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Shawcor Releases Third Quarter Results and Announces Closure of Mobile Alabama Pipe Coating Plant

Published on 2004-11-08. Author : SpecialChem

ShawCor Ltd. (TSX :SCL.SV.A, SCL.MV.B) announced, in conjunction with the release of its third quarter 2004 financial results, that it will close the Bredero Shaw pipecoating and fabrication yard at Theodore, near Mobile, Alabama, as soon as existing contract commitments have been completed. The facility currently employs approximately 450 permanent and contract personnel.

As a result of the decision to close the facility ShawCor will incur restructuring charges in the fourth quarter of approximately $81.8 million, reflecting a write down of the plant and equipment and other costs and provisions related to the shutdown. Current project contracts, which will extend into the second quarter of 2005, will be completed before ceasing operations at the site. Bredero Shaw will continue to service the pipeline industry's global flow assurance and offshore markets from its other locations around the world.

ShawCor's consolidated financial results for the three months and nine months ended September 30, 2004 follow.


Results for the quarter reflected a net loss of $8.7 million or $0.11 per share on revenue of $208.9 million. The main factor behind the unsatisfactory result was the continuing poor performance at the company's Mobile, Alabama facility, which experienced operating losses totaling $14.9 million or $0.20 per share in the quarter.

As noted in our second quarter report to shareholders, in response to the ongoing production issues and unsatisfactory operating results at Mobile, a comprehensive strategic review to evaluate the role of the Mobile facility in ShawCor's global pipecoating network was initiated and presented to the Board of Directors for their review on November 3rd.. Following that discussion the Board approved a decision to close the Mobile facility after completion of the projects on hand which are expected to extend out to the second quarter of 2005. As a result, fourth quarter earnings will be negatively impacted by charges of approximately $81.8 million ($1.09 per share), reflecting the write-down of the Mobile facility plant and equipment and other costs and provisions related to the shutdown, including the anticipated operating loss in the fourth quarter. This closure notwithstanding, the company remains committed to the deepwater flow assurance market worldwide and will continue to serve this market from its existing facilities in other locations.

The situation at Mobile overshadowed positive developments in the rest of ShawCor's businesses. In Norway, coating commenced on the Langeled project and pipecoating results were strong in the Americas onshore market. Canusa-CPS and Shaw Pipeline Services also posted good results in the quarter. The company's Exploration and Production segment experienced a 15% increase in revenue and a more than 100% increase in operating income over the prior quarter as both Guardian and OMSCO enjoyed continuing strength in business activity levels. The Petrochemical and Industrial segment also experienced improvement as revenue increased 22% and operating income more than tripled to $4.1 million compared to $1.3 million in the third quarter of 2003.

The Mobile strategic review referred to earlier concluded that the market outlook for the plant's products and services, over the short to medium term is less than previously anticipated as development work in the Gulf of Mexico has slowed appreciably and local content requirements in other parts of the world bias this work toward in-country coating solutions. In addition, the fabrication work contracted for in 2004 is more complex than previous fabrication work and the ability to recover reasonable prices for the effort and risk involved is very much in doubt. The study concluded that the best return would come from maintaining the company's strong position in flow assurance products for the worldwide deep water markets utilizing existing locations other than Mobile.

The restructuring of Bredero Shaw's deepwater business and the shutdown of the Mobile site will take some time, but will have a positive impact on future earnings. Overall current backlog and new orders are strong, reflecting better markets in all of ShawCor's businesses, and the company's balance sheet is in good shape.


The following is management's interim discussion and analysis of operations and financial position and should be read in conjunction with the Consolidated Financial Statements and Management's Discussion and Analysis included in the company's 2003 Annual Report.

Revenue and Income from Operations

ShawCor classifies its revenue and income from operations in three industry segments: Pipeline, Exploration and Production and Petrochemical and Industrial.

Consolidated revenue for the third quarter of the year was $208.9 million compared to $201.9 million in the previous quarter and $178.3 million in the corresponding quarter of last year. All three business segments reported higher revenues in the third quarter compared to the same quarter of last year. In the pipeline segment, improvement in the other businesses in the segment, together with the start-up of the Langeled project in Norway and increased Canadian small-diameter pipe-coating activity were positive contributors to the increase. Operating losses in the quarter at the Mobile, Alabama facility of $14.9 million or $0.20 per share on revenues of $17.7 million resulted in a consolidated loss for the quarter of $8.7 million or $0.11 per share. In the 3rd quarter of 2003, Mobile's revenues and operating losses were $13.9 million and $5.6 million, respectively.

On a year-to-date basis, consolidated revenue was $594.7 million compared to $629.4 million in the prior year. The operating losses at Mobile, which total $34.1 million or $0.45 per share for the nine months ended September 30, 2004 on revenues of $42.8 million resulted in a net loss for the year-to-date of $8.6 million or $0.11 per share, compared to net income of $19.3 million or $0.27 per share last year. For the first nine months of 2003, the Mobile facility reported an operating loss of $12.7 million after depreciation of $15.5 million on revenues of $62.4 million.

In the Pipeline segment, revenue for the quarter of $153.8 million compares to $146.5 million in the prior quarter and $133.1 million in the third quarter of last year. Revenue in the quarter was positively impacted by increased activity at the company's North American onshore pipecoating plants and the start up of production on the Langeled project in Norway. The Farsund plant began producing finished product in the third quarter, is moving through the ramp–up stage and is currently operating at 70% of plant capacity. However, project delays in the United Kingdom and budget restrictions in Nigeria produced overall unfavourable results in the European/West Africa division. Coating revenue from the Far East operations was lower, related to the completion of some large projects in the first half of the year. The other pipeline segment businesses continued to produce good results, although an increase in radiographic inspection work at Shaw Pipeline Services reduced operating margins somewhat compared to the second quarter. Despite the improvement in revenue, the segment posted a loss from operations of $7.7 million in the quarter, the result of the temporary slowing of activity in the Far East and the ongoing operating issues at Mobile.

On November 3rd, the Board of Directors of ShawCor approved a plan to address the operating issues at Mobile, resulting in a decision to close the Mobile facility. The company will continue to service the flow assurance markets from it's other locations. Certain of the existing machinery and equipment currently utilized at the Mobile yard will be moved to other Bredero Shaw locations to support expected growth in those regional markets. Projects currently under contract, extending into the second quarter of 2005, will be completed before closing down the site. Ongoing costs to maintain the site in a shuttered state to the end of the leases, which run through to 2010 for the main site, and to 2014 for the associated office building, are anticipated to be in the order of $3 million per year until such time as a reasonable exit from the facility can be achieved. As a result of the decision to close the facility, fourth quarter earnings will include charges of approximately $81.8 million ($1.09 per share) relating to losses from operations at Mobile in the fourth quarter and asset write-down and other restructuring costs and provisions relating to the shutdown.

In the Exploration and Production segment, revenue of $24.7 million was 15% higher than in the prior quarter and 21% higher than in the third quarter of last year. New orders for OMSCO's drill pipe and drill string components continue to increase and the division is entering the fourth quarter with a good backlog. To date, higher raw material input costs have not negatively impacted profit margins but tight supplies of some material inputs has limited the ramp-up of production. Guardian's Canadian and Mexican inspection businesses continued to strengthen, but third quarter revenue was 10% behind second quarter levels, reflecting the impact of wet weather on drilling activity in Western Canada. Income from operations for the segment was $1.9 million compared to $0.9 million last quarter and $5.5 million in the corresponding quarter of 2003. The third quarter 2003 figure included a one-time gain of $5.3 million on the sale of OMSCO's Scottish manufacturing facility. Excluding this gain, the 2004 year-to-date operating earnings reflected a $1.7 million improvement over segment earnings for the comparable period for 2003.


Financial and corporate costs consist of corporate office costs not charged to the operating divisions and other non-operating items including foreign exchange gains and losses on cash balances. Corporate costs have increased over the corresponding quarter of last year due to certain activities formerly performed by Bredero Shaw being performed by the corporate office. In addition, the figure for the current quarter includes foreign exchange losses of $0.9 million while the third quarter 2003 figure was net of foreign exchange gains of $0.3 million. Year to date corporate costs benefited from a $4.5 million gain on the sale of shares of Compagnie Générale de Géophysique in the second quarter.

Net interest expense in the quarter of $1.3 million compares to $1.8 million in the third quarter of 2003, reflecting the lower debt levels in 2004. Interest expense for the quarter includes $0.2 million of amortization of deferred costs incurred last year for the new bank and long-term note facilities. Operating losses in Mobile and Africa in the quarter and year-to-date were not taxeffected.

Cash Flow

Cash flow generated from operating activities before changes in working capital totaled $6.3 million in the quarter and $32.2 million year-to-date. Investment in working capital, primarily for inventories at OMSCO and the Bredero Shaw Norwegian pipecoating plant to support increased business volumes or project-specific requirements, reduced overall cash generated from operations by $7.2 million in the quarter and $14.6 million year-todate. Cash flow used in investing activities included additions to fixed assets of $6.5 million in the quarter and $24.4 million year-to-date, primarily related to the remobilization of the Farsund, Norway plant for the Langeled project.

Cash flow generated from financing activities totaled $5.0 million in the quarter and related to increases in bank indebtedness in Bredero Shaw's U.S. and Norwegian operations. On a year-to-date basis, cash flow generated from financing activities totaled $2.4 million dollars, net of dividends paid year-to-date of $3.0 million.

Changes in Accounting Policies

On January 1, 2004, the company adopted new amendments to section 3870 of the Canadian Institute of Chartered Accountant's Handbook – Stock-Based Compensation and Other Stock-Based Payments. Adoption of this policy requires that the fair market value of stock options, as determined using the Black-Scholes or some other method, be recognized as a charge against earnings at the time that they are granted. The impact of adopting this policy is outlined in Note 2 to the interim financial statements for the nine months ended September 30, 2004.

Source: ShawCor Ltd.

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