Samuel Manu-Tech Inc. - Second quarter results
TORONTO, July 30 /CNW/ -
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RESULTS OF OPERATIONS
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Effective for the quarter ending September 30, 2007, the segment formerly
known as Distribution was combined with the Packaging segment. The change was
the result of the completion of the sale of Energy Steel Products Inc. on
July 31, 2007. Comparative figures have been restated accordingly.
Samuel Manu-Tech Inc. achieved significantly improved results as compared
to the first quarter of 2008.
Net Sales
Sales for the second quarter ended June 30, 2008 were $259.8 million,
which represents an increase of $30.6 million or 13.4% over the $229.2 million
achieved in the comparable period of last year. Sales for the six months to
June 30, 2008 were $487.5 million which represents an increase of
$23.7 million or 5.1% over the $463.8 million achieved in the comparable
period of last year. In both cases, the increase results primarily from the
contribution from recent acquisitions and start-up operations as well as
increased selling prices. These positive factors more than offset continued
weaker end user demand in certain key sectors resulting from the economic
slowdown in North America, increased competition and the negative impact of
the strong Canadian dollar.
Compared to the first quarter of this year sales are up 14.1%.
Sales of the Packaging segment in the second quarter, at $121.2 million,
were up $2.6 million or 2.2% compared to last year with increased sales in the
U.S. reflecting higher volumes and selling prices which more than offset
decreases in Canada. Sales in Canada continued to be negatively impacted by
the continued softening in the forestry and construction sectors and increased
competition due to exchange. Compared to the first quarter of this year sales
of the Packaging segment are up 10.7%.
Metal Processing sales for the second quarter were $138.6 million, which
is up $28.0 million or 25.3% compared to last year. This was primarily due to
higher sales of roll formed products reflecting the ramp up of the U.S.
operations in Iuka, Mississippi as well as the acquisition of Omega Joists
Inc. in February 2008. Sales of steel pressure vessels and stainless and
carbon steel tubular products were also higher in the second quarter
reflecting increased volumes and selling prices and the acquisitions of
Northland Stainless, Inc., Associated Tube USA Inc. in August 2007, and
Tubular Products Company in January 2008. These increases were offset in part
by lower steel pickling and existing welded tubular assembly sales reflecting
lower volume levels. Compared to the first quarter of this year, sales of the
Metal Processing segment are up 17.2%.
Earnings
Net earnings from continuing operations for the second quarter were
$12.1 million or $0.37 per share compared to $8.0 million or $0.25 per share
in the comparable quarter of last year. Net earnings from continuing
operations for the six months to June 30, 2008 were $15.1 million or $0.47 per
share compared to $14.0 million or $0.44 per share last year. On
July 31, 2007, the Company sold the operations and net assets of its
subsidiary, Energy Steel Products, Inc. The results from this subsidiary,
which were previously included in the Distribution segment, have been
reclassified as discontinued operations in the accompanying interim
consolidated financial statements. Additional details are outlined in Note 6 -
Discontinued Operations to the interim consolidated financial statements. Net
earnings for the second quarter were $12.1 million or $0.37 per share compared
to $9.2 million or $0.29 per share in the comparable quarter of last year. Net
earnings for the six months to June 30, 2008 were $15.1 million or $0.47 per
share compared to $16.2 million or $0.51 per share last year. The results for
the second quarter this year include a pre-tax restructuring gain of
$0.5 million ($0.3 million after tax) related to the closure of the
Scarborough, Ontario strapping manufacturing facility as outlined in Note 5 to
the interim consolidated financial statements and positively impacted earnings
by $0.01 per share. For the six months in 2008 the net restructuring charge
had no impact on earnings. This compares to the second quarter and six months
results last year which included a restructuring charge of $1.3 million
($0.9 million after tax) and $5.0 million ($3.3 million after tax) and which
negatively impacted earnings in the second quarter and first six months last
year by $0.03 and $0.10 per share respectively.
Operating profit (see below for cautionary language regarding non-GAAP
measures) for the second quarter amounted to $19.1 million compared to
$15.1 million in the comparable quarter of last year with increases in both
the Packaging and Metal Processing segments.
The Packaging segment had an operating profit of $8.1 million, which was
$2.9 million higher than the $5.2 million earned last year with all of the
increase occurring in the U.S. reflecting increased volumes and higher pricing
levels. In addition, increased operating efficiencies were realized as the new
steel strapping facility in Heath County, Ohio started to achieve targeted
production levels. Operating profit in Canada remained relatively unchanged
with the benefits from certain cost reduction measures and increased pricing
levels offsetting the continued slowdown in the forestry and construction
sectors and the negative effects from increased competition and the stronger
Canadian dollar. Compared to the first quarter of this year, operating profit
for the Packaging segment increased by over 300%.
The Metal Processing segment generated operating profits of
$13.9 million, which was $1.4 million higher than the $12.5 million earned in
the comparable quarter of last year. Operating profits from roll formed
products were up reflecting increased sales levels and the positive
contribution from the U.S. operations. Operating profits from steel pressure
vessels and tubular operations were also higher reflecting increased sales and
the acquisitions of Northland Stainless, Inc. and Tubular Products Company.
These increases were offset in part by decreased operating profits from
stainless steel tubular products reflecting a less favourable product mix and
slowdowns at the U.S. and Mexican operations. Operating profits from steel
pickling operations were also down reflecting lower overall volumes primarily
as a result of reduced demand for pickling from our major Southern Ontario
customer relating mainly to reduced automotive parts production. Compared to
the first quarter of this year, operating profit for the Metal Processing
segment was up 103%.
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FINANCIAL CONDITION
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Liquidity and Capital Resources
Cash flow from continuing operations before changes in non-cash working
capital for the first six months of 2008 amounted to $28.1 million which was
up $5.1 million from $23.0 million in the comparable period last year with the
increase attributable to higher earnings and increased levels of depreciation
and amortization. Overall, cash flow generated from operating activities from
continuing operations was $2.7 million compared to $11.4 million used last
year. This reflects increased levels of profitability and decreased
requirements for non-cash working capital.
Cash used in investing activities from continuing operations at
$67.5 million was above last year's $19.0 million and is due to increased
spending on business acquisitions offset in part by decreased spending on
capital assets. Cash flow generated from financing activities amounted to
$67.4 million in the six months compared to $15.9 million last year with the
increase in cash this year due to the net increase in long-term debt.
Dividends paid on common shares for the six months amounted to $6.4 million or
$0.20 per share which was the same as last year. In aggregate, the cash
position increased by $2.7 million compared to a $17.0 million decrease last
year. The Company continues to maintain credit facilities with various banks
and at June 30, 2008 had available unused credit facilities of approximately
$86.5 million.
Capital Expenditures
Capital expenditures in the six months to June 30, 2008 were $8.4 million
compared to $19.1 million during the comparable period last year. Expenditures
in the current six months related primarily to new and replacement machinery
and equipment at several locations.
Business Acquisitions
On February 27, 2008, the Company acquired the assets and all business
operations of Omega Joists Inc. for consideration of $27 million subject to
certain adjustments for working capital items. On January 31, 2008, the
Company acquired 100% of the outstanding shares of Tubular Products Company
for consideration of U.S. $33 million plus an earn-out payment, subject to
certain adjustments for working capital items. The Company is pleased with the
performance of both acquisitions to date. Both of these strategic acquisitions
are reported under the Metal Processing segment, and have been accounted for
under the purchase method of accounting. Additional details are outlined in
Note 7 - Business Acquisitions to the interim consolidated financial
statements.
Joint Venture
On April 8, 2008, the Company announced that its majority owned steel
pickling operations in Ohio, Samuel Steel Pickling Company, had entered into a
letter of intent with respect to a strategic alliance with Viking &
Worthington Steel Enterprises, LLC. Additional details are outlined in Note 12
- Joint Venture to the interim consolidated financial statements.
Discontinued Operations
On July 31, 2007, the Company sold the operations and net assets of its
U.S. distribution business, Energy Steel Products, Inc., as discussed above
under Earnings. Additional details are outlined in Note 6 - Discontinued
Operations to the interim consolidated financial statements.
Subsequent Event
On July 30, 2008 the Company announced the signing of a non-binding
letter of intent to sell all of its Nanticoke, Ontario steel pickling
operations. Additional details are outlined in Note 13 - Subsequent Event to
the interim consolidated financial statements.
Working Capital
Working capital at June 30, 2008 was $281.9 million, an increase of
$41.6 million from the year-end position due to higher receivables and
inventories offset in part by higher bank indebtedness and payables. Overall,
the working capital ratio decreased slightly to 3.7 from the year-end position
of 3.9 but increased compared to the end of the second quarter last year when
it was 3.1.
Net Borrowings to Capitalization
The Company's net borrowings as at June 30, 2008 amounted to
$208.5 million, an increase of $75.0 million from $133.5 million at December
31, 2007. This increase reflects the increased spending on business
acquisitions during the first six months as well as a higher investment in
working capital, offset in part by higher profits and decreased spending on
capital assets. The net debt to capitalization ratio at the end of the quarter
increased to 37.3% compared to 28.3% at year-end and 29.0% at the end of the
second quarter last year.
Capital Stock
Details of issued and outstanding common shares are outlined in Note 2 to
these interim consolidated financial statements. As at the date of this report
the number of outstanding common shares is 32,123,445. During the quarter
ended June 30, 3008, no stock options were issued or exercised; however,
7,000 stock options were forfeited and cancelled.
Outlook
Carbon steel pricing levels, which increased in the first quarter,
continued to increase at a more significant pace in the second quarter. Price
increases for carbon steel during the first half of this year have been driven
by reduced imports as well as higher raw material, scrap, energy and freight
costs. Domestic inventories continued at relatively low levels which in turn
kept supplies tight. End user demand, however, in certain key sectors remained
relatively soft particularly in the automotive, residential construction and
forestry sectors. The outlook for the third quarter is for underlying demand
in North America to remain soft. However, low imports and a continuation of
high input costs should lead to carbon steel prices remaining relatively
stable.
In addition, after increasing somewhat in the first quarter, stainless
steel surcharges continued to increase in the second quarter driven by higher
nickel, chrome and natural gas costs. The forecast however is for nickel
surcharges and base prices to decrease in the third quarter driven in part by
lower demand.
Furthermore, the strength of the Canadian dollar relative to the U.S.
dollar continued to have a negative impact on the Company's results in the
second quarter as compared to last year.
The Company is pleased with the results for the second quarter, which was
a marked improvement over the first quarter. While challenging conditions are
anticipated to continue for the balance of the year, including soft demand in
certain key sectors, increased competition, and margin compression, the
Company anticipates a relatively strong performance for the balance of the
year compared to the second half of 2007.
Quarterly Results
(in thousands of dollars except per share amounts)
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2008 2008 2007 2007
Q2 Q1 Q4 Q3
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Net Sales from continuing
operations $259,771 $227,764 $209,360 $226,663
Net Earnings from continuing
operations 12,070 3,078 3,278 4,104
Basic Earnings per Share 0.37 0.10 0.10 0.12
Diluted Earnings per Share 0.37 0.10 0.10 0.12
Net Earnings 12,070 3,078 3,278 7,800
Basic Earnings per Share 0.37 0.10 0.10 0.24
Diluted Earnings per Share 0.37 0.10 0.10 0.24
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2007 2007 2006 2006
Q2 Q1 Q4 Q3
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Net Sales from continuing
operations $229,235 $234,608 $211,434 $226,126
Net Earnings from continuing
operations 8,028 5,938 9,763 11,820
Basic Earnings per Share 0.25 0.19 0.30 0.37
Diluted Earnings per Share 0.24 0.19 0.29 0.37
Net Earnings 9,197 7,024 11,254 12,384
Basic Earnings per Share 0.29 0.22 0.35 0.39
Diluted Earnings per Share 0.28 0.22 0.34 0.39
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Samuel Manu-Tech Inc. (SMT-TSX) is a leading North American industrial
products and technology company producing and distributing a wide range of
steel, plastic and related industrial products and services from locations in
Canada, the United States and Mexico.
Mark C. Samuel
Chairman & CEO
July 30, 2008
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The "Second Quarter Results" utilize the term "operating profit (EBIT)"
which is a non-GAAP measure. Securities regulations require that
corporations caution readers that these terms do not have standardized
meanings under GAAP and are unlikely to be comparable to similar measures
used by other companies. Operating profit (EBIT) is defined as earnings
from continuing operations before restructuring charge (gain), interest
and income taxes.
Operating profit (EBIT) should not be construed as a substitute for net
earnings or cash flows from operations (each as determined in accordance
with generally accepted accounting principles) for the purpose of
analyzing the Company's operating performance, financial position or cash
flows. The Company believes that, in addition to cash flow from
operations and net earnings, operating profit is a useful financial
performance measurement for assessing operating performance as it
provides investors with an additional basis to evaluate the ability of
the Company to incur and service debt and to fund capital expenditures.
This report may contain forward-looking information that is subject to
risks, uncertainties and assumptions. Such information represents our
current views based on information as at the date of issuing this report.
We do not intend to update this information and disclaim any legal
obligation to the contrary.
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CONSOLIDATED STATEMENTS OF EARNINGS
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Six Months ended June 30, 2008 and 2007 (unaudited)
(in thousands of dollars except per share amounts)
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2ND QUARTER SIX MONTHS
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2008 2007 2008 2007
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NET SALES $ 259,771 $ 229,235 $ 487,535 $ 463,843
COSTS AND EXPENSES
(INCOME):
Cost of sales,
selling &
administration 233,254 207,559 447,718 422,615
Depreciation and
amortization 7,479 5,430 14,160 11,189
Foreign exchange loss
(gain) (104) 1,136 (380) 830
Interest on long-term
debt 2,148 1,799 4,115 3,391
Interest on short-
term debt 26 334 94 545
Interest income (24) (21) (32) (33)
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242,779 216,237 465,675 438,537
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EARNINGS FROM CONTINUING
OPERATIONS BEFORE
RESTRUCTURING CHARGE
(GAIN) AND INCOME
TAXES 16,992 12,998 21,860 25,306
RESTRUCTURING CHARGE
(GAIN) (note 5) (478) 1,328 12 4,992
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EARNINGS FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES 17,470 11,670 21,848 20,314
INCOME TAXES (RECOVERY):
Current 5,495 3,732 7,305 6,557
Future (95) (90) (605) (209)
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5,400 3,642 6,700 6,348
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NET EARNINGS FROM
CONTINUING OPERATIONS 12,070 8,028 15,148 13,966
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NET EARNINGS FROM
DISCONTINUED OPERATIONS
(note 6) - 1,169 - 2,255
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NET EARNINGS $ 12,070 $ 9,197 $ 15,148 $ 16,221
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BASIC EARNINGS PER SHARE
From continuing
operations 0.37 0.25 0.47 0.44
From discontinued
operations 0.00 0.04 0.00 0.07
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$ 0.37 $ 0.29 $ 0.47 $ 0.51
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DILUTED EARNINGS PER SHARE
From continuing
operations 0.37 0.24 0.47 0.43
From discontinued
operations 0.00 0.04 0.00 0.07
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$ 0.37 $ 0.28 $ 0.47 $ 0.50
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See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
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Six Months ended June 30, 2008 and 2007 (unaudited)
(in thousands of dollars)
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2ND QUARTER
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2008 2007
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RETAINED EARNINGS, BEGINNING OF PERIOD $ 341,925 $ 327,472
NET EARNINGS 15,148 16,221
DIVIDENDS PAID ON COMMON SHARES (6,425) (6,421)
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RETAINED EARNINGS, END OF PERIOD $ 350,648 $ 337,272
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See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
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June 30, 2008 (unaudited) and December 31, 2007 (audited)
(in thousands of dollars)
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June 30, Dec. 31,
2008 2007
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,191 $ 1,876
Accounts receivable 160,863 123,801
Inventories (note 1) 208,126 180,555
Prepaid expenses and sundry 3,925 3,260
Income taxes receivable 1,687 6,475
Future income taxes 5,789 5,500
Assets held for sale - 345
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386,581 321,812
CAPITAL ASSETS 182,312 173,150
ACCRUED PENSION ASSET 9,906 9,335
FUTURE INCOME TAXES 328 1,260
GOODWILL 81,859 50,008
INTANGIBLE ASSETS 20,417 11,396
OTHER ASSETS 1,905 1,294
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$ 683,308 $ 568,255
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank indebtedness $ 5,498 $ 3,915
Accounts payable and accrued liabilities 91,663 68,462
Deferred revenue 4,237 5,880
Dividends payable 3,251 3,245
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104,649 81,502
LONG-TERM DEBT 209,201 131,414
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS 2,411 2,326
FUTURE INCOME TAXES 14,200 15,285
OTHER LONG-TERM LIABILITIES 718 366
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331,179 230,893
SHAREHOLDERS' EQUITY:
Capital stock (note 2) 29,891 29,891
Contributed surplus 216 216
Retained earnings 350,648 341,925
Accumulated other comprehensive loss (note 3) (28,626) (34,670)
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352,129 337,362
SUBSEQUENT EVENT (note 13)
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$ 683,308 $ 568,255
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See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months ended June 30, 2008 and 2007 (unaudited)
(in thousands of dollars)
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2ND QUARTER SIX MONTHS
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2008 2007 2008 2007
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CASH FLOWS FROM (USED
IN) OPERATING ACTIVITIES:
Net earnings from
continuing
operations $ 12,070 $ 8,028 $ 15,148 $ 13,966
Items not involving
cash:
Depreciation and
amortization 7,479 5,430 14,160 11,189
Loss (gain) on
disposal of
capital assets (506) 33 (61) 56
Future income taxes (95) (90) (605) (209)
Increase in accrued
pension asset (259) (1,477) (558) (2,301)
Decrease in post-
retirement benefits
other than pensions 15 235 34 288
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18,704 12,159 28,118 22,989
Change in non-cash
operating working
capital:
Decrease (increase)
in accounts
receivable (22,830) (4,165) (25,970) (14,809)
Decrease (increase)
in inventories (11,165) (7,320) (20,136) (20,074)
Decrease (increase)
in prepaid expenses
and sundry (1,030) (2,091) (604) 544
Decrease (increase)
in income taxes
receivable 4,817 - 4,924 -
Increase (decrease)
in accounts payable
and accrued
liabilities 8,352 (8,418) 18,141 1,290
Increase (decrease)
in deferred revenue (1,150) 857 (1,732) (100)
Increase (decrease)
in income taxes
payable - 754 - (1,196)
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(4,302) (8,224) 2,741 (11,356)
CASH FLOWS FROM (USED IN)
INVESTING ACTIVITIES:
Proceeds on sale of
capital assets 1,154 39 1,089 91
Purchase of capital
assets (5,122) (9,686) (8,430) (19,101)
Business acquisitions
(note 7) (25) - (60,130) -
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(3,993) (9,647) (67,471) (19,010)
CASH FLOWS FROM (USED IN)
FINANCING ACTIVITIES:
Increase in other
assets (741) (425) (566) (354)
Issuance of common
shares (note 2) - 180 - 359
Increase in long-term
debt 14,478 13,624 74,429 24,168
Repayment of long-term
debt - (271) - (1,809)
Dividends paid on
common shares (3,213) (3,212) (6,425) (6,421)
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10,524 9,896 67,438 15,943
CASH FLOWS FROM (USED IN)
DISCONTINUED OPERATIONS
Operating activities - 1,062 - (2,557)
Investing activities - (2) - (46)
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- 1,060 - (2,603)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH POSITION 62 (2) 24 35
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INCREASE (DECREASE) IN
CASH POSITION 2,291 (6,917) 2,732 (16,991)
CASH POSITION, BEGINNING
OF PERIOD (1,598) (14,341) (2,039) (4,267)
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CASH POSITION, END OF
PERIOD $ 693 $ (21,258) $ 693 $ (21,258)
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Cash position is comprised of cash and cash equivalents, with maturities
at the date of purchase of three months or less, less bank indebtedness.
See accompanying notes to consolidated financial statements.
SEGMENTED INFORMATION
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Six Months ended June 30, 2008 and 2007 (unaudited)
(in thousands of dollars)
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2ND QUARTER SIX MONTHS
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NET SALES 2008 2007 2008 2007
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Packaging $ 121,207 $ 118,654 $ 230,706 $ 239,164
Metal Processing 138,564 110,581 256,829 224,679
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Consolidated $ 259,771 $ 229,235 $ 487,535 $ 463,843
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2ND QUARTER SIX MONTHS
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EARNINGS FROM CONTINUING
OPERATIONS BEFORE
RESTRUCTURING CHARGE
(GAIN), INTEREST AND
INCOME TAXES 2008 2007 2008 2007
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Packaging $ 8,097 $ 5,200 $ 9,881 $ 11,193
Metal Processing 13,895 12,526 20,736 23,242
Corporate (2,850) (2,616) (4,580) (5,226)
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Earnings from
continuing operations
before restructuring
charge (gain),
interest and income
taxes 19,142 15,110 26,037 29,209
Restructuring charge
(gain) (478) 1,328 12 4,992
Interest on long-term
debt 2,148 1,799 4,115 3,391
Interest on short-term
debt 26 334 94 545
Interest income (24) (21) (32) (33)
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Earnings from
continuing operations
before income taxes $ 17,470 $ 11,670 $ 21,848 $ 20,314
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See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
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Six Months ended June 30, 2008 and 2007 (unaudited)
(in thousands of dollars)
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2ND QUARTER SIX MONTHS
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2008 2007 2008 2007
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NET EARNINGS $ 12,070 $ 9,197 $ 15,148 $ 16,221
OTHER COMPREHENSIVE
INCOME (LOSS):
Unrealized gain
(loss) on
translation of net
foreign operations 995 (10,378) 6,110 (11,260)
Change in unrealized
gain (loss) on
derivatives
designated as cash
flow hedges 1,234 21 (310) 114
Income taxes on
change in unrealized
gains (losses) (422) (7) 106 (39)
Reclassification of
realized loss on
cash flow hedges 70 43 210 643
Income taxes on
reclassification of
unrealized loss (24) (15) (72) (220)
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TOTAL OTHER
COMPREHENSIVE INCOME
(LOSS) 1,853 (10,336) 6,044 (10,762)
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COMPREHENSIVE INCOME
(LOSS) $ 13,923 $ (1,139) $ 21,192 $ 5,459
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See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months ended June 30, 2008 and 2007 (unaudited)
(in thousands of dollars except per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES:
The unaudited consolidated financial statements are prepared in
accordance with accounting principles generally accepted in Canada. These
financial statements should be read in conjunction with the Company's
audited annual financial statements for the year ended December 31, 2007.
All accounting policies and methods of their application used in the
interim financial statements are consistent with the Company's annual
financial statements except as noted below:
Adoption of new accounting policies
(i) Financial Instruments - Disclosures and Presentation
On January 1, 2008, the Company adopted The Canadian Institute of
Chartered Accountants ("CICA") Handbook Section 3862, "Financial
Instruments - Disclosures" and Section 3863, "Financial Instruments -
Presentation". The adoption of these new standards resulted in additional
disclosures with regard to financial instruments and their impact on the
Company's financial position and performance, including disclosures
identifying the nature and extent of risks arising from financial
instruments to which the Company is exposed during the period and at the
balance sheet date, and how the Company manages those risks. These new
standards relate to disclosure and presentation only and did not have an
impact on the Company's consolidated financial results. Please refer to
note 8 for further details.
(ii) Capital Management
On January 1, 2008, the Company adopted CICA Handbook Section 1535,
"Capital Disclosures". Adoption of this new standard resulted in
additional disclosures with regard to the Company's objectives, policies
and processes for the management of its capital. This new standard
relates to disclosure and presentation only and did not have an impact on
the Company's consolidated financial results. Please refer to note 9 for
further details.
(iii) Inventories
On January 1, 2008, the Company adopted CICA Handbook Section 3031,
"Inventories". Section 3031 establishes standards for the measurement and
disclosure of inventories. This new standard requires the measurement of
inventories at the lower of cost and net realizable value and provides
guidance on the determination of cost, including allocation of overheads
and other costs to inventory. Adoption of Section 3031 did not have a
significant impact on the Company's consolidated financial statements.
The Company values raw materials, work in process and finished goods at
the lower of cost and net realizable value. The cost of inventories
comprises all costs of purchasing, costs of conversion and other costs
incurred in bringing the inventories to their present location and
condition. Net realizable value is the estimated selling price in the
ordinary course of business less the estimated costs of completion and
the estimated costs necessary to make the sale. The Company applies the
first-in, first-out (FIFO) cost formula. There have been no reversals in
the period of any previously recorded inventory write-downs.
Future Changes in Accounting Policy
(i) Goodwill and Intangible Assets
In February 2008, the CICA issued Handbook Section 3064 "Goodwill and
Intangible Assets", which replaces Section 3062, "Goodwill and Other
Intangible Assets" and Section 3450 "Research and Development Costs".
This Section establishes standards for the recognition, measurement, and
disclosure of goodwill and intangible assets. The provisions relating to
the definition and initial recognition of intangible assets, including
internally generated intangible assets, are equivalent to the
corresponding International Financial Reporting Standard, IAS 38
"Intangible Assets". Standards pertaining to goodwill are unchanged from
the previous Section 3062. This new Section applies to financial
statements relating to fiscal years beginning on or after October 1,
2008. The adoption of this accounting standard is not expected to have a
significant impact on the Company's consolidated financial statements.
(ii) International Financial Reporting Standards (IFRS)
In February 2008, the Canadian Accounting Standards Board confirmed that
publicly accountable enterprises will be required to report under IFRS
effective for fiscal periods beginning on or after January 1, 2011.
Initial IFRS training has begun and the Company is in the process of
developing a plan to convert its consolidated financial statements to
IFRS. Upon adoption of IFRS, it is likely that changes in accounting
policies will be required that may materially impact the Company's
consolidated financial statements. The Company will assess the impact of
the conversion to IFRS and will continue to invest in training and
resources required throughout the transition period.
2. CAPITAL STOCK:
June 30, December 31,
2008 2007
-------------------------------------------------------------------------
Number of common shares outstanding 32,123,445 32,123,445
Number of options outstanding 423,700 430,700
-------------------------------------------------------------------------
The Company did not issue any stock options during the three and six
months ended June 30, 2008, nor were any stock options exercised. During
the quarter ended June 30, 2008, 7,000 stock options were forfeited and
cancelled.
Weighted average number of shares:
-------------------------------------------------------------------------
2ND QUARTER SIX MONTHS
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Basic Shares 32,123,445 32,109,112 32,123,445 32,094,978
Effect of dilutive
stock options 74,138 191,372 94,203 170,228
Diluted shares 32,197,583 32,300,484 32,217,648 32,265,206
-------------------------------------------------------------------------
-------------------------------------------------------------------------
3. ACCUMULATED OTHER COMPREHENSIVE LOSS:
2ND QUARTER SIX MONTHS
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
CUMULATIVE TRANSLATION
ADJUSTMENT
Balance, beginning
of period $ (29,176) $ (13,989) $ (34,291) $ (13,107)
Unrealized gain
(loss) on
translation of net
foreign operations 995 (10,378) 6,110 (11,260)
-------------------------------------------------------------------------
Balance, end of period (28,181) (24,367) (28,181) (24,367)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
UNREALIZED DERIVATIVE
GAIN (LOSS) ON CASH
FLOW HEDGES, net
Balance, beginning
of period (1,303) (26) (379) -
Impact of new cash
flow hedge
accounting rules
on January 1, 2007
(net of taxes of
$250) - - - (482)
Changes in
unrealized gain or
loss on derivatives
designated as cash
flow hedges 1,234 21 (310) 114
Income taxes on
change in unrealized
gains/losses (422) (7) 106 (39)
Reclassification of
realized loss on
cash flow hedges 70 43 210 643
Income taxes on
reclassification of
unrealized loss (24) (15) (72) (220)
-------------------------------------------------------------------------
Balance, end of period (445) 16 (445) 16
-------------------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE LOSS $ (28,626) $ (24,351) $ (28,626) $ (24,351)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. FUTURE BENEFIT COSTS:
The Company has incurred pension and other post-retirement benefit costs
as noted below.
-------------------------------------------------------------------------
2ND QUARTER SIX MONTHS
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Defined benefit
pension plans $ 904 $ 1,146 $ 1,809 $ 3,420
Defined contribution
pension plans 486 565 925 1,120
Other benefit plans 55 62 108 129
-------------------------------------------------------------------------
Total $ 1,445 $ 1,773 $ 2,842 $ 4,669
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. RESTRUCTURING CHARGE:
On January 5, 2007, the Company announced the approval of a formal plan
to close its Warden Avenue manufacturing facility in Scarborough,
Ontario. The Company estimates it will incur costs of $4,190 ($1,643
after income taxes) to provide for facility closure, disposal of certain
assets, severance and other related items. The restructuring costs are
associated with the Packaging segment, and are reported in the
restructuring charge (gain) line within the consolidated statements of
earnings. As of June 30, 2008, $1,574 of cumulative restructuring costs
has been recorded net of a gain on sale of $4,797.
The following table highlights the activity and balance of the
restructuring charge for the period ended June 30, 2008:
-------------------------------------------------------------------------
Costs
incurred six
Costs months
Total incurred to ended Cumulative
Costs December 31, June 30, costs
Restructuring Charge Expected 2007 2008 incurred
-------------------------------------------------------------------------
Severance, termination
costs, benefits,
retention bonuses $ 2,974 $ 2,972 $ 2 $ 2,974
Pension curtailment
and settlement 4,327 1,127 - 1,127
Gain on sale of
machinery and
equipment (1,488) - (683) (683)
Gain on sale of land
and building (4,114) (4,114) - (4,114)
Other 2,491 1,577 693 2,270
-------------------------------------------------------------------------
Total $ 4,190 $ 1,562 $ 12 $ 1,574
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other restructuring costs include facility closure costs, capital asset
dismantling and write down, and inventory write down.
-------------------------------------------------------------------------
Less
costs
Less incurred
costs and
Balance, paid or charged Balance
Restructuring March 31, otherwise to Adjust- June 30,
Accrual 2008 settled expense ments 2008
-------------------------------------------------------------------------
Severance,
termination costs,
benefits, retention
bonuses $ 753 $ 349 $ - $ - $ 404
Pension curtailment
and settlement 1,127 - - - 1,127
Other 72 25 - - 47
-------------------------------------------------------------------------
Total $ 1,952 $ 374 $ - $ - $ 1,578
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. DISCONTINUED OPERATIONS:
On July 31, 2007, the Company sold the operations and net assets of its
U.S. subsidiary, Energy Steel Products, Inc. ("ESP"), for consideration
of U.S. $26,006. Accordingly, the results of operations and financial
position of ESP have been segregated and presented separately as
discontinued operations in the consolidated financial statements. The net
income from the discontinued operations included in the consolidated
financial statements is as follows:
-------------------------------------------------------------------------
2ND QUARTER SIX MONTHS
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Net sales $ - $ 12,704 $ - $ 26,213
Cost of sales, selling
& administration - 10,787 - 22,516
-------------------------------------------------------------------------
Earnings before income
taxes - 1,917 - 3,697
Income taxes - 748 - 1,442
-------------------------------------------------------------------------
Net income from
discontinued
operations $ - $ 1,169 $ - $ 2,255
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. BUSINESS ACQUISITIONS:
On February 27, 2008, the Company acquired the principle assets of Omega
Joists Inc. ("Omega") for consideration of $27,000 subject to certain
adjustments for working capital items. Omega is a recognized leader in
the design, engineering, manufacturing and supply of open web steel
joists used primarily in the commercial and industrial building products
industry in western Canada.
On January 31, 2008, the Company acquired 100% of the outstanding shares
of Tubular Products Company ("Tubular") for consideration of U.S. $33,000
plus an earn out payment, subject to certain adjustments for working
capital items. Tubular is a recognized leader in the design, engineering,
manufacturing and supply of laser cut carbon steel tubing, fabricated
tubular components and welded sub-assemblies used primarily in outdoor
and power transmission equipment, all-terrain, automotive and other
vehicles and reusable coil carriers in North America.
Both acquisitions are reported under the Metal Processing segment, and
have been accounted for under the purchase method of accounting.
Effective from the acquisition date, the results of operations have been
included in the consolidated statements of earnings.
The process of valuing certain assets acquired has not been finalized,
and, as such, the fair value allocation of the purchase prices is subject
to refinement. On a preliminary basis, details of the consideration given
and the fair value of net assets acquired are as follows, in Canadian
dollars:
Cash consideration $59,624
Acquisition costs 506
-------------------------------------------------------------------------
Total purchase price $60,130
-------------------------------------------------------------------------
Net assets acquired, at fair values:
Accounts receivable $ 6,513
Inventories 4,351
Capital assets 9,901
Intangible assets (subject to amortization) 11,091
Goodwill 30,641
Accounts payable (2,367)
-------------------------------------------------------------------------
Net assets acquired, net of cash of $50 (Tubular) $60,130
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Of the total goodwill acquired, $27,560 is deductible for tax purpose.
8. FINANCIAL INSTRUMENTS:
The Company has exposure to the following risks from its use of financial
instruments: credit risk, market risk and liquidity risk.
Credit Risk
-----------
Credit risk arises from the potential default of a customer in meeting
its financial obligation to the Company. The Company has credit
evaluation, approval and monitoring processes to mitigate potential
credit risk.
The Company evaluates the collectability of accounts receivable and
records an allowance for doubtful accounts which reduces receivables to
the amount management reasonably believes will be collected.
Credit risk exists in the event of non-performance by a counterparty to
forward exchange contracts and interest rate swaps. This risk is
minimized as each contract is with a major chartered bank and represents
an exchange between the same parties allowing for an offset in the event
of non-performance.
The carrying amount of financial assets represents the maximum credit
exposure. The maximum exposure to credit risk at the reporting date was:
June 30, December 31,
2008 2007
-------------------------------------------------------------------------
Cash and cash equivalents $ 6,191 $ 1,876
Accounts receivable 160,863 123,801
Other assets 1,905 1,294
-------------------------------------------------------------------------
Total $ 168,959 $ 126,971
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The aging of accounts receivable at the reporting date was:
-------------------------------------------------------------------------
June 30, December 31,
2008 2007
-------------------------------------------------------------------------
1 to 30 days $ 97,987 $ 66,045
30 to 60 days 44,939 39,291
60 to 90 days 13,174 13,063
Greater than 90 days 7,415 8,004
-------------------------------------------------------------------------
Gross accounts receivable $ 163,515 $ 126,403
-------------------------------------------------------------------------
Less: Allowance for doubtful accounts (2,652) (2,602)
-------------------------------------------------------------------------
Total accounts receivable, net $ 160,863 $ 123,801
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Market risk
-----------
Market risk is the risk that changes in market prices, such as foreign
exchange rates and interest rates, will affect the Company's income or
the value of its holding in financial instruments.
Foreign exchange risk / Currency risk
The Company is a net seller of U.S. dollars with U.S. dollar receipts
from sales exceeding U.S. dollar denominated purchases of raw materials,
supplies and equipment. As a net seller of U.S. funds, the Company is
negatively affected by a strong Canadian currency. However, this is
somewhat offset by the favourable effect of a strong Canadian dollar on
the Company's purchase of raw materials, supplies and equipment in U.S.
dollars. The Company enters into forward exchange contracts to hedge the
cash flow risk associated with its estimated net foreign currency cash
requirements and certain significant transactions. The Company also
enters into forward exchange contracts to hedge the cash flow risk
associated with specific transactions denominated in currencies other
than U.S. dollars. Unrealized gains and losses on outstanding contracts
are not recorded in the consolidated statement of earnings until maturity
of the underlying transactions.
The Company uses derivative financial instruments to manage risks from
fluctuations in exchange rates. All such instruments are used for risk
management purposes only, as the Company does not enter into derivatives
for speculative purposes.
All derivative instruments are recorded in the consolidated statement of
earnings at fair value unless the derivative instrument is a contract to
buy or sell a non-financial item in accordance with the Company's
expected purchase, sale or usage requirements referred to as a "normal
purchase or normal sale". Normal purchase and normal sales are exempt
from the application of the standard and are accounted for as executory
contracts. Changes in the fair value of a derivative instrument
designated as an effective cash flow hedge are recorded in accumulated
other comprehensive income, a component of equity.
The Company enters into foreign currency forward contracts to hedge
foreign exchange exposure on anticipated operational cash flows. The
effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges is recognized in other
comprehensive income. Any gain or loss in fair value relating to the
ineffective portion is recognized immediately in the consolidated
statement of earnings.
At June 30, 2008, the Company was committed to the sale of U.S. $12,000
under forward exchange contracts at rates of exchange ranging from Cdn.
$1.0166 to Cdn. $1.0316 maturing from July 9, 2008 to December 19, 2008.
In addition, the Company was committed to the sale of EUR 885 under
forward exchange contracts. The contracts are at rates of exchange
ranging from Cdn. $1.5054 to Cdn. $1.6105 maturing from July 2, 2008 to
Jan 9, 2009. The Company was also committed to the sale of GBP 716 under
forward exchange contracts. The contracts are at rates of exchange
ranging from Cdn. $1.9110 to Cdn. $2.0240 maturing from July 18, 2008 to
November 14, 2008.
The fair value of the contracts as at June 30, 2008 was an unrealized
loss of $67 ($46 net of tax) and is recorded within accounts payable on
the consolidated balance sheet.
If the Canadian dollar had appreciated (depreciated) 1 percent against
the U.S. dollar at June 30, 2008, with all other variables held constant,
the impact of the foreign currency change on the Company's U.S. dollar
denominated financial instruments would be to increase (decrease)
earnings from continuing operations before taxes for the six months
ending June 30, 2008 by $1,244. This analysis excludes the impact of
hedging activities which mitigate the Company's exposure to changes in
foreign exchange rates. The impact of changes in other currencies on the
Company's earnings is not significant.
Interest rate risk
The Company is subject to floating interest rates on its long-term debt
facilities and consequently, there is risk of cash flow exposure in the
event that interest rates increase. The Company enters into interest rate
swaps to hedge its exposure to changes in interest rates. At June 30,
2008, the Company had U.S. $50,000 of interest rate swap agreements in
place with the balance of long-term debt subject to floating interest
rates.
Any change in the fair value of the effective portion of an interest rate
swap that is designated and qualifies as a cash flow hedge is recognized
in other comprehensive income. Any gain or loss in fair value relating to
the ineffective portion, if any, is recognized immediately in the
statement of earnings. The fair value of the interest rate swaps at June
30, 2008 was an unrealized loss of $609 ($415 net of tax) based on the
amount quoted by the Company's banker and has been recognized in other
comprehensive income and is recorded within other long-term liabilities
on the consolidated balance sheet.
A 1% increase (decrease) in the interest rate would have resulted in an
approximately $380 decrease (increase) in the pre-tax earnings of the
Company for the quarter ended June 30, 2008. This analysis assumes that
all other variables, in particular foreign currency rates, and the level
of interest rate swaps in place, remained constant.
Liquidity risk
--------------
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company's approach to
managing liquidity risk is to ensure that it will always have sufficient
liquidity to meet liabilities when due. The Company monitors sales and
collection efforts to ensure sufficient cash flows are generated from
operations to meet current debt servicing requirements. At June 30, 2008,
the Company had cash and cash equivalents of $6,191 and revolving credit
facilities that permitted the Company to borrow funds up to an aggregate
of $296,414 of which $216,154 had been drawn.
All of the Company's financial liabilities, other than long-term debt,
have contractual maturities of less than one year.
The maturities of the Company's long-term debt credit facilities are as
follows: $73,844 in 1 to 2 years; and $135,357 within 3 years. These
amounts are the contractual undiscounted cash flows.
Management monitors consolidated cash flow through quarterly forecasting
and through the annual budget process. The Company expects to be able to
re-negotiate credit facilities and to generate cash to meet the repayment
requirements as noted above.
Fair value
----------
Under Canadian generally accepted accounting principles, financial
instruments are classified into one of the following five categories:
held-for-trading, held-to-maturity investments, loans and receivables,
available-for-sale financial assets and other financial liabilities. The
Company has also designated certain of its derivatives as effective
hedges. The carrying values of the Company's financial instruments on the
consolidated balance sheet are classified into the following categories:
June 30, December 31,
2008 2007
-------------------------------------------------------------------------
Held-for-trading $ 693 $ (2,039)
Loans and receivables $ 160,863 $ 123,801
Other financial liabilities $ (300,864) $ (199,666)
Loss on derivatives designated as effective
hedge $ (676) $ (576)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, long-term debt, foreign exchange
contracts and interest rate swap contracts. The Company has designated
its cash and bank indebtedness as held-for-trading, which is measured at
fair value. Accounts receivable are classified as loans and receivables,
which are measured at amortized cost. Accounts payable and accrued
liabilities and long-term debt are classified as other financial
liabilities, which are measured at amortized cost.
The carrying value of the cash and cash equivalents, accounts receivable,
and accounts payable approximates their fair values due to the immediate
or short-term maturity of these financial instruments.
The estimated fair value of the Company's variable-rate debt approximates
the carrying value of such debt since the variable interest rates are
market-based, and the Company believes such debt could be refinanced on
materially similar terms.
The fair value of the Company's derivative financial instruments used to
manage exposure to increases in procurement costs arising from certain
foreign currency denominated purchases are estimated based upon fair
value estimates of the related cash-settled foreign currency forward
agreement provided by the counterparty to the transactions. The fair
value of the forward exchange contracts reflects the cash flows due to or
from the Company if settlement had taken place on June 30, 2008.
The fair value of interest rate swaps used by the Company to manage
interest rate exposure is based upon fair value estimates of the
agreement provided by the counterparty to the transactions. The fair
value of the interest rate swaps reflects the cash flows due to or from
the Company if settlement had taken place on June 30, 2008.
9. CAPITAL MANAGEMENT:
The Company's objective when managing capital is to maintain a prudent
capital base so as to maintain investor, creditor and market confidence
and to sustain future development of the business. Management defines
capital as the Company's total shareholders' equity, as well as long-term
debt and bank indebtedness.
The Board of Directors in conjunction with management has agreed to a
quantitative targeted return for the Company and promotes year over year
sustainable profitable growth. The Board of Directors also reviews on a
quarterly basis whether any dividends should be paid with reference to
the Company's Dividend Policy. Management considers such factors as
consistency with the Company's capital financing strategy objectives,
target yield to our shareholders, external benchmarks, and targeted
percentage of average annual net earnings before recommending its
quarterly dividend to be paid. In the six months ended June 30th, 2008,
dividends totaling $6,425 have been declared payable to the Company's
shareholders.
In order to maintain or adjust the capital structure, the Company may
provide dividends paid to shareholders, purchase shares for cancellation
pursuant to normal course issuer bids, issue new shares, issue new debt,
and issue new debt to replace existing debt with different
characteristics.
There were no changes in the Company's approach to capital management
during the period compared to that of 2007. The Company's strategy for
capital risk management is driven by the cost effectiveness of externally
available debt, cash from operations and expectations for future
acquisitions and capital expenditures. Financial covenants under the
Company's existing credit facilities include net debt to capitalization,
net debt to earnings before interest, taxes, depreciation and
amortization (EBITDA) and current ratio covenants, all of which the
Company was in compliance with at June 30, 2008.
10. BUSINESS SEGMENTS:
The Company, prior to July 31, 2007, operated in three business segments,
Packaging, Metal Processing and Distribution, primarily within the North
American market. Effective for the quarter ending September 30, 2007, the
segment formerly known as Distribution has been combined with the
Packaging segment. The change is the result of the completion of the sale
of Energy Steel Products Inc. on July 31, 2007. Comparative figures have
been restated accordingly.
11. COMPARATIVE FIGURES:
Comparative figures have been restated due to the discontinuance of the
Company's U.S. distribution operations as a result of selling its
subsidiary, Energy Steel Products, Inc.; and the combining of the
Company's Distribution segment into the Packaging segment, as indicated
in notes 6 and 10 to these interim consolidated financial statements.
12. JOINT VENTURE:
On April 8, 2008, the Company announced that its majority owned steel
pickling operations in Ohio, Samuel Steel Pickling Company ("Samuel
Pickling"), entered into a letter of intent with respect to a strategic
alliance with Viking & Worthington Steel Enterprises, LLC ("V&W"). Under
the terms of the letter of intent, V&W would shut down its steel pickling
operations in Valley City, Ohio and have its Northeast Ohio pickling
requirements processed at Samuel Pickling. V&W would obtain a minority
ownership position in Samuel Pickling as a result. The new ownership
structure would include Gibraltar Industries and V&W while Samuel Manu-
Tech Inc. would remain the majority owner and operating manager of the
new venture. The closing of this transaction, which was originally
anticipated to occur in June 2008, has been delayed due to the non-
completion of a number of pre-closing conditions.
13. SUBSEQUENT EVENT:
On July 30, 2008, the Company announced the signing of a non-binding
letter of intent to sell all of its Nanticoke, Ontario steel pickling
operations to its major customer, U.S. Steel Canada. The decision to sell
the Nanticoke pickling lines reflects the company's expectations for
reduced steel and pickling demand in the Ontario marketplace and the
desire to reallocate capital into higher growth areas. The Company
remains committed to servicing the Southern Ontario marketplace through
its state-of-the-art steel pickling and slitting operations in Stoney
Creek, Ontario. The transaction is anticipated to close in the third
quarter of 2008 following the completion of due diligence and ongoing
negotiations.
%SEDAR: 00002004E
For further information: John D. Amodeo, Vice-President and Chief
Financial Officer, Samuel Manu-Tech Inc., 185 The West Mall, Suite 1500,
Toronto, Ontario, M9C 5L5, Telephone: (416) 626-2190, Website:
www.samuelmanutech.com, Email address: smt@samuelmanutech.com
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