Diversification Helps HSE Maintain 81% of Revenue in Challenging First Quarter 2009 Business Environment
Tue May 12, 11:25 PMCALGARY, May 12 /CNW/ - HSE Integrated Ltd. ("HSE", "Our", "We", or the "Company") today announced its financial results for the first quarter of the 2009 fiscal year ended March 31, 2009.
Total revenue for the quarter declined 18.7% to $22.4 million from $27.6 million for the same period in the 2008 fiscal year. This had a very negative impact on operating margin which declined 60.3% to $2.0 million (8.9% of revenue) from $5.0 million (18.2% of revenue) in the prior year. Sales, general and administrative expenses ("SG&A") declined 7.4% to $2.2 million from $2.4 million. HSE reports a loss for the quarter of $1.8 million (a loss of $0.05 per share) compared to $0.0 in the first quarter of 2008 ($0.00 per share). EBITDA declined EBITDA declined from $2.6 million in Q1 2008 to ($0.2) million in Q1 2009.
All of the revenue decline took place in the Oilfield portion of the Company's activities, the segment of the business related to health and safety services for conventional oil and gas exploration, drilling, completion and workover activities. Because of the collapse in crude oil and natural gas prices and the global credit crisis that took place in the latter half of 2008, HSE's client E&P companies drastically reduced capital and operating expenditures in the first quarter. Therefore, Oilfield revenues declined 35.7% to $10.3 million in Q1 2009 from $16.0 million in the prior year.
Industrial health and safety revenues, however, increased on a year-over-year basis by 4.6% to $12.1 million from $11.6 million last year. In the past four years HSE has aggressively expanded revenues beyond conventional oil and gas to include oilsands, refining, petrochemicals, manufacturing, utilities, mining, offshore oil and gas, power generation and food and beverage. While none of these sectors are immune to the economic downturn, the Company's industrial and geographic diversification has created a situation where growth in stronger markets exceeded the decline in those negatively impacted by the recession.
The Company's balance sheet remained strong. At March 31, 2009, working capital was $19.5 million compared to $20.5 million at December 31, 2008 and $19.9 million at March 31, 2008. Long term bank debt remained unchanged from year end at $10.8 million and there was no draw on the operating line of credit. HSE had $1.1 million in cash on hand at March 31, 2009 compared to a draw on the operating facility of $4.1 million on March 31 of the prior year.
In response to the downturn in revenues and the economy, by mid-January HSE began a significant cost-reduction initiative to bring fixed and variable costs in line with reduced business levels. This included layoffs, job reclassifications, temporary pay cuts, unpaid leave, and a reduction of all non-essential expenses such as advertising, travel, and in-person staff meetings. On May 1, 2009, a significant change in the field technician pay structure was implemented for western Canada. Going forward, it is expected that the cumulative impact of these initiatives will significantly reduce the total revenue level at which HSE can generate a positive cashflow in the current economic environment. During the period HSE incurred $282,000 in one-time severance costs.
For the first quarter the results of HSE's new U.S. operation, Boots & Coots HSE Services LLC ("BCHSE"), were included in the consolidated financial results. BCHSE did not generate a positive cashflow in the first quarter. However, the customer response is encouraging and the long-term outlook for BCHSE remains positive. BCHSE is participating in the same corporate cost-reduction initiatives as the Company has initiated in Canada.
David Yager, Chairman and CEO, offered the following comments for HSE's first quarter 2009 financial results:
"In an extremely difficult business environment, HSE is doing what it must to manage costs in a period of very low demand for Oilfield health and safety services. We entered the year with the belief that the winter drilling season would at least to some degree track historic levels. However, by mid-January it became apparent that client capital spending reductions would be greater than anticipated, and therefore we began an aggressive cost cutting program. HSE believes that the severe downturn in conventional oil and gas exploration, drilling, completion and workover services is temporary. HSE is committed to this sector and its clients, and therefore has taken the necessary steps to be an important player in this industry when demand for its services recovers.
Demand for Industrial health and safety services is mixed. Some sectors such as mining, steel and auto manufacturing are struggling resulting in reduced business for HSE. Others such as oilsands, east coast offshore and nuclear power remain stable and are growing. Assisted by new clients and new markets, growth in selective Industrial health and safety exceeded declines in others, resulting in a year-over-year growth in revenue. Some client plant repair and maintenance activities that require health and safety services have been postponed as operators conserve cash. Whether or not HSE can increase total Industrial revenues for the fifth straight year is unknown at this time, but the Company does have growth opportunities in the current business environment.
The significant EBITDA and earnings decline is attributable to the higher margin Oilfield revenue decline and one-time charges incurred during the quarter.
Going forward, HSE is becoming cautiously optimistic that the worst is over in terms of clients cutting capital and operational spending. Oil prices have increased significantly from late 2008 and have stabilized above $50 a barrel. The introduction of oil and gas activity stimulus programs in Alberta and reduced drilling and service costs have increased the number of prospects that are economically viable at current commodity prices. Some capital projects, particularly in Atlantic Canada and the oilsands, are proceeding. New clients are being developed regularly because the total need for quality industrial health and safety services and expertise in all markets is substantially greater than HSE's current market penetration.
The contribution by our staff has been extraordinary. The largest element of our cost cuts has been in all components of labor. Management and the Board of Directors recognize the company-wide sacrifice our team is making to get through this difficult period, and remains committed to ensuring that HSE emerges from the downturn as a challenging, exciting and rewarding career opportunity".
For further information and analysis please see the attached Management 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 Wednesday May 13, 2009.
Dial-In Number: 1-800-814-4862 or 1-416-644-3433
Conference Replay until June 13, 2009: 1-416-640-1917 or 1-877-289-8525 (Passcode: 21305784 followed by the pound sign)
Webcast:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2664640
ANNUAL GENERAL MEETING
HSE's Annual General Meeting of Shareholders will be held in the Cardium Room at the Petroleum Club in Calgary, 319- 5th Ave. S.W., at 3 PM on Friday May 15, 2009.
HSE is an integrated, national supplier of industrial Health, Safety and Environmental services. From its head office in Calgary, Alberta, it serves its clients from field service locations in Alberta, British Columbia, Saskatchewan, Ontario, Nova Scotia, New Brunswick, Newfoundland-Labrador and Michigan. HSE also operates in Midland, Texas, through a jointly owned company called Boots & Coots HSE Services LLC. HSE trades on the TSX under the symbol "HSL".
Forward Looking Statements
This news release contains forward-looking information and statements (collectively "forward-looking statements") within the meaning of applicable securities laws 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, would, could, might, intend, plan, continue, ongoing, project, objective and other similar terms and phrases. These forward-looking 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 forward-looking statements are subject to inherent risks and uncertainties. There is significant risk that the forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause actual future results and events to differ materially from that expressed in the forward-looking statements. Accordingly this news release is subject to the disclaimer and qualified by the assumptions and risk factors referred to in the Management Discussion and Analysis in the 2009 first quarter report, in the 2008 annual report, and in other filings with securities commissions in Canada as reported in the Company's profile at www.sedar.com. Any forward-looking statements in this news release speak only as of the date of this news release. Except as required by law, the Company disclaims any intention to update or revise any forward-looking statements to reflect new events or circumstances.
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 three month periods ended March 31, 2009 and 2008
The following management discussion and analysis is dated May 12, 2009, and is a review of the financial results of HSE Integrated Ltd. ("HSE", "We", "Our", or the "Company") for the three month periods ended March 31, 2009 and 2008. This MD&A should be read in conjunction with HSE's other 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 May 12, 2009. 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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Quarter ended Quarter ended Year-over-year
March 31, 2009 March 31, 2008 % change
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Revenue $22,401 $27,569 -18.7%
Operating and materials 20,410 22,552 -9.5%
Operating margin 1,991 5,017 -60.3%
Operating margin % 8.9% 18.2%
Selling, general
& administrative 2,207 2,384 -7.4%
Net loss (1,806) (11) -16,318.2%
- per share basic (0.05) (0.0) -16,314.8%
- per share diluted (0.05) (0.0) -16,314.8%
EBITDA (1) (216) 2,633 -108.2%
EBITDA % (1.0%) 9.6%
Total assets 64,554 77,237 -16.4%
Total long-term liabilities $17,506 $21,670 -19.2%
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See Non-GAAP Measures for (1)
Financial Review
Overview
HSE operates in a single industry segment, industrial health and safety. The Company provides a package of integrated 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 shower (decontamination) services; on-site medical services; worker safety training; industrial hygiene services; and safety management and consulting services.
Total revenue for the quarter decreased 18.7% from $27,569 in 2008 to $22,401 in 2009. Operating margin of $1,991 was 8.9% of revenues, down from $5,017 or 18.2% in 2008. SG&A decreased to $2,207 from $2,384 in the prior year, but as a percentage of revenue SG&A increased from 8.6% of revenue in fiscal 2008 to 9.8% in 2009. HSE reported a loss of $1,806 or ($0.05) per share compared to a loss of $11 or ($0.0) per share in the prior year. HSE generated EBITDA of $(216) or (1.0%) of revenue in 2009, down 108.2% from $2,633 or 9.6% of revenue in 2008.
Revenue
The Company currently provides services to customers in two main business areas: Oilfield health and safety ("Oilfield") and Industrial health and safety services ("Industrial"). Oilfield services are provided to customers who operate within the conventional upstream, or "wellhead", sector of the oil and gas industry. This includes oil and gas well exploration, drilling, completion and workover operations. Industrial services are provided to customers operating in a wide variety of other industries, including: non-conventional upstream oil development and production (including oilsands extraction); oil and gas processing and refining; petrochemicals; pulp and paper; utilities; power generation; and diverse manufacturing industries. It also includes worker safety training and safety management and consulting services. The Company tracks billings to customers by defined revenue grouping, but uses a common pool of equipment and manpower resources to provide these services. Management services are provided from a common personnel pool.
The revenue for these revenue groups is shown below:
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Quarter Quarter Year Quarter Year
ended ended over ended over
March 31, March 31, year % March 31, year %
2009 2008 change 2007 change
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Oilfield $10,260 $15,961 (35.7)% $19,799 (19.4)%
Industrial 12,141 11,608 4.6% 8,149 42.4%
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Total Revenue $22,401 $27,569 (18.7)% $27,948 (1.4)%
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As a % of Revenue:
Oilfield 45.8% 57.9% 70.8%
Industrial 54.2% 42.1% 29.2%
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Total Revenue 100.0% 100.0% 100.0%
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Oilfield
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Oilfield revenues in the year decreased by 35.7% in 2009 compared to 2008. The year-over-year decline is due to lower overall activity levels in Western Canada in the first quarter of 2009 in the conventional upstream, or "wellhead", sector of the oil and gas industry: oil and natural gas well drilling, completion and workover (repair and maintenance) operations in the Western Canadian Sedimentary Basin. Compared to the same period in the prior year, this significant revenue decrease was caused by several negative external events including lower oil prices, lower natural gas prices, reduced access to debt and equity capital by Company clients, and the introduction of increased Crown royalties in Alberta, a major market for HSE.
Services provided in the Oilfield sector are primarily oriented towards supporting the development of natural gas with a higher level of health and safety protection required for the development of sour gas - reserves of natural gas containing hydrogen sulphide - and crude oil containing sour gas. Some oil reservoirs tend to go "sour" over time due to the injection of water for secondary recovery, thus increasing the requirement for safety services. The primary driver of revenue fluctuations in comparative reporting periods relates to a major decline in all forms of conventional oilfield activity in the markets served including drilling, new well completions, and well workover activities.
The overall depressed economic environment for the conventional oil and gas industry has also put pressure on the prices HSE can charge its clients for services provided. To compensate for vastly reduced commodity prices, clients are seeking pricing relief for the input services including health and safety. Therefore, HSE has been forced to adjust its pricing downward in order to maintain clients and market share. In response, HSE has undertaken a series of internal cost reduction measures to maintain an acceptable operating margin. These initiatives will be discussed in detail under the discussion of Operating Materials Expense and Selling General and Administrative Expense below.
In the first quarter of 2009, the Company's venture with Boots & Coots International Well Control, Inc. - Boots & Coots HSE Services LLC ("BCHSE") - generated its first ongoing revenues as the equipment and service offering was expanded with the arrival of breathing air trailers and trailer-mounted decontamination units in addition to the combination fire/shower units that arrived in West Texas and Oklahoma in the fourth quarter of 2008. Service locations were opened in Odessa, Texas and Oklahoma City. While total revenue generated was modest, the Company is pleased with customer acceptance of the equipment, service and branding in light of the significant oilfield activity downturn that U.S. markets are also experiencing.
Industrial
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The Industrial health and safety services component of the Company's total revenue continued to grow in the first quarter of 2009, however at a much slower rate than in the past because of the negative effects of the global recession and sharp reductions in commodity prices into virtually every market and industry in which HSE operates.
Industrial revenue increased $533 (4.6%) to $12,141 from $11,608 in the same period in the prior year. Industrial health and safety services comprised 54.2% of total revenues, up from 42.1% in 2008. This is the first time that Industrial revenues have exceeded Oilfield revenues in the first quarter of the year. Without a significant recovery in Oilfield activity, Industrial revenues will continue to be greater than Oilfield revenues.
The year-over-year Industrial health and safety revenues generated varied widely depending upon the service location. Central and southern Alberta experienced minor declines, while revenue from oilsands operations in Northeast Alberta increased slightly.
Revenues in Ontario from locations in Sudbury, Sarnia, Windsor and Hamilton were down about one-third, but revenue from Atlantic Canada rose by 73% compared to the same period in 2008.
For the period ended March 31, 2009, the Company had one customer representing more than 10% of revenue (2008 - none). The Company had sales of approximately $2.3 million to the customer during the quarter.
Operating and Materials Expense and Operating Margin
Operating and materials expense consists of costs directly attributable to the delivery of health and safety services to customers. These include: wages and benefits for field employees and contractors; equipment rentals and leases; field service center property costs; transportation; fuel; consumables; equipment repairs and maintenance; and field office administration including field sales.
Operating and materials expense for the quarter ended March 31, 2009 totaled $20,410 or 91.1% of revenue as compared to $22,552 or 81.8% of revenue in 2008. Operating margin for the year declined from $5,017 (18.2% of revenue) in the first quarter of 2008 to $1,991 (8.9% of revenue) in 2009.
The decrease in operating margins is due to a number of factors. The Company's fixed field service location operating costs were spread over a significantly lower revenue base. Based on the strong performance of the Company in the fourth quarter of 2008, HSE also entered the year overstaffed relative to client demand which began to decline sharply early in the new year. As well, BCHSE was still in the startup stage with expenses in advance of revenue.
However, by mid-January it became clear that the economic downturn in all industries and markets was going to be far more severe than management anticipated. Therefore, at the end of January a series of cost reduction measures were implemented, the full impact of which will not be in place until May of 2009. These include layoffs of approximately 10% of full-time staff, salary reductions for all non-field employees in Western Canada of 5%, salary reductions from 10% to 20% for management and executives, a company-wide hiring freeze without executive approval, and a series of operating costs reductions involving travel, advertising and entertainment expenses. These cost reductions also applied to operations in the United States. During the period, the Company incurred severance costs of $282 associated with the foregoing. The last element of the operating cost reduction is a switch of field service personnel from a monthly base salary and daily job bonus to an hourly pay basis. This will directly link field service personnel expense to revenue for the first time. Management anticipates that, based on its historical revenue mix, these cost reductions, once fully realized, should reduce the average monthly revenue required to achieve break even EBITDA to approximately $6.0 to $6.5 million per month.
Included in operating expenses is an addition to the provision for doubtful accounts of $95 to reflect increased collection risks as a result of the deterioration in the general business environment. The allowance for doubtful accounts receivable was $1,490 (6% of trade accounts receivable) at the end of the quarter.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense consists of costs not directly attributable to the delivery of services to 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 totaled $2,207 (9.8% of revenue), down from $2,384 (8.6% of revenue) in the prior year. Personnel costs declined as staff numbers declined year-over-year and the impact of salary reductions on March 1, 2009 came into effect. Temporary staff hired in 2008 as part of various accounting system conversions were no longer needed in 2009. Travel and advertising costs declined as part of a company-wide initiative to reduce all costs in response to reduced operating levels. Offsetting the SG&A cost reductions achieved by the foregoing was the inclusion of expenses related to BCHSE for the first time in 2009.
EBITDA and Net Loss
EBITDA (see "Non-GAAP Measures") in the quarter decreased from $2,633 in the first quarter of 2008 to ($216) in the current quarter. The EBITDA decrease was primarily because of significant revenue declines in the Oilfield business area. However, operating expenses and SG&A, which include a significant fixed cost component, did not decline in proportion. As well, severance costs from staff reductions in the first quarter of 2009 further reduced EBITDA.
Total amortization for the quarter was $1,739, down from $2,125 in 2008. Property and equipment amortization declined compared to the prior year at $1,611 (down from $1,868) as the Company controlled the pace of capital additions during 2008 and the first quarter of 2009. Intangible assets amortization declined to $128 from $257 in 2008 as certain amortization periods expired during 2008, particularly for non-competition provisions.
Stock-based compensation for the quarter was $50 (2008 - $135). The decrease is primarily due to a reduction in the number of outstanding unvested options.
Interest on long term debt and other interest and bank charges decreased from $297 in 2008 to $149 in 2009. Interest on the Company's variable rate bank debt decreased as interest rates dropped. On average, the Company's average borrowing rate was approximately 3.7% lower in the first quarter of 2009 than in the equivalent quarter in 2008. This saved the company approximately $100 in interest charges. As well, the Company had significantly lower levels of overall debt throughout the current quarter than it had in the first quarter of 2008. Capital lease obligations at March 31, 2009 were $1,514 lower than at March 31, 2008. Long-term debt was reduced by $3,459 compared to March 31, 2008. As well, the Company had a net cash position in 2009 versus an operating line draw totaling $4,149 at the end of the first quarter of 2008.
For the first quarter of 2009, the loss on disposal of property and equipment was $93 with proceeds on sale of $209. Partially offsetting the loss is the amortization of a deferred gain on sale / leaseback of assets as discussed in the 2008 annual MD&A. The remainder of asset divestitures consisted of retirement of vehicles replaced through the Company's fleet management program.
HSE had a $440 income tax recovery for the quarter versus an income tax expense of $89 for 2008. The change can be attributed primarily to a decrease in taxable income in the year.
Net loss for the quarter was $1,806 or $(0.05) per share versus a loss of $11 or ($0.0) per share in 2008. The year-over-year decline was primarily due to the decrease in EBITDA as described above.
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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Years ended December 31, 2009 2010 2011 2012 2013 Total
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Capital lease
obligations $ 633 265 111 5 - $ 1,014
Vehicle operating leases 1,824 2,349 1,621 433 6 6,233
Property & other leases 2,203 2,339 1,483 1,011 695 7,731
Long-term debt 55 10,854 818 - - 11,727
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Total contractual
obligations $ 4,715 15,807 4,033 1,449 701 $26,705
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Liquidity
In the quarter ended June 30, 2007, 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. The revolving facility may be drawn upon by way of Canadian dollar prime based loans, US dollar base rate based loans, bankers' acceptances, LIBOR loans or letters of credit.
Depending upon the ratio of HSE's consolidated senior debt to 12-month trailing EBITDA (as defined in the agreement), the facilities bear interest at the bank's prime rate (or U.S. base rate) plus a margin varying between 0.25% and 1.50%, or at bankers' acceptance rates with a stamping fee of 1.75% to 3.00%. An additional standby fee ranging from 0.35% to 0.65% per annum is also required on any unused portion of the credit facilities. Based on the results to March 31, 2009, the margin on the Company's bankers' acceptance based debt for the second quarter of 2009 is 2.50%.
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. The credit facilities are collateralized under a general security agreement. They are also subject to a senior debt to EBITDA ratio covenant, a current ratio covenant, an interest coverage covenant, and various positive and negative covenants that are typical for this type of facility. At March 31, 2009, the Company was in compliance with all of these covenants. However, there is a risk that, depending on levels of activity, the Company may fail to comply with its debt covenants within the next twelve month period. Anticipating a continuation of the challenging business environment for Oilfield health and safety services for the remainder of 2009 and possibly 2010, the Company approached its secured lender in the first quarter to discuss modifying its bank credit facility. Based on the Company's substanial current and fixed assets relative to total debt the lender has proposed amending the facility. Discussions are underway and expected to be completed prior to June 30, 2009.
At the end of the first quarter, the draw against the revolving facility was $10,829, and there was no draw against the operating facility. At March 31 the Company had cash on hand of $1,061.
Cash Provided by (Used in) Operations
Cash provided by operations in the quarter was $581 in 2009 compared to ($2,623) for 2008. Reduced revenue levels in the quarter resulted in negative EBITDA and break-even operating cash flow excluding changes in working capital. However, collections of accounts receivable improved significantly when compared to 2008 as transition issues with the implementation of a new billing system effective January 1, 2008 delayed cash collections during the first quarter of 2008.
Cash Provided by (Used in) Financing and Investing
During the quarter, the Company had no need to draw on its operating line. The Company also made scheduled debt reductions of $388 towards capital lease and other long term debt obligations.
Purchases of property and equipment for the year amounted to $464, the majority of which was revenue generating health safety services rental equipment. Proceeds from disposal of property and equipment were $209.
Working Capital
At March 31, 2009, the Company had working capital (not including current portion of long-term debt obligations) of $19,519. This compares to $20,514 on December 31, 2008 and $19,902 at March 31, 2008. The change from December 31, 2008 relates to changes in non-cash working capital as collections of receivables during the quarter were partially offset by reductions in payables and accruals. The change from the balance at the end of the first quarter of 2008 related to improved cash position offset by reductions in non-cash working capital, particularly accounts receivable. The Company's cash position improved from a draw of $4,149 at the end of the first quarter 2008 to cash on hand of $1,061 in 2009.
Outlook
In the last half of the 2008 fiscal year, the world economy entered a period of unprecedented financial turmoil resulting in recessionary business conditions in most markets in which the Company operates. In addition, commodity prices that determine the financial health of many of HSE's main clients (petroleum, natural gas, minerals, wood products, pulp and paper) declined sharply.
Although these negative economic changes took place in 2008, the full impact did not become material to HSE until the first quarter of 2009. Early in January it became apparent that the recession in 2009 was going to be deeper than management and many experts and analysts had predicted. The result was the abrupt shutdown of major capital projects and industrial facilities ranging from partially constructed oilsands plants to nickel mines to steel mills to automobile assembly plants. For the oilfield service sector in western Canada, the active drilling rig count peaked in the third week of January then began to decline steadily resulting in the lowest drilling rig utilization and number of wells drilled in this century.
Oilfield
Drilling, completion and workover activity in Canada declined sharply in the fourth quarter of 2008 and the first quarter of 2009. The current outlook for new wells drilled in Canada in 2009 by the Canadian Association of Oilwell Drilling Contractors ("CAODC") released on February 20, 2009 forecasts a total of only 11,176 wells being drilled this year. This is half the levels of drilling activity experienced in 2006 and the lowest level of wells drilling since 1993. Since this forecast was released in February, the price of oil has held relatively stable but the price of natural gas has continued to decline. HSE will approach the remainder of 2009 with extreme caution and the view that the February CAODC forecast may be optimistic.
A similar, though not as dramatic, downturn has taken place in the United States. While this doesn't directly affect the activities of BCHSE because capacity is so limited relative to total market opportunity, the focus on cost cutting does make the introduction of new services like worker and asset protection more difficult. Client recognition of the Boots & Coots brand as a credible supplier of safety services is positive. However, the timing of introducing a new service that increases costs in any way is challenging.
In response to the foregoing, HSE has undertaken every meaningful cost reduction strategy it can while still maintaining the core technical staff and delivery capability required to remain in the business and service clients when activity improves.
Effective April 1, 2009, the government of Alberta introduced drilling activity royalty credits and a one-year reduced royalty period that expires March 31, 2010. The purpose was to spur drilling activity and employment. The two elements of the program significantly improve the economics of conventional oil and gas exploration and development drilling. Reduced drilling and service costs have also improved investment economics. However, because of continued tight equity and debt markets, the only companies that can take full advantage of the stimulus are companies with strong balance sheets and/or discretionary internal cashflow. Because of depressed share prices, an attractive way to replace reserves for E&P companies is through acquisition, not drilling. This redirection of capital to acquisitions from drilling and production will further impair the Company's opportunities to provide health and safety services.
Saskatchewan and British Columbia have not been spared the effects of the downturn. The price of oil was down to $US 33 a barrel in early December. This resulted in an activity downturn in the first quarter in the Bakken light oil play in southeast Saskatchewan. With oil seemingly stable in the $US 50 a barrel range in the past month, plus the Canadian dollar declining to the US$ 0.80 range, the economics of continued development of this play have improved. This appears promising for HSE's Weyburn location. Activity in British Columbia is heavily weighted towards natural gas. While the Montney and Horn River shale gas plays continue to look geologically promising, it is unlikely that activity in northeast B.C. will be robust until gas prices improve.
While some HSE clients have indicated their intention to take advantage of the improved economics and start drilling when weather permits in late May or June, the outlook for the second and third quarters of the current fiscal year for Oilfield health and safety services is not encouraging. The Company will focus on maximizing opportunities with active customers and on cost control measures until business improves.
Industrial
The outlook for the Company's Industrial health and safety services varies significantly because of the variety of markets and industries in which HSE operates.
Oilsands remains promising for several reasons. While the cancellation or postponement of major capital projects - some partly constructed - for oilsands extraction and heavy oil upgrading is well known, there are positive developments. Overall synthetic heavy oil producing is rising because two major projects that have been under construction for four years - CNRL Horizon and OPTI-Nexen Long Lake - have come on stream. The Company continues to market aggressively to major producers. As a result, HSE believes it can continue to expand its presence and revenues from the oilsands regions of northeast Alberta on the production side, regardless of the sharp reduction in capital projects. Lower oil prices have focused oilsands developers on costs. Outsourcing all or more of essential health and safety services can yield cost-savings without compromising worker or asset protection.
Other Industrial safety work in western Canada - primarily plant shutdown and turnaround services - has declined in 2009 as facility operators conserve cash and push these necessary maintenance and repair expenditures into the future. While regulators will permit some delays, much of this work can only be pushed out one year. In the past two years, HSE has established itself as a major player in this market. However, HSE received notification that some of the work that was scheduled for the second quarter of 2009 has been postponed. Further, very competitive pricing has emerged resulting in HSE losing some work to competitors that it had previously secured. The Company's view is that the competition's prices were so low in some cases that losing the work will not damage HSE's short-term financial performance. Failure to perform by competitors could also ensure HSE secures this work in the future.
HSE's Ontario client base is diverse and is affected by the recession in different ways. The shutdown of mines and steel plants because of low mineral and product prices will have a negative impact on the Company, but the energy processing plants such as refineries and petrochemical plants will continue to operate and will require ongoing health and safety services. HSE's total market presence in Ontario relative to the opportunity remains quite small. While 2009 will be a challenging year, the future for this market remains promising.
The Atlantic region of Canada remains a bright spot for HSE in 2009. The Company's new service location in St. John's, Newfoundland-Labrador ("NL") will serve the offshore oil and gas industry and act as a regional base for large industrial projects in industries like hydro-electric construction projects, mining and mineral processing. To this end HSE has delivered medical equipment and services to a mining project, and has secured a new client for offshore drilling. Atlantic offshore projects are proceeding and HSE believes it has the opportunity to participate in these projects.
While HSE did increase total Industrial health and safety revenues in the first quarter of 2009, the postponement or loss of plant shutdown and turnaround contracts in western Canada in the second quarter will negatively impact total revenues for the year. Whether or not HSE will enjoy Industrial services revenue growth in 2009 after five consecutive years of expansion is unknown at this time.
Cost Control and Short-Term Outlook
As a result of the precipitous decline in activity and revenues in most markets in which HSE operates, early in the quarter the Company undertook a major review of fixed and variable operating costs and implemented a series of initiatives described above under Operating Expenses and SG&A. The Company is confident that once these expense and operating costs reductions are fully implemented, they will permit HSE to generate a positive cashflow at lower revenue levels than prior years.
Management believes it has taken all the prudent steps necessary to bring operating expenses in line with revenue for the remainder of 2009 while still maintaining the technical capability essential for quality service and sufficient capacity to be able to fill the known order book and client demand. However, should there be a sharp increase in client demand in the short term, HSE will not have enough service personnel to respond quickly. Management regards this as an appropriate trade-off for the current business environment.
In the first quarter of 2009, HSE's diversified business model allowed the Company to maintain 81.3% of revenues from the same period in 2008. Considering the overall state of the economy, management regards this as reasonably successful, a testament to the high value clients place on HSE's services, and the determination of management and sales personnel to continually reach into new markets and industries. At the present time and for the business outlook as it appears today, management believes it has taken the appropriate cost reduction initiatives to put expenses in line with revenue.
That said, it would appear that the downward path of the economy has stabilized in the sense that most major financial and commodity markets have reached or approached some sort of bottom. Combined with the opportunities for growth described above that HSE has in several markets, the Company is cautiously optimistic that it is stable in the current business environment, has the financial strength to maintain its operations until business improves, and has not impaired its ability to benefit from a recovery by cutting staff too far or divesting major divisions or assets to stay in business.
Quarterly Results
-----------------------------------------------------------------------
2009 2008
-----------------------------------------------------------------------
Q1 Q4 Q3 Q2 Q1
-----------------------------------------------------------------------
Revenue $22,401 $29,905 $28,202 $28,087 $27,569
Net earnings (loss) (1,806) 431 396 (568) (11)
EBITDA (1) (216) 2,713 2,858 2,187 2,633
-----------------------------------------------------------------------
Income (loss) per share -
basic and diluted (0.05) $0.01 $0.01 $(0.02) $0.00
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------
2007
-----------------------------------------------------
Q4 Q3 Q2
-----------------------------------------------------
Revenue $26,464 $23,578 $19,352
Net earnings (loss) (9,173) (15,920) (3,113)
EBITDA (1) 2,601 1,376 (1,790)
-----------------------------------------------------
Income (loss) per share -
basic and diluted $(0.25) $(0.42) $(0.08)
-----------------------------------------------------
-----------------------------------------------------
See Non-GAAP Measures for (1)
HSE's business has two offsetting seasonal components. Revenue for Oilfield health and safety services is historically highest in first and fourth quarters and lowest in the second quarter because this sector uses equipment that can only access well locations during certain times of the year and because of the effects of weather on field activity. Industrial revenue includes a mix of year-round contracts and "turnarounds" - scheduled major maintenance projects and repair activities on client facilities. These turnarounds tend to be scheduled during the second and third quarters to avoid the possibility of adverse effects from freezing weather. As a result, Industrial revenue tends to be highest in the second and third quarters.
Revenue by quarter for the last eight quarters is as follows
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Oilfield $10,260 $14,597 $12,039 $8,667 $15,961
Industrial 12,141 15,308 16,163 19,420 11,608
-------------------------------------------------------------------------
Total revenue $22,401 $29,905 $28,202 $28,087 $27,569
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------
2007
-------------------------------------------------------
Q4 Q3 Q2
-------------------------------------------------------
Oilfield $15,879 $11,722 $6,486
Industrial 10,585 11,856 12,866
-------------------------------------------------------
Total revenue $26,464 $23,578 $19,352
-------------------------------------------------------
-------------------------------------------------------
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:
- During the first quarter of 2009, the Company paid rent for a regional
office to a corporation related to a Director of the Company in the
amount of $57 (2008 - $57)
- During the first quarter of 2009, the Company also paid rent of $74
(2008 - $74) for a regional office to a corporation controlled by a
Senior Manager 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, liabilities, revenues and expenses, as well as the disclosure of commitments and contingencies. Management bases its estimates and judgments on historical experience and on various other 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, impairment of long-lived assets, amortization of property and equipment, and future income tax liabilities. A full description of the methods for determining these accounting policies and estimates, as well as the risks related to the possible effects of changes in these policies and estimates, can be found in HSE's 2008 Annual Report.
Accounting Pronouncements
On January 1, 2009 the Company adopted the revised Canadian accounting standards regarding Goodwill and Intangible Assets. These standards provide guidance with respect to the recognition, measurement and disclosure of goodwill and intangible assets. The provisions of the new standards relating to the definition of intangible assets and their initial recognition have been changed to coincide with those in the equivalent International Financial Reporting Standard. This change had no effect on the Company's reported results.
International Financial Reporting Standards
The CICA's Accounting Standards Board has confirmed that IFRS will be adopted as Canadian GAAP for publicly accountable entities in Canada for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Therefore, the Company must be in a position to report its results, including its comparative results for the 2010 fiscal year, in accordance with IFRS beginning January 1, 2011.
With the assistance of external consultants, the Company has started an IFRS conversion project and is currently in the process of evaluating the impact of the change to IFRS on the results of our operations, financial position and disclosures. The Company expects to complete its assessment of the major differences between existing Canadian GAAP and IFRS as they apply to our particular circumstances, and to establish a project plan for the conversion by the end of the second quarter of 2009.
Financial and Other Instruments
The Company's financial instruments include cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, income taxes payable, obligations under capital leases and long-term debt. The carrying value of these instruments approximates their fair value either because of their short maturities or because the interest rates to which they are subject approximate market rates.
The Company is exposed to the following risks as a result of its use of financial instruments:
- credit risk
- liquidity risk
- market risk
These risks, and the Company's method of mitigating the risks, are described in the Management Discussion and Analysis included in the Company's 2008 Annual Report.
Business Risks
The activities the Company undertakes involve a number of risks and uncertainties, some of which are: economic and market events including disruptions in international credit markets and reductions in macroeconomic activity; business cyclicality within the industries in which HSE's customers operate; availability of qualified staff; competitive conditions including pricing pressures; risks of customer credit default; deterioration in the financial condition of financial institutions and insurance companies that HSE deals with; availability of financing at competitive rates; changes in foreign exchange rates and interest rates 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 of the business risks faced by the Company are included in the Management Discussion and Analysis included in the Company's 2008 Annual Report.
Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting during the quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Common Shares Outstanding
At May 12, 2009 and December 31, 2008 there were 37,575,675 common shares of HSE outstanding. At March 31, 2009, the Company had options outstanding to issue 2,447,831 shares at a weighted average exercise price of $1.88 per share. Of these options, 1,452,145 were exercisable. At May 12, 2009, there were 2,993,832 options outstanding at a weighted average exercise price of $1.56 per share. Of these options, 1,529,816 were exercisable.
Non-GAAP Measures
This report makes reference to EBITDA, a measure that is not recognized under generally accepted accounting principles. 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 and bank charges, 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 quarters ended March 31 2009 2008
-------------------------------------------------------------------------
Net loss $(1,806) $ (11)
Add (deduct):
Amortization 1,739 2,125
Stock-based compensation 50 135
Interest and bank charges 149 297
Foreign exchange gain (1) (2)
Loss on disposal of property and equipment 93 -
Income tax (440) 89
-------------------------------------------------------------------------
EBITDA $ (216) $ 2,633
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarterly EBITDA Calculation
2009 2008
-------------------------------------------------------------------------
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Net earnings (loss) $ (1,806) $ 431 $ 396 $ (568) $ (11)
Add (deduct):
Amortization 1,739 1,399 1,821 1,920 2,125
Impairment of goodwill
and intangible assets - - - 100 -
Stock-based
compensation 50 95 23 155 135
Interest and
bank charges 149 200 288 331 297
Foreign exchange
loss (gain) (1) (35) 4 2 (2)
Loss on disposal
of property
and equipment 93 193 129 326 -
Income taxes (440) 430 197 (79) 89
-------------------------------------------------------------------------
EBITDA $ (216) $ 2,713 $ 2,858 $ 2,187 $ 2,633
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007
-----------------------------------------------------
Q4 Q3 Q2
-----------------------------------------------------
Net earnings (loss) $ (9,173) $(15,920) $ (3,113)
Add (deduct):
Amortization 2,243 2,004 1,955
Impairment of goodwill
and intangible assets 10,505 15,000 -
Stock-based
compensation 255 186 333
Interest and
bank charges 311 309 302
Foreign exchange
loss (gain) 12 22 3
Loss on disposal
of property
and equipment 103 99 30
Income taxes (1,655) (324) (1,300)
-----------------------------------------------------
EBITDA $ 2,601 $ 1,376 $ (1,790)
-----------------------------------------------------
-----------------------------------------------------
Forward-Looking Statements
Certain statements in this MD&A constitute forward-looking information and statements (collectively "forward-looking 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 involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this MD&A, such forward-looking statements use such words as expect, anticipate, estimate, believe, may, will, would, could, might, intend, plan, continue, ongoing, project, objective, should and other similar terms and phrases. This forward-looking information reflects the Company's current expectations regarding future events and operating performance based on assumptions and analyses made by the Company based on its experience and an assessment of current conditions, known trends, expected future developments and other factors which management believe to be appropriate under the circumstances.
The forward-looking statements contained in this MD&A reflect several material factors, expectations and assumptions including, without limitation: economic conditions within Canada and the United States, both in general and within specific industries; demand for the Company's services by customers in various industries and geographic locations; pricing levels for the Company's services; commodity prices; foreign currency exchange rates; interest rates; access to financing; the Company's future operating results and financial condition; and competition within particular markets or for particular services.
Forward-looking statements involve significant risks and uncertainties and should not be read as a guarantee of future performance or results, and will not necessarily be an accurate indication of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements including, but not limited to, the factors discussed above and other risk factors discussed herein and listed from time to time in the Company's reports and public disclosure documents including its annual report, annual information form and other filings with securities commissions in Canada as reported under the Company's profile at www.sedar.com.
The Company cautions that the foregoing list of assumptions, risks and uncertainties is not exhaustive. The forward-looking statements contained in this MD&A speak only as of the date of this MD&A, and the Company assumes no 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
March 31 December 31
(Stated in thousands), (unaudited) 2009 2008
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 1,061 $ 1,114
Accounts receivable (note 4) 23,452 25,740
Inventory 233 222
Prepaid expenses and other assets 1,488 1,897
-------------------------
26,234 28,973
Property and equipment 34,660 36,173
Intangible assets 3,660 3,788
-------------------------
$ 64,554 $ 68,934
-------------------------
-------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities $ 6,111 $ 8,096
Income taxes payable 604 363
Current portion of obligations
under capital lease (note 7) 663 922
Current portion of long-term debt (note 6) ` 63 98
Current portion of deferred gain (note 12) 137 137
-------------------------
7,578 9,616
Deferred gain (note 12) 421 455
Obligations under capital lease (note 7) 277 370
Long-term debt (note 6) 11,626 11,628
Future income taxes 4,865 5,278
-------------------------
24,767 27,347
-------------------------
SHAREHOLDERS' EQUITY
Share capital (note 8) 60,040 60,040
Contributed surplus (note 9) 4,607 4,559
Deficit (24,942) (23,136)
Accumulated other comprehensive income 82 124
-------------------------
39,787 41,587
-------------------------
$ 64,554 $ 68,934
-------------------------
-------------------------
Commitments and contingencies (notes 12 and 15)
See accompanying notes to the consolidated financial statements.
-------------------------------------------------------------------------
HSE Integrated Ltd.
Consolidated Statements of Loss
Three month periods ended
(Stated in thousands, except March 31 March 31
per share amounts),(unaudited) 2009 2008
-------------------------------------------------------------------------
REVENUE $ 22,401 $ 27,569
COSTS
Operating and materials 20,410 22,552
Selling, general and administrative 2,207 2,384
Amortization of property and equipment 1,611 1,868
Amortization of intangible assets 128 257
Stock-based compensation (notes 9 and 10) 50 135
Interest on long-term debt 131 267
Other interest and bank charges 18 30
Foreign exchange loss (gain) (1) (2)
Loss on disposal of property and equipment 93 -
-------------------------
24,647 27,491
-------------------------
EARNINGS (LOSS) BEFORE INCOME TAX (2,246) 78
-------------------------
Income taxes
Current provision - 236
Future reduction (440) (147)
-------------------------
(440) 89
-------------------------
NET LOSS $ (1,806) $ (11)
-------------------------
-------------------------
Loss per share
Basic and diluted $ (0.05) $ (0.00)
-------------------------
-------------------------
Weighted average shares outstanding
Basic 37,576 37,568
Diluted 37,576 37,568
-------------------------
-------------------------
See accompanying notes to the consolidated financial statements.
-------------------------------------------------------------------------
HSE Integrated Ltd.
Consolidated Statements of Other Comprehensive Loss
Three month periods ended March 31 March 31
(Stated in thousands),(unaudited) 2009 2008
-------------------------------------------------------------------------
Net Loss $ (1,806) $ (11)
Other comprehensive loss
Foreign currency loss on translating
financial statements of self-sustaining
foreign operations (42) -
-------------------------
Other comprehensive loss $ (1,848) $ (11)
-------------------------
-------------------------
Consolidated Statements of Deficit and Accumulated Other
Comprehensive Income
Three month periods ended March 31 March 31
(Stated in thousands),(unaudited) 2009 2008
-------------------------------------------------------------------------
Deficit, beginning of period $ (23,136) $ (23,384)
Net Loss (1,806) (11)
-------------------------
Deficit, end of period $ (24,942) $ (23,395)
-------------------------
-------------------------
Accumulated other comprehensive income,
beginning of period $ 124 $ -
Foreign currency loss on translating financial
statements of self-sustaining operations (42) -
-------------------------
Accumulated other comprehensive income,
end of period $ 82 $ -
-------------------------
-------------------------
See accompanying notes to the consolidated financial statements.
-------------------------------------------------------------------------
HSE Integrated Ltd.
Consolidated Statements of Cash Flows
Three month periods ended March 31 March 31
(Stated in thousands),(unaudited) 2009 2008
-------------------------------------------------------------------------
Cash provided by (used in)
Operations
Net loss $ (1,806) $ (11)
Charges to income not involving cash:
Amortization 1,739 2,125
Stock-based compensation (notes 9 and 10) 50 135
Future income tax reduction (440) (147)
Loss on disposal of property and equipment 93 -
Change in non-cash working capital (note 13) 945 (4,725)
-------------------------
Cash provided by (used in) operations 581 (2,623)
-------------------------
Financing
Advances of operating line of credit - 3,711
Repayment of bank indebtedness - (178)
Repayment of obligations under capital leases (351) (327)
Repayment of long-term debt (37) (63)
-------------------------
Cash provided by (used in) financing activities (388) 3,143
-------------------------
Investing
Purchase of property and equipment (464) (520)
Proceeds from disposal of property and
equipment 209 -
-------------------------
Cash used in investing activities (255) (520)
-------------------------
Cash flow from operating,
financing and investing activities (62) -
Effect of exchange rate on cash and cash
equivalents 9 -
-------------------------
Net decrease in cash and cash equivalents (53) -
Cash and cash equivalents, beginning of period 1,114 -
-------------------------
Cash and cash equivalents, end of period $ 1,061 $ -
-------------------------
-------------------------
See accompanying notes to the consolidated financial statements.
-------------------------------------------------------------------------
HSE Integrated Ltd.
Notes to the consolidated financial statements
(Unaudited)
For the three month periods ended March 31, 2009 and 2008
(Stated in thousands of dollars)
-------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
These unaudited interim consolidated financial statements of HSE
Integrated Ltd. ("HSE" or "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, 2008, 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, 2008.
These unaudited interim consolidated financial statements include the
accounts of the Company and its subsidiaries which, with the exception of
Boots & Coots HSE Services LLC (see note 3), are wholly owned. Unless
otherwise specified all amounts are stated in thousands of Canadian
dollars except for per-share amounts, which are stated in dollars per
weighted-average share.
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP"). In
preparing these consolidated financial statements, 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.
HSE's business has two offsetting seasonal components. Revenue for
Oilfield health and safety services is historically highest in the first
and fourth quarters and lowest in the second quarter because this sector
uses equipment that can only access well locations during certain times
of the year and because of the effects of weather on field activity.
Industrial revenue includes a mix of year-round contracts and
"turnarounds" - scheduled major maintenance projects and repair
activities on client facilities. These turnarounds tend to be scheduled
during the second and third quarters to avoid the possibility of adverse
effects from freezing weather. As a result, Industrial revenue tends to
be highest in the second and third quarters.
-------------------------------------------------------------------------
NOTE 2 - CHANGE IN ACCOUNTING POLICIES
On January 1, 2009 the Company adopted the revised Canadian accounting
standards regarding Goodwill and Intangible Assets. These standards
provide guidance with respect to the recognition, measurement and
disclosure of goodwill and intangible assets. The provisions of the new
standards relating to the definition of intangible assets and their
initial recognition have been changed to coincide with those in the
equivalent International Financial Reporting Standard. This change had no
effect on the Company's reported results.
Accounting Standards pending adoption
In February 2008, the Accounting Standards Board ("AcSB") confirmed the
changeover to International Financial Reporting Standards (IFRS) from
Canadian GAAP will be required for publicly accountable enterprises
effective for interim and annual financial statements relating to fiscal
years beginning on or after January 1, 2011. The AcSB issued an
"omnibus" exposure draft of IFRS with comments due by July 31, 2008,
wherein early adoption by Canadian entities is also permitted. The
Canadian Securities Administrators ("CSA") has also issued Concept Paper
52-402, which requested feedback on the early adoption of IFRS as well as
the continued use of US GAAP by domestic issuers. In March 2009, the AcSB
issued a second exposure draft regarding the adoption of IFRS. This
exposure draft clarified the definition of publicly accountable
enterprises, proposed to provide additional introductory material for the
CICA Handbook as part of the adoption of IFRS, and updated the IFRS
standards to be included in the CICA Handbook to include those standards
which had changed since the initial omnibus exposure draft was issued.
The eventual changeover to IFRS represents changes due to new accounting
standards. The transition from current Canadian GAAP to IFRS is a
significant undertaking that may materially affect the Company's reported
financial position and results of operations.
-------------------------------------------------------------------------
NOTE 3 - UNITED STATES OPERATIONS
On May 7, 2008 the Company incorporated new US-based subsidiaries to
pursue the expansion of Oilfield safety services in the continental
United States. The Company owns 100% of the shares of HSE Integrated
Inc. ("INC") a Delaware corporation which in turn owns a 90% interest in
Boots & Coots HSE Services LLC ("BCHSE"), a Delaware Limited Liability
Company. Boots & Coots International Well Control Inc. owns the
remaining 10% of BCHSE. A non-controlling interest has not been recorded
as BCHSE has accumulated losses.
Activity in the first quarter focused on sales and marketing of BCHSE's
suite of services to potential customers in Oklahoma and Texas. BCHSE
generated minimal amounts of revenue in the quarter and incurred an
operating loss of approximately $465.
-------------------------------------------------------------------------
NOTE 4 - FINANCIAL RISK MANAGEMENT
Overview
The Company is exposed to the following risks from its use of financial
instruments:
- credit risk
- liquidity risk
- market risk
The Board of Directors has overall responsibility for the establishment
and oversight of the Company's risk management framework. The Company's
Audit Committee oversees how management monitors compliance with the
Company's risk management practices and reviews the adequacy of the risk
management framework in relation to the risks faced by the Company. The
Company's risk management practices are established to identify and
analyze the risks faced by the Company, to set appropriate risk limits
and controls, and to monitor risks and adherence to limits.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Company's receivables from
customers.
The Company's accounts receivable are due from customers in a variety of
industries including a significant proportion with customers operating in
the energy and manufacturing industries. The ability of customers within
the energy industry to pay us is partially affected by fluctuations in
the price they receive for various hydrocarbon products. Customers in
both these industries may also face particular challenges in their
ability to secure debt and equity financing. The maximum credit exposure
associated with trade accounts receivable is the carrying value.
The Company follows a credit policy under which the Company reviews each
new customer individually for credit worthiness before the Company's
standard payment and delivery terms and conditions are offered. The
Company's review includes external ratings, where available, and trade
references. Customers that fail to meet the Company's credit worthiness
criteria may transact with the Company only on a prepayment basis. On an
on going basis, the Company also reviews the payment patterns of its
existing customers and the customers' continued credit worthiness.
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the amount of probable credit losses in the Company's
existing accounts receivable. The Company determines the allowance by
reviewing individual accounts past due for collectability, historical
write-off experience, and overall account aging. The Company reviews its
allowance for doubtful accounts on a continuous basis as new information
becomes available and reviews past due amounts at least monthly.
March 31, December 31,
2009 2008
-------------------------------------
Trade accounts receivable $ 24,942 27,145
Allowance for doubtful accounts (1,490) (1,405)
-------------------------------------
Total trade accounts receivable $ 23,452 25,740
-------------------------------------
-------------------------------------
The aging of trade receivables is as follows:
March 31, 2009 December 31, 2008
--------------------------------------------------
Gross Allowance Gross Allowance
Current (0 - 30 days
from invoice date) $ 10,199 - 13,465 -
Past due 1-30 days 7,705 - 6,633 -
Past due 31-90 days 4,259 477 5,949 481
More than 90 days 2,779 1,013 1,098 924
--------------------------------------------------
Total $ 24,942 1,490 27,145 1,405
--------------------------------------------------
--------------------------------------------------
The movement in the allowance for doubtful accounts receivables in
respect of trade receivables during the quarter is as follows:
2009 2008
-------------------------------------
Balance, January 1 $ 1,405 1,155
Bad debt provision 95 (21)
Write-offs net of recoveries (10) 19
-------------------------------------
Balance, March 31 $ 1,490 1,153
-------------------------------------
-------------------------------------
-------------------------------------------------------------------------
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company requires liquidity
to meet financial obligations as they come due and to fund our investing
activities.
The Company's contractual financial liabilities include interest
payments, trade and other payables, bank indebtedness, secured
equipment loans, an operating line of credit margined by accounts
receivable, a revolving credit facility and capital leases for equipment
(notes 6 and 7).
The Company's approach to managing liquidity is to ensure, as far as
possible, that it will always have sufficient liquidity to meet its
liabilities when due, under both normal and distressed conditions,
without unacceptable losses or risking damage to the Company's
reputation. The Company generally relies on operating cash flow to
provide liquidity to meet its financial obligations. As well, the
Company has access to operating lines of credit and a revolving credit
facility (see note 6). At March 31, 2009 the Company had cash on hand of
$1,061 and undrawn operating lines of credit totalling $7,500. In
addition, the Company has access to $14,171 of the unused revolving
credit facility with its current lender available to fund capital
expenditures and acquisitions. The operating facility is renewable
annually, while the revolving facility matures on June 25, 2010.
-------------------------------------------------------------------------
Market risk
Market risk is the risk that changes in market prices, such as foreign
exchange rates, interest rates and equity prices will affect the
Company's income.
HSE is exposed to currency risk on US dollar denominated financial assets
and liabilities. The Company adjusts the reported amounts of foreign
currency denominated financial assets and liabilities to their Canadian
dollar equivalent at each balance sheet date. For amounts held directly
by the Company, any related foreign exchange gains and/or losses are
recognized in the consolidated statement of earnings. For amounts held by
the Company's self-sustaining foreign operations, the amount is included
in other comprehensive income. At March 31, 2009 the extent of this
exposure was not material.
HSE is exposed to interest rate risk on its prime based operating
facility and bankers' acceptance based revolving credit facility. No
prime-based amounts are outstanding at March 31, 2009. Based on amounts
outstanding at March 31, 2009, a 1% increase in the average of bankers'
acceptance rates for a year would cost the Company $108 in additional
interest expense.
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NOTE 5 - CAPITAL MANAGEMENT
Management's policy is to maintain an appropriate capital base that
allows the Company to maintain investor, creditor and market confidence
and to sustain future development of the business. The Company seeks to
manage its capital structure to ensure that we have the financial
capacity and liquidity to fund our operating and investment activities.
The Company generally relies on operating cash flows to fund capital
expenditures, but may occasionally need to use external sources to
facilitate acquisition or expansionary activities.
To ensure that the Company maintains an appropriate balance between
long-term debt and shareholders' equity, we monitor the ratio of
long-term debt to total capital. As at March 31, 2009 and December 31,
2008, these ratios were:
March 31, 2009 December 31, 2008
------------------------------------
Long-term debt $ 11,689 11,726
Shareholders' equity 39,787 41,587
------------------------------------
Total capitalization $ 51,476 53,313
------------------------------------
------------------------------------
Long-term debt to
total capitalization 0.23 0.22
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NOTE 6 - OPERATING FACILITIES and LONG-TERM DEBT
The Company's credit facilities include a $25 million three-year
interest-only revolving facility and a $7.5 million operating facility.
The credit facilities bear interest at the bank's prime rate (or U.S.
base rate) plus a margin varying between 0.25 percent and 1.50 percent,
or at bankers' acceptance rates with a variable stamping fee of 1.75 to
3.00 percent. An additional standby fee ranging from 0.35 to 0.65 percent
per annum is also required on any unused portion of the credit
facilities. The applicable margin is dependent on the Company's
consolidated debt to trailing 12 month cash flows ratio (as defined in
the agreement). For each quarter, interest is paid based on the ratio at
the immediately preceding quarter end. At March 31, 2009 the applicable
margin for interest to be paid during the second quarter of 2009 is a
stamping fee of 2.5 per cent on banker's acceptances issued on behalf of
the Company.
Deferred financing costs associated with the financing facilities have
been shown as a reduction in the carrying value of long term debt and are
being expensed over the term of the debt using the effective interest
rate method.
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. Both the
operating facility and the revolving facility are subject to certain
covenants including a covenant regarding the ratio of senior debt to cash
flows (as defined in the agreement), a current ratio covenant, an
interest coverage covenant and certain other positive and negative
covenants that are typical for these types of facilities. The credit
facilities are collateralized under a general security agreement.
The Company complied with all externally imposed debt covenants at
March 31, 2009. However, management has identified a risk that, depending
on levels of activity between March 31 and the end of 2009, the Company
may fail to comply with its debt covenants within the next twelve month
period. The Company is currently negotiating with its lender to vary the
terms of its credit agreement in a manner that would modify the covenant
requirements or replace them with others that are acceptable to the
lender.
March 31 December 31
2009 2008
------------------------
Equipment financing contracts bearing interest
at rates averaging 3.15% (2008 - 2.93%),
payable in blended monthly payments of $11
(2008 - $12) secured by specific equipment. $ 88 $ 131
Three year interest only
revolving credit facility 10,829 10,829
------------------------
10,917 10,960
Accrued consideration on
share purchase acquisition 810 810
------------------------
11,727 11,770
Less current portion (63) (98)
------------------------
11,664 11,672
Less unamortized debt issue costs (38) (44)
------------------------
$ 11,626 $ 11,628
------------------------
------------------------
Outstanding principal repayments are due as follows:
Years ending March 31:
2010 $ 63
2011 11,658
2012 6
---------
11,727
Less: current portion (63)
---------
$ 11,664
---------
---------
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NOTE 7 - OBLIGATIONS UNDER CAPITAL LEASE
Amounts due under capital lease arrangements are repayable in blended
monthly payments of $102 (2008 - $105) and bear interest at rates
averaging 5.51% (2008 - 5.45%) per annum. On certain leases, the Company
has options to acquire the leased assets at various times through 2012.
Outstanding repayment terms are as follows:
Years ended March 31
2010 $ 715
2011 226
2012 71
2013 1
-----------------------------------------------
1,013
Less: interest (73)
-----------------------------------------------
940
Less: current portion (663)
-----------------------------------------------
$ 277
-----------------------------------------------
-----------------------------------------------
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NOTE 8 - SHARE CAPITAL
a) Authorized:
Unlimited number of common shares without par value.
Unlimited number of preferred shares, issuable in series.
b) Issued and outstanding:
March 31, 2009 December 31, 2008
-----------------------------------------------------
Shares $ Shares $
Common shares (in thousands) Amount (in thousands) Amount
-----------------------------------------------------
Balance,
beginning of period 37,576 $ 60,040 37,568 $ 60,036
Changes (net of
share issue costs):
Issued on exercise
of options - - 8 4
-----------------------------------------------------
Balance,
end of period 37,576 $ 60,040 37,576 $ 60,040
-----------------------------------------------------
-----------------------------------------------------
c) Per share amounts:
Basic per common share amounts are computed by dividing earnings by the
weighted average number of common shares outstanding during the period.
Diluted per common share amounts are computed by dividing earnings by the
diluted weighted average number of common shares outstanding during the
period.
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NOTE 9 - CONTRIBUTED SURPLUS
March 31 December 31
2009 2008
------------------------
Balance, beginning of period $ 4,559 $ 4,144
Stock compensation expense 48 415
------------------------
Balance, end of period $ 4,607 $ 4,559
------------------------
------------------------
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NOTE 10 - STOCK-BASED COMPENSATION PLANS
Incentive stock option plan
The weighted average fair value of options granted for the quarter ended
March 31, 2009 was $Nil (2008 - $1.88). The fair value of each option
granted was estimated on the date of grant using the Modified Black-
Scholes option-pricing model with the following assumptions:
March 31 December 31
2009 2008
------------------------
Vesting period (years) - 3
Risk-free interest rate - 2.11%
Expected life (years) - 5
Price volatility - 89.70%
------------------------
------------------------
Pursuant to the stock option plan, a maximum of 10% of the issued and
outstanding common shares of the Company are reserved from time to time,
for issuance to eligible participants. Option prices and vesting terms
are determined by the directors at the time of granting at an exercise
price no less than market on the grant date. The term of options granted
does not exceed five years.
Information about outstanding stock options is as follows:
Quarter ended March 31, Year ended December 31,
2009 2008
------------------------ ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
--------------------------------------------------
Outstanding,
beginning of period 2,533,499 $ 1.88 2,379,998 $ 2.15
Granted - - 735,000 0.99
Exercised - - (8,000) 0.50
Forfeited (85,668) 1.83 (573,499) 1.86
--------------------------------------------------
Outstanding,
end of period 2,447,831 $ 1.89 2,533,499 $ 1.88
--------------------------------------------------
--------------------------------------------------
Exercisable at
end of period 1,452,145 $ 2.16 1,335,810 $ 2.16
--------------------------------------------------
--------------------------------------------------
The following table summarizes information about stock options
outstanding at March 31, 2009:
Weighted
Exercise average
Options prices remaining Number
outstanding $ life exercisable
--------------------------------------------------
605,000 0.50-1.05 4.01 20,000
677,499 1.06-1.69 1.42 542,497
716,999 1.70-2.50 2.35 554,651
448,333 2.51-3.50 2.01 334,997
--------------------------------------------------
2,447,831 1.89 2.45 1,452,145
--------------------------------------------------
--------------------------------------------------
Deferred share unit plan
On January 16, 2007, 15,000 deferred share units ("DSUs") were granted to
non-executive directors. An additional 15,000 DSUs were granted on May
15, 2008. On December 15, 2008 3,000 of the DSUs were settled for $1.
The units are revalued quarterly and any change in value is included as
an increase or decrease in stock based compensation expense and accrued
liabilities. The expense recognized for the quarter ended March 31, 2009
was $3 (March 31, 2008 - $1).
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NOTE 11 - 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:
- During the first quarter of 2009, the Company paid rent for a
regional office to a corporation related to a Director of the
Company in the amount of $57 (2008 - $57)
- During the first quarter of 2009, the Company also paid rent of $74
(2008 - $74) for a regional office to a corporation controlled by a
Senior Manager of the Company.
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NOTE 12 - COMMITMENTS
The Company leases certain shop and office space and vehicles and
equipment under operating leases for periods ending between 2009 and
2013. Future minimum lease payments under these leases in each of the
next five years are as follows:
Rental Operating
Years ending March 31 facilities leases Total
------------------------------------
2010 $ 2,823 2,423 5,246
2011 2,188 2,220 4,408
2012 1,265 1,296 2,561
2013 986 292 1,278
2014 574 1 575
In May 2008, the Company sold three of its buildings as part of a
sale/lease back arrangement. The net proceeds on the sale were
$1.7 million, resulting in gains on sale of $0.7 million. The resulting
gains have been deferred and are being amortized over the 60 month lives
of the leases.
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NOTE 13 - SUPPLEMENTARY CASH FLOW INFORMATION
Three Months ended
Increase (decrease) in non-cash March 31
working capital from operations 2009 2008
------------------------
Accounts receivable $ 2,289 (5,849)
Inventory (11) (3)
Prepaid expenses and other assets 409 153
Income tax recoverable/payable 241 229
Accounts payable and accrued liabilities (1,983) 745
------------------------
Net change in non-cash working capital $ 945 (4,725)
------------------------
------------------------
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NOTE 14 - 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
quarter ended March 31, 2009, the Company had one customer representing
more than 10% of revenue (March 31, 2008 - none). The Company had sales
of approximately $2.3 million to the customer during the quarter.
At March 31, 2009 US operations comprised less than 1% of revenues and
assets of the Company.
The Company provides services to two main groups of customer industries.
"Oilfield" services are provided to customers in the conventional
upstream, or "wellhead", sector of the oil and gas industry.
"Industrial" services are provided to customers in a variety of other
industries including: non-conventional upstream oil development and
production (including oil sands extraction); oil and gas processing;
petrochemicals; pulp and paper; utilities; power generation; and
manufacturing. It also includes worker safety training and safety
management and consulting services. The Company tracks revenues provided
to each customer group as a method to predict future operating activity.
Revenue by customer group is as follows:
Three Months ended
March 31
2009 2008
------------------------
Oilfield $ 10,260 $ 15,961
Industrial 12,141 11,608
------------------------
Total Revenue $ 22,401 27,569
------------------------
------------------------
As a % of Revenue:
Oilfield 45.8% 57.9%
Industrial 54.2% 42.1%
------------------------
Total Revenue 100.0% 100.0%
------------------------
------------------------
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NOTE 15 - CONTINGENCIES
In the ordinary course of business activities, the Company may be
contingently liable for litigation and claims with customers, suppliers,
former employees, and third parties. Management believes that adequate
provisions have been recorded in the accounts where applicable. Although
it may not be possible to estimate accurately the extent of potential
costs and losses, if any, management believes that the ultimate
resolution of such contingencies would not have a material effect on the
financial position of the Company.
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ContactsPlease contact: HSE Integrated Ltd.David Yager
Chairman & CEO
Telephone: (403) 266-1833
E-Mail: dyager@hseintegrated.com Lori McLeod-Hill
CFO
Telephone: (403) 266-1833
E-Mail: lmcleod-hill@hseintegrated.com
34.12 (0.28%)
