(TSX: SCL.A, SCL.B)
TORONTO, May 8 /CNW/ -
Financial Summary
(In thousands of Canadian dollars Three Months Ended
except per share amounts) Mar. 31
2007 2006
-------------------------------------------------------------------------
Operating Results Restated
Revenue $ 221,329 $ 262,547
EBITDA (note 1) 38,407 47,644
Operating income from continuing operations 27,972 37,478
Income from continuing operations 23,308 24,755
Income (loss) from discontinued operations (55) (35)
Net income 23,253 24,720
Net income (loss) per share (Class A and B)
- Basic
Continuing operations 0.31 0.33
Discontinued operations 0.00 0.00
Total 0.31 0.33
Net income (loss) per share (Class A and B)
- Diluted
Continuing operations 0.31 0.33
Discontinued operations 0.00 0.00
Total 0.31 0.33
-------------------------------------------------------------------------
Cash Flow
Cash from (used in) operating activities 23,279 48,551
Additions to property, plant and equipment 15,493 6,873
-------------------------------------------------------------------------
Financial Position
Working capital 348,923 296,959
Total assets 1,000,569 937,358
Shareholders' equity per share
(Class A and B) $ 8.67 $ 7.61
-------------------------------------------------------------------------
Note 1: EBITDA is a non-GAAP measure calculated by adding back to net
income from continuing operations, net interest, taxes, and
amortization of property, plant and equipment.
Note 2: Shareholders' equity per share is a non-GAAP measure calculated
by dividing shareholders' equity by the number of Class A and
Class B share outstanding at the date of the balance sheet.
Note 3: During the fourth quarter of 2006, ShawCor Ltd. adopted the
proportionate consolidation method of accounting for its 30%
investment in the Arabian Pipecoating Company Limited ("APCO").
The Company previously accounted for this investment using the
equity method. This change in accounting policy has been applied
retroactively and as a result, revenue, operating expenses and
certain balance sheet accounts for previous periods have been
restated. Refer to note 2 of the 2006 annual Consolidated
Financial Statements.
Consolidated revenue for the first quarter of 2007 totaled $221.3 million compared to $262.5 million in the first quarter of 2006, with the decrease reflecting completion of the Langeled project in Norway and Leith Scotland, in the first quarter of 2006 and a year over year reduction in large-diameter pipe coating activity in the Far East. These lower levels of pipe coating activity at Bredero Shaw were partly mitigated by increased revenue at each of the Company's other divisions. Revenue also declined compared with the $276.3 million reported in the fourth quarter of 2006 as a result of the completion in the prior quarter of significant pipe coating projects in Brazil and Ras Al Khaimah and the impact of a slowdown in small diameter pipe coating activity in Western Canada. These reductions were partially offset by continuing growth in the Petrochemical and Industrial segment businesses.
Consolidated EBITDA totaled $38.4 million (17.3% of sales) in the quarter compared to $54.5 million (19.7% of sales) in the prior quarter and $47.6 million (18.1% of sales) in the first quarter of 2006. EBITDA was primarily impacted by the lower revenue at Bredero Shaw.
Consolidated income from continuing operations in the quarter totaled $23.3 million compared to $26.7 million during the last quarter and $24.8 million in the first quarter of 2006, while net income totaled $23.3 million ($0.31 per share) compared to $26.7 million ($0.36 per share) in the last quarter and $24.7 million ($0.33 per share) in the first quarter of last year.
The Company's backlog grew $34.8 million or 9% in the quarter to $402.7 million. The growth in backlog, together with the current level of bidding activity, is expected to translate into modest growth in revenue compared with the first quarter with the result that revenue for the full year in 2007 is expected to be at or near the 2006 level.
MANAGEMENT DISCUSSION AND ANALYSIS
The following is management's interim discussion and analysis of operations and financial position and should be read in conjunction with the Consolidated Financial Statements and Management's Discussion and Analysis included in the Company's 2006 Annual Report.
Revenue and Income from Operations
ShawCor classifies its revenue and income from operations in two industry segments: Pipeline and Pipe Services, and Petrochemical and Industrial.
Consolidated revenue for the quarter totaled $221.3 million, 80% of the level achieved in the last quarter and 84% of the level recorded in the first quarter of 2006. Lower revenue in the quarter at Bredero Shaw, the Company's global pipe coating business, was partially offset by revenue growth at the Company's other divisions. Net income for the quarter was $23.3 million or $0.31 per share compared to $26.7 million ($0.36 per share) in the last quarter and $24.7 million ($0.33 per share) in the first quarter of 2006.
In the Pipeline and Pipe Services segment, revenue in the quarter totaled $182.4 million compared to $244.0 million in the fourth quarter of 2006. Revenue at Bredero Shaw in the quarter was 71% of last quarter's level and reflected the impact of the winding down of the KOC project at the division's pipe coating plant in Ras Al Khaimah and the PDEG project in Brazil, together with a decline in small-diameter coating activity, consistent with lower natural gas drilling levels, in Western Canada. In addition, revenue was impacted by the delay of several pipe coating projects in the USA, the Far East, and Nigeria. At the segment's other divisions, revenue decreases were experienced at both Shaw Pipeline Services and Canusa-CPS as pipeline project activity levels declined from the exceptionally high levels reported in the fourth quarter of 2006.
Compared with the first quarter of 2006, Pipeline and Pipe Services segment revenue decreased by $46 million or 20% with the decrease reflecting reductions in production at Bredero Shaw's large-diameter pipe coating plants in the Far East and the impact of the Langeled project at the division's plants in Farsund, Norway and Leith, Scotland, which was completed in the first quarter of 2006. Revenue in the quarter at the segment's other divisions all increased over the corresponding quarter of last year with Shaw Pipeline Services and Canusa-CPS posting strong revenue growth on higher project activity, and revenue at Guardian increasing as a result of the new integrated facility at Nisku, Alberta, which was commissioned in the third quarter of 2006. Operating income from continuing activities for the segment totaled $24.5 million (13.5% of sales) in the quarter compared to $40.8 million (16.7% of sales) in the prior quarter and $37.3 million (16.3% of sales) in the first quarter of 2006, and was adversely impacted by the revenue reductions noted above. Partially offsetting the revenue impact was the benefit of reduced depreciation expense and fixed costs in the quarter that were lower than both the prior quarter and the first quarter of last year.
In the Petrochemical and Industrial segment, revenue in the quarter of $39.5 million increased 20% over the last quarter and 13% over the first quarter of last year reflecting increased business activity at both DSG-Canusa and ShawFlex. Operating income from continuing operations for the segment totaled $7.0 million (17.7% of sales) in the quarter compared to $5.6 million (17.0% of sales) in the last quarter and $4.6 million (13.2% of sales) in the first quarter of 2006.
Finance
Financial and corporate costs consist of corporate office costs not charged to the operating divisions and other non-operating items including foreign exchange gains and losses on cash balances. Financial and corporate costs for the quarter totaled $4.3 million before foreign exchange gains of $720 thousand, compared to $3.6 million, before foreign exchange losses of $1.0 million, in the last quarter, and $5.0 million in the first quarter of 2006, before foreign exchange gains of $550 thousand.
Net interest income totaled $1.6 million in the quarter, compared to $1.4 million in the last quarter and $88 thousand in the first quarter of 2006, with the improvement reflecting the significant increase in the cash position of the Company.
Income tax expense was $6.7 million (22.7% of pre-tax income) in the quarter compared to $15.7 million (36.3% of pre-tax income) in the last quarter and $12.8 million (34.1% of pre-tax income) in the first quarter of last year. The effective tax rate (income taxes as a percentage of income from continuing operations before income taxes and non-controlling interest) in the quarter benefited from a 5 percentage point reduction due to decreases in the Company's Canadian future tax balances and a 3 percentage point reduction from the recognition of future tax assets as a result of the Company's improved profitability in the United States. The tax rate for the first quarter of 2006 was impacted by losses in foreign jurisdictions, where the tax loss benefits were not recognized in the consolidated financial statements.
Cash Flow
Cash flow generated from operating activities in the quarter totaled $23.3 million, compared to $40.6 million in the last quarter and $48.6 million in the first quarter of 2006, with the decrease reflecting the lower earnings in the quarter together with an increase in non-cash working capital mainly resulting from reduced taxes payable balances, reflecting income tax payments made in the quarter, partially offset by lower accounts receivable levels consistent with the lower revenue in the quarter.
Cash flow used in investing activities in the quarter totaled $15.4 million, substantially comprised of capital expenditures of $15.5 million. Major expenditures in the quarter included pipe coating capacity expansions in Canada and the United States and plant upgrades at Bredero Shaw's facility in Ras Al Khaimah. Cash flow used in investing activities totaled $16.8 million in the last quarter, comprised of capital expenditures of $18.1 million partially offset by proceeds of $1.3 million received on the disposal of property, plant and equipment, while cash flow used in investing activities in the first quarter of 2006 totaled $6.8 million, representing capital expenditures in that quarter.
Cash flow used in financing activities totaled $14.5 million, comprised of $10.7 million paid to repurchase 385,000 Class A shares under the Company's Normal Course Issuer Bid ("NCIB"), dividends paid to shareholders of $4.2 million and $967 thousand paid to reduce bank indebtedness, partially offset by $1.3 million received on the issuance of 86,875 Class A shares on the exercise of stock options. Cash flow used in financing activities totaled $903 thousand in the first quarter of 2006 while cash flow generated from financing activities totaled $899 thousand in the prior quarter.
Liquidity and Capitalization
At March 31, 2007, the Company recorded a working capital ratio of 2.49 to 1 compared to 2.39 to 1 at December 31, 2006. Operating working capital, excluding cash and cash equivalents, increased $9.1 million in the quarter to $49.9 million with the growth mainly due to lower taxes payable, partially offset by decreased receivables levels in line with the lower revenue in the quarter. As a result of the net cash flows detailed above, cash and cash equivalents decreased $7.1 million in the quarter to $302.2 million.
Change in Accounting Policies
On January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants' Handbook Section 1530, Comprehensive Income; Section 3855, Financial Instruments - Recognition and Measurement; Section 3861, Financial Instruments - Disclosure and Presentation; and Section 3865, Hedges. These changes require the Company to classify all financial assets as held-for-trading, designated at fair value, available-for-sale, held-to-maturity, or loans and receivables. The new accounting standards also require the Company to measure all financial assets, including derivatives and excluding loans and receivables, debt securities classified as held-to-maturity and available-for-sale equities that do not have quoted market values in an active market, at fair values. Changes in the fair values of financial assets classified as held-for-trading and of derivatives that are not considered effective hedges are charged to net income. Changes in the fair values of financial assets classified as available-for-sale and derivatives that are considered effective hedges are charged to other comprehensive income. As required, these new accounting standards have been applied as an adjustment to opening retained earnings and accumulated other comprehensive income. Prior period figures have not been restated. Refer to note 1 to the first quarter 2007 interim financial statements for further information.
Financial Instruments
The following table sets out the notional amounts outstanding under foreign exchange contracts, the average contractual exchange rates and the settlement of these contracts as at March 31, 2007:
(in thousands)
-------------------------------------------------------------------------
Maturity
-------------------------------------------------------------------------
U.S. dollars sold for Canadian dollars
-------------------------------------------------------------------------
Less than one year US$24,350
-------------------------------------------------------------------------
Weighted average rate 1.1325
-------------------------------------------------------------------------
Canadian dollars sold for U.S. dollars
-------------------------------------------------------------------------
Less than one year CAD$1,150
-------------------------------------------------------------------------
Weighted average rate 0.8697
-------------------------------------------------------------------------
At March 31, 2007, the Company had notional amounts of $29.4 million of forward contracts outstanding (December 31, 2006 - $38.5 million) with a fair value of the Company's liability for all foreign exchange forward contracts totaling $689 thousand (December 31, 2006 - $3.1 million).
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with Canadian Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. These estimates and assumptions are made with management's best judgment given the information available at the time; however, actual results could differ from the estimates. Critical estimates used in preparing the consolidated financial statements were materially unchanged during the quarter.
Risks and Uncertainties
Operating in an international environment, servicing predominantly the oil and gas industry, ShawCor faces a number of business risks and uncertainties that could materially adversely affect the Company's projections, business, results of operations and financial condition. There were no material changes in the nature or magnitude of such business risks during the quarter. A more complete outline of the risks and uncertainties facing the Company are included in the annual Management's Discussion and Analysis.
Contractual Obligations
There were no material changes to the Company's contractual obligation during the quarter, other than those that would be expected in the ordinary course of business.
Summary of Quarterly Results
The following is a summary of selected financial information for the nine most recently completed quarters:
(In thousands of Canadian dollars except per share amounts) First Second Third Fourth Full Year ------------------------------------------------------------------------- Revenue (Restated - see note below) 2007 $ 221,329 $ $ $ $ 2006 262,547 269,433 251,324 276,315 1,059,619 2005 244,952 231,995 241,639 293,867 1,012,453 Operating income from continuing operations (Restated - see note below) 2007 27,972 2006 37,478 35,835 23,677 41,790 138,780 2005 29,326 12,509 21,882 31,737 95,454 Income from continuing operations 2007 23,308 2006 24,755 24,898 16,549 26,722 92,924 2005 18,688 7,516 34,806 21,780 82,790 Income (loss) from discontinued operations 2007 (55) 2006 (35) (192) 7 (69) (289) 2005 (930) 2,224 55,946 (1,190) 56,050 Net income (loss) 2007 23,253 2006 24,720 24,706 16,556 26,653 92,635 2005 17,758 9,740 90,752 20,590 138,840 Operating income from continuing operations per share (Classes A and B) Basic and diluted 2007 0.37 2006 0.51 0.48 0.32 0.56 1.87 2005 0.39 0.17 0.29 0.42 1.27 Income from continuing operations per share (Classes A and B) Basic and Diluted 2007 0.31 2006 0.33 0.34 0.22 0.36 1.25 2005 0.25 0.10 0.45 0.30 1.10 Income (loss) from discontinued operations per share (Classes A and B) Basic and Diluted 2007 0.00 2006 0.00 0.00 0.00 0.00 0.00 2005 (0.01) 0.03 0.75 (0.02) 0.75 Net income (loss) per share (Classes A and B) Basic and Diluted 2007 0.31 2006 0.33 0.34 0.22 0.36 1.25 2005 0.24 0.13 1.20 0.28 1.85 ------------------------------------------------------------------------- Note: Quarterly revenue and operating income from continuing operations figures have been restated to reflect the change in accounting treatment for the Company's investment in the Arabian Pipecoating Company Limited adopted in the fourth quarter of 2006. Please refer to note 2 to the 2006 annual Consolidated Financial Statements.
The following are key factors affecting the comparability of quarterly financial results.
The Company's operations in the Pipeline and Pipe Services segment, representing more than 80% of the Company's consolidated revenue, are largely project-based. The nature and timing of projects can result in variability in the Company's quarterly revenue and profitability. In addition, certain of the Company's operations are subject to a degree of seasonality particularly in the Pipeline and Pipe Services market segment. The following are additional key factors impacting the comparability of the quarterly information disclosed above:
The majority of the Company's revenue is transacted in currencies other than Canadian dollars, with a majority transacted in U.S. dollars. Changes in the rates of exchange between the Canadian dollar and other currencies could have a significant effect on the amount of these revenues when it is translated into Canadian dollars.
On November 3, 2004, the Company announced the closure of its Mobile, Alabama facility. This event had a significant impact on the financial results for the fourth quarter of 2004. Operations at the facility ceased in the fourth quarter of 2005 and discontinued operations accounting treatment was adopted in that quarter with prior quarters restated on a comparable basis.
On September 30, 2005, the Company completed the sale of its OMSCO drill pipe manufacturing division. The division has been accounted for as a discontinued operation.
Outstanding Share Capital
As at April 27, 2007, the Company had 60,616,050 Class A Subordinate Voting Shares ("Class A") outstanding and 13,078,142 Class B Multiple Voting Shares ("Class B") outstanding. Each Class B share is convertible into a Class A share at the option of the holder. In addition, as at April 27, 2007, the Company had stock options outstanding to purchase up to 2,549,400 Class A shares.
Outlook
The Company's consolidated order backlog, representing customer orders expected to be completed within one year, totaled $402.7 million at March 31, 2007, compared to $367.8 million at the beginning of the quarter, with several major pipe coating projects won in the period in Brazil, the Middle East and the United States.
The Company expects pipe coating activity levels to improve modestly throughout the balance of the year, supported by the growth in backlog in the quarter together with the current level of bidding activity with the result that full year 2007 revenue is expected to be at or near the 2006 level. The Company is currently working to secure major pipe coating contracts in the North Sea and Baltic regions and success in securing these contracts combined with continued strong large diameter pipeline activity in the Americas could provide significant revenue growth in 2008 and beyond. The Company is continuing to explore other growth opportunities and continues to enjoy a strong balance sheet with the financial capacity to capitalize on these opportunities as and when they arise.
Forward Looking Information
This document includes certain statements that reflect management's expectations and objectives for ShawCor's future performance, opportunities and growth which constitute forward-looking information under applicable securities laws. Such statements, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. These statements may be identified by the use of forward-looking terminology such as "may," "will," "should", "anticipate," "expect", "believe", "predict", "estimate," "continue," "intend," "plan," and variations of these words or other similar expressions. These statements are based on assumptions, estimates and analysis made by ShawCor in light of its experience and perception of trends, current conditions and expected developments as well as other factors believed to be reasonable and relevant in the circumstances. Although ShawCor believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions in light of currently available information, ShawCor can give no assurance that such expectations will be achieved.
Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those predicted, expressed or implied by the forward-looking statements. Significant risks facing ShawCor include, but are not limited to: changes in global economic activity and changes in energy supply and demand which impact on the level of drilling activity and pipeline construction; political, economic and other risks arising from ShawCor's international operations; compliance with environmental, trade and other laws; liability claims; fluctuations in foreign exchange rates; fluctuations in prices of raw materials, as well as other risks and uncertainties.
Other information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com.
ShawCor will be hosting a Shareholder and Analyst Conference Call and Webcast on May 9, 2007 at 10:00 a.m. EDT to discuss the Company's first quarter 2007 financial results. Please visit our website at www.shawcor.com for further details.
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars except per share data)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31
-------------------------
2007 2006
Restated
----------- -----------
Revenue $ 221,329 $ 262,547
----------- -----------
Operating expenses (notes 2, 3 and 4) 181,855 213,436
Amortization 9,982 10,185
Research and development 1,520 1,449
----------- -----------
193,357 225,070
----------- -----------
Operating income from continuing operations 27,972 37,478
Interest income, net (note 5) 1,599 88
----------- -----------
Income before income taxes and
non-controlling interest 29,571 37,566
Income taxes (note 6) 6,716 12,792
----------- -----------
Income before non-controlling interest 22,855 24,774
Non-controlling interest 453 (19)
----------- -----------
Income from continuing operations 23,308 24,755
Loss from discontinued operations (note 7) (55) (35)
----------- -----------
Net income $ 23,253 $ 24,720
----------- -----------
----------- -----------
Earnings per share, Class A and B
- Basic and Diluted
Continuing operations $ 0.31 $ 0.33
Discontinued operations - -
----------- -----------
----------- -----------
Total $ 0.31 $ 0.33
----------- -----------
----------- -----------
-------------------------------------------------------------------------
SEGMENTED INFORMATION Three Months Ended
March 31
-------------------------
Revenue 2007 2006
----------- -----------
Pipeline and Pipe Services $ 182,368 $ 227,925
Petrochemical and Industrial 39,519 35,026
Intersegment Eliminations (558) (404)
----------- -----------
$ 221,329 $ 262,547
----------- -----------
----------- -----------
Income (loss) from operations
Pipeline and Pipe Services $ 24,536 $ 37,287
Petrochemical and Indus 6,983 4,636
Financial and Corporate (3,547) (4,445)
----------- -----------
----------- -----------
$ 27,972 $ 37,478
----------- -----------
----------- -----------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended
March 31
-------------------------
2007 2006
Restated
----------- -----------
Operating activities:
Income from continuing operations $ 23,308 $ 24,755
Items not requiring an outlay of cash:
Amortization 9,982 10,185
Stock-based compensation (note 2) 675 582
Future income taxes (157) (606)
Non-controlling interest in earnings
of subsidiaries (453) 19
Change in non-cash working capital
and other (10,076) 13,616
----------- -----------
Cash provided by operating activities 23,279 48,551
----------- -----------
Investing activities:
Purchases of property, plant and
equipment (15,493) (6,873)
Proceeds on disposal property,
plant and equipment 101 41
----------- -----------
Cash used in continuing investing
activities (15,392) (6,832)
----------- -----------
Financing activities:
Decrease in bank indebtedness (967) (1,003)
Issue of shares 1,325 100
Purchase of shares for cancellation (10,658) -
Dividends paid to shareholders (4,188) -
----------- -----------
Cash used in continuing financing
activities (14,488) (903)
Foreign exchange on foreign cash and
cash equivalents 155 1,864
----------- -----------
Net cash provided by (used in)
continuing operations (6,446) 42,680
Net cash provided by (used in)
discontinued operations (note 7) (679) 810
Cash and cash equivalents at
beginning of period 309,322 200,335
----------- -----------
Cash and cash equivalents at
end of period $ 302,197 $ 243,825
----------- -----------
----------- -----------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED BALANCE SHEETS
Mar. 31 Dec. 31
2007 2006
------------- -------------
Assets
Current assets
Cash and cash equivalents $ 302,197 $ 309,322
Accounts receivable 179,841 188,865
Inventories 79,689 79,662
Taxes receivable 4,971 4,293
Prepaid expenses 16,269 12,897
Current assets of discontinued
operations (note 7) 9 156
------------- -------------
582,976 595,195
Property, plant and equipment, net 207,562 202,078
Goodwill 175,280 175,813
Other assets (note 8) 34,751 34,940
------------- -------------
$ 1,000,569 $ 1,008,026
------------- -------------
------------- -------------
Liabilities
Current liabilities
Bank indebtedness (note 9) $ 3,127 $ 4,094
Accounts payable and accrued
liabilities 165,728 169,387
Deferred revenues 15,739 10,907
Taxes payable 41,752 57,010
Derivative financial
instruments (note 15) 689 -
Current liabilities of discontinued
operations (note 7) 7,018 7,789
------------- -------------
234,053 249,187
Long-term debt 86,547 87,480
Minority interest in subsidiaries 4,126 5,013
Other non-current liabilities (note 10) 36,592 36,419
------------- -------------
361,318 378,099
------------- -------------
Shareholders' Equity
Capital stock (note 11) 207,318 206,852
Contributed surplus (note 12) 10,830 10,603
Retained earnings 507,715 498,001
Accumulated other comprehensive
income (note 13) (86,612) (85,529)
------------- -------------
421,103 412,472
------------- -------------
639,251 629,927
------------- -------------
$ 1,000,569 $ 1,008,026
------------- -------------
------------- -------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended
March 31
----------------------------
2007 2006
----------------------------
Balance at beginning of period $ 498,001 $ 421,547
Net income 23,253 24,720
------------- -------------
521,254 446,267
Excess of purchase price paid over
stated value of shares (9,351) -
Dividends paid (4,188) -
------------- -------------
Balance at end of period $ 507,715 $ 446,267
------------- -------------
------------- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
March 31
----------------------------
2007 2006
----------------------------
Net income $ 23,253 $ 24,720
Other comprehensive income (loss),
net of income taxes:
Unrealized gain (loss) on translating
financial statements of self-sustaining
foreign operations (1,092) 3,283
Gain on hedges of unrealized foreign
currency translation 382 -
------------- -------------
Unrealized foreign currency translation
gain (loss), net of hedging activites (710) 3,283
------------- -------------
Unrealized loss on available-for-sale
financial assets arising during the period (640) -
Income tax benefit 218 -
------------- -------------
Change in unrealized loss on
available-for-sale financial assets (422) -
------------- -------------
Gain on derivatives designated as
cash flow hedges 117 -
Income tax expense (40) -
Loss on derivatives designated as cash
flow hedges in prior periods transferred
to net income in the current period 138 -
Income tax expense (47) -
------------- -------------
Change in gain on derivatives designated
as cash flow hedges 168 -
------------- -------------
Other comprehensive income (loss) (964) 3,283
------------- -------------
Comprehensive income $ 22,289 $ 28,003
------------- -------------
------------- -------------
ShawCor Ltd.
Notes to the Consolidated Financial Statements (Unaudited)
1. Accounting policies
The accompanying unaudited interim consolidated financial statements
of ShawCor Ltd. (the "Company") have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP") for the
preparation of interim financial statements. They do not include all of
the information and disclosures required by GAAP for annual consolidated
financial statements. Except for the exception noted below, these
unaudited interim financial statements have been prepared in accordance
with accounting policies outlined in the Company's audited financial
statements for the year ended December 31, 2006. Accordingly, these
interim financial statements should be read in conjunction with the
Company's annual consolidated financial statements.
In the fourth quarter of 2006, the Company adopted the proportionate
consolidation method of accounting for its 30% investment in the Arabian
Pipecoating Company. This change in accounting policy was applied
retroactively with comparative figures restated. The Company previously
accounted for this investment using the equity method.
On January 1, 2007, the Company adopted the Canadian Institute of
Chartered Accountants' Handbook Section 1530, Comprehensive Income;
Section 3251, Equity, Section 3855, Financial Instruments - Recognition
and Measurement; Section 3861, Financial Instruments - Disclosure and
Presentation; and Section 3865, Hedges. As required, these new
accounting standards have been as adopted prospectively with an
adjustment to accumulated other comprehensive income. Prior period
figures have not been restated. The following adjustments were made to
the Company's balance sheet as a result of these changes:
(in thousands of Canadian dollars) Jan. 1, 2007
-------------------------------------------------------------------------
Increase (decrease) in assets
Other assets $ 193
-------------
Total increase (decrease) in assets $ 193
-------------
-------------
Increase (decrease) in liabilities
Derivative financial instruments liability $ 925
Current taxes payable (315)
Future taxes 253
Long-term debt (551)
-------------
Total increase (decrease) in liabilities 312
-------------
Increase (decrease) in shareholders' equity
Accumulated other comprehensive income related
to available-for-sale financial assets 491
Accumulated other comprehensive income related
to cash flow hedges (611)
-------------
Total increase (decrease) in shareholders' equity (119)
-------------
Total increase (decrease) in liabilities and
shareholders' equity $ 193
-------------
-------------
The following is a description of the accounting policies adopted by the
Company as a result of implementing these accounting changes:
a) Comprehensive income
The Company's comprehensive income is comprised of net income and other
comprehensive income, which is made up of unrealized foreign currency
gains or losses on the translation of the financial statements of self-
sustaining foreign operations, gains or losses on available-for-sale
financial assets and changes in unrealized gains or losses on derivatives
designated as effective cash flow hedges.
b) Accumulated other comprehensive income
Accumulated other comprehensive income is included on the consolidated
balance sheet as a separate component of shareholders' equity and
includes accumulated unrealized foreign currency gains or losses on the
translation of the financial statements of self-sustaining foreign
operations, accumulated gains or losses on available-for-sale financial
assets and accumulated changes in unrealized gains or losses on
derivatives designated as effective cash flow hedges.
c) Financial instruments
Held-for-trading financial assets are financial assets which are acquired
for resale prior to maturity. Held-for trading financial assets are
reflected in the consolidated balance sheet at fair value with changes in
fair value during a period charged to operating expenses. Held-to-
maturity financial assets are non-derivative financial assets with a
fixed maturity which the Company intends to hold until maturity. Such
assets are measured at amortized cost. Available-for-sale financial
assets are those non-derivative financial assets which are so designated
by the Company or that do not fall into another category. Available-for-
sale financial assets are carried on the consolidated balance sheet at
fair value with gains or losses from changes in fair value in a period
included in other comprehensive income. Derivative financial instruments
designated as effective cash flow hedges are reflected in the
consolidated balance sheet at fair value with any gains of losses
resulting from fair value changes included in other comprehensive income.
Derivatives with positive exposures are classified as assets while those
with negative exposures are classified as liabilities. Derivative
financial instruments not designated as effective cash flow hedges are
carried at fair value in the consolidated balance sheet with gains or
losses resulting from changes in fair value in a period charged to
operating expenses. Loans and receivables are accounted for at amortized
cost.
The following is a summary of the classes of financial instruments
included in the Company's consolidated balance sheet as well as their
designation by the Company under the new accounting standards:
-------------------------------------------------------------------------
Balance sheet item Designation
-------------------------------------------------------------------------
Cash and cash equivalents Held-for-trading
-------------------------------------------------------------------------
Accounts receivable Loans and receivables
-------------------------------------------------------------------------
Long-term investments Available-for-sale
-------------------------------------------------------------------------
Accounts payable and accrued Other liabilities
liabilities
-------------------------------------------------------------------------
Long-term debt Other liabilities
-------------------------------------------------------------------------
d) Transaction costs
Transaction costs related to the acquisition or issue of held-for-trading
financial instruments are charged to net income as incurred. Transaction
costs related to financial instruments not designated as held-for-trading
are included in the financial instrument's initial recognition amount.
2. Stock-based compensation
On February 28, 2007, the Board of Directors approved the granting of
371,800 stock options under the 2001 Employee Plan. The total average
fair value of the stock options, calculated using the Black-Scholes
pricing model, was $2.7 million. The fair value of options granted under
the 2001 Employee plan will be amortized to compensation expense over the
5 year vesting period of options. The assumptions used in calculating the
fair value of the options are as follows: expected life of options
6.25 years, expected stock price volatility 29%, expected dividend yield
0.92%, and risk free interest rate 3.98%. The compensation cost from the
continuing amortization of granted stock options for the three months
ended March 31, 2007 included in operating expenses is $675 thousand
(March 31, 2006 - $582 thousand).
3. Foreign exchange gains and losses
Included in operating expenses for the three months ended March 31, 2007
are foreign exchange gains totaling $720 thousand (March 31, 2006 - $547
thousand). These gains arise from foreign currency transactions and from
the translation of the financial statements of foreign integrated
subsidiaries.
4. Employee future benefits
The Company's cost under both defined benefit and defined contribution
arrangements included in operating expenses for the three months ended
March 31, 2007 is $2.4 million (March 31, 2006 - $2.4 million).
5. Interest income (expense)
Three Months Ended Mar. 31
(in thousands of Canadian dollars) 2007 2006
-------------------------------------------------------------------------
Interest on short-term deposits $ 3,183 $ 1,743
Interest on bank indebtedness (197) (260)
Interest on long-term debt (1,387) (1,395)
----------------------------
$ 1,599 $ 88
----------------------------
----------------------------
Net interest received during the three months ended March 31, 2007
totaled $1.1 million (March 31, 2006 - $425 thousand).
6. Income taxes
Net income taxes paid during the three months ended March 31, 2007
totaled $24.2 million (March 31, 2006 - $4.4 million).
7. Discontinued operations
On November 2, 2004, the Company announced its decision to close the
Mobile, Alabama pipe-coating facility and operations at the facility
ceased in the fourth quarter of 2005. The Company adopted discontinued
operations accounting treatment for the Mobile facility in the fourth
quarter of 2005.
The following table summarizes the financial results and cash flows
from discontinued operations for the three months ended March 31, 2007
and 2006 and the assets and liabilities of the discontinued operations as
at those dates:
Three Months Ended Mar. 31
(in thousands of Canadian dollars) 2007 2006
-------------------------------------------------------------------------
Revenue $ - $ 18
----------------------------
Income (loss) from operations (55) (35)
Interest expenses - -
----------------------------
Income (loss) from discontinued operations
before income taxes (55) (35)
Income tax expense - -
----------------------------
Net income (loss) from discontinued
operations $ (55) $ (35)
----------------------------
----------------------------
Cash flow from (used in) operating
activities $ (679) $ 810
----------------------------
----------------------------
Current assets $ 9 $ -
Property, plant and equipment, net - 7,841
Current liabilities 7,018 12,129
8. Other assets
Mar. 31 Dec. 31
(in thousands of Canadian dollars) 2007 2006
-------------------------------------------------------------------------
Long-term investment $ 2,979 $ 2,875
Deferred financing costs 1,394 2,089
Accrued employee future benefit asset 4,273 4,572
Future income taxes 26,105 25,404
----------------------------
Total $ 34,751 $ 34,940
----------------------------
----------------------------
Other assets include a long-term investment in Garneau Inc., a Canadian-
based, publicly traded pipe-coating company. This investment is
classified as available-for-sale under the new accounting standards
related to financial instruments and accordingly, subsequent to
January 1, 2007, is carried at fair value with changes in fair value
charged to other comprehensive income.
9. Bank indebtedness
At March 31, 2007, the Company had operating credit lines of
$203.2 million (December 31, 2006 - $204.1 million), net of $65.8 million
of various standby letters of credit for performance and bid bonds
(December 31, 2006 - $74.1 million) and bank indebtedness of $1.1 million
(December 31, 2006 - $3.0 million), excluding the Company's proportionate
share of the bank indebtedness of its joint venture, Arabian Pipecoating
Company Limited.
10. Other non-current liabilities
Mar. 31 Dec. 31
(in thousands of Canadian dollars) 2007 2006
-------------------------------------------------------------------------
Non-current asset retirement obligations $ 3,502 $ 3,561
Accrued employee future benefit obligations 3,438 2,362
Future income taxes 29,652 30,496
----------------------------
Total $ 36,592 $ 36,419
----------------------------
----------------------------
11. Capital stock
(in thousands of Canadian dollars
except share information) Mar. 31, 2007 Dec. 31, 2006
-------------------------------------------------------------------------
Number of shares: Class A
Balance, beginning of the period 60,914,175 61,006,045
Issued - stock options 86,875 331,157
Conversions Class B to Class A - 9,873
Purchase and cancelled under Normal
Course Issuer Bid (385,000) (432,900)
----------------------------
Balance, end of the period 60,616,050 60,914,175
----------------------------
Number of shares: Class B 13,078,142 13,078,142
----------------------------
Total number of shares 73,694,192 73,992,317
----------------------------
----------------------------
Stated value: Class A
Balance, beginning of the period $ 205,848 $ 203,716
Issued - stock options 1,773 3,573
Conversion Class B to Class A - -
Purchased and cancelled under Normal
Course Issuer Bid (1,307) (1,441)
----------------------------
Balance, end of the period 206,314 205,848
----------------------------
Stated Value: Class B 1,004 1,004
----------------------------
Total stated value Class A and Class B $ 207,318 $ 206,852
----------------------------
----------------------------
12. Contributed surplus
(in thousands of Canadian dollars Mar. 31, 2007 Dec. 31, 2006
-------------------------------------------------------------------------
Balance, beginning of period $ 10,603 $ 9,231
Stock compensation expense (note 2) 675 2,798
Fair value of stock options exercised (448) (1,426)
------------- -------------
Balance, end of period $ 10,830 $ 10,603
------------- -------------
------------- -------------
13. Accumulated other comprehensive income
in thousands of Canadian dollars
except share information) Mar. 31, 2007 Dec. 31, 2006
-------------------------------------------------------------------------
Balance, beginning of period (85,529) (100,260)
Transitional adjustment on adoption of
new accounting policies (note 1) (119) -
Unrealized foreign currency translation
gain (losses), net of hedging activities $ (710) $ 3,283
Unrealized loss on available-for-sale
financial assets (422) -
Gain on derivatives designated as
cash flow hedges 168 -
----------------------------
Balance, end of period $ (86,612) $ (96,977)
----------------------------
----------------------------
14. Stock option plans
A summary of the status of the Company's stock option plans and changes
during the year are presented below:
-------------------------------------------------------------------------
Mar. 31, 2007 Dec. 31, 2006
-------------------------------------------------------------------------
Weighted Weighted
Market Average Average
Growth Other Total Exercise Total Exercise
Plan(1) Plans Shares Price Shares Price
-------------------------------------------------------------------------
Balance
outstanding,
beginning
of year 7,875 2,261,520 2,269,395 $15.76 2,578,165 $ 15.76
-------------------------------------------------------------------------
Granted - 371,800 371,800 25.02 457,700 17.27
-------------------------------------------------------------------------
Exercised (2,955) (83,920) (86,875) 15.86 (331,157) 16.43
-------------------------------------------------------------------------
Forfeited - - - - (66,890) 15.75
-------------------------------------------------------------------------
Expired (4,920) - (4,920) 17.91 (368,423) 17.31
-------------------------------------------------------------------------
Balance
outstanding,
end of period - 2,549,400 2,549,400 17.10 2,269,395 $ 15.76
-------------------------------------------------------------------------
(1) This maximum number is achieved only when the market value of the
shares at the time of exercise is equal to no less than four times
the value at the date of the grant.
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted
average
remaining Weighted Weighted
Outstanding contractual average Exercisable average
Range of at March 31, life exercise at March 31, exercise
exercise prices 2007 in years price 2007 price
-------------------------------------------------------------------------
$10.00 to $15.00 606,680 5.88 $12.76 606,680 $12.76
-------------------------------------------------------------------------
$15.01 to $20.00 1,528,920 7.07 $16.79 1,528,920 $16.79
-------------------------------------------------------------------------
$20.01 to $25.00 42,000 8.28 $20.90 4,000 $21.90
-------------------------------------------------------------------------
$25.01 to $30.00 371,800 9.76 $25.02 - -
-------------------------------------------------------------------------
2,549,400 2,139,600
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted
average
remaining Weighted Weighted
Outstanding contractual average Exercisable average
Range of at Dec. 31, life exercise at Dec. 31, exercise
exercise prices 2006 in years price 2006 price
-------------------------------------------------------------------------
$10.00 to $15.00 626,920 6.13 $12.78 626,920 $12.78
-------------------------------------------------------------------------
$15.01 to $20.00 1,600,475 7.26 $16.79 1,237,275 $16.75
-------------------------------------------------------------------------
$20.01 to $25.00 42,000 8.53 $20.90 4,000 $21.90
-------------------------------------------------------------------------
2,269,395 1,868,195
-------------------------------------------------------------------------
15. Financial instruments
The Company has determined the estimated fair values of its financial
instruments based on appropriate valuation methodologies; however,
considerable judgment is required to develop these estimates.
Accordingly, these estimated fair values are not necessarily indicative
of the amounts the Company could realize in a current market exchange.
The estimated fair value amounts can be materially affected by the use of
different assumptions or methodologies. The methods and assumptions used
to estimate the fair value of financial instruments as well as related
interest rate credit and foreign exchange risk are described below:
a) Cash and cash equivalents, accounts receivable, bank indebtedness,
accounts payable and accrued liabilities, and income taxes
Due to the short period to maturity of the financial instruments, the
carrying values as presented in the consolidated balance sheet are
reasonable estimates of fair values.
b) Long-term debt
The fair value of the Company's long-term debt is based on current rates
for debt with similar terms and maturities and is not materially
different from its carrying values.
The following are key risks associated with the Company's financial
instruments:
a) Interest rate risk
The following table summarizes the Company's exposure to interest rate
risk at March 31, 2007:
-------------------------------------------------------------------------
(in thousands of Fixed interest rate
Canadian dollars) maturing in
-------------------------------------------------------------------------
Floating rate 1 year Greater than Total
or less 1 year
-------------------------------------------------------------------------
Financial assets
-------------------------------------------------------------------------
Cash and cash
equivalents $302,197 $ - $ - $302,197
-------------------------------------------------------------------------
Total $302,197 $ - $ - $302,197
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial
liabilities
-------------------------------------------------------------------------
Bank indebtedness $ 3,127 $ - $ - $ 3,127
-------------------------------------------------------------------------
Long-term debt - - 87,098 87,098
-------------------------------------------------------------------------
Total $ 3,127 $ - $ 87,098 $ 90,225
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average fixed
rates of debt - - 5.11% -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Credit risk
Certain of the Company's financial assets are exposed to credit risk.
Cash and cash equivalents consist of deposits with major commercial banks
and short-term investments which are readily convertible into cash.
The Company, in the normal course of business, is exposed to credit risk
from its customers, substantially all of which are in the energy
industry. These accounts receivable are subject to normal industry credit
risks.
The Company is also exposed to credit risk from the potential default by
any of its counterparties on its foreign exchange forward contracts. The
Company mitigates this credit risk by dealing with counterparties who are
major financial institutions and which the Company anticipates will
satisfy their obligations under the contracts.
c) Foreign exchange risk
The Company operates in several countries, which gives rise to a risk
that its earnings and cash flows may be adversely impacted by
fluctuations in foreign exchange. The Company utilizes foreign exchange
forward contracts to manage foreign exchange risk from its underlying
customer contracts. In particular, the Company uses foreign exchange
forward contracts for the sole purpose of hedging a portion of its
projected foreign currency inflows, consisting primarily of foreign
currency sales to the Company's customers. Gains or losses on these
hedging instruments are recognized in the same period as, and as part of,
the hedged transactions. The Company does not enter into foreign exchange
contracts for speculative purposes. The Company does not generally
attempt to hedge the net investment and equity of self-sustaining foreign
operations, except that the U.S. dollar long-term note payable is
designated as a hedge of a portion of its net investment in Bredero
Shaw's U.S. dollar-based operations. The following table sets out the
notional amounts outstanding under foreign exchange contracts, the
average contractual exchange rates and the settlement of these contracts
as at March 31, 2007:
(in thousands)
-------------------------------------------------------------------------
Maturity
-------------------------------------------------------------------------
U.S. dollars sold for Canadian dollars
-------------------------------------------------------------------------
Less than one year US$24,350
-------------------------------------------------------------------------
Weighted average rate 1.1325
-------------------------------------------------------------------------
Canadian dollars sold for U.S. dollars
-------------------------------------------------------------------------
Less than one year CAD$1,150
-------------------------------------------------------------------------
Weighted average rate 0.8697
-------------------------------------------------------------------------
Foreign exchange options and forward exchange contracts are used to hedge
foreign exchange exposures related to commercial activities. They are not
used by the Company for speculative purposes. At March 31, 2007, the
Company had notional amounts of $29.4 million of forward contracts
outstanding (December 31, 2006 - $38.7 million). These amounts are used
to express the volume of transactions and are not recognized in the
consolidated financial statements. These financial instruments are
contracted with major, chartered banks; as a result, credit and liquidity
risks related to these instruments are considered to be low.
The fair values of foreign exchange forward contracts represent an
approximation of the amounts the Company would have paid to or received
from counterparties to unwind its positions at March 31, 2007. The fair
value of the Company's net liability for all foreign exchange forward
contracts at March 31, 2007 was $689 thousand (December 31, 2006 -
$3.1 million). The fair value of this liability has been recognized on
the consolidated balance sheet through a charge to other comprehensive
income. If these contracts ceased to be effective as hedges, unrecognized
gains or losses pertaining to the portion of the hedging transactions in
excess of projected foreign-denominated cash flows would be transferred
from accumulated other comprehensive income and recognized in net income
at the time this condition was identified.
16. Segmented information
Three Months Ended Mar. 31
2007 2006
(in thousands of Canadian dollars) Restated
--------------------------------------- -------------- -------------
Revenue
Pipeline and Pipe Services $ 182,368 $ 227,925
Petrochemical and Industrial 39,519 35,026
Intersegment Eliminations (558) (404)
-------------- -------------
$ 221,329 $ 262,547
-------------- -------------
-------------- -------------
Income (loss) from operations
Pipeline and Pipe Services $ 24,536 $ 37,287
Petrochemical and Industrial 6,983 4,636
Financial and Corporate (3,547) (4,445)
-------------- -------------
$ 27,972 $ 37,478
-------------- -------------
-------------- -------------
Goodwill
Pipeline and Pipe Services $ 157,059 $ 152,224
Petrochemical and Industrial 18,221 16,597
-------------- -------------
$ 175,280 $ 168,821
-------------- -------------
-------------- -------------
Total assets
Pipeline and Pipe Services $ 944,768 $ 985,656
Petrochemical and Industrial 113,937 96,622
Financial and Corporate 1,263,797 1,183,399
Elimination (1,321,933) (1,328,319)
-------------- -------------
$ 1,000,569 $ 937,358
-------------- -------------
-------------- -------------
17. Joint venture operations
The Company's joint venture operations consist of its 50% interests in
Bredero Shaw Revestimentos de Tubos Ltda. and Thermotite Brasil Ltda. and
its 30% interest in the jointly controlled Arabian Pipecoating Company
Limited. These investments have been accounted for through proportionate
consolidation with the Company's share of each joint venture's assets,
liabilities, revenue, expenses, net income and cash flows consolidated
based on the Company's ownership position. On January 1, 2007, the
Company sold 33% of its 75% ownership interest in Thermotite Brazil Ltda.
("Thermotite") to Delta Premium Trading Corp. Effective from the date of
the transaction, Thermotite is jointly controlled by the Company and
Delta Trading and accordingly, the Company has accounted for its
investment in Thermotite through proportional consolidation subsequent to
this date. The figures related to these joint ventures included in the
Company's consolidated financial statements are summarized as follows:
Three Months Ended
(in of thousands of Canadian dollars) Mar. 31
-------------------------------------------------------------------------
2007 2006
-------------- -------------
Revenue $ 13,540 $ 4,817
Operating and other expenses 10,287 3,522
-------------- -------------
Net income before income taxes 3,253 1,295
Provision for taxes 398 104
-------------- -------------
Net income $ 2,855 $ 1,191
-------------- -------------
-------------- -------------
Cash provided by (used in):
Operating activities $ (1,165) $ (388)
Investing activities - (347)
Financing activities - 712
Current assets $ 19,779 $ 8,240
Property, plant and equipment, net 10,417 3,912
Goodwill 5,074 -
Current liabilities 14,744 6,161
18. Comparative figures
Comparative figures have been reclassified where necessary to correspond
with the current year's presentation.