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ShawCor Ltd. Releases its Results for the 2006 Fiscal Year

Published on 2007-03-02. Author : SpecialChem

Fourth Quarter 2006 Results

Consolidated revenue of ShawCor Ltd. ("ShawCor" or the "Company") for the fourth quarter of 2006 totaled $276.3 million, compared to $251.3 million in the prior quarter with the increase resulting from increased business activity in the Pipeline and Pipe Services segment, partially offset by some seasonal softness in the Petrochemical and Industrial segment. Consolidated revenue for the quarter was lower than the fourth quarter of 2005 reflecting the impact of the Langeled project which contributed revenue of $41.9 million in the fourth quarter 2005 and was completed in the first quarter of 2006. On a full year basis, consolidated revenue from continuing operations of $1.06 billion reached a new record level for the Company and increased 5% over the level achieved in 2005.

Pipeline and Pipe Services segment revenue for the quarter totaled $244.0 million an increase of 12% compared to $216.9 million in the prior quarter and $266.1 million in the fourth quarter of 2005. The Company had expected that fourth quarter revenue would be slightly below third quarter levels as a result of reduced activity in Bredero Shaw's North Sea and Far East regions. While these regions did soften as anticipated, stronger than expected revenue from Bredero Shaw Americas region led to the overall revenue growth for the Pipeline and Pipe Services segment. Three factors accounted for the Bredero Shaw Americas revenue result. First, unexpectedly strong small diameter pipecoating demand was experienced in Canada, resulting in high levels of coated pipe in customer inventories which will likely reduce demand in the first half of 2007. Second, additional production shifts were added at facilities in Canada, which enabled higher large diameter production levels than anticipated. Third, an increase in revenue was realized from the PDEG project in Brazil. This revenue growth more than offset the anticipated reduction in revenue in the Far East region where business activity returned to more typical levels. The decline in revenue for the Pipeline and Pipe Services segment compared with the fourth quarter of last year was due mainly to the fact that the Langeled project had contributed revenue of $41.9 million in the fourth quarter 2005. Revenue in the quarter also improved over the prior quarter at the segment's other divisions. Strong revenue growth at Shaw Pipeline Services compared with the third quarter reflected increased variation orders on several pipeline projects while Canusa- CPS benefited from the stronger small diameter pipe demand in Western Canada as well as an increase in project activity in the Middle East. On a full year basis, revenue for the segment for the year totaled $922.3 million, 3% higher than $892.6 million in 2005.

In the Petrochemical and Industrial segment, revenue for the fourth quarter of 2006 of $32.8 million, although seasonally lower than the prior quarter, was 16% higher than in the fourth quarter of 2005 with DSG-Canusa and ShawFlex both experiencing stronger market demand and ShawFlex continuing to realize the impact of the material cost pass-through to customers. Revenue for the segment for the full year increased 14% over the prior year to $138.9 million.

Consolidated income from continuing operations before interest, income taxes and non- controlling interest totaled $41.8 million (15.1% of revenue) in the fourth quarter of 2006, compared to $23.7 million (9.4% of revenue) in the third quarter and $31.7 million (10.8% of revenue) in the fourth quarter of 2005. On a full year basis, consolidated income from continuing operations of $138.8 million increased 45% over the level achieved in 2005.

In the Pipeline and Pipe Services segment, operating income from continuing operations in the quarter of $40.8 million (16.7% of revenue) increased 70% over the previous quarter and 17% over the fourth quarter of last year. The operating income growth of the Pipeline and Pipe Services segment was primarily attributable to the 12% increase in revenue coupled with increased operating margins at Bredero Shaw. This margin growth was attributable to a more favourable mix of projects, a significant improvement in facility utilization in the Americas region, and the benefit of lower variable operating costs as a result of improvements in project execution on the KOC and PDEG projects. Compared to the fourth quarter of last year, Bredero Shaw's operating income decreased marginally reflecting the lower level of revenue in the quarter associated with the completion of the Langeled project. Margins, however, were improved through a favourable project mix and ongoing performance improvement measures.

Operating income at Canusa-CPS and Shaw Pipeline Services in the quarter improved over the third quarter and the fourth quarter of 2005, in line with the increased revenue. Operating income at Guardian, while lower than in the prior quarter reflecting seasonally lower revenue, improved over the fourth quarter of 2005 as a result of the launch in the third quarter of 2006 of the division's new integrated tubular inspection and machining facility. Operating income for the segment for the year totaled $138.5 million (15.0% of revenue) compared to $100.4 million (11.2% of revenue) in 2005.

In the Petrochemical and Industrial segment, operating income from continuing operations for the fourth quarter of $5.6 million (17.0% of revenue) improved 11% over the $5.0 million (14.4% of revenue) recorded in the third quarter and improved $4.1 million over the $1.5 million (5.5% of revenue) in the fourth quarter of last year, with DSG-Canusa and ShawFlex both achieving improvements over the prior quarter and the fourth quarter of the prior year. Operating income for the segment for the full year totaled $19.2 million, 61% higher than the level achieved in 2005.

Financial and corporate costs in the quarter consisted of unallocated corporate expenses of $4.6 million including foreign exchange losses of $1.0 million. In the fourth quarter of 2005, financial and corporate costs consisted of unallocated corporate expenses of $4.7 million. On a full year basis, financial and corporate costs totaled $18.9 million in 2006, inclusive of $970 thousand of foreign exchange gains, compared to $16.9 million in 2005, net of foreign exchange losses of $874 thousand.

Net interest income was $1.4 million in the fourth quarter of 2006, compared to $881 thousand in the third quarter and $282 thousand in the fourth quarter of 2005. The increase in the quarter reflects the impact of higher cash balances as a result of cash flows generated by the Company as well as the favourable impact of the stronger Canadian dollar on the translation of the U.S. dollar denominated interest expense on the Company's Senior Notes. Net interest income for the full year 2006 totaled $2.8 million compared to net interest expense of $3.4 million in 2005.

Income tax expense related to continuing operations totaled $15.7 million (36.4% of income from continuing operations before income taxes), with the effective tax rate in the quarter reflecting the impact of losses in certain countries, primarily Nigeria, where the future tax benefit was not recognized in the Company's consolidated financial statements. Income tax expense totaled $11.2 million (35.0% of income from continuing operations before income taxes) in the fourth quarter of 2005. On a full year basis, income tax expense related to continuing operations totaled $46.8 million (33.1% of income from continuing operations before taxes) compared to $10.1 million (11.0% of income from continuing operations before taxes), net of a reduction in tax expense of $18.4 million from the utilization of previous years' income tax losses not previously recognized in the Company's accounts.

Consolidated income from continuing operations for the quarter totaled $26.7 million ($0.36 per share), compared to $16.6 million ($0.22 per share) in the third quarter and $21.8 million ($0.30 per share) in the four quarter of 2005. For the full year 2006, consolidated income from continuing operations totaled $92.9 million ($1.25 per share) compared to $82.8 million in 2005 ($1.10 per share), inclusive of an $18.4 million ($0.25 per share) reduction in income tax expense from the utilization of prior year tax losses not previously recognized in the accounts.

Losses from discontinued operations for the quarter totaled $69 thousand ($0.00 per share) compared to $1.2 million ($0.02 per share) in 2005 and reflected costs related to the closed Mobile, Alabama facility. Losses from discontinued operations for the full year 2006 totaled $289 thousand ($0.00 per share), while in 2005, income from discontinued operations totaled $56.1 million ($0.75 per share) and was comprised of earnings of $14.5 million from the OMSCO division until its sale to Vallourec & Mannesmann Tubes S.A. ("V&M") on September 30, 2005, and a gain of $48.4 million, net of deferred tax expense of $26.7 million, recorded on the sale, partially offset by operating losses for the year related to the Mobile, Alabama pipecoating plant totaling $6.9 million.

Consolidated net income for the fourth quarter of 2006 was $26.7 million ($0.36 per share) compared to $16.6 million ($0.22 per share) in the third quarter and $20.6 million ($0.28 per share) in the fourth quarter of 2005. Consolidated net income for 2006 totaled $92.6 million ($1.25 per share), compared to $138.8 million ($1.85 per share) in 2005. Net income in 2005 was inclusive of an after-tax gain on the sale of the OMSCO division of $48.4 million ($0.65 per share) and an $18.4 million ($0.25 per share) reduction in income tax expense from the utilization of prior year tax losses not previously recognized in the accounts.

Cash Flows

Cash flow generated by continuing operations in the quarter totaled $40.6 million compared to cash flow used in continuing operations of $3.7 million in the fourth quarter of 2005. The improvement reflected the increased profits, partially offset by a $2.3 million increase in noncash working capital balances, compared to a $40.6 million increase experienced in the fourth quarter of 2005. This change in working capital resulted from the lower revenue in the quarter, compared to the fourth quarter of last year, changes in project mix with reduced prepaid expenses and raw material inventories associated with projects at the end of 2006 compared with 2005, and increased taxes payable due to the increased profits. On a full year basis, cash flow generated by continuing operating activities in 2006 totaled $183.6 million compared to $79.9 million in 2005.

Cash flow used in continuing investing activities in the quarter totaled $16.8 million, comprised of capital expenditures of $18.1 million less proceeds on disposal of property, plant and equipment of $1.3 million. Major capital expenditures in the quarter included continuing development of the new pipecoating plant in Portland, Oregon, pipecoating capacity expansions at the Company's Saudi joint venture, and the commencement of construction of a new facility in Camrose, Alberta. In the fourth quarter of last year, cash used in continuing investing activities totaled $12.0 million reflecting adjustments on the closing of the OMSCO divestment of $6.0 million and proceeds on the disposal of property, plant and equipment of $173 thousand, partially offset by capital expenditures of $6.1 million. Cash flow used in continuing investing activities for the full year totaled $68.3 million, including $60.7 million. Cash flow generated by continuing investing activities totaled $92.0 million in 2005 including proceeds on the divestment of the OMSCO division of $129.6 million. Capital expenditures in 2005 totaled $38.1 million.

Cash flow generated by continuing financing activities totaled $899 thousand in the quarter, mainly consisting of an increase in bank indebtedness of $3.0 million and $1.2 million received on the exercise of stock options, partially offset by dividends paid to shareholders of $3.3 million. In the fourth quarter of 2005, cash flow used in continuing financing activities totaled $18.3 million, comprised of $15.1 million paid to repurchase Class A shares under the Normal Course Issuer Bid and dividends paid to shareholders of $3.3 million. For the full year, cash flow used in continuing financing activities in 2006 totaled $14.3 million compared to $22.7 million in 2005.

Overall, cash and cash equivalents increased $39.2 million during the quarter to $309.3 million, compared with a decrease of $27.4 million during the fourth quarter of 2005 to $200.3 million.

For the full year 2006, cash increased $109.0 million compared to $123.4 million in 2005, inclusive of proceeds on the divestment of OMSCO of $129.6 million.

Outlook

Demand for the products and services of the Company's largest market segment, the Pipeline and Pipe Services segment, is mainly driven by the level of pipeline infrastructure investment. This investment, in turn, is determined by energy supply and demand, which itself is a function of global economic activity. Demand for the products and services of the Petrochemical and Industrial segment is driven by the general level of economic activity in the regions where the segment operates, primarily North America and Western Europe. Economic activity in North America is expected to continue into 2007, albeit at a lower rate than that enjoyed during the past few years. In Western Europe, the economic recovery which began in 2006 should continue, with modest growth expected in 2007.

Growth in economic activity translates into strong demand for energy. Since energy supply is limited in the medium-term, prices are expected to remain strong; however, at levels below those experienced during most of 2006. Strong demand together with limited supply and on-going depletion of existing energy reserves, should encourage additional production and infrastructure development. In addition, record profits and cash flows at the major energy companies during the past two years have strengthened their balance sheets and put them in the position to fund major expansion programs. These factors should result in increased pipeline construction and translate into favourable business prospects for the Company over the next several years.

In 2007, ShawCor's revenue is expected to be broadly in line with 2006 levels. Revenue is expected to increase in North and South America, due in large part to the pipecoating capacity expansions which commenced in 2006 in Western Canada and the United States, and the impact of the Brazilian joint venture which the company entered into during the year, together with increased business activity in the Middle East. Growth in these areas is expected to be tempered by continuing softness in the North Sea and by lower revenue in the Far East where the extremely high level of project activity experienced in 2006 is expected to abate somewhat.

Consolidated order backlog, representing customer orders expected to be completed within one year, totaled $367.8 million compared to $352.0 million at the end of the third quarter, and $367.6 million at the beginning of the year. The composition of the 2006 year-end backlog has shifted considerably from the beginning of the year, with considerable growth in Canada and the United States offset by weakening in Europe, due mainly to the completion of the Langeled project, and in the Far East where pipecoating project activity is returning to more typical levels following unprecedented strength in 2006.

The Company continues to enjoy a very strong balance sheet with the financial capacity to fund significant internal and external growth opportunities as they arise. This opportunity to fund expansion together with the strong market fundamentals enjoyed by the Company provides the potential for strong growth for ShawCor in the years ahead.

Forward-Looking Information

This document includes certain statements that reflect management's expectations and objectives for ShawCor's future performance, opportunities and growth which constitute forward-looking information under applicable securities laws. Such statements, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. These statements may be identified by the use of forward-looking terminology such as "may," "will," "should", "anticipate," "expect", "believe", "predict", "estimate," "continue," "intend," "plan," and variations of these words or other similar expressions. These statements are based on assumptions, estimates and analysis made by ShawCor in light of its experience and perception of trends, current conditions and expected developments as well as other factors believed to be reasonable and relevant in the circumstances. Although ShawCor believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions in light of currently available information, ShawCor can give no assurance that such expectations will be achieved.

Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those predicted, expressed or implied by the forwardlooking statements. Significant risks facing ShawCor include, but are not limited to: changes in global economic activity and changes in energy supply and demand which impact on the level of drilling activity and pipeline construction; political, economic and other risks arising from ShawCor's international operations; compliance with environmental, trade and other laws; liability claims; fluctuations in foreign exchange rates; fluctuations in prices of raw materials, as well as other risks and uncertainties.

Source: ShawCor Ltd.


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