Shawcor Ltd. reported its operational and financial results for the three months ended June 30, 2021.
• Second quarter 2021 revenue was $306 million, 15% higher than the $266 million reported in the second quarter of 2020.
• Adjusted EBITDA1 in the second quarter of 2021 was $35.2 million, reflecting $3.1 million of COVID-19 related government wage subsidies, 719% higher than the $4.3 million of Adjusted EBITDA reported in the second quarter of 2020, which included $7.5 million of COVID-19 related government wage subsidies.
• Net Income2 in the second quarter of 2021 was $2.6 million (or income per share of $0.04 diluted) compared with a net loss of $36.9 million (or $0.52 loss per share diluted) in the second quarter of 2020. Adjusted net income1,2 in the second quarter of 2021 was $10.8 million (or adjusted income per share1,2 of $0.15) compared with adjusted net loss1,2 of $21.9 million (or $0.31 adjusted loss per share1,2) in the second quarter of 2020.
• The Company’s order backlog was $489 million at June 30, 2021, compared to the backlog of $521 million at March 31, 2021.
Mr. Mike Reeves, President & Chief Executive Officer of Shawcor Ltd. remarked “During the second quarter Shawcor delivered Adjusted EBITDA of $35.2 million on $305.9 million of revenue. Strong performance in all business segments was driven by sequentially higher pipeline coating margins, improved demand for composite pipe and robust order intake across Shawcor’s non-oil and gas product portfolio.”
Mr. Reeves added “While Shawcor, like many of our peers, continues to experience raw material supply chain tightness, supportive fundamentals in the majority of our diverse end markets coupled with Shawcor’s substantial backlog, commitment to technical innovation and disciplined cost management position the Company to deliver positive financial results for the remainder of 2021 and beyond while keeping our employees healthy and safe.”
1.0 SECOND QUARTER HIGHLIGHTS
Adjusted EBITDA1 of $35.2 million in the second quarter reflects higher profitability from the execution of pipe coating activity and increased demand for composite pipe products in the upstream oil and gas market. In addition, the second quarter benefited from continued growth in the Company’s non-oil and gas businesses which accounted for almost 40% of the revenue in the quarter. The second quarter results also include $3.1 million of COVID-19 related government wage subsidies.
Since March of 2020, the Company has actioned the closure of several girth weld inspection branches and controlled shutdown or sale of 9 fixed pipe coating facilities, including the current quarter’s decision to proceed with the closure plans for its Adria, Italy facility and completed sale of one of its facilities in Argentina. The Company incurred $5.2 million of one-time net restructuring charges in the quarter and continues to expect a quarterly normalized SG&A run-rate of approximately $55 million for the remainder of the year.
As at June 30, 2021, the Company had cash and cash equivalents totaling $140.0 million (December 31, 2020 – $214.5 million). This decrease is due to the repayment of $75 million on its outstanding credit facility in the second quarter of 2021, which was completed based on confidence in the outlook for the year. Partially offsetting the decrease, the quarter generated positive cash flow from operations of $24.7 million, reflecting improved operating results and a reduction of $6.3 million in working capital excluding the impact of restructuring liabilities, and limited capital spending to $5.0 million during the second quarter.
Selected Segment Financial Highlight
The Pipeline and Pipe Services segment delivered improved performance across all businesses in the quarter compared to the first quarter of 2021. Despite some supply chain challenges, the Company successfully executed on increased large pipe coating project backlog during the current quarter. The segment’s engineering services business experienced muted activity levels coming off its first quarter seasonal slowdown, while the integrity management business contributed stable revenue in the quarter. The Pipeline and Pipe Services segment generated revenues of $142.6 million, a decrease of $13.7 million, or 9%, from $156.3 million in the second quarter of 2020. This was primarily due to the absence of $22.5 million of revenue attributable to the Products business that was sold in late 2020. Adjusted EBITDA1 in the second quarter of 2021 was $13.0 million, a significant improvement compared to a negative $3.1 million in the second quarter of 2020, reflecting higher margin pipe coating activity and reduced operating cost base.
The Composite Systems segment experienced increased revenues for retail fuel and water/wastewater fiberglass reinforced plastic (“FRP”) tanks following the previous quarter’s seasonal slowdown, however, production levels were impacted by raw material shortages. Improved drilling and completion activity in the Permian Basin and Western Canada in the current period drove increases in this segment’s composite pipe product sales and tubular management services. Revenue in the second quarter of 2021 increased by $29.7 million, or 44%, compared to the second quarter of 2020. Adjusted EBITDA1 in the second quarter of 2021 was $15.9 million compared to $7.7 million in the second quarter of 2020.
The Automotive and Industrial segment continued its strong performance, though not at the record-levels of profitability experienced in the previous quarter. The segment delivered revenues of $66.7 million in the second quarter of 2021, a 54% increase over the same period of 2020. Adjusted EBITDA1 of $10.7 million in the second quarter of 2021 also represented an increase compared to $5.3 million in the second quarter of 2020. Demand for the Company’s automotive products continued to outpace automotive production recovery as a result of increased adoption of electronic content and inventory build. In industrial markets, the business benefitted from infrastructure spending to build out communication and transportation networks. The segment’s revenue also benefitted from early pass through of copper price increases in the quarter, albeit with no impact on gross margin.
The order backlog of $489 million as at June 30, 2021, represents a decrease over the $521 million order backlog as at March 31, 2021. This expected decrease was mainly attributed to steady execution on pipe coating projects, partially offset by intake in the Company’s FRP tank business and an increase in orders in other areas of the Company’s business. Outstanding firm bids were over $972 million as of June 30, 2021, higher than the $811 million from last quarter due to increased bidding activity. Conditional bids, pending final investment decision, were at $151 million in revenue at the end of the quarter, an increase over $110 million compared to the prior quarter. Budgetary estimates at the end of the second quarter were over $1 billion, on par with the budgetary value of $1 billion as at the end of the previous quarter.
2.0 OUTLOOK
The Company expects to deliver improved financial performance in 2021 over 2020, with improved performance in the second half of the year and some quarterly volatility due to project execution timing. Although disruptions related to supply chain issues are expected to continue for the remainder of the year, the Company anticipates these impacts will largely have abated by early 2022.
As discussed earlier, the Company expects its quarterly normalized SG&A run-rate to be approximately $55 million. The Company has substantially rationalized its footprint and will continue to focus on maintaining efficient operations with the technical expertise and geographic footprint that provide the best opportunity for the Company to secure work and drive profitability.
The Company anticipates some modest delays in final investment decisions and contract award decisions tied to several larger pipe coating projects, pushing associated backlog build into early 2022 rather than late 2021 as originally expected. However, in most cases the execution schedules for these projects are not expected to be materially delayed.
Pipeline and Pipe Services Segment
The Company expects to continue to execute work secured in its backlog with several projects nearing completion in the second half of the year. Larger operators have maintained their disciplined approach to capital spending and a modest improvement in spending is expected to continue throughout 2021 as operators return to a minimum base level of investment to maintain current levels of production. A moderate increase in drilling and completion related capital spending is expected as activity levels in the Permian Basin and in Western Canada grow.
Composite Systems Segment
Demand for FRP tanks is expected to remain robust throughout 2021 as retail fuel service stations maintain healthy margins. Continued growth in demand for water storage and treatment FRP tanks is expected to be supported by projected higher infrastructure spending and commercial and municipal water projects. Raw material shortages and associated supply chain challenges are anticipated to persist for the remainder of the year. The business continues to manage production schedules and lead times to minimize impacts and price surcharges have been implemented to manage raw material cost increases. Modest improvements in demand for the segment’s core pipe products and tubular management services in North America are expected as activity levels in Western Canada and in the Permian Basin continue their gradual rise.
Automotive and Industrial Segment
The Company’s automotive facility in Germany experienced some damage and downtime as a result of the recent flooding in the region; however, rapid cleanup and repair activities have been completed and the site has returned to near fully operational status. Given the speed of this recovery, the Company does not anticipate material impacts to its performance in the second half of the year and orders can be fulfilled by facility locations in other regions if needed. In spite of this event and the challenges associated with sustained raw material shortages, the Company expects to see continued growth in demand for its automotive products, particularly in Asia Pacific and Europe, Middle East, Africa and Russia regions, where electric vehicles adoption rates are highest. In the industrial side of the business, the Company is expecting to benefit from infrastructure spending as new and upgraded communication networks are constructed and nuclear refurbishments continue in Canada, and federal stimulus packages are rolled out, while continuing to effectively manage the volatility of copper raw material costs
