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Attention Business/Financial Editors
HSE Integrated Ltd. Announces Record Second Quarter 2008 Financial Results
CALGARY, Aug. 13 /CNW/ - HSE Integrated Ltd. ("HSE", "Our", "We", or the
"Company") today announced its financial results for the second quarter and
year to date ended June 30, 2008. Financial and operating highlights are
summarized below:
<<
- Quarterly revenue was $28.1 million, the highest quarterly revenue in
the history of the company and 45% higher than the same period in the
previous year.
- EBITDA for the quarter was $2.2 million, a $4 million increase from
EBITDA of ($1.8) million last year.
- Six month revenue was $55.7 million, also the highest for two
consecutive quarters in HSE's history and an 18% improvement over the
previous year.
- EBITDA for the first six months was $4.8 million, a 60% increase from
the same period in fiscal 2007.
- Industrial safety revenues continue to grow, increasing to record
levels of $19.4 million for the second quarter, a 51% gain from 2007
and a 191% increase over the second quarter of 2006. For the first
six months, Industrial revenue was $31.0 million, a 48% gain over the
first half of 2007. In the first half of the 2008 fiscal year,
HSE's Industrial safety services group is approximately three times
the size it was during the same period in 2006.
- For the first time, Industrial safety revenue exceeded
Oilfield safety revenue for the first six months of the year.
- Oilfield revenues for the quarter were $8.7 million, an increase of
34% over 2007, reflecting a shorter spring break up and an
improvement in natural gas prices and related activity. However,
total Oilfield safety services for the quarter were still
significantly lower than the $13.3 million generated in the second
quarter of fiscal 2006.
- Oilfield safety service revenues for the first six months were
$24.6 million compared to $26.3 million in 2007 and $36.6 million in
the first half of 2006.
- Revenue from the Oilsands region of Northeast Alberta continued to
grow, accounting for 16% of revenues in the first six months, an
increase of 62% over the prior year and 558% higher than in 2006.
- Central and Atlantic Canada continue to enjoy strong rates of growth.
To June 30, revenue totaled $10.3 million, a 103% increase over the
same period in 2007.
- SG&A as a percentage of revenues continued to decline reflecting the
Company's commitment to fixed cost control and improved margins.
SG&A for the quarter was $2.5 million or 9% of revenues compared to
$2.6 million and 13% in the prior year. For the first six months,
SG&A declined to $4.8 million from $5.1 million and as a percentage
of revenue declined to 9% in 2008 from 11% in 2007.
- Announced May 7, 2008, HSE made significant progress in developing
its partnership with Boots & Coots International Well Control, Inc.
("Boots & Coots") to exploit expansion into the continental
U.S. marketplace. The first field service equipment is scheduled to
arrive in Texas in mid-August with more scheduled to follow in the
third and fourth quarters.
>>
David Yager, Chairman and CEO, offered the following comments for HSE's
second quarter 2008 results:
"For four years HSE has invested in diversifying its revenue base away
from conventional oil and gas in order to offset the historical seasonal and
commodity-driven cyclicality that characterizes this business in Canada. This
makes for a better business in every way, from cashflow management to creating
a more attractive working environment for our valuable employees.
To accomplish this, for four years HSE has had a strategy of moving into
new industries and geographic markets in order to achieve and hopefully
sustain consistent levels of growth regardless of the historic cyclicality of
the oilfield services sector in western Canada.
With the financial results HSE is releasing today reflecting the
continued growth in markets in which the Company did not even have a presence
prior to 2005, we at HSE are confident our business model is sound and we have
demonstrated a proven formula for continued growth in the months and years
ahead. It is obvious from this growth that HSE provides essential and quality
services for our growing client base across the country.
Internal efforts to improve operating margins continue. With SG&A and
field delivery costs fixed, the Company is confident that profit margins will
increase with revenue and ongoing efficiency gains. An improvement in demand
for Oilfield safety services in Alberta - plus initiatives to expand into
other provinces and the United States - should help HSE achieve more historic
utilization levels for this capital asset class. This will continue to improve
revenue and margins.
On behalf of the Board of Directors, we're extremely proud of the
outstanding work and commitment our managers and staff have made in the past
two years to achieve this dramatic change in our business going forward, a
change for the better of all HSE's stakeholders: employees, clients, and
capital providers. The effort in the second quarter by everyone is
particularly commendable."
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 10 AM
(Eastern Daylight Time), 8 AM (Mountain Daylight Time) on Thursday August 14,
2008.
Dial-In Number: 1-800-587-1893 or 1-416-915-5761
Conference Replay to August 28, 2008: 1-416-640-1917 or 1-877-289-8525
(Passcode: 21280295 followed by the pound sign)
Webcast: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID= 2368520
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 and Michigan. Expansion in
to the United States is underway. 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, 2008 and 2007
>>
The following management discussion and analysis is dated August 13,
2008, 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,
2008 and 2007. 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 13, 2008. 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 Three Six Six
Months Months Quarter Months Months Year
Ended Ended Over- Ended Ended Over
June 30, June 30, Quarter June 30, June 30, Year
2008 2007 % Change 2008 2007 % Change
------------------------------------------------------------
Revenue $ 28,087 $ 19,352 45.1% $ 55,656 $ 47,300 17.7%
Operating and
materials 23,440 18,545 26.4% 45,992 39,175 17.4%
------------------------------------------------------------
Operating
margin 4,647 807 475.8% 9,664 8,125 18.9%
Operating
margin % 16.5% 4.2% 292.9% 17.4% 17.2% 1.2%
------------------------------------------------------------
Selling,
general &
admini-
strative $ 2,460 $ 2,598 (5.3%) $ 4,844 $ 5,113 (5.3%)
Net (loss) (568) (3,113) (81.8%) (579) (2,209) 73.8%
- per share
basic &
diluted (0.02) (0.08) 75.0% (0.02) (0.06) 66.7%
------------------------------------------------------------
EBITDA(1) $ 2,187 $ (1,791) 222.1% $ 4,820 $ 3,012 60.0%
EBITDA % 7.8% (9.2%) 184.8% 8.7% 6.4% 35.9%
------------------------------------------------------------
Total assets $ 72,232 $ 98,025 (26.3%)
Total long-term liabilities 20,474 23,977 (14.6%)
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See Non-GAAP Measures for (1)
Financial Review
Revenue
>>
HSE operates in a single industry segment, which involves providing an
integrated package 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 and consulting services.
For the three months ended June 30, 2008, the Company had one customer
representing more than 10% of revenue (June 30, 2007 - nil).
The Company currently provides services to its customers in two main
business areas: Oilfield Services ("Oilfield") and Industrial Services
("Industrial"). Oilfield is the conventional upstream, or "wellhead", sector
of the oil and gas industry. Industrial represents non-conventional upstream
oil development and production including oilsands extraction, oil and gas
processing and refining plants and facilities, petrochemicals, pulp and paper,
utilities, power generation, diverse manufacturing industries, worker safety
training, and safety management and consulting services. The Company had
previously separately disclosed revenue for air quality monitoring
("Environment"), but has now grouped these services into either the Industrial
or Oilfield market in which these services are deployed.
<<
The revenue for these customer groups is shown below:
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Quarter ended Quarter ended Quarter ended
June 30, 2008 June 30, 2007 June 30, 2006
-------------------------------------------------
Oilfield $ 8,667 $ 6,486 $ 13,253
Industrial 19,420 12,866 6,671
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Total Revenue 28,087 19,352 19,924
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As a % of Revenue:
Oilfield 30.9% 33.5% 66.5%
Industrial 69.1% 66.5% 33.5%
-------------------------------------------------
Total Revenue 100.0% 100.0% 100.0%
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Six months Six months Six months
ended ended ended
June 30, 2008 June 30, 2007 June 30, 2006
-------------------------------------------------
Oilfield $ 24,628 $ 26,285 $ 36,642
Industrial 31,028 21,015 10,747
-------------------------------------------------
Total Revenue 55,656 47,300 47,389
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As a % of Revenue:
Oilfield 44.3% 55.6% 77.3%
Industrial 55.7% 44.4% 22.7%
-------------------------------------------------
Total Revenue 100.0% 100.0% 100.0%
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Oilfield
--------
>>
Oilfield revenues in the quarter experienced a 33.6% gain compared to the
second quarter of 2007, and a 34.6% decline as compared to the second quarter
of 2006. The year over year gain from 2007 to 2008 is due to increased overall
activity levels within the conventional upstream, or "wellhead", sector of the
oil and gas industry: oil and natural gas well drilling, completion and
work-over (repair and maintenance) operations. Services provided in the
Oilfield sector are primarily oriented towards supporting the development of
natural gas, particularly sour gas containing hydrogen sulphide. The primary
driver of revenue fluctuations in the three comparative reporting periods
relates to an increase or reduction in natural gas drilling and work-over
activity caused primarily by significant fluctuations in natural gas prices
and external factors such as interest rates, currency exchange rates, equity
and debt markets, and federal and provincial taxation and royalty policies.
Industry sources have indicated that over the past three years, new
conventional oil and gas well drilling activity levels in the Western Canadian
Sedimentary Basin ("WCSB") have declined sharply from 2006 to 2007 but
remained approximately the same in 2008 as compared to 2007. Well workover and
stimulation activities on existing wells have followed a similar pattern. In
addition to the overall activity decline, there has been a commodity-price
influenced shift in new wells drilled in the first six months of 2008 from
natural gas to crude oil. This has also contributed to the contraction of
overall demand for the Company's Oilfield safety services.
To meet growing industry demand in British Columbia and Saskatchewan,
equipment and personnel were redeployed from Alberta generating increases in
Oilfield revenue. This trend should continue as customers redeploy capital to
these markets because of new discoveries and attractive fiscal regimes for oil
and gas development.
HSE has experienced some pricing pressure with customers caused primarily
by additional capacity added by competitors and overall industry reduction in
demand. As conventional oil and gas exploration and production has become less
profitable for E&P companies because of lower gas prices and higher overall
operating costs, there has been pressure to sustain profitability by asking
vendors like HSE to provide products and services at flat or lower prices.
<<
Industrial
----------
>>
The Company continues its successful business diversification strategy,
and reports a 50.9% ($6,554) increase in Industrial revenues in the second
quarter when compared to the prior year, and an almost 191.1% ($12,749)
increase when compared to the similar period in 2006.
The continuing growth in Industrial revenues is from increased demand for
safety equipment and services from oil and gas processing facilities, thermal
heavy oil recovery, and oilsands extraction and construction projects in
Alberta; safety services, fire suppression, gas detection and breathing air
equipment rental services to diverse industrial and commercial markets in
British Columbia, Alberta, and Ontario; safety services for the refining,
mining, offshore drilling and production and other industries in Atlantic
Canada; and worker safety training and safety consulting services in all
markets.
The second quarter of 2008 was characterized by a significant increase in
processing plant (oilfield and industrial) shutdown and turnaround safety
services which tend to take place in the spring and fall of the year. The
Company's increased revenue in this area is a combination of repeat business
from satisfied clients from prior years, a more focused marketing effort in
this area, increased expertise in this specialized area through the addition
of some key operations and marketing personnel, more service contracts for
services on a continuous basis, and growing customer acceptance of HSE as a
viable provider of these services.
A significant portion of the increase in Industrial revenues came from
continued growth in demand for a growing range of HSE's services to oilsands
construction, extraction and processing operations in Northeast Alberta based
from Fort McMurray. This geographic area experienced growth rates of 62% over
the prior year, and 558% when compared to the same period in 2006. In the
second quarter of 2008, revenue from this region represented 16% of total
revenue.
Equipment and services delivered in Central and Atlantic Canada, and the
North Eastern United States, is classified as Industrial revenue. Revenue from
these areas in the first six months of 2008 was $10.3 million and has
increased by 103% when compared to 2007.
Building upon the acquisitions completed in April 2006, and increased
demand created by more aggressive marketing efforts in new and existing
markets, the Company continues to gain customer recognition as a capable,
qualified and reliable provider of safety services.
Prior to HSE, no single industrial safety services company in Canada has
ever been able to offer its clients the capacity and diversity of services
from a single source. The continued growth of Industrial safety revenues
reflects both customer acceptance of HSE as a capable and reliable vendor and
validates the Company's business model that this is an essential and viable
business.
Operating and Materials Expense and Operating Margin
Operating and materials expense consists of costs directly attributable
to the delivery of safety and related services to customers. These include:
wages and benefits for field employees and contractors; equipment rentals and
leases; field service centre 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, 2008
totaled $23.4 million or 83.5% of revenue as compared to $18.5 million or
95.8% of revenue in 2007. Operating margin for the quarter increased from
$0.8 million or 4.2% of revenue in 2007, to $4.6 million or 16.5% of revenue
in 2008.
The significant increase in operating margin is due to higher revenue in
all business categories and increased utilization of all the Company's capital
assets compared to the same period in the prior year. Higher input costs (such
as fuel) negatively impacted 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 ended June 30, 2008 totaled $2.5 million, which
represents a 5.3% reduction from the same period in the prior year. This was
achieved despite a 45% increase in revenue during the period. On a
year-to-date basis, SG&A is down 5.3% year over year while revenues have
increased by 17.7%. This is in line with the Company's ongoing fixed cost
reduction and efficiency initiatives which have been underway since the second
quarter of 2007.
EBITDA and Net Earnings (Loss)
Reflecting a 45% increase in revenues for the quarter June 30, 2008
compared to the prior year, EBITDA (see "Non-GAAP Measures") increased to
$2.2 million from $(1.8) million in Q2 2007, an improvement of $4.0 million.
This was caused by significant revenue increases and higher equipment
utilization rates in all areas. This was also assisted by tightly controlled
SG&A and field fixed cost expenses.
Total amortization for the quarter was $1.9 million. This was comprised
of $1.7 million in property and equipment amortization, and $0.2 million in
intangible asset amortization. Property and equipment amortization has
increased by $0.1 million when compared to the prior year due to previous
investments in property and equipment and from similar assets acquired through
acquisitions.
Stock-based compensation for the quarter was $0.2 million (2007 -
$0.3 million).
Interest on long term debt in the quarter decreased slightly from the
same period in the prior year, and other interest and bank charges increased
slightly. Decreased interest from obligations under capital leases was offset
by some increases due to a draw on the operating line of credit early in the
reporting period and an increase of non-interest bank and finance charges.
For the second quarter of 2008, the loss on disposal of property and
equipment was $326 as compared to a loss of $30 for the same period in the
prior year. Asset divestitures in the period were the result of an ongoing
review of all the capital assets of the Company to ensure optimal utilization
and ongoing commercial viability. Non-essential assets were sold in a
sale/leaseback arrangement resulting in a deferred gain.
HSE had an income tax recovery of approximately $0.1 million in the
second quarter, which represents an improvement from the $(1.3) million
recovery recorded for the same period in the prior year primarily due to
increased profitability.
The net loss for the second quarter was $0.6 million, which represents an
increase compared to a net loss of $3.1 million for the same period in 2007.
The greatly reduced loss is due to higher levels of revenue and EBITDA.
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 outstanding contractual obligations as noted in the following table:
<<
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Years ended December 31, 2008 2009 2010 2011 2012 Total
-------------------------------------------------------------------------
Capital lease obligations $702 1,094 296 111 6 $2,209
Vehicle operating leases 845 1,507 1,419 739 21 4,531
Property & other leases 1,509 2,597 2,015 1,267 707 8,095
Long-term debt 88 1,138 13,853 9 - 15,088
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Total contractual
obligations $3,144 6,336 17,583 2,126 734 $29,923
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Cash Provided by Operations
Cash provided by operations in the quarter was $4.2 million as compared
to cash provided by operations of $2.9 million for the same period in the
prior year. The primary cause for the change was a higher level of earnings.
In the first quarter of 2008, a new invoicing software system was installed
that provides the benefits of increased administrative efficiency, and greater
controls over the timely recognition of revenue. The launch of this software
created initial delays in invoicing, and accounts for much of the relative
rise in accounts receivable in the first quarter. These delays have been
largely remedied in the second quarter through increased training and user
experience. Approximately 3% of accounts receivable is aged greater than 90
days, the full amount of which has been provided for in the allowance for
doubtful accounts.
Cash Used in Financing and Investing
During the quarter, the Company paid down its operating line of credit by
$3.7 million. This leaves $7.5 million available for future use. The Company
also made scheduled debt reductions of $1.0 million toward capital lease and
other long term debt obligations.
Purchases of property and equipment for the quarter amounted to
$1.1 million, the majority of which was revenue generating safety services
rental equipment.
Liquidity
The Company's credit facilities include a $25 million three-year
interest-only revolving facility and a $7.5 million operating facility. 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 subject to
covenants that are typical for this type of facilities, and are collateralized
under a general security agreement.
At June 30, 2008, the draw against the revolving facility was
$14.0 million and the Company was in compliance with its financial covenants
and continues to maintain a favourable relationship with its primary lender.
<<
Outlook
Oilfield
--------
>>
Due to a steady increase in the price of crude oil, a significant
recovery in the price of natural gas, and resolution of some of the
"unintended consequences" of Alberta's new Crown royalty regime intended to
come into effect January 1, 2009, demand for Company equipment and services
from clients in the Oilfield sector in Alberta - HSE's largest market - is
improved compared to the prior year. Indications from Company clients are that
their capital programs - particularly for natural gas - will be steady or
increased in the second half of 2008 compared to the second half of 2007. This
will benefit the Company and should increase demand for, and utilization of,
the larger capital assets specifically oriented towards natural gas drilling,
completion and development. Recent announcements of increased capital budgets
for natural gas development in Alberta give the Company some confidence that
the period of lowest demand for its specialized assets and services for this
market segment has passed.
HSE's strategy will be to continue to carefully monitor demand and
redeploy capital assets outside of the Oilfield sector in Alberta (either in
Industrial markets or Oilfield markets in other jurisdictions) in order to
achieve asset utilization rates that will generate a more satisfactory return
on invested capital than the Company has achieved in recent reporting
quarters.
Due to attractive fiscal regimes and new discoveries of hydrocarbons in
British Columbia and Saskatchewan, demand for the Company's Oilfield equipment
and services in these markets will continue to grow.
<<
United States Expansion
-----------------------
>>
As announced on May 7, 2008, HSE continues to pursue the expansion of its
Oilfield safety services division in the continental United States through a
new company called Boots & Coots HSE Services, LLC. ("BCHSE"), jointly owned
by HSE (90%) and Boots & Coots International Well Control, Inc. ("Boots &
Coots") (10%). In the second quarter, progress was made in launching this new
venture including incorporation of the operating entity, selection of a joint
Board of Directors, development of operating policies and procedures, review
of opportunities available from Boots & Coots existing facilities, budgets,
recruiting and training strategies, ongoing marketing, insurance and
regulatory matters, and other undertakings congruent with starting up a new
operation in another country.
Initially, BCHSE will provide fire protection and worker decontamination
services during well stimulation operations. This will involve the relocation
of the necessary specialized and proprietary capital assets, designed and
manufactured by HSE in Canada, to selected US markets. The first equipment, a
high capacity fire/shower combination unit, is scheduled to be shipped to the
Boots & Coots service location in Decatur, Texas, in mid-August. The Decatur
location, northwest of Fort Worth, Texas, services the active Barnett Shale
gas play in the region. Other equipment has been identified for shipment in
the third and fourth quarters of 2008. Management is seeking shop and services
facilities in two other markets to continue the expansion plans for the 2008
fiscal year, and is actively recruiting field service personnel for these
markets. The President of BCHSE, Jarvis Jackson, has relocated to Houston,
Texas.
The Company believes that the U.S. market will remain active for natural
gas drilling, and that gas development companies and their subcontractors are
ready to embrace a higher level of worker and asset safety protection services
than they have in the past. The Company is optimistic that by transferring
capital assets to the U.S. it will achieve higher utilization levels for
currently underutilized capital assets than it will without this initiative.
HSE is also confident that it has chosen the right strategic partner to
accelerate growth in this market at a greater rate than HSE would have
accomplished on its own.
<<
Industrial
----------
>>
Based on the success in significantly growing the Industrial segment of
the business in 2008, the Company now believes that it can continue to grow in
this large and diverse marketplace for many years. During the second quarter
of 2008, two new service locations were opened in Ontario, one in Sudbury and
one in Hamilton. Both have the characteristics of successful Industrial safety
markets that include heavy and safety-intensive industry, a proven existing
client base, a diverse potential client base, and a lack of competitors
offering the capacity and scope of services like those offered by HSE. The
Company believes Sudbury and Hamilton will eventually join Saint John, New
Brunswick, as successful "greenfield" service locations, with greenfield
defined as a new service centre opened without an acquisition. Saint John was
opened in early 2006 and in only two years has grown to the point that it
accounted for 9.4% of total revenues in the first six months of the current
fiscal year.
HSE introduced a new service in the second quarter from its Bonnyville,
Alberta location - a mobile safety equipment service unit. Building upon its
partnership with Levitt-Safety, a leading independent supplier of safety
equipment, this service unit travels to remote processing plants and
facilities and services their essential safety equipment on-site. Based on
immediate commercial success and customer demand, a second unit is under
construction for two other markets in Alberta. A new service from an existing
service location will meet the Company's overall goal of increasing revenue
without increasing direct fixed costs, resulting in improving operating
margins over time.
Another market that continues to demonstrate opportunity is Fort McMurray
and the growing bitumen upgrading facilities planned or under construction
north and east of Edmonton near the Company's Fort Saskatchewan service
location. The Company now works in some capacity for every major oilsands
operator and is now regularly included in all bid and tender processes for
upcoming oilsands extraction and upgrading construction projects. To service
these opportunities, the Company continues to invest in expertise, capacity
and infrastructure to maximize its future opportunities from oilsands and
non-conventional heavy oil development.
HSE remains the only company of its type servicing diverse industries
across Canada with a broad, integrated suite of services that cost-effectively
assist our clients in fulfilling their obligation to protect their workers,
their assets and the communities in which they operate. Because HSE is the
largest company of its type and the first to provide its unique integrated
services package - and demand continues to grow - the Company is clearly
meeting a need in the marketplace that has always existed but has never been
satisfied by a single vendor. At this time HSE does not know of any major
competitors in any markets in which it operates that are contemplating
delivering the same service suite on a similar scale, nor is the Company aware
of any major competitor that intends to compete directly against HSE in its
chosen space or markets.
Supplying Industrial safety services and equipment is different than
Oilfield safety services and equipment in that it has a higher component of
labor and a lower component of equipment rentals. While this results in a
generally lower operating margin, it is also much less capital intensive than
the Oilfield side of the business. The Company believes that the Industrial
sector offers greater revenue predictability, decreased cyclicality, and
attractive returns on invested capital.
Future Growth
The improved financial performance of the Company in the second quarter
of 2008 compared to 2007 has also improved its financial flexibility going
forward. The growth in the Industrial division in the past two years has been
almost completely organic because the Company has made no acquisitions in this
segment since the second quarter of 2006. Should demand for Oilfield safety
services remain at the same levels as the previous 12 months and the
Industrial division remain stable, the Company believes it has adequate
internal cashflow to meet all debt obligations, maintain its existing capital
asset base in good working order, and generate free cash for expansion.
Another continuing initiative is increasing operating margins. While the
Company is confident it has SG&A under control, there still exists
opportunities to increase profit margins at the field operating level through
a combination of increased Oilfield asset utilization, better purchasing and
cost control at the field operations levels, and the continued upgrading of
the business management capabilities of field service management team. The
Company continues to work on these areas on an ongoing basis with the
objective of increased profit margins going forward.
A key element of continuing to grow the Industrial component will be
access to manpower. In the past year the Company has made significant strides
in creating and staffing its Human Resources and Staff Development departments
and is the best equipped it has ever been to meet this opportunity.
<<
Quarterly Results
2008 2007
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue:
Oilfield 8,667 $15,961 15,879 11,722 6,486 19,799
Industrial 19,420 11,608 10,585 11,856 12,866 8,149
-------------------------------------------------------------------------
Total revenue $28,087 $27,569 $26,464 $23,578 $19,352 $27,948
Net earnings (loss) (568) (11) (9,173) (15,920) (3,113) 904
EBITDA(1) 2,187 2,633 2,601 1,376 (1,790) 4,802
-------------------------------------------------------------------------
Income (loss) per
share - basic
and diluted ($0.02) $0.00 $(0.25) $(0.42) $(0.08) $0.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2006
--------------------------------------------------------
Q4 Q3 Q2 Q1
--------------------------------------------------------
Revenue:
Oilfield 18,672 20,737 13,253 23,389
Industrial 7,526 6,215 6,671 4,076
--------------------------------------------------------
Total revenue $26,198 $26,952 $19,924 $27,465
Net earnings (loss) 984 1,197 (1,073) 2,353
EBITDA(1) 4,341 4,283 1,140 5,548
--------------------------------------------------------
Income (loss) per
share - basic
and diluted $0.03 $0.03 $(0.03) $0.07
--------------------------------------------------------
--------------------------------------------------------
See Non-GAAP Measures for (1)
>>
HSE's business has a seasonal component. Revenue from Oilfield services
tends to be highest in the first and fourth quarters and lower in the second
quarter because this sector uses equipment that cannot access remote well
locations during certain times of the year. For Industrial services revenue,
the second and third quarters tend to be higher due to greater levels of
safety service projects supporting scheduled facility maintenance and repair
activities at client sites.
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:
<<
- Included in accounts receivable is a non interest bearing promissory
note of $49, (2007 - $49) which is due from an officer and director
of the Company. This note is payable on demand. In the quarter, the
Company paid rent and property taxes to a corporation related to this
same officer and director of the Company in the amount of
$105 (2007 - $101). The rent is for a regional office.
- In the second quarter of 2008, the Company also paid rent and
property taxes of $78 (2007 - $78), and $nil (2007 - $12) for
regional offices to two different corporations. Different members of
senior management of the Company control each corporation.
>>
Critical Accounting Policies and Estimates
HSE prepares its consolidated financial statements in accordance with
Canadian generally accepted accounting principles (GAAP). 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 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, intangible assets, 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 2007 Annual Report.
Accounting Pronouncements
Effective January 1, 2008, the Company adopted the following Canadian
Institute of Chartered Accountants (CICA) Handbook Section 3862, Financial
Instruments - Disclosures; Section 3863, Financial Instruments - Presentation;
and Section 1535, Capital Disclosures. The adoption of the new standards
resulted in additional note disclosure requirements. For a description of the
principal changes due to the adoption of the accounting standards and for
further details on changes in significant accounting policies, see note 2 to
the unaudited Consolidated Financial Statements for the period ended June 30,
2008.
In February 2008 the CICA issued recommendations relating to the
recognition, measurement and disclosure of goodwill and intangible assets
which will be effective for the Company's 2009 reporting. The Company is
currently assessing the impact of implementing these recommendations.
In February 2008, the CICA 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 the "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. 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.
Therefore, the Company must be in a position to report its results and
comparatives in accordance with IFRS beginning January 1, 2011. The Company is
assessing the potential impacts of this transition and developing its project
plan accordingly.
Business Risks
The activities the Company undertakes involve a number of risks and
uncertainties, some of which are: business cyclicality, availability of
qualified staff 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
2007 Annual Report.
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, 2008.
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.
There have been no changes in the Company's internal control over
financial reporting during the first half of 2008 that have materially
affected, or are reasonably likely to materially affect, its internal control
over financial reporting.
Common Shares Outstanding
At August 13, 2008, there were 37,575,675 common shares of HSE
outstanding. At June 30, 2008 and December 31, 2007, there were 37,567,675
common shares outstanding.
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 and goodwill impairment,
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 2008 2007
-------------------------------------------------------------------------
Net earnings (loss) $ (579) $ (2,209)
Add (deduct):
Amortization and goodwill impairment 4,145 3,843
Stock-based compensation 290 690
Interest and bank charges 628 634
Foreign exchange loss (gain) - 2
Loss on disposal of property and equipment 326 737
Income tax 10 (685)
-------------------------------------------------------------------------
EBITDA $ 4,820 $ 3,012
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarterly EBITDA Calculation
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Net earnings
(loss) $(568) $(11) $(9,173) $(15,920) $(3,113) $904
Add (deduct):
Amortization 1,920 2,125 2,243 2,004 1,955 1,888
Impairment of
goodwill and
intangible
assets 100 - 10,505 15,000 - -
Stock-based
compensation 155 135 255 186 333 357
Interest and
bank charges 331 297 311 309 302 332
Foreign
exchange
loss (gain) 2 (2) 12 22 3 (1)
Loss (gain)
on disposal
of property
and equipment 326 - 103 99 30 707
Income taxes (79) 89 (1,655) (324) (1,300) 615
-------------------------------------------------------------------------
EBITDA $2,187 $2,633 $2,601 $1,376 $(1,790) $4,802
-------------------------------------------------------------------------
-------------------------------------------------------------------------
----------------------------------
2006
----------------------------------
Q4 Q3
----------------------------------
Net earnings
(loss) $984 $1,197
Add (deduct):
Amortization 2,458 1,862
Impairment of
goodwill and
intangible
assets - -
Stock-based
compensation 285 312
Interest and
bank charges 403 346
Foreign
exchange
loss (gain) (93) -
Loss (gain)
on disposal
of property
and equipment (26) (19)
Income taxes 330 585
----------------------------------
EBITDA $4,341 $4,283
----------------------------------
----------------------------------
>>
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) 2008 2007
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 249 $ -
Accounts receivable (note 4) 27,815 24,851
Inventory 221 216
Prepaid expenses and other assets 1,748 1,758
Income taxes recoverable 340 720
-------------------------
30,373 27,545
Property and equipment 37,802 41,314
Intangible assets 4,057 4,513
-------------------------
$ 72,232 $ 73,372
-------------------------
-------------------------
LIABILITIES
Current
Bank indebtedness $ - $ 616
Accounts payable and accrued liabilities 8,656 8,220
Current portion of deferred gain (Note 12) 137 -
Current portion of obligations under
capital lease (note 7) 1,274 1,328
Current portion of long-term debt (note 6) 1,200 216
-------------------------
11,267 10,380
Deferred gain (Note 12) 523 -
Obligations under capital lease (note 7) 758 1,453
Long-term debt (note 6) 13,845 14,995
Future income taxes 5,348 5,748
-------------------------
31,741 32,576
-------------------------
SHAREHOLDERS' EQUITY
Share capital (note 8) 60,036 60,036
Contributed surplus (note 9) 4,418 4,144
Deficit (23,963) (23,384)
-------------------------
40,491 40,796
-------------------------
$ 72,232 $ 73,372
-------------------------
-------------------------
Commitments and contingencies (note 12 and 15)
See accompanying notes to the consolidated financial statements.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
HSE Integrated Ltd.
Consolidated Statements of Earnings (Loss) and Retained Earnings
(Deficit)
Three Months ended Six Months ended
June 30 June 30
-------------------------------------------------------------------------
(Stated in thousands),
(unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
REVENUE $ 28,087 19,352 $ 55,656 47,300
----------------------------------------
COSTS
Operating and materials 23,440 18,545 45,992 39,175
Selling, general and
administrative 2,460 2,598 4,844 5,113
Amortization of property and
equipment 1,722 1,647 3,590 3,227
Amortization of intangible
assets 198 308 455 616
Stock-based compensation
(note 9 & 10) 155 333 290 690
Interest on long-term debt 271 279 538 588
Other interest and bank charges 60 22 90 46
Foreign exchange loss 2 3 - 2
Goodwill impairment 100 - 100 -
Loss on disposal of
property and equipment 326 30 326 737
----------------------------------------
28,734 23,765 56,225 50,194
----------------------------------------
EARNINGS (LOSS) BEFORE INCOME
TAXES (647) (4,413) (569) (2,894)
----------------------------------------
Income taxes
Current (recovery) 174 (1,158) 410 (359)
Future reduction (253) (142) (400) (326)
----------------------------------------
(79) (1,300) 10 (685)
----------------------------------------
NET LOSS AND COMPREHENSIVE LOSS (568) (3,113) (579) (2,209)
RETAINED EARNINGS (Deficit),
beginning of period (23,395) 4,822 (23,384) 3,918
----------------------------------------
RETAINED EARNINGS (Deficit),
end of period $(23,963) 1,709 $(23,963) 1,709
----------------------------------------
----------------------------------------
Loss per share
Basic and diluted $ 0.02 (0.08) $ 0.02 (0.06)
----------------------------------------
----------------------------------------
Weighted average number
of shares (Note 8)
Basic 37,568 37,465 37,568 37,465
Diluted 37,572 38,032 37,572 37,882
----------------------------------------
----------------------------------------
See accompanying notes to the consolidated financial statements.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
HSE Integrated Ltd.
Consolidated Statements of Cash Flows
Three Months ended Six Months ended
June 30 June 30
-------------------------------------------------------------------------
(Stated in thousands),
(unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided by (used in)
Operations
Net loss $ (568) (3,113) $ (579) (2,209)
Charges to income not
involving cash:
Amortization 1,920 1,955 4,045 3,843
Stock-based compensation 155 333 290 690
Future income tax (253) (142) (400) (326)
Goodwill impairment 100 - 100 -
Loss on disposal of
property and equipment (326) 30 (326) 737
Changes in non-cash working
capital (note 13) 2,564 3,811 (2,159) 1,377
----------------------------------------
Cash provided by operations 4,244 2,874 1,623 4,111
----------------------------------------
Financing
Repayment of operating line
of credit (3,711) - - -
Repayment of bank indebtedness (438) - (616) -
Repayment of obligations
under capital lease (422) (439) (749) (939)
Repayment of long-term debt (103) (1,066) (166) (2,147)
Issuance of share capital,
net of costs - - 4
----------------------------------------
Cash used in financing (4,674) (1,505) (1,531) (3,082)
----------------------------------------
Investing
Purchase of property and
equipment (1,139) (1,359) (1,661) (2,815)
Acquisitions (100) - (100) -
Proceeds from disposal of
property and equipment 1,918 229 1,918 620
----------------------------------------
Cash provided (used in) investing 679 (1,130) 157 (2,195)
----------------------------------------
Net change in cash and cash
equivalents 249 239 249 (1,165)
Cash and cash equivalents,
beginning of period - 5,147 - 6,551
----------------------------------------
Cash and cash equivalents,
end of period $ 249 5,386 $ 249 5,386
----------------------------------------
----------------------------------------
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, 2008 and 2007
(Stated in thousands of dollars)
-------------------------------------------------------------------------
NOTE 1 - 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, 2007, 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, 2007.
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 to the
current period presentation.
-------------------------------------------------------------------------
NOTE 2 - CHANGE IN ACCOUNTING POLICIES
On January 1, 2008, the Company adopted the new Canadian accounting
standards regarding Financial Instruments - Disclosures, Financial
Instruments - Presentation and Capital Disclosures. The new standards on
financial instruments supersede previous disclosure requirements. The new
requirements also provide for disclosure of the Company's capital
structure and how it is managed. The Company has added additional
disclosure to address the requirements of the new standards related to
financial instruments (note 4) and capital management (note 5).
Accounting Standards pending adoption
In February 2008, the CICA Accounting Standards Board ("AcSB") issued
recommendations relating to the recognition, measurement and disclosure
of goodwill and intangible assets which will be effective for the
Company's 2009 reporting. The Company is currently assessing the impact
of implementing these recommendations.
In February 2008, the "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. 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 - ACQUISITIONS
On July 1, 2007, the Company acquired the shares of Prairie Wide Safety
Ltd. ("PWS") of Weyburn, Saskatchewan in a business combination 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 price was based upon a
predetermined formula, not to exceed $2.2 million plus the assumption of
debt, based upon historical results, with additional consideration
contingent upon performance measures achieved in the first year from the
acquisition date. The results of operations are included in the accounts
from date of acquisition. Consideration and acquisition costs were
originally comprised of 100,000 common shares of the Company valued at
$1.64 per share, $1,884 cash and the assumption of debt.
Additional consideration which was contingent upon performance measures
based upon the first year after acquisition, has been reflected in the
following table. The additional consideration was $100 cash, resulting in
total cash paid of $1,984 and an increase in goodwill from $1,362 to
$1,462. All other amounts remain the same as there is no additional
contingent consideration.
Management has, in accordance with the Company's accounting policy for
goodwill, determined a goodwill impairment of $100.
Prairie Wide Safety Ltd.
-------------------------------------------------------------------------
Net assets acquired
-------------------------------------------------------------------------
Non-cash working capital 46
Property and equipment 1,365
Intangible assets 152
Goodwill 1,462
Bank indebtedness (119)
Long-term debt (392)
Capital lease obligations (139)
Future income taxes (227)
-------------------------------------------------------------------------
2,148
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration paid
-------------------------------------------------------------------------
Cash 1,984
Issuance of Common shares 164
-------------------------------------------------------------------------
2,148
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 4 - FINANCIAL RISK MANAGEMENT
Overview
The Company has exposure 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.
The Company, through its training and management standards and
procedures, aims to develop a disciplined and constructive control
environment in which all employees understand their roles and
obligations.
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.
Trade and other accounts receivables
The Company's exposure to credit risk is influenced mainly by the
individual characteristics of each customer and its industry life cycle.
For the quarter ended June 30, 2008, the Company had one customer that
generated sales of more than 10% of Company revenue (2007 - nil). Based
on its customer base, the Company does not believe that it has any
significant concentrations of credit risk. The Company does not have any
off balance sheet credit exposure related to its customers.
The Company has established a credit policy under which each new customer
is analyzed 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 creditworthiness
criteria may transact with the Company only on a prepayment basis. The
maximum credit exposure associated with trade accounts receivable is the
carrying value.
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 based
on historical write-off experience, account aging and the oil and gas
industry economic cycle. The Company reviews its allowance for doubtful
accounts monthly. Past due balances are reviewed individually for
collectability.
June 30, 2008 December 31, 2007
---------------------------------------
Trade accounts receivable $ 28,966 26,006
Allowance for doubtful accounts (1,151) (1,155)
---------------------------------------
Total trade accounts receivable $ 27,815 24,851
---------------------------------------
---------------------------------------
The aging of trade receivables at the reporting date was:
June 30, 2008 December 31, 2007
---------------------------------------
Gross Allowance Gross Allowance
Current (0 - 30 days from
invoice date) $ 16,283 - 15,886 -
Past due 1-30 days 6,754 - 5,772 -
Past due 31-90 days 5,013 235 3,473 280
More than 90 days 916 916 875 875
---------------------------------------
Total $ 28,966 1,151 26,006 1,155
---------------------------------------
---------------------------------------
The movement in the allowance for doubtful accounts receivables in
respect of trade receivables during the period was as follows:
June 30, 2008 December 31, 2007
---------------------------------------
Balance at January 1 $ 1,155 427
Impairment loss recognized
(recovered) (4) 728
---------------------------------------
Balance at end of period $ 1,151 1,155
---------------------------------------
---------------------------------------
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'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 stressed conditions, without unacceptable losses or risking
damage to the Company's reputation.
The Company has the following contractual financial liabilities,
including interest payments: trade and other payables, bank indebtedness,
secured equipment loans, an operating line of credit margined by accounts
receivable, a three year credit facility and capital leases for equipment
(notes 6 and 7).
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. The Company has minimal transactions in US dollars and
therefore minimal exposure. For every 1% change in the prime interest
rate would cost the Company $138 in additional interest expense.
-------------------------------------------------------------------------
NOTE 5 - CAPITAL MANAGEMENT
The Board's policy is to maintain an appropriate capital base that
maintains investor, creditor and market confidence and to sustain future
development of the business. The Company seeks to maintain a balance
between the level of long-term debt and shareholders' equity to ensure
access to capital markets to fund growth and working capital. The Company
may occasionally need to increase these levels to facilitate acquisition
or expansionary activities.
The Company was in compliance with all externally imposed debt covenants
at June 30, 2008.
As at June 30, 2008 and December 31, 2007, these ratios were as follows:
(Stated in thousands, except
ratios) June 30, 2008 December 31, 2007
---------------------------------------
Long-term debt $ 15,045 15,211
Shareholders' equity 40,954 40,796
---------------------------------------
Total capitalization $ 55,999 56,007
---------------------------------------
---------------------------------------
Long-term debt to total
capitalization 0.27 0.27
---------------------------------------
---------------------------------------
-------------------------------------------------------------------------
NOTE 6 - OPERATING FACILITIES and LONG-TERM DEBT
The Company has established credit facilities including 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 up to 2.25%, or at bankers' acceptance rates with a
variable stamping fee of 1.50% to 3.75%. An additional standby fee
ranging from 0.20% to 0.60% 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. The operating
facility is subject to covenants that are typical for this type of
facility. The credit facilities are collateralized under a general
security agreement.
Deferred financing costs associated with the new financing facilities
have been shown as a reduction in the carrying value of long-term debt
and will be expensed over the term of the debt using the effective
interest rate method.
June 30 December
2008 31 2007
--------------------
Equipment financing contracts bearing interest at
rates averaging 3.75% (2007 - 3.13%), payable in
blended monthly payments of $14 (2007 - $19)
secured by specific equipment $ 219 $ 391
Three year interest only revolving credit facility 13,829 13,829
--------------------
14,048 14,220
Accrued consideration on share purchase acquisition 1,040 1,040
--------------------
15,088 15,260
Less: current portion (1,200) (216)
--------------------
13,888 15,044
Less: unamortized debt issue costs (43) (49)
--------------------
$ 13,845 $ 14,995
--------------------
--------------------
Outstanding principal repayments are due as follows:
June 30
Periods ending June 30 2008
----------
2009 $ 1,200
2010 13,870
2011 16
2012 2
----------
15,088
----------
----------
-------------------------------------------------------------------------
NOTE 7 - OBLIGATIONS UNDER CAPITAL LEASE
The amounts due under capital lease arrangements are repayable in blended
monthly payments of $118 (2007 - $125) and bear interest at rates
averaging 5.44% (2007 - 5.50%) per annum. On certain leases, the Company
has options to acquire the leased assets at various times throughout term
to 2012.
June 30
Periods ending June 30 2008
----------
2009 $ 1,392
2010 585
2011 201
2012 31
2013 -
----------
2,209
Less: interest (177)
----------
2,032
Less: current portion (1,274)
----------
$ 758
----------
----------
-------------------------------------------------------------------------
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:
June 30, 2008 December 31, 2007
---------------------------------------
Shares Shares
(in $ (in $
Common shares thousands) Amount thousands) Amount
---------------------------------------
Balance, beginning of period 37,568 $ 60,036 37,462 $ 59,862
Changes (net of share issue
costs):
Issued on acquisition of PWS - - 100 164
Issued on exercise of
options - - 6 10
---------------------------------------
Balance, end of period 37,568 $ 60,036 37,568 $ 60,036
---------------------------------------
---------------------------------------
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.
-------------------------------------------------------------------------
NOTE 9 - CONTRIBUTED SURPLUS
June 30 December 31
2008 2007
---------------------------------------
Balance, beginning of period $ 4,144 $ 1,423
Stock compensation expense 274 1,116
Exercise of stock options - (4)
Warrants - expired - 1,609
---------------------------------------
Balance, end of period $ 4,418 $ 4,144
---------------------------------------
---------------------------------------
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NOTE 10 - STOCK-BASED COMPENSATION PLANS
Incentive stock option plan
Information about outstanding stock options is as follows:
June 30 December 31
2008 2007
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
-------------------- --------------------
Outstanding, beginning of
period 2,379,998 $ 2.15 1,924,501 $ 2.24
Granted 735,000 0.99 667,500 1.71
Exercised - - (5,333) 1.06
Forfeited (90,164) 1.85 (206,670) 2.12
-------------------- --------------------
Outstanding, end of period 3,024,834 $ 1.87 2,379,998 $ 2.15
-------------------- --------------------
-------------------- --------------------
Exercisable at end of period 1,430,820 $ 2.15 996,143 $ 2.06
-------------------- --------------------
-------------------- --------------------
The following table summarizes information about stock options
outstanding at June 30, 2008:
Weighted
average
Exercise remaining
Options prices life in Number
outstanding $ years exercisable
-------------------------------------------------
763,000 0.50-1.05 4.72 28,000
246,667 1.06-1.60 1.65 246,667
1,195,167 1.61-2.15 2.94 609,498
330,000 2.16-2.70 2.54 219,996
490,000 2.71-4.50 2.75 326,659
-------------------------------------------------
3,024,834 1.87 3.21 1,430,820
-------------------------------------------------
-------------------------------------------------
Deferred share unit plan
The Company has 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. On May 22, 2008, an additional 15,000 deferred
share units were granted. The units were valued and re-valued at
June 30, 2008 and resulted in a total expense of $16 (June 30, 2007 was a
recovery of $1) .
-------------------------------------------------------------------------
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:
- Included in accounts receivable is a non-interest bearing
promissory note of $49 (2007 - $49) which is due from an officer
and Director of the Company. This note is payable on demand. In
the second quarter of 2008, the Company paid rent and property
taxes to a corporation related to this same Officer and Director
of the Company in the amount of $105 (2007 - $101). The rent is
for a regional office.
- In the second quarter of 2008, the Company paid rent and property
taxes of $78 (2007 - $78), and $nil (2007 - $12) for regional
offices to two different corporations. Different members of senior
management of the Company control each corporation.
-------------------------------------------------------------------------
NOTE 12 - COMMITMENTS
The Company leases certain shop and office space and vehicles and
equipment under operating leases for periods ending between 2008 and
2013. Future minimum lease payments under these leases in each of the
next five years are as follows:
Rental Operating
Periods ending June 30 facilities leases Total
-------------------------------
2009 $ 2,899 1,601 4,500
2010 2,315 1,479 3,794
2011 1,634 1,130 2,764
2012 894 318 1,212
2013 649 2 651
-------------------------------
In May 2008 the Company sold three of its buildings as part of a
sale/leaseback 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 will be amortized over the remaining lives
of the leases.
-------------------------------------------------------------------------
NOTE 13 - SUPPLEMENTARY CASH FLOW INFORMATION
Three Months ended Six Months ended
Increase (decrease) in non-cash June 30 June 30
working capital from operations 2008 2007 2008 2007
---------------------------------------
Short term investments $ - 810 $ - 802
Accounts receivable 2,885 6,376 (2,964) 5,096
Inventory (2) (32) (5) (40)
Prepaid expenses and other assets (143) 234 10 313
Income tax recoverable/payable 150 (3,192) 380 (2,410)
Accounts payable and accrued
liabilities (326) (385) 420 (2,384)
---------------------------------------
Net change in non-cash working
capital $ 2,564 3,811 $ (2,159) 1,377
---------------------------------------
---------------------------------------
-------------------------------------------------------------------------
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 June 30, 2008, the Company had one customer representing
more than 10% of revenue (June 30, 2007 - nil).
Revenue by customer group is as follows:
Three Months ended Six Months ended
June 30 June 30
2008 2007 2008 2007
---------------------------------------
Oilfield $ 8,667 6,486 $ 24,628 26,285
Industrial 19,420 12,866 31,028 21,015
---------------------------------------
Total Revenue $ 28,087 19,352 $ 55,656 47,300
---------------------------------------
---------------------------------------
As a % of Revenue:
Oilfield 30.9% 33.5% 44.3% 55.6%
Industrial 69.1% 66.5% 55.7% 44.4%
---------------------------------------
Total Revenue 100.0% 100.0% 100.0% 100.0%
---------------------------------------
---------------------------------------
-------------------------------------------------------------------------
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.
>>
-30-
/For further information: HSE Integrated Ltd.: David Yager, Chairman &
CEO, Telephone: (403) 266-1833, E-Mail: dyager@hseintegrated.com; James M.
Hill, President, COO and Acting CFO, Telephone: (519) 429-0080, E-Mail:
jhill@hseintegrated.com/
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