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 Shawcor Ltd. Announces Third Quarter 2009 ResultsNovember 3, 2009 (TSX: SCL.A, SCL.B) TORONTO, Nov. 3 /PRNewswire-FirstCall/ -
Financial Summary
(in thousands of Canadian Three Months Ended Nine Months Ended
dollars except per September 30, September 30,
share amounts) 2009 2008 2009 2008
Restated Restated
(note 1) (note 1)
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Operating Results
Revenue $ 302,812 $ 357,249 $ 923,067 $ 945,724
EBITDA (note 2) 64,472 68,611 200,069 163,567
Operating income from
continuing operations 49,972 52,315 153,584 120,423
Income from continuing
operations 33,690 33,962 99,553 78,708
Income (loss) from
discontinued operations 57 (82) 371 10,402
Net income 33,747 33,880 99,924 89,110
Net income (loss) per share
(Class A and B) - Basic
Continuing operations 0.48 0.48 1.41 1.11
Discontinued operations 0.00 0.00 0.01 0.15
Total 0.48 0.48 1.42 1.26
Net income (loss) per share
(Class A and B) - Diluted
Continuing operations 0.48 0.47 1.41 1.10
Discontinued operations 0.00 0.00 0.01 0.14
Total 0.48 0.47 1.42 1.24
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Cash Flow
Cash provided by continuing
operating activities 59,575 23,967 156,395 78,437
Additions to property,
plant and equipment 5,751 23,085 25,926 61,999
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Financial Position
Working capital 274,196 168,891
Total assets 1,136,627 1,131,541
Shareholders' equity per
share (Class A and B)
(note 3) $ 10.90 $ 9.18
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Note 1: Restated for change in accounting policy. Refer to note 1 to the
interim consolidated financial statements for the three and nine months
ended September 30, 2009.
Note 2: 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 $ 33,690 $ 33,962 $ 99,553 $ 78,708
Add (deduct):
Income taxes 15,607 15,741 50,121 38,394
Interest expense - net 675 2,523 3,910 3,505
Amortization of property,
plant and equipment 13,405 15,400 43,200 41,907
Amortization of
intangible assets 1,095 985 3,285 1,053
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EBITDA $ 64,472 $ 68,611 $ 200,069 $ 163,567
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Note 3: 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. Third Quarter 2009 Highlights Consolidated revenue from continuing operations for the third quarter of 2009 totaled $302.8 million, a decrease of $54.4 million or 15.2%, compared to the third quarter of 2008, with the decrease related to reduced market activity in both of the Company's industry segments. The decrease in the Pipeline and Pipe Services segment was mainly as a result of lower small diameter pipe coating volumes stemming from a decline in drilling activity in North America as well as reduced pipe coating project volumes in Europe and the Middle East. Revenue in the Petrochemical and Industrial segment decreased primarily as a result of reduced business activity levels due to the soft economic conditions in industrial and automotive markets in North America and Western Europe. The decrease was partially offset by the impact on the translation of the Company's U.S. dollar denominated revenue from the year over year weakening of the Canadian dollar. During the third quarter of 2009, the effect of foreign exchange fluctuations on the translation of foreign currency operations had a favourable impact on revenue, operating income from continuing operations and net income of approximately $8.5 million, $4.5 million and $2.6 million, respectively, compared to the third quarter of 2008. Operating income from continuing operations totaled $50.0 million in the third quarter, a 4.5% decrease compared to the $52.3 million reported in the third quarter of 2008 with the 15.2% year over year revenue reduction partially offset by improved operating margins in the Pipeline and Pipe Services segment resulting from improved manufacturing efficiencies and lower manufacturing input costs. Net income in the third quarter of 2009 totaled $33.7 million ($0.48 per share, diluted) and remained relatively flat compared to the net income in the third quarter of 2008 of $33.9 million ($0.47 per share, diluted). First Nine Months of 2009 Highlights Consolidated revenue from continuing operations in the first nine months of 2009 was $923.1 million, compared to $945.7 million in the first nine months of 2008, a decrease of $22.6 million or 2.4%. The decrease was primarily due to lower revenues in both of the Company's industry segments as a result of reduced market activity, partially offset by the favourable effect of foreign exchange fluctuations. During the first nine months of 2009, the effect of foreign exchange fluctuations on the translation of foreign currency operations had a favourable impact on revenue, operating income from continuing operations and net income of approximately $69.5 million, $25.9 million and $16.7 million, respectively, compared to the first nine months of 2008. Net income in the first nine months of 2009 totaled $99.9 million ($1.42 per share, diluted) compared to $89.1 million ($1.24 per share, diluted) in the first nine months of 2008, an increase of $10.8 million ($0.18 per share, diluted) or 12.1%. The increase was primarily due to higher operating income, partially offset by a $10.4 million ($0.14 per share, diluted) reduction in income from discontinued operations as the Company had recorded a settlement of a lawsuit related to the Company's closed pipe coating operation in Mobile, Alabama in the first nine months of 2008. The Company's backlog at September 30, 2009 of $239.9 million declined 20.4% from the level at the beginning of the quarter as strong revenue exceeded new order bookings. However, subsequent to the quarter ended September 30, 2009, the Company has secured letters of intent for several large pipe coating projects with customers in Canada (approximately $54.0 million in revenue value) that are not included in the backlog. In South East Asia, ShawCor's pipe coating division has secured a letter of intent relating to the PNG LNG project in Papua New Guinea (approximately $180.0 million in revenue value) which, if the project is sanctioned for construction, will have a significant positive impact on the Company's backlog. MANAGEMENT'S DISCUSSION AND ANALYSIS The following Management Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of the Company. The MD&A should be read in combination with the Consolidated Financial Statements and accompanying notes, and the MD&A included in the Company's 2008 Annual Report. All dollar amounts in the MD&A are in thousands of Canadian dollars, except per share amounts, or unless otherwise stated. Revenue, Income from Operations and Net Income ShawCor classifies its revenue and income from operations into two industry segments: Pipeline and Pipe Services, and Petrochemical and Industrial. Discussion of the consolidated operating results and operating results for each of these segments follows: Consolidated Results
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Three months ended
(in thousands of September 30, June 30, September 30,
Canadian dollars) 2009 2009 2008
Restated(a)
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Revenue from continuing operations $302,812 $312,791 $357,249
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Operating income from
continuing operations $49,972 $53,178 $52,315
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Operating margin 16.5% 17.0% 14.6%
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(a) Restated for a change in accounting policy - refer to note 1 to the
interim consolidated financial statements for the period ended
September 30, 2009.
Third Quarter 2009 versus Third Quarter 2008 Consolidated revenue from continuing operations for the third quarter of 2009 totaled $302.8 million, a decrease of $54.4 million or 15.2%, compared to the third quarter of 2008, which was related to decreases across both industry segments. The decrease in the Pipeline and Pipe Services was mainly as a result of lower small diameter pipe coating volumes resulting from lower levels of drilling activity in North America. Revenue related to the Petrochemical and Industrial segment decreased primarily as a result of reduced business activity levels due to the soft economic conditions in industrial and automotive markets in North America and Western Europe. During the third quarter of 2009, the effect of foreign exchange fluctuations on the translation of foreign currency operations had a favourable impact on revenue, operating income from continuing operations and net income of approximately $8.5 million, $4.5 million and $2.6 million, respectively compared to the third quarter of 2008. Operating income from continuing operations totaled $50.0 million (16.5% of revenue from continuing operations) in the third quarter, representing a 4.5% decrease compared to the $52.3 million (14.6% of revenue from continuing operations) achieved in the third quarter of 2008. The decrease was primarily due to the year over year revenue reduction partially offset by the improved operating margins in the Pipeline and Pipe Services segment resulting from improved manufacturing efficiencies and lower manufacturing input costs. Net income in the third quarter of 2009 totaled $33.7 million ($0.48 per share, diluted) and remained relatively flat compared to the net income in the third quarter of 2008 of $33.9 million (0.47 per share, diluted). Third Quarter 2009 versus Second Quarter 2009 Consolidated revenue from continuing operations in the third quarter of 2009 decreased by $10.0 million or 3.2% compared to the second quarter of 2009. The decrease was primarily due to the unfavourable impact of foreign exchange rate fluctuations. During the third quarter of 2009, the effect of foreign exchange fluctuations on the translation of foreign currency operations had an unfavourable impact on revenue, operating income from continuing operations and net income of approximately $17.4 million, $5.9 million and $3.9 million, respectively, compared to the second quarter of 2009. Operating income from continuing operations and net income in the third quarter of 2009 decreased $3.2 million or 6.0% and $889 thousand or 2.6%, respectively, compared to the second quarter of 2009, primarily due to the decrease in consolidated revenue. First nine months of 2009 versus First nine months of 2008 Consolidated revenue from continuing operations in the first nine months of 2009 was $923.1 million, compared to $945.7 million in the first nine months of 2008, a decrease of $22.6 million or 2.4%. The decrease was primarily due to lower revenue in both of the Company's industry segments as a result of reduced market activity, partially offset by the favourable effect of foreign exchange fluctuations. During the first nine months of 2009, the effect of foreign exchange fluctuations on the translation of foreign currency operating results had a favourable impact on revenue, operating income from continuing operations and net income of approximately $69.5 million, $25.9 million and $16.7 million, respectively compared to the first nine months of 2008. Operating income from continuing operations in the first nine months of 2009 increased $33.2 million or 27.5%, compared to the first nine months of 2008. The increase was primarily due to the improved operating margins as a result of greater manufacturing efficiencies and reduced manufacturing input costs, partially offset by the impact of lower revenue on facility utilization and overhead absorption in the period. Net income for the first nine months of 2009 increased $10.8 million ($0.18 per share, diluted) or 12.1%, compared to the first nine months of 2008, primarily due to higher operating income, partially offset by a $10.4 million ($0.14 per share, diluted) reduction in income from discontinued operations as the Company had recorded a settlement of a lawsuit related to the Company's closed pipe coating operation in Mobile, Alabama in the first nine months of 2008. Pipeline and Pipe Services
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Three months ended
(in thousands of September 30, June 30, September 30,
Canadian dollars) 2009 2009 2008
Restated(a)
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Revenue from continuing operations $273,262 $283,888 $323,347
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Operating income from
continuing operations $53,433 $58,853 $52,971
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Operating margin 19.6% 20.7% 16.4%
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(a) Restated for a change in accounting policy - refer to note 1 to the
interim consolidated financial statements for the period ended
September 30, 2009.
Third Quarter 2009 vs. Third Quarter 2008 In the Pipeline and Pipe Services segment, revenue in the third quarter of 2009 totaled $273.3 million and was $50.1 million or 15.5% lower than in the third quarter of 2008, primarily due to a decrease in revenue at Bredero Shaw and Flexpipe Systems. Revenue for Bredero Shaw in the third quarter of 2009 decreased 15.3% compared to the third quarter of 2008 mainly as a result of a decline in drilling activity in North America as well as reduced pipe coating project volumes in Europe and the Middle East, partially offset by the favourable impact of the weaker Canadian dollar on the translation of the division's mainly U.S. dollar-based revenue. In the Europe, Africa and Russia region, revenue decreased by 89.4% as low utilization at the Leith, Scotland and Orkanger, Norway facilities contrasted with the third quarter of 2008 when the Badarastskaya Bay and Pluto projects had contributed strong volumes. Revenue in the Middle East region decreased by 61.1% in the third quarter of 2009 compared to the third quarter of 2008, primarily due to lower pipe coating project activity in Saudi Arabia and Ras Al Khaimah. In the Asia Pacific region, revenue increased 9.6% due mainly to higher levels of pipe coating activity at the region's plant in Kabil, Indonesia. In the America's region, revenue in the third quarter of 2009 increased by 23.1% from the third quarter of 2008, mainly due to strong growth in Mexico and $50.5 million in revenue contributed by the North East Offshore and Tobago pipeline projects in Trinidad, partially offset by a decrease in small diameter pipe coating activity in Western Canada and the U.S., which declined by 46.1% and 19.4%, respectively. Revenue for Flexpipe Systems in the third quarter of 2009 decreased 55.4% compared to the third quarter of 2008 as a result of the continuing low levels of drilling and well completion activity in Western Canada. Operating income from continuing operations in the quarter for the segment totaled $53.4 million (19.6% of revenue from continuing operations) and increased marginally from $53.0 million (16.4% of revenue from continuing operations) in the third quarter of 2008. The improvement in operating margins of 3.2 percentage points was the result of improved manufacturing efficiencies, reduced manufacturing input costs and a reduction in fixed costs stemming from the reorganization of Bredero Shaw's Europe, Africa and Russia region. Third Quarter 2009 versus Second Quarter 2009 In the Pipeline and Pipe Services segment, revenue in the third quarter of 2009 was 3.7% lower than in the second quarter of 2009 primarily due to a decrease at Bredero Shaw, partially offset by an increase at Shaw Pipeline Services. Revenue in the quarter at Bredero Shaw decreased mainly due to the unfavorable effect of foreign exchange fluctuations, lower large diameter pipe coating project volumes in North America and the impact of the winding down of several large diameter pipe coating projects in the Middle East and Europe, Africa and Russia regions, partially offset by an increase in revenue relating to the Trinidad project and stronger volumes at the Kabil Indonesia facility. Revenue in the quarter at Shaw Pipeline Services increased primarily due to increased higher levels of U.S. land-based pipeline girth well inspection activity. Operating income from continuing operations in the third quarter of 2009 was 9.2% lower than the level achieved in the second quarter of 2009, primarily as a result of the decrease in revenue in the third quarter of 2009. Operating margin in the third quarter of 2009 decreased by 1.1 percentage points when compared to the second quarter of 2009, primarily due to the unfavorable effect of foreign exchange fluctuations. First nine months of 2009 versus First nine months of 2008 Revenue in the first nine months of 2009 in the Pipeline and Pipe Services segment was $837.1 million compared to $838.1 million in the first nine months of 2008. The marginal decrease was primarily due to a decrease at Bredero Shaw as a result of lower small diameter pipe coating volumes in North America, almost entirely offset by the inclusion of revenue from Flexpipe Systems, which was acquired on June 27, 2008 and the favourable impact of the weaker Canadian dollar on the translation of foreign currency operating results. Operating income from continuing operations in the first nine months of 2009 was $168.9 million compared to $119.3 million for the first nine months of 2008, an increase of $49.6 million or 41.6%. The increase was primarily due to a 5.9 percentage point increase in operating margins, the result of improved manufacturing efficiencies and a decrease in manufacturing input costs. Petrochemical and Industrial
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Three months ended
(in thousands of September 30, June 30, September 30,
Canadian dollars) 2009 2009 2008
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Revenue from continuing operations $29,916 $30,100 $34,246
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Operating income from
continuing operations $2,092 $2,208 $5,170
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Operating margin 7.0% 7.3% 15.1%
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Third Quarter 2009 versus Third Quarter 2008 In the Petrochemical and Industrial segment, revenue in the third quarter of 2009 totaled $29.9 million compared to $34.2 million in the third quarter of 2008, a decrease of $4.3 million or 12.6%. The decrease was primarily due to reduced business activity levels at DSG-Canusa as a result of the significantly weaker demand in industrial and automotive markets in North America and Western Europe. Operating income from continuing operations in the quarter for the segment totaled $2.1 million (7.0% of revenue from continuing operations) compared to $5.2 million (15.1% of revenue from continuing operations) in the third quarter of 2008 and reflected the impact of the lower revenue in the period. Third Quarter 2009 versus Second Quarter 2009 Revenue and operating income for the segment in the third quarter of 2009 decreased marginally over levels in the second quarter of 2009 and resulted from the unfavorable effect of foreign exchange fluctuations. First nine months of 2009 versus First nine months of 2008 Revenue for the Petrochemical and Industrial segment in the first nine months of 2009 was $89.3 million compared to $109.0 million for the first nine months of 2008, a decrease of $19.6 million or 18.0%. The decrease was mainly due to a decline at DSG-Canusa as a result of the current global economic downturn, especially in the automotive industry. ShawFlex revenue was also negatively impacted during the first nine months of 2009 by lower industry wire and cable prices as a result of reductions in the price of copper compared to the first nine months of 2008. Operating income in the first nine months of 2009 was $4.6 million and in the first nine months of 2008 was $16.6 million, a decrease of $11.9 million or 72.1%. Operating margins declined by 10.0 percentage points, a result of the decrease in revenue during the period, the impact of lower business activity on factory utilization, and a one-time increase in fixed costs related to restructuring at DSG-Canusa's European operations. Financial and Corporate Financial and corporate costs consist of corporate office costs not charged to the operating divisions and other non-operating items including foreign exchange gains and losses on cash balances. Third Quarter 2009 versus Third Quarter 2008 Financial and corporate costs for the third quarter of 2009, before net foreign exchange losses of $2.3 million, totaled $3.2 million a decrease of $2.8 million from the $6.0 million in the third quarter of 2008, before net foreign exchange gains of $247 thousand. The decrease compared to the second quarter of 2008 was primarily due to the reversal of a provision related to resolved workers compensation claims, lower professional fees and a higher allocation of corporate costs to R&D expense reported in the Pipeline and Pipe Services segment due to increased R&D activity. Third Quarter 2009 versus Second Quarter 2009 Financial and corporate costs decreased by $3.1 million in the third quarter of 2009 compared to the second quarter of 2009, primarily as a result of a decrease in professional fees and general liability insurance costs. First nine months of 2009 versus First nine months of 2008 Financial and corporate costs for the first nine months of 2009 totaled $17.5 million, before net foreign exchange losses of $2.5 million, a marginal decrease compared to $17.6 million, before net foreign exchange gains of $2.3 million in the first nine months of 2008. Net Interest Expense Third Quarter 2009 versus Third Quarter 2008 Net interest expense totaled $675 thousand in the third quarter of 2009, compared to $2.5 million in the third quarter of 2008, a decrease of $1.8 million primarily due to a repayment of Senior Notes of $28.7 million made in the second quarter of 2009. Refer to note 8 to the interim consolidated financial statements for the quarter ended September 30, 2009, for further information. Third Quarter 2009 versus Second Quarter 2009 Net interest expense decreased by $897 thousand in the third quarter of 2009 compared to the second quarter of 2009, primarily due to the repayment of Senior Notes of $28.7 million, discussed above. First nine months of 2009 versus First nine months of 2008 Net interest expense for the first nine months of 2009 totaled $3.9 million compared to $3.5 million, in the first nine months of 2008, an increase of $405 thousand. The increase was primarily due to lower cash balances as a result of the Flexpipe Systems acquisition on June 27, 2008 and cash employed to repurchase shares under the Normal Course Issuer Bid, partially offset by a decrease in interest expense as a result of the repayment of Senior Notes of $28.7 million, discussed above. Income Taxes Income tax expense related to continuing operations in the third quarter of 2009 was $15.6 million, an effective rate of 31.7%, compared to $15.7 million or an effective rate of 31.6% in the third quarter of 2008 and $17.3 million, an effective rate of 33.5%, in the second quarter of 2009. The effective tax rate in the third quarter of 2009 was marginally higher than the Company's expected tax rate of 31.0%, primarily as a result of foreign withholding taxes on inter-corporate dividends and the impact of certain costs which are not deductible for income tax purposes. Cash Flow Cash provided by continuing operating activities Cash provided by continuing operating activities in the third quarter of 2009 totaled $59.6 million, compared to $24.0 million in the third quarter of 2008 and $58.1 million in the second quarter of 2009 with the changes reflecting the changes in income from continuing operations as well as the movement in net working capital. During the quarter, the change in non-cash working capital and foreign exchange was a decrease of $11.0 million, with reduced accounts receivable, inventory and higher taxes payable, partially offset by lower accounts payable and deferred revenue. Cash provided by continuing operating activities in the first nine months of 2009 totaled $156.4 million, compared to $78.4 million in the first nine months of 2008, an increase of $78.0 million as a result of an increase in income from continuing operations and the movement in net working capital. During the first nine months of 2009, the change in non-cash working capital and foreign exchange was a decrease of $4.6 million, with reduced accounts receivable, inventory and higher taxes payable, partially offset by lower accounts payable and deferred revenue. This reduction in working capital compares with an increase in the first nine months of 2008 of $50.8 million. Cash used in continuing investing activities Cash used in continuing investing activities in the third quarter of 2009 totaled $5.6 million, compared to $10.3 million in the second quarter of 2009 and $23.1 million in the third quarter of 2008, and was comprised of capital expenditures on property, plant and equipment of $5.8 million partially offset by foreign exchange adjustments. Cash used in continuing investing activities in the first nine months of 2009 totaled $30.0 million, compared to $180.7 million in the first nine months of 2008 and was comprised of capital expenditures on property, plant and equipment of $25.9 million and a long-term notes receivable investment of $4.1 million. Cash provided by (used in) continuing financing activities Cash used in continuing financing activities in the third quarter of 2009 totaled $4.7 million, compared to $51.6 million last quarter and $24.4 million in the third quarter of 2008, and mainly consisted of dividends paid to shareholders of $4.9 million. Cash used in continuing financing activities in the first nine months of 2009 totaled $75.0 million, compared to cash provided by continuing financing activities in the first nine months of 2008 of $18.8 million, and consisted of dividends paid to shareholders of $32.2 million and the repayment of Senior Notes and bank indebtedness of $28.7 million and $15.4 million, respectively. Other Comprehensive Loss Other comprehensive loss in the quarter totaled $13.0 million and was comprised of an unrealized foreign currency loss on translation of self- sustaining foreign operations as a result of the strengthening of the Canadian dollar during the period, net of hedging activities. Liquidity and Capitalization At September 30, 2009, the Company recorded a working capital ratio (the ratio of current assets to current liabilities) of 2.1 to 1 compared to 1.65 to 1 at December 31, 2008. Operating working capital, excluding cash and cash equivalents, bank indebtedness, the current portion of long-term debt, current future taxes and working capital of discontinued operations, decreased $12.6 million during the quarter to $163.8 million, reflecting lower accounts receivables and inventory levels. Change in Accounting Policies The following are changes in the Company's accounting policies which came into effect in the first quarter of 2009: a) Goodwill and Intangible Assets On January 1, 2009, the Company adopted CICA Handbook section 3064, Goodwill and Intangible Assets. Also as of this date, as is required on adoption of this section, the Company no longer applies Emerging Issues Committee Abstract EIC-27, Revenues and Expenditures During the Pre-operating Period. As required, this accounting standard has been adopted retrospectively with restatement of prior year figures. The following adjustments were made to the Company's consolidated financial statements as a result of adopting this accounting standard: Change in Consolidated Balance Sheets:
As at As at
Dec. 31, Dec. 31,
(in thousands of Canadian dollars) 2008 2007
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Increase in inventories $ 1,678 $ 2,501
Decrease in other assets (3,285) (5,067)
Increase in future taxes 484 770
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Decrease in total assets $ (1,123) $ (1,796)
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Future income taxes $ - $ -
Decrease in retained earnings (1,123) (1,796)
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Decrease in total liabilities
and shareholders' equity $ (1,123) $ (1,796)
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Change in Consolidated Statement of Income:
Three Months Nine Months
Ended Ended
September 30, September 30,
2008 2008
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Increase (decrease) in cost of goods sold $ (1,829) $ 4,731
Increase (decrease) in income taxes 549 (1,419)
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Increase (decrease) in income from
continuing operations $ 1,280 $ (3,312)
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Increase (decrease) in net income $ 1,280 $ (3,312)
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Earnings per share
Basic
Continuing operations $ 0.02 $ (0.04)
Total $ 0.02 $ (0.04)
Diluted
Continuing operations $ 0.01 $ (0.04)
Total $ 0.01 $ (0.04)
The following is a description of the revised accounting policy adopted by the Company as a result of implementing this accounting change: Costs incurred in the mobilization of project-specific plants for fixed term projects are included in work-in-process inventories and are charged to costs of goods sold on a percentage-of-completion basis. Such costs are to be included in inventories only if incurred after the Company is awarded the project and if directly related to the performance of the contract. b) Credit Risk and the Fair Value of Financial Assets and Financial Liabilities On January 1, 2009, the Company adopted EIC-173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. The adoption of this accounting standard had no effect on the Company's consolidated financial statements. International Financial Reporting Standards During 2008, the AcSB confirmed that publicly accountable enterprises, including the Company, will be required to adopt International Financial Reporting Standards ("IFRS") in place of Canadian Generally Accepted Accounting Principles ("GAAP") for interim and annual reporting purposes. The required changeover date is for fiscal years beginning on or after January 1, 2011. The Company has commenced the process to transition to IFRS and has developed a project plan, which was described in the Company's 2008 Annual Report to Shareholders. The Company is currently engaged in the solution development phase of the project, which involves the training of project team members and the development of new IFRS accounting policies and implementation guidance. This phase of the project is expected to be completed by the end of the fourth quarter of 2009. During the implementation phase, the Company will execute the changes to business processes, financial systems, accounting policies, disclosure controls and internal controls over financial reporting that will be required to implement IFRS. This phase of the project is expected to be completed by the end of the second quarter of 2010. At this time, the impact on the Company's consolidated financial statements is not reasonably determinable. Financial Instruments The following table sets out the notional amounts outstanding under foreign exchange contracts, the average contractual exchange rates and the settlement of these contracts as at September 30, 2009:
September 30,
2009
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U.S. dollars sold for Canadian dollars
Less than one year US$ 12,000
Weighted-average rate 1.1748
U.S. dollars sold for Euros
Less than one year US$ 1,465
Weighted-average rate 1.3442
U.S. dollars sold for British Pounds
Less than one year US$ 5,000
Weighted-average rate 1.5509
Euros sold for U.S. dollars
Less than one year Euro 2,150
Weighted-average rate 1.4490
One year to two years Euro 2,200
Weighted-average rate 1.4465
Euros sold for British Pounds
Less than one year Euro 508
Weighted-average rate 1.1760
Euros sold for Norwegian Kroners
Less than one year Euro 1,681
Weighted-average rate 8.7647
As of September 30, 2009, the Company had notional amounts of $30.3 million of forward contracts outstanding ($25.5 million as of December 31, 2008) with the fair value of the Company's net benefit from all foreign exchange forward contracts totaling $1.5 million ($1.5 million, net obligation, as of December 31, 2008). 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 2008 Annual Report. 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 are included in the annual MD&A contained in the Company's 2008 Annual Report. Contractual Obligations There were no material changes to the Company's contractual obligations during the quarter, other than those that would be expected in the ordinary course of business. Summary of Quarterly Results The following is a summary of selected financial information for the ten most recently completed quarters:
(in thousands of
Canadian dollars
except per share
amounts) First Second Third Fourth Full Year
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Revenue (Restated -
see note below)
2009 $307,464 $312,791 $302,812 $ - $ -
2008 293,357 295,118 357,249 433,853 1,379,577
2007 221,329 276,440 264,892 285,438 1,048,099
Operating income from
continuing operations
(Restated - see
note below)
2009 50,434 53,178 49,972 - -
2008 40,919 27,189 52,315 75,588 196,011
2007 27,074 39,764 52,149 43,081 162,068
Income from continuing
operations (Restated -
see note below)
2009 31,520 34,343 33,690 - -
2008 26,952 17,825 33,962 56,013 134,752
2007 22,679 25,177 34,845 36,565 119,266
Income (loss) from
discontinued operations
(Restated - see
note below)
2009 21 293 57 - -
2008 (69) 10,553 (82) 609 11,011
2007 (55) (48) (59) (30,300) (30,462)
Net income (Restated -
see note below)
2009 31,541 34,636 33,747 - -
2008 26,852 28,378 33,880 56,623 145,733
2007 22,624 25,129 34,786 6,265 88,804
Operating income from
continuing operations
per share (Classes A
and B) (Restated -
see note below)
Basic
2009 0.72 0.76 0.71 - -
2008 0.57 0.38 0.74 1.07 2.76
2007 0.37 0.55 0.73 0.60 2.23
Diluted
2009 0.72 0.76 0.70 - -
2008 0.57 0.38 0.73 1.07 2.74
2007 0.36 0.54 0.72 0.59 2.21
Income from continuing
operations per share
(Classes A and B)
(Restated - see
note below)
Basic
2009 0.45 0.49 0.48 - -
2008 0.38 0.25 0.48 0.79 1.90
2007 0.31 0.35 0.49 0.51 1.64
Diluted
2009 0.45 0.49 0.48 - -
2008 0.37 0.25 0.47 0.78 1.88
2007 0.30 0.34 0.48 0.51 1.62
Income (loss) from
discontinued operations
per share (Classes A
and B) (Restated -
see note below)
Basic
2009 0.00 0.00 0.00 - -
2008 0.00 0.15 0.00 0.01 0.16
2007 0.00 0.00 0.00 (0.42) (0.42)
Diluted
2009 0.00 0.00 0.00 - -
2008 0.00 0.15 0.00 0.01 0.15
2007 0.00 0.00 0.00 (0.42) (0.41)
Net income per share
(Classes A and B)
(Restated - see
note below)
Basic
2009 0.45 0.49 0.48 - -
2008 0.38 0.40 0.48 0.80 2.06
2007 0.31 0.35 0.49 0.09 1.22
Diluted
2009 0.45 0.49 0.48 - -
2008 0.37 0.40 0.47 0.79 2.03
2007 0.30 0.34 0.48 0.09 1.21
Note: 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. Refer to
note 1 to the interim consolidated financial statements for the quarter
ended September 30, 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 90% 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. Outstanding Share Capital As at October 21, 2009, the Company had 57,438,253 Class A Subordinate Voting Shares outstanding and 13,060,209 Class B Multiple Voting Shares outstanding. Each Class B share is convertible into a Class A share at the option of the holder. In addition, as at October 21, 2009, the Company had stock options outstanding to purchase up to 2,849,146 Class A shares. Management's Health, Safety and Environmental Commitment The Company is committed to providing a safe and healthy workplace and ensuring that all business activities are conducted in a manner that protects the environment. This commitment includes designing and operating its plants and individual processes in compliance with applicable government requirements regulating the discharge of substances into the environment or otherwise relating to the protection of the environment. The Company's program for health, safety and environmental management is further described in the Company's Annual Information Form under Health, Safety, and Environmental Policy. Outlook The Company's geographic diversification has been a critical factor in the strong financial performance reported in the first nine months of 2009. Continued strength in international business activity with such projects as the Kumang Cluster and Gumusut projects in the Asia Pacific region and the NEO project in Trinidad, have offset the revenue weakness associated with the dramatic decline in drilling activity in North America. The Company's consolidated order backlog at September 30, 2009, representing the value of firm customer purchase orders expected to be completed within one year, totaled $239.9 million, 20.4% lower than at the beginning of the quarter. However, subsequent to the quarter ended September 30, 2009, the Company has secured letters of intent for several large pipe coating projects with customers in Canada (approximately $54.0 million in revenue value) that are not included in the backlog. In South East Asia, ShawCor's pipe coating division has secured s letter of intent relating to the PNG LNG project in Papua New Guinea (approximately $180.0 million in revenue value) which, if the project is sanctioned for construction, will have a significant positive impact on the Company's backlog. Forward Looking Information This document includes certain statements that reflect management's expectations and objectives for ShawCor's future performance, opportunities and growth which constitute forward-looking information under applicable securities laws. Such statements, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. These statements may be identified by the use of forward-looking terminology such as "may," "will," "should", "anticipate," "expect", "believe", "predict", "estimate," "continue," "intend," "plan," and variations of these words or other similar expressions. These statements are based on assumptions, estimates and analysis made by ShawCor in light of its experience and perception of trends, current conditions and expected developments as well as other factors believed to be reasonable and relevant in the circumstances. Although ShawCor believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions in light of currently available information, ShawCor can give no assurance that such expectations will be achieved. Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those predicted, expressed or implied by the forward-looking statements. Significant risks facing ShawCor include, but are not limited to: changes in global economic activity and changes in energy supply and demand which impact on the level of drilling activity and pipeline construction; political, economic and other risks arising from ShawCor's international operations; compliance with environmental, trade and other laws; liability claims; fluctuations in foreign exchange rates; fluctuations in prices of raw materials, as well as other risks and uncertainties. Other information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com. ShawCor will be hosting a Shareholder and Analyst conference call and webcast on November 4, 2009 at 10:00 am ET to discuss the Company's third quarter 2009 financial results. Please visit our website at www.shawcor.com for future details.
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars except per share data)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2009 2008 2009 2008
Restated- Restated-
note 1 note 1
---------- ---------- ---------- ----------
Revenue $302,812 $357,249 $923,067 $945,724
Cost of goods sold 173,350 234,463 541,338 623,701
---------- ---------- ---------- ----------
Gross profit 129,462 122,786 381,729 322,023
Selling, general and
administrative expenses
(notes 2 and 3) 59,521 52,403 171,290 155,595
Amortization of property,
plant and equipment 13,405 15,400 43,200 41,907
Amortization of
intangible assets 1,095 985 3,285 1,053
Foreign exchange
losses (gains) 2,321 (247) 2,506 (2,286)
Research and development
expenses 3,148 1,930 7,864 5,331
---------- ---------- ---------- ----------
Operating income from
continuing operations 49,972 52,315 153,584 120,423
Interest income on short-
term deposits 191 224 507 2,286
Interest expense on
bank indebtedness (368) (1,494) (1,343) (2,165)
Interest expense on
long-term debt (498) (1,253) (3,074) (3,626)
---------- ---------- ---------- ----------
Income before income taxes
and non-controlling interest 49,297 49,792 149,674 116,918
Income taxes 15,607 15,741 50,121 38,394
---------- ---------- ---------- ----------
Income before non-controlling
interest 33,690 34,051 99,553 78,524
Non-controlling interest - (89) - 184
---------- ---------- ---------- ----------
Income from continuing
operations 33,690 33,962 99,553 78,708
Income (loss) from discontinued
operations (note 4) 57 (82) 371 10,402
---------- ---------- ---------- ----------
Net income $ 33,747 $ 33,880 $ 99,924 $ 89,110
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per shares (note 19)
Basic
Continuing operations $ 0.48 $ 0.48 $ 1.41 $ 1.11
Discontinued operations - - 0.01 0.15
---------- ---------- ---------- ----------
Total $ 0.48 $ 0.48 $ 1.42 $ 1.26
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted
Continuing operations $ 0.48 $ 0.47 $ 1.41 $ 1.10
Discontinued operations - - 0.01 0.14
---------- ---------- ---------- ----------
Total $ 0.48 $ 0.47 $ 1.42 $ 1.24
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
-------------------------------------------------------------------------
SEGMENTED INFORMATION
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2009 2008 2009 2008
Restated- Restated-
note 1 note 1
---------- ---------- ---------- ----------
Revenue
Pipeline and Pipe Services $273,262 $323,347 $837,101 $838,125
Petrochemical and Industrial 29,916 34,246 89,334 108,968
Intersegment Eliminations (366) (344) (3,368) (1,369)
---------- ---------- ---------- ----------
$302,812 $357,249 $923,067 $945,724
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) from operations
Pipeline and Pipe Services $ 53,433 $ 52,971 $168,932 $119,339
Petrochemical and Industrial 2,092 5,170 4,625 16,561
Financial and Corporate (5,553) (5,826) (19,973) (15,477)
---------- ---------- ---------- ----------
$ 49,972 $ 52,315 $153,584 $120,423
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2009 2008 2009 2008
Restated- Restated-
note 1 note 1
---------- ---------- ---------- ----------
Operating activities:
Income from continuing
operations $ 33,690 $ 33,962 $ 99,553 $ 78,708
Items not requiring
an outlay of cash:
Amortization of property,
plant and equipment 13,405 15,400 43,200 41,907
Amortization of
intangible assets 1,095 985 3,285 1,053
Amortization of
transaction costs 111 110 333 330
Asset retirement obligation
expense (note 10) (427) 170 2,033 1,902
Stock-based compensation
(note 2) 772 836 2,394 2,529
Future income taxes (1,977) 674 (327) 409
Loss on disposal of
property, plant and
equipment 1,028 255 1,361 358
Gain on short-term
investments (73) - (1,202) -
Impairment of available-
for-sale financial assets - - 336 1,498
Non-controlling interest in
earnings of subsidiaries - 89 - (184)
Gain on disposal of
subsidiary - - - (1,063)
Settlement of asset retirement
obligations (note 10) (280) 716 (2,244) (658)
Change in employee
future benefits 1,272 857 3,087 2,489
Change in non-cash working
capital and foreign exchange 10,958 (30,087) 4,585 (50,841)
---------- ---------- ---------- ----------
Cash provided by continuing
operating activities 59,575 23,967 156,395 78,437
---------- ---------- ---------- ----------
Investing activities:
Purchases of property,
plant and equipment (5,751) (23,085) (25,926) (61,999)
Proceeds on disposal of
property, plant and equipment (61) - 44 33
Acquisition of subsidiaries - - - (124,376)
Increase in long-term
notes receivable 180 - (4,068) -
Proceeds on disposal
of subsidiaries - - - 5,635
Investment in shares - - -
---------- ---------- ---------- ----------
Cash used in continuing
investing activities (5,632) (23,085) (29,950) (180,707)
---------- ---------- ---------- ----------
Financing activities:
Increase (decrease) in
bank indebtedness (689) (10,005) (15,418) 52,965
Repayment of long-term debt - - (28,705) -
Issue of shares (note 11) 816 304 1,301 1,739
Purchase of shares for
cancellation - (10,154) - (22,796)
Dividends paid to
shareholders (4,850) (4,537) (32,205) (13,085)
---------- ---------- ---------- ----------
Cash provided by (used
in) continuing financing
activities (4,723) (24,392) (75,027) 18,823
---------- ---------- ---------- ----------
Foreign exchange on foreign
cash and cash equivalents (4,479) 1,531 (8,395) 6,024
---------- ---------- ---------- ----------
Net cash provided by (used in)
continuing operations 44,740 (21,979) 43,023 (77,423)
Net cash provided by (used in)
discontinued operations
(note 4) 739 (37,638) 1,416 (33,702)
Cash and cash equivalents
at beginning of period 77,892 123,509 78,932 175,017
---------- ---------- ---------- ----------
Cash and cash equivalents
at end of period $123,371 $ 63,892 $123,371 $ 63,892
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SHAWCOR LTD.
INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of Canadian dollars)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2009 2008
Restated-
Note 1
------------- -------------
Assets
Current assets
Cash and cash equivalents (note 5) $ 123,371 $ 78,932
Short-term investments 1,202 -
Accounts receivable 235,140 307,933
Taxes receivable 13,542 9,261
Inventories 124,035 152,284
Prepaid expenses 18,340 14,635
Derivative financial instruments 1,674 523
Current future income taxes 3,318 3,532
Current assets of discontinued operation
(note 4) 10,815 12,256
------------- -------------
531,437 579,356
Property, plant and equipment, net 279,440 307,735
Goodwill 218,312 229,549
Intangible assets (note 6) 63,879 66,452
Future income taxes 29,868 31,173
Other assets (note 7) 13,691 13,024
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