Investors: 2009 Press Releases
Rigid Cost Control Helps Create Q3 2009 Operating Margin Despite 27.2% Year-Over-Year Revenue Decline
NEWS RELEASE - October 06, 2009
HSE Integrated Ltd. ("HSE" or the "Company") (TSX-HSL) today announced its financial results for the third quarter and nine months ended September 30, 2009.
Total revenue for the quarter declined 27.2% to $20.5 million from $28.2 million for the same period in the 2008 fiscal year. For the nine month period, revenue declined 25.5% from $83.9 million to $62.5 million. These significant contractions in HSE’s business reflect the impact of a severe recession in North America and a major downturn in conventional oil and gas well drilling and capital spending in western Canada compared to prior years.
This had a negative impact on operating margins. For the quarter, the operating margin declined 46.7% to $3.1 million (15.0% of revenue) from $5.8 million (20.5% of revenue) in the prior year. For the nine month period, operating margin contracted 57.9% to $6.5 million (10.4% of revenue) from $15.5 million (18.4% of revenue) in the 2008 fiscal year.
As part of its continuing focus on cost control to offset revenue declines, selling, general and administrative expenses (“SG&A”) for the quarter declined 29.4% to $2.1 million from $2.9 million in the prior year. For the first nine months, SG&A declined 20.9% to $6.2 million from $7.8 million in fiscal 2008. SG&A expenses in Q3 include approximately $160,000 in extraordinary legal and administrative expenses associated with defending against an unsuccessful unsolicited bid for of the Company.
HSE reported a loss for the quarter of $0.7 million (a loss of $0.02 per share) compared to a profit of $0.4 million ($0.01 per share) in Q3 2008. For the nine month period, the loss was $4.5 million (a loss of $0.12 per share) compared to a loss of $0.2 million (a loss of $0.00 per share) for the prior year.
EBITDA for the quarter declined 64.5% from $2.9 million in Q3 2008 to $1.0 million in Q3 2009. For the nine month period ended September 30, EBITDA fell 95.5% from $7.7 million in 2008 to $0.3 million in 2009.
Directionally, however, the Q3 operating margin was substantially improved from Q2 as a result of rigid cost controls introduced early in the year. Although revenue in Q3 only increased $1.0 million from $19.6 million earned in Q2, EBITDA increased by $1.5 million. HSE has reached previously announced targets of revenues beyond which the Company can generate positive EBITDA.
The bulk 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 third quarter and first nine months of the current fiscal year. Oilfield revenues in Q3 fell 48.8% to $6.2 million from $12.0 million in 2008 and accounted for only 30.0% of total business. For the nine month period, Oilfield revenue declined 43.4% from $36.7 million to $20.7 million. For the nine months to September 30, Oilfield represented only 33.2% of total business compared to 43.7% in 2008 and 53.6% for the same period in 2007.
Due to the sharp decline in drilling and capital expenditures referenced above, all companies supporting this sector are experiencing similar business contractions in Canada and the United States. According to data from the Canadian Association of Oilwell Drilling Contractors, to September 30, 2008 a total of 12,817 new wells had been drilled. For the same period in 2009 the total was 7,605, a 41% decline.
Revenue generated from Industrial health and safety services also declined in the third quarter, but not to the same degree of magnitude. For the quarter, Industrial revenues declined 11.1% from $16.2 million to $14.4 million. For the first nine months, Industrial revenues declined 11.5% from $47.2 million to $41.8 million. However, 2009 Industrial safety revenues for this period are still greater than the $32.9 million generated in 2007. This is because growth with new services, new clients and new markets still exceeds revenue contraction caused by macro-economic conditions.
In the third quarter Industrial health and safety services accounted for 70.0% of total revenue, up from 57.3% in 2008 and 50.3% in 2007. For the first nine months the same figures are 66.8%, 56.3% and 46.4% respectively.
The Company’s balance sheet remains strong. At September 30, 2009, working capital excluding current portions of long-term items was $18.6 million, up slightly from $18.4 million at June 30, 2009 but down from $20.5 million on December 31, 2008. Bank debt remained unchanged from year end and June 30 at $10.8 million. On October 5, 2009, the Company paid down $3 million on this revolving facility, leaving $7.8 million drawn of the $15 million available.
HSE had $5.0 million in cash or cash equivalents on hand at September 30, 2009 compared to $5.9 million at June 30, 2009 and $1.1 million at December 31, 2008. Accounts receivables plus cash at September 30, 2009 exceeded all cash liabilities by $4.3 million
The increase in working capital at September 30, 2009 despite a 27.2% year-over-year decline in quarterly revenue reflects HSE’s commitment to reducing costs and managing cashflow as effectively as possible without permanently impairing the Company’s ability to return to historic levels of revenue and operating margin when the various sectors of the economy in which HSE operates recover.
At September 30, 2009 HSE has net tangible assets per share of $0.96 per share. Tangible assets include cash, accounts receivable, inventory and the book value of capital assets (property, plant and equipment). Tangible liabilities include accounts payable, income taxes payable, capital leases, and long-term debt. The decrease in net tangible assets per share from previous calculations is primarily because of depreciation and amortization deductions on the Company’s capital assets.
David Yager, Chairman and CEO, offered the following comments for HSE’s third quarter 2009 financial results:
“The challenges facing the world economy and those of our clients continue. Therefore, HSE is doing what it must to operate as efficiently as possible with the intention of conserving working capital and maintaining the Company’s ability to exploit a recovery when it occurs.
However, after two quarters of declines in every area, our Q3 results demonstrate the first signs of economic recovery and the full impact of the business process rationalizations that have taken place to be able to adapt to economic realities. Although Q3 was difficult on a year-over-year basis, directionally from Q2 the Company generated increased revenue, operating margin, EBITDA and working capital.
There continues to be progress on many fronts. A new worker health product has been introduced in the oilsands. Although still in the commercial pilot phase, it appears to solve a real problem in remote locations and has the potential for opportunity and growth. Some contracts were awarded at Esso’s Kearl Lake oilsands development, the first major project of this type to proceed since commodity prices began to decline last year. HSE has developed specialized expertise in the areas of wind and nuclear power safety, both likely to be growth areas in the future. Some of the plants in Ontario and Michigan’s industrial heartland that were closed earlier this year have reopened. Our new operation in Newfoundland-Labrador continues to grow, and a new safety services contract with a national provider of industrial gases has introduced HSE to new markets.
Although oil prices have stayed stable above $70 a barrel, natural gas prices remain a concern. However, more analysts believe that a gradual recovery in industrial demand, combined with the continued reduction in supply caused by natural reservoir declines and reduced gas drilling, will cause the North America wide natural gas glut to begin to reverse itself in 2010. This would cause an increase in gas drilling in 2010 which would have a very positive impact on HSE’s Oilfield division.
Capital markets have improved compared to a year ago. In a presentation to the Petroleum Services Association of Canada Drilling Forecast and Industry Outlook Conference in Calgary on November 5, 2009, CIBC World Markets Inc. reported that from July 1 to October 31, 2008, the E&P sector raised only $0.6 billion in combined debt and equity capital. The figure for the same period in 2009 was $8.3 billion. While a portion of the money was spent on debt reduction and acquisitions, this means that the balance sheets of HSE’s client companies are strengthened, leaving them able to invest in exploration and development which will increase HSE’s business.
Nevertheless, because the bulk of the opportunities for HSE are still in the future – next year at the earliest – management will remain vigilant in controlling costs, conserving capital and searching for new clients and opportunities. That said, the worst is over for HSE. How long it will take to return to historic levels of revenue and profitability remains uncertain.
I can’t say enough about what a great job management and staff continues to do in helping our Company through this difficult period. Thank you very much.”
For further information and analysis please see the attached Management Discussion and Analysis and Financial Statements.
CONFERENCE CALL
On November 11, 2009, David Yager, CEO, and Lori McLeod-Hill, CFO, will be hosting a conference call to discuss the third quarter results. Details follow:
Conference Call Time and Date: Wednesday November 11, 2009 11:30 AM ET (9:30 AM MT)
Dial-In Number: 1-416-644-3427 or 1-800-731-6941
Conference Replay to December 9, 2009: 1-416-640-1917 or 1-877-289-8525 (Passcode: 4182888 followed by the pound sign)
Webcast: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2885300
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 second 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.
For more information, please contact:
David Yager, Chairman & CEO
Telephone: (403) 266-1833
E-Mail:
Lori McLeod-Hill, CFO
Telephone: (403) 266-1833
E-Mail: lmcleod-hill@hseintegrated.com