(TSX: SCL.A, SCL.B)
TORONTO, May 9 /CNW/ -
Financial Summary (In thousands of Canadian dollars Three Months Ended Mar. 31 except per share amounts) 2008 2007 ------------------------------------------------------------------------- Operating Results Revenue $ 293,357 $ 221,329 EBITDA (note 1) 54,591 38,407 Operating income from continuing operations 41,219 27,972 Income from continuing operations 27,131 23,308 Income (loss) from discontinued operations (69) (55) Net income 27,062 23,253 Net income (loss) per share (Class A and B) - Basic Continuing operations 0.38 0.31 Discontinued operations 0.00 0.00 Total 0.38 0.31 Net income (loss) per share (Class A and B) - Diluted Continuing operations 0.38 0.31 Discontinued operations 0.00 0.00 Total 0.38 0.31 ------------------------------------------------------------------------- Cash Flow Cash from (used in) operating activities (9,515) 29,853 Additions to property, plant and equipment 12,261 15,493 ------------------------------------------------------------------------- Financial Position Working capital 280,551 348,923 Total assets 1,020,077 1,000,569 Shareholders' equity per share (Class A and B) (note2) $ 8.64 $ 8.67 ------------------------------------------------------------------------- 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 27,131 23,308 Add (deduct): Income taxes 14,430 6,716 Interest (income) expense 87 (1,599) Amortization of property, plant and equipment 12,943 9,982 ------------------------------------------------------------------------- EBITDA 54,591 38,407 -------------------------------------------------------------------------
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 for the first quarter of 2008 totaled $293.4 million, 32.5% higher than the first quarter of 2007 and 2.8% higher than the fourth quarter of last year, with the year over year growth reflecting increased activity at the Company's Pipeline and Pipe Services segment businesses, partially offset by marginally lower revenue in the Petrochemical and Industrial segment. This growth was achieved despite the adverse impact of the stronger Canadian dollar in the quarter. Compared with the first quarter of 2007, the 13% strengthening of the Canadian dollar against the US dollar reduced reported revenue by $21 million.
Net income in the quarter totaled $27.1 million ($0.38 per diluted share), compared to $23.3 million ($0.31 per diluted share) in the first quarter of last year, with the improvement reflecting the increased revenue in the quarter together with improved operating margins. Consolidated operating margins (operating income from continuing operations divided by revenue from continuing operations) were 14.1% in the quarter compared to 12.6% in the first quarter of last year.
The Company's backlog at March 31 remained strong at $413.9 million although down from $460.1 million at the beginning of the quarter due to the higher level of sales. This strong backlog, together with continuing high levels of bidding activity, is indicative of the increasing investments in energy infrastructure globally and supports the Company's potential for strong growth in the years ahead.
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 Q1 2007
Consolidated revenue from continuing operations for the first quarter of 2008 totaled $293.4 million, an increase of 32.5% over $221.3 million recorded in the first quarter of 2007, despite the impact of the Canadian dollar during the period. The Canadian dollar strengthened against the U.S. dollar by approximately 13.0% on average, during the first quarter of 2008 compared with the first quarter of last year, which adversely impacted revenue, operating income from continuing operations and net income by approximately $21 million, $5 million and $3 million, respectively.
Operating income from continuing operations totaled $41.2 million (14.1% of revenue from continuing operations) in the quarter, representing a 47.4% increase over $28.0 million (12.6% of revenue from continuing operations) achieved in the first quarter of last year, with the improvement reflecting the increased revenue in the period together with the improved operating margins.
Net income in the quarter totaled $27.1 million ($0.38 per share, diluted) compared to $23.3 million ($0.31 per share, diluted) in the first quarter of 2007, reflecting the higher operating income in the quarter partially offset by the impact of a higher effective income tax rate. The improvement in earnings per share is reflective of the higher net income together with the benefit of the reduction in shares outstanding as a result of 3 million Class A shares having been repurchased under the Normal Course Issuer Bid over the past twelve months.
Current Quarter versus Q4 2007
Consolidated revenue from continuing operations in the first quarter increased 2.8% over the level achieved last quarter, reflecting a modest weakening of the Canadian dollar in the period, compared to the U.S. dollar, together with the impact of higher business activity in the Company's Petrochemical and Industrial segment.
Operating income from continuing operations in the first quarter was 4.4% higher than last quarter, reflecting the impact of the higher revenue and increased operating margins, and despite start up costs associated with new pipe coating facilities and products and a $1.5 million write-down of the company's investment in Garneau Inc.
Net income in the quarter increased by $23.3 million, or $0.33 per share, diluted, from $3.8 million ($0.05 per share, diluted) in the previous quarter. Net income in the fourth quarter of 2007 included a loss from discontinued operations of $30.3 million ($0.42 per share, diluted) following the recording of a provision related to a jury verdict in a case involving environmental contamination at the Company's former facility in Mobile, Alabama.
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 Mar. 31 Dec. 31 Mar. 31 (In thousands of Canadian dollars) 2008 2007 2007 Revenue from continuing operations $255,794 $254,316 $182,368 Income from continuing operations $38,508 $40,280 $24,536 Operating margin 15.1% 15.8% 13.5%
Current Quarter versus Q1 2007
In the Pipeline and Pipe Services segment, revenue from continuing operations in the first quarter of 2008 totaled $255.8 million and was 40.3% higher than in the first quarter of last year, driven by strong results at Bredero Shaw, Canusa-CPS and Shaw Pipeline Services. At Bredero Shaw, revenue from continuing operations increased 40.3% over the first quarter of last year with growth achieved in all regions. In North America, revenue increased 35.0% as a result of large diameter pipe coating projects in the USA and Canada together with the impact of the commencement of pipe coating production at the new facility in Camrose, Alberta. In the Europe/Africa region, revenue increased 39.0% reflecting increased offshore pipe coating volumes associated with projects in Spain and Tunisia. Revenue in the Far East region increased 87.3% over the first quarter of last year on higher large diameter pipe coating volume while in the Middle East region, revenue increased 21.0% as the pipe coating plant in Ras Al Khaimah, UAE came on-line after completion of an upgrade and capacity expansion program. In the segment's other business units, revenue at Shaw Pipeline Services and Canusa-CPS both reached new quarterly records as a result of international project work, while revenue at Guardian decreased marginally reflecting continuing softness in Western Canadian drilling activity.
Operating income from continuing operations for the segment of $38.5 million (15.1% of revenue from continuing operations) in the quarter increased 56.9% over the first quarter of last year and reflected the impact of the higher revenue as well as higher operating margins. Operating margins in the quarter of 15.1% improved 1.6 percentage points over the 13.5% achieved in the first quarter of last year, principally due to the improved factory utilization in North American facilities resulting from higher large diameter pipe coating volumes.
Current Quarter versus Q4 2007
Revenue in the first quarter was marginally higher than last quarter as increases at Canusa-CPS, Shaw Pipeline Services and Guardian were partially offset by a small decrease at Bredero Shaw. In the first quarter, Bredero Shaw experienced revenue growth at the project facilities in Spain and Tunisia and the newly reconstructed facility in Ras Al Khaimah. These sources of revenue were offset by a decline in volume from the record level of activity in the fourth quarter of last year at the Company's established pipe coating facilities in Canada, USA, Malaysia, and Saudi Arabia.
Operating income from continuing operations in the quarter was 95.6% of the level in the prior quarter as record operating performance at Canusa-CPS and Shaw Pipeline Services was offset by a decline in operating income at Bredero Shaw. During the first quarter, the launch of the new facilities at Camrose Alberta and Ras Al Khaimah and the launch of a new insulation product at the Orkanger Norway facility resulted in operating margins that have not yet reached planned levels. Also negatively impacting operating margins was an increase in depreciation expense of $2.2 million associated with the Camrose and Ras Al Khaimah capital expansions.
Petrochemical and Industrial Three months ended Mar. 31 Dec. 31 Mar. 31 (In thousands of Canadian dollars) 2008 2007 2007 Revenue from continuing operations $38,137 $28,450 $39,519 Income from continuing operations $6,075 $3,065 $6,983 Operating margin 15.9% 10.8% 17.7%
Current Quarter versus Q1 2007
In the Petrochemical and Industrial segment, revenue in the first quarter of 2008 totaled $38.1 million and was 3.5% lower than in the first quarter of last year, reflecting the impact of the stronger Canadian dollar on the translation of DSG-Canusa's significant U.S dollar based revenue. Operating income in the first quarter of 2008 of $6.1 million was 87.0% of the level in the first quarter of 2007 and reflected the impact of the stronger Canadian dollar in the period.
Current Quarter versus Q4 2007
Revenue for the segment in the quarter was 134.0% of the level achieved in the fourth quarter of last year reflecting increased business activity at both DSG-Canusa and Shawflex, despite softening economic activity in North America. Operating income in the quarter nearly doubled from the prior quarter reflecting the higher revenue together with operating margin improvement of 5.1 percentage points, the result of improved factory utilization at DSG Europe and Shawflex.
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 net foreign exchange gains of $3.1 million, totaled $6.5 million compared to $4.3 million in the first quarter of last year, before net foreign exchange gains of $720 thousand. The increase in corporate costs resulted primarily from the write-down of $1.5 million on the Company's investment in Garneau Inc. This charge reflects a decrease in the market value of the investment that the Company considers to be other than temporary.
Interest Income
Net interest expense totaled $87 thousand in the quarter, compared to interest income of $1.6 million in the first quarter 2007 and $743 thousand last quarter, and reflected the impact of lower cash balances in the quarter, together with lower rates of interest earned on cash and cash equivalents in the U.S and Canada.
Income Taxes
Income tax expense related to continuing operations in the quarter was $14.4 million, an effective rate of 35.1% compared to $6.7 million or an effective rate of 22.7% in the first quarter of last year and $6.3 million or an effective rate of 15.6% in the fourth quarter of 2007. The effective tax rate in the quarter was adversely impacted by tax losses in certain jurisdictions and the write down of the Company's investment in Garneau Inc. for which no tax benefits were recorded. In the fourth quarter of 2007, the effective rate had been favourably impacted by the utilization of previously unrecognized loss carry forwards in certain countries, while in the first quarter 2007, the effective rate was benefited by decreases in the Company's Canadian future tax liability balances and the recognition of future tax assets as a result of the Company's improved profitability in the United States.
Cash Flow
Cash flow used in continuing operating activities in the quarter totaled $9.5 million, compared to cash generated of $8.7 million last quarter and $29.9 million in the first quarter of 2007 and reflected a $52.4 million investment in higher working capital to support increasing business levels.
Cash flow used in continuing investing activities in the quarter totaled $14.3 million, compared to $33.2 million last quarter and $22.0 million in the first quarter of 2007, and was comprised of capital expenditures of $12.3 million and investment in deferred project costs of $2.1 million, partially offset by proceeds received on the disposal of property, plant and equipment of $32 thousand. Major capital additions in the quarter included the pipe coating plant capacity expansions in Pearland, Texas, Camrose, Alberta and Ras Al Khaimah, UAE.
Cash flow used in continuing financing activities in the quarter totaled $16.2 million, compared to $17.8 million last quarter and $14.5 million in the first quarter of 2007, and consisted of dividends paid to shareholders of $4.0 million, $12.6 million paid to repurchase 405,000 Class A Subordinate Voting Shares ("Class A Shares") at an average price of $31.22, partially offset by $459 thousand received from the issuance of Class A Shares on the exercise of stock options, and increases in bank indebtedness of $9 thousand.
Other Comprehensive Income
Other comprehensive income in the quarter totaled $18.7 million and was mainly comprised of an unrealized foreign currency translation gain of $18.8 million, net of hedging activities, reflecting the weakening of the Canadian dollar versus the U.S. dollar in the quarter and the effect of recognizing in the income statement an unrealized loss of $840 thousand on available-for-sale financial assets, and $996 thousand of unrealized gains on the maturity of derivative financial instruments designated as cash flow hedges and on the discontinuance of hedge accounting for outstanding derivatives.
Liquidity and Capitalization
At March 31, 2008, the Company recorded a working capital ratio (the ratio of current assets to current liabilities) of 1.99 to 1 compared to 1.98 to 1 at December 31, 2007. Operating working capital, excluding cash, cash equivalents and bank indebtedness, increased $57.9 million during the quarter to $138.7 million, mainly reflecting increases in accounts receivable stemming from the high levels of sales experienced at the end of the first quarter, together with increased inventory levels incurred to support new projects and partially offset by higher taxes payable.
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.
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 $ 2,624
------------
Total increase in assets $ 2,624
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------------
Increase in shareholders' equity:
Retained earnings 2,624
------------
Total increase to shareholders' equity 2,624
------------
Total increase to liabilities and shareholders' equity $ 2,624
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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 March 31, 2008:
------------------------------------------------------------------------- (in thousands) ------------------------------------------------------------------------- Canadian dollars sold for Great Britain pounds ------------------------------------------------------------------------- Less than one year CAD$820 ------------------------------------------------------------------------- Weighted average rate 2.0032 ------------------------------------------------------------------------- U.S. dollars sold for Canadian dollars ------------------------------------------------------------------------- Less than one year US$12,000 ------------------------------------------------------------------------- Weighted average rate 1.0205 ------------------------------------------------------------------------- Euros sold for U.S. dollars ------------------------------------------------------------------------- Less than one year Euro 3,033 ------------------------------------------------------------------------- Weighted average rate 1.4430 ------------------------------------------------------------------------- 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 Kroner ------------------------------------------------------------------------- Less than one year US$9,543 ------------------------------------------------------------------------- Weighted average rate 5.3261 ------------------------------------------------------------------------- U.S. dollars sold for Malaysian Ringgit ------------------------------------------------------------------------- Less than one year US$9,800 ------------------------------------------------------------------------- Weighted average rate 3.2780 -------------------------------------------------------------------------
At March 31, 2008, the Company had notional amounts of $44.2 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 $297 thousand (December 31, 2007 - $1.5 million, net benefit).
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 nine most recently completed quarters:
(In thousands of Canadian dollars except per share amounts) First Second Third Fourth Full Year ------------------------------------------------------------------------- Revenue (Restated - see note below) 2008 $ 293,357 $ - $ - $ - $ - 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 - - - - 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 - - - - 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) - - - - 2007 (55) (48) (59) (30,300) (30,462) 2006 (35) (192) 7 (69) (289) Net income 2008 27,062 - - - - 2007 23,253 30,219 30,132 3,753 87,357 2006 24,720 24,706 16,556 26,653 92,635 (In thousands of Canadian dollars except per share amounts) First Second Third Fourth Full Year ------------------------------------------------------------------------- Operating income from continuing operations per share (Classes A and B) Basic 2008 0.58 - - - - 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 - - - - 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 - - - - 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 - - - - 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 - - - - 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 - - - - 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 - - - - 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 - - - - 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 April 30, 2008, the Company had 57,860,930 Class A Subordinate Voting Shares ("Class A") outstanding and 13,078,142 Class B Multiple Voting Shares ("Class B") outstanding. Each Class B share is convertible into a Class A share at the option of the holder. In addition, as at April 30, 2008, the Company had stock options outstanding to issue up to 2,541,220 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 consolidated order backlog at March 31, 2008, representing the value of firm customer purchase orders expected to be completed within one year, totaled $413.9 million, 10.2% lower than at the beginning of the quarter, with the decrease reflecting the high level of pipe coating activity in the quarter. Although somewhat lower than at the beginning of the quarter, the current backlog remains very strong.
The Company's current outlook is for pipeline activity to continue to be strong with 2008 consolidated revenue expected to grow at a 10% to 15% rate from 2007. The Company continues to pursue significant business opportunities globally. Success in securing these projects, together with the buoyant market outlook in North America, the Middle East and the Far East should support continued significant revenue growth during the next few years.
Forward Looking Information
This document includes certain statements that reflect management's expectations and objectives for ShawCor's future performance, opportunities and growth which constitute forward-looking information under applicable securities laws. Such statements, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. These statements may be identified by the use of forward-looking terminology such as "may," "will," "should", "anticipate," "expect", "believe", "predict", "estimate," "continue," "intend," "plan," and variations of these words or other similar expressions. These statements are based on assumptions, estimates and analysis made by ShawCor in light of its experience and perception of trends, current conditions and expected developments as well as other factors believed to be reasonable and relevant in the circumstances. Although ShawCor believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions in light of currently available information, ShawCor can give no assurance that such expectations will be achieved.
Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those predicted, expressed or implied by the forward-looking statements. Significant risks facing ShawCor include, but are not limited to: changes in global economic activity and changes in energy supply and demand which impact on the level of drilling activity and pipeline construction; political, economic and other risks arising from ShawCor's international operations; compliance with environmental, trade and other laws; liability claims; fluctuations in foreign exchange rates; fluctuations in prices of raw materials, as well as other risks and uncertainties.
Other information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com.
ShawCor will be hosting a Shareholder and Analyst conference call and webcast on May 12, 2008 at 10:00 am ET to discuss the Company's first quarter 2008 financial results. Please visit our website at www.shawcor.com for future details.
V.L. Shaw W.P. Buckley
Chair President & C.E.O.
Toronto, Ontario
May 9, 2008
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars except per share data)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31
--------------------------
2008 2007
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Revenue $ 293,357 $ 221,329
Cost of goods sold 187,654 136,740
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Gross profit 105,703 84,589
Selling, general and administrative
expenses (notes 2, 3 and 4) 49,863 45,115
Amortization of property, plant and equipment 12,943 9,982
Research and development expense 1,678 1,520
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Operating income from continuing operations 41,219 27,972
Interest income (expense) (note 5) (87) 1,599
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Income before income taxes
and non-controlling interest 41,132 29,571
Income taxes 14,430 6,716
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Income before non-controlling interest 26,702 22,855
Non-controlling interest 429 453
------------ ------------
Income from continuing operations 27,131 23,308
Loss from discontinued operations (note 6) (69) (55)
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Net income $ 27,062 $ 23,253
------------ ------------
------------ ------------
Earnings per share, Class A and B
- Basic (note 19)
Continuing operations $ 0.38 $ 0.31
Discontinued operations - -
------------ ------------
Total $ 0.38 $ 0.31
------------ ------------
------------ ------------
Earnings per share Class A and B
- Diluted (note 19)
Continuing operations $ 0.38 $ 0.31
Discontinued operations - -
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Total $ 0.38 $ 0.31
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SEGMENTED INFORMATION
Three Months Ended
March 31
--------------------------
2008 2007
------------ ------------
Revenue
Pipeline and Pipe Services $ 255,794 $ 182,368
Petrochemical and Industrial 38,137 39,519
Intersegment Eliminations (574) (558)
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$ 293,357 $ 221,329
------------ ------------
------------ ------------
Income (loss) from operations
Pipeline and Pipe Services $ 38,508 $ 24,536
Petrochemical and Industrial 6,075 6,983
Financial and Corporate (3,364) (3,547)
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$ 41,219 $ 27,972
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SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended
March 31
--------------------------
2008 2007
------------ ------------
Operating activities:
Income from continuing operations $ 27,131 $ 23,308
Items not requiring an outlay of cash:
Amortization of property, plant and
equipment 12,943 9,982
Amortization of deferred project costs 3,722 5,676
Asset retirement obligation expense 1,066 195
Stock-based compensation (note 2) 887 675
Future income taxes (3,734) (157)
Gain on disposal of property,
plant and equipment (9) (82)
Impairment of available-for-sale
financial asset (note 8) 1,498 -
Non-controlling interest
in earnings of subsidiaries (429) (453)
Settlement of asset retirement obligations (959) (1,173)
Change in employee future benefits 766 835
Change in non-cash working capital (52,396) (8,953)
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Cash provided by (used in) continuing
operating activities (9,515) 29,853
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Investing activities:
Purchases of property, plant and equipment (12,261) (15,493)
Proceeds on disposal of property,
plant and equipment 32 101
Increase in deferred project costs (2,054) (6,574)
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Cash used in continuing investing activities (14,283) (21,966)
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Financing activities:
Increase (decrease) in bank indebtedness 9 (967)
Issue of shares 459 1,325
Purchase of shares for cancellation (12,642) (10,658)
Dividends paid to shareholders (4,015) (4,188)
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Cash used in continuing financing activities (16,189) (14,488)
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Foreign exchange on foreign
cash and cash equivalents 5,718 155
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-
Net cash used in continuing operations (34,269) (6,446)
Net cash provided by (used in)
discontinued operations (note 6) 1,260 (679)
Cash and cash equivalents at beginning
of period 175,017 309,322
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Cash and cash equivalents at end of period $ 142,008 $ 302,197
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Supplemental information:
Cash interest paid $ 1,189 $ 2,034
Cash income taxes paid $ 8,301 $ 24,196
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED BALANCE SHEETS
March 31 December 31
2008 2007
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Assets
Current assets
Cash and cash equivalents (note 7) $ 142,008 $ 175,017
Accounts receivable 260,528 203,547
Taxes receivable 9,857 3,169
Inventories 121,474 102,486
Prepaid expenses 7,400 11,362
Derivative financial instruments 695 1,508
Current future income taxes 4,195 2,770
Current assets of discontinued
operation (note 6) 17,029 16,305
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563,186 516,164
Property, plant and equipment, net 250,597 242,783
Goodwill 167,542 161,038
Future income taxes 26,145 24,463
Other assets (note 8) 12,607 15,878
------------ ------------
$ 1,020,077 $ 960,326
------------ ------------
------------ ------------
Liabilities
Current liabilities
Bank indebtedness (note 9) $ 116 $ 107
Accounts payable and accrued liabilities 146,717 153,116
Taxes payable 49,820 32,030
Derivative financial instruments 648 -
Deferred revenues 32,016 24,021
Current liabilities of discontinued
operation (note 6) 53,318 51,265
------------ ------------
282,635 260,539
Long-term debt 75,989 72,726
Future income taxes 31,867 33,006
Derivative financial instruments 344 -
Other non-current liabilities (note 10) 13,172 10,740
------------ ------------
404,007 377,011
------------ ------------
Non-controlling interest in subsidiaries 2,994 3,283
------------ ------------
Shareholders' Equity
Capital stock (note 11) 202,505 203,252
Contributed surplus (note 12) 12,415 11,729
Retained earnings 500,984 486,548
Accumulated other comprehensive loss (note 13) (102,828) (121,497)
------------ ------------
613,076 580,032
------------ ------------
$ 1,020,077 $ 960,326
------------ ------------
------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended
March 31
--------------------------
2008 2007
------------ ------------
Balance at beginning of period $ 486,548 $ 498,001
Transitional adjustment (note 1) 2,624 -
------------ ------------
Adjusted balance at beginning of year 489,172 498,001
Net income 27,062 23,253
------------ ------------
516,234 521,254
Excess of purchase price paid over
stated value of shares (note 11) (11,235) (9,351)
Dividends declared (4,015) (4,188)
------------ ------------
Balance at end of period $ 500,984 $ 507,715
------------ ------------
------------ ------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
March 31
--------------------------
2008 2007
------------ ------------
Net income $ 27,062 $ 23,253
Other comprehensive income (loss),
net of income taxes:
Unrealized gain (loss) on translating
financial statements of self-sustaining
foreign operations 22,103 (1,092)
Gain (loss) on hedges of unrealized
foreign currency translation (3,278) 382
------------ ------------
Unrealized foreign currency translation gain
(loss), net of hedging activites 18,825 (710)
------------ ------------
Unrealized loss on available-for-sale
financial assets arising during the period (911) (640)
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 253 218
------------ ------------
Change in unrealized loss on
available-for-sale financial assets 840 (422)
------------ ------------
Gain on derivatives designated
as cash flow hedges - 117
Income tax expense - (40)
Loss (gain) on derivatives designated as cash
flow hedges in prior periods transferred to
net income in the current period (1,508) 138
Income tax expenses (benefits) transferred
to net income in the current period 512 (47)
------------ ------------
Change in gain (loss) on derivatives
designated as cash flow hedges (996) 168
------------ ------------
Other comprehensive income (loss) 18,669 (964)
------------ ------------
Comprehensive income $ 45,731 $ 22,289
------------ ------------
------------ ------------
ShawCor Ltd.
Notes to the Consolidated Financial Statements (Unaudited)
1. Changes in 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) 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 interim consolidated financial statements.
b) 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 16.
c) 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 15.
d) 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................................................ $ 2,624
------------
Total increase in assets................................... $ 2,624
------------
------------
Increase in shareholders' equity:
Retained earnings ....................................... 2,624
------------
Total increase to shareholders' equity .................... 2,624
------------
Total increase to liabilities and shareholders' equity .... $ 2,624
------------
------------
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
On February 22, 2008, the Board of Directors approved the granting of
398,600 stock options under the 2001 Employee Plan. The total fair value
of the stock options was $3.8 million and the weighted average fair value
of options granted during three months ended March 31, 2008 was $10.57
(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 .............. 29.30% 29.02%
-------------------------------------------------------------------------
Expected dividend yield ...................... 0.75% 0.92%
-------------------------------------------------------------------------
Risk-free interest rate ...................... 3.68% 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 ended March 31, 2008, included
in selling, general and administrative expenses, is $887 thousand (three
month ended March 31, 2007 $675 thousand).
3. Foreign exchange gains and losses
Included in selling, general and administrative expenses for the three
months ended March 31, 2008 are foreign exchange gains totaling
$3.1 million, while foreign exchange gains for the three months ended
March 31, 2007 totaled $720 thousand.
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 ended March 31, 2008 is $2.4 million (March 31, 2007 -
$2.4 million).
5. Interest income (expense)
Three Months Ended Mar. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Interest income on short-term deposits $ 1,452 $ 3,183
Interest expense on bank indebtedness (356) (197)
Interest expense on long-term debt (1,183) (1,387)
--------------------------
$ (87) $ 1,599
--------------------------
--------------------------
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 following table summarizes the financial results and cash flows from
discontinued operations for the periods ended March 31, 2008 and 2007 and
the assets and liabilities of the discontinued operations as at those
dates:
Three Months Ended Mar. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Revenue $ - $ -
--------------------------
Loss from operations (69) (55)
Interest expenses - -
--------------------------
Loss from discontinued operations
before income taxes (69) (55)
Income tax recovery - -
--------------------------
Loss from discontinued operations $ (69) $ (55)
--------------------------
--------------------------
--------------------------
Cash flow provided by (used in)
operating activities $ 1,260 $ (679)
--------------------------
--------------------------
Current assets $ 17,029 $ 9
Property, plant and equipment, net - -
Current liabilities $ 53,318 $ 7,018
7. Cash and Cash Equivalents
Mar. 31 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Cash $ 60,541 $ 122,655
Cash equivalents 81,467 52,362
--------------------------
$ 142,008 $ 175,017
--------------------------
--------------------------
8. Other assets
Mar. 31 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Long-term investment $ 1,678 $ 2,589
Deferred project costs 8,372 8,492
Accrued employee future benefit asset 2,557 4,797
--------------------------
$ 12,607 $ 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.
9. Bank indebtedness
At March 31, 2008, the Company had total operating credit lines of
$179.5 million (December 31, 2007 - $172.0 million), of which
$115.8 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 nil (December 31, 2007 - nil), to yield
unutilized credit facilities of $63.7 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.
10. Other non-current liabilities
Mar. 31 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Non-current asset retirement obligations $ 11,883 $ 7,977
Accrued employee future benefit obligations 1,289 2,763
--------------------------
$ 13,172 $ 10,740
--------------------------
--------------------------
11. Capital stock
Mar. 31 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Captial Stock
-------------------------------------------------------------------------
Number of shares: Class A
Balance, beginning of the period 58,234,570 60,914,175
Issued - stock options 31,360 320,295
Purchase - normal course issuer bid (405,000) (2,999,900)
--------------------------
Balance, end of the period 57,860,930 58,234,570
Number of shares: Class B 13,078,142 13,078,142
--------------------------
Total number of shares 70,939,072 71,312,712
--------------------------
--------------------------
Stated value:
Balance, beginning of the period $ 202,248 $ 205,848
Issued - stock options 459 4,955
Purchase - normal course issuer bid (1,407) (10,194)
Compensation cost on exercised options 201 1,639
--------------------------
Balance, end of the period 201,501 $ 202,248
Stated value: Class B 1,004 1,004
--------------------------
Total stated value $ 202,505 $ 203,252
--------------------------
--------------------------
During the three months ended March 31, 2008, the Company repurchased and
cancelled 405,000 Class A Subordinated Voting Shares ("Class A shares")
(March 31 2007 - 385,000) under the terms of a Normal Course Issuer Bid
("NCIB"). The excess of cost over stated capital of the acquired shares,
which for the three months ended March 31, 2008 totaled $11.2 million
(March 31, 2007 - $9.4 million), was charged to retained earnings. The
repurchase of shares was made on the open market at prevailing market
prices for a total of $12.6 million.
12. Contributed surplus
Three Months Ended Mar. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Balance, beginning of period $ 11,729 $ 10,603
Stock compensation expense (note 2) 887 675
Fair value of stock options exercised (201) (448)
--------------------------
Balance, end of period $ 12,415 $ 10,830
--------------------------
--------------------------
13. Accumulated other comprehensive loss
Mar. 31 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Unrealized foreign currency translation losses,
net of hedging activities $ (102,828) $ (121,653)
Unrealized loss on available-for-sale
financial asset - (840)
Gain on derivatives designated
as cash flow hedges - 996
--------------------------
Balance, at end of period $ (102,828) $ (121,497)
--------------------------
--------------------------
14. Stock option plans
A summary of the status of the Company's stock option plans and changes
during the period are presented below:
-------------------------------------------------------------------------
Mar. 31, 2008 Dec. 31, 2007
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Total Exercise Total Exercise
Options Price Options Price
-------------------------------------------------------------------------
Balance outstanding,
beginning
of period 2,173,980 17.24 2,269,395 15.76
-------------------------------------------------------------------------
Granted 398,600 29.90 371,800 25.02
-------------------------------------------------------------------------
Exercised (31,360) 14.60 (320,295) 15.64
-------------------------------------------------------------------------
Forfeited - - (142,000) 17.42
-------------------------------------------------------------------------
Expired - - (4,920) 17.91
-------------------------------------------------------------------------
Balance outstanding,
end of period 2,541,220 19.26 2,173,980 17.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted
average
remaining Weighted Weighted
Outstanding contractual average Exercisable average
Range of at March 31, life in exercise at March 31, exercise
exercise prices 2008 years price 2008 price
-------------------------------------------------------------------------
$10.00 to $15.00 501,860 5.12 $12.67 471,380 $12.76
-------------------------------------------------------------------------
$15.01 to $20.00 1,245,160 6.11 $16.81 839,156 $16.74
-------------------------------------------------------------------------
$20.01 to $25.00 40,000 7.26 $20.90 18,400 $21.03
-------------------------------------------------------------------------
$25.01 to $30.00 754,200 9.29 $27.60 71,120 $25.02
-------------------------------------------------------------------------
2,541,220 1,400,056
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted
average
Outstanding remaining Weighted Exercisable Weighted
at contractual average at average
Range of December 31, life in exercise December 31, exercise
exercise prices 2007 years price 2007 price
-------------------------------------------------------------------------
$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
-------------------------------------------------------------------------
15. 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:
-------------------------------------------------------------------------
Mar. 31 Dec. 31
(in thousands of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Financial assets:
-------------------------------------------------------------------------
Held for trading, measured at fair value
-------------------------------------------------------------------------
Cash $ 60,541 $ 122,655
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Held to maturity, recorded at amortized cost
-------------------------------------------------------------------------
Cash equivalents 81,467 52,362
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loans and receivables, recorded at amortized cost
-------------------------------------------------------------------------
Accounts receivable 260,528 203,547
-------------------------------------------------------------------------
Taxes receivable 9,857 3,169
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Available for sale, measured at fair value
-------------------------------------------------------------------------
Long-term investment 1,678 2,589
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Derivatives, measured at fair value
-------------------------------------------------------------------------
Derivative financial instruments (297) 1,508
-------------------------------------------------------------------------
Financial liabilities:
-------------------------------------------------------------------------
Other liabilities, recorded at amortized cost:
-------------------------------------------------------------------------
Bank indebtedness 116 107
-------------------------------------------------------------------------
Accounts payable and accrued liabilities 146,717 153,116
-------------------------------------------------------------------------
Taxes payable 49,820 32,030
-------------------------------------------------------------------------
Long-term debt 75,989 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, with the exception of the Company's
Senior Notes of $76.0 million (December 31, 2007 - $72.7 million). Based
on current interest rates for debt with similar terms and maturities, the
fair value of the Senior Notes is estimated to be $76.7 million
(December 31, 2007 - $74.9 million).
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 March 31, 2008:
(in thousands)
-------------------------------------------------------------------------
Maturity March 31, 2008
-------------------------------------------------------------------------
Canadian dollars sold for Great Britain Pounds
-------------------------------------------------------------------------
Less than one year CAD$820
-------------------------------------------------------------------------
Weighted average rate 2.0032
-------------------------------------------------------------------------
U.S. dollars sold for Canadian dollars
-------------------------------------------------------------------------
Less than one year US$12,000
-------------------------------------------------------------------------
Weighted average rate 1.0205
-------------------------------------------------------------------------
Euros sold for U.S. dollars
-------------------------------------------------------------------------
Less than one year Euro 3,033
-------------------------------------------------------------------------
Weighted average rate 1.4430
-------------------------------------------------------------------------
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$9,543
-------------------------------------------------------------------------
Weighted average rate 5.3261
-------------------------------------------------------------------------
U.S. dollars sold for Malaysian Ringgit
-------------------------------------------------------------------------
Less than one year US$9,800
-------------------------------------------------------------------------
Weighted average rate 3.2780
-------------------------------------------------------------------------
At March 31, 2008, the Company had notional amounts of $44.2 million of
forward contracts outstanding (December 31, 2007 - $35.7 million). These
amounts are used to express the volume of transactions and are not
recognized in the consolidated financial statements. The Company has
elected not to apply hedge accounting to these forward contracts.
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 Audit Committee of 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 March 31,
2008, fluctuations of +/- 5% in the Canadian dollar, relative to those
foreign currencies, would impact the Company's consolidated revenue,
operating income from continuing activities and income from continuing
activities for the three months then ended by approximately $9.7 Million,
$4.1 million and $3.5 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 amount of interest expenses 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 March 31,
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 March 31, 2008:
-------------------------------------------------------------------------
(in thousands) Fixed interest rate maturing in
-------------------------------------------------------------------------
Floating 1 year or Greater
rate less than 1 year Total
-------------------------------------------------------------------------
Financial assets
-------------------------------------------------------------------------
Cash and cash
equivalents $60,541 $81,467 $- $142,008
-------------------------------------------------------------------------
Total $60,541 $81,467 $- $142,008
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
fixed rate of
cash equivalents - 2.66% -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial liabilities
-------------------------------------------------------------------------
Bank indebtedness $116 $- $- $116
-------------------------------------------------------------------------
Long-term debt - - 75,989 75,989
-------------------------------------------------------------------------
Total $116 $- $75,989 $76,105
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 assesses the credit quality of the
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 March 31, 2008 are as follows:
(in thousands of Canadian dollars) Mar. 31, 2008
-------------------------------------------------------------------------
Not past due $ 186,405
Past due 1 to 30 days 29,091
Past due 31 to 60 days 24,336
Past due 61 to 90 days 19,424
Past due for more than 90 days 6,609
-------------
Total trade receivables 265,865
Less: allowance for doubtful accounts 5,337
-------------
Net receivables $ 260,528
-------------
-------------
The following is an analysis of the change in the allowance for doubtful
accounts for the three months ended March 31, 2008:
Three Months Ended
(in thousands of Canadian dollars) Mar. 31, 2008
-------------------------------------------------------------------------
Balance, beginning of period $ 4,165
Bad debt expense 1,082
Write-offs of bad debts (1)
Impact of change in foreign -
exchange rates 91
-------------
Balance, end of period 5,337
-------------
-------------
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 March 31,
2008, the Company has cash and cash equivalents totaling $142.0 million
and had unutilized lines of credit available to use of $63.7 million. The
following are the contractual maturities of the Company's financial
liabilities as of March 31, 2008:
-------------------------------------------------------------------------
Less than After one
(in thousands of Canadian dollars) one year year
-------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 143,219 $ -
-------------------------------------------------------------------------
Asset retirement obligations 3,498 11,123
-------------------------------------------------------------------------
Long-term debt - 75,989
-------------------------------------------------------------------------
16. 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 March 31, 2008, total managed capital was $688.2 million
(December 31, 2007 - $652.7 million), comprised of shareholders equity of
$612.2 million (December 31, 2007 - $580.0 million) and long-term debt of
$76.0 (December 31, 2007 - $72.7 million).
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 March 31, 2008 was within the parameters established by
these agreements.
17. 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 ended March 31, 2008 and 2007, and goodwill and total assets as of
those dates by segment are as follows:
(in thousands of Canadian dollars)
Financial
Pipeline and Petrochemical and
Pipe Services and Industrial Corporate
---------------------- ---------------------- ----------
2008 2007 2008 2007 2008
---------------------- ---------------------- ----------
Revenue
- customer 254,935 175,713 38,134 39,500 -
- intersegment 859 6,655 3 19 -
---------------------- ---------------------- ----------
- total 255,794 182,368 38,137 39,519 -
---------------------- ---------------------- ----------
---------------------- ---------------------- ----------
---------------------- ---------------------- ----------
Income (loss)
from operations 38,508 24,536 6,075 6,983 (3,364)
---------------------- ---------------------- ----------
---------------------- ---------------------- ----------
Total assets 1,101,343 944,768 84,250 113,937 812,796
---------------------- ---------------------- ----------
---------------------- ---------------------- ----------
Goodwill 148,889 157,059 18,653 18,221 -
---------------------- ---------------------- ----------
---------------------- ---------------------- ----------
Financial
and
Corporate Eliminations Total
---------- ---------------------- ----------------------
2007 2008 2007 2008 2007
---------- ---------------------- ----------------------
Revenue
- customer - (1,148) (1,116) 291,921 214,097
- intersegment - 574 558 1,436 7,232
---------- ---------------------- ----------------------
- total - (574) (558) 293,357 221,329
---------- ---------------------- ----------------------
---------- ---------------------- ----------------------
---------- ---------------------- ----------------------
Income (loss)
from operations (3,547) - - 41,219 27,972
---------- ---------------------- ----------------------
---------- ---------------------- ----------------------
Total assets 1,263,797 (978,312) (1,321,933) 1,020,077 1,000,569
---------- ---------------------- ----------------------
---------- ---------------------- ----------------------
Goodwill - - - 167,542 175,280
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18. 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:
Three Months Ended
(in thousands of Canadian dollars) March 31
-------------------------------------------------------------------------
2008 2007
--------------------------
Revenue $ 16,688 $ 13,540
--------------------------
Operating and other expenses 14,159 10,287
Net income before income taxes 2,529 3,253
Provision for taxes 401 398
--------------------------
Net income $ 2,128 $ 2,855
--------------------------
--------------------------
Cash provided by (used in):
Operating activities $ 1,305 $ (1,165)
Investing activities (2,172) -
Financing activities (2,872) -
Current assets 24,303 19,779
Property, plant and equipment, net 13,954 10,417
Goodwill 4,805 5,074
Current liabilities 17,590 14,744
19. 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 Mar. 31
2008 2007
-------------------------------------------------------------------------
Basic
Class A 58,123,683 60,922,150
Class B 13,078,142 13,078,142
--------------------------
Total 71,201,825 74,000,292
--------------------------
--------------------------
Diluted
Class A 58,877,374 61,524,525
Class B 13,078,142 13,078,142
--------------------------
Total 71,955,516 74,602,667
--------------------------
--------------------------
20. 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.
21. Comparative figures
Comparative figures have been reclassified where necessary to correspond
with the current year's presentation.