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Strad Announces Fourth Quarter Results

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.

CALGARY, Alberta, Feb. 28, 2019 (GLOBE NEWSWIRE) -- Strad Energy Services Ltd., (“Strad” or the “Company”), an industrial matting and equipment rentals company, today announced its financial results for the year-ended December 31, 2018. All amounts are stated in Canadian dollars unless otherwise noted.

YEAR-END FINANCIAL AND OPERATIONAL HIGHLIGHTS

  • Revenue increased by 2% to 119.9 million compared to $117.6 million in 2017;
  • EBITDA (1,4) increased 9% to $27.2 million compared to $25.0 million in 2017;
  • Net loss improved to $1.0 million compared with net loss of $7.3 million in 2017, including a $10.9 million impairment in the Equipment Rentals segment. Excluding the impact of the impairment, net earnings in 2018 would have been $6.9 million or $0.12 per share;    
  • Capital additions totaled $33.8 million, of which $31.3 million was deployed to maintain and grow the Company’s industrial matting fleet to meet the expected demand in Canada and the U.S.;
  • Grew the industrial matting fleet by 31% to 111,710 mats;
  • Funded debt(2) increased to $14.0 million at December 31, 2018, compared to $9.8 million at December 31, 2017. Funded debt(2) to covenant EBITDA(3) ratio was 0.5 : 1.0 at December 31, 2018; and
  • Subsequent to year-end, Strad's board approved a $6.0 million increase in the 2019 capital program, bringing total approved capital to $18.0 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 plus current and long-term obligations under finance lease less cash.
  3. Covenant EBITDA, as defined in the Company's credit facility agreement, is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one-time charges.
  4. 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.

FOURTH QUARTER FINANCIAL AND OPERATIONAL HIGHLIGHTS

  • Revenue increased by 17% to $32.3 million compared to $27.5 in 2017;
  • EBITDA (1,4) increased 110% to $10.6 million compared to $5.1 million in 2017;
  • Net loss increased to $5.4 million compared to a net loss of $3.4 million in 2017, due to a $10.9 million impairment in the Equipment Rentals segment in the quarter. Excluding the impact of the impairment, net earnings for the quarter would have been $2.5 million or $0.04 per share;
  • Commenced an industrial matting project in Canada related to the North Montney Mainline;
  • Capital additions totaled $12.2 million focused on maintaining and growing the Company's industrial matting fleet.

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 plus current and long-term obligations under finance lease less cash.
  3. Covenant EBITDA, as defined in the Company's credit facility agreement, is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one-time charges.
  4. 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.

“2018 marked a pivotal year for Strad as we realigned the Company to focus on high growth industrial matting, allowing us to participate in a broad range of sectors across North America including construction and the maintenance of large-scale infrastructure projects. We set a goal to grow our matting fleet by dedicating our entire growth capital budget in 2018 to Industrial Matting knowing this segment can drive growth and profitability,” said Andy Pernal, President and CEO of Strad. “The fundamentals for industrial matting remain strong in Canada and the U.S. as evidenced by our fourth quarter results. We are confident in our outlook for 2019, providing several approved infrastructure projects, such as LNG Canada and Coastal GasLink, remain on schedule with no delays in construction.”

“The fourth quarter highlighted the potential for our Industrial Matting business line to deliver high rates of return with a 110% increase in EBITDA for the segment.  In the quarter, we kicked off a large matting project in the Montney region and saw increased activity from our U.S. business.  Both of these developments contributed to a 17% increase in revenue for the quarter versus the same period in 2017,” said Michael Donovan, CFO of Strad. “With our available cash flow for the year, we ramped up our matting growth capital investments by 50% for the year, made payments on our long-term debt, and bought back 5% of our shares through our NCIB.”

  
YEAR-END FINANCIAL HIGHLIGHTS
(in thousands of Canadian dollars)
 
 Three months ended December 31, 2018
 Industrial MattingEquipment RentalsCorporateTotal
     
Revenue$18,493 $13,810 $ $32,303 
Operating expenses8,675 9,059  17,734 
Selling, general and administration1,422 1,935 605 3,962 
Share based payments29 40 15 84 
(Gain) loss on disposal of property, plant and equipment(17)(204)3 (218)
Foreign exchange loss64 78  142 
EBITDA (1)8,320 2,902 (623)10,599 
Depreciation and amortization (2)3,475 14,570 208 18,253 
EBIT (3)4,845 (11,668)(831)(7,654)
Interest expense  235 235 
Income tax recovery  (2,518)(2,518)
Net income (loss)  1,452 (5,371)
     
Equipment Fleet:    
Matting fleet at period end111,710   111,710 
Average matting fleet107,900   107,900 
Equipment fleet at period end 6,120  6,120 
Average equipment fleet 6,140  6,140 


 Three months ended December 31, 2017
 Industrial MattingEquipment RentalsCorporateTotal
     
Revenue$12,492 $15,030 $ $27,522 
Operating expenses7,110 11,951  19,061 
Selling, general and administration994 1,353 822 3,169 
Share based payments47 61 15 123 
Loss on disposal of property, plant and equipment6 7 3 16 
Foreign exchange loss20 30 44 94 
EBITDA (1)4,315 1,628 (884)5,059 
Depreciation and amortization (2)3,599 4,725 594 8,918 
EBIT (3)716 (3,097)(1,478)(3,859)
Interest expense  158 158 
Income tax recovery  (653)(653)
Net loss  (983)(3,364)
     
Equipment Fleet:    
Matting fleet at period end85,300   85,300 
Average matting fleet87,020   87,020 
Equipment fleet at period end 6,200  6,200 
Average equipment fleet 6,070  6,070 

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”. 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.
  2. 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.
  3. Earnings before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”.

(in thousands of Canadian dollars)

 Year-ended December 31, 2018
 Industrial MattingEquipment RentalsCorporateTotal
     
Revenue$60,463 $59,459 $ $119,922 
Operating expenses33,826 44,056  77,882 
Selling, general and administration5,197 6,960 2,987 15,144 
Share based payments113 158 61 332 
Gain on disposal of property, plant and equipment(256)(527)(5)(788)
Foreign exchange loss (gain)67 97 (6)158 
EBITDA (1)21,516 8,715 (3,037)27,194 
Depreciation and amortization (2)7,468 26,497 404 34,369 
EBIT (3)14,048 (17,782)(3,441)(7,175)
Interest expense  812 812 
Income tax recovery  (6,970)(6,970)
Net income (loss)  2,717 (1,017)
     
Equipment Fleet:    
Matting fleet at period end111,710   111,710 
Average matting fleet91,780   91,780 
Equipment fleet at period end 6,120  6,120 
Average equipment fleet 6,100  6,100 


 Year-ended December 31, 2017
 Industrial MattingEquipment RentalsCorporateTotal
     
Revenue$57,480 $60,119 $ $117,599 
Operating expenses32,062 46,596  78,658 
Selling, general and administration4,270 5,787 3,717 13,774 
Share based payments153 213 127 493 
Gain on disposal of property, plant and equipment(81)(115)(22)(218)
Foreign exchange (gain) loss(120)(168)222 (66)
EBITDA (1)21,196 7,806 (4,044)24,958 
Depreciation and amortization (2)10,927 18,498 807 30,232 
EBIT (3)10,269 (10,692)(4,851)(5,274)
Interest expense  1,518 1,518 
Income tax expense  484 484 
Net loss  (6,853)(7,276)
     
Equipment Fleet:    
Matting fleet at period end85,300   85,300 
Average matting fleet80,970   80,970 
Equipment fleet at period end 6,200  6,200 
Average equipment fleet 6,070  6,070 

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 Measures and Additional IFRS Measures and Reconciliations”. 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.
  2. Included in depreciation and amortization for the year-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.
  3. Earnings before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”.


   
FINANCIAL POSITION AND RATIOS  
(in thousands of Canadian dollars, except ratio amounts)As at December 31, 2018As at December 31, 2017
 
  
Working capital(1)$19,333 $19,617 
Funded debt(2)14,009 9,768 
Total assets175,477 174,821 
 
 
  
Funded debt to EBITDA(3)0.5 : 1.0 0.4 : 1.0 

Notes:

(1)       Working capital is calculated as current assets less current liabilities.
(2)       Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease.
(3)     EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus severance and transaction costs.


FOURTH QUARTER RESULTS

Strad reported an increase in revenue and EBITDA of 17% and 110%, respectively during the three months ended December 31, 2018, compared to the same period in 2017. During the three months ended December 31, 2018, Strad reported a net loss of $(5.4) million compared to a net loss of $(3.4) million in 2017. The higher net loss in 2018 was due to the recognition of a $10.9 million impairment in Equipment Rentals as a result of the deteriorating outlook for the Canadian market.

For the three months ended December 31, 2018, Strad's Industrial Matting segment reported an increase in revenue and EBITDA of 48% and 93% as compared to the same period in 2017. Earnings before interest and taxes ("EBIT") from Industrial Matting increased from $0.7 million in the fourth quarter of 2017 to $4.8 million in the fourth quarter of 2018.  The increase in revenue, EBITDA and EBIT was a result of a significant matting project in Canada that occurred throughout the fourth quarter of 2018, as well as an 83% increase in U.S. revenue year-over-year. The increase in revenue for the fourth quarter of 2018 was also impacted by improved customer pricing as compared to the same period in 2017.

Strad’s Equipment Rentals segment reported a decrease in revenue and an increase in EBITDA of 8% and 78%, respectively, during the three months ended December 31, 2018, compared to the same period in 2017. The decrease in revenue was a result of lower revenue in Canada, due to the discontinuance of the drill cuttings management  service line, which was mostly offset by an increase in pricing and utilization in the U.S.

During the fourth quarter of 2018, capital expenditures were $12.0 million in Industrial Matting, $0.1 million in Equipment Rentals and $0.1 million in Corporate. The majority of the capital spending related to wood matting additions, which were acquired to prepare for and to support industrial matting projects for the upcoming 2019 year. As of December 31, 2018, the industrial matting fleet was 111,710 as compared to 101,210 at September 30, 2018.

OUTLOOK

We continued to execute on our industrial matting strategy announced in 2018, with company EBITDA for the year totaling $27.2 million compared to $25.0 million in the prior year. Industrial Matting EBITDA totaled $21.5 million compared to $21.2 million in the prior year, while Equipment Rentals contributed $8.7 million compared to $7.8 million in the prior year. Despite a challenging macro-economic environment, the fourth quarter of 2018 was our strongest quarter since 2014. Financial results for the quarter were attributed primarily to the strong margins in the Industrial Matting segment, posting $8.3 million of EBITDA compared to $4.3 million for the same period in 2017. Results for the quarter were propelled by a large matting project related to the North Montney mainline.

We believe strongly in the opportunities presented in both Canada and the U.S. for our Industrial Matting segment. Formal approval of the LNG Canada project and associated Coastal GasLink pipeline will provide significant opportunity for the Industrial Matting segment in 2019. The Trans Mountain Expansion Project will similarly provide opportunities for Strad. However, any delay in construction could impact timing of potential matting projects.

In 2019, we will look to employ our expertise in deploying large-scale matting projects 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. Our internal estimates place the current market size for matting in North America at over $2.0 billion annually and growing.

Consistent with our strategy to grow our matting fleet, we deployed $31.3 million of capital to maintain and increase our fleet in 2018. The remainder of our $33.8 million capital program was comprised of maintenance capital and technology enhancements. Our board has approved a 2019 capital program of $18.0 million with the expectation that total capital spend in 2019 will be approximately $30.0 million, of which $29.0 million will be allocated to maintaining and growing the industrial matting fleet.

The equipment rentals market in Canada saw a dramatic shift in macro economic conditions in the fourth quarter. Market access restrictions in Canada culminated in average Western Canadian Select (“WCS”) pricing of under six US dollars per barrel in December 2018, a decline of over 85% from the prior year. These conditions have led to initial reductions in 2019 capital budgets by major Canadian producers which have impacted first quarter 2019 rig counts and expected activity levels in the Equipment Rentals segment throughout the first half of 2019. In the U.S., the outlook for Equipment Rentals remains consistent with 2018 as West Texas Intermediate (“WTI”) pricing has remained relatively consistent. Drilling activity is expected to be stable throughout 2019 in the U.S.

On November 26, 2018, we announced the approval from the Toronto Stock Exchange to renew our Normal Course Issuer Bid (“NCIB”) allowing us to buy back a maximum of 4,067,205 common shares. The NCIB commenced on November 28, 2018 and will terminate November 27, 2019. Subsequent to year-end, the Company purchased 471,408 common shares under the NCIB. Under our previous NCIB, which expired September 13, 2018, we purchased and canceled 2,768,320, or 5% of the outstanding common shares.

In 2018, our funds from operations allowed us to increase our capital program, repurchase shares under our NCIB, while carrying a minimal amount of debt. We expect this trend to continue in 2019 as our funds from operations and strong balance sheet provide the flexibility to evaluate various alternatives to create shareholder value, including, without limitation, organic growth opportunities or strategic acquisitions.

RESULTS OF OPERATIONS  
   
Industrial Matting  
   
(in thousands of Canadian dollars)Three months ended December 31,Year-ended December 31,
  2018 2017 % 2018 2017 %
                 
  Canadian revenue$13,869 $9,969 39%$43,629 $49,787 (12)%
  U.S. revenue4,624 2,523 83%16,834 7,693 119%
Total Revenue18,493 12,492 48%60,463 57,480 5%
       
EBITDA(1)8,320 4,315 93%21,516 21,196 2%
EBITDA as a percentage of revenue45%35% 36%37% 
       
EBIT(2)4,845 716 577%14,048 10,269 37%
EBIT as a percentage of revenue26%6% 23%18% 
       
Capital expenditures(3)11,941 4,570 161%31,307 19,250 63%
Property, plant and equipment64,921 45,021 44%64,921 45,021 44%
       
Equipment Fleet:      
Matting fleet at period end(4)111,710 85,300 31%111,710 85,300 31%
Average matting fleet(5)107,900 87,020 24%91,780 80,970 13%
Average utilization %(6)45%33% 35%36% 

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”. 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. 
  2. Earnings before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
  3. Includes assets acquired under finance lease and purchases of intangible assets.
  4. Matting fleet balances are as at December 31, 2018 and 2017. 
  5. Matting fleet balances are averages for the three months and year-ended December 31, 2018 and 2017.
  6. Equipment utilization includes matting equipment on rent only and is calculated using gross asset value.

Revenue for the three months ended December 31, 2018, of $18.5 million increased 48% compared to $12.5 million during the same period of 2017. Increased revenue was primarily due to the timing of industrial matting projects in comparison to the same quarter of 2017. Average utilization improved from 33% to 45% during the fourth quarter of 2018 as compared to the same period in 2017, partially due to a significant pipeline project along the North Montney Mainline that occurred in 2018. Average pricing improved by 25% for the three months ended December 31, 2018 as compared to the same period in 2017, which further contributed to the increase in revenue during the fourth quarter.

Strad's matting fleet increased to 111,710 mats as at December 31, 2018, compared to 85,300 mats at December 31, 2017, to meet the expected increase in customer demand.

EBITDA for the three months ended December 31, 2018, increased 93% to $8.3 million as compared to $4.3 million during the three months ended December 31, 2017. EBITDA as a percentage of revenue was 45% during the three months ended December 31, 2018, compared to 35% during the same period in 2017. The increase in EBITDA was driven primarily by the increase in revenue which was partially offset by a 22% increase in operating expenses as compared to the same period in 2017.

During the fourth quarter of 2018, EBIT increased to $4.8 million compared to $0.7 million during the same period of 2017. The primary driver for the increase in EBIT were the same factors that led to the increase in EBITDA for the fourth quarter of 2018 compared to the fourth quarter of 2017.

Revenue for the year-ended December 31, 2018, increased 5% to $60.5 million from $57.5 million during the same period of 2017. The primary increase in revenue year-over-year was due to the 119% increase in U.S. industrial matting revenue as compared to the year-ended December 31, 2017. This was offset by the 12% revenue decrease in Canada to $43.6 million, compared to $49.8 million during the same period in 2017, due to the delay of matting projects until the fourth quarter of 2018, which led to a decrease in utilization to 35% from 36%. Further impacting revenue was a 32% increase in pricing year-over-year.

During the year-ended December 31, 2018, EBITDA increased 2% to $21.5 million compared to $21.2 million for the same period of 2017. The increase in EBITDA is primarily due to the increase in revenue year-over-year, which was partially offset by a 6% increase in operating expenses year-over-year. EBITDA as a percentage of revenue decreased slightly to 36% for the year-ended December 31, 2018, as compared to 37% for the year-ended December 31, 2017.

EBIT for the year-ended December 31, 2018, increased to $14.0 million as compared to $10.3 million for the same period in 2017. The increase in EBIT was primarily driven by the increase in EBITDA for the fourth quarter of 2018 as compared to the fourth quarter of 2017. The increase in EBIT was further improved by a decrease in depreciation expense to $7.5 million for the year-ended December 31, 2018, as compared to $10.9 million for the year-ended December 31, 2017. The decrease in depreciation expense is due to the accelerated depreciation of mats with no remaining useful life during 2017 that did not occur in 2018.

Operating expenses for the three months and year-ended December 31, 2018, increased 22% and 6%, respectively, to $8.7 million and $33.8 million as compared to $7.1 million and $32.1 million during the same period of 2017. The increase in operating expenses was primarily due to higher transportation and other third party costs for the three months and year-ended December 31, 2018, as compared to the same periods in 2017.

   
Equipment Rentals  
   
(in thousands of Canadian dollars)Three months ended December 31,Year-ended December 31,
  2018 2017 % 2018 2017 %
                 
  Canadian revenue$7,112 $9,550 (26)%$33,770 $40,513 (17)%
  U.S. revenue6,698 5,480 22%25,689 19,606 31%
Total Revenue13,810 15,030 (8)%59,459 60,119 (1%)
       
EBITDA(1)2,902 1,628 78%8,715 7,806 12%
EBITDA as a percentage of revenue21%11% 15%13% 
       
EBIT (2)(11,668)(3,097)nm (17,782)(10,692)nm 
EBIT as a percentage of revenue(84)%(21)% (30)%(18)% 
       
Capital expenditures(3)97 458 (79)%1,171 2,669 (56)%
Property, plant and equipment71,790 96,689 (26)%71,790 96,689 (26)%
       
Equipment Fleet:      
Equipment fleet at period end(4)6,120 6,200 (1)%6,120 6,200 (1)%
Average equipment fleet(5)6,140 6,070 1%6,100 6,070 nm 
Average utilization %(6)36%33% 34%35% 
       
Rig Counts(7)      
Western Canada193 202 (4)%189 202 (6)%
Bakken55 49 12%54 46 17%
Marcellus75 73 3%77 70 10%
Rockies68 69 (1)%68 63 8%

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”. 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. 
  2. Earnings before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
  3. Includes assets acquired under finance lease and purchases of intangible assets. 
  4. Surface equipment fleet balances are as at December 31, 2018 and 2017. 
  5. Surface equipment fleet balances are averages for the three months and year-ended December 31, 2018 and 2017.
  6. Equipment utilization includes surface equipment on rent only and is calculated using gross asset value.
  7. Source: Baker Hughes "North America Rotary Rig Count". Rig Counts are average rig counts for the period.

Revenue for the three months ended December 31, 2018, decreased 8% to $13.8 million from $15.0 million during the same period in 2017. Revenue decreased primarily due to lower Canadian revenue, which was the result of the discontinuance of the drill cuttings management service line that operated in the fourth quarter of 2017. The decrease was partially offset by the improvement of average utilization to 36% from 33% for the three months ended December 31, 2018, as compared to the same period in 2017. Average utilization improved as a result of the increase in rig counts in the  Bakken and Marcellus by 12% and 3%, respectively, which was offset by a decrease in rig counts in the Rockies and western Canada by 1% and 4%, respectively. Overall average pricing improved by 38% in the fourth quarter of 2018 as compared to the same period in 2017. 

During the fourth quarter, EBITDA increased 78% to $2.9 million from $1.6 million during the fourth quarter of 2017. EBITDA as a percentage of revenue increased to 21% at December 31, 2018, compared to 11% at December 31, 2017. The increase in EBITDA was driven primarily by the decrease in operating expenses to $9.1 million during the fourth quarter of 2018 as compared to $12.0 million for the same period in 2017.

EBIT for the three months ended December 31, 2018, decreased to $(11.7) million from $(3.1) million during the same period of 2017.  The decrease in EBIT was driven primarily by the increase in depreciation expense during the fourth quarter of 2018 to $14.6 million compared to $4.7 million during the same period in 2017. The increase in depreciation expense was due to a $10.9 million impairment of rental equipment assets that occurred during the fourth quarter of 2018 which was partially offset by lower depreciation expense incurred during the fourth quarter of 2018 compared to the same period in 2017.

Revenue for the year-ended December 31, 2018, decreased 1% to $59.5 million from $60.1 million at December 31, 2017. The decrease in revenue was driven by lower Canadian revenue, which decreased 17% to $33.8 million during the year-ended December 31, 2018, as compared to $40.5 million for the same period of 2017. Lower revenue in Canada was the result of a 6% decline in average rig counts and the discontinuance of the drill cuttings management service line. The decrease in Canadian revenue was offset by the 31% increase in U.S. revenue year-over-year, which was the result  of increased activity levels in the U.S. as noted by the improved average rig counts in the Bakken, Marcellus and the Rockies of 17%, 10% and 8% respectively. Further offsetting the decrease in Canadian revenue, was an 18% improvement in average pricing in 2018 as compared to 2017.

During the year-ended December 31, 2018, EBITDA increased 12% to $8.7 million from $7.8 million during the same period in 2017. The increase in EBITDA was driven by lower operating expenses from $46.6 million in 2017 to $44.1 million in 2018. EBITDA as a percentage of revenue for the year-ended December 31, 2018, increased to 15% compared to 13% during the same period of 2017.

EBIT for the year-ended December 31, 2018, decreased to $(17.8) million from $(10.7) million during the same period in 2017. EBIT decreased due to the increase in depreciation expense to $26.5 million during the year-ended December 31, 2018, as compared to $18.5 million during the same period in 2017. The increase in depreciation expense was due to a $10.9 million impairment of equipment rental assets that occurred during the fourth quarter of 2018, which was partially offset by lower depreciation expense for the year ended December 31, 2018, as compared to the same period of 2017.

Operating expenses for the three months and year-ended December 31, 2018, decreased 24% and 5%, respectively, to $9.1 million and $44.1 million as compared to $12.0 million and $46.6 million during the same period of 2017. The decrease in operating expenses for the three months and year-ended December 31, 2018, was primarily the result of the discontinuance of the drill cuttings management service line, which led to a decrease in headcount related expenses during the 2018 year, as compared to the same period in 2017.

 
LIQUIDITY AND CAPITAL RESOURCES
 
(in thousands of Canadian dollars)December 31, 2018December 31, 2017
  
Current assets$36,625 $31,899 
Current liabilities17,292 12,282 
Working capital(1)19,333 19,617 
   
Banking facilities  
Operating facility$762 $ 
Syndicated revolving facility12,934 10,776 
Total facility borrowings13,696 10,776 
   
Total credit facilities(2)$48,500 $48,500 
Unused credit capacity34,804 37,724 

Notes:

  1. Working capital is calculated as current assets less current liabilities, as derived from the Company's consolidated statement of financial position.
  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 December 31, 2018, Strad had access to $48.5 million of credit facilities.

As at December 31, 2018, working capital decreased slightly to $19.3 million compared to $19.6 million at December 31, 2017. The change in current assets is a result of a 23% increase in accounts receivable to $32.0 million for the fourth quarter of 2018 compared to $26.0 million for the fourth quarter of 2017. The increase in accounts receivable is due to the timing of collections of accounts receivable outstanding, in addition to revenue being higher in the fourth quarter of 2018 as compared to the fourth quarter of 2017. Inventory remained the same at $1.8 million at December 31, 2018, as compared to December 31, 2017. Prepaid expenses increased 192% to $2.1 million at December 31, 2018, as compared to $0.7 million at December 31, 2017. The increase in prepaid expenses was the result of a large deposit made during the fourth quarter of 2018 in addition to prepaid rent and higher insurance premiums.

The change in current liabilities is a result of a 37% increase in accounts payable and accrued liabilities to $16.4 million at December 31, 2018, compared to $11.9 million at year end. The increase in accounts payable was primarily due to the timing of payments made during the fourth quarter of 2018.

Cash flow from operating activities for the year-ended December 31, 2018, decreased slightly to $29.8 million compared to $29.9 million for the same period of 2017, due to an increased working capital investment, partially offset by an increase in EBITDA and an increase in proceeds on used fleet sales. Funds from operations for the three months ended December 31, 2018, increased to $11.5 million compared to $6.6 million for the three months ended December 31, 2017. Capital expenditures totaled $12.2 million for the three months ended December 31, 2018. 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 December 31, 2018, 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 December 31, 2018, 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 year-ended December 31, 2018, the overall effective rates on the operating facility and revolving facility were 4.24% and 4.60%, respectively. As of December 31, 2018, $0.8 million was drawn on the operating facility and $12.9 million was drawn on the revolving facility. Required payments on the revolving facility are interest only.

As at December 31, 2018, 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 plus current and long-term obligations under finance lease, less cash.
  • Covenant EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one-time charges.
  • Interest expense ratio is calculated as the ratio of trailing twelve months adjusted EBITDA plus share based payments to trailing twelve months 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 CovenantsAs at December 31, 2018As at December 31, 2017
Funded debt to EBITDA ratio (not to exceed 3.0:1)
  
Funded debt$14,009 $9,768 
Covenant EBITDA26,877 25,339 
Ratio0.5 0.4 
   
EBITDA to interest coverage ratio (no less than 3.0:1)  
Covenant EBITDA$26,877 $25,339 
Covenant interest expense812 1,225 
Ratio33.1 20.7 


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. As of June 30, 2018, the Company implemented changes to its method of calculating EBITDA, which no longer includes adjustments for gains and losses due to foreign exchange or disposal of property, plant and equipment that occur during the normal course of business. EBITDA is now calculated as net income (loss) before interest, taxes, 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 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 the energy services industry 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 plus current and long-term portion of finance lease obligations less cash from syndicate institutions.

  
Reconciliation of Funds from Operations 
(in thousands of Canadian dollars)  
 Three months ended December 31,Year-ended December 31,
 
 2018 2017 2018 2017
Net cash generated from operating activities$6,230 $19,082 $29,801 $29,877 
Less:    
Changes in non-cash working capital(5,197)12,434 (3,840)229 
Funds from Operations11,427 6,648 33,641 29,648 
         


    
Reconciliation of EBITDA and EBIT   
(in thousands of Canadian dollars)    
 Three months ended December 31,Year-ended December 31,
 2018201720182017
Net loss:$(5,371)$(3,364)$(1,017)$(7,276)
Add (deduct):    
Depreciation and amortization18,253 8,918 34,369 30,232 
Income tax (recovery) expense(2,518)(653)(6,970)484 
Interest expense235 158 812 1,518 
EBITDA(1)10,599 5,059 27,194 24,958 
(Deduct):    
Depreciation and amortization(18,253)(8,918)(34,369)(30,232)
EBIT(7,654)(3,859)(7,175)(5,274)
(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 quarterly non-IFRS and additional IFRS measures  
(in thousands of Canadian dollars)    
 Three months ended
 Dec 31, 2018 Sep 30, 2018 Jun 30, 2018 Mar 31, 2018  
Net income (loss):$(5,371)$890 $3,861 $(397)
Add (deduct):    
Depreciation and amortization18,253 5,444 5,240 5,432 
Income tax (recovery) expense(2,518)(62)(4,428)38 
Interest expense235 230 157 190 
EBITDA(1)10,599 6,502 4,830 5,263 
(Deduct):    
Depreciation and amortization(18,253)(5,444)(5,240)(5,432)
EBIT(7,654)1,058 (410)(169)
(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.



(in thousands of Canadian dollars)Three months ended
 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017  
Net (loss) income:$(3,364)$598 $(2,163)$(2,347)
Add (deduct):    
Depreciation and amortization8,918 7,359 7,572 6,383 
Income tax (recovery) expense(653)1,123 (102)116 
Interest expense158 359 492 509 
EBITDA(1)5,059 9,439 5,799 4,661 
(Deduct):    
Depreciation and amortization(8,918)(7,359)(7,572)(6,383)
EBIT(3,859)2,080 (1,773)(1,722)
(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  
(in thousands of Canadian dollars)  
 Year-ended December 31, 2018Year-ended December 31, 2017
Bank indebtedness (cash) at syndicate banks $762  $(1,626)  
Long term debt12,934 10,776 
Current and long term obligations under finance lease313 618 
Funded Debt14,009 9,768 


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 budget, planned allocations of capital expenditures, 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 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., 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 in Canada and large scale matting projects in the U.S., 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. 

FOURTH 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,  March 1, 2019.

The conference call dial in number is 1-844-388-0561, followed by Conference ID code 5775086

The conference call will also be accessible via webcast at www.stradenergy.com

A replay of the call will be available approximately after the conference call ends until Friday, March 8th, 2019, at 1:00 p.m. ET. To access the replay, call 1-855-859-2056, followed by pass code 5775086.

     
Strad Energy Services Ltd.
Consolidated Statement of Financial Position
As at December 31, 2018 and 2017
    
     
(in thousands of Canadian dollars)As at December 31, 2018
 As at December 31, 2017
 
 $
 $
 
Assets  
Current assets  
Cash 1,859 
Trade receivables32,013 26,038 
Inventories1,839 1,818 
Prepaids and deposits2,063 707 
Other assets 1,289 
Income taxes receivable710 188 
Total current assets36,625 31,899 
   
Non-current assets  
Property, plant and equipment136,978 141,917 
Intangible assets1,448 556 
Income tax receivable305 278 
Deferred income tax assets121 171 
Total non-current assets138,852 142,922 
Total assets175,477 174,821 
   
Liabilities  
Current liabilities  
Bank indebtedness762  
Accounts payable and accrued liabilities16,373 11,937 
Current portion of obligations under finance lease157 345 
Total current liabilities17,292 12,282 
   
Non-current liabilities  
Long-term debt12,934 10,776 
Obligations under finance lease156 273 
Deferred income tax liabilities9,151 11,567 
Total liabilities39,533 34,898 
   
Equity  
Share capital147,664 154,763 
Contributed surplus13,068 12,736 
Accumulated other comprehensive income23,439 22,635 
Deficit(48,227)(50,211)
Total equity135,944 139,923 
Total liabilities and equity175,477 174,821 
   

 

    
Strad Energy Services Ltd.
Consolidated Statement of Income (Loss) and Comprehensive Income (Loss)
For the years ended December 31, 2018 and 2017
   
    
(in thousands of Canadian dollars, except per share amounts)   
  Year-ended December 31,
   2018
   2017
  
  $
  $
  
Revenue  119,922  117,599 
Expenses   
Operating expenses  77,882  78,658 
Depreciation  34,070  29,447 
Amortization of intangible assets  299  169 
Amortization of other assets    616 
Selling, general and administration  15,144  13,774 
Share-based payments  332  493 
Gain on disposal of property, plant and equipment  (788) (218)
Foreign exchange loss (gain)  158  (66)
Interest expense  812  1,518 
Loss before income tax  (7,987) (6,792)
Income tax (recovery) expense  (6,970) 484 
Loss for the period  (1,017) (7,276)
    
Other comprehensive loss   
Items that may be reclassified subsequently to net loss   
Cumulative translation adjustment  5,148  (4,328)
Deferred tax expense on foreign exchange gain  (4,344)  
Total comprehensive loss  (213) (11,604)
    
    
Loss per share:   
Basic and diluted ($0.02)($0.12)
    
    

 

   
Strad Energy Services Ltd.
Consolidated Statement of Cash Flow
For the years ended December 31, 2018 and 2017
  
   
(in thousands of Canadian dollars)  
 Year-ended December 31,
 2018
 2017
 
 $
 $
 
Cash flow provided by (used in)  
Operating activities  
Net income (loss) for the period(1,017)(7,276)
Adjustments for items not affecting cash:  
Depreciation and amortization34,369 30,232 
Deferred income tax (recovery) expense(6,710)161 
Share-based payments332 493 
Interest expense812 1,518 
Unrealized foreign exchange loss (gain)202 (280)
Gain on disposal of property, plant and equipment(788)(218)
Book value of used fleet sale6,441 5,018 
Changes in items of non-cash working capital(3,840)229 
Net cash generated from operating activities29,801 29,877 
   
Investing activities  
Purchase of property, plant and equipment(32,568)(22,124)
Proceeds from sale of property, plant and equipment1,778 1,011 
Purchase of intangible assets(1,182)(65)
Proceeds from sale of other assets1,272  
Cash paid on business acquisition (2,750)
Cash assumed on business acquisition 322 
Changes in items of non-cash working capital364 214 
Net cash used in investing activities(30,336)(23,392)
   
Financing activities  
Repayment of long-term debt(4,342)(21,032)
Borrowings6,500 5,307 
Repayment of finance lease obligations (net)(332)(958)
Repayment of shareholder loan 304 
Issuance of common shares 15,000 
Share issue costs (1,025)
Normal course issuer bid(4,098)(167)
Interest expense(812)(1,518)
Changes in items of non-cash working capital11 (73)
Net cash used in financing activities(3,073)(4,162)
Effect of exchange rate changes on cash and cash equivalents987 645 
Decrease in cash and cash equivalents(2,621)2,968 
   
Cash and cash equivalents (including bank indebtedness) - beginning of year1,859 (1,109)
Cash and cash equivalents (including bank indebtedness) - end of year(762)1,859 
   
Cash paid for income tax457 690 
Cash paid for interest810 1,273 


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 Oil and Gas, Pipeline, Power Transmission, and Mining.

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

For more information, please contact:

Andy Pernal 
President and Chief Executive Officer 
(403) 775-9202 
email: apernal@stradenergy.com

Michael Donovan
Chief Financial Officer
(403) 775-9221
email: mdonovan@stradenergy.com

www.stradenergy.com

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