NISKU, AB, Aug. 14 /CNW/ -
Corporate Highlights
- $1 million domestic equipment project for ShawCor Ltd. completed in
the second quarter of 2007.
Summary of Results
Three months ended Six months ended
(In thousands, except per June 30, June 30, June 30, June 30,
share data, unaudited) 2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue $ 4,772 $ 13,020 $ 12,017 $ 31,830
Margin 180 2,505 1,646 6,387
Margin % 3.8% 19.2% 13.7% 20.0%
Earnings (loss) before
income taxes (1,759) (21) (2,587) 1,849
Net earnings (loss) (1,281) (273) (1,982) 857
Earnings (loss)
per share - basic (0.11) (0.02) (0.16) 0.07
Earnings (loss)
per share - diluted (0.11) (0.02) (0.16) 0.07
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 six months ended June 30, 2007 and 2006 and in conjunction with the audited consolidated financial statements and Annual Management Discussion and Analysis for the year ended December 31, 2006.
MANAGEMENT DISCUSSION & ANALYSIS
-------------------------------------------------------------------------
Financial
Second quarter revenue for the period ended June 30, 2007, totaled $4.8 million which was a $8.2 million decrease from the $13.0 million recorded for the comparative quarter ended June 30, 2006, a direct result of decreased Camrose coating activity and Nisku manufacturing activity experienced in the second quarter. Year to date revenue for the period ended June 30, 2007 totaled $12.0 million which is $19.8 million below the June 30, 2006 comparative period total of $31.8 million, also a direct result of decreased overall coating and manufacturing activity.
The slowdown in the oil and gas industry throughout the first six months of 2007 has adversely affected 2007 revenue generated by the Corporation.
Manufacturing revenues for the quarter ended June 30, 2007 totaled $2.1 million, a decrease of $2.3 million from the quarter ended June 30, 2006. Manufacturing activity decreased further during the second quarter of 2007 as industry activity remained slow. Year to date results in manufacturing revenue totaled $4.6 million for the six month period ended June 30, 2007, a decrease from the $8.1 million recorded in the 2006 comparative period.
Pipeline revenues for the quarter ended June 30, 2007, totaled $2.7 million, a decrease of $5.9 million from the quarter ended June 30, 2006. Small diameter coating activity decreased, as overall industry activity was curtailed significantly. Also, the mainline ACCESS project in progress during the second quarter of 2006 was completed during the third quarter of 2006. Pipeline revenue for the six months period ended June 30, 2007 totaled $7.5 million, a decrease of $16.3 million over the comparative period total of $23.8 million, as a result of decreased year to date small diameter coating activity and completion of the ACCESS project.
Margin for the second quarter ended June 30, 2007 totaled $0.2 million, which is $2.3 million below the $2.5 million recorded for the comparative period. The margin decrease is directly attributed to decreased revenue generated from both segmented operations as overall industry activity slowed down significantly. Year to date margin of $1.6 million (13.7%) is $4.8 million below the $6.4 million (20.0%) recorded for the comparative six month period and reflects the curtailment in overall activity.
Manufacturing margins of $0.3 million (15.2%) for the quarter ended June 30, 2007 was $0.6 million below the $0.9 million (21.5%) recorded for the period ended June 30, 2006 and was caused by lower activity and further cost overruns on the large international order. Year to date margin of $0.5 million (11.8%) is $1.6 million below the 2006 six month comparative period total of $2.1 million (26.3%) with the overall margins negatively affected by lower activity levels, pricing pressure and cost overruns on the large international order.
Pipeline gross margins of ($0.1) million for the quarter ended June 30, 2007 are $1.7 million below the comparative period ended June 30, 2006. Decreased small diameter revenue during the second quarter of 2007 together with completion of the ACCESS mainline project in 2006 and fixed overhead costs, resulted in decreased overall gross margins in the Pipeline division. Year to date pipeline margins of $1.1 million (14.9 %) were $3.2 million below the $4.3 million (18.0%) recorded for the comparative period, and reflect decreased coating activity during the first six months of 2007.
The Corporation's selling, general and administrative expenses totaled $1.4 million for the three month period ended June 30, 2007, an increase of $0.3 million from the expenses recorded at June 30, 2006. Increased office expenses, investor relations expenses, wages, consulting and professional fees were incurred during the second quarter of 2007 as more stringent public reporting requirements are being met and new strategic initiatives are being evaluated. Year to date selling, general and administrative expenses total $3.0 million which is an increase of $0.7 million over the comparative six month period ended June 30, 2006.
Amortization expense for the period ended June 30, 2007 showed an increase and totaled $530 thousand, an increase of $56 thousand over the $474 thousand recorded for the comparative period ended June 30, 2006 and reflects increased amortization as a result of capital expenditures incurred during the 2006 and 2007 years. Year to date amortization of $1.1 million is $0.1 million above the amortization expense for the comparative six months period ended June 30, 2006.
Funds used by operations, before changes in non-cash working capital, for the quarter ended June 30, 2007 totaled $1.2 million, compared to the $0.5 million generated for the comparative period, a decrease attributed to decreased overall operational revenue and margins generated by both segments of the Corporation in the second quarter of 2007. Year to date operating funds, before non-cash working capital used for the period ended June 30, 2007, totaled $1.5 million, $4.4 million below the $2.9 million generated over the comparative period and reflects the cash flow used during the slowdown in business activity for both segments of Garneau operations.
Interest costs on the operating loan and the loan payable of $102 thousand for the period ended June 30, 2007 was $68 thousand below the $170 thousand recorded for the period ended June 30, 2006. Interest costs decreased during the second quarter as usage of operating facilities and loans to finance working capital requirements decreased as a result of the decreased revenue generated during the second quarter.
Other income totaled $204 thousand for the three month period ended June 30, 2007, an increase from the $728 thousand other expense for the comparative period. This change is primarily a result of 2006 transaction expenses incurred by the Corporation pertaining to the terminated Plan of Arrangement agreement with ShawCor Ltd. being eliminated in 2007 operations combined with a workers compensation refund received during the second quarter of 2007.
The decrease in coating revenue and gross margin there-from resulted in net losses totaling $1.3 million for the three month period ended June 30, 2007, an increase of $1.0 million from the $0.3 million net loss reflected in the comparative period ended June 30, 2006. A future income tax recovery of $478 thousand was recorded in the second quarter of 2007 primarily as a result of deductible temporary differences recognized in relation to the net losses recorded for the second quarter of 2006. Year to date net loss of $2.0 million is a $2.9 million decline from the $0.9 million net earnings generated from the six months comparative period ended June 30, 2006.
Net losses before tax for the Manufacturing division for the period ended June 30, 2007 totaled $417 thousand as compared to the $378 thousand of net earnings before tax for the comparative period. The $795 thousand reduction reflects the decreased revenue generated in the second quarter of 2007 together with further cost overruns incurred on the large international project. Year to date net loss before tax for the Manufacturing division of $0.9 million is a $1.8 million decline from $0.9 million net earnings before tax for the six month period ended June 30, 2006.
Net losses before tax for the Pipeline division totaled $1.3 million for the period ended June 30, 2007, a decline of $0.9 million from the $0.4 million net loss before tax generated for the comparative period. This net loss is attributed to the decreased revenue and margins generated from coating products. Net loss before tax for the Pipeline division over the six month period June 30, 2007, totaled $1.7 million, which reflects a $2.6 million decline of over the comparative six month period net earnings of $0.9 million.
No comprehensive income or loss and no opening or closing balances for accumulated comprehensive income or loss is recorded for the period ended June 30, 2007.
Accounts Receivable totaled $3.6 million at June 30, 2007, a decrease of $10.7 million over the $14.3 million recorded at December 31, 2006, and is attributed to receivables carried on domestic coating revenue and domestic manufacturing revenue reducing as overall revenue generated reduced in the second quarter. Unbilled revenue totaled $1.9 million at June 30, 2007, an increase of $0.7 million over the $1.2 million recorded at December 31, 2006 and pertains to increased work in progress on manufacturing projects at June 30, 2007.
During the second quarter period ended June 30, 2007 new credit facilities were approved by the Corporation's bank. Operating and loan payable credit facilities available to the Corporation included a demand revolving operating line of credit of $18.0 million ($3.0 million utilized), a demand revolving evergreen loan of $5.0 million ($2.2 million utilized), a loan lease facility for $1.8 million ($0.4 million utilized pertaining to the manufacture of polyethylene pipe and acquisition of forklifts) and a demand loans facility in the amount of $9.0 million ($1.9 million utilized). The operating line of credit continues to fluctuate within authorized limits. Terms and conditions for the new credit facilities authorized include requirements for the completion of new security documentation, updated appraisals on corporate buildings and land owned in Camrose and Nisku and ongoing covenants set by the bank. The Corporation is currently operating within these covenants. Security documentation and appraisals are in progress. The $20 million increase in credit facilities authorized will be used to fund new strategic initiatives expected to be undertaken by the Corporation. The Corporation's bank working capital covenants have been adjusted. For the purposes of the working capital covenant calculation, principal payments on the loans payable scheduled to be repaid after 12 months are not included in the working capital.
Net additions to capital equipment were $572 thousand for the quarter end June 30, 2007, compared to $733 thousand for the period ended June 30, 2006 and totaled $0.9 million year to date compared to the $1.2 million recorded in the comparative period ended June 30, 2006. Capital expenditures for 2007 were primarily related to additional fabrication, mobile equipment under construction, and coating equipment betterments required in the normal course of business to support operations during the second quarter of 2007.
Selected Quarterly Information
(In thousands, except per share data)
-------------------------------------
-------------------------------------------------------------------------
Three Months Ended (unaudited)
-------------------------------------------------------------------------
June March December September
30/07 31/07 31/06 30/06
-------------------------------------------------------------------------
Total Revenues $4,772 $7,245 $14,134 $11,078
-------------------------------------------------------------------------
Net Earnings (loss) (1,281) (701) 37 53
-------------------------------------------------------------------------
Basic Earnings (loss)
per Share (0.11) (0.06) 0.00 0.00
-------------------------------------------------------------------------
Diluted Earnings (loss)
per Share (0.11) (0.06) 0.00 0.00
-------------------------------------------------------------------------
Total Assets 28,779 30,501 39,571 34,709
-------------------------------------------------------------------------
Long Term Capital Lease
Obligations 171 211 241 353
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended (unaudited)
-------------------------------------------------------------------------
June March December September
30/06 31/06 31/05 30/05
-------------------------------------------------------------------------
Total Revenues $13,020 $18,810 $16,472 $11,456
-------------------------------------------------------------------------
Net Earnings (loss) (273) 1,130 993 511
-------------------------------------------------------------------------
Basic Earnings (loss)
per Share (0.02) 0.10 0.08 0.05
-------------------------------------------------------------------------
Diluted Earnings (loss)
per Share (0.02) 0.09 0.08 0.05
-------------------------------------------------------------------------
Total Assets 38,424 38,635 38,141 33,499
-------------------------------------------------------------------------
Long Term Capital Lease
Obligations 414 475 535 660
-------------------------------------------------------------------------
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 first quarter of 2006 and contributed to improved first quarter performance. Quarterly net earnings (loss) reported were negatively affected by transaction costs incurred totaling $1.8 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 declared. Manufacturing activity remained active throughout 2006, however, manufacturing and coating activity experienced a significant slow down in the first quarter of 2007 which has continued during the second quarter and has resulted in losses being recorded in the first and second quarters of 2007.
Outstanding Shares Data
At December 31, 2006, the Corporation had 12,048,527 outstanding common shares and 920,550 outstanding options to acquire common shares. 214,050 of these options were vested and exercisable. During the quarter ended March 31, 2007, no options were exercised. Options totaling 15,000 at an average price of $1.48 were forfeited during the quarter ended March 31, 2007 with 905,550 options outstanding at March 31, 2007 (214,050 vested). During the quarter ended June 30, 2007, 23,300 options were exercised for the cash proceeds of $14. Stock options exercised during the period ended June 30, 2007 resulted in $9 being transferred from contributed surplus to share capital. 50,000 new options were granted during the second quarter at a price of $1.14. Options totaling 12,000 were forfeited at an average price of $0.60 during the quarter ended June 30, 2007 with 920,250 options outstanding at June 30, 2007 (178,750 vested). Outstanding common shares totaled 12,071,827 at June 30, 2007. Diluted shares at June 30, 2007 total 12,071,827 and include the dilutive impact of options outstanding at June 30, 2007 on overall shares outstanding. No further shares have been issued or options have been exercised or cancelled to the date of this report.
New Accounting Policies
As disclosed in the December 31, 2006 annual audited Consolidated Financial Statements, on January 1, 2007, the Corporation adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530 "Comprehensive Income", Section 3251 "Equity", Section 3855 "Financial Instruments-Recognition and Measurement", Section 1506 "Accounting Changes", Section 3865 "Hedges" and Section 3861 "Financial Instruments- Disclosure and Presentation".
The adoption of these standards has had no material impact on the Corporation's net earnings or cash flows. The other effects of the implementation of the new standards are discussed in the notes to the consolidated interim financial statements contained herein.
Internal Controls over Financial Reporting
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 June 30, 2007.
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
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 June 30, 2007 have been evaluated by senior management and are in compliance with reporting requirements at June 30, 2007. Furthermore, these disclosure controls and procedures are in the process of being enhanced further in 2007.
Critical Accounting Estimates
The Corporation recognizes revenues related to equipment fabrication contracts based on the percentage-of-completion of the individual contracts. At June 30, 2007, significant fabrication contracts in progress include domestic orders for coating equipment, oilfield tanks, buildings and catwalks totaling $2.5 million. The international coating equipment contract in progress at June 30, 2007 totaled $4.5 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. These estimates are made using historical experience and knowledge of current market conditions, however, are subject to change as market conditions shift or technological advances are made.
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.
Disclosure of Contractual Obligations
At June 30, 2007, there were no significant changes to the contractual obligations disclosed by the Corporation which were outlined in the Management Discussion and Analysis for the year ended December 31, 2006.
Contingencies
During the period ended June 30, 2007, the Corporation remained a named defendant in a lawsuit with 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.
Business Risks
At June 30, 2007, there are no significant changes to the business risks outlined in the Management Discussion and Analysis for the year ended December 31, 2006.
Operational
Small diameter coating activity for the second quarter of 2007 was well below the activity recorded in 2006 as only one coating line was in operation for most of the second quarter with only one shift employed. The order book remained soft during the second quarter of 2007 as the normal spring break up curtailed coating activity to June 30, 2007. Design and fabrication work continued on the plant upgrades capital program announced in the fall of 2006 for the Camrose plant.
Domestic manufacturing activity also reduced in the second quarter of 2007 as project bidding and activity were slow in Nisku. Garneau manufacturing operations plant hours continued at 8 hour shifts throughout the second quarter and staff cutbacks occurred as project activity decreased.
Outlook
Although 2006 drilling activity exceeded 23,400 wells, a softening of commodity prices and activity was experienced in the third and fourth quarters of 2006 which resulted in decreased coating activity into 2007. This noticeable slowdown has continued into the second quarter of 2007 with both coating and manufacturing activity being curtailed significantly. This slowdown in industry activity, together with the historically slow spring breakup season impacted Garneau's second quarter financial results substantially as both coating and manufacturing revenue recorded were well below 2006 comparisons.
Design and fabrication on the major Camrose capital expenditure program continued during the second quarter of 2007 and is progressing as originally planned. This major upgrade to the Camrose facility is projected to improve production efficiencies and reduce downtime and maintenance costs in the plants. We project improved capabilities for future client orders through these upgrades.
Installation and commissioning on the large international order which commenced during the first quarter is now complete. Cost overruns were incurred during the installation stage to meet customer requirements. The $1 million coating equipment order secured from ShawCor Ltd. for domestic coating equipment was completed and shipped in the second quarter.
Discussions on proceeding with the CCSI joint venture agreement signed in the fall of 2005 continued during the second quarter of 2007. 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.
The Corporation announced major expansion plans on August 14, 2007 wherein the Corporation is diversifying their Pipeline business segment into the distribution of oil country tubular goods and line pipe products. This expansion enables Garneau to offer tubular and line pipe procurement and inventory management to our clients, in addition to the existing coating services provided from our 65,000 sq ft Camrose facility. Increased marketing efforts and infrastructure realignment procedures are underway to support this aggressive initiative. The expansion will not require significant changes to the plant or yard infrastructure in the Camrose operation. Negotiation for initial supply of tubular products is complete and authorized bank credit lines have been increased by $20 million to support this new strategic initiative. The tubular and line pipe in Western Canada industry is estimated, by management to exceed over $1.0 billion dollars annually in recent years and Garneau is anticipating that it can be successfully penetrate the existing market based on the Corporation's ability to now offer consolidated "one stop shopping" for these services. This announcement marks a major step in Garneau's commitment to providing the oil and gas industry with additional value added services and further reflects Garneau's commitment to increasing corporate growth and long term profitability for our shareholders.
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.
Further strategic initiatives are currently being discussed and implementing a new strategic plan with new strategic initiatives during fiscal 2007 will be a primary focus of the Corporation. Additionally, management will focus on controlling infrastructure costs during this market slowdown.
On behalf of the Board of Directors
(signed)
Glen Garneau,
President and Chief Executive Officer
Garneau Inc.
Consolidated Balance Sheets
-------------------------------------------------------------------------
at at
(In thousands of Canadian dollars) June 30, December 31,
(unaudited) 2007 2006
-------------------------------------------------------------------------
Assets
Current Assets:
Accounts receivable $ 3,581 $ 14,293
Unbilled revenue 1,885 1,162
Inventory (note 5) 2,340 3,067
Prepaid expenses and deposits 115 16
-------------------------------------------------------------------------
7,921 18,538
Other assets 58 56
Property, plant and equipment 20,800 20,977
-------------------------------------------------------------------------
$ 28,779 $ 39,571
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities:
Operating loan (note 10) $ 2,986 $ 5,224
Accounts payable and accrued liabilities 2,336 7,207
Billings in excess of costs incurred and
estimated earnings on uncompleted contracts - 204
Customer deposits 112 112
Loans payable (note 7) 4,106 4,918
Current portion of capital lease obligations 243 343
-------------------------------------------------------------------------
9,783 18,008
Capital lease obligations 171 241
Future income taxes - 606
-------------------------------------------------------------------------
9,954 18,855
-------------------------------------------------------------------------
Shareholders' Equity:
Share capital (note 6) 21,424 21,401
Contributed surplus 167 99
Deficit (2,766) (784)
-------------------------------------------------------------------------
18,825 20,716
Contingencies (note 8)
Basis of presentation
-------------------------------------------------------------------------
$ 28,779 $ 39,571
-------------------------------------------------------------------------
See accompanying notes to unaudited interim consolidated financial
statements.
Garneau Inc.
Consolidated Statements of Operations and Comprehensive Income (loss)
and Deficit
(In thousands of
Canadian dollars Three months ended Six months ended
except per share June 30, June 30, June 30, June 30,
data, unaudited) 2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue $ 4,772 $ 13,020 $ 12,017 $ 31,830
Operating costs 4,592 10,515 10,371 25,443
-------------------------------------------------------------------------
180 2,505 1,646 6,387
Other expenses (income):
Selling, general and
administrative 1,415 1,151 3,002 2,275
Amortization 530 474 1,068 968
Research and development 51 26 90 93
Foreign exchange loss
(gain) (10) (23) 2 (37)
Gain on disposal of
property, plant and
equipment - - (4) -
-------------------------------------------------------------------------
1,986 1,628 4,158 3,299
-------------------------------------------------------------------------
(1,806) 877 (2,512) 3,088
Financing:
Interest on
operating loan 33 76 71 130
Interest on loans
payable 69 94 154 187
Other 55 64
Other expenses
(income), net (204) 728 (214) 922
-------------------------------------------------------------------------
Earnings(loss) before
income taxes (1,759) (21) (2,587) 1,849
-------------------------------------------------------------------------
Income taxes:
Future (478) (252) (605) 992
Net earnings (loss)
and comprehensive
income (loss) (1,281) (273) (1,982) 857
-------------------------------------------------------------------------
Deficit, beginning of
period (1,485) (601) (784) (1,731)
-------------------------------------------------------------------------
Deficit, end of
period $ (2,766) $ (874) $ (2,766) $ (874)
-------------------------------------------------------------------------
Earnings (loss) per
share:
Basic $ (0.11) $ (0.02) $ (0.16) $ 0.07
Diluted $ (0.11) $ (0.02) $ (0.16) $ 0.07
Weighted average
common shares:
Basic 12,058,713 11,811,388 12,053,648 11,643,681
Diluted 12,058,713 11,811,388 12,053,648 11,643,681
-------------------------------------------------------------------------
See accompanying notes to unaudited interim consolidated financial
statements.
Garneau Inc.
Consolidated Statements of Cash Flows
(In thousands of Three months ended Six months ended
Canadian dollars, June 30, June 30, June 30, June 30,
unaudited) 2007 2006 2007 2006
-------------------------------------------------------------------------
Cash provided by
(used in):
Operations:
Net earnings (loss) $ (1,281) $ (273) $ (1,982) $ 857
Items not involving
cash:
Amortization 530 474 1,068 968
Stock-based
compensation
expense 40 46 77 49
Gain on disposal of
property, plant
and equipment - - (4) -
Future income taxes (478) 252 (605) 992
-------------------------------------------------------------------------
(1,189) 499 (1,446) 2,866
Changes in non-cash
operating working
capital 1,431 2,434 5,541 414
-------------------------------------------------------------------------
242 2,933 4,095 3,280
-------------------------------------------------------------------------
Financing:
Proceeds from
exercise of share
purchase options 14 156 14 205
Increase (decrease)
in operating loan 767 (1,828) (2,238) (881)
Repayment of loans
payable (389) (256) (812) (1,066)
Advances under loans
payable - - - -
Repayment of capital
lease (61) (83) (170) (165)
-------------------------------------------------------------------------
331 (2,011) (3,206) (1,907)
Investments:
Other assets (1) (189) (2) (189)
Proceeds from disposal
of property, plant
and equipment - - 27 -
Additions to property,
plant and equipment (572) (733) (914) (1,184)
-------------------------------------------------------------------------
(573) (922) (889) (1,373)
-------------------------------------------------------------------------
Change in cash - - - -
Cash, beginning of
period - - - -
-------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to unaudited interim consolidated financial
statements.
Garneau Inc.
Notes to the Consolidated Interim Financial Statements (unaudited)
------------------------------------------------------------------
(Tabular amounts in thousands of Canadian dollars)
For the three and six months ended June 30, 2007 and 2006
Basis of Presentation:
The Corporation is incorporated under the Business Corporations Act of
Alberta. Its principal business activities are the coating of pipe and
manufacturing of equipment for use in the oil and gas industry. The
Corporation is subject to seasonal fluctuations in operating results that
impact quarter-to-quarter operating results and, thus, one quarter's
operating results are not necessarily indicative of a subsequent
quarter's operating results.
These unaudited interim consolidated financial statements have been
prepared by management in accordance with Canadian generally accepted
accounting principles for interim financial statements. These
consolidated interim financial statements have been prepared on a going
concern basis in accordance with Canadian generally accepted accounting
principles, which assumes that the future operations will allow for the
realization of assets and discharge of liabilities in the normal course
of business. The application of the going concern concept is dependent
upon the ability of the Corporation to generate profitable operations and
the ongoing support of its lender. 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, except as described in note 2. Notes
to the consolidated interim financial statements for the period ended
June 30, 2007 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 2006 audited financial statements.
2) Changes in Accounting Policies and Practices
As disclosed in the December 31, 2006 annual audited Consolidated
Financial Statements, on January 1, 2007, the Corporation adopted the
Canadian Institute of Chartered Accountants ("CICA") Handbook Section
1530 "Comprehensive Income", Section 3251 "Equity", Section 3855
"Financial Instruments - Recognition and Measurement", Section 1506
"Accounting Changes", Section 3865 "Hedges" and Section 3861 "Financial
Instruments-Disclosure and Presentation".
The adoption of these standards has had no material impact on the
Corporation's net earnings or cash flows. The other effects of the
implementation of the new standards are discussed below.
Comprehensive Income
The new standards introduce comprehensive income, which consists of net
earnings and other comprehensive income ("OCI"). The Corporation has no
OCI transactions recorded for the period ended June 30, 2007. The
adoption of Comprehensive Income has been in accordance with the
applicable transitional provisions.
Section 3251 establishes standards for the presentation of equity and for
the changes in equity during the reporting period. The cumulative changes
in OCI are included in accumulated other comprehensive income ("AOCI"),
which is presented as a new category within shareholders' equity. The
Corporation has no opening or closing balances for accumulated other
comprehensive income or loss.
Financial Instruments
The financial instruments standard establishes the recognition and
measurement criteria for financial assets, financial liabilities and
derivatives. All financial instruments are required to be measured at
fair value on initial recognition of the instrument, except for certain
related party transactions. Measurement in subsequent periods depends on
whether the financial instrument has been classified as "held-for-
trading", "available-for-sale financial assets", "held-to-maturity
investments", "loans and receivables", or "other financial liabilities"
as defined by the standard.
Financial assets and financial liabilities "held-for-trading" are
measured at fair value with changes in those fair values recognized in
net earnings. "Available-for-sale financial assets" are measured at fair
value, with changes in those fair values recognized in OCI. "Held-to-
maturity investments", "loans and receivables" and "other financial
liabilities" are measured at amortized cost using the effective interest
method.
Cash and cash equivalents are designated as "held-for-trading". Accounts
receivable and unbilled revenue are designated as "loans and
receivables". Accounts payable and accrued liabilities, operating loans,
customer deposits, loans payable and capital lease obligations are
designated as "other financial liabilities".
Section 3855 requires that the Corporation records non-financial
derivatives as assets or liabilities at their fair value unless exempted
from derivative treatment as normal purchase or sale. The Section also
requires the Corporation to identify embedded derivatives that need
separation from the related host contract and measure those embedded
derivatives at fair value. Subsequent change in fair value of embedded
derivatives is recognized in the consolidated statement of operations and
deficit in the period the change occurs. The Corporation has elected to
apply this accounting treatment for all embedded derivatives in host
contracts entered into on or after January 1, 2003 and has determined
there are no material embedded derivatives that must be separated from
the host contract and accounted for separately and there are no non-
financial derivative instruments.
Transactions costs that are directly attributable to the acquisition or
issuance or disposal of financial assets or liabilities are expensed at
the time of occurrence.
Section 3861 (replaces Handbook Section 3860, Financial Instruments-
Disclosure and Presentation) establishes standards for presentation of
financial instruments and non-financial derivatives, and identifies
information that should be disclosed. There was no material effect on the
Corporation's financial statements when we adopted the Section 3861 on
January 1, 2007.
Hedges
Section 3865 specifies circumstances under which hedge accounting is
permissible and how hedge accounting may be performed. The Corporation
currently does not have any hedges.
Accounting Changes
In July 2006, the Accounting Standards Board ("AcSB") issued a
replacement of The Canadian Institute of Chartered Accountants' Handbook
("CICA Handbook") Section 1506, Accounting Changes ("Section 1506"). The
new standard allows for voluntary changes in accounting policy only when
they result in financial statements providing reliable and more relevant
information, requires changes in accounting policy to be applied
retrospectively unless doing so is impracticable, requires prior period
errors to be corrected retrospectively and calls for enhanced disclosures
about the effects of changes in accounting policies, estimates and errors
on the financial statements. The impact that the adoption of Section 1506
will have on the Company's results of operations and financial condition
will depend on the nature of future accounting changes. The adoption of
Section 1506 effective January 1, 2007 has had no impact on these
unaudited interim consolidated financial statements.
Recent Accounting Pronouncements Issued and Not Yet Applied
a) Financial instruments and capital disclosure:
In October 2006, the AcSB approved disclosure and presentation
requirements for financial instruments that revise and enhance the
disclosure requirements of Section 3861. These requirements included
Sections 3862 - Financial Instruments-Disclosure ("Section 3862"),
which replaces Section 3861 and Section 1535, Capital Disclosures
("Section 1535"), which establishes standards for disclosing
information about an entity's capital and how it is managed. Section
1535 requires disclosure of an entity's objectives, policies and
processes for managing capital, quantitative data about the entity in
regards to capital and whether the entity has compiled with any
capital requirements and if it has not complied, the consequences of
such non-compliance. This standard is effective for the Corporation
for interim and annual financial statements beginning on January 1,
2008. Early adoption is permitted at the same time an entity adopts
other standards relating to accounting for financial instruments. The
Corporation does not expect the adoption of this standard to have a
material impact on its consolidated financial position and results of
operations.
Section 3862 is based on IFRS 7, Financial Instruments: Disclosures,
and places an increased emphasis on disclosures about the risks
associated with both recognized and unrecognized financial
instruments and how these risks are managed.
Section 3862 requires disclosures, by class of financial instrument
that enables users to evaluate the significance of financial
instruments for an entity's financial position and performance,
including disclosures about fair value. In addition, disclosure is
required of qualitative and quantitative information about exposure
to risks arising from financial instruments, including specified
minimum disclosures about credit risk, liquidity risk and market
risk. The quantitative disclosures must also include a sensitivity
analysis of each type of market risk to which an entity is exposed,
show how net income and other comprehensive income would have been
affected by reasonably possible changes in the relevant risk
variable.
This standard is effective for the Corporation for interim and annual
financial statements beginning on January 1, 2008. The Corporation
does not expect the adoption of this standard to have a material
impact on its financial position and results of operations.
b) Financial instruments presentation:
In October 2006, the AcSB approved Section 3863 - Financial
Instruments-Presentation, which replaces Section 3861, Financial
Instruments-Disclosure and Presentation. The existing requirements
on presentation of financial instruments have been carried forward
unchanged to Section 3863, Financial Instruments-Presentation.
This standard is effective for the Corporation for interim and annual
financial statements beginning on January 1, 2008. The Corporation
does not expect the adoption of the standard to have a material
impact on its financial position and results of operation.
c) Inventories:
In June 2007, the CICA issued Section 3031, "Inventories," which
requires inventory to be measured at the lower of cost and net
realizable value. The standard also provides guidance on the costs
that can be capitalized. In addition, previous inventory write-downs
must be reversed if the economic circumstances have changed to
support an increased inventory value. The standard is effective for
2008. We are currently evaluating the impact of adopting this
standard on our consolidated financial statements.
3) 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.
Three months ended Three months ended
June 30, 2007 June 30, 2006
Manufacturing Pipeline Manufacturing Pipeline
Revenue $ 2,065 $ 2,707 $ 4,375 $ 8,645
Gross margin 314(15.2%) (134)(-5.0%) 942(21.5%) 1,563(18.1%)
Amortization 43 487 38 436
Interest expense - 102 - 170
Other expenses
and income
before income
taxes 688 619 526 1,356
Earnings (loss)
before income
taxes (417) (1,342) 378 (399)
Property, plant
and equipment 2,151 38,549 2,426 36,408
Accumulated
amortization 1,633 18,267 1,901 16,330
Net book value 518 20,282 525 20,078
Capital
expenditures - 572 210 523
Total assets 2,684 26,095 3,942 34,482
Six months ended Six months ended
June 30, 2007 June 30, 2006
Manufacturing Pipeline Manufacturing Pipeline
Revenue $ 4,561 $ 7,456 $ 8,053 $ 23,777
Gross margin 537(11.8%) 1,109(14.9%) 2,114(26.3%) 4,273(18.0%)
Amortization 86 982 69 899
Interest expense - 225 - 317
Other expenses
and income
before income
taxes 1,358 1,582 1,107 2,146
Earnings (loss)
before income
taxes (907) (1,680) 938 911
Property, plant
and equipment 2,151 38,549 2,426 36,408
Accumulated
amortization 1,633 18,267 1,901 16,330
Net book value 518 20,282 525 20,078
Capital
expenditures - 914 254 930
Total assets 2,684 26,095 3,942 34,482
Gross margin is determined by deducting operating costs from revenue.
Operating costs consist of all direct material, labor and plant overhead
costs.
Two customers accounted for 12% and 12% of consolidated revenue
respectively for the period ended June 30, 2007.
4) Supplementary Cash Flow Information
Three Months Ended Six Months Ended
-------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Interest Paid $76 $170 $199 $317
-------------------------------------------------------------------------
Income taxes paid - - - -
Property, plant and equipment in the amount of Nil (2006 - Nil) were
acquired by way of capital lease during of the three month period ended
June 30, 2007.
5) Inventory
-------------------------------------------------------------------------
As at As at
June 30, December 31,
Inventory consists of the following: 2007 2006
-------------------------------------------------------------------------
Raw Materials $ 1,555 $ 1,881
Finished goods 785 1,186
-------------------------------------------------------------------------
$ 2,340 $ 3,067
-------------------------------------------------------------------------
6) Share Data
At December 31, 2006, the Corporation had 12,048,527 outstanding common
shares and 920,550 outstanding options to acquire common shares. 214,050
of these options were vested and exercisable. During the quarter ended
March 31, 2007, no options were exercised. Options totaling 15,000 at an
average price of $1.48 were forfeited during the quarter ended March 31,
2007 with 905,550 options outstanding at March 31, 2007 (214,050 vested).
During the quarter ended June 30, 2007, 23,300 options were exercised for
the cash proceeds of $14. Stock options exercised during the period ended
June 30, 2007 resulted in $9 being transferred from contributed surplus
to share capital. New options totaling 50,000 were granted during the
second quarter at a price of $1.14. Options totaling 12,000 were
forfeited at an average price of $0.60 during the quarter ended June 30,
2007 with 920,250 options outstanding at June 30, 2007 (178,750 vested).
Outstanding common shares totaled 12,071,827 at June 30, 2007. Diluted
shares at June 30, 2007 total 12,071,827 and include the dilutive impact
of options outstanding at June 30, 2007 on overall shares outstanding.
-------------------------------------------------------------------------
Share Continuity Schedule Number of
------------------------- shares
-------------------------------------------------------------------------
Common shares outstanding at
December 31, 2006 12,048,527 $21,401
--------------------------
Issued for cash during 2007 on exercised
of options 23,300 14
--------------------------
Transfer from contributed surplus for
stock options exercised - 9
--------------------------
Common shares outstanding at June 30, 2007 12,071,827 21,424
--------------------------
The fair value of stock options granted during the second quarter of 2007
is estimated at the grant date using the Black-Scholes option pricing
model using the following weighted average assumptions
Period Ended June 30, 2007
-------------
Expected dividends Nil
Risk-free interest rate 4.64%
Expected life 3 yrs
Expected volatility 60%
Total stock based compensation expense for the period ended June 30, 2007
totaled $40. The weighted average fair value of each option was
determined to be $0.52.
7) 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:
As at As at
June 30, 2007 December 31, 2006
Due within 12 months $ 1,306 $ 1,556
Due after 12 months $ 2,800 $ 3,362
8) Contingencies
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.
9) Comparative Figures
Certain of the comparative figures have been reclassified to confirm with
the current period's presentation.
10) Operating Loan and Loans Payable
During the second quarter period ended June 30, 2007 new credit
facilities were approved by the Corporation's bank. At June 30, 2007, the
Corporation had available a demand revolving operating line of credit of
$18,000 ($2,986 utilized) bearing interest at the lender's prime rate
plus 0.375% for the Canadian loan and US prime plus 0.375% or libor plus
1.975% for the USD advances. This interest rate is adjusted to prime if
the Corporation covenant ratios are within a certain limit. As part of
the revolving credit facility, the Corporation had sub-limits consisting
of a demand revolving evergreen loan of $5,000 ($2,206 utilized) bearing
interest at the prime plus 0.875% (See note 7), a loan lease facility for
$1,800 ($414 utilized pertaining to the manufacture of polyethylene pipe
and acquisition of forklifts) million bearing prime plus 0.875% and a
demand loan facility in the amount of $9.0 million ($1,900 utilized)
bearing prime plus 0.875%. The amount available under the facilities is
subject to a borrowing based 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 loan. As collateral for the facilities, the
Corporation has provided a general security agreement creating a first
priority charge over all assets, floating charge over all present and
after acquired Corporation's real property and assignment of all
insurance. Terms and conditions for the new credit facilities authorized
include requirements for the completion of new security documentation,
updated appraisals on corporate buildings and land owned in Camrose and
Nisku and ongoing covenants set by the bank. New security documentation
and appraisals are in the progress of being completed.