(TSX: SCL.A, SCL.B)
TORONTO, Nov. 1 /CNW/ -
<<
Financial Summary
Three Months Ended Nine Months Ended
Sep. 30 Sep. 30
(In thousands of Canadian
dollars except per share
amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating Results Restated Restated
Revenue $ 245,349 $ 239,164 $ 766,008 $ 712,434
EBITDA (note 1) 36,872 33,031 128,771 97,491
Operating income from
continuing operations 23,649 21,869 96,907 63,694
Income from continuing
operations 16,549 34,693 66,202 61,010
Income (loss) from
discontinued operations 7 56,059 (220) 57,240
Net income (loss) 16,556 90,752 65,982 118,250
Net income (loss) per
share (Class A and B)
- Basic
Continuing operations 0.22 0.46 0.89 0.81
Discontinued operations 0.00 0.74 0.00 0.76
Total 0.22 1.20 0.89 1.57
Net income (loss) per
share (Class A and B)
- Diluted
Continuing operations 0.22 0.46 0.89 0.81
Discontinued operations 0.00 0.74 0.00 0.76
Total 0.22 1.20 0.89 1.57
-------------------------------------------------------------------------
Cash Flow
Cash from (used in)
continuing operating
activities 61,500 35,247 139,850 83,454
Additions to property,
plant and equipment 21,535 13,380 40,643 30,676
-------------------------------------------------------------------------
Financial Position
Working capital 304,793 282,305
Total assets 943,530 911,731
Shareholders' equity per share
(Class A and B) $ 7.89 $ 7.20
-------------------------------------------------------------------------
Note 1: EBITDA is a non-GAAP measure calculated by adding back to income
from continuing operations, interest, taxes and
depreciation/amortization. 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.
Note 2: 2005 figures have been restated to reflect discontinued
operations accounting treatment for OMSCO and the Mobile, Alabama
pipe-coating operation.
>>
Consolidated revenue for the quarter totaled $245.3 million compared to
$239.2 million in the same quarter of last year. The third quarter revenue was
7% lower than in the second quarter as a result of the impact of project
timing in Bredero Shaw's Far East region, partially offset by revenue growth
in Bredero Shaw Americas and the start-up of a major project in the Middle
East. Business activity at the Company's other divisions continued to be
strong with revenue either increasing or remaining similar to prior quarter
levels. On a year-to-date basis, consolidated revenue of $766.0 million was 8%
higher than in the same period of last year.
Consolidated income from continuing operations totaled $16.5 million
($0.22 per share) in the quarter, compared to $34.7 million ($0.46 per share)
in the third quarter of 2005, which result included the benefit of previously
unrecognized income tax losses totaling $18.4 million ($0.25 per share). Third
quarter consolidated income from continuing operations decreased from $24.9
million ($0.34 per share) in the second quarter of the year in line with the
lower revenue. On a year-to-date basis, income from continuing operations
totaled $66.2 million ($0.89 per share) compared to $61.0 million ($0.81 per
share), including the $18.4 million ($0.25 per share), income tax benefit in
the first nine months of 2005. The growth in earnings per share reflects both
the increased revenue and operating margin improvements in the first nine
months of 2006 and the impact of reduced shares outstanding through share
repurchases under the Company's ongoing Normal Course Issuer Bid.
On August 8, 2006, the Company announced the acquisition of a 50%
interest in Eupec Brasil Ltda., which operates a pipe-coating plant adjacent
to the Vallourec & Mannesmann pipe mill in Belo Horizonte, Brazil. Eupec
Brasil Ltda. was subsequently renamed Bredero Shaw Revestimentos de Tubos
Ltda. and, together with ShawCor's existing operation, Thermotite Brasil Ltda.
which is also located in Belo Horizonte, will enable ShawCor to offer a
complete range of anticorrosion coatings and linings along with high
performance insulation coatings to serve both the onshore and offshore
segments of the Brazilian pipeline market.
On October 5, 2006, the Company announced that the agreement to purchase
Garneau Inc. had been terminated due to delays in closing resulting from a
review of the transaction by the Competition Bureau, the prospect of further
delays, and the inability of the parties to resolve the outstanding issues
associated with the Competition Bureau review.
As a result of the termination of the Garneau agreement, on October 10,
2006 the Company announced a $30 million pipe-coating capacity expansion in
Western Canada. This investment will include the construction of a new
state-of-the-art coating plant in Camrose, Alberta adjacent to the Company's
existing facility, the construction of a new rail spur to double
transportation capacity, and upgrades to increase the capacity of the existing
Camrose coating plant. This project, which commenced in October, and is
expected to be completed in phases between December 2006 and the end of the
second quarter of 2007, will significantly reduce lead times, meet the growing
demand for insulated pipelines in the Tar Sands region and also enable the
Company's other Alberta pipe-coating facilities to become more focused and
efficient.
The anticipated softness in the North Sea and Far Eastern regions of
Bredero Shaw is expected to continue into the fourth quarter, partially offset
by Bredero Shaw Americas pipe-coating activity which is expected to remain
robust. Fourth quarter revenue is expected to be slightly below third quarter
levels with operating income impacted by increased costs associated with the
launch of new facilities. Revenue for the full year is forecast to be in line
with 2005; however, improved operating performance is expected to result in a
significant improvement in income from continuing operations per share for
2006 compared with the $0.85 per share recorded in 2005 (reported earnings per
share of $1.10 less the benefit of previously unrecognized income tax losses
totaling $18.4 million or $0.25 per share). In addition, the operating
performance gains achieved over the past 12 months position the Company to
continue to generate improved operating income in 2007.
MANAGEMENT DISCUSSION AND ANALYSIS
The following is management's interim discussion and analysis of
operations and financial position and should be read in conjunction with the
Consolidated Financial Statements and Management's Discussion and Analysis
included in the Company's 2005 Annual Report.
Revenue and Income from Operations
ShawCor classifies its revenue and income from operations in two industry
segments: Pipeline and Pipe Services, and Petrochemical and Industrial.
Consolidated revenue from consolidated operations totaled $245.3 million
in the third quarter, 3% higher than in the same quarter of 2005 but 7% lower
than in the second quarter of 2006. As expected, revenue at Bredero Shaw was
lower than in the prior quarter reflecting pipe-coating project timing,
particularly in the Far East region. This decrease was partially offset by
revenue growth at the Bredero Shaw America's region, improvements at the
Pipeline and Pipe Services segment's other divisions and at the Petrochemical
and Industrial segment. Consolidated net income for the quarter totaled $16.6
million ($0.22 per share) compared to $90.8 million ($1.20 per share) in the
third quarter of 2005. Third quarter 2005 net income included an after-tax
gain on the sale of the OMSCO drill-pipe manufacturing division of $48.8
million ($0.65 per share) and the impact of an $18.4 million ($0.25 per share)
reduction in income taxes from the utilization of income tax losses not
previously recognized in the accounts. Compared to the second quarter of 2006,
net income in the third quarter decreased $8.2 million ($0.12 per share), in
line with the decrease in consolidated revenue in the quarter. On a
year-to-date basis, consolidated revenue of $766.0 million was 8% higher than
in the same period last year while net income of $66.0 million ($0.89 per
share) compares to $118.3 million ($1.57 per share) including the gain on the
sale of OMSCO ($48.8 million or $0.65 per share) and the benefit of previously
unrecognized income tax losses ($18.4 million or $0.25 per share).
In the Pipeline and Pipe Services segment, revenue in the third quarter
of $210.9 million was slightly higher than in the third quarter of last year;
however, was $16.1 million lower than in the prior quarter. As expected,
revenue decreased from second quarter levels at Bredero Shaw as stronger
business activity in North America and revenue from the KOC project in the
Middle East were more than offset by lower pipe-coating activity in the Far
East region resulting from the completion of major projects at the plants in
Malaysia and Indonesia. Revenue at the segment's other divisions increased by
approximately 2% from the prior quarter. Income from continuing operations for
the third quarter for the Pipeline and Pipe Services segment was $24.0 million
(11.4% of revenue), 7% higher than $22.6 million (10.8% of revenue) in the
third quarter of 2005. Compared to last quarter; however, income from
continuing operations and operating margins (income from continuing operations
divided by revenue) both decreased reflecting the lower revenue and the impact
of provisions totaling $5.4 million recorded in the North Sea and African
regions related to cost reduction initiatives and facility rationalization in
those areas. On a year-to-date basis, revenue for the nine months ended
September 30, 2006 of $661.1 million was 7% higher than in the corresponding
period of 2005. Income from continuing operations for the segment for the
year-to-date totaled $97.6 million, 49% higher than in the same period of
2005.
In the Petrochemical and Industrial segment, revenue in the quarter of
$34.9 million increased 17% from the third quarter of 2005 as ShawFlex and
DSG-Canusa both experienced higher levels of business activity versus the
prior year. Compared to the second quarter of 2006, revenue for the segment
decreased 4% as lower revenue at DSG-Canusa was partially offset by
improvements at ShawFlex. Income from continuing operations for the segment
for the third quarter of $5.0 million (14.4% of sales) increased 67% from
levels in the third quarter of 2005 and 28% from the second quarter of 2006.
Operating margins in the third quarter improved 3.6 percentage points from the
prior quarter, reflecting the impact of sales price increases at ShawFlex in
response to copper price increases experienced earlier in the year. On a
year-to-date basis, revenue for the segment totaled $106.1 million and income
from continuing operations totaled $13.6 million representing increases of 14%
and 31%, respectively, over the same period last year.
Finance
Financial and corporate costs consist of corporate office costs not
charged to the operating divisions and other non-operating items including
foreign exchange gains and losses on cash balances. Financial and corporate
costs for the quarter, before net foreign exchange gains of $1.5 million,
totaled $6.9 million compared to $4.3 million in the prior quarter, before net
foreign exchange losses of $54 thousand, with the increase mainly due to the
expensing of previously deferred costs stemming from the unsuccessful Garneau
transaction and increased management incentive compensation costs in line with
the earnings improvement.
Net interest income totaled $908 thousand in the quarter, compared to
$424 thousand in the prior quarter and net interest expense of $1.1 million in
the third quarter of 2005. The improvement over the third quarter of last year
reflects the improved cash position of the Company resulting from the
divestiture of the OMSCO division in the third quarter of 2005 together with
cash generated during the twelve month period.
Income tax expense was $8.0 million (32.4% of pre-tax income) in the
quarter compared to $10.4 million (28.6% of pre-tax income) in the prior
quarter and a recovery of $13.9 million in the third quarter of last year
inclusive of an $18.4 million benefit of previously unrecognized income tax
losses. The third quarter 2006 effective tax rate continued to be favourably
impacted by the utilization of previously unrecognized tax losses in the
United States; however, this benefit was tempered by tax losses in other
countries, principally Nigeria, which were not tax-effected. Canadian
Generally Accepted Accounting Principles allow the recording of the benefit of
tax losses only when there is reasonable assurance that those losses will be
utilized in the future; the foreign tax losses incurred in the quarter did not
meet this test.
Cash Flow
Cash flow generated from operating activities in the quarter totaled
$61.5 million, reflecting reductions of working capital and other of $34.0
million, compared to $29.4 million last quarter and $35.2 million in the third
quarter of 2005. On a year-to-date basis, cash flow generated from operating
activities totaled $139.9 million compared to $83.4 million in the first nine
months of 2005.
Capital expenditures in the quarter totaled $21.5 million compared to
$12.6 million last quarter and $13.4 million in the third quarter of last
year. Major expenditures in the quarter included the continuing development of
the new Portland Oregon pipe-coating facility, land development and
preparation for a subcontract double-jointing facility at the new site in
Camrose, Alberta, investments to expand capacity and add a research and
development pilot line in the Thermotite plant in Norway and plant upgrades
related to the KOC project at the pipe-coating plant in Ras Al Khaimeh. On a
year-to-date basis, cash flow used in investing activities totaled $49.1
million compared to $30.3 million in the corresponding period of last year.
Cash flow used in financing activities totaled $6.5 million in the
quarter and consisted of dividends paid to shareholders of $3.3 million and
the cost of shares repurchased under the Normal Course Issue Bid of $3.6
million, partially offset by $378 thousand received from the issuance of
shares on the exercise of stock options. Cash used in financing activities
totaled $2.6 million in the third quarter of 2005, reflecting a decrease in
bank indebtedness of $2.9 million and the receipt of $280 thousand on the
exercise of stock options. On a year-to-date basis, cash flow used in
financing activities totaled $15.1 million compared to $5.5 million in the
first nine months of last year.
Liquidity and Capitalization
At September 30, 2006, the Company recorded a working capital ratio of
2.27 to 1 compared to 2.22 to 1 at June 30, 2006 and 2.08 to 1 at December 31,
2005. Operating working capital, excluding cash and cash equivalents decreased
$30.5 million in the quarter to $35.2 million, mainly the result of lower
receivables reflecting the decrease in revenue compared to last quarter. Cash
and cash equivalents increased $24.0 million in the quarter to $269.6 million,
compared to an increase of $1.7 million last quarter.
Financial Instruments
The Company manages interest rate risk and foreign exchange risk through
the use of derivative financial instruments including foreign exchange option
contracts and forward exchange contracts. These instruments are used to hedge
exposures related to commercial activities only. The Company does not use them
for speculative purposes. Short-term movements on financial instruments
acquired as a hedge of a specific foreign currency purchase obligation or
revenue source are deferred and matched with the specific transaction.
At September 30, 2006, the Company had notional amounts of $24.3 million
of forward contracts outstanding (December 31, 2005 - $104.5 million) with a
fair value of negative $1.8 million (December 31, 2005 - positive $1.9
million). These amounts are used to express the volume of transactions and are
not recognized in the consolidated financial statements.
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity
with Canadian Generally Accepted Accounting Principles ("GAAP") requires
management to make estimates and assumptions that affect the amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the period. These estimates and assumptions are made with
management's best judgment given the information available at the time,
however, actual results could differ from the estimates. Critical estimates
used in preparing the consolidated financial statements were materially
unchanged during the quarter.
Risks and Uncertainties
Operating in an international environment, servicing predominantly the
oil and gas industry, ShawCor faces a number of business risks and
uncertainties that could materially adversely affect the Company's
projections, business, results of operations and financial condition. There
were no material changes in the nature or magnitude of such business risks
during the quarter. The Company's 2005 Annual Report and 2005 Annual
Information Form include a more detailed discussion of these risks and
uncertainties.
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 selected financial information for the ten most recently
completed quarters:
<<
(In thousands of Canadian
dollars except per share
amounts) First Second Third Fourth Full Year
-------------------------------------------------------------------------
Revenue
2006 $ 257,730 $ 262,929 $ 245,349 $ $
2005 242,859 230,411 239,164 291,685 1,004,119
2004 163,352 174,311 172,440 227,681 737,784
Operating income
from continuing
operations
2006 37,452 35,806 23,649
2005 29,326 12,499 21,869 31,719 95,413
2004 15,499 12,758 10,690 28,231 67,178
Income from
continuing
operations
2006 24,755 24,898 16,549
2005 18,688 7,629 34,693 21,780 82,790
2004 11,268 8,128 7,434 12,297 39,127
Income (loss)
from
discontinued
operations
2006 (35) (192) 7
2005 (930) 2,111 56,059 (1,190) 56,050
2004 (7,683) (11,617) (16,092) (90,396) (125,788)
Net income
(loss)
2006 24,720 24,706 16,556
2005 17,758 9,740 90,752 20,590 138,840
2004 3,585 (3,489) (8,658) (78,099) (86,661)
Operating income
from continuing
operations per
share (Classes A
and B)
Basic and Diluted
2006 0.51 0.48 0.32
2005 0.39 0.17 0.29 0.42 1.27
2004 0.21 0.17 0.14 0.38 0.90
Income from
continuing
operations per
share (Classes A
and B)
Basic and Diluted
2006 0.33 0.34 0.22
2005 0.25 0.10 0.46 0.29 1.10
2004 0.15 0.11 0.10 0.16 0.52
Income (loss)
from discontinued
operations per
share (Classes A
and B)
Basic and Diluted
2006 0.00 0.00 0.00
2005 (0.01) 0.03 0.74 (0.01) 0.75
2004 (0.10) (0.16) (0.21) (1.21) (1.68)
Net income (loss)
per share
(Class A and B)
2006 0.33 0.34 0.22
2005 0.24 0.13 1.20 1.28 1.85
2004 0.05 (0.05) (0.11) (1.05) (1.16)
-------------------------------------------------------------------------
>>
The following are key factors affecting the comparability of quarterly
financial results.
The Company's operations in the Pipeline and Pipe Services segment,
representing 86% of the Company's year-to-date 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 amounts of these revenues when they are
translated into Canadian dollars.
On November 3, 2004, the Company announced the closure of its Mobile,
Alabama facility. This event had a significant impact on the financial results
for the fourth quarter of 2004. Operations at the facility ceased in the
fourth quarter of 2005 and discontinued operations accounting treatment was
adopted in that quarter with prior quarters restated on a comparable basis.
On September 30, 2005, the Company completed the sale of its OMSCO drill
pipe manufacturing division. The division has been accounted for as a
discontinued operation.
Outstanding Share Capital
As at October 27, 2006, the Company had 60,676,953 Class A Subordinate
Voting Shares ("Class A") outstanding and 13,078,142 Class B Multiple Voting
Shares ("Class B") outstanding. Each Class B share is convertible into a Class
A share at the option of the holder. In addition, as at October 27, 2006, the
Company had stock options outstanding to purchase up to 2,849,340 Class A
shares. During the third quarter, 197 thousand shares were repurchased at a
weighted average cost of $18.37, including brokerage commissions, under the
Normal Course Issue Bid for a total expenditure of $3.6 million.
Outlook
The Company's consolidated order backlog, representing customer orders
expected to be completed within one year, totaled $316 million at September
30, 2006, compared to $266 million at the beginning of the quarter.
The Company continues to anticipate a slowing of business activity in the
fourth quarter of the year compared with the third quarter as lower business
levels in the North Sea and Far East regions are partially offset by strong
pipe-coating activity in the America's region. Fourth quarter revenue is
expected to be slightly below third quarter levels with operating income
impacted by increased costs associated with the launch of new facilities.
Although the revenue outlook for full year 2006 is basically in line with the
full year result for 2005, the Company's improved operational performance in
both of its business segments is expected to result in a significant
improvement in income from continuing operations per share for 2006 compared
with the $0.85 per share recorded in 2005 (reported earnings per share of
$1.10 less the benefit of previously unrecognized income tax losses totaling
$18.4 million or $0.25 per share).
The operating performance gains achieved over the past 12 months position
the Company to continue to generate improved operating income in 2007. Robust
bidding activity combined with available capacity at the Company's Europe and
Far East facilities, and the impact of the Company's investment program,
including the North American capacity expansion and the Brazilian joint
venture acquisition, position the Company for growth as new pipeline projects
that are presently being designed and bid commence production in 2008 and
beyond.
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, anti-trust and other laws; liability claims;
fluctuations in foreign exchange rates; fluctuations in prices of raw
materials, as well as other risks and uncertainties, as more fully described
in our 2005 Annual Information Form and 2005 Annual Report. Please refer to
the Company's 2005 Annual Information Form and 2005 Annual Report for more
information.
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 Thursday November 2, 2006 at 10:00 AM EST, this will discuss the
company's third quarter 2006 financial results. Please visit our website at
www.shawcor.com for further details.
<<
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars except per share data)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
Sept 30 Sept 30
------------------------- -------------------------
2006 2005 2006 2005
Restated - Restated -
Note 7 Note 7
------------------------- -------------------------
Revenue $ 245,349 $ 239,164 $ 766,008 $ 712,434
------------ ------------ ------------ ------------
Operating expenses
(notes 2, 3 and 4) 208,406 205,061 636,290 610,390
Amortization 13,277 11,083 32,892 33,884
Research and
development 1,375 2,001 4,272 5,817
------------ ------------ ------------ ------------
223,058 218,145 673,454 650,091
------------ ------------ ------------ ------------
Share of earnings in
associated company 1,358 850 4,353 1,351
------------ ------------ ------------ ------------
Operating income from
continuing operations 23,649 21,869 96,907 63,694
Interest expense
(income) (note 5) (908) 1,145 (1,446) 3,679
------------ ------------ ------------ ------------
Income before income
taxes and non-
controlling interest 24,557 20,724 98,353 60,015
Income taxes (note 6) 7,954 (13,890) 31,123 (1,082)
------------ ------------ ------------ ------------
Income before non-
controlling interest 16,603 34,614 67,230 61,097
Non-controlling
interest (54) 79 (1,028) (87)
------------ ------------ ------------ ------------
Income from continuing
operations 16,549 34,693 66,202 61,010
Income (loss) from
discontinued
operations (note 7) 7 56,059 (220) 57,240
------------ ------------ ------------ ------------
Net income $ 16,556 $ 90,752 $ 65,982 $ 118,250
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share,
Class A and B - Basic
and Diluted
Continuing
operations $ 0.22 $ 0.46 $ 0.89 $ 0.81
Discontinued
operations - 0.74 - 0.76
------------ ------------ ------------ ------------
Total $ 0.22 $ 1.20 $ 0.89 $ 1.57
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SEGMENTED INFORMATION
Three Months Ended Nine Months Ended
Sept 30 Sept 30
------------------------- -------------------------
Restated - Restated -
Note 7 Note 7
------------------------- -------------------------
Revenue
Pipeline and Pipe
Services $ 210,917 $ 209,593 $ 661,081 $ 620,268
Petrochemical and
Industrial 34,910 29,920 106,143 93,268
Intersegment
Eliminations (478) (349) (1,216) (1,102)
------------ ------------ ------------ ------------
$ 245,349 $ 239,164 $ 766,008 $ 712,434
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Operating income (loss)
from continuing
operations
Pipeline and Pipe
Services $ 24,047 $ 22,550 $ 97,584 $ 65,527
Petrochemical and
Industrial 5,039 3,023 13,603 10,372
Financial and
Corporate (5,437) (3,704) (14,280) (12,205)
------------ ------------ ------------ ------------
$ 23,649 $ 21,869 $ 96,907 $ 63,694
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended Nine Months Ended
Sept 30 Sept 30
------------------------- -------------------------
2006 2005 2006 2005
Restated - Restated -
Note 7 Note 7
------------------------- -------------------------
Operating activities:
Income from
continuing
operations $ 16,549 $ 34,693 $ 66,202 $ 61,010
Items not requiring
an outlay of cash:
Amortization 13,277 11,083 32,892 33,884
Stock-based
compensation
(note 2) 738 244 2,139 1,446
Future income taxes (1,793) (2,594) (4,680) (509)
Non-controlling
interest in
earnings of
subsidiaries 54 (79) 1,028 87
Share of earnings
of associated
company (1,358) (850) (4,353) (1,351)
Change in non-cash
working capital
and other 34,033 (7,250) 46,622 (11,113)
------------ ------------ ------------ ------------
Cash provided by
continuing operating
activities 61,500 35,247 139,850 83,454
------------ ------------ ------------ ------------
Investing activities:
Purchases of property,
plant and equipment (21,535) (13,380) (40,643) (30,676)
Proceeds on disposal
of property, plant
and equipment 76 322 117 402
Acquisition of joint
venture interest
(note 8) (8,555) - (8,555) -
------------ ------------ ------------ ------------
Cash used in continuing
investing activities (30,014) (13,058) (49,081) (30,274)
------------ ------------ ------------ ------------
Financing activities:
Decrease in bank
indebtedness - (2,868) (1,715) (2,757)
Issue of shares 378 280 956 613
Purchase of shares
for cancellation (3,609) - (7,797)
Dividends paid to
shareholders (3,275) - (6,557) (3,323)
------------ ------------ ------------ ------------
Cash used in continuing
financing activities (6,506) (2,588) (15,113) (5,467)
------------ ------------ ------------ ------------
Foreign exchange on
foreign cash and cash
equivalents 8 (3,149) (5,713) (2,972)
------------ ------------ ------------ ------------
Net cash provided by
continuing operations 24,988 16,452 69,943 44,741
Net cash provided by
(used in) discontinued
operations (note 7) (957) 128,847 (695) 106,510
Cash and cash
equivalents at
beginning of period 245,521 82,449 200,304 76,497
------------ ------------ ------------ ------------
Cash and cash
equivalents at end
of period $ 269,552 $ 227,748 $ 269,552 $ 227,748
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED BALANCE SHEETS
Sept. 30 Dec. 31
2006 2005
------------ ------------
Assets
Current assets
Cash and cash equivalents $ 269,552 $ 200,304
Accounts receivable 178,710 213,416
Inventories 75,277 81,012
Taxes receivable 6,475 5,711
Prepaid expenses 14,253 23,030
Current assets of discontinued
operations (note 7) 108 799
------------ ------------
544,375 524,272
Property, plant and equipment, net 187,258 177,317
Goodwill 169,613 167,172
Investment in associated company 7,744 5,061
Other assets (note 9) 29,881 33,887
Non-current assets of discontinued
operations (note 7) 4,659 7,974
------------ ------------
$ 943,530 $ 915,683
------------ ------------
------------ ------------
Liabilities
Current liabilities
Bank indebtedness (note 10) $ - $ 1,715
Accounts payable and accrued liabilities 165,764 167,473
Deferred revenues 14,586 23,975
Taxes payable 51,002 46,203
Current liabilities of discontinued
operations (note 7) 7,770 12,250
------------ ------------
239,122 251,616
Long-term debt 83,858 87,210
Minority interest in subsidiaries 3,902 2,842
Other non-current liabilities (note 11) 31,821 38,777
------------ ------------
358,703 380,445
------------ ------------
Shareholders' Equity
Capital stock (note 12) 204,655 204,720
Contributed surplus (note 13) 10,951 9,231
Retained earnings 474,616 421,547
Cumulative translation account (note 14) (105,395) (100,260)
------------ ------------
584,827 535,238
------------ ------------
$ 943,530 $ 915,683
------------ ------------
------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Nine Months Ended
Sept 30 Sept 30
------------------------- -------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Balance at beginning
of period $ 464,292 $ 324,990 $ 421,547 $ 300,815
Net income 16,556 90,752 65,982 118,250
------------ ------------ ------------ ------------
480,848 415,742 487,529 419,065
Excess of purchase
price paid over
stated value of shares (2,957) - (6,356)
Dividends paid (3,275) - (6,557) (3,323)
------------ ------------ ------------ ------------
Balance at end of
period $ 474,616 $ 415,742 $ 474,616 $ 415,742
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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. These unaudited interim financial statements have
been prepared in accordance with accounting policies outlined in the
Company's audited financial statements for the year ended December 31,
2005. Accordingly, these interim financial statements should be read in
conjunction with the Company's annual consolidated financial statements.
2. Stock-based compensation
On August 9, 2006, the Board of Directors approved the granting of 36,000
stock options under the 2001 Employee Plan with a fair value, calculated
using the Black-Scholes pricing model, of $227 thousand. The fair value
of these options will be amortized to compensation expense over the 5
year vesting period of the options. The assumptions used in calculating
the fair value of the options are as follows: expected life of options
from 4.25 years to 8.25 years, expected stock price volatility ranges
from 27.7% to 34.0%, expected dividend yield 0.87%, and risk free
interest rate ranging from 4.01% to 4.07% over the life of the options.
The compensation cost from the continuing amortization of granted stock
options for the three months and nine months ended September 30, 2006
included in operating expenses is $738 thousand and $2.1 million,
respectively (September 30, 2005 - $244 thousand and $1.4 million,
respectively).
3. Foreign exchange gains and losses
Included in operating expenses for the three months and nine months ended
September 30, 2006 are foreign exchange gains totaling $1.5 million and
$2.0 million, respectively (September 30, 2005 - losses of $78 thousand
and $880 thousand, respectively). These gains and losses arise from
foreign currency transactions and from the translation of the financial
statements of foreign integrated subsidiaries.
4. Employee future benefits
The Company's cost under both defined benefit and defined contribution
arrangements included in operating expenses for the three months and nine
months ended September 30, 2006 is $2.8 million and $8.0 million,
respectively (September 30, 2005 - $2.7 million and $6.7 million,
respectively).
5. Interest expense (income)
Three Months Ended Nine Months Ended
(in thousands of Sept 30 Sept 30
Canadian dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Interest on short-term
deposits $ (2,213) $ (380) $ (6,313) $ (1,093)
Interest on bank
indebtedness 26 94 891 458
Interest on long-term
debt 1,279 1,431 3,976 4,314
---------------------------------------------------
$ (908) $ 1,145 $ (1,446) $ 3,679
---------------------------------------------------
---------------------------------------------------
Net interest received during the three months and nine months ended
September 30, 2006 totaled $945 thousand and $1.4 million, respectively
(September 30, 2005 - interest paid of $928 thousand and $3.9 million,
respectively).
6. Income taxes
Net income taxes paid during the three months and nine months ended
September 30, 2006 totaled $8.8 million and $31.8 million, respectively
(September 30, 2005 - $11.4 million and $18.0 million, respectively).
7. Discontinued operations
On September 30, 2005, the Company concluded the sale of its OMSCO drill
pipe manufacturing division ("OMSCO") and accordingly adopted
discontinued operations accounting treatment for the division in the
third quarter of 2005. On November 2, 2004, the Company announced its
decision to close the Mobile, Alabama pipe-coating facility and
operations at the facility ceased in the fourth quarter of 2005. The
Company adopted discontinued operations accounting treatment for the
Mobile facility in the fourth quarter of 2005.
The following table summarizes the financial results and cash flows from
discontinued operations for the three and nine months ended September 30,
2006 and 2005 and the assets and liabilities of the discontinued
operations as at those dates:
Three Months Ended Sept 30, 2006
Mobile
(in thousands of Canadian dollars) OMSCO Facility Total
-------------------------------------------------------------------------
Revenue $ - $ - $ -
--------------------------------------
Income (loss) from operations - 7 7
Gain on sale - - -
Interest expenses - - -
--------------------------------------
Income (loss) from discontinued
operations before income taxes - 7 7
Income tax expense - - -
--------------------------------------
Net income (loss) from discontinued
operations $ - $ 7 $ 7
--------------------------------------
--------------------------------------
Cash flow from (used in)
operating activities - (957) (957)
Cash flow from (used in)
investing activities - - -
Cash flow from (used in)
financing activities - - -
--------------------------------------
Net cash provided by (used in)
discontinued operations $ - $ (957) (957)
--------------------------------------
--------------------------------------
Three Months Ended Sept 30, 2005
Mobile
(in thousands of Canadian dollars) OMSCO Facility Total
-------------------------------------------------------------------------
Revenue $ 31,271 $ 1,213 $ 32,484
--------------------------------------
Income (loss) from operations 5,654 (1,221) 4,433
Gain on sale 75,109 - 75,109
Interest expenses 93 - 93
--------------------------------------
Income (loss) from discontinued
operations before income taxes 80,670 (1,221) 79,449
Income tax expense 23,390 - 23,390
--------------------------------------
Net income (loss) from discontinued
operations $ 57,280 $ (1,221) $ 56,059
--------------------------------------
--------------------------------------
Cash flow from (used in)
operating activities 41,455 (47,693) (6,238)
Cash flow from (used in)
investing activities 135,700 - 135,700
Cash flow from (used in)
financing activities (615) - (615)
--------------------------------------
Net cash provided by (used in)
discontinued operations $ 176,540 $ (47,693) $ 128,847
--------------------------------------
--------------------------------------
Nine Months Ended Sept 30, 2006
Mobile
(in thousands of Canadian dollars) OMSCO Facility Total
-------------------------------------------------------------------------
Revenue $ - $ 60 $ 60
--------------------------------------
Income (loss) from operations - (220) (220)
Gain on sale - - -
Interest expenses - - -
--------------------------------------
Income (loss) from discontinued
operations before income taxes - (220) (220)
Income tax expense - - -
--------------------------------------
Net income (loss) from
discontinued operations $ - $ (220) $ (220)
--------------------------------------
--------------------------------------
Cash flow from (used in)
operating activities - (695) (695)
Cash flow from (used in)
investing activities - - -
Cash flow from (used in)
financing activities - - -
--------------------------------------
Net cash provided by (used in)
discontinued operations $ - $ (695) $ (695)
--------------------------------------
--------------------------------------
Current assets - 108 108
Property, plant and equipment, net - 4,659 4,659
Current liabilities - 7,770 7,770
--------------------------------------
Nine Months Ended Sept 30, 2005
Mobile
(in thousands of Canadian dollars) OMSCO Facility Total
-------------------------------------------------------------------------
Revenue $ 91,333 $ 21,468 $ 112,801
--------------------------------------
Income (loss) from operations 14,868 (5,823) 9,045
Gain on sale 75,109 - 75,109
Interest expenses 226 - 226
--------------------------------------
Income (loss) from discontinued
operations before income taxes 89,751 (5,823) 83,928
Income tax expense 26,688 - 26,688
--------------------------------------
Net income (loss) from
discontinued operations $ 63,063 $ (5,823) $ 57,240
--------------------------------------
--------------------------------------
Cash flow from (used in)
operating activities 5,124 (33,599) (28,475)
Cash flow from (used in)
investing activities 135,600 - 135,600
Cash flow from (used in)
financing activities (615) - (615)
--------------------------------------
Net cash provided by (used in)
discontinued operations $ 140,109 $ (33,599) $ 106,510
--------------------------------------
--------------------------------------
Current assets - 2,946 2,946
Property, plant and equipment, net - 9,038 9,038
Current liabilities - 13,122 13,122
--------------------------------------
8. Acquisition
On August 8, 2006, the Company announced the acquisition of a 50%
interest in Eupec Brasil Ltda., which operates a pipe-coating plant
adjacent to the Vallourec & Mannesmann pipe mill in Belo Horizonte,
Brazil. Eupec Brasil Ltda. was subsequently renamed Bredero Shaw
Revestimentos de Tubos Ltda. The allocation of the purchase price has not
yet been finalized pending the completion of an appraisal of the value of
acquired property, plant and equipment. This is expected to be completed
prior to the end of the year. 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 estimated
assigned values:
Current assets $ 2,013
Property, plant and equipment 2,973
Goodwill 4,473
Current liabilites (904)
------------
$ 8,555
------------
------------
Consideration given:
Cash, net of cash acquired of $1,173 $ 8,555
------------
$ 8,555
------------
------------
This acquisition has been accounted for by the purchase method with the
results of operations included in the consolidated financial statements
from the date of acquisition.
9. Other assets
Sept. 30 Dec. 31
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
Long-term investment $ 2,875 $ 2,875
Deferred financing costs 2,188 2,031
Accrued employee future benefit asset 4,123 4,384
Future income taxes 20,695 24,597
-------------------------
Total $ 29,881 $ 33,887
-------------------------
-------------------------
Other assets include a long-term investment in Garneau Inc., a Canadian-
based, publicly traded pipe-coating company with a market value of
$3.5 million at September 30, 2006.
10. Bank indebtedness
As at September 30, 2006, the Company had operating lines of credit of
US $175 million, of which CAD$83.3 million has been utilized for various
types of standby letters of credit for performance and bid bonds
(December 31, 2005 - $98.0 million, September 30, 2005 - $78.0 million)
and bank indebtedness of nil (December 31, 2005 - $1.7 million,
September 30, 2005 - $1.7 million).
11. Other non-current liabilities
Sept. 30, Dec. 31,
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
Non-current asset retirement obligations $ 3,282 $ 2,249
Accrued employee future benefit obligations 2,546 1,953
Future income taxes 25,993 34,575
-------------------------
Total $ 31,821 $ 38,777
-------------------------
-------------------------
12. Capital stock
Sept. 30, Dec. 31,
(in thousands except share information) 2006 2005
-------------------------------------------------------------------------
Number of shares: Class A
Balance, beginning of the period 61,006,045 61,224,968
Issued - stock options 93,935 206,727
Conversions Class B to Class A 9,873 657,950
Purchase and cancelled under Normal Course
Issuer Bid (432,900) (1,083,600)
-------------------------
Balance, end of the period 60,676,953 61,006,045
-------------------------
Number of shares: Class B 13,078,142 13,088,015
-------------------------
Total number of shares 73,755,095 74,094,060
-------------------------
-------------------------
Stated value: Class A
Balance, beginning of the period $ 203,716 $ 205,849
Issued - stock options 1,376 1,459
Conversion Class B to Class A - 51
Purchased and cancelled under Normal Course
Issuer Bid (1,441) (3,643)
-------------------------
Balance, end of the period 203,651 203,716
-------------------------
Stated Value: Class B 1,004 1,004
-------------------------
Total stated value Class A and Class B $ 204,655 $ 204,720
-------------------------
-------------------------
13. Contributed surplus
Three Months Ended Nine Months Ended
(in thousands of Sept. 30 Sept. 30
Canadian dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Balance, beginning of
period $ 10,351 $ 7,694 $ 9,231 $ 7,196
Stock compensation
expense (note 2) 738 244 2,139 1,446
Fair value of stock
options exercised (138) (101) (419) (805)
---------------------------------------------------
Balance, end of
period $ 10,951 $ 7,837 $ 10,951 $ 7,837
---------------------------------------------------
---------------------------------------------------
14. Cumulative translation account
Three Months Ended Nine Months Ended
(in thousands of Sept. 30 Sept. 30
Canadian dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Balance at beginning
of period $ (104,535) $ (78,605) $ (100,260) $ (71,509)
Translation of self-
sustaining foreign
operations (860) (12,552) (5,135) (19,648)
---------------------------------------------------
Balance at end of
year $ (105,395) $ (91,157) $ (105,395) $ (91,157)
---------------------------------------------------
---------------------------------------------------
During the nine months ended September 30, 2006, the Canadian dollar
gained 3.8% (2005 gained 2.7%) against the U.S. dollar, weakened 3.8%
(2005 gained 14.1%) against the Euro and weakened 6.05% (2005 gained
10.5%) against the U.K. pound.
15. Financial instruments
Foreign exchange options and forward exchange contracts are used to hedge
foreign exchange exposures related to commercial activities. They are not
used by the Company for speculative purposes. At September 30, 2006, the
Company had notional amounts of $24.3 million of forward contracts
outstanding (December 31, 2005 - $104.5 million, September 30, 2005 -
$108.5 million). These amounts are used to express the volume of
transactions and are not recognized in the consolidated financial
statements. These financial instruments are contracted with major,
chartered banks; as a result, credit and liquidity risks related to these
instruments are considered to be low.
The fair values of foreign exchange forward contracts represent an
approximation of the amounts the Company would have paid to or received
from counterparties to unwind its positions at September 30, 2006. The
fair value of the Company's net liability for all foreign exchange
forward contracts at September 30, 2006 not recognized in the
consolidated financial statements was approximately $1.8 million
(December 31, 2006 - $1.9 million net benefit, September 30, 2005 -
$885 thousand net benefit). If these contracts ceased to be effective as
hedges, unrecognized gains or losses pertaining to the portion of the
hedging transactions in excess of projected foreign-denominated cash
flows would be recognized in income at the time this condition was
identified.
16. Segmented information
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
(in thousands of Restated - Restated -
Canadian dollars) 2006 Note 7 2006 Note 7
-------------------------------------------------------------------------
Revenue
Pipeline and Pipe
Services $ 210,917 $ 209,594 $ 661,081 $ 620,268
Petrochemical and
Industrial 34,910 29,920 106,143 93,268
Intersegment
Eliminations (478) (350) (1,216) (1,102)
---------------------------------------------------
$ 245,349 $ 239,164 $ 766,008 $ 712,434
---------------------------------------------------
---------------------------------------------------
Operating income
(loss) from
continuing operations
Pipeline and Pipe
Services $ 24,047 $ 22,550 $ 97,584 $ 65,527
Petrochemical and
Industrial 5,039 3,023 13,603 10,372
Financial and
Corporate (5,437) (3,704) (14,280) (12,205)
---------------------------------------------------
$ 23,649 $ 21,869 $ 96,907 $ 63,694
---------------------------------------------------
---------------------------------------------------
Goodwill
Pipeline and Pipe
Services $ 152,730 $ 152,534
Petrochemical and Industrial 16,883 16,672
-------------------------
$ 169,613 $ 169,206
-------------------------
-------------------------
Total assets
Pipeline and Pipe Services $ 933,518 $ 897,898
Petrochemical and Industrial 80,245 73,666
Financial and Corporate 935,329 936,695
Elimination (1,005,562) (996,528)
-------------------------
$ 943,530 $ 911,731
-------------------------
-------------------------
17. Proposed transaction
On October 5, 2006, the Company announced that the agreement to purchase
Garneau Inc. had been terminated due to delays in closing as a result of
a review by the Competition Bureau and the inability of the parties to
resolve outstanding issues.
18. Joint venture operation
On August 8, 2006, the Company announced the acquisition of a 50%
interest in Eupec Brasil Ltda., a joint venture equally owned and
controlled by ShawCor Ltd. and Delta Premium Trading Corp. Subsequent to
the transaction, the name of the joint venture company was changed to
Bredero Shaw Revestimentos de Tubos Ltda. ("BSRTL") The Company's share
of BSRTL's assets, liabilities, revenue, expenses, net income and cash
flows are consolidated based on the Company's 50% proportional ownership
position. The figures related to BSRTL included in the Company's
consolidated financial statements are summarized as follows:
Sept. 30,
(in thousands of Canadian dollars) 2006
-------------------------------------------------------------------------
Revenue $ 966
Operating and other expenses 879
Net income before tax 87
Provision for taxes 20
------------
Net income for the period $ 67
------------
------------
Cash provided by used in
Operating activities $ 52
Investing activities -
Financing activities -
------------
Current assets $ 3,666
Property, plant and equipment, net 2,857
Goodwill 4,828
Current liabilities 1,353
------------
19. Comparative figures
Comparative figures have been reclassified where necessary to correspond
with the current year's presentation.
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