- Third quarter 2020 revenue was $268 million, 32% lower than the $394 million reported in the third quarter of 2019.
- Adjusted EBITDA1 in the third quarter of 2020 was $17.8 million, 58% lower than the $42.4 million reported in the third quarter of 2019.
- Net loss2 in the third quarter of 2020 was $18.3 million (or loss per share of $0.26 diluted) compared with a net income of $6.5 million (or $0.09 earnings per share diluted) in the third quarter of 2019. Excluding the impact of restructuring cost and the adjustment for Argentina hyperinflationary accounting, adjusted net loss1 in the third quarter of 2020 was $11.2 million (or adjusted loss per share1 of $0.16) compared with adjusted net income1 of $6.0 million (or $0.09 adjusted earnings per share1) in the third quarter of 2019.
- The Company’s order backlog was $542 million at September 30, 2020, compared to the backlog of $553 million at June 30, 2020.
TORONTO, Nov. 12, 2020 (GLOBE NEWSWIRE) -- Shawcor Ltd. (TSX: SCL) Mr. Steve Orr, Chief Executive Officer of Shawcor Ltd. remarked, “Third quarter revenue and Adjusted EBITDA were primarily impacted by improved performances in the Company’s non-oil and gas related businesses and unanticipated supply chain disruptions across the company as a result of the COVID-19 pandemic and in our Gulf of Mexico operations due to Hurricane Laura. During the quarter we continued to take actions to reduce our cost structure, including initiating the controlled shutdown of one of our two pipe coating locations in Southeast Asia, and to preserve cash and keep our employees safe while servicing customers in these unprecedented times.”
Mr. Orr added, “We anticipate an improved and stronger performance for the remainder of the year and into 2021, with an expected fourth quarter Adjusted EBITDA, before COVID related government assistance, in the $25 to $30 million range. Our confidence for improved performance is based on continued improvement in demand for our products and services across all the markets we service, the execution of secured work in our backlog, including the recently announced Payara project, and the positive impact of our cost reduction activity.”
1 EBITDA, Adjusted EBITDA, adjusted net income or loss and adjusted earnings or loss per share are Non-GAAP measures. Non-GAAP measures do not have standardized meanings under GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of these Non-GAAP measures.
2 Net Loss attributable to shareholders of the Company.
Selected Financial Highlights
| (in thousands of Canadian dollars, except per share amounts and percentages) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||
| $ | % | $ | % | $ | % | $ | % | |||||||
Revenue | 267,659 | 394,015 | 852,804 | 1,155,382 | ||||||||||
| Gross profit | 74,321 | 27.8% | 114,618 | 29.1% | 227,402 | 26.7% | 330,242 | 28.6% | ||||||
| (Loss) Income from Operations(a) | (19,289 | ) | (7.2%) | 17,117 | 4.3% | (277,272 | ) | (32.5%) | 54,127 | 4.7% | ||||
| Net (Loss) Income for the period(b) | (18,311 | ) | 6,520 | (289,989 | ) | 48,490 | ||||||||
| (Loss) Earnings per share ("EPS"): | ||||||||||||||
| Basic | (0.26 | ) | 0.09 | (4.12 | ) | 0.69 | ||||||||
| Diluted | (0.26 | ) | 0.09 | (4.12 | ) | 0.69 | ||||||||
| Adjusted EBITDA(c) | 17,803 | 6.7% | 42,396 | 10.8% | 28,263 | 3.3% | 106,854 | 9.2% | ||||||
| Adjusted Net (Loss) Income Attributable to Shareholders | (11,181 | ) | (4.2%) | 6,006 | 1.5% | (65,981 | ) | (7.7%) | 28,225 | 2.4% | ||||
| Adjusted Net (Loss) Income(b)(c) | (11,275 | ) | 6,243 | (66,365 | ) | 28,463 | ||||||||
| Adjusted EPS(c) | ||||||||||||||
| Basic | (0.16 | ) | 0.09 | (0.94 | ) | 0.40 | ||||||||
| Diluted | (0.16 | ) | 0.09 | (0.94 | ) | 0.40 | ||||||||
| (a) | Operating loss in the nine month ended September 30, 2020 includes restructuring costs of $29.7 million and impairment charges of $206.7 million. | |||||||||||||
| (b) | Attributable to shareholders of the Company. | |||||||||||||
| (c) | Adjusted EBITDA, Adjusted Operating Income or Loss, Adjusted Net Income or Loss and Adjusted EPS are non-GAAP measure. Non-GAAP measures do not have a standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non GAAP Measures for further details and a reconciliation of these Non-GAAP measures. | |||||||||||||
1.0 KEY DEVELOPMENTS - THIRD QUARTER
Contract Award for the Payara Project
On October 1, 2020, the Company announced that its pipe coating division had been awarded a definitive contract with Saipem to provide thermal insulation and anticorrosion coating services for the Payara development project located in the Stabroek block offshore Guyana. The value of the award is in the range of $55-65 million and is scheduled to commence in Q4 2020 from Shawcor’s Veracruz, Mexico and Channelview, Texas facilities. Saipem previously awarded Shawcor coating contracts for the first two phases of the Liza development in Guyana in 2017 and 2018, respectively.
Impact of COVID-19
In March 2020, global market downturn caused by the COVID-19 pandemic and recent changes in oil and gas supply and demand resulted in an immediate decrease in demand for products and services supplied by Shawcor. The situation remains dynamic and the ultimate duration and magnitude of the impact on the global economy and on the Company remains unknown at this time.
The implications on Shawcor as a result of decreases in demand may be significant and include:
- Material declines in revenue and cash flows
- Future impairments charges to property, plant and equipment
- Increased risk of non-payment of accounts receivables; and
- Additional restructuring charges
The Company has taken measures to address the reduced current demand and the high degree of uncertainty in future demand. These measures include targeting in excess of $60 million in annualized selling, general and administrative (“SG&A”) and other cost savings and generating in excess of $40 million in cash from working capital reductions and asset sales.
The Company has completed the following actions to reduce costs, preserve cash and meet its stated targets.
- Suspension of the regular quarterly dividend, commencing in the second quarter.
- Reduced Board compensation by 30%, CEO cash compensation by 20% and Senior Executive cash compensation by 10%.
- With further actions taken in the quarter, salaried workforce headcount has been reduced by over 19% since March 2020.
- Aggressive cost controls were implemented and are expected to generate over $10 million in annualized savings. This includes the elimination of all non-essential travel, entertainment and other discretionary spending.
- During the quarter, planned capital spending has been further reduced to the $30-$35 million range for 2020 to include only essential maintenance capital and select growth spending to deliver on firm orders, particularly in our Composite Systems Tank business (formerly ZCL Composites).
- The controlled shutdown of 5 pipe coating facilities, including a facility in South East Asia that was announced in the current quarter, and several girth weld inspection branches. The Company continues to assess its international footprint and will likely take further optimization actions in the upcoming quarters.
- Reduced working capital by $47.3 million, excluding the impact of increased restructuring liabilities, and generated cash proceeds from asset sales of $16.5 million in the first nine months of 2020.
The Company has incurred $29.7 million of restructuring costs to date as a result of the actions completed.
The Company continues to expect the total value of its completed and planned initiatives will meet its stated targets and result in a quarterly normalized SG&A run-rate of approximately $70 million.
1.1 Third Quarter Highlights and Outlook
Adjusted EBITDA1 of $17.8 million in the third quarter reflected the improved contributions from Shawcor’s non-oil and gas businesses as demand strengthened in automotive and industrial markets, the continuing economic and industry disruption and uneven impact caused by the global COVID-19 pandemic and second wave resurgence, a recovery in composite pipe activity as oil and gas market conditions somewhat stabilized and the positive benefit of $17 million recorded from government wage support programs.
During the quarter, the Company was awarded the Payara offshore project in Guyana and continued to execute work and ramp-up of its pipe coating facilities. Hurricane Laura, which landed in the US Gulf Coast in August, negatively impacted the supply chain of key materials and resulting production at the Channelview, Texas facility. Although this supply chain issue has been subsequently addressed and production has resumed at the Channelview facility, this will negatively impact fourth quarter results as work has been pushed out. In addition, the Company has effectively managed supply chain disruptions resulting from COVID-19 by working closely with customers to sequence projects. Employee safety and HSE procedures continued to be prioritized and the Company experienced no site-wide shutdowns as a result of COVID-19 during the quarter.
1 EBITDA and Adjusted EBITDA are Non-GAAP measures. Non-GAAP measures do not have standardized meanings under GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of these Non-GAAP Measures.
Non-oil and gas businesses experienced a rebound in activity as automotive demand recovered, industrial markets strengthened and demand for composite tanks remained strong during the quarter. The increased demand resulted in material contributions from non-oil and gas businesses which accounted for over 35% of total revenues.
Weakness in commodity prices persisted and OPEC+ production curtailments created a fragile environment for our oil and gas related businesses. Despite these conditions demand moved off second quarter lows and some market stability returned which translated into improved composite pipe activity during the quarter.
Progress was made during the quarter towards the Company’s targets of $60 million in sustainable annualized SG&A cost reductions and $40 million in incremental cash generation. The Company has now reduced its salaried workforce by over 19% as a result of actions taken to date and continued actions to optimize its operating footprint with the closure of one of two Southeast Asia pipe coating facilities. The Company remains on track to meet its goal of a quarterly normalized SG&A cost run rate of $70 million and incurred one-time restructuring charges of $12.5 million during the quarter.
The Company remains focused on cash generation initiatives as evidenced by the positive cash inflow in the third quarter of $59 million from reduced working capital, excluding the impact of increased restructuring liabilities, and $5.8 million from proceeds of asset sales. Although the Company expects that there will be a need to increase working capital as demand gradually returns, it will work diligently to manage working capital to minimize the re-investment. Planned capital expenditures have also been further reduced in the quarter to the $30-$35 million range for the year.
The Pipeline and Pipe Services Segment’s revenues continue to be impacted by suppressed activity levels as a result of COVID-19 and lower commodity prices which although having improved over the second quarter lows, with WTI crude trading in the $35-45 range during the quarter, WTI and Brent Crude prices remain over 35% lower than at the start of the year. North American exploration and production operators continued their focus on portfolio quality, capital discipline and industry consolidation. Capital spending reductions remain in the range of 50% on a year-over-year basis and drilling activity in North American oil and gas basins remained muted with quarter-end rig counts in Canada and the U.S. totalling 75 and 266, respectively. Completion activity improved as more drilled but uncompleted wells were moved to production. Demand for small diameter pipe coating in the U.S. and Western Canada was limited during the quarter as customers utilized existing inventories and delayed projects. Revenues from the land-based small diameter market decreased in the quarter as a result of the closure of four of the Company’s North American coating facilities initiated earlier in the year. Demand for call-out non-destructive testing (“NDT”) inspection services and large diameter girth weld inspection services to pipeline operators continued to be impacted by the delay or cancellation of certain U.S. transmission projects. Despite these conditions, certain projects were advanced during the quarter and an award of approximately $20 million for girth weld inspection services was secured for a major US land transmission line. Demand from operators for pipeline engineering design and integrity management services remained strong and continued to be resilient as customers looked externally for expertise to backfill internal resources gaps to manage advanced integrity asset programs on existing assets. Work continued to be executed on several international and offshore projects and production ramp-up continued at facilities in Mexico, Brazil, Scotland, Norway and Indonesia. Revenues from the Channelview (Texas) location were lower than expected in the quarter as result of Hurricane Laura, which caused supply chain disruptions and related impact on production.
The Composite Systems segment experienced higher revenues on the strength of continued demand for retail fuel and water and wastewater tank applications. Revenues continued to reflect investments in North American convenience store retail modernization and the trend to replace both early generation single-wall fibreglass reinforced plastics (“FRP”) and aging, legacy steel tanks with new double-wall FRP solutions. The business maintained its focus on execution and delivery during the quarter to meet the high backlog. North American completion activity and international demand improved as compared to the previous quarter resulting in higher revenues for composite pipe products. Large and mid-size operators worked through existing pipe inventories and drilled but uncompleted wells moved to production in some basins leading to improved demand for the segments core composite products as well as new, larger diameter spoolable pipe. These developments and project orders in international markets resulted in the business restarting production at its Calgary, Alberta facilities during the quarter. Business development activities continued during the quarter with active project bids for composite pipe products in Australia, India, South America and the Middle East. Conditions in Western Canada continued to be depressed with lower demand for OCTG tubulars management services. During the quarter the business started the distribution of relined downhole tubulars in the Permian Basin market through the Composite Pipe sales team in Midland, Texas.
The Automotive and Industrial segment experienced higher revenues as global automotive OEM assembly plants increased capacity utilization primarily as the sector experienced a stronger than anticipated recovery. This resulted in increased demand for the Company’s automotive heat-shrink products and appliances during the quarter. The specialty wire and cable business experienced slightly lower revenue following a strong second quarter performance in North American electrical and communication markets.
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 as a leading indicator of changes in consolidated revenue. The order backlog of $542 million as at September 30, 2020, represents a slight decrease over the $553 million order backlog as June 30, 2020. This decrease reflects revenue generated in the quarter from backlog orders and the impact of a lower Canadian to U.S. dollar exchange rate.
In addition to the backlog, the Company closely monitors its bidding activity and the value of outstanding firm bids, which represents bids provided to customers with firm pricing and conditions against a defined scope, is over $870 million as of September 30, 2020, higher compared to the $790 million from last quarter largely due to the addition of a bid for a gas project in Qatar offset by the Payara project moving into backlog. Included in the firm bid, but not in the backlog, are unsanctioned conditional awards between engineering and procurement companies (“EPC’s”) and Shawcor for a scope of work that is estimated at over $120 million in revenue to be executed beyond the third quarter of 2020. The Company is also working with customers on several other projects and the value of budgetary estimates at the end of the third quarter was over $2.5 billion. Although the timing of these projects is uncertain, the Company’s bid and budgetary figures represent a diverse portfolio of opportunities to sustain and build the backlog.
Outlook
The Company’s financial performance is correlated with the level of industry activity and the level of investment in energy and infrastructure for resource development, storage and transportation around the globe and the resultant demand for the Company’s products and services.
Despite market challenges, the Company expects results to improve in the fourth quarter and into 2021 based on increased demand in the Composite pipe business, positive recovery signs in automotive and industrial markets, the ramp-up and execution of pipe coating work secured in the backlog and the continued strength in Composite tank demand. Based on these factors and actions taken to reduce costs and streamline operations earlier the year, the Company expects improved financial performance for the remainder of the year and into 2021, with fourth quarter Adjusted EBITDA, net of government assistance, in the $25 to $30 million range.
The long term outlook remains uncertain and difficult to forecast as the pace and magnitude of a broader market recovery will be dependent on the nature and duration of the COVID-19 pandemic and its impact on economic output and overall energy demand. Many exploration and production (“E&P”) operators have significantly curtailed production and the industry remains focused on capital discipline to ensure long term sustainability.
The Company’s performance will be determined by the strength of its diverse base business and the return of demand for its products and services, particularly in the U.S. and international energy markets. The Company expects results will benefit from actions taken to right size the business, improve profitability and meet its stated targets for annualized cost reduction and cash generation. These actions include reducing expenses and spending, aligning the Company’s operational footprint, cost structure and human resources with market demand, supported by the controlled closure of facilities initiated to date, which includes the 5 pipe coating plants and several girth weld inspection branches.
The Company’s base oil and gas business in North America is tied to the spending programs and budgets of E&P operators. In the U.S. land market, operators have reduced capital spending budgets to date by up to 50% as a result of the decline in economic activity and oil and gas demand as well as regulatory delays in transmission line projects. The Company expects U.S. land demand to stabilize at current levels and does not anticipate any near-term material improvement in demand for its products and services which are tied to the North American drilling and completion market. In Western Canada, limited off-take capacity in the region caused by the lack of new pipeline infrastructure has resulted in continued depressed spending and the Company does not expect improved market conditions or demand in the medium term.
As the economy and energy demand recovers, the Company continues to expect that the global oil & gas capex cycle will resume and that large international and offshore projects will be sanctioned as NOC’s (National Oil Companies) and IOC’s (International Oil Companies) realign their portfolios. These investments are required to replace, maintain and rehabilitate infrastructure that is at or beyond its useful design life, replace production due to reservoir depletion, requirements for advanced technologies and non-corrosive materials, or to address geopolitical challenges which are affecting several important producing regions. Additionally, higher investments in gas, specifically LNG and for domestic energy, are being supported by the increased demand for gas and greener alternatives to support continued energy transition.
Further detail on the outlook for the Pipeline and Pipe Services, Composite Systems and Automotive and Industrial segments are set out below.
Pipeline and Pipe Services Segment
Market demand for Company’s Pipeline and Pipe Services segment is driven by capital spending and investments by major EPC’s and international and national oil and gas producers. The Company has a track record of providing leading solutions and successful execution on critical international and offshore development projects.
The Company expects to continue to execute work secured in its backlog, including new international and offshore projects expected to be awarded in the fourth quarter, and continues to ramp-up pipe coating facilities in Channelview (Texas), Mexico, Brazil, Scotland, Norway and Indonesia.
The outlook for the pipe coating business is closely tied to project development and sanctioning timelines. The Company continues to engage with EPC’s and producers as they review project portfolios and expects certain projects which are yet to be sanctioned to be delayed in the near-term as a result of cost controls and reduced capital spending. Projects with the greatest likelihood of moving ahead are those tied to securing long-term domestic energy supply, projects undertaken as a result of national economic development and those that risk the loss of drilling-rights due to non-development timelines.
The Company continues to monitor international developments including Norway’s consideration of time-limited tax relief measures for oil and gas development, momentum in Brazil’s pre-salt offshore projects and Middle Eastern offshore designed to meet domestic energy requirements. In addition, the Company is monitoring progress on a previously deferred major East African crude oil project for which budgetary estimates were provided during the quarter.
North American demand for the pipeline and pipe services segment is closely tied to drilling and completion activity, the development of new and the repair/replacement of transmission pipelines and requirements for pipeline integrity and regulatory compliance. These activities drive the demand for small and large diameter pipe coatings and joint protection, girth weld inspection services and engineering design and consulting services.
Although activity in U.S. land has somewhat stabilized in the quarter, operators have moved to restructure, reduce capital spending budgets and in some cases consolidate through acquisition. The Company expects demand to stabilize at these lower levels and gradually improve in the next several quarters as operators return to a minimum base level of investment to maintain current levels of production. Possible COVID-19 resurgence remains a recovery risk and the industry is expected to continue its focus on employee safety and risk mitigation protocols.
The Company will continue its efforts to adjust its pipe coating footprint to match market activity levels and exit certain North American and international locations and/or product lines which are not strategic over the longer term. The continued depression experienced in Western Canada in the first half of the year is expected to continue as off-take capacity remains limited, there is no certainty of new pipeline infrastructure being built and lower commodity prices continue.
Composite Systems Segment
Market demand for the Company’s Composite Systems segment businesses are driven by North American drilling and completion activity, demand for international oil and gas gathering line applications, advanced materials in OCTG and underground storage and treatment tanks in retail fuel, water and wastewater and oil and gas. The segment benefits from a lower cost of ownership of composite systems versus steel and other materials, the development of larger diameter pipe applications and its international market qualifications.
The composite pipe business benefited from improved conditions in the third quarter as North American land completion activity and demand for the segment’s core products returned to more stable levels. Operators remained disciplined and maintained drill rigs and activity at levels similar to the previous quarter. Rig counts are expected to continue to lag completions for the balance of the year and operators are likely to continue the trend towards industry rationalization and consolidation.
Demand for the segment’s core pipe products in North America is expected to remain low compared to historical levels in the near-term, however the Company believes that the lower demand can be partially offset by the continued commercialization of the larger diameter pipe applications, market share gains as operators adopt composite technology for its overall cost profile and environmental advantages, and continued business development work on international energy and infrastructure projects.
Demand for composite storage tanks is delinked from the dynamics of oil and gas markets and is expected to remain strong throughout the balance of 2020. The business continues to focus on the execution of its historically high backlog and benefits from North American infrastructure spending. Fuel market tank demand is expected to remain strong as commercial and convenience store retailers realize the benefits of higher fuel margins and replace early generation single-wall FRP and legacy steel tanks with new double-wall FRP tanks to meet insurance company and banking requirements in some jurisdictions.
The demand for water storage and treatment tanks is expected to be supported by anticipated higher infrastructure spending and through its partnership with third parties to jointly develop complete product solutions for commercial and municipal water projects. The Company expects to deliver on its composite tank order backlog over the balance of the year with a focus on safe operations, productivity improvements and supply chain management.
Automotive and Industrial Segment
Demand for the Company’s Automotive and Industrial segment businesses generally follows GDP activity; however, the segment continues to be well positioned to capture the growing trend of electronic content in automobiles with specified sealing, insulating and customized application equipment systems for Tier 1 assembly customers and the expected increased spending on nuclear facility refurbishment.
The global automotive recovery and associated demand is expected to continue over the near-term as OEM assembly plants and Tier 1 suppliers increase capacity levels and re-stock inventories driven by the low interest rate environment, growth in consumer demand as the importance of personal transportation increases as a result of COVID-19 and electrical and hybrid government incentive programs.
Over the long-term demand for electric and plug-in hybrid passenger vehicles and light trucks is expected to grow and represent more than 50% of global vehicle sales by the early part of the next decade, with Europe and China to be the market leaders in vehicle electrification.
Industrial market demand for heat-shrink products is expected to continue its moderate recovery, while demand for specialty wire and cable products is expected to remain steady with solid demand from electrical utilities and communications providers in eastern North America.
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 | Nine Months Ended | ||||||||||||
| September 30, | September 30, | September 30, | September 30, | ||||||||||
| (in thousands of Canadian dollars) | 2020 | 2019(b) | 2020 | 2019(b) | |||||||||
| Pipeline and Pipe Services | $ | 135,634 | $ | 210,645 | $ | 472,426 | $ | 675,506 | |||||
| Composite Systems | 83,972 | 129,996 | 240,472 | 318,709 | |||||||||
| Automotive and Industrial | 49,270 | 53,809 | 142,283 | 162,910 | |||||||||
| Elimination(a) | (1,217 | ) | (435 | ) | (2,377 | ) | (1,743 | ) | |||||
| Consolidated revenue | $ | 267,659 | $ | 394,015 | $ | 852,804 | $ | 1,155,382 | |||||
| (a) | Represents the elimination of the inter-segment sales between the Pipeline and Pipe Services segment, the Composite Systems segment and the Automotive and Industrial segment. | ||||||||||||
| (b) | Restated to conform with current period presentation of segments. | ||||||||||||
Third Quarter 2020 versus Third Quarter 2019
Consolidated revenue decreased by $126.4 million, or 32%, from $394.0 million during the third quarter of 2019, to $267.7 million during the third quarter of 2020, reflecting revenue decreases of $75.0 million in the Pipeline and Pipe Services segment, $46.0 million in the Composite Systems segment and $4.5 million in the Automotive and Industrial segment. The decreases in all segments continue to reflect the impact of the global COVID-19 pandemic and the ongoing volatility in the energy markets.
In the Pipeline and Pipe Services segment, revenue in the third quarter of 2020 was $135.6 million, or 36% lower than in the third quarter of 2019, due to lower revenues in North America and Latin America, partially offset by higher revenues in the Middle East, Africa and Russia (“EMAR”) and Asia Pacific regions. See Section 3.1 – Pipeline and Pipe Services Segment for additional disclosure on the segment.
In the Composite Systems segment, revenue was $46.0 million lower during the third quarter of 2020, compared to $130.0 million in the third quarter of 2019, primarily due to decreased demand for composite pipe products. See Section 3.2 – Composite Systems Segment for additional disclosure on the segment.
In the Automotive and Industrial segment, revenue was $4.5 million lower during the third quarter of 2020, compared to $53.8 million in the third quarter of 2019, primarily due to decreased demand for automotive products and overall decreased activity levels in the North America and Latin America regions. See Section 3.3 – Automotive and Industrial Segment for additional disclosure on the segment.
Nine Months ended September 30, 2020 versus Nine Months ended September 30, 2019
Consolidated revenue decreased by $302.6 million, or 26%, from $1,155 million for the nine month period ended September 30, 2019, to $852.8 million for the nine month period ended September 30, 2020, reflecting revenue decreases of $203.1 million in the Pipeline and Pipe Services segment, $78.2 million in the Composite Systems segment and $20.6 million in the Automotive and Industrial segment.
In the Pipeline and Pipe Services segment, revenue in the nine month period ended September 30, 2020 was $472.4 million, or 30% lower than in the nine month period ended September 30, 2019, due to lower revenues in North America, Latin America and the EMAR regions, and partially offset by higher revenue in Asia Pacific. See Section 3.1 – Pipeline and Pipe Services Segment for additional disclosure on the segment.
In the Composite Systems segment, revenue was $78.2 million lower in the nine month period ended September 30, 2020, compared to $318.7 million in the nine month period ended September 30, 2019, primarily due to decreased demand for composite pipe products, partially offset by the benefit related to the inclusion of a full quarter of revenues in the first quarter of 2020 related to the acquisition of the ZCL business in April 2019. See Section 3.2 – Composite Systems Segment for additional disclosure on the segment.
In the Automotive and Industrial segment, revenue was $20.6 million lower in the nine month period ended September 30, 2020, compared to $162.9 million in the nine month period ended September 30, 2019, due to decreased activity levels in North America and EMAR, slightly offset by higher revenue in the Asia Pacific region. See Section 3.3 – Automotive and Industrial Segment for additional disclosure on the segment.
2.2 Loss/Income from Operations ("Operating Loss/ Income")
The following table sets forth operating (loss) income and Adjusted EBITDA for the following periods:
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | September 30, | September 30, | ||||||||||
| (in thousands of Canadian dollars, except percentages) | 2020 | 2019 | 2020 | 2019 | |||||||||
| Operating (loss)/income(a) | $ | (19,289 | ) | $ | 17,117 | $ | (277,272 | ) | $ | 54,127 | |||
| Operating margin(b) | (7.2% | ) | 4.3% | (32.5% | ) | 4.7% | |||||||
| Adjusted EBITDA(b) | $ | 17,803 | $ | 42,396 | $ | 28,263 | $ | 106,854 | |||||
| Adjusted EBITDA margin(b) | 6.7% | 10.8% | 3.3% | 9.2% | |||||||||
| (a) | Operating loss in the nine months ended September 30, 2020 includes $29.7 million of restructuring costs and $206.7 million of impairment charge. | ||||||||||||
| (b) | Operating margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. Non-GAAP measures do not have a standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of these Non-GAAP measures. | ||||||||||||
In the first quarter of 2020, the Company conducted a review of its impairment testing on property, plant and equipment, intangible assets and goodwill due to the current uncertain business climate brought about by the global COVID-19 pandemic and the volatility in the energy markets. As a result of this review, the Company recorded impairment charges of $203.1 million due to the current market conditions for certain assets and the Company’s assessment of the related future demand and market recovery. The impairment charges included $143.6 million and $46.0 million on intangible assets and goodwill for Pipeline Performance Group (formerly Bredero Shaw) and Shawcor Inspection Services, respectively, and $13.4 million on assets at two U.S. land pipe coating facilities and certain assets related to large diameter products in its Composite Systems facility in Alberta. In the third quarter of 2020, the Company recorded an additional impairment of $3.6 million on assets at a pipe coating facility in Asia Pacific for the Pipeline Performance Group related to the recently announced closure plans.
Operating Income in the nine months of 2020 includes an additional quarter of income from the ZCL composite tank business as compared to the same period in 2019 as the acquisition of the ZCL business was completed in April 2019, which had a net positive impact on the nine months of 2020 results.
In response to the current challenging business conditions, the Company also completed several cost reduction and cash preservation initiatives. As a result of the significant reduction of the salaried workforce and the shut down of certain facilities and branch offices in the second and third quarter, the Company has recorded restructuring costs of $29.7 million in the current year.
Third Quarter 2020 versus Third Quarter 2019
The third quarter of 2020 had an Operating Loss of $19.3 million, a decrease compared to the $17.1 million Operating Income in the third quarter of 2019. The decrease is primarily due to a $40.3 million decrease in gross profit, the negative impact of the $12.4 million restructuring costs, a $3.6 million impairment charge in the current quarter, and $4.2 million less from gain on sale of land. This is partially offset by a decrease of $22.3 million in SG&A expenses.
The current quarter benefited from COVID-19 related government wage subsidies recorded of $17 million, of which $9.5 million was recorded in cost of goods sold and $7.5 million was recorded in SG&A expenses.
The $40.3 million decrease in gross profit resulted from the $126.4 million decrease in revenue, as explained above, and a 1.3 percentage point decrease in gross margin from the third quarter of 2019. The decrease in the gross margin percentage was primarily due to product and project mix, the decrease in revenue and the impact of lower utilization of facilities on the absorption of manufacturing overheads due to the continued impact of the global COVID-19 pandemic and ongoing volatility in the energy markets. The decrease in gross margin is partially offset by $9.5 million of COVID-19 related government wage subsidies recorded in the current quarter.
SG&A expenses decreased by $22.3 million compared to the third quarter of 2019, primarily due to the completed cost control and headcount reduction initiatives that resulted in decreases of $12.2 million in compensation related costs (includes a $1.5 million reduction in incentive-based compensation) and $3.5 million in travel and entertainment expenses. The current quarter also benefited from COVID-19 related government wage subsidies of $7.5 million.
Adjusted EBITDA was $17.8 million in the third quarter of 2020 compared to $42.4 million in the third quarter of 2019. See Section 7.0 Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.
Nine Months ended September 30, 2020 versus Nine Months ended September 30, 2019
The nine months of 2020 had an Operating Loss of $277.3 million, a significant decrease compared to the $54.0 million Operating Income in the nine months of 2019. The decrease is primarily due to the negative impact of the $206.7 million impairment charge, a $102.8 million decrease in gross profit, $29.7 million incurred in restructuring costs, an additional $7.6 million in net foreign exchange losses and a $36.8 million lower gain on sale of land; partially offset by a $47.7 million decrease in SG&A expenses.
The nine months results benefited from COVID-19 related government wage subsidies recorded of $24.6 million, of which $9.5 million was recorded in cost of goods sold and $15.1 million was recorded in SG&A expenses.
The $102.8 million decrease in gross profit resulted from the $302.6 million decrease in revenue, as explained above, and a 1.9 percentage point decrease in the gross margin from the nine month period of 2019. The decrease in the gross margin percentage was primarily due to product and project mix, the decrease in revenue and the impact of lower utilization of facilities on the absorption of manufacturing overheads primarily due to the impact of global COVID-19 pandemic and the volatility in the energy markets. The decrease in gross margin was partially offset by $9.5 million of COVID-19 related government wage subsidies recorded in the current period.
SG&A expenses decreased by $47.7 million compared to the first nine months of 2019, primarily due to the completed cost control and headcount reduction initiatives that resulted in decreases of $29.9 million in compensation related costs (includes a $14.2. million reduction in incentive-based compensation) and $7.7 million in travel and entertainment expenses. The current period also benefited from the COVID-19 related government wage subsidies of $15.1 million and the absence of non-recurring integration and acquisition costs related to the ZCL business in the current period compared to the $9.4 million incurred in the prior year period. This was partially offset by the current period including an additional quarter of ongoing SG&A expenses of $5.6 million for the ZCL business as it was acquired in April 2019 and increases of $4.9 million of provisions and equipment expenses and $1.7 million of professional fees.
Adjusted EBITDA was $28.3 million in the nine month period ended September 30, 2020 compared to $106.9 million in the nine month period ended September 30, 2019. See Section 7.0 Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.
2.3 Income from Investments in Associates
The following table sets forth the income from investments in associates for the following periods:
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||
| (in thousands of Canadian dollars) | 2020 | 2019 | 2020 | 2019 | ||||||||
| Income from investments in associates | $ | 8,083 | $ | 234 | $ | 8,175 | $ | 8,976 | ||||
The Company has equity-accounted investments in Zedi Inc. ("Zedi") and Power-Feed-Thru Systems and Connectors, LLC ("PFT"). In the third quarter of 2020, the Company recorded a gain of $8.2 million in the investment in Zedi based on a current valuation of the investment. During the second quarter of 2019, Zedi disposed of its software and automation businesses which represented a substantial part of its operations and as a result, the Company received $29.2 million of proceeds and recorded a gain of $9.7 million.
3.0 SEGMENT INFORMATION
3.1 Pipeline and Pipe Services Segment
The following table sets forth, by geographic location, the revenue, Operating (Loss) Income and Adjusted EBITDA for the Pipeline and Pipe Services segment for the following periods:
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | September 30, | September 30 | ||||||||||
| (in thousands of Canadian dollars, except percentages) | 2020 | 2019(a) | 2020 | 2019(a) | |||||||||
| North America | $ | 67,405 | $ | 124,090 | $ | 236,806 | $ | 384,498 | |||||
| Latin America | 2,229 | 32,846 | 28,506 | 85,600 | |||||||||
| EMAR | 51,058 | 50,288 | 153,732 | 183,257 | |||||||||
| Asia Pacific | 14,942 | 3,421 | 53,382 | 22,151 | |||||||||
| Total revenue | $ | 135,634 | $ | 210,645 | $ | 472,426 | $ | 675,506 | |||||
| Operating (Loss) Income(b) | $ | (36,647) | $ | (9,292) | $ | (276,297) | $ | 9,537 | |||||
| Operating margin(c) | (27%) | (4.4%) | (58.5%) | 1.4% | |||||||||
| Adjusted EBITDA(c) | $ | (11,885) | $ | 6,826 | $ | (22,958) | $ | 24,516 | |||||
| Adjusted EBITDA margin(c) | (8.8%) | 3.2% | (4.9%) | 3.6% | |||||||||
| (a) | Restated to conform with current period presentation of segments. | ||||||||||||
| (b) | Operating loss in the nine months ended September 30, 2020 includes $18.0 million restructuring costs and $196.9 million of impairment charges. | ||||||||||||
| (c) | Operating margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. Non-GAAP measures do not have a standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of these Non-GAAP measures. | ||||||||||||
Third Quarter 2020 versus Third Quarter 2019
Revenue in the third quarter of 2020 was $135.6 million, a decrease of $75.0 million, or 36%, from $210.6 million in the comparable period of 2019. This was primarily due to lower revenues in North America and Latin America, partially offset by higher revenue in EMAR and Asia Pacific:
- North America revenue decreased by $56.7 million, or 46%, primarily as a result of lower activity levels for small and large diameter pipe coating and girth weld inspection services in the region, partially offset by higher revenue from engineering services.
- Revenue in Latin America decreased by $30.6 million, or 93%, primarily due to lower revenue from the Liza II and other pipe coating project activity in Mexico compared to the prior year quarter.
- In EMAR, revenue increased by $0.7 million, or 2%, primarily due to higher pipe coating project activity at the Leith, Scotland facility and Orkanger, Norway facility. This was partially offset by lower activity levels at Ras Al Khaimah, UAE (“RAK”) facilities, Italy facilities and lower revenue from field joint coating projects in the region.
- Revenue in Asia Pacific increased by $11.5 million, or 337%, mainly due to higher pipe coating project activities at the Kabil, Indonesia facility and the Kuantan, Malaysia facility.
In the third quarter of 2020, the Operating Loss was $36.6 million, as compared to an Operating Loss of $9.3 million in the third quarter of 2019. The decline reflects a $31.7 million decrease in gross profit, $10.0 million of restructuring costs and a $3.6 million impairment. This is partially offset by a decrease of $13.0 million in SG&A, as explained in Section 2.2 above, a decrease in depreciation and amortization of $3.0 million, and a gain on sale of land of $1.2 million.
The current quarter benefited from COVID-19 related government wage subsidies recorded of $5.4 million, of which $3.6 million was recorded in cost of goods sold and $1.8 million was recorded in SG&A expenses.
The decrease in the gross profit was primarily due to the lower revenue, as explained above, and an 8.0 percentage point decrease in gross margin. The decrease in the gross margin percentage was primarily due to product and project mix, lower utilization in North America and Latin America facilities and the related impact on the absorption of manufacturing overheads. The decrease in gross profit was partially offset by COVID-19 related government subsidies recorded in the third quarter.
Adjusted EBITDA in the third quarter of 2020 was negative $11.9 million compared to positive $6.8 million in the third quarter of 2019. See Section 7.0 - Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.
Nine Months ended September 30, 2020 versus Nine Months ended September 30, 2019
Revenue in the nine months of 2020 was $472.4 million, a decrease of 203.1 million, or 30%, from $675.5 million in the comparable period of 2019. This was primarily due to lower revenues in North America, Latin America and EMAR, partially offset by higher revenue in Asia Pacific:
- North America revenue decreased by $147.7 million, or 38%, primarily as a result of lower activity levels for small and large diameter pipe coating and girth weld inspection services in the region, partially offset by higher revenue from engineering services. Revenue for the first nine months of 2020 was also negatively impacted by the delay of revenue in the first quarter caused by the execution of work to address the fourth quarter 2019 service quality event at the Channelview, Texas facility.
- Revenue in Latin America decreased by $57.1 million, or 67%, primarily due to lower activity levels in Brazil and Argentina and Mexico compared to the nine month period of the prior year.
- In EMAR, revenue decreased by $29.5 million, or 16%, primarily due to lower revenue levels at the Italy and UK facilities, partially offset by higher pipe coating project activity levels at the Leith, Scotland, Orkanger, Norway and RAK facilities and higher revenue from field joint coating projects in the region.
- Revenue in Asia Pacific increased by $31.2 million, or 141%, mainly due to higher pipe coating project activity at the Kabil, Indonesia facility, partially offset by lower revenue from the Kuantan, Malaysia facility.
In the first nine months of 2020, Operating Loss was $276.3 million compared to Operating Income of $9.5 million in the comparable prior year period. The decrease reflects the negative impact of the $196.9 million impairment charge recorded, $18.0 million of restructuring costs and a $70.0 million decrease in gross profit, and were partially offset by a decrease of $23.2 million in SG&A expenses, as explained in Section 2.2 above, and a decrease in depreciation and amortization of $7.1 million. The first nine months of 2020 included a gain on sale of land of $1.2 million compared to a gain on sale of land of $32.6 million in the nine months of 2019.
The nine months results benefited from COVID-19 related government wage subsidies recorded of $7.5 million, of which $3.6 million was recorded in cost of goods sold and $3.9 million was recorded in SG&A expenses.
The decrease in the gross profit was primarily due to the lower revenue, as explained above, and a 3.3 percentage point decrease in gross margin. The decrease in the gross margin percentage was primarily due to product and project mix, lower utilization in North America and Latin America facilities and the related impact on the absorption of manufacturing overheads. The decreases in gross profit was partially offset by the COVID-19 related government wage subsidies recorded in the period.
Adjusted EBITDA in the nine months of 2020 was negative $23.0 million compared to positive $24.5 million in the nine months of 2019. See Section 7.0- Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.
3.2 Composite Systems Segment
The following table sets forth, by geographic location, the revenue, Operating (Loss) Income and Adjusted EBITDA for the Composite Systems segment for the following periods:
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | September 30, | September 30, | ||||||||||
| (in thousands of Canadian dollars, except percentages) | 2020 | 2019(a) | 2020 | 2019(a) | |||||||||
| North America | $ | 83,220 | $ | 126,574 | $ | 237,049 | $ | 309,541 | |||||
| Latin America | 489 | 1,376 | 2,326 | 4,678 | |||||||||
| EMAR | 298 | 1,781 | 1,069 | 2,939 | |||||||||
| Asia Pacific | (35) | 265 | 28 | 1,551 | |||||||||
| Total revenue | $ | 83,972 | $ | 129,996 | $ | 240,472 | $ | 318,709 | |||||
| Operating Income(b) | $ | 13,058 | $ | 21,067 | $ | 733 | $ | 40,359 | |||||
| Operating margin(c) | 15.6% | 16.2% | 0.3% | 12.7% | |||||||||
| Adjusted EBITDA(c) | $ | 21,596 | $ | 27,230 | $ | 39,718 | $ | 67,534 | |||||
| Adjusted EBITDA margin(c) | 25.7% | 20.9% | 16.5% | 21.2% | |||||||||
| (a) | Restated to conform with current period presentation of segments. | ||||||||||||
| (b) | Operating Income in the nine months ended September 30, 2020 includes $4.2 million of restructuring costs and $9.8 million of impairment charges. | ||||||||||||
| (c) | Operating margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. Non-GAAP measures do not have a standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of these Non-GAAP measures. | ||||||||||||
Third Quarter 2020 versus Third Quarter 2019
Revenue in the third quarter of 2020 decreased by $46.0 million, or 35%, compared to the third quarter of 2019, primarily due to the negative impact of global COVID-19 pandemic and the volatility in the energy markets. North America revenue decreased by $43.4 million, or 34%, primarily due to lower demand for composite pipe products which resulted from the continued capital discipline focus of exploration and production operators and low oil and gas prices. In addition, tubular management service activity levels in Western Canada remain depressed. This was partially offset by higher revenues in the composite tank business as demand in the retail fuel market remains strong.
Operating Income in the third quarter of 2020 was $13.1 million compared to an Operating Income of $21.1 million in the third quarter of 2019. The decrease reflects a $7.3 million decrease in gross profit, the negative impact of the $0.4 million restructuring costs and is partially offset by a decrease of $5.0 million in SG&A expenses, as explained in Section 2.2 above.
The current quarter benefited from COVID-19 related government wage subsidies recorded of $7.7 million, of which $4.3 million was recorded in cost of goods sold and $3.4 million was recorded in SG&A expenses.
The decrease in gross profit was primarily due to the decrease in revenue, as explained above, offset by an 8.5 percentage point increase in gross margin. The increase in the gross margin points was primarily due to higher utilization in the composite tank facilities driven by process improvements and partially offset by lower utilization in the composite pipe facility. The third quarter of 2019 also included a one-time inventory revaluation adjustment of $3.6 million related to the acquisition of the composite tank business. In addition, the decreases in gross profit was partially offset by the COVID-19 related government wage subsidies recorded in the third quarter.
Adjusted EBITDA in the third quarter of 2020 was $21.6 million compared to $27.2 million in the third quarter of 2019. See Section 7.0 -Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.
Nine Months ended September 30, 2020 versus Nine Months ended September 30, 2019
Revenue in the nine months of 2020 decreased by $78.2 million, or 25%, compared to the nine months of 2019, primarily due to the negative impact of the ongoing global COVID-19 pandemic and the volatility in the energy markets. North America revenue decreased by $72.5 million, or 23%, primarily due to lower demand level in composite pipe products, attributed to the continued capital discipline focus of exploration and production operators and low oil and gas prices. In addition, tubular management service activity levels were lower in Western Canada. These decreases were partially offset by the increased revenue in the composite tank business from continued strong demand in the retail fuel market. In addition, the current year-to-date period includes an additional quarter of revenues from the ZCL business which was acquired in April 2019.
Operating Income in the nine months of 2020 was $0.7 million compared to Operating Income of $40.4 million in the first nine months of 2019. The operating results for the current period include an additional quarter of operating income from the composite tank business as the ZCL business was acquired in April 2019. The decrease reflects the negative impact of the $4.2 million restructuring costs, the $9.8 million impairment charge recorded in the first quarter of this year, a $24.5 million decrease in gross profit and an increase of $3.1 million in depreciation and amortization, partially offset by a decrease of $6.3 million in SG&A expenses.
The nine months results benefited from COVID-19 related government wage subsidies recorded of $10.5 million, of which $4.3 million was recorded in cost of goods sold and $6.2 million was recorded in SG&A expenses.
The decrease in gross profit was primarily due to the decrease in revenue, as explained above. The decrease in the gross margin was primarily due to lower utilization in the composite pipe facility and the related impact on the absorption of manufacturing overheads partially offset by higher margins in the composite tank business due to higher plant utilization and process improvements. In addition, the decreases in gross profit was partially offset by the COVID-19 related government wage subsidies recorded in the period.
The decrease in SG&A expenses reflects reduced costs as result of restructuring initiatives completed, the absence of non-recurring integration and acquisition costs related to the ZCL business in the current period compared to the $3.8 million incurred in the prior year period and $6.2 million of COVID-19 related government wage subsidies recorded in the period. This was partially offset by the current period including an additional quarter of ongoing SG&A expenses of $5.6 million for the ZCL business which was acquired in April 2019.
Adjusted EBITDA in the nine months of 2020 was $39.7 million compared to $67.5 million in the nine months of 2019. See Section 7.0 - Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.
3.3 Automotive and Industrial Segment
The following table sets forth, by geographic location, the revenue, Operating Income and operating margin for the Automotive and Industrial segment for the following periods:
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | September 30, | September 30, | ||||||||||
| (in thousands of Canadian dollars, except percentages) | 2020 | 2019 | 2020 | 2019 | |||||||||
| North America | $ | 29,457 | $ | 33,332 | $ | 89,396 | $ | 96,853 | |||||
| EMAR | 16,416 | 17,752 | 44,548 | 58,407 | |||||||||
| Asia Pacific | 3,397 | 2,725 | 8,339 | 7,650 | |||||||||
| Total revenue | $ | 49,270 | $ | 53,809 | $ | 142,283 | $ | 162,910 | |||||
| Operating Income(a) | $ | 6,043 | $ | 8,593 | $ | 13,516 | $ | 26,414 | |||||
| Operating margin(b) | 12.3% | 16.0% | 9.5% | 16.2% | |||||||||
| Adjusted EBITDA(b) | $ | 9,244 | $ | 9,708 | $ | 23,253 | $ | 29,754 | |||||
| Adjusted EBITDA margin(b) | 18.8% | 18.0% | 16.3% | 18.3% | |||||||||
| (a) | Operating Income in the nine months ended September 30, 2020 includes $6.3 million of restructuring costs. | ||||||||||||
| (b) | Operating margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. Non-GAAP measures do not have a standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of these Non-GAAP measures. | ||||||||||||
Third Quarter 2020 versus Third Quarter 2019
Revenue in the third quarter of 2020 decreased by $4.5 million, or 8.4%, compared to the third quarter of 2019, due to lower demand for heat shrink tubing products in the automotive sector in North America and EMAR, slightly offset by higher revenue in Asia Pacific. The decline in the automotive sector reflects that a majority of global automotive OEM assembly plants temporarily halted production and suspended operations late in the first quarter as a result of COVID-19 and have yet to return to full capacity as of the third quarter of 2020.
Operating Income in the third quarter of 2020 was $6.0 million compared to an Operating Income of $8.6 million in the third quarter of 2019. The decrease in Operating Income was primarily due to the negative impact of $2.0 million in restructuring costs and a decrease in gross profit of $1.3 million.
The current quarter benefited from COVID-19 related government wage subsidies recorded of $2.4 million, of which $1.6 million was recorded in cost of goods sold and $0.8 million was recorded in SG&A expenses.
The decrease in gross profit was primarily due to the decrease in revenue, as explained above and lower utilization in the manufacturing plants, which was partially offset by COVID-19 related government wage subsidies recorded in the current quarter.
Adjusted EBITDA in the third quarter of 2020 was $9.2 million compared to $9.7 million in the third quarter of 2019. See Section 7.0 - Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.
Nine Months ended September 30, 2020 versus Nine Months ended September 30, 2019
Revenue in the nine months of 2020 decreased by $20.6 million, or 13%, compared to the nine months of 2019, due to lower demand for heat shrink tubing products in the automotive sector in North America and EMAR, slightly offset by higher revenue in Asia Pacific. The decline in the automotive sector reflects that a majority of global automotive OEM assembly plants temporarily halted production and suspended operations late in the first quarter as a result of COVID-19, continued for much of the second quarter, and have yet to come back to full capacity as of the third quarter.
Operating Income in the nine months of 2020 was $13.5 million, lower compared to $26.4 million in the nine months of 2019. The decrease in Operating Income was primarily due to the negative impact of $6.3 million in restructuring costs and a decrease in gross profit of $8.4 million, partially offset by a decrease of $1.8 million in SG&A expenses.
The nine months results benefited from COVID-19 related government wage subsidies recorded of $3.2 million, of which $1.6 million was recorded in cost of goods sold and $1.6 million was recorded in SG&A expenses.
The decrease in gross profit was primarily due to the decrease in revenue, as explained above, and a 1.8 percentage point decrease in gross margin. The decrease in gross margin was primarily due to product mix, lower plant utilization and the related impact on the absorption of manufacturing overheads. The decrease in gross profit was partially offset by the COVID-19 related government wage subsidies recorded in the period.
Adjusted EBITDA in the nine months of 2020 was $23.3 million compared to $29.8 million in the nine months of 2019. See Section 7.0 - Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.
3.4 Financial and Corporate
Financial and corporate costs include corporate expenses not allocated to the operating segments and other non-operating items, including foreign exchange gains and losses on foreign currency denominated cash and working capital balances. The corporate division of the Company only earns revenue that is considered incidental to the activities of the Company. As a result, it does not meet the definition of a reportable operating segment as defined under IFRS.
The following table sets forth the Company’s unallocated financial and corporate expenses for the following periods:
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||
| (in thousands of Canadian dollars) | 2020 | 2019 | 2020 | 2019 | ||||||||
| Financial and corporate expenses | $ | (1,743 | ) | $ | (3,251 | ) | $ | (15,224 | ) | $ | (22,183 | ) |
Third Quarter 2020 versus Third Quarter 2019
The third quarter of 2020 reflected financial and corporate loss of $1.7 million compared to an operating loss of $3.3 million in the same period of 2019. The third quarter of 2020 included $1.5 million of COVID-19 related governmental wage subsidies and reflected a decrease of $1.7 million in incentive-based compensation costs when compared to the same period in 2019. This was partially offset by decrease of $2.2 million in foreign exchange gain.
Nine Months ended September 30, 2020 versus Nine Months ended September 30, 2019
Financial and corporate costs in the nine months of 2020 were $15.2 million compared to $22.2 million in the nine months of 2019. The decrease was primarily due to the decrease of $11.3 million in incentive-based compensation, and $3.4 million of COVID-19 related government wage subsidies recorded in the period, partially offset by a $7.6 million increase in foreign exchange loss. The period also reflects an absence of non-recurring acquisition costs related to the ZCL business in the current period compared to the $5.0 million incurred in the prior year period.
4.0 LIQUIDITY AND CAPITALIZATION
As at September 30, 2020, the Company had cash and cash equivalents totalling $106.8 million (December 31, 2019 – $98.2 million) and had unutilized lines of credit available to use of $275.2 million (December 31, 2019 – $275.6 million).
The effects of the COVID-19 pandemic and the rapid decline in oil prices has adversely impacted demand for the Company’s products and services and its operating results, financial position and access to sources of liquidity. With the uncertainty about the extent and depth of the market contraction and its impact on financial results, the Company turned its focus in the second quarter on the reduction of costs and cash preservation to protect its balance sheet. As communicated in April 2020, the Company targeted $60 million in sustainable annualized SG&A savings and $40 million in incremental cash generation. The Company has made significant progress to date on these targets by reducing CEO, executive and Board compensation, reducing the salaried workforce levels by over 19%, optimizing its footprint with the closure of four North American pipe coating facilities, announced plans to close a pipe coating facility in South East Asia and several girth well inspection branch offices and making significant cuts to other operating costs and capital budgets. As a result of these efforts the Company is on track to meet its goal of a quarterly normalized SG&A run rate of $70 million. During the first nine months of 2020, the Company has also delivered positive cash flow of $47.3 million from reduced working capital, excluding the impact of increased restructuring liabilities, and $16.5 million from proceeds of asset sales. Based on these actions completed and planned, its diversified business and current backlog, the Company expects to generate sufficient cash flows to fund its operations, working capital requirements and capital program.
5.0 FORWARD-LOOKING INFORMATION
This news release 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 impact and duration of the global COVID-19 pandemic and the related impacts on the Company’s operations, including exposure to additional risks and liabilities and on the global supply and demand of oil and gas, the completion of restructuring initiatives and cost controls, including facility and branch closures, and the levels of cost savings and cash generation to be achieved thereby, the achievement of its anticipated quarterly normalized SG&A, the future outlook for capital expenditures in the offshore oil and gas sector and US land drilling and completion activity, the demand for its products in retail fuel, automotive and industrial markets, the level of financial performance in the fourth quarter of 2020 and into 2021, the effect of the Company’s diversified portfolio of products on revenue and operating income, the demand for the Company’s products in the Pipeline and Pipe Services, Composite Systems and the Automotive and Industrial segments of the Company’s business, the expected development of the Company’s order backlog and the impact thereof on the Company’s revenue and operating income, including the award of contracts on outstanding bids, the impact of global economic activity on the demand for the Company's products, the impact of continuing demand for oil and gas, the impact of global oil and gas commodity prices, the impact of changing energy demand, supply and prices and the impact and likelihood of changes in competitive conditions in the markets in which the Company participates, the execution of definitive contracts for and the timing to complete certain pipe coating projects, the likelihood that projects will be sanctioned in the future, and the impact thereof on the Company’s business, the ability of the Company to fund its operating and capital requirements and the ability of the Company to satisfy its debt covenants.
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 duration and the impact of the COVID-19 pandemic on the Company, its employees, customers, suppliers, energy and commodity markets and on the global economy, the impact on the Company of changes in the strategy by U.S. oil and gas operators to heighten focus on capital discipline and shareholder returns, the impact on the Company of reduced demand for its products and services, including the delay, suspension or cancellation of existing and anticipated contracts, as a result of lower investment in global oil and gas extraction, infrastructure and transportation activity following the previous declines in the global price of oil and gas, long term changes in global or regional economic activity and changes in energy supply and demand, which with other factors, 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; the impact of climate change on the demand for the Company’s products and fluctuations in foreign exchange rates, as well as other risks and uncertainties described herein under "Risks and Uncertainties" and in the Company’s annual MD&A and in the Company’s Annual Information Form under "Risk Factors".
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 the continuation or renewal of certain COVID 19 related restrictions on a more targeted basis than the basis on which those restrictions were imposed earlier in the year and the impact thereof on global economic activity, the Company’s ability to manage supply chain disruptions caused by the COVID-19 pandemic or natural disasters, global oil and gas prices, the commencement of work by the Company on the Payara Project during the fourth quarter of 2020, the delay in the near term of certain projects and the likelihood of projects tied to securing long-term domestic energy supply or drilling rights being sanctioned, the recommencement of increased capital expenditures in the global offshore oil and gas segment, the commencement of recovery of the global economy, no growth in Western Canada and stable demand levels in U.S. land markets in 2021, stronger than previously anticipated recovery of demand in the automotive market, particularly in North America and Europe, solid demand in the retail fuel market and stable demand in the industrial markets, the Company’s ability to execute projects under contract, 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, the adequacy of the Company’s existing accruals in respect of environmental compliance and in respect of litigation and tax matters and other claims generally, and the level of payments under the Company's performance, bid and surety bonds and the ability of the Company to satisfy all covenants under the Credit Facility and having sufficient liquidity to fund its obligations and planned initiatives. 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.
6.0 CONFERENCE CALL AND ADDITIONAL INFORMATION
Shawcor will be hosting a Shareholder and Analyst Conference Call and Webcast on Friday, November 13th, 2020 at 9:00 AM ET, which will discuss the Company’s Third Quarter 2020 Financial Results. To participate via telephone, please dial 1-877-776-4039 or 1-315-625-6955. Conference Call ID: 2083391. Web PIN: 8396; Alternatively, please go to the following website address to participate via webcast: https://edge.media-server.com/mmc/p/48xiyixv
The Company’s third quarter MD&A and financial statements are available on Shawcor’s website at www.shawcor.com.
Additional information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com.
For further information, please contact:
Paul Pierroz
Senior Vice President, Corporate & Investor Relations
Telephone: 416.744.5540
E-mail: paul.pierroz@shawcor.com
Source: Shawcor Ltd.
Shawcor.ER
Shawcor Ltd.
| Interim Consolidated Balance Sheets (Unaudited) | ||||||
| September 30, | December 31, | |||||
| (in thousands of Canadian dollars) | 2020 | 2019 | ||||
| ASSETS | ||||||
| Current Assets | ||||||
| Cash and cash equivalents | $ | 106,830 | $ | 98,218 | ||
| Loans receivable | – | 712 | ||||
| Accounts receivable | 212,610 | 246,745 | ||||
| Contract assets | 40,825 | 41,616 | ||||
| Income taxes receivable | 18,341 | 33,493 | ||||
| Inventory | 171,687 | 160,792 | ||||
| Prepaid expenses | 19,555 | 17,560 | ||||
| Derivative financial instruments | 168 | 177 | ||||
| Total current assets | 570,016 | 599,313 | ||||
| Non-current Assets | ||||||
| Property, plant and equipment | 382,186 | 420,027 | ||||
| Right-of-use assets | 77,218 | 84,269 | ||||
| Intangible assets | 217,268 | 271,514 | ||||
| Investments in associates | 14,592 | 15,400 | ||||
| Deferred income tax assets | 33,367 | 37,462 | ||||
| Other assets | 4,514 | 5,396 | ||||
| Goodwill | 245,598 | 377,704 | ||||
| Total non-current assets | 974,743 | 1,211,772 | ||||
| TOTAL ASSETS | $ | 1,544,759 | $ | 1,811,085 | ||
| LIABILITIES AND EQUITY | ||||||
| Current Liabilities | ||||||
| Accounts payable and accrued liabilities | $ | 197,353 | $ | 177,452 | ||
| Provisions | 19,187 | 25,694 | ||||
| Income taxes payable | 16,532 | 18,918 | ||||
| Derivative financial instruments | 132 | 330 | ||||
| Contract liabilities | 52,992 | 43,693 | ||||
| Lease liabilities | 20,281 | 21,461 | ||||
| Other liabilities | 3,324 | 9,518 | ||||
| Total current liabilities | 309,801 | 297,066 | ||||
| Non-current Liabilities | ||||||
| Long-term debt | 434,566 | 435,462 | ||||
| Lease liabilities | 62,367 | 67,768 | ||||
| Provisions | 20,740 | 20,477 | ||||
| Employee future benefits | 16,831 | 15,390 | ||||
| Deferred income tax liabilities | 10,171 | 19,306 | ||||
| Other liabilities | 5,215 | 5,669 | ||||
| Total non-current liabilities | 549,890 | 564,072 | ||||
| Total liabilities | 859,691 | 861,138 | ||||
| Equity | ||||||
| Share capital | 719,172 | 710,563 | ||||
| Contributed surplus | 26,272 | 32,615 | ||||
| Retained (deficit) earnings | (107,508 | ) | 193,027 | |||
| Non-controlling interests | 4,197 | 4,647 | ||||
| Accumulated other comprehensive income | 42,935 | 9,095 | ||||
| Total equity | 685,068 | 949,947 | ||||
| TOTAL LIABILITIES AND EQUITY | $ | 1,544,759 | $ | 1,811,085 | ||
Shawcor Ltd.
| Interim Consolidated Statements of (Loss) Income (Unaudited) | ||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| (in thousands of Canadian dollars, except per share amounts) | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Revenue | ||||||||||||||
| Sale of products | $ | 139,075 | $ | 189,423 | $ | 404,022 | $ | 507,549 | ||||||
| Rendering of services | 128,584 | 204,592 | 448,782 | 647,833 | ||||||||||
| 267,659 | 394,015 | 852,804 | 1,155,382 | |||||||||||
| Cost of Goods Sold and Services Rendered | 193,338 | 279,397 | 625,402 | 825,140 | ||||||||||
| Gross Profit | 74,321 | 114,618 | 227,402 | 330,242 | ||||||||||
| Selling, general and administrative expenses | 55,053 | 77,398 | 185,824 | 233,488 | ||||||||||
| Research and development expenses | 2,293 | 3,716 | 9,090 | 10,411 | ||||||||||
| Foreign exchange (gains) losses | (938 | ) | (3,178 | ) | 4,242 | (3,352 | ) | |||||||
| Depreciation and amortization | 22,343 | 24,951 | 70,275 | 73,562 | ||||||||||
| Gain on sale of land | (1,213 | ) | (5,386 | ) | (1,213 | ) | (37,994 | ) | ||||||
| Impairment | 3,623 | – | 206,707 | – | ||||||||||
| Restructuring costs | 12,449 | – | 29,749 | – | ||||||||||
| (Loss) Income from Operations | (19,289 | ) | 17,117 | (277,272 | ) | 54,127 | ||||||||
| Income from investments in associates | 8,083 | 234 | 8,175 | 8,976 | ||||||||||
| Finance costs, net | (6,673 | ) | (6,528 | ) | (18,068 | ) | (15,468 | ) | ||||||
| Cost associated with repayment of long-term debt and credit facilities | – | – | – | (12,308 | ) | |||||||||
| Net monetary loss | (390 | ) | (504 | ) | (1,245 | ) | (2,391 | ) | ||||||
| (Loss) Income before Income Taxes | (18,269 | ) | 10,319 | (288,410 | ) | 32,936 | ||||||||
| Income tax expense (recovery) | 136 | 3,562 | 1,963 | (15,792 | ) | |||||||||
| Net (Loss) Income | $ | (18,405 | ) | $ | 6,757 | $ | (290,373 | ) | $ | 48,728 | ||||
| Net (Loss) Income Attributable to: | ||||||||||||||
| Shareholders of the Company | $ | (18,311 | ) | $ | 6,520 | $ | (289,989 | ) | $ | 48,490 | ||||
| Non-controlling interests | (94 | ) | 237 | (384 | ) | 238 | ||||||||
| Net (Loss) Income | $ | (18,405 | ) | $ | 6,757 | $ | (290,373 | ) | $ | 48,728 | ||||
| (Loss) Earnings per Share | ||||||||||||||
| Basic | $ | (0.26 | ) | $ | 0.09 | $ | (4.12 | ) | $ | 0.69 | ||||
| Diluted | $ | (0.26 | ) | $ | 0.09 | $ | (4.12 | ) | $ | 0.69 | ||||
| Weighted Average Number of Shares Outstanding (000s) | ||||||||||||||
| Basic | 70,415 | 70,152 | 70,344 | 70,137 | ||||||||||
| Diluted | 70,415 | 70,434 | 70,344 | 70,420 | ||||||||||
Shawcor Ltd.
| Interim Consolidated Statements of Cash Flows (Unaudited) | ||||||||||||
| (in thousands of Canadian dollars) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||
| Operating Activities | ||||||||||||
| Net (loss) income | $ | (18,405 | ) | $ | 6,757 | $ | (290,373 | ) | $ | 48,728 | ||
| Add (deduct) items not affecting cash | ||||||||||||
| Depreciation and amortization | 22,343 | 24,951 | 70,275 | 73,562 | ||||||||
| Impairment | 3,623 | – | 206,707 | – | ||||||||
| Impact of Inventory revaluation adjustment | – | 3,612 | – | 7,000 | ||||||||
| Interest expense on right-of-use assets leases | 940 | 861 | 2,896 | 2,421 | ||||||||
| Share-based compensation and incentive-based compensation | 1,195 | 2,674 | (1,741 | ) | 12,479 | |||||||
| Deferred income taxes | (2,469 | ) | (4,449 | ) | (3,475 | ) | (28,535 | ) | ||||
| (Gain) loss on disposal of property, plant and equipment | (137 | ) | 702 | (653 | ) | 389 | ||||||
| Gain on sale of land | (1,213 | ) | (5,386 | ) | (1,213 | ) | (37,994 | ) | ||||
| Unrealized (gain) loss on derivative financial instruments | (443 | ) | (50 | ) | (189 | ) | 1,255 | |||||
| Income from investments in associates | (8,083 | ) | (234 | ) | (8,175 | ) | (8,976 | ) | ||||
| Other | 1,178 | (2,455 | ) | (3,465 | ) | (6,201 | ) | |||||
| Change in non-cash working capital and foreign exchange | 8,781 | (18,838 | ) | 63,434 | (58,980 | ) | ||||||
| Cash Provided by Operating Activities | $ | 7,310 | $ | 8,145 | $ | 34,028 | $ | 5,148 | ||||
| Investing Activities | ||||||||||||
| Decrease in loans receivable | – | 612 | 748 | 1,824 | ||||||||
| Decrease in short-term investments | – | – | – | 2,046 | ||||||||
| Purchase of property, plant and equipment | (3,317 | ) | (10,038 | ) | (16,930 | ) | (34,589 | ) | ||||
| Proceeds on disposal of property, plant and equipment | 5,834 | 6,988 | 7,650 | 47,659 | ||||||||
| Decrease in other assets | 220 | 128 | 627 | 366 | ||||||||
| Proceeds from investments in associate | – | – | 8,878 | 29,171 | ||||||||
| Business acquisition net of cash acquired | – | – | – | (291,477 | ) | |||||||
| Cash Provided by (Used in) Investing Activities | 2,737 | (2,310 | ) | 973 | (245,000 | ) | ||||||
| Financing Activities | ||||||||||||
| (Decrease) increase in long-term debt | (842 | ) | (29,000 | ) | (1,724 | ) | 158,085 | |||||
| Repayment of lease liabilities | (5,750 | ) | (5,238 | ) | (16,888 | ) | (18,677 | ) | ||||
| Issuance of shares | – | – | – | 357 | ||||||||
| Dividends paid to shareholders | – | (10,522 | ) | (10,546 | ) | (31,562 | ) | |||||
| Cash (Used in) Provided by Financing Activities | $ | (6,592 | ) | $ | (44,760 | ) | $ | (29,158 | ) | $ | 108,203 | |
| Effect of Foreign Exchange on Cash and Cash Equivalents | (346 | ) | (1,219 | ) | 2,769 | (3,349 | ) | |||||
| Net increase (decrease) in Cash and Cash Equivalents | 3,109 | (40,144 | ) | 8,612 | (134,998 | ) | ||||||
| Cash and Cash Equivalents - Beginning of Period | 103,721 | 122,410 | 98,218 | 217,264 | ||||||||
| Cash and Cash Equivalents - End of Period | $ | 106,830 | $ | 82,266 | $ | 106,830 | $ | 82,266 | ||||
| Cash | 105,029 | 82,261 | 105,029 | 82,261 | ||||||||
| Cash Equivalents | 1,801 | 5 | 1,801 | 5 | ||||||||
| Total Cash and Cash Equivalents | $ | 106,830 | $ | 82,266 | $ | 106,830 | $ | 82,266 | ||||
7.0 RECONCILIATION OF NON-GAAP 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 its capital structure. These 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 provide further information and assist readers in understanding the results of the Company’s operations and financial position. 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.
EBITDA and Adjusted EBITDA
EBITDA is a non-GAAP measure defined as earnings before interest, income taxes, depreciation and amortization. Adjusted EBITDA is also a non-GAAP measure defined as EBITDA adjusted for items which do not impact day to day operations. Adjusted EBITDA is calculated by adding back to EBITDA the sum of impairments, costs associated with repayment of long-term debt and credit facilities, gain on sale of land, gain on sale of investment in associates, acquisition costs, restructuring costs and hyperinflationary adjustments. The Company believes that EBITDA and Adjusted EBITDA are useful supplemental measures that provide a meaningful indication of the Company’s results from principal business activities prior to the consideration of how these activities are financed or the tax impacts in various jurisdictions and for comparing its operating performance with the performance of other companies that have different financing, capital or tax structures. The Company presents Adjusted EBITDA as a measure of EBITDA that excludes the impact of transactions that are outside the Company’s normal course of business or day to day operations. Adjusted EBITDA is used by many analysts in the oil and gas industry as one of several important analytical tools to evaluate financial performance and is a key metric in business valuations. It is also considered important by lenders to the Company and is included in the financial covenants of the Company’s Credit Facility.
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||
| (in thousands of Canadian dollars) | 2020 | 2019 | 2020 | 2019 | ||||||||
| Net (Loss) Income | $ | (18,405 | ) | $ | 6,757 | $ | (290,373 | ) | $ | 48,728 | ||
| Add: | ||||||||||||
| Income tax expense (recovery) | 136 | 3,562 | 1,963 | (15,792 | ) | |||||||
| Finance costs, net | 6,673 | 6,528 | 18,068 | 15,468 | ||||||||
| Amortization of property, plant, equipment, intangible and ROU assets | 22,343 | 24,951 | 70,275 | 73,562 | ||||||||
| Cost associated with repayment of long-term debt and credit facilities | – | – | – | 12,308 | ||||||||
| EBITDA | $ | 10,747 | $ | 41,798 | $ | (200,067 | ) | $ | 134,274 | |||
| ZCL acquisition costs and other related items | – | 3,674 | – | 16,357 | ||||||||
| Hyperinflation adjustment for Argentina | 446 | 2,310 | 1,336 | 3,904 | ||||||||
| Gain on sale of land | (1,213 | ) | (5,386 | ) | (1,213 | ) | (37,994 | ) | ||||
| Gain on investment in associate | (8,249 | ) | – | (8,249 | ) | (9,687 | ) | |||||
| Impairment | 3,623 | – | 206,707 | – | ||||||||
| Restructuring costs | 12,449 | – | 29,749 | – | ||||||||
| Adjusted EBITDA | $ | 17,803 | $ | 42,396 | $ | 28,263 | $ | 106,854 | ||||
Pipeline and Pipe Services Segment
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||
| (in thousands of Canadian dollars) | 2020 | 2019 | 2020 | 2019 | ||||||||
| Operating (Loss) Income | $ | (36,647 | ) | $ | (9,292 | ) | $ | (276,297 | ) | $ | 9,537 | |
| Add: | ||||||||||||
| Amortization of property, plant, equipment, intangible and ROU assets | 12,426 | 15,433 | 39,814 | 46,960 | ||||||||
| EBITDA | $ | (24,221 | ) | $ | 6,141 | $ | (236,483 | ) | $ | 56,497 | ||
| Hyperinflation adjustment for Argentina | (80 | ) | 636 | (160 | ) | 522 | ||||||
| Gain on sale of land | (1,213 | ) | – | (1,213 | ) | (32,552 | ) | |||||
| Gain on investment in associate | – | 49 | – | 49 | ||||||||
| Impairment | 3,623 | – | 196,879 | – | ||||||||
| Restructuring costs | 10,006 | – | 18,019 | – | ||||||||
| Adjusted EBITDA | $ | (11,885 | ) | $ | 6,826 | $ | (22,958 | ) | $ | 24,516 | ||
Composite Systems Segment
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||
| (in thousands of Canadian dollars) | 2020 | 2019 | 2020 | 2019 | ||||||||
| Operating Income | $ | 13,058 | $ | 21,067 | $ | 733 | $ | 40,359 | ||||
| Add: | ||||||||||||
| Amortization of property, plant, equipment, intangible and ROU assets | 8,128 | 7,900 | 24,911 | 21,796 | ||||||||
| EBITDA | $ | 21,186 | $ | 28,967 | $ | 25,644 | $ | 62,155 | ||||
| ZCL acquisition costs and other related items | – | 3,650 | – | 10,822 | ||||||||
| Gain on sale of land | – | (5,387 | ) | – | (5443 | ) | ||||||
| Impairment | – | – | 9,828 | – | ||||||||
| Restructuring costs | 410 | – | 4,246 | – | ||||||||
| Adjusted EBITDA | $ | 21,596 | $ | 27,230 | $ | 39,718 | $ | 67,534 | ||||
Automotive and Industrial Segment
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||
| (in thousands of Canadian dollars) | 2020 | 2019 | 2020 | 2019 | ||||||||
| Operating Income | $ | 6,043 | $ | 8,593 | $ | 13,516 | $ | 26,414 | ||||
| Add: | ||||||||||||
| Amortization of property, plant, equipment, intangible and ROU assets | 1,174 | 1,115 | 3,482 | 3,340 | ||||||||
| EBITDA | $ | 7,217 | $ | 9,708 | $ | 16,998 | $ | 29,754 | ||||
| Restructuring costs | 2,027 | – | 6,255 | – | ||||||||
| Adjusted EBITDA | $ | 9,244 | $ | 9,708 | $ | 23,253 | $ | 29,754 | ||||
Adjusted Net (Loss) Income and Adjusted EPS
Adjusted net (loss) income is a non-GAAP measure defined as net income before acquisition-related and integration items, including transaction costs and financing fees; cost reduction and integration related initiatives such as separation benefits, retention payments, other exit costs, impact of inventory revaluation adjustment and certain costs associated with integrating an acquired company’s operations; gains or losses from early termination of debt and hedging activities; gains and losses on the disposal of land; gain on investment in associate; asset impairment charges; restructuring cost; hyperinflation adjustment for Argentina and the tax effect of the pre-tax adjustments above at applicable tax rates and certain other tax items. We define adjusted EPS as adjusted net (loss) income attributable to shareholders divided by the weighted average number of shares and the weighted average number of diluted shares.
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||
| (in thousands of Canadian dollars) | 2020 | 2019 | 2020 | 2019 | ||||||||
| Net (Loss) Income | $ | (18,405 | ) | $ | 6,757 | $ | (290,373 | ) | $ | 48,728 | ||
| Add: | ||||||||||||
| ZCL acquisition costs and other related items | – | 3,674 | – | 16,357 | ||||||||
| Hyperinflation adjustment for Argentina | 898 | 2,636 | 2,971 | 5,832 | ||||||||
| Cost associated with repayment of long-term debt and credit facilities | – | – | – | 12,308 | ||||||||
| Gain on sale of land | (1,213 | ) | (5,386 | ) | (1,213 | ) | (37,994 | ) | ||||
| Gain on investment in associate | (8,249 | ) | – | (8,249 | ) | (9,687 | ) | |||||
| Restructuring costs | 12,449 | – | 29,749 | – | ||||||||
| Impairment | 3,623 | – | 206,707 | – | ||||||||
| Tax effect of the above adjustments | (378 | ) | (1,438 | ) | (5,957 | ) | (7,081 | ) | ||||
| Adjusted Net (Loss) Income | $ | (11,275 | ) | $ | 6,243 | $ | (66,365 | ) | $ | 28,463 | ||
| Adjusted Net (Loss) Income Attributable to Shareholders | $ | (11,181 | ) | $ | 6,006 | $ | (65,981 | ) | $ | 28,225 | ||
| Adjusted EPS | ||||||||||||
| Basic | $ | (0.16 | ) | $ | 0.09 | $ | (0.94 | ) | $ | 0.40 | ||
| Diluted | $ | (0.16 | ) | $ | 0.09 | $ | (0.94 | ) | $ | 0.40 | ||
Operating Margin/Adjusted Operating Margin
Operating margin/adjusted operating margin are defined as operating (loss) income divided by revenue and are non-GAAP measures. The Company believes that operating margin and adjusted operating margin are useful supplemental measures that provide meaningful assessment of the business performance of the Company and its Operating Segments. The Company uses these measures as key indicators of financial performance, operating efficiency and cost control based on volume of business generated.
Adjusted Operating (Loss) Income
Adjusted Operating (Loss) Income is a non-GAAP measure calculated by adding back to Operating (loss) income the sum of gain from sale of land, ZCL acquisition costs and other related items, restructuring cost, impairment and hyperinflationary adjustments. Adjusted Operating (Loss) Income does not have a standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures provided by other companies.
The following table sets forth the Company’s Adjusted Operating (Loss) Income:
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||
| (in thousands of Canadian dollars) | 2020 | 2019 | 2020 | 2019 | ||||||||
| (Loss) Income from operation | $ | (19,289 | ) | $ | 17,117 | $ | (277,272 | ) | $ | 54,127 | ||
| Add: | ||||||||||||
| ZCL acquisition costs and other related items | – | 3,674 | – | 16,357 | ||||||||
| Hyperinflation adjustment for Argentina | 502 | 2,000 | 1,713 | 3,329 | ||||||||
| Gain on sale of land | (1,213 | ) | (5,386 | ) | (1,213 | ) | (37,994 | ) | ||||
| Restructuring costs | 12,449 | – | 29,749 | – | ||||||||
| Impairment | 3,623 | – | 206,707 | – | ||||||||
| Adjusted Operating (Loss) Income | $ | (3,928 | ) | $ | 17,405 | $ | (40,316 | ) | $ | 35,819 | ||