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(TSX: SCL.A, SCL.B)
TORONTO, Aug. 6 /CNW/ -
Financial Summary
(In thousands of
Canadian dollars Three Months Six Months
except per share Ended June 30 Ended June 30
amounts) 2008 2007 2008 2007
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Operating Results
Revenue $ 295,118 $ 276,440 $ 588,475 $ 497,769
EBITDA (note 1) 46,475 57,050 101,066 95,457
Operating income from
continuing operations 33,449 47,036 74,668 75,008
Income from continuing
operations 22,207 30,267 49,338 53,575
Income (loss) from
discontinued operations 10,553 (48) 10,484 (103)
Net income 32,760 30,219 59,822 53,472
Net income (loss) per share
(Class A and B) - Basic
Continuing operations 0.31 0.41 0.69 0.73
Discontinued operations 0.15 0.00 0.15 0.00
Total 0.46 0.41 0.84 0.73
Net income (loss) per
share (Class A and B) -
Diluted
Continuing operations 0.31 0.41 0.69 0.72
Discontinued operations 0.15 0.00 0.15 0.00
Total 0.46 0.41 0.84 0.72
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Cash Flow
Cash from operating
activities 74,334 24,254 64,819 54,107
Additions to property,
plant and equipment 26,653 23,868 38,914 39,361
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Financial Position
Working capital 171,860 284,231
Total assets 1,146,410 921,442
Shareholders' equity per
share (Class A and B)
(note 2) $ 9.09 $ 8.08
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Note 1: 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. 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 22,207 30,267 49,338 53,575
Add (deduct):
Income taxes 10,191 18,261 24,621 24,977
Interest (income) expense 895 (1,229) 982 (2,828)
Amortization of property,
plant and equipment 13,182 9,751 26,125 19,733
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EBITDA 46,475 57,050 101,066 95,457
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Note 2: 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.
Consolidated revenue from continuing operations for the second quarter of 2008 totaled $295.1 million, 6.8% higher than the second quarter of 2007 and marginally higher than the first quarter of the current year, with the year over year growth reflecting increased activity at the Company's Pipeline and Pipe Services segment businesses, partially offset by lower revenue in the Petrochemical and Industrial segment. The growth in consolidated revenue was achieved despite the adverse impact of the stronger Canadian dollar in the quarter. Compared with the second quarter of 2007, the 8.0% strengthening of the Canadian dollar against the U.S. dollar reduced reported revenue by $12.9 million. Consolidated income from continuing operations for the quarter totaled $22.2 million ($0.31 per share, diluted) compared to $27.1 million ($0.38 per share, diluted) last quarter and $30.3 million ($0.41 per share, diluted) in the second quarter of 2007, with the reduction in income from prior quarters attributable to decreased operating margins in both business segments.
A settlement of US$43.5 million was reached in the quarter with the plaintiff in the Dirt Inc. lawsuit related to the closed Mobile, Alabama facility. This settlement is to be shared between the Company and Halliburton Energy Services Inc. and is significantly less than the previously announced jury award of $108 million. The apportionment of the settlement between the Company and Halliburton is still to be determined. As a result of the settlement, the Company reduced its reserves related to this matter by $10.6 million ($0.15 per share, diluted), net of income taxes.
Net income in the quarter totaled $32.8 million ($0.46 per diluted share), compared to $27.1 million ($0.38 per diluted share) last quarter and $30.2 million ($0.41 per share, diluted) in the second quarter of last year.
On a year to date basis, consolidated revenue from continuing operations totaled $588.5 million, 18.2% higher than in the first half of 2007, while income from continuing operations totaled $49.3 million ($0.69 per share, diluted) compared to $53.6 million ($0.72 per share, diluted) for the same period of 2007. Net income for the first six months of 2008 totaled $59.8 million ($0.84 per share, diluted) compared to $53.5 million ($0.72 per share, diluted) in the corresponding period of last year.
During the quarter, the Company completed the sale of its investment in Bredero Shaw Nigeria Ltd. (BSNL) for net proceeds of $5.6 million and accordingly recorded a gain on the transaction of $1.1 million. The Company will continue to operate the facility on behalf of the purchaser under the terms of a technical services agreement.
On June 27, 2008, the Company completed the purchase of the outstanding shares of Flexpipe Systems Inc. ("Flexpipe") for $133.7 million, including assumed debt. Flexpipe manufactures and sells a proprietary, flexible, non-metallic, corrosion-resistant pipeline product marketed primarily to oil and natural gas producers in Canada and the United States. This product is used by oil and gas producers in applications that benefit from the product's ease and speed of installation and its pressure and corrosion resistance capabilities. Flexpipe is based in Calgary, Alberta and has sales offices and service depots in Saskatchewan, Colorado and Texas. The acquisition of Flexpipe has provided ShawCor with an attractive new product line to address a growing opportunity that is emerging within the global pipeline industry.
The Company's backlog of $475.6 million at June 30, 2008 increased 15% during the second quarter and includes several large pipe coating contracts that were announced during the second quarter, reflecting strong international large diameter and offshore project activity. The strong backlog and continuing high level of quotations and bids underpins the Company's continuing positive outlook. The revenue growth experienced in the first half of the year is expected to continue for the balance of the year and into 2009, primarily driven by buoyant pipeline-related activity. The reported backlog at June 30, 2008 does not include contracted orders of the recently acquired Flexpipe Systems business. The acquisition of Flexpipe Systems adds an important new technology and range of products to the Company's portfolio and is expected to provide a strong source of revenue growth for the Company.
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 2007 Annual Report.
Revenue, Income from Operations and Net Income
Consolidated Results
Current Quarter versus Q2 2007
Consolidated revenue from continuing operations for the second quarter of 2008 totaled $295.1 million, 6.8% higher than the $276.4 million recorded in the second quarter of 2007, despite the impact of the stronger Canadian dollar during the period. The Canadian dollar strengthened against the U.S. dollar by approximately 8.0% on average, during the second quarter of 2008 compared with the second quarter of last year, which adversely impacted revenue, operating income from continuing operations and net income by approximately $12.9 million, $2.4 million and $1.4 million, respectively. Offsetting the effect of the stronger Canadian dollar on reported revenue was the impact of higher material costs which have been passed through to customers.
Operating income from continuing operations totaled $33.4 million (11.3% of revenue from continuing operations) in the quarter, compared to $47.0 million (17.0% of revenue from continuing operations) in the second quarter of last year. The lower operating margin (operating income from continuing operations divided by revenue from continuing operations) in the quarter, compared to the prior year, reflects the impact of higher manufacturing fixed costs and depreciation associated with the ramp up of production at the new plants in Camrose, Alberta and Ras Al Khaimah, U.A.E. Also negatively impacting operating margins were costs incurred in commissioning the Pluto project at the Company's pipe coating plant in Orkanger, Norway, together with operating cost increases in the Middle East and the Far East due to government mandated fuel price increases in the quarter and generally rising inflation rates.
Income from discontinued operations totaled $10.6 million in the quarter ($0.15 per share, diluted) and reflected a reduction in reserves related to the Dirt Inc. lawsuit, net of income taxes. A settlement of US$43.5 million was reached in the quarter with the plaintiff in the lawsuit, which is to be shared between the Company and Halliburton Energy Services Inc. and is significantly less than the previously announced jury award of $108 million.
Net income in the quarter totaled $32.8 million ($0.46 per share, diluted) compared to $30.2 million ($0.41 per share, diluted) in the second quarter of 2007, with the improvement in earnings per share reflecting the impact of the lawsuit settlement partially offset by the lower income from continuing operations in the quarter.
Current Quarter versus Q1 2008
Consolidated revenue from continuing operations in the second quarter was marginally higher than the level achieved last quarter as slightly higher revenue in the Pipeline and Pipe Services segment was partially offset by a small decline in the Petrochemical and Industrial segment.
Operating income from continuing operations in the second quarter was 81.1% of the $41.2 million recorded last quarter and was adversely impacted by lower operating margins at Bredero Shaw and in the Petrochemical and Industrial segment.
Net income in the quarter increased $5.7 million ($0.08 per share, diluted) from $27.1 million ($0.38 per share, diluted) in the previous quarter.
Year-To-Date 2008 vs. 2007
Consolidated revenue from continuing operations for the six months ended June 30, 2008 totaled $588.5 million, 18.2% higher than $497.8 million recorded in the corresponding period of last year, while operating income from continuing operations totaled $74.7 million (12.7% of revenue from continuing operations) compared to $75.0 million (15.1% of revenue from continuing operations) in the first six months of 2007. On a year-to-date basis, net income totaled $59.8 million ($0.84 per share, diluted) compared to $53.5 million ($0.72 per share, diluted) in the first half of 2007.
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 ------------------------------------------------------------------------- Three months ended (In thousands of Canadian dollars) June 30 2008 Mar. 31 2008 June 30 2007 ------------------------------------------------------------------------- Revenue from continuing operations $258,984 $255,794 $238,964 ------------------------------------------------------------------------- Income from continuing operations $34,420 $38,508 $46,378 ------------------------------------------------------------------------- Operating margin 13.3% 15.1% 19.4% -------------------------------------------------------------------------
Current Quarter versus Q2 2007
In the Pipeline and Pipe Services segment, revenue from continuing operations in the second quarter of 2008 totaled $259.0 million, 8.4% higher than in the second quarter of last year, and reflected growth at Bredero Shaw, Canusa-CPS and Shaw Pipeline Services. At Bredero Shaw, revenue from continuing operations increased 2.2% over the second quarter of last year with growth achieved mainly in the Far East and Middle East regions, partially offset by softness in the North American and Europe/Africa regions. In North America, revenue in the quarter was adversely impacted by a short term reduction in large-diameter pipe coating activity while in the Europe/Africa region, revenue reflected lower pipe coating activity as the Thermotite facility in Orkanger, Norway prepared for the Pluto project. In the segment's other business units, revenue increased at Shaw Pipeline Services, Guardian and Canusa-CPS as these divisions experienced buoyant business activity during the quarter.
Operating income from continuing operations for the segment was $34.4 million (13.3% of revenue from continuing operations) in the quarter compared to $46.4 million (19.4% of revenue from continuing operations) in the second quarter of last year, with the decrease in operating margins (operating income from continuing operations divided by revenue from continuing operations) reflecting the impact of higher manufacturing fixed costs and depreciation associated with the ramp up of production at the new plants in Camrose, Alberta and Ras Al Khaimah, U.A.E. Also negatively impacting operating margins were costs incurred in commissioning the Pluto project at the Company's pipe coating plant in Orkanger, Norway, together with operating cost increases in the Middle East, the Far East due to government mandated fuel price increases in the quarter and generally rising inflation rates.
Current Quarter versus Q1 2008
Revenue for the segment in the second quarter was 1.2% higher than in the prior quarter as increases at Bredero Shaw and Guardian were partially offset by a small decrease at Canusa-CPS. The increase at Bredero Shaw reflected the ramp-up of production at the division's new pipe coating plant in Ras Al Khaimah, and a strengthening of pipe coating volumes at the plants in Kuantan, Malaysia and Kabil, Indonesia, partially offset by lower volumes in North America and Europe.
Operating income from continuing operations in the quarter was 89.4% of the level achieved in the prior quarter with the segment's operating margin decreasing by 1.9 percentage points. This decrease was attributable to costs incurred in commissioning the Pluto project and manufacturing cost inflation increases experienced at facilities in the Middle East and Far East.
Year-to-Date 2008 vs. Year-to-Date 2007
Revenue for the six months ended June 30, 2008 for the Pipeline and Pipe Services segment totaled $514.8 million, 22.2% higher than the revenue recorded during the same period of 2007. Operating income from continuing operations for the segment for the first six months of the year totaled $72.9 million (14.2% of revenue from continuing operations) compared to $70.9 million (16.8% of revenue from continuing operations) during the corresponding period of last year.
Petrochemical and Industrial
------------------------------------------------------------------------- Three months ended (In thousands of Canadian dollars) June 30 2008 Mar. 31 2008 June 30 2007 ------------------------------------------------------------------------- Revenue from continuing operations $36,585 $38,137 $38,179 ------------------------------------------------------------------------- Income from continuing operations $5,316 $6,075 $6,500 ------------------------------------------------------------------------- Operating margin 14.5% 15.9% 17.0% -------------------------------------------------------------------------
Current Quarter versus Q2 2007
In the Petrochemical and Industrial segment, revenue in the quarter totaled $36.6 million and was 4.2% lower than in the second quarter of last year, reflecting the impact of the stronger Canadian dollar on the translation of DSG-Canusa's significant U.S dollar based revenue combined with a slowdown in the industrial and energy markets served by ShawFlex. Operating income in the second quarter of 2008 of $5.3 million (14.5% of revenue from continuing operations) compares to $6.5 million (17.0% of revenue from continuing operations) in the second quarter of 2007 with the decrease in operating margin reflecting the impact of the stronger Canadian dollar on DSG-Canusa's results together with the impact of volume reductions on capacity utilization at ShawFlex.
Current Quarter versus Q1 2008
Revenue for the segment in the second quarter was 95.9% of the level achieved last quarter and reflected the impact of slower business activity at ShawFlex partially offset by growth at DSG-Canusa. Operating income from continuing operations in the quarter was 87.5% of the level achieved in the first quarter of 2008 and reflected the impact of lower revenue and lower operating margins stemming primarily from higher raw material prices and lower factory through put.
Year-to-Date 2008 vs. Year-to-Date 2007
Revenue for the Petrochemical and Industrial segment for the six months ended June 30, 2008 totaled $74.7 million compared to $77.7 million in the same period of last year, while operating income from continuing operations for the first six months of the year totaled $11.4 million (15.2% of revenue from continuing operations) compared to $13.5 million (17.4% of revenue from continuing operations) in 2007.
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 a net foreign exchange loss of $1.1 million, totaled $5.2 million compared to $4.1 million in the second quarter of last year, before a net foreign exchange loss of $1.8 million, with the increase in corporate costs mainly the result of increased professional and other fees connected to acquisition activity. Financial and corporate costs in the second quarter, excluding foreign exchange losses, were $1.3 million lower than in the prior quarter. On a year-to-date basis, financial and corporate costs totaled $11.7 million, excluding foreign exchange gains of $2.1 million, compared to $8.3 million in the same period of 2007, excluding foreign exchange losses of $1.0 million. Year to date financial and corporate costs include a $1.5 million writedown on the Company's investment in Garneau Inc. that was recorded in the first quarter.
Interest Income
Net interest expense totaled $895 thousand in the quarter, compared to interest income of $1.2 million in the second quarter of 2007 and interest expense of $87 thousand last quarter, and reflected the impact of lower cash balances in the quarter, together with lower rates of interest earned on cash and cash equivalents in the U.S and Canada.
Income Taxes
Income tax expense related to continuing operations in the quarter was $10.2 million, an effective rate (income tax expense divided by income before income taxes and non-controlling interest) of 31.3% compared to $18.3 million (effective rate of 37.8%) in the second quarter of last year and $14.4 million (effective rate of 35.1%) in the first quarter of 2008. The effective tax rate in the quarter was slightly lower than the Company's Canadian statutory tax rate of 34.1% having been favourably impacted by earnings of certain subsidiaries located in lower tax rate jurisdictions. The effective tax rate in the second quarter of 2007 and in the first quarter of 2008 were adversely impacted by tax losses at certain subsidiaries for which tax benefits had not been recognized. Additionally, the effective tax rate in the first quarter of 2008 was adversely impacted by the write down of the Company's investment in Garneau Inc. for which no tax benefit was recorded.
Cash Flow
Cash flow generated by continuing operating activities in the quarter totaled $74.3 million, compared to $24.3 million in the second quarter of 2007 and cash used of $9.5 million last quarter, and included the impact of a $31.4 million reduction in working capital, due to lower accounts receivable balances and higher accounts payable, partially offset by higher inventories incurred to support increasing business activity.
Cash flow used in continuing investing activities in the quarter totaled $153.7 million, compared to $14.3 million last quarter and $20.1 million in the second quarter of 2007, and was comprised of cash paid to purchase the outstanding shares of Flexpipe Systems Inc. in the amount of $121.9 million, $2.5 million paid to acquire 20% of the outstanding shares of PT Bredero Shaw Indonesia, one of the Company's non-wholly owned subsidiaries, capital expenditures of $26.7 million and investment in deferred project costs of $8.3 million, partially offset by proceeds received on the disposal of one of the Company's Nigerian subsidiaries of $5.6 million. Major capital additions in the quarter included capacity expansions programs at the Regina Saskatchewan, Camrose Alberta, and Pearland Texas pipe coating plants.
Cash flow generated by continuing financing activities in the quarter totaled $59.4 million, compared to cash used of $16.2 million last quarter and $70.6 million in the second quarter of 2007, and consisted of an increase to bank indebtedness of $63.0 million related to the acquisition of Flexpipe and cash received on the issuance of shares on exercise of stock options of $976 thousand, partially offset by dividends paid to shareholders of $4.5 million.
Other Comprehensive Income
Other comprehensive income in the quarter totaled $2.3 million, representing unrealized foreign currency translation gains on translation of the financial statements of foreign subsidiaries, net of hedging activities, reflecting the slight weakening of the Canadian dollar versus the U.S. dollar in the second quarter.
Liquidity and Capitalization
At June 30, 2008, the Company recorded a working capital ratio (the ratio of current assets to current liabilities) of 1.44 to 1 compared to 1.98 to 1 at December 31, 2007. Operating working capital, excluding cash, cash equivalents, bank indebtedness, the current portion of long-term debt and working capital of discontinued operations, decreased $1.7 million during the quarter to $173.2 million, as a result of lower accounts receivable balances and higher accounts payable, partially offset by increased inventories, and the assumption of $22.7 million in operating working capital on the
Change in Accounting Policies
The following are changes in the Company's accounting policies which came into effect in the first quarter of 2008:
a) General Standards of Financial Statements Presentation
Effective, January 1, 2008, the Company adopted changes to the Canadian Institute of Chartered Accountants' ("CICA") Handbook Section 1400, General Standards of Financial Statement Presentation. Amendments to this Handbook section require management to evaluate, as at each balance sheet date, the Company's ability to continue as a going concern. When management concludes that the company can no longer operate as a going concern, this fact, along with information relevant to that assessment, is required to be disclosed in the financial statements. When financial statements are not prepared on a going concern basis, this fact is to be disclosed along with a description of the basis of preparation.
b) Capital Disclosures
Effective January 1, 2008, the Company adopted CICA Handbook Section 1535, Capital Disclosures. This new Handbook section establishes standards for disclosing information about an entity's capital and how it is managed and includes the requirement for disclosure of information about an entity's objectives, policies and processes for managing capital. The disclosures related to this new handbook section are included in note 17.
c) Financial Instruments
Effective January 1, 2008, the Company adopted the following CICA Handbook Sections: 3862, Financial Instruments - Disclosure; and 3863, Financial Instruments - Presentation, which outline the disclosure requirements related to the Company's financial instruments. The adoption of the standards did not have any impact on the classification and valuation of the Company's financial instruments. The new disclosures required by these Handbook sections are included in note 16.
d) Inventories
On January 1, 2008, the Company adopted CICA Handbook Section 3031, Inventories. As required, this new accounting standard has been adopted retroactively with an adjustment to retained earnings. Prior year figures have not been restated. The following adjustments were made to the Company's balance sheet as a result of adopting this new accounting standard:
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(in thousands of Canadian dollars) January 1, 2008
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Increase in assets:
Inventories $ 2,624
-----------------
Total increase in assets $ 2,624
-----------------
-----------------
Increase in shareholders' equity:
Retained earnings 2,624
-----------------
Total increase to shareholders' equity 2,624
-----------------
Total increase to liabilities and shareholders' equity $ 2,624
-----------------
-----------------
The following is a description of the accounting policy adopted by the Company as a result of implementing this accounting change:
Inventories are valued at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis except in certain project based pipe coating businesses where the average cost basis is employed, and includes direct materials, direct labour and variable and fixed manufacturing overheads. Net realizable value for finished goods and work-in-process is the amount which would be realized on the sale, less the cost of transport, and for raw materials and supplies is replacement cost. Ownership of inbound inventories is recognized at the time title passes to the Company, which coincides with the invoicing and release of such inventories by suppliers.
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 June 30, 2008:
------------------------------------------------------------------------- (in thousands) June 30, 2008 ------------------------------------------------------------------------- Canadian dollars sold for Great Britain Pounds ------------------------------------------------------------------------- Less than one year CAD$410 ------------------------------------------------------------------------- Weighted average rate 2.0027 ------------------------------------------------------------------------- U.S. dollars sold for Canadian dollars ------------------------------------------------------------------------- Less than one year US$12,000 ------------------------------------------------------------------------- Weighted average rate 1.0093 ------------------------------------------------------------------------- Euros sold for U.S. dollars ------------------------------------------------------------------------- Less than one year Euro 4,150 ------------------------------------------------------------------------- Weighted average rate 1.4985 ------------------------------------------------------------------------- One year to two years Euro 2,150 ------------------------------------------------------------------------- Weighted average rate 1.4490 ------------------------------------------------------------------------- Two years to three years Euro 2,200 ------------------------------------------------------------------------- Weighted average rate 1.4465 ------------------------------------------------------------------------- U.S. dollars sold for Norwegian Kroners ------------------------------------------------------------------------- Less than one year US$9,543 ------------------------------------------------------------------------- Weighted average rate 5.3273 ------------------------------------------------------------------------- U.S. dollars sold for Malaysian Ringgit ------------------------------------------------------------------------- Less than one year US$3,800 ------------------------------------------------------------------------- Weighted average rate 3.2785 -------------------------------------------------------------------------
At June 30, 2008, the Company had notional amounts of $39.3 million of forward contracts outstanding (March 30, 2008 - $44.2 million) with the fair value of the Company's net obligation from all foreign exchange forward contracts totaling $1.5 million (March 31, 2008 - $297 thousand, net benefit).
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 2007 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 2007 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 ten most recently completed quarters:
(In thousands of
Canadian dollars
except per share
amounts) First Second Third Fourth Full Year
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Revenue (Restated
- see note below)
2008 $ 293,357 $ 295,118 $ - $ - $ -
2007 221,329 276,440 264,892 285,438 1,048,099
2006 262,547 269,433 251,324 276,315 1,059,619
Operating income
from continuing
operations
(Restated -
see note below)
2008 41,219 33,449 - - -
2007 27,972 47,036 45,500 39,493 160,001
2006 37,478 35,835 23,677 41,790 138,780
Income from
continuing
operations
2008 27,131 22,207 - - -
2007 23,308 30,267 30,191 34,053 117,819
2006 24,755 24,898 16,549 26,722 92,924
Income (loss)
from discontinued
operations
2008 (69) 10,553 - - -
2007 (55) (48) (59) (30,300) (30,462)
2006 (35) (192) 7 (69) (289)
Net income
2008 27,062 32,760 - - -
2007 23,253 30,219 30,132 3,753 87,357
2006 24,720 24,706 16,556 26,653 92,635
Operating income
from continuing
operations per
share (Classes
A and B)
Basic
2008 0.58 0.47 - - -
2007 0.38 0.64 0.63 0.55 2.21
2006 0.51 0.48 0.32 0.56 1.87
Diluted
2008 0.57 0.47 - - -
2007 0.37 0.63 0.63 0.54 2.18
2006 0.51 0.48 0.32 0.56 1.87
Income from
continuing
operations per
share (Classes
A and B)
Basic
2008 0.38 0.31 - - -
2007 0.31 0.41 0.42 0.48 1.62
2006 0.33 0.34 0.22 0.36 1.25
Diluted
2008 0.38 0.31 - - -
2007 0.31 0.41 0.42 0.47 1.60
2006 0.33 0.34 0.22 0.36 1.25
Income (loss)
from discontinued
operations per
share (Classes
A and B)
Basic
2008 0.00 0.15 - - -
2007 0.00 0.00 0.00 (0.42) (0.42)
2006 0.00 0.00 0.00 0.00 0.00
Diluted
2008 0.00 0.15 - - -
2007 0.00 0.00 0.00 (0.42) (0.41)
2006 0.00 0.00 0.00 0.00 0.00
Net income
per share
(Classes A and B)
Basic
2008 0.38 0.46 - - -
2007 0.31 0.41 0.42 0.06 1.20
2006 0.33 0.34 0.22 0.36 1.25
Diluted
2008 0.38 0.46 - - -
2007 0.31 0.41 0.42 0.05 1.19
2006 0.33 0.34 0.22 0.36 1.25
Note: Quarterly revenue and operating income from continuing operations
figures have been restated to reflect the change in accounting
treatment for the Company's investment in the Arabian Pipecoating
Company Limited adopted in the fourth quarter of 2006. Please
refer to note 2 to the 2006 annual Consolidated Financial
Statements.
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 80% 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.
On November 3, 2004, the Company announced the closure of its Mobile,
Alabama facility. Operations at the facility ceased in the fourth
quarter of 2005 and discontinued operations accounting treatment was
adopted in that quarter with prior quarters restated on a comparable
basis.
Outstanding Share Capital
As at July 28, 2008, the Company had 57,922,183 Class A Subordinate Voting Shares ("Class A") outstanding and 13,077,909 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 July 31, 2008, the Company had stock options outstanding to purchase up to 2,510,200 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 backlog increased 15% during the second quarter to $475.6 million at June 30, 2008. Several large pipe coating contracts were announced during the quarter including the $35 million Gumusut-Kakap deepwater project, the $30 million Vega project and the $50 million Alberta Clipper project. In addition, the Company announced in the quarter the $20 million Baydaratskaya Bay project in Russia to be performed for Gazprom, the world's largest natural gas producer.
The Company's outlook for the balance of the year continues to be positive with year over year growth, excluding the impact of the Flexpipe acquisition, in the range of 12% to 15%. Pipeline-related activity continues to be buoyant in each of the Company's global regions, underpinned by the strong backlog and a large number of project opportunities that are at the bid stage, with the result that revenue growth is expected to continue into next year and beyond. Success in winning and executing these activities will be crucial to achieving the Company's growth targets. The acquisition of Flexpipe Systems adds an important new technology and range of products to the Company's portfolio and is expected to provide a strong source of growth.
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 August 7, 2008 at 10:00 am ET to discuss the Company's second quarter 2008 financial results. Please visit our website at www.shawcor.com for further details.
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars except per share data)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenue $ 295,118 $ 276,440 $ 588,475 $ 497,769
Cost of goods sold 195,024 161,516 382,678 292,580
------------ ------------ ------------ ------------
Gross profit 100,094 114,924 205,797 205,189
Selling, general and
administrative
expenses (notes 2,
3 and 4) 51,740 56,418 101,603 107,209
Amortization of
property, plant and
equipment 13,182 9,751 26,125 19,733
Research and
development expense 1,723 1,719 3,401 3,239
------------ ------------ ------------ ------------
Operating income from
continuing operations 33,449 47,036 74,668 75,008
Interest income
(expense) (note 5) (895) 1,229 (982) 2,828
------------ ------------ ------------ ------------
Income before income
taxes and non-
controlling interest 32,554 48,265 73,686 77,836
Income taxes 10,191 18,261 24,621 24,977
------------ ------------ ------------ ------------
Income before non-
controlling interest 22,363 30,004 49,065 52,859
Non-controlling
interest (156) 263 273 716
------------ ------------ ------------ ------------
Income from continuing
operations 22,207 30,267 49,338 53,575
Loss from discontinued
operations (note 6) 10,553 (48) 10,484 (103)
------------ ------------ ------------ ------------
Net income $ 32,760 $ 30,219 $ 59,822 $ 53,472
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share,
Class A and B -
Basic (note 20)
Continuing
operations $ 0.31 $ 0.41 $ 0.69 $ 0.73
Discontinued
operations 0.15 - 0.15 -
------------ ------------ ------------ ------------
Total $ 0.46 $ 0.41 $ 0.84 $ 0.73
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share
Class A and B -
Diluted (note 20)
Continuing
operations $ 0.31 $ 0.41 $ 0.69 $ 0.72
Discontinued
operations 0.15 - 0.15 -
------------ ------------ ------------ ------------
Total $ 0.46 $ 0.41 $ 0.84 $ 0.72
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
-------------------------------------------------------------------------
SEGMENTED INFORMATION
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenue
Pipeline and Pipe
Services $ 258,984 $ 238,964 $ 514,778 $ 421,332
Petrochemical and
Industrial 36,585 38,179 74,722 77,698
Intersegment
Eliminations (451) (703) (1,025) (1,261)
------------ ------------ ------------ ------------
$ 295,118 $ 276,440 $ 588,475 $ 497,769
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income (loss) from
operations
Pipeline and Pipe
Services $ 34,420 $ 46,378 $ 72,928 $ 70,914
Petrochemical and
Industrial 5,316 6,500 11,391 13,483
Financial and
Corporate (6,287) (5,842) (9,651) (9,389)
------------ ------------ ------------ ------------
$ 33,449 $ 47,036 $ 74,668 $ 75,008
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Operating activities:
Income from con-
tinuing operations $ 22,207 $ 30,267 $ 49,338 $ 53,575
Items not requiring
an outlay of cash:
Amortization of
property, plant
and equipment 13,182 9,751 26,125 19,733
Amortization of
deferred project
costs 2,986 3,277 6,708 8,953
Asset retirement
obligation expense 666 1,043 1,732 1,238
Stock-based
compensation
(note 2) 806 697 1,693 1,372
Future income taxes 3,469 792 (265) 635
Gain on disposal of
property, plant
and equipment 112 (121) 103 (203)
Impairment of
available-for-sale
financial asset
(note 9) - - 1,498 -
Non-controlling
interest in
earnings of
subsidiaries 156 (263) (273) (716)
Gain on disposal
of subsidiary
(note 21) (1,063) - (1,063) -
Settlement of asset
retirement
obligations (415) (1,424) (1,374) (2,597)
Change in employee
future benefits 866 927 1,632 1,762
Change in non-cash
working capital 31,362 (20,692) (21,035) (29,645)
------------ ------------ ------------ ------------
Cash provided by
continuing operating
activities 74,334 24,254 64,819 54,107
------------ ------------ ------------ ------------
Investing activities:
Purchases of
property, plant
and equipment (26,653) (23,868) (38,914) (39,361)
Proceeds on disposal
of property, plant
and equipment - 101 32 202
Increase in deferred
project costs (8,294) 3,995 (10,348) (2,579)
Acquisition of
subsidiaries
(note 21) (124,376) - (124,376) -
Proceeds on disposal
of subsidiaries
(note 21) 5,635 - 5,635 -
Investment in shares - (301) - (301)
------------ ------------ ------------ ------------
Cash used in
continuing investing
activities (153,688) (20,073) (167,971) (42,039)
------------ ------------ ------------ ------------
Financing activities:
Increase (decrease)
in bank indebtedness 62,961 (2,700) 62,970 (3,667)
Issue of shares 976 2,359 1,435 3,684
Purchase of shares
for cancellation - (66,104) (12,642) (76,762)
Dividends paid to
shareholders (4,533) (4,171) (8,548) (8,359)
------------ ------------ ------------ ------------
Cash provided by
(used in) continuing
financing activities 59,404 (70,616) 43,215 (85,104)
------------ ------------ ------------ ------------
Foreign exchange on
foreign cash and
cash equivalents (1,225) (11,921) 4,493 (11,766)
------------ ------------ ------------ ------------
Net cash used in
continuing operations (21,175) (78,356) (55,444) (84,802)
Net cash provided by
(used in) discontinued
operations (note 6) 2,676 (1,267) 3,936 (1,946)
Cash and cash
equivalents at
beginning of period 142,008 302,197 175,017 309,322
------------ ------------ ------------ ------------
Cash and cash
equivalents at end
of period $ 123,509 $ 222,574 $ 123,509 $ 222,574
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Supplemental
information:
Cash interest paid $ 1,374 1,462 $ 2,563 $ 3,496
Cash income taxes
paid $ 3,747 11,509 $ 12,048 $ 35,705
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED BALANCE SHEETS
June 30 December 31
2008 2007
------------ ------------
Assets
Current assets
Cash and cash equivalents (note 7) $ 123,509 $ 175,017
Accounts receivable 247,793 203,547
Taxes receivable 8,418 3,169
Inventories 155,030 102,486
Prepaid expenses 10,466 11,362
Derivative financial instruments 485 1,508
Current future income taxes 5,638 2,770
Current assets of discontinued operation
(note 6) 9,785 16,305
------------ ------------
561,124 516,164
Property, plant and equipment, net 280,293 242,783
Goodwill 209,408 159,480
Intangible assets (note 8) 60,258 1,558
Future income taxes 20,264 24,463
Other assets (note 9) 15,063 15,878
------------ ------------
$ 1,146,410 $ 960,326
------------ ------------
------------ ------------
Liabilities
Current liabilities
Bank indebtedness (note 10) $ 68,077 $ 107
Accounts payable and accrued liabilities 148,382 153,116
Taxes payable 50,718 32,030
Derivative financial instruments 519 -
Deferred revenues 55,001 24,021
Current portion of long-term debt 28,369 -
Current liabilities of discontinued operation
(note 6) 38,198 51,265
------------ ------------
389,264 260,539
Long-term debt 53,292 72,726
Future income taxes 40,290 33,006
Derivative financial instruments 343 -
Other non-current liabilities (note 11) 17,475 10,740
------------ ------------
500,664 377,011
------------ ------------
Non-controlling interest in subsidiaries 404 3,283
------------ ------------
Shareholders' Equity
Capital stock (note 12) 203,778 203,252
Contributed surplus (note 13) 12,924 11,729
Retained earnings 529,211 486,548
Accumulated other comprehensive loss (note 14) (100,571) (121,497)
------------ ------------
645,342 580,032
------------ ------------
$ 1,146,410 $ 960,326
------------ ------------
------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Balance at beginning
of period $ 500,984 $ 507,715 $ 486,548 $ 498,001
Transitional
adjustment (note 1) - - 2,624 -
------------ ------------ ------------ ------------
Adjusted balance at
beginning of year 500,984 507,715 489,172 498,001
Net income 32,760 30,219 59,822 53,472
------------ ------------ ------------ ------------
533,744 537,934 548,994 551,473
Excess of purchase
price paid over
stated value of
shares (note 12) - (58,813) (11,235) (68,164)
Dividends declared (4,533) (4,171) (8,548) (8,359)
------------ ------------ ------------ ------------
Balance at end of
period $ 529,211 $ 474,950 $ 529,211 $ 474,950
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Net income $ 32,760 $ 30,219 $ 59,822 $ 53,472
Other comprehensive
income (loss), net
of income taxes:
Unrealized gain
(loss) on translating
financial statements
of self-sustaining
foreign operations 1,197 (28,133) 23,300 (29,225)
Gain (loss) on hedges
of unrealized foreign
currency translation 1,060 6,893 (2,218) 7,275
Income tax expense - (1,237) - (1,237)
------------ ------------ ------------ ------------
Unrealized foreign
currency translation
gain (loss), net of
hedging activities 2,257 (22,477) 21,082 (23,187)
------------ ------------ ------------ ------------
Unrealized loss on
available-for-sale
financial assets
arising during
the period - (643) (911) (1,283)
Unrealized loss on
available-for-sale
financial assets
transferred to net
income in the
current period - - 1,498 -
Income tax expense
transferred to net
income in the period - 218 253 436
------------ ------------ ------------ ------------
Change in unrealized
loss on available-
for-sale financial
assets - (425) 840 (847)
------------ ------------ ------------ ------------
Gain on derivatives
designated as cash
flow hedges - 2,028 - 2,145
Income tax expense - (688) - (728)
Loss (gain) on
derivatives
designated as cash
flow hedges in prior
periods transferred
to net income in
the current period - (104) (1,508) 34
Income tax expenses
(benefits)
transferred to net
income in the
current period - 35 512 (12)
------------ ------------ ------------ ------------
Change in gain (loss)
on derivatives
designated as cash
flow hedges - 1,271 (996) 1,439
------------ ------------ ------------ ------------
Other comprehensive
income (loss) 2,257 (21,631) 20,926 (22,595)
------------ ------------ ------------ ------------
Comprehensive income $ 35,017 $ 8,588 $ 80,748 $ 30,877
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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, 2007. Accordingly,
these interim consolidated financial statements should be read in
conjunction with the Company's annual consolidated financial statements.
a) Intangible Assets
Intangible assets, including intellectual property, are recorded at their
allocated cost at the date of acquisition of the related subsidiary.
Amortization is provided for intangible assets with definite lives,
including intellectual property, on a straight-line basis over their
estimated useful lives of up to 25 years.
b) General Standards of Financial Statements Presentation
Effective January 1, 2008, the Company adopted changes to the Canadian
Institute of Chartered Accountants' ("CICA") Handbook Section 1400,
General Standards of Financial Statement Presentation. Amendments to this
Handbook section require management to evaluate, as at each balance sheet
date, the Company's ability to continue as a going concern. If management
concludes that the Company can no longer operate as a going concern, that
fact, along with information relevant to that assessment, is required to
be disclosed in the financial statements. When financial statements are
not prepared on a going concern basis, this fact is to be disclosed along
with a description of the basis of preparation. This change had no impact
on the Company's unaudited interim consolidated financial statements.
c) Capital Disclosures
Effective January 1, 2008, the Company adopted CICA Handbook Section
1535, Capital Disclosures. This Handbook section establishes standards
for disclosing information about the Company's capital and how it is
managed and includes the requirement for disclosure of information about
the Company's objectives, policies and processes for managing capital.
The disclosures related to this handbook section are included in note 17.
d) Financial Instruments
Effective January 1, 2008, the Company adopted the following CICA
Handbook Sections: 3862, Financial Instruments - Disclosure; and 3863,
Financial Instruments - Presentation, the former of which outlines the
disclosure requirements related to the Company's financial instruments.
The adoption of the standards did not have any impact on the
classification and valuation of the Company's financial instruments. The
disclosures required by these Handbook sections are included in note 16.
e) Inventories
On January 1, 2008, the Company adopted CICA Handbook Section 3031,
Inventories. As required, this accounting standard has been adopted
prospectively with an adjustment to retained earnings. Prior year figures
have not been restated. The following adjustments were made to the
Company's balance sheet as a result of adopting this accounting standard:
-------------------------------------------------------------------------
(in thousands of Canadian dollars) January 1, 2008
-------------------------------------------------------------------------
Increase in assets:
Inventories.............................................. $ 2,624
------------
Total increase in assets................................... $ 2,624
------------
------------
Increase in shareholders' equity:
Retained earnings........................................ 2,624
------------
Total increase to shareholders' equity..................... 2,624
------------
Total increase to liabilities and shareholders' equity..... $ 2,624
------------
------------
The following is a description of the accounting policy adopted by the
Company as a result of implementing this accounting change:
Inventories are valued at the lower of cost or net realizable value. Cost
is determined on a first-in, first-out basis, except in certain project
based pipe coating businesses where the average cost basis is employed,
and includes direct materials, direct labour and variable and fixed
manufacturing overheads. Net realizable value for finished goods and
work-in-process is the amount which would be realized on the sale, less
the cost of transport, and for raw materials and supplies is replacement
cost. Ownership of inbound inventories is recognized at the time title
passes to the Company, which coincides with the invoicing and release of
such inventories by suppliers.
2. Stock-based compensation
The Board of Directors approved the granting of 30,000 stock options on
May 26, 2008 and 398,600 on February 22, 2008 under the 2001 Employee
Plan. The total fair value of the stock options granted during six months
ended June 30, 2008 was $4.1 million and the weighted average fair value
of the options was $10.54 (2007 - $8.15), calculated using the Black-
Scholes pricing model with the following assumptions:
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Expected life of options...................... 6.25 years 6.25 years
-------------------------------------------------------------------------
Expected stock price volatility............... 29.63% 29.02%
-------------------------------------------------------------------------
Expected dividend yield....................... 0.75% 0.92%
-------------------------------------------------------------------------
Risk-free interest rate....................... 3.20% 4.04%
-------------------------------------------------------------------------
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 and six months ended June 30,
2008, included in selling, general and administrative expenses, is $806
thousand and $1.7 million, respectively (June 30, 2007 - $697 thousand
and $1.7 million, respectively).
3. Foreign exchange gains and losses
Included in selling, general and administrative expenses for the three
months and six months ended June 30, 2008 are foreign exchange losses of
$1.1 million and gains of $2.1 million, respectively, (June 30, 2007 -
losses of $1.0 million and $1.8 million, respectively).
4. 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 and six months ended June 30, 2008 is $2.4 million and
$4.8 million (June 30, 2007 - $2.5 million and $4.9 million).
5. Interest income (expense)
Three Months Ended Six Months Ended
(in thousands of June 30 June 30
Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Interest on short-
term deposits $ 610 $ 2,625 $ 2,062 $ 5,808
Interest on bank
indebtedness (315) (108) (671) (305)
Interest on long-
term debt (1,190) (1,288) (2,373) (2,675)
----------------------------------------------------
$ (895) $ 1,229 $ (982) $ 2,828
----------------------------------------------------
----------------------------------------------------
6. 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.
On July 17, 2008, the Company announced that it had reached a settlement
of the Alabama lawsuit brought by Dirt, Inc. against Bredero Price
Company, Bredero Shaw LLC, ShawCor Ltd. and Halliburton Energy Services,
Inc., which resulted in the previously announced verdict of
US$100 million in compensatory damages and punitive damages of
US$2 million against each defendant plus interest. The matter was
settled, at a mediation ordered by the Alabama Supreme Court as part of
the appeal proceedings, for a total of US$43.5 million against all
parties. The Company and its co-shareholder of Bredero Price Company are
now discussing apportionment of the settlement amount. As a result of
this settlement, the Company has reduced its reserves related to this
lawsuit to $36.0 million, less anticipated income tax recoveries of
$12.6 million, with the result that income from discontinued operations
was recorded in the three months ended June 30, 2008 in amount of
$10.6 million, net of an income tax recovery of $6.6 million.
The following table summarizes the financial results and cash flows from
discontinued operations for the three months and six months ended
June 30, 2008 and 2007 and the assets and liabilities of the discontinued
operations as at those dates:
Three Months Ended Six Months Ended
(in thousands of June 30 June 30
Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue $ - $ - $ - $ -
----------------------------------------------------
Income (loss) from
operations 17,156 (48) 17,087 (103)
Interest expenses - - -
----------------------------------------------------
Income (loss) from
discontinued
operations before
income taxes 17,156 (48) 17,087 (103)
Income tax expense 6,603 - 6,603 -
----------------------------------------------------
Income (loss) from
discontinued
operations $ 10,553 $ (48) $ 10,484 $ (103)
----------------------------------------------------
----------------------------------------------------
Cash flow provided by
(used in) operating
activities $ 2,676 $ (1,267) $ 3,936 $ (1,946)
Current assets $ 9,785 $ 2
Property, plant and
equipment, net - -
Current liabilities $ 38,198 $ 5,792
7. Cash and cash equivalents
June 30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Cash $ 87,996 $ 122,655
Cash equivalents 35,513 52,362
--------------------------
$ 123,509 $ 175,017
--------------------------
--------------------------
8. Intangible assets
June 30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Intellectual property with limited life,
net of accumulated amortization of nil
(2007 - nil) $ 57,927 $ 827
Intangible assets with limited life net of
accumulated amortization of nil (2007 - nil) 400 400
Intangible assets with indefinite life 1,931 331
--------------------------
$ 60,258 $ 1,558
--------------------------
--------------------------
Intellectual property represents the costs of certain technology and
know-how obtained in acquisitions. Intangible assets include trademarks,
brand names and customer relationships obtained in acquisitions.
9. Other assets
June 30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Long-term investments $ 1,690 $ 2,589
Deferred project costs 8,966 8,492
Accrued employee future benefit asset 4,407 4,797
--------------------------
$ 15,063 $ 15,878
--------------------------
--------------------------
Other assets include a long-term investment in Garneau Inc. ("Garneau"),
a Canadian-based, publicly traded pipe coating company. The Company has
reviewed the 2007 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, 2008 of $1.5 million.
10. Bank indebtedness
On June 24, 2008, the Company negotiated a $65.8 million increase in its
operating credit lines, in support of the Company's acquisition of
Flexpipe Systems Inc. ("Flexpipe") on June 27, 2008. In addition,
Flexpipe has a line of credit of $15.0 million. At June 30, 2008, the
Company had total operating credit lines of $257.8 million (December 31,
2007 - $172.0 million), of which $122.8 million has been drawn for
various standby letters of credit for performance, bid and surety bonds
(December 31, 2007 - $107.0 million) and bank indebtedness of
$68.7 million (December 31, 2007 - nil), to yield unutilized credit
facilities of $66.3 million (December 31, 2007 - $64.7 million),
excluding the Company's proportionate share of the bank indebtedness of
its joint venture, Arabian Pipecoating Company Limited.
As part of the acquisition of Flexpipe, the Company acquired Flexpipe's
long-term debt in the amount of $6.6 million. This debt bears interest at
bank prime plus 0.75% and is repayable in monthly installments of
$229 thousand. Principal repayments of this debt are estimated to be:
(in thousands of Canadian dollars) Total
-------------------------------------------------------------------------
2008 $ 1,996
2009 2,743
2010 1,829
-------------------------------------------------------------------------
6,568
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. Other non-current liabilities
June 30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Non-current asset retirement obligations $ 13,471 $ 7,977
Accrued employee future benefit obligations 4,004 2,763
--------------------------
$ 17,475 $ 10,740
--------------------------
--------------------------
12. Capital stock
June 30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Number of shares: Class A
Balance, beginning of the period 58,234,570 60,914,175
Issued - stock options 92,380 320,295
Conversions Class B to Class A 233 -
Purchase - normal course issuer bid (405,000) (2,999,900)
Balance, end of the period 57,922,183 58,234,570
Number of shares: Class B 13,077,909 13,078,142
--------------------------
Total number of shares 71,000,092 71,312,712
--------------------------
--------------------------
Stated value:
Balance, beginning of the period $ 202,248 $ 205,848
Issued - stock options 1,435 4,955
Conversions Class B to Class A - -
Purchase - normal course issuer bid (1,407) (10,194)
Compensation cost on exercised options 498 1,639
--------------------------
Balance, end of the period 202,774 202,248
--------------------------
Stated value: Class B 1,004 1,004
--------------------------
Total stated value $ 203,778 $ 203,252
--------------------------
--------------------------
During the six months ended June 30, 2008, the Company repurchased and
cancelled 405,000 Class A Subordinated Voting Shares ("Class A shares")
(June 30, 2007 - 2,540,100) under the terms of a Normal Course Issuer Bid
("NCIB"). The excess of cost over stated capital of the acquired shares,
which for the six months ended June 30, 2008 totaled $11.2 million
(June 30, 2007 - $68.2 million), was charged to retained earnings. The
repurchase of shares was made on the open market at prevailing market
prices for a total of $12.6 million.
13. Contributed surplus
Three months ended Six months ended
(in thousands of June 30, June 30, June 30, June 30,
Canadian dollars) 2008 2007 2008 2007
Balance, beginning
of period $ 12,415 $ 10,830 $ 11,729 $ 10,603
Stock compensation
expense (note 2) 806 697 1,693 1,373
Fair value of stock
options exercised (297) (704) (498) (1,153)
---------------------------------------------------
Balance, end of
period $ 12,924 $ 10,823 $ 12,924 $ 10,823
---------------------------------------------------
---------------------------------------------------
14. Accumulated other comprehensive loss
June 30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Unrealized foreign currency translation
losses, net of hedging activities $ (100,571) $ (121,653)
Unrealized loss on available-for-sale
financial asset - (840)
Gain on derivatives designated as cash
flow hedges - 996
--------------------------
Balance, at end of period $ (100,571) $ (121,497)
--------------------------
--------------------------
15. Stock option plans
A summary of the status of the Company's stock option plans and changes
during the period are presented below:
-------------------------------------------------------------------------
June 30, 2008 Dec. 31, 2007
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Total Exercise Total Exercise
Shares Price Shares Price
-------------------------------------------------------------------------
Balance outstanding,
beginning of year 2,173,980 17.24 2,269,395 15.76
-------------------------------------------------------------------------
Granted 428,600 30.03 371,800 25.02
-------------------------------------------------------------------------
Exercised (92,380) 15.52 (320,295) 15.64
-------------------------------------------------------------------------
Forfeited - - (142,000) 17.42
-------------------------------------------------------------------------
Expired - - (4,920) 17.91
-------------------------------------------------------------------------
Balance outstanding,
end of period 2,510,200 19.49 2,173,980 17.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted
average
remaining Weighted Weighted
Outstanding contractual average Exercisable average
Range of at June 30, life in exercise at June 30, exercise
exercise prices 2008 years price 2008 price
-------------------------------------------------------------------------
$10.00 to $15.00 479,200 4.92 $12.64 448,720 $12.73
-------------------------------------------------------------------------
$15.01 to $20.00 1,211,960 5.85 $16.83 817,876 $16.75
-------------------------------------------------------------------------
$20.01 to $25.00 40,000 7.01 $20.90 18,400 $21.03
-------------------------------------------------------------------------
$25.01 to $30.00 749,040 9.04 $27.62 70,088 $25.02
-------------------------------------------------------------------------
$30.01 to $35.00 30,000 9.51 $31.77 - -
-------------------------------------------------------------------------
2,510,200 1,355,084
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted
average
remaining Weighted Weighted
Outstanding contractual average Exercisable average
Range of at December life in exercise at December exercise
exercise prices 31, 2007 years price 31, 2007 price
-------------------------------------------------------------------------
$10.00 to $15.00 518,620 5.28 $12.69 387,616 $12.80
-------------------------------------------------------------------------
$15.01 to $20.00 1,259,760 6.36 $16.81 645,568 $16.71
-------------------------------------------------------------------------
$20.01 to $25.00 40,000 7.51 $20.90 11,200 $21.19
-------------------------------------------------------------------------
$25.01 to $30.00 355,600 9.01 $25.02 - -
-------------------------------------------------------------------------
2,173,980 1,044,384
-------------------------------------------------------------------------
16. 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:
-------------------------------------------------------------------------
June 30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Financial assets:
-------------------------------------------------------------------------
Held for trading, measured at fair value
-------------------------------------------------------------------------
Cash $ 87,996 $ 122,655
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Held to maturity, recorded at amortized cost
-------------------------------------------------------------------------
Cash equivalents 35,513 52,362
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loans and receivables, recorded at amortized cost
-------------------------------------------------------------------------
Accounts receivable 247,793 203,547
-------------------------------------------------------------------------
Taxes receivable 8,418 3,169
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Available for sale, measured at fair value
-------------------------------------------------------------------------
Long-term investments 1,690 2,589
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Derivatives, measured at fair value
-------------------------------------------------------------------------
Derivative financial instruments (377) 1,508
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial liabilities:
-------------------------------------------------------------------------
Other liabilities, recorded at amortized cost:
-------------------------------------------------------------------------
Bank indebtedness 68,077 107
-------------------------------------------------------------------------
Accounts payable and accrued liabilities 148,382 153,116
-------------------------------------------------------------------------
Taxes payable 50,718 32,030
-------------------------------------------------------------------------
Long-term debt 81,661 72,726
-------------------------------------------------------------------------
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, with the exception of the Company's
Senior Notes of $75.1 million (December 31, 2007 - $72.7 million). Based
on current interest rates for debt with similar terms and maturities, the
fair value of the Senior Notes is estimated to be $75.6 million
(December 31, 2007 - $74.9 million).
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 June 30, 2008:
-------------------------------------------------------------------------
(in thousands) June 30, 2008
-------------------------------------------------------------------------
Canadian dollars sold for Great Britain Pounds
-------------------------------------------------------------------------
Less than one year CAD$410
-------------------------------------------------------------------------
Weighted average rate 2.0027
-------------------------------------------------------------------------
U.S. dollars sold for Canadian dollars
-------------------------------------------------------------------------
Less than one year US$12,000
-------------------------------------------------------------------------
Weighted average rate 1.0093
-------------------------------------------------------------------------
Euros sold for U.S. dollars
-------------------------------------------------------------------------
Less than one year Euro 4,150
-------------------------------------------------------------------------
Weighted average rate 1.4985
-------------------------------------------------------------------------
One year to two years Euro 2,150
-------------------------------------------------------------------------
Weighted average rate 1.4490
-------------------------------------------------------------------------
Two years to three years Euro 2,200
-------------------------------------------------------------------------
Weighted average rate 1.4465
-------------------------------------------------------------------------
U.S. dollars sold for Norwegian Kroners
-------------------------------------------------------------------------
Less than one year US$9,543
-------------------------------------------------------------------------
Weighted average rate 5.3273
-------------------------------------------------------------------------
U.S. dollars sold for Malaysian Ringgit
-------------------------------------------------------------------------
Less than one year US$3,800
-------------------------------------------------------------------------
Weighted average rate 3.2785
-------------------------------------------------------------------------
At June 30, 2008, the Company had notional amounts of $39.3 million of
forward contracts outstanding (December 31, 2007 - $35.7 million) with
the fair value of the Company's net obligation from all foreign exchange
forward contracts totaling $1.5 million (December 31, 2007 -
$1.5 million, net benefit).
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 Audit Committee of 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 June 30, 2008,
fluctuations of +/- 5% in the Canadian dollar, relative to those foreign
currencies, would impact the Company's consolidated revenue, operating
income from continuing activities and income from continuing activities
for the three months then ended by approximately $7.4 million,
$1.6 million and $900 thousand, respectively, prior to hedging
activities. 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 amount of interest expenses 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 June 30, 2008,
fluctuations of +/- 5% in the Canadian dollar, relative to the U.S.
dollar, would impact the Company's accumulated other comprehensive income
and interest expense by $3.8 million and $50 thousand, respectively, 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 June 30, 2008:
-------------------------------------------------------------------------
(in thousands) Fixed interest rate maturing in
-------------------------------------------------------------------------
Floating 1 year or Greater
rate less than 1 year Total
-------------------------------------------------------------------------
Financial assets
-------------------------------------------------------------------------
Cash and cash
equivalents $87,996 $35,513 $ - $123,509
-------------------------------------------------------------------------
Total $87,996 $35,513 $ - $123,509
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
fixed rate of
cash equivalents - 1.94% -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial liabilities
-------------------------------------------------------------------------
Bank indebtedness $68,077 $ - $ - $68,077
-------------------------------------------------------------------------
Long-term debt 6,568 25,289 49,804 81,661
-------------------------------------------------------------------------
Total $74,645 $25,289 $49,804 $149,738
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
fixed rate of debt - - 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 assesses the credit quality of the
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 June 30, 2008 are as follows:
(in thousands of Canadian dollars) June 30, 2008
-------------------------------------------------------------------------
Not past due $ 203,606
Past due 1 to 30 days 28,562
Past due 31 to 60 days 9,699
Past due 61 to 90 days 5,182
Past due for more than 90 days 4,895
------------
Total trade receivables 251,944
Less: allowance for doubtful accounts 4,151
------------
Net receivables $ 247,793
------------
------------
The following is an analysis of the change in the allowance for doubtful
accounts for the three months ended June 30, 2008:
Six Months Ended
(in thousands of Canadian dollars) June 30, 2008
-------------------------------------------------------------------------
Balance, beginning of period $ 4,165
Bad debt expense 295
Write-offs of bad debts (251)
Impact of change in foreign exchange rates (58)
------------
Balance, end of period $ 4,151
------------
------------
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 June 30,
2008, the Company has cash and cash equivalents totaling $124.2 million
and had unutilized lines of credit available to use of $66.3 million. The
following are the contractual maturities of the Company's financial
liabilities as of June 30, 2008:
-------------------------------------------------------------------------
Less than After one
(in thousands of Canadian dollars) one year year
-------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 146,279 $ -
-------------------------------------------------------------------------
Asset retirement obligations 2,103 13,471
-------------------------------------------------------------------------
Bank indebtedness 68,077 -
-------------------------------------------------------------------------
Long-term debt 28,369 53,292
-------------------------------------------------------------------------
Interest on financial instruments 3,877 3,876
-------------------------------------------------------------------------
Derivative financial instruments 34 343
-------------------------------------------------------------------------
17. 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 June 30, 2008, total managed capital was $795.1 million
(December 31, 2007 - $652.7 million), comprised of shareholders equity of
$645.3 million (December 31, 2007 - $580.0 million), long-term debt of
$81.7 (December 31, 2007 - $72.7 million) and bank indebtedness of
$68.1 million (December 31, 2007 - $107 thousand).
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 equivalent, 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 June 30, 2008 was within the parameters established by these
agreements.
18. 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 six months ended June 30, 2008 and 2007, and goodwill and
total assets as of those dates by segment are as follows:
Three Months Ended Six Months Ended
(in thousands of June 30 June 30
Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue
Pipeline and Pipe
Services 258,984 238,964 514,778 421,332
Petrochemical and
Industrial 36,585 38,179 74,722 77,698
Intersegment
Eliminations (451) (703) (1,025) (1,261)
---------------------------------------------------
295,118 276,440 588,475 497,769
---------------------------------------------------
---------------------------------------------------
Income (loss) from
operations
Pipeline and Pipe
Services 34,420 46,378 72,928 70,914
Petrochemical and
Industrial 5,316 6,500 11,391 13,483
Intersegment
Eliminations (6,287) (5,842) (9,651) (9,389)
---------------------------------------------------
33,449 47,036 74,668 75,008
---------------------------------------------------
---------------------------------------------------
Goodwill
Pipeline and Pipe
Services 190,779 150,122
Petrochemical and
Industrial 18,629 16,999
-------------------------
209,408 167,121
-------------------------
-------------------------
Total assets
Pipeline and Pipe
Services 1,207,161 911,997
Petrochemical and
Industrial 84,242 80,400
Financial and
Corporate 945,960 1,143,581
Elimination (1,090,953) (1,214,068)
-------------------------
1,146,410 921,910
-------------------------
-------------------------
19. 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:
(in thousands of Three Months Ended Six Months Ended
Canadian dollars) June 30 June 30
-------------------------------------------------------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenue $ 21,277 $ 12,203 $ 37,965 $ 25,743
Operating and other
expenses 17,180 8,715 31,339 19,002
Net income before
income taxes 4,097 3,488 6,626 6,741
Provision for taxes 820 312 1,221 710
------------ ------------ ------------ ------------
Net income $ 3,277 $ 3,176 $ 5,405 $ 6,031
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash provided by
(used in):
Operating activities $ 4,099 $ (1,170) $ 5,404 $ (2,335)
Investing activities (1,627) - (3,799) -
Financing activities - - (2,872) -
Current assets - - 26,621 19,238
Property, plant and
equipment, net - - 14,426 10,695
Goodwill - - 5,135 5,013
Current liabilities - - 16,610 13,463
20. Earnings per share
The weighted average number of common shares for the purpose of the
earnings per share calculations was as follows:
Six Months Ended
June 30
2008 2007
-------------------------------------------------------------------------
Basic
Class A 57,922,183 58,613,990
Class B 13,077,909 13,078,142
--------------------------
Total 71,000,092 71,692,132
--------------------------
--------------------------
Dilutive effect of stock options
Class A 873,513 2,509,289
Class B - -
--------------------------
Total 873,513 2,509,289
--------------------------
--------------------------
Diluted
Class A 58,795,696 61,123,279
Class B 13,077,909 13,078,142
--------------------------
Total 71,873,605 74,201,421
--------------------------
--------------------------
21. Acquisitions and divestitures
On April 14, 2008, the Company acquired 20% of the outstanding shares of
PT Bredero Shaw Indonesia for $2.5 million. The excess of the
proportionate fair value of the net assets of this company over the
amount of the disbursement that was made to acquire the shares has been
allocated as a reduction to fixed assets. Subsequent to this transaction,
the Company owns 95% of the outstanding shares of this subsidiary.
On June 27, 2008, the Company announced the acquisition of the
outstanding shares of Flexpipe. Flexpipe is a leading manufacturer of
spoolable, composite line pipe which is used by oil and gas producers in
applications that benefit from the product's ease and speed of
installation and its pressure and corrosion resistance capabilities and
is based in Canada. This transaction is being accounted for using the
purchase method with the balance sheet and financial results of Flexpipe
included in the Company's consolidated financial statements from the date
of acquisition. The allocation of the purchase price has not yet been
finalized pending the completion of an appraisal of the acquired assets
and liabilities. This is expected to be completed within the next twelve
months. The following are the preliminary details of the acquisition.
These details may be adjusted pending the finalization of the purchase
equation:
(In thousands of Canadian dollars)
-------------------------------------------------------------------------
Net assets acquired at assigned values:
Current assets $ 36,583
Property, plant and equipment 17,898
Goodwill 43,825
Other intangible assets 58,700
Current liabilities (13,272)
Future income taxes (9,392)
Other long-term liabilities (640)
-------------------------------------------------------------------------
$ 133,702
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration given:
Cash, net of cash acquired of $1,376 $ 121,905
Indebtedness assumed 11,797
-------------------------------------------------------------------------
$ 133,702
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On June 30, 2008, the Company recorded the sale of its wholly-owned
division Bredero Shaw Nigeria Ltd. ("BSNL") for proceeds of $5.6 million
and consequently recorded a gain of $1.1 million representing the excess
of the purchase price over the carrying value of the net assets sold. The
following is a summarized balance sheet of BSNL at the time of sale:
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
Current assets $ 5,581
Property, plant and equipment, net 129
Current liabilities 799
-------------------------------------------------------------------------
On June 6, 2007, the Company purchased all of the outstanding shares of
X-Tek Industrial Limited from X-Tek Systems Limited. The name of the
company was subsequently changed to Shaw Inspection Systems Limited
("SISL"). The following are the finalized details of the acquisition:
(In thousands of Canadian dollars)
-------------------------------------------------------------------------
Net assets acquired at assigned values:
Current assets $ 2,323
Property, plant and equipment 329
Goodwill 560
Other intangible assets 1,558
Current liabilities (1,984)
-------------------------------------------------------------------------
$ 2,786
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration given:
Cash 2,786
-------------------------------------------------------------------------
$ 2,786
-------------------------------------------------------------------------
-------------------------------------------------------------------------
22. Upcoming accounting changes
In February 2008, the CICA issued new Handbook section 3064, Goodwill and
Intangible Assets, which is effective for fiscal years beginning on or
after October 1, 2008. The Company is currently evaluating the impact of
the new accounting standards on its financial position, results of
operations and disclosures.
23. Comparative figures
Comparative figures have been reclassified where necessary to correspond
with the current year's presentation.