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Aecon reports improved third quarter results

Nov 8, 2006
  • Margins continue to show strong improvement
  • Operating profit increases to $14.5 million
  • Net income grows to $12.8 million
  • Backlog of work at highest level in five years
  • Results reinforce profitable outlook for 2006

 

Toronto, Ontario – November 8, 2006: Aecon Group Inc. (TSX: ARE) today reported improved results for the third quarter and first nine months of 2006 as margins, operating profit and net income all improved compared to the same periods last year.

 

Revenue, Margins, Operating Profit and Net Income

 

Revenues in the third quarter of 2006 totalled $316 million, a decrease of $25 million from the same period last year, while revenues for the first nine months of the year were $775 million compared to $797 million in 2005.

 

Gross margins (revenues less costs and expenses) as a percentage of revenues increased to 10.4% in the quarter from 5.9% last year and to 7.3% in the first nine months from 5.4% in 2005.

 

Operating profit (representing the results from operations before interest, income taxes and extraordinary items) grew to $14.5 million in the quarter as compared to $4.9 million in the same quarter last year. For the nine months, operating profit was $7.0 million, compared to $0.1 million in 2005.

 

Net income in the quarter improved to $12.8 million ($0.34 per diluted share / $0.35 basic) compared to net income of $2.1 million in the same quarter of 2005 ($0.07 per share basic and diluted). Net income of $0.9 million ($0.03 per share basic and diluted) in the first nine months compares to a net loss of $4.6 million ($0.16 per share basic and diluted) in the same period last year.

 

 

Financial Highlights

 

 

Three Months Ended September 30

Nine Months Ended September 30

$ millions

 

2006

 

2005

 

 

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

316

$

341

 

 

$

775

$

797

Gross margin

 

32.9

 

20.1

 

 

 

56.9

 

43.2

Operating profit

 

14.5

 

4.9

 

 

 

7.0

 

0.1

Interest expense, net

 

1.7

 

2.4

 

 

 

5.9

 

6.7

Income taxes

 

-

 

0.4

 

 

 

0.2

 

1.5

Extraordinary gain, net of income taxes

 

-

 

-

 

 

 

-

 

3.4

Net income (loss) for the period

 

12.8

 

2.1

 

 

 

0.9

 

(4.6)

Backlog - September 30

$

838

$

489

 

 

 

 

 

 

 

 

Marketing, general and administrative expenses amounted to $13.2 million in the third quarter of 2006, which is $1.8 million higher than the same period last year due primarily to the expansion of operations in western Canada, higher incentive accruals and increased Bill 198 compliance costs in the Corporate group.

 

Depreciation and amortization expense of $5.3 million in the quarter is $3.3 million higher than the same quarter last year and is due primarily to the amortization of concession rights related to the existing Quito airport, which commenced in the quarter. Foreign exchange gains in the quarter of less than $0.1 million compared to losses of $1.7 million in the same quarter last year.

Outlook

 

“Aecon's third quarter results are in line with our expectation of a strong second half and they reinforce our expectations for a profitable year,” said John M. Beck, Chairman and CEO, Aecon Group Inc. “The solid improvement we've seen in our operations also positions Aecon well for further growth in profitability beyond 2006.”

 

“At our AGM in June, we outlined a strategic plan designed to drive improved profitability through 2007 and 2008 – including a focus on Canada, a priority on margin growth over volume growth, leveraging our strength in the energy and transportation sectors, and concentrating on those areas where we have a proven record of profitability,” Mr. Beck said. “I think the strong results achieved to date are evidence that this strategy has us headed in the right direction in line with our business plan.”

 

“Aecon's backlog of contracted work is higher than we've seen in over five years and continues to grow,” said Scott Balfour, President and CFO, Aecon Group Inc. “Perhaps more important however, is the margin growth, both in real terms and as a percentage of revenues, that is imbedded in this backlog. Together, these trends bode well for Aecon's prospects and earnings.”

 

The Cross Israel Highway is performing well and traffic is ramping up as anticipated. Negotiations continue to finalize arrangements for the highway's northern extension, with financial close most likely to occur early in 2007. The continued strong performance of this asset reinforces management's view that it holds significant value in excess of Aecon's investment, and work continues to monetize at least a portion of this value by the end of 2007.

Backlog and New Business Awards

 

New business awards of $343 million in the quarter represented a $44 million increase from the same quarter last year, driving Aecon's backlog to a five year high of $838 million at September 30 ($350 million higher than at the same time last year).

 

On a segmented basis, backlog increases of $290 million in the Infrastructure segment and $110 million in the Industrial segment over the past 12 months offset a decline of $51 million in the Buildings segment. Included in Infrastructure backlog is $129 million related to the new Quito airport project.

 

Not included in backlog, but important to Aecon's prospects, are the expected revenues from Aecon's growing alliances and supplier-of-choice arrangements such as those in place with Union Gas, Ontario Power Generation, Bell Canada, Expertech and Suncor. Aecon's effective backlog is therefore greater than what is reported here.

 

 

 

 

 

 

Business Highlights

 

· The $12.8 million net income reported in the third quarter makes it the most profitable quarter in Aecon's history.

 

· All four segments recorded an improved return on revenue in the third quarter as compared to the same quarter last year, reflecting Aecon's focus on margin growth as opposed to volume growth.

 

· Average week day traffic on the Cross Israel Highway in the third quarter of 2006 was up approximately 12% compared to the third quarter of 2005 despite the heightened tensions in the region during the quarter.

 

· Construction of the new airport in Quito, Ecuador is off to a good start with approximately 250 workers currently on site where work is progressing on schedule and on budget.

Segmented Results

 

Aecon reports its results in four segments: Infrastructure, Buildings, Industrial and Concessions.

 

Ø  Infrastructure

 

The Infrastructure segment includes all aspects of civil construction from highways, bridges and tunnels to airports, marine facilities, transit and power projects as well as utilities construction.

 

 

Financial Highlights

($ millions)

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

2006

 

2005

 

 

 

 

2006

 

2005

 

 

Revenues

$

173

$

137

 

 

 

$

338

$

296

 

 

Segment operating profit

 

11.8

 

4.5

 

 

 

 

9.3

 

5.8

 

 

Return on revenue

 

6.8%

 

3.3%

 

 

 

 

2.8%

 

1.9%

 

 

Backlog - September 30

$

465

$

176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note: Certain prior period comparative figures have been reclassified to conform to the new segment definitions adopted in the second quarter of this year.

 

Revenues from the Infrastructure segment increased to $173 million in the third quarter from $137 million in the same period last year, as revenue gains of $40 million from roadbuilding operations $1 million from utilities operations and $9 million from other heavy civil operations offset revenue declines of $14 million from the segment's Quebec operations.

 

Operating profits of $11.8 million were up significantly from the $4.5 million recorded in the third quarter of 2005. Increased operating profits were reported by all operating units with roadbuilding, utilities, Quebec operations and other heavy civil operations up $2.3 million, $0.6 million, $2.3 million, and $2.2 million respectively.

 

Looking ahead, Aecon continues to expect a strong year from its Ontario roadbuilding and utilities operations, with increased profit contributions anticipated in both of these sectors over those reported in 2005. These increased profit contributions, along with an expected improvement in results from Aecon's Quebec civil operations (largely as a result of claim settlements), are expected to more than offset a decline in contributions from international construction in 2006.

 

Ø  Buildings

The Buildings segment includes all aspects of Aecon's commercial, institutional and multi-unit residential building construction and renovation activities.

 

Financial Highlights

$ millions

Three Months Ended

September 30

 

Nine Months Ended

September 30

 

 

2006

 

2005

 

 

 

 

2006

 

2005

Revenues

$

71

$

115

 

 

 

$

239

$

300

Segment operating profit

 

1.3

 

1.5

 

 

 

 

2.0

 

2.1

Return on revenue

 

1.9%

 

1.3%

 

 

 

 

0.8%

 

0.7%

Backlog - September 30

$

191

$

242

 

 

 

 

 

 

 

 

 

 

 

Revenues in the Buildings segment were $71 million in the third quarter, a $43 million decrease over the same period last year. The Toronto operations had the largest single reduction in revenue, declining $39 million, while the Ottawa and Montreal operations had reductions of $6 million and $4 million respectively. Partially offsetting these declines was an increase of $3 million in revenues from the segment's Seattle operations.

 

Operating profits in the quarter were $1.3 million compared to $1.5 million in the third quarter last year. These profits, generated from a smaller revenue base, produced an increase in return on revenue to 1.9% this year, up from 1.3% in 2005. The Toronto, Ottawa, Halifax and Vancouver operations reported small profit improvements in the quarter, offset by declines in Montreal and Seattle. None of the increases or declines exceeded $0.5 million.

 

The Buildings segment is expected to report improved margins and increased profit contributions in 2006 despite expectations of a year over year decline in revenues. Profit contributions from the Toronto business unit are expected to increase in 2006 (due in part to the favourable resolution of outstanding change orders and claims), while overall profit contributions from the segment's other business units are expected to approximate those reported in 2005, with some business units recording a modest increase in contributions and others posting a modest decline.

 

Ø  Industrial

 

Industrial operations include all of Aecon's industrial manufacturing and construction activities from in-plant construction in the nuclear and cogeneration sectors to the fabrication of specialty pipe and modules for the oil and gas sector and the design and manufacture of “Once Through” Steam Generators.

Financial Highlights

$ millions

Three Months Ended September 30

Nine Months Ended

September 30

2006

2005

2006

2005

Revenues

$

65

$

83

 

 

 

$

185

$

191

 

Segment operating profit

4.4

2.5

6.9

2.4

Return on revenue

 

6.8%

 

3.0%

 

 

 

 

3.7%

 

1.3%

 

Backlog - September 30

$

182

$

71

 

 

 

 

 

 

 

 

 

Revenues in the Industrial segment were $65 million in the quarter, an $18 million decline from the same quarter in 2005. Increases of $5 million from the segment's Ontario construction operations, $4 million from fabrication operations in Ontario and Atlantic Canada, and $1 million from Innovative Steam Technologies (IST) were offset by declines in Western Canada due to the completion of a large fire re-build project in 2005.

Operating profits in the segment grew to $4.4 million, a $1.9 million increase from the third quarter of 2005. The increased earnings were generated by improvements of $1.3 million from Ontario construction, $1.3 million from Ontario and Atlantic fabrication operations and $0.3 million from IST.

 

The outlook for Aecon's Industrial segment continues to strengthen, led by expectations of solid improvements from the segment's fabrication operations across the country and the module assembly operation in Alberta. Aecon's industrial construction operations in Ontario are also expected to have another solid year, although it is still expected that profit contributions in this sector will fall just short of the strong results recorded in 2005. IST continues to operate in a challenging sales environment where sales prospects, although strong, continue to develop at a pace significantly slower than originally anticipated – likely resulting in reduced revenues and a net loss for the year in this business unit.

 

Ø  Concessions

 

The Concessions segment includes the development, operation and financing of infrastructure projects by way of public-private partnership, build-own-operate-transfer or other alternative financing contract structures. This segment focuses primarily on the operations, management, maintenance and enhancement of investments in transportation infrastructure concessions, including the Cross Israel Toll Highway and Quito International Airport concession companies.

 

Financial Highlights

$ millions

Three Months Ended September 30

Nine Months Ended September 30

2006

2005

2006

2005

Revenues

$

12

$

7

 

$

23

$

13

Segment operating loss

 

(0.4)

 

(0.5)

 

 

(2.3)

 

(1.7)

Return on revenue

 

(3.3)%

 

(7.0)%

 

 

(10.1)%

 

(12.6)%

Note: Certain prior period comparative figures have been reclassified to conform to the new segment presentation that was adopted in the second quarter of 2006.

 

Revenues in the Concessions segment were $12 million in the quarter, a $5 million increase over the same period in 2005, reflecting the inclusion this quarter of $7 million in revenues from operation of the existing Quito Airport.

 

An operating loss of $0.4 million for the third quarter of 2006 was a $0.1 million improvement over last year as an operating profit of $0.8 million from the existing Quito airport was offset by higher MG&A costs in the segment.

 

While the investments reported in Aecon's Concessions segment continue to grow in value, this increasing value will not be fully reflected in earnings until certain project milestones are reached or when a portion of an investment is monetized. The modest amount that is expected to be earned in 2006 from the operation of the existing Quito airport, combined with the fees earned from other concession operations in Israel and Canada, are not expected to offset the overhead and other costs incurred in this segment. However, more meaningful contributions are expected from the existing Quito airport during the remainder of the construction period.

 

Ø  Corporate and Other

Net Corporate expenses for the quarter were $2.6 million compared to $3.0 million in 2005. The decrease is due primarily to lower losses on sales of fixed assets this year.


Consolidated Results

 

The Consolidated Results for the third quarter and first nine months of 2006 and 2005 are available at the end of this News Release.

Balance Sheet Highlights

Balance Sheet Highlights

(thousands of dollars)

Sept. 30, 2006

Dec. 31, 2005

 

 

 

 

 

Cash, cash equivalents, restricted cash and restricted term deposits and marketable securities

$

53,737

$

49,820

Other current assets

 

359,541

 

292,595

Property, plant and equipment

 

53,360

 

56,116

Other long-term assets

 

182,115

 

105,891

Total Assets

648,753

504,422

 

 

 

 

 

Current liabilities

$

294,860

$

286,659

Long-term debt

 

62,518

 

35,671

Other long-term liabilities

 

146,849

 

75,764

Shareholders' equity

 

144,526

 

106,328

Total Liabilities and Shareholders' Equity

648,753

504,422

 

Conference Call

 

A conference call has been scheduled for Wednesday, November 8, 2006 at 10:30 a.m. ET to discuss Aecon's Third Quarter 2006 financial results. Participants should dial 416-620-2408 or 1-800-215-1640 at least 10 minutes prior to the conference time of 10:30 a.m.

 

For those unable to attend the call, a replay will be available after 12:30 p.m. at 1-800-558-5253 or 416-626-4100 until midnight, November 15, 2006. The pass code will be 21309328#.

 

About Aecon

 

Aecon Group Inc. is Canada's largest publicly traded construction and infrastructure development company. Aecon and its subsidiaries provide services to private and public sector clients throughout Canada and internationally.

 

The information in this news release includes certain forward-looking statements. Forward-looking statements are based on estimates and assumptions derived from past experience and interpretation of historical trends, current conditions and expected future developments. Many factors could cause Aecon's actual results, performance or achievements to vary from those expressed or inferred by these statements. Risk factors are discussed in greater detail in the Section entitled “Risk Factors” in Aecon's Renewal Annual Information Form dated March 31, 2006 and filed on SEDAR at www.sedar.com. Although Aecon believes that the expectations reflected in forward-looking statements are reasonable, it can give no assurance that the expectations of any forward-looking statements will prove to be correct.


Consolidated Statements of Operations for the three months ended Sept. 30, 2006 and 2005  (in thousands of dollars, except per share amounts) (unaudited)

 

Consolidated Statements of Operations for the three months ended Sept. 30, 2006 and 2005

2006

2005

Revenues

$

316,039

$

340,793

 

 

 

Costs and expenses

283,123

 

320,659

 

 

 

 

32,916

 

20,134

 

 

 

Marketing, general and administrative expenses

13,237

 

11,394

 

 

 

Foreign exchange (gains) losses

(32)

 

1,659

 

 

 

(Gain) loss on sale of assets

(54)

 

206

 

 

 

Depreciation and amortization

5,253

 

1,954

 

 

 

Interest expensenet

1,706

 

2,424

 

 

 

 

20,110

 

17,637

 

 

 

Income before income taxes

12,806

 

2,497

 

 

 

Income tax expense (recovery)

 

 

Current

512

 

407

Future

(534)

 

-

 

 

 

 

(22)

 

407

 

 

 

Net income for the period

$

12,828

$

2,090

 

 

 

Net earnings per share

 

 

Basic

$

0.35

$

0.07

Diluted

$

0.34

$

0.07

 

 

 

Average number of shares outstanding

 

 

Basic

36,698,212

 

29,592,494

Diluted

38,109,577

 

33,262,891

 

 

 

 

 

 


Consolidated Statements of Operations for the nine months ended Sept. 30, 2006 and 2005  (in thousands of dollars, except per share amounts) (unaudited)

 

Consolidated Statements of Operations for the nine months ended Sept. 30, 2006 and 2005

2006

2005

Revenues

$

775,353

$

796,643

 

 

 

Costs and expenses

718,470

 

753,479

 

 

 

 

56,883

 

43,164

 

 

 

Marketing, general and administrative expenses

40,048

 

35,965

 

 

 

Foreign exchange losses

962

 

2,197

 

 

 

Gain on sale of assets

(131)

 

(806)

 

 

 

Depreciation and amortization

9,049

 

5,688

 

 

 

Interest expensenet

5,886

 

6,702

 

 

 

 

55,814

 

49,746

 

 

 

Income (loss) before income taxes and extraordinary item

1,069

 

(6,582)

 

 

 

Income tax expense (recovery)

 

 

Current

710

 

1,492

Future

(534)

 

-

 

 

 

 

176

 

1,492

 

 

 

Income (loss) before extraordinary item

893

 

(8,074)

 

 

Extraordinary gain, net of income taxes

-

 

3,444

 

 

Net income (loss) for the period

$

893

$

(4,630)

 

 

 

Earnings (loss) per share before extraordinary item

 

 

Basic

$

0.03

$

(0.27)

Diluted

$

0.03

$

(0.27)

 

 

Net earnings (loss) per share

 

 

Basic

$

0.03

$

(0.16)

Diluted

$

0.03

$

(0.16)

 

 

 

Average number of shares outstanding

 

 

Basic

34,746,874

 

29,394,024

Diluted

36,756,512

 

33,094,157