(TSX: SCL.A, SCL.B)
TORONTO, Nov. 6 /CNW/ -
Financial Summary (In thousands of Three Months Nine Months Canadian dollars except Ended Sept. 30 Ended Sept. 30 per share amounts) 2008 2007 2008 2007 ------------------------------------------------------------------------- Operating Results Revenue $ 357,249 $ 264,892 $ 945,724 $ 762,661 EBITDA (note 1) 67,232 55,373 168,298 150,831 Operating income from continuing operations 50,486 45,500 125,154 120,509 Income from continuing operations 32,682 30,191 82,020 83,766 Income (loss) from discontinued operations (82) (59) 10,402 (162) Net income 32,600 30,132 92,422 83,604 Net income (loss) per share (Class A and B) - Basic Continuing operations 0.46 0.42 1.15 1.15 Discontinued operations 0.00 0.00 0.15 0.00 Total 0.46 0.42 1.30 1.15 Net income (loss) per share (Class A and B) - Diluted Continuing operations 0.46 0.42 1.14 1.14 Discontinued operations 0.00 0.00 0.14 0.00 Total 0.46 0.42 1.28 1.14 ------------------------------------------------------------------------- Cash Flow Cash from operating activities 29,906 37,550 94,723 105,848 Additions to property, plant and equipment 23,085 23,943 61,999 63,304 ------------------------------------------------------------------------- Financial Position Working capital 168,227 287,584 Total assets 1,138,595 931,959 Shareholders' equity per share (Class A and B) $ 9.28 $ 8.25 (note2) ------------------------------------------------------------------------- Note 1: EBITDA is a non-GAAP measure calculated by adding back to income from continuing operations, the sum of interest (income)/expense, taxes and depreciation/amortization of property, plant and equipment. EBITDA does not have a standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures prescribed by other companies. EBITDA is used by many analysts in the oil and gas industry as one of several important analytical tools. The following is the calculation of EBITDA for the periods presented above: Income from continuing operations 32,682 30,191 82,020 83,766 Add (deduct): Income taxes 15,192 15,943 39,813 40,920 Interest (income) expense 2,523 (811) 3,505 (3,638) Amortization of property, plant and equipment 16,835 10,050 42,960 29,783 ------------------------------------------------------------------------- EBITDA 67,232 55,373 168,298 150,831 ------------------------------------------------------------------------- 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 shares outstanding at the date of the balance sheet.
Consolidated revenue from continuing operations in the third quarter of 2008 totaled $357.2 million and exceeded revenue in the prior quarter and the third quarter of 2007 by 21.1% and 34.9%, respectively. Revenue in the quarter reached record levels for the second quarter in a row, driven by continuing strength in the Company's Pipeline and Pipe Services segment.
Consolidated income from continuing operations in the quarter totaled $32.7 million ($0.46 per share, diluted) compared to $22.2 million ($0.31 per share, diluted) in the second quarter of 2008 and $30.2 million ($0.42 per share, diluted) in the third quarter of 2007. Operating margins (operating income from continuing operations divided by revenue from continuing operations) improved by approximately 3 percentage points over the second quarter 2008 as a result of improved operating performance at Bredero Shaw due to improved capacity utilization and the completion of the commissioning of two new plants, and at the Petrochemical and Industrial segment businesses reflecting effective operating cost containment.
Net income in the third quarter totaled $32.6 million ($0.46 per diluted share), compared to $32.8 million ($0.46 per diluted share) in the second quarter 2008 (which result included a gain from discontinued operations of $10.5 million) and $30.1 million ($0.42 per share, diluted) in the third quarter of last year.
On a year-to-date basis, consolidated revenue from continuing operations totaled $945.7 million, 24.0% higher than in the corresponding period of 2007, while income from continuing operations totaled $82.0 million ($1.14 per share, diluted) compared to $83.8 million ($1.14 per share, diluted) for the same period of 2007. Net income for the first nine months of 2008 totaled $92.4 million ($1.28 per share, diluted) compared to $83.6 million ($1.14 per share, diluted) in the same period of last year.
The Company's backlog of $528.6 million at September 30, 2008 increased 11.1% during the third quarter, reflecting continuing strength in international large diameter and offshore project activity and the effect of including the backlog of the recently acquired Flexpipe Systems business.
MANAGEMENT'S 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 2007 Annual Report.
Revenue, Income from Operations and Net Income
Consolidated Results
Current Quarter versus Q3 2007
Consolidated revenue from continuing operations in the third quarter of 2008 totaled $357.2 million and reached a new quarterly record for the Company. Revenue in the quarter was 34.9% higher than the $264.9 million recorded in the third quarter of 2007, driven by continuing strength in the Pipeline and Pipe Services segment businesses.
Operating income from continuing operations totaled $50.5 million (14.1% of revenue from continuing operations) in the quarter, compared to $45.5 million (17.2% of revenue from continuing operations) in the third quarter of last year. The lower operating margin (operating income from continuing operations divided by revenue from continuing operations) in the quarter, compared to the prior year, reflects the impact of increased manufacturing fixed costs and depreciation associated with new plants in Camrose, Alberta and Ras Al Khaimah, U.A.E, together with operating cost increases in the Middle East, the Far East, and in the Petrochemical and Industrial segment businesses.
Net income in the quarter totaled $32.6 million ($0.46 per share, diluted) compared to $30.1 million ($0.42 per share, diluted) in the third quarter of 2007, with the improvement in earnings per share reflecting revenue growth, partially offset by the impact of lower operating margins compared to the third quarter of 2007.
Current Quarter versus Q2 2008
Consolidated revenue from continuing operations in the third quarter increased 21.1% over the level achieved in the prior quarter as significant revenue growth in the Pipeline and Pipe Services segment was partially offset by a decline in the Petrochemical and Industrial segment.
Operating income from continuing operations at $50.5 million in the third quarter was 50.9% higher than the $33.4 million recorded in the second quarter of 2008, a result of the revenue increase and the benefit from a 2.8 percentage point improvement in consolidated operating margins reflecting improved operating performance at Bredero Shaw due to improved capacity utilization and the completion of the commissioning of two new plants, and at the Petrochemical and Industrial segment businesses as a result of effective operating cost containment.
Income from continuing operations in the third quarter increased by $10.5 million ($0.15 per share, diluted) over the second quarter of 2008 due to the operating income improvement while net income was marginally lower. Net income in the second quarter of 2008 included income from discontinued operations of $10.6 million ($0.15 per share, diluted) related to the settlement of a lawsuit pertaining to the Company's closed Mobile, Alabama pipe coating operation.
Year-To-Date 2008 vs. 2007
Consolidated revenue from continuing operations for the nine months ended September 30, 2008 totaled $945.7 million, 24.0% higher than the revenue recorded in the corresponding period of last year, and reflected higher levels of business activity in the Pipeline and Pipe Services segment, partially offset by the impact of market softness in the Petrochemical and Industrial segment. Operating income from continuing operations for the period totaled $125.2 million (13.2% of revenue from continuing operations) compared to $120.5 million (15.8% of revenue from continuing operations) in the same period of 2007, with the margin decrease reflecting the impact of higher manufacturing fixed costs and depreciation expense associated with new pipe coating plants. On a year-to-date basis, net income totaled $92.4 million ($1.28 per share, diluted) compared to $83.6 million ($1.14 per share, diluted) in the first nine months of 2007.
ShawCor classifies its revenue and income from operations in two industry segments: Pipeline and Pipe Services, and Petrochemical and Industrial. Discussion of the operating results of each of these segments follows: Pipeline and Pipe Services ------------------------------------------------------------------------- Three months ended Sept. 30 June 30 Sept. 30 (In thousands of Canadian dollars) 2008 2008 2007 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue from continuing operations $ 323,346 $ 258,984 $ 227,778 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income from continuing operations 51,142 $ 34,420 42,738 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating margin 15.8% 13.3% 18.8% -------------------------------------------------------------------------
Current Quarter versus Q3 2007
In the Pipeline and Pipe Services segment, revenue from continuing operations in the third quarter of 2008 totaled $323.3 million, 42.0% higher than in the third quarter of last year, and reflected growth at all divisions in the segment together with the inclusion of revenue from Flexpipe Systems, which was acquired by the Company on June 27, 2008. At Bredero Shaw, revenue from continuing operations increased 28.6% over the third quarter of last year with growth achieved in all regions. In the Americas region, revenue grew by 9.3% reflecting commencement of the Deep Panuke offshore pipe coating project, which contributed $25.4 million in the quarter, partially offset by lower revenue in the United States. In the Europe, Africa and Russia region, revenue increased 93.9% due to the impact of the Badaratskaya Bay project, which contributed $21.1 million in the quarter at the division's pipe coating plant in Leith, Scotland, and the Pluto project, which contributed $9.3 million in the quarter at the division's plant in Orkanger, Norway. In the Middle East region, revenue increased 85.7% over the level in the third quarter of 2007 when the division's plant in Ras Al Khaimah was undergoing a major plant upgrade. Finally, in the Far East region, revenue in the quarter was broadly unchanged compared with the third quarter of 2007. Revenue in the quarter at each of the segment's other divisions increased over the levels achieved in the third quarter of last year reflecting continuing strong global pipeline market activity.
Operating income from continuing operations for the segment was $51.1 million (15.8% of revenue from continuing operations) in the quarter compared to $42.7 million (18.8% of revenue from continuing operations) in the third quarter of last year, with the decrease in operating margins (operating income from continuing operations divided by revenue from continuing operations) reflecting the increased fixed manufacturing costs and depreciation associated with the Company's new pipe coating plants in Ras Al Khamaih, and Camrose Alberta, and costs associated with the continued ramp up of production on the technically complex Pluto project at the Bredero Shaw plants in Norway and Malaysia.
Current Quarter versus Q2 2008
Revenue for the Pipeline and Pipe Services segment in the third quarter was 24.9% higher than in the second quarter of this year, reflecting the inclusion of revenue from the acquired Flexpipe Systems business together with strong revenue growth at the segment's Bredero Shaw and Shaw Pipeline Services divisions. At Bredero Shaw, the most significant sources of the revenue growth were the Badaratskaya Bay project in Leith, Scotland and the Deep Panuke project offshore Canada. The acquisition of Flexpipe Systems contributed revenue growth of approximately $26 million compared with the second quarter.
Operating income from continuing operations in the quarter was $16.7 million or 49% higher than the level achieved in the second quarter 2008, reflecting the higher revenue in the period together with a 2.5 percentage point improvement in operating margins. The second quarter 2008 operating margins had been impacted by several factors related to the operating performance at Bredero Shaw. In the third quarter, margins benefited from improved capacity utilization, a reduction in product and plant launch costs, and a modest impact from price increases to offset operating cost increases.
Year-to-Date 2008 vs. Year-to-Date 2007
Revenue for the nine months ended September 30, 2008 for the Pipeline and Pipe Services segment totaled $838.1 million, 29.1% higher than the revenue recorded during the same period of 2007, and reflected year over year growth at all of the divisions in the segment, underpinned by continuing buoyant activity levels in global pipeline markets. Operating income from continuing operations for the segment for the first nine months of the year totaled $124.1 million (14.8% of revenue from continuing operations) compared to $113.74 million (17.5% of revenue from continuing operations) during the corresponding period of last year. Operating income was positively impacted by the higher revenue in the period, but this was partially offset by the impact of lower operating margins stemming from increased manufacturing costs and depreciation expense related to new pipe coating capacity.
Petrochemical and Industrial ------------------------------------------------------------------------- Three months ended Sept. 30 June 30 Sept. 30 (In thousands of Canadian dollars) 2008 2008 2007 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue from continuing operations $ 34,247 $ 36,585 $ 37,518 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income from continuing operations 5,170 $ 5,316 6,274 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating margin 15.1% 14.5% 16.7% -------------------------------------------------------------------------
Current Quarter versus Q3 2007
In the Petrochemical and Industrial segment, revenue in the quarter totaled $34.2 million and was 91.3% of the level in the third quarter of last year, reflecting the continuing slowdown in the markets served by ShawFlex, the result of weak industrial markets in North America, partially offset by moderate revenue growth at DSG-Canusa's European operations. Operating income for the segment in the third quarter of 2008 of $5.2 million (15.1% of revenue from continuing operations) compared to $6.3 million (16.7% of revenue from continuing operations) in the third quarter of 2007 with the decrease in operating margins reflecting the impact of lower production volumes at ShawFlex.
Current Quarter versus Q2 2008
Revenue for the segment in the third quarter was 93.6% of the level achieved in the second quarter of the year and reflected the impact of slower business activity at both ShawFlex and DSG-Canusa. Operating income from continuing operations in the quarter was 97.3% of the level achieved in the prior quarter and reflected the impact of the lower revenue in the quarter, partially offset by the impact of a 0.6 percentage point improvement in operating margins stemming from effective cost containment activities.
Year-to-Date 2008 vs. Year-to-Date 2007
Revenue for the Petrochemical and Industrial segment for the nine months ended September 30, 2008 totaled $109.0 million, compared to $115.2 million in the same period of last year, reflecting lower revenue at both ShawFlex and DSG-Canusa stemming from the weakening economic environment in North America and the related impact on the segment's industrial markets. Operating income from continuing operations for the first nine months of the year totaled $16.6 million (15.2% of revenue from continuing operations) compared to $19.8 million (17.1% of revenue from continuing operations) in 2007 with the reduction reflecting the lower revenue in the period together with the impact of lower operating margins resulting from lower production volumes and increased operating costs.
Financial and Corporate
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, before a net foreign exchange gain of $233 thousand, totaled $6.1 million compared to $5.0 million in the third quarter of last year, before a net foreign exchange gain of $1.5 million with the increase due to increased costs for recruitment and management development. Financial and corporate costs in the third quarter, excluding foreign exchange losses, increased by $829 thousand over the second quarter of 2008. On a year-to-date basis, financial and corporate costs totaled $17.8 million, excluding foreign exchange gains of $2.3 million, compared to $13.3 million in the same period of 2007, excluding foreign exchange losses of $428 thousand. Year-to-date financial and corporate costs include a $1.5 million write-down of the Company's investment in Garneau Inc. that was recorded in the first quarter of this year.
Interest Income
Net interest expense totaled $2.5 million in the quarter, compared to interest income of $811 thousand in the third quarter of 2007 and interest expense of $895 thousand in the second quarter of 2008, with the increase due to the impact of higher levels of debt associated with the acquisition of Flexpipe Systems at the end of the second quarter of 2008. On a year-to-date basis, interest expense for the nine months ended September 30, 2008 totaled $3.5 million compared to interest income in the same period of 2007 of $3.6 million with the change mainly reflecting the impact of lower cash balances in 2008 together with higher levels of bank indebtedness due to the Flexpipe Systems acquisition.
Income Taxes
Income tax expense related to continuing operations in the quarter was $15.2 million, an effective rate (income tax expense divided by income before income taxes and non-controlling interest) of 31.7% compared to $15.9 million (effective rate of 34.4%) in the third quarter of last year and $10.2 million (effective rate of 31.3%) in the second quarter of 2008. The effective tax rate in the quarter was slightly lower than the Company's Canadian statutory tax rate of 34.1% having been favourably impacted by earnings of certain subsidiaries located in lower tax rate jurisdictions. On a year-to-date basis, income tax expense totaled $39.8 million (effective rate of 32.7%) in the nine months ended September 30, 2008 compared to $40.9 million (effective rate of 33.0%) in the same period of 2007.
Cash Flow
Cash flow generated by continuing operating activities in the quarter totaled $29.9 million, compared to $37.6 million in the third quarter of 2007 and $74.3 million in the second quarter of 2008, and reflected a $31.7 million investment in working capital balances, related to the higher accounts receivable and prepaid expenses incurred solely to support the higher business levels generated in the third quarter. Cash flow generated by continuing operating activities totaled $94.7 million for the nine months ended September 30, 2008 compared to $105.8 million in the same period of 2007, with the decrease from the prior year reflecting increased levels of working capital investment, partially offset by higher income from continuing operations before amortization expense.
Cash flow used in continuing investing activities in the quarter totaled $29.0 million, compared to $153.7 million in the second quarter of 2008 and $27.2 million in the third quarter of 2007, and was comprised of capital expenditures of $23.1 million and investment in deferred project costs of $5.9 million. Major capital additions in the quarter included capacity expansions programs at the Regina, Saskatchewan and Camrose, Alberta pipe coating plants and project-related capital expenditures at Bredero Shaw's Leith Scotland and Orkanger Norway pipe coating plants. Cash flow used in continuing investing activities for the nine months ended September 30, 2008 totaled $197.0 million compared to $83.5 million in the same period of 2007 with the increase mainly resulting from the $121.9 million acquisition of Flexpipe Systems Inc. on June 27, 2008.
Cash flow used in continuing financing activities in the quarter totaled $24.4 million, compared to $4.5 million in the third quarter of 2007 and cash generated of $59.4 million in the second quarter of 2008, and consisted of a decrease in bank indebtedness of $10.0 million, $10.2 million paid to repurchase 400,000 Class A shares under the Company's Normal Course Issuer Bid ("NCIB"), and dividends paid to shareholders of $4.5 million, partially offset by cash received on the issuance of shares on the exercise of stock options in the amount of $304 thousand. On a year-to-date basis, cash flow generated by continuing financing activities totaled $18.8 million compared to cash flow used in continuing financing activities of $89.6 million in the corresponding period of 2007, with the change mainly due to an increase in bank indebtedness in 2008 of $53.0 million, representing financing for the Flexpipe Systems acquisition, compared to repayments of bank indebtedness in 2007 of $4.0 million, as well as a lower level of share repurchases under the NCIB in 2008 compared with 2007.
Cash flow used in discontinued operations totaled $37.6 million in the quarter, compared to $3.9 million in the third quarter of 2007 and cash flow generated by discontinued operations of $2.7 million in the second quarter of 2008, and reflected the payment of the settlement reached on July 17, 2008 with the plaintiff in a lawsuit related to the discontinued Mobile, Alabama pipe coating facility. On a year-to-date basis, cash flow used in discontinued operations totaled $33.7 million compared to $5.8 million in the same period of last year.
Other Comprehensive Loss
Other comprehensive loss in the quarter totaled $8.3 million, representing unrealized foreign currency translation losses on translation of the financial statements of foreign subsidiaries, net of hedging activities, a result of the weakening of the Canadian dollar versus the U.S. dollar in the third quarter, together with an unrealized loss of $959 thousand on the Company's investment in the shares of Garneau Inc. On a year-to-date basis, other comprehensive income totaled $13.0 million, representing unrealized foreign currency translation gains on translation of the financial statements of foreign subsidiaries, net of hedging activities, compared to the other comprehensive loss of $38.0 million in the same period of last year that had consisted of losses on translation of the financial statements of foreign subsidiaries, net of hedging activities.
Liquidity and Capitalization
At September 30, 2008, the Company recorded a working capital ratio (the ratio of current assets to current liabilities) of 1.46 to 1 compared to 1.98 to 1 at December 31, 2007. Operating working capital, excluding cash, cash equivalents, bank indebtedness, the current portion of long-term debt and working capital of discontinued operations, increased $5.5 million during the quarter to $178.7 million and reflected increased accounts receivable and prepaid expense balances incurred solely to support increasing levels of business activity, partially offset by the related impact of increased accounts payables and accrued liabilities.
Change in Accounting Policies
The following are changes in the Company's accounting policies which came into effect in the first quarter of 2008:
a) General Standards of Financial Statements Presentation
Effective, January 1, 2008, the Company adopted changes to the Canadian Institute of Chartered Accountants' ("CICA") Handbook Section 1400, General Standards of Financial Statement Presentation. Amendments to this Handbook section require management to evaluate, as at each balance sheet date, the Company's ability to continue as a going concern. When management concludes that the company can no longer operate as a going concern, this fact, along with information relevant to that assessment, is required to be disclosed in the financial statements. When financial statements are not prepared on a going concern basis, this fact is to be disclosed along with a description of the basis of preparation.
b) Capital Disclosures
Effective January 1, 2008, the Company adopted CICA Handbook Section 1535, Capital Disclosures. This new Handbook section establishes standards for disclosing information about an entity's capital and how it is managed and includes the requirement for disclosure of information about an entity's objectives, policies and processes for managing capital. The disclosures related to this new handbook section are included in note 17.
c) Financial Instruments
Effective January 1, 2008, the Company adopted the following CICA Handbook Sections: 3862, Financial Instruments - Disclosure; and 3863, Financial Instruments - Presentation, which outline the disclosure requirements related to the Company's financial instruments. The adoption of the standards did not have any impact on the classification and valuation of the Company's financial instruments. The new disclosures required by these Handbook sections are included in note 16.
Effective August 30, 2008, the Company adopted the following Emerging Issues Committee abstract; EIC-172 Financial Instruments - Income Statement Representation Of Tax Loss Carryforward Recognized Following An Unrealized Gain Recorded In Other Comprehensive Income. As required, this accounting standard has been adopted retroactively with restatement of prior periods. The following adjustments were made to the Company's balance sheet as a result of adopting this accounting standard:
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(in thousands of Canadian dollars) January 1,
2008
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Increase in assets:
Future taxes $ 3,288
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Total increase in assets $ 3,288
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Increase in liabilities:
Future taxes $ 4,533
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Total increase in liabilities $ 4,533
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Increase (decrease) in shareholders' equity:
Retained earnings 3,288
Accumulated other comprehensive loss (4,533)
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Total increase to shareholders' equity. (1,245)
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Total increase to liabilities and shareholders' equity $ 3,288
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d) Inventories
On January 1, 2008, the Company adopted CICA Handbook Section 3031,
Inventories. As required, this new accounting standard has been adopted
retroactively with an adjustment to retained earnings. Prior year figures have
not been restated. The following adjustments were made to the Company's
balance sheet as a result of adopting this new accounting standard:
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(in thousands of Canadian dollars) January 1,
2008
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Increase in assets:
Inventories $ 3,067
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Total increase in assets $ 3,067
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Increase in shareholders' equity:
Retained earnings 3,067
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Total increase to shareholders' equity. 3,067
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Total increase to liabilities and shareholders' equity $ 3,067
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The following is a description of the accounting policy adopted by the Company as a result of implementing this accounting change:
Inventories are valued at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis except in certain project based pipe coating businesses where the average cost basis is employed, and includes direct materials, direct labour and variable and fixed manufacturing overheads. Net realizable value for finished goods and work-in-process is the amount which would be realized on the sale, less the cost of transport, and for raw materials and supplies is replacement cost. Ownership of inbound inventories is recognized at the time title passes to the Company, which coincides with the invoicing and release of such inventories by suppliers.
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 September 30, 2008:
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(in thousands) Sept. 30,
2008
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U.S. dollars sold for Canadian dollars
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Less than one year US$12,000
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Weighted average rate 1.0107
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Euros sold for U.S. dollars
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Less than one year Euro 4,150
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Weighted average rate 1.4969
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One year to two years Euro 2,150
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Weighted average rate 1.4490
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Two years to three years Euro 2,200
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Weighted average rate 1.4465
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U.S. dollars sold for Norwegian Kroners
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Less than one year US$4,685
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Weighted average rate 5.4000
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U.S. dollars sold for Euros
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Less than one year US$3,160
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Weighted average rate 1.4698
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At September 30, 2008, the Company had notional amounts of $30.3 million of forward contracts outstanding (June 30, 2008 - $39.3 million) with the fair value of the Company's net obligation from all foreign exchange forward contracts totaling $1.1 million (June 30, 2008 - $1.5 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, as compared to those disclosed in the Company's last annual Management's Discussion and Analysis contained in the Company's 2007 Annual Report.
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, businesses, 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 contained in the Company's 2007 Annual Report.
Contractual Obligations
There were no material changes to the Company's contractual obligations 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 eleven most recently completed quarters:
(In thousands of Canadian dollars except per share amounts) First Second Third Fourth Full Year ------------------------------------------------------------------------- Revenue (Restated - see note below) 2008 $ 293,357 $ 295,118 $ 357,249 $ - $ - 2007 221,329 276,440 264,892 285,438 1,048,099 2006 262,547 269,433 251,324 276,315 1,059,619 Operating income from continuing operations (Restated - see note below) 2008 41,219 33,449 50,486 - - 2007 27,972 47,036 45,500 39,493 160,001 2006 37,478 35,835 23,677 41,790 138,780 Income from continuing operations 2008 27,131 22,207 32,682 - - 2007 23,308 30,267 30,191 34,053 117,819 2006 24,755 24,898 16,549 26,722 92,924 Income (loss) from discontinued operations 2008 (69) 10,553 (82) - - 2007 (55) (48) (59) (30,300) (30,462) 2006 (35) (192) 7 (69) (289) Net income 2008 27,062 32,760 32,600 - - 2007 23,253 30,219 30,132 3,753 87,357 2006 24,720 24,706 16,556 26,653 92,635 Operating income from continuing operations per share (Classes A and B) Basic 2008 0.58 0.47 0.71 - - 2007 0.38 0.64 0.63 0.55 2.21 2006 0.51 0.48 0.32 0.56 1.87 Diluted 2008 0.57 0.47 0.70 - - 2007 0.37 0.63 0.63 0.54 2.18 2006 0.51 0.48 0.32 0.56 1.87 Income from continuing operations per share (Classes A and B) Basic 2008 0.38 0.31 0.46 - - 2007 0.31 0.41 0.42 0.48 1.62 2006 0.33 0.34 0.22 0.36 1.25 Diluted 2008 0.38 0.31 0.46 - - 2007 0.31 0.41 0.42 0.47 1.60 2006 0.33 0.34 0.22 0.36 1.25 Income (loss) from discontinued operations per share (Classes A and B) Basic 2008 0.00 0.15 0.00 - - 2007 0.00 0.00 0.00 (0.42) (0.42) 2006 0.00 0.00 0.00 0.00 0.00 Diluted 2008 0.00 0.15 0.00 - - 2007 0.00 0.00 0.00 (0.42) (0.41) 2006 0.00 0.00 0.00 0.00 0.00 Net income per share (Classes A and B) Basic 2008 0.38 0.46 0.46 - - 2007 0.31 0.41 0.42 0.06 1.20 2006 0.33 0.34 0.22 0.36 1.25 Diluted 2008 0.38 0.46 0.46 - - 2007 0.31 0.41 0.42 0.05 1.19 2006 0.33 0.34 0.22 0.36 1.25 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
this revenue when it is translated into Canadian dollars.
On November 3, 2004, the Company announced the closure of its Mobile,
Alabama facility. 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.
Outstanding Share Capital
As at October 29, 2008, the Company had 57,559,237 Class A Subordinate Voting Shares ("Class A") outstanding and 13,060,209 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 October 29, 2008, the Company had stock options outstanding to purchase up to 2,487,166 Class A shares.
Management's Health, Safety and Environmental Commitment
The Company is committed to providing a safe and healthy workplace and ensuring that all business activities are conducted in a manner that protects the environment. This commitment includes designing and operating its plants and individual processes in compliance with applicable government requirements regulating the discharge of substances into the environment or otherwise relating to the protection of the environment. The Company's program for health, safety and environmental management is further described in the Company's Annual Information Form under Health, Safety, and Environmental Policy.
Outlook
The Company's backlog totaled $528.6 million at September 30, 2008, representing an increase of 11.1% during the third quarter of the year, with bidding activity remaining strong throughout the quarter. The Company's outlook for the balance of the year continues to be positive with expected strong fourth quarter revenue resulting in significant year over year growth in 2008. While the Company is carefully monitoring the potential negative impact that the global financial market crisis could have on the Company's markets, ShawCor is well positioned to take advantage of the opportunities that could emerge during a downturn by leveraging the Company's strong balance sheet and significant global competitive position. Longer term, the industry fundamentals of supply, demand, and particularly depletion, are expected to require increased investment in energy infrastructure globally with resulting growth opportunities for ShawCor.
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 November 7, 2008 at 10:00 am ET to discuss the Company's third quarter 2008 financial results. Please visit our website at www.shawcor.com for future details.
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars except per share data)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Revenue $ 357,249 $ 264,892 $ 945,724 $ 762,661
Cost of goods sold 236,292 155,651 618,970 448,231
----------- ----------- ----------- -----------
Gross profit 120,957 109,241 326,754 314,430
Selling, general and
administrative
expenses (notes 2, 3
and 4) 51,706 51,780 153,309 158,988
Amortization of
property, plant and
equipment 16,835 10,050 42,960 29,783
Research and
development expense 1,930 1,911 5,331 5,150
----------- ----------- ----------- -----------
Operating income from
continuing operations 50,486 45,500 125,154 120,509
Interest income
(expense) (note 5) (2,523) 811 (3,505) 3,638
----------- ----------- ----------- -----------
Income before income
taxes and non-
controlling interest 47,963 46,311 121,649 124,147
Income taxes 15,192 15,943 39,813 40,920
----------- ----------- ----------- -----------
Income before non-
controlling interest 32,771 30,368 81,836 83,227
Non-controlling interest (89) (177) 184 539
----------- ----------- ----------- -----------
Income from continuing
operations 32,682 30,191 82,020 83,766
Income (loss) from
discontinued
operations (note 6) (82) (59) 10,402 (162)
----------- ----------- ----------- -----------
Net income $ 32,600 $ 30,132 $ 92,422 $ 83,604
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share,
Class A and B - Basic
(note 20)
Continuing
operations $ 0.46 $ 0.42 $ 1.15 $ 1.15
Discontinued
operations - - 0.15 -
----------- ----------- ----------- -----------
Total $ 0.46 $ 0.42 $ 1.30 $ 1.15
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share
Class A and B - Diluted
(note 20)
Continuing
operations $ 0.46 $ 0.42 $ 1.14 $ 1.14
Discontinued
operations - - 0.14 -
----------- ----------- ----------- -----------
Total $ 0.46 $ 0.42 $ 1.28 $ 1.14
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
----------------------------------------------- ------------------------
SEGMENTED INFORMATION Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Revenue
Pipeline and Pipe
Services $ 323,346 $ 227,778 $ 838,125 $ 649,111
Petrochemical and
Industrial 34,247 37,518 108,968 115,215
Intersegment
Eliminations (344) (404) (1,369) (1,665)
----------- ----------- ----------- -----------
$ 357,249 $ 264,892 $ 945,724 $ 762,661
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) from
operations
Pipeline and Pipe
Services $ 51,142 $ 42,738 $ 124,069 $ 113,652
Petrochemical and
Industrial 5,170 6,274 16,561 19,757
Financial and
Corporate (5,826) (3,512) (15,476) (12,900)
----------- ----------- ----------- -----------
$ 50,486 $ 45,500 $ 125,154 $ 120,509
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Operating activities:
Income from
continuing
operations $ 32,682 $ 30,191 $ 82,020 $ 83,766
Items not requiring
an outlay of cash:
Amortization of
property, plant
and equipment 16,835 10,050 42,960 29,783
Amortization of
deferred project
costs 8,498 6,521 15,206 19,650
Asset retirement
obligation expense 170 (88) 1,902 1,150
Stock-based
compensation
(note 2) 836 696 2,529 2,068
Future income taxes 674 (496) 409 139
Gain on disposal of
property, plant
and equipment 255 - 358 -
Impairment of
available-for-sale
financial asset
(note 9) - - 1,498 -
Non-controlling
interest in
earnings of
subsidiaries 89 177 (184) (539)
Gain on disposal of
subsidiary (note 21) - - (1,063) -
Settlement of asset
retirement
obligations 716 (163) (658) (2,760)
Change in employee
future benefits 857 457 2,489 2,219
Change in non-cash
working capital (31,706) (9,795) (52,742) (29,628)
----------- ----------- ----------- -----------
Cash provided by
continuing operating
activities 29,906 37,550 94,723 105,848
----------- ----------- ----------- -----------
Investing activities:
Purchases of
property, plant and
equipment (23,085) (23,943) (61,999) (63,304)
Proceeds on disposal
of property, plant
and equipment - 503 33 705
Increase in deferred
project costs (5,939) (3,802) (16,287) (17,993)
Acquisition of
subsidiaries
(note 21) - - (124,376) (2,579)
Proceeds on disposal
of subsidiaries - - 5,635 -
Investment in shares - - - (301)
----------- ----------- ----------- -----------
Cash used in
continuing investing
activities (29,024) (27,242) (196,994) (83,472)
----------- ----------- ----------- -----------
Financing activities:
Increase (decrease)
in bank indebtedness (10,005) (351) 52,965 (4,018)
Issue of shares 304 1,028 1,739 4,712
Purchase of shares
for cancellation (10,154) (1,161) (22,796) (77,923)
Dividends paid to
shareholders (4,537) (4,054) (13,085) (12,413)
----------- ----------- ----------- -----------
Cash provided by (used
in) continuing
financing activities (24,392) (4,538) 18,823 (89,642)
----------- ----------- ----------- -----------
Foreign exchange on
foreign cash and cash
equivalents 1,531 (8,637) 6,024 (20,403)
----------- ----------- ----------- -----------
Net cash used in
continuing operations (21,979) (2,867) (77,423) (87,669)
Net cash provided by
(used in) discontinued
operations (note 6) (37,638) (3,896) (33,702) (5,842)
Cash and cash
equivalents at
beginning of period 123,509 222,574 175,017 309,322
----------- ----------- ----------- -----------
Cash and cash
equivalents at end
of period $ 63,892 $ 215,811 $ 63,892 $ 215,811
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supplemental
information:
Cash interest paid $ 2,484 1,082 $ 5,047 $ 4,025
Cash income taxes
paid $ 5,010 13,795 $ 17,058 $ 49,500
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED BALANCE SHEETS
December 31
2007
September 30 Restated -
2008 Note 1
-------------- ------------
Assets
Current assets
Cash and cash equivalents (note 7) $ 63,892 $ 175,017
Accounts receivable 274,952 203,547
Taxes receivable 9,332 3,169
Inventories 152,110 102,486
Prepaid expenses 16,055 11,362
Derivative financial instruments 529 1,508
Current future income taxes 3,888 2,770
Current assets of discontinued operation
(note 6) 10,374 16,305
----------- -----------
531,132 516,164
Property, plant and equipment, net 288,487 242,783
Goodwill 212,071 159,480
Intangible assets (note 8) 59,440 1,558
Future income taxes 31,599 27,751
Other assets (note 9) 15,866 15,878
----------- -----------
$1,138,595 $ 963,614
----------- -----------
----------- -----------
Liabilities
Current liabilities
Bank indebtedness (note 10) $ 58,072 $ 107
Accounts payable and accrued liabilities 178,393 153,116
Taxes payable 52,949 32,030
Derivative financial instruments 1,160 -
Deferred revenues 45,671 24,021
Current portion of long-term debt 25,429 -
Current liabilities of discontinued operation
(note 6) 1,231 51,265
----------- -----------
362,905 260,539
Long-term debt 51,653 72,726
Future income taxes 50,549 37,539
Other non-current liabilities (note 11) 17,373 10,740
----------- -----------
482,480 381,544
----------- -----------
Non-controlling interest in subsidiaries 432 3,283
----------- -----------
Shareholders' Equity
Capital stock (note 12) 202,754 203,252
Contributed surplus (note 13) 13,686 11,729
Retained earnings 552,253 489,836
Accumulated other comprehensive loss (note 14) (113,010) (126,030)
----------- -----------
655,683 578,787
----------- -----------
$1,138,595 $ 963,614
----------- -----------
----------- -----------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Balance at beginning
of period $ 529,211 $ 474,950 $ 486,548 $ 498,001
Transitional
adjustment (note 1.f) 443 - 3,067 -
Transitional
adjustment (note 1.e) 3,288 - 3,288 -
----------- ----------- ----------- -----------
Adjusted balance at
beginning of year 532,942 474,950 492,903 498,001
Net income 32,600 30,132 92,422 83,604
----------- ----------- ----------- -----------
565,542 505,082 585,325 581,605
Excess of purchase
price paid over
stated value of
shares (note 12) (8,752) (1,041) (19,987) (69,205)
Dividends declared (4,537) (4,054) (13,085) (12,413)
----------- ----------- ----------- -----------
Balance at end of
period $ 552,253 $ 499,987 $ 552,253 $ 499,987
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Net income $ 32,600 $ 30,132 $ 92,422 $ 83,604
Other comprehensive
income (loss), net
of income taxes:
Unrealized gain
(loss) on
translating
financial
statements of
self-sustaining
foreign operations (5,868) (19,553) 17,432 (48,778)
Gain (loss) on
hedges of
unrealized foreign
currency
translation (1,757) 5,198 (3,975) 12,473
Income tax benefit
(expense) 300 (883) 678 (2,120)
----------- ----------- ----------- -----------
Unrealized foreign
currency translation
gain (loss), net of
hedging activites (7,325) (15,238) 14,135 (38,425)
----------- ----------- ----------- -----------
Unrealized loss on
available-for-sale
financial assets
arising during the
period (959) (312) (1,870) (1,595)
Unrealized loss on
available-for-sale
financial assets
transferred
to net income in
the current period - - 1,498 -
Income tax expense
transferred to net
income in the period - 106 253 542
----------- ----------- ----------- -----------
Change in unrealized
loss on available-
for-sale financial
assets (959) (206) (119) (1,053)
----------- ----------- ----------- -----------
Gain on derivatives
designated as cash
flow hedges - 1,151 - 3,296
Income tax expense - (393) - (1,121)
Loss (gain) on
derivatives
designated as cash
flow hedges in
prior periods
transferred to net
income in the
current period - (1,104) (1,508) (1,070)
Income tax expenses
(benefits)
transferred to net
income in the
current period - 376 512 364
----------- ----------- ----------- -----------
Change in gain (loss)
on derivatives
designated as cash
flow hedges - 30 (996) 1,469
----------- ----------- ----------- -----------
Other comprehensive
income (loss) (8,284) (15,414) 13,020 (38,009)
----------- ----------- ----------- -----------
Comprehensive income $ 24,316 $ 14,718 $ 105,442 $ 45,595
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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 as noted below, these unaudited interim
consolidated financial statements have been prepared in accordance with
accounting policies outlined in the Company's audited consolidated
financial statements for the year ended December 31, 2007. Accordingly,
these interim consolidated financial statements should be read in
conjunction with the Company's annual consolidated financial statements.
a) Intangible Assets
Intangible assets and intellectual property are recorded at their
allocated cost at the date of acquisition of the related subsidiary.
Amortization is recorded for intangible assets and intellectual property
with limited lives on a straight-line basis over their estimated useful
lives of up to 15 years.
b) General Standards of Financial Statements Presentation
Effective January 1, 2008, the Company adopted changes to the Canadian
Institute of Chartered Accountants' ("CICA") Handbook Section 1400,
General Standards of Financial Statement Presentation. Amendments to this
Handbook section require management to evaluate, as at each balance sheet
date, the Company's ability to continue as a going concern. If management
concludes that the Company can no longer operate as a going concern, that
fact, along with information relevant to that assessment, is required to
be disclosed in the financial statements. When financial statements are
not prepared on a going concern basis, this fact is to be disclosed along
with a description of the basis of preparation. This change had no impact
on the Company's unaudited interim consolidated financial statements.
c) Capital Disclosures
Effective January 1, 2008, the Company adopted CICA Handbook section
1535, Capital Disclosures. This Handbook section establishes standards
for disclosing information about the Company's capital and how it is
managed and includes the requirement for disclosure of information about
the Company's objectives, policies and processes for managing capital.
The disclosures related to this Handbook section are included in note 17.
d) Financial Instruments
Effective January 1, 2008, the Company adopted the following CICA
Handbook sections: 3862, Financial Instruments - Disclosure; and 3863,
Financial Instruments - Presentation, the former of which outlines the
disclosure requirements related to the Company's financial instruments.
The adoption of the standards did not have any impact on the
classification and valuation of the Company's financial instruments. The
disclosures required by these Handbook sections are included in note 16.
e) Financial Instruments
Effective August 30, 2008, the Company adopted the following Emerging
Issues Committee abstract; EIC-172 Financial Instruments - Income
Statement Representation Of Tax Loss Carryforward Recognized Following An
Unrealized Gain Recorded In Other Comprehensive Income. As required, this
accounting standard has been adopted retroactively with restatement of
prior periods. The following adjustments were made to the Company's
balance sheet as a result of adopting this accounting standard:
-------------------------------------------------------------------------
(in thousands of Canadian dollars) January 1,
2008
-------------------------------------------------------------------------
Increase in assets:
Future taxes.............................................. $ 3,288
-----------
Total increase in assets.................................... $ 3,288
-----------
-----------
Increase in liabilities:
Future taxes.............................................. $ 4,533
-----------
Total increase in liabilities............................... $ 4,533
-----------
Increase (decrease) in shareholders' equity:
Retained earnings......................................... 3,288
Accumulated other comprehensive loss...................... (4,533)
-----------
Total increase to shareholders' equity...................... (1,245)
-----------
Total increase to liabilities and shareholders' equity...... $ 3,288
-----------
-----------
f) Inventories
On January 1, 2008, the Company adopted CICA Handbook Section 3031,
Inventories. As required, this accounting standard has been adopted
prospectively with an adjustment to retained earnings. Prior year figures
have not been restated. The following adjustments were made to the
Company's balance sheet as a result of adopting this accounting standard:
-------------------------------------------------------------------------
(in thousands of Canadian dollars) January 1,
2008
-------------------------------------------------------------------------
Increase in assets:
Inventories .............................................. $ 3,067
-----------
Total increase in assets.................................... $ 3,067
-----------
-----------
Increase in shareholders' equity:
Retained earnings......................................... 3,067
-----------
Total increase to shareholders' equity...................... 3,067
-----------
Total increase to liabilities and shareholders' equity...... $ 3,067
-----------
-----------
The following is a description of the accounting policy adopted by the
Company as a result of implementing this accounting change:
Inventories are valued at the lower of cost or net realizable value. Cost
is determined on a first-in, first-out basis, except in certain project
based pipe coating businesses where the average cost basis is employed,
and includes direct materials, direct labour and variable and fixed
manufacturing overheads. Net realizable value for finished goods and
work-in-process is the amount which would be realized on the sale, less
the cost of transport, and for raw materials and supplies is replacement
cost. Ownership of inbound inventories is recognized at the time title
passes to the Company, which coincides with the invoicing and release of
such inventories by suppliers.
2. Stock-based compensation
The Board of Directors approved the granting of 30,000 stock options on
May 26, 2008 and 398,600 on February 22, 2008 under the 2001 Employee
Plan. The total fair value of the stock options granted during nine
months ended September 30, 2008 was $4.1 million and the weighted average
fair value of the options was $10.54 (2007 - $8.15), calculated using the
Black-Scholes pricing model with the following assumptions:
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Expected life of options....................... 6.25 years 6.25 years
-------------------------------------------------------------------------
Expected stock price volatility................ 29.63% 29.02%
-------------------------------------------------------------------------
Expected dividend yield........................ 0.75% 0.92%
-------------------------------------------------------------------------
Risk-free interest rate........................ 3.20% 4.04%
-------------------------------------------------------------------------
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 compensation cost from the continuing amortization of
granted stock options for the three months and nine months ended
September 30, 2008, included in selling, general and administrative
expenses, is $836 thousand and $2.5 million, respectively (September 30,
2007 - $696 thousand and $2.1 million, respectively).
3. Foreign exchange gains and losses
Included in selling, general and administrative expenses for the three
months and nine months ended September 30, 2008 are foreign exchange
gains of $233 thousand and $2.3 million, respectively, (September 30,
2007 - gains of $1.5 million and $428 thousand, respectively).
4. Employee future benefits
The Company's cost under both defined benefit and defined contribution
arrangements included in selling, general and administrative expenses for
the three months and nine months ended September 30, 2008 is $2.5 million
and $7.3 million (September 30, 2007 - $2.3 million and $7.2 million).
5. Interest income (expense)
Three Months Ended Nine Months Ended
(in thousands of Sept. 30 Sept. 30
Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Interest on short-term
deposits $ 224 $ 2,291 $ 2,286 $ 8,099
Interest on bank
indebtedness (1,495) (225) (2,166) (531)
Interest on long-term
debt (1,252) (1,255) (3,625) (3,930)
--------------------------------------------------
$ (2,523) $ 811 $ (3,505) $ 3,638
--------------------------------------------------
--------------------------------------------------
6. Discontinued operations
On November 2, 2004, the Company announced its decision to close the
Mobile, Alabama pipe coating facility (the "Mobile Facility") and by
December 31, 2005, operations at the Mobile Facility had ceased. The
Company adopted discontinued operation accounting treatment for the
Mobile Facility in 2005. The Mobile Facility was part of the Pipeline
and Pipe Services market segment.
The Company previously announced that it had reached a settlement of the
Alabama lawsuit brought by Dirt, Inc. against Bredero Price Company,
Bredero Shaw LLC, ShawCor Ltd. and Halliburton Energy Services, Inc.,
which resulted in the previously announced verdict of US$100 million in
compensatory damages and punitive damages of US$2 million against each
defendant plus interest. The matter was settled, at a mediation ordered
by the Alabama Supreme Court as part of the appeal proceedings, for a
total of US$43.5 million against all parties. As a result of this
settlement, in the second quarter of 2008, the Company has reduced its
reserves related to this lawsuit to $36.0 million, less anticipated
income tax recoveries of $12.6 million. During the three months ended
September 30, 2008, all amounts related to the settlement were paid.
The following table summarizes the financial results and cash flows from
discontinued operations for the three months and nine months ended
September 30, 2008 and 2007 and the assets and liabilities of the
discontinued operations as at those dates:
Three Months Ended Nine Months Ended
(in thousands of Sept. 30 Sept. 30
Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue $ - $ - $ - $ -
--------------------------------------------------
Income (loss) from
operations (35) (59) 17,052 (162)
Interest expense - - - -
--------------------------------------------------
Income (loss) from
discontinued operations
before income taxes (35) (59) 17,052 (162)
Income tax expense 47 - 6,650 -
--------------------------------------------------
Income (loss) from
discontinued
operations $ (82) $ (59) $ 10,402 $ (162)
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
Cash flow used in
operating activities $ (37,638) $ (3,896) $ (33,702) $ (5,842)
--------------------------------------------------
--------------------------------------------------
Current assets $ 10,374 $ 2
Property, plant and
equipment, net - -
Current liabilities $ 1,231 $ 1,955
7. Cash and cash equivalents
Sept. 30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Cash $ 63,207 $ 122,655
Cash equivalents 685 52,362
------------------------
$ 63,892 $ 175,017
------------------------
------------------------
8. Intangible assets
Sept. 30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Intellectual property with limited life,
net of accumulated amortization of $951 thousand
(2007 - nil) $ 57,109 $ 827
Intangible assets with limited life net of
accumulated amortization of nil (2007 - nil) 400 400
Intangible assets with indefinite life 1,931 331
------------------------
$ 59,440 $ 1,558
------------------------
------------------------
Intellectual property represents the costs of certain technology and
know-how obtained in acquisitions. Intangible assets include trademarks,
brand names and customer relationships obtained in acquisitions.
9. Other assets
Sept. 30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Long-term investments $ 719 $ 2,589
Deferred project costs 10,843 8,492
Accrued employee future benefit asset 4,304 4,797
------------------------
$ 15,866 $ 15,878
------------------------
------------------------
Other assets include a long-term investment in Garneau Inc. ("Garneau"),
a Canadian-based, publicly traded pipe coating company. The Company has
reviewed the 2007 financial performance of Garneau, as outlined in its
public filings, and the protracted decline in its share price and has
concluded that the decrease in fair value, based on quoted market prices,
of the investment from original cost is other than temporary. The
Company has recorded a charge to selling, general and administrative
expenses, in the financial and corporate segment, during the three months
ended March 31, 2008 of $1.5 million.
10. Bank indebtedness
At September 30, 2008, the Company had total operating credit lines of
$248.4 million (December 31, 2007 - $172.0 million), of which $74.6
million has been drawn for various standby letters of credit for
performance, bid and surety bonds (December 31, 2007 - $107.0 million)
and bank indebtedness of $58.1 million (December 31, 2007 - nil), to
yield unutilized credit facilities of $115.7 million (December 31, 2007 -
$64.7 million), excluding the Company's proportionate share of the bank
indebtedness of its joint venture, Arabian Pipecoating Company Limited.
At June 27, 2008, as part of the acquisition of Flexpipe, the company
assumed Flexpipe's bank debt which was repaid during the three months
ended September 30, 2008.
11. Other non-current liabilities
Sept. 30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Non-current asset retirement obligations $ 12,615 $ 7,977
Accrued employee future benefit obligations 4,758 2,763
------------------------
$ 17,373 $ 10,740
------------------------
------------------------
12. Capital stock
Sept. 30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Number of shares: Class A
Balance, beginning of the period 58,234,570 60,914,175
Issued - stock options 111,734 320,295
Conversions Class B to Class A 233 -
Purchase - normal course issuer bid (805,000) (2,999,900)
Balance, end of the period 57,541,537 58,234,570
Number of shares: Class B 13,077,909 13,078,142
---------------------------
Total number of shares 70,619,446 71,312,712
---------------------------
---------------------------
Stated value:
Balance, beginning of the period $ 202,248 $ 205,848
Issued - stock options 1,739 4,955
Conversions Class B to Class A - -
Purchase - normal course issuer bid (2,809) (10,194)
Compensation cost on exercised options 572 1,639
---------------------------
Balance, end of the period 201,750 202,248
---------------------------
Stated value: Class B 1,004 1,004
---------------------------
Total stated value $202,754 $ 203,252
---------------------------
---------------------------
During the nine months ended September 30, 2008, the Company repurchased
and cancelled 805,000 Class A Subordinated Voting Shares ("Class A
shares") (September 30, 2007 - 2,574,600) under the terms of a Normal
Course Issuer Bid ("NCIB"). The excess of cost over stated capital of
the acquired shares, which for the nine months ended September 30, 2008
totaled $20.0 million (September 30, 2007 - $69.2 million), was charged
to retained earnings. The repurchase of shares was made on the open
market at prevailing market prices for a total of $22.8 million.
13. Contributed surplus
Three months ended Nine months ended
(in thousands of Sept. 30 Sept. 30
Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Balance, beginning
of period $ 12,924 $ 10,823 $ 11,729 $ 10,603
Adjustment for
stock-based
compensation - - - -
Stock compensation
expense (note 2) 836 696 2,529 2,069
Fair value of stock
options exercised (74) (380) (572) (1,533)
----------------------------------------------------
Balance, end of
period $ 13,686 $ 11,139 $ 13,686 $ 11,139
----------------------------------------------------
----------------------------------------------------
14. Accumulated other comprehensive loss
Sept.30 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Unrealized foreign currency translation
losses, net of hedging activities $ (112,051) $ (126,186)
Unrealized loss on available-for-sale
financial asset (959) (840)
Gain on derivatives designated as cash
flow hedges - 996
-------------------------
Balance, at end of period $ (113,010) $ (126,030)
-------------------------
-------------------------
15. Stock option plans
A summary of the status of the Company's stock option plans and changes
during the period are presented below:
-------------------------------------------------------------------------
September 30, 2008 December 31, 2007
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Total Exercise Total Exercise
Shares Price Shares Price
-------------------------------------------------------------------------
Balance outstanding,
beginning of year 2,173,980 $17.24 2,269,395 $15.76
-------------------------------------------------------------------------
Granted 428,600 $30.03 371,800 $25.02
-------------------------------------------------------------------------
Exercised (111,734) $15.56 (320,295) $15.64
-------------------------------------------------------------------------
Forfeited (3,680) $26.08 (142,000) $17.42
-------------------------------------------------------------------------
Expired - - (4,920) $17.91
-------------------------------------------------------------------------
Balance outstanding,
end of period 2,487,166 $19.51 2,173,980 $17.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Range of Outstanding Weighted Weighted Exercisable Weighted
exercise at average average at Sep 30, average
prices Sep 30, remaining exercise 2008 exercise
2008 contractual price price
life in
years
-------------------------------------------------------------------------
$10.00 to $15.00 476,566 4.66 $12.64 446,086 $12.73
-------------------------------------------------------------------------
$15.01 to $20.00 1,194,760 5.64 $16.84 801,396 $16.77
-------------------------------------------------------------------------
$20.01 to $25.00 40,000 6.75 $20.90 18,400 $21.03
-------------------------------------------------------------------------
$25.01 to $30.00 745,840 8.77 $27.61 69,848 $25.02
-------------------------------------------------------------------------
$30.01 to $35.00 30,000 9.26 $31.77 - $0.00
-------------------------------------------------------------------------
2,487,166 1,335,730
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Range of Outstanding Weighted Weighted Exercisable Weighted
exercise at average average at Dec. 31, average
prices Dec. 31, remaining exercise 2007 exercise
2007 contractual price price
life in
years
-------------------------------------------------------------------------
$10.00 to $15.00 518,620 5.28 $12.69 387,616 $12.80
-------------------------------------------------------------------------
$15.01 to $20.00 1,259,760 6.36 $16.81 645,568 $16.71
-------------------------------------------------------------------------
$20.01 to $25.00 40,000 7.51 $20.90 11,200 $21.19
-------------------------------------------------------------------------
$25.01 to $30.00 355,600 9.01 $25.02 - -
-------------------------------------------------------------------------
2,173,980 1,044,384
-------------------------------------------------------------------------
16. Financial instruments and financial risk management
a) Categories of Financial Assets and Financial Liabilities
Under Canadian GAAP, financial instruments are classified into one of the
following categories: held-for-trading, held-to-maturity investments,
loans and receivables, available-for-sale financial assets, derivatives
and other financial liabilities. The Company has classified its
financial instruments as follows:
-------------------------------------------------------------------------
Sept. 30, Dec. 31,
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Financial assets:
-------------------------------------------------------------------------
Held for trading, measured at fair value
-------------------------------------------------------------------------
Cash $ 63,207 $ 122,655
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Held to maturity, recorded at amortized cost
-------------------------------------------------------------------------
Cash equivalents 685 52,362
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loans and receivables, recorded at amortized cost
-------------------------------------------------------------------------
Accounts receivable 274,952 203,547
-------------------------------------------------------------------------
Taxes receivable 9,332 3,169
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Available for sale, measured at fair value
-------------------------------------------------------------------------
Long-term investments 719 2,589
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Derivatives, measured at fair value
-------------------------------------------------------------------------
Derivative financial instruments (631) 1,508
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial liabilities:
-------------------------------------------------------------------------
Other liabilities, recorded at amortized cost:
-------------------------------------------------------------------------
Bank indebtedness 58,072 107
-------------------------------------------------------------------------
Accounts payable and accrued liabilities 178,393 153,116
-------------------------------------------------------------------------
Taxes payable 52,949 32,030
-------------------------------------------------------------------------
Long-term debt 77,082 72,726
-------------------------------------------------------------------------
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. The fair
values of the Company's financial instruments are not materially
different from their carrying values. The Company's Senior Notes with a
carrying value of $77.1 million (December 31, 2007 - $72.7 million) has a
fair value estimated to be $74.9 million (December 31, 2007 -
$74.9 million), based on current interest rates for debt with similar
terms and maturities.
b) Foreign Exchange Forward Contracts and Other Hedging Arrangements
The Company utilizes financial instruments to manage the risk associated
with foreign exchange rates. The Company formally documents all
relationships between hedging instruments and the hedge items, as well as
its risk management objective and strategy for undertaking various hedge
transactions.
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 September 30, 2008:
-------------------------------------------------------------------------
(in thousands) Sept. 30, 2008
-------------------------------------------------------------------------
U.S. dollars sold for Canadian dollars
-------------------------------------------------------------------------
Less than one year US$12,000
-------------------------------------------------------------------------
Weighted average rate 1.0107
-------------------------------------------------------------------------
Euros sold for U.S. dollars
-------------------------------------------------------------------------
Less than one year Euro 4,150
-------------------------------------------------------------------------
Weighted average rate 1.4969
-------------------------------------------------------------------------
One year to two years Euro 2,150
-------------------------------------------------------------------------
Weighted average rate 1.4490
-------------------------------------------------------------------------
Two years to three years Euro 2,200
-------------------------------------------------------------------------
Weighted average rate 1.4465
-------------------------------------------------------------------------
U.S. dollars sold for Norwegian Kroners
-------------------------------------------------------------------------
Less than one year US$4,685
-------------------------------------------------------------------------
Weighted average rate 5.4000
-------------------------------------------------------------------------
U.S. dollars sold for Euros
-------------------------------------------------------------------------
Less than one year US$3,160
-------------------------------------------------------------------------
Weighted average rate 1.4698
-------------------------------------------------------------------------
At September 30, 2008, the Company had notional amounts of $30.3 million
of forward contracts outstanding (December 31, 2007 - $35.7 million) with
the fair value of the Company's net obligation from all foreign exchange
forward contracts totaling $1.1 million (December 31, 2007 -
$1.5 million, net benefit).
c) Financial Risk Management
The Company's operations expose it to a variety of financial risks
including: market risk (including foreign exchange and interest rate
risk), credit risk and liquidity risk. The Company's overall risk
management program focuses on the unpredictability of financial markets
and seeks to minimize potential adverse effects on the Company's
financial position and financial performance. Risk management is the
responsibility of Company management. Material risks are monitored and
are regularly reported to the Board of Directors.
Foreign exchange risk
The majority of the Company's business is transacted outside of Canada
through subsidiaries operating in several countries. The net investments
in these subsidiaries as well as their revenue, operating expenses and
non-operating expenses are based in foreign currencies. As a result, the
Company's consolidated revenue, expenses and financial position, may be
impacted by fluctuations in foreign exchange rates as these foreign
currency items are translated into Canadian dollars. As of September 30,
2008, fluctuations of +/- 5% in the Canadian dollar, relative to those
foreign currencies, would impact the Company's consolidated revenue,
operating income from continuing operations and income from continuing
operations for the three months then ended by approximately
$12.3 million, $3.0 million and $1.8 million, respectively, prior to
hedging activities. The Company utilizes foreign exchange forward
contracts to manage foreign exchange risk from its underlying customer
contracts. The Company does not enter into foreign exchange contracts for
speculative purposes.
The Company's 5.11% Senior Notes and associated interest expense are
denominated in U.S. dollars. Fluctuations in the exchange rate between
the Canadian and U.S. dollar would impact the carrying value of the Notes
in terms of Canadian dollars as well as the amount of interest expense
when translated into Canadian dollars. Effective July 3, 2003, the
Company designated the Senior Notes as a hedge of a portion of its net
investment in the Company's U.S. dollar based operations. Gains and
losses from the translation of this debt are not included in the income
statement, but are shown in accumulated other comprehensive income. As of
September 30, 2008, fluctuations of +/- 5% in the Canadian dollar,
relative to the U.S. dollar, would impact the Company's accumulated other
comprehensive income and interest expense by $3.8 million and
$50 thousand, respectively, for the three months then ended.
The objective of the Company's foreign exchange risk management
activities is to minimize transaction exposures associated with the
Company's foreign currency-denominated cash streams and the resulting
variability of the Company's earnings. The Company utilizes foreign
exchange forward contracts to manage this foreign exchange risk. The
Company does not enter into foreign exchange contracts for speculative
purposes. With the exception of the Company's U.S. dollar based
operations, the Company does not hedge translation exposures.
Interest rate risk
The following table summarizes the Company's exposure to interest rate
risk at September 30, 2008:
-------------------------------------------------------------------------
(in thousands of
Canadian dollars) Fixed interest rate maturing in
-------------------------------------------------------------------------
Floating 1 year or Greater
rate less than 1 year Total
-------------------------------------------------------------------------
Financial assets
-------------------------------------------------------------------------
Cash and cash
equivalents $63,207 $685 $ - $63,892
-------------------------------------------------------------------------
Total $63,207 $685 $ - $63,892
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
fixed rate of
cash equivalents - 3.01% - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial liabilities
-------------------------------------------------------------------------
Bank indebtedness $58,072 $ - $ - $58,072
-------------------------------------------------------------------------
Long-term debt - 25,429 51,653 77,082
-------------------------------------------------------------------------
Total $58,072 $ 25,429 $51,653 $135,154
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
fixed rate of debt - - 5.11% -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company's interest rate risk arises primarily from its floating rate
bank indebtedness, and is not currently considered to be material.
Credit risk
Credit risk arises from cash and cash equivalents held with banks,
forward foreign exchange contracts, as well as credit exposure of
customers, including outstanding accounts receivable. The maximum credit
risk is equal to the carrying value of the financial instruments.
The objective of managing counter party credit risk is to prevent losses
in financial assets. The Company is subject to considerable concentration
of credit risk since the majority of its customers operate within the
global energy industry and are therefore affected to a large extent by
the same macroeconomic conditions and risks. The Company manages this
credit risk by assessing the credit quality of all counter parties,
taking into account their financial position, past experience and other
factors. Management also establishes and regularly reviews credit limits
of counter parties and monitors utilization of those credit limits on an
ongoing basis.
The carrying value of accounts receivable are reduced through the use of
an allowance for doubtful accounts and the amount of the loss is
recognized in the income statement with a charge to selling, general and
administrative expenses. When a receivable balance is considered to be
uncollectible, it is written off against the allowance for doubtful
accounts. Subsequent recoveries of amounts previously written off are
credited against selling, general and administrative expenses.
The aging of trade accounts receivable and the balance of the allowance
for doubtful accounts as of September 30, 2008 are as follows:
(in thousands of Canadian dollars) Sept. 30, 2008
------------------------------------------------------------------------
Not past due $ 214,072
Past due 1 to 30 days 34,056
Past due 31 to 60 days 16,134
Past due 61 to 90 days 6,068
Past due for more than 90 days 8,114
-------------
Total trade receivables 278,444
Less: allowance for doubtful accounts 3,492
-------------
Net receivables $ 274,952
-------------
-------------
The following is an analysis of the change in the allowance for doubtful
accounts for the three months ended September 30, 2008:
Nine Months Ended
(in thousands of Canadian dollars) Sept. 30, 2008
-------------------------------------------------------------------------
Balance, beginning of period $ 4,165
Bad debt expense (1,015)
Write-offs of bad debts (3)
Impact of change in foreign exchange rates 345
-------------
Balance, end of period $ 3,492
-------------
-------------
Liquidity Risk
The Company's objective in managing liquidity risk is to maintain
sufficient, readily available cash reserves in order to meet its
liquidity requirements at any point in time. The Company achieves this by
maintaining sufficient cash and cash equivalents and through the
availability of funding from committed credit facilities. As of
September 30, 2008, the Company has cash and cash equivalents totaling
$63.9 million and had unutilized lines of credit available to use of
$115.7 million. The following are the contractual maturities of the
Company's financial liabilities as of September 30, 2008:
-------------------------------------------------------------------------
Less than After one
(in thousands of Canadian dollars) one year year
-------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 175,599 $ -
-------------------------------------------------------------------------
Asset retirement obligations 2,906 14,594
-------------------------------------------------------------------------
Bank indebtedness 58,072 -
-------------------------------------------------------------------------
Long-term debt 25,429 51,653
-------------------------------------------------------------------------
Interest on financial instruments 3,636 3,306
-------------------------------------------------------------------------
Derivative financial instruments 631 -
-------------------------------------------------------------------------
17. Capital management
The Company defines capital that it manages as the aggregate of its
shareholders' equity and interest bearing debt. The Company's objectives
when managing capital are to ensure that the Company will continue to
operate as a going concern and continue to provide products and services
to its customers, preserve its ability to finance expansion opportunities
as they arise, and provide returns to its shareholders.
As at September 30, 2008, total managed capital was $790.8 million
(December 31, 2007 - $652.7 million), comprised of shareholders equity of
$655.7 million (December 31, 2007 - $580.0 million), long-term debt of
$77.1 million (December 31, 2007 - $72.7 million) and bank indebtedness
of $58.1 million (December 31, 2007 - $107 thousand).
The Company manages its capital structure and makes adjustments to it in
light of changes in economic conditions, the risk characteristics of the
underlying assets and business investment opportunities. To maintain or
adjust the capital structure, the Company may attempt to issue or re-
acquire shares, acquire or dispose of assets, or adjust the amount of
cash, cash equivalent, bank indebtedness or long-term debt balances. The
Company's capital is not subject to any capital requirements imposed by
any regulators; however, it is limited by the terms of its credit
facility and long-term debt agreements. Specifically, the Company is
required to maintain a Fixed Charge Coverage Ratio (Earnings Before
Interest, Taxes, Depreciation and Amortization ["EBITDA"] divided by
interest expense) of more than 2.5 to 1 and a debt to total
capitalization ratio of less than 0.45 to one. The Company's capital
structure at September 30, 2008 was within the parameters established by
these agreements.
18. Segmented information
The Company classifies its operations into two general segments of the
global energy industry: Pipeline and Pipe Services and Petrochemical and
Industrial. Revenue and income (loss) from operations for the three
months and nine months ended September 30, 2008 and 2007, and goodwill
and total assets as of those dates by segment are as follows:
Three months ended Nine months ended
Sept. 30 Sept. 30
(in thousands of
Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue
Pipeline and Pipe
Services 323,346 227,778 838,125 649,111
Petrochemical and
Industrial 34,247 37,518 108,968 115,215
Intersegment
Eliminations (344) (404) (1,369) (1,665)
------------------------- ------------------------
357,249 264,892 945,724 762,661
------------------------- ------------------------
------------------------- ------------------------
Income (loss) from
operations
Pipeline and Pipe
Services 51,142 42,738 124,069 113,652
Petrochemical and
Industrial 5,170 6,274 16,561 19,757
Financial and
Corporate (5,826) (3,512) (15,476) (12,900)
------------------------- ------------------------
50,486 45,500 125,154 120,509
------------------------- ------------------------
------------------------- ------------------------
Goodwill
Pipeline and Pipe
Services 194,039 144,645
Petrochemical and
Industrial 18,032 16,652
-------------------------
212,071 161,297
-------------------------
-------------------------
Total assets
Pipeline and Pipe Services 1,244,519 924,390
Petrochemical and Industrial 81,907 81,255
Financial and Corporate 881,982 941,744
Elimination (1,069,813) (1,015,430)
-------------------------
1,138,595 931,959
-------------------------
-------------------------
19. Joint venture operations
The Company's joint venture operations 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. The
figures related to these joint ventures included in the Company's
consolidated financial statements are summarized as follows:
(in thousands of Three Months Ended Nine Months Ended
Canadian dollars) Sept. 30 Sept. 30
-------------------------------------------------------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenue $ 44,728 $ 18,785 $ 82,693 $ 44,528
Operating and other
expenses 30,738 13,540 62,077 32,542
Net income before
income taxes 13,990 5,245 20,616 11,986
Provision for taxes 4,172 375 5,393 1,085
------------ ------------ ------------ ------------
Net income $ 9,818 $ 4,870 $ 15,223 $ 10,901
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash provided by
(used in):
Operating activities $ 6,297 $ 962 $ 11,701 $ (1,373)
Investing activities (486) 69 (4,285) 69
Financing activities (4,448) 4,108 (7,320) 4,108
Current assets - - 40,310 19,058
Property, plant and
equipment, net - - 14,133 11,130
Goodwill - - 4,681 4,366
Current liabilities - - 25,327 13,382
20. Earnings per share
The weighted average number of common shares for the purpose of the
earnings per share calculations was as follows:
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Basic
Class A 57,834,682 58,613,020 57,943,554 59,807,549
Class B 13,077,909 13,078,142 13,077,909 13,078,142
---------------------------------------------------
Total 70,912,591 71,691,162 71,021,463 72,885,691
---------------------------------------------------
---------------------------------------------------
Dilutive effect of
stock options
Class A 701,861 921,285 728,059 802,696
Class B - - - -
---------------------------------------------------
Total 701,861 921,285 728,059 802,696
---------------------------------------------------
---------------------------------------------------
Diluted
Class A 58,536,543 9,534,305 58,671,613 60,610,245
Class B 13,077,909 13,078,142 13,077,909 13,078,142
---------------------------------------------------
Total 71,614,452 72,612,447 71,749,522 73,688,387
---------------------------------------------------
---------------------------------------------------
21. Acquisitions and divestitures
On April 14, 2008, the Company acquired 20% of the outstanding shares of
PT Bredero Shaw Indonesia for $2.5 million. The excess of the
proportionate fair value of the net assets of this company over the
amount of the disbursement that was made to acquire the shares has been
allocated as a reduction to fixed assets. Subsequent to this transaction,
the Company owns 95% of the outstanding shares of this subsidiary.
On June 27, 2008, the Company announced the acquisition of the
outstanding shares of Flexpipe Systems Inc. ("Flexpipe"). Flexpipe is
based in Canada and is a leading manufacturer of spoolable, composite
line pipe which is used by oil and gas producers in applications that
benefit from the product's ease and speed of installation and its
pressure and corrosion resistance capabilities. This transaction is being
accounting for using the purchase method with the balance sheet and
financial results of Flexpipe included in the Company's consolidated
financial statements from the date of acquisition. The allocation of the
purchase price has not yet been finalized pending the completion of an
appraisal of the acquired assets and liabilities. This is expected to be
completed within the next nine months. The following are the preliminary
details of the acquisition. These details may be adjusted pending the
finalization of the purchase equation:
(In thousands of Canadian dollars)
-------------------------------------------------------------------------
Net assets acquired at assigned values:
Current assets $ 36,583
Property, plant and equipment 17,898
Goodwill 46,816
Other intangible assets 58,700
Current liabilities (16,263)
Future income taxes (9,392)
Other long-term liabilities (640)
-------------------------------------------------------------------------
$ 133,702
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration given:
Cash, net of cash acquired of $1,376 $ 121,905
Indebtedness assumed 11,797
-------------------------------------------------------------------------
$ 133,702
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On June 30, 2008, the Company recorded the sale of its wholly-owned
division Bredero Shaw Nigeria Ltd. ("BSNL") for proceeds of $5.6 million
and consequently recorded a gain of $1.1 million representing the excess
of the purchase price over the carrying value of the net assets sold. The
following is a summarized balance sheet of BSNL at the time of sale:
(In thousands of Canadian dollars)
-------------------------------------------------------------------------
Current assets $ 5,581
Property, plant and equipment, net 129
Current liabilities 799
-------------------------------------------------------------------------
On June 6, 2007, the Company purchased all of the outstanding shares of
X-Tek Industrial Limited from X-Tek Systems Limited. The name of the
company was subsequently changed to Shaw Inspection Systems Limited
("SISL"). The following are the finalized details of the acquisition:
(In thousands of Canadian dollars)
-------------------------------------------------------------------------
Net assets acquired at assigned values:
Current assets $ 2,323
Property, plant and equipment 329
Goodwill 560
Other intangible assets 1,558
Current liabilities (1,984)
-------------------------------------------------------------------------
$ 2,786
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration given:
Cash 2,786
-------------------------------------------------------------------------
$ 2,786
-------------------------------------------------------------------------
-------------------------------------------------------------------------
22. Upcoming accounting changes
In February 2008, the CICA issued new Handbook section 3064, Goodwill and
Intangible Assets, which is effective for fiscal years beginning on or
after October 1, 2008. The Company is currently evaluating the impact of
the new accounting standards on its financial position, results of
operations and disclosures.
On February 13, 2008, The Accounting Standards Board confirmed that the
use of International Financial Reporting Standards ("IFRS") will be
required in Canada for publicly accountable profit-oriented enterprises
for fiscal years beginning on or after January 1, 2011 and the Company
will be required to report using IFRS beginning on this date. The Company
has begun the process of evaluating the effect of and the planning for
the transition to IFRS. The impact of the ultimate adoption of IFRS on
the Company has not yet been finalized.
23. Comparative figures
Comparative figures have been reclassified where necessary to correspond
with the current year's presentation.