ShawCor Ltd. Announces First Quarter 2010 Results
(TSX: SCL.A, SCL.B)
TORONTO, May 7 /CNW/ -
Financial Summary
Three Months Ended
(in thousands of Canadian dollars March 31,
except per share amounts) 2010 2009
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Operating Results
Revenue $ 224,572 $ 307,464
EBITDA (note 1) 29,819 66,671
Operating income from continuing operations 16,464 50,434
Income from continuing operations 9,999 31,520
Income from discontinued operations - 21
Net income 9,999 31,541
Net income per share (Class A and B)
- Basic
Continuing operations 0.14 0.45
Discontinued operations - -
Total 0.14 0.45
Net income per share (Class A and B)
- Diluted
Continuing operations 0.14 0.45
Discontinued operations - -
Total 0.14 0.45
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Cash Flow
Cash provided by continuing operating
activities $ 26,570 $ 38,745
Additions to property, plant and equipment 11,308 14,143
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Financial Position
Working capital $ 305,510 $ 262,389
Total assets 1,172,855 1,221,270
Shareholders' equity per share (Class A and B)
(note 2) $ 11.06 $ 10.90
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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 of property, plant and equipment and
intangible assets. EBITDA does not have a standardized meaning prescribed
by GAAP and is not necessarily comparable to similar measures prescribed
by other companies. EBITDA is used by many analysts in the oil and gas
industry as one of several important analytical tools. The following is
the calculation of EBITDA for the periods presented above:
Income from continuing operations $ 9,999 $ 31,520
Add (deduct):
Income taxes 5,523 17,251
Interest expense - net 942 1,663
Amortization of property, plant and equipment 12,260 15,142
Amortization of intangible assets 1,095 1,095
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EBITDA $ 29,819 $ 66,671
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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.
ShawCor Ltd. ("ShawCor" or the "Company") is a growth-oriented, global energy services company specializing in technology-based products and services for the Pipeline and Pipe Services and the Petrochemical and Industrial markets. The Company operates seven divisions with over seventy manufacturing, sales and service facilities located around the world.
FIRST QUARTER 2010 RESULTS
1. Core Business Segments
As at March 31, 2010, the Company operated its seven divisions through two reportable operating segments, Pipeline and Pipe Services and Petrochemical and Industrial:
Pipeline and Pipe Services
The Pipeline and Pipe Services segment is the largest segment of the Company and accounted for 86.6% of consolidated revenue for the three months ended March 31, 2010. This segment includes the Bredero Shaw, Canusa-CPS, Shaw Pipeline Services, Flexpipe Systems and Guardian divisions.
Petrochemical and Industrial
The Petrochemical and Industrial segment, which accounted for 13.4% of consolidated revenue for the three months ended March 31, 2010, includes the DSG-Canusa and ShawFlex divisions. Operations within this segment utilize polymer and adhesive technology that was developed for the Pipeline and Pipe Services segment and is now being applied to applications in Petrochemical and Industrial markets.
2. Financial Highlights
2.1 Selected First Quarter Financial Information
The following sets forth the Company's financial highlights for the three
months ended March 31:
2010 2009 Change ($)
------------ ------------ ------------
Revenue $ 224,572 $ 307,464 $ (82,892)
Cost of goods sold 138,414 183,949 (45,535)
------------ ------------ ------------
Gross profit 86,158 123,515 (37,357)
Selling, general and
administrative expense 55,135 55,865 (730)
Foreign exchange gains (1,420) (1,371) (49)
Research and development expense 2,624 2,350 274
------------ ------------ ------------
EBITDA(a) 29,819 66,671 (36,852)
Amortization of property, plant
and equipment 12,260 15,142 (2,882)
Amortization of intangible assets 1,095 1,095 -
------------ ------------ ------------
Operating income from continuing
operations 16,464 50,434 (33,970)
Interest expense - net 942 1,663 (721)
Income taxes 5,523 17,251 (11,728)
------------ ------------ ------------
Income from continuing operations 9,999 31,520 (21,521)
Income from discontinued
operations - 21 (21)
------------ ------------ ------------
Net income $ 9,999 $ 31,541 $ (21,542)
------------ ------------ ------------
------------ ------------ ------------
(a) Earnings before interest, income taxes, depreciation and
amortization ("EBITDA") is a non-GAAP measure and should not be
considered as an alternative to net income or any other measure of
performance under GAAP.
Revenue
Revenue decreased by $82.9 million or 27.0% in the first quarter of 2010 compared to the first quarter of 2009, primarily as a result of reduced market activity in the Pipeline and Pipe Services segment and the unfavourable effect of foreign exchange fluctuations.
Operating income from continuing operations
Operating income from continuing operations decreased by $34.0 million or 67.5% in the first quarter of 2010 compared to the first quarter of 2009, primarily due to the decrease in revenue explained above and the unfavourable effect of foreign exchange fluctuations.
Net income
Net income decreased to $10.0 million in the first quarter of 2010 compared to $31.5 million in the first quarter of 2009, a decrease of $21.5 million or 68.2%. The decrease was primarily due to the decrease in operating income explained above, partially offset by lower interest expense and income taxes. Income taxes decreased mainly as a result of the decrease in operating income.
Sales Backlog
The Company's order backlog at March 31, 2010, representing customer orders expected to be completed within one year, totaled $396.1 million compared to $410.5 million at December 31, 2009, a decrease of $14.4 million or 3.5%. The backlog does not include the US$93.0 million Total Laggan project for which a letter of intent was received in April 2010. The inclusion of the Total Laggan project, coupled with continued strong bidding activity, provides the Company with confidence in the potential for growth in the backlog as the year progresses.
2.2 Foreign Exchange Impact
The following table sets forth the impact on revenues, operating income from continuing operations and net income, compared with the comparable prior year period, as a result of foreign exchange fluctuations on the translation of foreign currency operations for the following periods:
Q1 2010 Q1 2010
vs. vs.
Q4 2009 Q1 2009
------------ ------------
Revenue $ (4,508) $ (26,448)
Operating income from continuing operations $ (706) $ (5,334)
Net income $ (692) $ (3,547)
The following table sets forth the significant currencies in which the Company operates and the foreign year-to-date average exchange rates for these currencies versus Canadian dollars, for the following periods:
Three Months Ended
--------------------------------------
March 31, December 31, March 31,
2010 2009 2009
------------ ------------ ------------
U.S. Dollar 1.0438 1.0544 1.2410
Euro 1.4469 1.5569 1.6472
British Pounds 1.6339 1.7154 1.7832
3. Results from Operations
3.1 Consolidated Information
Revenue
The following table sets forth revenue by reportable operating segment for the following periods:
Three Months Ended Change ($)
----------------------------------- -----------------------
Q1 2010 Q1 2010
March 31, December 31, March 31, vs. vs.
2010 2009 2009 Q4 2009 Q1 2009
----------- ----------- ----------- ----------- -----------
Pipeline and
Pipe
Services $ 194,579 $ 235,759 $ 279,942 $ (41,180) $ (85,363)
Petrochemical
and
Industrial 29,993 25,152 27,522 4,841 2,471
----------- ----------- ----------- ----------- -----------
Consolidated $ 224,572 $ 260,911 $ 307,464 $ (36,339) $ (82,892)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
First Quarter 2010 versus Fourth Quarter 2009
Consolidated revenue was $224.6 million in the first quarter of 2010 compared to $260.9 million in the fourth quarter of 2009, a decrease of $36.3 million or 13.9%, with a decrease in the Pipeline and Pipe Services segment combining with the unfavourable impact of foreign exchange fluctuations as noted in section 2.2 - Foreign Exchange Impact.
The decrease in the Pipeline and Pipe Services segment was due to lower revenue in Latin America, EMAR and Asia Pacific of $20.5 million, $17.6 million and $10.4 million, respectively, partially offset by an increase in North America of $7.3 million. See section 3.2 - Segment Information for additional information with respect to the change in revenue in the Pipeline and Pipe Services segment.
The increase in the Petrochemical and Industrial segment was due to an increase in North America and EMAR of $3.6 million and $1.2 million, respectively. See section 3.2 - Segment Information for additional information with respect to the change in revenue in the Petrochemical and Industrial segment.
First Quarter 2010 versus First Quarter 2009
Consolidated revenue decreased by $82.9 million or 27.0% in the first quarter of 2010 compared to the first quarter of 2009. The decrease was due to a decrease in the Pipeline and Pipe Services segment and the unfavourable impact of foreign exchange fluctuations as noted in section 2.2 - Foreign Exchange Impact, partially offset by an increase in the Petrochemical and Industrial segment.
The decrease in the Pipeline and Pipe Services segment was due to lower revenue in EMAR, North America and Latin America of $40.9 million, $32.0 million and $13.6 million, respectively, partially offset by an increase in Asia Pacific of $1.1 million. See section 3.2 - Segment Information for additional information with respect to the change in revenue in Pipeline and Pipe Services.
The increase in the Petrochemical and Industrial segment was due to an increase in EMAR and North America of $1.7 million and $800 thousand, respectively. See section 3.2 - Segment Information for additional information with respect to the change in revenue in Petrochemical and Industrial.
Operating income from continuing operations
The following table sets forth operating income from continuing operations ("operating income") and operating margin for the following periods:
Three Months Ended Change
----------------------------------- -----------------------
Q1 2010 Q1 2010
March 31, December 31, March 31, vs. vs.
2010 2009 2009 Q4 2009 Q1 2009
----------- ----------- ----------- ----------- -----------
Operating
income $ 16,464 $ 38,591 $ 50,434 $ (22,127) $ (33,970)
Operating
margin(a) 7.3% 14.8% 16.4% (7.5 points)(9.1 points)
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(a) Operating margin is defined as operating income from continuing
operations divided by revenue.
First Quarter 2010 versus Fourth Quarter 2009
Operating income decreased by $22.1 million in the first quarter of 2010 compared to the fourth quarter of 2009 and operating margin decreased by 7.5 percentage points over the same period. The decrease in operating income was primarily due to the reduction in revenue explained above. The reduction in operating margin was a result of the under absorption of fixed manufacturing overhead included in cost of goods sold and selling, general and administrative expenses that was associated with the 13.9% year over year revenue decline.
First Quarter 2010 versus First Quarter 2009
Operating income decreased by $34.0 million in the first quarter of 2010 compared to the first quarter of 2009 and operating margin decreased by 9.1 percentage points over the same period. The decrease in operating income was mainly due to the reduction in revenue explained above. The reduction in operating margin was a result of the under absorption of fixed manufacturing overhead included in cost of goods sold and selling, general and administrative expenses that was associated with the 27.0% year over year revenue decline.
Interest expense - net
The following table sets forth the components of interest expense - net for the following periods:
Three Months Ended Change
----------------------------------- -----------------------
Q1 2010 Q1 2010
March 31, December 31, March 31, vs. vs.
2010 2009 2009 Q4 2009 Q1 2009
----------- ----------- ----------- ----------- -----------
Interest
income on
short-term
deposits $ (227) $ (409) $ (235) $ 182 $ 8
Interest
expense
on bank
indebtedness 444 437 571 7 (127)
Interest
expense on
long-term debt 725 734 1,327 (9) (602)
----------- ----------- ----------- ----------- -----------
Interest
expense
- net $ 942 $ 762 $ 1,663 $ 180 $ (721)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
First Quarter 2010 versus Fourth Quarter 2009
Interest expense - net was $942 thousand in the first quarter of 2010 compared to $762 thousand in the fourth quarter of 2009, a marginal increase of $180 thousand. The increase was mainly due to lower interest income earned on short-term deposits.
First Quarter 2010 versus First Quarter 2009
Interest expense - net decreased by $721 thousand in the first quarter of 2010 compared to the first quarter of 2009, primarily due to lower interest expense on long-term debt and bank indebtedness. The decrease in interest expense on long-term debt was due to lower debt levels in the first quarter of 2010 compared to the first quarter of 2009 as a result of the repayment of Senior Notes made in the second quarter of 2009. See section 4.4 - Credit Facilities for additional information with respect to the debt repayment.
Income taxes
First Quarter 2010 versus Fourth Quarter 2009
The Company recorded income tax expense of $5.5 million (35.5% of income from continuing operations before income taxes) in the first quarter of 2010, compared to tax expense of $6.3 million (16.6% of income from continuing operations before income taxes) in the fourth quarter of 2009. The effective tax rate in the first quarter of 2010 was higher than the Company's expected effective tax rate of 31.0%, primarily due to losses generated in lower-taxed foreign jurisdictions in the first quarter of 2010, mainly in the EMAR region and an increase of $776 thousand to the Company's income tax reserve relating to potential tax liabilities associated with certain foreign jurisdictions.
First Quarter 2010 versus First Quarter 2009
Income tax expense relating to continuing operations in the first quarter of 2010 totaled $5.5 million (35.5% of income from continuing operations before income taxes), compared to tax expense of $17.3 million (35.4% of income from continuing operations before income taxes) in the first quarter of 2009. The effective tax rate in the first quarter of 2010 was largely in line with the rate in the first quarter of 2009 and was lower than the Company's expected effective tax rate of 31.0%. The increase from the expected rate resulted primarily from losses generated in lower-taxed foreign jurisdictions mainly in the EMAR region and an increase of $776 thousand to the Company's income tax reserve relating to potential tax liabilities associated with certain foreign jurisdictions.
Discontinued operations
Income from discontinued operations was $nil in the first quarter of 2010 compared to a loss of $27 thousand in the fourth quarter of 2009 and income of $21 thousand in the first quarter of 2009.
3.2 Segment Information
3.2.1 Pipeline and Pipe Services segment
The following table sets forth, by geographic location, the revenue, operating income from continuing operations and operating margin for the Pipeline and Pipe Services segment for the following periods:
Three Months Ended Change
----------------------------------- -----------------------
Q1 2010 Q1 2010
March 31, December 31, March 31, vs. vs.
2010 2009 2009 Q4 2009 Q1 2009
----------- ----------- ----------- ----------- -----------
Revenue
North America $ 92,181 $ 84,846 $ 124,162 $ 7,335 $ (31,981)
Latin America 8,736 29,209 22,325 (20,473) (13,589)
EMAR 32,739 50,340 73,608 (17,601) (40,869)
Asia Pacific 60,923 71,364 59,847 (10,441) 1,076
----------- ----------- ----------- ----------- -----------
Total revenue $ 194,579 $ 235,759 $ 279,942 $ (41,180) $ (85,363)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Operating
income $ 19,965 $ 43,847 $ 56,646 $ (23,882) $ (36,681)
Operating
margin 10.3% 18.6% 20.2% (8.3 points)(9.9 points)
First Quarter 2010 versus Fourth Quarter 2009
Revenue in the first quarter of 2010 was $194.6 million compared to $235.8 million in the fourth quarter of 2009, a decrease of $41.2 million or 17.5%. The decrease was due to lower revenue in Latin America, EMAR and Asia Pacific of $20.5 million, $17.6 million and $10.4 million, respectively, partially offset by an increase in North America of $7.3 million.
The decrease in Latin America was mainly due to the completion of the Trinidad North East Offshore and Tobago Pipelines project in the fourth quarter of 2009 and lower project activity in Brazil and Mexico.
The decrease in EMAR was primarily due to lower pipe coating volumes in Europe and the Middle East as a result of the completion of the Skarv project in the fourth quarter of 2009 and the delay of the start up of the Block 31 and Block 18 Angola projects to the second quarter of 2010.
The decrease in Asia Pacific was mainly a result of the completion of the $30.0 million SSB Gumusut project in the fourth quarter of 2009.
The increase in North America was primarily due to an increase in demand for small diameter production in Canada in the first quarter of 2010 compared to the fourth quarter of 2009 and the commencement of production of the TCPL Cushing Extension project in the first quarter of 2010.
Operating income in the first quarter of 2010 was $20.0 million compared to $43.8 million in the fourth quarter of 2009, a decrease of $23.9 million or 54.6%. The decrease was primarily due to the lower revenue explained above and the unfavourable effect of foreign exchange fluctuations. The reduction in operating margin was a result of the under absorption of fixed manufacturing overhead included in cost of goods sold and selling, general and administrative expenses that was associated with the 17.5% revenue decline discussed above.
First Quarter 2010 versus First Quarter 2009
Revenue in the Pipeline and Pipe Services segment decreased by $85.4 million or 30.5% in the first quarter of 2010 compared to the first quarter of 2009. The decrease was due to lower revenue in EMAR, North America and Latin America of $40.9 million, $32.0 million and $13.6 million, respectively, partially offset by an increase in Asia Pacific of $1.1 million.
The decrease in EMAR was mainly due to lower pipe coating volumes in Europe and the Middle East as a result of a reduction in large project activity in the first quarter of 2010 compared to the first quarter of 2009 and as a result of a delay in the start-up of the particularly large Block 31 and Block 18 Angola projects to the second quarter of 2010.
The decrease in North America was primarily due to reduced drilling and well completions in Canada and the U.S., which negatively impacted volumes in several of the Company's key product markets including small diameter pipe coating, spoolable composite pipe and drill pipe services.
The decrease in Latin America was primarily due to strong growth in Mexico in the first quarter of 2009 as a result of increased pipeline investment by Pemex, the national oil company of Mexico, not repeated to the same extent in the first quarter of 2010 and large project activity in Brazil in the first quarter of 2009 not repeated to the same extent in the first quarter of 2010.
Operating income in the first quarter of 2010 decreased by $36.7 million or 64.8% compared to $56.6 million in the first quarter of 2009, primarily due to the lower revenue explained above and the unfavourable effect of foreign exchange fluctuations. The reduction in operating margin was a result of the under absorption of fixed manufacturing overhead included in cost of goods sold and selling, general and administrative expenses that was associated with the 30.5% revenue decline discussed above.
3.2.2 Petrochemical and Industrial segment
The following table sets forth, by geographic location, the revenue, operating income from continuing operations and operating margin for the Petrochemical and Industrial segment for the following periods:
Three Months Ended Change
----------------------------------- -----------------------
Q1 2010 Q1 2010
March 31, December 31, March 31, vs. vs.
2010 2009 2009 Q4 2009 Q1 2009
----------- ----------- ----------- ----------- -----------
Revenue
North America $ 16,407 $ 12,775 $ 15,593 $ 3,632 $ 814
EMAR 13,586 12,378 11,928 1,208 1,658
----------- ----------- ----------- ----------- -----------
Total revenue $ 29,993 $ 25,153 $ 27,521 $ 4,840 $ 2,472
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Operating
income $ 2,921 $ 436 $ 325 $ 2,485 $ 2,596
Operating
margin 9.7% 1.7% 1.2% 8.0 points 8.5 points
First Quarter 2010 versus Fourth Quarter 2009
In the Petrochemical and Industrial segment, revenue in the first quarter of 2010 totaled $30.0 million compared to $25.2 million in the fourth quarter of 2009, an increase of $4.8 million or 19.0%. The increase was due to an increase in revenue in North America and EMAR of $3.6 million and $1.2 million, respectively.
The increase in North America and EMAR was mainly due to improved demand in the first quarter of 2010 in the wire and cable and automotive and communication markets.
Operating income in the first quarter of 2010 was $2.9 million compared to $436 thousand in the fourth quarter of 2009, an increase of $2.5 million or 573.4%. The increase was primarily due to the increase in revenue explained above with the operating margin improving by 8.0 points on significantly better facility utilization and fixed cost absorption.
First Quarter 2010 versus First Quarter 2009
Revenue in the Petrochemical and Industrial segment increased by $2.5 million or 9.1% in the first quarter of 2010 compared to the first quarter of 2009. The increase was due to an increase in revenue in EMAR and North America.
The increase in EMAR and North America was primarily due to improved demand in the first quarter of 2010 in the wire and cable and automotive and communication markets.
Operating income in the first quarter of 2010 increased by $2.6 million or 800.0% compared to $325 thousand in the first quarter of 2009, primarily due to the increase in revenue explained above with the operating margin improving by 8.5 points on significantly better facility utilization and fixed cost absorption.
3.2.3 Financial and Corporate
Financial and corporate costs include corporate expenses not allocated to the operating segments and other non-operating items including foreign exchange gains and losses on foreign currency denominated cash and working capital balances. The corporate division of the Company only earns revenue that is considered incidental to the activities of the Company. As a result, it does not meet the definition of a reportable operating segment as defined under GAAP.
The following table sets forth the Company's unallocated financial and corporate expenses, before foreign exchange gains and losses, for the following periods:
Three Months Ended Change
----------------------------------- -----------------------
Q1 2010 Q1 2010
March 31, December 31, March 31, vs. vs.
2010 2009 2009 Q4 2009 Q1 2009
----------- ----------- ----------- ----------- -----------
Financial and
Corporate
Expense $ 7,841 $ 4,407 $ 7,908 $ 3,434 $ (67)
First Quarter 2010 versus Fourth Quarter 2009
Financial and corporate costs, before net foreign exchange gains of $1.4 million, increased by $3.4 million in the first quarter of 2010 compared to the fourth quarter of 2009. The increase was primarily due to a downward adjustment to an accrual related to the management compensation program in the fourth quarter of 2009, the commencement of a new long term management compensation program in the first quarter of 2010 and an increase in professional fees in the first quarter of 2010 compared to the fourth quarter of 2009.
First Quarter 2010 versus First Quarter 2009
Financial and corporate costs for the first quarter of 2010 totaled $7.8 million, before net foreign exchange gains of $1.4 million, a marginal decrease compared to $7.9 million, before net foreign exchange gains of $1.4 million in the first quarter of 2009.
4. Liquidity and Capitalization
The following table sets forth the Company's cash flows by activity and cash balance for the following periods:
Three Months Ended
--------------------------------------
March 31, December 31, March 31,
2010 2009 2009
------------ ------------ ------------
Income from continuing operations $ 9,999 $ 31,553 $ 31,520
Non-cash items 13,552 5,749 20,346
Settlement of asset retirement
obligations (297) 937 (1,947)
Change in employee future benefits 786 (3,544) 1,085
Change in non-cash working capital
and foreign exchange 2,530 96,042 (12,259)
------------ ------------ ------------
Cash provided by continuing
operating activities 26,570 130,737 38,745
Cash used in continuing investing
activities (11,442) (7,745) (14,045)
Cash used in continuing financing
activities (4,435) (4,581) (18,718)
Foreign exchange on foreign cash
and cash equivalents (4,666) (2,579) 521
------------ ------------ ------------
Net cash provided by (used in)
continuing operations 6,027 115,832 6,503
Net cash provided by (used in)
discontinued operations (2) 10,785 (112)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 6,025 126,617 6,391
Cash and cash equivalents at
beginning of year 249,988 123,371 78,932
------------ ------------ ------------
Cash and cash equivalents at
end of period $ 256,013 $ 249,988 $ 85,323
------------ ------------ ------------
------------ ------------ ------------
4.1 Cash provided by continuing operating activities
Cash provided by continuing operating activities in the first quarter of 2010 totaled $26.6 million, compared to $130.7 million in the fourth quarter of 2009, a decrease of $104.1 million or 79.6%. The decrease was primarily due to a decrease in income from continuing operations and the movement in non-cash working capital and foreign exchange. Income from continuing operations decreased mainly due to the decline in revenue as discussed in section 3.1 - Consolidated Information.
Cash provided by continuing operating activities in the first quarter of 2010 decreased by $12.1 million or 31.2% compared to the first quarter of 2009. The decrease was primarily due to a decrease in income from continuing operations and non-cash items, partially offset by the movement in non-cash working capital and foreign exchange. Income from continuing operations decreased mainly due to the decline in revenue as discussed in section 3.1 - Consolidated Information. Non-cash items decreased mainly as a result of changes in future income taxes combined with a decrease in amortization of property, plant and equipment.
During the quarter, non-cash working capital and foreign exchange increased primarily as a result of reduced accounts receivable and inventories, partially offset by lower accounts payable and deferred revenue.
4.2 Cash used in continuing investing activities
Cash used in continuing investing activities totaled $11.4 million in the first quarter of 2010 compared to $7.7 million in the fourth quarter of 2009 and $14.0 million in the first quarter of 2009 and was mainly comprised of capital expenditures on property, plant and equipment of $11.3 million including expenditures on a concrete mobile coating plant in Russia.
4.3 Cash used in continuing financing activities
Cash used in continuing financing activities totaled $4.4 million in the first quarter of 2010 compared to $4.6 million in the fourth quarter of 2009 and $18.7 million in the first quarter of 2009 and mainly consisted of dividends paid to shareholders of $4.9 million.
4.4 Credit facilities
The following table presents the Company's total credit facilities as at:
March 31, December 31,
2010 2009
------------ ------------
Total available credit facilities $ 245,376 $ 251,856
Standby letters of credit for performance,
bid and surety bonds 55,808 61,835
------------ ------------
Unutilized credit facilities $ 189,568 $ 190,021
------------ ------------
------------ ------------
Senior Notes
On June 27, 2003, the Company entered into an agreement for the issue and sale, at par, on a private placement basis to institutional investors, US$75.0 million of Senior Notes due June 30, 2011. Under the terms of the agreement, the Company is required to repay the Senior Notes in three equal installments of US$25.0 million on June 30, 2009, 2010 and 2011. On June 30, 2009, the Company made the 2009 Repayment of US$25.0 million ($28.7 million at the then current exchange rate). As at March 31, 2010, $51.0 million was outstanding under the Senior Notes, of which $25.6 million has been classified as current portion of long-term debt.
Debt Covenants
Under the terms of the Company's credit facilities and long-term debt agreements, the Company must maintain the following:
- Fixed Charge Coverage Ratio of more than 2.5 to 1; and
- Debt to total capitalization ratio of less than 0.45 to 1.
The Company was in compliance with the debt covenants detailed above as at March 31, 2010. These debt covenants are non-GAAP measures and should not be considered as an alternative to net income or any other measure of performance under GAAP.
4.5 Future uses of liquidity
Commitments and Contingencies
As part of the Company's normal operations, it often enters into contracts, such as leases and purchase contracts, which obligate the Company to make disbursements in the future. The contractual cash obligations for leases and purchase commitments as at March 31, 2010 remain substantially unchanged from the amount disclosed as at December 31, 2009 in the Company's 2008 Annual Report.
The Company expects to have sufficient financial capacity to meet all contractual obligations as and when they become due.
Litigation Matters
In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with customers, suppliers and other third parties. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not possible to estimate the extent of potential costs and losses, if any, management believes, but can provide no assurance, that the ultimate resolution of such contingencies would not have a material adverse effect on the consolidated financial position of the Company.
4.6 Financial Risk Management
The Company's operations expose it to a variety of financial risks including: market risk (including foreign exchange and interest rate risk), credit risk and liquidity risk. The Company's overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company's financial position and financial performance. Risk management is the responsibility of Company management. Material risks are monitored and are regularly reported to the Board of Directors.
4.7 Outstanding share capital
As at April 27, 2010, the Company had 57,496,079 Class A shares outstanding and 13,059,973 Class B shares outstanding. In addition, as at April 27, 2010, the Company had stock options, employee share units and deferred share units outstanding to purchase up to 2,968,096 Class A shares.
5. Critical Accounting Estimates and Accounting Policy Developments
5.1 Critical accounting estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. These estimates and assumptions are made with management's best judgment given the information available at the time; however, actual results could differ from the estimates. Critical estimates used in preparing the consolidated financial statements were materially unchanged during the quarter, as compared to those disclosed in the Company's last annual MD&A contained in the Company's 2009 Annual Report.
5.2 Upcoming accounting changes
International Financial Reporting Standards ("IFRS")
During 2008, the Canadian Accounting Standards Board (the "AcSB") confirmed that publicly accountable enterprises, including the Company, will be required to adopt IFRS in place of GAAP for interim and annual reporting purposes. The required changeover date is for fiscal years beginning on or after January 1, 2011.
The Company commenced the transition process to IFRS during 2008 and had developed a project plan in this regard. A project team has been assembled led by senior finance management. The project team includes individuals from throughout the Company and is being advised by the Company's external auditors.
The project plan consists of the following five main phases:
1. Diagnostic;
2. Design and planning;
3. Solution development,
4. Implementation; and
5. Post-implementation review.
The Company completed the first two phases in 2008 and the third phase in 2009. Refer to the Company's 2009 Annual Report for further information with respect to the completion of the first three phases.
The Company initiated the implementation phase of the project in the first quarter of 2010. The following table sets forth the key activities included in the implementation phase of the project plan and the status for each activity as at March 31, 2010:
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Activity Status
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Business Processes - The assessment of the impact of transition to
IFRS on business activities such as hedging,
debt covenants, performance measures and
compensation arrangements is currently
underway and is expected to be completed
during the third quarter of 2010.
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Information Technology - The identification of additional IT
("IT") requirements has been completed.
- The accounting system has been updated and
provided with the capability to generate 2010
IFRS financial information parallel to GAAP
financial information. Further updates will
be implemented to include new modules that
will capture all new accounting and
disclosure requirements under IFRS. Testing
is expected to be completed by the third
quarter of 2010.
- The Company will continue to assess on an
ongoing basis the need for further
modifications to the system to ensure an
efficient transition to IFRS.
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Disclosure Controls and - The assessment of the material impacts of
Internal Controls over IFRS standards on entity level, IT,
Financial Reporting disclosure and business process controls is
expected to be completed during the second
quarter of 2010.
- The design and the evaluation of the
effectiveness of the controls is expected to
be completed during the third quarter of 2010
in order to prepare for certification under
IFRS in 2011.
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Accounting Policies - Detailed analysis with respect to accounting
policy choices has been substantially
completed.
- The form financial statements and notes to
consolidated financial statements have been
completed and are to be reviewed by the Audit
Committee in the second quarter of 2010.
- IFRS 1 transitional accounting policy choices
have been selected and the opening Balance
Sheet as at January 1, 2010 is being prepared
for audit later in 2010.
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Communication and - The Company has engaged the external auditors
Training as advisors to provide educational resources
and to advise and assist with the transition
to IFRS.
- Several training sessions on the adoption and
implementation of IFRS will be offered to
accounting staff throughout 2010.
- Divisional controllers have been provided
with detailed instructions with respect to
accounting policy decisions and
implementation as well as opening balance
sheet instructions in the first quarter of
2010.
- Members of the management staff have attended
various professional development seminars,
courses and webcasts related to the
transition to IFRS.
- The Audit Committee receives regular
quarterly updates with respect to the key
milestones met in the IFRS transition project
plan.
- The Company's senior executive management
team receives monthly presentations and
project status updates from the project team.
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6. General Outlook
The significant reduction in revenue experienced by the Company in the first quarter of 2010 compared with the prior year was a direct result of the impact of lower pipeline project activity on several of the business units in the Pipeline and Pipe Services segment. However, in the second half of 2010, the Company will commence production on the previously announced US$185.0 million Papua New Guinea LNG project and the US$42.0 million Epic Energy QSN3 project in Eastern Australia. These projects are expected to result in a strengthening of revenue and operating income once production commences in the second half of 2010.
Also contributing to an improved outlook for late 2010 and beyond has been the receipt of a letter of intent relating to the US$93.0 million Total Laggan project. This project is expected to have a significant impact on facility utilization and revenue commencing in the fourth quarter of 2010. Also expected to favourably impact revenue will be the start up of production in June 2010 at the Company's new joint venture in Russia that will provide concrete weight pipe coatings for the offshore pipelines in the Russian Arctic.
The Petrochemical and Industrial segment's markets have shown the initial indications of improvement in the first quarter of 2010 with revenue increasing modestly over the prior year. The potential exists for further improvement as the year progresses if industrial and automotive markets in North America and Europe continue to strengthen.
The Company's order backlog at March 31, 2010, representing customer orders expected to be completed within one year, totaled $396.1 million compared to $410.5 million at December 31, 2009, a decrease of $14.4 million or 3.5%. The backlog does not include the US$93.0 million Total Laggan project for which a letter of intent was received in April. The inclusion of the Total Laggan project, coupled with continued strong bidding activity, provides the Company with confidence in the potential for growth in the backlog as the year progresses.
7. 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 its projections, businesses, results of operations and financial condition. There were no material changes in the nature or magnitude of such business risks during the quarter. A more complete outline of the risks and uncertainties facing the Company is included in the annual MD&A contained in the Company's 2009 Annual Report.
8. Environmental matters
While environmental related liabilities are considered immaterial to the Company's financial results, they are important to the Company from a social responsibility standpoint. Refer to the Company's 2009 Annual Report for additional information with respect to the Company's environmental matters.
As at March 31, 2010, the accruals on the unaudited consolidated balance sheet related to environmental matters and included as asset retirement obligations were $15.6 million. The Company believes the accrual to be sufficient to satisfy and reasonably estimate environmental liabilities related to known environmental matters.
9. Summary of Quarterly Results
The following is a summary of selected financial information for the nine most recently completed quarters:
(in thousands
of Canadian
dollars except
per share
amounts) First Second Third Fourth Full Year
-------------------------------------------------------------------------
Revenue
2010 $ 224,572 $ - $ - $ - $ -
2009 307,464 312,791 302,812 260,911 1,183,978
2008(a) 293,357 295,118 357,249 433,853 1,379,577
Operating
income from
continuing
operations
2010 16,464 - - - -
2009 50,434 53,178 49,972 38,591 192,175
2008(a) 40,919 27,189 52,315 75,588 196,011
Income from
continuing
operations
2010 9,999 - - - -
2009 31,520 34,343 33,690 31,553 131,106
2008(a) 26,952 17,825 33,962 56,013 134,752
Income (loss)
from
discontinued
operations
2010 - - - - -
2009 21 293 57 (27) 344
2008(a) (69) 10,553 (82) 609 11,011
Net income
2010 9,999 - - - -
2009 31,541 34,636 33,747 31,526 131,450
2008(a) 26,852 28,378 33,880 56,623 145,733
Operating
income from
continuing
operations
per share
(Classes A
and B)
Basic
2010 0.23 - - - -
2009 0.72 0.76 0.71 0.54 2.73
2008(a) 0.57 0.38 0.74 1.07 2.76
Diluted
2010 0.23 - - - -
2009 0.72 0.76 0.70 0.53 2.71
2008(a) 0.57 0.38 0.73 1.07 2.74
Income from
continuing
operations
per share
(Classes A
and B)
Basic
2010 0.14 - - - -
2009 0.45 0.49 0.48 0.44 1.86
2008(a) 0.38 0.25 0.48 0.79 1.90
Diluted
2010 0.14 - - - -
2009 0.45 0.49 0.48 0.43 1.85
2008(a) 0.37 0.25 0.47 0.78 1.88
Income
(loss) from
discontinued
operations
per share
(Classes A
and B)
Basic
2010 0.00 - - - -
2009 0.00 0.00 0.00 0.00 0.00
2008(a) 0.00 0.15 0.00 0.01 0.16
Diluted
2010 0.00 - - - -
2009 0.00 0.00 0.00 0.00 0.00
2008(a) 0.00 0.15 0.00 0.01 0.15
Net income
per share
(Classes A
and B)
Basic
2010 0.14 - - - -
2009 0.45 0.49 0.48 0.44 1.86
2008(a) 0.38 0.40 0.48 0.80 2.06
Diluted
2010 0.14 - - - -
2009 0.45 0.49 0.48 0.43 1.85
2008(a) 0.37 0.40 0.47 0.79 2.03
(a) Quarterly revenue and operating income from continuing operations
figures have been restated to reflect the change in accounting policy
for deferred project costs adopted in the first quarter of 2009.
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 86.0% 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 comparability of the quarterly information disclosed above is also impacted by movements in exchange rates as the majority of the Company's revenue is transacted in currencies other than Canadian dollars, primarily 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.
10. Forward Looking Information
This document includes certain statements that reflect management's expectations and objectives for the Company's future performance, opportunities and growth, which statements constitute forward-looking information under applicable securities laws. Such statements, other than statements of historical fact, are predictive in nature or depend on future events or conditions. Forward-looking information involves 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. Specifically, this document includes forward-looking information in respect of, among other things, the impact of global economic activity on the demand for the Company's products as well as the prices of commodities used by the Company, the impact of changing energy demand, supply and prices, the impact of changes in competitive conditions in the markets in which the Company participates, the impact of changing laws for environmental compliance on the Company's capital and operating costs, the Company's relationships with its employees, the continued establishment of international operations, the effect of continued development in emerging economies, as well as the Company's plans as they relate to research and development activities and the maintenance of its current dividend policies.
Forward-looking information involves known and unknown risks and uncertainties that could cause actual results to differ materially from those predicted by the forward-looking information. We caution readers not to place undue reliance on forward looking information as a number of factors could cause actual events, results and prospects to differ materially from those expressed in or implied by the forward looking information. Significant risks facing the Company 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; exposure to product and other liability claims; compliance with environmental, trade and other laws; political, economic and other risks arising from the Company's international operations; fluctuations in foreign exchange rates, as well as other risks and uncertainties, as more fully described herein under the heading "Risks and Uncertainties".
These statements of forward-looking information are based on assumptions, estimates and analysis made by management 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. These assumptions include assumptions in respect of the potential for improvement in demand for the Company's products and services as a result of continued global economic recovery, the potential for increased investment in global energy infrastructure as a result of stabilization of capital markets, the Company's ability to execute projects under contract, the continued supply of and stable pricing for commodities used by the Company, and the availability of personnel resources sufficient for the Company to operate its businesses. The Company believes that the expectations reflected in the forward-looking information are based on reasonable assumptions in light of currently available information. However, should one or more risks materialize or should any assumptions prove incorrect, then actual results could vary materially from those expressed or implied in the forward-looking information included in this document and the Company can give no assurance that such expectations will be achieved.
When considering the forward looking information in making decisions with respect to the Company, readers should carefully consider the foregoing factors and other uncertainties and potential events. ShawCor Ltd. does not assume the obligation to revise or update forward looking information after the date of this document, or to revise it to reflect the occurrence of future unanticipated events, except as may be required under applicable securities laws.
Other information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com.
ShawCor will be hosting a Shareholder and Analyst conference call and webcast on May 10, 2010 at 10:00 am EDT to discuss the Company's first quarter 2010 financial results. Please visit our website at www.shawcor.com for further details.
SHAWCOR LTD.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As at
-------------------------------------------------------------------------
March 31, December 31,
(in thousands of Canadian dollars) 2010 2009
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents ................ $ 256,013 $ 249,988
Accounts receivable....................... 181,689 191,821
Taxes receivable.......................... 15,115 14,055
Inventories............................... 106,364 109,379
Prepaid expenses.......................... 13,198 14,392
Derivative financial instruments ......... 2,433 1,782
Current future income..................... 4,697 4,668
------------- -------------
579,509 586,085
Property, plant and equipment, net.......... 266,584 270,219
Goodwill.................................... 209,346 214,449
Intangible assets .......................... 61,689 62,784
Future income taxes......................... 39,714 36,249
Derivative financial instruments ........... 10 39
Other assets ............................... 16,003 16,152
------------- -------------
$ 1,172,855 $ 1,185,977
------------- -------------
------------- -------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 130,208 $ 133,275
Taxes payable............................. 43,877 42,971
Derivative financial instruments ......... 127 510
Deferred revenue.......................... 73,834 75,100
Current portion of long-term debt ........ 25,560 26,235
Current obligations under capital lease... 339 371
Current liabilities of discontinued
operation ............................... 54 56
------------- -------------
273,999 278,518
Long-term debt ............................. 25,487 26,052
Obligations under capital lease............. 405 492
Future income taxes......................... 78,881 76,552
Other non-current liabilities .............. 14,412 13,941
------------- -------------
393,184 395,555
------------- -------------
Shareholders' Equity
Capital stock 204,853 204,151
Contributed surplus 17,742 17,277
Retained earnings 700,944 695,800
Accumulated other comprehensive loss (143,868) (126,806)
------------- -------------
779,671 790,422
------------- -------------
$ 1,172,855 $ 1,185,977
------------- -------------
------------- -------------
SHAWCOR LTD.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31,
-------------------------------------------------------------------------
(in thousands of Canadian dollars,
except per share amounts) 2010 2009
-------------------------------------------------------------------------
Revenue..................................... $ 224,572 $ 307,464
Cost of goods sold.......................... 138,414 183,949
------------- -------------
Gross profit................................ 86,158 123,515
Selling, general and administrative expenses 55,135 55,865
Amortization of property, plant and equipment 12,260 15,142
Amortization of intangible assets........... 1,095 1,095
Foreign exchange gains...................... (1,420) (1,371)
Research and development expenses........... 2,624 2,350
------------- -------------
Operating income from continuing operations 16,464 50,434
Interest income on short term deposits...... 227 235
Interest expense on bank indebtedness....... (444) (571)
Interest expense on long-term debt.......... (725) (1,327)
------------- -------------
Income before income taxes.................. 15,522 48,771
Income taxes................................ 5,523 17,521
------------- -------------
Income from continuing operations........... 9,999 31,520
Income from discontinued operation.......... - 21
------------- -------------
Net income for the year $ 9,999 $ 31,541
------------- -------------
------------- -------------
Earnings per shares
Basic
Continuing operations..................... $ 0.14 $ 0.45
Discontinued operations................... - -
------------- -------------
Total..................................... $ 0.14 $ 0.45
------------- -------------
------------- -------------
Diluted
Continuing operations..................... $ 0.14 $ 0.45
Discontinued operations................... - -
------------- -------------
Total..................................... $ 0.14 $ 0.45
------------- -------------
------------- -------------
SHAWCOR LTD.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
Three Months Ended
March 31,
-------------------------------------------------------------------------
(in thousands of Canadian dollars) 2010 2009
-------------------------------------------------------------------------
Balance, at beginning of period............. $ 695,800 $ 601,407
Net income for the period................... 9,999 31,541
------------- -------------
705,799 632,948
Dividends declared.......................... (4,855) (4,500)
------------- -------------
Balance, at end of year of period........... $ 700,944 $ 628,448
------------- -------------
------------- -------------
SHAWCOR LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
March 31,
-------------------------------------------------------------------------
(in thousands of Canadian dollars) 2010 2009
-------------------------------------------------------------------------
Net income for the period................... $ 9,999 $ 31,541
Other comprehensive income (loss), net of
income taxes:
Unrealized gain (loss) on translating
financial statements of self-sustaining
foreign operations....................... (18,181) 7,886
Gain (loss) on hedges of unrealized
foreign currency translation............. 1,350 (727)
Income tax benefit (expense).............. (231) 124
------------- -------------
Unrealized foreign currency translation
gain (loss), net of hedging activities..... (17,062) 7,283
------------- -------------
Unrealized loss on available-for-sale
financial asset arising in the period.... - (336)
Unrealized loss on available-for-sale
financial asset transferred to net
income in the current period............. - 336
------------- -------------
Change in unrealized loss on available-
for-sale financial asset................. - -
------------- -------------
Other comprehensive income (loss) for
the period................................. (17,062) 7,283
------------- -------------
Comprehensive income (loss) for the period $ (7,063) $ 38,824
------------- -------------
------------- -------------
SHAWCOR LTD.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Three Months Ended
March 31
-------------------------------------------------------------------------
(in thousands of Canadian dollars) 2010 2009
-------------------------------------------------------------------------
Operating activities
Income from continuing operations......... $ 9,999 $ 31,520
Add (deduct) items not affecting cash:
Amortization of property, plant and
equipment.............................. 12,260 15,142
Amortization of intangible assets....... 1,095 1,095
Amortization of transaction costs....... 111 110
Amortization of long-term prepaid
expenses............................... 87 320
Asset retirement obligations expense.... 363 1,788
Stock-based compensation................ 982 848
Future income taxes..................... (1,165) 563
Gain (loss) on disposal of property,
plant and equipment.................... (181) 144
Impairment of available-for-sale
financial asset........................ - 336
Settlement of asset retirement obligations.. (297) (1,947)
Change in employee future benefits.......... 786 1,085
Change in non-cash working capital and
foreign exchange........................... 2,530 (12,259)
------------- -------------
Cash provided by continuing operating
activities................................. 26,570 38,745
------------- -------------
Investing activities
Purchases of property, plant and equipment (11,308) (14,143)
Proceeds on disposal of property, plant
and equipment............................ - 98
Increase in long-term notes receivable.... (134) -
------------- -------------
Cash used in continuing investing activities (11,442) (14,045)
------------- -------------
Financing activities
Decrease in bank indebtedness............. - (14,427)
Increase (decrease) in capital............ (119) 29
Issue of shares........................... 539 -
Dividends paid to shareholders............ (4,855) (4,500)
------------- -------------
Cash used in continuing financing activities (4,435) (18,718)
------------- -------------
Foreign exchange on foreign cash and
cash equivalents........................... (4,666) 521
Net cash provided by continuing operations.. 6,027 6,503
Net cash used in discontinued operation..... (2) (112)
Cash and cash equivalents, at beginning
of period.................................. 249,988 78,932
------------- -------------
Cash and cash equivalents, at end
of period.................................. $ 256,013 $ 85,323
------------- -------------
------------- -------------
For further information: Gary Love, Vice President, Finance and CFO, Telephone: (416) 744-5818, e-mail: [email protected], website: www.shawcor.com
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