Garneau Inc. second quarter results ended June 30, 2007



    NISKU, AB, Aug. 14 /CNW/ -

    
                            Corporate Highlights

    -   $1 million domestic equipment project for ShawCor Ltd. completed in
        the second quarter of 2007.


    Summary of Results

                                  Three months ended        Six months ended
    (In thousands, except per    June 30,    June 30,    June 30,    June 30,
     share data, unaudited)         2007        2006        2007        2006
    -------------------------------------------------------------------------
    Revenue                   $    4,772  $   13,020  $   12,017  $   31,830
    Margin                           180       2,505       1,646       6,387
    Margin %                        3.8%       19.2%       13.7%       20.0%
    Earnings (loss) before
     income taxes                 (1,759)        (21)     (2,587)      1,849

    Net earnings (loss)           (1,281)       (273)     (1,982)        857
    Earnings (loss)
     per share - basic             (0.11)      (0.02)      (0.16)       0.07
    Earnings (loss)
     per share - diluted           (0.11)      (0.02)      (0.16)       0.07
    

    This report includes forward looking statements that are based on the
Corporation's current expectations and therefore are subject to uncertainties
such as the level of industry drilling and coating activity, foreign exchange
fluctuations and world wide economic conditions that may cause actual results
to differ materially.
    This analysis should be read in conjunction with the unaudited interim
consolidated financial statements of the Corporation for the six months ended
June 30, 2007 and 2006 and in conjunction with the audited consolidated
financial statements and Annual Management Discussion and Analysis for the
year ended December 31, 2006.


    MANAGEMENT DISCUSSION & ANALYSIS
    -------------------------------------------------------------------------

    Financial

    Second quarter revenue for the period ended June 30, 2007, totaled
$4.8 million which was a $8.2 million decrease from the $13.0 million recorded
for the comparative quarter ended June 30, 2006, a direct result of decreased
Camrose coating activity and Nisku manufacturing activity experienced in the
second quarter. Year to date revenue for the period ended June 30, 2007
totaled $12.0 million which is $19.8 million below the June 30, 2006
comparative period total of $31.8 million, also a direct result of decreased
overall coating and manufacturing activity.
    The slowdown in the oil and gas industry throughout the first six months
of 2007 has adversely affected 2007 revenue generated by the Corporation.
    Manufacturing revenues for the quarter ended June 30, 2007 totaled
$2.1 million, a decrease of $2.3 million from the quarter ended June 30, 2006.
Manufacturing activity decreased further during the second quarter of 2007 as
industry activity remained slow. Year to date results in manufacturing revenue
totaled $4.6 million for the six month period ended June 30, 2007, a decrease
from the $8.1 million recorded in the 2006 comparative period.
    Pipeline revenues for the quarter ended June 30, 2007, totaled
$2.7 million, a decrease of $5.9 million from the quarter ended June 30, 2006.
Small diameter coating activity decreased, as overall industry activity was
curtailed significantly. Also, the mainline ACCESS project in progress during
the second quarter of 2006 was completed during the third quarter of 2006.
Pipeline revenue for the six months period ended June 30, 2007 totaled
$7.5 million, a decrease of $16.3 million over the comparative period total of
$23.8 million, as a result of decreased year to date small diameter coating
activity and completion of the ACCESS project.
    Margin for the second quarter ended June 30, 2007 totaled $0.2 million,
which is $2.3 million below the $2.5 million recorded for the comparative
period. The margin decrease is directly attributed to decreased revenue
generated from both segmented operations as overall industry activity slowed
down significantly. Year to date margin of $1.6 million (13.7%) is
$4.8 million below the $6.4 million (20.0%) recorded for the comparative six
month period and reflects the curtailment in overall activity.
    Manufacturing margins of $0.3 million (15.2%) for the quarter ended
June 30, 2007 was $0.6 million below the $0.9 million (21.5%) recorded for the
period ended June 30, 2006 and was caused by lower activity and further cost
overruns on the large international order. Year to date margin of $0.5 million
(11.8%) is $1.6 million below the 2006 six month comparative period total of
$2.1 million (26.3%) with the overall margins negatively affected by lower
activity levels, pricing pressure and cost overruns on the large international
order.
    Pipeline gross margins of ($0.1) million for the quarter ended June 30,
2007 are $1.7 million below the comparative period ended June 30, 2006.
Decreased small diameter revenue during the second quarter of 2007 together
with completion of the ACCESS mainline project in 2006 and fixed overhead
costs, resulted in decreased overall gross margins in the Pipeline division.
Year to date pipeline margins of $1.1 million (14.9 %) were $3.2 million below
the $4.3 million (18.0%) recorded for the comparative period, and reflect
decreased coating activity during the first six months of 2007.
    The Corporation's selling, general and administrative expenses totaled
$1.4 million for the three month period ended June 30, 2007, an increase of
$0.3 million from the expenses recorded at June 30, 2006. Increased office
expenses, investor relations expenses, wages, consulting and professional fees
were incurred during the second quarter of 2007 as more stringent public
reporting requirements are being met and new strategic initiatives are being
evaluated. Year to date selling, general and administrative expenses total
$3.0 million which is an increase of $0.7 million over the comparative six
month period ended June 30, 2006.
    Amortization expense for the period ended June 30, 2007 showed an
increase and totaled $530 thousand, an increase of $56 thousand over the
$474 thousand recorded for the comparative period ended June 30, 2006 and
reflects increased amortization as a result of capital expenditures incurred
during the 2006 and 2007 years. Year to date amortization of $1.1 million is
$0.1 million above the amortization expense for the comparative six months
period ended June 30, 2006.
    Funds used by operations, before changes in non-cash working capital, for
the quarter ended June 30, 2007 totaled $1.2 million, compared to the
$0.5 million generated for the comparative period, a decrease attributed to
decreased overall operational revenue and margins generated by both segments
of the Corporation in the second quarter of 2007. Year to date operating
funds, before non-cash working capital used for the period ended June 30,
2007, totaled $1.5 million, $4.4 million below the $2.9 million generated over
the comparative period and reflects the cash flow used during the slowdown in
business activity for both segments of Garneau operations.
    Interest costs on the operating loan and the loan payable of
$102 thousand for the period ended June 30, 2007 was $68 thousand below the
$170 thousand recorded for the period ended June 30, 2006. Interest costs
decreased during the second quarter as usage of operating facilities and loans
to finance working capital requirements decreased as a result of the decreased
revenue generated during the second quarter.
    Other income totaled $204 thousand for the three month period ended
June 30, 2007, an increase from the $728 thousand other expense for the
comparative period. This change is primarily a result of 2006 transaction
expenses incurred by the Corporation pertaining to the terminated Plan of
Arrangement agreement with ShawCor Ltd. being eliminated in 2007 operations
combined with a workers compensation refund received during the second quarter
of 2007.
    The decrease in coating revenue and gross margin there-from resulted in
net losses totaling $1.3 million for the three month period ended June 30,
2007, an increase of $1.0 million from the $0.3 million net loss reflected in
the comparative period ended June 30, 2006. A future income tax recovery of
$478 thousand was recorded in the second quarter of 2007 primarily as a result
of deductible temporary differences recognized in relation to the net losses
recorded for the second quarter of 2006. Year to date net loss of $2.0 million
is a $2.9 million decline from the $0.9 million net earnings generated from
the six months comparative period ended June 30, 2006.
    Net losses before tax for the Manufacturing division for the period ended
June 30, 2007 totaled $417 thousand as compared to the $378 thousand of net
earnings before tax for the comparative period. The $795 thousand reduction
reflects the decreased revenue generated in the second quarter of 2007
together with further cost overruns incurred on the large international
project. Year to date net loss before tax for the Manufacturing division of
$0.9 million is a $1.8 million decline from $0.9 million net earnings before
tax for the six month period ended June 30, 2006.
    Net losses before tax for the Pipeline division totaled $1.3 million for
the period ended June 30, 2007, a decline of $0.9 million from the
$0.4 million net loss before tax generated for the comparative period. This
net loss is attributed to the decreased revenue and margins generated from
coating products. Net loss before tax for the Pipeline division over the six
month period June 30, 2007, totaled $1.7 million, which reflects a
$2.6 million decline of over the comparative six month period net earnings of
$0.9 million.
    No comprehensive income or loss and no opening or closing balances for
accumulated comprehensive income or loss is recorded for the period ended
June 30, 2007.
    Accounts Receivable totaled $3.6 million at June 30, 2007, a decrease of
$10.7 million over the $14.3 million recorded at December 31, 2006, and is
attributed to receivables carried on domestic coating revenue and domestic
manufacturing revenue reducing as overall revenue generated reduced in the
second quarter. Unbilled revenue totaled $1.9 million at June 30, 2007, an
increase of $0.7 million over the $1.2 million recorded at December 31, 2006
and pertains to increased work in progress on manufacturing projects at
June 30, 2007.
    During the second quarter period ended June 30, 2007 new credit
facilities were approved by the Corporation's bank. Operating and loan payable
credit facilities available to the Corporation included a demand revolving
operating line of credit of $18.0 million ($3.0 million utilized), a demand
revolving evergreen loan of $5.0 million ($2.2 million utilized), a loan lease
facility for $1.8 million ($0.4 million utilized pertaining to the manufacture
of polyethylene pipe and acquisition of forklifts) and a demand loans facility
in the amount of $9.0 million ($1.9 million utilized). The operating line of
credit continues to fluctuate within authorized limits. Terms and conditions
for the new credit facilities authorized include requirements for the
completion of new security documentation, updated appraisals on corporate
buildings and land owned in Camrose and Nisku and ongoing covenants set by the
bank. The Corporation is currently operating within these covenants. Security
documentation and appraisals are in progress. The $20 million increase in
credit facilities authorized will be used to fund new strategic initiatives
expected to be undertaken by the Corporation. The Corporation's bank working
capital covenants have been adjusted. For the purposes of the working capital
covenant calculation, principal payments on the loans payable scheduled to be
repaid after 12 months are not included in the working capital.
    Net additions to capital equipment were $572 thousand for the quarter end
June 30, 2007, compared to $733 thousand for the period ended June 30, 2006
and totaled $0.9 million year to date compared to the $1.2 million recorded in
the comparative period ended June 30, 2006. Capital expenditures for 2007 were
primarily related to additional fabrication, mobile equipment under
construction, and coating equipment betterments required in the normal course
of business to support operations during the second quarter of 2007.

    
    Selected Quarterly Information

    (In thousands, except per share data)
    -------------------------------------
    -------------------------------------------------------------------------
                                         Three Months Ended (unaudited)
    -------------------------------------------------------------------------
                                    June       March    December   September
                                   30/07       31/07       31/06       30/06
    -------------------------------------------------------------------------
    Total Revenues                $4,772      $7,245     $14,134     $11,078
    -------------------------------------------------------------------------
    Net Earnings (loss)           (1,281)       (701)         37          53
    -------------------------------------------------------------------------
    Basic Earnings (loss)
     per Share                     (0.11)      (0.06)       0.00        0.00
    -------------------------------------------------------------------------
    Diluted Earnings (loss)
     per Share                     (0.11)      (0.06)       0.00        0.00
    -------------------------------------------------------------------------
    Total Assets                  28,779      30,501      39,571      34,709
    -------------------------------------------------------------------------
    Long Term Capital Lease
     Obligations                     171         211         241         353
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                         Three Months Ended (unaudited)
    -------------------------------------------------------------------------
                                    June       March    December   September
                                   30/06       31/06       31/05       30/05
    -------------------------------------------------------------------------
    Total Revenues               $13,020     $18,810     $16,472     $11,456
    -------------------------------------------------------------------------
    Net Earnings (loss)             (273)      1,130         993         511
    -------------------------------------------------------------------------
    Basic Earnings (loss)
     per Share                     (0.02)       0.10        0.08        0.05
    -------------------------------------------------------------------------
    Diluted Earnings (loss)
     per Share                     (0.02)       0.09        0.08        0.05
    -------------------------------------------------------------------------
    Total Assets                  38,424      38,635      38,141      33,499
    -------------------------------------------------------------------------
    Long Term Capital Lease
     Obligations                     414         475         535         660
    -------------------------------------------------------------------------
    

    The seasonality of the pipe coating business and project nature of
international contracts results in wide quarterly fluctuations in revenue
generated by the Corporation and net earnings (loss) there from. The second
quarter ended June 30 is historically the slowest period for the Corporation
with the quarter ended March 31 the most active. The ACCESS coating project
continued in progress during the first quarter of 2006 and contributed to
improved first quarter performance. Quarterly net earnings (loss) reported
were negatively affected by transaction costs incurred totaling $1.8 million
for the year ended December 31, 2006. Fourth quarter earnings for the period
ended December 31, 2006 were also negatively affected by the retirement
allowance and corporate bonuses declared. Manufacturing activity remained
active throughout 2006, however, manufacturing and coating activity
experienced a significant slow down in the first quarter of 2007 which has
continued during the second quarter and has resulted in losses being recorded
in the first and second quarters of 2007.

    Outstanding Shares Data

    At December 31, 2006, the Corporation had 12,048,527 outstanding common
shares and 920,550 outstanding options to acquire common shares. 214,050 of
these options were vested and exercisable. During the quarter ended March 31,
2007, no options were exercised. Options totaling 15,000 at an average price
of $1.48 were forfeited during the quarter ended March 31, 2007 with 905,550
options outstanding at March 31, 2007 (214,050 vested). During the quarter
ended June 30, 2007, 23,300 options were exercised for the cash proceeds of
$14. Stock options exercised during the period ended June 30, 2007 resulted in
$9 being transferred from contributed surplus to share capital. 50,000 new
options were granted during the second quarter at a price of $1.14. Options
totaling 12,000 were forfeited at an average price of $0.60 during the quarter
ended June 30, 2007 with 920,250 options outstanding at June 30, 2007
(178,750 vested). Outstanding common shares totaled 12,071,827 at June 30,
2007. Diluted shares at June 30, 2007 total 12,071,827 and include the
dilutive impact of options outstanding at June 30, 2007 on overall shares
outstanding. No further shares have been issued or options have been exercised
or cancelled to the date of this report.

    New Accounting Policies

    As disclosed in the December 31, 2006 annual audited Consolidated
Financial Statements, on January 1, 2007, the Corporation adopted the Canadian
Institute of Chartered Accountants ("CICA") Handbook Section 1530
"Comprehensive Income", Section 3251 "Equity", Section 3855 "Financial
Instruments-Recognition and Measurement", Section 1506 "Accounting Changes",
Section 3865 "Hedges" and Section 3861 "Financial Instruments- Disclosure and
Presentation".
    The adoption of these standards has had no material impact on the
Corporation's net earnings or cash flows. The other effects of the
implementation of the new standards are discussed in the notes to the
consolidated interim financial statements contained herein.

    Internal Controls over Financial Reporting

    The Corporation has historically operated with an implemented system of
internal controls over financial reporting that it believes adequately
protects the assets of the Corporation and is appropriate for the nature of
its business and the size of its operations. These internal controls include
disclosure controls and procedures designed to ensure that information
required to be disclosed by the Corporation is accumulated and communicated to
our management as appropriate to allow timely decisions regarding required
disclosure.
    It should be noted that while the Corporation's Chief Executive Officer
and Chief Financial Officer believe that the Corporation's disclosure controls
and procedures historically in place, provide a reasonable level of assurance
that the system of internal controls are sufficient, they do not guarantee
that the disclosure controls and procedures will prevent all errors and fraud.
A control system, no matter how well conceived or operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met.
    The Chief Executive Officer and Chief Financial Officer of the
Corporation are responsible for designing internal controls over financial
reporting or causing them to be designed under their supervision in order to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with Canadian generally accepted accounting principles.
    Management of the Corporation commenced an evaluation of these existing
internal controls over financial reporting. This evaluation was not fully
completed at June 30, 2007.
    The Corporation's Chief Executive Officer and Chief Financial Officer
have concluded based on their evaluation that, partially due to the limited
number of staff and resources at Garneau, inherent weaknesses in areas of
internal controls over financial reporting are present, including segregation
of duties, lack of financial expertise at certain levels in the finance
functions, documented review of financial reporting entries and
reconciliations, controlled use of spreadsheets, information technology
safeguards, risk assessment processes, physical controls, documentation
controls and controls at the entity level. The Corporation does not have fully
disciplined and developed processes and procedures in place to support
accounting estimates and documented accounting policies and procedures in
accordance with generally accepted accounting principles. As a result of these
weaknesses there is no guarantee that a material misstatement would not be
prevented or detected.
    The evaluation of existing internal controls over financial reporting is
continuing with a view to identifying control weaknesses. Implementation of
strengthened financial reporting controls will occur during 2007, where
required.

    Disclosure, Confidentiality and Trading Policy

    The Corporation has formal disclosure controls and procedures in place
which promotes an understanding of the legal requirements among the
Corporation's directors, officers and employees as it pertains to the timely,
factual and accurate communications with the public for Garneau Inc., together
with compliance of trading requirements of Corporation securities and
confidentiality of non public disclosed information. The effectiveness of the
Corporation's disclosure controls and procedures at June 30, 2007 have been
evaluated by senior management and are in compliance with reporting
requirements at June 30, 2007. Furthermore, these disclosure controls and
procedures are in the process of being enhanced further in 2007.

    Critical Accounting Estimates

    The Corporation recognizes revenues related to equipment fabrication
contracts based on the percentage-of-completion of the individual contracts.
At June 30, 2007, significant fabrication contracts in progress include
domestic orders for coating equipment, oilfield tanks, buildings and catwalks
totaling $2.5 million. The international coating equipment contract in
progress at June 30, 2007 totaled $4.5 million. Revenues from contracts are
determined on the percentage-of-completion method, based on the ratio of costs
incurred to date over estimated total costs. The Corporation has a process
whereby progress on jobs is reviewed by management on a regular basis and
estimated costs to complete are updated. However, due to unforeseen changes in
the nature or cost of the work to be completed or performance issues, contract
profit can differ from earlier estimates.
    The Corporation provides an estimate for amortization of assets based on
the expected useful life of assets with coating and extrusion equipment
calculated based on a straight-line method. These estimates are made using
historical experience and knowledge of current market conditions, however, are
subject to change as market conditions shift or technological advances are
made.
    The Corporation evaluates the probability of collection of accounts
receivable and records an allowance for doubtful accounts, which reduces the
receivables to the amount management reasonably believes will be collected. In
determining the amount of allowance, the following factors are considered: the
length of time the receivable has been outstanding, specific knowledge of each
customer's financial condition and historical experience.
    The Corporation also provides estimates pertaining to the valuation of
long-lived assets, valuation of inventory, valuation of future income taxes
and other estimates provided in the normal course of business operations.

    Disclosure of Contractual Obligations

    At June 30, 2007, there were no significant changes to the contractual
obligations disclosed by the Corporation which were outlined in the Management
Discussion and Analysis for the year ended December 31, 2006.

    Contingencies

    During the period ended June 30, 2007, the Corporation remained a named
defendant in a lawsuit with claims in the aggregate amount of $1.5 million. In
the opinion of management, this matter is without substantial merit and no
provisions have been made for this claim in the accounts.

    Business Risks

    At June 30, 2007, there are no significant changes to the business risks
outlined in the Management Discussion and Analysis for the year ended
December 31, 2006.

    
                                 Operational
    

    Small diameter coating activity for the second quarter of 2007 was well
below the activity recorded in 2006 as only one coating line was in operation
for most of the second quarter with only one shift employed. The order book
remained soft during the second quarter of 2007 as the normal spring break up
curtailed coating activity to June 30, 2007. Design and fabrication work
continued on the plant upgrades capital program announced in the fall of 2006
for the Camrose plant.
    Domestic manufacturing activity also reduced in the second quarter of
2007 as project bidding and activity were slow in Nisku. Garneau manufacturing
operations plant hours continued at 8 hour shifts throughout the second
quarter and staff cutbacks occurred as project activity decreased.

    
                                   Outlook
    

    Although 2006 drilling activity exceeded 23,400 wells, a softening of
commodity prices and activity was experienced in the third and fourth quarters
of 2006 which resulted in decreased coating activity into 2007. This
noticeable slowdown has continued into the second quarter of 2007 with both
coating and manufacturing activity being curtailed significantly. This
slowdown in industry activity, together with the historically slow spring
breakup season impacted Garneau's second quarter financial results
substantially as both coating and manufacturing revenue recorded were well
below 2006 comparisons.
    Design and fabrication on the major Camrose capital expenditure program
continued during the second quarter of 2007 and is progressing as originally
planned. This major upgrade to the Camrose facility is projected to improve
production efficiencies and reduce downtime and maintenance costs in the
plants. We project improved capabilities for future client orders through
these upgrades.
    Installation and commissioning on the large international order which
commenced during the first quarter is now complete. Cost overruns were
incurred during the installation stage to meet customer requirements. The
$1 million coating equipment order secured from ShawCor Ltd. for domestic
coating equipment was completed and shipped in the second quarter.
    Discussions on proceeding with the CCSI joint venture agreement signed in
the fall of 2005 continued during the second quarter of 2007. The venture is
working towards bringing cold weather application to the coating process and
will resume activity in 2007. If proven successful, this could lead to new
revenue streams for the Corporation on future large diameter projects.
    The Corporation announced major expansion plans on August 14, 2007
wherein the Corporation is diversifying their Pipeline business segment into
the distribution of oil country tubular goods and line pipe products. This
expansion enables Garneau to offer tubular and line pipe procurement and
inventory management to our clients, in addition to the existing coating
services provided from our 65,000 sq ft Camrose facility. Increased marketing
efforts and infrastructure realignment procedures are underway to support this
aggressive initiative. The expansion will not require significant changes to
the plant or yard infrastructure in the Camrose operation. Negotiation for
initial supply of tubular products is complete and authorized bank credit
lines have been increased by $20 million to support this new strategic
initiative. The tubular and line pipe in Western Canada industry is estimated,
by management to exceed over $1.0 billion dollars annually in recent years and
Garneau is anticipating that it can be successfully penetrate the existing
market based on the Corporation's ability to now offer consolidated "one stop
shopping" for these services. This announcement marks a major step in
Garneau's commitment to providing the oil and gas industry with additional
value added services and further reflects Garneau's commitment to increasing
corporate growth and long term profitability for our shareholders.
    Garneau will continue to invest in research and development, while
actively pursuing potential new markets and focusing on profitable growth by
offering specialty products and services to complement our core coating and
manufacturing operation.
    Further strategic initiatives are currently being discussed and
implementing a new strategic plan with new strategic initiatives during fiscal
2007 will be a primary focus of the Corporation. Additionally, management will
focus on controlling infrastructure costs during this market slowdown.

    On behalf of the Board of Directors


    (signed)
    Glen Garneau,
    President and Chief Executive Officer


    
    Garneau Inc.
    Consolidated Balance Sheets

    -------------------------------------------------------------------------
                                                            at            at
    (In thousands of Canadian dollars)                 June 30,  December 31,
    (unaudited)                                           2007          2006
    -------------------------------------------------------------------------

    Assets
    Current Assets:
    Accounts receivable                            $     3,581   $    14,293
    Unbilled revenue                                     1,885         1,162
    Inventory (note 5)                                   2,340         3,067
    Prepaid expenses and deposits                          115            16
    -------------------------------------------------------------------------
                                                         7,921        18,538
    Other assets                                            58            56
    Property, plant and equipment                       20,800        20,977

    -------------------------------------------------------------------------
                                                   $    28,779   $    39,571
    -------------------------------------------------------------------------
    Liabilities and Shareholders' Equity
    Current Liabilities:
    Operating loan (note 10)                       $     2,986   $     5,224
    Accounts payable and accrued liabilities             2,336         7,207
    Billings in excess of costs incurred and
     estimated earnings on uncompleted contracts             -           204
    Customer deposits                                      112           112
    Loans payable (note 7)                               4,106         4,918
    Current portion of capital lease obligations           243           343
    -------------------------------------------------------------------------
                                                         9,783        18,008

    Capital lease obligations                              171           241
    Future income taxes                                      -           606
    -------------------------------------------------------------------------
                                                         9,954        18,855
    -------------------------------------------------------------------------

    Shareholders' Equity:
    Share capital (note 6)                              21,424        21,401
    Contributed surplus                                    167            99
    Deficit                                             (2,766)         (784)
    -------------------------------------------------------------------------
                                                        18,825        20,716

    Contingencies (note 8)
    Basis of presentation
    -------------------------------------------------------------------------
                                                   $    28,779   $    39,571
    -------------------------------------------------------------------------
    See accompanying notes to unaudited interim consolidated financial
    statements.



    Garneau Inc.
    Consolidated Statements of Operations and Comprehensive Income (loss)
    and Deficit


    (In thousands of
     Canadian dollars           Three months ended          Six months ended
     except per share         June 30,     June 30,     June 30,     June 30,
     data, unaudited)            2007         2006         2007         2006
    -------------------------------------------------------------------------

    Revenue               $     4,772  $    13,020  $    12,017  $    31,830
    Operating costs             4,592       10,515       10,371       25,443
    -------------------------------------------------------------------------
                                  180        2,505        1,646        6,387

    Other expenses (income):
      Selling, general and
       administrative           1,415        1,151        3,002        2,275
      Amortization                530          474        1,068          968
      Research and development     51           26           90           93
      Foreign exchange loss
       (gain)                     (10)         (23)           2          (37)
      Gain on disposal of
       property, plant and
       equipment                    -            -           (4)           -
    -------------------------------------------------------------------------
                                1,986        1,628        4,158        3,299
    -------------------------------------------------------------------------
                               (1,806)         877       (2,512)       3,088

    Financing:
      Interest on
       operating loan              33           76           71          130
      Interest on loans
       payable                     69           94          154          187
      Other                        55                        64
    Other expenses
     (income), net               (204)         728         (214)         922
    -------------------------------------------------------------------------
    Earnings(loss) before
     income taxes              (1,759)         (21)      (2,587)       1,849
    -------------------------------------------------------------------------

    Income taxes:
      Future                     (478)        (252)        (605)         992

    Net earnings (loss)
     and comprehensive
     income (loss)             (1,281)        (273)      (1,982)         857

    -------------------------------------------------------------------------
    Deficit, beginning of
     period                    (1,485)        (601)        (784)      (1,731)
    -------------------------------------------------------------------------
    Deficit, end of
     period               $    (2,766) $      (874) $    (2,766) $      (874)
    -------------------------------------------------------------------------

    Earnings (loss) per
     share:
      Basic               $     (0.11) $     (0.02) $     (0.16) $      0.07
      Diluted             $     (0.11) $     (0.02) $     (0.16) $      0.07
    Weighted average
     common shares:
      Basic                12,058,713   11,811,388   12,053,648   11,643,681
      Diluted              12,058,713   11,811,388   12,053,648   11,643,681
    -------------------------------------------------------------------------
    See accompanying notes to unaudited interim consolidated financial
    statements.



    Garneau Inc.
    Consolidated Statements of Cash Flows


    (In thousands of            Three months ended          Six months ended
     Canadian dollars,        June 30,     June 30,     June 30,     June 30,
     unaudited)                  2007         2006         2007         2006
    -------------------------------------------------------------------------
    Cash provided by
     (used in):

    Operations:
      Net earnings (loss) $    (1,281) $      (273) $    (1,982) $       857
      Items not involving
       cash:
      Amortization                530          474        1,068          968
      Stock-based
       compensation
       expense                     40           46           77           49
      Gain on disposal of
       property, plant
       and equipment                -            -           (4)           -
      Future income taxes        (478)         252         (605)         992
    -------------------------------------------------------------------------
                               (1,189)         499       (1,446)       2,866

    Changes in non-cash
     operating working
     capital                    1,431        2,434        5,541          414
    -------------------------------------------------------------------------
                                  242        2,933        4,095        3,280
    -------------------------------------------------------------------------

    Financing:
      Proceeds from
       exercise of share
       purchase options            14          156           14          205
      Increase (decrease)
       in operating loan          767       (1,828)      (2,238)        (881)
      Repayment of loans
       payable                   (389)        (256)        (812)      (1,066)
      Advances under loans
       payable                      -            -            -            -
      Repayment of capital
       lease                      (61)         (83)        (170)        (165)
    -------------------------------------------------------------------------
                                  331       (2,011)      (3,206)      (1,907)

    Investments:
      Other assets                 (1)        (189)          (2)        (189)
      Proceeds from disposal
       of property, plant
       and equipment                -            -           27            -
      Additions to property,
       plant and equipment       (572)        (733)        (914)      (1,184)
    -------------------------------------------------------------------------
                                 (573)        (922)        (889)      (1,373)
    -------------------------------------------------------------------------

    Change in cash                  -            -            -            -

    Cash, beginning of
     period                         -            -            -            -
    -------------------------------------------------------------------------
    Cash, end of period   $         -  $         -  $         -  $         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to unaudited interim consolidated financial
    statements.



    Garneau Inc.
    Notes to the Consolidated Interim Financial Statements (unaudited)
    ------------------------------------------------------------------
    (Tabular amounts in thousands of Canadian dollars)

    For the three and six months ended June 30, 2007 and 2006

    Basis of Presentation:

    The Corporation is incorporated under the Business Corporations Act of
    Alberta. Its principal business activities are the coating of pipe and
    manufacturing of equipment for use in the oil and gas industry. The
    Corporation is subject to seasonal fluctuations in operating results that
    impact quarter-to-quarter operating results and, thus, one quarter's
    operating results are not necessarily indicative of a subsequent
    quarter's operating results.

    These unaudited interim consolidated financial statements have been
    prepared by management in accordance with Canadian generally accepted
    accounting principles for interim financial statements. These
    consolidated interim financial statements have been prepared on a going
    concern basis in accordance with Canadian generally accepted accounting
    principles, which assumes that the future operations will allow for the
    realization of assets and discharge of liabilities in the normal course
    of business. The application of the going concern concept is dependent
    upon the ability of the Corporation to generate profitable operations and
    the ongoing support of its lender. These consolidated interim financial
    statements do not include any adjustments to the carrying value of assets
    and liabilities that might be necessary should the Corporation not
    continue operating in the normal course of business.

    1)  Significant Accounting Policies:

    These unaudited consolidated interim financial statements follow the same
    accounting policies and methods of application as the most recent annual
    consolidated financial statements, except as described in note 2. Notes
    to the consolidated interim financial statements for the period ended
    June 30, 2007 do not include all disclosures required by Canadian
    Generally Accepted Accounting Principles for annual financial statements.
    For further detailed information, the reader is advised to refer to
    Garneau Inc.'s 2006 audited financial statements.

    2)  Changes in Accounting Policies and Practices

    As disclosed in the December 31, 2006 annual audited Consolidated
    Financial Statements, on January 1, 2007, the Corporation adopted the
    Canadian Institute of Chartered Accountants ("CICA") Handbook Section
    1530 "Comprehensive Income", Section 3251 "Equity", Section 3855
    "Financial Instruments - Recognition and Measurement", Section 1506
    "Accounting Changes", Section 3865 "Hedges" and Section 3861 "Financial
    Instruments-Disclosure and Presentation".

    The adoption of these standards has had no material impact on the
    Corporation's net earnings or cash flows. The other effects of the
    implementation of the new standards are discussed below.

    Comprehensive Income

    The new standards introduce comprehensive income, which consists of net
    earnings and other comprehensive income ("OCI"). The Corporation has no
    OCI transactions recorded for the period ended June 30, 2007. The
    adoption of Comprehensive Income has been in accordance with the
    applicable transitional provisions.

    Section 3251 establishes standards for the presentation of equity and for
    the changes in equity during the reporting period. The cumulative changes
    in OCI are included in accumulated other comprehensive income ("AOCI"),
    which is presented as a new category within shareholders' equity. The
    Corporation has no opening or closing balances for accumulated other
    comprehensive income or loss.

    Financial Instruments

    The financial instruments standard establishes the recognition and
    measurement criteria for financial assets, financial liabilities and
    derivatives. All financial instruments are required to be measured at
    fair value on initial recognition of the instrument, except for certain
    related party transactions. Measurement in subsequent periods depends on
    whether the financial instrument has been classified as "held-for-
    trading", "available-for-sale financial assets", "held-to-maturity
    investments", "loans and receivables", or "other financial liabilities"
    as defined by the standard.

    Financial assets and financial liabilities "held-for-trading" are
    measured at fair value with changes in those fair values recognized in
    net earnings. "Available-for-sale financial assets" are measured at fair
    value, with changes in those fair values recognized in OCI. "Held-to-
    maturity investments", "loans and receivables" and "other financial
    liabilities" are measured at amortized cost using the effective interest
    method.

    Cash and cash equivalents are designated as "held-for-trading". Accounts
    receivable and unbilled revenue are designated as "loans and
    receivables". Accounts payable and accrued liabilities, operating loans,
    customer deposits, loans payable and capital lease obligations are
    designated as "other financial liabilities".

    Section 3855 requires that the Corporation records non-financial
    derivatives as assets or liabilities at their fair value unless exempted
    from derivative treatment as normal purchase or sale. The Section also
    requires the Corporation to identify embedded derivatives that need
    separation from the related host contract and measure those embedded
    derivatives at fair value. Subsequent change in fair value of embedded
    derivatives is recognized in the consolidated statement of operations and
    deficit in the period the change occurs. The Corporation has elected to
    apply this accounting treatment for all embedded derivatives in host
    contracts entered into on or after January 1, 2003 and has determined
    there are no material embedded derivatives that must be separated from
    the host contract and accounted for separately and there are no non-
    financial derivative instruments.

    Transactions costs that are directly attributable to the acquisition or
    issuance or disposal of financial assets or liabilities are expensed at
    the time of occurrence.

    Section 3861 (replaces Handbook Section 3860, Financial Instruments-
    Disclosure and Presentation) establishes standards for presentation of
    financial instruments and non-financial derivatives, and identifies
    information that should be disclosed. There was no material effect on the
    Corporation's financial statements when we adopted the Section 3861 on
    January 1, 2007.

    Hedges

    Section 3865 specifies circumstances under which hedge accounting is
    permissible and how hedge accounting may be performed. The Corporation
    currently does not have any hedges.

    Accounting Changes

    In July 2006, the Accounting Standards Board ("AcSB") issued a
    replacement of The Canadian Institute of Chartered Accountants' Handbook
    ("CICA Handbook") Section 1506, Accounting Changes ("Section 1506"). The
    new standard allows for voluntary changes in accounting policy only when
    they result in financial statements providing reliable and more relevant
    information, requires changes in accounting policy to be applied
    retrospectively unless doing so is impracticable, requires prior period
    errors to be corrected retrospectively and calls for enhanced disclosures
    about the effects of changes in accounting policies, estimates and errors
    on the financial statements. The impact that the adoption of Section 1506
    will have on the Company's results of operations and financial condition
    will depend on the nature of future accounting changes. The adoption of
    Section 1506 effective January 1, 2007 has had no impact on these
    unaudited interim consolidated financial statements.

    Recent Accounting Pronouncements Issued and Not Yet Applied

    a)  Financial instruments and capital disclosure:

        In October 2006, the AcSB approved disclosure and presentation
        requirements for financial instruments that revise and enhance the
        disclosure requirements of Section 3861. These requirements included
        Sections 3862 - Financial Instruments-Disclosure ("Section 3862"),
        which replaces Section 3861 and Section 1535, Capital Disclosures
        ("Section 1535"), which establishes standards for disclosing
        information about an entity's capital and how it is managed. Section
        1535 requires disclosure of an entity's objectives, policies and
        processes for managing capital, quantitative data about the entity in
        regards to capital and whether the entity has compiled with any
        capital requirements and if it has not complied, the consequences of
        such non-compliance. This standard is effective for the Corporation
        for interim and annual financial statements beginning on January 1,
        2008. Early adoption is permitted at the same time an entity adopts
        other standards relating to accounting for financial instruments. The
        Corporation does not expect the adoption of this standard to have a
        material impact on its consolidated financial position and results of
        operations.

        Section 3862 is based on IFRS 7, Financial Instruments: Disclosures,
        and places an increased emphasis on disclosures about the risks
        associated with both recognized and unrecognized financial
        instruments and how these risks are managed.

        Section 3862 requires disclosures, by class of financial instrument
        that enables users to evaluate the significance of financial
        instruments for an entity's financial position and performance,
        including disclosures about fair value. In addition, disclosure is
        required of qualitative and quantitative information about exposure
        to risks arising from financial instruments, including specified
        minimum disclosures about credit risk, liquidity risk and market
        risk. The quantitative disclosures must also include a sensitivity
        analysis of each type of market risk to which an entity is exposed,
        show how net income and other comprehensive income would have been
        affected by reasonably possible changes in the relevant risk
        variable.

        This standard is effective for the Corporation for interim and annual
        financial statements beginning on January 1, 2008. The Corporation
        does not expect the adoption of this standard to have a material
        impact on its financial position and results of operations.

    b)  Financial instruments presentation:

        In October 2006, the AcSB approved Section 3863 - Financial
        Instruments-Presentation, which replaces Section 3861, Financial
        Instruments-Disclosure and Presentation. The existing requirements
        on presentation of financial instruments have been carried forward
        unchanged to Section 3863, Financial Instruments-Presentation.

        This standard is effective for the Corporation for interim and annual
        financial statements beginning on January 1, 2008. The Corporation
        does not expect the adoption of the standard to have a material
        impact on its financial position and results of operation.

    c)  Inventories:

        In June 2007, the CICA issued Section 3031, "Inventories," which
        requires inventory to be measured at the lower of cost and net
        realizable value. The standard also provides guidance on the costs
        that can be capitalized. In addition, previous inventory write-downs
        must be reversed if the economic circumstances have changed to
        support an increased inventory value. The standard is effective for
        2008. We are currently evaluating the impact of adopting this
        standard on our consolidated financial statements.

    3)  Segment Disclosures

    Management has determined that the Corporation operates in two reportable
    business segments which were Manufacturing and Pipeline. The accounting
    policies of the segments are the same as those described in the summary
    of significant accounting policies.

                         Three months ended            Three months ended
                            June 30, 2007                 June 30, 2006
                  Manufacturing       Pipeline  Manufacturing       Pipeline

    Revenue          $    2,065     $    2,707     $    4,375     $    8,645
    Gross margin      314(15.2%)   (134)(-5.0%)     942(21.5%)   1,563(18.1%)
    Amortization             43            487             38            436
    Interest expense          -            102              -            170

    Other expenses
     and income
     before income
     taxes                  688            619            526          1,356
    Earnings (loss)
     before income
     taxes                 (417)        (1,342)           378           (399)

    Property, plant
     and equipment        2,151         38,549          2,426         36,408
    Accumulated
     amortization         1,633         18,267          1,901         16,330
    Net book value          518         20,282            525         20,078
    Capital
     expenditures             -            572            210            523
    Total assets          2,684         26,095          3,942         34,482



                          Six months ended              Six months ended
                            June 30, 2007                 June 30, 2006
                  Manufacturing       Pipeline  Manufacturing       Pipeline

    Revenue          $    4,561     $    7,456     $    8,053     $   23,777
    Gross margin      537(11.8%)   1,109(14.9%)   2,114(26.3%)   4,273(18.0%)
    Amortization             86            982             69            899
    Interest expense          -            225              -            317

    Other expenses
     and income
     before income
     taxes                1,358          1,582          1,107          2,146
    Earnings (loss)
     before income
     taxes                 (907)        (1,680)           938            911

    Property, plant
     and equipment        2,151         38,549          2,426         36,408
    Accumulated
     amortization         1,633         18,267          1,901         16,330
    Net book value          518         20,282            525         20,078
    Capital
     expenditures             -            914            254            930
    Total assets          2,684         26,095          3,942         34,482


    Gross margin is determined by deducting operating costs from revenue.
    Operating costs consist of all direct material, labor and plant overhead
    costs.

    Two customers accounted for 12% and 12% of consolidated revenue
    respectively for the period ended June 30, 2007.

    4)  Supplementary Cash Flow Information

                                    Three Months Ended      Six Months Ended
    -------------------------------------------------------------------------
                                    June 30,   June 30,   June 30,   June 30,
                                       2007       2006       2007       2006
    -------------------------------------------------------------------------
    Interest Paid                       $76       $170       $199       $317
    -------------------------------------------------------------------------
    Income taxes paid                     -          -          -          -


    Property, plant and equipment in the amount of Nil (2006 - Nil) were
    acquired by way of capital lease during of the three month period ended
    June 30, 2007.

    5)  Inventory

    -------------------------------------------------------------------------
                                                         As at         As at
                                                       June 30,  December 31,
    Inventory consists of the following:                  2007          2006
    -------------------------------------------------------------------------
    Raw Materials                                  $     1,555   $     1,881
    Finished goods                                         785         1,186
    -------------------------------------------------------------------------
                                                   $     2,340   $     3,067
    -------------------------------------------------------------------------

    6)  Share Data

    At December 31, 2006, the Corporation had 12,048,527 outstanding common
    shares and 920,550 outstanding options to acquire common shares. 214,050
    of these options were vested and exercisable. During the quarter ended
    March 31, 2007, no options were exercised. Options totaling 15,000 at an
    average price of $1.48 were forfeited during the quarter ended March 31,
    2007 with 905,550 options outstanding at March 31, 2007 (214,050 vested).
    During the quarter ended June 30, 2007, 23,300 options were exercised for
    the cash proceeds of $14. Stock options exercised during the period ended
    June 30, 2007 resulted in $9 being transferred from contributed surplus
    to share capital. New options totaling 50,000 were granted during the
    second quarter at a price of $1.14. Options totaling 12,000 were
    forfeited at an average price of $0.60 during the quarter ended June 30,
    2007 with 920,250 options outstanding at June 30, 2007 (178,750 vested).
    Outstanding common shares totaled 12,071,827 at June 30, 2007. Diluted
    shares at June 30, 2007 total 12,071,827 and include the dilutive impact
    of options outstanding at June 30, 2007 on overall shares outstanding.

    -------------------------------------------------------------------------
    Share Continuity Schedule                       Number of
    -------------------------                         shares
    -------------------------------------------------------------------------
    Common shares outstanding at
     December 31, 2006                              12,048,527       $21,401
                                                   --------------------------
    Issued for cash during 2007 on exercised
     of options                                         23,300            14
                                                   --------------------------
    Transfer from contributed surplus for
     stock options exercised                                 -             9
                                                   --------------------------
    Common shares outstanding at June 30, 2007      12,071,827        21,424
                                                   --------------------------


    The fair value of stock options granted during the second quarter of 2007
    is estimated at the grant date using the Black-Scholes option pricing
    model using the following weighted average assumptions

        Period Ended                   June 30, 2007
                                       -------------

        Expected dividends                    Nil
        Risk-free interest rate             4.64%
        Expected life                       3 yrs
        Expected volatility                   60%


    Total stock based compensation expense for the period ended June 30, 2007
    totaled $40. The weighted average fair value of each option was
    determined to be $0.52.

    7)  Loans Payable

    Loans payable to the Corporation's bank are payable upon demand and are
    classified as a current liability. Scheduled repayments are as follows:

                                                  As at                As at
                                          June 30, 2007    December 31, 2006
    Due within 12 months                    $     1,306          $     1,556
    Due after 12 months                     $     2,800          $     3,362


    8)  Contingencies

    The Corporation has been named defendant in a lawsuit and has received
    claims in the aggregate amount of $1.5 million. In the opinion of
    management, this matter is without substantial merit and no provision has
    been made for the claim in the accounts.

    9)  Comparative Figures

    Certain of the comparative figures have been reclassified to confirm with
    the current period's presentation.

    10) Operating Loan and Loans Payable

    During the second quarter period ended June 30, 2007 new credit
    facilities were approved by the Corporation's bank. At June 30, 2007, the
    Corporation had available a demand revolving operating line of credit of
    $18,000 ($2,986 utilized) bearing interest at the lender's prime rate
    plus 0.375% for the Canadian loan and US prime plus 0.375% or libor plus
    1.975% for the USD advances. This interest rate is adjusted to prime if
    the Corporation covenant ratios are within a certain limit. As part of
    the revolving credit facility, the Corporation had sub-limits consisting
    of a demand revolving evergreen loan of $5,000 ($2,206 utilized) bearing
    interest at the prime plus 0.875% (See note 7), a loan lease facility for
    $1,800 ($414 utilized pertaining to the manufacture of polyethylene pipe
    and acquisition of forklifts) million bearing prime plus 0.875% and a
    demand loan facility in the amount of $9.0 million ($1,900 utilized)
    bearing prime plus 0.875%. The amount available under the facilities is
    subject to a borrowing based formula applied to the levels of accounts
    receivable and inventories. Letters of guarantee and credit for
    performance and bid guarantees, when issued, reduce the amount available
    for borrowing under the loan. As collateral for the facilities, the
    Corporation has provided a general security agreement creating a first
    priority charge over all assets, floating charge over all present and
    after acquired Corporation's real property and assignment of all
    insurance. Terms and conditions for the new credit facilities authorized
    include requirements for the completion of new security documentation,
    updated appraisals on corporate buildings and land owned in Camrose and
    Nisku and ongoing covenants set by the bank. New security documentation
    and appraisals are in the progress of being completed.
    





For further information:

For further information: Frank Deys, CFO, frankd@garneau-inc.com, Phone:
(780) 955-2396, Fax: (780) 955-7715

Organization Profile

GARNEAU INC.

More on this organization


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890