HSE Integrated Ltd. - Second Quarter and Six Month Operating Margins Increase
& Losses Decline Despite Lower Revenue
CALGARY, Aug. 12 /CNW/ - HSE Integrated Ltd. ("HSE" or the "Company") announces its financial results for the three month and six month reporting periods ended June 30, 2010. Operating margins increased and losses decreased for both periods despite a decline in revenue in 2010 compared to the same periods in 2009.
Total revenue for the second quarter decreased 6.2% from $19.6 million in 2009 to $18.4 million in 2010. Operating margin (revenue less operating expenses) of $1.5 million was 8.3% of revenues, up from $1.4 million or 7.3% of revenues in 2009. Selling, general and administrative expense ("SG&A") increased to $1.90 million from $1.87 million in the prior year. As a percentage of revenue, SG&A increased from 9.6% of revenue in fiscal 2009 to 10.4% in 2010. HSE reported a loss of $1.24 million or ($0.03) per share compared to a loss of $1.9 million or ($0.05) per share in the prior year. EBITDA was ($0.4) million or (2.1%) of revenue in 2010, improved 15.7% from ($0.5) million or (2.3%) of revenue in 2009.
Total revenue for the six month period declined 6.5% from $42.0 million in 2009 to $39.3 million in 2010. Operating margin of $4.7 million was 12.0% of revenue compared to $3.4 million or 8.1% of revenue in the prior year. SG&A was $3.9 million for the period, a 5.3% decline from $4.1 million in the prior year. As a percentage of revenue SG&A remained constant at 9.8% of revenue in 2010 compared to 9.7% in 2009. The company reported a loss of $1.4 million or ($0.04) per share compared to a loss of $3.7 million or ($0.10) per share for the first six months of the 2009 fiscal year. EBITDA for the period was $0.8 million compared to a loss of $0.7 million a year ago.
Included in SG&A expenses for 2010 are one-time charges of $0.45 million related to the Company's transition to the International Financial Reporting Standards ("IFRS") with which HSE will comply commencing in the 2011 fiscal year.
Industrial health and safety revenues for the quarter declined 21.8% from $15.2 million in 2009 to $11.9 million in 2010. This reflects a highly competitive pricing environment for plant shutdown and turnaround services for oil and gas processing facilities in western Canada where the Company lost business to competitors based on price. HSE also worked at lower prices for some existing clients on ongoing projects. The decline also reflects the re-pricing of a contract on a large construction project that had encountered significant cost over-runs that were not the fault of HSE. HSE chose to maintain this business relationship because HSE's cashflow from future business will be greater than the financial impact of the re-pricing on HSE's Q2 financial results. Industrial accounted for 65.0% of HSE's business in Q2, down from 77.9% for the same period in 2009.
For the first six months of the current fiscal year, Industrial health and safety revenue declined 12.9% from $27.4 million in 2009 to $23.9 million in 2010. Industrial accounted for 60.8% of HSE's total revenue in the first half of fiscal 2010 compared to 65.3% a year ago. The bulk of this revenue decline took place in Q2 for the reasons stated above.
Oilfield activity, however, increased for the first time since 2008. In Q2 health and safety services to Oilfield clients increased 48.8% from $4.3 million in 2009 to $6.4 million in 2010, comprising 35.0% of total revenue for the period compared to 22.1% last year. For the six month period, Oilfield revenues rose 5.7% from $14.6 million in 2009 to $15.4 million in 2010. As a percentage of total revenues, Oilfield increased from 34.7% in 2009 to 39.2% this year. The primary cause is an increase in oil drilling, particularly in the second quarter, and the rising demand for HSE's shower and fire protection services for oilwells stimulated with acid or hydrocarbons,
In the United States, the improved performance of Boots & Coots HSE Services, LLC continues to have a positive impact on the Company's financial performance. Activity has improved significantly in this market compared to a year ago and customers are accepting this service as a reliable and competent provider of worker, asset and community protection services.
HSE's balance sheet and working capital position remain strong. At June 30, 2010 total long-term liabilities were $7.9 million, down substantially from $16.5 million on June 30, 2009. Working capital net of long-term debt at June 30 was $14.1 million, the same as on December 31, 2009. Working capital has declined from $18.4 million at June 30, 2009, but long-term liabilities have declined by a greater amount.
David Yager, Chairman, President and CEO, had the following comments on the financial performance of the Company to June 30, 2010.
"The overall markets in which the Company operates are significantly improved on a year-over-year basis. Spending on all aspects of the hydrocarbon energy business except natural gas development is up significantly. Plants that were shut down in industrial markets in Ontario or the U.S. last year have re-opened. Equity and debt capital markets have improved. The pricing pressure from clients that began last year has stabilized in that downward pressure has eased. Because of manpower shortages in western Canada, as activity increases it is likely that the prices HSE can charge will rise before the fall. Based on land sales and well licenses, the recovery in the conventional oil and gas business in western Canada is looking steady with improvement through the remainder of 2010 and into 2011.
The only negative in HSE's year-over-year financial performance was on the Industrial side in Q2. In the plant shutdown and turnaround market in western Canada, our competitors are either willing or able to work at prices at which HSE cannot generate an acceptable profit margin. For now, many clients seem to be more concerned with price than quality. Working with a client on one major project to offset a cost over-run hurt our performance in Q2, but in the long-term maintaining this valuable commercial relationship will serve us well.
Shareholders and potential investors should understand that the Q2 decline in Industrial revenues was not the disappearance or transformation of this market or a decline in demand for HSE's services. We regard this as a one-time anomaly that will be offset by sales efforts to develop new clients and a greater focus on quality than price as general economic conditions improve.
HSE has proven in the past five years that providing health and safety services to diverse Industrial clients is a large and growing business. Nothing that has occurred in the current fiscal year has in any way changed our view of the total opportunity for our Company.
Our field technicians and technical support staff continue to do outstanding work every day on every job. In terms of diversity of services, regional delivery capability, and a commitment to quality and service, HSE remains Canada's industry leader, a position we do not take for granted and which we intend to maintain."
Greater detail on the financial performance of the Company and the outlook for the future is contained in Management Discussion & Analysis of the Q2 and YTD financial results. This can be accessed on SEDAR at www.sedar.com.
Q2 Conference Call
On August 13, 2010, David Yager, CEO, and Lori McLeod-Hill, CFO, will be hosting a conference call. Details follow:
Conference Call Time and Date: Friday August 13, 2010 11:00 AM ET
(9:00 AM MT)
Dial-In Number: 1-647-427-7450 (Toronto area) or 1-888-231-8191
Conference Replay to September 10, 2010: 1-416-849-0833 or 1-800-642-1687
(Passcode: 89967753)
Webcast: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=3162280
About HSE
HSE is an integrated, national supplier of industrial Health, Safety and Environmental services. From its head office in Calgary, Alberta, HSE 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 Texas through a jointly owned company called Boots & Coots HSE Services LLC.
HSE trades on the TSX under the symbol "HSL".
HSE Integrated Ltd.
Management Discussion and Analysis ("MD&A")
For the Quarter and Year to Date ended June 30, 2010 and 2009
The following management discussion and analysis is dated August 12, 2010 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, 2010 and 2009. This MD&A should be read in conjunction with HSE's other documents filed on SEDAR at www.sedar.com. Unless otherwise disclosed, the financial information presented in this discussion has been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and takes into consideration information available to management up to August 12, 2010. 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
2010 2009 % Change 2010 2009 % Change
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Revenue $ 18,350 $ 19,566 (6.2%) $ 39,257 $ 41,967 (6.5%)
Operating and
materials 16,825 18,145 (7.3%) 34,551 38,555 (10.4%)
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Operating
margin 1,525 1,421 7.3% 4,706 3,412 37.9%
Operating
margin % 8.3% 7.3% 12.0% 8.1%
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Selling,
general &
administra-
tive $ 1,905 $ 1,872 1.8% $ 3,864 $ 4,079 (5.3%)
Net loss (1,235) (1,928) (35.9%) (1,443) (3,734) 61.4%
- per share
basic &
diluted (0.03) (0.05) - (0.04) (0.10) 60.0%
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EBITDA(1) ($380) ($451) 15.7% $842 ($667) 226.2%
EBITDA % (2.1%) (2.3%) 2.1% (1.6%)
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Total assets $ 49,577 $ 60,745
Total
long-term
liabilities 7,939 16,462
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(1) See Non-GAAP Measures
FINANCIAL REVIEW
Overview
HSE provides an integrated suite of worker, asset and community health and safety protection services to the private and public sector including: onsite 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; hydrocarbon emergency response including well control and blowout recovery; worker shower (decontamination) services; onsite medical services; first aid; emergency medical response; worker safety training; industrial hygiene services; and safety management.
Total revenue for the quarter decreased 6.2% from $19.6 million in 2009 to $18.4 million in 2010. Operating margin (revenue less operating expenses) of $1.5 million was 8.3% of revenues, up from $1.4 million or 7.3% of revenues in 2009. Selling, general and administrative expense ("SG&A") increased to $1.90 million from $1.87 million in the prior year. As a percentage of revenue, SG&A increased from 9.6% of revenue in fiscal 2009 to 10.4% in 2010. HSE reported a loss of $1.24 million or ($0.03) per share compared to a loss of $1.9 million or ($0.05) per share in the prior year. EBITDA(1) was ($0.4) million or (2.1%) of revenue in 2010, down 15.7% from ($0.5) million or (2.3%) of revenue in 2009.
Total revenue for the six month period declined 6.5% from $42.0 million in 2009 to $39.3 million in 2010. Operating margin of $4.7 million was 12.0% of revenue compared to $3.4 million or 8.1% of revenue in the prior year. SG&A was $3.9 million for the period, a 5.3% decline from $4.1 million in the prior year. As a percentage of revenue SG&A remained constant at 9.8% of revenue in 2010 compared to 9.7% in 2009. The company reported a loss of $1.4 million or ($0.04) per share compared to a loss of $3.7 million or ($0.10) per share for the first six months of the 2009 fiscal year. EBITDA for the period was $0.8 million compared to a loss of $0.7 million a year ago.
Included in SG&A expenses for 2010 is $0.45 million related to the Company's transition to the International Financial Reporting Standards ("IFRS") with which HSE must comply going forward. Contained in 2009 SG&A expenses is $0.5 million ($282 in the first quarter of the year and $234 in the second quarter) related to cost reduction initiatives undertaken by the Company in response to the global recession and a commensurate decline in overall demand for HSE's services.
Revenue
In terms of reporting, the Company provides health and safety services to customers in two main business areas: Industrial and Oilfield. The differentiation takes place primarily because of the activity drivers that affect demand. Demand for Oilfield health and safety services is highly cyclical due to external factors such as commodity prices, currency exchange, capital markets, and changing government policy. Industrial health and safety services are provided to a vast array of clients with the commonality of being less influenced by the same external factors that has historically made the Oilfield sector cyclical.
Industrial services are provided to customers operating in a wide variety of industries and the public sector including; non-conventional upstream oil development and production (including oilsands extraction); oil and gas processing and refining; petrochemicals; pulp and paper; utilities; power generation; agriculture food and beverage; offshore operations; and diverse manufacturing industries. Industrial also includes worker safety training and safety management services.
Oilfield health and safety services are exclusively employed by oil and gas exploration, drilling and production companies that operate within the conventional upstream, or "wellhead", sector of the oil and gas industry. This includes oil and gas well exploration, drilling, completion and workover operations but does not include oilsands extraction.
The Company tracks billings to customers by defined revenue groupings, but uses a common pool of equipment and manpower resources to provide these services. Management and administration services are provided from a common personnel pool.
The revenue for these business areas is shown below:
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Quarter Quarter Year Quarter Year
ended ended over ended over
June 30, June 30, year % June 30, year %
2010 2009 change 2008 change
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Industrial $11,926 $15,249 (21.8%) $19,420 (21.5%)
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Oilfield 6,424 4,317 48.8% 8,667 (50.2%)
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Total Revenue $18,350 $19,566 (6.2%) $28,087 (30.3%)
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As a % of Revenue:
Industrial 65.0% 77.9% 69.1%
Oilfield 35.0% 22.1% 30.9%
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Total Revenue 100.0% 100.0% 100.0%
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Six Six Six
months months Year months Year
ended ended over ended over
June 30, June 30, year % June 30, year %
2010 2009 change 2008 change
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Industrial $23,850 $27,390 (12.9%) $31,028 (11.7%)
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Oilfield 15,407 14,577 5.7% 24,628 (40.8%)
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Total Revenue $39,257 $41,967 (6.5%) $55,656 (24.6%)
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As a % of Revenue:
Industrial 60.8% 65.3% 55.7%
Oilfield 39.2% 34.7% 44.3%
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Total Revenue 100.0% 100.0% 100.0%
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Industrial
The Industrial health and safety services component of the Company's total revenue declined in the second quarter of 2010. Although there was a general recovery in the industries and geographical markets in which HSE operates, services supplied to conventional and non-conventional hydrocarbon processing and extraction facilities were subject to pricing pressure which included price reductions to key clients. The oil and gas processing plant shutdown and turnaround services that typically take place during the second quarter were subject to pricing pressure caused primarily by increased focus on servicing this market by HSE competitors that in the past have predominantly serviced the Oilfield sector. Some clients tended to award these service contracts to the lowest bidder.
In addition, a client undertaking a major capital project incurred major cost over-runs. The client approached HSE and gave the Company the option of re-pricing at a lower rate or being replaced on the project. After a cost-benefit analysis, HSE chose to stay on the project. Under the renegotiated terms, prices for safety equipment rentals were reduced which had a negative impact on the revenues in the second quarter. However, the Company is of the view that the contribution from future business will exceed the negative quarter two impact.
Due to the factors cited above, in the second quarter, Industrial revenue decreased $3.3 million or 21.8% to $11.9 million from $15.2 million in the prior year. For the first six months of the current fiscal year, Industrial health and safety services revenue was $23.9 million, 12.9% lower than $27.4 million generated in the same period in the 2009 fiscal year. Industrial health and safety services comprised 60.8% of total revenues, down from 65.3% in 2009.
Oilfield
Oilfield revenues in the second quarter increased by $2.1 million or 48.8% compared to second quarter of 2009. For the first six months of the current fiscal year, Oilfield health and safety services revenue was $15.4 million, 5.7% higher than $14.6 million generated in the same period in the 2009 fiscal year.
The improved financial performance of the Oilfield portion of the Company's business reflects an overall recovery in this sector compared to the same period in 2009. The factors behind this recovery include stable oil prices, improved economics in Alberta due to a revised royalty regime, and continued success by Exploration and Production companies using horizontal drilling and multi-stage fracturing extraction technologies in mature oilfields and in tight oil-bearing reservoirs. Many of the oil reservoirs being exploited in this manner are water-sensitive and therefore produce more effectively when fractured with acid or hydrocarbon fluids. Employing these fluids on horizontal oil well completions has resulted in increased demand for the Company's shower and fire protection services and on-site first aid services compared to 2009.
In the United States, Boots & Coots HSE Services LLC ("BCHSE"), the Company's venture with Boots & Coots, Inc., contributed $0.4 million to revenue in the second quarter of 2010 compared to $0.1 million in the same period of 2009. For the six months ended June 30, 2010 revenue was $0.6 million, an increase of $0.5 million over the six months ended June 30, 2009. BCHSE continues to gain customer acceptance as a capable provider of worker and asset protection services.
During the period ended June 30, 2010, the Company did not have a customer representing more than 10.0% of revenue (2009 - one customer contributing 12.3% of revenue).
Operating and Materials Expense and Operating Margin
Operating and materials expense consists of costs directly attributable to the delivery of health and safety services to customers. These include; wages and benefits for field employees and contractors; equipment rentals and leases; field service center property costs; transportation; fuel; consumables; equipment repairs and maintenance; and field office administration including field sales.
Operating and materials expense for the quarter ended June 30, 2010 totaled $16.8 million or 91.7% of revenue, as compared to $18.1 million or 92.7% of revenue in 2009. Operating margin for the period increased from $1.4 million (7.3% of revenue) in 2009 to $1.5 million (8.3% of revenue) in 2010.
For the first six months, operating and materials totaled $34.6 million or 88.0% of revenue compared to $38.6 million or 91.9% of revenue for the period ended June 30, 2009. Operating margin for the first six months increased from $3.4 million or 8.1% of revenue last year to $4.7 million or 12.0% of revenue in 2010.
The increase in operating margin is due to a significant improvement in the profitability of the Company's U.S. operations, rigorous control over all expenses, and the full impact of the cost reduction initiatives undertaken in the first half of 2009. Partially offsetting the salary expense savings was the first reversal of the salaried employee pay reduction instituted in March of 2009.
The allowance for doubtful accounts receivable was $1.24 million or 7.2% of trade accounts receivable at the end of the quarter compared to $1.26 million or 7.2% of trade accounts receivable at December 31, 2009. Days sales outstanding increased slightly from 77 days in the second quarter of 2009 to 79 days for the same quarter in the current year.
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 executive management; corporate head-office functions and support services; administrative personnel; corporate sales and marketing costs; liability insurance; professional fees; and investor-relations expenses.
SG&A for the quarter totaled $1.90 million (10.4% of revenue), up slightly from $1.87 million (9.6% of revenue) in the prior year. The Company continually attempts to minimize SG&A but these efforts were partially offset by the first reversal of the salaried employee pay reduction instituted in March of 2009. Preparing the Company for the adoption of IFRS in 2011 resulted in expenditures of $0.45 million in the six month period ended June 30, 2010.
For the first six months, SG&A declined to $3.9 million from $4.1 million in the prior year. The primary reason SG&A did not reduce as much as expected after last year's cost reductions was expenses due to IFRS. As a percentage of revenue SG&A increased to 9.8% from 9.7% in 2009.
EBITDA and Net Loss
Despite a 6.2% decline in revenue, EBITDA (see "Non-GAAP Measures") in the second quarter of 2010 improved slightly from the same period in 2009, as EBITDA improved from negative $0.5 million in 2009 to negative $0.4 million in 2010. The EBITDA margin was (2.1%) for the quarter; lower than historical performance but slightly improved over the negative EBITDA margin of (2.3%) in the second quarter of 2009. For the first six months EBITDA was $0.8 million compared to a negative $0.7 million in the same period of 2009. This EBITDA increase was the result of continued cost reductions, the implementation of a new variable cost structure for service delivery, and improved financial performance in the United States.
Total amortization for the quarter was $1.4 million, down from $1.7 million in the second quarter 2009. Property and equipment amortization decreased in the current quarter to $1.3 million compared to $1.6 million in the prior year. HSE continues to tightly control capital additions. Intangible assets amortization remained consistent quarter-over-quarter.
Stock-based compensation for the quarter was $0.09 million (2009 - $0.1 million). The slight year-over-year decline is due to a reduction in the number of outstanding unvested options.
Interest on long-term debt and other interest and bank charges increased from $0.12 million in 2009 to $0.14 million in 2010. Capital lease obligations at June 30, 2010 decreased by $0.4 million compared to the same quarter from the prior year. Long-term debt was reduced by $5.9 million compared to same quarter from the prior year.
For the second quarter of 2010, the gain on the disposal of property and equipment was $0.2 million with proceeds on sale of $0.1 million. Contributing to the gain is the amortization of a deferred gain on sale / leaseback of real estate assets as discussed in the 2008 annual MD&A. The asset divestitures consisted primarily of retirement of vehicles replaced through the Company's fleet management program.
Net loss for the quarter was $1.2 million or ($0.03) per share versus a net loss of $1.9 million or ($0.05) per share in the same quarter from the prior year. The year-over-year improvement was primarily due to cost containment.
Current Quarter versus Q1, 2010
Revenue for the second quarter decreased 12.0% to $18.4 million from $20.9 million in the first quarter. Oilfield revenue declined because of seasonal demand reductions that take place every year. Industrial revenue remained constant at $11.9 million in the first quarter and $11.9 million in the second quarter. In recent years Industrial revenue has been higher in Q2 than Q1. The Company regards this flat quarter over quarter Industrial revenue as an anomaly in the current fiscal year for reasons discussed in detail above.
Operating expenses decreased by $0.9 million from $17.7 million (84.8% of revenue) to $16.8 million (91.7% of revenue). This is due to a number of factors including the increasing use of short-term light truck rentals in the first quarter to reflect seasonal demand, field service wages being tied more closely to activity, and rigorous monitoring of maintenance and operating costs.
SG&A remained constant at $1.90 million in the second quarter and $1.96 million in the first quarter 2010.
Liquidity and Capital Resources
The Company's principal sources of capital are cash flows from operations and, borrowings under an established credit facility with its senior lender and equity financing.
The Company, through the conduct of its operations, has undertaken certain contractual obligations as noted in the following table:
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Years ended
December 31 2010 2011 2012 2013 2014 Total
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Capital lease
obligations $ 131 $ 71 $ 10 $ - $ - $ 212
Vehicle and equipment
operating leases 1,319 2,009 816 50 8 4,202
Rental facilities 1,404 2,594 2,212 1,856 1,457 9,523
Long-term debt 652 2,114 1,304 1,304 435 5,810
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Total contractual
obligations $ 3,506 $ 6,788 $ 4,342 $ 3,210 $ 1,900 $19,747
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Liquidity
On April 27, 2010, the Company entered into a $15.0 million credit facility with a regional financial institution. The facility consists of a $10.0 million operating revolving loan facility for general operating purposes and a $5.0 million non-revolving reducing loan facility. The two facilities were used to retire the $5.3 million in existing bank debt.
The $5.0 million non-revolving term facility is repayable in monthly payments of $109 starting July 1, 2010. The facility is payable in full 48 months after initial drawdown. The operating facility is renewable annually and is margined to accounts receivable. Both facilities bear interest at prime plus a fixed percentage. A standby fee is also required on any unused portion of the operating facility. Both facilities are subject to certain covenants including a working capital covenant, a debt to equity covenant, a cash flow to debt covenant and other positive and negative covenants. The facilities are collateralized under a general security agreement.
As at June 30, 2010, the Company was in default of the fixed charge coverage covenant which gave the regional financial institution the right to demand immediate repayment of the loan facility. The default was remedied with a covenant waiver received August 4, 2010, prior to the financial statements being completed. The financial institution waived the covenant for the periods June 30, September 30 and December 31, 2010 conditional upon the Company being compliant with all covenants on March 31, 2011. As at June 30, 2010, the total outstanding on the loan facility was $5,000 of which $1,304 was current. The fixed charge coverage covenant is the ratio of earnings before interest, taxes, depreciation and amortization less capital expenditures to interest and principal repayments.
At the end of the second quarter, the Company had cash on hand of $0.9 million.
Cash provided by Operations
Cash provided by operations in the quarter was $1.6 million in 2010 compared to $5.3 million provided by operations in 2009. Reduced revenue levels in the quarter resulted in negative EBITDA and break-even operating cash flow excluding changes in working capital. Days sales outstanding ("DSO") increased slightly to 79 days at June 30, 2010 from 77 days at June 30, 2009.
Cash used in Financing and Investing
During the quarter, the Company made scheduled capital lease and equipment loan payments of $0.1 million. The operating line of $5.3 million was re-paid and a $5.0 million non-revolving reducing committed facility was drawn. The remaining $0.3 million was paid out of cash flow. The Company did not need to draw on its operating line during the quarter.
Purchases of property and equipment for the second quarter amounted to $0.5 million, the majority of which was revenue-generating health safety services rental equipment. Proceeds from the disposal of property and equipment were $0.1 million.
Working Capital
At June 30, 2010, the Company had working capital (not including current portions of long-term debt obligations) of $14.1 million. This compares to $14.1 million on December 31, 2009 and $18.4 million at June 30, 2009. The decrease from June 30, 2009 is related primarily to a decrease in cash and cash equivalents as funds were used to pay down long-term debt during the second quarter of 2010.
Outlook
On a year-over-year basis, the overall business climate in which HSE operated in the second quarter of 2010 was improved over the same period in 2009. The second quarter of 2009 was characterized by steadily declining natural gas prices, shuttered processing plants, delayed or cancelled oilsands and heavy oil upgrading projects, uncertain credit markets, volatile public capital markets, Alberta's New Royalty Framework, and high degrees of economic uncertainty. The focus of the Company in Q2 2009 was to continue to reduce internal spending in every way possible in order to offset a decline in revenue.
In the second quarter of 2010, the overall operating environment was much more favorable. Crude oil prices had been stable for a year. Some steel mills and other major resource processing facilities had re-opened. Equity capital markets had significantly recovered and debt capital markets had improved. Several new oilsands projects were announced or underway. The Company had emerged from a difficult year with lower debt levels and a strong working capital position.
But challenges remained. Customers became increasingly price-sensitive to input costs from vendors like HSE. Overcapacity created a highly competitive marketplace. Downward re-pricing of services for key customers to maintain business eroded some of the competitive advantages the Company created with its cost-reduction strategies in 2009.
The Company's financial performance in the second quarter reflected both the opportunities presented by the recovery and the challenges that remain in several industrial sectors. The slight decline in overall revenue demonstrated the new realities of the post-recession business environment - competitive pricing, reduced margins and intense competition. However, the increased operating and EBITDA margins demonstrated that HSE has responded appropriately to the new realities in the marketplace.
Industrial
In Q2 2010, Industrial health and safety revenues declined compared to the same period in 2009. This was not because of a reduction in demand for the services provided by HSE but intense pricing pressure from clients looking to increase their internal profit margins or reduce expenses by spending less on health and safety. In fact, because of increased regulatory requirements and expectations by shareholders and the public that companies do whatever is necessary to protect workers, assets and the community, total expenditures on the services HSE provides have grown in the past three decades. What HSE encountered in this particular reporting period was intense pricing pressure for safety services in the established western Canadian hydrocarbon processing industry.
Management believes the factors that caused Industrial health and safety revenues to decline in Q2 2010 are an anomaly that will be rectified by an improvement in the economy, client appreciation of quality services, and the more aggressive marketing campaign to new clients and industries that has been a key element of the 2010 strategic plan.
The oilsands and non-conventional thermal recovery market of northeast Alberta remains a stable market with a combination of growth opportunities and competitive challenges. New projects are going forward and will continue to do so for the foreseeable future. However, the growth and stability of this resource development project is attracting greater competition. Regardless, as a commitment to this market, in Q2 HSE took possession of a new service and training facility in Fort McMurray under a multi-year lease commitment. With four large and modern classrooms, HSE now has the largest and most advanced worker health and safety training facility in the oilsands region of northeast Alberta. In the latter half of Q3 and into Q4, indications from clients are increased demand in the oilsands
In the area of marketing and business development, in 2010 HSE has been more focused on clients with multiple operations in multiple regions that can be serviced by the Company's broad delivery footprint, the largest in Canada. These include oil refining, petrochemicals, food processing, industrial supplies, maintenance contractors, and national Engineering, Procurement and Construction companies. HSE is targeting this type of client because of HSE's unique combination of services diversity, capacity, and existing regional delivery capabilities. Although in some cases this is a long sales cycle, in the past year the Company has gained several new national clients in highly diverse industries for which HSE provides services in multiple geographic regions.
In terms of expanding the client base, the focus on costs is a positive development. The largest providers of worker, asset and community protection services are the asset owners and operators themselves. All major hydrocarbon processing facilities have an in-house fire department using essentially the same equipment and personnel as HSE. Most own their own breathing apparatus. Many operate on-site medical and/or first aid clinics. The recession has caused all industries to find ways to be more efficient. This includes a focus on the core mission of the client company which is not health and safety. As a result, the overall trend among clients is they are interested in investigating ways to become more efficient and profitable. This may include the outsourcing of non-core activities such as health and safety. The business development initiatives described above are intended to exploit this opportunity.
Oilfield
The Oilfield health and safety component of HSE's business is where the Company started. This industry is characterized by hazardous working conditions, remote operations, highly cyclical demand, and numerous competitors of various sizes. This market is serviced by a 100% out-sourced, mobile health and safety services sector.
The challenges facing drilling, exploration and production activity in the Western Canada Sedimentary Basin ("WCSB") in recent years in B.C., Alberta, Saskatchewan and Manitoba are well known. There has been a significant decline in every major economic input resulting in vastly reduced spending and activity in 2009 compared to all prior years in recent history.
However, in 2010 there has been the first measurable change in direction since the summer of 2008. In terms of drilling, the Canadian Association of Oilwell Drilling contractors reports that in the three-month period April 1 to June 30, 2010, there were 2,323 wells drilled in the WCSB, a 54 percent increase from 1,504 for the same period in 2009. According to CIBC World Markets in a report dated July 27, 2010, total wells licenses issued on a year-to-date basis was 41 percent higher than 2009 levels, 7,342 compared to 5,222. There were 406 active drilling rigs in the WCSB on this day, almost double the 204 rigs drilling on the same date in 2009.
An important indicator of future activity is the permitting of Crown exploration and development rights or land sales revenue. In the WCSB, in the first half of the current fiscal year exploration and development companies had spent $1.73 billion, the highest on record for this period except for the boom years of 2006 and 2008. In Alberta, total funds collected by the province to the July 7, 2010 land sale was about 12 times higher than the same period in 2009. This investment in future development rights by HSE's customers is a strong signal that the recovery in HSE's Oilfield health and safety services business in Q2 2010 compared to the same period last year is sustainable.
One of the most significant changes in the business has been the switch from gas to oil drilling. In the period 1992 to 2008, about 70% of all wells drilled in the WCSB had natural gas as the target. Therefore, HSE's Oilfield business has historically been oriented towards gas. Both gas and oil prices collapsed in 2008, however oil prices recovered substantially in 2009. Gas has yet to rise above multi-year lows.
Therefore, developers have switched their focus toward oil, which is currently more profitable to develop. In the first half of 2010, the CAODC reported that 2,431 oilwells had been drilled compared to only 2,612 gaswells making oil the target in about half of all wells completed as producers. In 2009 there were 3,190 oilwells drilled in the WCSB, 34% of all wells drilled.
Oilwell drilling is being driven by the application of long-reach horizontal wells completed with multi-stage fracturing to many of Alberta's mature fields and reservoirs. A great number of Alberta's oil reservoirs are responding well to this technique, with the economics enhanced by changes to the New Royalty Framework in Alberta announced in March of 2010 and finalized in May.
At HSE, we have been concerned about the appropriateness of our fire and shower assets due to the switch from gas to oil drilling. However, as more oil reservoirs are exploited, it is becoming clear that better production results if certain water-sensitive, oil-bearing zones are fractured with acid or hydrocarbons. It was hydrocarbon fracturing of the massive Pembina Cardium oilfields in the 1950s that created the mobile oilfield fire protection business. Because of this, HSE has seen the first major increase in demand for its most capital-intensive asset class since 2008.
The Company expects Oilfield activity to continue to ramp up for the remainder of 2010 and continue into 2011.
United States
HSE now reports segmented financial information for its U.S. operations which comprise - CRS Technologies Inc. ("CRU") which operates from Taylor, Michigan (a suburb of Detroit), and Boots & Coots HSE Services LLC ("BCHSE") which operates from a head office in Houston, Texas.
On a year-over-year basis, HSE's U.S. operations are significantly improved although still modest on a consolidated basis. Revenue for the second quarter increased to $0.9 million from $0.2 million in 2009. EBITDA increased to $0.3 million in the quarter from negative $0.3 million in 2009.
The Company anticipates this trend will continue in the remainder of 2010. In the Industrial markets served from Michigan, marketing efforts with new clients in new areas are providing encouraging results.
BP's Macondo blowout in the Gulf of Mexico that took place in April and has only recently been brought under control could be a harbinger of positive developments for HSE's Oilfield health and safety services in the United States. This incident has placed oil and gas developers under increased scrutiny, particularly their policies regarding worker and community protection and contingency plans should an event occur requiring emergency response.
Among western countries with significant domestic oil and gas producing industries (Canada, UK, Norway, Denmark, Holland, France, Germany), the United States industry is conspicuous by the degree to which it is self-regulated in the areas of health, safety and environmental protection. HSE and its partner, Boots & Coots, have already seen increased interest by a variety of clients in different markets about equipment and services for worker, asset and community protection.
While the pace at which new regulations will be passed in the various states and at the federal level is unknown, progressive exploration and development companies will be ahead of the curve in demonstrating their willingness to enhance worker and community safety. Forecasting the rate at which this will impact HSE is difficult. HSE has been adding capacity. It is clear that demand for the Company's products and services in the large U.S. market will be much greater following the BP incident than it would have been otherwise.
On April 12, 2010 Boots & Coots, Inc. announced that it had entered into an agreement under which all of its shares would be acquired by Halliburton. This transaction is expected to close in the summer of 2010. Some administrative services such as payroll and legal that have been performed by Boots & Coots are in the process of being transferred to HSE in preparation of the acquisition by Halliburton. However, the partnership with Boots & Coots continues and the total impact of this transaction on HSE and BCHSE is not known at the time of writing.
Quarterly Results
2010 2009
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Industrial $11,926 $11,924 $12,533 $14,375 $15,249 $12,141
Oilfield 6,424 8,983 6,557 6,169 4,317 10,260
------------------------------------------------------
Total Revenue $18,350 $20,907 $19,090 $20,544 $19,566 $22,401
Net earnings (loss) (1,235) (208) (2,178) (722) (1,928) (1,806)
EBITDA(1) (380) 1,222 496 1,016 (451) (216)
------------------------------------------------------
Income (loss) per
share - basic and
diluted $ (0.03) $ (0.01) $ (0.06) $ (0.02) $ (0.05) $ (0.05)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008
-------------------------------------
Q4 Q3
-------------------------------------
Industrial $15,308 $16,163
Oilfield 14,597 12,039
------------------
Total Revenue $29,905 $28,202
Net earnings (loss) 431 396
EBITDA(1) 2,713 2,858
------------------
Income (loss) per
share - basic and
diluted $ 0.01 $ 0.01
-------------------------------------
-------------------------------------
(1) See Non-GAAP Measures
HSE's business has two offsetting seasonal components. Revenue for Oilfield health and safety services is historically highest in first and fourth quarters and lowest in the second quarter because this sector uses equipment that can only access well locations during certain times of the year, and because of the effects of weather on field activity. Industrial revenue includes a mix of year-round contracts and "turnarounds" - scheduled major maintenance projects and repair activities on client facilities. These turnarounds tend to be scheduled during the second and third quarters to avoid the possibility of adverse effects from freezing weather. As a result, Industrial revenue tends to be highest in the second and third quarters.
Related-Party Transactions
During the quarter, the Company had the following transactions with related parties, all of which are measured at exchange amounts.
- In the second quarter, the Company paid rent and property taxes of
$0.1 million (2009 - $0.1 million) for a regional office to a
corporation related to a Director of the Company.
- In the second quarter, the Company also paid rent of $0.08 million
(2009 - $0.07 million) for a regional office to a corporation
controlled by a Senior Manager of the Company.
- In the second quarter, the Company paid $0.09 million (2009 - $0) to
a corporation related to a Director of the Company pursuant to an
agreement that pre-dates the directorship.
Critical Accounting Policies and Estimates
HSE prepares its consolidated financial statements in accordance with Canadian generally accepted accounting principles. In doing so, management is required to make various estimates and judgments in determining the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of commitments and contingencies. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Estimates and assumptions are reviewed periodically, and actual results may differ from those estimates under different assumptions or conditions. Management must use its judgment related to uncertainties in order to make these estimates and assumptions.
The accounting policies and estimates believed to require the most difficult, subjective or complex judgments and which are material to the Company's financial reporting results include: allowance for doubtful accounts, impairment of long-lived assets, amortization of property and equipment, and future income tax liabilities. A full description of the methods for determining these accounting policies and estimates as well as the risks related to the possible effects of changes in these policies and estimates, can be found in HSE's 2009 annual report.
Accounting Standards Pending Adoption
Business Combinations, Consolidated Financial Statements and Non-controlling Interests
In January 2009, the Canadian Accounting Standards Board ("AcSB") issued three new recommendations regarding business combinations, consolidated financial statements and non-controlling interests. While these standards are effective for fiscal years beginning on or after January 1, 2011, early adoption is permitted if all three standards are adopted simultaneously. The new standards include:
- Section 1582, which will replace Section 1581, deals with accounting
for business combinations. The new standard harmonizes Canadian
accounting standards with IFRS 3 - Business Combinations. Section
1582 is applicable prospectively to business combinations entered
into after adoption.
- Sections 1601 and 1602 together will replace existing section 1600.
Section 1601 provides standards for the preparation of consolidated
financial statements, while section 1602 provides standards with
respect to accounting for non-controlling interests in subsidiaries.
The new standard harmonizes Canadian accounting standards with
proposed revisions to IAS 27 - Consolidated and Separate Financial
Statements. It makes changes to the circumstances under which the
Company must consolidate an entity, as well as to disclosure
requirements.
The impact of these standards on the Company's financial statements will depend upon the timing and nature of any future acquisitions.
International Financial Reporting Standards
On February 13, 2008, the Canadian Accounting Standards Board ("AcSB") confirmed the requirement for all publicly accountable enterprises to adopt International Financial Reporting Standards ("IFRS") for fiscal years beginning on or after January 1, 2011. Effective January 1, 2011 HSE will be required to report its interim and annual financial statements in accordance with IFRS including comparative information for the 2010 period.
HSE has commenced the process to transition from current Canadian GAAP to IFRS. A project team led by Finance has been established. Representatives from other areas of HSE participate as required. A Steering Committee comprised of HSE Executives monitors the IFRS project on a monthly basis. Regular reporting to the Audit Committee and the Board of Directors on the status of the IFRS project has also been implemented.
HSE has developed a project plan that consists of three major phases: initial assessment, detailed assessment and design, and implementation.
Initial assessment - this phase involved performing a high-level impact assessment to identify the areas that would be affected by the transition to IFRS. As a result of these procedures, the potentially impacted areas were identified as high, medium and low impact. The level of impact was determined based on the relative significance of the account balance and the nature of the differences between current HSE accounting policies and the accounting policies required by IFRS.
Detailed assessment and design - this phase involves the identification of changes required to existing accounting policies, information systems and business processes, together with an analysis of policy alternatives allowed under IFRS and the development of a template for IFRS financial statements and notes. HSE's efforts are currently focused on this phase of the project.
Implementation - this phase includes execution of changes to information systems and business processes, completing formal authorization processes to formally approve recommended accounting policy changes, completion of the opening balance sheet and training programs for the finance group and other areas of the company as required.
Progress-to-date
HSE has identified differences between accounting policies under Canadian GAAP and accounting policy choices under IFRS, both on an ongoing basis and with respect to certain choices available on conversion as allowed or required by IFRS 1. HSE undertook an analysis of all applicable standards to confirm the classification of the differences as high, medium and low impact. Differences in accounting policies related to property and equipment, leases, impairments, stock-based compensation and financial statement and note disclosures have been identified as high and medium impact.
HSE has identified the major components of each of the types of property and equipment, and assigned useful lives and residual values for all of its asset classes. The Company will complete the calculation of the opening balance sheet adjustment by the end of September 2010.
HSE has completed a review of all leased properties, vehicles and equipment to identify operating and finance leases. The Company is in the process of finalizing calculations for the opening balance sheet.
Changes to the general ledger will be straightforward. The most significant system changes relate to the fixed asset sub-system. The Company must track all assets as required under current Canadian GAAP until January 1, 2011 and then under IFRS effective January 1, 2011. Throughout 2010, the Company must also compile the fixed asset information under IFRS to prepare a comparative year of financial information. HSE is finalizing a system plan including a test plan to address all three requirements.
HSE has completed a review of all new disclosures required under IFRS to identify system and business process changes required. HSE has prepared a draft template for IFRS financial statements and notes. HSE is also working on the transition disclosures and supporting schedules. After the completion of each 2010 Canadian GAAP quarter end, HSE will prepare a set of IFRS compliant financial statements for the same quarters. The purpose of this process is to build the 2010 comparatives required for 2011, identify where additional training of HSE resources may be required, and to test the timelines required to meet 2011 interim and annual reporting deadlines.
As the review of accounting policies is completed, the policies are approved and differences are quantified, appropriate changes to ensure the integrity of internal control over financial reporting and disclosure controls and procedures will be made. The certifying officers plan to complete the design, and initially evaluate the effectiveness of new controls in the third and fourth quarter of 2010 to prepare for certification under IFRS in 2011. The Company will also ensure that its key stakeholders are informed about the anticipated effects of the IFRS transition.
The Company is required to meet various financial covenants included in its credit facility. There is a possibility that these covenants will be affected by required IFRS changes. A clause is included in the credit facility agreement allowing for a period of time to renegotiate affected covenants.
Work to be completed by the end of third quarter
- Formal approvals of recommended accounting policies and IFRS 1
elections by the Steering Committee and Board of Directors.
- Completion of draft template for IFRS financial statements and notes
including reviews and approvals by the Steering Committee, Board of
Directors, and HSE's Auditors.
- Preparation of required transition disclosures and schedules.
- Preparation of January 1, 2010 IFRS balance sheet with quantification
of differences.
- Completion of detailed system plan and testing started.
Most adjustments required on transition to IFRS will be made, retrospectively, against retained earnings on the opening January 1, 2010 balance sheet. However, IFRS 1 First-Time Adoption of International Financial Reporting Standards provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions, in certain areas, to the general requirement for full retrospective application of IFRS. The Company is analyzing the various accounting policy choices and will implement those determined to be the most appropriate in the circumstances. Significant exemptions available to HSE under consideration are:
- An exemption allowing business combinations to be accounted for under
IFRS standards starting at a date of the Company's choosing, rather
than requiring that all acquisitions be restated from inception as
they would have been under IFRS.
- An exemption allowing the Company to apply IFRS accounting for
stock-based compensation on a prospective basis for stock options
granted and unvested prior to transition.
- An exemption allowing an entity to value fixed asset components at
their fair value at the January 1, 2010 opening balance sheet, rather
than retrospectively restating amortization of components and
recording disposals and additions of components that were expensed as
required under Canadian GAAP.
Described below are the high priority areas where changes in accounting policies are expected to impact the Company's consolidated financial statements. The list below should not be regarded as a complete list of changes that will result from HSE's transition to IFRS. It is intended to highlight the areas that we consider most significant, however, an analysis of changes is still in progress and not all decisions have been made where choices of accounting policies are available. The differences described below are those existing based on Canadian GAAP and IFRS as of today.
Property, Plant and Equipment - IAS 16
IAS 16 defines property, plant and equipment as tangible items that are held for use in the production or supply of goods and services, for rental to others, or for administrative purposes, and are expected to be used during more than one year.
IFRS and Canadian GAAP contain the same basic principle for property, plant and equipment; however, there are some differences. IFRS requires that major components of an asset for which different depreciation methods or rates are appropriate to be depreciated separately. Depreciation commences when the asset is available for use where Canadian GAAP begins amortization when the asset is actually put into service. IFRS also permits property, plant and equipment to be measured at fair value or at amortized cost.
As indicated above, IFRS 1 contains an elective exemption where the Company may elect to reset property and equipment, at its fair value on the date of transition, as its new cost basis.
Impairment of Assets - IAS 36
Canadian GAAP impairment testing compares the asset-carrying values with undiscounted future cash flows to determine whether impairment exists. If the carrying amount exceeds the recoverable amount, the carrying value is written down to estimated fair value.
IAS 36 uses a one-step approach for both testing for and measurement of impairment, with carrying values compared directly to the higher of fair value less costs to sell and value in use (calculated using discounted cash flows). This may result in more frequent impairments where carrying values of assets were previously supported under Canadian GAAP on an undiscounted cash-flow basis, but could not be supported under a discounted cash-flow basis.
IAS 36 also contains a requirement to reverse any previous impairment losses where circumstances have changed such that the impairments have reversed. Canadian GAAP prohibits the reversal of impairment losses.
Leases - IAS 17
IAS 17 classifies a lease as either a finance lease or an operating lease. In respect of lessors, there is a subcategory of finance lease for manufacturer or dealer leases.
Both Canadian GAAP and IFRS lease classification depend on whether substantially all the risks and rewards of ownership of a leased asset have been transferred from the lessor to the lessee, and are made at the inception of the lease. A number of indicators are used to assist in lease classification. However, under Canadian GAAP, in practice, the quantitative thresholds included in certain of the indicators are treated as "bright lines" and there are fewer indicators to be considered.
Immediate gain recognition from the sale and leaseback of an asset depends upon whether or not the sale takes place at fair value, and whether the leaseback is classified as an operating lease or finance lease.
Business Risks
The activities the Company undertakes involve a number of risks and uncertainties, some of which are: economic and market events including disruptions in international credit markets and reductions in macroeconomic activity; business cyclicality within the industries in which HSE's customers operate; competitive conditions including pricing pressures; risks of customer credit default; deterioration in the financial condition of financial institutions and insurance companies that HSE deals with; availability of financing at competitive rates; changes in foreign exchange rates and interest rates and litigation and contingencies. Additional risks and uncertainties that the Company may be unaware of, or that were determined to be immaterial may also become important factors that affect the Company. A discussion of the business risks faced by the Company is available in the Management Discussion and Analysis included in the Company's 2009 Annual Report.
Internal Control Over Financial Reporting
Changes in Internal Controls Over Financial Reporting During 2010
There have been no significant changes in the Company's internal control over financial reporting during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Common Shares Outstanding
At August 12, 2010 and December 31, 2009 there were 37,575,675 common shares outstanding. At June 30, 2010, the Company had options outstanding to issue 2,577,497 shares at a weighted-average exercise price of $1.34 per share. Of these options, 1,536,142 were exercisable. On April 5, 2010 an additional 715,000 stock options were granted at an exercise price of $0.49.
At August 12, 2010 there were 2,564,498 options outstanding at a weighted average price of $1.35 per share. Of these options, 1,533,143 were exercisable.
Non-GAAP Measures
This report makes reference to EBITDA, a measure that is not recognized under generally accepted accounting principles. Management believes that, in addition to net earnings, EBITDA is a useful supplementary measure. EBITDA provides investors with an indication of earnings before provisions for interest and bank charges, taxes, amortization, foreign exchange gains or losses, gains or losses on the disposal of property and equipment and the non-cash effect of stock-based compensation expense. Investors should be cautioned that EBITDA should not be construed as an alternative to net earnings determined by GAAP as an indication of the Company's performance. HSE's method of calculating EBITDA may differ from that of other companies and, accordingly, may not be comparable to measures used by other companies.
EBITDA Calculation
-------------------------------------------------------------------------
For the six months ended June 30 2010 2009
-------------------------------------------------------------------------
Net earnings (loss) $ (1,443) $ (3,734)
Add (deduct):
Amortization 2,966 3,431
Stock-based compensation 128 149
Interest and bank charges 258 269
Foreign exchange loss (gain) (6) 11
Gain (loss) on disposal of property and equipment (605) 219
Income tax (456) (1,012)
-------------------------------------------------------------------------
EBITDA $ 842 $ (667)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarterly EBITDA Calculation
-------------------------------------------------------------------------
2010 2009
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Net earnings
(loss) $(1,235) $ (208) $(2,178) $ (722) $(1,928) $(1,806)
Add (deduct):
Amortization 1,396 1,570 1,618 1,650 1,692 1,739
Impairment of
property and
equipment - - 1,641 - - -
Impairment of
goodwill and
intangible
assets - - - - - -
Stock-based
compensation 87 41 43 101 99 50
Interest and
bank charges 140 118 135 140 120 149
Foreign exchange
loss (gain) (1) (5) (8) (3) 12 (1)
Loss on disposal
of property and
equipment (218) (387) 57 35 126 93
Income taxes (549) 93 (812) (185) (572) (440)
-------------------------------------------------------------------------
EBITDA $ (380) $ 1,222 $ 496 $ 1,016 $ (451) $ (216)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------
2008
-------------------------------------
Q4 Q3
-------------------------------------
Net earnings
(loss) $ 431 $ 396
Add (deduct):
Amortization 1,399 1,821
Impairment of
property and
equipment - -
Impairment of
goodwill and
intangible
assets - -
Stock-based
compensation 95 23
Interest and
bank charges 200 288
Foreign exchange
loss (gain) (35) 4
Loss on disposal
of property and
equipment 193 129
Income taxes 430 197
-------------------------------------
EBITDA $ 2,713 $ 2,858
-------------------------------------
-------------------------------------
Forward-Looking Statements
Certain statements in this MD&A constitute forward-looking information and statements (collectively "forward-looking statements") within the meaning of applicable securities laws. These forward-looking statements concern, among other things, the Company's prospects, expected revenues, expenses, profits, financial position, strategic direction and growth initiatives, all of which involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this MD&A, such forward-looking statements use such words as expect, anticipate, estimate, believe, may, will, would, could, might, intend, plan, continue, ongoing, project, objective, should and other similar terms and phrases. This forward-looking information reflects the Company's current expectations regarding future events and operating performance based on assumptions and analyses made by the Company based on its experience and an assessment of current conditions, known trends, expected future developments and other factors which management believe to be appropriate under the circumstances. These forward-looking statements include among others:
- Management believes the factors that caused Industrial health and
safety revenues to decline in Q2 2010 are an anomaly that will be
rectified by an improvement in the economy, client appreciation of
quality services, and the more aggressive marketing campaign to new
clients and industries
- The oilsands and non-conventional thermal recovery market of
northeast Alberta remains a stable market with a combination of
growth opportunities and competitive challenges.
- In the latter half of Q3 and into Q4, indications from clients are
increased demand in the oilsands
- The recession has caused all industries to find ways to be more
efficient. This includes a focus on the core mission of the client
company which is not health and safety. As a result, the overall
trend among clients is they are interested in investigating ways to
become more efficient and profitable. This may include the
outsourcing of non-core activities such as health and safety.
- An important indicator of future activity is permitting of Crown
exploration and development rights or land sales revenue.
- This investment in future development rights by HSE's customers is a
strong signal that the recovery in HSE's Oilfield health and safety
services business in Q2 2010 compared to the same period last year is
sustainable.
- At HSE we have been concerned about the appropriateness of our fire
and shower assets to the switch from gas to oil drilling. However, as
more oil reservoirs are exploited, it is becoming clear that better
production results if certain water-sensitive, oil-bearing zones are
fractured with acid or hydrocarbons. Because of this, HSE has seen
the first major increase in demand for its most capital-intensive
asset class since 2008.
- The Company expects Oilfield activity to continue to ramp up for the
remainder of 2010 and continue into 2011
- The Company anticipates that the positive trend in its US operations
will continue in the remainder of 2010.
- BP's Macondo blowout in the Gulf of Mexico that took place in April
and has only recently been brought under control and could be a
harbinger of positive developments for HSE's Oilfield health and
safety services in the United States.
- It is clear that demand for the Company's products and services in
the large U.S. market will be much greater following the BP incident
than it would have been otherwise.
The forward-looking statements contained in this MD&A reflect several material factors, expectations and assumptions including, without limitation: economic conditions within Canada and the United States, both in general and within specific industries; demand for the Company's services by customers in various industries and geographic locations; pricing levels for the Company's services; commodity prices; foreign currency exchange rates; interest rates; access to financing; the Company's future operating results and financial condition; and competition within particular markets or for particular services.
Forward-looking statements involve significant risks and uncertainties and should not be read as a guarantee of future performance or results, and will not necessarily be an accurate indication of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements including, but not limited to, the factors discussed above and other risk factors discussed herein and listed from time to time in the Company's reports and public disclosure documents including its annual report, annual information form and other filings with securities commissions in Canada as reported under the Company's profile at www.sedar.com.
The Company cautions that the foregoing list of assumptions, risks and uncertainties is not exhaustive. The forward-looking statements contained in this MD&A speak only as of the date of this MD&A, and the Company assumes no obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.
Additional Information
Additional information relating to HSE is available under our profile on the SEDAR website at www.sedar.com and www.hseintegrated.com.
HSE Integrated Ltd.
-------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
(stated in thousands of dollars) (unaudited)
-------------------------------------------------------------------------
June 30, December 31,
2010 2009
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 883 $ 460
Accounts receivable (note 3) 16,041 16,156
Inventory 217 199
Prepaid expenses and other assets 1,439 1,654
Income taxes recoverable 1,095 398
--------------------------
19,675 18,867
Property and equipment 26,906 28,595
Intangible assets 2,996 3,260
--------------------------
$ 49,577 $ 50,722
--------------------------
--------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities $ 5,496 $ 4,667
Income taxes payable 84 72
Current portion of obligation under capital
leases 170 233
Current portion of long-term debt (note 4) 2,114 5,222
Current portion of deferred gain 137 137
--------------------------
8,001 10,331
Deferred gain 250 319
Obligations under capital leases 43 122
Long-term debt (note 4) 3,611 818
Future income taxes 4,035 4,170
--------------------------
15,940 15,760
--------------------------
SHAREHOLDERS' EQUITY
Share capital (note 5) 60,040 60,040
Contributed surplus 4,850 4,755
Deficit (31,213) (29,770)
Accumulated other comprehensive income (loss) (40) (63)
--------------------------
33,637 34,962
--------------------------
$ 49,577 $ 50,722
--------------------------
--------------------------
Contingencies (note 7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
HSE Integrated Ltd.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF LOSS
-------------------------------------------------------------------------
(stated in thousands of dollars) Three months ended Six months ended
(unaudited) June 30 June 30
-------------------------------------------------------------------------
2010 2009 2010 2009
-------------------------------------------------------------------------
REVENUE $ 18,350 19,566 $ 39,257 41,967
----------------------------------------
COSTS
Operating and materials 16,825 18,145 34,551 38,555
Selling, general and
administrative 1,905 1,872 3,864 4,079
Amortization of property and
equipment 1,264 1,554 2,702 3,165
Amortization of intangible
assets 132 138 264 266
Stock-based compensation 87 99 128 149
Interest on long-term debt 101 103 184 234
Other interest and bank charges 39 17 74 35
Foreign exchange (gain) loss (1) 12 (6) 11
(Gain) loss on disposal of
property and equipment (218) 126 (605) 219
----------------------------------------
20,134 22,066 41,156 46,713
----------------------------------------
LOSS BEFORE INCOME TAX (1,784) (2,500) (1,899) (4,746)
----------------------------------------
Income taxes
Current recovery (505) - (314) -
Future reduction (44) (572) (142) (1,012)
----------------------------------------
(549) (572) (456) (1,012)
----------------------------------------
NET LOSS $ (1,235) (1,928) $ (1,443) (3,734)
----------------------------------------
----------------------------------------
Loss per share
Basic and diluted $ (0.03) (0.05) $ (0.04) (0.10)
----------------------------------------
----------------------------------------
Weighted average shares
outstanding
Basic 37,576 37,576 37,576 37,576
Diluted 37,576 37,576 37,576 37,576
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
HSE Integrated Ltd.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
-------------------------------------------------------------------------
(stated in thousands of dollars) Three months ended Six months ended
(unaudited) June 30 June 30
-------------------------------------------------------------------------
2010 2009 2010 2009
-------------------------------------------------------------------------
Net Loss $ (1,235) (1,928) $ (1,443) (3,734)
Unrealized gain (loss) on translating
financial statement of
self-sustaining foreign
operations 58 (43) 23 (85)
----------------------------------------
Comprehensive loss $ (1,177) (1,971) $ (1,420) (3,819)
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-------------------------------------------------------------------------
HSE Integrated Ltd.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
-------------------------------------------------------------------------
(stated in thousands of dollars) Three months ended Six months ended
(unaudited) June 30 June 30
-------------------------------------------------------------------------
2010 2009 2010 2009
-------------------------------------------------------------------------
Deficit, beginning of period $(29,978) (24,942) $(29,770) (23,136)
Net loss (1,235) (1,928) (1,443) (3,734)
----------------------------------------
Deficit, end of period $(31,213) (26,870) $(31,213) (26,870)
----------------------------------------
----------------------------------------
Accumulated other comprehensive
income (loss), beginning of
period $ (98) 82 $ (63) 124
Unrealized gain (loss) on
translating financial statements
of self-sustaining foreign
operations 58 (43) 23 (85)
----------------------------------------
Accumulated other comprehensive
income (loss), end of period $ (40) 39 $ (40) 39
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
HSE Integrated Ltd.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
(stated in thousands of dollars) Three months ended Six months ended
(unaudited) June 30 June 30
-------------------------------------------------------------------------
2010 2009 2010 2009
-------------------------------------------------------------------------
Cash provided by Operations
Net loss $ (1,235) (1,928) $ (1,443) (3,734)
Charges to income not
involving cash:
Amortization 1,396 1,692 2,966 3,431
Stock-based compensation 87 99 128 149
Future income tax reduction (44) (572) (142) (1,012)
(Gain) loss on disposal of
property and equipment (218) 126 (605) 219
Change in non-cash working
capital (note 9) 1,627 5,932 439 6,877
----------------------------------------
Cash provided by operations 1,613 5,349 1,343 5,930
----------------------------------------
----------------------------------------
Financing
Repayment of obligations under
capital leases (70) (318) (143) (669)
Non-revolving term loan
facility 5,000 - 5,000
Repayment of long-term debt (5,370) (67) (5,333) (104)
Amortization of deferred
financing fees 19 - 19 -
----------------------------------------
Cash used in financing activities (421) (385) (457) (773)
----------------------------------------
----------------------------------------
Investing
Purchase of property and
equipment (520) (437) (1,037) (901)
Proceeds from disposal of
property and equipment 133 312 575 521
----------------------------------------
----------------------------------------
Cash used in investing activities (387) (125) (462) (380)
Cash flow from operating, financing
and investing activities 805 4,839 424 4,777
Effect of exchange rate on foreign
currency held 8 23 (1) 32
----------------------------------------
----------------------------------------
Net change in cash and cash
equivalents 813 4,862 423 4,809
Cash and cash equivalents,
beginning of period 70 1,061 460 1,114
----------------------------------------
Cash and cash equivalents, end of
period $ 883 5,923 $ 883 5,923
----------------------------------------
----------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
HSE Integrated Ltd.
Notes to the Consolidated Financial Statements
For the three and six month periods ended June 30, 2010 and 2009
(stated in thousands of dollars) (unaudited)
-------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
These unaudited interim consolidated financial statements of HSE Integrated Ltd. ("HSE" or "the Company") have been prepared following the same accounting policies and methods of computation as the audited annual consolidated financial statements of the Company for the year ended December 31, 2009. 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, 2009.
These unaudited interim consolidated financial statements include the accounts of the Company and its subsidiaries which, with the exception of Boots & Coots HSE Services LLC (note 8), are wholly owned. Unless otherwise specified all amounts are stated in thousands of Canadian dollars except for per-share amounts, which are stated in dollars per weighted-average share.
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). In preparing these consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from these estimates.
HSE's business has two offsetting seasonal components. Revenue for Oilfield health and safety services is historically highest in the first and fourth quarters and lowest in the second quarter because this sector uses equipment that can only access well locations during certain times of the year and because of the effects of weather on field activity. Industrial revenue includes a mix of year-round contracts and "turnarounds" - scheduled major maintenance projects and repair activities on client facilities. These turnarounds tend to be scheduled during the second and third quarters to avoid the possibility of adverse effects from freezing weather. As a result, Industrial revenue tends to be highest in the second and third quarters.
NOTE 2 - CHANGE IN ACCOUNTING Standards
Accounting Standards Pending Adoption
Business Combinations, Consolidated Financial Statements and Non-controlling Interests
In January 2009, the AcSB issued three new recommendations regarding business combinations, consolidated financial statements and non-controlling interests. While these standards are effective for fiscal years beginning on or after January 1, 2011, early adoption is permitted if all three standards are adopted simultaneously. The new standards include:
- Section 1582, which will replace Section 1581, deals with accounting
for business combinations. The new standard harmonizes Canadian
accounting standards with IFRS 3 - Business Combinations. Section
1582 is applicable prospectively to business combinations entered
into after adoption.
- Sections 1601 and 1602 together will replace existing section 1600.
Section 1601 provides standards for the preparation of consolidated
financial statements, while section 1602 provides standards with
respect to accounting for non-controlling interests in subsidiaries.
The new standard harmonizes Canadian accounting standards with
proposed revisions to IAS 27 - Consolidated and Separate Financial
Statements. It makes changes to the circumstances under which the
Company must consolidate an entity, as well as to disclosure
requirements.
The impact of these standards on the Company's financial statements will depend upon the timing and nature of any future acquisitions.
NOTE 3 - FINANCIAL RISK MANAGEMENT
Overview
The Company is exposed to the following risks from its financial instruments:
- credit risk
- liquidity risk
- market risk
The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk-management framework. The Company's Audit Committee oversees how management monitors compliance with the Company's risk-management practices and reviews the adequacy of the risk-management framework in relation to the risks faced by the Company. The Company's risk-management practices are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables from customers.
The Company's accounts receivable are due from customers in a variety of industries including a significant proportion with customers operating in the energy and manufacturing industries. The ability of customers within the energy industry to pay us is partially affected by fluctuations in the price they receive for various hydrocarbon products. The maximum credit exposure associated with trade accounts receivable is the carrying value.
The Company follows a credit policy under which the Company reviews each new customer individually for credit worthiness before the Company's standard payment and delivery terms and conditions are offered. The Company's review includes external ratings, where available, and trade references. Customers that fail to meet the Company's credit worthiness criteria may transact with the Company only on a prepayment basis. On an ongoing basis, the Company also reviews the payment patterns of its existing customers and the customers' continued credit worthiness.
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance by reviewing individual accounts past due for collectability, historical write-off experience, and overall account aging. The Company reviews its allowance for doubtful accounts on an ongoing basis, but at least monthly.
--------------------------------------------------------------------
June 30, December 31,
2010 2009
--------------------------------------------------------------------
Trade accounts receivable $ 17,282 $ 17,416
Allowance for doubtful accounts (1,241) (1,260)
--------------------------
Total trade accounts receivable $ 16,041 $ 16,156
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--------------------------------------------------------------------
The aging of trade receivables from the invoice date is as follows:
-------------------------------------------------------------------------
June 30, December 31,
2010 2009
-------------------------------------------------------------------------
Past due: Gross Allowance Gross Allowance
----------------------------------------
0 - 30 days (current) $ 10,590 $ - $ 7,938 $ -
31 - 60 days 2,733 - 5,135 3
61 - 120 days 3,247 529 3,433 347
More than 120 days 712 712 910 910
----------------------------------------
Total $ 17,282 $ 1,241 $ 17,416 $ 1,260
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The movement in the allowance for doubtful accounts receivables in respect of trade receivables during the period is as follows:
--------------------------------------------------------------------
2010 2009
--------------------------------------------------------------------
Balance, April 1 $ 1,255 $ 1,490
Bad-debt provision - 106
Write-offs net of recoveries (14) (386)
--------------------------
Balance, June 30 $ 1,241 $ 1,210
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Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company requires liquidity to meet financial obligations as they come due and to fund our investing activities.
The Company's contractual financial liabilities include interest payments, trade and other payables, income taxes payable, a revolving operating line of credit margined to accounts receivable and property and equipment and capital leases for equipment (note 4).
The Company's approach to managing liquidity is to ensure, to the extent possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and distressed conditions, without unacceptable losses or risking damage to the Company's reputation. The Company generally relies on operating cash flow to provide liquidity to meet its financial obligations. As well, the Company had access to undrawn operating lines of credit of $10.0 million and cash on hand of $0.9 million at June 30, 2010.
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company's income.
HSE is exposed to currency risk on U.S.-dollar denominated financial assets and liabilities. The Company adjusts the reported amounts of foreign-currency denominated financial assets and liabilities to their Canadian-dollar equivalent at each balance sheet date. For amounts held directly by the Company, any related foreign exchange gains and/or losses are recognized in the consolidated statement of earnings. For amounts held by the Company's self-sustaining foreign operations, the amount is included in other comprehensive income. At June 30, 2010, the extent of this exposure was not material.
HSE is exposed to interest rate risk on its prime-based revolving operating facility. Based on amounts outstanding at June 30, 2010, a 1% increase in the average prime interest rate for the year would cost the Company $45 annually in additional interest expense.
NOTE 4 - OPERATING FACILITIES AND LONG-TERM DEBT
On April 27, 2010 the Company entered into a $15,000 credit facility with a regional financial institution. The facility consists of a $10,000 operating revolving loan facility for general operating purposes and a $5,000 non-revolving reducing loan facility. The two facilities were used to retire the $5,300 existing bank debt.
The $5,000 non-revolving term facility is repayable in monthly payments of $109 starting July 1, 2010. The facility is payable in full 48 months after initial drawdown. The operating facility is renewable annually and is margined to accounts receivable. Both facilities bear interest at prime plus a fixed percentage. A standby fee is also required on any unused portion of the operating facility. Both facilities are subject to certain covenants including a working capital covenant, a debt to equity covenant, a fixed charge coverage ratio and other positive and negative covenants. The facilities are collateralized under a general security agreement and include accounts receivable and property and equipment.
As at June 30, 2010, the Company was in default of the fixed charge coverage covenant which gave the regional financial institution the right to demand immediate repayment of the loan facility. The default was remedied with a covenant waiver received August 4, 2010, prior to the financial statements being completed. The financial institution waived the covenant for the periods June 30, September 30 and December 31, 2010 conditional upon the Company being compliant with all covenants on March 31, 2011. As at June 30, 2010, the total outstanding on the loan facility was $5,000 of which $1,304 was current. The fixed charge coverage covenant is the ratio of earnings before interest, taxes, depreciation and amortization less capital expenditures to interest and principal repayments.
Deferred financing costs associated with the financing facilities have been shown as a reduction in the carrying value of the long-term debt and are being expensed over the term of the debt based on the effective interest rate method.
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June 30 December 31
2010 2009
-------------------------------------------------------------------------
Equipment financing contracts $ - $ 33
Non-revolving term loan facility 5,000 5,300
--------------------------
5,000 5,333
Accrued consideration on share-purchase
acquisition 810 810
--------------------------
5,810 6,143
Less unamortized debt-issue costs (85) (103)
Less current portion (2,114) (5,222)
--------------------------
$ 3,611 $ 818
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Outstanding principal repayments are due as follows:
-----------------------------------------------------------
Years ended June 30
-----------------------------------------------------------
2011 $ 2,114
2012 1,304
2013 1,304
2014 1,088
------------
5,810
Less: current portion and unamortized debt-issue
costs (2,199)
------------
$ 3,611
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NOTE 5 - SHARE CAPITAL AND STOCK-BASED COMPENSATION PLANS
At June 30, 2010 there were 37,575,675 common shares of the Company outstanding (December 31, 2009 - 37,575,675).
At June 30, 2010, the Company had options outstanding to issue 2,577,497 shares (December 31, 2009 - 2,375,333) at a weighted average price of $1.34 per share (December 31, 2009 - $1.56). Of these options, 1,536,142 were exercisable (December 31, 2009 - 1,360,315).
Incentive stock option plan
The weighted average fair value of options issued for the quarter ended June 30, 2010 was $0.38 (2009 - $0.26). The fair value of each option granted was estimated on the date of grant using the Merton Black-Scholes option-pricing model with the following assumptions:
--------------------------------------------------------------------
June 30, December 31,
2010 2009
--------------------------------------------------------------------
Vesting period (years) 3 3
Risk-free interest rate 2.60% 1.69%
Expected life (years) 5 5
Price volatility 100.74% 92.78%
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--------------------------------------------------------------------
Pursuant to the stock-option plan, a maximum of 10% of the issued and outstanding common shares of the Company are reserved from time to time for issuance to eligible participants. The directors determine option prices and vesting terms at the time of granting at an exercise price based on the volume weighted average price for the five trading days immediately preceding the grant date. The term of options granted does not exceed five years.
Information about outstanding stock options is as follows:
-------------------------------------------------------------------------
June 30, 2010 December 31, 2009
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
--------------------------------------------
Outstanding, beginning of
year 2,375,333 $ 1.56 2,533,499 $ 1.88
Granted 715,000 0.49 650,000 0.36
Exercised - - -
Forfeited (512,836) 1.14 (808,166) 1.62
--------------------------------------------
Outstanding, end of period 2,577,497 $ 1.34 2,375,333 $ 1.56
--------------------------------------------
Exercisable at end of period 1,536,142 $ 1.91 1,360,315 $ 2.18
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-------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at June 30, 2010:
-------------------------------------------------------
Weighted
Average
Options Exercise Remaining Number
Outstanding Prices ($) Life Exercisable
-------------------------------------------------------
1,534,164 0.25 - 1.19 3.92 494,142
427,833 1.20 - 2.14 1.62 426,500
245,500 2.15 - 3.09 0.60 245,500
370,000 3.10 - 4.04 0.78 370,000
-------------------------------------------------------
2,577,497 1.34 2.77 1,536,142
-------------------------------------------------------
-------------------------------------------------------
Deferred share unit plan
For the 2010 and 2009 years, the directors' retainers and meeting fees are being paid with deferred share units (DSU's). The total DSU's outstanding at June 30, 2010 were 325,601. On April 5, 2010, 103,263 DSU's were granted and on May 21, 2010 an additional 26,896 DSU's were granted. The units are re-valued quarterly and any change in value is included as an increase or decrease in stock based compensation expense and accrued liabilities. The expense recognized for the quarter ended June 30, 2010 was $41 (quarter ended June 30, 2009 - $43)
NOTE 6 - RELATED-PARTY TRANSACTIONS
During the quarter, the Company had the following transactions with related parties, all of which are measured at exchange amounts.
- In the second quarter, the Company paid rent and property taxes of
$105 (2009 - $103) for a regional office to a corporation related to
a Director of the Company.
- In the second quarter, the Company also paid rent of $78 (2009 - $74)
for a regional office to a corporation controlled by a Senior Manager
of the Company.
- In the second quarter, the Company paid $85 (2009 - $0) for supplies
and commissions to a corporation related to a Director of the
Company pursuant to an agreement that pre-dates the directorship.
NOTE 7 - 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.
NOTE 8 - SEGMENT INFORMATION
The Company operates in two main geographic areas: Canada and the United States (U.S.). Each geographic area has a President responsible for the operations and strategy of his area's business. Personnel working within a particular region report to the President, and the President reports to the Chief Executive Officer.
Within each geographic segment, the Company uses common resources to provide services to a variety of customer industries. The Company groups these customer industries into two categories. "Oilfield" services are provided to customers in the conventional upstream, or "wellhead", sector of the oil and gas industry. "Industrial" services are provided to customers in a variety of other industries including: non-conventional upstream oil development and production (including oilsands extraction); oil and gas processing; petrochemicals; pulp and paper; utilities; power generation; and manufacturing. It also includes worker safety training and safety management services.
Corporate division expenses consist of salary expenses, stock compensation, and office costs related to corporate employees, as well as public company costs.
For the three months ended June 30, 2010, no one customer provided more than 10% of the Company's revenue (June 30, 2009 - one customer). During the three months ended June 30, 2009, the Company had sales of approximately 2.4 million to this customer.
On May 7, 2008, a new company called Boots & Coots HSE Services LLC ("BCHSE") was incorporated to pursue the expansion of Oilfield safety services in the continental United States. The Company owns 100% of the shares of HSE Integrated Inc. ("INC") a Delaware corporation that in turn owns a 90% interest in BCHSE, a Delaware Limited Liability Company. Boots & Coots Services, Inc. owns the remaining 10% interest. A non-controlling interest has not been recorded as BCHSE has incurred losses to date.
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Three months ended June 30
-------------------------------------------------------------------------
Canada U.S.
--------------------------------------------
2010 2009 2010 2009
--------------------------------------------
Revenue
Oilfield $ 6,027 $ 4,226 397 91
Industrial 11,435 15,130 491 119
--------------------------------------------
Total revenue $ 17,462 $ 19,356 $ 888 $ 210
--------------------------------------------
Operating income (loss)(1) 1,260 1,671 265 (250)
Interest expense - - - -
Amortization of property and
equipment and intangibles 1,372 1,669 24 23
Property and equipment 25,616 31,829 1,290 1,213
Intangibles 2,996 3,522 - -
Capital expenditures(2) 316 402 204 35
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Three months ended June 30
-------------------------------------------------------------------------
Corporate Total
--------------------------------------------
2010 2009 2010 2009
--------------------------------------------
Revenue
Oilfield - - $ 6,424 $ 4,317
Industrial - - 11,926 15,249
--------------------------------------------
Total revenue - - $ 18,350 $ 19,566
--------------------------------------------
Operating income (loss)(1) (1,905) (1,872) (380) (451)
Interest expense 140 120 140 120
Amortization of property and
equipment and intangibles - - 1,396 1,692
Property and equipment - - 26,906 33,042
Intangibles - - 2,996 3,522
Capital expenditures(2) - - 520 437
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-------------------------------------------------------------------------
(1) Operating income (loss) is defined as net income (loss) before
amortization of property and equipment and intangibles, interest,
foreign exchange gains or losses, gains or losses on disposal of
capital assets, share-based compensation, and income taxes.
(2) Property and equipment for Corporate is included in Canada.
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Six months ended June 30
-------------------------------------------------------------------------
Canada U.S.
--------------------------------------------
2010 2009 2010 2009
--------------------------------------------
Revenue
Oilfield $ 14,821 $ 14,468 $ 586 $ 109
Industrial 22,951 26,998 899 392
--------------------------------------------
Total revenue $ 37,772 $ 41,466 $ 1,485 $ 501
--------------------------------------------
Operating income (loss)(1) 4,395 4,024 311 (612)
Interest expense - - - -
Amortization of property and
equipment and intangibles 2,919 3,388 47 43
Property and equipment 25,616 31,829 1,290 1,213
Intangibles 2,996 3,522 - -
Capital expenditures(2),(3) 774 615 263 286
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-------------------------------------------------------------------------
Six months ended June 30
-------------------------------------------------------------------------
Corporate Total
--------------------------------------------
2010 2009 2010 2009
--------------------------------------------
Revenue
Oilfield - - $ 15,407 $ 14,577
Industrial - - 23,850 27,390
--------------------------------------------
Total revenue - - $ 39,257 $ 41,967
--------------------------------------------
Operating income (loss)(1) (3,864) (4,079) 842 (667)
Interest expense 258 269 258 269
Amortization of property and
equipment and intangibles - - 2,966 3,431
Property and equipment - - 26,906 33,042
Intangibles - - 2,996 3,522
Capital expenditures(2),(3) - - 1,037 901
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-------------------------------------------------------------------------
(1) Operating income (loss) is defined as net income (loss) before
amortization of property and equipment and intangibles, interest,
foreign exchange gains or losses, gains or losses on disposal of
capital assets, share-based compensation, and income taxes.
(2) Property and equipment for Corporate is included in Canada.
(3) $197 in property and equipment was transferred from Canada to the
U.S. year-to-date June 30, 2009.
NOTE 9 - SUPPLEMENTARY CASH FLOW INFORMATION
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Three months ended Six months ended
June 30 June 30
-------------------------------------------------------------------------
2010 2009 2010 2009
-------------------------------------------------------------------------
Changes in non-cash working
capital from operations:
Accounts receivable $ 2,183 6,795 $ 135 9,084
Inventory (4) (8) (18) (19)
Prepaid expenses and other
assets 181 143 222 552
Accounts payable and
accrued liabilities 125 (995) 784 (2,978)
Income tax payable
(recoverable) (858) (3) (684) 238
--------------------------------------------
Net change $ 1,627 5,932 $ 439 6,877
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For further information: HSE Integrated Ltd., David Yager, Chairman & CEO, Telephone: (403) 266-1833, E-Mail: [email protected]; Lori McLeod-Hill, CFO, Telephone: (403) 266-1833, E-Mail: [email protected]
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