 58,234,570
Issued - stock options 2,400 113,234
Conversions Class B to Class A - 17,933
Purchase - normal courseissuer bid - (1,007,200)
-------------------------------------------------------------------------
Balance, end of the period 57,360,937 57,358,537
-------------------------------------------------------------------------
Number of shares: Class B 13,060,209 13,060,209
-------------------------------------------------------------------------
Total number of shares 70,421,146 70,418,746
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stated value:
Balance, begining of the period $ 201,070 $ 202,248
Issued - stock options 29 1,763
Conversions Class B to Class A - 1
Purchase - normal course issuer bid - (3,518)
Compensation cost on exercised options 9 576
-------------------------------------------------------------------------
Balance, end of the period 201,108 201,070
-------------------------------------------------------------------------
Stated value: Class B 1,003 1,003
-------------------------------------------------------------------------
Total stated value $ 202,111 $ 202,073
-------------------------------------------------------------------------
During the three months ended March 31, 2009, the Company repurchased and
cancelled nil Class A Subordinated Voting Shares ("Class A shares")
(March 31, 2008 - 405,000) under the terms of a Normal Course Issuer Bid
("NCIB"). The excess of cost over stated capital of the acquired shares,
which for the three months ended March 31, 2009 totaled $nil (March 31,
2008 - $11.2 million), was charged to retained earnings.
12. Contributed surplus
Three Months Ended
Mar. 31
(in thousands of Canadian dollars) 2009 2008
-------------------------------------------------------------------------
Balance, beginning of period $ 14,512 $ 11,729
Adjustment for stock-based compensation - -
Stock compensation expense (note 2) 848 887
Fair value of stock options exercised (9) (201)
-------------------------
Balance, end of period $ 15,351 $ 12,415
-------------------------
-------------------------
13. Accumulated other comprehensive loss
Mar. 31 Dec. 31
(in thousands of Canadian dollars) 2009 2008
-------------------------------------------------------------------------
Unrealized foreign currency translation losses,
net of hedging activities $ (78,257) $ (85,540)
Unrealized loss on available-for-sale financial
asset - -
Gain on derivatives designated as cash flow
hedges - -
-------------------------
Balance, at end of period $ (78,257) $ (85,540)
-------------------------
-------------------------
14. Stock option plans
A summary of the status of the Company's stock option plans and changes
during the period are presented below:
-------------------------------------------------------------------------
Mar. 31, 2009 Dec. 31, 2008
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Total Share Price Total Shares Price
-------------------------------------------------------------------------
Balance outstanding,
beginning of year 2,470,466 19.14 2,173,980 17.24
-------------------------------------------------------------------------
Granted 510,200 15.58 428,600 30.03
-------------------------------------------------------------------------
Exercised (2,400) 12.27 (113,234) 15.56
-------------------------------------------------------------------------
Forfeited - - (16,880) 19.24
-------------------------------------------------------------------------
Expired - - (2,000) 15.94
-------------------------------------------------------------------------
Balance outstanding,
end of period 2,978,266 18.77 2,470,466 19.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding
-------------------------------------------------------------------------
Weighted average
remaining
Range of exercise Outstanding at contractual Weighted average
prices March 31, 2009 life in years exercise price
-------------------------------------------------------------------------
$10.00 to $15.00 472,566 4.28 $12.64
-------------------------------------------------------------------------
$15.01 to $20.00 1,691,300 6.55 $16.30
-------------------------------------------------------------------------
$20.01 to $25.00 40,000 6.16 $20.90
-------------------------------------------------------------------------
$25.01 to $30.00 744,400 8.29 $27.62
-------------------------------------------------------------------------
$30.01 to $35.00 30,000 8.76 $31.77
-------------------------------------------------------------------------
2,978,266
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding
-------------------------------------------------------------------------
Weighted average
remaining
Range of exercise Outstanding at contractual Weighted average
prices Demember 31, 2008 life in years exercise price
-------------------------------------------------------------------------
$10.00 to $15.00 474,966 4.41 $12.63
-------------------------------------------------------------------------
$15.01 to $20.00 1,181,100 5.41 $16.84
-------------------------------------------------------------------------
$20.01 to $25.00 40,000 6.50 $20.90
-------------------------------------------------------------------------
$25.01 to $30.00 744,400 8.54 $27.62
-------------------------------------------------------------------------
$30.01 to $35.00 30,000 9.01 $31.77
-------------------------------------------------------------------------
2,470,466
-------------------------------------------------------------------------
15. Financial instruments and financial risk management
a) Categories of Financial Assets and Financial Liabilities
Under Canadian GAAP, financial instruments are classified into one of the
following categories: held-for-trading, held-to-maturity investments,
loans and receivables, available-for-sale financial assets, derivatives
and other financial liabilities. The Company has classified its financial
instruments as follows:
-------------------------------------------------------------------------
Mar. 31, Dec. 31,
(in thousands of Canadian dollars) 2009 2008
-------------------------------------------------------------------------
Financial assets:
-------------------------------------------------------------------------
Held for trading, measured at fair value
-------------------------------------------------------------------------
Cash $ 85,323 $ 78,932
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loans and receivables, recorded at amortized cost
-------------------------------------------------------------------------
Accounts receivable 287,707 307,933
-------------------------------------------------------------------------
Taxes receivable 9,488 9,261
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Available for sale, measured at fair value
-------------------------------------------------------------------------
Long-term investments 24 360
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Derivatives, measured at fair value
-------------------------------------------------------------------------
Derivative financial instruments (1,011) (1,526)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial liabilities:
-------------------------------------------------------------------------
Other liabilities, recorded at amortized cost:
-------------------------------------------------------------------------
Bank indebtedness 1,171 15,418
-------------------------------------------------------------------------
Accounts payable and accrued liabilities 173,775 193,675
-------------------------------------------------------------------------
Taxes payable 51,390 53,405
-------------------------------------------------------------------------
Current portion of long-term debt 30,914 30,672
-------------------------------------------------------------------------
Long-term debt 61,150 60,554
-------------------------------------------------------------------------
The Company has determined the estimated fair values of its financial
instruments based on appropriate valuation methodologies; however,
considerable judgment is required to develop these estimates. The fair
values of the Company's financial instruments are not materially
different from their carrying values. The Company's Senior Notes with a
carrying value of $92.1 million (December 31, 2008 - $91.2 million) has a
fair value estimated to be $91.8 million (December 31, 2008 - $90.9
million), based on current interest rates for debt with similar terms and
maturities.
b) Foreign Exchange Forward Contracts and Other Hedging Arrangements
The Company utilizes financial instruments to manage the risk associated
with foreign exchange rates. The Company formally documents all
relationships between hedging instruments and the hedge items, as well as
its risk management objective and strategy for undertaking various hedge
transactions.
The following table sets out the notional amounts outstanding under
foreign exchange contracts, the average contractual exchange rates and
the settlement of these contracts as at March 31, 2009:
-------------------------------------------------------------------------
(in thousands) Mar 31, 2009
-------------------------------------------------------------------------
U.S. dollars sold for Canadian dollars
-------------------------------------------------------------------------
Less than one year US$12,000
-------------------------------------------------------------------------
Weighted average rate 1.1099
-------------------------------------------------------------------------
One year to two years US$1,000
-------------------------------------------------------------------------
Weighted average rate 1.2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Euros sold for U.S. dollars
-------------------------------------------------------------------------
One year to two years Euro 2,150
-------------------------------------------------------------------------
Weighted average rate 1.4490
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Two year to three years Euro 2,200
-------------------------------------------------------------------------
Weighted average rate 1.4465
-------------------------------------------------------------------------
At March 31, 2009, the Company had notional amounts of $23.3 million of
forward contracts outstanding (December 31, 2008 - $25.5 million) with
the fair value of the Company's net obligation from all foreign exchange
forward contracts totaling $1.0 million (December 31, 2008 - $1.5
million).
c) Financial Risk Management
The Company's operations expose it to a variety of financial risks
including: market risk (including foreign exchange and interest rate
risk), credit risk and liquidity risk. The Company's overall risk
management program focuses on the unpredictability of financial markets
and seeks to minimize potential adverse effects on the Company's
financial position and financial performance. Risk management is the
responsibility of Company management. Material risks are monitored and
are regularly reported to the Board of Directors.
Foreign exchange risk
The majority of the Company's business is transacted outside of Canada
through subsidiaries operating in several countries. The net investments
in these subsidiaries as well as their revenue, operating expenses and
non-operating expenses are based in foreign currencies. As a result, the
Company's consolidated revenue, expenses and financial position, may be
impacted by fluctuations in foreign exchange rates as these foreign
currency items are translated into Canadian dollars. As of March 31,
2009, fluctuations of +/- 5% in the Canadian dollar, relative to those
foreign currencies, would impact the Company's consolidated revenue,
operating income from continuing operations and income from continuing
operations for the three months then ended by approximately $11.2
million, $4.7 million and $4.4 million, respectively, prior to hedging
activities. In addition, such fluctuations would impact the Company's
consolidated total assets, consolidated total liabilities and
consolidated total shareholders' equity by $73.1 million, $26.0 million
and $47.1 million, respectively. The Company utilizes foreign exchange
forward contracts to manage foreign exchange risk from its underlying
customer contracts. The Company does not enter into foreign exchange
contracts for speculative purposes.
The Company's 5.11% Senior Notes and associated interest expense are
denominated in U.S. dollars. Fluctuations in the exchange rate between
the Canadian and U.S. dollar would impact the carrying value of the Notes
in terms of Canadian dollars as well as the amount of interest expense
when translated into Canadian dollars. Effective July 3, 2003, the
Company designated the Senior Notes as a hedge of a portion of its net
investment in the Company's U.S. dollar based operations. Gains and
losses from the translation of this debt are not included in the income
statement, but are shown in accumulated other comprehensive income. As of
March 31, 2009, fluctuations of +/- 5% in the Canadian dollar, relative
to the U.S. dollar, would impact the Company's accumulated other
comprehensive income by $3.8 million for the three months then ended.
The objective of the Company's foreign exchange risk management
activities is to minimize transaction exposures associated with the
Company's foreign currency-denominated cash streams and the resulting
variability of the Company's earnings. The Company utilizes foreign
exchange forward contracts to manage this foreign exchange risk. The
Company does not enter into foreign exchange contracts for speculative
purposes. With the exception of the Company's U.S. dollar based
operations, the Company does not hedge translation exposures.
Interest rate risk
The following table summarizes the Company's exposure to interest rate
risk at March 31, 2009:
-------------------------------------------------------------------------
(in thousands of Canadian dollars) Fixed interest
rate maturing in
-------------------------------------------------------------------------
Floating 1 year Greater
rate or less than
1 year Total
-------------------------------------------------------------------------
Financial assets
Cash and cash equivalents....... $85,323 - - $85,323
-------------------------------------------------------------------------
Total............................. $85,323 - - $85,323
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average fixed rate of
cash equivalents................. - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial liabilities
Bank indebtedness............... $ 1,171 - - $ 1,171
-------------------------------------------------------------------------
Current portion of long-term
debt........................... - $30,914 - $30,914
-------------------------------------------------------------------------
Long-term debt.................. - - $61,150 $61,150
-------------------------------------------------------------------------
Total............................. $ 1,171 $30,914 $61,150 $93,235
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average fixed rate of
debt............................. - 5.11% 5.11%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company's interest rate risk arises primarily from its floating rate
bank indebtedness, and is not currently considered to be material.
Credit risk
Credit risk arises from cash and cash equivalents held with banks,
forward foreign exchange contracts, as well as credit exposure of
customers, including outstanding accounts receivable. The maximum credit
risk is equal to the carrying value of the financial instruments.
The objective of managing counter party credit risk is to prevent losses
in financial assets. The Company is subject to considerable concentration
of credit risk since the majority of its customers operate within the
global energy industry and are therefore affected to a large extent by
the same macroeconomic conditions and risks. The Company manages this
credit risk by assessing the credit quality of all counter parties,
taking into account their financial position, past experience and other
factors. Management also establishes and regularly reviews credit limits
of counter parties and monitors utilization of those credit limits on an
ongoing basis.
The carrying value of accounts receivable are reduced through the use of
an allowance for doubtful accounts and the amount of the loss is
recognized in the income statement with a charge to selling, general and
administrative expenses. When a receivable balance is considered to be
uncollectible, it is written off against the allowance for doubtful
accounts. Subsequent recoveries of amounts previously written off are
credited against selling, general and administrative expenses.
The aging of trade accounts receivable and the balance of the allowance
for doubtful accounts as of March 31, 2009 are as follows:
(in thousands of Canadian dollars) Mar. 31, Dec. 31,
2009 2008
----------------------------------------------------------- ------------
Not past due $ 199,787 $ 246,758
Past due 1 to 30 days 61,536 41,433
Past due 31 to 60 days 14,437 12,177
Past due 61 to 90 days 7,653 5,295
Past due for more than 90 days 11,301 8,507
------------ ------------
Total trade receivables 294,714 314,170
Less: allowance for doubtful accounts 7,007 6,237
------------ ------------
Net receivables $ 287,707 $ 307,933
------------ ------------
------------ ------------
The following is an analysis of the change in the allowance for doubtful
accounts for the three months ended March 31, 2009 and 2008:
Three Months Ended Mar. 31
(in thousands of Canadian dollars) 2009 2008
----------------------------------------------------------- ------------
Balance, beginning of period $ 6,237 $ 4,165
Bad debt expense 1,156 1,082
Write-offs of bad debts (336) (1)
Recovery of previously written-off amounts 23 -
Impact of change in foreign exchange rates (73) 91
------------ ------------
Balance, end of period $ 7,007 $ 5,337
------------ ------------
------------ ------------
Liquidity Risk
The Company's objective in managing liquidity risk is to maintain
sufficient, readily available cash reserves in order to meet its
liquidity requirements at any point in time. The Company achieves this by
maintaining sufficient cash and cash equivalents and through the
availability of funding from committed credit facilities. As of March 31,
2009, the Company has cash and cash equivalents totaling $85.3 million
(December 31, 2008 - $78.9 million) and had unutilized lines of credit
available to use of $215.9 million (December 31, 2008 - $198.0 million).
The following are the contractual maturities of the Company's financial
liabilities as of March 31, 2009:
(in thousands
of Canadian
dollars) 30 to 90 to Greater
Less than 90 365 1 to than
30 days days days 5 years 5 years Total
-------------------------------------------------------------------------
Accounts
payable and
accrued
liabilities $ 76,133 $ 42,386 $ 38,113 - - $156,632
Asset
retirement
obligations - - 17,143 1,918 7,397 26,458
Bank
indebtedness - - 1,171 - - 1,171
Long-term
debt - - 30,914 61,150 - 92,064
Obligations
under
capital
leases 43 86 258 691 - 1,078
Interest
on
obligations
under
capital
leases 5 10 31 85 - 131
Interest on
financial
instruments 392 797 2,378 2,378 - 5,945
Derivative
financial
instruments 225 470 928 33 - 1,656
----------------------------------------------------------
Total $ 76,798 $ 43,749 $ 90,936 $ 66,255 $ 7,397 $285,135
----------------------------------------------------------
----------------------------------------------------------
16. Capital management
The Company defines capital that it manages as the aggregate of its
shareholders' equity and interest bearing debt. The Company's objectives
when managing capital are to ensure that the Company will continue to
operate as a going concern and continue to provide products and services
to its customers, preserve its ability to finance expansion opportunities
as they arise, and provide returns to its shareholders.
As at March 31, 2009, total managed capital was $861.0 million (December
31, 2008 - $839.2 million), comprised of shareholders equity of $767.7
million (December 31, 2008 - $732.5 million), long-term debt of $61.2
million (December 31, 2008 - $60.6 million), current portion of long-term
debt of $30.9 million (December 31, 2008 - $30.7 million) and bank
indebtedness of $1.2 million (December 31, 2008 - $15.4 million).
The Company manages its capital structure and makes adjustments to it in
light of changes in economic conditions, the risk characteristics of the
underlying assets and business investment opportunities. To maintain or
adjust the capital structure, the Company may attempt to issue or re-
acquire shares, acquire or dispose of assets, or adjust the amount of
cash, cash equivalents, bank indebtedness or long-term debt balances. The
Company's capital is not subject to any capital requirements imposed by
any regulators; however, it is limited by the terms of its credit
facility and long-term debt agreements. Specifically, the Company is
required to maintain a Fixed Charge Coverage Ratio (Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA") divided by
interest expense) of more than 2.5 to 1 and a debt to total
capitalization ratio of less than 0.45 to one. The Company's capital
structure at March 31, 2009 was within the parameters established by
these agreements.
17. Segmented information
The Company classifies its operations into two general segments of the
global energy industry: Pipeline and Pipe Services and Petrochemical and
Industrial. Revenue and income (loss) from operations for the three
months and twelve months ended March 31, 2009 and 2008, and goodwill and
total assets as of those dates by segment are as follows:
Three Months Ended Mar. 31
2009 2008
Restated-
(in thousands of Canadian dollars) note 1
-------------------------------------------------------------------------
Revenue
Pipeline and Pipe Services 279,951 255,794
Petrochemical and Industrial 29,318 38,137
Intersegment Eliminations (1,805) (574)
--------------------------
307,464 293,357
--------------------------
--------------------------
Income (loss) from operations
Pipeline and Pipe Services 56,646 37,822
Petrochemical and Industrial 325 6,075
Financial and Corporate (6,537) (2,978)
--------------------------
50,434 40,919
--------------------------
--------------------------
Goodwill
Pipeline and Pipe Services 214,915 148,889
Petrochemical and Industrial 19,649 18,653
--------------------------
234,564 167,542
--------------------------
--------------------------
Total assets
Pipeline and Pipe Services 1,358,655 1,100,396
Petrochemical and Industrial 83,818 84,250
Financial and Corporate 823,032 812,796
Elimination (1,044,235) (978,312)
--------------------------
1,221,270 1,019,130
--------------------------
--------------------------
18. Joint venture operations
The Company's joint venture operations have been accounted for through
proportionate consolidation with the Company's share of each joint
venture's assets, liabilities, revenue, expenses, net income and cash
flows consolidated based on the Company's ownership position. The figures
related to these joint ventures included in the Company's consolidated
financial statements are summarized as follows:
Three Months Ended
(in thousands of Canadian dollars) Mar. 31
-------------------------------------------------------------------------
2009 2008
------------ ------------
Revenue $ 18,579 $ 16,688
Operating and other expenses 13,806 14,159
Net income before income taxes 4,773 2,529
Provision for taxes 1,055 401
------------ ------------
Net income $ 3,718 $ 2,128
------------ ------------
------------ ------------
Cash provided by (used in):
Operating activities $ 4,405 $ 1,305
Investing activities (1,181) (2,172)
Financing activities (1,745) (2,872)
Current assets 28,886 24,303
Property, plant and equipment, net 15,478 13,954
Goodwill 4,469 4,805
Current liabilities 11,824 17,590
Long-term Liabilities 1,402 733
19. Earnings per share
The weighted average number of common shares for the purpose of the
earnings per share calculations was as follows:
Three Months Ended Mar. 31
2009 2008
---------------------------
Basic
Class A 57,359,386 58,123,683
Class B 13,060,209 13,078,142
------------ ------------
Total 70,419,595 71,201,825
------------ ------------
------------ ------------
Dilutive effect of stock options
Class A 71,805 753,691
Class B - -
------------ ------------
Total 71,805 753,691
------------ ------------
------------ ------------
Diluted
Class A 57,431,191 58,877,374
Class B 13,060,209 13,078,142
------------ ------------
Total 70,491,400 71,955,516
------------ ------------
------------ ------------
20. Upcoming accounting changes
On February 13, 2008, The Accounting Standards Board ("AcSB") confirmed
that the use of International Financial Reporting Standards ("IFRS") will
be required in Canada for publicly accountable profit-oriented
enterprises for fiscal years beginning on or after January 1, 2011 and
the Company will be required to report using IFRS beginning on this date.
The Company has begun the process of evaluating the effect of and the
planning for the transition to IFRS. The impact of the ultimate adoption
of IFRS on the Company has not yet been finalized.
In January 2009, the AcSB issued the following new Handbook sections:
1582 - Business Combinations, 1601 - Consolidations, and 1602 - Non-
Controlling Interests. These standards are effective January 1, 2011. The
Company has not yet determined the impact of the adoption of these
standards on its consolidated financial statements.
21. Comparative figures
Comparative figures have been reclassified from statements previously
stated to conform to the presentation of the current year consolidated
financial statements, and to show the effects of retrospective
application of a new accounting policy (see note 1).