First quarter 2020 revenue was $319 million, 9% lower than the $350 million reported in the first quarter of 2019.
Adjusted EBITDA1 in the first quarter of 2020 was $6 million, 78% lower than the $28 million reported in the first quarter of 2019.Net loss2 in the first quarter of 2020 was $234.9 million (or loss per share of $3.35 diluted) compared with a net loss of $9.1 million (or $0.13 loss per share diluted) in the first quarter of 2019. Excluding the impact of impairment charges and the adjustment for Argentina hyperinflationary accounting, adjusted net loss1 in the first quarter of 2020 was $32.9 million (or adjusted loss per share1 of $0.47) compared with adjusted net income1 of $3.2 million (or $0.05 adjusted earnings per share1) in the first quarter of 2019. The Company’s order backlog was $575 million at March 31, 2020, higher compared to the backlog of $513 million at December 31, 2019.TORONTO, May 13, 2020 (GLOBE NEWSWIRE) — Shawcor Ltd. (TSX:SCL) Mr. Steve Orr, Chief Executive Officer of Shawcor Ltd. remarked, “First quarter revenue and profits were negatively impacted by the recent reduced demand for the Company’s products and services as a result of lower capital spending by Exploration and Production operators and significant disruptions across the supply chain as a result of the global COVID-19 pandemic. Although every business experienced head winds, our North America Upstream and Automotive reliant businesses experienced the greatest declines. The Company’s backlog, which is supported by projects which are already sanctioned and underway, is proving to be resilient.”Mr. Orr added “Shawcor is going through a period of unprecedented uncertainty as a result of external conditions and our focus remains on ensuring employee health, management of the Company through the very difficult operating environment and continuing to service our valued customers. We expect the period of reduced demand and disruption will be a magnitude larger in the very near term and will likely last for several quarters. Actions we are taking to reduce cost and conserve cash together with the flawless delivery of work we have booked will ensure Shawcor will remain 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 Highlights1.0 KEY DEVELOPMENTS
Shawcor Provides Business and Financial UpdateOn March 16, 2020 and April 21, 2020, the Company issued news releases (available at www.sedar.com) withdrawing previously provided forward-looking information and providing updates on its mobilization of resources to protect its employees and customers during the COVID-19 pandemic and the measures it had and would be undertaking to address the uncertainty and expected market downturn caused by the COVID-19 pandemic and recent changes in oil and gas supply and 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. Board compensation will be reduced by 30%, CEO cash compensation will be reduced by 20% and Senior Executive cash compensation will be reduced by 10%.
Salaried workforce headcount was reduced by approximately 7.5%, which is expected to result in annualized savings of over $15 million at a severance cost of approximately $6.0 million.
Aggressive cost controls were implemented and are expected to generate over $10 million in annualized savings.
Received a further $8.9 million in funds from the sale of a minority position in an associate late in the quarter.
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).In addition, the Company is working on the following initiatives to streamline operations, deliver further cost savings and preserve cash.The controlled shutdown of several facilities, including the targeted closure of 4 pipe coating plants prior to the end of 2020.
Restructuring the organization to reduce salaried workforce by an additional 5% while maintaining core capabilities.
Reductions in working capital and asset sales to generate additional cash proceeds.
Recalibrating expenses relating to 2020 short and longer-term employee incentive programs. The Company expects the total value of our completed and planned initiatives will meet its stated targets and result in a quarterly normalized SG&A run-rate of $70 million. 1.1 First Quarter Highlights and Outlook
Adjusted EBITDA1 of $6.2 million in the first quarter was lower than expected due to the negative economic impact caused by the COVID-19 pandemic and the rapid decline in oil prices resulting from global demand decreasing by 30% and the market moving to an oversupply situation where worldwide storage neared full capacity. The Company’s operations were impacted by significant supply chain disruptions and demand volatility worldwide as a result of these events and the measures taken to combat COVID-19 including mobility restrictions, border closures, shutdown of non-essential business and new health and monitoring guidelines.The priorities at the end of the first quarter shifted to employee health, maintaining critical operations and services for customers and strengthening the Company’s financial position through aggressive cost reduction and cash generation efforts. Subsequent to the quarter, the Company reduced CEO, executive and Board compensation, salaried workforce levels and its operating and capital budgets. In addition, it announced the suspension of its dividend to shareholders commencing in the second quarter of 2020.The Pipeline and Pipe services segment revenues were negatively impacted in the quarter by the rapid decline in oil prices which resulted in significant capital spending cuts by North American exploration and production operators whose planned expenditures are expected to decline by 50% year-over-year. As market conditions in the United States deteriorated as the quarter progressed, demand for small diameter pipe coating and girth well inspection services declined as customers moved to utilize existing inventories and halted new drilling and completion activity. The schedules for U.S. transmission projects shifted during the quarter resulting in lower demand for large diameter girth weld inspection services. Conditions in Western Canada continued to be depressed with lower demand for small diameter pipe coating and OCTG tubulars management services. During the quarter, the Company executed the work to resolve the fourth quarter 2019 service quality event and as expected it negatively impacted revenues in our Channelview, Texas facility. In addition, work continued to be executed on several international and offshore projects and the Company also worked closely with asset owners on project requirements and phasing. 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 Composites Systems segment experienced lower revenues for its composite pipe products due to the impact of the 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 used existing pipe inventories to meet demand which resulted in lower demand for our composite pipe products in Canada and the U.S. During the quarter, the Company secured orders for its newly added larger diameter spoolable product which partially mitigated some of the weakness experienced in the rest of the portfolio. The composite tank business continued to experience strong demand and backlog for fuel, water/wastewater and oil and gas applications, although the business’ ability to execute work in the quarter was impacted by the limitation of its manufacturing output as a result of COVID-19 protocols and supply chain disruptions.The Automotive and Industrial segment experienced lower revenues and operated at a reduced capacity due to lower demand resulting from production shutdowns and government lockdown restrictions. At the end of the quarter, the majority of automotive OEM assembly plants temporarily halted production and suspended operations as a result of COVID-19 which resulted in lower demand for the Company’s automotive heat-shrink products and appliances. In addition, industrial customers were impacted by supply chain disruptions which resulted in lower demand in some of the segment’s other non-oil and gas markets. The specialty wire and cable business experienced slightly lower revenue on lower general demand in the quarter, however backlog increased from electrical utilities and communication providers in eastern North America.Order BacklogThe 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 $575 million as at March 31, 2020, represents an increase over the $513 million order backlog as at December 31, 2019 and includes several project awards in the first quarter including the Woodside Sangomar offshore project in Sengal. This reflects revenue generated in the quarter from backlog orders which was more than offset by new orders on the base business and other project wins moving from bid to backlog. In addition to the backlog, the Company closely monitors its bidding activity, which represents bids provided to customers with firm pricing and terms and conditions against a defined scope. The value of outstanding firm bids is over $798 million as of March 31, 2020, down from last quarter largely due to certain offshore and international pipeline projects moving from bid back to budgetary as a result of project delays. Included in the firm bid, but not in the backlog, are unsanctioned conditional awards between engineering and procurement companies (“EPC”) and Shawcor for a scope of work that is estimated at over $190 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 $1.58 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.OutlookShawcor’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. As a result of the current economic environment, the Company anticipates a decrease in consolidated revenue and EBITDA in the second quarter as compared to the first quarter. Financial results for the balance of the year will be difficult to predict as it is highly dependent on the nature and duration of the COVID-19 pandemic and its impact on economic output and energy demand. The Company’s performance will likely be determined by the strength of its base oil and gas business, particularly in the U.S., the stability of its composite tank business, the ability to continue to execute work and projects secured in the backlog and the return of a stable demand profile in automotive and industrial markets which are serviced by the Company. The Company’s base oil and gas business in North America is heavily tied to the spending programs of exploration and production operators. In the U.S. land, operators have reduced capital spending budgets by up to 50% and initiated production shut-ins as a result of the sudden decline in economic activity and oil and gas prices. 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.As a result of the current market dynamics in North America and international operations, the Company has taken steps to align its operational footprint, cost structure and human resources with market demand, closed and/or consolidated select U.S. girth weld inspection branch offices and initiated the controlled closure of certain pipe coating locations. The second quarter is expected to see the largest impact of the recent significant decline in operating budgets, while the Company expects demand to stabilize at a lower base in the second half of the year.The Company’s priorities in the second quarter will continue to be on employee health, the safe delivery of its products and services to its customers and strengthening its financial position through cost reductions, cash preservation and restructuring activities. The Company expects to take certain restructuring and/or severance charges in the second quarter as a result of its cost reduction measures which will generate savings to be realized over the balance of the year.Despite the turbulent environment, the Company has work secured in its backlog which includes 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. As a result, the Company expects stronger results in the second half of the year than the first half. The Company has well developed health and safety management systems in place to ensure its staff and facilities can continue to operate during the COVID-19 pandemic. As the economy and energy demand recover, the Company continues to expect the global oil & gas capex cycle will resume and that large 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 for LNG and 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 SegmentMarket demand in the Company’s North American Pipeline & Pipe services segment businesses is closely tied to drilling and completion activity, the construction of new and the repair/replacement of old 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.Activity in U.S. land is expected to be lower in the near term as operators have moved to aggressively cut costs, reduce capital spending budgets by up to 50% and initiate production shut-ins in certain areas as a result of the decline in economic activity and changes in oil and gas supply and demand. Projects to increase take-away capacity constraints in the Permian and other U.S. shale regions may be delayed in the near-term as operators respond to the rapid decline in commodity prices and continue their focus on capital discipline. As a result of the decreased demand and market dynamics, the Company will adjust its pipe coating profile to match market activity levels and exit certain locations and/or product lines which are not strategic over the longer term. The continued depression experienced in Western Canada in the first 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.The Company expects to continue to execute work secured in it backlog including new projects awarded in the first quarter and continues to ramp-up certain international and offshore pipe coating facilities. This includes facilities in Channelview (Texas), Scotland, Norway, Indonesia and UAE. The Company is continuing to review projects with EPC’s and International and National oil and gas customers 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 projects with the greatest likelihood of moving ahead will be those tied to securing long-term domestic energy supply and those that risk the loss of drilling-rights due to non-development.Composite Systems SegmentMarket 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 will experience an impact from the decline in drilling and completion activity across the customer base as operators reduce drill rigs and activity levels. The Company expects demand for its core products to be lower for the balance of the year and will adjust its cost structure and spending accordingly. The lower demand will be partially offset by the market introduction of larger diameters, anticipated gain in market share 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 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 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 and supply chain management.Automotive and Industrial SegmentDemand 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 lower in the second quarter of 2020 as many automotive OEM assembly plants temporarily halted production and suspended operations. Demand is expected to strengthen in the latter part of the quarter as OEMs restart operations. The Company’s operations in China continue 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.As a result of the expected increase in infrastructure spending, the Company has experienced an increase in new order bookings for its specialty wire and cable products and a growing backlog primarily from electrical utilities and communications providers in eastern North America.2.0 CONSOLIDATED INFORMATION AND RESULTS FROM OPERATIONS2.1 RevenueThe following table sets forth revenue by reportable operating segment for the following periods:First Quarter 2020 versus First Quarter 2019
Consolidated revenue decreased by $30.6 million, or 9%, from $349.6 million during the first quarter of 2019, to $319.0 million during the first quarter of 2020, reflecting revenue decreases of $37.6 million in the Pipeline and Pipe Services segment and $5.1 million in the Automotive and Industrial segment, partially offset by an increase of $12.4 million in the Composite Systems segment.In the Pipeline and Pipe Services segment, revenue in the first quarter of 2020 was $180.5 million, or 17% lower than in the first quarter of 2019, primarily due to lower revenues in North America and Latin America, partially offset by higher revenue levels in the Europe, Middle East, Africa and Russia (“EMAR”) and 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 $12.4 million higher during the first quarter of 2020, compared to $77.0 million in the first quarter of 2019, primarily due to the current quarter including the ZCL acquisition. See Section 3.2 – Composite Systems Segment for additional disclosure on the segment.In the Automotive and Industrial segment, revenue was $5.1 million lower during the first quarter of 2020, compared to $54.9 million in the first quarter of 2019, due to decreased activity levels in all regions. 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 income and Adjusted EBITDA for the following periods:Due to the current uncertain business climate brought about by the global COVID-19 pandemic and the turmoil in the energy markets, the Company exercised significant judgements and estimates and conducted a review of its impairment testing on property, plant and equipment, intangible assets and goodwill. As a result of this review, the Company identified and recorded impairment charges of $203.1 million in the first quarter of 2020 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 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 quarter of 2020 includes the acquisition of the ZCL business in April 2019, which had a net positive impact on the first quarter of 2020 results, reflecting a full quarter of income from the composite tank business.First Quarter 2020 versus First Quarter 2019The first quarter of 2020 had an Operating Loss of $221.8 million, a significant decrease compared to the $7.6 million Operating Income in the first quarter of 2019. Operating Loss in the current quarter includes the negative impact of the $203.1 million impairment charge, a $12.9 million decrease in gross profit and increases of $3.0 million in amortization of property, plant, equipment and intangible assets primarily related to the acquisition of ZCL, $1.5 million in amortization of lease right-of-use (“ROU”) assets, $3.2 million in net foreign exchange losses and $6.2 million in SG&A expenses. The $12.9 million decrease in gross profit resulted from the $30.6 million decrease in revenue, as explained above, and a 1.4 percentage point decrease in the gross margin from the first 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.SG&A expenses increased by $6.2 million compared to the first quarter of 2019, primarily due to increases of $2.7 million in professional fees and insurance costs, $4.0 million in decommissioning, equipment and product development costs, and higher ongoing SG&A expenses for the acquired ZCL business. This was partially offset by a $7.3 million decrease in incentive-based compensation.Adjusted EBITDA was $6.2 million in the first quarter of 2020 compared to $28.2 million in the first quarter of 2019. See Section 7.0 Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.2.3 Income from Investments in AssociatesThe following table sets forth the income from investments in associates for the following periods:The Company has equity-accounted investments in Zedi Inc. (“Zedi”) and Power-Feed-Thru Systems and Connectors, LLC (“PFT”). During the first quarter of 2020, the Company received $8.9 million of proceeds pertaining to the partial redemption of the investment in Zedi.3.0 SEGMENT INFORMATION
3.1 Pipeline and Pipe Services SegmentThe following table sets forth, by geographic location, the revenue, Operating Income and Adjusted EBITDA for the Pipeline and Pipe Services segment for the following periods:First Quarter 2020 versus First Quarter 2019
Revenue in the first quarter of 2020 was $180.5 million, a decrease of $37.6 million, or 17%, from $218.1 million in the comparable period of 2019. This was primarily due to lower revenues in North America and Latin America, partially offset by higher revenue in EMAR and Asia Pacific: North America revenue decreased by $35.5 million, or 29%, 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 current quarter was also negatively impacted by the delay of revenue 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 $8.4 million, or 30%, primarily due to lower activity levels in Brazil and Argentina, partially offset by the continued execution of the Liza II project in the Veracruz, Mexico facility.
In EMAR, revenue increased by $1.1 million, or 2%, primarily due to higher activity levels at the Orkanger, Norway and Ras Al Khaimah, UAE (“RAK”) facilities and higher revenue from field joint coating projects in the region. This was partially offset by lower revenue levels at the Leith, Scotland and Italian facilities.
Revenue in Asia Pacific increased by $5.2 million, or 49%, 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 quarter of 2020, Operating Loss was $215.7 million compared to $12.7 million in the first quarter of 2019, an increase of $203.0 million. Operating Loss in the current quarter includes the negative impact of the $193.3 million impairment charge recorded. The decline also reflects a $7.8 million decrease in gross profit and an increase in SG&A expenses, as explained in Section 2.2 above. The decrease in the gross profit was primarily due to the lower revenue, as explained above, partially offset by a 0.7 percentage point increase in gross margin. The increase in the gross margin percentage was primarily due to product and project mix, partially offset by lower utilization in North America and Latin America facilities and the related impact on the absorption of manufacturing overheads.Adjusted EBITDA in the first quarter of 2020 was negative $8.0 million compared to positive $2.5 million in the first quarter of 2019. See Section 7.0 Reconciliation of Non-GAAP Measures for additional disclosures regarding Adjusted EBITDA.3.2 Composite Systems SegmentThe following table sets forth, by geographic location, the revenue, Operating Income and Adjusted EBITDA for the Composite Systems segment for the following periods:
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