Armtec Infrastructure Income Fund Reports Third Quarter Results

Toronto Stock Exchange: ARF.UN; ARF.DB

GUELPH, ON, Nov. 3, 2010 /CNW/ - Armtec Infrastructure Income Fund (the "Fund" or "Armtec") (TSX: ARF.UN and ARF.DB) today reported financial results for the third quarter and nine months ended September 30, 2010.

Highlights:

• Revenue was $143.6 million during the third quarter of 2010, a decrease of 11.4% or $18.4 million over the same period in 2009 as a result of continued delays and cost overruns in Engineered Solutions ("ES"). Year to date, revenues were $343.6 million, an increase of 1.5% or $5.0 million over 2009.
• EBITDA¹ was $22.2 million, compared to $38.1 million in the same period in 2009. Year to date, EBITDA was $39.4 million, compared to $62.7 million in the prior year.  These results continue to reflect the lower ES project margins.
• Issued 8.875% senior unsecured notes for gross proceeds of $150 million, maturing September 2017.
• Entered into a new $250 million revolving credit facility, maturing September 2015.
• In the second quarter, unitholders approved the conversion of the Fund's income trust structure into a growth oriented public corporation named Armtec Infrastructure Inc.
• Subsequent to the third quarter, the Fund closed an agreement to sell the assets of its Calgary Packaging Business for a cash consideration of $15.0 million.

"In the third quarter, Armtec experienced lower financial results due to poor performance in its Engineered Solutions business. The majority of the Fund's large-scale, complex projects in production experienced further unexpected delays exacerbated by some cost over-runs, which resulted in contribution levels that were below expectations.  Construction and infrastructure application product ("CIA") revenues showed more resilience, remaining ahead of last year's levels on a year to date basis, in spite of a slight decline in the quarter due to challenging weather conditions in the Prairie region," said Charles M. Phillips, President and Chief Executive Officer.  "Looking ahead, the Engineered Solutions backlog and bidding activity continues to support a recovery in large project demand.  Management has taken the necessary steps to maintain financial flexibility in our capital structure and build added capacity for future growth. As we move into 2011 in a new corporate form, Armtec intends to pay an annualized quarterly dividend of $1.60 per share."

Results of Operations

	Three Months Ended		Nine Months Ended
(in thousands of Canadian dollars except per unit amounts) (unaudited)	September 30, 2010	September 30, 2009	September 30, 2010	September 30, 2009
Revenue	$ 143,587	$ 162,003	$ 343,598	$ 338,613
Cost of sales	104,309	104,542	251,800	225,823
Amortization of property, plant and equipment	3,945	3,589	11,265	9,196
Gross margin	35,333	53,872	80,533	103,594
As a % of revenue	24.6%	33.3%	23.4%	30.6%
Distribution and warehousing	6,326	6,900	15,432	14,907
Selling, general and administrative	11,514	13,468	38,560	37,636
Reorganization expenses	712	579	3,127	1,856
Amortization of intangible assets	3,228	3,190	9,676	8,360
Earnings from operations	13,553	29,735	13,738	40,835
Interest and financing expenses	10,512	4,284	18,394	9,579
Earnings (loss) before taxes	3,041	25,451	(4,656)	31,256
Interest and financing expenses	10,512	4,284	18,394	9,579
Total amortization	7,173	6,779	20,941	17,556
Reorganization expenses	712	579	3,127	1,856
Fair value increments of acquired inventory	-	234	-	402
Earnings before taxes from discontinued operations	610	629	1,265	1,599
Total amortization from discontinued operations	111	141	345	417
EBITDA	$ 22,159	$ 38,097	$ 39,416	$ 62,665
As a % of revenue	15.4%	23.5%	11.5%	18.5%
Basic and diluted earnings per unit - continuing operations	$ 0.35	$ 1.30	$ (0.01)	$ 1.72
Basic and diluted earnings per unit	$ 0.38	$ 1.33	$ 0.05	$ 1.80
Basic and diluted distributable cash per unit^1	$ 0.78	$ 1.66	$ 1.15	$ 2.54

¹ Please refer to the Liquidity, Distributable Cash and Distributions section of this MD&A for the reconciliation of this non-GAAP measure.  Distributable cash per unit excludes the impact of Reorganization expenses.

Third Quarter Results

Revenue

Armtec recorded revenue from continuing operations of $143.6 million during the third quarter of 2010, a decrease of $18.4 million or 11.4% as compared to the same period in 2009.  CIA product revenue for the third quarter of 2010 was $80.2 million or 1.3% above the same period in 2009.  The continued wet weather conditions in the Prairie region impacted drainage product revenue, though partially mitigated by increased demand for drainage products in the Pacific region, reflecting the benefits of the government stimulus spending and improved demand from the natural resource sector.  Central and Eastern Canada experienced a decline in CIA product revenue primarily related to the overall slow down in the Fund's residential construction end use market associated with both the decline in housing starts and the end of the renovation tax credit.  The Central region also experienced a decline in the agricultural drainage market in the quarter reflecting the shift in the buying pattern to earlier in 2010.

ES revenue in the third quarter of 2010 was $63.4 million, or 23.4% below the comparable period in 2009. The third quarter results in 2010 reflected bridge work and parkade manufacturing for the Calgary West Light Rapid Transit and the York Region tunnel liner project.  Production commenced on the Toronto Transit Commission tunnel project towards the end of September. Revenue from sound barrier products declined slightly as compared to the prior year with fewer contracts in the U.S. during 2010.

While most of the Fund's major ES projects had commenced production by the end of the quarter, the complexity of the projects, combined with unexpected start up delays on several major projects caused revenue levels to be below expectations.  Armtec also experienced soft commercial and industrial construction activity associated with high vacancy rates as a result of the recession accounting for approximately half of the revenue decline in the quarter.

The ES project backlog remains strong at the end of September with approximately $180 million in backlog, which is approximately 50% higher than 2009 levels.

Earnings from Continuing Operations

Earnings from operations for the third quarter were $13.6 million compared to $29.7 million in the same period of 2009.  Earnings from operations included a charge of $0.7 million in 2010 in connection with the Fund's Reorganization initiative, its transition to International Financial Reporting Standards ("IFRS"), and the conversion of the Fund from a trust to a corporation.  In the third quarter of 2009, the Fund incurred Reorganization costs of $0.6 million.  Excluding the impact of the Reorganization expenses, earnings from operations were $16.0 million lower than 2009 levels.

The gross margin for the third quarter of 2010 was $35.3 million; a decrease of $18.6 million from $53.9 million in 2009.  As a percentage of revenue, gross margin declined to 24.6% as compared to 25.8% in the second quarter of 2010 and 33.3% in the third quarter of 2009.

The decline in the third quarter gross margin quantum and percentage, relative to 2009 related to (i) the impact of unused production capacity caused by delays in commencing production on several larger projects, (ii) costs overruns in the quarter in connection with the increased complexity of current contracts particularly in Western Canada, and (iii) continued competitive pricing in both the precast ES operations and CIA products.  By comparison, the third quarter of 2009 was an unusually strong earnings period with a large number of major projects in full production, with several projects nearing completion where stronger margins are typically realized because of better than estimated cost performance.  Contracts that are currently being completed were bid approximately 10 percentage points below 2009 levels as market volume levels were impacted by the recession.

The gross margin decline from levels achieved in the second quarter principally reflects the change in product mix associated with reduced CIA product revenue as well as the much lower ES margin performance discussed above.

Distribution and warehousing was $6.3 million, compared to $6.9 million in the third quarter of 2009.  As a percentage of revenue, these costs were comparable with the same period last year.

Selling, general and administrative expenses were $11.5 million, or 8.0% of revenue, as compared to $13.5 million or 8.3% of revenue in 2009.  The reduction in costs reflects the savings from the Fund's Reorganization initiatives and lower variable compensation.

Amortization of intangible assets was $3.2 million consistent with $3.2 million in 2009.

Year to Date Results

Revenue

The Fund recorded revenue from continuing operations of $343.6 million for the nine months ended September 30, 2010; an increase of $5.0 million or 1.5% over the same period in 2009.  Tremca and Pre-Con, acquired in May and June of 2009 (the "2009 Acquisitions"), contributed incremental revenue of $25.0 million in 2010.  Base business volumes declined by $20.0 million or 6.0% relative to the same period last year.  Increased CIA product volumes partially offset the lower ES revenue caused by delayed production schedules and soft market conditions.

Revenue from CIA products was $183.9 million for the nine months ended September 30, 2010; an increase of 13.0% over the same period in 2009.  CIA product revenue improvements were driven by increased demand for drainage products, principally in the Eastern and Pacific regions as the infrastructure markets reflected the benefits of the government stimulus spending.  The Prairie and Pacific regions also benefitted from improved activity levels in natural resource markets. Softness was noted in the third quarter for drainage product installations in the Prairie region, attributable to unusually wet weather conditions in the Prairies.

For the nine months ended September 30, 2010, ES revenue was $159.7 million, or 9.2% lower than the same period in 2009, as a result of revenue in the third quarter of 2010 being 23.4% behind 2009. After giving effect for the incremental revenue associated with the contributions from the 2009 Acquisitions, the year-over-year decline in ES revenue for the nine month period was 20.3% as a result of (i) production delays associated with several large-scale projects, (ii) the complexity of several projects in production, and (iii) continued softness associated with the negative effects of the recession on products used in the industrial and commercial end use market.  The growing backlog and volume of current bidding activity continues to support the recovery of larger ES projects, however given the delays noted in the third quarter, the impact is now anticipated in 2011.

Earnings from Continuing Operations

Earnings from operations for the nine months ended September 30, 2010 were $13.7 million compared to $40.8 million in the same period of 2009.  Earnings from operations included a charge of $3.1 million in 2010 in connection with the Reorganization, adopting IFRS and conversion of the Fund to a corporation.  In the same period in 2009, Reorganization expenses were $1.9 million.  Excluding the impact of the Reorganization expenses, earnings from operations were $25.8 million lower than 2009 levels.

The gross margin for the nine months ended September 30, 2010 was $80.5 million, a decrease of $23.1 million from the $103.6 million in 2009.  As a percentage of revenue, gross margin declined to 23.4% as compared to 30.6% in 2009.  The decline in the gross margin percentage reflected the impact of lower manufacturing levels earlier in the year, a more competitive pricing environment, as well as delays and additional cost adjustments associated with increased production complexities in the 2010 ES projects.  Overall ES margins in 2009 exceeded the historical average of the Fund.  During challenging economic conditions, the projects that are secured tend to be more complex in nature and have lower margin expectations, making it more difficult to meet or exceed original estimates.  The composition of projects under construction during 2010 has been more complex than in prior years.

Distribution and warehousing costs were $15.4 million, compared to $14.9 million in the first nine months of 2009.  As a percentage of revenue, these costs were comparable with the same period last year.

Selling, general and administrative expenses were $38.6 million, or 11.2% of revenue, as compared to $37.6 million or 11.1% of revenue in 2009.  The additional costs reflected the incremental impact of the 2009 Acquisitions offset in part by savings from the Fund's Reorganization initiatives and reduced variable compensation costs.

To date, approximately 100 positions have been eliminated, with Reorganization net savings realized of approximately $5.1 million.

Amortization of intangible assets was $9.7 million compared to $8.4 million in 2009.  These changes principally reflected the amortization on intangible assets associated with the 2009 Acquisitions.

Outlook

Many existing ES project commitments that were anticipated to commence subcontracting and begin production in the second half of the 2010 construction season experienced delays and production inefficiencies due to the complex nature of some of the projects.  The current ES projects are at various stages of ramping up and are anticipated to reach efficient production levels near the end of 2010 and into 2011.

The backlog for ES continued to build and is approximately 50% higher at the end of September 2010 than at September 30, 2009.  Current backlog levels are approximately $180 million.  Current ES Projects in backlog (i) represent more typical production compared to projects in the backlog at the start of 2010, and (ii) reflect a gradual easing of price pressures experienced in 2009 and early 2010.

Recent contract awards, such as the Southeast Stoney Trail and Circle Drive projects in Western Canada are examples of projects which are much more consistent with Armtec's core production competencies.  During 2010, the Fund was producing projects that were significantly more complex than those produced prior to the recession resulting in inefficiencies contributing to further compression of margins and extending production times.

The outlook for CIA product revenue for the balance of 2010 is expected to be lower than 2009 levels based on an anticipated continuing softness in residential end use market and the unfavourable weather conditions in the Prairie region.

Construction activity in the Fund's end use markets tapers off with the onset of winter weather conditions and remains at low levels through the first quarter.  The CIA product group in particular is impacted by seasonal weather conditions.  As a result, EBITDA levels in the first and fourth quarters are expected to be lower than the second and third quarters in the fiscal year.

The Fund has yet to see a full recovery in its private markets.  Natural resource markets are showing signs of improved activity.  However, residential markets have tapered off after some improvement in the first half of the year and are not anticipated to improve before the end of the 2010 construction season.  The commercial and industrial construction market has stabilized but is well off historical levels and a return to pre-recession levels is not anticipated in the near future given current vacancy rates for commercial and industrial properties.  The current commercial and industrial market conditions have significantly impacted the Fund's Central region results in 2010.

Overall, management expects revenue in the fourth quarter of 2010 to be consistent with 2009 levels based on the current outlook.  With the current mix and stage of production of the ES projects scheduled during 2010, the gross margin levels will continue to be lower than prior years.  The decline in ES margins in the fourth quarter will not be offset by CIA results as these products are highly seasonal and begin to taper off as winter approaches.

Management continues to build on the initial steps taken to further the integration of its acquisitions, building resiliency into the business in order to remain responsive to end-use and geographic market fluctuations.  The Fund continues to address opportunities and make the changes necessary to address challenging demand conditions in order to emerge as a stronger, more customer focused business as the end-use markets recover.

Management and the Board of Trustees have established a target leverage ratio of approximately two times Total Debt to Adjusted EBITDA ("Target Ratio"), and are committed to reducing leverage to the Target Ratio through a combination of (i) anticipated recovery in the core ES business, (ii) accretive acquisitions, and/or (iii) issuing equity.  The recapitalization of the balance sheet, discussed above, was intended to mitigate the anticipated short term effects of the unusual volatility in the ES business.  Armtec plans to convert to a corporation, effective on or about January 1, 2011, thereby removing the restrictions on its ability to issue equity.

The Fund plans to pay the current distributions of $0.18 per month to December 2010.  Following the conversion to a corporate form, Armtec intends to declare quarterly dividends at an initial annualized rate of $1.60 per share.

CONFERENCE CALL & WEBCAST
Management will host a conference call at 10:00 a.m. (EST) on Thursday, November 4, 2010 to discuss the results. Investors who wish to participate can access the call using the following numbers: 416-644-3414 or 1-800-814-4859. The call will be webcast live and archived on the Fund's website at www.armtecincomefund.com.

A taped rebroadcast will be available to listeners following the call until 12:00 a.m. on November 11, 2010. To access the rebroadcast, please dial 416-640-1917 or 1-877-289-8525 and quote the passcode 4364561 followed by the number sign.

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

ABOUT ARMTEC INFRASTRUCTURE INCOME FUND
The Armtec group 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 residential construction, commercial building, agricultural drainage and natural resources.  Armtec operates through its network of regional offices and production facilities across the country.  Armtec produces a broad range of engineered solutions, including 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.  Armtec Infrastructure Income Fund's units are listed on the TSX under the ARF.UN symbol and its convertible debentures under the ARF.DB symbol. For more information, please visit www.armtecincomefund.com.

NON-GAAP MEASURES
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
References to EBITDA are to earnings before interest, 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 distributions prior to debt service, changes in working capital, capital expenditures and income taxes.  However, EBITDA is not a recognized measure under Canadian 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 the Fund's performance or as an alternative to cash flows from operating, investing and financing activities as a measure of the Fund's liquidity and cash flows.  The Fund's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, the Fund's EBITDA may not be comparable to similarly named measures used by other issuers.

Distributable Cash
Distributable cash is not a defined term under Canadian GAAP but is determined by the Fund as cash flows provided by or used in operating activities adjusted for items not affecting cash, non-recurring expenses, expenditures required to sustain the current state of operations, and the change in non-cash working capital. 

Management believes that distributable cash is a useful supplemental measure of performance as it provides investors with an indication of the amount of cash available for distribution to unitholders of the Fund by adjusting cash provided by operating activities for the seasonality of the business via changes in non-cash working capital, adjusting for sustaining capital purchases, Reorganization expenses and other items not affecting cash.  Investors are cautioned, however, that distributable cash should not be construed as an alternative to using net earnings and comprehensive earnings as measures of profitability or the statement of cash flows.  Furthermore, the Fund's method of calculating distributable cash may not be comparable to other similarly named calculations from other issuers.

RISKS AND UNCERTAINTIES
The Fund is subject to certain risks and uncertainties that could have a material adverse effect on the Fund's results of operations, business prospects, financial condition, cash distributions to unitholders and the trading price of the Fund's units.  These uncertainties and risks include, but are not limited to:  industry cyclicality; competition; acquisition and expansion risk; capital and liquidity risk; current global financial conditions; reduction in demand for products; information management; credit risk; 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; risk of future legal proceedings; securities laws compliance and corporate governance standards; geographical risk; seasonality and adverse weather; geopolitical; and certain risks related to the structure of the Fund including dependence on the Fund's subsidiaries; income tax matters; unitholder limited liability; leverage and restrictive covenants; Credit Facilities; nature of units; distribution of securities on redemption or termination of the Fund; restrictions on potential growth; effect of market interest rates on price of units; undiversified and illiquid holdings in Armtec Operating Trust; potential dilution.  Cash distributions are not guaranteed.  Further information about these and other risks and uncertainties can be found in the disclosure documents filed by Armtec Infrastructure Income Fund with the securities regulatory authorities, available at www.sedar.com.

FORWARD-LOOKING STATEMENTS
This news release may contain "forward-looking" statements within the meaning of applicable securities legislation which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund or industry results, to be materially different from any future results, events, expectations, performance or achievements expressed or implied by such forward-looking statements.  All such forward-looking statements are made pursuant to the "safe harbour" provisions of applicable Canadian securities legislation.  Forward-looking statements may include comments with respect to the Fund's objectives, strategies to achieve those objectives, expected financial results, and the outlook for the Fund's business.  Forward-looking statements typically contain such words or phrases such as "may", "outlook", "objective", "intend", "estimate", "anticipate", "should", "could", "would", "will", "expect", "believe", "plan" and other similar terminology suggesting future outcomes or events.  These statements reflect current expectations regarding future events and operating performance and are based on information currently available to the Fund's management.

Forward-looking statements involve numerous assumptions and should not be read as guarantees of future performance or results.  Such statements will not necessarily be accurate indications of whether or not such future performance or results will be achieved.  Forward-looking statements should not unduly be relied upon as a number of factors, many of which are beyond the control of the Fund, could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to the factors discussed under "Risks and Uncertainties" of the Fund's Annual MD&A and in the Fund's materials filed with the Canadian securities regulatory authorities from time to time including the Annual Information Form.  Although the forward-looking statements contained in this release are based upon what management of the Fund believes are reasonable assumptions, the Fund cannot assure investors that actual results 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 and outlook are made as of the date of this news release and, except as required by applicable law, the Fund assumes no obligation to update or revise them to reflect new events or circumstances.

For further information:

Charles M. Phillips	James R. Newell	Carrie Boutcher
President & Chief Executive Officer	Chief Financial Officer	Vice President, Investor Relations & Treasurer
Armtec Limited Partnership	Armtec Limited Partnership	Armtec Limited Partnership
Tel:  [phone]	Tel:  [phone]	Tel:  [phone]
Fax: [phone]	Fax: [phone]	Fax: [phone]