Armtec Infrastructure : Reports Financial Results for the Fourth Quarter and Full Year 2013

CONCORD, ON, March 18, 2014 /CNW/ - Armtec Infrastructure Inc. ("Armtec" or the "Company") (TSX: ARF) (TSX: ARF.DB) ("Armtec") today reported financial results for the year and the fourth quarter ended December 31, 2013. As previously announced, Armtec is reporting its 2013 financial performance on the basis of two reporting segments: Drainage Solutions ("Drainage") and Precast Concrete Solutions ("Precast"). Previously, the Company reported its results within one operating segment. The 2012 results have been realigned to conform with the new reporting segments for 2013.

Highlights:

• Revenue in 2013 was $455.5 million, consistent with the prior year, with engineered precast volume improvements leading to a 7.2% revenue increase for the Precast business unit ("BU or BUs"). These gains were offset by an 11.7% decline in Drainage revenues.  While there were encouraging signs of recovery in some Drainage areas during the second half of the year, we could not make up the softness from the first half, which was driven by a weather-shortened construction season, lower municipal spending, reduced forestry grants and the impact of the Charbonneau Commission Inquiry in Quebec. For the fourth quarter, overall revenue was $108.0 million, a 3.2% decrease over the prior year, with Drainage revenue impacted by continued competitive pressure in the Prairies and the early closure of many infrastructure projects due to the early winter.
• Earnings from operations for the year were $28.0 million compared to $26.9 million in 2012, with strong contributions from the Soundwall market, as well as the Kitimat smelter modernization project in the Pacific market area. Precast earnings were up $9.7 million for the year, while Drainage earnings were down $8.1 million. Fourth quarter earnings from operations were $2.9 million compared to $1.1 million in the same period last year.
• Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") for 2013 was $40.1 million, down slightly for the year, and up slightly in the fourth quarter (please see the section entitled "Non-GAAP Measure"). The overall lower results in Drainage were not fully offset by the improved performance in the Precast business.
• Management estimates a first quarter 2014 EBITDA loss of approximately $8 million as compared to EBITDA of $0.1 million in the same period of 2013.  A portion of the revenue and associated earnings foregone in the first quarter is expected to be recovered prior to the end of 2014.  Management believes that the unfavourable market conditions at the start of the year will persist through March and into the second quarter of 2014.  The Company intends to access the interest accrual option under the 2012 Brookfield Facility, as required, to ensure it will have sufficient liquidity for the operations of the business. Despite the challenging start to the year, the Company remains focused on executing its performance improvement plans with an aim of delivering improved earnings in the second half of 2014 over the same period in 2013. (Note that this is forward-looking information and for more information please see the section entitled "Caution Regarding Forward-Looking Statements")

"We continue to be passionate about Armtec's role in Canada's infrastructure market and the new opportunities we are pursuing to broaden our product offering and strengthen our market coverage" said Mark Anderson, President and Chief Executive Officer. "The start to this year has been a challenge due to harsh winter conditions and project delays but we remain focused on improving our results in the second half of 2014."  (Note that this is forward-looking information and for more information please see the section entitled "Caution Regarding Forward-Looking Statements")

Overview
2013 was a year of transition for Armtec.  Emerging from the Turnaround Plan of 2012, the Company realigned its organizational structure away from four geographic regions to two product-focused business units: Drainage Solutions and Precast Concrete Solutions.  The Turnaround Plan was announced by Armtec in November of 2011 by setting targeted EBITDA improvements of $20 million over a 12 to 24 month period.  The Turnaround Plan was successful in delivering $22 million of improvement and increasing EBITDA from $16.7 million in 2011 to $41.1 million in 2012.  The Company's overall financial performance in 2013 of $40.1 million in EBITDA remained consistent with 2012 at $41.1 million.  Solid gains in revenue and EBITDA achieved in the Precast BU were offset by less favourable results in the Drainage BU that did not recover from the adverse weather conditions in the first half of the year.

The gains in Precast were driven by engineered precast with strong performance in the Pacific and Soundwall market areas.  The Kitimat smelter modernization project in the Pacific market area was a key contributor to the favourable Precast results in 2013.  Armtec's portion of the Kitimat smelter modernization project was announced in December of 2011 to supply precast components to expand and upgrade Rio Tinto Alcan's aluminum smelter in Kitimat, British Columbia.  The Drainage shortfall was largely due to lower demand across all market areas driven by a weather-shortened construction season. In addition, lower municipal spending, reduced forestry grants and the Charbonneau Commission Inquiry in Quebec impacted Eastern Canada and increased competitive pressures were experienced in Western Canada.  The Charbonneau Commission Inquiry is a public inquiry in Quebec into alleged corruption in the management of public construction contracts.  Demand from international markets was also lower than the prior year.

During the third quarter of 2013, Armtec reached an agreement in principle to settle all previously disclosed proposed class action proceedings commenced by investors who purchased shares of the Company during the period of March 24, 2011 through June 8, 2011.  The agreement in principle provides for a payment of approximately $12.9 million, inclusive of all taxes, fees, interest and costs, by Armtec's insurers and as such the settlement would not impact the Company's cash resources.  The proposed settlement is made without any admission of liability by the Company or any of its current or former officers and directors.  In February of 2014, the parties entered into a definitive settlement agreement in accordance with the foregoing terms.  A court-approved notice will be issued regarding the settlement approval process and the settlement terms.  The settlement is subject to the fulfillment of customary conditions including opt-out thresholds and court approval.  There is no assurance that these conditions will be fulfilled. (Note that the foregoing information is forward-looking information.  Please see the section entitled "Caution Regarding Forward-Looking Statements".)

Summary of Results

Full Year Results
Revenue
Armtec recorded revenue of $455.5 million in 2013 which was slightly lower than 2012 levels at $457.4 million.  Revenue from transportation related projects increased, however, municipal government projects continued to lag prior year levels.  Agricultural drainage product revenue was impacted by the unfavourable installation conditions due to poor weather during the first half of 2013 and while revenue improved in the second half of the year, the shortfall was not fully recovered.  The softness in the infrastructure and agricultural markets was offset by improved engineered precast volumes, with year-over-year growth in natural resource and commercial building applications.

Earnings from Operations
The earnings from operations for 2013 were $28.0 million compared to $26.9 million in 2012.  Depreciation and amortization was $12.1 million or $1.6 million lower than 2012 levels of approximately $13.7 million.

Gross margin was $84.1 million, consistent with the prior year as a percentage of revenue at 18.5%.  Improvements in operational performance and the favourable mix of engineered precast projects especially in the Pacific and Soundwall market areas offset the impact of softer volumes of standard precast products and the depressed construction activity in Eastern Canada.  The impact of the reduced demand for drainage products was compounded by the competitive corrugated steel pipe pricing pressures in the Prairies and a slight increase in raw material costs.

Selling, general and administrative expenses for 2013 were $56.0 million, compared to $59.3 million in 2012.  This reduction was the result of lower annual incentives for employees in 2013, which offset the investment in human resources made primarily to support sales functions.

EBITDA of $40.1 million was below the prior year by $1.0 million or 2.4%.  The $8.4 million decline in EBITDA for the Drainage BU and the Corporate administration cost increase of $1.2 million were partially offset by the $8.6 million improvement in EBITDA from the Precast BU.

Results by Segment
Drainage Solutions

Revenue
Revenue for Drainage in 2013 was $162.6 million, a decrease of $21.6 million, or 11.7%, from the same period in 2012.  While certain areas improved during the second half of the year, this did not offset the softness experienced throughout the first half of the year.  The agricultural, residential, natural resource and infrastructure application markets were impacted across each market area by the shortened installation season in 2013.  In addition, the release of new municipal projects in Eastern Canada has slowed as a result of the ongoing investigation by the Charbonneau Commission into the Quebec construction market.  Demand in Quebec was further depressed by the suspension of forestry grants by the provincial government.  Also in the Prairies, increased competition in the corrugated steel pipe market, driven largely by a new entrant, impacted selling prices.  The Drainage BU derives its International revenue primarily through exports to Russia.  With government spending diverted to the Sochi Olympics, International revenue was lower than prior year.  By comparison in 2012, installation conditions were favourable resulting in stronger demand and Eastern and Western Canada were not experiencing the challenges noted in 2013.

Earnings from Operations
On a year to date basis, earnings from operations for the Drainage BU decreased $8.1 million, or 32.7%, relative to the prior year.  Volume declines, competitive pricing in the corrugated steel pipe market in the Prairies, and the investment in additional sales and operations personnel, offset by lower annual incentives for employees were the main drivers of the lower year-over-year performance.  Depreciation and amortization were consistent with 2012 as a percentage of revenue.  EBITDA for the Drainage BU of $18.7 million was $8.4 million below 2012.

Precast Concrete Solutions

Revenue
Precast revenue for 2013 at $292.9 million was up $19.7 million, or 7.2%, over the $273.2 million of 2012.  Engineered precast project volume improvements continued to offset the slightly softer standard precast product revenue which was impacted by the unfavourable installation conditions in the first half of 2013 and overall lower market demand, especially in the Prairies.  Engineered precast revenue increased by $20.1 million, or 9.8%, and was attributable to growth in the Pacific and Soundwall market areas.  Revenue in the Pacific market was driven by the Kitimat smelter modernization project.  The Prairie market area saw increased activity related to parking structures used in commercial applications and the Soundwall gains were a function of a number of projects, predominantly in the highway infrastructure segment in Ontario.  In the Central Market area, gains from the build-up to the Pan American games with demand for new venues, parking garages and other engineered structures were more than off-set by the completion of other projects from 2012 such as the Toronto Transit Commission ("TTC") tunnel liner contract.  The TTC tunnel liner contract was announced by Armtec in December of 2009 to supply and deliver precast segmental rings for construction of the Toronto-York Spadina subway extension in Toronto and Vaughan, Ontario.  The Eastern market area experienced lower demand where a reduction in government spending levels and project delays were influenced by the construction scandal and ongoing Charbonneau Commission Inquiry.

Earnings from Operations
Overall, earnings from operations in Precast improved in 2013 by $9.7 million over 2012.  In addition to the improved engineered precast project volumes, operational performance continued to improve in 2013 driven by a more favourable mix of projects.  These improvements offset the impact of the softer standard precast volumes which were impacted by poor weather in the first half of the year and softer demand in the single family residential market resulting in lower margin performance on these products.  Depreciation and amortization was slightly higher than the prior year as a result of the generative capital expenditures made to support the Highway 407 East expansion project, which is now expected to commence production early in 2014 (note that this is forward-looking information and for more information please see the section entitled "Caution Regarding Forward-Looking Statements").  In June of 2013, Armtec announced it had been awarded a contract to supply and deliver precast girders for new bridge structures being constructed in the Greater Toronto Area as part of the Highway 407 East expansion project.  The resulting EBITDA for the year ended December 31, 2013 improved over 2012 levels by $8.6 million.

Fourth Quarter Results
Revenue
Armtec recorded revenue of $108.0 million for the three months ended December 31, 2013, a $3.6 million or a 3.2% decrease over the three months ended December 31, 2012.  Improved engineered precast volumes in the Pacific, Prairie and Soundwall market areas offset the softness in Central Canada in the quarter.  Revenue from standard precast products improved slightly with stronger volumes noted for the first time in Eastern Canada in 2013 as compared to the same period of 2012.  Revenue from the Drainage BU was slightly lower than the prior year resulting from the continued competitive pricing environment in the Prairie provinces and the premature closure of many infrastructure projects with the early onset of winter.

Earnings from Operations
The earnings from operations for the fourth quarter of 2013 were $2.9 million, or 2.6% of revenue, as compared to $1.1 million, or 1.0% of revenue, for the 2012 comparative period.  Depreciation and amortization in the quarter of $3.0 million was consistent with 2012 levels.

The gross margin for the three months ended December 31, 2013 was $17.3 million, a decrease of $2.2 million, from $19.5 million in the same period of 2012.  As a percentage of revenue, the gross margin in the quarter was 16.0%, compared with 17.5% in the same period of 2012.  Despite similar revenue levels, operating results for the Drainage BU were lower than the prior year mainly due to lower pricing experienced in the Prairie provinces and a slight increase in raw material costs as compared to 2012.  Performance in the Precast BU was consistent with the prior year.

Selling, general and administrative expenses, before depreciation and amortization, for the three months ended December 31, 2013 were $12.9 million as compared to $16.2 million in 2012.  The decrease in expenses in the quarter related to the reduced provision of annual incentive costs net of the planned investment in additional resources, which primarily support the sales function.

EBITDA performance for the quarter of $5.9 million was favourable when compared to the prior year of $4.8 million.  Although the Precast BU performed consistently with the prior year, the continued lower results in the Drainage BU resulted in a reduction of annual incentives in 2013 for the Company when compared to 2012, thus impacting the results for the quarter.

Outlook
This section contains forward-looking information.  For more information please see the section entitled "Caution Regarding Forward-Looking Statements".

The long term outlook for Armtec's markets remains favourable; driven by a stable macro-economic climate in Canada and ongoing infrastructure investment required across the country.  In the near term, the demand for Armtec's products is expected to remain flat to slightly favourable.   However, Armtec is pursuing new opportunities in both the Precast and Drainage BUs to broaden its product depth and strengthen its market coverage, which management believes should support revenue growth in 2014.

A stronger customer focus is expected to regain some, but not all, of the revenue softness experienced in the Drainage BU across Canada in 2013.  Steady demand is anticipated from provincial-level government spending while improvement is anticipated in the natural resource end use markets, offset by the potential slowdown in agricultural drainage installations, which are heavily impacted by crop prices.  Although the Charbonneau Commission Inquiry is expected to continue into 2015, some improvement is expected in the Quebec infrastructure market in the second half of 2014 as legislation has been passed by the provincial government to mitigate the alleged level of corruption previously experienced in the awarding and management of public construction contracts.  The demand from municipalities outside Quebec is anticipated to remain at lower than historic levels as local governments continue to carefully manage capital and maintenance programs in efforts to balance their budgets.

Precast market activity is expected to remain steady with the current level of building construction and infrastructure projects announced throughout Canada over the next two years.  Improved demand is anticipated in Western Canada as increased investment in the oil and gas sector should directly and indirectly impact infrastructure investment.  In addition, the forestry industry in the Pacific market should see increased demand from the United States ("US") housing recovery.  For Armtec, these gains will be largely off-set by the completion of the engineered precast work at the Kitimat smelter modernization project in BC.  The demand for Armtec's engineered precast products in Ontario in 2014 is expected to be less than the prior year as investments in bridge and transit construction will be more than offset by reduced spending on infrastructure related to parking garages and the Pan American games. The total backlog of engineered precast work was $129 million at December 31, 2013 and was consistent with the $132 million one year earlier.  Despite relatively flat to slightly favourable overall demand, Armtec has been investing in talent and resources to pursue additional products and solutions for both standard and engineered precast.  Management believes these efforts should start to result in incremental revenues in 2014 and benefit future years.

Although it is typical to experience an EBITDA loss in the first quarter, management anticipates a significant decline in 2014 first quarter earnings relative to prior years.  Harsh winter weather conditions, predominantly in Ontario and Manitoba, and unexpected project delays are expected to lead to lower precast revenue and higher precast costs.  The continued below average temperatures have adversely impacted precast production facilities with outdoor manufacturing processes.  The Drainage Business Unit will similarly be adversely affected by the weather conditions, but to a much lesser extent.

As a result, management estimates a first quarter 2014 EBITDA loss of approximately $8 million as compared to EBITDA of $0.1 million in the same period of 2013. A portion of the revenue and associated earnings foregone in the first quarter is expected to be recovered prior to the end of 2014.  Management believes that these unfavourable market conditions will persist through March and into the second quarter of 2014.  The Company intends to access the Brookfield interest accrual option as required to ensure it will have sufficient liquidity for the operations of the business. Despite the challenging start to the year, the Company remains focused on executing its performance improvement plans with an aim of delivering improved earnings in the second half of 2014 over the same period in 2013.

The successful transition to the new BU structure in 2013 positions the Company well in order to benefit from the sharing of best practices and leveraging of the core competencies in each of Precast and Drainage.  Management has established performance improvement plans within each BU and Market Area designed to grow revenue and improve key execution capabilities in 2014.

Conference Call

Management will host a conference call at 10:00 a.m. (ET)on Wednesday, March 19, 2014 to discuss the results. Investors who wish to participate can access the call using the following numbers: 1-800-319-4610 or +1-604-638-5340 outside Canada and the US. The call archived on Armtec's website at www.armtec.com.

A taped rebroadcast will be available to listeners following the call until 12:00 a.m. on Wednesday, March 26, 2014. To access the rebroadcast, please dial 1-800-319-6413 or +1-604-638-9010 outside of Canada & USA and quote the passcode 3271#.

Armtec's full consolidated financial statements, notes to financial statements and management's discussion and analysis are available at www.sedar.com or at www.armtec.com.

About Armtec Infrastructure Inc.
Armtec is a manufacturer and marketer of a comprehensive range of infrastructure products and engineered construction solutions for customers in a diverse cross-section of industries that are located in every region of Canada, as well as in selected markets globally.  These markets include Canada's national and regional public infrastructure markets and private sector markets in agricultural drainage, commercial building, residential construction and natural resources.  Effective January 1, 2013, Armtec started operating within its new organizational structure which realigned the business away from the four geographic regions to two product-focused business units: Drainage Solutions and Precast Concrete Solutions.  Armtec operates through a network of offices and production facilities across the country.  Drainage manufactures and markets corrugated high-density polyethylene pipe, corrugated steel pipe and other drainage related products including small bridge structures.  Precast manufactures and markets highly engineered precast systems such as parking garages, bridges, sport venues and building envelopes as well as standard precast products such as steps, paving stones and utility vaults.

Non-GAAP Measure
EBITDA
References to EBITDA are to earnings before finance (income) expense - net, income taxes, depreciation and amortization, certain non-recurring expenses and certain other non-cash amounts.  Management believes that in addition to net earnings, EBITDA is a useful supplemental measure of cash available prior to debt service, changes in working capital, capital expenditures and income taxes.  However, EBITDA is not a recognized measure under GAAP.  Investors are cautioned that EBITDA should not be construed as an alternative to net and comprehensive earnings determined in accordance with GAAP as an indicator of Armtec's performance or as an alternative to cash flows from operating, investing and financing activities as a measure of Armtec's liquidity and cash flows.  Armtec's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, Armtec's EBITDA may not be comparable to similarly named measures used by other issuers.

Risks and Uncertainties
Armtec is subject to certain risks and uncertainties that could have a material adverse effect on Armtec's results of operations, business prospects, financial condition, and the trading price of Armtec's shares.  These risks and uncertainties are largely derived from Armtec's business environment.  These uncertainties and risks include, but are not limited to:  capital and liquidity risk; access to bonding and letters of credit; competition; large project risk; credit risk; fluctuations in operating results; seasonality and adverse weather; relationships with suppliers; lack of long-term agreements; existing legal proceedings; risk of future legal proceedings; industry cyclicality; change management; availability and price volatility of raw materials; acquisition and expansion risk; current global economic conditions; reduction in demand for products; reliance on key personnel; labour markets; environmental; currency fluctuations; product liability; expiration of rights under license and distribution arrangements; operating hazards; intellectual property; collective bargaining; pension plans; interest rates; information management; uninsured and underinsured losses; insurance coverage; securities laws compliance and corporate governance standards; income tax and other taxes; geographical risk; and geopolitical.  Further information about these and other risks and uncertainties can be found in the disclosure documents filed by Armtec Infrastructure Inc. with the securities regulatory authorities, available at www.sedar.com.

Caution Regarding Forward-Looking Statements
This news release contains "forward-looking" statements (including those set out under the headings "Highlights", "Overview", "Precast Concrete Solutions - Earnings from operations", and "Outlook") within the meaning of applicable securities legislation which involve known and unknown risks, uncertainties and other factors which may cause the actual results, events, performance or achievements of Armtec or industry results, to be materially different from any future results, events, performance or achievements expressed or implied by such forward-looking statements.  Forward-looking statements typically contain such words or phrases as "may", "outlook", "objective", "intend", "estimate", "anticipate", "should", "could", "would", "will", "expect", "believe", "plan" and other similar terminology suggesting future outcomes or events.  Forward-looking statements reflect current expectations regarding future results, events, performance and achievements and are based on information currently available to Armtec's management, anticipated operating and financial results of Armtec and current and anticipated market conditions.

Forward-looking statements involve numerous assumptions and should not be read as guarantees of future results, events, performance or achievements.  Such statements will not necessarily be accurate indications of whether or not such future results, events, performance or achievements will be achieved.  You should not unduly rely on forward-looking statements as a number of factors, many of which are beyond the control of Armtec, could cause actual results, events, performance or achievements to differ materially from the results, events, performance or achievements discussed in the forward-looking statements, including, but not limited to the factors discussed in Armtec's materials filed with the Canadian securities regulatory authorities from time to time.  These factors also include, but are not limited to, known and unknown risks with respect to: restrictive covenants and obligations under the Senior Notes, the 2012 Brookfield Facility and the Revolving Credit Facility; access to bonding and letters of credit; market competition, including potential new market entrants; cost estimates vs. actual profit in respect of large projects; credit risk in respect of Armtec's receivables; fluctuations in operating results; seasonality and adverse weather; relationships with suppliers of raw materials and the availability and volatile pricing of such materials; uncertainties with respect to short-term customer and supplier agreements; the outcome of pending and future claims and litigation; industry cyclicality; ineffective change management, the ability to attract and retain key personnel and competition for labour; acquisition and expansion risk and associated geographical risks related thereto; current global financial conditions, currency and interest rate fluctuations; a reduction in demand for Armtec's products; current and future environmental obligations pursuant to federal, provincial and municipal environmental laws and regulations; product liability in respect of both Armtec's products and the products incorporated from third parties; expiration of rights under license and distribution arrangements and potential infringement in respect of Armtec's intellectual property and any of Armtec's licensed intellectual property; operating hazards; collective bargaining; pension plans; information management; current insurance coverage, uninsured and underinsured losses with respect to Armtec's insurance policies; changes to securities laws and corporate governance standards; changes in and Armtec's compliance with respect to income tax and other tax laws; and geopolitical risk.

Although the forward-looking statements contained in this news release are based upon what management of Armtec believes are reasonable assumptions, Armtec cannot assure investors that actual results, events, performance or achievements will be consistent with these forward-looking statements.  All forward-looking statements in this news release are qualified by these cautionary statements.  These forward-looking statements are made as of the date of this news release and, except as required by applicable law, Armtec assumes no obligation to update or revise them to reflect new events or circumstances.

Defined Terms
Capitalized terms that are not otherwise defined in this news release shall have the meanings given to them in Armtec's management's discussion and analysis for the three and 12 months ended December 31, 2013.

SOURCE Armtec Infrastructure Inc.

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