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Aecon reports significantly improved results for 2006

Mar 6, 2007
  • Margins continue to show strong improvement
  • Operating profit increases to $19.7 million – including gains in each segment
  • Net income improves to $11.5 million
  • Strongest Q4 in Aecon history
  • Backlog revenue and backlog margins continue to strengthen
  • Outlook for 2007 and 2008 remains strong

 

Toronto, Ontario – March 6, 2007: Aecon Group Inc. (TSX: ARE) today reported significantly improved operating results for 2006 as margins, operating profit and net income all improved over those reported the previous year.

 

Revenue, Operating Results and Net Income

 

Revenues in 2006 totalled $1.11 billion, essentially unchanged from the $1.12 billion reported last year, as a targeted reduction in the Buildings segment revenues offset increases in the Infrastructure, Industrial and Concessions segments.

 

Gross margins (revenues less direct costs and expenses) increased by $29.7 million, bringing gross margins as a percentage of revenues to 8.7% in 2006, up from 6.0% in 2005.

 

Operating profit (representing income from operations before interest, income taxes and extraordinary items) amounted to $19.7 million, an increase of $12.5 million over last year. All segments reported improved operating results, with the largest improvement of $10.7 million coming from the Industrial segment, which more than doubled the operating profit reported in 2005.

 

Net income in 2006 grew to $11.5 million ($0.31 per diluted share / $0.33 basic) compared to a net loss of $1.1 million in 2005 ($0.04 per share basic and diluted). Net income of $10.6 million in the fourth quarter ($0.28 per diluted share / $0.29 basic) represented a $7.1 million increase from the $3.5 million reported in the fourth quarter of 2005 ($0.11 per diluted share / $0.12 basic).

Financial Highlights

 

 

Three Months Ended
December 31

Twelve Months
December 31

$ millions

 

2006

 

2005

 

 

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

338

$

324

 

 

$

1,113

$

1,120

Gross margin

 

39.7

 

23.7

 

 

 

96.6

 

66.8

Operating profit

 

12.8

 

7.1

 

 

 

19.7

 

7.2

Interest expense, net

 

1.6

 

2.6

 

 

 

7.5

 

9.3

Income taxes

 

0.6

 

1.0

 

 

 

0.7

 

2.5

Extraordinary gain, net of income taxes

 

-

 

-

 

 

 

-

 

3.4

Net income (loss) for the period

 

10.6

 

3.5

 

 

 

11.5

 

(1.1)

Backlog - December 31

$

786

$

577

 

 

 

 

 

 


Marketing, general and administrative expenses amounted to $62.5 million in 2006, which is $12.8 million higher than the previous year due primarily to higher volumes in most segments, the expansion of operations in western Canada, higher performance-related incentive costs, higher stock option compensation expenses and increased Bill 198 compliance costs.

 

Depreciation and amortization expense of $14.6 million is $7.0 million higher than last year due primarily to amortization of concession rights related to the existing Quito airport, which commenced in 2006. Foreign exchange gains of $0.3 million compared to losses of $3.0 million in 2005.

 

Outlook

 

“The strong results achieved this year are evidence that our strategic plan has us headed in the right direction,” said John M. Beck, Chairman and CEO, Aecon Group Inc. “The continuing strength of Aecon's core markets, especially in the energy and transportation infrastructure sectors in Canada, bode well for continued improvement in 2007 and 2008. Of particular focus for us will be continuing to drive profitable growth in the Alberta market.”

 

“The strength of our backlog and the growing margins we saw throughout 2006 are strong positive signals for Aecon,” said Scott Balfour, President and CFO, Aecon Group Inc. “In 2007, I expect to see a continuation of most of the key trends that have driven our improved bottom line results over the past year.”

 

Backlog and New Business Awards

 

Backlog at December 31, 2006, was $786 million, a $209 million increase from the same time last year, as backlog increases in the Infrastructure and Industrial segments more than offset a decline in the Buildings segment. Importantly, the margins embedded in backlog continue to strengthen as backlog grows. Not included in backlog, but important to Aecon's prospects, are the expected revenues from Aecon's growing alliances and supplier-of-choice arrangements that do not specify the amount of work to be carried out.

 

New contract awards of $1.32 billion were booked in 2006, a 17% increase from the $1.13 billion awarded in 2005.

 

Fourth Quarter Business Highlights

 

· Net income of $10.6 million in the fourth quarter – made possible in part by unseasonably favourable construction weather in Southern Ontario – made this the most profitable fourth quarter in Aecon's history.

 

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

 

· Hochtief AG (and affiliates), Aecon's largest shareholder for several years, sold all of its 16,576,896 Aecon common shares.

· Average week day traffic on the Cross Israel Highway in December 2006 surpassed 80,000, a 15.6% increase over December 2005.

 

· Construction of the new airport in Quito, Ecuador, is progressing well with approximately 500 workers on site.

 

Subsequent Event

 

On February 1, 2007, Aecon announced that it had acquired The Karson Group, one of the largest aggregate, asphalt and civil construction companies in Eastern Ontario. The $42 million cash and debt deal makes Aecon one of the five largest aggregate producers in Ontario, with over 350 million tonnes of aggregate reserves, and it significantly strengthens operations in Eastern Ontario.

 

Segmented Results

 

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

 

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  (1)(2)

 

 

 

 

 

 

$ millions

 

2006

 

2005

 

 

Revenues

$

    484

$

    432

 

 

Segment operating profit

 

    16.5

 

    10.8

 

 

Return on revenue

 

    3.4%

 

    2.5%

 

 

Backlog – December 31

 

    410

 

    117

 

 

(1) Certain prior period comparative figures have been reclassified to conform to the new segment definitions currently being used.

(2) Not included in the Financial Highlights table above is a first quarter 2005 extraordinary gain of $4.1 million before income taxes resulting from the acquisition by Aecon of its partner's share in a joint venture.

 

Revenues from the Infrastructure segment increased $52 million to $484 million in 2006, as revenue gains of $64 million from roadbuilding operations and $15 million from utilities operations offset declines of $27 million from other heavy civil operations.

 

Operating profit from the Infrastructure segment grew to $16.5 million in 2006, a $5.7 million improvement over 2005. Increases of $3.8 million from roadbuilding operations and $2.1 million from utilities operations drove the earnings improvement, while earnings from other heavy civil operations declined slightly.

 

Backlog of $410 million at December 31, 2006 represents an increase of $292 million from the same time last year. Included in backlog at the end of 2006 is $130 million related to the Quito airport project (after a reduction of 42.3% reflecting Aecon's ownership in the concession company granting construction contract).

Buildings

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

 

Financial Highlights

 

 

 

 

 

 

$ millions

 

2006

 

2005

 

Revenues

$

323

$

395

 

 

Segment operating profit

$

4.6

 

2.1

 

 

Return on revenue

 

1.4%

 

0.5%

 

 

Backlog – December 31

 

191

 

289

 

 

Revenues in the Buildings segment totalled $323 million in 2006, down from $395 million in 2005 largely due to a $77 million decrease in revenues from the segment's Toronto operations. The revenue decline in Toronto was targeted in response to a strategic refocus of this business in an effort to improve its margin profile. This year's revenue decline was primarily the result of a number of large lump sum projects reaching peak production in 2005 compared with much lower production levels towards the close-out of these same projects in 2006, as well as a reduction in new work awarded in 2006.

 

Despite the decline in revenues, operating results improved in the segment, with an operating profit of $4.6 million in 2006 compared to $2.1 million in 2005. Toronto operations, which benefited from the favourable resolution of outstanding change orders carried forward from 2005, had the largest year-over-year improvement of $3.9 million.

 

Backlog of $191 million in the buildings segment at the end of 2006 was $98 million lower than the previous year.

Industrial

Industrial operations include all of Aecon's industrial manufacturing and construction activities from in-plant construction to the fabrication of specialty pipe and the design and manufacture of Once Through Steam Generators.

Financial Highlights

 

 

 

 

 

 

 

 

 

 

$ millions

 

2006

 

2005

 

Revenues

$

290

$

273

 

 

Segment operating profit

 

19.5

 

8.8

 

 

Return on revenue

 

6.7%

 

3.2%

 

 

Backlog – December 31

 

186

 

172

 

 

 

Revenues of $290 million in the Industrial segment were $17 million higher than 2005 as increases of $28 million from construction operations in Ontario and $12 million from fabrication operations in Ontario and Eastern Canada offset revenue declines of $13 million at Innovative Steam Technologies (IST) and $7 million in Western Canada. The relatively small decline in revenue from Western Canada illustrates the extent to which volume reductions due to the completion in 2005 of a substantial fire rebuild project at an oil refinery in Northern Alberta have been replaced by new work with higher value-added Aecon involvement.

 

Segment operating profit more than doubled in 2006, reaching $19.5 million or $10.7 million higher than 2005. Improvements in fabrication operations (up $6.1 million), Western Canada (up $5.2 million) and Ontario construction (up $3.4 million) all contributed to the improved results. Only IST, with a loss of $3.7 million compared to a profit of $1.4 million in 2005, showed a decline in 2006.

 

Backlog at December 31, 2006 of $186 million was $14 million higher than the previous year. In Western Canada, backlog of $40 million was up $16 million from 2005, while IST's backlog of $23 million represents an $18 million increase over the backlog recorded a year earlier. Although down $22 million from last year, Ontario Construction backlog remains strong at $106 million.

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

 

2006

2005

Revenues

$

36

$

25

 

Segment operating loss

(2.6)

 

(3.5)

 

Return on revenue

(7.4)%

 

(13.8)%

 

Note: 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 $36 million, up from $25 million in 2005, reflecting the inclusion in 2006 of $13 million in revenues from operation of the existing Quito Airport.

 

An operating loss of $2.6 million in 2006 was an improvement over the $3.5 million loss recorded last year as an operating profit of $1.0 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 earned in 2006 from the operation of the existing Quito airport, combined with the fees earned from other concession operations in Israel and Canada, were not enough to offset the overhead and other costs incurred in this segment. However, more meaningful contributions are expected from the existing Quito airport concession during the remainder of the construction period.

Aecon does not include in its reported backlog potential revenues from operations management contracts and concession agreements. As such, while Aecon expects future revenues from its concession assets, no concession backlog is reported at December 31.

Corporate and Other

Net corporate expenses in 2006 totalled $18.2 million compared to $11.1 million in 2005. The increased costs are due largely to higher performance-related incentive costs, higher stock option expenses and increased Bill 198 compliance costs as well as non-recurring costs associated with the termination of one of Aecon's defined benefit pension plans.


Consolidated Results

 

The Consolidated Results for 2006 and 2005 are available at the end of this News Release.

Balance Sheet Highlights

Balance Sheet Highlights

(thousands of dollars)

 

Dec. 31, 2006

Dec. 31, 2005

 

 

 

 

 

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

$

78,528

$

49,820

Other current assets

 

372,839

 

292,595

Property, plant and equipment

 

53,348

 

56,116

Other long-term assets

 

211,572

 

105,891

Total Assets

716,287

504,422

 

 

 

 

 

Current liabilities

$

330,167

$

286,659

Long-term debt

 

81,120

 

35,671

Other long-term liabilities

 

151,397

 

75,764

Shareholders' equity

 

153,603

 

106,328

Total Liabilities and Shareholders' Equity

716,287

504,422

 

Conference Call

 

A conference call has been scheduled for Wednesday, March 7, 2007 at 10:30 a.m. ET to discuss Aecon's 2006 financial results. Participants should dial 416-641-6210 or 1-800-215-0816 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, March 14, 2007. The pass code is 21332075.

 

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.

Risk factors are discussed in greater detail in the Section entitled “Risk Factors and Uncertainties” in Management's Discussion and Analysis of operating results and Financial condition for the year ended December 31, 2006 to be 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 December 31, 2006 and 2005

(in thousands of dollars, except per share amounts) (unaudited)

 

Consolidated Statements of Operations for the three months ended December 31, 2006 and 2005

2006

2005

Revenues

$

337,953

$

323,601

 

 

 

 

Costs and expenses

 

298,274

 

299,934

 

 

 

 

 

 

39,679

 

23,667

 

 

 

 

Marketing, general and administrative expenses

 

22,410

 

13,683

 

 

 

 

Foreign exchange losses (gains)

 

(1,286)

 

799

 

 

 

 

Loss on sale of assets

 

199

 

177

 

 

 

 

Depreciation and amortization

 

5,564

 

1,938

 

 

 

 

Interest expensenet

 

1,630

 

2,605

 

 

 

 

 

 

28,517

 

19,202

 

 

 

 

Income before income taxes

 

11,162

 

4,465

 

 

 

 

Income tax expense (recovery)

 

 

 

Current

 

2,080

 

(2,827)

Future

 

(1,527)

 

3,802

 

 

 

 

 

 

553

 

975

 

 

 

 

Net income for the period

$

10,609

$

3,490

 

 

 

 

Net earnings per share

 

 

 

Basic

$

0.29

$

0.12

Diluted

$

0.28

$

0.11

 

 

 

 

Average number of shares outstanding

 

 

 

Basic

 

36,484,866

 

29,595,646

Diluted

 

38,046,615

 

33,233,682

 

 

 

 

 

 


Consolidated Statements of Operations for the years ended December 31, 2006 and 2005

(in thousands of dollars, except per share amounts) (unaudited)

 

Consolidated Statements of Operations for the three months ended December 31, 2006 and 2005

2006

2005

Revenues

$

1,113,306

$

1,120,244

 

 

 

Costs and expenses

1,016,744

 

1,053,413

 

 

 

 

96,562

 

66,831

 

 

 

Marketing, general and administrative expenses

62,458

 

49,648

 

 

 

Foreign exchange (gains) losses

(324)

 

2,996

 

 

 

Loss (gain) on sale of assets

68

 

(629)

 

 

 

Depreciation and amortization

14,613

 

7,626

 

 

 

Interest expensenet

7,516

 

9,307

 

 

 

 

84,331

 

68,948

 

 

 

Income (loss) before income taxes and extraordinary item

12,231

 

(2,117)

 

 

 

Income tax expense (recovery)

 

 

Current

2,790

 

(1,335)

Future

(2,061)

 

3,802

 

 

 

 

729

 

2,467

 

 

 

Income (loss) before extraordinary item

11,502

 

(4,584)

 

 

Extraordinary gain, net of income taxes

-

 

3,444

 

 

Net income (loss) for the year

$

11,502

$

(1,140)

 

 

 

Earnings (loss) per share before extraordinary item

 

 

Basic

$

0.33

$

(0.16)

Diluted

$

0.31

$

(0.16)

 

 

Net earnings (loss) loss per share

 

 

Basic

$

0.33

$

(0.04)

Diluted

$

0.31

$

(0.04)

 

 

 

Average number of shares outstanding

 

 

Basic

35,157,471

 

29,444,844

Diluted

37,116,872

 

33,136,178