(TSX: SCL.A, SCL.B)
TORONTO, Feb. 28 /CNW/ -
Financial Summary (In thousands of Canadian dollars Three Months Twelve Months except per share Ended Dec. 31 Ended Dec. 31 amounts) 2006 2005 2006 2005 ------------------------------------------------------------------------- Operating Results Restated Restated Revenue $ 276,315 $ 293,867 $1,059,619 $1,012,453 EBITDA (note 1) 54,530 42,574 183,705 140,214 Operating income from continuing operations 41,791 31,737 138,780 95,454 Income from continuing operations 26,722 21,780 92,924 82,790 Income (loss) from discontinued operations (69) (1,190) (289) 56,050 Net income (loss) 26,653 20,590 92,635 138,840 Net income (loss) per share (Class A and B) - Basic Continuing operations 0.36 0.30 1.25 1.10 Discontinued operations 0.00 (0.02) 0.00 0.75 Total 0.36 0.28 1.25 1.85 Net income (loss) per share (Class A and B) - Diluted Continuing operations 0.36 0.30 1.25 1.10 Discontinued operations 0.00 (0.02) 0.00 0.75 Total 0.36 0.28 1.25 1.85 ------------------------------------------------------------------------- Cash Flow Cash from (used in) continuing operating activities 40,597 (3,685) 183,585 79,890 Additions to property, plant and equipment 18,101 6,080 60,692 38,141 ------------------------------------------------------------------------- Financial Position Working capital 347,008 274,103 Total assets 1,008,026 919,846 Shareholders' equity per share (Class A and B) $ 8.51 $ 7.22 -------------------------------------------------------------------------
Note 1: EBITDA is a non-GAAP measure calculated by adding back to net
income from continuing operations, interest, taxes, and amortization of
property, plant and equipment.
Note 2: Shareholders' equity per share is a non-GAAP measure calculated
by dividing shareholders' equity by the number of Class A and Class B
share outstanding at the date of the balance sheet.
Note 3: During the fourth quarter of 2006, ShawCor Ltd. ("ShawCor" or the
"Company") 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 have been restated. Refer to note 1 of the interim
financial statements.
Fourth Quarter 2006 Results
Consolidated revenue of ShawCor Ltd. ("ShawCor" or the "Company") for the fourth quarter of 2006 totaled $276.3 million, compared to $251.3 million in the prior quarter with the increase resulting from increased business activity in the Pipeline and Pipe Services segment, partially offset by some seasonal softness in the Petrochemical and Industrial segment. Consolidated revenue for the quarter was lower than the fourth quarter of 2005 reflecting the impact of the Langeled project which contributed revenue of $41.9 million in the fourth quarter 2005 and was completed in the first quarter of 2006. On a full year basis, consolidated revenue from continuing operations of $1.06 billion reached a new record level for the Company and increased 5% over the level achieved in 2005.
Pipeline and Pipe Services segment revenue for the quarter totaled $244.0 million an increase of 12% compared to $216.9 million in the prior quarter and $266.1 million in the fourth quarter of 2005. The Company had expected that fourth quarter revenue would be slightly below third quarter levels as a result of reduced activity in Bredero Shaw's North Sea and Far East regions. While these regions did soften as anticipated, stronger than expected revenue from Bredero Shaw Americas region led to the overall revenue growth for the Pipeline and Pipe Services segment. Three factors accounted for the Bredero Shaw Americas revenue result. First, unexpectedly strong small diameter pipecoating demand was experienced in Canada, resulting in high levels of coated pipe in customer inventories which will likely reduce demand in the first half of 2007. Second, additional production shifts were added at facilities in Canada, which enabled higher large diameter production levels than anticipated. Third, an increase in revenue was realized from the PDEG project in Brazil. This revenue growth more than offset the anticipated reduction in revenue in the Far East region where business activity returned to more typical levels. The decline in revenue for the Pipeline and Pipe Services segment compared with the fourth quarter of last year was due mainly to the fact that the Langeled project had contributed revenue of $41.9 million in the fourth quarter 2005. Revenue in the quarter also improved over the prior quarter at the segment's other divisions. Strong revenue growth at Shaw Pipeline Services compared with the third quarter reflected increased variation orders on several pipeline projects while Canusa-CPS benefited from the stronger small diameter pipe demand in Western Canada as well as an increase in project activity in the Middle East. On a full year basis, revenue for the segment for the year totaled $922.3 million, 3% higher than $892.6 million in 2005.
In the Petrochemical and Industrial segment, revenue for the fourth quarter of 2006 of $32.8 million, although seasonally lower than the prior quarter, was 16% higher than in the fourth quarter of 2005 with DSG-Canusa and ShawFlex both experiencing stronger market demand and ShawFlex continuing to realize the impact of the material cost pass-through to customers. Revenue for the segment for the full year increased 14% over the prior year to $138.9 million.
Consolidated income from continuing operations before interest, income taxes and non-controlling interest totaled $41.8 million (15.1% of revenue) in the fourth quarter of 2006, compared to $23.7 million (9.4% of revenue) in the third quarter and $31.7 million (10.8% of revenue) in the fourth quarter of 2005. On a full year basis, consolidated income from continuing operations of $138.8 million increased 45% over the level achieved in 2005.
In the Pipeline and Pipe Services segment, operating income from continuing operations in the quarter of $40.8 million (16.7% of revenue) increased 70% over the previous quarter and 17% over the fourth quarter of last year. The operating income growth of the Pipeline and Pipe Services segment was primarily attributable to the 12% increase in revenue coupled with increased operating margins at Bredero Shaw. This margin growth was attributable to a more favourable mix of projects, a significant improvement in facility utilization in the Americas region, and the benefit of lower variable operating costs as a result of improvements in project execution on the KOC and PDEG projects. Compared to the fourth quarter of last year, Bredero Shaw's operating income decreased marginally reflecting the lower level of revenue in the quarter associated with the completion of the Langeled project. Margins, however, were improved through a favourable project mix and ongoing performance improvement measures. Operating income at Canusa-CPS and Shaw Pipeline Services in the quarter improved over the third quarter and the fourth quarter of 2005, in line with the increased revenue. Operating income at Guardian, while lower than in the prior quarter reflecting seasonally lower revenue, improved over the fourth quarter of 2005 as a result of the launch in the third quarter of 2006 of the division's new integrated tubular inspection and machining facility. Operating income for the segment for the year totaled $138.5 million (15.0% of revenue) compared to $100.4 million (11.2% of revenue) in 2005.
In the Petrochemical and Industrial segment, operating income from continuing operations for the fourth quarter of $5.6 million (17.0% of revenue) improved 11% over the $5.0 million (14.4% of revenue) recorded in the third quarter and improved $4.1 million over the $1.5 million (5.5% of revenue) in the fourth quarter of last year, with DSG-Canusa and ShawFlex both achieving improvements over the prior quarter and the fourth quarter of the prior year. Operating income for the segment for the full year totaled $19.2 million, 61% higher than the level achieved in 2005.
Financial and corporate costs in the quarter consisted of unallocated corporate expenses of $4.6 million including foreign exchange losses of $1.0 million. In the fourth quarter of 2005, financial and corporate costs consisted of unallocated corporate expenses of $4.7 million. On a full year basis, financial and corporate costs totaled $18.9 million in 2006, inclusive of $970 thousand of foreign exchange gains, compared to $16.9 million in 2005, net of foreign exchange losses of $874 thousand.
Net interest income was $1.4 million in the fourth quarter of 2006, compared to $881 thousand in the third quarter and $282 thousand in the fourth quarter of 2005. The increase in the quarter reflects the impact of higher cash balances as a result of cash flows generated by the Company as well as the favourable impact of the stronger Canadian dollar on the translation of the U.S. dollar denominated interest expense on the Company's Senior Notes. Net interest income for the full year 2006 totaled $2.8 million compared to net interest expense of $3.4 million in 2005.
Income tax expense related to continuing operations totaled $15.7 million (36.4% of income from continuing operations before income taxes), with the effective tax rate in the quarter reflecting the impact of losses in certain countries, primarily Nigeria, where the future tax benefit was not recognized in the Company's consolidated financial statements. Income tax expense totaled $11.2 million (35.0% of income from continuing operations before income taxes) in the fourth quarter of 2005. On a full year basis, income tax expense related to continuing operations totaled $46.8 million (33.1% of income from continuing operations before taxes) compared to $10.1 million (11.0% of income from continuing operations before taxes), net of a reduction in tax expense of $18.4 million from the utilization of previous years' income tax losses not previously recognized in the Company's accounts.
Consolidated income from continuing operations for the quarter totaled $26.7 million ($0.36 per share), compared to $16.6 million ($0.22 per share) in the third quarter and $21.8 million ($0.30 per share) in the four quarter of 2005. For the full year 2006, consolidated income from continuing operations totaled $92.9 million ($1.25 per share) compared to $82.8 million in 2005 ($1.10 per share), inclusive of an $18.4 million ($0.25 per share) reduction in income tax expense from the utilization of prior year tax losses not previously recognized in the accounts.
Losses from discontinued operations for the quarter totaled $69 thousand ($0.00 per share) compared to $1.2 million ($0.02 per share) in 2005 and reflected costs related to the closed Mobile, Alabama facility. Losses from discontinued operations for the full year 2006 totaled $289 thousand ($0.00 per share), while in 2005, income from discontinued operations totaled $56.1 million ($0.75 per share) and was comprised of earnings of $14.5 million from the OMSCO division until its sale to Vallourec & Mannesmann Tubes S.A. ("V&M") on September 30, 2005, and a gain of $48.4 million, net of deferred tax expense of $26.7 million, recorded on the sale, partially offset by operating losses for the year related to the Mobile, Alabama pipecoating plant totaling $6.9 million.
Consolidated net income for the fourth quarter of 2006 was $26.7 million ($0.36 per share) compared to $16.6 million ($0.22 per share) in the third quarter and $20.6 million ($0.28 per share) in the fourth quarter of 2005. Consolidated net income for 2006 totaled $92.6 million ($1.25 per share), compared to $138.8 million ($1.85 per share) in 2005. Net income in 2005 was inclusive of an after-tax gain on the sale of the OMSCO division of $48.4 million ($0.65 per share) and an $18.4 million ($0.25 per share) reduction in income tax expense from the utilization of prior year tax losses not previously recognized in the accounts.
Cash Flows
Cash flow generated by continuing operations in the quarter totaled $40.6 million compared to cash flow used in continuing operations of $3.7 million in the fourth quarter of 2005. The improvement reflected the increased profits, partially offset by a $2.3 million increase in non-cash working capital balances, compared to a $40.6 million increase experienced in the fourth quarter of 2005. This change in working capital resulted from the lower revenue in the quarter, compared to the fourth quarter of last year, changes in project mix with reduced prepaid expenses and raw material inventories associated with projects at the end of 2006 compared with 2005, and increased taxes payable due to the increased profits. On a full year basis, cash flow generated by continuing operating activities in 2006 totaled $183.6 million compared to $79.9 million in 2005.
Cash flow used in continuing investing activities in the quarter totaled $16.8 million, comprised of capital expenditures of $18.1 million less proceeds on disposal of property, plant and equipment of $1.3 million. Major capital expenditures in the quarter included continuing development of the new pipecoating plant in Portland, Oregon, pipecoating capacity expansions at the Company's Saudi joint venture, and the commencement of construction of a new facility in Camrose, Alberta. In the fourth quarter of last year, cash used in continuing investing activities totaled $12.0 million reflecting adjustments on the closing of the OMSCO divestment of $6.0 million and proceeds on the disposal of property, plant and equipment of $173 thousand, partially offset by capital expenditures of $6.1 million. Cash flow used in continuing investing activities for the full year totaled $68.3 million, including $60.7 million. Cash flow generated by continuing investing activities totaled $92.0 million in 2005 including proceeds on the divestment of the OMSCO division of $129.6 million. Capital expenditures in 2005 totaled $38.1 million.
Cash flow generated by continuing financing activities totaled $899 thousand in the quarter, mainly consisting of an increase in bank indebtedness of $3.0 million and $1.2 million received on the exercise of stock options, partially offset by dividends paid to shareholders of $3.3 million. In the fourth quarter of 2005, cash flow used in continuing financing activities totaled $18.3 million, comprised of $15.1 million paid to repurchase Class A shares under the Normal Course Issuer Bid and dividends paid to shareholders of $3.3 million. For the full year, cash flow used in continuing financing activities in 2006 totaled $14.3 million compared to $22.7 million in 2005.
Overall, cash and cash equivalents increased $39.2 million during the quarter to $309.3 million, compared with a decrease of $27.4 million during the fourth quarter of 2005 to $200.3 million. For the full year 2006, cash increased $109.0 million compared to $123.4 million in 2005, inclusive of proceeds on the divestment of OMSCO of $129.6 million.
Outlook
Demand for the products and services of the Company's largest market segment, the Pipeline and Pipe Services segment, is mainly driven by the level of pipeline infrastructure investment. This investment, in turn, is determined by energy supply and demand, which itself is a function of global economic activity. Demand for the products and services of the Petrochemical and Industrial segment is driven by the general level of economic activity in the regions where the segment operates, primarily North America and Western Europe. Economic activity in North America is expected to continue into 2007, albeit at a lower rate than that enjoyed during the past few years. In Western Europe, the economic recovery which began in 2006 should continue, with modest growth expected in 2007.
Growth in economic activity translates into strong demand for energy. Since energy supply is limited in the medium-term, prices are expected to remain strong; however, at levels below those experienced during most of 2006. Strong demand together with limited supply and on-going depletion of existing energy reserves, should encourage additional production and infrastructure development. In addition, record profits and cash flows at the major energy companies during the past two years have strengthened their balance sheets and put them in the position to fund major expansion programs. These factors should result in increased pipeline construction and translate into favourable business prospects for the Company over the next several years.
In 2007, ShawCor's revenue is expected to be broadly in line with 2006 levels. Revenue is expected to increase in North and South America, due in large part to the pipecoating capacity expansions which commenced in 2006 in Western Canada and the United States, and the impact of the Brazilian joint venture which the company entered into during the year, together with increased business activity in the Middle East. Growth in these areas is expected to be tempered by continuing softness in the North Sea and by lower revenue in the Far East where the extremely high level of project activity experienced in 2006 is expected to abate somewhat.
Consolidated order backlog, representing customer orders expected to be completed within one year, totaled $367.8 million compared to $352.0 million at the end of the third quarter, and $367.6 million at the beginning of the year. The composition of the 2006 year-end backlog has shifted considerably from the beginning of the year, with considerable growth in Canada and the United States offset by weakening in Europe, due mainly to the completion of the Langeled project, and in the Far East where pipecoating project activity is returning to more typical levels following unprecedented strength in 2006.
The Company continues to enjoy a very strong balance sheet with the financial capacity to fund significant internal and external growth opportunities as they arise. This opportunity to fund expansion together with the strong market fundamentals enjoyed by the Company provides the potential for strong growth for ShawCor in the years ahead.
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.
Further information on 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 February 28, 2007 at 10:00 a.m. EST to discuss the company's fourth quarter 2006 financial results. Please visit our website at www.shawcor.com for further details.
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars except per share data)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Twelve Months Ended
Dec 31 Dec 31
------------------------ ------------------------
2006 2005 2006 2005
------------------------ ------------------------
Revenue $ 276,315 $ 293,867 $1,059,619 $1,012,453
----------- ----------- ----------- -----------
Operating expenses
(notes 2, 3 and 4) 219,183 249,972 868,012 865,014
Amortization 13,531 9,885 46,745 43,895
Research and development 1,810 2,273 6,082 8,090
----------- ----------- ----------- -----------
234,524 262,130 920,839 916,999
----------- ----------- ----------- -----------
Operating income from
continuing operations 41,791 31,737 138,780 95,454
Interest expense
(income) (note 5) (1,440) (282) (2,804) 3,420
----------- ----------- ----------- -----------
Income before income
taxes and non-
controlling interest 43,231 32,019 141,584 92,034
Income taxes (note 6) 15,717 11,191 46,840 10,109
----------- ----------- ----------- -----------
Income before non-
controlling interest 27,514 20,828 94,744 81,925
Non-controlling interest (792) 952 (1,820) 865
----------- ----------- ----------- -----------
Income from continuing
operations 26,722 21,780 92,924 82,790
Income (loss) from
discontinued operations
(note 7) (69) (1,190) (289) 56,050
----------- ----------- ----------- -----------
Net income $ 26,653 $ 20,590 $ 92,635 $ 138,840
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (losses)
per share, Class A
and B - Basic and
Diluted
Continuing
operations $ 0.36 $ 0.30 $ 1.25 $ 1.10
Discontinued
operations - (0.02) - 0.75
----------- ----------- ----------- -----------
Total $ 0.36 $ 0.28 $ 1.25 $ 1.85
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SEGMENTED INFORMATION
Three Months Ended Twelve Months Ended
Dec 31 Dec 31
------------------------ ------------------------
Revenue 2006 2005 2006 2005
----------- ----------- ----------- -----------
Pipeline and Pipe
Services $ 243,951 $ 266,135 $ 922,328 $ 892,556
Petrochemical and
Industrial 32,795 28,214 138,938 121,482
Intersegment
Eliminations (431) (482) (1,647) (1,585)
----------- ----------- ----------- -----------
$ 276,315 $ 293,867 $1,059,619 $1,012,453
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) from
operations
Pipeline and Pipe
Services $ 40,816 $ 34,857 $ 138,483 $ 100,407
Petrochemical and
Industrial 5,589 1,546 19,192 11,918
Financial and
Corporate (4,614) (4,666) (18,895) (16,871)
----------- ----------- ----------- -----------
$ 41,791 $ 31,737 $ 138,780 $ 95,454
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended Twelve Months Ended
Dec 31 Dec 31
----------- ----------- ----------- -----------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Operating activities:
Income from
continuing
operations $ 26,722 $ 21,780 $ 92,924 $ 82,790
Items not requiring
an outlay of cash:
Amortization 13,531 9,885 46,745 43,895
Stock-based
compensation
(note 2) 659 1,414 2,798 2,860
Future income taxes 1,182 4,739 (3,498) 4,230
Non-controlling
interest in
earnings of
subsidiaries 792 (952) 1,820 (865)
Change in non-cash
working capital
and other (2,289) (40,551) 42,796 (53,020)
----------- ----------- ----------- -----------
Cash provided by
(used in) continuing
operating activities 40,597 (3,685) 183,585 79,890
----------- ----------- ----------- -----------
Investing activities:
Purchases of property,
plant and equipment (18,101) (6,080) (60,692) (38,141)
Proceeds on disposal
property, plant and
equipment 1,334 173 1,451 575
Proceeds on disposal
of discontinued
operations (note 7) - (6,046) - 129,558
Acquisition of joint
venture interest
(note 8) - - (9,099) -
----------- ----------- ----------- -----------
Cash provided by
(used in) continuing
investing activities (16,767) (11,953) (68,340) 91,992
----------- ----------- ----------- -----------
Financing activities:
Increase (decrease)
in bank indebtedness 2,976 82 1,183 (1,538)
Issue of shares 1,191 21 2,147 634
Purchase of shares
for cancellation - (15,139) (7,797) (15,139)
Dividends paid to
shareholders (3,268) (3,289) (9,825) (6,612)
----------- ----------- ----------- -----------
Cash provided by
(used in) continuing
financing activities 899 (18,325) (14,292) (22,655)
----------- ----------- ----------- -----------
Foreign exchange on
foreign cash and cash
equivalents 9,894 (941) 4,168 (3,942)
----------- ----------- ----------- -----------
Net cash provided by
(used in) continuing
operations 34,622 (34,904) 105,120 145,285
Net cash provided by
(used in)
discontinued
operations (note 7) 4,562 7,489 3,867 (21,898)
Cash and cash
equivalents at
beginning of period 270,138 227,750 200,335 76,948
----------- ----------- ----------- -----------
Cash and cash
equivalents at
end of period $ 309,322 $ 200,335 $ 309,322 $ 200,335
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED BALANCE SHEETS
Dec. 31 Dec. 31
2006 2005
----------- -----------
Assets
Current assets
Cash and cash equivalents $ 309,322 $ 200,335
Accounts receivable 188,865 216,269
Inventories 79,662 86,120
Taxes receivable 4,293 5,711
Prepaid expenses 12,897 20,648
Current assets of discontinued
operations (note 7) 156 799
----------- -----------
595,195 529,882
Property, plant and equipment, net 202,078 180,931
Goodwill 175,813 167,172
Other assets (note 9) 34,940 33,887
Non-current assets of discontinued
operations (note 7) - 7,974
----------- -----------
$1,008,026 $ 919,846
----------- -----------
----------- -----------
Liabilities
Current liabilities
Bank indebtedness (note 10) $ 4,094 $ 2,911
Accounts payable and accrued liabilities 168,387 170,446
Deferred revenues 10,907 23,975
Taxes payable 57,010 46,197
Current liabilities of discontinued
operations (note 7) 7,789 12,250
----------- -----------
248,187 255,779
Long-term debt 87,480 87,210
Minority interest in subsidiaries 5,013 2,842
Other non-current liabilities (note 11) 37,419 38,777
----------- -----------
378,099 384,608
----------- -----------
Shareholders' Equity
Capital stock (note 12) 206,852 204,720
Contributed surplus (note 13) 10,603 9,231
Retained earnings 498,001 421,547
Cumulative translation account (note 14) (85,529) (100,260)
----------- -----------
629,927 535,238
----------- -----------
$1,008,026 $ 919,846
----------- -----------
----------- -----------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Twelve Months Ended
Dec 31 Dec 31
----------- ----------- ----------- -----------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Balance at beginning
of period $ 474,616 $ 415,742 $ 421,547 $ 300,815
Net income 26,653 20,590 92,635 138,840
----------- ----------- ----------- -----------
501,269 436,332 514,182 439,655
Excess of purchase
price paid over stated
value of shares - (11,496) (6,356) (11,496)
Dividends paid (3,268) (3,289) (9,825) (6,612)
----------- ----------- ----------- -----------
Balance at end of
period $ 498,001 $ 421,547 $ 498,001 $ 421,547
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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, 2005. 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 Limited ("APCO"). This change in accounting policy
has been applied retroactively with all comparative figures restated.
The Company previously accounted for this investment using the equity
method.
2. Stock-based compensation
On November 6, 2006, the Board of Directors approved the granting of
4,000 stock options under the 2001 Director Plan. The total average fair
value of the stock options, calculated using the Black-Scholes pricing
model, was $23 thousand. The options granted under the 2001 Director
plan vest immediately and as a result, the fair value of the options was
charged to compensation cost immediately. The assumptions used in
calculating the fair value of the options are as follows: expected life
of options 3.25 years, expected stock price volatility 28%, expected
dividend yield 1.03%, and risk free interest rate 4.07%. The
compensation cost from the continuing amortization of granted stock
options for the three months and twelve months ended December 31, 2006
included in operating expenses is $659 thousand and $2.8 million,
respectively (December 31, 2005 - $1.4 million and $2.9 million,
respectively).
3. Foreign exchange gains and losses
Included in operating expenses for the three months and twelve months
ended December 31, 2006 are foreign exchange losses totaling $1.0 million
and gains of $970 thousand, respectively (December 31, 2005 - losses of
$6 thousand and $874 thousand, respectively). These gains and losses
arise from foreign currency transactions and from the translation of the
financial statements of foreign integrated subsidiaries.
4. Employee future benefits
The Company's cost under both defined benefit and defined contribution
arrangements included in operating expenses for the three months and
twelve months ended December 31, 2006 is $1.4 million and $9.4 million,
respectively (December 31, 2005 - $511 thousand and $7.3 million,
respectively).
5. Interest expense (income)
Three Months Ended Twelve Months Ended
(in thousands of Dec. 31 Dec. 31
Canadian dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Interest on short-term
deposits $ (3,253) $ (1,872) $ (9,566) $ (2,965)
Interest on bank
indebtedness 483 178 1,456 659
Interest on long-term
debt 1,330 1,412 5,306 5,726
--------------------------------------------------
$ (1,440) $ (282) $ (2,804) $ 3,420
--------------------------------------------------
--------------------------------------------------
Net interest received during the three months and twelve months ended
December 31, 2006 totaled $553 thousand and $1.9 million, respectively
(December 31, 2005 - interest paid of nil and $3.9 million,
respectively).
6. Income taxes
Net income taxes paid during the three months and twelve months ended
December 31, 2006 totaled $10.3 million and $42.1 million, respectively
(December 31, 2005 - $3.1 million and $21.1 million, respectively).
7. Discontinued operations
On September 30, 2005, the Company concluded the sale of its OMSCO drill
pipe manufacturing division ("OMSCO") and accordingly adopted
discontinued operations accounting treatment for the division in the
third quarter of 2005. On November 2, 2004, the Company announced its
decision to close the Mobile, Alabama pipe-coating facility and
operations at the facility ceased in the fourth quarter of 2005. The
Company adopted discontinued operations accounting treatment for the
Mobile facility in the fourth quarter of 2005.
The following table summarizes the financial results and cash flows from
discontinued operations for the three and twelve months ended
December 31, 2006 and 2005 and the assets and liabilities of the
discontinued operations as at those dates:
7. Discontinued operations (continued)
Three Months Ended Three Months Ended
(in thousands Dec 31, 2006 Dec 31, 2005
of Canadian Mobile Mobile
dollars) OMSCO Facility Total OMSCO Facility Total
-------------------------------------------------------------------------
Revenue $ - $ - $ - $ (761) $ 1,577 $ 816
-----------------------------------------------------------
Income (loss)
from
operations - (69) (69) (381) (1,035) (1,416)
Gain on sale - - - - - -
Interest
expenses - - - (226) - (226)
-----------------------------------------------------------
Income (loss)
from
discontinued
operations
before
income taxes - (69) (69) (155) (1,035) (1,190)
Income tax
expense - - - - - -
-----------------------------------------------------------
Net income
(loss) from
discontinued
operations $ - $ (69) $ (69) $ (155) $ (1,035) $ (1,190)
-----------------------------------------------------------
-----------------------------------------------------------
Cash flow from
(used in)
operating
activities - 1,049 1,049 - 7,489 7,489
Cash flow from
(used in)
investing
activities - 7,974 7,974 - - -
Cash flow from
(used in)
financing
activities - (4,461) (4,461) - - -
-----------------------------------------------------------
Net cash
provided by
(used in)
discontinued
operations $ - $ 4,562 $ 4,562 $ - $ 7,489 $ 7,489
-----------------------------------------------------------
-----------------------------------------------------------
Twelve Months Ended Twelve Months Ended
(in thousands Dec 31, 2006 Dec 31, 2005
of Canadian Mobile Mobile
dollars) OMSCO Facility Total OMSCO Facility Total
Revenue $ - $ 60 $ 60 $ 90,572 $ 23,045 $113,617
------------------------------------------------------------
Income (loss)
from
operations - (289) (289) 14,487 (6,858) 7,629
Gain on sale - - - 75,109 - 75,109
Interest
expenses - - - - - -
-----------------------------------------------------------
Income (loss)
from
discontinued
operations
before
income taxes - (289) (289) 89,596 (6,858) 82,738
Income tax
expense - - - 26,688 - 26,688
-----------------------------------------------------------
Net income
(loss) from
discontinued
operations $ - $ (289) $ (289) $ 62,908 $ (6,858) $ 56,050
-----------------------------------------------------------
-----------------------------------------------------------
Cash flow from
(used in)
operating
activities - 354 354 (2,121) (19,546) (21,667)
Cash flow from
(used in)
investing
activities - 7,974 7,974 (231) - (231)
Cash flow from
(used in)
financing
activities - (4,461) (4,461) - - -
-----------------------------------------------------------
Net cash
provided by
(used in)
discontinued
operations $ - $ 3,867 $ 3,867 $ (2,352) $(19,546) $(21,898)
-----------------------------------------------------------
-----------------------------------------------------------
Current assets - 156 156 - 799 799
Property,
plant and
equipment,
net - - - - 7,974 7,974
Current
liabilities - 7,789 7,789 - 12,250 12,250
-----------------------------------------------------------
8. Acquisition
On August 8, 2006, the Company announced the acquisition of a 50%
interest in Eupec Brasil Ltda., which operates a pipe-coating plant
adjacent to the Vallourec & Mannesmann pipe mill in Belo Horizonte,
Brazil. Eupec Brasil Ltda. was subsequently renamed Bredero Shaw
Revestimentos de Tubos Ltda. The allocation of the purchase price has
not yet been finalized pending the completion of an appraisal of the
value of acquired property, plant and equipment. This is expected to be
completed prior to the end of the year. The following are the
preliminary details of the acquisition; these details may be adjusted
pending the finalization of the purchase equation:
(in thousands of Canadian dollars)
----------------------------------------------------
Net assets acquired at estimated
assigned values:
Current assets $ 1,972
Property, plant and equipment 3,625
Goodwill 4,390
Current liabilites (888)
----------
$ 9,099
----------
----------
Consideration given:
Cash, net of cash acquired of $1,149 $ 9,099
----------
$ 9,099
----------
----------
This acquisition has been accounted for by the purchase method with the
results of operations included in the consolidated financial statements
from the date of acquisition.
9. Other assets
Dec. 31 Dec. 31
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
Long-term investment $ 2,875 $ 2,875
Deferred financing costs 2,089 2,031
Accrued employee future benefit asset 4,572 4,384
Future income taxes 25,404 24,597
----------- -----------
Total $ 34,940 $ 33,887
----------- -----------
----------- -----------
Other assets include a long-term investment in Garneau Inc., a Canadian-
based, publicly traded pipe-coating company with a market value of
$3.6 million at December 31, 2006 (December 31, 2005 - $3.2 million).
10. Bank indebtedness
At December 31, 2006, the Company had unused operating credit lines of
$204.1 million (2005 - $150.3 million), net of $74.1 million of various
standby letters of credit for performance and bid bonds (2005 -
$98.0 million) and bank indebtedness of $3.0 million (2005 -
$1.7 million), excluding the Company's proportionate share of the bank
indebtedness of its joint venture, Arabian Pipecoating Company Limited.
11. Other non-current liabilities
Dec. 31 Dec. 31
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
Non-current asset retirement obligations $ 4,561 $ 2,249
Accrued employee future benefit obligations 2,362 1,953
Future income taxes 30,496 34,575
----------- -----------
Total $ 37,419 $ 38,777
----------- -----------
----------- -----------
12. Capital stock
(in thousands except share information) Dec. 31, 2006 Dec. 31, 2005
-------------------------------------------------------------------------
Number of shares: Class A
Balance, beginning of the period 61,006,045 61,224,968
Issued - stock options 331,157 206,727
Conversions Class B to Class A 9,873 657,950
Purchase and cancelled under Normal Course
Issuer Bid (432,900) (1,083,600)
------------ ------------
Balance, end of the period 60,914,175 61,006,045
------------ ------------
Number of shares: Class B 13,078,142 13,088,015
------------ ------------
Total number of shares 73,992,317 74,094,060
------------ ------------
------------ ------------
Stated value: Class A
Balance, beginning of the period $ 203,716 $ 205,849
Issued - stock options 3,573 1,459
Conversion Class B to Class A - 51
Purchased and cancelled under Normal Course
Issuer Bid (1,441) (3,643)
------------ ------------
Balance, end of the period 205,848 203,716
------------ ------------
Stated Value: Class B 1,004 1,004
------------ ------------
Total stated value Class A and Class B $ 206,852 $ 204,720
------------ ------------
------------ ------------
13. Contributed surplus
Three Months Ended Twelve Months Ended
(in thousands of Dec. 31 Dec. 31
Canadian dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Balance, beginning of
period $ 10,951 $ 7,837 $ 9,231 $ 7,196
Stock compensation
expense (note 2) 659 1,414 2,798 2,860
Fair value of stock
options exercised (1,007) (20) (1,426) (825)
--------------------------------------------------
Balance, end of period $ 10,603 $ 9,231 $ 10,603 $ 9,231
--------------------------------------------------
--------------------------------------------------
14. Cumulative translation account
Three Months Ended Twelve Months Ended
(in thousands of Dec. 31 Dec. 31
Canadian dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Balance at beginning
of period $ (104,535) $ (91,157) $ (100,260) $ (71,509)
Translation of
self-sustaining
foreign operations 19,006 (9,103) 14,731 (28,751)
--------------------------------------------------
Balance at end of year $ (85,529) $ (100,260) $ (85,529) $ (100,260)
--------------------------------------------------
--------------------------------------------------
During the twelve months ended December 31, 2006, the Canadian dollar
weakened 0.3% (2005 gained 3.5%) against the U.S. dollar, weakened
11.8% (2005 gained 16.2%) against the Euro and weakened 14.0% (2005
gained 13.7%) against the U.K. pound.
15. Financial instruments
Foreign exchange options and forward exchange contracts are used to hedge
foreign exchange exposures related to commercial activities. They are
not used by the Company for speculative purposes. At December 31, 2006,
the Company had notional amounts of $38.7 million of forward contracts
outstanding (December 31, 2005 - $104.5 million). These amounts are used
to express the volume of transactions and are not recognized in the
consolidated financial statements. These financial instruments are
contracted with major, chartered banks; as a result, credit and liquidity
risks related to these instruments are considered to be low.
The fair values of foreign exchange forward contracts represent an
approximation of the amounts the Company would have paid to or received
from counterparties to unwind its positions at December 31, 2006. The
fair value of the Company's net liability for all foreign exchange
forward contracts at December 31, 2006 not recognized in the consolidated
financial statements was approximately $3.1 million (December 31, 2005 -
$1.9 million net benefit). If these contracts ceased to be effective as
hedges, unrecognized gains or losses pertaining to the portion of the
hedging transactions in excess of projected foreign-denominated cash
flows would be recognized in income at the time this condition was
identified.
16. Segmented information
(in thousands) Dec. 31 Dec. 31
----------------------------------------------- ------------------------
Revenue 2006 2005 2006 2005
----------- ----------- ----------- -----------
Pipeline and Pipe
Services $ 243,951 $ 266,135 $ 922,328 $ 892,556
Petrochemical and
Industrial 32,795 28,214 138,938 121,482
Intersegment
Eliminations (431) (482) (1,647) (1,585)
----------- ----------- ----------- -----------
$ 276,315 $ 293,867 $1,059,619 $1,012,453
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) from
operations
Pipeline and Pipe
Services $ 40,816 $ 34,857 $ 138,483 $ 100,407
Petrochemical and
Industrial 5,589 1,546 19,192 11,918
Financial and
Corporate (4,614) (4,666) (18,895) (16,871)
----------- ----------- ----------- -----------
$ 41,791 $ 31,737 $ 138,780 $ 95,454
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Goodwill
Pipeline and Pipe
Services $ 157,630 $ 150,901
Petrochemical and
Industrial 18,183 16,271
----------- -----------
$ 175,813 $ 167,172
----------- -----------
----------- -----------
Total assets
Pipeline and Pipe
Services $ 984,850 $ 975,574
Petrochemical and
Industrial 110,965 88,019
Financial and
Corporate 1,235,684 1,146,315
Elimination (1,323,473) (1,290,062)
----------- -----------
$1,008,026 $ 919,846
----------- -----------
----------- -----------
17. Joint venture operations
On August 8, 2006, the Company announced the acquisition of a 50%
interest in Eupec Brasil Ltda., a joint venture equally owned and
controlled by the Company and Delta Premium Trading Corp. Subsequent to
the transaction, the name of the joint venture company was changed to
Bredero Shaw Revestimentos de Tubos Ltda. ("BSRTL"). The Company also
has 30% ownership in the jointly controlled Arabian Pipecoating Company
Limited ("APCO") located in Saudi Arabia. Both of 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:
Three Months Ended Twelve Months Ended
(in thousands) Dec. 31 Dec. 31
----------------------------------------------- ------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Revenue $ 7,657 $ 2,182 $ 25,919 $ 8,334
Operating and other
expenses 6,981 2,038 20,803 6,839
----------- ----------- ----------- -----------
Net income before
income taxes 676 144 5,116 1,495
Provision for taxes 23 15 312 157
----------- ----------- ----------- -----------
Net income $ 653 $ 129 $ 4,804 $ 1,338
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash provided by
(used in):
Operating activities $ 131 $ 486 $ 4,041 $ 314
Investing activities (1,350) (557) (3,298) (1,942)
Financing activities 1,248 105 (76) 1,242
Current assets $ 9,318 $ 5,609
Property, plant and
equipment, net 9,984 3,613
Goodwill 4,451 -
Current liabilities 5,868 4,353
18. Comparative figures
Comparative figures have been reclassified where necessary to correspond
with the current year's presentation.