Armtec Infrastructure Inc. Reports Results for the Second Quarter 2012

Toronto Stock Exchange: ARF; ARF.DB

GUELPH, ON, Aug. 8, 2012 /CNW/ - Armtec Infrastructure Inc. ("Armtec" or the "Company") (TSX: ARF; ARF.DB) today reported financial results for the second quarter ended June 30, 2012.

Highlights:

• Revenue in the quarter of $127.4 million, an increase of 3.3% or $4.1 million ahead of 2011.  Engineered Solutions ("ES") revenue was $50.6 million, 5.2% ahead of the $48.1 million in the same quarter of 2011; Construction and Infrastructure Applications ("CIA") revenue was $76.8 million, an increase of 2.1% over the same period in the prior year.  Year to date, revenue was $210.5 million, an increase of $12.2 million or 6.2% over 2011.  ES revenue was $97.3 million, 2.3% higher than the same period of 2011 with CIA products revenue of $113.2 million, representing an increase of $10.0 million or 9.7% over the prior year;
• Gross margin was $27.7 million, an increase of $16.1 million from the $11.6 million in the second quarter of 2011.  As a percentage of revenue, gross margin increased to 21.8%, a significant improvement from the 9.4% achieved in the prior year.  Year to date, gross margin was $37.0 million, an increase of $20.5 million from the $16.5 million in the same period in 2011.  As a percentage of revenue, gross margin increased to 17.6%, compared to the 8.3% achieved in 2011;
• EBITDA¹ was $18.1 million compared to a $3.4 million in the same period in 2011. Year to date, EBITDA was $18.2 million, compared to a loss of $0.5 million in 2011;
• The Company's ES backlog at the end of June 2012 remains strong at approximately $150.0 million, an increase of approximately $40.0 million over June 2011 levels;
• Cash at June 30, 2012 was $35.9 million despite the seasonal build of inventory and ramp up of ES projects moving from backlog to production;
• Armtec met the covenants under the Company's term loan with an affiliate of Brookfield Asset Management (the "Brookfield Facility"); and
• Management has entered a process to refinance the Brookfield Facility and is currently reviewing various non-binding proposals which are subject to further negotiation and due diligence.

"In the second quarter of 2012, Armtec's solid financial results reflected performance improvements achieved from the Company's Turnaround Plan implemented in the fourth quarter of 2011.  In the first half of 2012, the Turnaround Plan delivered $14.0 million in savings, with over 90% of these savings resulting from cost improvements," said Mark Anderson, President and Chief Executive Officer.  "As a result, the most significant operational issues in our business have been addressed and further longer-term improvements are now underway.  Management remains keenly focused on delivering the $20.0 million in savings with the Turnaround Plan and are confident that the remaining $6.0 million will be realized by the end of the year.  For the balance of the year and into 2013, the management team will focus on planning for further performance improvements and progressing towards more historical earnings levels."

Summary of Results

			Three Months Ended						Six Months Ended
(in thousands of Canadian dollars except per share amounts) (unaudited)			June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
Revenue		$	127,408		$	123,295		$	210,504		$	198,270
Gross margin		$	27,740		$	11,625		$	37,028		$	16,501
As a % of revenue			21.8%			9.4%			17.6%			8.3%
Selling, general and administrative		$	12,798		$	16,515		$	26,509		$	33,159
As a % of revenue			10.0%			13.4%			12.6%			16.7%
Impairment of assets		$	-		$	140,022		$	-		$	140,022
			-%			113.6%			-%			70.6%
Earnings (loss) from operations		$	14,068		$	(145,077)		$	10,008		$	(156,390)
As a % of revenue			11.0%			(117.7)%			4.8%			(78.9)%
Finance expense		$	12,060		$	6,626		$	25,093		$	13,491
As a % of revenue			9.5%			5.4%			11.9%			6.8%
Net earnings (loss) attributable to owners of the Company		$	1,506		$	(135,670)		$	(11,314)		$	(148,940)
As a % of revenue			1.2%			(110.0)%			(5.4)%			(75.1)%
Basic and diluted earnings (loss) per share		$	0.06		$	(5.78)		$	(0.47)		$	(6.79)
EBITDA^1		$	18,092		$	3,445		$	18,229		$	(541)
As a % of revenue			14.2%			2.8%			8.7%			(0.3)%
Breakdown of revenue by product lines^2:
	CIA	$	76,795		$	75,206		$	113,181		$	103,148
	ES		50,613			48,089			97,323			95,122
Total revenue		$	127,408		$	123,295		$	210,504		$	198,270
Breakdown of depreciation and amortization by financial statement line item:
	Cost of sales	$	1,696		$	3,918		$	4,077		$	7,445
	Selling, general and administrative		1,496			3,368			3,578			7,183
Total depreciation and amortization		$	3,192		$	7,286		$	7,655		$	14,628

1)	Please refer to the section entitled "Non-GAAP Measure" of the separately issued management, discussion and analysis for the interim period ended June 30, 2012 for the reconciliation of EBITDA.
2)	Beginning with the first quarter of 2012, the Company has realigned its products within the CIA and ES categories.

OVERVIEW

Performance improvements remain on track through the second quarter of 2012 as the Turnaround Plan, announced in the fall of 2011, contributed stronger operating margins in combination with a 6.2% increase in year to date revenue over 2011 levels.  Revenue for the six months ended June 30, 2012 was $210.5 million, a $12.2 million improvement over $198.3 million in the first half of 2011.  CIA product revenue to date in 2012 was $113.2 million, representing growth of 9.7% over the same period in 2011 at $103.1 million due to better pricing strategies, improved operational performance and mild winter conditions that supported a strong start to drainage volumes used in agricultural and natural resource applications.

Revenue of $97.3 million from ES projects for the first six months of 2012 was 2.3% over the $95.1 million in the comparative period of 2011.  Improvements in gross margin results over 2011 continued to be realized in ES projects resulting from a combination of reduced workforce, enhanced operating practices and an improvement in the mix of projects.  Recession bid, lower margin projects have been substantially completed and the current projects in backlog show improved bid margins over 2011 levels.  The ES backlog at June 30, 2012 was approximately $150.0 million or $40.0 million higher than June 2011 levels.

Armtec commenced a rigorous Turnaround Plan during the fourth quarter of 2011 aimed at generating additional EBITDA of approximately $20.0 million over a 12 to 24 month period.  The plan is focused on cost reduction actions, comprising 90%, and revenue improvements.  The results for the first half of 2012 reflect an estimated EBITDA benefit of $14.0 million derived from Turnaround Plan initiatives across all regions of the Company.  Approximately 85% of the over 200 action items have been successfully completed with 93% of the savings to date related to cost saving initiatives.  Over half of the Turnaround Plan achievements have been accomplished through improved labour management, particularly in the ES projects across the country.  Gains have also been made with respect to CIA margins through improved pricing and cost management.

Management remains focused on the achievement of the remaining action plans which were developed at the various levels throughout the organization to ensure the savings and improvement targets are achieved.  With a significant portion of the identified savings achieved in the first half of 2012, management believes the remaining $6.0 million identified under the Turnaround Plan will be achieved by the end of the year.

SECOND QUARTER RESULTS

Revenue
Armtec recorded revenue of $127.4 million for the three months ended June 30, 2012, $4.1 million or 3.3% ahead of revenue of $123.3 million for the three months ended June 30, 2011.  Revenue from CIA products was $76.8 million for the three month period, an increase of 2.1% over the same period in 2011.  Similar to the first quarter of 2012, the Central and Eastern regions benefitted from improved installation conditions, primarily for agricultural drainage applications.  Stronger natural resource revenue across all regions were offset by softness in infrastructure activities related to highways and transportation applications in the Prairie region while the Pacific region experienced lower volumes in utilities applications.

ES revenue was $50.6 million in the second quarter of 2012, or 5.2% ahead of the $48.1 million in the same quarter of 2011.  The Pacific region showed growth in natural resource volumes with the Kitimat smelter modernization project, awarded late in 2011, reaching expected production levels.   Both the Prairie and Central regions experienced lower volumes in the infrastructure sector that were partially offset by commercial project activity relating to retail warehousing.

Earnings from Operations
Earnings from operations for the three months ended June 30, 2012 were $14.1 million as compared to a $145.1 million loss in the same period of 2011.  During the second quarter of 2011 the Company recorded a $140.0 million non-cash impairment charge of which $109.9 million was against goodwill and $30.1 million against certain property, plant and equipment and other intangible assets.  Depreciation and amortization levels in the second quarter of 2012 were lower than 2011 levels at approximately $3.2 million as compared to $7.3 million due to the impairments recorded during 2011.  Earnings from operations before the impact of the impairment, depreciation and amortization would have reflected earnings of $17.3 million in 2012 compared to $2.2 million for the second quarter of 2011.

The gross margin for the three months ended June 30, 2012 was $27.7 million, an increase of $16.1 million from $11.6 million in the same period of 2011.  As a percentage of revenue, the second quarter gross margin of 21.8% was a significant improvement over the 9.4% achieved in the same period of 2011 and was more in line with levels achieved in the second quarter of 2010.  Before depreciation and amortization, the gross margin was 23.1% in 2012 compared with 12.6% in 2011.

Gross margin performance in the CIA products business improved in the quarter compared to the same three months of 2011, primarily with regard to the steel and plastic products as a result of increased production volumes and better plant efficiencies supported by the improved installation conditions.  During the quarter, pricing levels improved  compared to 2011.

The ES gross margin continued to show improvement in the three months ended June 30, 2012 as compared to the same period in 2011 while revenue grew slightly.  The ES margins have improved primarily as a result of the Turnaround Plan initiatives and a better mix of higher margin projects. Improvement in ES project performance continues to be driven by the reduction in the Company's hourly workforce, particularly in the Prairie region where the Company has experienced the strongest improvement in year over year labour utilization.  The management teams have been focused on production process improvements which translated into reduced costs and better utilization of resources.  The Kitimat smelter modernization project in the Pacific has achieved expected volumes and gross margin performance in the quarter.

Selling, general and administrative expenses for the three months ended June 30, 2012 were $12.8 million, or $3.7 million lower than 2011 levels.  Before depreciation and amortization, selling, general and administration costs were $11.3 million or $1.8 million lower than prior year levels.  The reduction in total spend reflects reduced staffing year over year and other cost reduction measures that were part of the identified initiatives under the Turnaround Plan.

YEAR TO DATE RESULTS

Revenue
Armtec recorded revenue of $210.5 million for the first half of 2012, $12.2 million or 6.2% ahead of revenue of $198.3 million for the six months ended June 30, 2011.  Revenue from CIA products was $113.2 million for the six month period, an increase of 9.7% or $10.0 million over the same period in 2011.   During 2011, CIA product deliveries and installations were delayed as a result of the unseasonably wet installation season.  Conversely, installation conditions, particularly during the first quarter of 2012, were favourable particularly with regard to drainage applications.  Activity levels in the Company's agricultural markets, primarily in the Central and Eastern regions, benefited from these conditions.  The natural resource end use market showed improvement with year over year growth in the energy and mining sectors across all regions, which offset softness in infrastructure applications in the Pacific and Prairie regions.

ES revenue was $97.3 million during the first half of the year, or 2.3% higher than the same period of 2011. Production volumes, as compared to the same period in 2011, were lower in the Central region's sound wall business reflecting the continued weak demand in the United States.  These declines in the infrastructure space were partially offset in the Central region by improved rail infrastructure project volumes related to recent GO Transit parking garage projects.  The Prairie and Pacific regions experienced stronger natural resource and commercial retail project demand which offset softer infrastructure market activity.  The Kitimat smelter modernization project was a major contributor to the growth in the Pacific region natural resource end use sector.

Earnings from Operations
Earnings from operations for the six months ended June 30, 2012 were $10.0 million as compared to a $156.4 million loss in the same period of 2011.  The Company recorded a $140.0 million non-cash impairment charge in the second quarter of 2011.  Depreciation and amortization levels in the first six months of 2012 were lower than 2011 levels at approximately $7.7 million as compared to $14.6 million due to the asset impairments recorded during 2011.  Earnings from operations before the impact of the impairment, depreciation and amortization in the first half of 2012 would have reflected earnings of $17.7 million in the first six months of 2012 compared to a $1.7 million loss for the first half of 2011.

The gross margin for the six months ended June 30, 2012 was $37.0 million, an increase of $20.5 million from $16.5 million in the same period of 2011.  As a percentage of revenue, the gross margin of 17.6% for the first half of 2012 was a significant improvement over the 8.3% achieved in the same period of 2011. Before depreciation and amortization, the gross margin was 19.5% in 2012 compared with 12.1% in 2011.

Gross margin performance in the CIA products business improved during 2012 as compared to the first six months of 2011 as a result of increased production volumes and better plant efficiencies supported by the improved site conditions, particularly during the first quarter.  In addition to improved pricing and product mix, higher than historical international volumes favourably impacted the performance improvement in the first half of 2012.  International CIA volumes are expected to be lower in the second half of the year, remaining consistent on a year over year basis.

The ES gross margin continued to show marked improvement during the first half of 2012 as compared to the same period in 2011 on slightly improved revenue levels.  The Turnaround Plan initiatives have supported the significant operational performance improvement in the ES projects.  The key contributors to the year over year improvement have been labour management and overhead spend control, particularly in the largest regions of Central and Prairies.  Performance on the Toronto Transit Commission ("TTC") tunnel liner project continued at a slightly positive contribution as compared to significant losses incurred during 2011.  During the first half of 2011, many of the larger projects achieved lower margins through a combination of lower initial bid margins and operational execution issues.  Examples of this include the significant losses incurred on the TTC project at start up and losses incurred through the completion of the Calgary West Light Rail Transit project.

Selling, general and administrative expenses for the six months ended June 30, 2012 were $26.5 million, or $6.7 million lower than 2011 levels.  Before depreciation and amortization, selling, general and administration costs were $22.9 million or $3.0 million lower than prior year levels.  The reduction in total spend reflects reduced staffing year over year and other cost reduction measures that were part of the identified initiatives under the Turnaround Plan.

Armtec offers an annual incentive plan to all non-union and certain union employees.  The plan is generally based on a combination of targets related to regional and overall Company performance and the achievement of individual objectives.  The plan also contains a "circuit breaker" where base conditions must be in place for the plan to be effective, the most significant being the achievement of financial covenants as related to the debt of the Company.  As a result of the circuit breaker provision and the refinancing in 2011, no incentives were incurred with respect to the 2011 year.  With the senior debt to adjusted EBITDA covenant, under the Brookfield Facility, in place and met as at June 30, 2012, the annual incentive plan for 2012 is expected to be achieved with an estimated impact on selling, general and administrative expenses of between $5.0 and $6.0 million to be expensed over the balance of 2012.

OUTLOOK

The Turnaround Plan has delivered expected results to date and remains on track.  Management expects to deliver the remaining improvements identified by the end of 2012, well within the anticipated 12 to 24 month period.  The benefits under the Turnaround Plan will diminish during the second half of the year as many of the initial action items were commenced in the fourth quarter of 2011.  Management expects to incur approximately $5.0 million to $6.0 million in additional selling, general and administrative expenses during the second half of 2012 as compared to the first half of the year related to the employee incentive plan as the covenants under the Brookfield Facility were met.

Armtec's ES backlog at the end of June 2012 remains strong at approximately $150.0 million, an increase of approximately $40.0 million over June 2011 levels.  The most significant project is the smelter modernization project in Kitimat, British Columbia which will contribute a total of approximately $32.0 million in revenue over 2012 and 2013. The backlog has been replenished with projects at improved bid margins which will be primarily realized in ES revenue throughout 2012 with some projects continuing into 2013.  These projects will replace the TTC and other complex projects that negatively impacted 2011 performance.  The combination of underperforming projects reaching completion, more representative structural projects in backlog, and the expected results derived from the Turnaround Plan are anticipated to continue to deliver improved performance over 2011 levels, though not at the same pace achieved in the second quarter relative to 2011.

CIA revenue is highly influenced by weather conditions. These product groups remain subject to competitive pricing pressures combined with the challenge of fluctuations in raw material costs.  Historical seasonal patterns indicate the first and fourth quarters would be lower than the second and third quarter volumes in the fiscal year.  With the favourable installation conditions in the first quarter of 2012, it is difficult to determine the extent to which purchases were shifted ahead in the year.  The current outlook indicates a slightly softer second half, as compared to 2011, for these products as a result of the orders pulled ahead into the first half of 2012.   Overall, operational performance for CIA products is expected to improve over 2011 levels due to improved manufacturing efficiencies and improved market pricing.

Management remains cautiously optimistic about the long-term outlook for infrastructure, the Company's largest end use market. Governments continue to reiterate their commitment to infrastructure renewal; however, spending levels may soften over the near term.  Armtec serves a diverse end use market base and anticipates strength in the private end use markets may offset the potential softness in infrastructure.

The outlook for Armtec's private markets remains mixed:

• Residential market activity is anticipated to remain at low levels reflecting anticipated single family housing forecasted starts.  Multi-unit residential starts continue to show a favourable trend;
• Commercial facility construction will benefit from certain projects which are anticipated to offset slower industrial starts;
• Agricultural market activity is influenced by commodity prices.  Currently, the outlook remains favourable. Volumes in this market are impacted by weather.  With the mild winter, it is difficult to determine the extent to which installations were pulled ahead in 2012 and the impact on crops with the dry hot summer conditions on fall installation budgets; and
• Natural resources markets are expected to remain strong in 2012, particularly in Western Canada.

The Brookfield Facility will become a current borrowing for the Company in August 2012.  The Company has entered into a process to examine available options to refinance the Brookfield Facility. Management is currently reviewing various non-binding proposals which are subject to further negotiation and due diligence. There can be no assurance that any of these non-binding proposals will result in a successful refinancing of the Brookfield Facility.  Key considerations of the refinancing process include the goals of lowering the cost associated with financing, improved facility flexibility and a longer maturity profile.

The Turnaround Plan was developed with very clear, attainable actions with defined accountabilities throughout every level of the organization.  In parallel with operational actions, improvement activities continue around the utilization of the SAP system.  Gains continue to be made on the management of input costs with approximately 85% of the over 200 identified Turnaround Plan actions completed.  The advancements made under the Turnaround Plan are critical to improve operations and regain the ability to adjust with market conditions.   Based on the current outlook and initiatives undertaken to date, the plan remains on target to achieve improved earnings in 2012 and realize the $20.0 million in savings by the end of 2012.

Over the balance of the year, the management team will look to move beyond the specific corrective actions of the Turnaround Plan.  The focus of the business in 2013 will be to improve operational performance and execution in a planful manner with a view to achieving more historical earnings levels in light of the uncertain current economic outlook.

CONFERENCE CALL AND WEBCAST

Management will host a conference call at 10:00 a.m. (ET) on Thursday, August 9, 2012 to discuss the results.  Investors who wish to participate can access the call using the following numbers: 416-644-3416 or 1-800-814-4860.  The call will be webcast live and archived on Armtec's website at www.armtec.com.

A taped rebroadcast will be available to listeners following the call until 12:00 a.m. on Thursday, August 16, 2012.  To access the rebroadcast, please dial 416-640-1917 or 1-877-289-8525 and quote the passcode 4547091#.

Armtec's full consolidated financial statements, notes to financial statements and management's discussion and analysis are available at www.sedar.com or at www.armtec.com.

ABOUT ARMTEC INFRASTRUCTURE INC.

Armtec is a leading manufacturer and marketer of a comprehensive range of infrastructure products and engineered construction solutions for customers in a diverse cross-section of industries that are located in every region of Canada, as well as in selected markets globally.  These markets include Canada's national and regional public infrastructure markets and private sector markets in agricultural drainage, commercial building, residential construction and natural resources.  Operating through its network of regional offices and production facilities across the country, Armtec's broad range of engineered solutions include products for drainage, bridge applications, soil retention, rehabilitation and water management systems including corrugated high-density polyethylene, corrugated steel and concrete pipe; an array of architectural and structural precast and pre-stressed concrete products from steps, paving stones, slabs and wall panels to highly engineered structural components designed and installed for projects such as bridges, sports venues and parking garages; and a full suite of noise barriers, acoustic enclosure and wall systems along with associated retaining wall and traffic barrier systems.

NON-GAAP MEASURE

Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
References to EBITDA are to earnings before finance cost, taxes (other than capital taxes), depreciation and amortization, certain non-recurring expenses and certain non-cash amounts resulting from purchase accounting.  Management believes that in addition to net earnings, EBITDA is a useful supplemental measure of cash available for dividends prior to debt service, changes in working capital, capital expenditures and income taxes.  However, EBITDA is not a recognized measure under GAAP.  Investors are cautioned that EBITDA should not be construed as an alternative to net and comprehensive earnings determined in accordance with GAAP as an indicator of Armtec's performance or as an alternative to cash flows from operating, investing and financing activities as a measure of Armtec's liquidity and cash flows.  Armtec's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, Armtec's EBITDA may not be comparable to similarly named measures used by other issuers.

RISKS AND UNCERTAINTIES

Armtec is subject to certain risks and uncertainties that could have a material adverse effect on Armtec's results of operations, business prospects, financial condition, dividends to shareholders and the trading price of Armtec's shares.  These uncertainties and risks include, but are not limited to:  capital and liquidity risk; access to bonding and letters of credit; credit risk; seasonality and adverse weather; existing legal proceedings; industry cyclicality; competition; acquisition and expansion risk; current economic conditions; reduction in demand for products; information management; change management; risk of future legal proceedings; relationships with suppliers; lack of long-term agreements; expiration of rights under license and distribution arrangements; availability and price volatility of raw materials; product liability; intellectual property; reliance on key personnel; labour markets; environmental; collective bargaining; pension plans; currency fluctuations; interest rates; uninsured and underinsured losses; operating hazards; securities laws compliance and corporate governance standards; income tax and other taxes; geographical risk; and geopolitical.  Dividends are not guaranteed.  Further information about these and other risks and uncertainties can be found in the disclosure documents filed by Armtec Infrastructure Inc. with the securities regulatory authorities, available at www.sedar.com.

FORWARD-LOOKING STATEMENTS

This news release contains "forward-looking" statements (including those set out under the heading "Overview", "Year to Date Quarter Results" and "Outlook" and those relating to timing of EBITDA improvement target; timing of the remaining improvement target; successful completion of the Company's refinancing process; timing of international CIA volumes; expectation that annual incentive plan be realized; the future impact of the annual incentive plan on selling, general and administrative expenses; the timing of delivering the remaining improvements under the Company's Turnaround Plan; backlog levels; improved margins in the current backlog; near term demand for CIA products; future infrastructure spending levels; and the outlook for Armtec's markets) within the meaning of applicable securities legislation which involve known and unknown risks, uncertainties and other factors which may cause the actual results, events, performance or achievements of Armtec or industry results, to be materially different from any future results, events, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements typically contain such words or phrases as "may", "outlook", "objective", "intend", "estimate", "anticipate", "should", "could", "would", "will", "expect", "believe", "plan" and other similar terminology suggesting future outcomes or events. Forward-looking statements reflect current expectations regarding future results, events, performance and achievements and are based on information currently available to Armtec's management, anticipated operating and financial results of Armtec, and current and anticipated market conditions.

Forward-looking statements involve numerous assumptions and should not be read as guarantees of future results, events, performance or achievements. Such statements will not necessarily be accurate indications of whether or not such future results, events, performance or achievements will be achieved.  You should not unduly rely on forward-looking statements as a number of factors, many of which are beyond the control of Armtec, could cause actual results, events, performance or achievements to differ materially from the results, events, performance or achievements discussed in the forward-looking statements, including, but not limited to the factors discussed in Armtec's materials filed with the Canadian securities regulatory authorities from time to time. Although the forward-looking statements contained in this news release are based upon what management of Armtec believes are reasonable assumptions, Armtec cannot assure investors that actual results, events, performance or achievements will be consistent with these forward-looking statements. All forward-looking statements in this news release are qualified by these cautionary statements. These forward-looking statements are made as of the date of this news release and, except as required by applicable law, Armtec assumes no obligation to update or revise them to reflect new events or circumstances.

DEFINED TERMS

Capitalized terms that are not otherwise defined in this news release shall have the meanings given to them in Armtec's management's discussion and analysis for the three and six months ended June 30, 2012. 

 

SOURCE: Armtec Infrastructure Inc.

Carrie Boutcher
Vice President, Investor Relations & Treasurer

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