Armtec Infrastructure Inc. Reports Results for the First Quarter 2011 and Suspension of Quarterly Dividend

Toronto Stock Exchange: ARF; ARF.DB

GUELPH, ON, June 8, 2011 /CNW/ - Armtec Infrastructure Inc. (the "Company" or "Armtec") (TSX: ARF) today reported financial results for the first quarter ended March 31, 2011.

Highlights:

  • Revenues of $75.0 million, an increase of 4.8% or $3.4 million over 2010. Engineered Solutions ("ES") growth offset anticipated lower Construction and Infrastructure Applications ("CIA") product volumes as 2011 represented typical off season volumes.
  • Gross margin was $4.8 million, a decrease of $3.8 million from the $8.6 million in the first quarter of 2010. As a percentage of revenue, gross margin declined to 6.4% from 11.9% in the prior year, reflecting the impact of lower CIA manufacturing levels typical of the beginning of the year, together with the continued effects of competitive recessionary pricing on ES projects.
  • EBITDA1 loss of $4.2 million compared to income of $0.2 million in the same period in 2010.
  • Subsequent to the first quarter of 2011, the Company suspended payment of its quarterly dividend until further notice.

"In the first quarter of 2011, Armtec's financial results reflected the margin compression in our ES business due to the complex nature of some of the projects, coupled with recession-level bid margins. The adverse impact of these contracts will be progressively reduced as they are completed, and our order backlog is rebuilt with more traditional work. In our CIA business, the 2011 installation season has been negatively affected by a late, wet spring relative to the first half of 2010, which recorded higher sales volumes as a result of more favourable weather conditions and government stimulus spending programs," said Charles M. Phillips, President and Chief Executive Officer. "The continuing impact of lower margin levels and the poor weather conditions have affected our ability to achieve the level of earnings required by the Senior Notes in order to pay dividends. Accordingly Armtec is suspending payment of its quarterly dividend until further notice. Looking ahead, our ES business is expected to improve toward the end of 2011, although gross margins are not expected to fully rebound to pre-recession levels. Armtec's business remains sound."

Summary of Results

            Three Months Ended
(in thousands of Canadian dollars except per share or unit amounts)
(unaudited)
          March 31,
2011
      March 31,
2010
                     
Revenue         $ 74,975     $ 71,556
                     
Gross margin           4,765       8,550
As a % of revenue           6.4%       11.9%
Loss from operations           (11,552)       (7,148)
                     
Net loss attributable to owners of the Company           (13,270)       (10,613)
                     
Depreciation and amortization           7,342       7,479
                     
Finance expense - net           6,626       3,795
                     
EBITDA1           (4,225)       186
As a % of revenue           (5.6)%       0.3%
Dividends or distributions declared           8,139       10,941
                     
Basic and diluted loss per share or unit         $ (0.65)     $ (0.52)
  1. Please see non-GAAP measure section below.

Suspension of Quarterly Dividend
As a result of the unprecedented weather conditions and continued margin compression in the Company's ES business, Armtec's loss for the first quarter was greater than expected. The unprecedented weather conditions across the country and margin compression in the Company's ES business have continued into the second quarter and as a consequence Armtec announced today that it is suspending payment of its quarterly dividend until further notice. As previously disclosed, Armtec must meet certain financial covenants in its Credit Facilities and Senior Notes involving leverage and earnings tests to permit it to pay dividends. It is anticipated that the earnings test on the Senior Notes will prevent Armtec from paying dividends beginning in the third quarter of 2011. Suspension of the quarterly dividend will assist Armtec to reduce its indebtedness otherwise outstanding. Armtec intends to reinstate a dividend when the Board of Directors considers it appropriate to do so based on a number of factors, including the level of earnings.

Previously, Armtec indicated that it expected to pay a quarterly dividend at an initial annualized rate of $1.60 per share or $0.40 per share each quarter. However, as previously disclosed, the declaration and the amount of any dividend is subject to a variety of factors, including, among other things, the performance of Armtec's operating business, the impact of weather on that business, financial requirements, debt covenants, the effect of acquisitions or dispositions on Armtec and other factors (see "Risk Factors" in Armtec's Annual Information Form dated March 10, 2011).

First Quarter Results

Revenue
Armtec recorded revenue of $75.0 million for the first quarter of 2011, an increase of $3.4 million, or 4.8% over the three months ended March 31, 2010. Infrastructure ES revenue growth offset the anticipated lower CIA product volumes as 2011 returned a typical winter installation pattern.

Revenue from CIA products was $26.9 million for the three months ended March 31, 2011, a decrease of 15.9% over the same period in 2010. The 2011 installation season has been negatively affected by a late wet spring. In 2010, CIA sales were stronger in the first half of the year and tapered off in the second half as a result of favourable spring weather conditions and government stimulus spending programs. During the first quarter of 2011, activity levels improved in natural resource end use markets, particularity in the Pacific region. Offsetting these gains were declines in residential end use markets, particularly in the Prairie region where housing starts have slowed considerably as compared to 2010 levels.

ES revenue was $48.1 million in the quarter, or an increase of 21.4% over the first quarter of 2010. The increase was supported by higher infrastructure backlog at the end of 2010. During the current quarter, the final stage of the Calgary West Light Rail Transit Guideway ("WLRTG") project was completed while the South East Stony Trail project, after some delays, approached expected production levels in the Prairie region. In the Central region, volumes continued to increase on the Toronto Transit Commission tunnel liner project adding to the production levels of a similar project for York Region. The Pacific region was negatively impacted by the 2010 Winter Olympics, while during the first quarter of 2011, project activity resumed in the region. Uneven activity levels are inherent in the Company's ES business for large infrastructure projects.

Earnings from Operations
The loss from operations for the first quarter ended March 31, 2011 was $11.6 million as compared to $7.1 million in the same period of the prior year. The gross margin for the three months ended was $4.8 million in 2011, a decrease of $3.8 million from the $8.6 million in first quarter of 2010. As a percentage of revenue, the first quarter gross margin declined to 6.4% as compared to 11.9% in 2010. The decline in the gross margin percentage reflected (i) the impact of lower manufacturing levels typical at the beginning of the year in Armtec's CIA production facilities exacerbated by the return to more typical seasonal activity levels as compared to 2010, (ii) the continued effects on current projects of the competitive recessionary pricing environment, (iii) delays of certain customer schedules and, (iv) particularly in the Prairie region, production inefficiencies associated with the delays impacting several ES projects undertaken during 2010 and commencing in 2011.

By way of comparison, ES margins in 2010 reflected the completion of the Anthony Henday Bridge project. The projects that Armtec secured during 2010 and still in production through the first quarter of 2011, such as the WLRTG tended to be more complex to manufacture and had lower margin expectations, making it more difficult to meet or exceed original estimates. As the result of delays, many of the larger 2010 projects carried over into 2011. These projects were further impacted by the inefficiencies associated with winter conditions. New projects wins, anticipated to impact the later part of 2011, are more in line with Armtec's core manufacturing competencies with somewhat improved bidding margins, though still off historical averages.

Depreciation and amortization levels in the first quarter were consistent with 2010 levels at approximately $7.3 million. There were no significant changes to the underlying assets in the quarter.

Selling, general and administrative expenses for the first quarter of 2011 were $16.8 million, consistent with 2010 levels. As a percentage of revenue, these costs were lower than the first quarter of 2010, reflecting the beneficial impact of the 2010 corporate reorganization.

Outlook

The first quarter performance of 2011 reflected the compression in margins on ES projects due to continued work on projects booked during the recession which were more complex in nature, coupled with lower pricing due to the lower volume of work at that time. Margins on these projects also reflected some startup effects and the production inefficiencies associated with winter work conditions. The impact of these contracts will be reduced as they are completed and the backlog is rebuilt with more traditional work. ES bookings in late 2010 and the first quarter of 2011 showed improving bid margins and projects more consistent with core production competencies. Weather conditions continue to be a significant factor and are expected to affect second quarter performance in 2011 to a far greater degree than previously anticipated, as are delays in awarding major projects. The March 31, 2011 ES project backlog is approximately $120 million. The decline of $20 million from December 2010 reflected the anticipated commencement of certain ES projects and the progression of the Toronto Transit Commission tunnel liners. Due to seasonal factors, as well as the specific construction schedules on projects in the backlog, management expects the improved margins, particularly in the ES business, will not have a meaningful impact on financial performance until later in 2011.

Armtec has yet to see a full recovery in its private markets. Natural resource markets are showing signs of improved activity; however, residential markets contracted in the recession and are not expected to show significant growth in 2011. The commercial and industrial construction markets stabilized during 2010 but remain well off historical levels and a return to pre-recession levels is not anticipated in the near future given current vacancy rates for commercial and industrial properties. The current commercial and industrial market conditions will continue to significantly impact the performance of the Central region in 2011.

CIA revenues are very sensitive to weather conditions. Construction activity tapers off with the onset of winter weather conditions and typically remains at low levels through the first quarter. The comparative volumes from 2010 reflected the impact of an unusually mild winter coupled with government incentives to accelerate construction activity. The 2011 season has started with a typical cold Canadian winter and weather continues to be a factor with near record precipitation in many areas of the country. As a result, second quarter CIA volumes are expected to be affected significantly and to a far greater degree than previously anticipated. In particular, the spring agricultural installation season is almost complete with little ability to access the fields in the Eastern and Central regions.

Based on the current outlook, management does not anticipate improvement in the ES business until the end of 2011. ES gross margin levels, anticipated to improve over time, are not expected to fully rebound to pre-recession levels during 2011.

Armtec is working with its lenders to amend the financial covenants in the Credit Facilities so as to remain in compliance with those covenants at the end of the second and subsequent quarters.

CONFERENCE CALL & WEBCAST
Management will host a conference call at 10:00 a.m. (ET) on Thursday, June 9, 2011 to discuss the results. Investors who wish to participate can access the call using the following numbers: 416-644-3415 or 1-877-974-0445. The call will be webcast live and archived on Armtec's website at www.armtec.com.

A taped rebroadcast will be available to listeners following the call until midnight on Thursday, June 16, 2011. To access the rebroadcast, please dial 416-640-1917 or 1-877-289-8525 and quote the passcode 4432560#.

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 leading 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. Operating through its network of regional offices and production facilities across the country, Armtec's broad range of engineered solutions include products for drainage, bridge applications, soil retention, rehabilitation and water management systems including corrugated high-density polyethylene, corrugated steel and concrete pipe; an array of architectural and structural precast and pre-stressed concrete products from steps, paving stones, slabs and wall panels to highly engineered structural components designed and installed for projects such as bridges, sports venues and parking garages; and a full suite of noise barriers, acoustic enclosure and wall systems along with associated retaining wall and traffic barrier systems.

NON-GAAP MEASURE
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
References to EBITDA are to earnings before finance expense, taxes (other than capital taxes), depreciation and amortization, certain non-recurring expenses and certain non-cash amounts resulting from purchase accounting. Management believes that in addition to net earnings, EBITDA is a useful supplemental measure of cash available for dividends 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, dividends to shareholders and the trading price of Armtec's shares. These uncertainties and risks include, but are not limited to: industry cyclicality; competition; acquisition and expansion risk; capital and liquidity risk; current economic conditions; reduction in demand for products; information management; credit risk; relationships with suppliers; lack of long-term agreements; expiration of rights under license and distribution arrangements; availability and price volatility of raw materials; product liability; intellectual property; reliance on key personnel; labour markets; environmental; collective bargaining; pension plans; currency fluctuations; interest rates; uninsured and underinsured losses; operating hazards; risk of future legal proceedings; securities laws compliance and corporate governance standards; income tax and other taxes; geographical risk; seasonality and adverse weather; and geopolitical. Dividends are not guaranteed. 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.

FORWARD-LOOKING STATEMENTS
This news release contains "forward-looking" statements (including those set out under the heading "Outlook" and "Suspension of Quarterly Dividend") 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. 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, 2011.

SOURCE Armtec Infrastructure Inc.

For further information:

Charles M. Phillips         James R. Newell         Carrie Boutcher
President & Chief Executive Officer         Chief Financial Officer         Vice President, Investor Relations & Treasurer
                     
Tel:  (519) 822-0210         Tel:  (519) 822-0210         Tel:  (519) 822-0210
Fax: (519) 822-8894         Fax: (519) 822-8894         Fax: (519) 822-8894

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Armtec Infrastructure Inc.

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