Toronto Stock Exchange: ARF.UN; ARF.DB
GUELPH, ON, Aug. 4, 2010 /CNW/ - Armtec Infrastructure Income Fund (the "Fund" or "Armtec") (TSX: ARF.UN and ARF.DB) today reported financial results for the second quarter and six months ended June 30, 2010.
- Revenues of $130.8 million during the second quarter of 2010, an
increase of 10.8% or $12.8 million over the same period in 2009, due
to the incremental impact of 2009 business acquisitions of Groupe
Tremca and Pre-Con. Year to date, revenues were $204.1 million, an
increase of 12.3% over 2009.
- EBITDA(1) was $18.2 million, compared to $23.7 million in the same
period in 2009. Year to date, EBITDA was $17.3 million, compared to
$24.6 million in the prior year.
- Issued 40,000 convertible unsecured subordinated debentures at a rate
of 6.5%; for an aggregate principal amount of $40 million.
- Unitholders approved the conversion of the Fund's income trust
structure into a growth oriented, dividend paying public corporation
named "Armtec Infrastructure Inc." at the Fund's Annual and Special
Meeting on June 24, 2010. It is anticipated that the proposed
conversion to a corporation will be completed on or about January 1,
"In the second quarter of 2010, Armtec's revenue was affected by timing differences in the scheduled production of our engineered solutions ("ES") backlog relative to 2009. Based on the proposed production schedules, we expect the ES work volumes in the second half of the year to exceed the levels achieved in the same period of 2009. In the construction and infrastructure application product ("CIA") side of our business, there are continued benefits from the government's infrastructure stimulus spending in fast turnaround projects, particularly in Ontario. Residential markets continued to gain strength and there were also improvements in the natural resources sector," said Charles M. Phillips, President and Chief Executive Officer. "Looking ahead, based on the volume of work coming to the market for tender and our increased backlog levels, the outlook for infrastructure markets is positive as governments continue to address the national infrastructure deficit. Management remains focused on the further integration of its acquisitions and building resiliency into the business, so that we are responsive to end-use and geographic market fluctuations and well positioned to deliver greater long-term value to all of our stakeholders."
RESULTS OF OPERATIONS
(in thousands of Canadian
dollars except per unit Three Months Ended Six Months Ended
amounts) June 30, June 30, June 30, June 30,
(unaudited) 2010 2009 2010 2009
Revenue $ 130,790 $ 117,952 $ 204,083 $ 181,699
Cost of sales 93,292 75,582 150,076 124,631
Amortization of property,
plant and equipment 3,716 2,981 7,446 5,775
Gross margin 33,782 39,389 46,561 51,293
As a % of revenue 25.8% 33.4% 22.8% 28.2%
Distribution and warehousing 5,793 5,499 9,490 8,343
Selling, general and
administrative 13,540 13,336 27,260 24,325
Reorganization expenses 1,739 756 2,415 1,277
Amortization of intangible
assets 3,247 2,798 6,556 5,278
Earnings from operations 9,463 17,000 840 12,070
Interest and financing
expenses (4,154) (2,413) (7,882) (5,295)
Earnings (loss) before
taxes 5,309 14,587 (7,042) 6,775
Interest and financing
expenses 4,154 2,413 7,882 5,295
Total amortization 6,963 5,779 14,002 11,053
Reorganization expenses 1,739 756 2,415 1,277
Fair value increments of
acquired inventory - 127 - 168
EBITDA(2) $ 18,165 $ 23,662 $ 17,257 $ 24,568
As a % of revenue 13.9% 20.1% 8.5% 13.5%
Basic and diluted earnings
(loss) per unit $ 0.27 $ 0.78 $ (0.33) $ 0.44
Basic and diluted
per unit(1) $ 0.64 $ 1.00 $ 0.37 $ 0.84
(1) Please refer to the Liquidity, Distributable Cash and Distributions
section of the separately released interim MD&A for the
reconciliation of this non-GAAP measure. Distributable cash per unit
excludes the impact of Reorganization expenses.
(2) See Non-GAAP Measures below.
Second Quarter Results
Armtec recorded revenue of $130.8 million during the second quarter of 2010, an increase of $12.8 million or 10.8% over the same period in 2009. The acquisitions of Groupe Tremca and Pre-Con, completed during 2009 (the "2009 Acquisitions"), contributed incremental revenue of $14.3 million. Base business volumes showed a marginal decline of $1.4 million or 1.3% relative to the same period last year.
CIA product revenues in the second quarter of 2010 were $74.4 million; an increase of 18.2% over 2009. This improvement was driven by increased demand for drainage products, principally in the Central region, reflecting the benefits of the government stimulus spending. Improvements in demand were noted from the natural resource sectors in the Prairie and Pacific regions, and also the residential markets in the Prairie and Eastern regions. These gains were mitigated by extremely wet weather conditions across the Prairies that slowed demand for the Fund's drainage products.
ES revenues in the second quarter of 2010 were $56.4 million, or 0.8% higher than in the comparable period in 2009. The incremental revenue contributions in the Eastern and Central regions, associated with the 2009 Acquisitions, offset the decline in the Prairie region. The 2010 results reflected bridge girder manufacturing for the Anthony Henday Drive project in Edmonton, along with the start up of the York Region tunnel liner project and the Calgary West Light Rapid Transit ("LRT"). However, there were fewer major projects underway in the second quarter of 2010 than in the same period last year, particularly in the Prairie region where significant revenue was generated in 2009 from the Calgary Airport Parkade and the WinSport Canada Athletic Complex. This uneven activity level for large infrastructure projects is an inherent aspect in the pre-cast ES operations. Demand for sound barrier products remained consistent with the prior year. The ES project backlog at the end of June was approximately 30% higher than 2009 levels. While not all slated for 2010 production, the backlog level supports stronger anticipated revenue levels in the second half of 2010 as compared to the first half of the year.
Earnings from Operations
Earnings from operations for the second quarter were $9.5 million compared to $17.0 million in the same period of 2009. Earnings from operations include a charge of $1.7 million in 2010 in connection with the Fund's Reorganization initiative and costs associated with the conversion of the Fund into a corporation. In the second quarter of 2009 the Fund incurred Reorganization costs of $0.8 million. Excluding the impact of the Reorganization expenses, earnings from operations were $11.2 million or $6.6 million lower than 2009 levels.
The gross margin for the second quarter of 2010 was $33.8 million; a decrease of $5.6 million from $39.4 million in 2009. As a percentage of revenue, gross margin declined to 25.8% as compared to 33.4% in 2009. The normal seasonal production volume increase, notably in the ES projects, supported the improved gross margin relative to the 17.4% achieved in the first quarter of 2010. As discussed above, the decline in the second quarter gross margin percentage relative to 2009 reflected the impact of lower manufacturing levels, and more competitive pricing, in the precast ES operations. Also impacting the gross margin percentage were the additional expected costs incurred during the start up phase of large ES projects, including the York Region tunnel liner and Calgary West LRT projects. By comparison, in 2009 significant ES projects, particularly in the Prairie region, were producing at full volumes on projects that had stronger pre-recession margins. The margins achieved in 2009 exceeded Armtec's historical levels as a result of the project mix and production volumes.
Distribution and warehousing was $5.8 million, compared to $5.5 million in the second quarter of 2009. As a percentage of revenue, these costs were comparable with the same period last year.
Selling, general and administrative expenses were $13.5 million, or 10.4% of revenue, as compared to $13.3 million or 11.3% of revenue in 2009. The additional costs reflected the incremental impact of the 2009 Acquisitions, offset in part by savings from the Fund's Reorganization initiatives.
Amortization of intangible assets was $3.2 million compared to $2.8 million in 2009. These changes principally reflected the amortization on intangible assets associated with the 2009 Acquisitions.
Year to Date Results
The Fund recorded revenue of $204.1 million for the six months ended June 30, 2010; an increase of $22.4 million or 12.3% over the same period in 2009. The 2009 Acquisitions contributed incremental revenue of $25.0 million. Base business volumes declined slightly by $2.6 million or 1.5% relative to the same period last year. The increased CIA product volumes partially offset the delayed ES production schedules.
Revenue from CIA products was $108.0 million in the first half of 2010; an increase of 26.9% over the same period in 2009. CIA product revenue improvements were driven by increased demand for drainage products, principally in the Central and Eastern Canadian infrastructure markets reflecting the benefits of the government stimulus spending, along with growing demand for residential concrete products mainly in the Prairie region. The Prairies and B.C. also benefitted from improved activity levels in natural resource markets. Revenue softness was noted in drainage products in the Prairie and Pacific regions, attributable to extremely wet weather conditions in the Prairies and the construction pause in B.C. in the first quarter around the 2010 Winter Olympics.
ES revenue was $96.1 million in the first half of 2010; 1.7% lower than 2009. Increased revenue was derived in the Central and Eastern regions, reflecting the contribution from the 2009 Acquisitions which were predominantly in ES. This growth mitigated the softness experienced in the base business revenue in the Prairie and Pacific regions, which were negatively impacted by the delayed timing of larger projects relative to a year ago. A number of large ES projects have commenced production in the second quarter or, as anticipated, will start up in the second half of 2010.
Earnings from Operations
Earnings from operations for the six months ended June 30, 2010 were $0.8 million compared to $12.1 million in the same period of 2009. Earnings from operations include a charge of $2.4 million in 2010 in connection with the Reorganization and conversion of the Fund to a corporation. In the same period in 2009 Reorganization expenses were $1.3 million. Excluding the impact of the Reorganization expenses, earnings from operations were $3.2 million or $10.2 million lower than 2009 levels.
The gross margin for the six months ended June 30, was $46.6 million, a decrease of $4.7 million from the $51.3 million in 2009. As a percentage of revenue, gross margin declined to 22.8% as compared to 28.2% in 2009. The decline in the gross margin percentage reflected the impact of lower manufacturing levels, and more competitive pricing, in the precast ES operations. Additional costs were also incurred with the start up large ES projects; including the York Region tunnel liner and Calgary West LRT projects. This decline was partially offset by an improved gross margin on CIA products as a result of improved manufacturing efficiencies associated with higher demand.
Distribution and warehousing was $9.5 million, compared to $8.3 million in the first six months of 2009. As a percentage of revenue, these costs were comparable with the same period last year.
Selling, general and administrative expenses were $27.3 million, or 13.4% of revenue, as compared to $24.3 million or 13.4% of revenue in 2009. The additional costs reflected the incremental impact of the 2009 Acquisitions offset in part by savings from the Fund's Reorganization initiatives.
Amortization of intangible assets was $6.6 million compared to $5.3 million in 2009. These changes principally reflected the amortization on intangible assets associated with the 2009 Acquisitions.
Various levels of government remain committed to addressing the national infrastructure deficit which supports a positive outlook for the infrastructure market. The incremental stimulus spending related to fast turnaround projects continues to benefit the Fund's CIA product lines. Weather conditions impact the construction activity in the Fund's markets, particularly in the CIA product groups. Unusually wet weather conditions on the Prairies, which has hindered the installation of drainage products in the first half of 2010, have delayed the start of projects that involve both CIA and ES products. The outlook for Central and Eastern Canada remains moderately positive over prior year levels. On a gross margin basis, CIA products continue to perform in line with historical levels.
Construction activity in the Fund's markets tapers off with the onset of winter weather conditions and remains at low levels through the first quarter. As a result, EBITDA levels in the first quarter are expected to be lower than the subsequent quarters in the fiscal year. As was the case in 2010, the second quarter EBITDA was stronger than the first quarter, however as previously noted the Prairie region's first half was negatively affected by the delayed timing of production of ES projects, unusually challenging weather conditions, and lower margins on its production.
Many existing project commitments are anticipated to commence subcontracting and begin production throughout the remaining 2010 construction season. The backlog for ES grew in the first half of 2010 and is approximately 30% higher at the end of the second quarter of 2010 than at the same time last year. Accordingly, management continues to anticipate that ES revenue in the second half of 2010 will exceed the first half of 2010, and the second half of 2009. However, additional delays could cause production on current planned projects to shift into 2011.
Gross margins on ES projects are showing signs of improvement, as evidenced by several new bridge projects in Western Canada and two recently awarded parking structures in Ontario. Coupled with increased ES production activity in the second half of 2010, management anticipates gross margin will show improvement over the levels achieved in the first half of 2010. However, ES gross margins on the current backlog are below historically comparable pre-recession levels by approximately 10 percentage points on average.
The recession has had a significant negative effect on Armtec's private markets. Management expects residential markets to be consistent with levels experienced in the second half of 2009. Natural resource markets are showing early signs of improved activity. The commercial construction market has stabilized, but a return to pre-recession levels is not anticipated in the near future given current vacancy rates. Agriculture markets, though dependent on weather conditions, have improved moderately and look to improve over the course of the year.
In comparison with 2009, management expects revenue growth in the second half of 2010 to be at a rate similar to the first six months of the year. With the current ES projects scheduled for production during 2010, the gross margin levels will be lower than prior years. The decline in ES margins will not be fully offset by the gains associated with increased volumes in CIA products.
Management remains focused on Armtec's 2010 Corporate Priorities (refer to the 2009 annual MD&A for more details):
- "One Company" Integration
- Sales Excellence
- Invest in Employees
- Operational Excellence
- Conclusion of the Trust Structure
Management continues to build on the initial steps taken to further the integration of its acquisitions. The management teams are committed to building resiliency into the business in order to remain responsive to end-use and geographic market fluctuations, while delivering value to our customers and unitholders, while investing in employee training. The Fund will make the changes necessary to address challenging demand conditions in order to emerge as a stronger, more customer focused business as the private markets recover.
As previously announced Armtec plans to convert into a corporation effective on or about January 3, 2011. The conversion was approved by more than 66 2/3% of votes cast by unitholders at Armtec's annual and special meeting on June 24, 2010. Armtec also announced that following the conversion, it expects to pay quarterly dividends at an initial annualized rate of $1.60 per share. The dividend policy reflects the current distribution level adjusted to take into account the expected level of income taxes to be incurred. An individual holder of an Armtec unit will generally have the same after tax return under the dividend payout as compared to the current distributions. The Fund plans to maintain its current distributions of $0.18 per month, or $2.16 annualized for the remainder of 2010.
CONFERENCE CALL & WEBCAST
Management will host a conference call at 10:00 a.m. (EST) on Thursday, August 5, 2010 to discuss the results. Investors who wish to participate can access the call using the following numbers: 416-644-3416 or 1-877-974-0446. The call will be webcast live and archived on the Fund's website at www.armtecincomefund.com.
A taped rebroadcast will be available to listeners following the call until 12:00 a.m. on August 12, 2010. To access the rebroadcast, please dial 416-640-1917 or 1-877-289-8525 and quote the passcode 4328297 followed by the number sign.
The Fund's full consolidated financial statements, notes to financial statements and management's discussion and analysis are available at www.sedar.com or at www.armtecincomefund.com.
ABOUT ARMTEC INFRASTRUCTURE INCOME FUND
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 residential construction, commercial building, agricultural drainage and natural resources. Operating through its network of regional offices and production facilities across the country, Armtec's broad range of construction 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. Armtec Infrastructure Income Fund's units are listed on the TSX under the ARF.UN symbol and its convertible debentures under the ARF.DB symbol. For more information, please visit www.armtecincomefund.com.
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
References to EBITDA are to earnings before interest, 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 distributions prior to debt service, changes in working capital, capital expenditures and income taxes. However, EBITDA is not a recognized measure under Canadian 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 the Fund's performance or as an alternative to cash flows from operating, investing and financing activities as a measure of the Fund's liquidity and cash flows. The Fund's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, the Fund's EBITDA may not be comparable to similarly named measures used by other issuers.
Distributable cash is not a defined term under Canadian GAAP but is determined by the Fund as cash flows provided by or used in operating activities adjusted for items not affecting cash, expenditures required to sustain the current state of operations, and the change in non-cash working capital. Management believes that distributable cash is a useful supplemental measure of performance as it provides investors with an indication of the amount of cash available for distribution to unitholders of the Fund by adjusting for the seasonality of the business via changes in non-cash working capital, adjusting for sustaining capital purchases and other items not affecting cash. Investors are cautioned, however, that distributable cash should not be construed as an alternative to using net earnings and comprehensive earnings as measures of profitability or the statement of cash flows. Furthermore, the Fund's method of calculating distributable cash may not be comparable to other similarly named calculations from other issuers.
RISKS AND UNCERTAINTIES
The Fund is subject to certain risks and uncertainties that could have a material adverse effect on the Fund's results of operations, business prospects, financial condition, cash distributions to unitholders and the trading price of the Fund's units. These uncertainties and risks include, but are not limited to: industry cyclicality; competition; acquisition and expansion risk; capital and liquidity risk; current global financial 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; currency fluctuations; interest rates; uninsured and underinsured losses; operating hazards; risk of future legal proceedings; securities laws compliance and corporate governance standards; geographical risk; seasonality and adverse weather; geopolitical; and certain risks related to the structure of the Fund including dependence on the Fund's subsidiaries; income tax matters; unitholder limited liability; leverage and restrictive covenants; credit facilities; nature of units; distribution of securities on redemption or termination of the Fund; restrictions on potential growth; effect of market interest rates on price of units; undiversified and illiquid holdings in Armtec Operating Trust; potential dilution. Cash distributions are not guaranteed. Further information about these and other risks and uncertainties can be found in the disclosure documents filed by Armtec Infrastructure Income Fund with the securities regulatory authorities, available at www.sedar.com.
This news release may contain "forward-looking" statements within the meaning of applicable securities legislation which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund or industry results, to be materially different from any future results, events, expectations, performance or achievements expressed or implied by such forward-looking statements. All such forward-looking statements are made pursuant to the "safe harbour" provisions of applicable Canadian securities legislation. Forward-looking statements may include comments with respect to the Fund's objectives, strategies to achieve those objectives, expected financial results, and the outlook for the Fund's business. Forward-looking statements typically contain such words or phrases such as "may", "outlook", "objective", "intend", "estimate", "anticipate", "should", "could", "would", "will", "expect", "believe", "plan" and other similar terminology suggesting future outcomes or events. These statements reflect current expectations regarding future events and operating performance and are based on information currently available to the Fund's management.
Forward-looking statements involve numerous assumptions, and significant and inherent risks and uncertainties, should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or not such results 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 the Fund, could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to the factors discussed under "Risks and Uncertainties" and in the Fund's materials filed with the Canadian securities regulatory authorities from time to time including the Annual Information Form. Although the forward-looking statements contained in this release are based upon what management of the Fund believes are reasonable assumptions, the Fund cannot assure investors that actual results 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 and outlook are made as of the date of this news release and, except as required by applicable law, the Fund assumes no obligation to update or revise them to reflect new events or circumstances.
SOURCE ARMTEC INFRASTRUCTURE INCOME FUND
For further information: For further information: Charles M. Phillips, President & Chief Executive Officer, Armtec Limited Partnership, Tel: (519) 822-0210, Fax: (519) 822-8894; James R. Newell, Chief Financial Officer, Armtec Limited Partnership, Tel: (519) 822-0210, Fax: (519) 822-8894; Carrie Boutcher, Vice President, Investor Relations & Treasurer, Armtec Limited Partnership, Tel: (519) 822-0210, Fax: (519) 822-8894