- First quarter revenue of $366 million decreased by 23% from the $472 million reported in the first quarter of 2015 and was also 20% lower than the $455 million reported in the fourth quarter of 2015.
- Adjusted EBITDA in the first quarter was $36.6 million, a decrease of 51% from the $74.2 million reported in the first quarter of 2015 and down 45% from the $66.5 million reported in the fourth quarter of 2015.
- Net income (attributable to shareholders of the Company) in the first quarter of 2016 was $7.5 million (or $0.12 per share diluted) compared with $37.8 million (or $0.58 per share diluted) in the first quarter of 2015 and $30.9 million (or $0.48 per share diluted) in the fourth quarter of 2015.
- The Company’s order backlog was $358 million at March 31, 2016, down from $452 million at December 31, 2015 and from $703 million a year ago.
TORONTO, May 11, 2016 (GLOBE NEWSWIRE) -- Mr. Steve Orr, Chief Executive Officer of Shawcor Ltd. remarked “As expected, Shawcor’s financial performance has been negatively impacted by the dramatic decline in North American well completion activity coupled with a continued downturn in global oil and gas development capital spending that is impacting project activity and revenue in each of our global regions. These factors translated into a 23% year over year decrease in revenue in the first quarter.”
Mr. Orr added “We have now largely completed the concrete coating component of the Shah Deniz project and are nearing completion of the two South Stream pipe coating projects that have been key contributors to strong performance at the Company’s Europe, Middle East, Africa and Russia ("EMAR") region. Given that the remainder of the Shah Deniz project will not start production in EMAR and Asia Pacific until the second half of 2016 and the continued lack of visibility on the timing for an improvement in other regions, the Company expects to report a significant operating loss in the second quarter.”
Mr. Orr also noted that “A sustained improvement in performance will not be achieved until either an increase in oil and gas prices triggers renewed upstream capital spending or, more likely, the Company commences work on projects that are currently being bid. As of March 31, 2016, the Company had firm bids outstanding with a combined project value in excess of approximately $2.0 billion, a level unprecedented in our history. Conversion of one or more of the large natural gas pipeline infrastructure projects that we are currently bidding would be a catalyst for stronger financial performance. Based on customer indications, we should have visibility on the timing of these projects, and our likelihood of securing them, by the end of the third quarter of this year.”
Selected Financial Highlights
(in thousands of Canadian dollars, except per share amounts and percentages) | Three Months Ended March 31, | |||||||||||
| 2016 | 2015 | |||||||||||
| Revenue | $ | 365,579 | $ | 471,940 | ||||||||
| Gross profit | 126,935 | 169,025 | ||||||||||
| Gross profit % | 34.7 | % | 35.8 | % | ||||||||
| Adjusted EBITDA(a) | 36,630 | 74,225 | ||||||||||
| Income from operations | 15,950 | 55,616 | ||||||||||
| Net income for the period(b) | $ | 7,461 | $ | 37,774 | ||||||||
| Earnings per share: | ||||||||||||
| Basic | $ | 0.12 | $ | 0.59 | ||||||||
| Fully diluted | $ | 0.12 | $ | 0.58 | ||||||||
(a) Adjusted EBITDA is a non-GAAP measure calculated by adding back to net income the sum of net finance costs, income taxes, amortization of property, plant, equipment and intangible assets, gains/losses from assets held for sale, gain from sale of land and impairment of assets and joint ventures. Adjusted EBITDA does not have a standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures provided by other companies. Adjusted EBITDA is used by many analysts in the oil and gas industry as one of several important analytical tools. It is also considered important by lenders to the Company. It should not be considered in isolation or used as an alternative to net income or any of the other measures of performance prepared in accordance with GAAP. Please refer to Section 6.0 “Reconciliation of Non-GAAP Measures” for additional information.
(b) Attributable to shareholders of the Company.
1.0 KEY DEVELOPMENTS
Acquisition of Lake Superior Consulting
On January 5, 2016, the Company announced that it had acquired the units of Lake Superior Consulting, LLC (“Lake Superior”) for approximately $37.9 million inclusive of an earn out payment payable in 2016. Lake Superior is a Duluth, Minnesota based professional services firm, specializing in pipeline engineering and integrity management services to major pipeline operators. The business operates from facilities in Minnesota, Texas, Nebraska, Kansas and North Dakota, provides pipeline design, engineering, inspection and commissioning as well as integrity management services, and had 2015 revenue of approximately US$45 million.
The acquisition of Lake Superior adds two new capabilities to the Company – pipeline engineering and integrity engineering. These capabilities, critical to our customers' success, provide Shawcor the access to the domain knowledge it needs to continually improve its current portfolio of services and to develop value-added solutions. Lake Superior’s highly regarded professional team of over 300 engineers, technicians and specialists bring decades of pipeline engineering and operational expertise to Shawcor.
Repurchase of US$78 Million of Senior Notes
In April 2016, the Company utilized a portion of its existing cash balances to repurchase approximately US$78 million of its long-term debt (“Senior Notes”) at a purchase price of approximately US$79 million plus accrued interest. The Company had previously announced the repurchase of US$75 million of its Senior Notes and subsequently acquired an additional US$3 million of its Senior Notes.
Amendments to Senior Notes Agreement and Credit Facility
On May 10, 2016, the Company announced that it had entered into amending agreements with its Senior Note holders and the syndicate of lenders under its unsecured bank credit facility (the “Credit Facility”). The principal amendments to the agreements with the Senior Note holders and to the Credit Facility were:
a) an increase in the Company’s permitted Total Debt to EBITDA covenant (the “Leverage Ratio”) (currently a maximum of 3.00 to 1.00) to 4.25 to 1.00 for the fiscal quarters ending September 30, 2016 and December 31, 2016;
b) at the Company’s option, an increase in the Leverage Ratio to 3.75 to 1.00 and 3.5 to 1.00 for the quarters ending March 31, 2017 and June 30, 2017, respectively;
c) increased interest rates and standby and other fees payable to Senior Note holders and under the Credit Facility during any period when the Company is permitted an increased Leverage Ratio (an “Increased Leverage Period”);
d) a reduction in the size of the Credit Facility from US$400 million to US$325 million; and
e) a change to the definition of Total Debt, which currently excludes up to US$75 million in letters of credit which are performance guarantees (“Performance Guarantees”), to exclude up to US$100 million in Performance Guarantees on a permanent basis and up to US$150 million in Performance Guarantees on a temporary basis during any Increased Leverage Period.
The Company will incur fees and expenses to implement these amendments of approximately US$1.5 million in the second quarter of 2016. Thereafter, the Company expects that the increased interest rates, standby fees and other amounts payable to the Senior Note holders and under the Credit Facility during the Increased Leverage Period will be more than offset by lower interest charges resulting from the overall debt reduction reflected in the US$78 million repurchase of Senior Notes and by lower standby fees resulting from the US$75 million reduction in the Credit Facility.
1.1 OUTLOOK
The Company noted in the Outlook included in Shawcor’s 2015 Annual Management’s Discussion and Analysis that the decline in global oil and gas prices has had two significant impacts on the Company’s business. First, it has caused a reduction in expenditures by customers on the drilling and completion of wells which has particularly impacted Shawcor’s Pipeline and Pipe Services Segment - North America region. Second, lower oil prices have contributed to the curtailment in large oil and gas greenfield development projects which in turn has impacted the international regions of the Pipeline and Pipe Services Segment. These trends are continuing with the result that the Company’s financial performance will decline materially during the second quarter and the Company expects to report a significant operating loss. In the third quarter, performance will benefit from the launch of flow assurance gathering line coating for the Shah Deniz project, however, revenue and earnings are likely to continue to lag first quarter levels.
The Company is encouraged by the strong level of current bidding activity as noted below; however, until North American oilfield activity stabilizes and large pipe coating projects that are under bid are awarded, a firm outlook on longer term performance is not possible. Further detail on the outlook for the Pipeline and Pipe Services segment by region and in the Petrochemical and Industrial segment is set out below.
Pipeline and Pipe Services Segment - North America
Shawcor’s North American Pipeline segment businesses continue to be impacted by the reduction in well completion activity in North America which has reduced demand for small diameter pipe coating and joint protection, Flexpipe composite pipe, Guardian OCTG pipe inspection and refurbishment and Desert NDT gathering line girth weld inspection. Demand for these products and services is expected to continue to decline until global oil prices exhibit sustained increases and the number of wells drilled and completed begins to increase. The Company does not expect this to happen until 2017 at the earliest.
Also contributing to an expected decline in revenue and earnings in the Company’s North American Pipeline segment during 2016 will be a slowdown in the build of new large diameter transmission pipeline infrastructure, partially as a result of regulatory delays and partially due to capital expenditure constraints by pipeline operators. This weakness, coupled with the weakness in small diameter gathering line activity and much lower insulation pipe coating volumes for Gulf of Mexico projects, will translate into lower overall North American Pipeline segment revenue during the balance of 2016 despite the addition of approximately US$45 million in revenue from the January 2016 acquisition of Lake Superior.
Pipeline and Pipe Services Segment - Latin America
Consistent with all of the Company’s Pipeline segment regions, lower spending on oil and gas infrastructure by our clients translated into a reduction in new project activity in the first quarter, which is expected to continue throughout 2016. In 2017, the possibility exists that revenue will recover strongly if the Company is awarded a very large project in Mexico that it is currently bidding. Visibility on the likelihood of this project proceeding and the Company’s success in obtaining the contract for the work should be known by the end of the third quarter. If our bid is successful, the project has the potential to be a significant contributor to revenue and earnings growth in 2017.
Pipeline and Pipe Services Segment - EMAR
With the completion of the concrete coating component of the Shah Deniz project and the near completion of the two South Stream pipe coating projects that have been key contributors to strong performance at the Company’s EMAR region, a substantial decline in activity in the EMAR region is expected for the balance of 2016. Beyond 2016, the potential exists for an improvement in revenue should the Company be successful in securing work that is currently being tendered, with the Nordstream 2 natural gas pipeline project in Northern Europe offering the best opportunity for enhanced activity in 2017 and 2018.
Pipeline and Pipe Services Segment - Asia Pacific
In the first quarter of 2016, the global trend of curtailment in large oil and gas greenfield development projects has impacted the Asia Pacific region. The reduced level of activity is expected to continue in the second quarter but will improve in the second half of 2016 with the launch of contracted flow assurance gathering line coating for the Shah Deniz project at one of the region’s facilities. Beyond 2016, revenue in the region will remain weak until a sustained improvement in oil and gas production development spending begins.
Petrochemical and Industrial Segment
Shawcor’s Petrochemical and Industrial segment businesses continue to deliver steady growth in revenue and earnings based on consistent demand growth in the North American and European automotive, industrial and nuclear refurbishment markets served by the segment’s business units. In 2016, an environment of modest global economic growth is expected to continue to provide healthy demand for the products supplied by the Company's Petrochemical and Industrial segment businesses which in turn should enable continued modest growth in revenue and earnings.
Order Backlog
The Company’s order backlog consists of firm customer orders only and represents the revenue the Company expects to realize on booked orders over the succeeding twelve months. The Company reports the twelve month billable backlog because it provides a leading indicator of significant changes in consolidated revenue. The order backlog at March 31, 2016 decreased to $358 million from $452 million at December 31, 2015 and from $703 million a year ago. The decline in backlog from the start of the first quarter is attributable to backlog revenue realized in the quarter in excess of new bookings and in particular from the continued execution of the Shah Deniz and South Stream project work.
In addition to the backlog, the Company closely monitors its bidding activity and the value of outstanding firm bids as of March 31, 2016 was approximately $2.0 billion. In addition, the Company has provided budgetary estimates and is currently working with customers on projects with aggregate values of approximately of $0.6 billion. At approximately $2.6 billion, the current level of project activity that the Company is pursuing is unprecedented in our history. Not surprisingly, a number of the projects face a range of challenges from regulatory approvals to increasing scrutiny by global energy companies who are seeking to reduce capital costs and project execution risks. However, several of the largest projects the Company is bidding are long term natural gas pipeline infrastructure projects for which the likelihood that the projects will advance, even in the current commodity price environment, is high. Confirmation that the projects will proceed and the likelihood of the Company securing one or more, should be known by the end of the third quarter of this year.
2.0 CONSOLIDATED INFORMATION AND RESULTS FROM OPERATIONS
2.1 Revenue
The following table sets forth revenue by reportable operating segment for the following periods:
| Three Months Ended | ||||||||||||
(in thousands of Canadian dollars) | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||||||||
| Pipeline and Pipe Services | $ | 316,980 | $ | 410,791 | $ | 428,814 | ||||||
| Petrochemical and Industrial | 48,873 | 45,615 | 44,240 | |||||||||
| Elimination(a) | (274 | ) | (1,146 | ) | (1,114 | ) | ||||||
| Consolidated | $ | 365,579 | $ | 455,260 | $ | 471,940 | ||||||
(a) Represents the elimination of the inter-segment sales between the Pipeline and Pipe Services segment and the Petrochemical and Industrial segment.
First Quarter 2016 versus Fourth Quarter 2015
Consolidated revenue decreased $89.7 million, or 20%, from $455.3 million during the fourth quarter of 2015 to $365.6 million during the first quarter of 2016, due to a decrease of $93.8 million in the Pipeline and Pipe Services segment, partially offset by an increase of $3.3 million in the Petrochemical and Industrial segment.
Pipeline and Pipe Services segment revenue decreased by $93.8 million, from $410.8 million in the fourth quarter of 2015 to $317.0 million in the first quarter of 2016, due to lower activity levels in all regions. See Section 3.1 – Pipeline and Pipe Services Segment for additional disclosure with respect to the change in revenue in the Pipeline and Pipe Services segment.
Petrochemical and Industrial segment revenue was higher by $3.3 million, or 7%, in the first quarter of 2016, compared to the fourth quarter of 2015, mainly due to higher revenue in North America and EMAR, partially offset by lower activity in the Asia Pacific region. See Section 3.2 – Petrochemical and Industrial Segment for additional disclosure with respect to the change in revenue in the Petrochemical and Industrial segment.
First Quarter 2016 versus First Quarter 2015
Consolidated revenue decreased by $106.4 million, or 23%, from $471.9 million during the first quarter of 2015, to $365.6 million during the first quarter of 2016, due to a decrease of $111.8 million in the Pipeline and Pipe Services segment, partially offset by an increase of $4.6 million in the Petrochemical and Industrial segment.
Pipeline and Pipe Services segment revenue in the first quarter of 2016 was $317.0 million, or 26% lower than in the first quarter of 2015, due to lower revenue in all regions. See Section 3.1 – Pipeline and Pipe Services Segment for additional disclosure with respect to the change in revenue in the Pipeline and Pipe Services segment.
Petrochemical and Industrial segment revenue increased by $4.6 million, or 11%, during the first quarter of 2016 compared to the first quarter of 2015, due to higher activity levels in all regions. See Section 3.2 – Petrochemical and Industrial Segment for additional disclosure with respect to the change in revenue in the Petrochemical and Industrial segment.
2.2 Income from Operations
The following table sets forth Operating Income and Operating Margin for the following periods:
| Three Months Ended | ||||||||||||
(in thousands of Canadian dollars, except Operating Margin) | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||||||||
| Operating Income | $ | 15,950 | $ | 45,696 | $ | 55,616 | ||||||
| Operating Margin(a) | 4.4 | % | 10.0 | % | 11.8 | % | ||||||
(a) Operating Margin is defined as Operating Income divided by revenue and is a non-GAAP measure. Non-GAAP measures do not have standardized meanings under GAAP and are not necessarily comparable to similar measures provided by other companies.
First Quarter 2016 versus Fourth Quarter 2015
Operating Income in the first quarter of 2016 was $16.0 million and was $29.7 million, or 65%, lower than in the fourth quarter of 2015. Operating Income was impacted by a decrease in gross profit of $24.8 million, an $8.0 million higher net foreign exchange loss, an increase in amortization of property, plant, equipment and intangible assets of $1.1 million and an increase in research and development expenses of $1.7 million. This was partially offset by a decrease in selling, general and administrative ("SG&A") expenses of $5.2 million.
The decrease in gross profit resulted from the decrease in revenue of $89.7 million, as explained above, partially offset by a 1.4 percentage point increase in the gross margin from the fourth quarter of 2015. The increase in the gross margin percentage was primarily due to project and product mix.
SG&A expenses decreased by $5.2 million, from $89.0 million in the fourth quarter of 2015 to $83.8 million in the first quarter of 2016. SG&A expenses decreased primarily due to charges recorded in the fourth quarter of 2015, consisting of a $3.5 million charge for the restructuring costs of Guardian USA, a $5.1 million litigation related provision, an inventory obsolescence provision of $1.6 million and a loss on disposal of fixed assets of $1.1 million. In addition, in the first quarter of 2016, there was a gain on the disposal of fixed assets of $1.0 million and a $1.2 million decrease in professional consulting fees. These sources of SG&A decreases were partially offset by higher personnel related costs of $9.1 million due to the acquisition of Lake Superior and the reversal of accruals for management incentive compensation expenses and defined pension benefits recorded in the fourth quarter of 2015 of $8.2 million and $1.2 million, respectively.
First Quarter 2016 versus First Quarter 2015
Operating Income in the first quarter of 2016 was $16.0 million and was $39.7 million, or 71%, lower than in the first quarter of 2015. Operating income was impacted by a decrease in gross profit of $42.1 million, an increase in net foreign exchange loss of $4.8 million and an increase in amortization of property, plant, equipment and intangible assets of $2.4 million. This was partially offset by a $9.9 million decrease in SG&A expenses.
The decrease in gross profit resulted in part from the decrease in revenue of $106.4 million, as explained above, and a 1.1 percentage point decrease in gross margin. The decrease in the gross margin percentage was primarily due to labour cost inefficiencies due to lower facility utilization and reduced absorption of manufacturing overheads as a result of the decrease in revenue in the Pipeline and Pipe Services segment.
SG&A expenses decreased by $9.9 million in the first quarter of 2016 compared to the first quarter of 2015. The decrease in SG&A expenses was primarily due to a reduction in personnel related costs and management incentive compensation of $8.7 million and a $3.7 million reduction in other costs. This was partially offset by a $2.5 million increase in costs due to the acquisition of Lake Superior.
2.3 Finance Costs, net
The following table sets forth the components of finance costs, net for the following periods:
| Three Months Ended | ||||||||||||
(in thousands of Canadian dollars) | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||||||||
| Interest income | $ | (316 | ) | $ | (276 | ) | $ | (200 | ) | |||
| Interest expense, other | 914 | 808 | 812 | |||||||||
| Interest expense on long-term debt | 4,146 | 4,196 | 3,836 | |||||||||
| Finance costs, net | $ | 4,744 | $ | 4,728 | $ | 4,448 | ||||||
First Quarter 2016 versus Fourth Quarter 2015
In the first quarter of 2016, net finance costs were $4.7 million, compared to net finance costs of $4.7 million during the fourth quarter of 2015. The slight increase in interest income and the slight reduction in interest expense on long-term debt was offset by higher interest expense on other items.
First Quarter 2016 versus First Quarter 2015
In the first quarter of 2016, net finance costs were $4.7 million, compared to net finance costs of $4.4 million during the first quarter of 2015. The increase in net finance costs was primarily a result of higher interest on long term debt due to the strengthening of the US dollar.
2.4 Income Taxes
The following table sets forth the income tax expenses for the following periods:
| Three Months Ended | ||||||||
(in thousands of Canadian dollars) | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||||
| Income tax expense | $ | 2,598 | $ | 9,653 | $ | 12,790 | ||
First Quarter 2016 versus Fourth Quarter 2015
The Company recorded an income tax expense of $2.6 million (24% of income before income taxes) in the first quarter of 2016 compared to an income tax expense of $9.7 million (24% of income before income taxes) in the fourth quarter of 2015. The effective tax rate in the first quarter of 2016 was lower than the Company's expected effective income tax rate of 27%, primarily due to a portion of the Company’s taxable income being earned in jurisdictions where the tax rate is 25% or less.
First Quarter 2016 versus First Quarter 2015
The Company recorded an income tax expense of $2.6 million (24% of income before income taxes) in the first quarter of 2016 compared to an income tax expense of $12.8 million (25% of income before income taxes) in the comparable period of the prior year. The effective tax rate in the first quarter of 2016 was lower than the Company's expected effective income tax rate of 27%, primarily due to a portion of the Company’s taxable income being earned in jurisdictions where the tax rate is 25% or less.
2.5 Foreign Exchange Impact
The following table sets forth the significant currencies in which the Company operates and the average foreign exchange rates for these currencies versus Canadian dollars, for the following periods:
| Three Months Ended | ||||||
| March 31, 2016 | December 31, 2015 | March 31, 2015 | ||||
| U.S. dollar | 1.3623 | 1.3463 | 1.2360 | |||
| Euro | 1.5009 | 1.4671 | 1.4078 | |||
| British Pounds | 1.9549 | 2.0294 | 1.8817 | |||
The following table sets forth the impact on revenue, Operating Income and net income (attributable to shareholders of the Company), compared with the prior quarter and the prior year period, as a result of foreign exchange fluctuations on the translation of foreign currency operations:
(in thousands of Canadian dollars) | Q1-2016 versus Q4-2015 | Q1-2016 versus Q1-2015 | ||||||||
| Revenue | $ | (6,828 | ) | $ | 8,913 | |||||
| Income from operations | (1,960 | ) | (1,404 | ) | ||||||
| Net income | $ | (1,819 | ) | $ | (730 | ) | ||||
In addition to the translation impact noted above, the Company recorded a foreign exchange loss of $1.7 million in the first quarter of 2016, compared to a gain of $3.1 million for the comparable period in the prior year, as a result of the impact of changes in foreign exchange rates on monetary assets and liabilities and short term foreign currency intercompany loans within the group, net of hedging activities.
2.6 Net Income (attributable to shareholders of the Company)
First Quarter 2016 versus Fourth Quarter 2015
Net income decreased by $23.4 million, from $30.9 million during the fourth quarter of 2015 to $7.5 million during the first quarter of 2016. This reduction was mainly due to the decrease in Operating Income of $29.7 million, as explained in section 2.2 above. This was partially offset by a $7.1 million decrease in income tax expense.
First Quarter 2016 versus First Quarter 2015
Net income decreased by $30.3 million, from $37.8 million during the first quarter of 2015 to $7.5 million during the first quarter of 2016. This reduction was mainly due to the decrease in Operating Income in the first quarter of 2016 of $39.7 million, as explained in section 2.2 above. This was partially offset by a $10.2 million decrease in income tax expense.
3.0 SEGMENT INFORMATION
3.1 Pipeline and Pipe Services segment
The following table sets forth, by geographic location, the Revenue, Operating Income and Operating Margin for the Pipeline and Pipe Services segment for the following periods:
| Three Months Ended | ||||||||||||
(in thousands of Canadian dollars, except Operating Margin) | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||||||||
| North America | $ | 137,767 | $ | 179,617 | $ | 203,637 | ||||||
| Latin America | 28,147 | 35,250 | 37,488 | |||||||||
| EMAR | 128,514 | 161,728 | 130,879 | |||||||||
| Asia Pacific | 22,552 | 34,196 | 56,810 | |||||||||
| Total Revenue | $ | 316,980 | $ | 410,791 | $ | 428,814 | ||||||
| Operating Income | $ | 16,193 | $ | 38,268 | $ | 55,117 | ||||||
| Operating Margin(a) | 5.1 | % | 9.3 | % | 12.9 | % | ||||||
(a) Operating Margin is defined as Operating Income divided by revenue and is a non-GAAP measure. Non-GAAP measures do not have standardized meanings under GAAP and are not necessarily comparable to similar measures provided by other companies.
First Quarter 2016 versus Fourth Quarter 2015
First quarter 2016 revenue decreased by $93.8 million, or 23%, to $317.0 million, from $410.8 million in the fourth quarter of 2015. All regions experienced lower activity levels:
- In North America, revenue decreased by $41.9 million, or 23%, as a result of reduced levels of large diameter pipe coating in Canada and the US and lower volumes of small diameter pipe coating in Canada, lower flexible composite pipe volumes, lower activity levels in tubular management services in Canada and decreased pipe weld inspection service revenue in the USA. This was partially offset by revenue generated by the newly acquired Lake Superior business.
- Latin America revenue decreased by $7.1 million, or 20%, primarily as a result of lower activity levels in Mexico at the Veracruz facility and at the Company’s Argentina facilities.
- In EMAR, revenue decreased by $33.2 million, or 21%, primarily due to the winding down of the Shah Deniz project in the Caspian and decreased activity levels at Orkanger, Norway and at Leith, Scotland. This was partially offset by higher revenues at Ras Al Khaimah, UAE (“RAK”) and at the Pozzallo, Italy facility.
- In Asia Pacific, revenue decreased by $11.6 million, or 34%, mainly due to a decrease in pipe coating project activity at the Kabil, Indonesia facility and lower pipe weld inspection service revenue in the region. This was partially offset by higher activity levels at the Kuantan, Malaysia facility.
In the first quarter of 2016, Operating Income was $16.2 million compared to $38.3 million in the fourth quarter of 2015, a decrease of $22.1 million, or 58%. The lower Operating Income was the result of a $24.0 million decrease in gross profit, primarily due to the decrease in revenue of $93.8 million, as explained above, partially offset by a 2.4 percentage point increase in gross margin due to project and product mix and the impact of the Company’s restructuring efforts. The reduction in gross profit was partially offset by lower SG&A expenses, as explained in section 2.2 above.
First Quarter 2016 versus First Quarter 2015
Revenue was $317.0 million in the first quarter of 2016, a decrease of $111.8 million, or 26%, from $428.8 million in the comparable period of 2015. All regions experienced lower activity levels:
- In North America, revenue decreased by $65.9 million, or 32%, as a result of lower large and small diameter pipe coating activity level in Canada and the US, lower flexible composite pipe volumes, lower activity levels in tubular management services in Canada and decreased pipe weld inspection service revenue in the USA. This was partially offset by revenue generated by the newly acquired Lake Superior business.
- In Latin America, revenue decreased by $9.3 million, or 25%, primarily due to decreased activity at the pipe coating facilities in Monterrey and Coatzacoalcos, Mexico and the Company’s Argentina facilities. This was partially offset by increased activity levels at the Veracruz, Mexico facility.
- EMAR revenue decreased by $2.4 million, or 2%, primarily due to lower activity levels at RAK, Orkanger, Norway, the Shah Deniz II project in the Caspian and the Company’s Italian facilities. This was partially offset by higher activity at the Leith, Scotland facility and field joint projects in the region.
- Asia Pacific revenue decreased by $34.3 million, or 60%, primarily due to the lower volumes associated with a lack of large projects at both Kabil, Indonesia and Kuantan, Malaysia.
In the first quarter of 2016, Operating Income was $16.2 million, $38.9 million lower than the Operating Income of $55.1 million in the first quarter of 2015. The lower Operating Income was the result of a $41.6 million decrease in gross profit, partly due to the decrease in revenue of $111.8 million, as explained above, and a 0.3 percentage point decrease in gross margin due to unfavourable project and product mix. The reduction in gross profit was partially offset by lower SG&A expenses, as explained in section 2.2 above.
3.2 Petrochemical and Industrial segment
The following table sets forth, by geographic location, the Revenue, Operating Income and Operating Margin for the Petrochemical and Industrial segment for the following periods:
| Three Months Ended | ||||||||||||
(in thousands of Canadian dollars, except Operating Margin) | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||||||||
| North America | $ | 29,611 | $ | 27,062 | $ | 25,506 | ||||||
| EMAR | 16,508 | 15,424 | 16,316 | |||||||||
| Asia Pacific | 2,754 | 3,129 | 2,418 | |||||||||
| Total Revenue | $ | 48,873 | $ | 45,615 | $ | 44,240 | ||||||
| Operating Income | $ | 7,595 | $ | 7,279 | $ | 6,261 | ||||||
| Operating Margin | 15.5 | % | 16.0 | % | 14.2 | % | ||||||
(a) Operating Margin is defined as Operating Income divided by revenue and is a non-GAAP measure. Non-GAAP measures do not have standardized meanings under GAAP and are not necessarily comparable to similar measures provided by other companies.
First Quarter 2016 versus Fourth Quarter 2015
In the first quarter of 2016, revenue increased by $3.3 million, or 7%, to $48.9 million, compared to the fourth quarter of 2015, primarily due to higher shipments of heat shrink tubing products in North America and EMAR and higher shipments of wire and cable products to the North American electrical utilities and other industrial customers.
Operating Income of $7.6 million in the first quarter of 2016 was $0.3 million, or 4%, higher than in the fourth quarter of 2015. The increase in Operating Income was primarily due to a $0.2 million increase in gross profit on higher sales, as explained above.
First Quarter 2016 versus First Quarter 2015
First quarter 2016 revenue totaled $48.9 million compared to $44.2 million in the first quarter of 2015, an increase of $4.6 million, or 10%. The increase was driven by higher heat shrink tubing product volumes in North America and Asia Pacific and higher shipments of wire and cable products to North American industrial customers.
Operating Income in the first quarter of 2016 was $7.6 million compared to $6.3 million in the first quarter of 2015, an increase of $1.3 million. The increase in Operating Income was mainly due to the $1.0 million reduction in SG&A expenses.
3.3 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 financial and corporate division of Shawcor does not meet the definition of a reportable operating segment as defined in IFRS, as it does not earn revenue.
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 | ||||||||||||
(in thousands of Canadian dollars) | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||||||||
| Financial and Corporate | $ | (6,125 | ) | $ | (5,543 | ) | $ | (8,859 | ) | |||
First Quarter 2016 versus Fourth Quarter 2015
Financial and corporate costs increased by $0.6 million from $5.5 million during the fourth quarter of 2015 to $6.1 million in the first quarter of 2016. The increase was due to a $3.8 million increase in stock based and long term management incentive compensation expenses and a $1.2 million increase in employee defined benefit costs, primarily due to the reversal of accruals in the fourth quarter of 2015. This was partially offset by a $4.1 million decrease in professional consulting fees, information technology and other personnel related expenses in the first quarter of 2016.
First Quarter 2016 versus First Quarter 2015
Financial and corporate costs decreased by $2.7 million from the first quarter of 2015 to $6.1 million in the first quarter of 2016. This was primarily due to a $2.4 million decrease in personnel related costs in the first quarter of 2016 versus the prior year.
4.0 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” and “forward looking statements” (collectively “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, judgements 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 the Outlook section and elsewhere in respect of, among other things, the achievement of key performance objectives, the incurrence of additional capital expenditures as necessary to facilitate growth in new markets, the timing of major project activity, the decline in consolidated revenues and earnings in 2016 from 2015 levels, the reduced activity levels and the decline in revenue and earnings in the Pipeline and Pipe Services segment of the Company’s business and the timing of recovery in respect thereof, the growth in revenue and earnings in the Petrochemical and Industrial segment of the Company’s business, the impact of the amendments made to the Credit Facility and Senior Notes and the repurchase of the Senior Notes, the sufficiency of resources, capacity and capital to meet market demand, to meet contractual obligations and to execute the Company’s development and growth strategy, the sufficiency of the Company’s human resources, systems and processes to operate its business and execute its strategic plan, the impact of the existing order backlog and other factors on the Company’s revenue and Operating Income in 2016, the impact of global economic activity on the demand for the Company's products, the impact of the decline in global oil and gas commodity prices on the level of industry investment in oil and gas infrastructure, the impact of changing energy demand, supply and prices, the impact and likelihood of changes in competitive conditions in the markets in which the Company participates, the adequacy of the Company’s existing accruals in respect of taxes, environmental compliance and in respect of litigation matters and other claims generally, the level of payments under the Company's performance bonds, the outcome of the Company’s outstanding bids and the expected development in the Company’s order backlog.
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: the impact on the Company of reduced demand for its products and services, including the suspension or cancellation of existing contracts, as a result of lower investment in global oil and gas extraction and transportation activity following the declines in the global price of oil and gas and as a result of delays in obtaining regulatory approvals; long term changes in global or regional economic activity and changes in energy supply and demand, which impact on the level of global pipeline infrastructure construction; exposure to product and other liability claims; shortages of or significant increases in the prices of raw materials used by the Company; 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 those in respect of global oil and gas prices, declines in expenditures on oil and gas infrastructures, modest global economic growth, the Company’s ability to execute projects under contract, the Company’s success in existing and future contract bids, the continued supply of and stable pricing for commodities used by the Company, the availability of personnel resources sufficient for the Company to operate its businesses, the maintenance of operations in major oil and gas producing regions and the ability of the Company to satisfy all covenants under its Credit Facilities and the Senior Notes. 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. The Company 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.
To the extent any forward looking information in this document constitutes future oriented financial information or financial outlooks, within the meaning of securities laws, such information is being provided to demonstrate the potential of the Company and readers are cautioned that this information may not be appropriate for any other purpose. Future oriented financial information and financial outlooks, as with forward looking information generally, are based on the assumptions and subject to the risks noted above.
Shawcor will be hosting a Shareholder and Analyst Conference Call and Webcast on Thursday May12th, 2016 at 10:00AM ET, which will discuss the Company’s First Quarter Financial Results.
To participate via telephone, please dial 1-315-625-6955 or 1-877-776-4039 and enter Conference ID: 9056 4354.
Click on this link http://edge.media-server.com/m/p/nc2awn6j to participate via webcast.
5.0 Additional Information
Additional information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com.
Please visit our website at www.shawcor.com for further details.
| Shawcor Ltd. | ||||
| Interim Consolidated Balance Sheets (Unaudited) | ||||
| March 31, | December 31, | |||
| (in thousands of Canadian dollars) | 2016 | 2015 | ||
| ASSETS | ||||
| Current Assets | ||||
| Cash and cash equivalents | $ | 278,177 | $ | 260,645 |
| Short-term investments | 2,778 | 2,954 | ||
| Accounts receivable | 281,302 | 396,974 | ||
| Income taxes receivable | 31,234 | 35,804 | ||
| Inventory | 131,668 | 167,557 | ||
| Prepaid expenses | 16,506 | 20,112 | ||
| Derivative financial instruments | 643 | 3,024 | ||
| 742,308 | 887,070 | |||
| Non-current Assets | ||||
| Loans receivable | 7,566 | 7,908 | ||
| Property, plant and equipment | 480,792 | 485,555 | ||
| Intangible assets | 222,918 | 223,298 | ||
| Investments in associates | 29,503 | 30,868 | ||
| Deferred income tax assets | 20,289 | 27,668 | ||
| Other assets | 27,027 | 26,268 | ||
| Goodwill | 451,459 | 457,070 | ||
| 1,239,554 | 1,258,635 | |||
| $ | 1,981,862 | $ | 2,145,705 | |
| LIABILITIES AND EQUITY | ||||
| Current Liabilities | ||||
| Accounts payable and accrued liabilities | $ | 248,382 | $ | 295,911 |
| Provisions | 19,232 | 25,562 | ||
| Income taxes payable | 36,273 | 34,624 | ||
| Derivative financial instruments | 2,247 | 1,984 | ||
| Deferred revenue | 30,897 | 58,129 | ||
| Obligations under finance lease | 1,087 | 1,176 | ||
| Other liabilities | 15,184 | 23,279 | ||
| 353,302 | 440,665 | |||
| Non-current Liabilities | ||||
| Long-term debt | 455,728 | 485,147 | ||
| Obligations under finance lease | 12,096 | 12,600 | ||
| Provisions | 40,312 | 44,075 | ||
| Employee future benefits | 23,410 | 21,942 | ||
| Deferred income tax liabilities | 10,028 | 14,898 | ||
| Other liabilities | 1,602 | 1,177 | ||
| 543,176 | 579,839 | |||
| 896,478 | 1,020,504 | |||
| Equity | ||||
| Share capital | 535,367 | 534,484 | ||
| Contributed surplus | 19,716 | 18,638 | ||
| Retained earnings | 490,541 | 492,713 | ||
| Non-controlling interests | 7,606 | 7,455 | ||
| Accumulated other comprehensive income | 32,154 | 71,911 | ||
| 1,085,384 | 1,125,201 | |||
| $ | 1,981,862 | $ | 2,145,705 | |
| Shawcor Ltd. | ||||||||||||
| Interim Consolidated Statements of Income (Unaudited) | ||||||||||||
| Three Months Ended March 31, | ||||||||||||
| (in thousands of Canadian dollars) | 2016 | 2015 | ||||||||||
| Revenue | ||||||||||||
| Sale of products | $ | 124,915 | $ | 135,166 | ||||||||
| Rendering of services | 240,664 | 336,774 | ||||||||||
| 365,579 | 471,940 | |||||||||||
| Cost of Goods Sold and Services Rendered | 238,644 | 302,915 | ||||||||||
| Gross Profit | 126,935 | 169,025 | ||||||||||
| Selling, general and administrative expenses | 83,831 | 93,713 | ||||||||||
| Research and development expenses | 4,308 | 4,073 | ||||||||||
| Foreign exchange losses (gains) | 1,713 | (3,097 | ) | |||||||||
| Amortization of property, plant and equipment | 14,829 | 13,743 | ||||||||||
| Amortization of intangible assets | 6,304 | 4,977 | ||||||||||
| Income from Operations | 15,950 | 55,616 | ||||||||||
| Loss from investments in associates | (453 | ) | (111 | ) | ||||||||
| Finance costs, net | (4,744 | ) | (4,448 | ) | ||||||||
| Income Before Income Taxes | 10,753 | 51,057 | ||||||||||
| Income taxes | 2,598 | 12,790 | ||||||||||
| Net Income | $ | 8,155 | $ | 38,267 | ||||||||
| Net Income Attributable to: | ||||||||||||
| Shareholders of the Company | $ | 7,461 | $ | 37,774 | ||||||||
| Non-controlling interests | 694 | 493 | ||||||||||
| Net Income | $ | 8,155 | $ | 38,267 | ||||||||
| Earnings per Share | ||||||||||||
| Basic | $ | 0.12 | $ | 0.59 | ||||||||
| Diluted | $ | 0.12 | $ | 0.58 | ||||||||
| Weighted Average Number of Shares Outstanding (000’s) | ||||||||||||
| Basic | 64,531 | 64,497 | ||||||||||
| Diluted | 64,617 | 64,770 | ||||||||||
| Shawcor Ltd. | ||||||||||
| Interim Consolidated Statements of Comprehensive Income (Unaudited) | ||||||||||
| Three Months Ended March 31, | ||||||||||
| (in thousands of Canadian dollars) | 2016 | 2015 | ||||||||
| Net Income | $ | 8,155 | $ | 38,267 | ||||||
| Other Comprehensive Income | ||||||||||
| Other Comprehensive (Loss) Income to be Reclassified to Net Income in Subsequent Periods | ||||||||||
| Exchange differences on translation of foreign operations | (39,388 | ) | 37,553 | |||||||
| Other comprehensive (loss) income attributable to investments in joint ventures | – | |||||||||
| Other comprehensive (loss) income attributable to investments in associates | (912 | ) | 279 | |||||||
| Net Other Comprehensive (Loss) Income to be Reclassified to Net Income in Subsequent Periods | (40,300 | ) | 37,832 | |||||||
| Other Comprehensive (Loss) Income, Net of Income Tax | (40,300 | ) | 37,832 | |||||||
| Total Comprehensive (Loss) Income | $ | (32,145 | ) | $ | 76,099 | |||||
| Comprehensive (Loss) Income Attributable to: | ||||||||||
| Shareholders of the Company | $ | (32,296 | ) | $ | 75,237 | |||||
| Non-controlling interests | 151 | 862 | ||||||||
| Total Comprehensive (Loss) Income | $ | (32,145 | ) | $ | 76,099 | |||||
| Shawcor Ltd. | ||||||||||||||||
| Interim Consolidated Statements of Changes in Equity (Unaudited) | ||||||||||||||||
(in thousands of Canadian dollars) | Share Capital | Contributed Surplus | Retained Earnings | Non- controlling Interests | Accumulated Other Comprehensive Income (Loss) | Total Equity | ||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||
| Balance – December 31, 2015 | 534,484 | 18,638 | 492,713 | 7,455 | 71,911 | 1,125,201 | ||||||||||
| Net income | – | – | 7,461 | 694 | – | 8,155 | ||||||||||
| Other comprehensive loss | – | – | – | (543 | ) | (39,757 | ) | (40,300 | ) | |||||||
| Comprehensive income (loss) | – | – | 7,461 | 151 | (39,757 | ) | (32,145 | ) | ||||||||
| Issued on exercise of stock options | 532 | – | – | – | – | 532 | ||||||||||
| Compensation cost on exercised options | 177 | (177 | ) | – | – | – | – | |||||||||
| Compensation cost on exercised RSUs | 174 | (174 | ) | – | – | – | – | |||||||||
| Share-based compensation expense | – | 1,429 | – | – | – | 1,429 | ||||||||||
| Dividends declared and paid to shareholders | – | – | (9,633 | ) | – | – | (9,633 | ) | ||||||||
| Balance – March 31, 2016 | 535,367 | 19,716 | 490,541 | 7,606 | 32,154 | 1,085,384 | ||||||||||
| Balance – December 31, 2014 | 533,660 | 14,625 | 433,177 | 7,254 | (8,103 | ) | 980,613 | |||||||||
| Net income | – | – | 37,774 | 493 | – | 38,267 | ||||||||||
| Other comprehensive income | – | – | – | 369 | 37,463 | 37,832 | ||||||||||
| Comprehensive income | – | – | 37,774 | 862 | 37,463 | 76,099 | ||||||||||
| Issued on exercise of stock options | 44 | – | – | – | – | 44 | ||||||||||
| Compensation cost on exercised options | 16 | (16 | ) | – | – | – | – | |||||||||
| Compensation cost on exercised RSUs | 52 | (52 | ) | – | – | – | – | |||||||||
| Share-based compensation expense | – | 1,085 | – | – | – | 1,085 | ||||||||||
| Dividends declared and paid to shareholders | – | – | (9,675 | ) | – | – | (9,675 | ) | ||||||||
| Balance – March 31, 2015 | 533,772 | 15,642 | 461,276 | 8,116 | 29,360 | 1,048,166 | ||||||||||
| Shawcor Ltd. | ||||||||
| Interim Consolidated Statements of Cash Flows (Unaudited) | ||||||||
| Three Months Ended March 31, | ||||||||
| (in thousands of Canadian dollars) | 2016 | 2015 | ||||||
| Operating activities | ||||||||
| Net income | $ | 8,155 | $ | 38,267 | ||||
| Add (deduct) items not affecting cash | ||||||||
| Amortization of property, plant and equipment | 14,829 | 13,743 | ||||||
| Amortization of intangible assets | 6,304 | 4,977 | ||||||
| Amortization of long-term prepaid expenses | 115 | 494 | ||||||
| Decommissioning obligations expense | 41 | 111 | ||||||
| Other provision expenses | 1,739 | 2,212 | ||||||
| Stock-based compensation and incentive-based compensation | 1,240 | 1,587 | ||||||
| Deferred income taxes | (4,973 | ) | 2,075 | |||||
| Loss on disposal of property, plant and equipment | 165 | 48 | ||||||
| Unrealized loss on derivative financial instruments | 2,644 | 2,696 | ||||||
| Loss from investments in associates | 453 | 111 | ||||||
| Settlement of decommissioning liabilities | (3 | ) | (6 | ) | ||||
| Settlement of other provisions | (7,739 | ) | (1,207 | ) | ||||
| Net change in future employee benefits | 603 | 324 | ||||||
| Change in non-cash working capital and foreign exchange | 61,896 | (49,137 | ) | |||||
| Cash Provided by Operating Activities | $ | 85,469 | $ | 16,295 | ||||
| Investing Activities | ||||||||
| Decrease in loan receivable | – | 39 | ||||||
| Decrease (increase) in short-term investments | 176 | (1,144 | ) | |||||
| Purchases of property, plant and equipment | (17,961 | ) | (15,224 | ) | ||||
| Proceeds on disposal of property, plant and equipment | 1,046 | 574 | ||||||
| Purchases of intangible assets | – | (37 | ) | |||||
| Deferred purchase consideration payment | – | (1,064 | ) | |||||
| Increase in other assets | (1,120 | ) | (57 | ) | ||||
| Business acquisitions, net of cash acquired | (25,539 | ) | (17,036 | ) | ||||
| Cash Used in Investing Activities | $ | (43,398 | ) | $ | (33,949 | ) | ||
| Financing Activities | ||||||||
| Increase in bank indebtedness | – | 1,418 | ||||||
| Decrease in loans payable | (237 | ) | (2,513 | ) | ||||
| Repayment of finance lease obligation | (173 | ) | (524 | ) | ||||
| Issuance of shares | 532 | 44 | ||||||
| Dividend paid to shareholders | (9,633 | ) | (9,675 | ) | ||||
| Cash Used in Financing Activities | $ | (9,511 | ) | $ | (11,250 | ) | ||
| Effect of Foreign Exchange on Cash and Cash Equivalents | (15,028 | ) | 9,967 | |||||
| Net increase (decrease) in Cash and Cash Equivalents for the Period | 17,532 | (18,937 | ) | |||||
| Cash and Cash Equivalents – Beginning of Period | 260,645 | 116,556 | ||||||
| Cash and Cash Equivalents – End of Period | $ | 278,177 | $ | 97,619 | ||||
6.0 Reconciliation of Non-GAAP to GAAP Financial Measures
The Company reports on certain non-GAAP measures that are used to evaluate its performance and segments, as well as to determine compliance with debt covenants and to manage the capital structure. Non-GAAP measures do not have standardized meanings under IFRS and are not necessarily comparable to similar measures provided by other companies. The Company discloses these measures because it believes that they assist readers in understanding the results of the Company’s operations and financial position and are meant to provide further information about its financial results to readers. These measures should not be considered in isolation or used in substitution for other measures of performance prepared in accordance with GAAP. The following is a reconciliation of the non-GAAP measures reported by the Company.
Adjusted EBITDA
The following table sets forth the Adjusted EBITDA for the following periods:
| Three Months Ended | ||||||
(in thousands of Canadian dollars) | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||
| Net income for the period | $ | 8,155 | $ | 31,467 | $ | 38,267 |
| Add: | ||||||
| Income tax expense | 2,598 | 9,653 | 12,790 | |||
| Finance costs, net | 4,744 | 4,728 | 4,448 | |||
| Amortization of property, plant, equipment and intangible assets | 21,133 | 20,061 | 18,720 | |||
| EBITDA(a) | 36,630 | 65,909 | 74,225 | |||
| Add: | ||||||
| Impairment | – | 590 | – | |||
| ADJUSTED EBITDA(a) | 36,630 | 66,499 | 74,225 | |||
(a) Adjusted EBITDA and EBITDA are used by many analysts in the oil and gas industry as one of several important analytical tools.