…Outperformed any and all other trucks that we have had in our fleet since the beginning. Tornado (Hydrovacs) have a strong desire to keep evolving and making improvements to their high standard equipment enabling customers to take pride in the fact that they have chosen the right company…"

David M. Kerper
General Manager, Atlas Daylighting LLC

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2010 Report to Shareholders

The Company continued to react to the negative effects that the deep recession was having on its operations by restructuring its operations and repositioning itself to focus more on its value added engineering and manufacturing capabilities and less on structural steel fabrication and erection. This resulted in the discontinuance of two business units in 2010 and the streamlining of its remaining operations through overhead and fixed cost reduction.   

The key initiatives undertaken by the company over the past two years were: 

  • Reduced its net funded debt by $31.4 million (from $48.1 million at December 31, 2008 to $16.7 million at December 31, 2010) through a series of successful initiatives;
  • Discontinued two money losing operations and sold a third, that was not core to its strategy.
  • Reduced overhead (OG&A) by $8.4 million (48% reduction) from $17.7 million in 2009  to $9.3 million in 2010; $3.0 million of the reduction came from continuing operations and $5.4 million from discontinued operations;
  • Reduced domestic plant capacity from 400,000 square feet to 200,000 square feet through aggressive restructuring;
  • Offset and replaced the domestic capacity reduction of 200,000 square feet  by undertaking a 45% investment in a Chinese joint venture that has access to an existing 400,000 square foot steel fabrication facility in China;
  • Committed significant resources to position the Company to be a leader in the global amusement ride business and specialty engineered products that it designs and builds.
  • Committed additional resources to position the Company to be a leader in the oilsands maintenance and steel erection business in Fort McMurray through its unique, First Nation controlled, partnership.

Management and the Board are confident that the Company is well positioned to exploit global opportunities for its specialty engineered products as well as participate in the western Canadian non-residential construction spending market through its steel fabrication and erection capabilities.

2010 Summary of Financial Results

The Company generated positive EBITDA of $1.3 million in 2010 from continuing operations compared to negative EBITDA of $1.1 million in 2009 representing a positive change in operating cash flow of $2.4 million year over year on $2 million less sales of $66 million. 
The net loss of $17.8 million ($0.20 basic and diluted loss per share) for the twelve months ended December 31, 2010 breaks downs as follows:

  • A loss from continuing operations of $3.8 million or $0.04 loss per share, (which includes a $0.02 non-cash loss per share on foreign exchange hedges);
  • A loss from discontinued operations of $14.0 million or $0.16 loss per share (which includes a $0.09 non-cash loss per share for goodwill impairment).

Cash flow used in continuing operations was $0.6 million during 2010 ($0.01 per share) versus $4.2 million in 2009 ($0.05 per share) which represented an improvement of $3.6 million.

Specialized Engineered Products Segment

Our Engineered Products segment focuses on high value added products such as amusement ride systems, observatory telescopes, hydrovac trucks, material handling equipment and pressure vessels.  Many of our products are globally competitive and exported around the world.  We have commenced a plan to manufacture some of these labour intensive products though our new joint venture in China.  A world class amusement ride project for a leading entertainment company in the U.S. was completed at the end of the second quarter of fiscal 2010 and the fabrication phase of a second amusement ride project for another leading entertainment company in the U.S. was substantially completed in 2010.  Early in 2011, the Company was also awarded a $9 million contract from one of the leading entertainment companies.
Notwithstanding the decrease in 2010 sales resulting form the disposition of our non-core combustion equipment business, 2010 EBITDA almost doubled from $2.1 million in 2009 to $4.0 million in 2010.

Steel fabrication & Installation Services Segmented Results

We have narrowed the focus of our steel fabrication and installation segment, to focus on steel fabrication for industrial and infrastructure applications that can leverage our unique engineering capabilities.  Steel fabrication and installation in these markets is more complex than in the commercial market which is more of a commodity service.  Part of this re-focusing involved the discontinuance of the fabrication business we used to process through our Trapp Avenue facility in BC.


Sales from continuing operations in this segment increased modestly over 2009 levels.  OG&A expenses from continuing operations decreased from $4.7 million in 2009 to $3.5 million in 2010 (27%), reflecting staff reductions and other cost control measures we put in place during the past two years. 
The positive effects of cost reductions reduced the EBITDA loss from continuing operations by $1.2 million in the year (from $1.6 million EBITDA loss to $0.4 million EBITDA loss).  We feel that this segment is well positioned to return to profitability in 2011 as revenue volumes return to pre-recessionary levels and the benefits of operational leverage kick-in from the reduction of our fixed cost overhead structure.


Outlook
The Company’s backlog is starting to grow again as the economy strengthens and Empire’s contract awards increase.  For example, backlog at December 31, 2010 of $19.5 million increased by $6.1 million to $25.6 million as of March 31, 2011.


The Company is actively marketing its competitive strengths in the specialized engineered product segment on the strength of its success in building some of the most innovative and exciting amusement rides in the world for two of the top entertainment companies in the world.  Since the Company acquired Dynamic Structures in 2007, we have positioned Dynamic Structures to be the leader in the fast growing, amusement ride business in China and with park owners around the world, seeking to fulfill the growing middle class desire for interactive themed ride entertainment. 


Moreover, Dynamic Structures, using its unique engineering skills, is working with two partners to manufacture two new, proprietary machines that each have global market reach channel to market potential.  Management anticipates that these new initiatives will result in a continuous predictable stream of “value added” manufacturing cash flow and profits.on a going forward basis. The specialized engineered products segment’s hydrovac truck manufacturing division continues to see a steady growth in its backlog of orders and is expected to have a good year as the oil and gas service market strengthens and the hydrovac truck penetrates the central Canadian excavation market.


The Company’s continuing steel fabrication and erection operations in western Canada are focused on fabricating and erecting complex, industrial and infrastructure steel projects out of its four steel fabrication facilities.  Management believes that the long term outlook for business capital expenditures in western Canada is very positive and the near term outlook is improving steadily.  The Company expects to benefit from this increased activity through better shop and field utilization rates and better pricing which will improve margins.


The Company’s aboriginal partnership in Fort McMurray, ACE Industrial Services, provides maintenance and related services to Alberta’s oil sands producers (welding, machining and installation services).  Management believes that the outlook for ACE in 2011 and beyond is tied to the significantly increasing amount of capital and maintenance expenditures expected to be invested in the oil sands area of Alberta. ACE is expected to perform better in 2011 and beyond. Its field erection operations were strengthened at the end of 2010 through the acquisition of a small erection firm in Ft. McMurray which expands its suite of services and strengthens its management team.


The Company is excited about its recently executed agreement with Qiguang Group to create a Chinese jointly owned company (45% owned by Empire Industries and 55% by The Qiguang Group). The new joint stock Company in China will enable Empire to actively participate in the steel fabrication market in China through the use of an existing leased steel fabrication facility in Guangdong Province; to actively export fabricated steel to Empire’s operations in Western Canada on a low cost base which can be incorporated into projects bid on in Western Canada; and to potentially manufacture some of the Company’s specialized engineered products in China (amusement rides, material handling equipment, hydrovac trucks and oil & gas process equipment).  The Company will have access to an existing 400,000 square foot steel fabrication facility in China, which offsets the 200,000 square feet of more expensive shop capacity the Company, divested itself of in western Canada.


As the Company returns to profitability, it will benefit from sheltering its profit through utilizing gross tax loss carry forwards of $25.8 million.


The Company took the initiative in early 2011 to strengthen its balance sheet and ensure the availability of adequate working capital to enable it to pursue and complete the various opportunities in the market place by raising $2.7 million in February 2011 ($2.0 million of equity and $0.7 million of convertible debt). The Company is also in the process of raising $3.0 million of equity through a private placement and expects to close this by May 31, 2011. 

Conclusion
Without question, the past two years have been challenging for the Company.  Management and the Board are confident that the restructuring and strategic repositioning initiatives that have been taken in the past two years have positioned the Company to return it to profitable growth in 2011 and beyond.  The Company will benefit from operating leverage arising from its leaner, more cost competitive structure and it will capitalize on its unique selling proposition, both domestically in steel fabrication and installation and internationally through its specialized engineered products business.


We are looking forward to an exciting and profitable 2011.


“Ian Macdonald”                                     “Guy Nelson”
Chairman of the Board                            Chief Executive Officer