NISKU, AB, May 15 /CNW/ -
Corporate Highlights
- Garneau announces plan of arrangement agreement with ShawCor dated
April 19, 2006.
- Record high revenue achieved for Corporation in the first quarter.
- $5.3 million in large project Domestic Orders received for fabrication
in the first quarter of 2006.
<<
Summary of Results Three months ended
(In thousands, except per share data) March 31, March 31,
(Unaudited) 2006 2005
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Revenue $ 18,810 $ 12,484
Margin 3,882 2,802
Margin % 20.6% 22.4%
Earnings before income taxes 1,870 1,107
Net earnings 1,130 1,107
Earnings per share - basic 0.10 0.10
Earning per share - diluted 0.09 0.09
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 unaudited interim
consolidated financial statements of the Corporation for the three months
ended March 31, 2006 and 2005 and in conjunction with the audited consolidated
financial statements and Annual Management Discussion and Analysis for the
year ended December 31, 2005.
MANAGEMENT DISCUSSION & ANALYSIS
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Financial
March 31, 2006 first quarter revenue totaled $18.8 million which was a
50.4% increase over $12.5 million recorded for the comparative quarter ended
March 31, 2005, a direct result of increased Camrose coating activity.
Manufacturing revenues for the quarter ended March 31, 2006 totaled
$3.7 million, an increase of $0.1 million from the quarter ended March 31,
2005. Manufacturing activity continued to operate near capacity during the
first quarter of 2006.
Pipeline revenues for the quarter ended March 31, 2006, totaled
$15.1 million, an increase of $6.2 million from the quarter ended March 31,
2005 as small diameter coating activity increased substantially during the
first quarter with production on the ACCESS project continuing into the second
quarter.
Margin for the quarter ended March 31, 2006 of $3.9 million is
$1.1 million above the $2.8 million recorded for the comparative period. The
margin increase is directly attributed to increased revenue generated from
small diameter coatings and the ACCESS project during the first quarter
together with increased margin percentages reflected in manufacturing revenue.
Manufacturing margins of $1.2 million (31.9%) for the quarter ended
March 31, 2006 were $0.4 million above the $0.8 million (22.7%) recorded for
the period ended March 31, 2005. The improvement in margins is directly
attributed to repetitive larger contract work being generated in 2006 together
with improved efficiencies within the fabrication facility.
Pipeline gross margins of $2.7 million (17.9%) for the quarter ended
March 31, 2006 are $0.7 million above the comparative period ended March 31,
2005. Increased small diameter revenue generated during the first quarter of
2006 resulted in increased overall gross margins in the Pipeline division.
Gross margin percentages of Pipeline operations decreased from 22.4% for the
period ended March 31, 2005 to 17.9% for the period ended March 31, 2006. This
decrease is primarily attributed to increased labor and material costs
incurred at the Camrose facility together with plant inefficiencies caused by
stringent client delivery requirements.
The Corporation's selling, general and administrative expenses totaled
$1.1 million for the three month period ended March 31, 2006, an increase of
$66 thousand from the expenses recorded at March 31, 2005. Increased wages and
increased professional services were incurred during the first quarter of
2006.
Amortization expense for the period ended March 31, 2006 remained
relatively unchanged and totaled $494 thousand, an increase of $14 thousand
over the $480 thousand recorded for the comparative period ended March 31,
2005.
Funds from operations, representing net earnings adjusted for items not
involving cash, generated by the Corporation for the period ended March 31,
2006 totaled $2.4 million, compared to the $1.7 million generated for the
comparative period, an increase attributed to increased pipeline revenue
generated in the first quarter of 2006.
Interest costs on the operating loan and the loan payable of
$147 thousand for the period ended March 31, 2006 were above the $123 thousand
recorded for the period ended March 31, 2005. Interest costs increased during
the first quarter as usage of operating facilities and loans to finance
working capital requirements increased as a result of the substantial increase
in activity generated in the first quarter.
The increase in coating revenue and gross margin therefrom, together with
increased manufacturing margins resulted in net earnings of $1.1 million for
the three month period ended March 31, 2006, which is in line with the
$1.1 million net earnings reflected in the comparative period ended March 31,
2005. A future income tax provision of $740 was recorded in the first quarter
of 2006 primarily as a result of depreciable capital asset pools used for
accounting purposes exceeding the undepreciated capital cost of the assets.
Net earnings before tax for the Manufacturing division for the period
ended March 31, 2006 totaled $560 thousand as compared to the $309 thousand
for the comparative period. The $251 thousand improvement reflects the
increased gross margin generated in 2006.
Net earnings before tax for the Pipeline division totaled $1.3 million
for the period ended March 31, 2006, an increase of $0.5 million over the
$0.8 million generated for the comparative period. This increase is attributed
to the increased revenue and margins generated from small diameter coating
products together with continuation of the ACCESS project during the first
quarter.
Accounts Receivable totaled $14.9 million at March 31, 2006, an increase
of $0.3 million over the $14.6 million recorded at December 31, 2005, and is
attributed to receivables carried on domestic coating revenue and domestic
manufacturing revenues on increased overall revenue generated.
At March 31, 2006, operating and loan payable credit facilities available
to the Corporation included a demand revolving operating line of credit of
$6.3 million (fully utilized), a demand revolving evergreen loan of
$3.0 million ($2.6 million utilized), a loan lease facility for $0.8 million
pertaining to the manufacture of polyethylene pipe and acquisition of
forklifts and term loans in the amount of $2.4 million. The operating line of
credit continues to fluctuate within authorized limits with peak use occurring
in the first quarter based on increased revenue activity and carrying of
receivables therefrom.
Additions to capital equipment were $451 thousand for the quarter end
March 31, 2006, compared to $362 thousand for the period ended March 31, 2005.
Capital expenditures for 2006 were primarily related to additional
fabrication, mobile and coating equipment betterments required during the
first quarter of 2006.
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 $1.6 million is recorded at March 31,
2006. Adjusted working capital totals $5.1 million, and is calculated by
deducting $3.5 million of loans payable, scheduled to be repaid after
12 months. The Corporation operated within all bank covenants at March 31,
2006.
Selected Quarterly Information
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Three Months Ended (Unaudited)
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Mar.31 Dec.31 Sept.30 June 30 Mar.31 Dec.31 Sept.30 June 30
/06 /05 /05 /05 /05 /04 /04 /04
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Total
Revenues $18,810 $16,472 $11,456 $7,953 $12,484 $9,429 $7,127 $4,303
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Net Earnings
(Loss) 1,130 993 511 (990) 1,107 (152) 181 (1,685)
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Basic
Earnings
(Loss) per
Share 0.10 0.08 0.05 (0.09) 0.10 (0.01) 0.02 (0.15)
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Diluted
Earnings
(Loss) per
Share 0.09 0.08 0.05 (0.09) 0.09 (0.01) 0.02 (0.15)
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Total
Assets 38,635 38,141 33,499 30,372 35,696 31,427 30,313 28,893
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Long Term
Capital
Lease
Obligations 475 535 660 372 431 489 546 602
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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 (loss)
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 856,725 at March
31, 2006, 730,225 of which are exercisable. During the first quarter of 2006,
70,450 options were exercised at an average price of $0.70 per share. The
70,450 issued shares increased total common shares outstanding to a total of
11,632,702 at March 31, 2006. There has been no material change to the
outstanding common shares to the date of this discussion and analysis.
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, 2006, significant fabrication contracts in progress include
domestic orders for oilfield tanks, buildings and catwalks totaling
$1.8 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.
The Corporation also provides estimates pertaining to the valuation of
long-lived assets, valuation of inventory, allowance for doubtful accounts and
other estimates provided in the normal course of business operations.
Disclosure of Contractual Obligations
At March 31, 2006, there were no significant changes to the contractual
obligations required to be made by the Corporation which were outlined in the
Management Discussion and Analysis for the year ended December 31, 2005.
Business Risks
At March 31, 2006, there are no significant changes to the business risks
outlined in the Management Discussion and Analysis for the year ended December
31, 2005.
Letters of Credit issued and outstanding at March 31, 2006 totaled $220
thousand and will continue to have the potential risk of being encashed until
maturity.
Subsequent Event
The Corporation announced on April 20, 2006 that it has entered into a
definitive arrangement agreement whereby ShawCor Ltd. ("ShawCor") will acquire
all of the outstanding common shares of Garneau Inc. ("Garneau").
The transaction will be effected by means of a court approved plan of
arrangement. Under the terms of the arrangement, shareholders of Garneau
(other than ShawCor and certain members of the Garneau family) will receive a
cash payment of $2.20 per share of Garneau. Holders of options to acquire
common shares of Garneau which are not exercised prior to the effective date
of the plan of arrangement will receive a cash payment per share equal to the
difference between $2.20 and the exercise price of the options. Members of the
Garneau family will exchange their common shares of Garneau Inc. for non-
voting preferred shares of Garneau Inc. which preferred shares will be
redeemable after 3 years and retractable after 2 years at a price to be based
on future profitability of certain ShawCor pipecoating operations, subject to
a minimum of $2.20 per share, and bear fixed cumulative dividends of 5% per
annum.
As part of the plan of arrangement, Garneau Inc. will sell its equipment
manufacturing division to Garneau Industries Ltd., a corporation controlled by
Glen Garneau, for a purchase price of $3.0 million. Furthermore, transaction
costs incurred by Garneau Inc. will include severance costs of approximately
$1.9 million, retention and transaction bonuses of approximately $0.8 million
and various professional and miscellaneous fees incurred to complete the
transaction.
The plan of arrangement calls for the acceleration of the vesting period
for all outstanding options to reflect immediate vesting of all outstanding
options as of the closing date of the transaction. The plan of arrangement
includes a provision for a termination fee in the amount of $1.7 million
payable to ShawCor Ltd. in the event that ShawCor Ltd. is not in default of
any material obligations, representations or warranties under the plan of
arrangement and a termination fee event occurs prior to the effective date as
follows:
(a) the Board of Directors withdraws or modifies in a manner
materially adverse to ShawCor its approval or recommendation of
the Arrangement Resolution or makes a public announcement to that
effect;
(b) the Board of Directors recommends any Alternative Transaction or
makes a public announcement to that effect;
(c) Garneau enters into an agreement with respect to an Alternative
Transaction (other than a confidentiality agreement); or
(d) the Board of Directors fails to reaffirm its recommendation of
the Arrangement Resolution by press release within five Business
Days after the public announcement or commencement of any
Alternative Transaction and within a reasonable period of time of
having been requested to do so by ShawCor.
Garneau Inc. established an independent committee of its Board of
Directors to consider the transaction. Completion of the plan of arrangement
is subject to regulatory approval, court approval, the approval of the
shareholders of Garneau Inc. and to other customary conditions. Shareholders
will be asked to approve the transaction at the annual and special meeting of
shareholders of Garneau Inc. scheduled to be held on May 30, 2006. The
transaction will require the approval by holders of two-thirds of the Garneau
Inc. shares and options who vote thereon and by a majority of the minority
shareholders who vote thereon, excluding the votes of shares owned by ShawCor
and by certain members of the Garneau family. Garneau Inc. will mail a
management proxy circular in respect of the meeting to its shareholders in
early May. This circular will contain important information respecting this
transaction.
Garneau Inc. engaged Peters & Co. Limited as its financial advisor to
assist in the negotiations with ShawCor. The independent committee of the
Board of Directors of Garneau Inc. engaged FirstEnergy Capital Corp. to
provide a formal valuation of Garneau Inc. and its equipment manufacturing
division pursuant to Ontario Securities Commission Rule 61-501 and Regulation
Q-27 of the AuthoritDe des marchDes financiers. The valuation concluded that as
of the date indicated in the valuation, subject to the assumptions and
qualifications to be set forth in the circular, the fair market value of the
Garneau common shares was in the range of $2.00 to $2.25 per common share and
the fair market value of the equipment manufacturing business was in the range
of $2,700,000 to $3,100,000. Peters & Co. Limited has provided an opinion that
the proposed transaction is fair, from a financial point of view, to the
shareholders of Garneau Inc. A copy of the valuation and fairness opinion will
be included in the management proxy circular to be mailed to the shareholders
of Garneau Inc.
Operational
Small diameter coating activity for the first quarter of 2006 was well
above activity recorded in 2005, resulting in Camrose facilities being fully
utilized and operating near capacity. Both coating lines were in full
operation with four shifts employed during the course of the first quarter.
Domestic manufacturing activity continued to remain active 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 2006.
Outlook
Garneau's coating activity in the first quarter of 2006 increased from
2005 with an outstanding order book entering into April which would indicate
that the second quarter coating activity could also exceed 2005 actual
results. Completion of the ACCESS project is expected during the second
quarter which will also contribute to projected increased coating revenue in
the second quarter. Drilling forecasts for 2006 exceed 25,000 wells, which
would support corporate projections for small diameter coating revenue for the
remainder of 2006 being active.
No new international contracts were received during the first quarter,
although international equipment bidding remains active with one large project
being closely pursued by our marketing department.
Domestic manufacturing remains very active with the Nisku fabrication
facility expected to operate near capacity for the entire second quarter. Two
new contracts totaling in excess of $5.3 million were announced during the
first quarter with both projects currently underway and expected to be
completed in the fourth quarter.
As noted in the Subsequent event disclosure of the Management Discussion
and Analysis portion of this first quarter report, Garneau issued a press
release on April 20th, 2006 wherein it announced that Garneau has entered into
a definitive arrangement agreement whereby ShawCor Ltd. will acquire all of
the outstanding common shares of Garneau Inc. This transaction is subject to
shareholders approval at the Annual and Special Meeting to be held on May 30,
2006 and also subject to regulatory and court approval. If approved, Garneau
Inc. will become a wholly owned subsidiary of ShawCor Ltd. and delisted from
the Toronto Stock Exchange.
On behalf of the Board of Directors
"signed"
Glen Garneau,
President and Chief Executive Officer
May 9, 2006
CONSOLIDATED BALANCE SHEETS
As at March 31, December 31,
2006 2005
(in thousands) (unaudited)
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ASSETS
Current Assets:
Accounts receivable $ 14,904 $ 14,554
Inventory 3,323 3,172
Prepaid expenses and deposits 64 28
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18,291 17,754
Property, plant and equipment 20,344 20,387
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$ 38,635 $ 38,141
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Operating loan $ 6,263 $ 5,316
Accounts payable and accrued liabilities 4,836 6,256
Deferred revenue 315 378
Loans payable 4,950 5,761
Current portion of capital lease obligations 351 372
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16,715 18,083
Capital lease obligations 475 535
Future income taxes 868 128
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18,058 18,746
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Shareholders' Equity:
Share capital 20,950 20,901
Contributed surplus 228 225
Deficit (601) (1,731)
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20,577 19,395
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$ 38,635 $ 38,141
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See accompanying notes to interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(In thousands, except per share data, Three months Three months
unaudited) ended Ended
March 31, March 31,
2006 2005
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Revenue $ 18,810 $ 12,484
Operating costs 14,928 9,682
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3,882 2,802
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Other operating expenses:
Selling, general and administrative 1,124 1,058
Amortization 494 480
Research and development 67 87
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1,685 1,625
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2,197 1,177
Financing:
Interest on loans payable 93 86
Interest on operating loan 54 37
Write down of property, plant and equipment - 70
Other expenses (income) 194 (81)
Foreign exchange gains (14) (42)
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Earnings before income taxes 1,870 1,107
Income taxes:
Future 740 -
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740 -
Net earnings 1,130 1,107
Deficit, beginning of period (1,731) (3,352)
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Deficit, end of period $ (601) $ (2,245)
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Earnings per share:
Basic $ 0.10 $ 0.10
Diluted $ 0.09 $ 0.09
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See accompanying notes to interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months Three months
ended ended
(In thousands, unaudited) March 31, March 31,
2006 2005
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Cash provided by (used in):
Operations:
Net earnings $ 1,130 $ 1,107
Items not involving cash:
Amortization 494 480
Stock based compensation costs 3 2
Write down of property, plant and equipment - 70
Future income taxes 740 -
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2,367 1,659
Changes in non-cash operating working capital (2,020) (4,329)
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347 (2,670)
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Financing:
Proceeds from exercise of share purchase options 49 7
Advances (repayments) of loans payable and
capital lease obligations (892) (366)
Increase in operating loan 947 3,391
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104 3,032
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Investments:
Additions to property, plant and equipment (451) (362)
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(451) (362)
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Decrease in cash - -
Cash, beginning of period - -
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Cash, end of period $ - $ -
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See accompanying notes to interim consolidated financial statements.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
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.
These consolidated interim 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 interim 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.
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, 2006 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 2005
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, 2006 March 31, 2005
Manufacturing Pipeline Manufacturing Pipeline
Revenue $3,678 $15,132 $3,551 $8,933
Gross margin 1,172 (31.9%) 2,710 (17.9%) 805 (22.7%) 1,997 (22.4%)
Other expenses 612 1,400 496 1,199
Net earnings
before income
taxes 560 1,310 309 798
3. Share Data
At March 31, 2006, the Corporation had 11,632,702 outstanding common
shares and 856,725 outstanding options to acquire common shares.
730,225 of these options were vested and exercisable. During the quarter,
70,450 options were exercised for cash proceeds of $49. Diluted shares at
March 31, 2006 total 12,123,488 and include the dilutive impact of
options outstanding at March 31, 2006 on overall shares outstanding.
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, 2006 December 31, 2005
Due within 12 months $1,435 $1,785
Due after 12 months $3,515 $3,976
5. Interest
Three Months Ended
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March 31, 2006 March 31, 2005
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Interest Paid $147 $123
6. Subsequent Event
The Corporation announced on April 20, 2006 that it has entered into a
definitive arrangement agreement whereby ShawCor Ltd. ("ShawCor") will
acquire all of the outstanding common shares of Garneau Inc. ("Garneau").
The transaction will be effected by means of a court approved plan of
arrangement. Under the terms of the arrangement, shareholders of Garneau
(other than ShawCor and certain members of the Garneau family) will
receive a cash payment of $2.20 per share of Garneau. Holders of options
to acquire common shares of Garneau which are not exercised prior to the
effective date of the plan of arrangement will receive a cash payment per
share equal to the difference between $2.20 and the exercise price of the
options. Members of the Garneau family will exchange their common shares
of Garneau Inc. for non-voting preferred shares of Garneau Inc. which
preferred shares will be redeemable after 3 years and retractable after
2 years at a price to be based on future profitability of certain ShawCor
pipecoating operations, subject to a minimum of $2.20 per share, and bear
fixed cumulative dividends of 5% per annum.
As part of the plan of arrangement, Garneau Inc. will sell its equipment
manufacturing division to Garneau Industries Ltd., a corporation
controlled by Glen Garneau, for a purchase price of $3.0 million.
Furthermore, transaction costs incurred by Garneau Inc. will include
severance costs of approximately $1.9 million, retention and transaction
bonuses of approximately $0.8 million and various professional and
miscellaneous fees incurred to complete the transaction.
The plan of arrangement calls for the acceleration of the vesting period
for all outstanding options to reflect immediate vesting of all
outstanding options as of the closing date of the transaction. The plan
of arrangement includes a provision for a termination fee in the amount
of $1.7 million payable to ShawCor Ltd. in the event that ShawCor Ltd. is
not in default of any material obligations, representations or warranties
under the plan of arrangement and a termination fee event occurs prior to
the effective date as follows:
(a) the Board of Directors withdraws or modifies in a manner
materially adverse to ShawCor its approval or recommendation of
the Arrangement Resolution or makes a public announcement to that
effect;
(b) the Board of Directors recommends any Alternative Transaction or
makes a public announcement to that effect;
(c) Garneau enters into an agreement with respect to an Alternative
Transaction (other than a confidentiality agreement); or
(d) the Board of Directors fails to reaffirm its recommendation of
the Arrangement Resolution by press release within five Business
Days after the public announcement or commencement of any
Alternative Transaction and within a reasonable period of time of
having been requested to do so by ShawCor.
Completion of the plan of arrangement is subject to regulatory approval,
court approval, the approval of the shareholders of Garneau Inc. and to
other customary conditions. Shareholders will be asked to approve the
transaction at the annual and special meeting of shareholders of Garneau
Inc. scheduled to be held on May 30, 2006. The transaction will require
the approval by holders of two-thirds of the Garneau Inc. shares and
options who vote thereon and by a majority of the minority shareholders
who vote thereon, excluding the votes of shares owned by ShawCor and by
certain members of the Garneau family.
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/
>>
%SEDAR: 00008952E
