Shawcor Ltd. Announces Second Quarter 2020 Results

Thursday, 06. August 2020 23:01
  • Second quarter 2020 revenue was $266 million, 35% lower than the $412 million reported in the second quarter of 2019.
  • Adjusted EBITDA1 in the second quarter of 2020 was $4.3 million, 88% lower than the $36.2 million reported in the second quarter of 2019.
  • Net loss2 in the second quarter of 2020 was $36.8 million (or loss per share of $0.52 diluted) compared with a net income of $51.0 million (or $0.73 earnings per share diluted) in the second quarter of 2019. Excluding the impact of restructuring cost and the adjustment for Argentina hyperinflationary accounting, adjusted net loss1 in the second quarter of 2020 was $21.9 million (or adjusted loss per share1 of $0.31) compared with adjusted net income1 of $18.9 million (or $0.27 adjusted earnings per share1) in the second quarter of 2019. 
  • The Company’s order backlog was $553 million at June 30, 2020, compared to the backlog of $575 million at March 31, 2020.
  • Subsequent to the quarter end, the Company successfully entered in an amending agreement with its syndicate of lenders for its banking credit facility that will provide covenant relief through December 31, 2021.

TORONTO, Aug. 06, 2020 (GLOBE NEWSWIRE) -- Shawcor Ltd. (TSX:SCL) Mr. Steve Orr, Chief Executive Officer of Shawcor Ltd. remarked, “Second quarter revenue and Adjusted EBITDA were as expected and reflected reduced demand for the Company’s products and services as a result of the COVID-19 pandemic and reduced capital programs in the Energy sector. During the quarter the execution strength of the Company was fully leveraged and visible as we moved to retool our cost structure, keep our employees safe and service our customers in these unprecedented times.”

Mr. Orr added “Although it remains difficult to predict demand and the performance in the near term, we believe that the second quarter’s performance is the lowest we will see and that improved results will be supported by sustained cost reduction, secured work and the gradual return of demand in the markets we serve. We expect that these factors will result in improved performances in many of the Company’s businesses in the quarters ahead. Actions we are taking to aggressively reduce costs and conserve liquidity, together with the delivery of work we have secured with our customers, will ensure Shawcor remains an industry leader.”

1 EBITDA, Adjusted EBITDA, adjusted net income or loss and adjusted earnings or loss per share are Non-GAAP measures. Non-GAAP measures do not have standardized meanings under GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of these Non-GAAP measures.

2 Net Loss attributable to shareholders of the Company.

Selected Financial Highlights

(in thousands of Canadian dollars, except per share amounts and percentages)Three Months Ended
June 30,

Six Months Ended
June 30,

  2020  2019 2020  2019 
  $    %
$   %$    %$   %
            
Revenue266,118  411,789 585,145  761,367 
Gross profit67,776  25.5%117,42028.5%153,081 26.2%215,62428.3%
(Loss) Income from Operations(a)(36,165)(13.6%)29,3767.1%(257,983)(44.1%)37,010 4.9%
Net (Loss) Income for the period(b) (36,775) 51,044 (271,678) 41,970 
(Loss) Earnings per share ("EPS"):          
Basic(0.52) 0.73 (3.86) 0.60 
Diluted(0.52) 0.73 (3.86) 0.60 
            

Adjusted EBITDA(c)
4,256  1.6%36,2148.8%10,460  1.8%64,458 8.5%
Adjusted Operating (Loss) Income(c)(18,536) (7.0%)9,3022.3% (36,388) (6.2%)18,414 2.4%
Adjusted Net (Loss) Income(b)(c)(21,945) 18,937  (54,801) 22,210 
Adjusted EPS(c)
          
Basic
(0.31) 0.27 (0.78) 0.32 
Diluted
(0.31) 0.27 (0.78) 0.32 
(a)Operating loss in the six month ended June 30, 2020 includes restructuring costs of $17.3 million and impairment charges of $203.1 million.
(b)Attributable to shareholders of the Company.
(c)Adjusted EBITDA, Adjusted Operating Income or Loss, Adjusted Net Income or Loss and Adjusted EPS are non-GAAP measure. Non-GAAP measures do not have a standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non GAAP Measures for further details and a reconciliation of these Non-GAAP measures.

1.0 KEY DEVELOPMENTS

Amendments to its Credit Facility

On June 25, 2020, the Company announced that pending completion of an amendment to the terms of the Company’s bank credit facility (the “Credit Facility”), the lenders in the Company’s banking syndicate had agreed to waive compliance with the leverage and interest coverage ratios under the Credit Facility for the second fiscal quarter ending June 30, 2020 should Shawcor be in default thereof. On July 29, 2020, the Company entered into an amending agreement with its syndicate of lenders under its bank credit facility. The amendment provides the Company with covenant relief through December 31, 2021.

The principal amendments to the Credit Facility are:

  • a waiver of the maximum Net Debt to EBITDA covenant (the “Leverage Ratio”) for the fiscal quarter ended September 30, 2020 (“Q3 2020”) and change in the maximum Leverage Ratio to:
    • 5.75 to 1.00 for the fiscal quarter ended December 31, 2020 (“Q4 2020”)
    • 6.50 to 1.00 for the fiscal quarter ended March 31, 2021 (“Q1 2021”)
    • 5.75 to 1.00 for the fiscal quarter ended June 30, 2021 (“Q2 2021”)
    • 5.50 to 1.00 for the fiscal quarter ended September 30, 2021 (“Q3 2021”)
    • 5.00 to 1.00 for the fiscal quarter ended December 31, 2021 (“Q4 2021”)
    • 3.50 to 1.00 for all fiscal quarters thereafter;
       
  •  a waiver of the minimum EBITDA to Interest covenant (the “Interest Coverage Ratio”) for Q3 2020 and a change in the minimum Interest Coverage Ratio to:
    • 2.25 to 1.00 for Q4 2020
    • 2.00 to 1.00 for Q1 2021
    • 2.25 to 1.00 for Q2 2021
    • 2.50 to 1.00 for Q3 2021
    • 2.75 to 1.00 for Q4 2021
    • 3.00 to 1.00 for all fiscal quarters thereafter;
       
  • for the purposes of the amended Leverage Ratio and Interest Coverage Ratio, EBITDA shall be calculated as follows:
    • For Q4 2020: (Q4 2020 EBITDA) x 4
    • For Q1 2021: (Q4 2020 EBITDA + Q1 2021 EBITDA) x 2
    • For Q2 2021: (Q4 2020 EBITDA + Q1 2021 EBITDA + Q2 2021 EBITDA) x 4/3
    • Thereafter, on a trailing 12 month basis;
       
  • until receipt by the banking syndicate of reporting for the fiscal year ended December 31, 2020, the addition of a minimum monthly liquidity test, calculated as aggregate unrestricted cash held in lender’s accounts plus undrawn availability under the Credit Facility, of $290 million;
     
  • a first priority security interest in favour of the banking syndicate is to be provided against the majority of the personal property of the Borrowers and Guarantors under the Credit Facility; and
     
  • increased interest rates and standby and other fees.

The Company will incur fees and expenses of approximately $1.4 million in Q3 and Q4 2020 to implement these amendments.

Impact of COVID-19

In March 2020, global market downturn caused by the COVID-19 pandemic and recent changes in oil and gas supply and demand resulted in an immediate decrease in demand for products and services supplied by Shawcor. The situation remains dynamic and the ultimate duration and magnitude of the impact on the global economy and on the Company remains unknown at this time.

The implications on Shawcor as a result of decreases in demand may be significant and include:

  • Material declines in revenue and cash flows
  • Future impairments charges to property, plant and equipment
  • Increased risk of non-payment of accounts receivables: and
  • Additional restructuring charges

The Company has taken measures to address the reduced current demand and the high degree of uncertainty in future demand. These measures include targeting in excess of $60 million in annualized selling, general and administrative (“SG&A”) and other cost savings and generating in excess of $40 million in cash from working capital reductions and asset sales. 

The Company has completed the following actions to reduce costs, preserve cash and meet its stated targets. 

  • Suspension of the regular quarterly dividend, commencing in the second quarter. 
     
  • Reduced Board compensation by 30%, CEO cash compensation by 20% and Senior Executive cash compensation by 10%. 
     
  • Salaried workforce headcount was reduced by over 15%.

  • Aggressive cost controls were implemented and are expected to generate over $10 million in annualized savings. This includes the elimination of all non-essential travel, entertainment and other discretionary spending.

  • Planned capital spending has been reduced to the $40-$50 million range for 2020 to include only essential maintenance capital and select growth spending to deliver on firm orders, particularly in our Composite Systems Tank business (formerly ZCL Composites).
     
  • The controlled shutdown of 4 pipe coating facilities and several branches, with additional footprint optimization in progress for finalization in the second half of the year.
     
  • Reduced working capital by $43.7 million, excluding the impact of increased restructuring liabilities, and generated cash proceeds from asset sales of $10.7 million in the first half of 2020. 

The Company has incurred $17.3 million of restructuring costs to date as a result of the actions completed.

The Company expects the total value of its completed and planned initiatives will meet its stated targets and result in a quarterly normalized SG&A run-rate of approximately $70 million. 

1.1   Second Quarter Highlights and Outlook

Adjusted EBITDA1 of $4.3 million in the second quarter was largely in-line with expectations, reflecting the ongoing negative economic impact of COVID-19, a sharp decline in global oil prices and a positive benefit from government wage support program funds received in the quarter. During the quarter, COVID-19 resulted in significant global supply chain disruptions as several countries restricted mobility and suspended non-essential business activity. In addition, OPEC+ and major energy producing countries took actions to curtail production output during the quarter to address the oil and gas oversupply situation. 

The Company’s operations experienced significant reduced demand for products and services tied to energy and automotive markets during the quarter. Despite these challenges, the Company safely executed on secured work, met the demand for its infrastructure and other related products and services and aggressively reduced its cost base. 

In addition to the actions announced in the April 21, 2020 press release and earlier, significant additional progress was made in the balance of the quarter towards our targets of $60 million in sustainable annualized SG&A savings and $40 million in incremental cash generation. For example, the Company has now reduced its salaried workforce by over 15% as compared to year-end and continued to optimize its operating footprint with the closure of four North American pipe coating facilities and several branch offices.

As a result of these efforts the Company is on track to meet its goal of a quarterly normalized SG&A run rate of $70 million. The Company incurred one-time restructuring charges of $17 million during the second quarter as part of these cost saving initiatives.

In addition, the Company remains focused on cash generation initiatives as evidenced by the positive cash inflow in the second quarter of $35 million, excluding the impact of increased restructuring liabilities, from reduced working capital and $1.6 million from proceeds of asset sales. Although the Company expects that there will be a need to increase working capital in the second half of the year as demand gradually returns, it will work diligently to manage working capital to minimize the re-investment. 

1 EBITDA and Adjusted EBITDA are Non-GAAP measures. Non-GAAP measures do not have standardized meanings under GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of these Non-GAAP Measures.

The Pipeline and Pipe services segment revenues were negatively impacted during the quarter by the decline in oil prices. WTI crude traded in negative territory during April for the first time in history, with WTI and Brent Crude prices down over 34% since the start of the year. As market conditions deteriorated during the quarter, North American exploration and production operators moved to reduce capital spending in the range of 50% year-over-year and initiated production shut-ins to conserve cash. Activity in major North American oil and gas basins declined considerably in the second quarter with the average U.S. rig count declining 50% over the prior quarter and reaching its lowest level in recent history. Demand for small diameter pipe coating in the U.S. and Western Canada was limited during the quarter as customers utilized existing inventories and delayed new transmission projects. During the quarter, the Company closed four North American coating facilities which provide anti-corrosion pipeline protection for land-based applications. These closures are expected to reduce revenues but improve profitability. Demand for large diameter girth weld inspection services was negatively impacted by the delay or cancellation of certain U.S. transmission projects. Enbridge delayed the Line 3 oil pipeline replacement and Dominion Energy cancelled the Atlantic Coast Pipeline. Demand from operators for pipeline engineering design and consulting services was strong as customers looked externally to backfill technical resource requirements which translated into higher revenue in the quarter. In addition, work continued to be executed on several international and offshore projects and production ramp-up continued at facilities in Channelview (Texas), Scotland, Norway, Indonesia and UAE. Commercial and technical teams actively engaged asset owners on project requirements and phasing as conditions warranted. 

The Composite Systems segment experienced significantly lower revenues for its composite pipe products due to the unprecedented decline in North American drilling and completion activity across its customer base. Large and mid-size Operators reduced drilling rigs rapidly over the quarter and worked through existing pipe inventories which resulted in record low demand for the Company’s core composite pipe products in Canada and the U.S. During the quarter, the business scaled back production at its Calgary, Alberta facilities to match market demand. Business development activities resulted in strong bid activity in Australia, South America and the Middle East during the second quarter. The Composite Tank business experienced continued strong demand for fuel, water/wastewater and oil and gas applications and additional shifts were added at select plant locations during the quarter to meet record backlog. Conditions in Western Canada continued to be depressed with lower demand for OCTG tubulars management services. 

The Automotive and Industrial segment experienced lower revenues and operated at a reduced capacity as a result of customer production shutdowns and government lockdown restrictions during the quarter. During the quarter, global automotive OEM assembly plants temporarily halted production and suspended operations for several weeks as a result of COVID-19 and were operating in the range of 40-60% capacity at the end of the quarter. This resulted in lower demand for the Company’s automotive heat-shrink products and appliances. In addition, industrial customers were impacted by disruptions which resulted in lower demand in some of the segment’s other industrial markets. The specialty wire and cable business experienced higher revenue on improved demand from North American electrical and communication distributors in the quarter.

Order Backlog

The Company’s order backlog consists of firm customer orders only and represents the revenue the Company expects to realize on booked orders over the succeeding twelve months. The Company reports the twelve-month billable backlog as a leading indicator of changes in consolidated revenue. The order backlog of $553 million as at June 30, 2020, represents a slight decrease over the $575 million order backlog as March 31, 2020. This decrease reflects revenue generated in the quarter from backlog orders and the impact of a lower Canadian to U.S. dollar exchange rate. 

In addition to the backlog, the Company closely monitors its bidding activity and the value of outstanding firm bids, which represents bids provided to customers with firm pricing and conditions against a defined scope, is over $790 million as of June 30, 2020, down slightly from last quarter largely due to certain offshore and international pipeline project delays. Included in the firm bid, but not in the backlog, are unsanctioned conditional awards between engineering and procurement companies (“EPC’s”) and Shawcor for a scope of work that is estimated at over $180 million in revenue beyond the end of the second quarter of 2020. The Company is also working with customers on several other projects and the budgetary estimates at the end of the second quarter remains at almost $1.4 billion. Although the timing of these projects is uncertain, the Company’s bid and budgetary figures represent a diverse portfolio of opportunities to sustain and build the backlog.

Outlook

Shawcor’s financial performance is correlated with the level of industry activity and the level of investment in energy and infrastructure for resource development, storage and transportation around the globe and the resultant demand for the Company’s products and services. 

The near-term outlook and results for the balance of the year remain difficult to forecast as performance will be highly dependent on the nature and duration of the COVID-19 pandemic and its impact on economic output and energy demand. Many exploration and production (“E&P”) operators have significantly curtailed production and moved to protection mode, with a stronger capital discipline focus to ensure long term sustainability. 

The Company’s performance will be determined by the strength of its diverse base business and the stabilization of demand for its products and services, particularly in the U.S., the continued positive demand in its composite tank business, the ability to continue to execute work and projects secured in the backlog and the return of the stable demand profile in automotive and industrial markets which are serviced by the Company. The Company expects results in the second half of the year will benefit from its efforts, to date and planned, to right size the business, improve profitability and meet its stated targets for annualized cost reduction and cash generation. These actions include reducing expenses and spending, aligning the Company’s operational footprint, cost structure and human resources with market demand and the controlled closure of several facilities, in addition to the 4 pipe coating locations closed prior to the end of Q2 2020.

The Company’s base oil and gas business in North America is heavily tied to the spending programs of E&P operators. In the U.S. land, operators have reduced capital spending budgets to date by up to 50% and completed production shut-ins as a result of the decline in economic activity and oil and gas demand, and regulatory delays in transmission line projects. The Company expects U.S. land demand to stabilize at current levels and gradually improve in the second half of the year assuming that the lifting of COVID-19 restrictions continues and its customers return to a minimum base level of spending. In Western Canada, limited off-take capacity in the region caused by the lack of new pipeline infrastructure has resulted in continued depressed spending. This market is not expected to improve in the medium term until new pipeline off-take capacity is moved on-line, and oil and gas prices strengthen.

Despite the current environment, the Company continues to believe that its current backlog is secure for international and offshore projects and non-oil and gas products such as composite underground storage tanks. It has a diversified customer base in terms of market focus, geographic reach and a combination of late and early cycle businesses. Based on these factors and cost reduction and cash generation activities, the Company continues to expect results to improve in the second half of the year should fundamentals remain at or above second quarter levels. 

As the economy and energy demand recover, the Company continues to expect that the global oil & gas capex cycle will resume and that large international and offshore projects will be sanctioned. These investments are required to replace, maintain and rehabilitate infrastructure that is at or beyond its useful design life, replace production due to reservoir depletion, requirements for advanced technologies and non-corrosive materials, or to address geopolitical challenges which are affecting several important producing regions. Additionally, higher investments in gas, specifically LNG and for domestic energy, are being supported by the increased demand for gas and greener alternatives.

Further detail on the outlook for the Pipeline and Pipe Services, Composite Systems and Automotive and Industrial segments are set out below.

Pipeline and Pipe Services Segment

Market demand in the Company’s North American Pipeline & Pipe services segment businesses is closely tied to drilling and completion activity, the development of new and the repair/replacement of transmission pipelines and requirements for pipeline integrity and regulatory compliance. These activities drive the demand for small and large diameter pipe coatings and joint protection, girth weld inspection services on existing pipelines and new projects and engineering design and consulting services.

Although activity in U.S. land has decreased significantly in the current quarter as operators have moved to aggressively cut costs and reduce capital spending budgets by up to 50%, the Company expects demand to stabilize at these lower levels and gradually improve in the second half of the year assuming that COVID-19 restrictions continue to ease and operators return to a minimum base level of investment to maintain current levels of production. 

The Company expects to continue to execute work secured in its backlog, including new international and offshore projects awarded in the first quarter, and continues to ramp-up pipe coating facilities in Channelview (Texas), Scotland, Norway, Indonesia and UAE. 

The Company is engaged with major EPC’s and international and national oil and gas customers as they review project portfolios and does expect certain projects which are yet to be sanctioned to be delayed as a result of cost controls and reduced capital spending. The Company expects that the projects with the greatest likelihood of moving ahead will be those tied to securing long-term domestic energy supply, projects undertaken as a result of national economic development and those that risk the loss of drilling-rights due to non-development timelines. The Company continues to monitor international developments including Norway’s consideration of time-limited tax relief measures for oil and gas development, momentum in Brazil’s pre-salt offshore oil and gas projects and Middle Eastern offshore sour gas projects designed to meet domestic energy requirements. In addition, the Company is monitoring progress on a previously deferred major East African crude oil project which has re-bid potential as a result of recent changes in the development landscape.

As a result of the decreased demand and market dynamics, the Company will continue its efforts to adjust its pipe coating footprint to match market activity levels and exit certain North American and international locations and/or product lines which are not strategic over the longer term. The continued depression experienced in Western Canada in the first and second quarter is expected to continue as off-take capacity remains limited, there is no certainty of new pipeline infrastructure being built and lower commodity prices continue.

Composite Systems Segment

Market demand for the Company’s Composite Systems segment businesses are driven by North American drilling and completion activity, demand for international oil and gas gathering line applications, advanced materials in OCTG and underground storage and treatment tanks in fuel, water and wastewater and oil and gas. The segment benefits from a lower cost of ownership of composite systems versus steel and other materials, the development of larger diameter pipe applications and its international market qualifications. 

The composite pipe business was significantly impacted in the second quarter by the decline in drilling and completion activity across the customer base as operators reduced drill rigs and activity levels. Although the demand for the businesses core products is expected to remain low compared to historical levels, there is some recent positive momentum in order in-take that could signal the need to restart production in the near future which would lead to improved results for the segment. The Company also believes that the lower demand can be partially offset by the continued commercialization of larger diameter solutions, market share gains and development work on international projects.

Demand for composite storage tanks is delinked from the dynamics of oil and gas markets and is expected to remain strong throughout the balance of 2020 and as the Company executes on a historically high backlog and benefits from North American infrastructure spending. Fuel market demand is expected to remain strong as commercial and convenience store retailers realize the benefits of higher fuel margins. The demand for water storage and treatment tanks is expected to be supported by expected higher infrastructure spending and through its partnership with third-party parties to jointly develop complete product solutions for commercial and municipal water projects. The Company expects to deliver on its composite tank order backlog over the balance of the year with a focus on safe operations, productivity improvements and supply chain management.

Automotive and Industrial Segment

Demand for the Company’s Automotive and Industrial segment businesses generally follows GDP activity; however, the segment continues to be well positioned to capture the growing trend of electronic content in automobiles with specified sealing, insulating and customized application equipment systems for Tier 1 assembly customers and the expected increased spending on nuclear facility refurbishment.

Automotive demand is expected to be slow to return in North America and Europe and the recovery is expected to extend to later in the year as OEM assembly plants restart and operate at reduced capacity levels in the near term. The Company’s operations in China are expected to ramp-up as OEMs in the region return to full production, however volumes are expected to remain at pre-COVID-19 levels. The impact of extended automotive shutdowns depends on the geographic extent of those OEM’s affected and their capacity ramp-up throughout the course of the year. 

Industrial market demand for heat-shrink products is expected to have moderate recovery beginning later in the year, while demand for specialty wire and cable products is expected to remain steady with solid demand from electrical utilities and communications providers in eastern North America.

2.0  CONSOLIDATED INFORMATION AND RESULTS FROM OPERATIONS

2.1  Revenue

The following table sets forth revenue by reportable operating segment for the following periods:

  Three Months EndedSix Months Ended
   June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars) 2020  2019(b)  2020  2019(b) 
Pipeline and Pipe Services$156,305 $246,780 $336,792 $464,861 
Composite Systems 67,095  111,699  156,500  188,713 
Automotive and Industrial 43,160  54,178  93,013  109,101 
Elimination(a) (442) (868) (1,160) (1,308)
Consolidated revenue$266,118 $411,789 $585,145 $761,367 
(a) Represents the elimination of the inter-segment sales between the Pipeline and Pipe Services segment, the Composite Systems segment and the Automotive and Industrial segment.
(b) Restated to conform with current period presentation of segments.

Second Quarter 2020 versus Second Quarter 2019

Consolidated revenue decreased by $145.7 million, or 35%, from $411.8 million during the second quarter of 2019, to $266.1 million during the second quarter of 2020, reflecting revenue decreases of $90.5 million in the Pipeline and Pipe Services segment, $44.6 million in the Composite Systems segment and $11.0 million in the Automotive and Industrial segment. The decreases in all segments primarily reflect the impact of the global COVID-19 pandemic and the ongoing volatility in the energy markets.

In the Pipeline and Pipe Services segment, revenue in the second quarter of 2020 was $156.3 million, or 37% lower than in the second quarter of 2019, due to lower revenues in all regions. See Section 3.1 – Pipeline and Pipe Services Segment for additional disclosure on the segment.

In the Composite Systems segment, revenue was $44.6 million lower during the second quarter of 2020, compared to $111.7 million in the second quarter of 2019, primarily due to decreased demand for composite pipe products. See Section 3.2 – Composite Systems Segment for additional disclosure on the segment.

In the Automotive and Industrial segment, revenue was $11.0 million lower during the second quarter of 2020, compared to $54.2 million in the second quarter of 2019, primarily due to decreased demand for automotive products in all regions. See Section 3.3 – Automotive and Industrial Segment for additional disclosure on the segment.

Six Months ended June 30, 2020 versus Six Months ended June 30, 2019

Consolidated revenue decreased by $176.2 million, or 23%, from $761.4 million for the six month period ended June 30, 2019, to $585.2 million for the six month period ended June 30, 2020, reflecting revenue decreases of $128.1 million in the Pipeline and Pipe Services segment, $32.2 million in the Composite Systems segment and $16.1 million in the Automotive and Industrial segment.

In the Pipeline and Pipe Services segment, revenue in the six month period ended June 30, 2020 was $336.8 million, or 28% lower than in the six month period ended June 30, 2019, primarily due to lower revenues in North America, Latin America and the Europe, Middle East, Africa and Russia (“EMAR”) region, partially offset by higher revenue levels in Asia Pacific regions. See Section 3.1 – Pipeline and Pipe Services Segment for additional disclosure on the segment.

In the Composite Systems segment, revenue was $32.2 million lower in the six month period ended June 30, 2020, compared to $188.7 million in the six month period ended June 30, 2019, primarily due to decreased demand for composite pipe products, partially offset by the benefit related to the inclusion of a full quarter of revenues in the first quarter of 2020 related to the acquisition of ZCL business in April 2019. See Section 3.2 – Composite Systems Segment for additional disclosure on the segment.

In the Automotive and Industrial segment, revenue was $16.1 million lower in the six month period ended June 30, 2020, compared to $109.1 million in the six month period ended June 30, 2019, due to decreased activity levels in North America and EMAR, slightly offset by higher revenue in Asia Pacific region. See Section 3.3 – Automotive and Industrial Segment for additional disclosure on the segment.

2.2  Loss/Income from Operations ("Operating Loss/ Income")

The following table sets forth operating (loss) income and Adjusted EBITDA for the following periods:

  Three Months EndedSix Months Ended
   June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars, except percentages) 2020  2019  2020  2019 
Operating (loss)/income(a)$(36,165) $29,376 $(257,983) $37,010 
Operating margin(b) (13.6%)  7.1%  (44.1%)  4.9% 
          
Adjusted EBITDA(b)$4,256 $36,214 $10,460 $64,458 
Adjusted EBITDA margin(b) 1.6%  8.8%  1.8%  8.5% 
(a)Operating loss in the six month ended June 30, 2020 includes $17.3 million of restructuring costs and $203.1 million of impairment charge.
(b)Operating margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. Non-GAAP measures do not have a standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of these Non-GAAP measures.

In the first quarter of 2020, the Company conducted a review of its impairment testing on property, plant and equipment, intangible assets and goodwill due to the current uncertain business climate brought about by the global COVID-19 pandemic and the volatility in the energy markets. As a result of this review, the Company recorded impairment charges of $203.1 million due to the current market conditions for certain assets and the Company’s assessment of the related future demand and market recovery. The impairment charges included $143.6 million and $46.0 million on intangible assets and goodwill for Pipeline Performance Group (formerly Bredero Shaw) and Shawcor Inspection Services, respectively, and $13.4 million on assets at two U.S. land pipe coating facilities and certain assets related to large diameter products in its Composite Systems facility in Alberta.

Operating Income in the first six months of 2020 includes an additional quarter of income from the ZCL composite tank business as compared to the same period in 2019 as the acquisition of the ZCL business was completed in April 2019, which had a net positive impact on the first half of 2020 results.

In response to the current challenging business conditions, the Company also completed several cost reduction and cash preservation initiatives. As a result, a significant reduction of the salaried workforce and the shut down of certain facilities and branch offices in the second quarter, the Company recorded restructuring costs of $17.1 million in the period.

Second Quarter 2020 versus Second Quarter 2019

The second quarter of 2020 had an Operating Loss of $36.2 million, a decrease compared to the $29.4 million Operating Income in the second quarter of 2019. The decrease is primarily due to a $49.6 million decrease in gross profit, the negative impact of the $17.1 million restructuring costs in the current quarter and a $32.6 million gain on sale of land in the second quarter of 2019. This is partially offset by a decrease of $31.3 million in SG&A expenses and a decrease of $4.6 million in depreciation and amortization of intangible assets, property, plant, equipment and lease right-of-use (“ROU”) assets.

The $49.6 million decrease in gross profit resulted from the $145.7 million decrease in revenue, as explained above, and a 3.0 percentage point decrease in gross margin from the second quarter of 2019. The decrease in the gross margin percentage was primarily due to product and project mix, the decrease in revenue and the impact of lower utilization of facilities on the absorption of manufacturing overheads due to the impact of global COVID-19 pandemic and ongoing volatility in the energy markets.

SG&A expenses decreased by $31.3 million compared to the second quarter of 2019, primarily due to the completed cost control and headcount reduction initiatives that resulted in decreases of $9.5 million in compensation related costs (includes a $5.5 million reduction in incentive-based compensation), $3.6 million in travel and entertainment expenses and $1.6 million in provision costs. The current quarter also benefited from the receipt of COVID-19 related government subsidies of $7.5 million and the absence of non-recurring integration and acquisition costs related to the ZCL business in the current quarter compared to the $8.7 million incurred in the second quarter of 2019.

Adjusted EBITDA was $4.3 million in the second quarter of 2020 compared to $36.2 million in the second quarter of 2019. See Section 7.0 Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.

Six Months ended June 30, 2020 versus Six Months ended June 30, 2019

The first half of 2020 had an Operating Loss of $258.0 million, a significant decrease compared to the $37.0 million Operating Income in the first half of 2019. The decrease is primarily due to the negative impact of the $203.1 million impairment charge, a $62.5 million decrease in gross profit, $17.3 million in restructuring costs, additional $5.4 million in net foreign exchange losses and a $32.6 million gain on sale of land in the second quarter of 2019, partially offset by $25.3 million decrease in SG&A expenses.

The $62.5 million decrease in gross profit resulted from the $176.2 million decrease in revenue, as explained above, and a 2.2 percentage point decrease in the gross margin from the six month period of 2019. The decrease in the gross margin percentage was primarily due to product and project mix, the decrease in revenue and the impact of lower utilization of facilities on the absorption of manufacturing overheads primarily due to the impact of global COVID-19 pandemic and the volatility in the energy markets.

SG&A expenses decreased by $25.3 million compared to the first half of 2019, primarily due to the completed cost control and headcount reduction initiatives that resulted in decreases of $17.7 million in compensation related costs (includes a $12.7 million reduction in incentive-based compensation) and $4.2 million in travel and entertainment expenses. The current year-to-date period also benefited from the receipt of COVID-19 related government subsidies of $7.5 million in the second quarter and the absence of non-recurring integration and acquisition costs related to the ZCL business in the current period compared to the $9.3 million incurred in the prior year period. This was partially offset by the current period including an additional quarter of ongoing SG&A expenses of $5.6 million for the ZCL business as it was acquired in April 2019 and increases of $4.0 million of provisions and equipment expenses and $2.1 million of professional fees. 

Adjusted EBITDA was $10.5 million in the six month period ended June 30, 2020 compared to $64.5 million in the six month period ended June 30, 2019. See Section 7.0 Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.

2.3   Income from Investments in Associates

The following table sets forth the income from investments in associates for the following periods:

 Three Months Ended
Six Months Ended
  June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars) 2020  2019  2020  2019 
Income (Loss) from investments in associates$(72)$9,485 $92 $8,742 

The Company has equity-accounted investments in Zedi Inc. ("Zedi") and Power-Feed-Thru Systems and Connectors, LLC ("PFT"). In 2020, the Company received $8.9 million of proceeds pertaining to the partial redemption of the investment in Zedi in the first quarter. During the second quarter of 2019, Zedi disposed of its software and automation businesses which represented a substantial part of its operations and as a result, the Company received $29.2 million of proceeds and recorded a gain of $9.7 million.

3.0   SEGMENT INFORMATION
 
3.1  Pipeline and Pipe Services Segment

The following table sets forth, by geographic location, the revenue, Operating (Loss) Income and Adjusted EBITDA for the Pipeline and Pipe Services segment for the following periods:

  Three Months EndedSix Months Ended
   June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars, except percentages) 2020  2019(a)  2020  2019(a) 
North America$82,313 $137,795 $169,401 $260,408 
Latin America 6,215  24,301  26,277  52,754 
EMAR 45,110  76,528  102,674  132,969 
Asia Pacific 22,667  8,156  38,440  18,730 
Total revenue$156,305 $246,780 $336,792 $464,861 
              
Operating (Loss) Income(b)$(23,977) $31,496 $(239,650) $18,829 
Operating margin(c) (15.3%)  12.8%  (71.2%)  4.1% 
              
Adjusted EBITDA(c)$(3,128) $15,168 $(11,073) $17,690 
Adjusted EBITDA margin(c) (2.0%)  6.1%  (3.3%)  3.8% 
(a)Restated to conform with current period presentation of segments.
(b) Operating loss in the six month period ended June 30, 2020 includes $8.0 million restructuring costs and $193.3 million of impairment charges.
(c) Operating margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. Non-GAAP measures do not have a standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of these Non-GAAP measures.

Second Quarter 2020 versus Second Quarter 2019

Revenue in the second quarter of 2020 was $156.3 million, a decrease of $90.5 million, or 37%, from $246.8 million in the comparable period of 2019. This was primarily due to lower revenues in North America, Latin America and EMAR, partially offset by higher revenue in Asia Pacific:

  • North America revenue decreased by $55.5 million, or 40%, primarily as a result of lower activity levels for small and large diameter pipe coating and girth weld inspection services in the region, partially offset by higher revenue from engineering services.
     
  • Revenue in Latin America decreased by $18.1 million, or 74%, primarily due to lower activity levels in the Brazil and Argentina facilities and lower revenue from the Liza II project in Veracruz, Mexico facility compared to the prior year quarter.
     
  • In EMAR, revenue decreased by $31.4 million, or 41%, primarily due to lower activity levels at Ras Al Khaimah, UAE (“RAK”) facilities, the Leith, Scotland and Italy facilities and lower revenue from field joint coating projects in the region. This was partially offset by higher revenue levels at the Orkanger, Norway facility.
     
  • Revenue in Asia Pacific increased by $14.5 million, or 178%, mainly due to higher pipe coating project activity at the Kabil, Indonesia facility, partially offset by lower revenue from the Kuantan, Malaysia facility.

In the second quarter of 2020, the Operating Loss was $24.0 million, as compared to an Operating Income of $31.5 million in the second quarter of 2019. The decline reflects a $30.4 million decrease in gross profit and $7.8 million of restructuring costs, partially offset by a decrease of $12.3 million in SG&A, which includes $2.1 million of COVID-19 related government subsidies received in the second quarter, as explained in Section 2.2 above, and a decrease in depreciation and amortization of $3.3 million. The second quarter of 2019 included a gain on sale of land of $32.5 million. The decrease in the gross profit was primarily due to the lower revenue, as explained above, and a 3.0 percentage point decrease in gross margin. The decrease in the gross margin percentage was primarily due to product and project mix, lower utilization in North America, Latin America and EMAR facilities and the related impact on the absorption of manufacturing overheads.

Adjusted EBITDA in the second quarter of 2020 was negative $3.1 million compared to positive $15.2 million in the second quarter of 2019. See Section 7.0 Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.

Six Months ended June 30, 2020 versus Six Months ended June 30, 2019

Revenue in the first half of 2020 was $336.8 million, a decrease of 128.1 million, or 28%, from $464.9 million in the comparable period of 2019. This was primarily due to lower revenues in North America, Latin America and EMAR, partially offset by higher revenue in Asia Pacific:

  • North America revenue decreased by $91.0 million, or 35%, primarily as a result of lower activity levels for small and large diameter pipe coating and girth weld inspection services in the region, partially offset by higher revenue from engineering services. The first half of 2020 was also negatively impacted by the delay of revenue in the first quarter caused by the execution of work to address the fourth quarter 2019 service quality event at the Channelview, Texas facility.
     
  • Revenue in Latin America decreased by $26.5 million, or 50%, primarily due to lower activity levels in Brazil and Argentina, partially offset by higher revenues from the Liza II project in the Veracruz, Mexico facility compared to the first half of the prior year.
     
  • In EMAR, revenue decreased by $30.3 million, or 23%, primarily due to lower revenue levels at the Leith, Scotland and Italy facilities, partially offset by higher activity levels at the Orkanger, Norway and RAK facilities and higher revenue from field joint coating projects in the region.
     
  • Revenue in Asia Pacific increased by $19.7 million, or 105%, mainly due to higher pipe coating project activity at the Kabil, Indonesia facility, partially offset by lower revenue from the Kuantan, Malaysia facility.

In the first half of 2020, Operating Loss was $239.7 million compared to Operating Income of $18.8 million in the comparable prior year period. The decrease reflects the negative impact of the $193.3 million impairment charge recorded, $8.0 million of restructuring costs and a $38.2 million decrease in gross profit, which were partially offset by a decrease of $10.2 million in SG&A expenses, which includes $2.1 million of COVID-19 related government subsidies received in the second quarter, as explained in Section 2.2 above, and a decrease in depreciation and amortization of $4.1 million. The second quarter of 2019 included a gain on sale of land of $32.5 million. The decrease in the gross profit was primarily due to the lower revenue, as explained above, and a 1.3 percentage point decrease in gross margin. The decrease in the gross margin percentage was primarily due to product and project mix, lower utilization in North America and Latin America facilities and the related impact on the absorption of manufacturing overheads.

Adjusted EBITDA in the first half of 2020 was negative $11.1 million compared to positive $17.7 million in the first half of 2019. See Section 7.0 Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.

3.2  Composite Systems Segment

The following table sets forth, by geographic location, the revenue, Operating (Loss) Income and Adjusted EBITDA for the Composite Systems segment for the following periods:

  Three Months EndedSix Months Ended
   June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars, except percentages) 2020  2019(a)  2020  2019(a) 
North America$65,884 $107,791 $153,829 $182,967 
Latin America 774  1,952  1,837  3,302 
EMAR 374  1,158  771  1,158 
Asia Pacific 63  798  63  1,286 
Total revenue$67,095 $111,699 $156,500 $188,713 
              
Operating (Loss) Income(b)$(4,356) $2,072 $(12,325) $19,292 
Operating margin(c) (6.5%)  1.9%  (7.9%)  10.2% 
              
Adjusted EBITDA(c)$7,710 $19,093 $18,122 $40,304 
Adjusted EBITDA margin(c) 11.5%  17.1 %  11.6%  21.4 % 
(a)Restated to conform with current period presentation of segments.
(b)Operating loss in the six month period ended June 30, 2020 includes $3.8 million of restructuring costs and $9.8 million of impairment charges.
(c)Operating margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. Non-GAAP measures do not have a standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of these Non-GAAP measures.

Second Quarter 2020 versus Second Quarter 2019

Revenue in the second quarter of 2020 decreased by $44.6 million, or 40%, compared to the second quarter of 2019, primarily due to the negative impact of global COVID-19 pandemic and the volatility in the energy markets. North America revenue decreased by $41.9 million, or 39%, primarily due to lower demand for composite pipe products which resulted from the continued capital discipline focus of exploration and production operators and low oil and gas prices. In addition, tubular management service activity levels in Western Canada remain depressed. This was partially offset by higher revenues in the composite tank business as retail fuel demand remains strong.

Operating Loss in the second quarter of 2020 was $4.4 million compared to an Operating Income of $2.1 million in the second quarter of 2019. The decrease reflects the negative impact of the $3.8 million restructuring costs and a $13.5 million decrease in gross profit, partially offset by a decrease of $8.6 million in SG&A expenses, which includes $2.7 million of COVID-19 related government subsidies received in the second quarter, as explained in Section 2.2 above. The decrease in gross profit was primarily due to the decrease in revenue, as explained above, and a 1.1 percentage point decrease in gross margin. The decrease in the gross margin was primarily driven by the lower utilization in the composite pipe facilities and the related impact on the absorption of manufacturing overheads, partially offset by higher margins in the composite tank business due to higher plant utilization and process improvements.

Adjusted EBITDA in the second quarter of 2020 was $7.7 million compared to $19.1 million in the second quarter of 2019. See Section 7.0 Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.

Six Months ended June 30, 2020 versus Six Months ended June 30, 2019

Revenue in the first half of 2020 decreased by $32.2 million, or 17%, compared to the first half of 2019, primarily due to the negative impact of the ongoing global COVID-19 pandemic and the volatility in the energy markets. North America revenue decreased by $29.1 million, or 16%, primarily due to lower demand level in composite pipe products, attributed to the capital discipline focus of exploration and production operators and low oil and gas prices. In addition, tubular management service activity levels were lower in Western Canada. These decreases were partially offset by the increased revenue in the composite tank business from continued strong demand in the retail fuel market. In addition, the current year-to-date period includes an additional quarter of revenues from the ZCL business which was acquired in April 2019.

Operating Loss in the first half of 2020 was $12.3 million compared to an Operating Income of $19.3 million in the first half of 2019. The operating results for the current period include an additional quarter of operating income from the composite tank business as the ZCL business was acquired in April 2019. The decrease reflects the negative impact of the $3.8 million restructuring costs, the $9.8 million impairment charge recorded in the first quarter of this year and a $17.2 million decrease in gross profit partially offset by a decrease of $1.2 million in SG&A expenses, as explained in Section 2.2 above. The decrease in gross profit was primarily due to the decrease in revenue, as explained above, and a 4.2 percentage point decrease in gross margin. The decrease in the gross margin was primarily due to lower utilization in the composite pipe facility and the related impact on the absorption of manufacturing overheads partially offset by higher margins in the composite tank business due to higher plant utilization and process improvements. The decrease in SG&A expenses reflects reduced costs as result of restructuring initiatives completed, the absence of non-recurring integration and acquisition costs related to the ZCL business in the current period compared to the $3.8 million incurred in the prior year period and $2.7 million of COVID-19 related government subsidies received in the second quarter. This was partially offset by the current period including an additional quarter of ongoing SG&A expenses of $5.6 million for the ZCL business as it was acquired in April 2019.

Adjusted EBITDA in the first half of 2020 was $18.1 million compared to $40.3 million in the first half of 2019. See Section 7.0 Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.

3.3  Automotive and Industrial Segment

The following table sets forth, by geographic location, the revenue, Operating (Loss) Income and operating margin for the Automotive and Industrial segment for the following periods:

  Three Months EndedSix Months Ended
   June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars, except percentages) 2020  2019  2020  2019 
North America$30,006 $31,866 $59,939 $63,521 
EMAR 9,988  19,759  28,132  40,655 
Asia Pacific 3,166  2,553  4,942  4,925 
Total revenue$43,160 $54,178 $93,013 $109,101 
              
Operating (Loss) Income(a)$(124) $8,472 $7,473 $17,821 
Operating margin(b) (0.3%)  15.6%  8.0%  16.3% 
              
Adjusted EBITDA(b)$5,290 $9,621 $14,009 $20,046 
Adjusted EBITDA margin(a) 12.3%  17.8%  15.1%  18.4% 
(a)Operating loss in current period includes $4.2 million of restructuring costs.
(b)Operating margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. Non-GAAP measures do not have a standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures provided by other companies. See Section 7.0 – Reconciliation of Non-GAAP Measures for further details and a reconciliation of these Non-GAAP measures.

Second Quarter 2020 versus Second Quarter 2019

Revenue in the second quarter of 2020 decreased by $11.0 million, or 20%, compared to the second quarter of 2019, due to lower demand for heat shrink tubing products in the automotive sector across all regions, partially offset by higher shipments for wire and cable products in North America. The decline in the automotive sector reflects that a majority of global automotive OEM assembly plants temporarily halted production and suspended operations late in the first quarter which continued for much of the second quarter as a result of COVID-19.

Operating Loss in the second quarter of 2020 was $0.1 million compared to an Operating Income of $8.5 million in the second quarter of 2019. The decrease in Operating Income was primarily due to the negative impact of $4.2 million in restructuring costs and a decrease in gross profit of $5.8 million, partially offset by a decrease of $1.4 million in SG&A expenses, which includes $0.7 million of COVID-19 related government subsidies received in the second quarter, as explained in Section 2.2 above. The decrease in gross profit was primarily due to the decrease in revenue, as explained above, and a 6.1 percentage point decrease in gross margin. The decrease in gross margin was primarily due to product mix and lower plant utilization and the related impact on the absorption of manufacturing overheads.

Adjusted EBITDA in the second quarter of 2020 was $5.3 million compared to $9.6 million in the second quarter of 2019. See Section 7.0 Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.

Six Months ended June 30, 2020 versus Six Months ended June 30, 2019

Revenue in the first half of 2020 decreased by $16.1 million, or 15%, compared to the first half of 2019, due to lower demand for heat shrink tubing products in the automotive sector across all regions, partially offset by higher shipments for wire and cable products in North America. The decline in the automotive sector reflects that a majority of global automotive OEM assembly plants temporarily halted production and suspended operations late in the first quarter which continued for much of the second quarter as a result of COVID-19.

Operating Income in the first half of 2020 was $7.5 million, lower compared to $17.8 million in the first half of 2019. The decrease in Operating Income was primarily due to the negative impact of $4.2 million in restructuring costs and a decrease in gross profit of $7.1 million, partially offset by a decrease of $1.1 million in SG&A expenses, which includes $0.7 million of COVID-19 related government subsidies received in the second quarter, as explained in Section 2.2 above. The decrease in gross profit was primarily due to the decrease in revenue, as explained above, and a 2.7 percentage point decrease in gross margin. The decrease in gross margin was primarily due to due to product mix, lower plant utilization and the related impact on the absorption of manufacturing overheads.

Adjusted EBITDA in the first half of 2020 was $14.0 million compared to $20.1 million in the first half of 2019. See Section 7.0 Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.

3.4    Financial and Corporate

Financial and corporate costs include corporate expenses not allocated to the operating segments and other non-operating items, including foreign exchange gains and losses on foreign currency denominated cash and working capital balances. The corporate division of the Company only earns revenue that is considered incidental to the activities of the Company. As a result, it does not meet the definition of a reportable operating segment as defined under IFRS.

The following table sets forth the Company’s unallocated financial and corporate expenses for the following periods:

 Three Months EndedSix Months Ended
  June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars) 2020  2019  2020  2019 
Financial and corporate expenses$(7,708)$(12,664)$(13,481)$(18,932)

Second Quarter 2020 versus Second Quarter 2019

Financial and corporate costs in the second quarter of 2020 were $7.7 million compared to $12.7 million in the second quarter of 2019. The decrease was primarily due to the absence of non-recurring acquisition costs related to the ZCL business in the current quarter compared to the $5.0 million incurred in the prior year quarter. The second quarter also reflects a $1.8 million decrease in incentive-based compensation costs, partially offset by $2.0 million of COVID-19 related government subsidies received in the second quarter, increases of $2.2 million in foreign exchange losses and $1.2 million in restructuring costs.

Six Months ended June 30, 2020 versus Six Months ended June 30, 2019

Financial and corporate costs in the first half of 2020 were $13.5 million compared to $18.9 million in the first half of 2019. The decrease was primarily due to the absence of non-recurring acquisition costs related to the ZCL business in the current quarter compared to the $5.0 million incurred in the prior year quarter. The second quarter also reflects a $7.8 million decrease in incentive-based compensation costs, partially offset by increases of $5.4 million in foreign exchange losses and $1.2 million in restructuring costs and $2.0 million of COVID-19 related government subsidies received in the second quarter.

4.0     LIQUIDITY AND CAPITALIZATION

As at June 30, 2020, the Company had cash and cash equivalents totalling $103.7 million (December 31, 2019 – $98.2 million) and had unutilized lines of credit available to use of $296.7 million (December 31, 2019 – $275.6 million).

The effects of the COVID-19 pandemic and the rapid decline in oil prices has adversely impacted demand for the Company’s products and services and its operating results, financial position and access to sources of liquidity. With the uncertainty about the extent and depth of the market contraction and its impact on financial results, the Company turned its focus in the second quarter on the reduction of costs and cash preservation to protect its balance sheet. As communicated in April 2020, the Company targeted $60 million in sustainable annualized SG&A savings and $40 million in incremental cash generation. The Company has made significant progress to date on these targets by reducing CEO, executive and Board compensation, reducing the salaried workforce levels by over 15%, optimizing its footprint with the closure of four North American pipe coating facilities and several branch offices and making significant cuts to other operating costs and capital budgets. As a result of these efforts the Company is on track to meet its goal of a quarterly normalized SG&A run rate of $70 million. During the second quarter, the Company also delivered positive cash flow of $35 million from reduced working capital, excluding the impact of increased restructuring liabilities, and $1.6 million from proceeds of asset sales. Based on these actions completed and planned, its diversified business and current backlog, the Company expects to generate sufficient cash flows to fund its operations, working capital requirements and capital program. 

Prior to June 30, 2020, the Company had obtained from its banking syndicate a waiver of compliance with the leverage and interest coverage ratios under the Credit Facility for its second quarter ending June 30, 2020 should the Company be in default thereof. The waiver was conditional on the completion of the renegotiation of the Credit Facility prior to a specific date. Due to the conditionality of the waiver, the Company did not have the unconditional right to defer the repayment of the debt beyond twelve months. As such, the outstanding balance was required to be presented as a current liability under International Financial Reporting Standards (“IFRS”). Subsequent to the quarter end, the Company successfully negotiated an amending agreement with its banking syndicate prior to the expiry of the conditional waiver, that provides covenant relief through December 2021. As of July 29, 2020, the date of completion of the amendments to the Credit Facility, the Credit Facility debt would be presented as a non-current liability and unutilized capacity would be available if the Company was in compliance with the covenants as stated in the amending agreement.

5.0   FORWARD-LOOKING INFORMATION

This document includes certain statements that reflect management’s expectations and objectives for the Company’s future performance, opportunities and growth, which statements constitute "forward-looking information" and "forward-looking statements" (collectively "forward-looking information") under applicable securities laws. Such statements, other than statements of historical fact, are predictive in nature or depend on future events or conditions. Forward-looking information involves estimates, assumptions, judgements and uncertainties. These statements may be identified by the use of forward-looking terminology such as "may", "will", "should", "anticipate", "expect", "believe", "predict", "estimate", "continue", "intend", "plan" and variations of these words or other similar expressions. Specifically, this document includes forward-looking information in the Outlook Section and elsewhere in respect of, among other things, the impact and duration of the global COVID-19 pandemic and the related impacts on the Company’s operations and the global supply and demand of oil and gas, the completion of restructuring initiatives and cost controls and the levels of cost savings and cash generation to be achieved thereby, the achievement of its anticipated quarterly normalized SG&A, the future outlook for capital expenditures in the offshore oil and gas sector and US land drilling and completion activity, the demand for its products in retail fuel, automotive and industrial markets, the level of financial performance for the balance of 2020, the effect of the Company’s diversified portfolio of products on revenue and operating income, the demand for the Company’s products in the Pipeline and Pipe Services, Composite Systems and the Automotive and Industrial segments of the Company’s business, the expected development of the Company’s order backlog and the impact thereof on the Company’s revenue and operating income, including the award of contracts on outstanding bids, the impact of global economic activity on the demand for the Company's products, the impact of continuing demand for oil and gas, the impact of global oil and gas commodity prices, the impact of changing energy demand, supply and prices and the impact and likelihood of changes in competitive conditions in the markets in which the Company participates, the execution of definitive contracts for and the timing to complete certain pipe coating projects, the likelihood that projects will be sanctioned in the future, and the impact thereof on the Company’s business, the ability of the Company to fund its operating and capital requirements and the ability of the Company to satisfy its debt covenants.

Forward-looking information involves known and unknown risks and uncertainties that could cause actual results to differ materially from those predicted by the forward-looking information. We caution readers not to place undue reliance on forward-looking information as a number of factors could cause actual events, results and prospects to differ materially from those expressed in or implied by the forward-looking information. Significant risks facing the Company include, but are not limited to: the duration and the impact of the COVID-19 pandemic on the Company, its employees, customers, suppliers, energy and commodity markets and on the global economy, the impact on the Company of changes in the strategy by U.S. oil and gas operators to heighten focus on capital discipline and shareholder returns, the impact on the Company of reduced demand for its products and services, including the delay, suspension or cancellation of existing and anticipated contracts, as a result of lower investment in global oil and gas extraction, infrastructure and transportation activity following the previous declines in the global price of oil and gas, long term changes in global or regional economic activity and changes in energy supply and demand, which with other factors, impact on the level of global pipeline infrastructure construction; exposure to product and other liability claims; shortages of or significant increases in the prices of raw materials used by the Company; compliance with environmental, trade and other laws; political, economic and other risks arising from the Company’s international operations; the impact of climate change on the demand for the Company’s products and fluctuations in foreign exchange rates, as well as other risks and uncertainties described herein under "Risks and Uncertainties" and in the Company’s annual MD&A and in the Company’s Annual Information Form under "Risk Factors".

These statements of forward-looking information are based on assumptions, estimates and analysis made by management in light of its experience and perception of trends, current conditions and expected developments as well as other factors believed to be reasonable and relevant in the circumstances. These assumptions include those in respect of the continuation of the lifting of COVID 19 restrictions and the impact thereof on global economic activity, global oil and gas prices, the delay in the near term of certain projects and the likelihood of projects tied to securing long-term domestic energy supply or drilling rights being sanctioned, the recommencement of increased capital expenditures in the global offshore oil and gas segment, the commencement of recovery of the global economy, no growth in Western Canada and gradual improvement over the balance of the year in U.S. land markets, softening demand in the automotive market, particularly in North America and Europe, solid demand in the retail fuel market and stable demand in the industrial markets, the Company’s ability to execute projects under contract, the continued supply of and stable pricing for commodities used by the Company, the availability of personnel resources sufficient for the Company to operate its businesses, the maintenance of operations in major oil and gas producing regions, the adequacy of the Company’s existing accruals in respect of environmental compliance and in respect of litigation and tax matters and other claims generally, and the level of payments under the Company's performance, bid and surety bonds and the ability of the Company to satisfy all covenants under the Credit Facility and having sufficient liquidity to fund its obligations and planned initiatives. The Company believes that the expectations reflected in the forward-looking information are based on reasonable assumptions in light of currently available information. However, should one or more risks materialize, or should any assumptions prove incorrect, then actual results could vary materially from those expressed or implied in the forward-looking information included in this document and the Company can give no assurance that such expectations will be achieved.

When considering the forward-looking information in making decisions with respect to the Company, readers should carefully consider the foregoing factors and other uncertainties and potential events. The Company does not assume the obligation to revise or update forward-looking information after the date of this document or to revise it to reflect the occurrence of future unanticipated events, except as may be required under applicable securities laws.

To the extent any forward-looking information in this document constitutes future oriented financial information or financial outlooks, within the meaning of securities laws, such information is being provided to demonstrate the potential of the Company and readers are cautioned that this information may not be appropriate for any other purpose. Future oriented financial information and financial outlooks, as with forward-looking information generally, are based on the assumptions and subject to the risks noted above.

6.0    CONFERENCE CALL AND ADDITIONAL INFORMATION

Shawcor will be hosting a Shareholder and Analyst Conference Call and Webcast on Friday, August 7th, 2020 at 9:00 AM ET, which will discuss the Company’s Second Quarter 2020 Financial Results. To participate via telephone, please dial 1-877-776-4039 or 1-315-625-6955. Conference Call ID: 1982005. Web PIN: 8396; Alternatively, please go to the following website address to participate via webcast: https://edge.media-server.com/mmc/p/mpfxdw8d 

The Company’s second quarter MD&A and financial statements are available on Shawcor’s website at www.shawcor.com.

Additional information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com.

For further information, please contact:

Paul Pierroz
Senior Vice President, Corporate & Investor Relations
Telephone: 416.744.5540
E-mail: paul.pierroz@shawcor.com 

Source: Shawcor Ltd.
Shawcor.ER

Shawcor Ltd.
Interim Consolidated Balance Sheets (Unaudited)

  June 30,  December 31,
(in thousands of Canadian dollars) 2020  2019
     
ASSETS    
     
Current Assets    
Cash and cash equivalents$103,721 $98,218
Loans receivable   712
Accounts receivable 208,309  246,745
Contract assets  48,270  41,616
Income taxes receivable 18,067  33,493
Inventory 174,558  160,792
Prepaid expenses 13,843  17,560
Derivative financial instruments 52  177
Total current assets 566,820  599,313
     
Non-current Assets    
Property, plant and equipment 401,519  420,027
Right-of-use assets 85,098  84,269
Intangible assets 223,929  271,514
Investments in associates 6,611  15,400
Deferred income tax assets 32,937  37,462
Other assets 4,912  5,396
Goodwill 245,836  377,704
Total non-current assets 1,000,842  1,211,772
TOTAL ASSETS$1,567,662 $1,811,085
     
LIABILITIES AND EQUITY    
     
Current Liabilities    
Bank indebtedness *$435,079 $
Accounts payable and accrued liabilities 180,898  177,452
Provisions  20,476  25,694
Income taxes payable 15,772  18,918
Derivative financial instruments 459  330
Contract liabilities 56,998  43,693
Lease liabilities 21,871  21,461
Other liabilities 4,568  9,518
Total current liabilities 736,121  297,066
     
Non-current Liabilities    
Long-term debt   435,462
Lease liabilities 68,111  67,768
Provisions  20,759  20,477
Employee future benefits 16,775  15,390
Deferred income tax liabilities 11,737  19,306
Other liabilities 3,596  5,669
Total non-current liabilities 120,978  564,072
Total liabilities 857,099  861,138
     
Equity    
Share capital 718,873  710,563
Contributed surplus 25,881  32,615
Retained (deficit) earnings (89,197) 193,027
Non-controlling interests 4,395  4,647
Accumulated other comprehensive income 50,611  9,095
Total equity   710,563  949,947
TOTAL LIABILITIES AND EQUITY$1,567,662 $1,811,085

* As of July 29, 2020, this bank indebtedness will be classified as a non-current liability.


Shawcor Ltd.
Interim Consolidated Statements of (Loss) Income (Unaudited)

  Three Months Ended
June 30,

  Six Months Ended
June 30,

(in thousands of Canadian dollars, except per share amounts) 2020  2019  2020  2019 
             
Revenue            
Sale of products$117,829 $179,881 $264,947 $318,126 
Rendering of services 148,289  231,908  320,198  443,241 
  266,118  411,789  585,145  761,367 
             
Cost of Goods Sold and Services Rendered 198,342  294,369  432,064  545,743 
             
Gross Profit 67,776  117,420  153,081  215,624 
             
Selling, general and administrative expenses 56,882  88,213  130,771  156,090 
Research and development expenses 3,390  3,385  6,797  6,695 
Foreign exchange losses (gains) 3,219  1,051  5,180  (174)
Depreciation and amortization 23,356  28,003  47,932  48,611 
Gain on sale of land   (32,608)   (32,608)
Impairment     203,084   
Restructuring costs 17,094    17,300   
(Loss) Income from Operations (36,165) 29,376  (257,983) 37,010 
             
(Loss) income from investments in associates (72) 9,485  92  8,742 
Finance costs, net (5,186) (5,483) (11,395) (8,940)
Cost associated with repayment of long-term debt and credit facilities       (12,308)
Net monetary loss (370) (1,236) (855) (1,887)
(Loss) Income before Income Taxes (41,793) 32,142  (270,141) 22,617 
             
Income tax (recovery) expense (4,904) (18,750) 1,827  (19,354)
             
Net (Loss) Income$(36,889)$50,892 $(271,968)$41,971 
             
Net (Loss) Income Attributable to:            
Shareholders of the Company$(36,775)$51,044 $(271,678)$41,970 
Non-controlling interests (114) (152) (290) 1 
Net (Loss) Income$(36,889)$50,892 $(271,968)$41,971 
             
(Loss) Earnings per Share            
Basic$(0.52)$0.73 $(3.86)$0.60 
Diluted$(0.52)$0.73 $(3.86)$0.60 
             
Weighted Average Number of Shares Outstanding (000s)            
Basic 70,409  70,140  70,308  70,130 
Diluted 70,409  70,398  70,308  70,389 


Shawcor Ltd.
Interim Consolidated Statements of Cash Flows
(Unaudited)


(in thousands of Canadian dollars)
 Three Months Ended
June 30,
 Six Months Ended
June 30,
  2020  2019  2020  2019 
Operating Activities        
Net (loss) income$(36,889)$50,892 $(271,968)$41,971 
Add (deduct) items not affecting cash        
Depreciation and amortization 23,356  28,003  47,932  48,611 
Impairment     203,084   
Impact of Inventory revaluation adjustment   3,388    3,388 
Interest expense on right-of-use assets leases 964  830  1,956  1,560 
Share-based compensation and incentive-based compensation(1,165) 4,304  (2,936) 9,805 
Deferred income taxes(5,033) (21,324) (1,006) (24,086)
Gain on disposal of property, plant and equipment(407) (33) (516) (313)
Gain on sale of land   (32,608)   (32,608)
Unrealized loss on derivative financial instruments 928  205  254  1,305 
Loss (Income) from investments in associates 72  (9,485) (92) (8,742)
Other (1,258) (5,628) (4,643) (3,746)
Change in non-cash working capital and foreign exchange46,041  (39,486) 54,653  (40,142)
Cash Provided by (Used in) Operating Activities$26,609 $(20,942)$26,718 $(2,997)
         
Investing Activities        
Decrease in loans receivable 325  575  748  1,212 
Decrease in short-term investments   5,148    2,046 
Purchase of property, plant and equipment (3,738) (9,115) (13,613) (24,551)
Proceeds on disposal of property, plant and equipment 1,629  40,278  1,816  40,671 
Decrease in other assets 277  135  407  238 
Proceeds from redemption of investments in associate   29,171  8,878  29,171 
Business acquisition net of cash acquired   (291,477)   (291,477)
Cash Used in Investing Activities (1,507) (225,285) (1,764) (242,690)
         
Financing Activities        
(Decrease) increase in bank indebtedness and long-term debt (585) 286,392  (882) 187,085 
Repayment of lease liabilities (5,125) (5,193) (11,138) (13,439)
Issuance of shares   1    357 
Dividends paid to shareholders   (10,520) (10,546) (21,040)
Cash (Used in) Provided by Financing Activities$(5,710)$270,680 $(22,566)$152,963 
         
Effect of Foreign Exchange on Cash and Cash Equivalents(2,014) 59  3,115  (2,130)
         
Net increase (decrease) in Cash and Cash Equivalents17,378  24,512  5,503  (94,854)
Cash and Cash Equivalents - Beginning of Period 86,343  97,898  98,218  217,264 
         
Cash and Cash Equivalents - End of Period$103,721 $122,410 $103,721 $122,410 

7.0   RECONCILIATION OF NON-GAAP MEASURES

The Company reports on certain non-GAAP measures that are used to evaluate its performance and segments, as well as to determine compliance with debt covenants and to manage its capital structure. These non-GAAP measures do not have standardized meanings under IFRS and are not necessarily comparable to similar measures provided by other companies. The Company discloses these measures because it believes that they provide further information and assist readers in understanding the results of the Company’s operations and financial position. These measures should not be considered in isolation or used in substitution for other measures of performance prepared in accordance with GAAP. The following is a reconciliation of the non-GAAP measures reported by the Company.

EBITDA and Adjusted EBITDA

EBITDA is a non-GAAP measure defined as earnings before interest, income taxes, depreciation and amortization. Adjusted EBITDA is also a non-GAAP measure defined as EBITDA adjusted for items which do not impact day to day operations. Adjusted EBITDA is calculated by adding back to EBITDA the sum of impairments, costs associated with repayment of long-term debt and credit facilities, gain on sale of land, gain on sale of investment in associates, acquisition costs, restructuring costs and hyperinflationary adjustments. The Company believes that EBITDA and Adjusted EBITDA are useful supplemental measures that provide a meaningful indication of the Company’s results from principal business activities prior to the consideration of how these activities are financed or the tax impacts in various jurisdictions and for comparing its operating performance with the performance of other companies that have different financing, capital or tax structures. The Company presents Adjusted EBITDA as a measure of EBITDA that excludes the impact of transactions that are outside the Company’s normal course of business or day to day operations. Adjusted EBITDA is used by many analysts in the oil and gas industry as one of several important analytical tools to evaluate financial performance and is a key metric in business valuations. It is also considered important by lenders to the Company and is included in the financial covenants of the Company’s Credit Facility.

 Three Months Ended Six Months Ended
  June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars) 2020  2019  2020  2019 
         
Net (Loss) Income$(36,889)$50,892 $(271,968)$41,971 
         
Add:        
Income tax (recovery) expense (4,904) (18,750) 1,827  (19,354)
Finance costs, net 5,186  5,483  11,395  8,940 
Amortization of property, plant, equipment, intangible and ROU assets 23,356  28,003  47,932  48,611 
Cost associated with repayment of long-term debt and credit facilities       12,308 
EBITDA$(13,251)$65,628 $(210,814)$92,476 
ZCL acquisition costs and other related items   12,132    12,683 
Hyperinflation adjustment for Argentina 413  749  890  1,594 
Gain on sale of land   (32,608)   (32,608)
Gain on redemption of investment in associate   (9,687)   (9,687)
Impairment     203,084   
Restructuring costs 17,094    17,300   
Adjusted EBITDA$4,256 $36,214 $10,460 $64,458 

Pipeline and Pipe Services Segment

 Three Months Ended Six Months Ended
  June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars) 2020  2019  2020  2019 
         
Operating (Loss) Income$(23,977)$31,496 $(239,650)$18,829 
         
Add:        
Amortization of property, plant, equipment, intangible and ROU assets 13,141  16,443  27,388  31,527 
EBITDA$(10,836)$47,939 $(212,262)$50,356 
Hyperinflation adjustment for Argentina (117) (219) (80) (114)
Gain on sale of land   (32,552)   (32,552)
Impairment     193,256   
Restructuring costs 7,825    8,013   
Adjusted EBITDA$(3,128)$15,168 $(11,073)$17,690 

Composite Systems Segment

 Three Months Ended Six Months Ended
  June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars) 2020  2019  2020  2019 
         
Operating (Loss) Income$(4,356)$2,072 $(12,325)$19,292 
         
Add:        
Amortization of property, plant, equipment, intangible and ROU assets 8,246  9,905  16,783  13,896 
EBITDA$3,890 $11,977 $4,458 $33,188 
ZCL acquisition costs and other related items   7,172    7,172 
Gain on sale of land   (56)   (56)
Impairment     9,828   
Restructuring costs 3,820    3,836   
Adjusted EBITDA$7,710 $19,093 $18,122 $40,304 

Automotive and Industrial Segment

 Three Months Ended Six Months Ended
  June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars) 2020  2019  2020  2019 
            
Operating (Loss) Income$(124)$8,472 $7,473 $17,821 
            
Add:           
Amortization of property, plant, equipment, intangible and ROU assets 1,188  1,149  2,308  2,225 
EBITDA$1,064 $9,621 $9,781 $20,046 
Restructuring costs 4,226    4,228   
Adjusted EBITDA$5,290 $9,621 $14,009 $20,046 

Adjusted Net (Loss) Income and Adjusted EPS

Adjusted net (loss) income is a non-GAAP measure defined as net income before acquisition-related and integration items, including transaction costs and financing fees; cost reduction and integration related initiatives such as separation benefits, retention payments, other exit costs, impact of inventory revaluation adjustment and certain costs associated with integrating an acquired company’s operations; gains or losses from early termination of debt and hedging activities; gains and losses on the disposal of land; gain on redemption of investment in associate; asset impairment charges; restructuring cost; hyperinflation adjustment for Argentina and the tax effect of the pre-tax adjustments above at applicable tax rates and certain other tax items. We define adjusted EPS as adjusted net (loss) income attributable to shareholders divided by the weighted average number of shares and the weighted average number of diluted shares.

 Three Months Ended Six Months Ended
  June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars) 2020  2019  2020  2019 
         
Net (Loss) Income$(36,889)$50,892 $(271,968)$41,971 
         
Add:        
ZCL acquisition costs and other related items   12,132    12,683 
Hyperinflation adjustment for Argentina 915  1,597  2,073  3,196 
Cost associated with repayment of long-term debt and credit facilities       12,308 
Gain on sale of land   (32,608)   (32,608)
Gain on redemption of investment in associate   (9,687)   (9,687)
Restructuring costs 17,094    17,300   
Impairment     203,084   
Tax effect of the above adjustments (3,179) (3,541) (5,580) (5,652)
Adjusted Net (Loss) Income$(22,059)$18,785 $(55,091)$22,211 
Adjusted Net (Loss) Income Attributable to Shareholders$(21,945)$18,937 $(54,801)$22,210 
Adjusted EPS        
Basic$(0.31)$0.27 $(0.78)$0.32 
Diluted$(0.31)$ 0.27 $(0.78)$ 0.32 

Operating Margin/Adjusted Operating Margin

Operating margin/adjusted operating margin are defined as operating (loss) income divided by revenue and are non-GAAP measures. The Company believes that operating margin and adjusted operating margin are useful supplemental measures that provide meaningful assessment of the business performance of the Company and its Operating Segments. The Company uses these measures as key indicators of financial performance, operating efficiency and cost control based on volume of business generated.

Adjusted Operating (Loss) Income

Adjusted Operating (Loss) Income is a non-GAAP measure calculated by adding back to Operating (loss) income the sum of gain from sale of land, ZCL acquisition costs and other related items, restructuring cost, impairment and hyperinflationary adjustments. Adjusted Operating (Loss) Income does not have a standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures provided by other companies.

The following table sets forth the Company’s Adjusted Operating (Loss) Income:

 Three Months Ended Six Months Ended
  June 30,  June 30,  June 30,  June 30, 
(in thousands of Canadian dollars) 2020  2019  2020  2019 
         
(Loss) Income from operation $(36,165)$29,376 $(257,983)$37,010 
         
Add:        
ZCL acquisition costs and other related items   12,132    12,683 
Hyperinflation adjustment for Argentina 535  402  1,211  1,329 
Gain on sale of land   (32,608)   (32,608)
Restructuring costs 17,094    17,300   
Impairment     203,084   
Adjusted Operating (Loss) Income$(18,536)$9,302 $(36,388)$18,414 

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