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(TSX:SCL.A, SCL.B)
TORONTO, Nov. 1 /CNW/ -
Financial Summary
(In thousands of
Canadian dollars Three Months Ended Nine Months Ended
except per share Sept. 30 Sept. 30
amounts) 2007 2006 2007 2006
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Restated Restated
Operating Results (note 3) (note 3)
Revenue $ 264,892 $ 251,324 $ 762,661 $ 783,304
EBITDA (note 1) 55,374 37,019 150,831 129,176
Operating income
from continuing
operations 45,500 23,676 120,509 96,989
Income from continuing
operations 30,191 16,549 83,766 66,202
Income (loss) from
discontinued
operations (59) 7 (162) (220)
Net income (loss) 30,132 16,556 83,604 65,982
Net income (loss)
per share (Class A
and B) - Basic
Continuing
operations 0.42 0.22 1.15 0.89
Discontinued
operations 0.00 0.00 0.00 0.00
Total 0.42 0.22 1.15 0.89
Net income (loss)
per share (Class A
and B) - Diluted
Continuing
operations 0.42 0.22 1.14 0.89
Discontinued
operations 0.00 0.00 0.00 0.00
Total 0.42 0.22 1.14 0.89
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Cash Flow
Cash from continuing
operating activities 33,701 64,859 90,361 143,009
Purchases of property,
plant and equipment 23,943 22,710 63,304 42,591
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Financial Position
Working capital 287,584 307,781
Total assets 931,959 948,565
Shareholders' equity
per share (Class A
and B) $ 8.25 $ 7.89
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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. 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.
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.
Note 3: During the fourth quarter of 2006, ShawCor Ltd. adopted the
proportionate consolidation method of accounting for its 30% investment
in the Arabian Pipecoating Company Limited ("APCO"). The Company
previously accounted for this investment using the equity method. This
change in accounting policy has been applied retroactively and as a
result, revenue, operating expenses and certain balance sheet accounts
for previous periods have been restated. Refer to note 2 of the 2006
annual consolidated financial statements.
Consolidated revenue from continuing operations for the third quarter totaled $264.9 million, 5% higher than in the third quarter of last year, with the growth broadly-based across all divisions of the Company. This growth was achieved despite the adverse impact of the stronger Canadian dollar in the quarter, which increased by an average of 8% versus the third quarter of last year, when compared to the U.S. dollar. On a year-to-date basis, consolidated revenue from continuing operations totaled $762.7 million for the nine months ended September 30, 2007, 97% of the level achieved in the same period of 2006 with the shortfall attributable to the strengthening of the Canadian dollar during the period.
Net income in the quarter totaled $30.1 million ($0.42 per diluted share), compared to $16.6 million ($0.22 per diluted share) in the third quarter of last year, with the improvement primarily reflecting a significant improvement in operating margins. Consolidated operating margins (operating income from continuing operations divided by revenue from continuing operations) were 17.2% in the quarter compared to 9.4% in the third quarter of last year. Net income for the first nine months of the year totaled $83.6 million ($1.14 per diluted share) compared to $66.0 million ($0.89 per diluted share) in the same period of 2006.
The Company's backlog at September 30 remained strong at $411.2 million, an increase of 9% from June 30. This strong backlog, together with continuing high levels of bidding activity, is indicative of the increasing investments in energy infrastructure globally and supports the Company's potential for strong growth in the years ahead.
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 2006 Annual Report.
Revenue, Income from Operations and Net Income
Consolidated Results
Consolidated revenue from continuing operations for the third quarter totaled $264.9 million, 5% higher than in the third quarter of last year, with the growth broadly-based across all divisions of the Company. This growth was achieved despite the adverse impact of the stronger Canadian dollar in the quarter. The Canadian dollar versus the U.S. dollar was 8% stronger on average this quarter compared with the third quarter of last year. This adversely impacted the translation of the Company's U.S.-denominated revenue into Canadian dollars by approximately $13 million. Net income in the quarter totaled $30.1 million ($0.42 per diluted share), compared to $16.6 million ($0.22 per diluted share) in the third quarter of last year, with the improvement reflecting both increased revenue and improved operating margins, partially offset by the adverse impact of the stronger Canadian dollar. The impact of the appreciation of the Canadian dollar on the translation of the Company's U.S. dollar-denominated revenue and operating expenses reduced reported net income by approximately $3 million. Consolidated operating margins (operating income from continuing operations divided by revenue from continuing operations) were 17.2% in the quarter compared to 9.4% in the third quarter of last year.
Consolidated revenue from continuing operations in the third quarter decreased 4% from the levels in the second quarter of this year, due in part to the impact of the 5% strengthening of the Canadian dollar, versus the U.S. dollar. Net income in the third quarter was slightly higher than in the prior quarter, despite the lower revenue, due primarily to a quarter over quarter improvement in foreign exchange gains of $3.3 million, mainly reflecting the maturity of hedging instruments in the period. Diluted earnings per share in the third quarter were $0.01 per share higher than in the previous quarter due to the impact on diluted shares of share repurchases made under the Normal Course Issuer Bid.
On a year-to-date basis, consolidated revenue from continuing operations totaled $762.7 million for the nine months ended September 30, 2007, 97% of the level achieved in the same period of 2006 with the shortfall attributable to the strengthening of the Canadian dollar during the period. The average exchange rate between the Canadian and U.S. dollars strengthened by 3% during the first nine months of 2007 versus the comparable period of last year. Net income for the first nine months of the year totaled $83.6 million ($1.14 per diluted share) compared to $66.0 million ($0.89 per diluted share) in the same period of 2006.
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 Sept. 30 June 30 Sept. 30 (In thousands of Canadian dollars) 2007 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue from continuing operations $227,779 $238,964 $216,889 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income from continuing operations $42,738 $46,378 $24,075 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating margin 18.8% 19.4% 11.1% -------------------------------------------------------------------------
Current Quarter versus Q3 2006
In the Pipeline and Pipe Services segment, revenue from continuing operations totaled $227.8 million in the quarter and was 5% higher than in the third quarter of last year, driven by strong results at Bredero Shaw, Canusa-CPS and Shaw Pipeline Services. At Bredero Shaw, revenue increased over the third quarter of last year reflecting strength in North America and the Far East, partially offset by continuing softness in the North Sea market and the impact of the temporary closure of the Ras Al Khaimah plant during an upgrade and expansion program. In North America, pipe coating of the Rockies Express and Corridor projects at the division's plant in Camrose, Alberta, together with the Golden Pass project in the United States contributed to the strong result while higher revenue in the Far East region was underpinned by the Medgaz project at the division's plant in Kuantan, Malaysia. The North Sea region of Bredero Shaw was adversely impacted by continuing softness in that market. In the segment's other business units, revenue in the quarter at Shaw Pipeline Services and Canusa-CPS grew strongly from levels in the third quarter of last year as a result of international project work, while revenue at Guardian was marginally lower reflecting continuing softness in Western Canadian drilling activity. Operating income from continuing operations for the segment of $42.7 million in the quarter was 78% higher than in the third quarter of last year and reflected the impact of the higher revenue as well as higher operating margins. Operating margins in the quarter of 18.8% were 7.7 percentage points higher than in the same quarter of 2006, reflecting improved project execution and improved factory through-put resulting from the higher business activity.
Current Quarter versus Q2 2007
Revenue for the segment in the quarter was 95% of the level achieved in the second quarter of this year, with the shortfall mainly reflecting the impact of the stronger Canadian dollar on the translation of the segment's primarily U.S. dollar-based revenue. Operating income in the quarter was $3.6 million lower than in the prior quarter due to the revenue decrease and the unfavourable impact of the stronger Canadian dollar on operating margins. Operating margins in the quarter were 0.6 percentage points lower than in the previous quarter.
On a year-to-date basis, revenue from continuing operations for the Pipeline and Pipe Services segment totaled $649.1 million compared to $678.4 million in the first nine months of 2006. Operating income from continuing operations for period totaled $113.7 million (17.5% of revenue), compared to $97.7 million (14.4% of revenue) last year.
Petrochemical and Industrial
------------------------------------------------------------------------- Three months ended Sept. 30 June 30 Sept. 30 (In thousands of Canadian dollars) 2007 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue from continuing operations $37,517 $38,178 $34,910 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income from continuing operations $6,274 $6,500 $5,039 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating margin 16.7% 17.0% 14.4% -------------------------------------------------------------------------
Current Quarter versus Q3 2006
In the Petrochemical and Industrial segment, revenue totaled $37.5 million, 7% higher than in the third quarter of last year and reflected increased business activity at both DSG-Canusa and ShawFlex, which both experienced modest revenue growth. Operating income from continuing operations in the quarter of $6.3 million increased 25% from the level recorded in the third quarter of 2006, and reflected both the increased revenue and improved operating margins. Operating margins in the quarter increased 2.3 percentage points from the third quarter of last year to 16.7%.
Current Quarter versus Q2 2007
Revenue for the segment in the quarter was 98% of the level achieved in the second quarter of the year with the decrease largely due to the strengthening of the Canadian dollar compared to both the U.S. dollar and the Euro. On average, the Canadian dollar was 5% stronger versus the U.S. dollar and 3% stronger versus the Euro, compared to the prior quarter. This had an adverse effect on the translation of the segment's revenue, particularly for DSG-Canusa, whose business in mainly conducted in the U.S.A. and Europe. Operating income for the segment decreased 3% from the previous quarter reflecting the lower revenue and marginally lower operating margins.
On a year-to-date basis, revenue for the segment totaled $115.2 million, compared to $106.1 million in the first nine months of 2006, while operating income from continuing operations totaled $19.8 million (17.1% of revenue), compared to $13.6 million (12.8% of revenue) in the same period of last year.
Financial and Corporate
Financial and corporate costs consist of corporate office costs not charged to the operating divisions and other non-operating items including foreign exchange gains and losses on cash balances. Financial and corporate costs for the quarter, before net foreign exchange gains of $1.5 million, totaled $5.0 million compared to $6.9 million in the third quarter of last year, before net foreign exchange gains of $1.5 million. Prior year financial and corporate expenses were unusually high and included costs related to the unsuccessful Garneau acquisition as well as increased management compensation costs in line with the improved financial results of 2006.
Financial and corporate expenses in the quarter were $905 thousand higher than in the second quarter of the year, excluding foreign exchange gains and losses, mainly the result of increased provision for management compensation expenses reflective of improvements in the year's financial performance outlook. Foreign exchange gains in the quarter totaled $1.5 million compared to losses of $1.8 million in the prior quarter.
On a year-to-date basis, financial and corporate costs totaled $13.3 million, before foreign exchange gains of $428 thousand, compared to $16.3 million before foreign exchange gains of $2.0 million in the first nine months of 2006.
Interest Income
Net interest income totaled $811 thousand in the quarter, compared to $881 thousand in the third quarter of last year. Net interest income was however reduced from the $1.2 million earned in the second quarter of this year as a result of lower average cash balances held during each period.
On a year-to-date basis, net interest income totaled $3.6 million compared to $1.4 million in the first nine months of last year.
Income Taxes
Income tax expense in the quarter was $15.9 million (34.4% of income before income taxes) compared to $7.9 million (32.4% of income before taxes) in the third quarter of 2006. Income tax expense in the second quarter of 2007 was $18.3 million (37.8% of income before taxes) and reflected the impact of losses at the Company's Nigerian operations for which tax benefits were not recorded.
Cash Flow
Cash flow generated from continuing operating activities in the quarter totaled $33.7 million compared to $30.8 million in the prior quarter and reflected increased investment in working capital compared to the previous quarter. Cash flow from continuing operating activities in the third quarter of 2006 was $64.9 million and reflected a significant reduction in working capital balances during that period. On a year-to-date basis, cash flow generated from continuing operating activities totaled $90.4 million compared to $143.0 million in the first nine month of 2006, with the decrease due to increased investment in working capital to support increased business levels, partially offset by the impact of higher earnings compared to in 2006.
Cash flow used in continuing investing activities in the quarter totaled $23.4 million compared to $26.6 million last quarter and $31.8 million in the third quarter of last year, and was comprised of capital expenditures of $23.9 million, partially offset by proceeds received on the disposal of property, plant and equipment of $503 thousand. Major capital additions in the quarter included the pipe coating plant capacity expansions in Camrose, Alberta and Ras Al Khaimah.
Cash flow used in continuing financing activities in the quarter totaled $4.5 million, compared to $70.6 million last quarter and $7.5 million in the third quarter of 2006, and consisted of dividends paid of $4.1 million, decreases in bank indebtedness of $351 thousand and $1.2 million paid to repurchase 34,500 Class A Subordinate Voting Shares ("Class A Shares) at an average price of $33.62, partially offset by $1.0 million received from the issuance of Class A Shares on the exercise of stock options.
Other Comprehensive Loss
Other comprehensive loss in the quarter totaled $15.4 million and was mainly comprised of an unrealized foreign currency translation loss of $15.2 million, net of hedging activities, reflecting the significant strengthening of the Canadian dollar versus the U.S. dollar in the quarter. On a year-to-date basis, other comprehensive loss totaled $38.0 million and is comprised of unrealized losses of $38.4 million, net of hedging activities, on the translation of the financial statements of the Company's foreign subsidiaries and a $1.1 million unrealized loss on an available-for-sale financial asset, the Company's investment in a publicly listed company, partially offset by an unrealized gain of $1.5 million on derivative financial instruments designated as cash flow hedges.
Liquidity and Capitalization
At September 30, 2007, the Company recorded a working capital ratio (the ratio of current assets to current liabilities) of 2.26 to 1 compared to 2.30 to 1 at the beginning of the quarter and 2.39 to 1 at the beginning of the year. Operating working capital, excluding cash, cash equivalents and bank indebtedness increased $6.9 million during the quarter to $71.8 million, mainly reflecting increases in accounts receivable stemming from the high levels of sales experienced at the end of the second quarter and the early part of the third quarter, together with increased prepaid expenses related to preparation for upcoming pipe coating projects.
Change in Accounting Policies
On January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants' Handbook Section 1530, Comprehensive Income; Section 3855, Financial Instruments - Recognition and Measurement; Section 3861, Financial Instruments - Disclosure and Presentation; and Section 3865, Hedges. These changes require the Company to classify all financial assets as held-for-trading, designated at fair value, available-for-sale, held-to-maturity, or loans and receivables. The new accounting standards also require the Company to measure all financial assets, including derivatives and excluding loans and receivables, debt securities classified as held-to-maturity and available-for-sale equities that do not have quoted market values in an active market, at fair values. Changes in the fair values of financial assets classified as held-for-trading and of derivatives that are not considered effective hedges are charged to net income. Changes in the fair values of financial assets classified as available-for-sale and derivatives that are considered effective hedges are charged to other comprehensive income. As required, these new accounting standards have been applied as an adjustment to opening retained earnings and accumulated other comprehensive income. Prior period figures have not been restated. Refer to note 1 to the third quarter 2007 interim financial statements for further information.
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 September 30, 2007:
(in thousands)
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Maturity
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U.S. dollars sold for Canadian dollars
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Less than one year US$11,750
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Weighted average rate 1.1108
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At September 30, 2007, the Company had notional amounts of $11.8 million of forward contracts outstanding (December 31, 2006 - $38.7 million) with the fair value of the Company's net benefit of all foreign exchange forward contracts totaling $1.3 million (December 31, 2006 - $3.1 million liability).
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 2006 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.
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 eleven most recently completed quarters:
(In thousands of Canadian dollars except per share amounts) First Second Third Fourth Full Year ------------------------------------------------------------------------- Revenue (Restated - see note below) 2007 $ 221,329 $ 276,440 $ 264,892 $ $ 2006 262,547 269,433 251,324 276,315 1,059,619 2005 244,952 231,995 241,639 293,867 1,012,453 Operating income from continuing operations (Restated - see note below) 2007 27,972 47,036 45,500 2006 37,478 35,835 23,677 41,790 138,780 2005 29,326 12,509 21,882 31,737 95,454 Income from continuing operations 2007 23,308 30,267 30,191 2006 24,755 24,898 16,549 26,722 92,924 2005 18,688 7,516 34,806 21,780 82,790 Income (loss) from discontinued operations 2007 (55) (48) (59) 2006 (35) (192) 7 (69) (289) 2005 (930) 2,224 55,946 (1,190) 56,050 Net income 2007 23,253 30,219 30,132 2006 24,720 24,706 16,556 26,653 92,635 2005 17,758 9,740 90,752 20,590 138,840 Operating income from continuing operations per share (Classes A and B) Basic 2007 0.38 0.64 0.63 2006 0.51 0.48 0.32 0.56 1.87 2005 0.39 0.17 0.29 0.42 1.27 Diluted 2007 0.37 0.63 0.63 2006 0.51 0.48 0.32 0.56 1.87 2005 0.39 0.17 0.29 0.42 1.27 Income from continuing operations per share (Classes A and B) Basic 2007 0.31 0.41 0.42 2006 0.33 0.34 0.22 0.36 1.25 2005 0.25 0.10 0.45 0.30 1.10 Diluted 2007 0.31 0.41 0.42 2006 0.33 0.34 0.22 0.36 1.25 2005 0.25 0.10 0.45 0.30 1.10 Income (loss) from discontinued operations per share (Classes A and B) Basic and Diluted 2007 0.00 0.00 0.00 2006 0.00 0.00 0.00 0.00 0.00 2005 (0.01) 0.03 0.75 (0.02) 0.75 Net income per share (Classes A and B) Basic 2007 0.31 0.41 0.42 2006 0.33 0.34 0.22 0.36 1.25 2005 0.24 0.13 1.20 0.28 1.85 Diluted 2007 0.31 0.41 0.42 2006 0.33 0.34 0.22 0.36 1.25 2005 0.24 0.13 1.20 0.28 1.85 ------------------------------------------------------------------------- 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. This event had a significant impact on the
financial results for the fourth quarter of 2004. 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.
On September 30, 2005, the Company completed the sale of its OMSCO
drill pipe manufacturing division. The division has been accounted
for as a discontinued operation.
Outstanding Share Capital
As at October 30, 2007, the Company had 58,642,770 Class A Subordinate Voting Shares ("Class A") outstanding and 13,078,142 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 October 30, 2007, the Company had stock options outstanding to purchase up to 2,240,280 Class A shares.
Management's Health, Safety and Environmental Commitment
The Company is committed to providing a safe and healthy workplace and ensuring that all business activities are conducted in a manner that protects the environment. This commitment includes designing and operating its plants and individual processes in compliance with applicable government requirements regulating the discharge of substances into the environment or otherwise relating to the protection of the environment. The Company's program for health, safety and environmental management is further described in the Company's Annual Information Form under Health, Safety, and Environmental Policy.
Outlook
The Company's consolidated order backlog at September 30, 2007, representing the value of firm customer purchase orders expected to be completed within one year, was $411.2 million, 9% higher than at the end of the second quarter, and reflected several new projects including a U.S. $57 million portion of the U.S. $85 million Pluto project, announced October 9, which is expected to be completed within twelve months.
The Company's current outlook for 2007 indicates that revenue will be slightly reduced from 2006 as a result of weakness in the fourth quarter from the continued strength of the Canadian dollar and a temporary decline in pipe coating activity from the levels experienced during the second and third quarters of the year, due in part to the slippage of pipe coating projects in Ras Al Khaimah and Brazil into the first quarter of 2008. The slow down is expected to be short-term and activity levels are expected to increase again in the first quarter of 2008. The Company continues to pursue significant business opportunities globally, and is in the process of bidding major offshore pipeline projects in Northern Europe. Success in securing these projects, together with the buoyant market outlook in North America, the Middle East and the Far East could result in significant revenue growth during the next few years.
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 November 2, 2007 at 10:00 a.m. ET to discuss the Company's third quarter 2007 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 Nine Months Ended
September 30 September 30
------------------------- -------------------------
2007 2006 2007 2006
Restated Restated
(note 1) (note 1)
------------ ------------ ------------ ------------
Revenue $ 264,892 $ 251,324 $ 762,661 $ 783,304
------------ ------------ ------------ ------------
Operating expenses
(notes 2, 3 and 4) 207,431 212,876 607,219 648,828
Amortization 10,050 13,397 29,783 33,215
Research and
development 1,911 1,375 5,150 4,272
------------ ------------ ------------ ------------
219,392 227,648 642,152 686,315
------------ ------------ ------------ ------------
Operating income from
continuing operations 45,500 23,676 120,509 96,989
Interest income (note 5) 811 881 3,638 1,364
------------ ------------ ------------ ------------
Income before income
taxes and non-
controlling interest 46,311 24,557 124,147 98,353
Income taxes 15,943 7,954 40,920 31,123
------------ ------------ ------------ ------------
Income before non-
controlling interest 30,368 16,603 83,227 67,230
Non-controlling interest (177) (54) 539 (1,028)
------------ ------------ ------------ ------------
Income from continuing
operations 30,191 16,549 83,766 66,202
Income (loss) from
discontinued
operations (note 7) (59) 7 (162) (220)
------------ ------------ ------------ ------------
Net income $ 30,132 $ 16,556 $ 83,604 $ 65,982
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share,
Class A and B - Basic
(note 19)
Continuing
operations $ 0.42 $ 0.22 $ 1.15 $ 0.89
Discontinued
operations - - - -
------------ ------------ ------------ ------------
Total $ 0.42 $ 0.22 $ 1.15 $ 0.89
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share
Class A and B -
Diluted (note 19)
Continuing
operations $ 0.42 $ 0.22 $ 1.14 $ 0.89
Discontinued
operations - - - -
------------ ------------ ------------ ------------
Total $ 0.42 $ 0.22 $ 1.14 $ 0.89
------------ ------------ ------------ ------------
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SEGMENTED INFORMATION
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
2007 2006 2007 2006
Restated Restated
(note 1) (note 1)
------------ ------------ ------------ ------------
Revenue
Pipeline and Pipe
Services $ 227,779 $ 216,889 $ 649,111 $ 678,377
Petrochemical and
Industrial 37,517 34,910 115,215 106,143
Intersegment
Eliminations (404) (475) (1,665) (1,216)
------------ ------------ ------------ ------------
$ 264,892 $ 251,324 $ 762,661 $ 783,304
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income (loss) from
operations
Pipeline and Pipe
Services $ 42,738 $ 24,075 $ 113,652 $ 97,667
Petrochemical and
Industrial 6,274 5,039 19,757 13,603
Financial and
Corporate (3,512) (5,438) (12,900) (14,281)
------------ ------------ ------------ ------------
$ 45,500 $ 23,676 $ 120,509 $ 96,989
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
2007 2006 2007 2006
Restated Restated
(note 1) (note 1)
------------ ------------ ------------ ------------
Operating activities:
Income from
continuing
operations $ 30,191 $ 16,549 $ 83,766 $ 66,202
Items not requiring
an outlay of cash:
Amortization of
property plant
and equipment 10,050 13,397 29,783 33,215
Amortization of
deferred financing
costs 146 140 433 368
Stock-based
compensation
(note 2) 696 738 2,068 2,139
Accretion expense
on asset
retirement
obligations 160 58 549 174
Future income taxes (496) (1,793) 139 (4,680)
Non-controlling
interest in
earnings of
subsidiaries 177 54 (539) 1,028
Change in employee
future benefits 457 675 2,219 853
Change in non-cash
working capital
and other (7,680) 35,041 (28,057) 43,710
------------ ------------ ------------ ------------
Cash provided by
continuing operating
activities 33,701 64,859 90,361 143,009
------------ ------------ ------------ ------------
Investing activities:
Purchases of property,
plant and equipment (23,943) (22,710) (63,304) (42,591)
Proceeds on disposal of
property, plant and
equipment 503 76 705 117
Acquisition of
subsidiary (note 18) - (8,555) (2,579) (8,555)
Investment in shares - - (301) -
Remeditaion of asset
retirement
obligations 47 (565) (2,506) (565)
------------ ------------ ------------ ------------
Cash used in continuing
investing activities (23,393) (31,754) (67,985) (51,594)
------------ ------------ ------------ ------------
Financing activities:
Decrease in bank
indebtedness (351) (1,027) (4,018) (1,793)
Issue of shares 1,028 378 4,712 956
Purchase of shares
for cancellation (1,161) (3,609) (77,923) (7,797)
Dividends paid to
shareholders (4,054) (3,275) (12,413) (6,557)
------------ ------------ ------------ ------------
Cash used in continuing
financing activities (4,538) (7,533) (89,642) (15,191)
------------ ------------ ------------ ------------
Foreign exchange on
foreign cash and
cash equivalents (8,637) (5) (20,403) (5,726)
------------ ------------ ------------ ------------
Net cash provided by
(used in) continuing
operations (2,867) 25,567 (87,669) 70,498
Net cash used in
discontinued
operations (note 7) (3,896) (957) (5,842) (695)
Cash and cash
equivalents at
beginning of period 222,574 245,528 309,322 200,335
------------ ------------ ------------ ------------
Cash and cash
equivalents at end
of period $ 215,811 $ 270,138 $ 215,811 $ 270,138
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED BALANCE SHEETS
Sept. 30 Dec. 31
2007 2006
------------ ------------
Assets
Current assets
Cash and cash equivalents $ 215,811 $ 309,322
Accounts receivable 192,019 188,865
Inventories 85,644 79,662
Taxes receivable 3,194 4,293
Prepaid expenses 17,079 12,897
Derivative financial instruments 1,301 -
Future income taxes 807 -
Current assets of discontinued operation
(note 7) 2 156
------------ ------------
515,857 595,195
Property, plant and equipment, net 226,896 202,078
Goodwill 161,297 175,813
Future income taxes 21,256 25,404
Other assets (note 8) 6,653 9,536
------------ ------------
$ 931,959 $ 1,008,026
------------ ------------
------------ ------------
Liabilities
Current liabilities
Bank indebtedness (note 9) $ 76 $ 4,094
Accounts payable and accrued liabilities 155,308 169,387
Deferred revenues 22,092 10,907
Taxes payable 48,842 57,010
Current liabilities of discontinued operation
(note 7) 1,955 7,789
------------ ------------
228,273 249,187
Long-term debt 73,834 87,480
Future income taxes 25,642 30,496
Other non-current liabilities (note 10) 8,909 5,923
------------ ------------
336,658 373,086
------------ ------------
Non-controlling interest in subsidiaries 3,453 5,013
Shareholders' Equity
Capital stock (note 11) 204,379 206,852
Contributed surplus (note 12) 11,139 10,603
Retained earnings 499,987 498,001
Accumulated other comprehensive loss (note 13) (123,657) (85,529)
------------ ------------
591,848 629,927
------------ ------------
$ 931,959 $ 1,008,026
------------ ------------
------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Balance at beginning
of period $ 474,950 $ 464,292 $ 498,001 $ 421,547
Net income 30,132 16,556 83,604 65,982
------------ ------------ ------------ ------------
505,082 480,848 581,605 487,529
Excess of purchase
price paid over
stated value of
shares (Note 11) (1,041) (2,957) (69,205) (6,356)
Dividends paid (4,054) (3,275) (12,413) (6,557)
------------ ------------ ------------ ------------
Balance at end
of period $ 499,987 $ 474,616 $ 499,987 $ 474,616
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Net income $ 30,132 $ 16,556 $ 83,604 $ 65,982
Other comprehensive income
(loss), net of income taxes:
Unrealized loss on
translating financial
statements of self-
sustaining foreign
operations (19,553) (860) (48,778) (5,135)
Gain on hedges of unrealized
foreign currency
translation 5,198 - 12,473 -
Income tax expense (883) - (2,120) -
---------- ---------- ---------- ----------
Unrealized foreign currency
translation loss, net
of hedging activites (15,238) (860) (38,425) (5,135)
---------- ---------- ---------- ----------
Unrealized loss on
available-for-sale
financial assets arising
during the period (312) - (1,595) -
Income tax benefit 106 - 542 -
---------- ---------- ---------- ----------
Change in unrealized loss on
available-for-sale
financial assets (206) - (1,053) -
---------- ---------- ---------- ----------
Gain on derivatives
designated as cash
flow hedges 1,151 - 3,296 -
Income tax expense (393) - (1,121) -
Gain on derivatives
designated as cash flow
hedges in prior periods
transferred to net income
in the current period (1,104) - (1,070) -
Income tax expenses
transferred to net income
in the current period 376 - 364 -
---------- ---------- ---------- ----------
Change in gain on derivatives
designated as cash flow hedges 30 - 1,469 -
---------- ---------- ---------- ----------
Other comprehensive loss (15,414) (860) (38,009) (5,135)
---------- ---------- ---------- ----------
Comprehensive income $ 14,718 $ 15,696 $ 45,595 $ 60,847
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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
financial statements have been prepared in accordance with accounting
policies outlined in the Company's audited financial statements for the
year ended December 31, 2006. Accordingly, these interim financial
statements should be read in conjunction with the Company's annual
consolidated financial statements.
In the fourth quarter of 2006, the Company adopted the proportionate
consolidation method of accounting for its 30% investment in the Arabian
Pipecoating Company. This change in accounting policy was applied
retroactively with comparative figures restated. The Company previously
accounted for this investment using the equity method.
On January 1, 2007, the Company adopted the Canadian Institute of
Chartered Accountants' Handbook Section 1530, Comprehensive Income;
Section 3251, Equity, Section 3855, Financial Instruments - Recognition
and Measurement; Section 3861, Financial Instruments - Disclosure and
Presentation; and Section 3865, Hedges. As required, these new accounting
standards have been adopted prospectively with an adjustment to
accumulated other comprehensive income. Prior period figures have not
been restated. The following adjustments were made to the Company's
balance sheet as a result of these changes:
(in thousands of Canadian dollars) Jan. 1, 2007
-------------------------------------------------------------------------
Increase (decrease) in assets
Other assets $ (760)
------------
Total increase (decrease) in assets $ (760)
------------
------------
Increase (decrease) in liabilities
Derivative financial instruments liability $ 925
Current future taxes payable (315)
Future taxes 253
Long-term debt (1,504)
------------
Total increase (decrease) in liabilities (641)
------------
Increase (decrease) in shareholders' equity
Accumulated other comprehensive income related to
available-for-sale financial assets 491
Accumulated other comprehensive income related to
cash flow hedges (611)
------------
Total increase (decrease) in shareholders' equity (119)
------------
Total increase (decrease) in liabilities and shareholders'
equity $ (760)
------------
------------
The following is a description of the accounting policies adopted by the
Company as a result of implementing these accounting changes:
a) Comprehensive income
The Company's comprehensive income is comprised of net income and other
comprehensive income, which is made up of unrealized foreign currency
gains or losses on the translation of the financial statements of self-
sustaining foreign operations, unrealized gains or losses on available-
for-sale financial assets and changes in unrealized gains or losses on
derivatives designated as effective cash flow hedges.
b) Accumulated other comprehensive income
Accumulated other comprehensive income is included on the consolidated
balance sheet as a separate component of shareholders' equity and
includes accumulated unrealized foreign currency gains or losses on the
translation of the financial statements of self-sustaining foreign
operations, accumulated unrealized gains or losses on available-for-sale
financial assets and accumulated unrealized gains or losses on
derivatives designated as effective cash flow hedges.
c) Financial instruments
Held-for-trading financial assets are financial assets which are acquired
for resale prior to maturity. Held-for-trading financial assets are
reflected in the consolidated balance sheet at fair value with changes in
fair value during a period charged to operating expenses. Held-to-
maturity financial assets are non-derivative financial assets with a
fixed maturity which the Company intends to hold until maturity. Such
assets are measured at amortized cost. Available-for-sale financial
assets are those non-derivative financial assets which are so designated
by the Company or that do not fall into another category. Available-for-
sale financial assets are carried on the consolidated balance sheet at
fair value with gains or losses from changes in fair value in a period
included in other comprehensive income. Derivative financial instruments
designated as effective cash flow hedges are reflected in the
consolidated balance sheet at fair value with any gains or losses
resulting from fair value changes included in other comprehensive income
to the extent of hedge effectiveness. Derivatives with positive exposures
are classified as assets while those with negative exposures are
classified as liabilities. Derivative financial instruments not
designated as effective cash flow hedges are carried at fair value in the
consolidated balance sheet with gains or losses resulting from changes in
fair value in a period charged to operating expenses. Loans and
receivables and other liabilities not held for trading are accounted for
at amortized cost.
The following is a summary of the classes of financial instruments
included in the Company's consolidated balance sheet as well as their
designation by the Company under the new accounting standards:
-------------------------------------------------------------------------
Balance sheet item Designation
-------------------------------------------------------------------------
Cash and cash equivalents Held-for-trading
-------------------------------------------------------------------------
Accounts receivable Loans and receivables
-------------------------------------------------------------------------
Long-term investments Available-for-sale
-------------------------------------------------------------------------
Accounts payable and accrued liabilities Other liabilities
-------------------------------------------------------------------------
Long-term debt Other liabilities
-------------------------------------------------------------------------
Bank indebtedness Held-for-trading
-------------------------------------------------------------------------
d) Transaction costs
Transaction costs related to the acquisition or issue of held-for-trading
financial instruments are charged to net income as incurred. Transaction
costs related to financial instruments not designated as held-for-trading
are included in the financial instrument's initial recognition amount.
2. Stock-based compensation
The compensation cost from the continuing amortization of granted stock
options for the three months and nine months ended September 30, 2007,
included in operating expenses, is $696 thousand and $2.1 million,
respectively (September 30, 2006 - $738 thousand and $2.1 million,
respectively).
3. Foreign exchange gains and losses
Included in operating expenses for the three months ended
September 30, 2007 are foreign exchange gains totaling $1.5 million,
while foreign exchange gains for the nine months ended September 30, 2007
totaled $428 thousand (September 30, 2006 - gains of $1.5 million and
$2.0 million, respectively). These gains arise from foreign currency
transactions and from the translation of the financial statements of
foreign integrated subsidiaries.
4. Employee future benefits
The Company's cost under both defined benefit and defined contribution
arrangements included in operating expenses for the three months and nine
months ended September 30, 2007 is $2.3 million and $7.2 million,
respectively (September 30, 2006 - $2.8 million and $8.0 million,
respectively)
5. Interest income (expense)
Three Months Ended Nine Months Ended
(in thousands of Sept. 30 Sept. 30
Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Interest on short-term
deposits $ 2,291 $ 2,275 $ 8,099 $ 6,313
Interest on bank
indebtedness (225) (115) (531) (973)
Interest on long-term
debt (1,255) (1,279) (3,930) (3,976)
---------------------------------------------------
$ 811 $ 881 $ 3,638 $ 1,364
---------------------------------------------------
---------------------------------------------------
Net interest paid during the three months and nine months ended
September 30, 2007 totaled $811 thousand and $4.7 million, respectively
(September 30, 2006 - $945 thousand and $1.4 million, respectively).
6. Income taxes
Net income taxes paid during the three months and nine months ended
September 30, 2007 totaled $11.5 million and $49.5 million, respectively
(September 30, 2006 - $8.8 million and $31.8 million, respectively).
7. Discontinued operations
On November 2, 2004, the Company announced its decision to close the
Mobile, Alabama pipe-coating facility and operations at the facility
ceased in the fourth quarter of 2005. The Company adopted discontinued
operations accounting treatment for the Mobile facility in the fourth
quarter of 2005.
The following table summarizes the financial results and cash flows from
discontinued operations for the three months and nine months ended
September 30, 2007 and 2006 and the assets and liabilities of the
discontinued operations as at those dates, respectively:
Three Months Ended Nine Months Ended
(in thousands of Sept. 30 Sept. 30
Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue $ - $ - $ - $ 60
---------------------------------------------------
Loss from operations (59) 7 (162) (220)
Interest expenses - -
---------------------------------------------------
Loss from discontinued
operations before
income taxes (59) 7 (162) (220)
Income tax expense - - - -
---------------------------------------------------
Loss from discontinued
operations $ (59) $ 7 $ (162) $ (220)
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
Cash flow from
(used in) operating
activities $ (3,896) $ (957) $ (5,842) $ (695)
---------------------------------------------------
---------------------------------------------------
Current assets $ 2 $ 108
Property, plant and
equipment, net - 4,659
Current liabilities $ 1,955 $ 7,770
8. Other assets
Sept. 30 Dec. 31
(in thousands of Canadian dollars) 2007 2006
-------------------------------------------------------------------------
Long-term investment $ 2,325 $ 2,875
Deferred financing costs 483 2,089
Accrued employee future benefit asset 3,845 4,572
-------------------------
Total $ 6,653 $ 9,536
-------------------------
-------------------------
Other assets include a long-term investment in Garneau Inc., a Canadian-
based, publicly traded pipe-coating company. This investment is
classified as available-for-sale under the new accounting standards
related to financial instruments and accordingly, subsequent to
January 1, 2007, is carried at fair value with changes in fair value
charged to other comprehensive income.
9. Bank indebtedness
At September 30, 2007, the Company had operating credit lines of
$175.0 million (December 31, 2006 - $204.1 million), net of $75.6 million
of various standby letters of credit for performance and bid bonds
(December 31, 2006 - $74.1 million) and bank indebtedness of nil
(December 31, 2006 - $3.0 million), excluding the Company's proportionate
share of the bank indebtedness of its joint venture, Arabian Pipecoating
Company Limited.
10. Other non-current liabilities
Sept. 30 Dec. 31
(in thousands of Canadian dollars) 2007 2006
-------------------------------------------------------------------------
Non-current asset retirement obligations $ 5,055 $ 3,561
Accrued employee future benefit obligations 3,854 2,362
-------------------------
Total $ 8,909 $ 5,923
-------------------------
-------------------------
11. Capital stock
(in thousands of Canadian dollars Sept. 30, Dec. 31,
except share information) 2007 2006
-------------------------------------------------------------------------
Number of shares: Class A
Balance, beginning of the period 60,914,175 61,006,045
Issued - stock options 303,195 331,157
Conversions Class B to Class A - 9,873
Purchase and cancelled under Normal Course
Issuer Bid (2,574,600) (432,900)
-------------------------
Balance, end of the period 58,642,770 60,914,175
-------------------------
Number of shares: Class B 13,078,142 13,078,142
-------------------------
Total number of shares 71,720,912 73,992,317
-------------------------
-------------------------
Stated value: Class A
Balance, beginning of the period $ 205,848 $ 203,716
Issued - stock options 6,245 3,573
Conversion Class B to Class A - -
Purchased and cancelled under Normal Course
Issuer Bid (8,718) (1,441)
-------------------------
Balance, end of the period 203,375 205,848
-------------------------
Stated Value: Class B 1,004 1,004
-------------------------
Total stated value Class A and Class B $ 204,379 $ 206,852
-------------------------
-------------------------
During the three months and nine months ending September 30, 2007, the
Company repurchased and cancelled 34,500 and 2,574,600 Class A
Subordinated Voting Shares ("Class A shares"), respectively
(September 30, 2006 - 197,000 and 432,900, respectively) under the terms
of a Normal Course Issuer Bid ("NCIB"). The excess of cost over stated
capital of the acquired shares, which for the three and nine months ended
September 30, 2007 totaled $1.0 million and $69.2 million, respectively
(September 30, 2006 - $3.0 million and $6.4 million, respectively), was
charged to retained earnings. Under the terms of the NCIB, which expires
on November 30, 2007, the Company is entitled to repurchase up to
2,675,400 more Class A shares.
12. Contributed surplus
Three Months Ended Nine Months Ended
(in thousands of Sept. 30 Sept. 30
Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Balance, beginning
of period $ 10,823 $ 10,351 $ 10,603 $ 9,231
Adjustment for stock-
based compensation - - - -
Stock compensation
expense (note 2) 696 738 2,069 2,139
Fair value of stock
options exercised (380) (138) (1,533) (419)
---------------------------------------------------
Balance, end of
period $ 11,139 $ 10,951 $ 11,139 $ 10,951
---------------------------------------------------
---------------------------------------------------
13. Accumulated other comprehensive loss
Three Months Ended Nine Months Ended
(in thousands of Sept. 30 Sept. 30
Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Balance, beginning
of period $ (108,243) $ (104,535) $ (85,529) $ (100,260)
Transitional
adjustment on
adoption of new
accounting policies
(note 1) - - (119) -
Unrealized foreign
currency translation
losses, net of hedging
activities (15,238) (860) (38,425) (5,135)
Unrealized loss on
available-for-sale
financial assets (206) - (1,053) -
Gain on derivatives
designated as cash
flow hedges 30 - 1,469 -
---------------------------------------------------
Balance, end of
period $ (123,657) $ (105,395) $ (123,657) $ (105,395)
---------------------------------------------------
---------------------------------------------------
14. Stock option plans
A summary of the status of the Company's stock option plans and changes
during the period are presented below:
Sept. 30, 2007
-------------------------------------------------------------------------
Weighted
Average
Market Growth Other Total Exercise
Plan (1) Plans Shares Price
-------------------------------------------------------------------------
Balance outstanding,
beginning of year 7,875 2,261,520 2,269,395 $ 15.76
-------------------------------------------------------------------------
Granted - 371,800 371,800 25.02
-------------------------------------------------------------------------
Exercised (2,955) (300,240) (303,195) 15.73
-------------------------------------------------------------------------
Forfeited - - - -
-------------------------------------------------------------------------
Expired (4,920) (92,800) (97,720) 16.72
-------------------------------------------------------------------------
Balance outstanding,
end of period - 2,240,280 2,240,280 17.25
-------------------------------------------------------------------------
Dec. 31, 2006
-----------------------------------------------
Weighted Weighted
Average Average
Total Exercise
Shares Price
-----------------------------------------------
Balance outstanding,
beginning of year 2,578,165 $ 15.76
-----------------------------------------------
Granted 457,700 17.27
-----------------------------------------------
Exercised (331,157) 16.43
-----------------------------------------------
Forfeited (66,890) 15.75
-----------------------------------------------
Expired (368,423) 17.31
-----------------------------------------------
Balance outstanding,
end of period 2,269,395 $ 15.76
-----------------------------------------------
(1) This maximum number is achieved only when the market value of the
shares at the time of exercise is equal to no less than four times
the value at the date of the grant.
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Range of Outstanding Weighted Weighted Exercisable Weighted
exercise at average average at Sep 30, average
prices Sep 30, remaining exercise 2007 exercise
2007 contractual price price
life in
years
-------------------------------------------------------------------------
$10.00 to $15.00 534,120 4.07 $12.70 400,976 $12.81
-------------------------------------------------------------------------
$15.01 to $20.00 1,297,560 6.71 $16.81 658,928 $16.71
-------------------------------------------------------------------------
$20.01 to $25.00 40,000 7.76 $20.90 11,200 $21.19
-------------------------------------------------------------------------
$25.01 to $30.00 368,600 9.26 $25.02 - -
-------------------------------------------------------------------------
2,240,280 1,071,104
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Range of Outstanding Weighted Weighted Exercisable Weighted
exercise at average average at Dec. 31, average
prices Dec. 31, remaining exercise 2007 exercise
2007 contractual price price
life
-------------------------------------------------------------------------
$10.00 to $15.00 626,920 6.13 $12.78 626,920 $12.78
-------------------------------------------------------------------------
$15.01 to $20.00 1,600,475 7.26 $16.79 1,237,275 $16.75
-------------------------------------------------------------------------
$20.01 to $25.00 42,000 8.53 $20.90 4,000 $21.90
-------------------------------------------------------------------------
2,269,395 1,868,195
-------------------------------------------------------------------------
15. Financial instruments
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.
Accordingly, these estimated fair values are not necessarily indicative
of the amounts the Company could realize in a current market exchange.
The estimated fair value amounts can be materially affected by the use of
different assumptions or methodologies. The methods and assumptions used
to estimate the fair value of financial instruments as well as related
interest rate credit and foreign exchange risk are described below:
a) Accounts receivable, accounts payable and accrued liabilities, and
income taxes
Due to the short period to maturity of the financial instruments, the
carrying values as presented in the consolidated balance sheet are
reasonable estimates of fair values.
b) Long-term debt
The fair value of the Company's long-term debt is based on current rates
for debt with similar terms and maturities and is not materially
different from its carrying values.
The following are key risks associated with the Company's financial
instruments:
a) Interest rate risk
The following table summarizes the Company's exposure to interest rate
risk at September 30, 2007:
-------------------------------------------------------------------------
Fixed interest rate
(in thousands of Canadian dollars) maturing in
-------------------------------------------------------------------------
Floating 1 year Greater Total
rate or less than
1 year
-------------------------------------------------------------------------
Financial assets
-------------------------------------------------------------------------
Cash and cash
equivalents $ 215,811 $ - $ - $ 215,811
-------------------------------------------------------------------------
Total $ 215,811 $ - $ - $ 215,811
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial liabilities
-------------------------------------------------------------------------
Bank indebtedness $ 76 $ - $ - $ 76
-------------------------------------------------------------------------
Long-term debt - - 73,834 73,834
-------------------------------------------------------------------------
Total $ 76 $ - $ 73,834 $ 73,910
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average fixed
rates of debt - - 5.11%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Credit risk
Certain of the Company's financial assets are exposed to credit risk.
Cash and cash equivalents consist of deposits and short-term term
deposits, with major financial institutions, which are readily
convertible into cash.
The Company, in the normal course of business, is exposed to credit risk
from its customers, substantially all of which are in the energy
industry. These accounts receivable are subject to normal industry credit
risks.
The Company is also exposed to credit risk from the potential default by
any of its counterparties on its foreign exchange forward contracts. The
Company mitigates this credit risk by dealing with counterparties who are
major financial institutions and which the Company anticipates will
satisfy their obligations under the contracts.
c) Foreign exchange risk
The Company operates in several countries, which gives rise to a risk
that its earnings and cash flows may be adversely impacted by
fluctuations in foreign exchange. The Company utilizes foreign exchange
forward contracts to manage foreign exchange risk from its underlying
customer contracts. In particular, the Company uses foreign exchange
forward contracts for the sole purpose of hedging a portion of its
projected foreign currency inflows, consisting primarily of foreign
currency sales to the Company's customers. Gains or losses on these
hedging instruments are recognized in other comprehensive income to the
extent of hedge effectiveness and then transferred to net income in the
same period as, and as part of, the hedged transactions. The Company does
not enter into foreign exchange contracts for speculative purposes. The
Company does not generally attempt to hedge the net investment and equity
of self-sustaining foreign operations, except that the U.S. dollar long-
term note payable is designated as a hedge of a portion of its net
investment in Bredero Shaw's U.S. dollar-based operations. 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 September 30, 2007:
(in thousands)
-------------------------------------------------------------------------
Maturity
-------------------------------------------------------------------------
U.S. dollars sold for Canadian dollars
-------------------------------------------------------------------------
Less than one year US$11,750
-------------------------------------------------------------------------
Weighted average rate 1.1108
-------------------------------------------------------------------------
Foreign exchange options and forward exchange contracts are used to hedge
foreign exchange exposures related to commercial activities. They are not
used by the Company for speculative purposes. At September 30, 2007, the
Company had notional amounts of $11.8 million of forward contracts
outstanding (December 31, 2006 - $38.7 million). These amounts are used
to express the volume of transactions and are not recognized in the
consolidated financial statements. These financial instruments are
contracted with major, chartered banks; as a result, credit and liquidity
risks related to these instruments are considered to be low.
The fair values of foreign exchange forward contracts represent an
approximation of the amounts the Company would have paid to or received
from counterparties to unwind its positions at September 30, 2007. The
fair value of the Company's net benefit for all foreign exchange forward
contracts at September 30, 2007 was $1.3 million (December 31, 2006 -
$3.1 million net liability) and has been recognized on the consolidated
balance sheet through a charge to other comprehensive income. If these
contracts ceased to be effective as hedges, unrecognized gains or losses
pertaining to the portion of the hedging transactions in excess of
projected foreign-denominated cash flows would be transferred from
accumulated other comprehensive income and recognized in net income at
the time this condition was identified.
16. 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 and
nine months ended September 30, 2007 and 2006, and goodwill and total
assets as of those dates by segments are as follows:
Three Months Ended Nine Months Ended
(in thousands) Sept. 30 Sept. 30
-------------------------------------------------------------------------
Revenue 2007 2006 2007 2006
-restated -restated
----------- ----------- ----------- ------------
Pipeline and
Pipe Services $ 227,779 $ 216,889 $ 649,111 $ 678,377
Petrochemical
and Industrial 37,517 34,910 115,215 106,143
Intersegment
Eliminations (404) (475) (1,665) (1,216)
----------- ----------- ----------- ------------
$ 264,892 $ 251,324 $ 762,661 $ 783,304
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Income (loss) from operations
Pipeline and
Pipe Services $ 42,738 $ 24,075 $ 113,652 $ 97,667
Petrochemical
and Industrial 6,274 5,039 19,757 13,603
Financial and
Corporate (3,512) (5,438) (12,900) (14,281)
----------- ----------- ----------- ------------
$ 45,500 $ 23,676 $ 120,509 $ 96,989
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Sept. 30, Dec 31,
2007 2006
Goodwill
Pipeline and
Pipe Services $ 144,645 $ 159,218
Petrochemical
and Industrial 16,652 16,595
----------- ------------
$ 161,297 $ 175,813
----------- ------------
----------- ------------
Total assets $ $
Pipeline and
Pipe Services 924,390 1,011,029
Petrochemical
and Industrial 81,255 79,612
Financial and
Corporate 941,744 1,170,083
Elimination (1,015,430) (1,252,698)
----------- ------------
$ 931,959 $ 1,008,026
----------- ------------
----------- ------------
17. Joint venture operations
The Company's joint venture operations consist of its 50% interests in
Bredero Shaw Revestimentos de Tubos Ltda. and Thermotite Brasil Ltda. and
its 30% interest in the jointly controlled Arabian Pipecoating Company
Limited. These investments have been accounted for through proportionate
consolidation with the Company's share of each joint venture's assets,
liabilities, revenue, expenses, net income and cash flows consolidated
based on the Company's ownership position. The figures related to these
joint ventures included in the Company's consolidated financial
statements are summarized as follows:
Three Months Ended Nine Months Ended
(in thousands) Sept. 30 Sept. 30
-------------------------------------------------------------------------
2007 2006 2007 2006
----------- ----------- ----------- ------------
Revenue $ 18,785 $ 6,941 $ 44,528 $ 18,262
Operating and
other expenses 13,540 5,496 32,542 13,822
Net income before
income taxes 5,245 1,445 11,986 4,440
Provision for taxes 375 59 1,085 289
----------- ----------- ----------- ------------
Net income $ 4,870 $ 1,386 $ 10,901 $ 4,151
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Cash provided by (used in):
Operating activities $ 962 $ 4,091 $ (1,373) $ 3,892
Investing activities 69 (1,175) 69 (1,948)
Financing activities 4,108 (2,273) 4,108 (1,324)
Current assets $ 19,058 $ 11,310
Property, plant and
equipment, net 11,130 7,992
Goodwill 4,366 4,828
Current liabilities 13,382 6,723
18. Acquisition
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"). SISL provides specialized, real-time/digital non-destructive
weld testing services to the onshore and offshore pipeline industry and
is based in the United Kingdom. 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 in the
forth quarter of the year. 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 1,708
Property, plant and equipment 1,059
Goodwill 1,335
Current liabilities (1,523)
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2,579
-------------------------------------------------------------------------
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Consideration given:
Cash 2,579
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2,579
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19. Earnings per share
The weighted average number of common shares for the purpose of the
earnings per share calculations was as follows:
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
2007 2006 2007 2006
-------------------------------------------------------------------------
Basic
Class A 58,613,020 60,969,096 59,807,549 60,969,096
Class B 13,078,142 13,078,142 13,078,142 13,078,142
----------- ----------- ----------- ------------
Total 71,691,162 74,047,238 72,885,691 74,047,238
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Diluted
Class A 59,534,305 60,937,045 60,610,245 60,937,045
Class B 13,078,142 13,078,142 13,078,142 13,078,142
----------- ----------- ----------- ------------
Total 72,612,447 74,015,187 73,688,387 74,015,187
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
20. Contingent liability
Dirt, Inc. has brought suit in Alabama against Bredero Price Company,
Bredero Shaw LLC, Halliburton Energy Services, Inc., and ShawCor Ltd.,
claiming that Bredero Price, during the time it operated as a joint
venture between ShawCor Ltd. and Halliburton Energy Services, Inc., began
disposal of hazardous waste in a construction materials landfill owned by
Dirt, Inc. The operations of Bredero Price Company were acquired by
Bredero Shaw LLC on October 1, 2002. Bredero had offered to take
responsibility for remediation of the site. The plaintiff has not
accepted that offer, and the amount of such remediation cost is disputed,
with expert opinions ranging from $6 million to $135 million. The
plaintiff is also seeking punitive damages, which under Alabama law could
be an amount up to three times actual damages; we believe, however, that
we have valid legal defenses to the imposition of any punitive damages.
The trial commenced October 22, 2007 and we are vigorously defending this
action. We have accrued in a prior year an amount which is near the low
end of the range of possible outcomes, for our 50% portion of an estimate
of what we believe, based on technical advice from our environmental
consultant, it will cost to remediate the site.
21. Comparative figures
Comparative figures have been reclassified where necessary to correspond
with the current year's presentation.