Armtec Reports Financial Results for the First Quarter 2014

CONCORD, ON, May 8, 2014 /CNW/ - Armtec Infrastructure Inc. ("Armtec" or the "Company") (TSX: ARF; ARF.DB) ("Armtec") today reported financial results for the three months ended March 31, 2014.

Summary:

  • Revenue in the first quarter was $69.6 million, a $9.4 million or 11.9% decrease over the same period in 2013. Drainage revenues declined 12.7% from the same period last year, impacted by the harsh winter conditions, particularly in Central Canada, which caused delays for many infrastructure projects and agricultural drainage installations. In the Precast business unit ("BU or BUs"), improved engineered precast volumes in the Prairie market area partially mitigated the shortfalls in the Central and Pacific market areas, resulting in an 11.6% decrease over 2013 levels.
  • Loss from operations for the quarter was $10.5 million compared to $2.9 million in 2013, the result of lower volumes, increased competitive activity and under-absorbed operating overheads in Drainage as well as a less favourable mix of projects and schedule delays in Precast.  The performance in both BUs was negatively impacted, particularly in Central Canada by the prolonged winter with extreme cold temperatures.
  • As previously announced, Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") for the first quarter of 2014 was down $7.6 million compared to $0.1 million in the year prior (please see the section entitled "Non-GAAP Measure"). Performance in both Precast and Drainage was impacted by lower volumes and increased operating overheads, primarily related to the weather and installation conditions, and, in the Drainage BU, increased competition.
  • The prolonged winter weather conditions in parts of Canada are expected to lead to lower second quarter revenue and profitability compared to prior year.  These anticipated results are expected to place pressure on the near term liquidity position and existing covenants under the Brookfield Facility.  Management believes this is a short-term situation and has alternate financing solutions available in the event that they are required.

"Despite the challenging start to the year, management remains focused on delivering improved earnings in the second half of 2014 over the same period in 2013," said Mark Anderson, President and Chief Executive Officer. "Looking ahead, we continue to pursue new opportunities to strengthen our market reach, expand our product offering and execute our performance improvement initiatives in order to capture both revenue and cost improvements. While the outlook for the balance of 2014 is mixed, based on geographic region and the timing of revenues and associated profitability, we believe the long-term outlook for Armtec's markets will continue to be favourable, driven by more stable economic conditions and ongoing investment in infrastructure across Canada."  (Note that this is forward-looking information and for more information please see the section entitled "Caution Regarding Forward-Looking Statements")

Summary of Results

           
For the three months ended March 31       2014   2013
(in thousands of Canadian dollars except per share amounts) (unaudited)            
             
Revenue           $  69,559       $  78,936
             
Gross margin           $  3,083       $  10,145
As a % of revenue       4.4%   12.9%
Selling, general and administrative           $  13,646       $  13,052
As a % of revenue       19.6%   16.5%
Loss from operations           $  (10,523)       $  (2,926)
As a % of revenue       (15.1)%   (3.7)%
Finance expense           $  7,677       $  7,443
As a % of revenue       11.0%   9.4%
Net loss attributable to owners of the Company           $  (13,566)       $  (7,729)
As a % of revenue       (19.5)%   (9.8)%
Basic and diluted loss per share           $  (0.56)       $  (0.32)
             
EBITDA           $  (7,558)       $  65
As a % of revenue       (10.9)%   0.1%
             

For the three months ended March 31       2014   2013
(in thousands of Canadian dollars except per share amounts) (unaudited)        
 
Breakdown of depreciation and amortization by financial statement line item:
  Cost of sales           $  1,517       $  1,632
  Selling, general and administrative     1,448 1,359
         
Total depreciation and amortization           $  2,965       $  2,991

First Quarter Results

Revenue
Armtec recorded revenue of $69.6 million in the first quarter of 2014, a $9.4 million or 11.9% decrease over the first quarter of 2013.  The Drainage BU revenue was impacted by the harsh winter conditions in Central Canada, which caused delays for many infrastructure projects and agricultural drainage installations. In the Precast BU, improved engineered precast volumes in the Prairie market area partially mitigated the shortfalls in the Central and Pacific market areas. In Central Canada, the extreme winter conditions of 2014 have impacted the construction industry.  This has significantly affected Armtec's project schedules and its ability to manufacture at its outdoor facilities at seasonally normal rates.  The Pacific market area revenue was lower than the prior year as the Kitimat smelter modernization project nears completion.  Armtec's portion of the Kitimat smelter modernization project was announced in December of 2011 to supply precast components to expand and upgrade Rio Tinto Alcan's aluminum smelter in Kitimat, British Columbia.  Revenue from standard precast products was slightly down when compared to 2013 levels.

Loss from Operations
The loss from operations for the first quarter of 2014 was $10.5 million compared to $2.9 million for the 2013 comparative period.  Depreciation and amortization in the quarter of $3.0 million was consistent with 2013 levels.

For the first quarter of 2014, the gross margin of $3.1 million, or 4.4% of revenue, was a reduction of $7.0 million as compared to $10.1 million, or 12.9% of revenue, for the first quarter of 2013.  Margins were affected in the Drainage BU by lower volumes and the slower start-up of production in many facilities which caused under-absorption of operating overheads.  Competition in the Western market area continued to impact performance of corrugated steel pipe products.  With the excess capacity in the Central and Eastern market areas, competition has increased in plastic products creating pricing pressures despite rising resin costs.

Performance in the Precast BU was impacted by lower volumes, a shift in product mix and under-absorbed operating overheads.  The Central market area was impacted severely by lower volumes and challenging manufacturing conditions caused primarily by the prolonged harsh winter that disrupted project schedules and significantly increased production costs and inefficiencies.  During the first quarter of 2013, the engineered precast projects consisted of multiple parking garages and the Kitimat smelter modernization work which had higher margins than the replacement bridge jobs in 2014.  Selling, general and administrative expenses, before depreciation and amortization, for the three months ended March 31, 2014 were $12.2 million or $0.5 million higher than the $11.7 million during the first quarter of 2013.  The increase in the quarter related to the planned investment in additional resources, which primarily support the sales function, net of reduced discretionary spend.

The EBITDA loss of $7.6 million for the quarter was unfavourable when compared to the prior year EBITDA of $0.1 million.  Performance in both BUs was impacted by lower volumes and increased operating overheads, primarily related to the weather and installation conditions and, in the Drainage BU, increased competition.

Results by Segment

Drainage Solutions

         
For the three months ended March 31       2014   2013
(in thousands of Canadian dollars) (unaudited)            
             
Revenue      $  15,908  $  18,216
             
Loss from operations       $  (2,792)       $  (2,118)
As a % of revenue       (17.6)%   (11.6)%
Depreciation and amortization      $  537       $  528
As a % of revenue       3.4%   2.9%
EBITDA      $  (2,255)       $  (1,590)
As a % of revenue       (14.2)%   (8.7)%

Revenue
Revenue for Drainage in the first quarter of 2014 was $15.9 million, a decrease of $2.3 million, or 12.7%, from the same period in 2013.  The decline was primarily in the Central market area where harsh winter weather conditions impacted revenue with below average temperatures for a prolonged period delaying the start of the construction and agricultural drainage installation season.  Depressed installations for agricultural and infrastructure applications in Central Canada were only partially offset by improved International shipments over 2013 levels.  Revenue levels across the remaining market areas were consistent with the prior year.

Loss from operations
Because of the slow start to the year, the loss from operations for the Drainage BU was $2.8 million, or $0.7 million worse than the prior year.  With the delayed start to the construction season, many production facilities, particularly in Central and Eastern Canada remained closed for longer periods than normal in order to mitigate the costs to the Company.  In addition to the impact of the reduced production volumes and resulting market capacity, plastic product pricing in Central and Eastern Canada, remained under pressure despite raw material price increases. The competitive pricing in the corrugated steel pipe market in the Prairies continued to persist.  The investment in additional sales and operations personnel were offset by tighter cost controls in selling, general and administrative spend.  Depreciation and amortization were consistent with 2013 levels. As a result, the EBITDA loss of $2.3 million was $0.7 million worse than 2013.

Precast Concrete Solutions

     
        2014   2013
(in thousands of Canadian dollars) (unaudited)          
           
Revenue           $  53,651       $  60,720
           
(Loss) earnings from operations           $  (3,377)       $  3,043
As a % of revenue     (6.3)% 5.0%
Depreciation and amortization           $  2,029       $  2,099
As a % of revenue     3.8% 3.5%
EBITDA           $  (1,348)       $  5,142
As a % of revenue     (2.5)% 8.5%

Revenue
Precast revenue of $53.7 million in the first quarter of 2014 was $7.1 million, or 11.6% below 2013 levels.  Engineered precast revenue declined by $6.6 million or 12.8% over the prior year and was affected by significantly colder weather experienced in Central Canada causing schedule delays on key projects and lost production time in our outdoor facilities.  The Prairie market area realized an improvement in revenue, despite schedule delays in certain large projects, with increased activity related mainly to bridge projects.  Revenue in the Pacific market area declined due to the near completion of the Kitimat smelter modernization project.  The Central market area volumes were significantly impacted by the prolonged and extremely cold winter and project schedule delays, particularly related to the Highway 407 East expansion which is an anchor project for this market area in 2014. In June of 2013, Armtec announced it had been awarded a contract to supply and deliver precast girders for new bridge structures being constructed in the Greater Toronto Area as part of the Highway 407 East expansion project.  By comparison, in 2013, the Central market area was performing well on a number of parking garages.

Standard precast revenue was slightly below prior year levels with growth in the Pacific market area partially offsetting declines in the Prairies and Central market areas.

(Loss) earnings from operations
The loss from operations in the first quarter of 2014 of $3.4 million represented a $6.4 million decline from the earnings of $3.0 million in 2013.   Under the severe weather conditions, project schedules were delayed, production costs increased as more resources were required to manufacture in the extreme temperatures and additional costs were incurred in maintaining the required temperature of manufacturing inputs such as aggregates which are stored outside.  Cure times for the concrete took longer and labour was impacted by the ability to work outdoors in the extreme temperatures, reducing productivity to below seasonal norms. The combination of not achieving expected output levels and incurring higher operating costs had a significant impact on the earnings from Precast in the quarter.

The mix of engineered precast projects further impacted the results in the quarter compared to the prior year.  As the Kitimat smelter modernization project in the Pacific market area winds down, new projects in ramp up were at expected lower gross margin levels. The Central market area produced more bridge components in the quarter which generates lower contributions than the parking garage projects that were the main driver in the same period of 2013.  Despite the improved revenue in the Prairie market area, the less favourable project mix contributed lower incremental earnings.

The investment in additional sales personnel caused a slight increase in selling, general and administrative spend over 2013. Depreciation and amortization were consistent with 2013 levels. As a result, the EBITDA loss of $1.3 million was $6.5 million worse than 2013.

Outlook
This section contains forward-looking information.  For more information please see the section entitled "Caution Regarding Forward-Looking Statements".

The long term outlook for Armtec's markets remains favourable; driven by a stable macro-economic climate in Canada and ongoing infrastructure investment required across the country.  The outlook for these markets for the balance of 2014 is, however, mixed.

Market conditions in Western Canada and the United States ("US") are positive while the economic fundamentals in Ontario, Eastern Canada and internationally have trended less favourably.  Stronger activity in oil & gas and forestry are two areas that are expected to directly and indirectly drive favourable demand for Armtec's products in Western Canada.  Management anticipates that revenue and profitability in the Prairie market area will be stronger than last year due to solid demand in residential, commercial and infrastructure construction driven largely from investments expected in highways/bridges, oil & gas infrastructure initiatives and sports venues.  In British Columbia, the Kitimat smelter modernization project is nearing completion and is expected to be replaced by lower margin projects, comprised mainly of rail infrastructure and bridge work, resulting in an unfavourable project mix.

In Ontario, the Highway 407 East expansion and Herb Gray Parkway project are expected to create strong demand for bridges, drainage and Soundwall products.  In January of 2014, Armtec announced it had been awarded a contract for Durisol Soundwall products for the highway expansion being constructed for the Herb Gray Parkway. Off-setting these positive impacts will be the completion of several projects relating to the Pan American games and rail infrastructure improvements that resulted in higher demand for sport venues and parking garages in the prior year.  It is anticipated that there will be lower activity in the non-residential building segment in 2014 resulting in lower demand for building envelopes. In addition, the shortened construction and installation season and lower municipal-level government spending are expected to provide further headwinds for the Company in Ontario.

The Eastern market area was also impacted by the unseasonably cold weather, compounding the adverse impact of the ongoing Charbonneau Commission Inquiry, a public proceeding in Quebec into alleged corruption in the management of public construction contracts. In Quebec, new municipal and provincial governments have the potential to accelerate construction spending in the province.  It is anticipated that improved demand should start to return in the second half of 2014 as the negative impact of the Charbonneau Commission Inquiry is expected to begin to ease.

Near term opportunities are expected from improved US market demand with specific prospects identified for engineered precast products.  The instability in Russia and the Ukraine will adversely affect the international business for the Drainage BU as it has traditionally relied on the Russian market for a portion of its international sales.

At the end of the first quarter, the Company had a backlog of engineered precast projects totaling $108 million versus a prior year backlog of $118 million.

The extreme and prolonged winter weather conditions have extended into the second quarter resulting in a shorter installation season affecting all segments, especially agriculture and infrastructure.  As a result of the weather and market conditions described above, it is expected that revenue and earnings for the second quarter will be below prior year levels.  The Company's anticipated performance for the first half of 2014 is expected to put pressure on the near term liquidity position and existing covenant under the Brookfield Facility.  Management anticipates that this is a short term situation and does have alternative financing solutions.  The Company continues to consider other available alternatives in order to deliver the most economical solution to address both the liquidity tightness and covenant concern in the event that a solution is required.

Despite the challenging start to the year, a portion of the revenue and associated earnings foregone in the first half are expected to be recovered prior to the end of 2014.  The Company remains focused on executing its performance improvement plans with an aim of delivering improved year over year earnings in the second half of 2014 that are likely to partially offset the first half shortfall.

Conference Call
Management will host a conference call at 10:00 a.m. (ET) on Friday, May 9, 2014 to discuss the results. Investors who wish to participate can access the call using the following numbers: 1-800-319-4610 or +1-604-638-5340 outside Canada and the US. The call will be archived on Armtec's website at www.armtec.com.

A taped rebroadcast will be available to listeners following the call until 12:00 a.m. on Friday, May 16, 2014. To access the rebroadcast, please dial 1-800-319-6413 or +1-604-638-9010 outside of Canada and the US and quote the passcode 3271#.

Armtec's full consolidated financial statements, notes to financial statements and management's discussion and analysis are available at www.sedar.com or at www.armtec.com.

About Armtec Infrastructure Inc.
Armtec is a manufacturer and marketer of a comprehensive range of infrastructure products and engineered construction solutions for customers in a diverse cross-section of industries that are located in every region of Canada, as well as in selected markets globally.  These markets include Canada's national and regional public infrastructure markets and private sector markets in agricultural drainage, commercial building, residential construction and natural resources.  Armtec operates through a network of offices and production facilities across the country.  Armtec operates in two business units: Drainage Solutions and Precast Concrete Solutions.  Drainage manufactures and markets corrugated high-density polyethylene pipe, corrugated steel pipe and other drainage related products including small bridge structures.  Precast manufactures and markets highly engineered precast systems such as parking garages, bridges, sport venues and building envelopes as well as standard precast products such as steps, paving stones and utility vaults.

Non-GAAP Measure
EBITDA
References to EBITDA are to earnings before finance (income) expense - net, income taxes, depreciation and amortization, certain non-recurring expenses and certain other non-cash amounts.  Management believes that in addition to net earnings, EBITDA is a useful supplemental measure of cash available prior to debt service, changes in working capital, capital expenditures and income taxes.  However, EBITDA is not a recognized measure under GAAP.  Investors are cautioned that EBITDA should not be construed as an alternative to net and comprehensive earnings determined in accordance with GAAP as an indicator of Armtec's performance or as an alternative to cash flows from operating, investing and financing activities as a measure of Armtec's liquidity and cash flows.  Armtec's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, Armtec's EBITDA may not be comparable to similarly named measures used by other issuers.

Risks and Uncertainties
Armtec is subject to certain risks and uncertainties that could have a material adverse effect on Armtec's results of operations, business prospects, financial condition, and the trading price of Armtec's shares.  These risks and uncertainties are largely derived from Armtec's business environment.  These uncertainties and risks include, but are not limited to:  capital and liquidity risk; access to bonding and letters of credit; competition; large project risk; credit risk; fluctuations in operating results; seasonality and adverse weather; relationships with suppliers; lack of long-term agreements; existing legal proceedings; risk of future legal proceedings; industry cyclicality; change management; availability and price volatility of raw materials; acquisition and expansion risk; current global financial conditions; reduction in demand for products; reliance on key personnel; labour markets; environmental; currency fluctuations; product liability; expiration of rights under license and distribution arrangements; operating hazards; intellectual property; collective bargaining; pension plans; interest rates; information management; uninsured and underinsured losses; insurance coverage; securities laws compliance and corporate governance standards; income tax and other taxes; geographical risk; and geopolitical.  Further information about these and other risks and uncertainties can be found in the disclosure documents filed by Armtec Infrastructure Inc. with the securities regulatory authorities, available at www.sedar.com.

Caution Regarding Forward-Looking Statements
This news release contains "forward-looking" statements (including those set out under the headings "Summary" and "Outlook") within the meaning of applicable securities legislation which involve known and unknown risks, uncertainties and other factors which may cause the actual results, events, performance or achievements of Armtec or industry results, to be materially different from any future results, events, performance or achievements expressed or implied by such forward-looking statements.  Forward-looking statements typically contain such words or phrases as "may", "outlook", "objective", "intend", "estimate", "anticipate", "should", "could", "would", "will", "expect", "believe", "plan" and other similar terminology suggesting future outcomes or events.  Forward-looking statements reflect current expectations regarding future results, events, performance and achievements and are based on information currently available to Armtec's management, anticipated operating and financial results of Armtec and current and anticipated market conditions.

Forward-looking statements involve numerous assumptions and should not be read as guarantees of future results, events, performance or achievements.  Such statements will not necessarily be accurate indications of whether or not such future results, events, performance or achievements will be achieved.  You should not unduly rely on forward-looking statements as a number of factors, many of which are beyond the control of Armtec, could cause actual results, events, performance or achievements to differ materially from the results, events, performance or achievements discussed in the forward-looking statements, including, but not limited to the factors discussed in Armtec's materials filed with the Canadian securities regulatory authorities from time to time.  These factors also include, but are not limited to, known and unknown risks with respect to: restrictive covenants and obligations under the Senior Notes, the Brookfield Facility and the Revolving Credit Facility; access to bonding and letters of credit; market competition, including potential new market entrants; cost estimates vs. actual profit in respect of large projects; credit risk in respect of Armtec's receivables; fluctuations in operating results; seasonality and adverse weather; relationships with suppliers of raw materials and the availability and volatile pricing of such materials; uncertainties with respect to short-term customer and supplier agreements; the outcome of pending and future claims and litigation; industry cyclicality; ineffective change management, the ability to attract and retain key personnel and competition for labour; acquisition and expansion risk and associated geographical risks related thereto; current global financial conditions, currency and interest rate fluctuations; a reduction in demand for Armtec's products; current and future environmental obligations pursuant to federal, provincial and municipal environmental laws and regulations; product liability in respect of both Armtec's products and the products incorporated from third parties; expiration of rights under license and distribution arrangements and potential infringement in respect of Armtec's intellectual property and any of Armtec's licensed intellectual property; operating hazards; collective bargaining; pension plans; information management; current insurance coverage, uninsured and underinsured losses with respect to Armtec's insurance policies; changes to securities laws and corporate governance standards; changes in and Armtec's compliance with respect to income tax and other tax laws; and geopolitical risk.

Although the forward-looking statements contained in this news release are based upon what management of Armtec believes are reasonable assumptions, Armtec cannot assure investors that actual results, events, performance or achievements will be consistent with these forward-looking statements.  All forward-looking statements in this news release are qualified by these cautionary statements.  These forward-looking statements are made as of the date of this news release and, except as required by applicable law, Armtec assumes no obligation to update or revise them to reflect new events or circumstances.

Defined Terms
Capitalized terms that are not otherwise defined in this news release shall have the meanings given to them in Armtec's management's discussion and analysis for the three months ended March 31, 2014.

 

 

SOURCE Armtec Infrastructure Inc.

For further information:

Carrie Boutcher 
Vice President & Corporate Secretary 
Tel: (647) 795-9290