(TSX: SCL.A, SCL.B)
TORONTO, Aug. 2 /CNW/ -
Financial Summary
(In thousands of
Canadian dollars Three Months Ended Six Months Ended
except per share Jun. 30 Jun. 30
amounts) 2007 2006 2007 2006
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Operating Results Restated Restated
Revenue $ 276,440 $ 269,433 $ 497,769 $ 531,980
EBITDA (note 1) 57,050 44,513 95,457 92,157
Operating income from
continuing operations 47,036 35,835 75,008 73,313
Income from continuing
operations 30,267 24,898 53,575 49,653
Income (loss) from
discontinued
operations (48) (192) (103) (227)
Net income (loss) 30,219 24,706 53,472 49,426
Net income (loss)
per share (Class A
and B) - Basic
Continuing
operations 0.41 0.34 0.73 0.67
Discontinued
operations 0.00 0.00 0.00 0.00
Total 0.41 0.34 0.73 0.67
Net income (loss)
per share (Class A
and B) - Diluted
Continuing
operations 0.41 0.34 0.72 0.67
Discontinued
operations 0.00 0.00 0.00 0.00
Total 0.41 0.34 0.72 0.67
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Cash Flow
Cash from continuing
operating activities 30,828 29,599 54,107 78,151
Purchases of property,
plant and equipment 23,868 13,008 39,361 19,881
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Financial Position
Working capital 284,231 300,979
Total assets 921,442 959,116
Shareholders' equity
per share (Class A
and B) $ 8.08 $ 6.16
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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. 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: 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.
Note 3: During the fourth quarter of 2006, ShawCor Ltd. adopted the
proportionate consolidation method of accounting for its 30% investment
in the Arabian Pipecoating Company Limited ("APCO"). The Company
previously accounted for this investment using the equity method. This
change in accounting policy has been applied retroactively and as a
result, revenue, operating expenses and certain balance sheet accounts
for previous periods have been restated. Refer to note 2 of the 2006
annual financial statements.
Consolidated revenue for the quarter totaled $276.4 million compared to $221.3 million during the first quarter of 2007 and $269.4 million in the second quarter of 2006. The 25% improvement over the first quarter was mainly the result of increased pipe coating activity at Bredero Shaw's Far East and North Sea regions and in the United States. Compared with the second quarter of last year, revenue at Bredero Shaw was essentially unchanged with growth in the Americas region offsetting reductions in the Far East. The Company's other divisions reported modest year over year revenue growth despite the impact of the strengthening Canadian dollar. On a year-to-date basis, revenue totaled $497.8 million compared to $532.0 in the first six months of 2006.
Consolidated income from continuing operations totaled $30.3 million ($0.41 per share) in the quarter compared to $23.3 million ($0.31 per share) in the prior quarter and $24.9 million ($0.34 per share) in the second quarter of last year, with the improvement reflecting the higher revenue in the quarter together with improved pipe coating project performance and improved efficiencies. On a year-to-date basis, consolidated income from continuing operations totaled $53.6 million ($0.72 per share) compared to $49.7 million ($0.67 per share) for the six months ended June 30, 2006.
The Company's backlog at June 30 remained strong at $377.1 million, although decreased 6% during the quarter reflecting the quarter's high level of business activity during the period. This strong backlog together with continuing high levels of bidding activity should result in full year revenue similar to levels achieved in 2006.
MANAGEMENT DISCUSSION AND ANALYSIS
The following is management's interim discussion and analysis of operations and financial position and should be read in conjunction with the Consolidated Financial Statements and Management's Discussion and Analysis included in the Company's 2006 Annual Report.
Revenue and Income from Operations
ShawCor classifies its revenue and income from operations in two industry segments: Pipeline and Pipe Services, and Petrochemical and Industrial.
Consolidated revenue from continuing operations totaled $276.4 million in the quarter, an increase of 25% over the prior quarter with the improvement mainly driven by higher levels of business activity at Bredero Shaw, the Company's pipe coating division. Consolidated second quarter revenue increased 3% over the second quarter of last year with business activity improved in both of the Company's market segments. Consolidated income from continuing operations totaled $30.3 million ($0.41 per share) in the quarter compared to $23.3 million ($0.31 per share) last quarter and $24.9 million ($0.34 per share) in the second quarter of last year, with the improvement reflecting the higher revenue in the quarter together with improved operating margin performance in both market segments. On a year-to-date basis, consolidated revenue from continuing operations totaled $497.8 million compared to $532.0 million in the same period of last year, while consolidated income from continuing operations totaled $53.6 million ($0.72 per share) compared to $49.7 million ($0.67 per share) in the first six months of 2006.
In the Pipeline and Pipe Services segment, revenue from continuing operations totaled $239.0 million in the quarter, 31% higher than in the prior quarter. The growth in revenue compared with the prior quarter was attributable to the Bredero Shaw division where the Far East, North Sea and United States operations saw increased project activity. Revenue in the Far East region was buoyed by the Bunga Orkid, Medgas and Angels projects, while the North Sea benefited from the Tyrihans deep water insulation project at the region's pipe coating facility at Orkanger, Norway. In the United States, pipe coating activity was favorably impacted by several projects including the Shenzi project which was executed at the division's Pearland, Texas plant. Lower revenue at the division's Middle East region, the result of the temporary shut-down and upgrade of the division's plant in Ras al Khaimah, partially offset the increased revenue in other regions of Bredero Shaw. An upgrade to the Ras al Khaimah facility is presently under construction and is expected to be completed, and the plant on-line, in the fourth quarter of this year.
Compared with the second quarter of 2006, revenue in the Pipeline and Pipe Services segment increased by 2%. At Bredero Shaw, revenue was slightly higher year over year on a significant increase in North American large diameter pipe coating project activity. This growth was partially offset by a reduction in activity in the Far East where volumes in the second quarter 2006 had reached record levels. Revenue in the quarter at the Pipeline and Pipe Services segment's other divisions all improved over the second quarter of 2006.
Operating income from continuing operations for the Pipeline and Pipe Services segment totaled $46.4 million (19.4% of revenue from continuing operations) compared to $24.5 million (13.5%) last quarter and $36.3 million (15.5%) in the second quarter of last year. The improvement in operating margins in the quarter reflected improved capacity utilization from the higher revenue together with a favourable project mix, particularly in the Far East region, and continued gains in pipe coating project execution. On a year-to-date basis, revenue for the Pipeline and Pipe Services segment totaled $421.3 million compared to $461.5 million in the first six months of 2006. Operating income from continuing operations for the segment totaled $70.9 million for the first six months of the year compared to $73.6 million in the corresponding period of last year.
In the Petrochemical and Industrial segment, revenue totaled $38.2 million in the quarter, compared to $39.5 million last quarter and $36.2 million in the second quarter of 2006. The decrease from the prior quarter reflected lower business activity at DSG-Canusa where revenue declined modestly to more typical levels after a particularly strong first quarter. Compared with the second quarter of 2006, both DSG-Canusa and ShawFlex reported higher revenue from underlying market growth. Operating income from continuing operations for the segment totaled $6.5 million (17.0% of revenue) in the quarter, compared to $7.0 million (17.7% of revenue) last quarter and $3.9 million (10.8% of revenue) in the second quarter of last year. On a year-to-date basis, revenue for the segment totaled $77.7 million compared to $71.2 million in the same period of 2006 while operating income from continuing operations totaled $13.5 million compared to $8.6 million in the first six months of 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 losses of $1.8 million, totaled $4.1 million compared to $4.3 million in the prior quarter, before net foreign exchange gains of $721 thousand. In the second quarter of last year, financial and corporate costs totaled $4.3 million, before foreign exchange gains of $54 thousand.
Net interest income totaled $1.2 million in the quarter, compared to $1.6 million in the prior quarter and $395 thousand in the second quarter of 2006, with the improvement over the second quarter of last year reflecting the improved cash position of the Company.
Income tax expense in the quarter was $18.3 million compared to $6.7 million last quarter and $10.4 million in the second quarter of last year. The effective tax rate (income taxes as a percentage of income from continuing operations before income taxes and non-controlling interest) was 37.8% in the quarter and was adversely impacted by losses at the Company's Nigerian operations for which tax benefits were not recognized. In addition, the Company's tax losses carried forward in the United States, which had favourably impacted effective tax rates in the past several quarters, were fully utilized in the second quarter.
Cash Flow
Cash flow generated from continuing operating activities in the quarter totaled $30.8 million compared to $23.3 million last quarter and $29.6 million in the second quarter of 2006, with the improvement mainly reflecting the improved earnings in the period. On a year-to-date basis, cash flow from continuing operating activities totaled $54.1 million compared to $78.2 million in the first six months of 2006.
Cash flow used in continuing investing activities in the quarter totaled $26.6 million, compared to $15.4 million last quarter and $13.0 million in the second quarter of last year, and was comprised of capital expenditures of $23.9 million, $2.6 million paid on the acquisition of a new subsidiary and $301 thousand paid to purchase shares in a company accounted for as a portfolio investment, partially offset by $101 thousand of proceeds received on the disposal of property, plant and equipment. Major capital expenditures in the quarter included the ongoing capacity expansions at the Company's pipe coating plants in Camrose, Alberta and Ras al Khaimah, U.A.E. Cash flow used in continuing investing activities for the first six months of the year totaled $42.0 million compared to $19.8 million in the corresponding period of 2006.
Cash flow used in continuing financing activities in the quarter totaled $70.6 million, compared to $14.5 million last quarter and $6.8 million in the second quarter of last year, and was comprised of $66.1 million used to purchase 2,155,100 Class A Subordinate Voting Shares ("Class A Shares") under the terms of the Company's Normal Course Issue Bid, dividends paid to shareholders of $4.2 million and $2.7 million paid to reduce bank indebtedness, partially offset by $2.4 million received on the issuance of 153,040 Class A Shares on the exercise of stock options. On a year-to-date basis, cash flow used in continuing financing activities totaled $85.1 million compared to $7.7 million in the same period of 2006.
Liquidity and Capitalization
At June 30, 2007, the Company recorded a working capital ratio of 2.30 to 1 compared to 2.49 to 1 at the beginning of the quarter and 2.39 to 1 at December 31, 2006. Operating working capital, excluding cash and cash equivalents, increased $15.1 million in the quarter to $64.9 million with the change mainly the result of increased accounts receivable and inventory balances consistent with the increased level of business activity in the quarter.
Change in Accounting Policies
On January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants' Handbook Section 1530, Comprehensive Income; Section 3855, Financial Instruments - Recognition and Measurement; Section 3861, Financial Instruments - Disclosure and Presentation; and Section 3865, Hedges. These changes require the Company to classify all financial assets as held-for-trading, designated at fair value, available-for-sale, held-to-maturity, or loans and receivables. The new accounting standards also require the Company to measure all financial assets, including derivatives and excluding loans and receivables, debt securities classified as held-to-maturity and available-for-sale equities that do not have quoted market values in an active market, at fair values. Changes in the fair values of financial assets classified as held-for-trading and of derivatives that are not considered effective hedges are charged to net income. Changes in the fair values of financial assets classified as available-for-sale and derivatives that are considered effective hedges are charged to other comprehensive income. As required, these new accounting standards have been applied as an adjustment to opening retained earnings and accumulated other comprehensive income. Prior period figures have not been restated. Refer to note 1 to the second quarter 2007 interim financial statements for further information.
Financial Instruments
The following table sets out the notional amounts outstanding under foreign exchange contracts, the average contractual exchange rates and the settlement of these contracts as at June 30, 2007:
(in thousands)
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Maturity
-------------------------------------------------------------------------
U.S. dollars sold for Canadian dollars
-------------------------------------------------------------------------
Less than one year US$22,500
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Weighted average rate 1.1261
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Canadian dollars sold for U.S. dollars
-------------------------------------------------------------------------
Less than one year CAD$1,150
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Weighted average rate 0.8697
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At June 30, 2007, the Company had notional amounts of $23.0 million of forward contracts outstanding (December 31, 2006 - $38.7 million) with the fair value of the Company's net benefit of all foreign exchange forward contracts totaling $1.3 million (December 31, 2006 - $3.1 million liability).
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with Canadian Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. These estimates and assumptions are made with management's best judgment given the information available at the time; however, actual results could differ from the estimates. Critical estimates used in preparing the consolidated financial statements were materially unchanged during the quarter.
Risks and Uncertainties
Operating in an international environment, servicing predominantly the oil and gas industry, ShawCor faces a number of business risks and uncertainties that could materially adversely affect the Company's projections, business, results of operations and financial condition. There were no material changes in the nature or magnitude of such business risks during the quarter. A more complete outline of the risks and uncertainties facing the Company are included in the annual Management's Discussion and Analysis.
Contractual Obligations
There were no material changes to the Company's contractual 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 ten most recently completed quarters:
(In thousands of Canadian dollars except per share amounts) First Second Third Fourth Full Year ------------------------------------------------------------------------- Revenue (Restated - see note below) 2007 $ 221,329 $ 276,440 $ $ $ 2006 262,547 269,433 251,324 276,315 1,059,619 2005 244,952 231,995 241,639 293,867 1,012,453 Operating income from continuing operations (Restated - see note below) 2007 27,972 47,036 2006 37,478 35,835 23,677 41,790 138,780 2005 29,326 12,509 21,882 31,737 95,454 Income from continuing operations 2007 23,308 30,267 2006 24,755 24,898 16,549 26,722 92,924 2005 18,688 7,516 34,806 21,780 82,790 Income (loss) from discontinued operations 2007 (55) (48) 2006 (35) (192) 7 (69) (289) 2005 (930) 2,224 55,946 (1,190) 56,050 Net income (loss) 2007 23,253 30,219 2006 24,720 24,706 16,556 26,653 92,635 2005 17,758 9,740 90,752 20,590 138,840 Operating income from continuing operations per share (Classes A and B) Basic 2007 0.38 0.64 2006 0.51 0.48 0.32 0.56 1.87 2005 0.39 0.17 0.29 0.42 1.27 Diluted 2007 0.37 0.63 2006 0.51 0.48 0.32 0.56 1.87 2005 0.39 0.17 0.29 0.42 1.27 Income from continuing operations per share (Classes A and B) Basic 2007 0.31 0.41 2006 0.33 0.34 0.22 0.36 1.25 2005 0.25 0.10 0.45 0.30 1.10 Diluted 2007 0.31 0.41 2006 0.33 0.34 0.22 0.36 1.25 2005 0.25 0.10 0.45 0.30 1.10 Income (loss) from discontinued operations per share (Classes A and B) Basic and Diluted 2007 0.00 0.00 2006 0.00 0.00 0.00 0.00 0.00 2005 (0.01) 0.03 0.75 (0.02) 0.75 Net income (loss) per share (Classes A and B) Basic 2007 0.31 0.41 2006 0.33 0.34 0.22 0.36 1.25 2005 0.24 0.13 1.20 0.28 1.85 Diluted 2007 0.31 0.41 2006 0.33 0.34 0.22 0.36 1.25 2005 0.24 0.13 1.20 0.28 1.85 ------------------------------------------------------------------------- Note: Quarterly revenue and operating income from continuing operations figures have been restated to reflect the change in accounting treatment for the Company's investment in the Arabian Pipecoating Company Limited adopted in the fourth quarter of 2006. Please refer to note 2 to the 2006 annual Consolidated Financial Statements.
The following are key factors affecting the comparability of quarterly financial results.
The Company's operations in the Pipeline and Pipe Services segment, representing more than 80% of the Company's consolidated revenue, are largely project-based. The nature and timing of projects can result in variability in the Company's quarterly revenue and profitability. In addition, certain of the Company's operations are subject to a degree of seasonality particularly in the Pipeline and Pipe Services market segment. The following are additional key factors impacting the comparability of the quarterly information disclosed above:
The majority of the Company's revenue is transacted in currencies other
than Canadian dollars, with a majority transacted in U.S. dollars.
Changes in the rates of exchange between the Canadian dollar and other
currencies could have a significant effect on the amount of this revenue
when it is translated into Canadian dollars.
On November 3, 2004, the Company announced the closure of its Mobile,
Alabama facility. This event had a significant impact on the financial
results for the fourth quarter of 2004. Operations at the facility ceased
in the fourth quarter of 2005 and discontinued operations accounting
treatment was adopted in that quarter with prior quarters restated on a
comparable basis.
On September 30, 2005, the Company completed the sale of its OMSCO drill
pipe manufacturing division. The division has been accounted for as a
discontinued operation.
Outstanding Share Capital
As at July 25, 2007, the Company had 58,906,890 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 July 25, 2007, the Company had stock options outstanding to purchase up to 2,304,760 Class A shares.
Outlook
The Company's consolidated order backlog, representing the value of firm customer purchase orders expected to be completed within one year, totaled $377.1 million at June 30, 2007 compared to $402.7 million 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 pipe coating activity to continue to be strong during the remainder of the year with the result that full year 2007 revenue should be similar to the level achieved in 2006. The Company continues to pursue significant business opportunities globally, and is currently preparing to bid major offshore pipeline projects in Northern Europe. Success in securing these projects, together with the buoyant market outlook in North America, the Middle East and the Far East could result in 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 August 3, 2007 at 10:00 a.m. EDT to discuss the Company's second quarter 2007 financial results. Please visit our website at www.shawcor.com for further details.
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars except per share data)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
2007 2006 2007 2006
Restated Restated
(note 1) (note 1)
------------ ------------ ------------ ------------
Revenue $ 276,440 $ 269,433 $ 497,769 $ 531,980
------------ ------------ ------------ ------------
Operating expenses
(notes 2, 3 and 4) 217,934 222,516 399,789 435,952
Amortization 9,751 9,633 19,733 19,818
Research and
development 1,719 1,448 3,239 2,897
------------ ------------ ------------ ------------
229,404 233,597 422,761 458,667
------------ ------------ ------------ ------------
Operating income from
continuing operations 47,036 35,835 75,008 73,313
Interest income (note 5) 1,229 395 2,828 483
------------ ------------ ------------ ------------
Income before income
taxes and non-
controlling interest 48,265 36,230 77,836 73,796
Income taxes (note 6) 18,261 10,377 24,977 23,169
------------ ------------ ------------ ------------
Income before non-
controlling interest 30,004 25,853 52,859 50,627
Non-controlling
interest 263 (955) 716 (974)
------------ ------------ ------------ ------------
Income from continuing
operations 30,267 24,898 53,575 49,653
Loss from discontinued
operations (note 7) (48) (192) (103) (227)
------------ ------------ ------------ ------------
Net income $ 30,219 $ 24,706 $ 53,472 $ 49,426
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share,
Class A and B - Basic
Continuing
operations $ 0.41 $ 0.34 $ 0.73 $ 0.67
Discontinued
operations - - - -
------------ ------------ ------------ ------------
Total $ 0.41 $ 0.34 $ 0.73 $ 0.67
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share
Class A and B - Diluted
Continuing
operations $ 0.41 $ 0.34 $ 0.72 $ 0.67
Discontinued
operations - - - -
------------ ------------ ------------ ------------
Total $ 0.41 $ 0.34 $ 0.72 $ 0.67
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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SEGMENTED INFORMATION
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
2007 2006 2007 2006
Restated Restated
(note 1) (note 1)
------------ ------------ ------------ ------------
Revenue
Pipeline and Pipe
Services $ 238,964 $ 233,563 $ 421,332 $ 461,488
Petrochemical and
Industrial 38,179 36,207 77,698 71,233
Intersegment
Eliminations (703) (337) (1,261) (741)
------------ ------------ ------------ ------------
$ 276,440 $ 269,433 $ 497,769 $ 531,980
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income (loss) from
operations
Pipeline and Pipe
Services $ 46,378 $ 36,305 $ 70,914 $ 73,592
Petrochemical and
Industrial 6,500 3,928 13,483 8,564
Financial and
Corporate (5,842) (4,398) (9,389) (8,843)
------------ ------------ ------------ ------------
$ 47,036 $ 35,835 $ 75,008 $ 73,313
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
2007 2006 2007 2006
Restated Restated
(note 1) (note 1)
------------ ------------ ------------ ------------
Operating activities:
Income from con-
tinuing operations $ 30,267 $ 24,898 $ 53,575 $ 49,653
Items not requiring
an outlay of cash:
Amortization 9,751 9,633 19,733 19,818
Stock-based
compensation
(note 2) 697 819 1,372 1,401
Future income
taxes 792 (2,281) 635 (2,887)
Non-controlling
interest in
earnings of
subsidiaries (263) 955 (716) 974
Change in non-
cash working
capital and
other (10,416) (4,425) (20,492) 9,191
------------ ------------ ------------ ------------
Cash provided by
operating activities 30,828 29,599 54,107 78,150
------------ ------------ ------------ ------------
Investing activities:
Purchases of
property, plant and
equipment (23,868) (13,008) (39,361) (19,881)
Proceeds on disposal
of property, plant
and equipment 101 - 202 41
Acquisition of
subsidiary (note 18) (2,579) - (2,579) -
Investment in shares (301) - (301) -
------------ ------------ ------------ ------------
Cash used in continuing
investing activities (26,647) (13,008) (42,039) (19,840)
------------ ------------ ------------ ------------
Financing activities:
Increase (decrease)
in bank indebted-
ness (2,700) 237 (3,667) (766)
Issue of shares 2,359 478 3,684 578
Purchase of shares
for cancellation (66,104) (4,188) (76,762) (4,188)
Dividends paid to
shareholders (4,171) (3,282) (8,359) (3,282)
------------ ------------ ------------ ------------
Cash used in continuing
financing activities (70,616) (6,755) (85,104) (7,658)
------------ ------------ ------------ ------------
Foreign exchange on
foreign cash and
cash equivalents (11,921) (7,585) (11,766) (5,721)
------------ ------------ ------------ ------------
Net cash provided by
(used in) continuing
operations (78,356) 2,251 (84,802) 44,931
Net cash provided by
(used in) discontinued
operations (note 7) (1,267) (548) (1,946) 262
Cash and cash equi-
valents at beginning
of period 302,197 243,825 309,322 200,335
------------ ------------ ------------ ------------
Cash and cash equi-
valents at end of
period $ 222,574 $ 245,528 $ 222,574 $ 245,528
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED BALANCE SHEETS
June. 30 Dec. 31
2007 2006
------------ ------------
Assets
Current assets
Cash and cash equivalents $ 222,574 $ 309,322
Accounts receivable 181,709 188,865
Inventories 82,785 79,662
Taxes receivable 4,802 4,293
Prepaid expenses 14,451 12,897
Derivative financial instruments 1,235 -
Future income taxes 807 -
Current assets of discontinued operation
(note 7) 2 156
------------ ------------
508,365 595,195
Property, plant and equipment, net 216,771 202,078
Goodwill 167,121 175,813
Investment in associated company - -
Other assets (note 8) 29,653 34,940
------------ ------------
$ 921,910 $ 1,008,026
------------ ------------
------------ ------------
Liabilities
Current liabilities
Bank indebtedness (note 9) $ 427 $ 4,094
Accounts payable and accrued liabilities 152,528 169,387
Deferred revenues 16,338 10,907
Taxes payable 46,185 57,010
Current liabilities of discontinued operation
(note 7) 5,792 7,789
------------ ------------
221,270 249,187
Long-term debt 78,853 87,480
Non-controlling interest in subsidiaries 3,536 5,013
Other non-current liabilities (note 10) 37,630 36,419
------------ ------------
341,289 378,099
------------ ------------
Shareholders' Equity
Capital stock (note 11) 203,091 206,852
Contributed surplus (note 12) 10,823 10,603
Retained earnings 474,950 498,001
Accumulated other comprehensive loss
(note 13) (108,243) (85,529)
------------ ------------
580,621 629,927
------------ ------------
$ 921,910 $ 1,008,026
------------ ------------
------------ ------------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30 June 30
2007 2006 2007 2006
------------ ------------ ------------ ------------
Balance at beginning
of period $ 507,715 $ 446,267 $ 498,001 $ 421,547
Net income 30,219 24,706 53,472 49,426
------------ ------------ ------------ ------------
537,934 470,973 551,473 470,973
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Excess of purchase
price paid over
stated value of
shares (58,813) (3,399) (68,164) (3,399)
Dividends paid (4,171) (3,282) (8,359) (3,282)
------------ ------------ ------------ ------------
Balance at end of
period $ 474,950 $ 464,292 $ 474,950 $ 464,292
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30 June 30
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net income $ 30,219 $ 24,706 $ 53,472 $ 49,426
Other comprehensive
income (loss), net
of income taxes:
Unrealized gain
(loss) on trans-
lating financial
statements of self-
sustaining foreign
operations (28,133) (7,558) (29,225) (4,275)
Gain on hedges of
unrealized foreign
currency translation 6,893 - 7,275 -
Income tax expense (1,237) - (1,237) -
------------ ------------ ------------ ------------
Unrealized foreign
currency translation
gain (loss), net of
hedging activites (22,477) (7,558) (23,187) (4,275)
------------ ------------ ------------ ------------
Unrealized loss on
available-for-sale
financial assets
arising during
the period (643) - (1,283) -
Income tax benefit 218 - 436 -
------------ ------------ ------------ ------------
Change in unrealized
loss on available-
for-sale financial
assets (425) - (847) -
------------ ------------ ------------ ------------
Gain on derivatives
designated as cash
flow hedges 2,028 - 2,145 -
Income tax expense (688) - (728) -
Loss (gain) on
derivatives
designated as
cash flow hedges
in prior periods
transferred to net
income in the
current period (104) - 34 -
Income tax expense 35 - (12) -
------------ ------------ ------------ ------------
Change in gain on
derivatives desig-
nated as cash flow
hedges 1,271 - 1,439 -
------------ ------------ ------------ ------------
Other comprehensive
loss (21,631) (7,558) (22,595) (4,275)
------------ ------------ ------------ ------------
Comprehensive income $ 8,588 $ 17,148 $ 30,877 $ 45,151
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
ShawCor Ltd.
Notes to the Consolidated Financial Statements (Unaudited)
1. Accounting policies
The accompanying unaudited interim consolidated financial statements of
ShawCor Ltd. (the "Company") have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP") for the
preparation of interim financial statements. They do not include all of
the information and disclosures required by GAAP for annual consolidated
financial statements. Except for the exception noted below, these
unaudited interim financial statements have been prepared in accordance
with accounting policies outlined in the Company's audited financial
statements for the year ended December 31, 2006. Accordingly, these
interim financial statements should be read in conjunction with the
Company's annual consolidated financial statements.
In the fourth quarter of 2006, the Company adopted the proportionate
consolidation method of accounting for its 30% investment in the Arabian
Pipecoating Company. This change in accounting policy was applied
retroactively with comparative figures restated. The Company previously
accounted for this investment using the equity method.
On January 1, 2007, the Company adopted the Canadian Institute of
Chartered Accountants' Handbook Section 1530, Comprehensive Income;
Section 3251, Equity, Section 3855, Financial Instruments - Recognition
and Measurement; Section 3861, Financial Instruments - Disclosure and
Presentation; and Section 3865, Hedges. As required, these new accounting
standards have been adopted prospectively with an adjustment to
accumulated other comprehensive income. Prior period figures have not
been restated. The following adjustments were made to the Company's
balance sheet as a result of these changes:
(in thousands of Canadian dollars) Jan. 1, 2007
------------------------------------------------------------
Increase (decrease) in assets
Other assets $ 193
------------
Total increase (decrease) in assets $ 193
------------
------------
Increase (decrease) in liabilities
Derivative financial instruments liability $ 925
Current future taxes payable (315)
Future taxes 253
Long-term debt (1,504)
------------
Total increase (decrease) in liabilities (641)
------------
Increase (decrease) in shareholders' equity
Accumulated other comprehensive income related
to available-for-sale financial assets 491
Accumulated other comprehensive income related
to cash flow hedges (611)
------------
Total increase (decrease) in shareholders' equity (119)
------------
Total increase (decrease) in liabilities and
shareholders' equity $ (760)
------------
------------
The following is a description of the accounting policies adopted by the
Company as a result of implementing these accounting changes:
a) Comprehensive income
The Company's comprehensive income is comprised of net income and other
comprehensive income, which is made up of unrealized foreign currency
gains or losses on the translation of the financial statements of
self-sustaining foreign operations, gains or losses on available-for-sale
financial assets and changes in unrealized gains or losses on derivatives
designated as effective cash flow hedges.
b) Accumulated other comprehensive income
Accumulated other comprehensive income is included on the consolidated
balance sheet as a separate component of shareholders' equity and
includes accumulated unrealized foreign currency gains or losses on the
translation of the financial statements of self-sustaining foreign
operations, accumulated gains or losses on available-for-sale financial
assets and accumulated changes in unrealized gains or losses on
derivatives designated as effective cash flow hedges.
c) Financial instruments
Held-for-trading financial assets are financial assets which are acquired
for resale prior to maturity. Held-for trading financial assets are
reflected in the consolidated balance sheet at fair value with changes in
fair value during a period charged to operating expenses. Held-to-
maturity financial assets are non-derivative financial assets with a
fixed maturity which the Company intends to hold until maturity. Such
assets are measured at amortized cost. Available-for-sale financial
assets are those non-derivative financial assets which are so designated
by the Company or that do not fall into another category. Available-for-
sale financial assets are carried on the consolidated balance sheet at
fair value with gains or losses from changes in fair value in a period
included in other comprehensive income. Derivative financial instruments
designated as effective cash flow hedges are reflected in the
consolidated balance sheet at fair value with any gains or losses
resulting from fair value changes included in other comprehensive income.
Derivatives with positive exposures are classified as assets while those
with negative exposures are classified as liabilities. Derivative
financial instruments not designated as effective cash flow hedges are
carried at fair value in the consolidated balance sheet with gains or
losses resulting from changes in fair value in a period charged to
operating expenses. Loans and receivables are accounted for at amortized
cost.
The following is a summary of the classes of financial instruments
included in the Company's consolidated balance sheet as well as their
designation by the Company under the new accounting standards:
-------------------------------------------------------------------
Balance sheet item Designation
-------------------------------------------------------------------
Cash and cash equivalents Held-for-trading
-------------------------------------------------------------------
Accounts receivable Loans and receivables
-------------------------------------------------------------------
Long-term investments Available-for-sale
-------------------------------------------------------------------
Accounts payable and accrued liabilities Other liabilities
-------------------------------------------------------------------
Long-term debt Other liabilities
-------------------------------------------------------------------
d) Transaction costs
Transaction costs related to the acquisition or issue of held-for-trading
financial instruments are charged to net income as incurred. Transaction
costs related to financial instruments not designated as held-for-trading
are included in the financial instrument's initial recognition amount.
2. Stock-based compensation
The compensation cost from the continuing amortization of granted stock
options for the three months and six months ended June 30, 2007, included
in operating expenses, is $697 thousand and $1.4 million, respectively
(June 30, 2006 - $819 thousand and $1.4 million, respectively).
3. Foreign exchange gains and losses
Included in operating expenses for the three months ended June 30, 2007
are foreign exchange losses totaling $1.8 million, while foreign exchange
losses for the six months ended June 30, 2007 totaled $1.0 million
(June 30, 2006 - $54 thousand and $496 thousand, respectively). These
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 six
months ended June 30, 2007 is $2.5 million and $4.9 million, respectively
(June 30, 2006 - $2.8 million and $5.2 million, respectively)
5. Interest income (expense)
(in thousands of Three Months Ended June 30 Six Months Ended June 30
Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Interest on short-
term deposits $ 2,625 $ 2,295 $ 5,808 $ 4,038
Interest on bank
indebtedness (109) (598) (306) (858)
Interest on long-
term debt (1,288) (1,302) (2,675) (2,697)
----------------------------------------------------
$ 1,229 $ 395 $ 2,828 $ 483
----------------------------------------------------
----------------------------------------------------
Net interest received during the three months and six months ended
June 30, 2007 totaled $1.4 million and $2.5 million, respectively
(June 30, 2006 - $16 thousand and $409 thousand, respectively).
6. Income taxes
Net income taxes paid during the three months and six months ended
June 30, 2007 totaled $13.8 million and $38.0 million, respectively
(June 30, 2006 - $18.6 million and $23.0 million, respectively).
7. Discontinued operations
On November 2, 2004, the Company announced its decision to close the
Mobile, Alabama pipe-coating facility and operations at the facility
ceased in the fourth quarter of 2005. The Company adopted discontinued
operations accounting treatment for the Mobile facility in the fourth
quarter of 2005.
The following table summarizes the financial results and cash flows from
discontinued operations for the three months and six months ended
June 30, 2007 and 2006 and the assets and liabilities of the discontinued
operations as at those dates, respectively:
(in thousands of Three Months Ended June 30 Six Months Ended June 30
Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue $ - $ 42 $ - $ 60
----------------------------------------------------
Loss from operations (48) (192) (103) (227)
----------------------------------------------------
Interest expenses - -
Loss from discontinued
operations before
income taxes (48) (192) (103) (227)
Income tax expense - - - -
----------------------------------------------------
Loss from discontinued
operations $ (48) $ (192) $ (103) $ (227)
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
Cash flow from (used
in) operating
activities $ (1,267) $ (548) $ (1,946) $ 262
----------------------------------------------------
----------------------------------------------------
Current assets $ 2 $ -
Property, plant and
equipment, net - 4,830
Current liabilities $ 5,792 $ 8,797
8. Other assets
June 30 Dec. 31
(in thousands of Canadian dollars) 2007 2006
-------------------------------------------------------------------------
Long-term investment $ 2,637 $ 2,875
Deferred financing costs 517 2,089
Accrued employee future benefit asset 4,026 4,572
Future income taxes 22,473 25,404
-------------------------
Total $ 29,653 $ 34,940
-------------------------
-------------------------
Other assets include a long-term investment in Garneau Inc., a
Canadian-based, publicly traded pipe-coating company. This investment is
classified as available-for-sale under the new accounting standards
related to financial instruments and accordingly, subsequent to
January 1, 2007, is carried at fair value with changes in fair value
charged to other comprehensive income.
9. Bank indebtedness
At June 30, 2007, the Company had operating credit lines of
$187.0 million (December 31, 2006 - $204.1 million), net of $69.8 million
of various standby letters of credit for performance and bid bonds
(December 31, 2006 - $74.1 million) and bank indebtedness of nil
(December 31, 2006 - $3.0 million), excluding the Company's proportionate
share of the bank indebtedness of its joint venture, Arabian Pipecoating
Company Limited.
10. Other non-current liabilities
Jun. 30 Dec. 31
(in thousands of Canadian dollars) 2007 2006
-------------------------------------------------------------------------
Non-current asset retirement obligations $ 4,616 $ 3,561
Accrued employee future benefit obligations 3,578 2,362
Future income taxes 29,436 30,496
------------ ------------
Total $ 37,630 $ 36,419
------------ ------------
------------ ------------
11. Capital stock
(in thousands of Canadian dollars June 30, Dec. 31,
except share information) 2007 2006
-------------------------------------------------------------------------
Number of shares: Class A
Balance, beginning of the period 60,914,175 61,006,045
Issued - stock options 239,915 331,157
Conversions Class B to Class A - 9,873
Purchase and cancelled under Normal Course
Issuer Bid (2,540,100) (432,900)
-------------------------
Balance, end of the period 58,613,990 60,914,175
-------------------------
Number of shares: Class B 13,078,142 13,078,142
-------------------------
Total number of shares 71,692,132 73,992,317
-------------------------
-------------------------
Stated value: Class A
Balance, beginning of the period $ 205,848 $ 203,716
Issued - stock options 4,837 3,573
Conversion Class B to Class A - -
Purchased and cancelled under Normal Course
Issuer Bid (8,598) (1,441)
Compensation cost on exercised options
-------------------------
Balance, end of the period 202,087 205,848
-------------------------
Stated Value: Class B 1,004 1,004
-------------------------
Total stated value Class A and Class B $ 203,091 $ 206,852
-------------------------
-------------------------
During the three months and six months ending June 30, 2007, the Company
repurchased and cancelled 2,155,100 and 2,540,100 Class A Subordinated
Voting Shares ("Class A shares"), respectively (2006 - 235,900 for the
three and six months ended June 30) 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 and six months ended June 30, 2007
totaled $58.8 million and $68.2 million, respectively (2006 - $3.4
million for the three and six months ended June 30), was charged to
retained earnings. Under the terms of the NCIB, which expires on
November 30, 2007, the Company is entitled to repurchase up to 2,709,900
more Class A shares.
12. Contributed surplus
Three Months Ended Six Months Ended
(in thousands of June 30 June 30
Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Balance, beginning of
period $ 10,830 $ 9,719 $ 10,603 $ 9,231
Adjustment for stock-
based compensation - - - -
Stock compensation
expense (note 2) 697 819 1,373 1,401
Fair value of stock
options exercised (704) (187) (1,153) (281)
----------------------------------------------------
Balance, end of
period $ 10,823 $ 10,351 $ 10,823 $ 10,351
----------------------------------------------------
----------------------------------------------------
13. Accumulated other comprehensive loss
(in thousands of Three Months Ended June 30 Six Months Ended June 30
Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Balance, beginning
of period $ (86,612) $ (96,977) $ (85,529) $ (100,260)
Transitional adjust-
ment on adoption of
new accounting
policies (note 1) - - (119) -
Unrealized foreign
currency translation
gains (losses), net
of hedging activities (22,477) (7,558) (23,187) (4,275)
Unrealized loss on
available-for-sale
financial assets (425) - (847) -
Gain on derivatives
designated as cash
flow hedges 1,271 - 1,439 -
----------------------------------------------------
Balance, end of
period $ (108,243) $ (104,535) $ (108,243) $ (104,535)
----------------------------------------------------
----------------------------------------------------
14. Stock option plans
A summary of the status of the Company's stock option plans and changes
during the period are presented below:
-------------------------------------------------------------------------
June 30, 2007 Dec. 31, 2006
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Market Exer- Exer-
Growth Other Total cise Total cise
Plan(1) Plans Shares Price Shares Price
-------------------------------------------------------------------------
Balance
outstanding,
beginning of
year 7,875 2,261,520 2,269,395 $15.76 2,578,165 $15.76
-------------------------------------------------------------------------
Granted - 371,800 371,800 25.02 457,700 17.27
-------------------------------------------------------------------------
Exercised (2,955) (236,960) (239,915) 15.58 (331,157) 16.43
-------------------------------------------------------------------------
Forfeited - - - - (66,890) 15.75
-------------------------------------------------------------------------
Expired (4,920) (91,600) (96,520) 16.62 (368,423) 17.31
-------------------------------------------------------------------------
Balance
outstanding,
end of period - 2,304,760 2,304,760 17.23 2,269,395 $15.76
-------------------------------------------------------------------------
(1) This maximum number is achieved only when the market value of the
shares at the time of exercise is equal to no less than four times
the value at the date of the grant.
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted
Out- average Exercis-
standing remaining Weighted able Weighted
at contractual average at average
Range of June 30, life in exercise June 30, exercise
exercise prices 2007 years price 2007 price
-------------------------------------------------------------------------
$10.00 to $15.00 542,640 5.73 $12.71 401,792 $12.81
-------------------------------------------------------------------------
$15.01 to $20.00 1,352,320 6.94 $16.81 645,108 $16.68
-------------------------------------------------------------------------
$20.01 to $25.00 40,000 8.01 $20.90 - -
-------------------------------------------------------------------------
$25.01 to $30.00 369,800 9.51 $25.02 - -
-------------------------------------------------------------------------
2,304,760 1,046,900
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted
Out- average Exercis-
standing remaining Weighted able Weighted
at contractual average at average
Range of Dec. 31, life in exercise Dec. 31, exercise
exercise prices 2006 years price 2006 price
-------------------------------------------------------------------------
$10.00 to $15.00 626,920 6.13 $12.78 626,920 $12.78
-------------------------------------------------------------------------
$15.01 to $20.00 1,600,475 7.26 $16.79 1,237,275 $16.75
-------------------------------------------------------------------------
$20.01 to $25.00 42,000 8.53 $20.90 4,000 $21.90
-------------------------------------------------------------------------
2,269,395 1,868,195
-------------------------------------------------------------------------
15. Financial instruments
The Company has determined the estimated fair values of its financial
instruments based on appropriate valuation methodologies; however,
considerable judgment is required to develop these estimates.
Accordingly, these estimated fair values are not necessarily indicative
of the amounts the Company could realize in a current market exchange.
The estimated fair value amounts can be materially affected by the use of
different assumptions or methodologies. The methods and assumptions used
to estimate the fair value of financial instruments as well as related
interest rate credit and foreign exchange risk are described below:
a) Cash and cash equivalents, accounts receivable, bank indebtedness,
accounts payable and accrued liabilities, and income taxes
Due to the short period to maturity of the financial instruments, the
carrying values as presented in the consolidated balance sheet are
reasonable estimates of fair values.
b) Long-term debt
The fair value of the Company's long-term debt is based on current rates
for debt with similar terms and maturities and is not materially
different from its carrying values.
The following are key risks associated with the Company's financial
instruments:
a) Interest rate risk
The following table summarizes the Company's exposure to interest rate
risk at June 30, 2007:
-------------------------------------------------------------------------
(in thousands of
Canadian dollars) Fixed interest rate maturing in
-------------------------------------------------------------------------
1 year Greater than
Floating rate or less 1 year Total
-------------------------------------------------------------------------
Financial assets
-------------------------------------------------------------------------
Cash and cash
equivalents $ 222,574 $ - $ - $ 222,574
-------------------------------------------------------------------------
Total $ 222,574 $ - $ - $ 222,574
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial liabilities
-------------------------------------------------------------------------
Bank indebtedness $ 427 $ - $ - $ 427
-------------------------------------------------------------------------
Long-term debt - - 78,853 78,853
-------------------------------------------------------------------------
Total $ 427 $ - $ 78,853 $ 79,280
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average fixed
rates of debt - - 5.11%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Credit risk
Certain of the Company's financial assets are exposed to credit risk.
Cash and cash equivalents consist of deposits with major commercial banks
and short-term investments which are readily convertible into cash.
The Company, in the normal course of business, is exposed to credit risk
from its customers, substantially all of which are in the energy
industry. These accounts receivable are subject to normal industry credit
risks.
The Company is also exposed to credit risk from the potential default by
any of its counterparties on its foreign exchange forward contracts. The
Company mitigates this credit risk by dealing with counterparties who are
major financial institutions and which the Company anticipates will
satisfy their obligations under the contracts.
c) Foreign exchange risk
The Company operates in several countries, which gives rise to a risk
that its earnings and cash flows may be adversely impacted by
fluctuations in foreign exchange. The Company utilizes foreign exchange
forward contracts to manage foreign exchange risk from its underlying
customer contracts. In particular, the Company uses foreign exchange
forward contracts for the sole purpose of hedging a portion of its
projected foreign currency inflows, consisting primarily of foreign
currency sales to the Company's customers. Gains or losses on these
hedging instruments are recognized in the same period as, and as part of,
the hedged transactions. The Company does not enter into foreign exchange
contracts for speculative purposes. The Company does not generally
attempt to hedge the net investment and equity of self-sustaining foreign
operations, except that the U.S. dollar long-term note payable is
designated as a hedge of a portion of its net investment in Bredero
Shaw's U.S. dollar-based operations. The following table sets out the
notional amounts outstanding under foreign exchange contracts, the
average contractual exchange rates and the settlement of these contracts
as at June 30, 2007:
(in thousands)
-------------------------------------------------------------------------
Maturity
-------------------------------------------------------------------------
U.S. dollars sold for Canadian dollars
-------------------------------------------------------------------------
Less than one year US$22,500
-------------------------------------------------------------------------
Weighted average rate 1.1261
-------------------------------------------------------------------------
Canadian dollars sold for U.S. dollars
-------------------------------------------------------------------------
Less than one year CAD$1,150
-------------------------------------------------------------------------
Weighted average rate 0.8697
-------------------------------------------------------------------------
Foreign exchange options and forward exchange contracts are used to hedge
foreign exchange exposures related to commercial activities. They are not
used by the Company for speculative purposes. At June 30, 2007, the
Company had notional amounts of $23.0 million of forward contracts
outstanding (December 31, 2006 - $38.7 million). These amounts are used
to express the volume of transactions and are not recognized in the
consolidated financial statements. These financial instruments are
contracted with major, chartered banks; as a result, credit and liquidity
risks related to these instruments are considered to be low.
The fair values of foreign exchange forward contracts represent an
approximation of the amounts the Company would have paid to or received
from counterparties to unwind its positions at June 30, 2007. The fair
value of the Company's net benefit for all foreign exchange forward
contracts at June 30, 2007 was $1.3 million (December 31, 2006 -
$3.1 million net liability) and has been recognized on the consolidated
balance sheet through a charge to other comprehensive income. If these
contracts ceased to be effective as hedges, unrecognized gains or losses
pertaining to the portion of the hedging transactions in excess of
projected foreign-denominated cash flows would be transferred from
accumulated other comprehensive income and recognized in net income at
the time this condition was identified.
16. Segmented information
(in thousands of Three Months Ended Six Months Ended
Canadian dollars) June 30 June 30
----------------------------------------------- -------------------------
Revenue 2007 2006 2007 2006
------------ ------------ ------------ ------------
Pipeline and Pipe
Services $ 238,964 $ 233,563 $ 421,332 $ 461,488
Petrochemical and
Industrial 38,178 36,207 77,698 71,233
Intersegment
Eliminations (702) (337) (1,261) (741)
------------ ------------ ------------ ------------
$ 276,440 $ 269,433 $ 497,769 $ 531,980
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income (loss) from
operations
Pipeline and Pipe
Services $ 46,378 $ 36,305 $ 70,914 $ 73,592
Petrochemical and
Industrial 6,500 3,928 13,483 8,564
Financial and
Corporate (5,842) (4,398) (9,389) (8,843)
------------ ------------ ------------ ------------
$ 47,036 $ 35,835 $ 75,008 $ 73,313
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Goodwill
Pipeline and Pipe
Services $ 150,122 $ 148,908
Petrochemical and
Industrial 16,999 16,595
------------ ------------
$ 167,121 $ 165,503
------------ ------------
------------ ------------
Total assets $ $
Pipeline and Pipe
Services 911,997 962,119
Petrochemical and
Industrial 80,400 79,612
Financial and Corporate 1,143,581 1,170,083
Elimination (1,214,068) (1,252,698)
------------ ------------
$ 921,910 $ 959,116
------------ ------------
------------ ------------
17. Joint venture operations
The Company's joint venture operations consist of its 50% interests in
Bredero Shaw Revestimentos de Tubos Ltda. and Thermotite Brasil Ltda. and
its 30% interest in the jointly controlled Arabian Pipecoating Company
Limited. These investments have been accounted for through proportionate
consolidation with the Company's share of each joint venture's assets,
liabilities, revenue, expenses, net income and cash flows consolidated
based on the Company's ownership position. The figures related to these
joint ventures included in the Company's consolidated financial
statements are summarized as follows:
(in thousands of Three Months Ended Six Months Ended
Canadian dollars) June 30 June 30
----------------------------------------------- -------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenue $ 12,203 $ 11,321 $ 25,743 $ 16,138
Operating and other
expenses 8,715 8,326 19,002 11,848
------------ ------------ ------------ ------------
Net income before
income taxes 3,488 2,995 6,741 4,290
Provision for taxes 312 230 710 334
------------ ------------ ------------ ------------
Net income $ 3,175 $ 2,765 $ 6,030 $ 3,956
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash provided by
(used in):
Operating activities $ (1,170) $ (199) $ (2,335) $ (587)
Investing activities - (773) - (1,120)
Financing activities - 949 - 1,661
Current assets $ 19,238 $ 10,399
Property, plant and
equipment, net 10,695 4,135
Goodwill 5,013 -
Current liabilities 13,463 7,023
18. Acquisition
On June 6, 2007, the Company purchased all of the outstanding shares of
X-Tek Industrial Limited from X-Tek Systems Limited. The name of the
company was subsequently changed to Shaw Inspection Systems Limited
("SISL"). SISL provides specialized, real-time/digital non-destructive
weld testing services to the onshore and offshore pipeline industry and
is based in the United Kingdom. The allocation of the purchase price has
not yet been finalized pending the completion of an appraisal of the
acquired assets and liabilities. This is expected to be completed in the
third quarter 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 assigned values:
Current assets 1,708
Property, plant and equipment 1,059
Goodwill 1,335
Current liabilities (1,523)
-------------------------------------------------------------------------
2,579
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration given:
Cash 2,579
-------------------------------------------------------------------------
2,579
-------------------------------------------------------------------------
-------------------------------------------------------------------------
19. Comparative figures
Comparative figures have been reclassified where necessary to correspond
with the current year's presentation.