Corporate Highlights
- ACCESS Pipeline coating bid of approximately $9 million awarded during
Q3.
- $3.3 Million Domestic Order for fabrication 59% complete at end of Q3.
- Domestic Manufacturing activity continues to be strong.
NISKU, AB, Nov. 9 /CNW/ -
<<
Summary of Results Three months ended Nine months ended
(In thousands, except per share September September September September
data) 30, 2005 30, 2004 30, 2005 30, 2004
-------------------------------------------------------------------------
Revenue $ 11,456 $ 7,127 $ 31,893 $ 23,178
Margin 2,299 1,769 5,697 4,565
Margin % 20.1% 24.8% 17.9% 19.7%
Operating income 570 481 668 211
Earnings (loss) before income
taxes 406 181 311 (256)
Net earnings (loss) 406 181 311 (256)
Earnings (loss) per share - basic 0.04 0.02 0.03 (0.02)
Earnings (loss) per share -
diluted 0.03 0.02 0.02 (0.02)
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 and annual
financial statements and Annual Management Discussion and Analysis.
Management Discussion and Analysis
Financial
September 30, 2005 third quarter revenue totaled $11.5 million, 62% above
the $7.1 million recorded for the comparative quarter ended September 30,
2004. Revenue is significantly higher as both manufacturing and coating
activity increased during the third quarter. Year to date revenue for the
period ended September 30, 2005 totaled $31.9 million which is also above the
September 30, 2004 comparative period total of $23.2 million and also a direct
result of the increase in manufacturing and small diameter coating activity
during 2005.
Pipeline revenues for the three month period ended September 30, 2005,
totaled $6.8 million, an increase of $3.2 million (89%) from the quarter ended
September 30, 2004 as small diameter coating activity increased significantly
during the third quarter. Pipeline revenue for the nine month period ended
September 30, 2005 totaled $19.3 million, a 24% increase over the comparative
period total of $15.6 million and also the direct result of increased small
diameter coating activity in the third quarter.
Manufacturing revenue for the three month period ended September 30, 2005
totaled $4.6 million, 31% above the $3.5 million recorded for September 30,
2004 comparative period as domestic equipment contract work remained very
active during the period. Year to date results also reflect the increase in
contract work as manufacturing revenue totaled $12.6 million for the nine
month period ended September 30, 2005, $5.0 million above the $7.6 million
recorded for 2004.
Margin for the three month period ended September 30, 2005 of
$2.3 million is above the $1.8 million recorded for the comparative period.
Overall margins were improved based on increased manufacturing and coating
activity. Year to date margin of $5.7 million (17.9%) is $1.1 million above
the $4.6 million (19.7%) recorded for the comparative nine month period and
reflects the improvement in manufacturing performance. Margin percentages
decreased from 19.7% to 17.9% as a result of competitive pressure on coating
prices.
Manufacturing margins for the three month period ended September 30, 2005
totaled $1.3 million (28.4%), $0.3 million above the $1.0 million comparative
period total as 2005 domestic manufacturing activity has increased
significantly. Year to date margin of $3.3 million (26.2%) is $2.1 million
above the 2004 nine month comparative period total of $1.2 million (15.9%)
with overall margins positively affected by higher activity levels.
The increase in pipeline revenue during the period ended September 30,
2005, resulted in increased pipeline margins for the three month period ended
September 30, 2005 totaling $1.0 million (14.4%) compared to the $0.7 million
(20.4%) recorded in 2004. Although the margin increased by $0.3 million, the
margin percentage decreased from 20.4% in 2004 to 14.4% for 2005. Continued
downward pressure on pricing together with increased plant overhead costs have
caused the decrease in margin. Year to date pipeline margins of $2.4 million
(12.4%) were $1.0 million below the $3.4 million (21.4%) recorded for the
comparative period as plant inefficiencies and competitive pressure on coating
prices were experienced in 2005.
The Corporation's selling, general and administrative expenses totaled
$1.1 million for the three month period ended September 30, 2005, an increase
of $0.3 million from the $0.8 million recorded for the three month period
ended September 30, 2004 and is attributed primarily to increased wages and
selling expenses experienced as a result of increased activity in 2005.
Amortization expense for the period ended September 30, 2005 totaled
$571 thousand, an increase of $73 thousand over the $498 thousand recorded for
the comparative period ended September 30, 2004. Increased coating activity
and utilization of the second coating line in Camrose contributed to the
increase.
Operating cash flow, representing net earnings (loss) adjusted for items
not involving cash, generated by the Corporation for the three month period
ended September 30, 2005 totaled $1.0 million, an improvement of $0.3 million
from operations over the comparative period. This improvement is attributed to
an increase in revenue over the comparative period. Year to date operating
cash flow at September 30, 2005, totaled $2.1 million, $0.7 million above the
$1.4 million generated over the comparative period.
Interest costs of $374 thousand for the nine month period ended
September 30, 2005 were $20 thousand below the $394 thousand recorded for the
period ended September 30, 2004.
The overall increase in revenue for the third quarter of 2005 and gross
margin resulted in net earnings of $406 thousand for the three month period
ended September 30, 2005, compared to $181 thousand for the comparative
period. Year to date net earnings of $311 thousand reflects a $567 thousand
improvement over the loss of $256 thousand recorded for the comparative
period.
Net earnings before tax for the Manufacturing division for the three
month period ended September 30, 2005 totaled $0.7 million as compared to the
$0.6 million earnings for the comparative period. Manufacturing activity
increased substantially during the third quarter of 2004 and has continued
throughout 2005. Manufacturing net earnings before tax for the nine month
period ended September 30, 2005 totaled $1.7 million, an increase of
$1.6 million over the $0.1 million net earnings before tax recorded for the
comparative period.
Net losses before tax for the Pipeline division totaled $0.3 million for
the three month period ended September 30, 2005, $0.1 million improvement from
the $0.4 million loss for the comparative period. Lower prices on small
diameter coating and increased direct overhead costs caused losses during the
third quarter. Year to date net losses before tax of $1.4 million is below the
$0.3 million net losses recorded to September 30, 2004, attributed to downward
pressure on pricing, increased direct overheard costs and plant inefficiencies
experienced during the course of 2005.
Accounts receivable total $9.4 million at September 30, 2005; an increase
over the $8.7 million recorded at December 31, 2004, and is attributed to the
increased activity experienced during the third quarter.
At September 30, 2005, operating and term loan credit facilities
authorized to the Corporation included a demand revolving operating line of
credit of $6.3 million, of which $6.3 million was available ($3.9 million
utilized), a demand revolving evergreen loan of $3.0 million ($2.3 million
utilized), a capital lease facility for $0.9 million pertaining to the
manufacture of polyethylene pipe and mobile equipment and term loans in the
amount of $3.0 million.
Additions to capital equipment were $1.2 million for the quarter ended
September 30, 2005, compared to $0.2 million for the quarter ended
September 30, 2004. Capital expenditures for the third quarter of 2005 were
primarily related to increased manufacturing equipment and land improvements
required to assist with increased activity, together with two new forklifts
and coating line improvements undertaken to process the $9.0 million ACCESS
project which commenced in October 2005.
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 -$1.1 million is recorded at
September 30, 2005. Adjusted working capital totals $2.8 million, and is
calculated by deducting $3.9 million of loans payable, scheduled to be repaid
after 12 months. The Corporation operated within all bank covenants at
September 30, 2005.
Selected Quarterly Information
------------------------------
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Three Months Ended
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Sept. June Mar. Dec. Sept. June Mar. Dec.
30/05 30/05 31/05 31/04 30/04 30/04 31/04 31/03
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Total
Reven-
ues $11,456 $7,953 $12,484 $9,429 $7,127 $4,303 $11,748 $11,326
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Net
Earnings
(Losses) 406 (1,095) 1,071 (152) 181 (1,685) 1,248 1,529
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Basic
Earnings
(Loss)
per
Share 0.04 (0.10) 0.09 (0.01) 0.02 (0.15) 0.11 0.14
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Diluted
Earnings
(Loss)
per
Share 0.03 (0.10) 0.08 (0.01) 0.02 (0.15) 0.10 0.13
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Total
Assets 33,182 30,160 35,590 31,427 30,313 28,893 36,640 37,121
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Long Term
Capital
Lease
Obliga-
tions 660 372 431 489 546 602 657 712
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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 is historically the slowest period for the
Corporation with the first quarter the most active.
Share Information
Outstanding options issued by the Corporation totaled 1,036,925 at
September 30, 2005, 897,800 of which are exercisable. During the third quarter
of 2005, 79,000 new options were issued at $1.10 and 3,600 options were
exercised. Common shares outstanding at September 30, 2005 total 11,459,502.
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 September 30, 2005, fabrication contracts totaling approximately
$3.3 million were in progress and 59% complete.
The Corporation provides an estimate for depreciation 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 September 30, 2005, there were no significant changes to the
contractual obligations required to be made by the Corporation which were
disclosed in the December 31, 2004 annual report.
Business Risks At September 30, 2005, there are no significant changes to
the business risks disclosed in the Garneau annual report for December 31,
2004. Letters of credit and receivables are outstanding in United States
dollars at September 30, 2005 for balances of contracts owing totaling
approximately $748 thousand and remain subject to foreign exchange
fluctuations.
Letters of credit issued and outstanding at September 30, 2005 total
$212 thousand and will continue to have the potential risk of being encashed
until maturity.
Operational
Although coating volumes increased in the third quarter, continued labor
shortages and high turn-over in the Camrose area contributed to plant
inefficiencies and lower margins experienced by the pipe coating division. The
plant is now operating on three shifts with staffing for a fourth shift
currently underway to handle the ACCESS project requirements and projected
small diameter fourth quarter demand.
Manufacturing remains very active with operations continuing to employ
two shifts working five/six days per week. A competitive employment
environment and labor shortage has restricted further growth, however, the
Corporation continues to look for alternatives in attracting skilled
employees. In house incentive programs and employee development programs are
being implemented to help stabilize employee turn-over.
Outlook
Garneau's small diameter coating activity improved during the third
quarter and the small diameter order book now exceeds $2 million dollars.
The 650km ACCESS pipeline coating project commenced in October 2005 with
the Camrose plant now operating both coating lines simultaneously.
The combination of improved small diameter coating demand and
commencement of the ACCESS project is projected to have a positive impact on
the coating operations financial results for the fourth quarter.
However, future upward movement on coating pricing will be required over
the near term to offset the increase in material, labor and plant operational
costs currently being experienced.
The Domestic manufacturing division of the Corporation is very active and
is expected to continue to operate near capacity in the existing Nisku
location for the fourth quarter. Plans for plant expansion in 2006 are now
being discussed to accommodate the current demand for domestic fabrication. A
shortage of skilled trades and upward pressure on existing wages in the
industry will continue to present challenges to the Corporation.
Although marketing efforts have increased internationally during 2005,
little further progress on large International contracts for the remainder of
2005 is expected.
Garneau continued to operate within all bank covenants during the third
quarter as established by the Corporation's bank.
Overall, management projects strong coating and manufacturing activity
over the next six months which is projected to contribute positively to the
Corporation's financial results.
On behalf of the Board of Directors
(signed)
Glen Garneau,
President and Chief Executive Officer
November 4, 2005
CONSOLIDATED BALANCE SHEETS
September December
As at 30, 2005 31, 2004
(In thousands) (unaudited)
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ASSETS
Current Assets:
Accounts receivable $ 9,421 $ 8,722
Inventory 3,861 2,679
Prepaid expenses and deposits 162 45
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13,444 11,446
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Property, plant and equipment 19,738 19,981
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$ 33,182 $ 31,427
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Operating loan $ 3,924 $ 2,769
Accounts payable and accrued liabilities 3,933 3,838
Deferred revenue and customer deposits 956 215
Loans payable 5,334 6,196
Current portion of capital lease obligations 353 223
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14,500 13,241
Capital lease obligations 660 489
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15,160 13,730
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Shareholders' Equity:
Share capital 20,843 20,834
Contributed surplus 220 215
Deficit (3,041) (3,352)
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18,022 17,697
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$ 33,182 $ 31,427
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CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(In thousands, except per Three Three Nine Nine
share data, unaudited) months months months months
ended ended ended ended
September September September September
30, 2005 30, 2004 30, 2005 30, 2004
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Revenue $ 11,456 $ 7,127 $ 31,893 $ 23,178
Operating costs 9,157 5,358 26,196 18,613
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2,299 1,769 5,697 4,565
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Other operating expenses:
Selling, general and
administrative 1,089 765 3,073 2,643
Amortization 571 498 1,733 1,631
Research and development 69 25 223 80
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1,729 1,288 5,029 4,354
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Operating income 570 481 668 211
Financing:
Interest on loans payable 81 105 259 305
Interest on operating loan 50 22 115 89
Other (7) 49 (7) (2)
Write-down of property, plant
& equipment - - 70 -
Other income (35) - (125) -
Foreign exchange losses 75 124 45 75
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Earnings (loss) before income
taxes 406 181 311 (256)
Income taxes - - - -
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- - - -
Net earnings (loss) 406 181 311 (256)
Deficit, beginning of period (3,447) (3,381) (3,352) (2,944)
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Deficit, end of period $ (3,041) $ (3,200) $ (3,041) $ (3,200)
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Earnings (loss) per share:
Basic $ 0.04 $ 0.02 $ 0.03 $ (0.02)
Diluted $ 0.03 $ 0.02 $ 0.02 $ (0.02)
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited) Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2005 30, 2004 30, 2005 30, 2004
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Cash provided by (used in):
Operations:
Net earnings (loss) $ 406 $ 181 $ 311 $ (256)
Items not involving cash:
Amortization 571 498 1,733 1,631
Write-down of property,
plant and equipment - - 70 -
Stock based compensation 1 3 5 11
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978 682 2,119 1,386
Changes in non-cash operating
working capital (1,202) (1,283) (1,164) 2,806
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(224) (601) 955 4,192
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Financing:
Proceeds from exercise of
share purchase options 2 - 9 107
Repayment of loans payable
and capital lease
obligations (391) (356) (1,011) (1,013)
Increase (decrease) in
operating loans 1,339 1,166 1,155 (3,825)
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950 810 153 (4,731)
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Investments:
Proceeds from sale of
property, plant and equipment 10 - 10 -
Additions to property, plant
and equipment (736) (209) (1,118) (875)
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(726) - (1,108) (875)
Increase (decrease) in cash - - - (1,414)
Cash, beginning of period - - - (1,414)
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Cash, end of period $ - $ - $ - $ -
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Property, plant and equipment in the amount of $450 thousand was acquired
by way of capital lease during the quarter.
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
Corporation 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 September 30, 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
September 30, 2005 September 30, 2004
Manufacturing Pipeline Manufacturing Pipeline
Revenue $ 4,612 $ 6,844 $ 3,500 $ 3,627
Gross margin 1,311 (28.4%) 988 (14.4%) 1,030 (29.4%) 739 (20.4%)
Other expenses 599 1,294 415 1,173
Earnings (loss)
before income
taxes 712 (306) 615 (434)
Nine months ended Nine months ended
September 30, 2005 September 30, 2004
Manufacturing Pipeline Manufacturing Pipeline
Revenue $ 12,626 $ 19,267 $ 7,618 $ 15,560
Gross margin 3,303 (26.2%) 2,394 (12.4%) 1,210 (15.9%) 3,355 (21.4%)
Other expenses 1,598 3,788 1,149 3,672
Earnings (loss)
before income
taxes 1,705 (1,394) 61 (317)
Substantially all of the carrying value of the property, plant and
equipment, and amortization expense relate to the Pipeline segment.
3. Share Data
At September 30, 2005, the Corporation had 11,459,502 outstanding common
shares and 1,036,925 outstanding options to acquire common shares.
897,800 of these options were vested and exercisable. During the quarter,
3,600 options were exercised.
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:
September 30, 2005 December 31, 2004
Due within 12 months $ 1,467 $ 1,468
Due after 12 months $ 3,867 $ 4,728
5. Interest
Three months ended Nine months ended
---------------------------------------
September September September September
30, 2005 30, 2004 30, 2005 30, 2004
---------------------------------------
Interest Paid $ 131 $ 127 $ 374 $ 394
About Garneau Inc.
------------------
Garneau Inc.'s primary business is the application of high performance
protective coatings and linings for oil and gas pipeline protection.
Additionally, Garneau Inc. designs and fabricates oilfield equipment for both
domestic and international markets. During more than 30 years of operating
experience, Garneau Inc. has developed significant expertise and innovative
technology, and has maintained a long-term focus on continuously improving the
pipe coating process with cost-effective, quality coatings. A talented and
effective management team provides the vision and experience for long-term
profitable growth and increasing shareholder value. The company's Website can
be accessed at: http://www.garneau-inc.com/
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%SEDAR: 00008952E
