HSE - Second quarter industrial sector growth offset by declines in oilfield service activity
CALGARY, Aug. 10 /CNW/ - HSE Integrated Ltd. ("HSE", "Our", "We", or the
"Company") is pleased to announce its second quarter financial results for the
period ended June 30, 2007. Financial and operating highlights are summarized
below:
- Continued execution of HSE's revenue diversification strategy was
demonstrated in the quarter, as revenue was comparable from the prior
year at $19.4 million. Significant growth in Industrial and
Environment Monitoring revenue largely offset declines in Oilfield
revenues.
- Service revenue delivered to non-conventional upstream oil and gas,
plants, facilities, training, and safety management services (the
"Industrial" market) increased by 93%, growing to $12.6 million in
the quarter as compared to $6.5 million for the same period in the
prior year.
- Industrial safety services revenue as a percentage of the total
business mix almost doubled - 65% in 2007 compared to 33% in the
previous year.
- Customer demand continues to increase for the Company's air quality
monitoring or "Environment" market which rose 17% in the quarter.
- EBITDA was a loss of $1.8 million for the quarter (2006 - gain of
$1.1 million) as the redeployment of personnel to Industrial safety
services partially offset a 58% decline in Oilfield services revenue.
- During the quarter, HSE entered an agreement with its current
lender for credit facilities that provide the Company with increased
financial flexibility to pursue strategic opportunities.
- Cash from operations was $4.1 million for the first half of 2007, as
compared to $1.6 million in the same period of 2006, mainly due to
improved methods for the timely collection of outstanding trade
receivables.
- Cash balance of $5.4 million and no draw against the Company's
operating line, and $11 million available under the revolving
facility.
- Subsequent to the end of the quarter, the Company acquired the
outstanding shares of Prairie Wide Safety Ltd. ("PWS") of Weyburn,
Saskatchewan.
David Yager, Chairman and CEO, offered the following comments for HSE's
second quarter financial results.
"The conventional oilfield service business continued to prove
challenging in the second quarter of 2007. HSE's diversification into new
industries and geographic regions permitted our Company to perform much better
financially than it would have had we not undertaken these previously planned
initiatives. We believe the non-conventional oilfield market growth generated
in the first half of fiscal 2007 will be a permanent component of HSE's future
revenue streams. We were able to demonstrate our ability to successfully and
safely execute multiple and simultaneous large scale Industrial safety
projects for our customers. HSE's integrated services model permits us to
better partner with our customers by offering a greater range of services in a
manner that is financially beneficial to HSE and our customers. By redeploying
Oilfield safety services personnel to Industrial assignments, we also
benefited from largely retaining all of our technical field services personnel
- which will better position us to fully exploit the recovery in the Oilfield
sector when it emerges - and by exposing our personnel to valuable experience
in delivering safety services to different industries. As well, we continue to
examine and reduce our fixed cost structure to seize every opportunity to
increase profitability without impairing service or delivery capacity."
For further information and analysis please see the attached Management's
Discussion and Analysis and Financial Statements.
CONFERENCE CALL
HSE will be hosting a conference to discuss their results at 11 AM
(Eastern Daylight Time), 9 AM (Mountain Daylight Time) on Friday August 10,
2007. To participate call 1-800-590-1508. Details on the webcast and
conference call replay are contained in a separate News Release.
HSE is an integrated, national supplier of industrial Health, Safety and
Environmental services. With its head office in Calgary, Alberta, HSE serves
its clients from field service locations in Alberta, British Columbia,
Saskatchewan, Ontario, Nova Scotia, New Brunswick and Michigan. HSE trades on
the TSX under the symbol "HSL".
Forward Looking Statements
This news release may contain forward-looking statements concerning,
among other things, the Company's prospects, expected revenues, expenses,
profits, financial position, strategic direction, and growth initiatives, all
of which are subject to risks, uncertainties and assumptions. These
forward-looking statements are identified by their use of terms and phrases
such as expect, anticipate, estimate, believe, may, will, intend, plan,
continue, project, objective and other similar terms and phrases. These
statements are based on certain assumptions and analyses made by the Company
based on its experience and assessment of current conditions, known trends,
expected future developments and other factors it believes are appropriate
under the circumstances. Such statements are subject to numerous external
variables, both known and unknown, such as changes in commodity prices for
natural gas and oil, changes in drilling activity, weather conditions,
industry-specific and general economic conditions and exchange rate
fluctuations. If any of these risks and uncertainties materializes or if
assumptions are incorrect, actual results may differ materially from those
expressed or implied in the forward-looking statements. The forward looking
statements included in this news release are not guarantees of future
performance and should not be unduly relied upon.
Non GAAP Measures
This report makes reference to EBITDA, a measure that is not recognized
under generally accepted accounting principles (GAAP). Management believes
that, in addition to net earnings, EBITDA is a useful supplementary measure.
EBITDA provides investors with an indication of earnings before provisions for
interest, taxes, amortization, gains or losses on the disposal of property and
equipment, foreign exchange gains or losses, and the non-cash effect of
stock-based compensation expense. Investors should be cautioned that EBITDA
should not be construed as an alternative to net earnings determined by GAAP
as an indication of the Company's performance. This method of calculating
EBITDA may differ from that of other companies and accordingly may not be
comparable to measures used by other companies.
HSE Integrated Ltd.
Management Discussion and Analysis ("MD&A")
For the Quarter and Year to Date Ended June 30, 2007 and 2006
The following management discussion and analysis is dated August 9, 2007,
and is a review of the financial results of HSE Integrated Ltd. ("HSE", "We",
"Our", or the "Company") for the quarter and year to date ended June 30, 2007
and 2006. This should be read in conjunction with the documents filed on SEDAR
at www.sedar.com. Unless otherwise disclosed, the financial information
presented in this discussion has been prepared in accordance with Canadian
generally accepted accounting principles ("GAAP") and takes into consideration
information available to management up to August 9, 2007. Unless otherwise
stated, dollar figures presented are expressed in thousands of Canadian
dollars and per-share figures in dollars per weighted-average common share.
The following MD&A contains forward-looking information and statements. We
refer you to the end of the MD&A for the disclaimer on forward looking
statements.
Selected Financial Information
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Three Months ended Quarter Six Months ended Year
June 30, Over June 30, Over
------------------- Quarter ------------------- Year
2007 2006 % Change 2007 2006 % Change
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Revenue $ 19,352 $ 19,924 (2.9)% $ 47,300 $ 47,388 (0.2)%
Operating and
materials 18,545 16,826 10.2% 39,175 36,561 7.1%
Operating margin 807 3,098 (74.0)% 8,125 10,827 (25.0)%
Operating
margin % 4.2% 15.5% (72.9)% 17.2% 22.8% (24.6)%
Selling,
general &
adminis-
trative $ 2,598 $ 1,958 32.7% $ 5,113 $ 4,141 23.5%
Net earnings
(loss) (3,113) (1,073) 190.1% (2,209) 1,280 (272.6)%
- per share
basic (0.08) (0.03) (166.7)% (0.06) 0.04 (250.0)%
- per share
diluted (0.08) (0.03) (166.7)% (0.06) 0.04 (250.0)%
EBITDA(1) $ (1,790) $ 1,140 (257.1)% $ 3,012 $ 6,686 (55.0)%
EBITDA % (9.3)% 5.7% (263.2)% 6.4% 14.1% (54.6)%
Total assets $ 98,025 $ 97,540 0.5%
Total long-term
liabilities 23,977 22,369 7.2%
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See Non-GAAP Measures for (1)
Financial Review
Revenue
HSE operates in a single industry segment, which involves providing a
variety of asset, worker and community safety-protection services including:
on-site safety supervision; gas detection; fixed and mobile air-quality
monitoring; breathing equipment rentals and services; fixed and mobile
firefighting and fire protection services and equipment; worker
decontamination (shower) services; on-site medical services; worker safety
training; and safety management consulting services. For the second quarter
and year to date ended June 30, 2007 and 2006 the Company had no customers
representing more than 10% of revenue.
The Company currently provides services to its customers in the following
main business areas: Oilfield Services ("Oilfield"), Industrial Services
("Industrial"), and Environment Monitoring Services ("Environment"). Oilfield
is the provision of the Company's services within the conventional upstream,
or "wellhead", sector of the oil and gas industry. Industrial represents the
services delivered to non-conventional upstream oil and gas development and
production, oil and gas processing and refining plants and facilities, diverse
non-petroleum resource and manufacturing industries, and the provision of
training and safety management services for multiple industrial sectors.
Environment focuses on air-quality monitoring to protect people, livestock,
wildlife and equipment from an array of airborne contaminants.
The revenue for these services is shown below:
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Three Months ended Quarter Six Months ended Year
June 30, Over June 30, Over
------------------- Quarter ------------------- Year
2007 2006 % Change 2007 2006 % Change
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Oilfield $ 4,992 $ 11,904 (58.1)% $ 21,346 $ 33,701 (36.7)%
Industrial 12,602 6,521 93.3% 20,143 10,420 93.3%
Environment 1,758 1,499 17.3% 5,811 3,267 77.9%
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Total Revenue $ 19,352 $ 19,924 (2.9)% $ 47,300 $ 47,388 (0.2)%
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As a % of
Revenue:
Oilfield 25.8% 59.8% 45.1% 71.1%
Industrial 65.1% 32.7% 42.6% 22.0%
Environment 9.1% 7.5% 12.3% 6.9%
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Total Revenue 100.0% 100.0% 100.0% 100.0%
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Continued execution of the Company's revenue diversification strategy was
demonstrated in the quarter. Revenue decreased slightly from the prior year to
$19.4 million, but significant declines in Oilfield revenues were largely
offset by growth in Industrial and Environment revenues.
Oilfield revenues have experienced large declines in both the quarter and
year to date when compared to the same period in the prior year. The largest
contributor to this decrease has been reduced overall activity levels within
the conventional upstream, or "wellhead", sector of the oil and gas industry;
drilling, completion and work-over activity particularly on natural gas wells.
Industry sources have indicated that, as compared to the same period in the
prior year, Western Canadian Sedimentary Basin ("WCSB") new conventional oil
and gas well drilling activity levels in the quarter have declined, as have
well servicing activity on existing wells. In the second quarter, customer
activity was also affected by more unfavorable weather conditions as compared
to recent years in the WCSB. Although HSE has been able to largely maintain
its pricing levels with its customers, additional capacity added by
competitors in a marketplace with overall reduction in demand has also
contributed to the Company's lower volume levels for the services provided to
this sector.
The Company is continuing its business diversification strategy, and
reports a 93% increase in Industrial revenues on both a quarter and year to
date basis when compared to the same periods in the prior year. Activity in
the quarter included multiple simultaneous projects mainly in the areas of
safety services to oil and gas processing facilities, thermal heavy oil
recovery and oilsands extraction and construction projects in Alberta; the
provision of safety services, fire, gas detection and breathing-air equipment
sales and service to industrial and commercial markets in British Columbia,
Alberta, and Ontario; and safety services for the refining, mining, offshore
drilling and production and other industries in Atlantic Canada. The larger
scale projects in the quarter included safety services to support facility
maintenance activities for an oilsands facility, a cement plant, a high volume
sour gas plant, and a fertilizer facility. Increased classroom capacity and
course offerings, as well as greater marketing efforts have also increased the
training component of industrial revenues.
As a result of the additional air quality monitoring capacity added in
the prior year, Environment revenues increased in the quarter by 17% and for
the year by 78% as compared to the same periods in 2006.
Operating and Materials Expense and Operating Margin
Operating and materials expense consists of costs directly attributable
to the provision of safety and related services to customers. These include:
wages and benefits for field employees and contractors; equipment rentals and
leases; property costs; transportation; fuel; consumables; equipment repairs
and maintenance; and field-office administration including field sales.
Operating and materials expense for the quarter ended June 30, 2007
totaled $18.5 million or 95.8% of revenue as compared to $16.8 million or
84.5% of revenue in the second quarter of 2006. Operating margin in the
quarter has declined from $3.1 million (15.5% of revenue) in the second
quarter of 2006, to $0.8 million (4.2% of revenue) the second quarter of 2007.
The Company also experienced increases in operating expenses and declines in
operating margins on a year to date basis.
Execution of the Company's diversification strategy enabled HSE to
redeploy personnel resources to the Industrial market; however this area is
currently characterized by lower margins than the Oilfield sector at the
operating level due to a lower proportion of equipment rentals and a higher
labour component in the total revenue mix. The usage associated with the
capital cost of the Company's rental assets (which includes such items as fire
trucks, ambulances, worker decontamination units, breathing air units, and air
quality monitors) is reflected in the amortization line within the statement
of earnings.
In addition to the utilization of personnel in other industries, the
Company is actively pursuing a review of operational efficiencies throughout
the organization that will not impair future revenue capacity. As part of the
continual focus on increasing margins, this initiative will include facility
consolidation intended to strengthen the base from which we service our
customers. This also includes a review of equipment, vehicles, and personnel
considered not essential in adding value to our customers.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense consists of costs
not directly attributable to the provision of services for customers. These
include costs generally associated with the following: corporate head-office
functions and services; administrative personnel; corporate sales and
marketing costs; liability insurance; professional fees; and investor
relations expenses.
SG&A for the quarter ended June 30, 2007 amounted to $2.6 million (YTD -
$5.1 million), versus $2.0 million (YTD - $4.1 million) in the comparable
periods in 2006. SG&A as a percentage of revenue on a year to date basis has
increased to 10.8%, from 8.7% a year earlier. The increase in SG&A costs in
comparison to the prior year is a result of higher business development and
corporate costs necessary to support the Company's strategic goals. As well,
the quarter included costs related to the Company's initial listing on the
Toronto Stock Exchange.
EBITDA and Net Earnings
Despite relatively stable revenue levels as compared to the prior year,
EBITDA (see "Non-GAAP Measures") in the quarter has declined to a loss of
$1.8 million (earnings YTD - $3.0 million), from earnings of $1.1 million
(earnings YTD - $6.7 million) for the same periods a year earlier. This was
caused mainly by reduced revenue on rental equipment utilization levels and
higher labour costs as a result of lower activity within the Oilfield services
side of the business, as well as increased investment in SG&A costs required
to support the future growth of the Company.
The net loss in the quarter was $3.1 (loss YTD - $2.2 million), which
represents a decline compared to the net loss of $1.1 million in the second
quarter of 2006, and the net income of $1.3 million on a year to date basis in
the prior year. The decrease in net earnings is primarily due to lower levels
of EBITDA, greater levels in amortization and stock-based compensation, and
offset by the recovery of prior year income tax.
Total amortization on a year to date basis was $3.8 million and consisted
of $3.2 million in property and equipment amortization, and $0.6 million in
intangibles amortization. Property and equipment amortization has increased by
$0.4 million when compared to the prior year due to previous investments in
property and equipment and from property and equipment acquired through
acquisitions. As well, the recognition of intangible assets on acquisitions
made in the prior year has also contributed to the increase in amortization.
Stock-based compensation on a year to date basis of $0.7 million (2006 -
$0.4 million) has increased due to additional grants of stock options to
employees of the Company.
Interest on long term debt and other interest and bank charges decreased
slightly from $647 in the first half of 2006 to $634 in 2007, as interest on
higher levels of obligations under capital leases offset lower levels of bank
debt.
On a year to date basis, the loss on disposal of property and equipment
was $0.7 million with proceeds on sale of $0.6 million and consisted mainly of
fleet related assets.
Due to a net loss before income tax, there was an income tax recovery of
$0.7 million in the first half of the year as compared to an expense of
$0.6 million for the same period in the prior year.
Quarterly Results
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2007 2006 2005
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
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Revenue $19,352 $27,948 $26,198 $26,952 $19,924 $27,465 $17,280 $15,080
Net
earnings
(loss) (3,113) 904 984 1,197 (1,073) 2,353 (59) 786
EBITDA(1) (1,790) 4,802 4,341 4,283 1,140 5,548 1,501 2,224
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Income
(loss) per
share -
basic and
diluted $(0.08) $0.02 $0.03 $0.03 $(0.03) $0.07 $(0.01) $0.02
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See Non GAAP Measures for (1)
HSE's business has a seasonal component. For a description of this
seasonality, please refer to the Company's 2006 Annual Report.
Liquidity and Capital Resources
The Company's principal sources of capital are cash flows from operations,
borrowings under an established credit facility with its senior lender, and
equity financing.
The Company, through the conduct of its operations, has undertaken certain
contractual obligations as noted in the following table:
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Periods ending
December 31, 2007 2008 2009 2010 2011 Total
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Capital lease
obligations $ 785 1,593 906 228 54 $ 3,566
Vehicle operating
leases 798 1,451 1,197 1,144 661 5,251
Property & other
leases 1,053 1,976 1,633 1,132 577 6,371
Long term debt 117 945 34 13,829 - 14,925
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Total contractual
obligations $ 2,753 5,965 3,770 16,333 1,292 $30,113
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Cash provided by (used in) operations
Cash provided by operations on a year to date basis was $4.1 million as
compared to almost $1.6 million in the prior year. Improved methods for the
timely collection of outstanding trade receivables have been the main
contributor to this.
Cash provided by (used in) financing and investing
During the first half of 2007, the Company made payments of $0.9 million
for its capital leases, and $2.1 million towards repayment of long term debt.
Purchases of property and equipment on a year to date basis amounted to
$2.8 million, the majority of which consists of field safety equipment, and
the construction costs related to medical treatment centre units, and fire and
shower units. The Company continues to monitor current operating conditions to
ensure that the addition of capacity is optimally utilized.
Liquidity
During the quarter, HSE entered into an agreement with its current lender
(a Canadian Chartered Bank) for credit facilities that provide the Company
with increased financial flexibility to pursue strategic opportunities as they
arise. The credit facilities include a $25 million three-year interest-only
revolving facility and a $7.5 million operating facility. Depending upon
certain financial ratios, the facilities bear interest at the bank's prime
rate (or U.S. base rate) plus up to 0.75 percent, or at bankers' acceptance
rates with a stamping fee of 1.50 to 2.25 percent. An additional standby fee
ranging between 0.20 to 0.35 percent per annum is also required on the unused
portion of the credit facilities. The revolving facility matures on June 25,
2010, with an ability to extend the term at the lender's option. The operating
facility is renewable annually and is margined to accounts receivable. This
facility is subject to covenants that are typical for this type of facility.
The credit facilities are collateralized under a general security agreement.
At the end of the quarter, the draw against the revolving facility was $13.8
million, and there was no draw against the operating facility.
At June 30, 2007, the Company was in compliance with its financial
covenants.
Subsequent Event
On July 1, 2007 the Company acquired the outstanding shares of Prairie
Wide Safety Ltd. ("PWS") of Weyburn, Saskatchewan in a business combination to
be accounted for using the purchase method. PWS serves the hydrocarbon
producing region of southeast Saskatchewan by providing complete oilfield and
industrial safety services to drilling, completion, well servicing and field
processing operations. The purchase consideration will be determined based
upon a predetermined formula not to exceed $2.2 million based upon historical
results, with additional consideration contingent upon performance measures
achieved in the first year after the acquisition date. The consideration will
also be subject to adjustments based upon working capital and long term debt
levels, and will be a combination of cash, the assumption of debt, and the
issuance of 100,000 common shares. The purchase price allocation has not been
completed and certain items such as fair value of assets and liabilities and
estimates for contingent consideration as of the acquisition date have not
been finalized.
Outlook
The Company continues to execute on its strategy of market
diversification for its services. Reduced conventional oil and gas
exploration, development and production activity levels in the WCSB, relative
to the record activity levels experienced over the past few years, have
negatively affected the Oilfield safety services side of the business, and
visibility of customer service demand remains poor for the balance of 2007.
Currently, Oilfield revenues represent a large proportion of the total
business mix, and as such, prolonged reduced customer activity in this sector
may result in a need to review financial covenants for specified periods of
time with the Company's lender. Management continues to review all options for
sources of capital as part of an ongoing risk mitigation practice.
In executing the Company's diversification strategy, capacity and
resources were redeployed into the Industrial component of the business and
are expected to continue to assist in reducing the cyclicality and seasonality
of safety services provided to the conventional upstream oil and gas sector.
In the quarter, the Company was able to demonstrate its ability to
successfully execute multiple and simultaneous large scale safety service
operations within a plant and facility environment for its customers. This had
three positive outcomes for HSE. First, redeploying Oilfield safety services
personnel to Industrial assignments has permitted the Company to retain
largely all of its technical field services personnel. This will position HSE
to fully exploit the recovery in the Oilfield sector when it emerges. Second,
diversifying the assignments of the technical field services team has given
these personnel valuable on-the-job training in delivering safety services to
different industries. Third, this capability was achieved over the last
several years by laying the groundwork of focused marketing efforts, and the
development of personnel and internal processes. By exhibiting its
capabilities in activities of this magnitude, HSE, with its integrated model,
is better positioned to partner with its customers by offering a greater range
of services that can be delivered throughout the year, and from which higher
margins can be attained. The Company is confident that servicing the
Industrial sector will be a permanent and growing component of the HSE
business mix in the future.
Subsequent to the end of the second quarter, the Company expanded its
national delivery footprint with the acquisition PWS. In the past, existing
customers have asked HSE to partner with them in the established and active
hydrocarbon producing region of southeast Saskatchewan. PWS provides a base
from which to provide a full range of services including breathing air safety
services, gas detection, shower services, fire protection, on-site first aid,
worker safety training, and plant and facility shutdown safety services. This
southeast Saskatchewan market is attractive in the current market environment
for Oilfield services because activity is primarily driven by crude oil, not
natural gas.
The Company believes its continued investment in sector and geographic
diversification, organic growth, skilled safety professionals and internal
process improvements and operational efficiency will ultimately increase
shareholder value.
Related-Party Transactions
During the quarter, the Company had the following transactions with
related parties all of which are measured at exchange amounts, which
approximate an arm's length equivalent at fair market value:
- In the second quarter of 2006, a company controlled by a former
director of HSE subcontracted the provision of certain goods and
services to HSE. For the second quarter of 2006, HSE billed this
company $290 in respect of the goods and services provided, and paid
the company $7 for goods and services received. These products and
services were sold at rates agreed to as part of the acquisition of
the assets of the company. Included in accounts receivable at the
end of the second quarter is $464 (2006 - $877) owed by this company
to HSE.
- Included in accounts receivable is a promissory note of $49,
(2006 - $54) which is due from an officer and director of the
Company. This note is payable on demand. In the second quarter of
2007, the Company paid rent and property taxes to a corporation
related to this same officer and director of the Company in the
amount of $101 (2006 - $62).
- In the second quarter of 2007, the Company also paid rent of $12
(2006 - $10) and $78 (2006 - $74) to two corporations each
associated with senior management of the Company.
Critical Accounting Policies and Estimates
HSE prepares its consolidated financial statements in accordance with
Canadian Generally Accepted Accounting Principles. In doing so, management is
required to make various estimates and judgments in determining the reported
amounts of assets and liabilities, revenues and expenses, as well as the
disclosure of commitments and contingencies. Management bases its estimates
and judgments on historical experience and on other various assumptions that
are believed to be reasonable under the circumstances. Estimates and
assumptions are reviewed periodically, and actual results may differ from
those estimates under different assumptions or conditions. Management must use
its judgment related to uncertainties in order to make these estimates and
assumptions.
The accounting policies and estimates believed to require the most
difficult, subjective or complex judgments and which are material to the
Company's financial reporting results include: allowance for doubtful
accounts, intangible assets and goodwill, impairment of long lived assets,
depreciation and amortization of property and equipment, and future income tax
liabilities. A full description of these accounting policies and estimates can
be found in HSE's 2006 Annual Report.
Accounting Pronouncements
On January 1, 2007, the Company adopted the new accounting standards
issued by the Canadian Institute of Chartered Accountants regarding the
recognition, measurement, disclosure and presentation of financial
instruments. Under these standards, financial instruments must be classified
into one of five categories: (i) held-for-trading, (ii) held-to-maturity,
(iii) loans and receivables, (iv) available-for-sale, and (v) other financial
liabilities. The new standards require that all financial instruments within
the scope of the standards, including all derivative instruments, be
recognized on the balance sheet initially at fair value. Subsequent
measurement of all financial assets and liabilities - except those in the
held-for-trading and available-for-sale categories - must be determined at
amortized cost using the effective interest rate method. Held-for-trading
financial instruments are measured at fair value with changes in fair value
recognized in earnings. Available-for-sale financial instruments are measured
at fair value with changes in fair value recognized in comprehensive income
until the investment is derecognized or impaired at which time the amounts
would be recorded in net earnings.
Under adoption of these new standards, the Company designated accounts
receivable as "loans and receivables", which are measured at amortized cost.
Short-term investments have been designated as "held-for-trading", which are
measured at fair values with changes in such value included in earnings.
Accounts payable and accrued liabilities and long-term debt are classified as
"other financial liabilities" which are measured at amortized cost. We have
classified previously deferred financing costs of $29 included in prepaid
expenses and other assets as unamortized debt issues costs, which now reduces
the carrying value of the long-term debt. The debt issue costs will be
accreted to the carrying value of long-term debt using the effective interest
method. Comparative amounts for prior periods have not been restated.
The Company also adopted as of January 1, 2007 new standards with respect
to comprehensive income. The new standards require a statement of
comprehensive income, if there are items that give rise to comprehensive
income or loss. The Company did not identify any such items giving rise to
comprehensive income or loss in the three and six months ended June 30, 2007,
or that would result in an adjustment to opening balances for accumulated
other comprehensive income or loss.
The Company was also required to adopt new accounting standards with
respect to hedging activities. As the Company does not currently have a
hedging program that is impacted by this accounting standard, the adoption of
these standards has no impact on the financial statements.
Two new Canadian accounting standards have been issued which will require
additional disclosure in the Company's financial statements commencing January
1, 2008 about the Company's financial instruments as well as its capital and
how it is managed.
Business Risks
The activities the Company undertakes involve a number of risks and
uncertainties, some of which are: crude oil and natural gas prices, cyclical
or seasonal nature of industry, merger and acquisition activity, availability
of qualified staff and financing, financial instruments, and litigation and
contingencies. Additional risks and uncertainties that the Company may be
unaware of, or that were determined to be immaterial, may also become
important factors that affect the Company. A discussion on the business risks
faced by the Company can be found in HSE's 2006 Annual Report.
Internal Control over Financial Reporting
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with participation
of the Company's management, including the Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as defined in
Multilateral Instrument 52-109. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were designed to provide a reasonable level of
assurance over disclosure of material information, and are effective as at
June 30, 2007.
Management's Report on Internal Control over Financial Reporting
The CEO and CFO of HSE Integrated Ltd. are responsible for designing
internal controls over financial reporting or causing them to be designed
under supervision. The Company's internal controls over financial reporting
are designed to provide reasonable assurance regarding the reliability of the
Company's financial reporting and its preparation of financial statements for
external purposes in accordance with Canadian generally accepted accounting
principles. Internal controls over financial reporting, no matter how well
designed, have inherent limitations. Therefore, internal controls over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation and may not prevent or detect all
misstatements.
The Company, in first quarter of 2007 identified revenue completeness,
internal control over financial reporting for acquisitions, segregation of
duties and technical expertise as internal control weaknesses. In the current
period, Management is satisfied that it has implemented adequate compensation
controls to address these weaknesses. There were no new acquisitions and no
new applicable technical accounting issues requiring outside consulting
assistance in the second quarter 2007.
The Company is committed to continually improving its internal control
environment in line with its strategy for growth. Other than the corrective
actions discussed above, there were no changes in the second quarter of 2007
in the Company's internal controls over financial reporting that have
materially affected, or are reasonably likely to affect the Company's internal
controls over financial reporting.
Common Shares Outstanding
At August 8, 2007, there were 37,465,675 common shares of HSE
outstanding, compared with 37,462,342 common shares outstanding as at December
31, 2006.
Non-GAAP Measures
This report makes reference to EBITDA, a measure that is not recognized
under generally accepted accounting principles (GAAP). Management believes
that, in addition to net earnings, EBITDA is a useful supplementary measure.
EBITDA provides investors with an indication of earnings before provisions for
interest, taxes, amortization, foreign exchange gains or losses, gains or
losses on the disposal of property and equipment, and the non-cash effect of
stock-based compensation expense. Investors should be cautioned that EBITDA
should not be construed as an alternative to net earnings determined by GAAP
as an indication of the Company's performance. HSE's method of calculating
EBITDA may differ from that of other companies and accordingly may not be
comparable to measures used by other companies.
EBITDA calculation
-------------------------------------------------------------------------
For the Six Months Ended June 30 2007 2006
-------------------------------------------------------------------------
Net earnings (loss) $(2,209) $1,280
Add (deduct):
Amortization 3,843 3,298
Stock based compensation 690 380
Interest 634 647
Foreign exchange loss 2 -
Loss on disposal of property and equipment 737 451
Income tax (685) 630
-------------------------------------------------------------------------
EBITDA $3,012 $6,686
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarterly EBITDA calculation
-------------------------------------------------------------------------
2007 2006
Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Net earnings (loss) $(3,113) $904 $984 $1,197 $(1,073) $2,353
Add (deduct):
Amortization 1,955 1,888 2,458 1,862 1,870 1,428
Stock based
compensation 333 357 285 312 231 149
Interest 302 332 403 346 359 290
Foreign exchange
(gain) loss 3 (1) (93) - - -
Loss (gain) on
disposal of
property and
equipment 30 707 (26) (19) 272 179
Income taxes (1,300) 615 330 585 (519) 1,149
-------------------------------------------------------------------------
EBITDA $(1,790) $4,802 $4,341 $4,283 $1,140 $5,548
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------
2005
Q4 Q3
-------------------------------------
Net earnings (loss) $(58) $786
Add (deduct):
Amortization 1,007 894
Stock based
compensation 98 70
Interest 34 16
Foreign exchange
(gain) loss 16 -
Loss (gain) on
disposal of
property and
equipment 177 186
Income taxes 226 272
-------------------------------------
EBITDA $1,500 $2,224
-------------------------------------
-------------------------------------
Forward-Looking Statements
This report contains forward-looking information and statements within the
meaning of applicable securities laws. These forward-looking statements
concern, among other things, the Company's prospects, expected revenues,
expenses, profits, financial position, strategic direction, and growth
initiatives, all of which are subject to risks, uncertainties and assumptions.
These forward-looking statements are identified by their use of terms and
phrases such as expect, anticipate, estimate, believe, may, will, intend,
plan, continue, project, objective and other similar terms and phrases. These
statements are based on certain assumptions and analyses made by the Company
based on its experience and assessment of current conditions, known trends,
expected future developments and other factors it believes are appropriate
under the circumstances. Such statements are subject to numerous external
variables, both known and unknown, such as changes in commodity prices for
natural gas and oil, changes in drilling activity, weather conditions,
industry-specific and general economic conditions and exchange rate
fluctuations. If any of these risks and uncertainties materializes or if
assumptions are incorrect, actual results may differ materially from those
expressed or implied in the forward-looking statements. The forward-looking
statements included in this MD&A are not guarantees of future performance and
should not be unduly relied upon. Such information and statements involve
known and unknown risks, uncertainties and other factors that may cause actual
results or events to differ materially from those anticipated in such
forward-looking information and statements.
The forward-looking information and statements contained in the MD&A speak
only as of the date of this MD&A, and none of the Company or its subsidiaries
assumes any obligation to publicly update or revise them to reflect new events
or circumstances, except as may be required pursuant to applicable laws.
Additional Information
Additional information relating to HSE is available under our profile on
the SEDAR website at www.sedar.com and at www.hseintegrated.com.
-------------------------------------------------------------------------
HSE Integrated Ltd.
Consolidated Balance Sheets
June 30 December 31
(Stated in thousands) (unaudited) 2007 2006
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 5,386 $ 6,551
Short term investments - 802
Accounts receivable 18,267 23,363
Inventory 804 764
Prepaid expenses and other assets 650 963
Income taxes recoverable 808 -
------------------------
25,915 32,443
Property and equipment 42,976 44,745
Goodwill 23,641 23,641
Intangible assets 5,493 6,109
------------------------
$ 98,025 $ 106,938
------------------------
------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities $ 7,181 $ 9,540
Income taxes payable - 1,602
Current portion of obligations under
capital leases 1,370 1,458
Current portion of long-term debt (note 3) 225 4,199
------------------------
8,776 16,799
Obligations under capital leases 2,188 3,039
Long-term debt (note 3) 14,661 12,834
Future income taxes 7,128 7,454
------------------------
32,753 40,126
------------------------
SHAREHOLDERS' EQUITY
Share capital (note 4) 61,480 61,471
Contributed surplus 2,083 1,423
Retained earnings 1,709 3,918
------------------------
65,272 66,812
------------------------
$ 98,025 $ 106,938
------------------------
------------------------
Subsequent Event (note 7)
-------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
HSE Integrated Ltd.
Consolidated Statements of Earnings and Retained Earnings
Three Months Six Months
(Stated in thousands, ended June 30 ended June 30
except per share amounts) ---------------------------------------
(unaudited) 2007 2006 2007 2006
-------------------------------------------------------------------------
REVENUE $ 19,352 19,924 $ 47,300 47,388
---------------------------------------
COSTS
Operating and materials 18,545 16,826 39,175 36,561
Selling, general and
administrative 2,598 1,958 5,113 4,141
Amortization of property and
equipment 1,647 1,636 3,227 2,825
Amortization of intangibles 308 234 616 473
Stock based compensation (note 5) 333 231 690 380
Interest on long-term debt 279 340 588 616
Other interest and bank charges 22 19 46 31
Foreign exchange loss 3 - 2 -
Loss on disposal of property and
equipment 30 272 737 451
---------------------------------------
23,765 21,516 50,194 45,478
---------------------------------------
EARNINGS (LOSS) BEFORE INCOME
TAXES (4,413) (1,592) (2,894) 1,910
---------------------------------------
Income taxes
Current (recovery) (1,158) (109) (359) 810
Future (recovery) (142) (410) (326) (180)
---------------------------------------
(1,300) (519) (685) 630
---------------------------------------
NET EARNINGS (LOSS) AND
COMPREHENSIVE INCOME (3,113) (1,073) (2,209) 1,280
RETAINED EARNINGS,
beginning of period 4,822 2,810 3,918 457
---------------------------------------
RETAINED EARNINGS,
end of period $ 1,709 1,737 $ 1,709 1,737
---------------------------------------
---------------------------------------
Earnings (loss) per share
Basic and diluted $ (0.08) (0.03) $ (0.06) 0.04
---------------------------------------
---------------------------------------
Weighted average number of
shares (thousands)
Basic 37,465 35,986 37,465 34,219
Diluted 38,032 36,786 37,882 34,510
-------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
HSE Integrated Ltd.
Consolidated Statements of Cash Flows
Three Months Six Months
ended June 30 ended June 30
---------------------------------------
(Stated in thousands) (unaudited) 2007 2006 2007 2006
-------------------------------------------------------------------------
Cash provided by (used in)
Operations
Net earnings $ (3,113) (1,073) $ (2,209) 1,280
Charges to income not
involving cash
Amortization 1,955 1,870 3,843 3,298
Stock-based compensation
(note 5) 333 231 690 380
Future income tax expense (142) (410) (326) (180)
Loss on disposal of
property and equipment 30 272 737 451
Change in non-cash working
capital 3,811 3,690 1,377 (3,674)
---------------------------------------
Cash provided by operations 2,874 4,580 4,111 1,555
---------------------------------------
Financing
Advances of operating line of
credit - (4,981) - (1,597)
Repayment of obligations under
capital leases (439) (297) (939) (577)
Issuance of long-term debt - - - 17,174
Repayment of long-term debt (1,066) (1,335) (2,147) -
Issuance of share capital,
net of costs - 11,931 4 13,480
---------------------------------------
Cash provided by (used in)
financing (1,505) 5,318 (3,082) 28,480
---------------------------------------
Investing
Purchase of property and
equipment (1,359) (703) (2,815) (1,150)
Acquisitions - (4,352) - (20,686)
Proceeds from disposal of
property and equipment 229 47 620 345
---------------------------------------
Cash (used in) investing (1,130) (5,008) (2,195) (21,491)
---------------------------------------
Net in cash and cash equivalents 239 4,890 (1,165) 8,544
Cash and cash equivalents,
beginning of period 5,147 4,036 6,551 382
---------------------------------------
Cash and cash equivalents,
end of period $ 5,386 8,926 $ 5,386 8,926
---------------------------------------
---------------------------------------
See accompanying notes to the consolidated financial statements.
-------------------------------------------------------------------------
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements
(unaudited)
For the three and six month periods ended June 30, 2007 and 2006
(stated in thousands of dollars, except share amounts)
-------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS
Nature of business
These unaudited interim consolidated financial statements of HSE
Integrated Ltd. (the "Company") have been prepared following the same
accounting policies and methods of computation as the audited annual
consolidated financial statements of the Company for the year ended
December 31, 2006, except as outlined in note 2. The disclosures
provided below are incremental to those included with the audited annual
consolidated financial statements and certain disclosures, which are
normally required to be included in the notes to the annual consolidated
financial statements, have been condensed or omitted. These unaudited
interim consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes for the
Company for the year ended December 31, 2006.
These unaudited interim consolidated financial statements include the
accounts of the Company and its subsidiaries, are stated in Canadian
dollars, and have been prepared in accordance with Canadian generally
accepted accounting principles ("GAAP"). Management is required to make
estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as at the
date of the financial statements and the reported amounts of revenue and
expenses during the reported period. Actual results could differ from
these estimates.
The Company's business is seasonal in nature with the highest activity in
the winter months (first and fourth fiscal quarters) and the lowest
activity during spring break up (second fiscal quarter) due to road
weight restrictions and reduced accessibility to remote work areas.
Certain prior year figures have been reclassified to conform with the
current period presentation.
These interim financial statements have not been reviewed by the
Company's auditors but have been reviewed and approved by the Company's
Audit Committee and Board of Directors.
-------------------------------------------------------------------------
NOTE 2 - CHANGE IN ACCOUNTING POLICIES
On January 1, 2007, the Company adopted the new accounting standards
issued by the Canadian Institute of Chartered Accountants regarding the
recognition, measurement, disclosure and presentation of financial
instruments. Under these standards, financial instruments must be
classified into one of five categories: (i) held-for-trading, (ii) held-
to-maturity, (iii) loans and receivables, (iv) available-for-sale, and
(v) other financial liabilities. The new standards require that all
financial instruments within the scope of the standards, including all
derivative instruments, be recognized on the balance sheet initially at
fair value. Subsequent measurement of all financial assets and
liabilities - except those in the held-for-trading and available-for-sale
categories - must be determined at amortized cost using the effective
interest rate method. Held-for-trading financial instruments are
measured at fair value with changes in fair value recognized in earnings.
Available-for-sale financial instruments are measured at fair value with
changes in fair value recognized in comprehensive income until the
investment is derecognized or impaired at which time the amounts would be
recorded in net earnings.
Under adoption of these new standards, the Company designated accounts
receivable as "loans and receivables", which are measured at amortized
cost. Short-term investments have been designated as "held-for-trading",
which are measured at fair values with changes in such value included in
earnings. Accounts payable and accrued liabilities and long-term debt are
classified as "other financial liabilities" which are measured at
amortized cost.
We have classified previously deferred financing costs of $29 included in
prepaid expenses and other assets as unamortized debt issues costs, which
now reduces the carrying value of the long-term debt. The debt issue
costs will be accreted to the carrying value of long-term debt using the
effective interest method. Comparative amounts for prior periods have
not been restated.
The Company also adopted as of January 1, 2007 new standards with respect
to comprehensive income. The new standards require a statement of
comprehensive income, if there are items that give rise to comprehensive
income or loss. The Company did not identify any such items giving rise
to comprehensive income or loss in the three and six months ended June
30, 2007 or that would result in an adjustment to opening balances for
accumulated other comprehensive income or loss.
The Company was also required to adopt new accounting standards with
respect to hedging activities. As the Company does not currently have a
hedging program that is impacted by this accounting standard, the
adoption of these standards has no impact on the financial statements.
Two new Canadian accounting standards have been issued which will require
additional disclosure in the Company's financial statements commencing
January 1, 2008 about the Company's financial instruments as well as its
capital and how it is managed.
-------------------------------------------------------------------------
NOTE 3 - OPERATING FACILITIES and LONG TERM DEBT
During the quarter, the Company entered an agreement with its current
lender for credit facilities. The credit facilities include a $25 million
three-year interest-only revolving facility and a $7.5 million operating
facility. The facilities bear interest at the bank's prime rate (or U.S.
base rate) plus up to 0.75 percent, or at bankers' acceptance rates with
a variable stamping fee of 1.50 to 2.25 percent. An additional standby
fee ranging between 0.20 to 0.35 percent per annum is also required on
the unused portion of the credit facilities. The revolving facility
matures on June 25, 2010, with an ability to extend the term at the
lender's option. The operating facility is renewable annually and is
margined to accounts receivable. This facility is subject to covenants
that are typical for this type of facility. The credit facilities are
collateralized under a general security agreement. Certain costs
associated with the new financing facilities have been shown as a
reduction of the carrying value of long term debt and will be expensed
over the term of the debt using the effective interest rate method.
During 2006 and first quarter 2007, the Company had the following bank
credit facilities:
a) a $20,000 non-revolving installment credit facility which
amortized over five years from date of draw, bearing interest
at the bank's prime rate, and was subject to an annual cash
flow sweep of 25% of earnings before interest, amortization and
taxes less interest paid and repayments of revolving and non-
revolving principal.
b) A $10,000 (seasonally reduced in June to November to $8,000)
operating facility bearing interest at the bank's prime rate.
This facility was subject to margin requirements based on
eligible accounts receivable.
c) A $5,000 revolving installment credit facility which amortized
over five years from date of draw and bears interest at the
bank's prime rate.
The credit facilities were secured by general security agreements and
required maintenance of certain financial ratios and other covenants.
June December
30 31
2007 2006
-------------------------------------------------------------------------
Equipment financing contracts bearing interest at
rates averaging 1.44% (2006 - 1.44%), payable in
blended monthly payments of $27 (2006 - $27)
secured by specific equipment. $ 307 $ 438
Non-revolving credit facility loan as noted above,
payable in quarterly principal payments of $988
(2006 - quarterly principal payments of $988) - 15,805
Three-year interest only revolving credit facility 13,830 -
---------------------
14,137 16,243
Accrued consideration on share purchase acquisition 790 790
---------------------
14,927 17,033
Less current portion (225) (4,199)
---------------------
14,702 12,834
Less unamortized debt issue costs (41) -
---------------------
$ 14,661 $ 12,834
---------------------
---------------------
Outstanding principal repayments are due as follows:
2007 $ 118
2008 945
2009 34
2010 13,830
----------
14,927
Less: current portion (225)
----------
$ 14,702
----------
----------
-------------------------------------------------------------------------
NOTE 4 - SHARE CAPITAL
a) Authorized:
Unlimited number of common shares without par value.
Unlimited number of preferred shares, issuable in series.
b) Issued and outstanding:
2007
-----------------------------
Common shares Shares Amount
(in thousands)
-----------------------------
Balance, December 31, 2006 37,462 $ 59,862
Issued on exercise of options 3 9
-----------------------------
Balance, end of period 37,465 $ 59,871
-----------------------------
-----------------------------
2007
-----------------------------
Warrants Units Amount
(in thousands)
-----------------------------
Balance, December 31, 2006 3,144 $ 1,609
Forfeited on expiry (3,144) (1,609)
-----------------------------
Balance, end of period - -
-----------------------------
-----------------------------
-------------------------------------------------------------------------
NOTE 5 - STOCK-BASED COMPENSATION PLANS
Options
On January 16, 2007, the Company issued 60,000 options to key senior
managers of the Company to purchase common shares of the Company at the
January 16, 2007 closing price of $1.75. The fair value of the options
issued was $59.
On January 25, 2007, the Company issued 320,000 options to senior
managers and officers of the Company to purchase common shares of the
Company at the January 25, 2007 closing price of $1.80. The fair value of
the options issued was $323.
On May 15, 2007, the Company issued 327,500 options to senior managers
and officers of the Company to purchase common shares of the Company at
the May 15, 2007 closing price of $1.62. The fair value of the options
issued was $451.
Deferred share unit plan
Effective November 13, 2006, the Company adopted a deferred share unit
("DSU") plan for non-executive directors. Under the terms of the plan,
DSUs awarded will vest immediately and will be settled with cash in the
amount equal to the closing price of the Company's common shares on the
redemption date specified by the Director upon tendering their
resignation from the Board. The redemption date must be after the date on
which the notice of redemption is filed with the Company and before
December 15 of the first calendar year commencing after the Director's
termination date. On January 16, 2007, 15,000 deferred share units were
granted to non-executive directors. The units were revalued at June 30,
2007 and the recovery recorded in income.
-------------------------------------------------------------------------
NOTE 6 - SEGMENT INFORMATION
Management has determined that the Company operates in a single industry
segment, which involves the provision of industrial health, safety and
environmental monitoring services. Substantially all of the Company's
operations, assets, revenues, and employees are in Canada. For the
periods ended June 30, 2007 and 2006, the Company had no customer
representing more than 10% of revenue.
Revenue by customer group is as follows:
Three Months Six Months
ended June 30 ended June 30
---------------------------------------
2007 2006 2007 2006
---------------------------------------
Oilfield $ 4,992 11,904 $ 21,346 33,701
Industrial 12,602 6,521 20,143 10,420
Environment 1,758 1,499 5,811 3,267
---------------------------------------
Total Revenue $ 19,352 19,924 $ 47,300 47,388
---------------------------------------
---------------------------------------
As a % of Revenue:
Oilfield 25.8% 59.8% 45.1% 71.1%
Industrial 65.1% 32.7% 42.6% 22.0%
Environment 9.1% 7.5% 12.3% 6.9%
---------------------------------------
Total Revenue 100.0% 100.0% 100.0% 100.0%
---------------------------------------
---------------------------------------
-------------------------------------------------------------------------
NOTE 7 - SUBSEQUENT EVENT
On July 1, 2007, the Company acquired Prairie Wide Safety Ltd. ("PWS") of
Weyburn, Saskatchewan in a business combination to be accounted for using
the purchase method. PWS serves the hydrocarbon producing region of
southeast Saskatchewan by providing complete oilfield and industrial
safety services to drilling, completion, well servicing and field
processing operations. The purchase consideration will be determined
based upon a predetermined formula not to exceed $2.2 million based upon
historical results, with additional consideration contingent upon
performance measures achieved in the first year from the acquisition
date. The consideration will also be subject to adjustments based upon
working capital and long term debt levels, and will be a combination of
cash, the assumption of debt, and the issuance of 100,000 common shares.
The purchase price allocation has not been completed and certain items
such as fair value of assets and liabilities and estimates for contingent
consideration as of the acquisition date have not been finalized.
%SEDAR: 00011733E
For further information: HSE Integrated Ltd., David Yager, Chairman &
CEO, Telephone: (403) 266-1833, E-Mail: dyager@hseintegrated.com; Tony
Hidalgo, Chief Financial Officer, Telephone: (403) 650-6481, E-Mail:
thidalgo@hseintegrated.com
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