NISKU, AB, March 22 /CNW/ - Garneau Inc.'s primary business is the
application of high performance protective coatings and linings for oil and
gas pipeline protection and additionally, the design and manufacturing of
oilfield equipment for both domestic and international markets. During more
than 30 years of operating experience, Garneau Inc. has developed significant
expertise and innovative technology, and has maintained a long-term focus on
continuously improving the pipe coating process with cost-effective, quality
coatings. The Corporation took further steps to expand pipeline operations
during the year 2002 by constructing a High Density Polyethylene Pipe ("HDPE")
manufacturing line in its Camrose facility. Accordingly, Garneau Inc. remains
capable of supplying their clients a full range of 2" - 6" HDPE for shallow
low-pressure gas lines. A talented and effective management team provides the
vision and experience for long-term profitable growth and increasing
shareholder value.
Vision
------
We are a company that uses technology and innovation to provide the
world with ingenious, high-quality products and services for the oil
industry.
Mission
-------
We provide our customers, partners and alliances with what they need,
when they need it ... always.
Values
------
We value innovation and ingenuity, keeping our commitments to each
other and our stakeholders, open and honest relationships, and
conducting our business in a way that is a "win/win" for all who work
with us.
Garneau Inc. is a public company with approximately 11.6 million shares
issued and outstanding, trading on the Toronto Stock Exchange under the symbol
GAR.
To the Shareholders:
INDUSTRY OVERVIEW
Demand for Garneau's small diameter coating products has historically
been correlated to drilling activity. Oil and gas drilling activity exceeded
21,900 wells for 2005, a modest 2% increase over 2004, with a slow second
quarter being offset by a very busy fourth quarter.
Garneau's small diameter activity and order book also increased
substantially during the fourth quarter as our clients prepared for an active
winter program. Production also commenced on the ACCESS large diameter
pipeline project during the fourth quarter with the remainder of the project
scheduled for completion in May of 2006.
Industry drilling forecasts project in excess of 25,000 wells to be
drilled for the 2006 year. These forecasts are based on the current strong
commodity pricing for oil and gas together with the continuation of shallow
gas well projects in the robust Alberta economy.
The Corporation is in position to handle first quarter demand based on
small diameter coating as both Camrose coating lines are fully operational and
increased staffing is in place.
Domestic manufacturing activity remained active for the entire 2005 year
as high demand for oilfield drilling service and equipment continued.
International opportunities continue to exist with additional
distribution agreements now in place to assist the Corporation in penetrating
new markets globally.
Overall, industry activity remains brisk with a shortage in the labor
market expected to present challenges for the Industry in 2006.
STRATEGIC DIRECTION
Senior Management focus on company profitability of the Corporation
continues with further progress in 2005 pertaining to our Strategic Plan
highlighted as follows.
- Design and Manufacturing Capability
Garneau's fabrication and manufacturing capability is gaining momentum
domestically as oilfield client relationships are being cultivated. Client
satisfaction as to the quality of product fabricated and timely delivery are
key to increasing future market penetration domestically. The Corporation is
in the process of completing rig designs to enable the Manufacturing division
to pursue this busy sector of oilfield work.
- Innovative Technology and Flexibility
Garneau's second coating line became operational in January of 2004 and
provides increased capacity during peak operational periods. Flexibility in
scheduling is now also available to manage both large diameter and small
diameter coating projects with the Corporation utilizing both lines at near
capacity during the production of the ACCESS project in the fourth quarter of
2005. The $9 million dollar ACCESS project is considered to be a major
stepping stone for Garneau in securing large diameter project work.
- CCSI Joint Venture
The Corporation signed a joint venture agreement in the third quarter of
2005 to develop cold weather joint coating applications and equipment for
future large diameter projects in the north. Initial trials and work on this
joint venture commenced in January 2006.
OUTLOOK 2006
Analysts are projecting in excess of 25,000 wells to be drilled in 2006,
a 15% increase over 2005 actual results of 21,925 wells. This projected
increase could result in a further increase in small diameter coating
requirements which could have a positive impact on our 2006 coating
operations.
Furthermore, price increases on coating products have been put in place
effective January of 2006 to offset material and labor increases incurred in
the fourth quarter of 2005.
Contribution margins on coating products were negatively affected by
these increases in material and labor costs and are projected to be restored
with the price increases. The improvement in revenue generated in 2005 versus
2004 is projected to continue for the first quarter of 2006 as the strong
small diameter order book in Camrose gets produced together with continuation
of the ACCESS large diameter project.
Domestic Manufacturing remains very active and is operating near current
plant capacity, restricted by the current plant space available in Nisku
together with a shortage of welders in the labor market.
Garneau has tentatively planned for a manufacturing expansion in Nisku by
constructing an 11,000 sq.ft concrete base in the fall of 2005 to hold a new
building. Plans for this expansion are contingent on securing additional
orders and increasing the Nisku labor force to ensure the future expansion is
financially viable. Aggressive pursuit of this expansion in 2006 is projected
by Management of the Corporation as our clients continue to project high
activity levels for the year.
International bidding continues, with new agency agreements secured over
the past year, to increase Garneau's marketing exposure internationally. The
Corporation's focus on supplying pipeline and coating equipment
internationally will continue in 2006.
The Corporation will continue to work towards attaining strategic
objectives with further expansion of the manufacturing operation and new
diversified projects being pursued in 2006.
Sincerely,
Glen R. Garneau
President and CEO
OPERATIONS
Garneau's Camrose facility overall operating usage increased during 2005,
a direct result of an increase in small diameter coating activity together
with the awarding and initial production on the ACCESS project in the fall.
Multiple shifts on both coating lines in Camrose were operating during
the fourth quarter of 2005 and are continuing during the first quarter of
2006. Although plant efficiencies have historically improved with increased
activity, the large order book this winter has resulted in customer delivery
pressures which are causing increased scheduling changes that will curb these
efficiencies somewhat in the first quarter.
Yard operations, equipment requirements and staffing have also increased
substantially with the production of the ACCESS project. Additional space has
been secured to store older customer coated product to free up valuable
storage close to the plant for production of new coating orders.
Garneau's High Density Polyethylene Pipe production increased in 2005 as
the Corporation reestablished itself with competitive pricing in the
marketplace. Polyethylene material shortages in the fourth quarter resulted in
substantial price increases and the Corporation concentrated on completing
coating product orders, withdrawing from utilizing valuable raw materials on
the low margin HDPE business until the Polyethylene industry stabilizes in
supply and pricing.
Garneau expects to commence production in HDPE pipe in the first quarter
of 2006.
A MANUFACTURING PERSPECTIVE
Manufacturing activity for the entire year was extremely busy with
multiple shifts worked throughout 2005. Further domestic sales opportunities
exist, however, current limitations exist on building space and welding labor
which need to be addressed to enable the Corporation to expand Manufacturing
operations. Specific recruitment programs are now underway to bring new
employees on stream.
Both the Sakhalin and Iranian coating plant MSA agreements were completed
during the course of 2005 with no additional contracts secured to date in
2006.
The international exposure gained from these contracts is projected to
enhance Garneau's future image as a fully integrated coating operation
providing expertise in the following areas:
- Coating plant engineering and design
- Coating plant fabrication and installation
- Coating plant operational capability
Garneau's over 30 year international history and technological
advancement in coating plant and pipeline equipment design remains an
attractive selling tool for the Corporation worldwide and continued coating
plant sales opportunities are projected for the Corporation in 2006.
The flexibility of our engineering and design department remain intact
and poised to facilitate additions to our existing line of equipment products.
Furthermore, the continued diversification of domestic manufacturing
products is projected to contribute to the long-term growth of the
Corporation's manufacturing division.
MANAGEMENT DISCUSSION AND ANALYSIS
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RESULT OF OPERATIONS
This report includes forward-looking statements that are based on the
Corporation's current expectations and therefore are subject to
uncertainties such as the level of industry drilling and coating
activity, foreign exchange fluctuations and worldwide economic conditions
that may cause actual results to differ materially.
Revenues
--------
Consolidated revenues for the fourth quarter ended December 31, 2005
totaled $16.5 million with total consolidated revenues increasing by 48.3% for
the year ended December 31, 2005; totaling $48.4 million compared to $32.6
million for the year ended December 31, 2004. An increase in coating activity
together with an increase in domestic manufacturing orders resulted in the
increased 2005 revenue.
Pipeline revenue totaled $12.3 million for the fourth quarter ended
December 31, 2005. Pipeline revenue totaled $31.6 million for the year ended
December 31, 2005 and represents a 47.9% increase over the $21.4 million in
pipeline revenue recorded for the year ended December 31, 2004. The increase
in pipeline revenue is attributed to increased small diameter coating volume
together with production on the ACCESS coating project in the fourth quarter.
Manufacturing revenue for the fourth quarter ended December 31, 2005
totaled $4.2 million. Manufacturing revenues totaled $16.8 million for the
year ended December 31, 2005, a 49% increase over the $11.2 million recorded
for the year ended December 31, 2004. Increased domestic manufacturing
activity throughout the 2005 year contributed to the substantial increase in
Manufacturing revenue.
Gross Margin
------------
The Corporation's gross margin for the fourth quarter ended December 31,
2005 totaled $3.1 million with the Corporation's gross margin totaling $8.8
million (18.2%) for the year ended December 31, 2005 compared to $6.2 million
(18.9%) for the year ended December 31, 2004. Increased domestic manufacturing
volumes and an increase in coating orders contributed to the increased overall
gross margin of $2.6 million.
The Pipeline division gross margin totaled $2.0 million (16.3%) for the
fourth quarter ended December 31, 2005. Although the pipeline gross margin
total of $4.4 million (13.9%) increased by $0.4 million from the $4.0 million
(18.9%) recorded at December 31, 2004, the percentage decrease reflects
downward competitive pressure on coating prices experienced during the course
of 2005 together with increased wages and operational costs incurred in the
robust Alberta economy. Increased product discounts were provided to key
distributors during the course of 2005 in lieu of increased competitive rebate
programs provided by coating competition, resulting in a net decrease of
revenue and gross margin totaling $1.0 million for the period ended
December 31, 2005.
The manufacturing division gross margin totaled $1.1 million (26.7%) for
the fourth quarter ended December 31, 2005. The manufacturing division gross
margin of $4.4 million (26.4%) is $2.3 million higher than the $2.1 million
gross margin recorded for the year end December 31, 2004. The 26.4% in gross
margin is also higher than the 19.0% recorded at December 31, 2004 and is
attributed to higher margins attained on domestic orders completed in 2005.
Expenses
--------
Selling, general and administrative expenses for the fourth quarter ended
December 31, 2005 totaled $1.4 million with selling, general, and
administrative expenses totaling $4.4 million (9.2% of revenue) for the year
ended December 31, 2005, as compared to the $3.8 million (11.6% of revenue)
for 2004. Upward pressure on wages in the very active Alberta labor market
together with increased commissions on higher revenue and international travel
costs contributed to the increased selling expenses.
The Corporation continues to calculate amortization of its coating
equipment based on utilization, better matching revenues generated by the
equipment. The balance of the Corporation's property, plant and equipment is
amortized on a straight-line basis. Total amortization of $467 thousand was
recorded for the fourth quarter ended December 31, 2005 with amortization
totaling $1.9 million for the year ended December 31, 2005, representing 3.9%
of revenue compared to $2.1 million for the year ended December 31, 2004
representing 6.5% of revenue.
The Corporation's research and development department activities
increased in 2005 as initial MacKenzie pipeline trials commenced and several
new research and development projects were initiated by the Corporation.
Research and development expenses totaled $292 thousand at December 31, 2005,
a $185 thousand increase over the $107 thousand recorded for the comparative
period ended December 31, 2004.
Manufacturing expenses totaled $0.6 million for the fourth quarter ended
December 31, 2005. Manufacturing expenses totaled $2.2 million for the year
ended December 31, 2005 an increase of $0.6 million over the $1.6 million
recorded for the period ended December 31, 2004. The manufacturing division's
overhead costs increased primarily due to upward pressure on wages and support
services being increased to accommodate increased activity.
The Pipeline division expenses totaled $1.1 million for the fourth
quarter ended December 31, 2005. The Pipeline division expenses total
$4.9 million for the year ended December 31, 2005, a decrease of $0.1 million
over the $5.0 million for the year ended December 31, 2004. The decrease in
Pipeline divisional expenses is due to a reduction in amortization expense for
Camrose property, plant and equipment. This reduction in amortization expense
was partially offset by increased wages and other selling, general and
administrative expenses incurred in 2005.
Foreign exchange losses totaled $27 thousand for the year ended
December 31, 2005 compared to $136 thousand in 2004, and are attributed to
continued strengthening of the Canadian dollar during the course of 2005. The
Corporation took measures to reduce the impact of foreign exchange
fluctuations in 2004 by bidding primarily in Canadian dollars and offsetting
US dollar revenue streams with US dollar purchases. The reduction in foreign
exchange losses partially reflects this change in bidding practices.
Interest costs totaled $500 thousand for the year ended December 31,
2005, a decrease of $23 thousand over the $523 thousand recorded for the year
ended December 31, 2004. A reduction in loans payable outstanding during the
year accounted for the reduced interest expense.
Future Income Taxes
-------------------
Future income taxes of $128 thousand arose in the fourth quarter
primarily as a result of the increase in net earnings for the period ended
December 31, 2005. The generation of taxable income in 2005 has resulted in
the realization of non-capital losses from prior periods and a resulting
decrease in the valuation allowance previously recorded on these losses.
Earnings (loss)
---------------
Net earnings for the fourth quarter ended December 31, 2005 totaled
$1.0 million. Net earnings of $1.6 million were recorded for the year ended
December 31, 2005 compared to net losses of $0.4 million recorded for the year
ended December 31, 2004. This $2.0 million improvement is attributed to
increased coating revenues and manufacturing revenue generated during 2005 and
a corresponding increase in manufacturing margins.
Manufacturing division earnings of $0.6 million was recorded for the
fourth quarter ended December 31, 2005. Manufacturing division earnings for
the year ended December 31, 2005 totaled $2.3 million, compared to the $0.5
million recorded at December 31, 2004 and is directly attributed to the
improved margins and revenue generated during 2005.
Pipeline divisional earnings totaled $0.6 million for the fourth quarter
ended December 31, 2005, primarily attributed to the increased small diameter
coating volumes and commencement of the ACCESS large diameter project.
Pipeline divisional losses for the year ended December 31, 2005 totaled
$0.5 million that reflect an improvement of $0.4 million over the year ended
December 31, 2004. Increased activity and initial production on the ACCESS
project contributed to improved divisional performance, albeit, competitive
pricing pressure decreased overall pipeline margins percentages and negatively
impacted earnings.
Liquidity and Capital Resources
-------------------------------
At December 31, 2005, operating and demand loan credit facilities
available to the Corporation included a demand revolving operating line of
credit of $6.3 million, a demand revolving evergreen loan of $3.0 million, a
capital lease loan facility for $0.9 million pertaining to the manufacture of
polyethylene pipe and forklift acquisitions and demand loans in the amount of
$2.5 million.
The Corporation has a $6.3 million operating line of credit available for
operating uses, of which $5.3 million was utilized and of which $1.0 million
was available and unused at December 31, 2005. Loans payable include the
evergreen term loan which was not fully drawn upon at December 31, 2005, and
has $0.1 million available to finance 100% of anticipated future capital
expenditures, consistent with $0.1 million available at December 31, 2004. The
Capital lease loan facility available for polyethylene pipe has been drawn on
by way of capital lease in the original amount of $1.3 million with payments
made as agreed to date. A further capital lease in the amount of $450 thousand
was entered into in the fall of 2005 to acquire 2 forklifts to accommodate
increased yard activity for the ACCESS project. Total capital leases
outstanding at December 31, 2005 total $907 thousand. Loans payable also
include demand bank loans outstanding at December 31, 2005 totaling $2.5
million which were used for purchase of the Nisku building and other long term
asset financing requirements.
Loans payable at December 31, 2005 total $5.8 million. The bank's working
capital covenants have been adjusted to remove principal payments scheduled
after 12 months from the working capital covenant calculation. Working capital
of negative $0.3 million is recorded at December 31, 2005. The adjusted
working capital, calculated by deducting $4.0 million of loans payable
scheduled to be repaid after 12 months, totals $3.6 million.
Loans payable and capital lease obligations at December 31, 2005 totaled
$6.7 million, a decrease of $0.2 million over the $6.9 million recorded at
December 31, 2004. This decrease is attributed to the principal payments made
on demand loans during the course of the year. The Corporation continues to
draw on available term debt credit facilities to finance capital asset
purchases with repayment in accordance with existing bank agreements. All bank
covenants were met at December 31, 2005.
Additions to property, plant and equipment were $2.4 million for the year
ended December 31, 2005, of which $0.5 million was purchased through a capital
lease, compared to $1.2 million for year ended December 31, 2004. Capital
expenditures for 2005 were primarily related to increased manufacturing
operations equipment costs, additional fabrication, mobile and coating
equipment improvements required to accommodate increased activity and
production of the ACCESS project during the year ended December 31, 2005. Land
improvement and site preparation in Nisku for future facility expansion was
also completed in the fall of 2005.
Cash generated from operations prior to changes in working capital, for
the fourth quarter ended December 31, 2005 totaled $1.6 million. Cash
generated from operations, prior to changes in working capital, was
$3.7 million for the year ended December 31, 2005, an increase of $2.0 million
over the $1.7 million generated in the year ended December 31, 2004. The
increase reflects cash generated from operations from net earnings during the
2005 year.
<<
Selected Annual Information
---------------------------
(In thousands, except per share data)
-------------------------------------------------------------------------
Year Ended December 31/05 December 31/04 December 31/03
-------------------------------------------------------------------------
Total Revenues $48,365 $32,607 $44,955
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Net Earnings (Loss) 1,621 (408) 1,334
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Basic Earnings (Loss)
per Share 0.14 (0.04) 0.12
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Diluted Earnings (Loss)
per Share 0.14 (0.04) 0.11
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Total Assets 38,141 31,427 37,121
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Long Term Capital
Lease Obligations 535 489 712
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The increase in manufacturing activity and coating activity resulted in
an improvement in net earnings being recorded for the December 31, 2005 year
end. The increased revenue generated also resulted in increased accounts
receivables outstanding during the course of 2005 which were funded by
increased operating loans and payables.
Selected Quarterly Information
------------------------------
(In thousands, except per share data)
-------------------------------------------------------------------------
2005
-------------------------------------------------------------------------
Three months ended December September June March
31/05 30/05 30/05 31/05
-------------------------------------------------------------------------
Total Revenues $16,472 $11,456 $7,953 $12,484
-------------------------------------------------------------------------
Net Earnings (Loss) 993 511 (990) 1,107
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Basic Earnings (Loss) per Share 0.08 0.05 (0.09) 0.10
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Diluted Earnings (Loss) per Share 0.08 0.05 (0.09) 0.10
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Total Assets 38,141 33,499 30,372 35,696
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Long Term Capital Lease Obligations 535 660 372 431
-------------------------------------------------------------------------
(In thousands, except per share data)
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2004
-------------------------------------------------------------------------
Three months ended December September June March
31/04 30/04 30/04 31/04
-------------------------------------------------------------------------
Total Revenues $9,429 $7,127 $4,303 $11,748
-------------------------------------------------------------------------
Net Earnings (Loss) (152) 181 (1,685) 1,248
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Basic Earnings (Loss) per Share (0.01) 0.02 (0.15) 0.11
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Diluted Earnings (Loss) per Share (0.01) 0.02 (0.15) 0.10
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Total Assets 31,427 30,303 28,893 36,640
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Long Term Capital Lease Obligations 489 546 602 657
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The seasonality of the pipe coating business and project nature of
international contracts results in wide quarterly fluctuations in revenue
generated by the Corporation and net earnings (loss) therefrom. The second
quarter ended June 30 is historically the slowest period for the Corporation
with the March 31 quarter the most active. Losses occurred in the period
June 30, 2005 as lower volumes of small diameter coating work was realized.
The commencement of the ACCESS project in the fourth quarter of 2005 together
with increased small diameter coating requirements resulted in a substantial
increase in revenue and net earnings for the Corporation in the fourth quarter
of 2005.
New Accounting Policies
-----------------------
The Canadian Institute of Chartered Accountants has adopted new
recommendations with respect to stock based compensation, asset retirement
obligations and impairments of long-lived assets in 2004. These
recommendations were adopted and implemented in 2004 and results therefrom
included in these statements. No new accounting policies were adopted in 2005.
Critical Accounting Estimates
-----------------------------
The Corporation recognizes revenues related to equipment fabrication
contracts based on the percentage of completion of the individual contracts.
At December 31, 2005, significant fabrication contracts in progress include
manufacturing flocculation tanks for $1.5 million, oilfield buildings for
$324 thousand and pipe stands for $121 thousand.
The Corporation provides for amortization of assets based on expected
useful life of the assets with coating and extrusion equipment calculated
based on utilization of the equipment to match revenues generated by the
equipment.
Outstanding Shares Data
-----------------------
Outstanding options issued by the Corporation totaled 984,375 at
December 31, 2004. During 2005, 79,000 options were granted at $1.10; 19,250
options were cancelled at a weighted average price of $0.61; and 116,950
options were exercised at a weighted average price of $0.57. Options
outstanding at December 31, 2005 totaled 927,175 (789,800 vested) with a
weighted average exercise price of $0.72.
Outstanding common shares of the Corporation at December 31, 2004 totaled
11,445,302. 116,950 options were exercised for $67 thousand during the course
of 2005 with outstanding common shares totaling 11,562,252 at year end
December 31, 2005.
Disclosure of Contractual Obligations
-------------------------------------
The following schedule represents scheduled obligation payments required
to be made by the Corporation.
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2010 and
Total 2006 2007 2008 2009 beyond
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Loans Payable $1,785 $1,368 $899 $508 $1,201
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Capital Lease Obligations 416 318 132 121 -
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Operating Lease 290 228 81 49 -
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Please refer to notes 4(a) and (b) and note 6 of the Consolidated
Financial Statements for further details.
BUSINESS RISKS
Capital spending by pipeline transmission and oil and gas companies
drives the demand for Garneau Inc.'s coating products and domestic
manufacturing products. The Corporation's continued success is fundamentally
linked to the continued growth and stability of the energy industry, both
domestically and internationally. In addition, Garneau Inc.'s future success
depends upon the continued expansion of equipment fabrication, increasing its
market share of pipe coating services in Canada and further diversification.
Other uncertainties in the industry include domestic and foreign government
policies and regulations, foreign exchange rates, and world energy prices.
The robust Alberta economy has overheated the local labor market with a
shortage of tradespeople and general labor now evident in both Nisku and
Camrose. Managing human resource requirements will present a challenge for the
Corporation in this market place.
The Corporation's revenue is generated substantially from a core group of
11 oil industry clients. A concentration of credit risks exists with accounts
receivable outstanding at year end December 31, 2005 from this core group of
clients accounting for 97% of total accounts receivable.
Increased product discounts were provided to key distributors during the
course of 2005 in lieu of increased competitive rebate programs provided by
coating competition, resulting in a net decrease of revenue and gross margin
totaling $1.0 million for the year ended December 31, 2005.
Furthermore, the Corporation has one major local competitor in the
Pipeline business segment that has significant market share and influence over
product pricing which could impact future corporate performance. Small
diameter coating activity for the Corporation is directly dependant on
drilling activity in the industry which has historically shown significant
fluctuations from year to year.
International business is dependant on the Corporation's ability to
secure large project work internationally, which has inherent risks associated
with the fluctuation of foreign exchange rates, together with economic and
political risks of certain foreign countries. The Corporation will consider
hedging and other strategies designed to mitigate the impact of foreign
exchange fluctuation on future contracts obtained.
DISCLOSURE, CONFIDENTIALITY AND TRADING POLICY
The Corporation has formal disclosure controls and procedures in place
which promotes an understanding of the legal requirements among the
Corporation's directors, officers and employees as it pertains to the timely,
factual and accurate communications with the public for Garneau Inc., together
with compliance of trading requirements of Corporation securities and
confidentiality of non public disclosed information. The effectiveness of the
Corporation's disclosure controls and procedures at December 31, 2005 have
been evaluated by senior management and are in compliance with reporting
requirements at December 31, 2005. Furthermore, these disclosure controls and
procedures are in the process of being enhanced further in 2006.
OUTLOOK
2005 results were positively impacted by the increase in domestic
manufacturing activity experienced throughout the 2005 year. Increased small
diameter coating activity, together with commencement of the ACCESS large
diameter project in the fourth quarter of 2005 also contributed favorably to
operating results. Further competitive pricing pressure was experienced during
the year which partially offset the contribution from increased small diameter
activity.
The Corporation remains active internationally in pursuing pipe handling
and coating equipment orders, although the competitiveness of future bids may
be affected by the Canadian dollar and further foreign exchange rate
fluctuations. Garneau has completed the Management Services Agreements for the
Russian and Middle East plants during 2005 which have provided the Corporation
with further recognition and exposure as a provider of coating services
worldwide.
With continued strong energy prices and capital budget forecasts provided
by energy companies for 2006, drilling and well completion activity is
projected to exceed 25,000 wells in 2006. If the increased drilling activity
translates into increased small diameter coating demand, this would contribute
positively to 2006 operating results for the Corporation. Strong fourth
quarter 2005 activity has continued into the first quarter of 2006 with the
Corporation's order book at an all time high.
The second small diameter coating line in Camrose operated near capacity
during the fourth quarter 2005 and will enable the Corporation to increase
coating capacity in the busy winter season together with the capability of
handling future potential large diameter projects like ACCESS simultaneously
with day to day small diameter coating demands from our existing clients. The
Corporation is now able to participate in a broader range of oil and natural
gas projects in both small and large diameter pipe. The doubling of the
Corporation's coating capacity at the Camrose plant, combined with the
expansion of services into the large diameter market, solidifies management's
belief that the Corporation is well positioned to increase its domestic market
share over the long term.
Management is of the opinion that achieving controlled growth outlined in
the Corporation's Strategic Plan will result in sufficient working capital
being generated from operations. This working capital, together with external
financing, is projected to meet the Corporation's liabilities and commitments
as they become payable. Future operations will remain dependant on the
Corporation's ability to generate sustainable profits.
The CCSI joint venture agreement was signed in the fall of 2005 and
initial trials began in January of 2006. The venture is working towards
bringing cold weather application to the coating process, which if proven
successful, could lead to new revenue streams for the Corporation on future
large diameter projects.
Garneau will continue to invest in research and development, while
actively pursuing potential new markets and focusing on profitable growth by
offering specialty products and services to complement our core coating and
manufacturing operation.
Operating profitability during fiscal 2006 will remain the primary focus
of the Corporation, requiring management to continue to control infrastructure
costs as new revenue sources cultivate during the projected continued active
domestic industry.
Edmonton, Canada
March 13, 2006
MANAGEMENT'S RESPONSIBILITY TO THE SHAREHOLDERS
The accompanying consolidated financial statements and other financial
information included in Garneau Inc.'s Annual Report are the responsibility of
the management of Garneau Inc. and have been approved by the Board of
Directors.
The financial statements have been approved by management, and are
prepared in conformity with Canadian generally accepted accounting principles.
The financial statements include estimates based on the experience and
judgment of management in order to ensure that the financial statements are
presented fairly in all material respects. Financial information presented
elsewhere in this Annual Report is consistent with that in the financial
statements.
The management of the Corporation developed and continues to maintain
systems of internal accounting controls and management practices designed to
provide reasonable assurance that the financial information is relevant,
reliable and accurate. In addition, programs of proper business conduct and
risk management are implemented to protect the Corporation's assets and
operations and to give reasonable assurance that transactions are properly
authorized, assets are guarded from loss or misuse and financial records are
maintained to provide reliable financial information for preparation of
financial statements.
The Board of Directors is responsible for ensuring that management
fulfils its responsibilities for financial reporting and internal control,
with the assistance of the Audit Committee. The Board appoints the Audit
Committee, whose members are Directors that are not corporate officers. This
committee meets periodically with management and the Corporation's external
auditors to discuss audit examinations, internal control, accounting policy
and financial reporting matters.
The Audit Committee also reviews with management the annual and quarterly
consolidated financial statements of the Corporation prior to submission to
the Board of Directors for final approval. The external auditors have full and
unrestricted access to the Audit Committee. The Audit Committee recommends a
firm of external auditors, to be appointed by the shareholders. KPMG LLP has
been appointed the external auditors of the Company to provide an independent
audit opinion on the annual consolidated financial statements. The Auditors'
Report to the shareholders is also presented in this Annual Report.
Sincerely,
"signed" "signed"
Glen R. Garneau Frank Deys
President, CEO Chief Financial Officer
Edmonton, Canada
March 13, 2006
AUDITORS' REPORT TO THE SHAREHOLDERS OF GARNEAU INC.
We have audited the consolidated balance sheets of Garneau Inc. as at
December 31, 2005 and 2004 and the consolidated statements of operations and
deficit and cash flows for the years then ended. These financial statements
are the responsibility of the Corporation's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Corporation as at
December 31, 2005 and 2004 and the results of its operations and its cash
flows for the years then ended in accordance with Canadian generally accepted
accounting principles.
Chartered Accountants
Edmonton, Canada
February 27, 2006
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
at at
December 31, December 31,
(In thousands) 2005 2004
-------------------------------------------------------------------------
Assets
Current Assets:
Cash $ - $ -
Accounts receivable 14,554 8,722
Inventory 3,172 2,679
Prepaid expenses and deposits 28 45
-------------------------------------------------------------------------
17,754 11,446
Property, plant and equipment (note 3) 20,387 19,981
-------------------------------------------------------------------------
$ 38,141 $ 31,427
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities:
Operating loan (note 2) $ 5,316 $ 2,769
Accounts payable and accrued liabilities 6,256 3,838
Deferred revenue 378 215
Loans payable (note 4(a)) 5,761 6,196
Current portion of capital lease obligations 372 223
-------------------------------------------------------------------------
18,083 13,241
Capital lease obligations (note 4(b)) 535 489
Future income taxes (note 7) 128 -
-------------------------------------------------------------------------
18,746 13,730
-------------------------------------------------------------------------
Shareholders' Equity:
Share capital (note 5) 20,901 20,834
Contributed surplus 225 215
Deficit (1,731) (3,352)
-------------------------------------------------------------------------
19,395 17,697
Commitments (note 6)
-------------------------------------------------------------------------
$ 38,141 $ 31,427
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
On behalf of the Board:
-------------------------- ---------------------------
Dan Motyka John Carruthers
Director Director
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
-------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31,
(In thousands except per share data) 2005 2004
-------------------------------------------------------------------------
Revenue $ 48,365 $ 32,607
Operating costs 39,543 26,430
-------------------------------------------------------------------------
8,822 6,177
-------------------------------------------------------------------------
Other operating expenses (income):
Selling, general and administrative 4,443 3,776
Amortization 1,883 2,107
Research and development 292 107
Bad debts - 60
Gain on disposal of property, plant
and equipment (8) -
-------------------------------------------------------------------------
6,610 6,050
-------------------------------------------------------------------------
2,212 127
Financing:
Interest on loans payable 341 404
Interest on operating loan 159 119
Other (12) -
Foreign exchange losses 27 136
Writedown of property, plant and equipment 113 -
Other income (165) (124)
-------------------------------------------------------------------------
Earnings (loss) before income taxes 1,749 (408)
-------------------------------------------------------------------------
Income taxes (note 7):
Future 128 -
-------------------------------------------------------------------------
128 -
Net earnings (loss) 1,621 (408)
Deficit, beginning of year
As previously reported (3,352) (2,750)
Adjustment to reflect change in
accounting for stock based compensation
(Note 1(f)) - (194)
-------------------------------------------------------------------------
Deficit, restated (3,352) (2,944)
-------------------------------------------------------------------------
Deficit, end of year $ (1,731) $ (3,352)
-------------------------------------------------------------------------
Earnings (loss) per share (note 5):
Basic $ 0.14 $ (0.04)
Diluted $ 0.14 $ (0.04)
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31,
(In thousands) 2005 2004
-------------------------------------------------------------------------
Cash provided by (used in):
Operations (note 10):
Net earnings (loss) $ 1,621 $ (408)
Items not involving cash:
Amortization 1,883 2,107
Stock based compensation costs 10 21
Gain on disposal of property, plant
and equipment (8) -
Writedown of property, plant and equipment 113 -
Future income taxes 128 -
-------------------------------------------------------------------------
3,747 1,720
Changes in non-cash operating working capital (3,727) 2,674
-------------------------------------------------------------------------
20 4,394
-------------------------------------------------------------------------
Financing:
Proceeds from exercise of share
purchase options 67 107
Repayment of loans payable and capital
lease obligations (1,459) (1,397)
Increase (decrease) in operating loan 2,547 (3,957)
Advances under term loan 769 633
-------------------------------------------------------------------------
1,924 (4,614)
-------------------------------------------------------------------------
Investments:
Proceeds from disposal of property,
plant and equipment 17 -
Additions to property, plant and equipment (1,961) (1,194)
-------------------------------------------------------------------------
(1,944) (1,194)
-------------------------------------------------------------------------
Decrease in cash - (1,414)
Cash, beginning of year - 1,414
-------------------------------------------------------------------------
Cash, end of year $ - $ -
-------------------------------------------------------------------------
Property, plant and equipment in the amount of $450 thousand were
acquired by way of capital lease during the third quarter of the year
ended December 31, 2005.
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
The Corporation is incorporated under the Business Corporations Act of
Alberta. Its principal business activities are the coating of pipe and
the manufacturing of equipment for use in the oil and gas industry.
In the notes to the consolidated financial statements, all dollar amounts
are stated in thousands of Canadian dollars, except share data, unless
otherwise indicated.
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These consolidated financial statements include the accounts of the
Corporation and its subsidiaries and joint ventures.
These consolidated financial statements have been prepared assuming that
future operations will allow for the realization of assets and discharge
of liabilities in the normal course of business. Management is of the
opinion that sufficient working capital will be obtained from operations
to meet the Corporation's liabilities and commitments as they become
payable. These consolidated financial statements do not include any
adjustments to the carrying value of assets and liabilities that might be
necessary should the Corporation not continue operating in the normal
course of business.
(b) Measurement Uncertainty:
The preparation of the financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the year. In determining estimates of the estimated
useful lives and net recoverable amounts for property, plant and
equipment, the Corporation relies on assumptions regarding applicable
industry performance and prospects, as well as general business and
economic conditions that prevail and are expected to prevail. Assumptions
underlying asset valuations are limited by the uncertainty of predictions
concerning future events. By nature, asset valuations are subjective and
do not necessarily result in precise determinations. Actual results could
differ from those estimates.
(c) Recognition of revenue:
Revenue from product sales is recognized at the date of shipment to the
customer.
Revenue related to the coating of pipe is recognized as the pipe is
processed.
Revenue related to equipment fabrication contracts is recognized based
upon the percentage of completion of the individual contracts. Amounts
billed in excess of amounts recognized are deferred. Any significant
anticipated losses on contracts in progress are provided for as soon as
they become evident.
(d) Inventory:
Raw materials are stated at the lower of cost and replacement cost. Work
in progress and finished goods are valued at the lower of cost and net
realizable value.
(e) Foreign currency translation:
Monetary assets and liabilities denominated in foreign currencies are
translated at prevailing rates of exchange at the balance sheet date.
Revenue and expenses are translated at the exchange rates prevailing on
the transaction date. Realized and unrealized exchange gains and losses
are included in earnings.
The operations of a wholly owned subsidiary, which is deemed to be an
integrated foreign operation, are translated using the temporal method.
Under this method, all monetary assets and liabilities are translated at
the exchange rate in effect at the balance sheet date and all non-
monetary assets and liabilities are translated using the exchange rates
in effect when the balance originated. Revenues and expenses are
translated at the average exchange rate prevailing during the year.
Translation gains and losses arising from changes in exchange rates are
included in the determination of earnings for the year.
(f) Stock-based compensation plan:
Effective January 1, 2004, the Corporation adopted the new accounting
recommendations of the Canadian Institute of Chartered Accountants with
respect to the accounting for stock-based compensation and other stock-
based payments with compensation costs being recognized on the basis of
fair values commencing at the grant date of the options. The
recommendations have been applied retroactively with restatement of
comparative figures for all stock-based payments to non-employees and all
awards to employees granted on or after January 1, 2002 and have
increased amounts previously reported for contributed surplus and deficit
at December 31, 2003 by $194.
(g) Property, plant and equipment:
Property, plant and equipment are stated at cost. Amortization is
provided using the straight-line method at the following annual rates:
-------------------------------------------------------------------------
Asset Rate
-------------------------------------------------------------------------
Land improvements 5%
Buildings and extrusion plant 5% - 6.25%
Machinery and equipment 6.25% - 33%
Leasehold improvements 20%
Rental equipment 12.5%
-------------------------------------------------------------------------
Equipment under capital lease is amortized using the same rates as
similar assets.
The amortization method for coating equipment and the extrusion plant
correlates amortization with utilization of the equipment to match
revenues generated by the equipment. It is not anticipated that this
method will extend the period over which the equipment will be amortized.
(h) Income Taxes:
The Corporation uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, future tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Future
tax assets and liabilities are measured using enacted or substantively
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on future tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the date of
enactment or substantive enactment.
(i) Impairment of Long Lived Assets:
Effective January 1, 2004, the Corporation prospectively adopted the new
accounting recommendations of the Canadian Institute of Chartered
Accountants with respect to the Impairment of Long-lived Assets. These
recommendations require the Corporation to review the valuation of long-
lived assets subject to amortization when events or changes in
circumstances may indicate or cause its carrying value to exceed the
total undiscounted cash flows expected from their use and eventual
disposition. An impairment loss would be recorded as the excess of
carrying value of the asset over its fair value, measured by either
market value or estimated by calculating the present value of expected
future cash flows related to the asset. Application of the new standard
has not had an impact on the measurement of the Corporation's long-lived
assets.
2. OPERATING LOAN
At December 31, 2005, the Corporation had available a demand revolving
operating loan of $6,250. As collateral for this loan and loans payable
(note 4), the Corporation has provided a general security agreement
creating a first charge over all assets, collateral mortgages of $8,400
over the Corporation's land and buildings, and assignments of insurance.
The operating loan bears interest at the lender's prime rate for Canadian
and United States dollar borrowings. Interest is paid monthly. The amount
available under the operating loan is subject to a borrowing base formula
applied to the levels of accounts receivable and inventories.
Letters of guarantee and credit for performance and bid guarantees, when
issued, reduce the amount available for borrowing under the operating
loan. Letters of Credit for $122 USD expiring February 2006 and $70 USD
expiring January 2006 were outstanding at December 31, 2005.
3. PROPERTY, PLANT AND EQUIPMENT
-------------------------------------------------------------------------
2005
-------------------------------------------------------------------------
Accumulated Net book
(In thousands) Cost amortization value
-------------------------------------------------------------------------
Land and land improvements $ 4,567 $ 1,666 $ 2,901
Buildings and extrusion plant 5,944 1,769 4,175
Machinery and equipment 24,383 12,566 11,817
Leasehold improvements 264 264 -
Rental equipment 832 713 119
-------------------------------------------------------------------------
$ 35,990 $ 16,978 $ 19,012
Equipment under capital lease 1,660 285 1,375
-------------------------------------------------------------------------
$ 37,650 $ 17,263 $ 20,387
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2004
-------------------------------------------------------------------------
Accumulated Net book
(In thousands) Cost amortization value
-------------------------------------------------------------------------
Land and land improvements $ 4,470 $ 1,539 $ 2,931
Buildings and extrusion plant 5,659 1,488 4,171
Machinery and equipment 23,044 11,406 11,638
Leasehold improvements 264 262 2
Rental equipment 832 645 187
-------------------------------------------------------------------------
$ 34,269 $ 15,340 $ 18,929
Equipment under capital lease 1,232 180 1,052
-------------------------------------------------------------------------
$ 35,501 $ 15,520 $ 19,981
-------------------------------------------------------------------------
4. (a) LOANS PAYABLE
-------------------------------------------------------------------------
(In thousands) 2005 2004
-------------------------------------------------------------------------
1. Vendor back mortgage interest only,
payable monthly with principal due
in full May 1, 2006. Interest is
charged at 6%. $ 350 $ 350
2. Demand evergreen bank loan, payable
in monthly principal installments of $85.
Interest is charged at the rate of bank
prime plus 0.875%, secured as described
in note 2. 2,914 2,956
3. Demand bank loan, payable in monthly
principal installments of $34. Interest
is charged at the rate of bank prime
plus 0.875%, secured as described in
note 2. 2,497 2,890
-------------------------------------------------------------------------
$ 5,761 $ 6,196
-------------------------------------------------------------------------
The evergreen bank loan is for financing the cost of capital upgrades and
is limited to the lesser of 100% of the total cost of upgrades and
$3,000.
Loans payable to the Corporation's bank are payable upon demand and are
classified as a current liability. Scheduled repayments are as follows:
2006 $ 1,785
------------
Total scheduled repayments due within 12 months $ 1,785
------------
2007 1,368
2008 899
2009 508
2010 351
And subsequent years 850
------------
Total scheduled repayments due after 12 months $ 3,976
------------
4. (b) CAPITAL LEASE OBLIGATIONS
The Corporation has financed certain equipment by entering into capital
leasing arrangements. Capital lease repayments are due as follows:
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
2005 $ - $ 260
2006 416 301
2007 318 203
2008 132 18
2009 121 -
-------------------------------------------------------------------------
Total minimum lease payments 987 782
Less amount representing interest at rates
ranging from 6% to 8% 80 70
-------------------------------------------------------------------------
Present value of capital lease payments 907 712
Current portion of capital lease obligations 372 223
-------------------------------------------------------------------------
$ 535 $ 489
-------------------------------------------------------------------------
5. SHARE CAPITAL
(a) Authorized:
Unlimited number of common shares.
(b) Issued:
-----------------------------------------------------------------
Number of shares $ Value
-----------------------------------------------------------------
Common shares outstanding at
December 31, 2003 11,259,877 $ 20,727
--------------------------------
Issued for cash during 2004 on
exercise of options 185,425 $ 107
--------------------------------
Common shares outstanding at
December 31, 2004 11,445,302 $ 20,834
--------------------------------
Issued for cash during 2005 on
exercise of options 116,950 $ 67
--------------------------------
Common shares outstanding at
December 31, 2005 11,562,252 $ 20,901
(c) Options:
The Corporation has implemented a stock option plan for directors,
officers, employees and consultants and reserved a rolling 10% of the
outstanding common shares for the plan. The exercise price of the
share purchase options reflects the market price of the shares at the
date the options were granted.
A summary of the status of the Corporation's stock option plan as of
December 31, 2005 and 2004, and changes during the years ended, on
those dates is presented below:
2005 2004
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------------------------------------------------------------
Outstanding at
beginning of
year 984,375 $0.67 1,204,800 $0.71
Granted 79,000 $1.10 31,750 $1.00
Exercised (116,950) $0.57 (185,425) $0.58
Expired - - (51,750) $2.25
Cancelled (19,250) $0.61 (15,000) $1.22
---------------------------------------------------------------------
Outstanding at
end of year 927,175 $0.72 984,375 $0.67
---------------------------------------------------------------------
Options
exercisable at
end of year 789,800 $0.72 852,375 $0.67
The following options are outstanding as of December 31, 2005:
---------------------------------------------------------------------
Number of Shares Exercise
Price
Granted Vested Expiry date per Share
---------------------------------------------------------------------
318,750 313,125 February 22, 2007 $ 0.56
200,000 200,000 May 15, 2006 $ 0.90
40,000 40,000 June 28, 2006 $ 0.79
144,875 102,625 September 18, 2007 $ 0.61
112,800 102,300 January 30,2008 $ 0.60
14,000 14,000 September 28, 2009 $ 1.00
17,750 17,750 September 28, 2009 $ 1.00
79,000 - September 9, 2010 $ 1.10
---------------------------------------------------------------------
927,175 789,800
The fair value of stock options granted is estimated at the grant
date using the Black-Scholes option pricing model using the following
assumptions:
Year Ended Dec.31/05 Dec.31/04
Dividend yield NIL NIL
Risk-free interest rate 2.75% 4.5%
Expected life 5 yrs 5 yrs
Expected volatility 50% 35%
Total stock based compensation expense for the year ended December
2005 totaled $10. Total stock based compensation expense for the year
ended December 2004 totaled $21.
(d) Employee Ownership Plan
The Corporation has an Employee Share Ownership Plan in place under
which employees may contribute 3% of eligible compensation each year
to purchase common shares of the Corporation. The Corporation will
match the employee contribution and the Corporation's contribution
vests on December 31 of each year. If the Corporation wishes, it is
authorized to issue up to 1,000,000 common shares under the Plan.
At December 31, 2005, 39 employees were participating under the Plan.
Employee and Corporation contributions for 2005 totaled $127 and were
used to purchase 110,351 common shares of the Corporation on the open
market.
(e) Earnings (loss) per Share:
The computations for basic and diluted earnings per share are as
follows:
(In thousands except per share value) 2005 2004
---- ----
Net earnings (loss) $ 1,621 $ (408)
---------------------------------------------------------------------
Weighted average number of common shares
outstanding:
Basic 11,480 11,386
Effect of stock options 318 -
---------------------------------------------------------------------
Diluted 11,718 11,386
---------------------------------------------------------------------
Earnings (loss) per share:
Basic $ 0.14 $ (0.04)
Diluted $ 0.14 $ (0.04)
---------------------------------------------------------------------
6. COMMITMENTS
The Corporation is committed to operating lease payments for
premises, automobiles, mobile and office equipment in the following
approximate amounts:
2006 $ 290
2007 228
2008 81
2009 49
7. INCOME TAXES
Income tax expense differs from the amount that would be computed by
applying the combined Federal and Provincial statutory income tax
rate of 33.6% (2004 - 33.6%) to income before income taxes. The
reasons for the differences are as follows:
---------------------------------------------------------------------
(in thousands) 2005 2004
---------------------------------------------------------------------
Expected income taxes (recovery) at
statutory rates $ 588 $ (137)
Increase (decrease) resulting from:
Other amounts 65 115
Change in valuation allowance (525) (252)
--------------------------
$ 128 $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
The tax effects of temporary differences that give rise to
significant portions of the future tax assets and future tax
liabilities are presented below:
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Future tax assets:
Losses carried forward
(expiring up to 2014) $ 1,588 $ 2,080
Other 261 242
---------------------------------------------------------------------
1,849 2,322
Less valuation allowance (143) (668)
---------------------------------------------------------------------
1,706 1,654
Future tax liabilities:
Property, plant and equipment - excess of
net book value over undepreciated
capital cost 1,834 1,654
---------------------------------------------------------------------
1,834 1,654
---------------------------------------------------------------------
Net future tax liability $ 128 $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
8. FINANCIAL INSTRUMENTS
(a) Market risks:
The Corporation operates internationally, giving rise to exposure
to market risks from changes in interest rates, foreign exchange
rates and commodity prices.
(b) Concentrations of credit risk:
Substantially all the Corporation's accounts receivable are with
companies in the oil and gas industry in Western Canada and with
a single international customer in the Corporation's
manufacturing segment. The Corporation's 11 largest customers
accounted for 97% of accounts receivable outstanding at the year
ended December 31, 2005.
(c) Fair value:
The fair values of cash, accounts receivable, operating loan and
accounts payable and accrued liabilities approximate their
carrying values due to the relatively short periods to maturity.
The fair values of the loans payable, capital leases and letters
of guarantee and credit are not significantly different from
their carrying values.
9. SEGMENT DISCLOSURES
Management has determined that the Corporation operates in two
reportable business segments which were Manufacturing and Pipeline.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Year ended
December 31, 2005 December 31, 2004
Manufacturing Pipeline Manufacturing Pipeline
Revenue $ 16,785 $ 31,580 $ 11,248 $ 21,359
Gross margin 4,425 4,397 2,134 4,043
26.4% 13.9% 19.0% 18.9%
Other expenses 2,168 4,905 1,626 4,959
Earnings (loss)
before income
taxes 2,257 (508) 508 (916)
Substantially all of the carrying value of the property, plant and
equipment and amortization expense relate to the Pipeline segment.
The Corporation had 3 customers with sales amounting to 10% or more
of consolidated revenues during the year ended December 31, 2005.
These 3 customers accounted for 17%, 14% and 10% of consolidated
revenues respectively. Export sales, primarily from sale of pipe
coating and handling equipment, totaled $4.4 million (2004 -
$8.1 million).
10. INTEREST AND INCOME TAXES PAID
Year Ended Dec.31/05 Dec.31/04
---------------------------------------------------------------------
Interest paid $ 500 $ 523
Income taxes paid - 28
DIRECTORS
Glen Garneau
President and Chief Executive Officer
Chris Garneau
Vice-President, Manufacturing
John W. Carruthers(1),(2),(3)
Vice-President, Northern Development, Enbridge Inc.
Daniel D. Laplante(1),(2),(3)
Vice-President, Sales & Marketing, Quorum Information Technologies Inc.
Daniel R. Motyka(1),(2),(3)
Vice-President, Designer Emeritus, Questor Technology Inc.
OFFICERS
Glen Garneau
President and Chief Executive Officer
Chris Garneau
Vice President, Manufacturing
Frank Deys, CMA
Chief Financial Officer
(1) Member of Audit Committee
Jay P. Reid (2) Member of Compensation Committee
Corporate Secretary (3) Corporate Governance Committee
HEADQUARTERS SALES OFFICE
Garneau Inc. Garneau Inc.
2003 - 5th Street No. 650, 407 - 2nd Street SW
Nisku, Alberta Calgary, Alberta
T9E 7X4 T2P 2Y3
Phone: (780) 955-2396 Phone: (403) 264-4880
Fax: (780) 955-7715 Fax: (403) 290-0055
AUDITORS LEGAL COUNSEL
MG LLP Burnet, Duckworth & Palmer LLP
10125-102nd Street First Canadian Centre
Edmonton, Alberta 1400, 350 - 7th Avenue SW
T5J 3V8 Calgary, Alberta T2P 3N9
REGISTRAR AND TRANSFER AGENT INVESTOR CONTACT
EMAIL
Olympia Trust Company Frank Deys - frankd(at)garneau-inc.com
Edmonton, Alberta Head Office
INVESTOR RELATIONS
darlenek(at)garneau-inc.com
STOCK EXCHANGE SYMBOL NOTICE OF ANNUAL AND SPECIAL
MEETING OF SHAREHOLDERS
TSX GAR Tuesday, May 16, 2006
Time: 3:00 p.m.
The Westin Hotel
GARNEAU INC. WEB SITE 320 - 4th Avenue SW
Calgary, Alberta
http://www.garneau-inc.com T2P 2S6
About Garneau Inc.
------------------
Garneau Inc.'s primary business is the application of high performance
protective coatings and linings for oil and gas pipeline protection.
Additionally, Garneau Inc. designs and fabricates oilfield equipment for both
domestic and international markets. During more than 30 years of operating
experience, Garneau Inc. has developed significant expertise and innovative
technology, and has maintained a long-term focus on continuously improving the
pipe coating process with cost-effective, quality coatings. A talented and
effective management team provides the vision and experience for long-term
profitable growth and increasing shareholder value. The company's Website can
be accessed at: http://www.garneau-inc.com/
>>
%SEDAR: 00008952E
