CALGARY, May 11 /CNW/ -
Corporate Highlights
- Domestic Manufacturing Revenue increased during Q1.
- $2.5 Million Domestic Order received for fabrication during Q1/Q2.
<<
Three months ended
Summary of Results Mar. 31, Mar. 31,
(In thousands, except per share data) 2005 2004
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Revenues $ 12,484 $ 11,748
Margin 2,802 3,209
Margin % 22.4% 27.3%
Operating income 1,071 1,545
Earnings before income taxes 1,001 1,455
Net earnings 1,001 1,248
Earnings per share - basic 0.09 0.11
Earning per share - diluted 0.08 0.10
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 world wide economic conditions that may cause actual results
to differ materially.
This analysis should be read in conjunction with the interim financial
statements and Annual Management Discussion and Analysis.
MANAGEMENT DISCUSSION & ANALYSIS
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Financial
March 31, 2005 first quarter revenue totaled $12.5 million which was a
6.3% increase over $11.7 million recorded for the comparative quarter ended
March 31, 2004, a direct result of increased domestic manufacturing activity.
Manufacturing revenues for the quarter ended March 31, 2005 totaled
$3.6 million, an increase of $1.6 million from the quarter ended March 31,
2004. Increased domestic manufacturing activity contributed significantly to
the increased revenues recorded for the period ended March 31, 2005.
Pipeline revenues for the quarter ended March 31, 2005, totaled
$8.9 million, a decrease of $0.9 million from the quarter ended March 31, 2004
as small diameter coating activity decreased during the current quarter.
Margin for the quarter ended March 31, 2005 of $2.8 million is 8.8% below
the $3.2 million recorded for the comparative period. The margin decrease is
directly attributed to decreased revenue generated from small diameter
coatings during the first quarter.
Manufacturing margins of $805 thousand (22.7%) for the quarter ended
March 31, 2005 were $455 thousand above the $350 thousand (17.9%) recorded for
the period ended March 31, 2004. The improvement in margins is directly
attributed to increased contract revenue being generated in 2005 together with
improved efficiencies within the fabrication facility.
Pipeline margins of $2.0 million (22.4%) for the quarter ended March 31,
2005 are $0.9 million below the comparative period ended March 31, 2004.
Decreased small diameter revenue generated during the first quarter of 2005
caused the lower margins in the Pipeline division.
The Corporation's selling, general and administrative expenses totaled
$1,058 thousand for the three month period ended March 31, 2005, an increase
of $96 thousand from the $962 thousand recorded at March 31, 2004. Increased
wages and international travel expenses were incurred during the first quarter
of 2005 as the Corporation expands efforts further in pursuing international
project opportunities.
Amortization expense for the period ended March 31, 2005 totaled $586
thousand, a decrease of $87 thousand over the $673 thousand recorded for the
comparative period ended March 31, 2004, a direct result of reduced plant
usage on small diameter coating volumes experienced during the first quarter.
Operating cash flow, representing net earnings adjusted for items not
involving cash, generated by the Corporation for the period ended March 31,
2005 totaled $1.7 million, compared to the $2.1 million generated for the
comparative period, a decrease attributed to decreased margins from lower
pipeline revenue generated in the first quarter of 2005.
Interest costs of $123 thousand for the period ended March 31, 2005 were
below the $161 thousand recorded for the period ended March 31, 2004. Interest
costs decreased during the first quarter as usage of operating facilities and
loans to finance working capital requirements reduced.
The Corporation wrote down capitalized software costs totalling $70k for
the period ended March 31, 2005.
The decrease in coating gross margin together with the write down of
software costs resulted in net earnings of $1.0 million for the three month
period ended March 31, 2005, which is below to the $1.3 million net earnings
reflected in the comparative period ended March 31, 2004.
Net earnings before tax for the Manufacturing division for the period
ended March 31, 2005 totaled $309 thousand as compared to the (-$7) thousand
net loss for the comparative period. The improvement reflects the increased
revenue and gross margin generated in 2005.
Net earnings before tax for the Pipeline division totaled $0.7 million
for the period ended March 31, 2005, a decrease of $0.8 million over the
$1.5 million generated for the comparative period. This decrease is primarily
attributed to the decreased revenue and margins generated from small diameter
coating products together with increased operational costs experienced during
the first quarter.
Accounts Receivable total $12.7 million at March 31, 2005, an increase
over the $8.7 million recorded at December 31, 2004, and is attributed to
receivables carried on domestic coating revenue, domestic manufacturing
revenues and for the international contracts.
At March 31, 2005, operating and term loan credit facilities available to
the Corporation included a demand revolving operating line of credit of
$6.3 million ($6.2 million utilized), a demand revolving evergreen loan of
$3.0 million ($2.8 million utilized), a loan facility for $0.7 million
pertaining to the manufacture of polyethylene pipe and term loans in the
amount of $3.1 million.
Additions to capital equipment were $362 thousand for the quarter end
March 31, 2005, compared to $411 thousand for the period ended March 31, 2004.
Capital expenditures for 2005 were primarily related to additional
fabrication, mobile and coating equipment betterments required during the
first quarter of 2005 together with software costs expended during this
period.
The Corporation's bank working capital covenants have been adjusted to
remove principal payments due after 12 months from the working capital
covenant calculation. Working capital of (-$0.5) million is recorded at
March 31, 2005. Adjusted working capital totals $3.9 million, and is
calculated by deducting $4.4 million of loans payable, scheduled to be repaid
after 12 months. The Corporation operated within all bank covenants at
March 31, 2005.
Selected Quarterly Information
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Three Months Ended
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Mar. Dec. Sept. June Mar. Dec. Sept. June
31/05 31/04 30/04 30/04 31/04 31/03 30/03 30/03
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Total
Revenues $12,484 $ 9,429 $ 7,127 $ 4,303 $11,748 $11,326 $ 7,793 $13,305
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Net
Earnings
(Losses) 1,071 (152) 181 (1,685) 1,248 1,529 (308) (1,119)
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Basic
Earnings
(Loss)
per
Share 0.09 (0.01) 0.02 (0.15) 0.11 0.14 (0.03) (0.10)
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Diluted
Earnings
per
Share 0.08 (0.01) 0.02 (0.15) 0.10 0.13 (0.03) (0.10)
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Total
Assets 35,590 31,427 30,313 28,893 36,640 37,121 35,009 37,419
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Long
Term
Capital
Lease
Obli-
gations 431 489 546 602 657 712 685 785
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The seasonality of the pipe coating business results in wide quarterly
fluctuations in revenue generated by the Corporation and net earnings (losses)
therefrom. The second quarter ended June 30 is historically the slowest period
for the Corporation with the March 31 quarter the most active.
Share Information
Outstanding options issued by the Corporation totaled 973,775 at
March 31, 2005, 850,150 of which are exercisable. During the first quarter of
2005, 10,600 options were exercised at an average price of $0.61 per share.
The 10,600 issued shares increased total common shares outstanding to a total
of 11,455,902 at March 31, 2005.
New Accounting Policies
There have been no new accounting policies adopted by the Corporation
this quarter.
Critical Accounting Estimates
The Corporation recognizes revenues related to equipment fabrication
contracts based on the percentage of completion of the individual contracts.
At March 31, 2005, significant fabrication contracts in progress include
domestic orders for oilfield tanks totaling $1.0 million and a coating oven
for $0.1 million.
The Corporation provides an estimate 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.
Disclosure of Contractual Obligations
At March 31, 2005, there were no significant changes to the contractual
obligations required to be made by the Corporation which were outlined in the
December 31, 2004 annual report.
Business Risks
At March 31, 2005, there are no significant changes to the business risks
outlined in the Garneau annual report for December 31, 2004. Receivables
outstanding in United States dollars at March 31, 2005 total approximately
$0.4 million and remain subject to foreign exchange fluctuations.
Letters of Credit issued and outstanding at March 31, 2005 total
$365 thousand and will continue to have the potential risk of being encashed
until maturity.
Operational
Small diameter coating activity for the first quarter of 2005 was below
activity recorded in 2004, resulting in underutilized facilities and
inefficiencies within the Camrose plant. Garneau's second small diameter line
was fully operational during the first quarter of 2005, with line speeds
improving to levels similar to those recorded by our established main coating
line.
Domestic manufacturing activity continued throughout the first quarter at
a brisk rate with two shifts continuing to operate in Nisku. These two
fabrication shifts are expected to continue throughout the second quarter of
2005.
Outlook
Garneau's coating activity in the first quarter of 2005 decreased from
2004. The Corporation has entered the historically slow second quarter of
coating operations with activity projected to remain slow during this period.
However, based on drilling forecasts exceeding 20,000 wells for 2005, small
diameter coating revenue for the remainder of 2005 is projected to be active.
Although no new contracts were received during the first quarter,
international equipment bidding remains active with several projects being
pursued by our marketing department. The Corporation has increased marketing
efforts internationally to pursue further inroads in coating equipment
opportunities worldwide.
Garneau's distribution of High Density Polyethylene Pipe is projected to
increase over the next nine months as shallow well drilling activity is
projected to remain active.
Domestic manufacturing remains very active with the Nisku fabrication
facility expected to operate near capacity for the entire second quarter.
The $2.5 million BOS Rentals order is projected to be completed during
the second quarter with additional fabrication work also underway.
Garneau continued to operate within all bank covenants during the first
quarter as established by the Corporation's bank.
Senior management remain focused on improving shareholders return and
based on projected domestic drilling activity forecasted for 2005, forecasted
financial results for 2005 remain positive.
On behalf of the Board of Directors
"signed"
Glen Garneau,
President and Chief Executive Officer
May 5, 2005
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
As at 2005 2004
(in thousands) (unaudited)
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ASSETS
Current Assets:
Accounts receivable $ 12,646 $ 8,722
Inventory 3,143 2,679
Prepaid expenses and deposits 114 45
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15,903 11,446
Property, plant and equipment 19,687 19,981
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$ 35,590 $ 31,427
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Operating loan $ 6,160 $ 2,769
Accounts payable and accrued liabilities 3,534 3,838
Deferred revenue 647 215
Loans payable 5,885 6,196
Current portion of capital lease obligations 226 223
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16,452 13,241
Capital lease obligations 431 489
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16,883 13,730
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Shareholders' Equity:
Share capital 20,841 20,834
Contributed surplus 217 215
Deficit (2,351) (3,352)
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18,707 17,697
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$ 35,590 $ 31,427
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CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT
Three Three
months months
ended ended
March 31, March 31,
(In thousands, except per share data, unaudited) 2005 2004
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Revenue $ 12,484 $ 11,748
Operating costs 9,682 8,539
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2,802 3,209
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Other operating expenses:
Selling, general and administrative 1,058 962
Amortization 586 673
Research and development 87 29
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1,731 1,664
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Operating income 1,071 1,545
Financing:
Interest on loans payable 86 115
Interest on operating loan 37 46
Write down of Property, Plant and Equipment 70 -
Other income (81) (43)
Foreign exchange gains (42) (28)
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Earnings before income taxes 1,001 1,455
Income taxes:
Future - 207
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- 207
Net earnings 1,001 1,248
Deficit, beginning of period (3,352) (2,944)
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Deficit, end of period $ (2,351) $ (1,696)
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Earnings per share:
Basic $ 0.09 $ 0.11
Diluted $ 0.08 $ 0.10
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Three
months months
ended ended
March 31, March 31,
(In thousands, unaudited) 2005 2004
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Cash provided by (used in):
Operations:
Net earnings $ 1,071 $ 1,248
Items not involving cash:
Amortization 586 673
Stock based compensation costs 2 4
Write down of Property, Plant and Equipment 70 -
Future income taxes - 207
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1,659 2,132
Changes in non-cash operating working capital (4,329) (2,662)
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(2,670) (530)
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Financing:
Proceeds from exercise of share purchase options 7 19
Repayment of loans payable and capital
lease obligations (366) (348)
Increase (decrease) in operating loans 3,391 (144)
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3,032 (473)
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Investments:
Additions to property, plant and equipment (362) (411)
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(362) (411)
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Decrease in cash - (1,414)
Cash, beginning of period - 1,414
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Cash, end of period $ - $ -
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NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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. The
company is subject to seasonal fluctuations in operating results.
1. Significant Accounting Policies:
These unaudited consolidated interim financial statements follow the same
accounting policies and methods of application as the most recent annual
consolidated financial statements. Notes to the consolidated interim
financial statements for the period ended March 31, 2005 do not include
all disclosures required by Canadian Generally Accepted Accounting
Principles for annual financial statements. For further detailed
information, the reader is advised to refer to Garneau Inc.'s 2004
audited financial statements.
2. Segment Disclosures
Management has determined that the Corporation operates in two reportable
business segments which are Manufacturing and Pipeline.
Three months ended Three months ended
March 31, 2005 March 31, 2004
Manufacturing Pipeline Manufacturing Pipeline
Revenue $3,551 $8,933 $1,954 $9,794
Gross margin 805 (22.7%) 1,997 (22.4%) 350 (17.9%) 2,859 (29.2%)
Other expenses 496 1,305 357 1,397
Earnings (loss)
before income
taxes 309 692 (7) 1,462
Substantially all of the carrying value of the property, plant and
equipment, and amortization expense relate to the Pipeline segment.
3. Share Data
At March 31, 2005, the Corporation had 11,455,902 outstanding common
shares and 973,775 outstanding options to acquire common shares. 850,150
of these options were vested and exercisable. During the quarter, 10,600
options were exercised for cash proceeds of $7.
4. Loans Payable
Loans payable to the Corporation's bank are payable upon demand and are
classified as a current liability. Scheduled repayments are as follows:
March 31, December 31,
2005 2004
Due within 12 months $ 1,467 $ 1,468
Due after 12 months $ 4,418 $ 4,728
5. Interest
Three Months Ended
March 31, March 31,
2005 2004
Interest Paid 123 161
About Garneau Inc.
------------------
Garneau Inc.'s primary business is the application of high performance
protective coatings and linings for oil and gas pipeline protection and
additionally 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/
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%SEDAR: 00008952E
