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Aecon reports third quarter results
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Toronto, Ontario – November 3, 2009: Aecon Group Inc. (TSX: ARE) today reported its financial results for the third quarter of 2009. Revenue, Operating Results and Net Income
Third quarter revenues reached a record $707 million, with increases reported in each of the four operating segments due primarily to the recent acquisitions of Lockerbie & Hole and South Rock, both in Alberta. Gross margin (representing revenues less direct costs and expenses) increased from $68.7 million (12.8% of revenues) in the third quarter of 2008 to $76.2 million (10.8% of revenues) in the third quarter of 2009. EBITDA (representing income from operations before interest expense, income taxes, depreciation and amortization, and non-controlling interests) grew to $48.5 million in the quarter from $44.4 million in the third quarter of 2008. Depreciation and amortization expense of $14.5 million in the quarter was $7.4 million higher than in the same quarter last year. The increases occurred mainly in the Infrastructure and Industrial segments, and resulted primarily from higher depreciation and amortization charges on property, plant and equipment, and intangible assets, resulting from the South Rock and Lockerbie acquisitions. Operating profit (representing income from operations before interest expense, income taxes and non-controlling interests) decreased to $34.0 million from $37.3 million in the same quarter last year, as decreases in the Industrial and Concessions segments offset increases in the Infrastructure and Buildings segments. The nine months operating profit was $54.0 million, an $8.5 million decrease from the same period last year, including a $2.6 million increase in foreign exchange losses. Earnings before taxes (representing income from operations before income taxes and non-controlling interests) in the quarter were $29.7 million, compared to $35.7 million in the same quarter of 2008. Net income decreased to $19.6 million ($0.35 per diluted share) in the quarter from $23.1 million ($0.45 per diluted share) in the same period last year. Net income of $28.9 million ($0.53 per diluted share) in the first nine months of 2009 was down from $39.0 million ($0.80 per diluted share) reported in the same period last year. Outlook “Aecon’s outlook remains positive,” said John M. Beck, Chairman and CEO, Aecon Group Inc. “Our record backlog and the relative durability of our Infrastructure and Buildings markets bode well for continued strong financial performance through 2010 and into 2011.” “Our strong balance sheet, healthy backlog and robust bidding pipeline continue to provide reason for optimism,” said Scott Balfour, President and CFO, Aecon Group Inc. “Although market conditions in the oilsands and the Ontario power sector continue to be weak, there are increasing signs that this market may begin to rebound in 2010 and 2011. And we continue to see the strongest civil and social infrastructure bidding pipeline in many years.” Backlog and New Business Awards Backlog at September 30, 2009 reached a record $1.92 billion, as growth in the Buildings and Industrial segments offset a small decline in Infrastructure backlog. Backlog within the recently acquired Lockerbie and South Rock operations was $680 million at September 30. Not included in backlog, but important to Aecon’s prospects due to the significant volumes involved, are the expected revenues from Aecon’s growing alliances and supplier-of-choice arrangements where the amount of work to be carried out is not specified. New contract awards of $971 million were booked in the quarter, compared to $555 million in the third quarter of 2008. A substantial portion of Aecon’s bidding pipeline includes large projects such as major highway extensions, hydroelectric power plants, hospitals and public transit projects. As such, it is expected that Aecon’s new business and backlog profile could be somewhat ‘lumpy’ over the next several quarters (within the context of what we expect will continue to be a general trend upward), with large increases in some quarters, when one or more of these large projects are awarded, and with little change or small declines in quarters when no large projects are awarded. Third Quarter Business Highlights • In July 2009, the Constitutional Court of Ecuador issued a ruling regarding airport charges and services, which could have an impact on Aecon’s concession interests in Quito, Ecuador. As the ruling is an event of default under the project agreements, the project debt (which remains non-recourse to Aecon, and which has not been called by the lenders) has been reclassified as current debt. Negotiations involving all parties are underway with a view to resolving the outstanding issues raised by this ruling. • In July 2009, the arbitration panel considering the second of two major claims launched by Continental Foundation Joint Venture (“CFJV” in which Aecon is a 45% partner) in respect of the Nathpa Jhakri hydroelectric project in India ruled substantially in the joint venture’s favour and dismissed a counter-claim for liquidated damages filed against CFJV. The ultimate financial impact of these awards is subject to a number of risks and uncertainties and the exact financial impact of these awards, including the timing, is not entirely clear at this time, but may (in addition to recovery of net investment in the project) be in the range of $4 million to $7 million. • In September 2009, Aecon issued convertible unsecured subordinated debentures resulting in total gross proceeds of $172.5 million. The move strengthened Aecon’s balance sheet and positioned it for working capital investment in new project opportunities, and further improved its liquidity in support of the surety capacity that may be required for these projects. • Average week day traffic on the Cross Israel Highway in September 2009 reached 121,000 vehicles, an 18% increase over September 2008. • Nearly 3.5 million passengers passed through the existing Quito airport in the first nine months of 2009, a 2.7% increase over the same period in 2008. Segmented Results Aecon reports its results in four operating 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.
(1) Segment operating profit or loss represents the profit or loss from operations, before interest expense, income taxes, non-controlling interests, and corporate allocations of overhead costs and capital charges. (2) Segment return on revenue is calculated as segment operating profit (loss) as a percentage of revenues. In the Infrastructure segment, third quarter revenues of $341 million were $103 million, or 43%, higher than last year. The largest revenue increase ($73 million) occurred in materials operations, due largely to the acquisition of South Rock in the first quarter of 2009 (South Rock is considered part of this segment’s materials operations). Growth in revenues from civil, utilities and international operations also added to the increase. Segment operating profit of $24.9 million in the quarter represents an $8.0 million, or 48%, increase over the third quarter of 2008. As in third quarter revenues, most of the increase in operating profit was generated from the materials operations. Profits decreased in the civil operations by $2 million, and increased in the utilities operations by $1 million, while operating profits from international operations were almost unchanged quarter-over-quarter. Segment backlog at September 30 was $576 million, a $5 million decrease from one year ago. Buildings The Buildings segment includes all aspects of Aecon’s commercial, institutional and multi-unit residential building construction and renovation activities.
Third quarter revenues of $121 million in the Buildings segment were $12 million, or 11%, higher than a year earlier. The increase resulted primarily from a $24 million increase in Toronto operations, partly offset by an $11 million decline in Seattle operations. The increase in Toronto reflects the impact of several Infrastructure Ontario projects underway during the quarter, while the decrease in Seattle reflects the wind-down of a large project that reached peak production in 2008. Segment operating profit of $0.9 million in the third quarter of 2009 represents an improvement of $1.8 million from the same quarter last year. Most of the quarter-over-quarter improvement in operating profits occurred in the Montreal operations, where losses decreased from $2.7 million in 2008 to $0.1 million in 2009. In the Toronto business unit, operating profits decreased by $0.5 million despite a $25 million increase in revenues, as reductions in contract margins realized on some projects offset the expected impact of higher volumes. Backlog of $630 million at the end of the third quarter of 2009 was $12 million higher than at the same time last 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, as well as Aecon’s commercial mechanical operations. The segment includes all of the Lockerbie & Hole operations acquired earlier this year.
In the Industrial segment, third quarter revenues of $216 million were $44 million higher than in 2008 due to the addition of $127 million in revenues from the newly acquired Lockerbie operations. Excluding Lockerbie, third quarter revenues decreased by $83 million due primarily to a decline in module assembly, pipe fabrication and site construction work in the oilsands, and less work in the Ontario power sector. Industrial segment operating profit of $13.1 million represents a decline from the $21.2 million recorded in the same period last year. Reflecting the revenue declines noted above, excluding Lockerbie operations, contributions from Ontario declined by $6.6 million in the quarter, while contributions from Western Canada declined by $9.0 million. Partially offsetting these declines were a $5.2 million contribution from Lockerbie operations and a $1.8 million increase at Innovative Steam Technologies. Segment backlog of $717 million is $416 million higher than at the same time last year due to the addition of $587 million in backlog from Lockerbie operations. 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.
Concessions segment revenues of $31 million in the third quarter were up $15 million compared to the same period in 2008. The majority of the increase came from Aecon’s interest in the operator of the Cross Israel Highway, a company in which Aecon holds a 30.6% interest. Segment operating loss of $0.2 million in the third quarter of 2009 compares to a profit of $3.3 million from the same period in 2008, with the majority of the decrease occurring in the Quito airport concessionaire, which includes the results from operating the existing Quito airport while the new airport is being constructed. As noted earlier, the Constitutional Court of Ecuador has issued a ruling regarding airport charges and services. Negotiations are underway with a view to resolving the outstanding issues resulting from this ruling, and although the end result of these negotiations is not yet clear, Aecon has decided to record no profit contribution in the third quarter from its equity participation in the concession. Aecon’s investment in the Cross Israel Highway concession continues to grow in value, but this increasing value will not be reflected in earnings until a dividend is received or a portion of the investment is sold. As such, even though the Cross Israel Highway is performing well and is generating strong operating cash flow, Aecon has not reported any revenues or profits from this investment. The project remains on track to deliver an expected 14% after-tax internal rate of return (“IRR”) on Aecon’s investment. 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 September 30. Corporate and Other Third quarter operating losses in the Corporate and Other segment increased by $1.5 million due largely to marketing, general and administrative (“MG&A”) expenses, which were $1.0 million higher than in the same quarter last year. The higher MG&A costs resulted primarily from higher training and employee compensation costs, as well as higher defined benefit pension plan expenses. Also negatively impacting the segment operating loss in the quarter were a $0.3 million unfavourable change in foreign exchange gains and losses year-over-year, and higher depreciation charges of $0.5 million, primarily for IT equipment. Consolidated Results The Consolidated Results for the three months and nine months ended September 30, 2009 and 2008 are available at the end of this News Release.
Balance Sheet Highlights
Conference Call A conference call has been scheduled for Wednesday, November 4, 2009 at 10:30 a.m. ET to discuss Aecon’s 2009 third quarter financial results. Participants should dial 416-620-2407 or 1-800-215-0816 at least 10 minutes prior to the conference time of 10:30 a.m. A replay will be available after 12:30 p.m. at 1-800-558-5253 or 416-626-4100 until midnight, November 11, 2009. The pass code is 21441795. 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 on a selected basis internationally. Aecon is pleased to be recognized as one of the 10 Best Employers in Canada as published by Report on Business Magazine. The information in this news release includes certain forward-looking statements.These “forward-looking” statements are based on currently available competitive, financial and economic data and operating plans but are subject to risks and uncertainties. The level of uncertainty associated with global economic events may impact the results of Aecon in a manner which is currently impossible to ascertain. In addition, factors could cause Aecon’s actual results, performance or achievements to vary from those expressed or inferred herein, including without limitation, the successful integration of recent acquisitions, failure to achieve the targets associated with the construction of the new Quito airport or operation of the existing Quito airport as well as the associated political risk in Ecuador, and the impact of economic conditions in Western Canada. Risk factors are discussed in greater detail in the section on “Risk Factors” in the Annual Information Form filed on March 31, 2009 and available at www.sedar.com. Forward-looking statements include information concerning possible or assumed future results of operations or financial position of Aecon, as well as statements preceded by, followed by, or that include the words “believes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “should” or similar expressions. Important factors, in addition to those discussed in this document, could affect the future results of Aecon and could cause those results to differ materially from those expressed in any forward-looking statements. Consolidated Statements of Income for the three months ended September 30, 2009 and 2008 (in thousands of dollars, except share and per share amounts) (unaudited)
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