In c2939 transmitted on Tuesday, February 19, 2008, an error occurred in
the Financial Summary Table. In the first column, "0.46" in "Continuing
operations" should have read "0.47" and "(0.41)" in "Discontinued
operations" should have read "(0.42)". Corrected copy follows:
ShawCor Ltd. announces fourth quarter and full year 2007 results
(TSX: SCL.A, SCL.B)
TORONTO, Feb. 19 /CNW/ -
Financial Summary
(In thousands of Canadian Three Months Ended Year Ended
dollars except per share Dec. 31 Dec. 31
amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
Operating Results
Revenue $ 285,438 $ 276,315 $1,048,099 $1,059,619
EBITDA (note 1) 50,731 54,891 202,808 187,828
Operating income from
continuing operations 39,492 41,791 160,001 138,780
Income from continuing
operations 34,053 26,722 117,819 92,924
Income (loss) from
discontinued operations (30,300) (69) (30,462) (289)
Net income (loss) 3,753 26,653 87,357 92,635
Net income (loss) per share
(Class A and B) - Basic
Continuing operations 0.48 0.36 1.62 1.25
Discontinued operations (0.42) 0.00 (0.42) 0.00
Total 0.06 0.36 1.20 1.25
Net income (loss) per share
(Class A and B) - Diluted
Continuing operations 0.47 0.36 1.60 1.25
Discontinued operations (0.42) 0.00 (0.41) 0.00
Total 0.05 0.36 1.19 1.25
-------------------------------------------------------------------------
Cash Flow
Cash from continuing
operating activities 8,710 38,752 97,513 189,877
Purchases of property,
plant and equipment 28,551 15,579 91,855 58,170
-------------------------------------------------------------------------
Financial Position
Working capital 255,625 341,375
Total assets 960,326 948,565
Shareholders' equity per share
(Class A and B) $ 8.13 $ 8.51
-------------------------------------------------------------------------
Note 1: EBITDA is a non-GAAP measure calculated by adding back to income
from continuing operations, the sum of reported interest
(income)/expense, taxes and depreciation/amortization, excluding the
impact of non-wholly owned subsidiaries. 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.
Fourth Quarter 2007 Results
Revenue
-------
Consolidated Results
-------------------------------------------------------------------------
Three months ended Dec. 31 Sept. 30 Dec. 31
(in thousands of Canadian dollars) 2007 2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pipeline and Pipe Services Segment 254,316 227,779 243,951
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Petrochemical and Industrial Segment 28,450 37,517 32,795
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Intersegment eliminations 2,672 (404) (431)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated 285,438 264,892 276,315
-------------------------------------------------------------------------
Current Quarter vs. Q4 2006
Consolidated revenue from continuing operations in the fourth quarter of the year totaled $285.4 million compared to $276.3 million in the fourth quarter of last year, with the increase achieved despite the adverse impact of the stronger Canadian dollar on the translation of foreign currency based revenue in the period. The Canadian dollar was approximately 15% stronger on average, in terms of the U.S. dollar, in the fourth quarter of 2007 compared with the fourth quarter of 2006, while it was 9% stronger in terms of the U.K. pound and 3% stronger in terms of the Euro. The Company's fourth quarter 2007 revenue would have been higher than reported by approximately $28 million, had exchange rates been the same as in the fourth quarter of 2006. On a full year basis, consolidated revenue totaled $1.049 billion compared to $1.060 billion in 2006.
Current Quarter vs. Q3 2007
Consolidated revenue in the fourth quarter was 8% higher than in the third quarter of the year as increased revenue in the Pipeline and Pipe Services segment was partially offset by lower revenue generated by the Petrochemical and Industrial segment.
Pipeline and Pipe Services Segment
Current Quarter vs. Q4 2006
Revenue in the quarter for the Pipeline and Pipe Services segment totaled $254.3 million, 104% of the level achieved in the fourth quarter of last year, despite the impact of the stronger Canadian dollar in the period. Revenue at Bredero Shaw in the period was largely the same as in the fourth quarter of 2006, in terms of Canadian dollars; however, revenue was 14% higher in terms of U.S. dollars, the division's functional currency. In the North American region, revenue increased 30% over the fourth quarter of last year, in U.S. dollar terms, driven by significantly higher pipe coating volumes at the division's large-diameter plants in Canada and the United States which more than offset the decline in small diameter volumes associated with lower Western Canadian drilling activity. In the Far East region, U.S. dollar revenue increased 62% from levels in the fourth quarter of 2006 reflecting increased pipe coating volumes at all of the region's plants. Revenue in the Middle East region declined from levels in the corresponding quarter of last year reflecting the impact of the temporary idling of the plant in Ras Al Khaimah, U.A.E. during a planned upgrade and capacity expansion program.
In the segment's other divisions, revenue at Shaw Pipeline Services was 28% higher than in the fourth quarter of 2006, while revenue at Guardian and Canusa-CPS decreased with revenue at Canusa-CPS adversely impacted by the stronger Canadian dollar and both divisions affected by the aforementioned impact of lower Western Canadian drilling activity. On a full year basis, revenue for the Pipeline and Pipe Services segment totaled $903.4 million compared to $922.3 million in 2006.
Current Quarter vs. Q3 2007
Revenue in the Pipeline and Pipe Services segment in the fourth quarter increased 12% over the prior quarter as revenue growth at Bredero Shaw and Shaw Pipeline Services was partially offset by declines at Canusa-CPS and Guardian. At Bredero Shaw, revenue growth resulted from increased large-diameter pipe coating activity in Canada and the United States, increased business activity at the division's Thermotite pipe coating plant in Orkanger, Norway, and commencement of the Balearic pipe coating project at a project plant mobilized in Alicante, Spain.
Revenue at Shaw Pipeline Services increased 23% over the prior quarter as a result of increased ultrasonic girth weld inspection activity and strong USA land pipeline construction. Revenue at Canusa-CPS and Guardian both decreased from third quarter levels with Canusa-CPS particularly impacted by the strengthening of the Canadian dollar.
Petrochemical and Industrial Segment
Current Quarter vs. Q4 2006
Revenue in the quarter for the Petrochemical and Industrial segment decreased 13% from the level achieved in the fourth quarter of 2006 with reductions experienced at both DSG-Canusa and ShawFlex. At DSG-Canusa, business levels in the U.S. were in line with the fourth quarter of last year while at the division's European operations, sales volumes increased modestly; however, the stronger Canadian dollar in the fourth quarter of 2007, compared to the fourth quarter of last year, resulted in lower reported revenue for the division in Canadian dollar terms. At ShawFlex, revenue in the quarter was adversely impacted by temporarily reduced demand for the division's products for Western Canadian oil sands development projects, the result of the tight labour market and increasing costs in that region. On a full year basis, revenue for the segment for 2007 was $143.7 million, 103% of the level achieved in the previous year.
Current Quarter vs. Q3 2007
Revenue in the fourth quarter for the segment decreased by 24% from the level achieved in the third quarter of the year. At DSG-Canusa, revenue in the quarter decreased 9% from the level in the prior quarter in line with the historical seasonal trend while revenue at ShawFlex was significantly lower as the result of the temporary slow-down in Western Canadian oil sands development projects discussed above.
Operating Income From Continuing Operations ------------------------------------------- Consolidated Results ------------------------------------------------------------------------- Three months ended Dec. 31 Sept. 30 Dec. 31 (in thousands of Canadian dollars) 2007 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue from continuing operations 285,438 264,892 276,315 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating income from continuing operations 39,492 45,500 41,791 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating margin 13.8% 17.2% 15.1% -------------------------------------------------------------------------
Current Quarter vs. Q4 2006
Consolidated income from continuing operations before interest, income taxes and non-controlling interest totaled $39.5 million (13.8% of consolidated revenue from continuing operations) in the fourth quarter of 2007 compared to $41.8 million (15.1% of consolidated revenue from continuing operations) in the fourth quarter of 2006, with the decrease reflecting the adverse impact on operating margins of the stronger Canadian dollar compared to the fourth quarter of last year. Certain of the Company's Canadian-based operations have large U.S. dollar-based revenue streams but incur the majority of their production and operating costs in Canadian dollars. As a result, a strengthening of the Canadian dollar reduces the Canadian dollar value of those U.S. dollar revenue streams, which in turn has the impact of reducing the operating margins of those divisions. The stronger Canadian dollar had an adverse impact on operating income from continuing operations of approximately $8 million in the quarter, when compared to the fourth quarter of last year, and a 3 percentage point adverse effect on operating margins. On a full year basis, consolidated income from continuing operations before interest, income taxes and non-controlling interest totaled $160.0 million, 15% higher than the level achieved in 2006.
Current Quarter vs. Q3 2007
Consolidated income from continuing operations before interest, income taxes and non-controlling interest in the quarter was 87% of the level achieved in the prior quarter due mainly to lower operating margins at Bredero Shaw, the impact of the strengthening in the quarter of the Canadian dollar on the operating margins of non-Bredero Shaw divisions and increased corporate and financial costs in the quarter.
Pipeline and Pipe Services Segment ------------------------------------------------------------------------- Three months ended Dec. 31 Sept. 30 Dec. 31 (in thousands of Canadian dollars) 2007 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue from continuing operations 254,316 227,779 243,951 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating income from continuing operations 40,280 42,738 40,816 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating margin 15.8% 18.8% 16.7% -------------------------------------------------------------------------
Current Quarter vs. Q4 2006
In the Pipeline and Pipe Services segment, operating income from continuing operations in the quarter of $40.3 million (15.8% of revenue from continuing operations) was in line with the level achieved in the fourth quarter of 2006, while operating margins decreased 0.9 percentage points. In Bredero Shaw, both operating income and operating margins were improved over the prior year, reflecting margin expansion in North America due to increased production throughput particularly in the region's large diameter plants, and reduced losses in Nigeria and the North Sea region. The operating margin improvements at Bredero Shaw were offset by lower operating margins at Canusa-CPS due in large part to the stronger Canadian dollar in the quarter compared to in the fourth quarter of 2006. On a full year basis, operating income from continuing operations for the segment totaled $153.9 million (17.0% of revenue) compared to $138.5 million (15.0% of revenue) in 2006.
Current Quarter vs. Q3 2007
Operating income from continuing operations for the segment in the quarter decreased 6% from the third quarter of the year while operating margins decreased 3.0 percentage points. Operating income from continuing operations and operating margins at Bredero Shaw decreased from the prior quarter as a result of the shut-down of the plant at Ras Al Khamiah, U.A.E. during a scheduled plant upgrade and capacity expansion program, and by start up costs associated with the Hasdrubal pipe coating project at the division's project-specific plant established in Gabes, Tunisia, partially offset by improvements in Canada and the United States stemming from increased factory throughput in the quarter.
At Guardian, operating income from continuing operations and operating margins increased from the prior quarter due to reduced fixed costs, while at Shaw Pipeline Services, operating income increased in line with the increased revenue while operating margins declined due to a greater proportion of lower margin radiographic inspection work in the quarter's revenue. Operating income from continuing operations decreased at Canusa-CPS from levels in the prior quarter as did operating margins, largely reflecting the negative impact of the stronger Canadian dollar on the division's operating margins.
Petrochemical and Industrial Segment ------------------------------------------------------------------------- Three months ended Dec. 31 Sept. 30 Dec. 31 (in thousands of Canadian dollars) 2007 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue from continuing operations 28,450 37,517 32,795 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating income from continuing operations 3,065 6,274 5,589 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating margin 10.8% 16.7% 17.0% -------------------------------------------------------------------------
Current Quarter vs. Q4 2006
In the Petrochemical and Industrial segment, operating income from continuing operations in the quarter of $3.1 million (10.8% of revenue from continuing operations) decreased $2.5 million from the level achieved in the fourth quarter of last year while operating margins decreased 6.2 percentage points. The decreases resulted from the lower revenue at DSG-Canusa and ShawFlex in the quarter and well as from the impact of the stronger Canadian dollar on the operating margins of DSG-Canusa's North American operations. On a full year basis, operating income for the segment totated $22.8 million (15.9% of revenue) compared to $19.2 million (13.8% of revenue) in 2006.
Current Quarter vs. Q3 2007
Operating income for the segment in the quarter was 49% of the level in the prior quarter while operating margins decreased 5.9 percentage points. Operating income performance in the quarter reflected the lower level of revenue in the quarter as well as the adverse effect on the operating margins of DSG-Canusa's North American operations of the stronger Canadian dollar in the period.
Financial and Corporate
Current Quarter vs. Q4 2006
Financial and corporate costs in the quarter consisted of unallocated corporate expenses of $3.9 million, net of foreign exchange gains of $47 thousand on the translation of foreign cash and working capital balances, compared to $4.6 million, including foreign exchange losses of $1.0 million, in the fourth quarter of last year, with the increase in corporate expenses reflecting higher management compensation expenses in line with the Company's improved consolidated financial results. On a full year basis, financial and corporate costs totaled $16.8 million, net of foreign exchange gains of $475 thousand, compared to $18.9 million in 2006, net of foreign exchange gains of $970 thousand.
Current Quarter vs. Q3 2007
Financial and corporate costs in the quarter, excluding foreign exchange gains and losses, decreased $322 thousand over the level in the third quarter of the year, mainly as a result of lower levels of corporate spending in the quarter. Foreign exchange gains in the quarter, stemming from foreign currency cash balances and working capital, totaled $47 thousand compared to $1.5 million in the third quarter of the year.
Non-Operating Income and Expenses
---------------------------------
Interest Income
Consolidated net interest income totaled $743 thousand in the fourth quarter compared to $811 thousand last quarter and $1.4 million in the fourth quarter of last year, with the decrease reflecting lower average cash balances in the quarter and the impact of the stronger Canadian dollar on the translation of interest expense related to the Company's U.S. dollar-denominated Senior Notes. Net interest income for the full year totaled $4.4 million compared to $2.8 million in 2006.
Income Tax Expense
Income tax expense related to continuing operations totaled $6.3 million (15.6% of income from continuing operations before income taxes) compared to $15.9 million (34.4% of income from continuing operations before income taxes) in the prior quarter and $15.7 million (36.4% of income from continuing operations before income taxes) in the fourth quarter of 2006. The income tax rate in the fourth quarter of 2007 was favourably impacted by the utilization of previously unrecognized tax loss carry forwards in certain countries, particularly Nigeria. This benefit reduced the effective tax rate in the fourth quarter by approximately 15 percentage points. Also benefiting the tax rate was the impact on Canadian future tax balances of announced reductions in future income tax rates. Tax expense in the full year 2007 totaled $47.2 million (28.7% of income from continuing operations before income taxes) compared to $46.8 million (33.1% of income from continuing operations before income taxes) in 2006.
Income from Continuing Operations
Consolidated income from continuing operations for the quarter totaled $34.1 million ($0.47 per share, diluted), compared to $30.2 million ($0.42 per share, diluted) in the third quarter and $26.7 million ($0.36 per share, diluted) in the fourth quarter of last year. On a full year basis, consolidated income from continuing operations totaled $117.8 million ($1.60 per share, diluted) compared to $92.9 million ($1.25 per share, diluted) in 2006.
Discontinued Operations
-----------------------
Loss from discontinued operations for the quarter totaled $30.3 million ($0.42 per share, diluted) and reflected provisions recorded in the quarter of $46.6 million, less the related income tax benefit of $16.3 million, in response to an adverse verdict in a lawsuit relating to the Company's shuttered facility in Mobile, Alabama. Although the Company intends to appeal, it has provided for its share of the jury verdict. Loss from discontinued operations was $59 thousand ($0.00 per share) last quarter and $69 thousand ($0.00 per share) in the fourth quarter of last year.
Net Income and Earnings Per Share
---------------------------------
Consolidated net income for the fourth quarter of the year was $3.8 million ($0.05 per share, diluted) compared to $30.1 million ($0.42 per share, diluted) in the third quarter and $26.7 million ($0.36 per share, diluted) in the fourth quarter of 2006. Consolidate net income for the full year 2007 totaled $87.4 million ($1.19 per share, diluted) compared to $92.6 million ($1.25 per share, diluted) in 2006.
Cash Flows
----------
Cash flow generated by continuing operations in the quarter totaled $8.7 million compared to cash flow provided by continuing operations of $38.7 million in the fourth quarter of 2006, and reflected increased levels of working capital investment in support of higher levels of business activity experienced in the quarter and expected to continue in 2008. On a full year basis, cash flow generated by continuing operations totaled $97.5 million in 2007 compared to $189.9 million in 2006.
Cash flow used in continuing investing activities in the quarter totaled $33.2 million, comprised mainly of capital expenditures of $28.6 million and increases in deferred project costs of $4.7 million. Major additions to property, plant and equipment in the quarter included continuing pipe coating capacity expansions at Bredero Shaw's facilities in Camrose, Alberta and Ras Al Khaimah, U.A.E. In the fourth quarter of 2006, cash used in continuing investing activities totaled $14.9 million, mainly reflecting capital expenditures of $15.6 million less the proceeds on disposal of property, plant and equipment of $1.3 million. On a full year basis, cash flow used in continuing investing activities totaled $99.4 million in 2007 compared to $74.0 million in 2006.
Cash flow used in continuing financing activities totaled $17.8 million in the quarter, mainly consisting of $14.0 million paid to repurchase 425,300 Class A shares under the Company's NCIB and dividends paid to shareholders of $4.0 million. In the fourth quarter of 2006, cash flow generated by continuing financing activities totaled $899 thousand, comprised of dividends paid to shareholders of $3.3 million, partially offset by $3.0 million received on an increase in bank indebtedness and $1.2 million received from the issuance of Class A shares on the exercise of stock options. On a full year basis, cash flow used in continuing financing activities totaled $107.7 million in 2007 compared to $14.9 million in 2006.
Overall, cash and cash equivalents decreased $40.8 million during the quarter to $175.0 million, compared with an increase of $39.2 million during the fourth quarter of 2006 to $309.3 million. During the full year 2007, cash and cash equivalents decreased $134.5 million while in the full year 2006, cash and cash equivalents increased $109.0 million.
Outlook
-------
Demand for the products and services of the Company's largest market segment, the Pipeline and Pipe Services segment, is mainly driven by the level of pipeline infrastructure investment. This investment, in turn, is determined by energy supply and demand, which itself is a function of global economic activity. Demand for the products and services of the Petrochemical and Industrial segment is driven by the general level of economic activity in the regions where the segment operates, primarily North America and Western Europe. The pace of economic growth in North America and Western Europe is expected to slow during 2008 from the high level experienced in 2007; however, it is expected to remain robust in the developing economies, particularly in the large economies of China and India.
Growth in economic activity translates into strong demand for energy. Since energy supply is limited in the medium-term, oil prices are expected to remain strong; however, at levels below those experienced during most of 2007. Strong demand together with limited supply and depletion of existing energy reserves should encourage additional production and infrastructure development. In addition, record profits and cash flows at the major energy producers during the past few years have strengthened their balance sheets and put them in the position to fund major expansion programs. These factors should result in increased pipeline construction and translate into favourable business prospects for the Company over the next several years.
In North America, new pipeline construction activity is currently resulting in high levels of utilization at the Company's large diameter pipe coating facilities. With the North American pipe coating market projected to remain strong and the Company adding capacity in both Canada and the United States, the North American region will be a key source of growth over the next few years. In the Middle East, the Company's facility in Ras Al Khaimah, U.A.E. will start up production in the first quarter 2008 following nine months of downtime to allow for a complete plant refurbishment and capacity expansion. Additionally, strong growth prospects are evident in the Far East with the Company launching the recently awarded Pluto project in mid-2008 and future growth potential expected to result from pipeline infrastructure developments in Malaysia, Indonesia and the northwest shelf of Australia.
In Europe, the recently awarded Gjoa project coupled with bidding activity on North Sea pipe coating projects will enable the Company to remobilize its currently inactive facility in Leith Scotland. It should be noted however that the Company does not now expect to participate in the pipe coating of the Nord Stream pipeline project. The Company has been advised by Nord Stream that it intends to award the pipe coating contract to a competitor and the Company understands that the pricing and contractual terms at which the pipe coating work will be awarded is below the level the Company requires to obtain a satisfactory financial return and ensure timely and adequate execution given the scope and risks associated with meeting Nord Stream's requirement that the project be executed through greenfield facilities in Germany and Finland. Notwithstanding this development, the remobilization of the Leith facility coupled with continued strong growth at the Company's Orkanger Norway deepwater insulation facility and newly launched concrete weight coating plants in Spain and Tunisia offer the prospect for growth in Europe in 2008 and beyond.
As a result of the above factors, ShawCor's consolidated revenue is forecast to increase moderately in 2008 followed by more robust growth in 2009 as the Company benefits from the anticipated pipe coating market growth and realizes the benefit of the capacity expansions now being put in place to accommodate these anticipated projects. Growth is also expected at the businesses of the Industrial and Petrochemical segment as they benefit from the continuing moderate economic growth in Canada and Europe and from increasing Western Canadian oil sands development.
Consolidated order backlog, representing customer orders expected to be completed within one year, totaled $460.1 million at December 31, 2007, compared to $411.2 million at the end of the third quarter, and $367.8 million at the beginning of the year.
The Company continues to enjoy a very strong balance sheet with the financial capacity to fund significant internal and external growth opportunities as they arise. This opportunity to fund expansion together with the strong market fundamentals enjoyed by the Company provides the potential for strong growth for ShawCor in the years ahead.
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 February 20, 2008 at 10:00 a.m. ET to discuss the Company's fourth 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 Twelve Months Ended
December 31 December 31
------------------------ ------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Revenue $ 285,438 $ 276,315 $1,048,099 $1,059,619
----------- ----------- ----------- -----------
Operating expenses
(notes 2, 3 and 4) 233,880 218,822 839,853 863,889
Amortization 11,136 13,892 42,165 50,868
Research and development 930 1,810 6,080 6,082
----------- ----------- ----------- -----------
245,946 234,524 888,098 920,839
----------- ----------- ----------- -----------
Operating income from
continuing operations 39,492 41,791 160,001 138,780
Interest income (note 5) 743 1,440 4,381 2,804
----------- ----------- ----------- -----------
Income before income
taxes and non-
controlling interests 40,235 43,231 164,382 141,584
Income taxes 6,285 15,717 47,205 46,840
----------- ----------- ----------- -----------
Income before non-
controlling interest 33,950 27,514 117,177 94,744
Non-controlling interest 103 (792) 642 (1,820)
----------- ----------- ----------- -----------
Income from continuing
operations 34,053 26,722 117,819 92,924
Income (loss) from
discontinued operations
(note 7) (30,300) (69) (30,462) (289)
----------- ----------- ----------- -----------
Net income $ 3,753 $ 26,653 $ 87,357 $ 92,635
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share,
Class A and B - Basic
(note 19)
Continuing
operations $ 0.48 $ 0.36 $ 1.62 $ 1.25
Discontinued
operations (0.42) - (0.42) -
----------- ----------- ----------- -----------
Total $ 0.06 $ 0.36 $ 1.20 $ 1.25
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share
Class A and B -
Diluted (note 19)
Continuing
operations $ 0.46 $ 0.36 $ 1.60 $ 1.25
Discontinued
operations (0.41) - (0.41) -
----------- ----------- ----------- -----------
Total $ 0.05 $ 0.36 $ 1.19 $ 1.25
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
-------------------------------------------------------------------------
SEGMENTED INFORMATION
Three Months Ended Twelve Months Ended
December 31 December 31
------------------------ ------------------------
2007 2006 2007 2006
Restated Restated
Revenue (note 1) (note 1)
----------- ----------- ----------- -----------
Pipeline and Pipe
Services $ 254,316 $ 243,951 $ 903,427 $ 922,328
Petrochemical and
Industrial 28,450 32,795 143,665 138,938
Intersegment
Eliminations 2,672 (431) 1,007 (1,647)
----------- ----------- ----------- -----------
$ 285,438 $ 276,315 $1,048,099 $1,059,619
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) from
operations
Pipeline and
Pipe Services $ 40,280 $ 40,816 $ 153,932 $ 138,483
Petrochemical and
Industrial 3,065 5,589 22,822 19,192
Financial and
Corporate (3,853) (4,614) (16,753) (18,895)
----------- ----------- ----------- -----------
$ 39,492 $ 41,791 $ 160,001 $ 138,780
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Twelve Months Ended
December 31 December 31
------------------------ ------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Balance at beginning
of period $ 499,402 $ 474,616 $ 498,001 $ 421,547
Transitional
adjustment (note 1) - - (585) -
----------- ----------- ----------- -----------
Adjusted balance at
beginning of year 499,402 474,616 497,416 421,547
Net income 3,753 26,653 87,357 92,635
----------- ----------- ----------- -----------
503,155 501,269 584,773 514,182
Excess of purchase
price paid over stated
value of shares
(note 11) (12,551) - (81,756) (6,356)
Dividends paid (4,056) (3,268) (16,469) (9,825)
----------- ----------- ----------- -----------
Balance at end
of period $ 486,548 $ 498,001 $ 486,548 $ 498,001
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Twelve Months Ended
December 31 December 31
------------------------ ------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net income $ 3,753 $ 26,653 $ 87,357 $ 92,635
Other comprehensive
income (loss), net of
income taxes:
Unrealized loss on
translating financial
statements of self-
sustaining foreign
operations (1,176) 19,866 (49,954) 14,731
Gain on hedges of
unrealized foreign
currency translation 1,357 - 13,830 -
Income tax expense 2,120 - - -
----------- ----------- ----------- -----------
Unrealized foreign
currency translation
gain, net of hedging
activites 2,301 19,866 (36,124) 14,731
----------- ----------- ----------- -----------
Unrealized gain (loss)
on available-for-sale
financial assets
arising during the
period 264 - (1,331) -
Income tax expense (542) - - -
----------- ----------- ----------- -----------
Change in unrealized
loss on available-
for-sale financial
assets (278) - (1,331) -
----------- ----------- ----------- -----------
Gain on derivatives
designated as cash
flow hedges 816 - 4,112 -
Income tax expense (277) - (1,398) -
Gain on derivatives
designated as cash
flow hedges in
prior periods
transferred to net
income in the
current period (609) - (1,679) -
Income tax expenses
transferred to net
income in the
current period 207 - 571 -
----------- ----------- ----------- -----------
Change in gain on
derivatives designated
as cash flow hedges 137 - 1,606 -
----------- ----------- ----------- -----------
Other comprehensive
gain (loss) 2,160 19,866 (35,849) 14,731
Comprehensive income $ 5,913 $ 46,519 $ 51,508 $ 107,366
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended Twelve Months Ended
December 31 December 31
------------------------ ------------------------
2007 2006 2007 2006
Restated Restated
(note 1) (note 1)
----------- ----------- ----------- -----------
Operating activities:
Income from continuing
operations $ 34,053 $ 26,722 $ 117,819 $ 92,924
Items not requiring
an outlay of cash:
Amortization 11,136 13,892 42,165 50,868
Asset retirement
obligation expense (3) 3,652 1,147 4,947
Stock-based
compensation
(note 2) 697 659 2,765 2,798
Future income taxes 2,194 1,182 681 (3,498)
Gain on disposal of
property, plant
and equipment 231 (63) (372) (56)
Non-controlling
interest in
earnings of
subsidiaries (103) 792 (642) 1,820
Settlement of asset
retirement
obligations 855 (711) (1,906) (1,276)
Change in employee
future benefits (2,044) (632) 175 221
Change in non-cash
working capital
and other (38,306) (6,741) (64,319) 41,129
----------- ----------- ----------- -----------
Cash provided by
continuing operating
activities 8,710 38,752 97,513 189,877
----------- ----------- ----------- -----------
Investing activities:
Purchases of property,
plant and equipment (28,551) (15,579) (91,855) (58,170)
Proceeds on disposal
of property, plant
and equipment 27 1,334 732 1,451
Increase in deferred
project costs (4,697) (133) (5,150) (8,159)
Acquisition of
subsidiary - (2,786) -
Acquisition of joint
venture interest - (544) - (9,099)
Investment in shares - - (301) -
----------- ----------- ----------- -----------
Cash used in continuing
investing activities (33,221) (14,922) (99,360) (73,977)
----------- ----------- ----------- -----------
Financing activities:
Increase (decrease)
in bank indebtedness 31 2,976 (4,275) 1,183
Increase in deferred
financing costs - - - (655)
Issue of shares 243 1,191 4,955 2,147
Purchase of shares
for cancellation (14,026) - (91,949) (7,797)
Dividends paid to
shareholders (4,056) (3,268) (16,469) (9,825)
----------- ----------- ----------- -----------
Cash provided by (used)
in continuing
financing activities (17,808) 899 (107,738) (14,947)
----------- ----------- ----------- -----------
Foreign exchange on
foreign cash and cash
equivalents (1,182) 9,893 (21,585) 4,167
----------- ----------- ----------- -----------
Net cash provided by
(used in) continuing
operations (43,501) 34,622 (131,170) 105,120
Net cash provided by
(used) in discontinued
operations (note 7) 2,707 4,562 (3,135) 3,867
Cash and cash
equivalents at
beginning of period 215,811 270,138 309,322 200,335
----------- ----------- ----------- -----------
Cash and cash
equivalents at end
of period $ 175,017 $ 309,322 $ 175,017 $ 309,322
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED BALANCE SHEETS
December 31 December 31
2007 2006
----------- -----------
Assets
Current assets
Cash and cash equivalents $ 175,017 $ 309,322
Accounts receivable 203,547 188,865
Taxes receivable 3,169 4,293
Inventories 102,486 79,662
Prepaid expenses 11,362 8,264
Derivative financial instruments 1,508 -
Current future income taxes 2,770 -
Current assets of discontinued operation
(note 7) 16,305 156
----------- -----------
516,164 590,562
Property, plant and equipment, net 242,783 202,078
Goodwill 161,038 175,813
Future income taxes 24,463 25,404
Other assets (note 8) 15,878 14,169
----------- -----------
$ 960,326 $1,008,026
----------- -----------
----------- -----------
Liabilities
Current liabilities
Bank indebtedness (note 9) $ 107 $ 4,094
Accounts payable and accrued liabilities 153,116 169,387
Taxes payable 32,030 57,010
Deferred revenues 24,021 10,907
Current liabilities of discontinued
operation (note 7) 51,265 7,789
----------- -----------
260,539 249,187
Long-term debt 72,726 87,480
Future income taxes 33,006 30,496
Other non-current liabilities (note 10) 10,740 5,923
----------- -----------
377,011 373,086
----------- -----------
Non-controlling interest in subsidiaries 3,283 5,013
----------- -----------
Shareholders' Equity
Capital stock (note 11) 203,252 206,852
Contributed surplus (note 12) 11,729 10,603
Retained earnings 486,548 498,001
Accumulated other comprehensive loss (note 13) (121,497) (85,529)
----------- -----------
580,032 629,927
----------- -----------
$ 960,326 $1,008,026
----------- -----------
----------- -----------
ShawCor Ltd.
Notes to the Consolidated Financial Statements (Unaudited)
1. Accounting policies
On January 1, 2007, the Company adopted the Canadian Institute of
Chartered Accountants' ("CICA") 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 year figures
have not been restated except that the translation impact of self-
sustaining foreign operations has been reclassified from cumulative
translation account to accumulated other comprehensive income in
accordance with the transitional provisions of the accounting standards.
The following adjustments were made to the Company's balance sheet as a
result of adopting these new accounting standards:
-------------------------------------------------------------------------
(in thousands of Canadian dollars) January 1,
2007
-------------------------------------------------------------------------
Decrease in assets:
Other assets ........................................... $ (1,345)
------------
Total decrease in assets.................................. $ (1,345)
------------
------------
Increase (decrease) in liabilities:
Derivative financial instruments liability ............. $ 925
Current future income taxes payable .................... (315)
Future income taxes .................................... 253
Long-term debt ......................................... (1,504)
------------
Total decrease in liabilities ............................ (641)
------------
Increase (decrease) in shareholders' equity:
Retained earnings ...................................... (585)
Accumulated other comprehensive income related to
available-for-sale financial assets ................... 492
Accumulated other comprehensive income
related to cash flow hedges ........................... (611)
------------
Total decrease to shareholders' equity ................... (704)
------------
Total decrease to liabilities and shareholders' equity ... $ (1,345)
------------
------------
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. 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. Held-to-
maturity financial assets, loans and receivables and other liabilities
not held for trading are accounted for at amortized cost with related
expenses charged to interest income or interest expense.
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 Held-for-trading
-------------------------------------------------------------------------
Cash equivalents Held-to-maturity
-------------------------------------------------------------------------
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 Other liabilities
-------------------------------------------------------------------------
d) Derivative Financial Instruments
The Company's policy is to document all relationships between hedging
instruments and hedged items, as well as the risk management objectives
and strategy for undertaking various hedge transactions. This process
includes linking all derivatives to specific assets and liabilities on
the consolidated statement of financial position or to the specific firm
commitments or forecasted transactions. The Company also assesses, both
at the inception of the hedge and on an ongoing basis, whether the
derivatives that are used are effective in offsetting changes in fair
values or cash flows of hedged items.
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.
e) 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 twelve months ended December 31, 2007,
included in operating expenses, is $ 697 thousand and $2.8 million,
respectively (December 31, 2006 - $659 thousand and $ 2.8 million,
respectively).
3. Foreign exchange gains and losses
Included in operating expenses for the three months ended December 31,
2007 are foreign exchange gains totaling $47 thousand, while foreign
exchange gains for the twelve months ended December 31, 2007 totaled
$475 thousand (December 31, 2006 - losses of $1.0 million and gains of
$970 thousand, 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
twelve months ended December 31, 2007 is $3.3 million and $10.5 million,
respectively (December 31, 2006 - $1.4 million and $9.4 million,
respectively).
5. Interest income (expense)
Three Months Ended Twelve Months Ended
(in thousands of Dec. 31 Dec. 31
Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Interest income on
short-term deposits $ 2,125 $ 3,253 $ 10,224 $ 9,566
Interest expense on
bank indebtedness (176) (483) (707) (1,456)
Interest expense on
long-term debt (1,206) (1,330) (5,136) (5,306)
---------------------------------------------------
$ 743 $ 1,440 $ 4,381 $ 2,804
---------------------------------------------------
---------------------------------------------------
Net interest paid during the three months and twelve months ended
December 31, 2007 totaled $743 thousand and $4.7 million, respectively
(December 31, 2006 - $553 thousand and $1.9 million received,
respectively).
6. Income taxes
Net income taxes paid during the three months and twelve months ended
December 31, 2007 totaled $4.6 million and $54.1 million, respectively
(December 31, 2006 - $10.3 million and $42.1 million, respectively).
7. 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 facility had ceased. The Company
adopted discontinued operation accounting treatment for the facility in
2005. The Mobile Facility was part of the Pipeline and Pipe Services
market segment.
On December 31, 2005, the Company accrued $6.3 million related to the
Mobile Facility, representing the present value of future lease and other
cost obligations for properties where it had ceased using the rights
conveyed by the leases. During 2007, the Company reached an agreement
with some of these lessors whereby the Company exited some leases prior
to their expiration. The settlement costs of these leases approximated
the related accruals.
On November 1, 2007, the Company announced a jury verdict of
U.S.$100 million in compensatory damages and U.S.$8 million in punitive
damages against the Company and Halliburton Energy Services Inc. ("HESI")
with the Company and HESI each responsible for 50% of the total award.
The verdict resulted from a lawsuit brought by Dirt Inc., a Mobile,
Alabama-based non-hazardous waste landfill operator, and related to the
disposal of industrial waste from the operations of the Mobile Facility.
The Company has reviewed the verdict with legal counsel and has
determined that it has strong grounds for an appeal, which will be
initiated as soon as possible. As a result of the verdict, the Company
has increased its accrual related to this issue to U.S. $54 million, this
being the Company's share of the verdict. The total charge to
discontinued operations in the year was $46.6 million, less estimated
income tax recoveries of $16.3 million.
The following table summarizes the financial results and cash flows from
discontinued operations for the years ended December 31, 2007 and 2006
and the assets and liabilities of the discontinued operations as at those
dates:
Three Months Ended Twelve Months Ended
(in thousands of Dec. 31 Dec. 31
Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue $ - $ - $ - $ 60
---------------------------------------------------
Loss from operations (46,603) (69) (46,765) (289)
Interest expenses - -
---------------------------------------------------
Loss from discontinued
operations before
income taxes (46,603) (69) (46,765) (289)
Income tax recovery (16,303) - (16,303) -
---------------------------------------------------
Loss from discontinued
operations $ (30,300) $ (69) $ (30,462) $ (289)
---------------------------------------------------
---------------------------------------------------
Cash flow provided by
(used in) operating
activities $ 2,707 $ 4,562 $ (3,135) $ 3,867
---------------------------------------------------
---------------------------------------------------
Current assets $ 16,305 $ 156
Property, plant and
equipment, net - -
Current liabilities $ 51,265 $ 7,789
8. Other assets
Dec. 31 Dec. 31
(in thousands of Canadian dollars) 2007 2006
-------------------------------------------------------------------------
Long-term investment $ 2,589 $ 2,875
Deferred financing costs - 2,089
Deferred project costs 8,492 4,633
Accrued employee future benefit asset 4,797 4,572
-------------------------
$ 15,878 $ 14,169
-------------------------
-------------------------
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 December 31, 2007, the Company had total operating credit lines of
$172.0 million (December 31, 2006 - $204.1 million), of which
$107.0 million has been drawn for various standby letters of credit for
performance, bid and surety bonds (December 31, 2006 - $74.1 million) and
bank indebtedness of nil (December 31, 2006 - $3.0 million), to yield
unutilized credit facilities of $64.9 million (2006 - $127.0 million),
excluding the Company's proportionate share of the bank indebtedness of
its joint venture, Arabian Pipecoating Company Limited.
10. Other non-current liabilities
Dec. 31 Dec. 31
(in thousands of Canadian dollars) 2007 2006
-------------------------------------------------------------------------
Non-current asset retirement obligations $ 7,977 $ 3,561
Accrued employee future benefit obligations 2,763 2,362
-------------------------
$ 10,740 $ 5,923
-------------------------
-------------------------
11. Capital stock
(in thousands of Canadian dollars Dec. 31, 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 320,295 331,157
Conversions Class B to Class A - 9,873
Purchase and cancelled under
Normal Course Issuer Bid (2,999,900) (432,900)
-------------------------
Balance, end of the period 58,234,570 60,914,175
-------------------------
Number of shares: Class B 13,078,142 13,078,142
-------------------------
Total number of shares 71,312,712 73,992,317
-------------------------
-------------------------
Stated value: Class A
Balance, beginning of the period $ 205,848 $ 203,716
Issued - stock options 4,955 2,147
Conversion Class B to Class A - -
Compensation cost on exercised options 1,639 1,426
Purchased and cancelled under
Normal Course Issuer Bid (10,194) (1,441)
-------------------------
Balance, end of the period 202,248 205,848
-------------------------
Stated Value: Class B 1,004 1,004
-------------------------
Total stated value Class A and Class B $ 203,252 $ 206,852
-------------------------
-------------------------
During the three months and twelve months ending December 31, 2007, the
Company repurchased and cancelled 425,300 and 2,999,900 Class A
Subordinated Voting Shares ("Class A shares"), respectively (December 31,
2006 - Nil 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 twelve months ended December 31,
2007 totaled $12.6 million and $81.8 million, respectively (December 31,
2006 - Nil and $6.4 million, respectively), was charged to retained
earnings. Under the terms of the NCIB, which was renewed on November 29,
2007, the Company is entitled to repurchase up to 5,000,000 Class A
shares and up to 100,000 Class B shares between December 3, 2007 and
November 30, 2008. The repurchase of shares is made on the open market at
prevailing market prices.
12. Contributed surplus
Three Months Ended Twelve Months Ended
(in thousands of Dec. 31 Dec. 31
Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Balance, beginning
of period $ 11,139 $ 10,951 $ 10,603 $ 9,231
Adjustment for stock-
based compensation - - - -
Stock compensation
expense (note 2) 697 659 2,765 2,798
Fair value of stock
options exercised (107) (1,007) (1,639) (1,426)
---------------------------------------------------
Balance, end of period $ 11,729 $ 10,603 $ 11,729 $ 10,603
---------------------------------------------------
---------------------------------------------------
13. Accumulated other comprehensive loss
Three Months Ended Twelve Months Ended
(in thousands of Dec. 31 Dec. 31
Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Balance, beginning
of period $ (123,657) $ (105,395) $ (85,529) $ (100,260)
Transitional adjustment
on adoption of new
accounting policies
(note 1) - - (119) -
Unrealized foreign
currency translation
losses, net of hedging
activities 2,303 19,866 (36,124) 14,731
Unrealized loss on
available-for-sale
financial assets (278) - (1,331) -
Gain on derivatives
designated as
cash flow hedges 137 - 1,606 -
---------------------------------------------------
Balance, end of period $ (121,497) $ (85,529) $ (121,497) $ (85,529)
---------------------------------------------------
---------------------------------------------------
14. Stock option plans
A summary of the status of the Company's stock option plans and changes
during the period are presented below:
-------------------------------------------------------------------------
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) (317,340) (320,295) 15.64
-------------------------------------------------------------------------
Forfeited - (142,000) (142,000) 17.42
-------------------------------------------------------------------------
Expired (4,920) - (4,920) 17.91
-------------------------------------------------------------------------
Balance outstanding,
end of period - 2,173,980 2,173,980 17.24
-------------------------------------------------------------------------
-----------------------------------------------
2006
-----------------------------------------------
Weighted
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 average
prices Demember 31, remaining exercise December 31, exercise
2007 contractual price 2007 price
life in
years
-------------------------------------------------------------------------
$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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Range of Outstanding Weighted Weighted Exercisable Weighted
exercise at average average at average
prices Demember 31, remaining exercise December 31, exercise
2006 contractual price 2006 price
life in
years
-------------------------------------------------------------------------
$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 value.
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 December 31, 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 $ 175,017 $ - $ - $ 175,017
-------------------------------------------------------------------------
Total $ 175,017 $ - $ - $ 175,017
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial liabilities
-------------------------------------------------------------------------
Bank indebtedness $ 107 $ - $ - $ 107
-------------------------------------------------------------------------
Long-term debt - - 72,726 72,726
-------------------------------------------------------------------------
Total $ 107 $ - $ 72,726 $ 72,833
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 that
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 Company has
designated, effective July 3, 2003, the 5.11% 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 the accumulated other
comprehensive income.
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 December 31, 2007:
(in thousands)
-------------------------------------------------------------------------
Maturity December 31, 2007
-------------------------------------------------------------------------
U.S. dollars sold for Canadian dollars
-------------------------------------------------------------------------
Less than one year US$12,000
-------------------------------------------------------------------------
Weighted average rate 1.0540
-------------------------------------------------------------------------
Euros sold for U.S. dollars
-------------------------------------------------------------------------
Less than one year EUR 883
-------------------------------------------------------------------------
Weighted average rate 1.4150
-------------------------------------------------------------------------
One year to two years EUR 2,150
-------------------------------------------------------------------------
Weighted average rate 1.4545
-------------------------------------------------------------------------
Two years to three years EUR 2,150
-------------------------------------------------------------------------
Weighted average rate 1.4490
-------------------------------------------------------------------------
Three years to four years EUR 2,200
-------------------------------------------------------------------------
Weighted average rate 1.4465
-------------------------------------------------------------------------
U.S. dollars sold for Norwegian Kroners
-------------------------------------------------------------------------
Less than one year US$6,243
-------------------------------------------------------------------------
Weighted average rate 5.3980
-------------------------------------------------------------------------
U.S. dollars sold for Malaysian Ringgit
-------------------------------------------------------------------------
Less than one year US$7,250
-------------------------------------------------------------------------
Weighted average rate 3.4062
-------------------------------------------------------------------------
Foreign exchange options and forward exchange contracts are used to hedge
foreign exchange exposures related to commercial activities. At
December 31, 2007, the Company had notional amounts of $35.7 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 December 31, 2007. The
fair value of the Company's net benefit for all foreign exchange forward
contracts at December 31, 2007 was $1.5 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
twelve months ended December 31, 2007 and 2006, and goodwill and total
assets as of those dates by segments are as follows:
Three Months Ended Twelve Months Ended
(in thousands) December 31 December 31
-------------------------------------------------------------------------
Revenue 2007 2006 2007 2006
-restated -restated
----------- ----------- ----------- -----------
Pipeline and Pipe
Services $ 254,316 $ 243,951 $ 903,427 $ 922,328
Petrochemical and
Industrial 28,450 32,795 143,665 138,938
Intersegment
Eliminations 2,672 (431) 1,007 (1,647)
----------- ----------- ----------- -----------
$ 285,438 $ 276,315 $1,048,099 $1,059,619
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) from
operations
Pipeline and Pipe
Services $ 40,280 $ 40,816 $ 153,932 $ 138,483
Petrochemical and
Industrial 3,065 5,589 22,822 19,192
Financial and
Corporate (3,853) (4,614) (16,753) (18,895)
----------- ----------- ----------- -----------
$ 39,492 $ 41,791 $ 160,001 $ 138,780
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Goodwill
Pipeline and Pipe
Services $ 143,960 $ 157,630
Petrochemical and
Industrial 17,078 18,183
----------- -----------
$ 161,038 $ 175,813
----------- -----------
----------- -----------
Total assets $ $
Pipeline and Pipe Services 973,688 984,850
Petrochemical and Industrial 74,480 110,965
Financial and Corporate 864,079 1,235,684
Elimination (951,921) (1,323,473)
----------- -----------
$ 960,326 $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 Twelve Months Ended
(in thousands) Dec 31 Dec 31
----------------------------------------------- -------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Revenue $ 20,685 $ 7,657 $ 65,213 $ 25,919
Operating and other
expenses 16,121 6,981 48,663 20,803
Net income before
income taxes 4,564 676 16,550 5,116
Provision for taxes 931 23 2,016 312
----------- ----------- ----------- -----------
Net income $ 3,633 $ 653 $ 14,534 $ 4,804
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash provided by
(used in):
Operating activities $ 17,175 $ (1,326) $ 15,802 $ 2,566
Investing activities (5,993) (1,350) (5,924) (3,298)
Financing activities (5,228) 1,248 (1,120) (76)
Current assets $ 25,597 $ 9,318
Property, plant and
equipment, net 11,877 9,984
Goodwill 4,521 4,451
Current liabilities 17,103 5,868
18. Acquisition
a) 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. Preliminary details of this acquisition
which will be finalized before the end of the second quarter of 2008,
follow:
-------------------------------------------------------------------------
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
Net assets acquired at assigned values:
Current assets.......................................... $ 2,324
Property, plant and equipment .......................... 329
Goodwill ............................................... 2,117
Current liabilities .................................... (1,984)
------------
$ 2,786
------------
------------
Consideration given:
Cash ................................................... $ 2,786
------------
$ 2,786
------------
------------
19. Earnings per share
The weighted average number of common shares for the purpose of the
earnings per share calculations was as follows:
Three Months Ended Twelve Months Ended
Dec. 31 Dec. 31
2007 2006 2007 2006
-------------------------------------------------------------------------
Basic
Class A 58,478,597 60,916,786 59,472,114 60,916,786
Class B 13,078,142 13,078,142 13,078,142 13,078,142
----------- ----------- ----------- -----------
Total 71,556,739 73,994,928 72,550,256 73,994,928
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted
Class A 59,447,176 61,035,758 60,350,112 61,035,758
Class B 13,078,142 13,078,142 13,078,142 13,078,142
----------- ----------- ----------- -----------
Total 72,525,318 74,113,900 73,428,254 74,113,900
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
20. Comparative figures
Comparative figures have been reclassified where necessary to correspond
with the current year's presentation.