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Aecon reports record results for 2007

Mar 4, 2008
  • Margins strengthen on record revenue
  • Operating profit reaches $60.8 million
  • Net income improves to record $48.3 million or $1.16 per share
  • Net income of $22.5 million in Q4 makes it the strongest quarter in Aecon history
  • Backlog of $1.23 billion is the largest year-end backlog in Aecon’s history
  • Outlook for 2008 and 2009 remains strong

 

Toronto, Ontario – March 4, 2008: Aecon Group Inc. (TSX: ARE) today reported record operating results for 2007 as margins, operating profit and net income all increased over those reported the previous year.

 

Revenue, Operating Results and Net Income

 

Revenue, Operating Results and Net Income
   

Three Months Ended
December 31

Twelve Months Ended
December 31

$ millions

 

2007

 

2006

     

2007

 

2006

                     

Revenues

$

482

$

338

   

$

1,493

$

1,113

Gross margin

 

48.5

 

39.7

     

142.4

 

96.6

EBITDA

 

30.8

 

19.1

     

82.7

 

36.5

Operating profit

 

26.2

 

13.5

     

60.8

 

21.9

Interest expense

 

(2.8)

 

(2.3)

     

(11.2)

 

(9.7)

Income taxes

 

(0.4)

 

(0.6)

     

(0.4)

 

(0.7)

Non-controlling interests

 

(0.4)

 

-

     

(0.8)

 

-

Net income (loss) for the period

 

22.5

 

10.6

     

48.3

 

11.5

Backlog - December 31

$

1,234

$

786

           

 

 

Revenues in 2007 totalled $1.49 billion, a 34% increase from the $1.11 billion reported last year, as increases were recorded in all four operating segments.

 

Gross margins (revenues less direct costs and expenses) increased by 47% to $142.4 million, bringing gross margins as a percentage of revenues to 9.6% from 8.7% in 2006.

 

EBITDA (representing income from operations before interest expense, income taxes, depreciation, amortization and non-controlling interests) grew to $82.7 million in 2007, an increase of 126% over the $36.5 million recorded in 2006.

 

Operating profit (representing income from operations before interest expense, income taxes and non-controlling interests) increased to $60.8 million from $21.9 million in 2006, an increase of 178%, as the Industrial, Infrastructure and Concessions segments each reported significant improvement. As expected, the Buildings segment reported a small decline of $0.2 million.

 

Net income in 2007 grew to $48.3 million ($1.16 per diluted share) from $11.5 million in 2006 ($0.31 per diluted share). Net income of $22.5 million in the fourth quarter ($0.50 per diluted share) was more than double the $10.6 million reported in the fourth quarter of 2006 ($0.28 per diluted share), making this the most profitable quarter in Aecon’s history.

 

Marketing, general and administrative expenses amounted to $71.9 million in 2007, which is $9.4 million higher than the previous year due primarily to higher volumes, the expansion of operations in western Canada, higher information technology costs and increased performance-related incentives.

 

Depreciation and amortization expense of $21.9 million is $7.3 million higher than last year due primarily to amortization of concession rights related to the existing Quito airport, which commenced in mid 2006. Foreign exchange losses of $1.6 million contrasted with gains of $0.3 million in 2006.

 

Outlook

 

“Aecon’s strong results are evidence that our strategic plan continues to have us on the right path,” said John M. Beck, Chairman and CEO, Aecon Group Inc. “The ongoing strength of our core markets, especially in the energy and transportation infrastructure sectors in Canada, bode well for continued strong financial performance in 2008 and 2009.”

 

“The strength of our backlog and the growth we experienced in 2007 are strong positive signals for Aecon,” said Scott Balfour, President and CFO, Aecon Group Inc. “In 2008, I expect to see a continuation of the key market forces that have driven our strong bottom line results over the past year.”

 

Backlog and New Business Awards

 

Backlog at December 31, 2007, was $1,234 million, a 57% increase from the same time last year, due to backlog growth in the Buildings and Industrial segments, offset somewhat by a small decline in the Infrastructure segment (due largely to work-off on the Quito International Airport project). 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 $1.94 billion were booked in 2007, a 47% increase from the $1.32 billion awarded in 2006.

 

Fourth Quarter Business Highlights

 

· Net income of $22.5 million in the fourth quarter of 2007 made this the most profitable quarter in Aecon’s history.

 

· In December 2007, Aecon acquired the assets of Leo Alarie and Sons, one of the largest construction companies in northern Ontario.

 

· In December 2007, Aecon was added to S&P/TSX Composite Index.

 

· Average weekday traffic on the Cross Israel Highway in December 2007 surpassed 93,000, a 15 % increase over December 2006.

 

 

· Construction of the new airport in Quito, Ecuador, is progressing well, reaching 22% completion at the end of 2007.

 

· Over 4.2 million passengers passed through the existing Quito International Airport in 2007, including more than 1 million in the fourth quarter, a 4.1% increase from the same quarter last year.

 

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)

Three Months

Ended December 31

 

Twelve Months

Ended December 31

 
   

2007

 

2006

       

2007

 

2006

   

Revenues

$

207

$

146

     

$

689

$

484

   

Segment operating profit

 

4.8

 

7.2

       

23.5

 

16.5

   

Return on revenue

 

2.3%

 

4.9%

       

3.4%

 

3.4%

   

Backlog - December 31

$

372

$

410

                 

 

(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.

 

Revenues from the Infrastructure segment increased 42% to $689 million in 2007, largely due to revenue increases from roadbuilding (much of which were from The Karson Group, acquired by Aecon in February 2007), as well as gains from heavy civil operations and utilities operations.

 

Operating profit from the Infrastructure segment grew to $23.5 million in 2007, a 42% improvement over 2006. Much of the improvement came from roadbuilding and heavy civil operations, both of which saw volume and margin growth in 2007, and from a $3.4 million gain on the sale of Aecon’s right to participate in the construction of an extension of the Cross Israel Highway. Partially offsetting these increases were risk reserves taken on a few previously completed large projects.

 

It should be noted that construction profits have not yet been recorded on the new Quito airport project. Under Aecon’s accounting policy for large multi-year contracts, profit is recognized only when construction reaches a stage of completion that is sufficient to reasonably determine a project’s probable results. This milestone is expected to be reached in the first half of 2008.

 

Backlog of $372 million at December 31, 2007 represents a decline of 9% from the same time last year, due largely to work performed on the Quito airport project and the impact of foreign exchange conversion.

 

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 December 31
  Twelve Months
Ended December 31
 
    2007   2006  
    2007   2006  
Revenues $ 131 $ 84       $ 386 $ 323    
Segment operating profit   3.2   2.6         4.4   4.6    
Return on revenue   2.5%   3.1%         1.1%   1.4%    
Backlog – December 31 $ 480 $ 191                  
 

Revenues in the Buildings segment totalled $386 million in 2007, a 20% increase over 2006 due primarily to increases from operations in Ottawa and Montreal. Partly offsetting these increases was a decline from Toronto operations in the first half of the year.
Segment operating profit of $4.4 million in 2007 was 5% lower than in 2006, as the impact of restructuring costs contributed to disappointing results from Toronto operations, offsetting year-over-year growth in operating profit from all other business units.
Backlog of $480 million in the Buildings segment at the end of 2007 was more than double the $191 million in place at the end of 2006, due in large part to the award of three large projects in the second half of the year within the Toronto business unit and strong new business awards in the Seattle business unit.

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)
Three Months
Ended December 31
  Twelve Months
Ended December 31
 
    2007   2006  
    2007   2006  
Revenues $ 146 $ 105       $ 398 $ 290    
Segment operating profit   18.5   12.6         36.2   19.5    
Return on revenue   12.7%   12.0%         9.1%   6.7%    
Backlog – December 31 $ 384 $ 186                  

Revenues of $398 million in the Industrial segment were 37% higher than 2006. While all operating units within this segment reported year-over-year revenue increases, the segment’s construction operations in Ontario and its Innovative Steam Technologies (IST) business were responsible for most of the increase.
Segment operating profit grew by 86% in 2007, reaching $36.2 million, led by improvements at IST, Western Canada operations and construction operations in Ontario. Higher volumes and generally improved margins contributed to most of the operating profit increases.
Backlog at December 31, 2007 of $384 million was more than double the $186 million in place a year earlier. The increase was due primarily to strong backlog growth in both Western and Central Canada, where the addition of a $105 million contract for a new power plant in Windsor contributed significantly to backlog, and at IST, which ended the year with the second highest backlog in its history.
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 December 31
  Twelve Months
Ended December 31
 
    2007   2006         2007   2006  
Revenues $ 15 $ 13       $ 58 $ 36  
Segment operating profit (loss)   0.2   (0.4)         4.0   (2.7)  
Return on revenue $ 1.3% $ (3.1%)         6.9%   (7.6)%  

Revenues in the Concessions segment were $58 million in 2007, up 61% from last year, reflecting the reporting of revenues from the Quito Airport project for the full year in 2007 compared to a half year in 2006.
Operating profit of $4.0 million in 2007 was an improvement of $6.7 million over the $2.7 million loss recorded last year. The main contributors to the increase were the operations of the existing airport in Quito, Ecuador and improved results from the operator of the Cross Israel Highway. All operating profits from the existing Quito airport are being invested to finance the development and construction costs of the new airport.
While Aecon’s investment in the Cross Israel Highway concession continues to grow in value, 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 15% 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 December 31.

Corporate and Other

Net corporate expenses in 2007 totalled $13.2 million compared to $18.2 million in 2006. Included in the 2007 results was $4.3 million which Aecon received in return for agreeing to amendments to a co-operation agreement negotiated with Hochtief AG, including a release from non-compete provisions which were set to expire in 2008. Pension expense was also lower in 2007 due to a $1.5 million non-recurring cost in 2006 associated with the termination of one of Aecon’s defined benefit pension plans.
Without the impacts of these one time items, net corporate expenses increased in 2007 by $0.7 million, due primarily to higher salary and performance-related incentive costs.

Consolidated Results
The Consolidated Results for 2007 and 2006 are available at the end of this News Release.

Balance Sheet Highlights
(thousands of dollars)    Dec. 31, 2007     Dec. 31, 2006 
         
Cash, cash equivalents, restricted cash and restricted term deposits and marketable securities $ 169,234 $ 78,528
Other current assets   434,015   372,839
Property, plant and equipment   97,105   53,348
Other long-term assets   210,298   211,572
Total Assets   910,652   716,287
         
Current liabilities $ 439,984 $ 330,167
Long-term debt   132,710   81,120
Other long-term liabilities   112,549   151,397
Shareholders’ equity   225,409   153,603
Total Liabilities and Shareholders’ Equity   910,652   716,287

 

Conference Call

A conference call has been scheduled for Wednesday, March 5, 2008 at 10:30 a.m. ET to discuss Aecon’s 2007 financial results. Participants should dial 416-641-6682 or 1-800-354-6885 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, March 12, 2008. The pass code is 21375083.

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. Aecon is pleased to be recognized as one of the 50 Best Employers in Canada as published by Report on Business Magazine.

Consolidated Statements of Income for the three months ended December 31, 2007 and 2006
(in thousands of dollars, except per share amounts) (unaudited)

Consolidated Statements of Income for the three months ended December 31, 2007 and 2006
    2007   2006
         
Revenues $ 482,320 $ 337,953
         
Direct costs and expenses   (433,812)   (298,274)
         
    48,508   39,679
         
Marketing, general and administrative expenses   (24,580)   (22,410)
         
Foreign exchange (losses) gains   (69)   1,286
         
Gain (loss) on sale of assets   4,260   (199)
         
Depreciation and amortization   (4,575)   (5,564)
         
Interest expense   (2,844)   (2,341)
         
Interest income   2,660   711
         
    (25,148)   (28,517)
         
Income before income taxes and
non-controlling interests
  23,360   11,162
         
Income tax (expense) recovery        
Current   1,115   (2,080)
Future   (1,539)   1,527
         
    (424)   (553)
         
Income before non-controlling interests   22,936   10,609
         
Non-controlling interests   (425)   -
         
Net income for the period $ 22,511 $ 10,609
         
Net earnings per share        
Basic $ 0.56 $ 0.29
Diluted $ 0.50 $ 0.28
         
Average number of shares outstanding        
Basic   39,952,263   36,484,866
Diluted   47,330,590   38,046,615
         


Consolidated Statements of Income for the years ended December 31, 2007 and 2006
(in thousands of dollars, except per share amounts) (unaudited) 

Consolidated Statements of Income for the years ended December 31, 2007 and 2006
    2007   2006
         
Revenues $ 1,492,747 $ 1,113,306
         
Direct costs and expenses   (1,350,311)   (1,016,744)
         
    142,436   96,562
         
Marketing, general and administrative expenses   (71,896)   (62,458)
         
Foreign exchange (losses) gains   (1,646)   324
         
Gain (loss) on sale of assets   7,840   (68)
         
Depreciation and amortization   (21,915)   (14,613)
         
Interest expense   (11,234)   (9,660)
         
Interest income   5,972   2,144
         
    (92,879)   (84,331)
         
Income before income taxes and non-controlling interests   49,557   12,231
         
Income tax (expense) recovery        
Current   223   (2,790)
Future   (653)   2,061
         
    (430)   (729)
         
Income before non-controlling interests   49,127   11,502
         
Non-controlling interests   (824)   -
         
Net income for the year $ 48,303 $ 11,502
         
Net earnings per share        
Basic $ 1.28 $ 0.33
Diluted $ 1.16 $ 0.31
         
Average number of shares outstanding        
Basic   37,673,208   35,157,471
Diluted   46,922,459   37,116,872