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Strad Announces Second Quarter Results and Increases Capital Budget


 

 

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Strad Inc.

CALGARY, Alberta, Aug. 01, 2019 (GLOBE NEWSWIRE) —

NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES (“U.S.”)

The news release contains “forward-looking information and statements” within the meaning of applicable securities laws. For full disclosure of the forward-looking information and statements and the risks to which they are subject, see the “Cautionary Statement Regarding Forward-Looking Information and Statements” later in this news release.

Strad Inc., (formerly “Strad Energy Services Ltd.”), today announced its financial results for the three and six months ended June 30, 2019. All amounts are stated in Canadian dollars unless otherwise noted.

SECOND QUARTER SELECTED FINANCIAL AND OPERATIONAL HIGHLIGHTS:

  • Revenue decreased 5% to $26.7 million as compared to $28.0 million for the same period in 2018;
  • Revenue for Industrial Matting in Canada was $10.1 million, down 3% and in the United States (“U.S.“) was $6.2 million, up 33% compared with the prior quarter;
  • EBITDA(1) increased 20% to $5.8 million as compared to $4.8 million for the same period in 2018. EBITDA increased in part due to a $1.5 million improvement in Industrial Matting EBITDA. This was partially offset by a decline in Equipment Rentals EBITDA of $0.4 million;
  • Net loss for the second quarter was $(1.7) million compared to net income of $3.9 million for the same period in 2018;
  • Capital additions totaled $10.6 million and was deployed to grow and maintain the Company’s Industrial Matting fleet to meet the expected demand in Canada and the U.S.;
  • Grew the Industrial Matting fleet by 7% to 126,660 mats in the quarter;
  • Reduced funded debt(2) by 47% to $7.5 million at June 30, 2019, compared to $14.0 million at December 31, 2018. Funded debt(2) to covenant EBITDA(3) ratio was 0.3 : 1.0 at June 30, 2019;
  • Purchased and canceled 81,126 common shares under the current normal course issuer bid (“NCIB“); and
  • Subsequent to period end, the Board approved a $9.0 million increase in the 2019 capital program, bringing total approved capital to $35.0 million for the year.
Notes:
(1) Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad’s use of such a term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
(2) Funded debt includes bank indebtedness plus long-term debt less cash.
(3) Covenant EBITDA, as defined in the Company’s credit facility agreement, is based on trailing twelve month EBITDA plus share based payments, plus additional one-time charges, less right of use asset amortization, less interest expense associated with leases.

“Our second quarter results demonstrated the opportunity for our Industrial Matting division. Our U.S. revenue increased 33% quarter over quarter and 38% on a year to date basis, signaling the significant opportunity we see in the U.S. market. In Canada, we were awarded three matting projects of meaningful size which are expected to begin later in the third quarter and continue throughout the rest of 2019,” said Andy Pernal, President and CEO of Strad. “In the first six months of 2019, we advanced our goal to grow our matting fleet to 180,000 units by 2021 by deploying $16.9 million to maintain and increase our fleet with $5.9 million focused directly on our U.S. fleet. To date, the Board of Directors have approved $35.0 million capital program for 2019.”

“The second quarter continued to highlight our Industrial Matting business with an 8% increase in revenue over the prior year. In the quarter, we benefited from the increased duration of the North Montney Mainline project, increased activity in the U.S., and the adoption of IFRS 16 resulting in a 31% increase in EBITDA for the Industrial Matting division. This increase was offset by a 29% reduction in Canadian revenue from Equipment Rentals, which impacted our profitability for the quarter,” said Michael Donovan, CFO of Strad. “With our available cash flow from the quarter we invested in our matting fleet, made payments on our long-term debt, and bought back shares through our NCIB.”

SECOND QUARTER FINANCIAL HIGHLIGHTS

Three months ended June 30, 2019
Industrial
Matting
Equipment
Rentals
Corporate Total
($000’s)
Revenue 16,315 10,361 26,676
Operating expenses 8,669 7,958 16,627
Selling, general and administration 1,400 1,903 989 4,292
Share based payments 20 29 2 51
Gain on the disposal of property, plant and equipment (19 ) (19 )
Gain on foreign exchange (22 ) (36 ) (58 )
EBITDA(1)(2) 6,248 526 (991 ) 5,783
Depreciation and amortization 5,437 3,415 145 8,997
EBIT(3) 811 (2,889 ) (1,136 ) (3,214 )
Interest expense 310 310
Income tax recovery (1,820 ) (1,820 )
Net loss 374 (1,704 )
Equipment Fleet:
Matting fleet at period end 126,660 126,660
Average matting fleet 124,040 124,040
Equipment fleet at period end 5,920 5,920
Average Equipment fleet 5,910 5,910
Three months ended June 30, 2018
Industrial
Matting
Equipment
Rentals
Corporate Total
($000’s)
Revenue 15,136 12,899 28,035
Operating expenses 9,379 10,623 20,002
Selling, general and administration 1,242 1,659 892 3,793
Share based payments 33 47 15 95
Gain on the disposal of property, plant and equipment (310 ) (413 ) (6 ) (729 )
Loss (gain)  on foreign exchange 22 32 (10 ) 44
EBITDA(1,2) 4,770 951 (891 ) 4,830
Depreciation and amortization 1,269 3,901 70 5,240
EBIT(3) 3,501 (2,950 ) (961 ) (410 )
Interest expense 157 157
Income tax recovery (4,428 ) (4,428 )
Net income 3,310 3,861
Equipment Fleet:
Matting fleet at period end 92,200 92,200
Average matting fleet 88,100 88,100
Equipment fleet at period end 6,100 6,100
Average Equipment fleet 6,100 6,100
Notes:
(1) Earnings before interest, taxes, depreciation and amortization (“ EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad’s use of such term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
(2) The current period results include impacts from the adoption of IFRS 16 “Leases”, which was adopted by the Company on January 1, 2019. These impacts are discussed in further detail in the “New Accounting Standards” section of the Management’s Discussion and Analysis. Comparative information has not been restated, and therefore, may not be comparable.
(3) Earnings (loss) before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”. 
Six months ended June 30, 2019
Industrial
Matting
Equipment
Rentals
Corporate Total
($000’s)
Revenue $ 34,060 $ 23,496 $ $ 57,556
Operating expenses 17,486 16,702 34,188
Selling, general and administration 2,772 3,802 1,854 8,428
Share based payments 54 70 16 140
Gain on the disposal of property, plant and equipment (47 ) (85 ) (132 )
Gain on foreign exchange (18 ) (29 ) (47 )
EBITDA(1,2) 13,813 3,036 (1,870 ) 14,979
Depreciation and amortization 8,822 7,035 291 16,148
EBIT(3) 4,991 (3,999 ) (2,161 ) (1,169 )
Interest expense 661 661
Income tax recovery (1,688 ) (1,688 )
Net loss (1,134 ) (142 )
Equipment Fleet:
Matting fleet at period end 126,600 126,600
Average matting fleet 120,600 120,600
Equipment fleet at period end 5,920 5,920
Average Equipment fleet 5,980 5,980
Six months ended June 30, 2018
Industrial
Matting
Equipment
Rentals
Corporate Total
($000’s)
Revenue $ 25,602 $ 30,797 $ $ 56,399
Operating expenses 15,552 23,459 39,011
Selling, general and administration 2,438 3,261 1,850 7,549
Share based payments 61 87 30 178
Gain on the disposal of property, plant and equipment (193 ) (276 ) (8 ) (477 )
Loss (gain) loss on foreign exchange 22 33 (10 ) 45
EBITDA(1,2) 7,722 4,233 (1,862 ) 10,093
Depreciation and amortization 2,596 7,935 141 10,672
EBIT(3) 5,126 (3,702 ) (2,003 ) (579 )
Interest expense 347 347
Income tax recovery (4,390 ) (4,390 )
Net income 2,040 3,464
Equipment Fleet:
Matting fleet at period end 92,200 92,200
Average matting fleet 87,200 87,200
Equipment fleet at period end 6,100 6,100
Average Equipment fleet 6,100 6,100
Notes:
(1) Earnings before interest, taxes, depreciation and amortization (“ EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad’s use of such term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
(2) The current period results include impacts from the adoption of IFRS 16 “Leases”, which was adopted by the Company on January 1, 2019. These impacts are discussed in further detail in the “New Accounting Standards” section of the Management’s Discussion and Analysis. Comparative information has not been restated, and therefore, may not be comparable.
(3) Earnings (loss) before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”.

FINANCIAL POSITION AND RATIOS

($000’s except ratios) As at June 30, 2019 As at December 31, 2018
Working capital(1) 6,057 19,333
Funded debt(2) 7,451 14,009
Total assets 172,990 175,477
Funded debt to EBITDA(3) 0.3 : 1.0 0.5 : 1.0
Notes:
(1) Working capital is calculated as current assets less current liabilities.
(2) Funded debt includes bank indebtedness plus long-term debt less cash.
(3) EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus severance and transaction costs.

SECOND QUARTER RESULTS

Strad reported a decrease in revenue of 5% and an increase in EBITDA of 20%, respectively during the three months ended June 30, 2019, compared to the same period in 2018. During the three months ended June 30, 2019, the Industrial Matting segment EBITDA improved by 31% to $6.2 million as compared to $4.8 million for the same period of 2018. Contributing to the improvement was the impact of $0.6 million from the adoption of IFRS 16. This was offset by a decline in EBITDA for the three months ended June 30, 2019 in the Equipment Rentals segment by 45% to $0.5 million from $1.0 million. Equipment Rentals EBITDA included a $0.8 million benefit from the adoption of IFRS 16. During the three months ended June 30, 2019, Strad reported net loss of $1.7 million compared to net income of $3.9 million in 2018.

For the three months ended June 30, 2019, Strad’s Industrial Matting segment reported an increase in revenue and EBITDA of 8% and 31% as compared to the same period in 2018. The increase in revenue was a result of multiple matting projects that occurred in the U.S. throughout the quarter, as well as significant growth in the average U.S. matting fleet, as compared to the same period of 2018. Earnings before interest and taxes (“EBIT“) from Industrial Matting decreased to $0.8 million for the three months ended June 30, 2019 from $3.5 million for the same period of 2018. The decrease in EBIT is primarily the result of the increase in depreciation for the three months ended June 30, 2019, due to $2.1 million of accelerated depreciation related to capital assets with no remaining useful lives, which did not occur during the same period of 2018. Further impacting the decrease in EBIT was depreciation of $0.5 million related to the adoption of IFRS 16.

Strad’s Equipment Rentals segment reported a decrease in revenue and EBITDA of 20% and 45%, respectively, during the three months ended June 30, 2019, as compared to the same period in 2018. The decrease in revenue was driven primarily by lower rig activity and average customer pricing in Canada. This was offset by slightly higher rig activity in the Bakken and the Rockies regions and a 15% improvement in average customer pricing in the U.S. for the three months ended June 30, 2019.

For the three months ended June 30, 2019, capital expenditures were $10.4 million in Industrial Matting and $0.2 million in Equipment Rentals. The majority of the capital additions were related to wood matting additions, which were acquired to prepare for and to support industrial matting projects that are planned for 2019.

OUTLOOK

We believe strongly in the opportunities presented in both Canada and the U.S. for our Industrial Matting segment. In the second quarter, we were awarded three matting projects of meaningful size in Canada which are expected to begin in late third quarter and continue throughout the fourth quarter of 2019. Formal approval of both the Trans Mountain pipeline expansion and the LNG Canada project, and associated Coastal GasLink project, will continue to provide significant opportunity for the Industrial Matting segment in late 2019 and subsequent years. The federal government anticipates the Trans Mountain pipeline expansion project to begin during the summer of 2019. The Coastal GasLink project is progressing with construction planning and preliminary work activities across northern British Columbia  preparing workforce accommodation sites and beginning right-of-way clearing in preparation for construction in mid to late 2019. Despite opposition to all of these projects, the federal government and the organizations responsible for those pipelines have committed to advancing the projects and maintaining the construction schedule.

In order to prepare for the opportunities ahead of us, we deployed $16.9 million of capital in the first six months of 2019, of which $5.9 million was committed towards opportunities in the U.S. This is consistent with our strategy to grow the matting fleet to 180,000 by 2021. In addition to prospects in Canada, we continue to bid on matting projects in the U.S. market. The Board of Directors has approved $35.0 million of capital spending in 2019, up from $26.0 million previously reported and we expect approximately half of this capital program to be deployed in the U.S. market. With increasing environmental responsibility and regulation throughout North America, we expect the overall matting market to increase as we also look to increase our market share. The Company also generated $4.1 million from the sale of matting capital assets as of June 30, 2019 to partially fund the 2019 capital program.

During the quarter, the United Conservative Party won the Provincial election in Alberta and formed a majority government. The party’s platform is pro-business and includes many reforms aimed at increasing capital investment in businesses based in Alberta. These reforms include a proposed reduction in the Provincial corporate tax rate to 8%, pursuing all possible pipeline projects and alternatives to get Alberta oil products to market and creating a job creation tax cut for employers.

Despite these positive developments and opportunities for the matting segment, the energy sector still faces several challenges. The Senate passed Bill C-69 and C-48, bills that amend the environmental assessment process and ban tanker traffic off the Coast of British Columbia. Each of these bills could have a profound impact on the energy industry and the Alberta government has vowed to challenge the bills. This legislation could result in further stagnated approval processes and delayed pipelines that are necessary to access new markets. Should new pipelines begin construction during 2019, the economic impact may still not be felt for several years.

In Canada, we see challenging times ahead for the Equipment Rentals business. Second quarter rig counts were down approximately 21% year-over-year in Canada and the forecast for the remainder of the year places 2019 estimates only marginally ahead of historic lows experienced in 2016. Beginning in the first quarter and continuing throughout the second quarter, we moved equipment from Canada to regions in the U.S. experiencing higher demand. Year to date, we have moved approximately $3.6 million net book value of equipment to the U.S., including the Permian Basin in West Texas. We will continue to be opportunistic with our equipment rentals fleet, deploying equipment in the U.S. where possible. The outlook for the U.S. Equipment Rentals business remains consistent with 2018. The business environment remains strong with low corporate tax rates and relatively stable West Texas Intermediate (“WTI”) pricing.

On November 26, 2018, the Company obtained approval from the Toronto Stock Exchange to renew the normal course issuer bid until November 27, 2019, with the number of common shares the Company can buy back limited to a maximum of 4,067,205 common shares. Under the previous NCIB, which ended on September 9, 2018, the Company purchased and canceled 2,768,320 common shares. Since the inception of the renewed NCIB, the Company has purchased 563,047 common shares.

While we remain committed to our objective of increasing our matting fleet, our strong cash flow generation and minimal debt balance continue to provide the flexibility to evaluate many alternatives to create shareholder value.

RESULTS OF OPERATIONS

Industrial Matting

Three months ended June 30,
Six months ended June 30,
($000’s) 2019
2018
% 2019 2018 %
Canadian revenue $ 10,134 $ 10,474 (3 )% 23,436 17,895 31 %
U.S. revenue 6,181 4,662 33 % 10,624 7,707 38 %
Total Revenue 16,315 15,136 8 % 34,060 25,602 33 %
EBITDA(1)(2) 6,248 4,770 31 % 13,813 7,722 79 %
EBITDA as a percentage of revenue 38 % 32 % 41 % 30 %
EBIT(3) 811 3,501 (77 )% 4,991 5,126 (3 )%
EBIT as a percentage of revenue 5 % 23 % 15 % 20 %
Capital expenditures(4) 10,352 5,304 95 % 16,937 9,254 83 %
Property, plant and equipment 69,301 49,396 40 % 69,301 49,396 40 %
Equipment Fleet:
Matting fleet at period end(5) 126,660 92,200 37 % 126,600 92,200 37 %
Average matting fleet(6) 124,040 88,100 41 % 120,600 87,200 38 %
Average utilization %(7) 30 % 31 % 33 % 29 %
Notes:
(1) Earnings before interest, taxes, depreciation and amortization (“ EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad’s use of such term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
(2) The current period results include impacts from the adoption of IFRS 16 “Leases”, which was adopted by the Company on January 1, 2019. These impacts are discussed in further detail in the “New Accounting Standards” section of the Management’s Discussion and Analysis. Comparative information has not been restated, and therefore, may not be comparable.
(3) Earnings (loss) before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
(4) Includes purchases of intangible assets.
(5) Matting fleet balances are as at June 30, 2019 and 2018. 
(6) Matting fleet balances are averages for the three and six months ended June 30, 2019 and 2018.
(7) Utilization includes matting on rent only and is calculated using gross asset value.

Revenue for the three months ended June 30, 2019, of $16.3 million increased 8% compared to $15.1 million during the same period of 2018. Increased revenue was driven by the 33% increase in U.S. revenue due to the timing of industrial matting projects that occurred during the three months ended June 30, 2019, in comparison to the same quarter of 2018. The increase in U.S. revenue was further impacted by an increase in average utilization to 42% from 32% as well as an increase in average customer pricing by 27%. This was offset by a decrease in Canadian revenue by 3% resulting from a decrease in average utilization to 21% from 29% for the three months ended June 30, 2019, as compared to the same period in 2018. Average Canadian pricing also decreased by 11%, further contributing to the decrease in Canadian revenue.

For the three months ended June 30, 2019, Strad’s average matting fleet increased to 124,040 mats compared to 88,100 mats for the same period of 2018, to meet the expected increase in customer demand as part of the Company’s plan to grow the matting fleet to 180,000 mats by late 2021.

EBITDA for the three months ended June 30, 2019, increased 31% to $6.2 million as compared to $4.8 million during the three months ended June 30, 2018. EBITDA as a percentage of revenue was 38% for the three months ended June 30, 2019, compared to 32% for the same period of 2018. The increase in EBITDA was driven primarily by increased U.S. revenue and a $0.6 million reduction in operating expenses due to the adoption of IFRS 16.

For the three months ended June 30, 2019, EBIT decreased to $0.8 million compared to $3.5 million during the same period of 2018. The primary driver for the decrease in EBIT was due to the accelerated depreciation of $2.1 million of capital assets with no remaining useful lives, which did not occur in the same period of 2018. Further impacting the decrease in EBIT was depreciation of $0.5 million related to the adoption of IFRS 16.

Revenue for the six months ended June 30, 2019, increased 33% to $34.1 million from $25.6 million for the same period in 2018. The primary increase in Canadian revenue year-over-year is due to timing of a large scale matting project which began in the fourth quarter of 2018 and carried through to the beginning of the second quarter of 2019, leading to a slight increase in Canadian utilization to 28% from 27%. This was offset by a 2% decrease in average Canadian pricing year-over-year due to the mix of projects. In the U.S., revenue increased 38% to $10.6 million, compared to $7.7 million during the same period in 2018, which was driven by a higher U.S. average fleet and an increase in utilization to 39% from 30%. Further impacting U.S. revenue was a 21% increase in pricing year-over-year.

During the six months ended June 30, 2019, EBITDA increased 79% to $13.8 million compared to $7.7 million during the same period of 2018. The increase in EBITDA is primarily due to the increase in revenue year-over-year and a $1.1 million reduction of operating expenses due to the adoption of IFRS 16.

EBIT for the six months ended June 30, 2019, decreased 3% to $5.0 million as compared to $5.1 million for the same period in 2019. The decrease in EBIT is primarily driven by the accelerated depreciation of $2.6 million of capital assets with no remaining useful life, as well as depreciation of $1.1 million related to the adoption of IFRS 16, which did not occur in the same period of 2018.

Operating expenses for the three and six months ended June 30, 2019, decreased 8% and increased 12%, respectively, to $8.7 million and $17.5 million as compared to $9.4 million and $15.6 million during the same period of 2018. The decrease in operating expenses for the three months ended June 30, 2019 was primarily due to the adoption of IFRS 16, that resulted in decreased rent and lease payments of $0.6 million. The increase in operating expenses for the six months ended June 30, 2019 was due to increased costs of goods sold related to damaged mats sold to a customer during the second quarter, as compared to the same period in 2018. This was offset by the adoption of IFRS 16, which led to changes in lease accounting resulting in decreased rent and lease related expenses of $1.1 million.

Equipment Rentals

Three months ended June 30, Six months ended June 30,
($000’s) 2019 2018 % 2019 2018 %
Canadian revenue 4,838 6,776 (29 )% 11,892 19,020 (37 )%
U.S. revenue 5,523 6,123 (10 %) 11,604 11,777 (1 %)
Total Revenue 10,361 12,899 (20 )% 23,496 30,797 (24 %)
EBITDA(1)(2) 526 951 (45 )% 3,036 4,233 (28 )%
EBITDA as a percentage of revenue 5 % 7 % 13 % 14 %
EBIT (3) (2,889 ) (2,950 ) nm (3,999 ) (3,702 ) nm
EBIT as a percentage of revenue (28 )% (23 )% (17 )% (12 )%
Capital expenditures(4) 184 587 (69 )% 184 986 (81 )%
Property, plant and equipment 64,710 89,502 (28 )% 64,710 89,502 (28 )%
Equipment Fleet:
Equipment fleet at period end(5) 5,920 6,100 (3 )% 5,920 6,100 (3 )%
Average equipment fleet(6) 5,910 6,100 (3 %) 5,980 6,100 (2 )%
Average utilization %(7) 34 % 32 % 34 % 36 %
Rig Counts(8)
Western Canada 81 103 (21 )% 132 187 (29 )%
Bakken 58 56 4 % 57 52 10 %
Marcellus 79 79 % 79 78 1 %
Rockies 71 65 9 % 74 68 9 %
Notes:
(1) Earnings before interest, taxes, depreciation and amortization (“ EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad’s use of such term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
(2) The current period results include impacts from the adoption of IFRS 16 “Leases”, which was adopted by the Company on January 1, 2019. These impacts are discussed in further detail in the “New Accounting Standards” section of the Management’s Discussion and Analysis. Comparative information has not been restated, and therefore, may not be comparable.
(3) Earnings (loss) before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
(4) Includes purchases of intangible assets.
(5) Equipment rentals fleet balances are as at June 30, 2019 and 2018. 
(6) Equipment rentals fleet balances are averages for the three and six months ended June 30, 2019 and 2018.
(7) Equipment utilization includes surface equipment on rent only and is calculated using gross asset value.
(8) Source: Baker Hughes “North America Rotary Rig Count”. Rig Counts are average rig counts for the period.

Revenue for the three months ended June 30, 2019, decreased 20% to $10.4 million from $12.9 million during the same period in 2018. The decrease in revenue was due to lower Canadian revenue, which was driven by a decrease in average customer pricing of 18% as compared to the same period of 2018. Included in Canadian revenue in 2018 was $0.7 million of product sales as compared to $nil in 2019. Rig counts in western Canada decreased by 21%, however during 2019 the Company transferred under-utilized Canadian rental equipment to the U.S., which resulted in an increase in utilization to 29% from 25%. Revenue in the U.S decreased by 10% as compared to the three months ended June 30, 2018. The decrease in U.S. revenue was driven by a decrease in utilization to 40% from 44% despite an increase in rig counts in the Bakken and the Rockies regions by 4% and 9% respectively and remaining flat in the Marcellus year over year. This was slightly offset by an increase in average pricing for the U.S. of 15% for the three months ended June 30, 2019, as compared to the same period in 2018.

For the three months ended June 30, 2019, EBITDA decreased 45% to $0.5 million from $1.0 million for the same period of 2018. EBITDA as a percentage of revenue decreased to 5% during the three months ended June 30, 2019, compared to 7% for the same period of 2018. The decrease in EBITDA was driven primarily by the decrease in revenue and an increase is non-recoverable hauling costs of $0.5 million for assets moved from Canada to the U.S. This was offset by a $0.8 million reduction in operating expenses due to the IFRS 16 adoption.

EBIT for the three months ended June 30, 2019, improved slightly to a loss of $(2.9) million from a loss of $(3.0) million during the same period of 2018. The decrease in EBIT is driven primarily by the decrease in EBITDA, as well as depreciation of $0.7 million related to the adoption of IFRS 16.

Revenue for the six months ended June 30, 2019, decreased 24% to $23.5 million from $30.8 million at June 30, 2018. The decrease in revenue was due to lower Canadian revenue, which was driven by a 29% decrease in western Canadian rig activity, resulting in a decrease in equipment rental utilization to 30% from 32% year-over-year as well as a decrease of 9% in average Canadian customer pricing. For the six months ended June 30, 2019, the rig counts for Bakken, Marcellus and the Rockies increased by 10%, 1% and 9%, respectively, however, utilization decreased to 39% from 42% driven primarily by a change in product mix year over year. The decrease in utilization led to a 1% decrease in U.S. revenue for the six months ended June 30, 2019 as compared to the same period of 2018. This was offset slightly by an increase in average customer pricing by 27% as compared to the six months ended June 30, 2018.

During the six months ended June 30, 2019, EBITDA decreased 28% to $3.0 million from $4.2 million during the same period in 2018. EBITDA as a percentage of revenue was comparable at 13% for the six months ended June 30, 2019, compared to 14% for the same period in 2018. The decrease in EBITDA was driven primarily by an increase in non-recoverable hauling costs of $0.9 million related to the transfer of equipment from Canada to the U.S. This was offset by a $1.5 million decrease in operating expenses year-over-year due to the adoption of IFRS 16.

EBIT for the six months ended June 30, 2019, decreased to $(4.0) million from $(3.7) million during the same period in 2018. EBIT declined during the six months ended June 30, 2019, primarily by the decrease in EBITDA, as well as depreciation of $1.5 million related to the adoption of IFRS 16.

Operating expenses for the three and six months ended June 30, 2019, decreased by 25% and 29% respectively, to $8.0 million and $16.7 million as compared to $10.6 million and $23.5 million during the same period of 2018. The decrease in operating expenses for the three and six months ended June 30, 2019, is primarily the result of lower activity levels and the adoption of IFRS 16. The adoption of IFRS 16 led to changes in lease accounting which resulted in decreased rent and lease related expense by $1.5 million. This was offset by the increase of $0.9 million in non-recoverable transportation costs.

LIQUIDITY AND CAPITAL RESOURCES

($000’s) June 30, 2019
December 31, 2018
Current assets $ 24,397 $ 36,625
Current liabilities 18,340 17,292
Working capital(1) 6,057 19,333
Banking facilities
Operating facility 991 762
Syndicated revolving facility 6,460 12,934
Total facility borrowings 7,451 13,696
Total credit facilities(2) 48,500 48,500
Unused credit capacity 41,049 34,804
Notes:
(1) Working capital is a Non-IFRS measure and calculated by Strad as current assets less current liabilities, as derived from the Company’s consolidated statement of financial position; see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
(2) Facilities are subject to certain limitations on accounts receivable, inventory, and net book value of fixed assets and are secured by a general security agreement over all of the Company’s assets. As at June 30, 2019, Strad had access to $48.5 million of credit facilities.

As at June 30, 2019, working capital was $6.1 million compared to $19.3 million at December 31, 2018. The change in current assets was a result of a 31% decrease in accounts receivable to $22.2 million for the second quarter of 2019 compared to $32.0 million for the fourth quarter of 2018. The decrease in accounts receivable was due to the timing of collections of accounts receivable outstanding and lower revenue. Inventory and prepaids decreased by 66% and 62% to $0.6 million and $0.8 million at June 30, 2019, respectively from $1.8 million and $2.1 million at December 31, 2018 respectively. The decrease in inventory was due to mats held in inventory at December 31, 2018, which were sold in the first quarter of 2019 and the decrease in prepaids was due to a large deposit made in the fourth quarter of 2018 that was cleared out in the first quarter of 2019.

The increase in current liabilities is primarily the result of an increase in current lease liabilities to $5.2 million as a result of the adoption of IFRS 16. This was offset by a 26% decrease in accounts payable and accrued liabilities to $12.2 million at June 30, 2019, compared to $16.4 million at year end. The decrease in accounts payable was primarily due to the timing of payments made for the second quarter of 2019.

Cash flow from operating activities for the six months ended June 30, 2019, increased to $26.6 million compared to $16.1 million for the six months ended June 30, 2018, due to increased cash generated from used fleet sales, and increased depreciation expense due to the changes in lease accounting resulting in a new depreciable asset in 2019. Funds from operations for the six months ended June 30, 2019, increased to $19.2 million compared to $13.6 million for the six months ended June 30, 2018. Capital expenditures totaled $17.2 million for the six months ended June 30, 2019. Management monitors funds from operations and the timing of capital additions to ensure adequate capital resources are available to fund Strad’s capital program.

As at June 30, 2019, the Company’s syndicated banking facility consists of an operating facility with a maximum principal amount of $7.0 million CAD and $5.0 million USD, and a $36.5 million CAD syndicated revolving facility, both of which are subject to certain limitations on accounts receivable, inventory, and net book value of fixed assets and are secured by a general security agreement over all of the Company’s assets. As at June 30, 2019, the Company had access to the maximum credit facilities. The syndicated banking facility will mature on September 29, 2021. The syndicated banking facility bears interest at bank prime plus a variable rate, which is dependent on the Company’s funded debt to covenant EBITDA ratio.

Based on the Company’s funded debt to covenant EBITDA ratio, the interest rate on the syndicated credit facility is bank prime plus 0.50% on prime rate advances and at the prevailing rate plus a stamping fee of 1.50% on bankers’ acceptances. For the six months ended June 30, 2019, the overall effective rates on the operating facility and revolving facility were 3.66% and 3.75%, respectively. As of June 30, 2019, $1.0 million was drawn on the operating facility and $6.5 million was drawn on the revolving facility. Required payments on the revolving facility are interest only.

As at June 30, 2019, the Company was in compliance with all of the financial covenants under its credit facilities.

The relevant definitions related to the financial debt covenant ratio terms as set forth in the Company’s syndicated banking facility are as follows:

  • Funded debt includes bank indebtedness plus long-term debt less cash.
  • Covenant EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one-time charges, less right of use asset amortization, less interest expense associated with leases.
  • Interest expense ratio is calculated as the ratio of trailing twelve month EBITDA plus share based payments to trailing twelve month interest expense on loans and borrowings.

The above noted definitions are not recognized under IFRS and are provided strictly for the purposes of the financial covenant calculation.

Financial Debt Covenants As at June 30, 2019
As at December 31, 2018
Funded debt to EBITDA ratio (not to exceed 3.0:1)
Funded debt $ 7,451 $ 14,009
Covenant EBITDA 27,220 26,877
Ratio 0.3 0.5
EBITDA to interest coverage ratio (no less than 3.0:1)
Covenant EBITDA 27,220 26,877
Covenant interest expense 767 812
Ratio 35.5 33.1

NON-IFRS AND ADDITIONAL IFRS MEASURES AND RECONCILIATIONS

Certain supplementary measures in this Press Release do not have any standardized meaning as prescribed under IFRS and, therefore, are considered non-IFRS measures. These measures are described and presented in order to provide shareholders and potential investors with additional information regarding the Company’s financial results, liquidity and its ability to generate funds to finance its operations. These measures are identified and presented, where appropriate, together with reconciliations to the equivalent IFRS measure. However, they should not be construed as alternative measures to IFRS measures, and as they do not have standardized meanings or standardized methods of calculation, the may not be consistent with or comparable to similar measures presented by other companies. These measures are further explained below.

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not a recognized measure under IFRS. Management believes that in addition to net income (loss), EBITDA is a useful supplemental measure as it provides an indication of the results generated by the Company’s principal business activities prior to consideration of how those activities are financed and taxed. EBITDA is now calculated as net income (loss) before interest, taxes, and depreciation and amortization. Segmented EBITDA is based upon the same calculation for defined business segments, which are comprised of Industrial Matting and Equipment Rentals. The Company’s method of calculating EBITDA may differ from that of other organizations and, accordingly, its EBITDA may not be comparable to that of other companies.

Earnings (loss) before interest and taxes (“EBIT”) is an additional measure under IFRS. Management believes that in addition to net income (loss), EBIT is a useful supplemental measure as it provides an indication of the results generated by the Company’s principal business activities prior to consideration of how those activities are financed and taxed.

Funds from operations are cash flow from operating activities excluding changes in non-cash working capital. Funds from operations is a non-IFRS measure commonly used in industrial services industries, such as Pipeline, Oil & Gas, Transmission & Distribution and construction, to assist in measuring a company’s ability to finance its capital programs, debt repayments and other financial obligations. Funds from operations is not intended to represent net cash generated from operating activities or other measures of financial performance in accordance with IFRS. It is a supplemental measure to gauge performance of the Company before non-cash items. The Company’s method of calculating funds from operations may differ from that of other organizations and, accordingly, its funds from operations may not be comparable to that of other companies.

Working capital is calculated as current assets minus current liabilities, as derived from the Company’s consolidated statement of financial position. Working capital, cash forecasting, and banking facilities are used by Management to ensure funds are available to finance growth opportunities.

Funded debt is a measure used in calculating our bank financial covenants. Funded debt is calculated as bank indebtedness plus long-term debt less cash from syndicate institutions.

Reconciliation of Funds from Operations

($000’s)
Three months ended June 30,
Six months ended June 30,
2019 2018 2019 2018
Net cash generated from operating activities 13,194 9,644 26,576 16,123
Less:
Changes in non-cash working capital 5,137 2,535 7,400 2,543
Funds from Operations 8,057 7,109 19,176 13,580

Reconciliation of EBITDA and EBIT

($’000’s)
Three months ended June 30,
Six months ended June 30,
2019 2018 2019 2018
Net (loss) income: (1,704 ) 3,861 (142 ) 3,464
Add (deduct):
Depreciation and amortization 8,997 5,240 16,148 10,672
Income tax recovery (1,820 ) (4,428 ) (1,688 ) (4,390 )
Interest expense 310 157 661 347
EBITDA(1) 5,783 4,830 14,979 10,093
(Deduct):
Depreciation and amortization (8,997 ) (5,240 ) (16,148 ) (10,672 )
EBIT (3,214 ) (410 ) (1,169 ) (579 )
(1) The current period results include impacts from the adoption of IFRS 16 “Leases”, which was adopted by the Company on January 1, 2019. These impacts are discussed in further detail in the “New Accounting Standards” section in page 16. Comparative information has not been restated, and therefore, may not be comparable.
Reconciliation of quarterly non-IFRS and additional IFRS measures
($’000’s)
Three months ended
Jun 30, 2019 Mar 31, 2019 Dec 31, 2018 Sep 30, 2018
Net (loss) income: (1,704 ) 1,566 (5,371 ) 890
Add (deduct):
Depreciation and amortization(1) 8,997 7,150 18,253 5,444
Income tax (recovery) expense (1,820 ) 132 (2,518 ) (62 )
Interest expense 310 351 235 230
EBITDA(2)(3) 5,783 9,199 10,599 6,502
(Deduct):
Depreciation and amortization (8,997 ) (7,150 ) (18,253 ) (5,444 )
EBIT (3,214 ) 2,049 (7,654 ) 1,058
(1) Included in depreciation and amortization for the three months ended December 31, 2018, are impairment charges of $10.9 million related to the impairment of Equipment Rentals assets during the fourth quarter of 2018.
(2) During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business. These changes have been updated for prior period balances.
(3) The current period results include impacts from the adoption of IFRS 16 “Leases”, which was adopted by the Company on January 1, 2019. These impacts are discussed in further detail in the “New Accounting Standards” section in page 16. Comparative information has not been restated, and therefore, may not be comparable.
Three months ended
Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Sep 30, 2017
Net income (loss): 3,861 (397 ) (3,364 ) 598
Add (deduct):
Depreciation and amortization 5,240 5,432 8,918 7,359
Income tax (recovery) expense (4,428 ) 38 (653 ) 1,123
Interest expense 157 190 158 359
EBITDA(1) 4,830 5,263 5,059 9,439
(Deduct):
Depreciation and amortization (5,240 ) (5,432 ) (8,918 ) (7,359 )
EBIT (410 ) (169 ) (3,859 ) 2,080
(1) During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business. These changes have been updated for prior period balances.
Reconciliation of funded debt
($’000’s)
Six months ended June 30, 2019 As at December 31, 2018
Bank indebtedness at syndicate banks 991 762
Long term debt 6,460 12,934
Lease liabilities 313
Funded Debt 7,451 14,009

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS

Certain statements and information contained in this Press Release constitute forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words “expect”, “plan”, “continue”, “estimate”, “anticipate”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe”, “may”, “predict”, or “will” and similar expressions are intended to identify forward-looking information or statements. More particularly, this Press Release contains forward-looking statements concerning future capital expenditures of the Company, including its 2019 capital program and possible increases thereto, planned allocations of capital expenditures, possible further repurchases under our NCIB, and funding thereof, by way of cash flow, anticipated cash flow, debt, anticipated growing demand for the Company’s products and services in 2019 and beyond, and anticipated revenue allocations amongst our service offerings, drilling activity in North America, pricing of the Company’s products and services, and expectations for 2019 and potential for improved profitability and the potential impact of changes in governments at legislation, and the potential for growth and expansion of certain components of the Company’s business, including further capital being allocated to increase our matting fleet, expanding our matting offerings in the U.S., our strategy to double our matting fleet by 2021, anticipated benefits from cost reductions and timing thereof, manufacturing capacity to meet anticipated demand for the Company’s products, and expected exploration and production industry activity including the effects of industry trends, including the potential of LNG infrastructure, on demand for the Company’s products. These statements relate to future events or to the Company’s future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.

Various assumptions were used in drawing the conclusions or making the projections contained in the forward-looking statements throughout this Press Release. The forward-looking information and statements included in this Press Release are not guarantees of future performance and should not be unduly relied upon. Forward-looking statements are based on current expectations, estimates, and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated and described in the forward-looking statements. Such information and statements involve known and unknown risks, uncertainties, and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements. In addition to other material factors, expectations, and assumptions which may be identified in this Press Release and other continuous disclosure documents of the Company referenced herein, assumptions have been made in respect of such forward-looking statements and information regarding, among other things: the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current industry conditions; anticipated financial performance, business prospects, impact of competition, strategies, the general stability of the economic and political environment in which the Company operates; exchange and interest rates; tax laws; the sufficiency of budgeted capital expenditures in carrying out planned activities; the availability and cost of labour and services and the adequacy of cash flow; debt and ability to obtain financing on acceptable terms to fund its planned expenditures, which are subject to change based on commodity prices; market conditions and future oil and natural gas prices; and potential timing delays. Although Management considers these material factors, expectations, and assumptions to be reasonable based on information currently available to it, no assurance can be given that they will prove to be correct.

Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect the Company’s operations and financial results are included in reports on file with the Canadian Securities Regulatory Authorities and may be accessed through the SEDAR website (www.sedar.com) or at the Company’s website. The forward-looking statements and information contained in this Press Release are expressly qualified by this cautionary statement. The Company does not undertake any obligation to publicly update or revise any forward looking statements or information, whether as a result of new information, future events, or otherwise, except as may be required by applicable securities laws.

SECOND QUARTER EARNINGS CONFERENCE CALL

Strad has scheduled a conference call to begin promptly at 8:00 a.m. MT (10:00 a.m. ET) on Friday, August 2, 2019.

The conference call dial in number is 1-844-388-0561, followed by Conference ID code 1564175

The conference call will also be accessible via webcast at edge.media-server.com/m6/p/zob9cn7a

A replay of the call will be available approximately after the conference call ends until Friday, August 9, 2019, at 1:00 p.m. ET. To access the replay, call 1-855-859-2056, followed by pass code 1564175.

Strad Inc.
Interim Consolidated Statement of Financial Position
(Unaudited)
(in thousands of Canadian dollars) As at June 30, 2019 As at December 31, 2018
$ $
Assets
Current assets
Trade receivables 22,250 32,013
Inventories 529 1,839
Prepaids and deposits 755 2,063
Lease receivable – current portion 341
Income taxes receivable 522 710
Total current assets 24,397 36,625
Non-current assets
Property, plant and equipment 134,167 136,978
Intangible assets 1,289 1,448
Right of use assets 12,455
Income tax receivable 292 305
Lease receivable 271
Deferred income tax assets 119 121
Total non-current assets 148,593 138,852
Total assets 172,990 175,477
Liabilities
Current liabilities
Bank indebtedness 991 762
Accounts payable and accrued liabilities 12,184 16,373
Income taxes payable 14
Lease liabilities – current portion 5,151 157
Total current liabilities 18,340 17,292
Non-current liabilities
Long-term debt 6,460 12,934
Lease liabilities 7,982 156
Deferred income tax liabilities 7,443 9,151
Total liabilities 40,225 39,533
Equity
Share capital 146,461 147,664
Contributed surplus 13,208 13,068
Accumulated other comprehensive income 20,774 23,439
Deficit (47,678 ) (48,227 )
Total equity 132,765 135,944
Total liabilities and equity 172,990 175,477
Strad Inc.
Interim Consolidated Statement of Income (Loss) and Comprehensive Income (Loss)
For the three and six months ended June 30, 2019 and 2018
(Unaudited)
(in thousands of Canadian dollars, except per share amounts)
Three months ended June 30,
Six months ended June 30,
2019 2018 2019 2018
$
$
$ $
Revenue 26,676 28,035 57,556 56,399
Expenses
Operating expenses 16,627 20,002 34,188 39,011
Depreciation 7,569 5,196 13,205 10,583
Amortization of intangible assets 132 44 266 89
Amortization of right of use assets 1,296 2,677
Selling, general and administration 4,292 3,793 8,428 7,549
Share-based payments 51 95 140 178
Gain on disposal of property, plant and equipment (19 ) (729 ) (132 ) (477 )
(Gain) loss on foreign exchange (58 ) 44 (47 ) 45
Interest expense 310 157 661 347
Loss before income tax (3,524 ) (567 ) (1,830 ) (926 )
Income tax recovery (1,820 ) (4,428 ) (1,688 ) (4,390 )
(Loss) income for the period (1,704 ) 3,861 (142 ) 3,464
Other comprehensive (loss) income
Items that may be reclassified subsequently to net income
Cumulative translation adjustment (1,359 ) 1,118 (2,665 ) 2,680
Deferred tax expense on foreign exchange gain (4,344 ) (4,344 )
Total comprehensive (loss) income (3,063 ) 635 (2,807 ) 1,800
(Loss) income per share:
Basic ($0.03 ) $0.07 $0.00 $0.06
Diluted ($0.03 ) $0.07 $0.00 $0.06
Strad Inc.
Interim Consolidated Statement of Cash Flow
For the six months ended June 30, 2019 and 2018
(Unaudited)
(in thousands of Canadian dollars)
Six months ended June 30,
2019 2018
$ $
Cash flow provided by (used in)
Operating activities
Net (loss) income for the period (142 ) 3,464
Adjustments for items not affecting cash:
Depreciation and amortization 16,148 10,672
Deferred income tax recovery (1,707 ) (4,400 )
Share-based payments 140 178
Interest expense 661 347
Unrealized foreign exchange loss 110 94
Gain on disposal of property, plant and equipment (132 ) (477 )
Book value of used fleet sales in operating activities 4,098 3,702
Changes in items of non-cash working capital 7,400 2,543
Net cash generated from operating activities 26,576 16,123
Investing activities
Purchase of property, plant and equipment (17,121 ) (10,298 )
Proceeds from sale of property, plant and equipment 158 1,395
Purchase of intangible assets (107 ) (747 )
Changes in items of non-cash working capital 1,017 793
Net cash used in investing activities (16,053 ) (8,857 )
Financing activities
Repayment of long-term debt (6,474 ) (4,406 )
Repayment of lease liabilities (2,571 ) (250 )
Repayment of shareholder loan 91
Normal course issuer bid (681 ) (3,910 )
Interest expense (661 ) (347 )
Changes in items of non-cash working capital (10 ) 2
Net cash used in financing activities (10,306 ) (8,911 )
Effect of exchange rate changes on cash and cash equivalents (446 ) 359
Increase (decrease) in cash and cash equivalents (229 ) (1,286 )
Cash and cash equivalents (including bank indebtedness) – beginning of year (762 ) 1,859
Cash and cash equivalents (including bank indebtedness) – end of period (991 ) 573
Cash paid for income tax 120
Cash paid for interest 696 254

ABOUT STRAD

Strad specializes in industrial matting and equipment rentals for projects of any size, from a network of branches across Canada and the United States. Strad aims to exceed customer expectations in many industrial sectors, including Pipeline, Oil and Gas, Transmission & Distribution, as well as Construction.

Strad is headquartered in Calgary, Alberta, Canada. Strad is listed on the Toronto Stock Exchange under the trading symbol “SDY”.

The current period results include impacts from the adoption of IFRS 16 “Leases”, which was adopted by the Company on January 1, 2019. These impacts are discussed in further detail in the “New Accounting Standards” section of the Management’s Discussion and Analysis. Comparative information has not been restated, and therefore, may not be comparable.

For more information, please contact:

Andy Pernal  
President and Chief Executive Officer  
(403) 775-9202  
email: 

Michael Donovan
Chief Financial Officer
(403) 775-9221
email: 

www.stradinc.com


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