CALGARY, March 30 /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. ("Garneau") 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.
Vision
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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
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We provide our customers, partners and alliances with what they
need, when they need it ... always.
Values
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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 12.0 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 23,441 wells for 2006, a 7% increase over 2005. After a strong start to the drilling season and momentum therefrom, drilling and subsequent coating activity slowed down during the latter part of the year as commodity prices declined.
Industry drilling forecasts project a decrease to a total of 21,000 wells to be drilled for the 2007 year. This is forecasted to be the first slowdown in the petroleum industry activity since 2002. Initial first quarter 2007 coating activity is well below the 2006 results as clients utilize previously coated inventory. A significant drop in gas well drilling is forecasted, while a 2000 well increase on the crude oil side is projected.
Domestic manufacturing activity remained active for the entire 2006 year as high demand for oilfield drilling service and equipment resulted in projects booked through to January 2007. A softening in new project quoting requirements occurred during the fourth quarter of 2006 with initial 2007 domestic activity expected to be curtailed based on a slowdown in overall industry activity.
International opportunities continue to exist with additional distribution agreements now in place to assist the Corporation in penetrating new markets globally.
Overall, a slowdown is forecasted for the Corporation for the first and second quarter of 2007, with increased activity in the third and fourth quarters. This forecast is contingent upon strong, stable commodity prices.
Plan of Arrangement
The Corporation announced on April 20, 2006 that it entered into a definitive arrangement agreement whereby ShawCor Ltd. ("ShawCor") would acquire all of the outstanding common shares of Garneau.
The terms of the Plan of Arrangement were amended on May 18, 2006, May 23, 2006 and June 29, 2006 to permit the Competition Bureau, Canada to complete their inquiry pertaining to the Plan of Arrangement transaction. The Competition Bureau, Canada requested an extension of their original request to August 8, 2006 to consider the proposed acquisition.
The Corporation announced on October 5, 2006 that the Plan of Arrangement agreement dated April 19, 2006 with ShawCor had been terminated. As a result, the proposed acquisition of Garneau shares by ShawCor would not proceed.
The decision not to proceed was based on the inability of the parties to resolve outstanding issues with the Competition Bureau and the prospect of further delays.
Termination of the ShawCor agreement resulted in Senior Management refocusing on the long-term Strategic Plan for Garneau. Strategic Planning is now underway with the future strategic direction of the Corporation expected to be presented to the Garneau Board of Directors in the second quarter of 2007. Implementation of the Strategic Plan would commence shortly thereafter.
STRATEGIC DIRECTION
Notwithstanding the in-depth negotiations of the ShawCor transaction during 2006 and Senior Management's involvement thereon, Senior Management continued to focus on operating performance and profitability of the Corporation with further progress in 2006 pertaining to our Strategic Plan highlighted as follows.
- Design and Manufacturing Capability Garneau's fabrication and manufacturing capability continued to gain momentum domestically as oilfield client relationships are cultivated. Client satisfaction as to the quality of product fabricated and timely delivery are keys to increasing future market penetration domestically. Further, the Corporation is also continuing the process of evaluating 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 periodically in 2006. The $9 million dollar ACCESS project completed in 2006 is considered to be a major stepping stone for Garneau in securing future large diameter pipe coating 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. However, this was put on hold during the ShawCor transaction negotiations. Research and development for this Joint Venture is scheduled to recommence in 2007.
INTERNAL CONTROLS
Senior Management commenced a review of the Corporation's internal controls in the fourth quarter of 2006.
Initial changes to the Corporation's internal controls and policy manual have now been completed and implemented. However, the full review and evaluation of internal controls over financial reporting is in progress but is not expected to be finalized until the end of the second quarter of 2007. Further evaluation and assessment of the Corporation's internal controls over financial reporting will continue to be ongoing by Senior Management.
OUTLOOK 2007
Analysts are projecting 21,000 wells to be drilled in 2007, a 10% decrease over 2006 actual results of 23,441 wells. This projected decrease will result in a decrease in small diameter coating requirements which will have a negative impact on our 2007 coating operations. This decrease in drilling is compounded by clients reducing their inventory holdings of coated pipe in stock.
2006 was a very busy and difficult year for the employees of the Corporation, as the uncertainty surrounding the ShawCor transaction put a strain on our employee group morale during the most active year on record. I would like to personally thank our dedicated employees for assisting the Corporation through this difficult period and look forward to your continued contribution toward future corporate objectives. The uncertainty regarding the transaction also provided a strain on client relations this past summer and we at Garneau would like to stress to our clients that we will do everything in our power to restore and improve the level of service that you have been accustomed to.
Also, we announced in mid-November of 2006 that Mr. Chris Garneau, formerly Vice President of Manufacturing, was retiring from the Corporation after twenty nine years of service. I would personally like to thank Chris for his contribution to Garneau over his tenure with the Corporation.
The termination of the ShawCor agreement has resulted in the Corporation getting back to business with a refreshed aggressive attitude which is expected to be incorporated into our future strategic initiatives. This is partially reflected in our $5 million Camrose plant capital program announced in the fourth quarter of 2006. This capital program will include significant improvements to both Camrose coating lines to help improve efficiencies and increase capacity, together with an overhaul of yard equipment and further land improvements to help improve yard efficiency. The Capital program commenced during the fourth quarter and will be implemented in phases over an eighteen month period.
Operationally, 2006 was a record revenue year for Garneau, as both divisions were very active throughout the most part of 2006. Revenue exceeded $57 million and the Corporation was also successful in recording net earnings of $947 thousand for the year, after absorbing transaction, retirement and other non-operational costs totaling $1.8 million. This achievement in a year surrounded by so much uncertainty is a testament to the dedication of the Garneau employees which will lead the Corporation into the future.
Industry activity slowed down significantly in the fourth quarter of 2006; however, we consider this slowdown to represent a temporary market correction which will affect Garneau performance for the initial 6 months of 2007. Activity is projected to be restored in the industry in latter 2007, contingent on no further deterioration of oil and gas commodity prices.
Although international marketing and promotion activity was curtailed in 2006, international equipment projects continue to be bid upon. The Corporation was successful in obtaining 1 major coating equipment contract in 2006 which is expected to be fully installed and commissioned during the first quarter of 2007. Garneau's reputation in designing and manufacturing coating equipment continues to grow and has led to the most recent awarding of a $1.0 million project from ShawCor for installation in their new Camrose plant.
We look forward to the completion of our revised Strategic Plan for the Corporation which we envision to aggressively pursue future growth and value for our Shareholders.
Sincerely,
(signed)
Glen R. Garneau
President and CEO
Garneau Inc.
A PIPE COATING PERSPECTIVE
Garneau's Camrose facility overall operating usage increased during 2006, a direct result of an increase in small diameter coating activity together with the production on the ACCESS project during the year.
Multiple shifts on both coating lines in Camrose were operating during the first half of 2006 with a slowdown of activity experienced during the third quarter of 2006, reducing production to 2 shifts for the remainder of 2006.
Demand on yard operations, equipment requirements and staffing also increased substantially in 2006 with the production of the ACCESS project. Additional space has been secured to store our customers' aged coated product to free up valuable storage close to the plant for production of new coating orders.
Garneau's High Density Polyethylene Pipe production was put on hold in 2006 as a result of the ShawCor transaction negotiations and management's focus on the ACCESS project. Garneau's strategy going forward for HDPE is being re-evaluated as part of Strategic Planning sessions now underway.
A MANUFACTURING PERSPECTIVE
Manufacturing activity for the entire year was extremely busy with multiple shifts worked throughout 2006. The Corporation was successful in attaining a new $3.5 million coating plant order for a southern United States corporation which commenced during the third quarter and has recently been shipped for installation.
The international exposure gained from large international contracts of this nature continues 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 2007.
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.
A slowdown in manufacturing project activity is currently being experienced by Garneau during the first quarter of 2007 as industry activity has tailed off in recent months. We are aggressively pursuing new projects to help offset the impact of this market slowdown.
The labor shortage experienced during 2006 resulted in the Corporation initiating recruitment programs overseas to satisfy labor requirements. Foreign workers are now on stream and the program is now fully operational at Garneau. The slowdown in recent activity is projected by our clients to be temporary, with the long-term foreign worker program expected to contribute to future expansion of manufacturing operations.
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
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Consolidated revenues for the fourth quarter ended December 31, 2006 totaled $14.1 million, $2.4 million less than the comparative 2005 fourth quarter total revenues of $16.5 million, primarily as a result of decreased Camrose coating activity experienced in the fourth quarter of 2006. Total consolidated revenues increased by 17.8% for the year ended December 31, 2006; totaling $57.0 million compared to $48.4 million for the year ended December 31, 2005. An increase in coating activity, increased domestic manufacturing orders and the work completed on the $3.5 million international order all contributed to the increased revenue recorded in 2006.
Pipeline revenue totaled $8.5 million for the fourth quarter ended December 31, 2006. This represents a $3.8 million decrease over the $12.3 million recorded for the fourth quarter of 2005 and is attributed to decreased small diameter coating requirements together with completion of the ACCESS project in the third quarter of 2006. Decreased drilling activity during the fourth quarter of 2006 together with a reduction of finished inventory of pipe contributed to the reduction in the fourth quarter. Pipeline revenue totaled $38.3 million for the year ended December 31, 2006 and represents a 21.2% increase over the $31.6 million in pipeline revenue recorded for the year ended December 31, 2005. The increase in pipeline revenue is attributed to increased small diameter coating volume, together with production on the ACCESS coating project throughout the first three quarters of 2006.
Manufacturing revenue for the fourth quarter ended December 31, 2006 totaled $5.6 million, compared to the $4.2 million recorded for the fourth quarter of 2005. This $1.4 million increase is primarily attributed to the $3.5 million international project in progress at year end 2006 together with domestic activity remaining active throughout the fourth quarter. Manufacturing revenues totaled $18.8 million for the year ended December 31, 2006, an 11.8% increase over the $16.8 million recorded for the year ended December 31, 2005. Increased domestic manufacturing activity throughout the 2006 year, together with the work-in-progress on the $3.5 million international contract, contributed to the increase in manufacturing revenue.
Gross Margin
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The Corporation's gross margin, as determined by deducting operating costs which consists of all raw material, labor and plant overhead expenses from revenue, for the fourth quarter ended December 31, 2006 totaled $2.8 million compared to the $3.1 million recorded for the fourth quarter ended December 31, 2005. This decrease of $0.3 million is attributed to decreased coating revenues and margins recorded during the fourth quarter. The Corporation's gross margin totaled $10.8 million (19.0%) for the year ended December 31, 2006 compared to $8.8 million (18.2%) for the year ended December 31, 2005. Increased manufacturing volumes and an increase in coating orders contributed to the increased overall gross margin of $2.0 million.
The pipeline division gross margin totaled $1.5 million (17.5%) for the fourth quarter ended December 31, 2006, a $0.5 million decrease from the $2.0 million (16.3%) recorded for the comparative quarter. This decrease is attributed to decreased coating volumes recorded in the fourth quarter of 2006. The pipeline gross margin total of $6.1 million (15.9%) increased by $1.7 million from $4.4 million (13.9%) recorded for the year ended December 31, 2005, with the percentage increase reflecting increased coating volumes and price increases instituted during 2006.
The manufacturing division gross margin totaled $1.3 million (22.8%) for the fourth quarter ended December 31, 2006, a $0.2 million increase over the $1.1 million (26.7%) gross margin recorded for the comparative period. This increase is primarily attributed to increased revenue generated during the quarter. The manufacturing division gross margin of $4.7 million (25.3%) is $0.3 million higher than the $4.4 million gross margin recorded for the year ended December 31, 2005. The 25.3% in gross margin is lower than the 26.4% recorded for the year ended December 31, 2005 and is attributed to some cost overruns on new products built on domestic and international orders completed in 2006.
Expenses
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Selling, general and administrative expenses for the fourth quarter ended December 31, 2006 totaled $2.4 million, a $1.0 million increase over the $1.4 million recorded for the comparative quarter. Increased expenses are attributed primarily to retirement allowances of $490 thousand and corporate bonuses of $352 thousand paid to employees of Garneau. Selling, general, and administrative expenses totaled $5.9 million (10.4% of revenue) for the year ended December 31, 2006, as compared to the $4.4 million (9.2% of revenue) for 2005. Upward pressure on wages in the very active Alberta labor market together with increased commissions on higher revenue and extraordinary costs including the encashment of senior management stock options totaling $258 thousand, a $490 thousand retirement allowance paid to a senior officer and bonuses of $352 thousand paid to employees of the Corporation contributed to the increase.
The Corporation calculates amortization of its property, plant and equipment based a straight-line basis. Total amortization of $536 thousand was recorded for the fourth quarter ended December 31, 2006 with amortization totaling $2.0 million for the year ended December 31, 2006, representing 3.5% of revenue compared to $1.9 million for the year ended December 31, 2005 representing 3.9% of revenue. Increased amortization costs for the 2006 year is primarily attributed to the increased capital expenditures totaling $2.5 million incurred for the 2006 year.
The Corporation's research and development department activities decreased in 2006 as several new research and development projects initiated in 2005 by the Corporation were put on hold during the ShawCor transaction negotiations (see Plan of Arrangement below). Research and development expenses totaled $96 thousand for the year ended December 31, 2006; a $196 thousand decrease from the $292 thousand recorded for the comparative period ended December 31, 2005.
Manufacturing expenses totaled $1.1 million for the fourth quarter ended December 31, 2006, as compared to expenses totaling $0.6 million for the comparative period. The increase in expenses is primarily attributed to the $490 thousand retirement allowance paid to the former Vice President of Manufacturing. Manufacturing expenses totaled $2.8 million for the year ended December 31, 2006, an increase of $0.6 million over the $2.2 million recorded for the period ended December 31, 2005. The manufacturing division's overhead costs increased primarily due to the $490 thousand retirement allowance and upward pressure on wages and support services being increased to accommodate increased activity.
The pipeline division expenses totaled $1.8 million for the fourth quarter ended December 31, 2006 compared to $1.1 million for the comparative period with the increase of $0.7 million pertaining primarily to corporate bonuses paid based on corporate financial performance together with increased professional fees and upward pressure on wages incurred during the 2006 year. The pipeline division expenses totaled $6.6 million for the year ended December 31, 2006, an increase of $1.7 million over the $4.9 million for the year ended December 31, 2005. The increase in pipeline divisional expenses is due to ShawCor transaction costs, corporate bonuses paid, stock options encashed and increased amortization expenses for Camrose property, plant and equipment.
Other income totaled $0.3 million for the fourth quarter ended December 31, 2006 and consists primarily of various miscellaneous sources of income. Other expenses totaled $0.8 million for the year ended December 31, 2006, an increase of $0.9 million from the comparative year end and include transaction costs totaling $1.1 million, which pertain directly to professional fees, severance payments, bonuses and other transaction costs relating to the terminated Plan of Arrangement. These other expenses were partially offset by various miscellaneous sources of income and a WCB refund received in 2006.
Interest costs totaled $612 thousand for the year ended December 31, 2006, an increase of $112 thousand over the $500 thousand recorded for the year ended December 31, 2005. An increase in operating loans outstanding during the year and increased receivables and unbilled revenue carrying costs primarily from the ACCESS and International project accounted for the increased interest expense.
A Reduction of Future Income Taxes
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A reduction of future income tax expense of $127 thousand arose in the fourth quarter primarily as a result of the utilization of non-capital losses. The generation of taxable income in 2006 has resulted in the utilization of non-capital losses from prior periods. Future income tax expense for the year ended December 31, 2006 totaled $478 thousand as compared to the $128 thousand in 2005.
Earnings
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Net earnings for the fourth quarter ended December 31, 2006 totaled $37 thousand as compared to the $1.0 million net earnings recorded in the comparative period, a result of decreased margins and increased expenses incurred during the fourth quarter of 2006. Net earnings of $0.9 million were recorded for the year ended December 31, 2006 compared to net earnings of $1.6 million recorded for the year ended December 31, 2005. This $0.7 million decrease is partially attributed to increased future income taxes recorded during 2006. Net earnings were negatively affected by the transaction costs, retirement allowance and options encashed totaling $1.8 million during 2006.
Manufacturing division earnings of $0.2 million were recorded for the fourth quarter ended December 31, 2006, a $0.4 million decrease from the $0.6 million recorded for the fourth quarter of 2005. The decrease is attributed to the retirement allowance of $490 thousand paid to a senior officer. Manufacturing division earnings for the year ended December 31, 2006 totaled $2.0 million, compared to the $2.3 million recorded at December 31, 2005 and is directly attributed to the improved margins and revenue generated during 2006, offset by the retirement allowance.
Pipeline divisional losses totaled $0.3 million for the fourth quarter ended December 31, 2006, compared to the $0.6 million net earnings recorded for the comparative period and is primarily attributed to the decreased small diameter coating volumes and completion of the ACCESS large diameter project in the third quarter. Pipeline divisional losses for the year ended December 31, 2006 totaled $0.6 million that reflect an increase of $0.1 million from the year ended December 31, 2005 losses of $0.5 million. Increased activity and final production on the ACCESS project contributed to improved divisional performance, albeit, the ShawCor transaction costs of $1.1 million together with $0.3 million in options encashed by senior management resulted in the loss of $0.6 million for the year ended December 31, 2006. Adjusted normalized earnings, adding the transaction costs and option encashment costs back into operations would result in division profitability of $0.8 million for the year 2006.
Liquidity and Capital Resources
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Accounts receivable totaled $14.3 million at December 31, 2006, an increase of $1.4 million over the $12.9 million recorded at December 31, 2005 and is attributed to receivables carried on domestic coating revenue and domestic manufacturing revenues increasing from large projects completed at year end. Unbilled revenue totaled $1.2 million at December 31, 2006, a decrease of $0.5 million over the $1.7 million recorded at December 31, 2005 and pertains to decreased work-in-progress on manufacturing projects at December 31, 2006.
At December 31, 2006, 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, and a capital lease loan facility for $0.6 million pertaining to the manufacture of polyethylene pipe and forklift acquisitions and demand loans in the amount of $4.9 million.
The Corporation has a $6.3 million operating line of credit available for operating uses, of which $5.2 million was utilized and of which $1.1 million was available and unused at December 31, 2006. Loans payable include the evergreen term loan which was not fully drawn upon at December 31, 2006, and has $0.2 million available to finance 100% of anticipated future capital expenditures, consistent with $0.1 million available at December 31, 2005. A further $2 million increase in the evergreen term loan facility limit was approved by the Corporation's bank in January 2007 to assist with financing future capital expenditures. This increased facility has not been drawn on to date. Total capital leases outstanding at December 31, 2006 total $584 thousand. A capital lease in the amount of $176 thousand was entered into in January of 2007 to acquire one forklift to accommodate continued yard activity for the Camrose plant. Loans payable also include demand bank loans outstanding at December 31, 2006 totaling $4.9 million which were used for purchase of the Nisku building and other long-term asset financing requirements.
Loans payable at December 31, 2006 total $4.9 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 $0.5 million is recorded at December 31, 2006. The adjusted working capital, calculated by deducting $3.4 million of loans payable scheduled to be repaid after 12 months, totals $3.9 million, an increase of $0.3 million from the previous year ended December 31, 2005.
Loans payable and capital lease obligations at December 31, 2006 totaled $5.5 million, a decrease of $1.2 million from the $6.7 million recorded at December 31, 2005. 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, 2006.
Additions to capital equipment were $814 thousand in the fourth quarter ended December 31, 2006 compared to $843 thousand in the comparative period and consist primarily of new forklifts acquired for Camrose coating and Nisku operations. Additions to property, plant and equipment were $2.6 million for the year ended December 31, 2006, compared to $2.0 million for the year ended December 31, 2005. Capital expenditures for 2006 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, 2006. New accounting software and implementation was also completed during the 2006 year, contributing to increased capital expenditures.
Cash generated from operations prior to changes in working capital, for the fourth quarter ended December 31, 2006 totaled $0.4 million. Cash generated from operations, prior to changes in working capital, was $3.4 million for the year ended December 31, 2006, a decrease of $0.3 million over the $3.7 million generated in the year ended December 31, 2005. The decrease reflects a decrease in cash generated from operations from reduced net earnings during the 2006 year.
Selected Annual Information --------------------------- (In thousands, except per share data) ------------------------------------------------------------------------- Year Ended December 31/06 December 31/05 December 31/04 ------------------------------------------------------------------------- Total Revenues $57,042 $48,365 $32,607 ------------------------------------------------------------------------- Net Earnings (Loss) 947 1,621 (408) ------------------------------------------------------------------------- Basic Earnings (Loss) per Share 0.08 0.14 (0.04) ------------------------------------------------------------------------- Diluted Earnings (Loss) per Share 0.08 0.14 (0.04) ------------------------------------------------------------------------- Total Assets 39,571 38,141 31,427 ------------------------------------------------------------------------- Long Term Capital Lease Obligations 241 535 489 -------------------------------------------------------------------------
The increase in manufacturing activity and coating activity resulted in an improvement in net earnings being recorded for the December 31, 2006 year end prior to allowing for transaction costs of $1.1 million recorded during 2006. The increased revenue generated also resulted in increased accounts receivables outstanding during the course of 2006 which were funded by increased payables and working capital generated from earnings.
Selected Quarterly Information
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(In thousands, except per share data)
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2006
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Three months December September June March
ended 31/06 30/06 30/06 31/06
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Total Revenues $14,134 $11,078 $13,020 $18,810
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Net Earnings (Loss) 37 53 (273) 1,130
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Basic Earnings (Loss)
per Share 0.00 0.00 (0.02) 0.10
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Diluted Earnings (Loss)
per Share 0.00 0.00 (0.02) 0.09
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Total Assets 39,571 34,709 38,424 38,635
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Long Term Capital
Lease Obligations 241 353 414 475
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(In thousands, except per share data)
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2005
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Three months December September June March
ended 31/05 30/05 30/05 31/05
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Total Revenues $16,472 $11,456 $7,953 $12,484
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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) 0.09
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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
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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) there from. The second quarter ended June 30 is historically the slowest period for the Corporation with the quarter ended March 31 the most active. The ACCESS coating project continued in progress during the second quarter of 2006 and contributed to improved second quarter performance. Quarterly net earnings (loss) reported were negatively affected by transaction costs incurred totaling $1.1 million for the year ended December 31, 2006. Fourth quarter earnings for the period ended December 31, 2006 were also negatively affected by the retirement allowance and corporate bonuses previously discussed. Manufacturing activity remained active throughout 2006.
New Accounting Policies
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In January 2005, the Canadian Institute of Chartered Accountants ("CICA") issued Handbook Section 3855, "Financial Instruments-Recognition and Measurement", Handbook Section 1530, "Comprehensive Income", and Handbook Section 3865, "Hedges." In 2006, the CICA issued Handbook Section 1506, "Accounting Changes". These standards will apply to the Corporation effective January 1, 2007. In December 2006, the CICA issued Handbook Section 1535, "Capital Disclosures", Handbook Section 3862, "Financial Instruments-Disclosures", Handbook Section 3863, "Financial Instruments-Presentation". These new standards will apply to the Corporation effective January 1, 2008. The Corporation is currently assessing the impact of these new standards.
Internal Controls over Financial Reporting
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The Corporation has historically operated with an implemented system of internal controls over financial reporting that it believes adequately protects the assets of the Corporation and is appropriate for the nature of its business and the size of its operations. These internal controls include disclosure controls and procedures designed to ensure that information required to be disclosed by the Corporation is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
It should be noted that while the Corporation's Chief Executive Officer and Chief Financial Officer believe that the Corporation's disclosure controls and procedures historically in place, provide a reasonable level of assurance that the system of internal controls are sufficient, they do not guarantee that the disclosure controls and procedures, will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
The Chief Executive Officer and Chief Financial Officer of the Corporation are responsible for designing internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles.
Management of the Corporation commenced an evaluation of these existing internal controls over financial reporting. This evaluation was not fully completed at December 31, 2006.
The Corporation's Chief Executive Officer and Chief Financial Officer have concluded based on their evaluation that, partially due to the limited number of staff and resources at Garneau, inherent weaknesses in areas of internal controls over financial reporting are present, including segregation of duties, lack of financial expertise at certain levels in the finance functions, documented review of financial reporting entries and reconciliations, controlled use of spreadsheets, information technology safeguards, risk assessment processes, physical controls, documentation controls and controls at the entity level. The Corporation does not have fully disciplined and developed processes and procedures in place to support accounting estimates and documented accounting policies and procedures in accordance with generally accepted accounting principles. As a result of these weaknesses there is no guarantee that a material misstatement would not be prevented or detected.
The evaluation of existing internal controls over financial reporting is continuing with a view to identifying control weaknesses. Implementation of strengthened financial reporting controls will occur during 2007, where required.
Disclosure, Confidentiality and Trading Policy
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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, 2006 have been evaluated by senior management and are in compliance with reporting requirements at December 31, 2006. Furthermore, these disclosure controls and procedures are in the process of being enhanced further in 2007.
Critical Accounting Estimates
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The Corporation recognizes revenues related to equipment fabrication contracts based on the percentage-of-completion of the individual contracts. At December 31, 2006, significant fabrication contracts in progress include domestic orders for oilfield tanks, buildings and catwalks totaling $3.1 million. The international coating equipment contract in progress at December 31, 2006 totaled $3.2 million. Revenues from contracts are determined on the percentage-of-completion method, based on the ratio of costs incurred to date over estimated total costs. The Corporation has a process whereby progress on jobs is reviewed by management on a regular basis and estimated costs to complete are updated. However, due to unforeseen changes in the nature or cost of the work to be completed or performance issues, contract profit can differ from earlier estimates.
The Corporation provides an estimate for amortization of assets based on the expected useful life of assets with coating and extrusion equipment calculated based on a straight-line method.
The Corporation evaluates the probability of collection of accounts receivable and records an allowance for doubtful accounts, which reduces the receivables to the amount management reasonably believes will be collected. In determining the amount of allowance, the following factors are considered: the length of time the receivable has been outstanding, specific knowledge of each customer's financial condition and historical experience.
The Corporation also provides estimates pertaining to the valuation of long-lived assets, valuation of inventory, valuation of future income taxes and other estimates provided in the normal course of business operations.
Outstanding Shares Data
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Outstanding options issued by the Corporation totaled 927,175, at December 31, 2005. During 2006, 706,500 options were granted at $1.48; 26,850 options were cancelled at a weighted average price of $0.96; and 486,275 options were exercised at a weighted average price of $0.62. Options totaling 200,000 were encashed at a weighted average price of $0.90. Options outstanding at December 31, 2006 totaled 920,550 (214,050 vested) with a weighted average exercise price of $1.31.
Outstanding common shares of the Corporation at December 31, 2005 totaled 11,562,252. Options totaling 486,275 were exercised for $301 thousand during the course of 2006 with outstanding common shares totaling 12,048,527 at December 31, 2006. No options have been exercised to March 30, 2007 with outstanding common shares totaling 12,048,527 at March 30, 2007.
Disclosure of Contractual Obligations
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The following schedule represents scheduled obligation payments required
to be made by the Corporation.
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2011 and
2007 2008 2009 2010 beyond
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Loans Payable $1,556 $1,087 $696 $540 $1,039
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Capital Lease Obligations 368 132 121 - -
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Operating Leases 283 189 139 53 52
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Please refer to notes 4(a) and (b) and note 6 of the consolidated
financial statements for further details.
Contingencies
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During the year ended December 31, 2006, the Company was named defendant in a lawsuit and has received claims in the aggregate amount of $1.5 million. In the opinion of management, this matter is without substantial merit and no provisions have been made for this claim in the accounts.
Plan of Arrangement
-------------------
The Corporation announced on October 5, 2006 that the Plan of Arrangement agreement dated April 19, 2006 with ShawCor Ltd. ("ShawCor") was terminated. As a result, the proposed acquisition of Garneau Inc. shares by ShawCor did not proceed.
The decision not to proceed was based on the inability of the parties to resolve outstanding issues raised by the Competition Bureau, Canada and the prospect of further delays.
Other expenses include costs pertaining to this terminated ShawCor transaction totaling $1.1 million for the year ended December 31, 2006.
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 resulted in a shortage of trades people and general labor in both Nisku and Camrose during 2006. 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 13 oil industry clients. A concentration of credit risk exists with accounts receivable outstanding at December 31, 2006 from this core group of clients, which account for 89 % of total accounts receivable.
Issued Letters of Credit outstanding at December 2006 totaled $142 thousand ($122 thousand USD).
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.
OUTLOOK
Garneau had a record year in 2006 with revenue exceeding $57 million. Results in 2006 were positively impacted by the completion of the Access project together with an increase in manufacturing activity experienced throughout the year. Small diameter coating price increases were implemented in January 2006 to help offset increased material and operating costs and partially restore coating margins.
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 received a $3.5 million order for coating plant equipment in July 2006 to be shipped and commissioned in the United States. This order was near completion by year end with shipment and commissioning in progress in January of 2007. A further equipment order from ShawCor in excess of $1 million has been received for completion in the second quarter of 2007.
Although 2006 drilling activity exceeded 23,400 wells, a softening of commodity prices and activity was experienced in the third and fourth quarters which resulted in decreased coating activity. This noticeable correction has continued into the first quarter of 2007 with both coating and manufacturing activity being curtailed significantly. Load out activity has continued in excess of incoming bare pipe in the first quarter of 2007, reducing client coated inventory in stock. Although our clients project this curtailed activity to represent a short term market correction, steps are being taken by management to reduce infrastructure costs accordingly.
The second small diameter coating line in Camrose operated near capacity throughout the first quarter of 2006 with continued usage during 2006. This second line enables 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. The successful completion of the ACCESS project will assist the corporation in future large diameter marketing efforts.
Management is of the opinion that achieving controlled growth 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. Activity was suspended during ShawCor negotiations in 2006; however, the venture is working towards bringing cold weather application to the coating process and will resume activity in 2007. If proven successful, this 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.
Implementing a new strategic plan with new strategic initiatives during fiscal 2007 will be a primary focus of the Corporation, in addition to management controlling infrastructure costs, during this market slowdown.
Edmonton, Canada
March 30, 2007
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 is responsible for the development and maintenance of systems of internal accounting controls and management practices designed to provide reasonable assurance that the financial information is relevant, reliable and accurate. In addition, management is responsible for programs of proper business conduct and risk management 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 30, 2007
AUDITORS' REPORT TO THE SHAREHOLDERS OF GARNEAU INC.
We have audited the consolidated balance sheets of Garneau Inc. as at December 31, 2006 and 2005 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 misstatement. 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, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
(signed)
KPMG LLP
Chartered Accountants
Edmonton, Canada
March 30, 2007
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
(In thousands) at at
December 31, December 31,
2006 2005
-------------------------------------------------------------------------
Assets
Current Assets:
Accounts receivable $ 14,293 $ 12,855
Unbilled revenue 1,162 1,699
Inventory (note 12) 3,067 3,172
Prepaid expenses and deposits 16 28
18,538 17,754
Other assets 56 -
Property, plant and equipment (note 3) 20,977 20,387
-------------------------------------------------------------------------
$ 39,571 $ 38,141
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities:
Operating loan (note 2) $ 5,224 $ 5,316
Accounts payable and accrued liabilities 7,207 6,256
Billings in excess of costs incurred and
estimated earnings on uncompleted contracts 204 306
Customer deposits 112 72
Loans payable (note 4(a)) 4,918 5,761
Current portion of capital lease obligations 343 372
-------------------------------------------------------------------------
18,008 18,083
Capital lease obligations (note 4(b)) 241 535
Future income taxes (note 7) 606 128
-------------------------------------------------------------------------
18,855 18,746
-------------------------------------------------------------------------
Shareholders' Equity:
Share capital (note 5) 21,401 20,901
Contributed surplus (note 5 (e)) 99 225
Deficit (784) (1,731)
-------------------------------------------------------------------------
Commitments and contingencies (notes 2 and 6) 20,716 19,395
-------------------------------------------------------------------------
$ 39,571 $ 38,141
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
On behalf of the Board:
(signed) (signed)
Dan Motyka John Carruthers
Director Director
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
-------------------------------------------------------------------------
(In thousands except per share data) Year Ended Year Ended
December 31, December 31,
2006 2005
-------------------------------------------------------------------------
Revenue $ 57,042 $ 48,365
Operating costs 46,227 39,543
-------------------------------------------------------------------------
10,815 8,822
-------------------------------------------------------------------------
Other operating expenses (income):
Selling, general and administrative 5,918 4,443
Amortization 2,012 1,883
Research and development 96 292
Bad debts 78 -
Foreign exchange losses (gains) (7) 27
Write-down of property, plant and equipment - 113
Gain on disposal of property, plant and
equipment (100) (8)
-------------------------------------------------------------------------
7,997 6,750
-------------------------------------------------------------------------
2,818 2,072
Financing:
Interest on operating loan 244 159
Interest on loans payable 368 341
Other (4) (12)
Other expenses (income), net (note 11) 785 (165)
-------------------------------------------------------------------------
Earnings before income taxes 1,425 1,749
-------------------------------------------------------------------------
Income taxes (note 7):
Future 478 128
-------------------------------------------------------------------------
478 128
Net earnings 947 1,621
-------------------------------------------------------------------------
Deficit, beginning of year (1,731) (3,352)
-------------------------------------------------------------------------
Deficit, end of year $ (784) $ (1,731)
-------------------------------------------------------------------------
Earnings per share:
Basic $ 0.08 $ 0.14
Diluted $ 0.08 $ 0.14
Weighted average common shares:
Basic 11,788,102 11,480,350
Diluted 12,065,424 11,718,850
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
(In thousands) Year Ended Year Ended
December 31, December 31,
2006 2005
-------------------------------------------------------------------------
Cash provided by (used in):
Operations (note 10):
Net earnings $ 947 $ 1,621
Items not involving cash:
Amortization 2,012 1,883
Stock-based compensation expense
(note 5 (c)) 74 10
Gain on disposal of property, plant
and equipment (100) (8)
Write-down of property, plant and
equipment - 113
Future income taxes 478 128
-------------------------------------------------------------------------
3,411 3,747
Changes in non-cash operating working capital 105 (3,727)
-------------------------------------------------------------------------
3,516 20
-------------------------------------------------------------------------
Financing:
Proceeds from exercise of share purchase
options 300 67
Increase (decrease) in operating loan (92) 2,547
Repayment of loans payable (1,783) (1,204)
Advances under loans payable 940 769
Repayment of capital lease (323) (255)
-------------------------------------------------------------------------
(958) 1,924
Investments:
Other assets (56) -
Proceeds from disposal of property, plant
and equipment 140 17
Additions to property, plant and equipment (2,642) (1,961)
-------------------------------------------------------------------------
(2,558) (1,944)
-------------------------------------------------------------------------
Change in cash - -
Cash, beginning of year - -
-------------------------------------------------------------------------
Cash, end of year $ - $ -
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
Garneau Inc. (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 per 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.
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. Significant items subject to such estimates and
assumptions include the estimated useful life and carrying amount of
property, plant and equipment, valuation of accounts receivable and
inventory, the assessment of the percentage of completion on lump-sum
contracts (including estimated costs and provision for estimated losses).
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 when products are shipped and
the customer takes ownership and assumes risk of loss, collection is
probable, persuasive evidence of an arrangement exists and the sales
price is fixed and determinable.
Revenue related to the coating of pipe is recognized as the services are
provided and the collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists and the sales price is fixed
and determinable.
The Corporation performs the majority of its equipment fabrication
activities under lump-sum contracts. Revenue on lump-sum contracts is
recognized using the percentage-of-completion method, measured by the
ratio of costs incurred to date to estimated total costs. Excluded from
costs incurred to date, particularly in the early stages of the contract,
are the costs of items that do not relate to performance of our
contracted work. Contract project costs include all direct labour,
material, subcontract, and equipment costs and those indirect costs
related to contract performance such as indirect labour, supplies, and
tools. General and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Changes in
project performance, project conditions, and estimated profitability,
including those arising from contract penalty provisions and final
contract settlements, may result in revisions to costs and income that
are recognized in the period in which such adjustments are determined.
Revenue from contract change orders, which occurred in most large
projects, is recognized when the owner has agreed to the change order in
writing. The asset entitled "unbilled revenue" represents revenue
recognized in advance of amounts invoiced. The liability entitled
"billing in excess of costs incurred and estimated earnings on
uncompleted contracts" represents amounts invoiced in excess of revenue
recognized.
(d) Inventory:
Raw materials are stated at the lower of cost, on a first-in, first-out
basis, and replacement cost. Finished goods and work-in-progress are
valued at the lower of cost, on a first-in, first-out basis, 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:
The Corporation has a stock-based compensation plan, which is described
in note 5(c). Since January 1, 2002, the Corporation accounts for all
stock-based compensation expense for stock options 5(c) granted to
employees, officers and directors in accordance with the fair value based
method of accounting. Under the fair value method, compensation cost is
measured at fair value on the grant date using the Black-Scholes model
and stock based compensation expense is recorded over the vesting period
of the option, with a corresponding increase in contributed surplus. When
the options are exercised, the proceeds received by the Corporation along
with the amount in contributed surplus associated with the exercised
options, will be credited to share capital.
(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 5%
Machinery, equipment and extrusion plant 6.25% - 33%
Rental equipment 12.5%
-------------------------------------------------------------------------
Equipment under capital lease is amortized using the same rates as
similar owned assets.
(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:
Long-lived assets, including property, plant and equipment are reviewed
for impairment whenever events or changes in circumstances may indicate
or cause their 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.
(j) Earnings per Share:
Basic earnings (loss) per share are computed by dividing net earnings
(loss) available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted per share amounts
are calculated using the treasury stock method. The treasury stock method
increases the diluted weighted average shares outstanding to include
additional shares from the assumed exercise of stock options, if
dilutive. The number of additional shares is calculated by assuming that
outstanding in-the-money stock options were exercised and the proceeds
from such exercises including any unamortized stock-based compensation
cost, were used to acquire shares of common stock at the average market
price during the year.
2. OPERATING LOAN
At December 31, 2006, 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. Issued letters of credit outstanding at December 2006 totaled
$142 thousand ($122 thousand USD).
3. PROPERTY, PLANT AND EQUIPMENT
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2006
-------------------------------------------------------------------------
Accumulated Net book
Cost amortization value
-------------------------------------------------------------------------
Land and land improvements $ 4,704 $ 1,821 $ 2,883
Buildings 6,058 2,061 3,997
Machinery, equipment and extrusion plant 26,602 13,897 12,705
Leasehold improvements 264 264 -
Rental equipment 353 342 11
Equipment under construction 172 - 172
-------------------------------------------------------------------------
38,153 18,385 19,768
Equipment under capital lease 1,660 451 1,209
-------------------------------------------------------------------------
$ 39,813 $ 18,836 $ 20,977
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2005
-------------------------------------------------------------------------
Accumulated Net book
Cost amortization value
-------------------------------------------------------------------------
Land and land improvements $ 4,567 $ 1,666 $ 2,901
Buildings 5,944 1,769 4,175
Machinery, equipment and extrusion plant 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
-------------------------------------------------------------------------
Equipment under construction is not amortized until it has been placed
into service.
4. (a) LOANS PAYABLE
---------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------
1. Demand evergreen bank loan, payable $ 2,814 $ 2,914
in monthly principal installments
of $101. Interest is charged at the
rate of bank prime plus 0.875%,
secured as described in note 2.
2. Demand bank loan, payable in monthly 2,104 2,497
principal installments of $34.
Interest is charged at the rate of
bank prime plus 0.875%, secured as
described in note 2.
3. Vendor back mortgage. Interest is
charged at 6%. - 350
---------------------------------------------------------------------
$ 4,918 $ 5,761
---------------------------------------------------------------------
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:
2007 $ 1,556
----------
Total scheduled repayments within 12 months $ 1,556
----------
2008 1,087
2009 696
2010 540
2011 372
And subsequent years 667
----------
Total scheduled repayments beyond 12 months $ 3,362
----------
4. (b) CAPITAL LEASE OBLIGATIONS
The Corporation has financed certain equipment by entering into
capital leasing arrangements. Capital lease repayments are due as
follows:
---------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------
2006 $ - $ 416
2007 368 318
2008 132 132
2009 121 121
---------------------------------------------------------------------
Total minimum lease payments 621 987
Less amount representing interest at rates
ranging from 6% to 8% 37 80
---------------------------------------------------------------------
Present value of capital lease payments 584 907
Current portion of capital lease obligations 343 372
---------------------------------------------------------------------
$ 241 $ 535
---------------------------------------------------------------------
5. SHARE CAPITAL
(a) Authorized:
Unlimited number of common shares.
(b) Issued:
---------------------------------------------------------------------
Number of shares $ Value
---------------------------------------------------------------------
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
--------------------------------
Issued for cash during 2006 on
exercise of options 486,275 300
--------------------------------
Transfer from contributed surplus
for stock options exercised - 200
--------------------------------
Common shares outstanding at
December 31, 2006 12,048,517 $21,401
(c) Stock-Based Compensation Plan:
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. The Board of Directors, at their
discretion, determines the vesting period at the time issuance. Stock
options may be exercisable, subject to the provisions of the plan
requiring acceleration of rights of exercise, until such date as may
be determined from time to time by the Board of Directors provided
that no stock option will be exercised more than 5 years from the
date of grant.
The continuity of the Corporation's outstanding and exercisable stock
options of the year ended December 31, 2006 and 2005 is as follows:
2006 2005
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------------------------------------------------------------
Outstanding at
beginning of
year 927,175 $0.72 984,375 $0.67
Granted 706,500 $1.48 79,000 $1.10
Exercised (486,275) $0.62 (116,950) $0.57
Encashed (200,000) $0.90 - -
Cancelled (26,850) $0.96 (19,250) $0.61
---------------------------------------------------------------------
Outstanding at
end of year 920,550 $1.31 927,175 $0.72
---------------------------------------------------------------------
Options
exercisable at
end of year 214,050 $0.74 789,800 $0.72
The following options are outstanding as of December 31, 2006:
---------------------------------------------------------------------
Number of Shares Exercise
Price
Granted Vested Expiry date per Share
---------------------------------------------------------------------
88,800 88,800 September 18, 2007 $ 0.61
65,150 65,150 January 30, 2008 $ 0.60
12,200 12,200 September 28, 2009 $ 1.00
47,900 47,900 September 9, 2010 $ 1.10
706,500 - November 10, 2011 $ 1.48
---------------------------------------------------------------------
920,550 214,050
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 2006 2005
---- ----
Expected dividends NIL NIL
Risk-free interest rate 3.91% 2.75%
Expected life 3 yrs 5 yrs
Expected volatility 60% 50%
Total stock based compensation expense for the year ended December 2006
totaled $74 (2005-$10). In 2006, the Corporation granted 706,500 options
to purchase common shares at an average price of $1.48 under the
Corporation's stock-option plan and the weighted average fair value of
each option was determined to be $0.65.
(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, 2006, 43 employees were participating under the Plan.
Employee and Corporation contributions for 2006 totaled $67 and were used
to purchase 39,577 common shares of the Corporation on the open market.
(e) Contributed Surplus
A summary of the status of the Corporation's contributed surplus account
as of December 31, 2006 and 2005, and changes during the year ended, on
those dates is presented below:
Year Ended 2006 2005
---- ----
Contributed surplus at beginning of the year $225 $215
Stock-based compensation expense 74 10
Stock options exercised (200) -
-------------------------------------------------------------------------
Contributed surplus at the end of year $99 $225
-------------------------------------------------------------------------
6. COMMITMENTS AND CONTINGENCIES
The Corporation is committed to operating lease payments for
premises, automobiles, mobile and office equipment in the following
approximate amounts:
2007 $ 283
2008 189
2009 139
2010 53
2011 52
The Corporation has been named defendant in a lawsuit and has
received claims in the aggregate amount of $1.5 million. In the
opinion of management, this matter is without substantial merit and
no provision has been made for the claim in the accounts.
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% (2005-33.6%) to income before income taxes. The reasons
for the differences are as follows:
---------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------
Expected income taxes (recovery) at
statutory rates $ 457 $ 588
Increase (decrease) resulting from:
Other amounts 9 65
Change in valuation allowance 12 (525)
---------------------------
$ 478 $ 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:
---------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------
Future tax assets:
Losses carried forward $ 1,051 $ 1,588
Other 224 261
---------------------------------------------------------------------
1,275 1,849
Less valuation allowance (155) (143)
---------------------------------------------------------------------
1,120 1,706
Future tax liabilities:
Property, plant and equipment - excess
of net book value over undepreciated
capital cost 1,726 1,834
---------------------------------------------------------------------
1,726 1,834
---------------------------------------------------------------------
Net future tax liability $ 606 $ 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. The Corporation has not hedged its
exposure to these items.
(b) Concentrations of credit risk:
Reflective of normal business, substantially all the
Corporation's accounts receivable are with companies in the oil
and gas industry in Western Canada and with two international
customers. The Corporation regularly monitors the activity and
balances in these accounts to manage its credit risk. The
Corporation's 13 largest customers accounted for 89% of accounts
receivable outstanding at December 31, 2006.
(c) Fair value:
The fair values of the loans payable, capital lease obligations
and letters of guarantee and credit are not significantly
different from their carrying values. The fair value of all other
financial instruments approximates their carrying values due to
the short periods to maturity.
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, 2006 December 31, 2005
Manufacturing Pipeline Manufacturing Pipeline
Revenue $ 18,760 $ 38,282 $ 16,785 $ 31,580
Gross margin 4,747 6,068 4,425 4,397
25.3% 15.9% 26.4% 13.9%
Other expenses
and income
before income
taxes 2,766 6,626 2,168 4,905
Earnings (loss)
before income
taxes 1,981 (556) 2,257 (508)
Property, plant
and equipment 2,151 37,662 2,172 35,478
Accumulated
amortization (1,555) (17,281) (1,937) (15,326)
Net book value 596 20,381 235 20,152
Two customers accounted for 14.0% and 13.4% of consolidated revenues
respectively. Export sales, primarily from sale of pipe coating and
handling equipment, totaled $3.4 million (2005-$4.4 million).
Gross margin is determined by deducting operating costs from revenue.
Operating costs consist of all direct material, labor and plant
overhead costs.
10. SUPPLEMENTARY CASH FLOW INFORMATION
Year Ended 2006 2005
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Interest paid $ 612 $ 500
Income taxes paid - -
Property, plant and equipment in the amount of Nil (2005-$450) were
acquired by way of capital lease during of the year ended
December 31, 2006.
11. PLAN OF ARRANGEMENT
The Corporation announced on October 5, 2006 that the Plan of
Arrangement agreement dated April 19, 2006 with ShawCor Ltd.
("ShawCor") was terminated. As a result, the proposed acquisition of
Garneau Inc. shares by ShawCor did not proceed.
The decision not to proceed was based on the inability of the parties
to resolve outstanding issues raised by the Competition Bureau,
Canada and the prospect of further delays.
Other expenses include costs pertaining to this terminated ShawCor
transaction totaling $1.1 million for the year ended December 31,
2006.
12. INVENTORY
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Inventory consists of the following: 2006 2005
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Raw materials $ 1,986 $ 2,162
Finished goods 1,081 886
Work-in-progress - 124
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$ 3,067 $ 3,172
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13. COMPARATIVE FIGURES
Certain of the Comparative figures have been reclassified to conform
with the current year's presentation.
DIRECTORS
Glen Garneau
President and Chief Executive Officer
John W. Carruthers(1),(2),(3)
Vice-President, Gas Services, Enbridge Inc.
Daniel D. Laplante(1),(2),(3)
Corporate Director, Okotoks, AB
Daniel R. Motyka(1),(2),(3)
Vice-President, Designer Emeritus, Questor Technology Inc.
Chris Garneau
President, CMG Design Inc.
OFFICERS
Glen Garneau
President and Chief Executive Officer
Frank Deys, CMA
Executive Vice President and Chief Financial Officer
Jay P. Reid
Corporate Secretary (1) Member of Audit Committee
(2) Member of Compensation Committee
(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
KPMG 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@garneau-inc.com
Edmonton, Alberta Head Office
INVESTOR RELATIONS
darlenek@garneau-inc.com
STOCK EXCHANGE SYMBOL NOTICE OF ANNUAL AND SPECIAL
MEETING OF SHAREHOLDERS
TSX GAR Tuesday, May 29, 2007
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.
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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