Mullen Group Ltd. Reports 2016 Financial Results

OKOTOKS, ALBERTA--(Marketwired - Feb 8, 2017) - Mullen Group Ltd. ("Mullen Group", "We", "Our" and/or the "Corporation") (MTL.TO), one of Canada's largest suppliers of trucking and logistics services as well as specialized transportation services to the oil and natural gas industry in Canada, today reported its financial and operating results for the quarter and year ended December 31, 2016, with comparisons to the same period last year.

Key financial highlights for the fourth quarter of 2016 with comparisons to 2015 are as follows:

HIGHLIGHTS
(unaudited) ($ millions)		Three month periods ended December 31
		2016	2015	Change
		$	$	%
Revenue
	Trucking/Logistics	173.0	177.5	(2.5	)
	Oilfield Services	84.4	109.7	(23.1	)
	Corporate and intersegment eliminations	0.4	0.5	(20.0	)
Total Revenue		257.8	287.7	(10.4	)
Operating income before depreciation and amortization (1)
	Trucking/Logistics	26.3	29.8	(11.7	)
	Oilfield Services	15.0	20.8	(27.9	)
	Corporate	1.2	2.1	(42.9	)
Total Operating income before depreciation and amortization (1)		42.5	52.7	(19.4	)
Operating income before depreciation and amortization - adjusted (1)		40.2	49.3	(18.5	)
(1) Refer to notes section of Summary

Mullen Group operates a diversified business model combined with a highly adaptable and variable cost structure. The financial highlights for the three month period ending December 31, 2016 are as follows:

• generated consolidated revenue of $257.8 million, a decrease of $29.9 million, or 10.4 percent, as compared to $287.7 million in 2015 due to:

  • a $25.3 million or 23.1 percent decline in the Oilfield Services segment

  • a $4.5 million or 2.5 percent decline in the Trucking/Logistics segment

• earned consolidated operating income before depreciation and amortization ("OIBDA") of $42.5 million, a decrease of $10.2 million as compared to $52.7 million in 2015 due to:

  • a $5.8 million decrease in the Oilfield Services segment

  • a $3.5 million decrease in the Trucking/Logistics segment

  • a $0.9 million increase in Corporate Office costs related to a $1.1 million negative variance in foreign exchange

• adjusting for the negative impact of foreign exchange at the Corporate Office, operating income before depreciation and amortization ("OIBDA - adjusted") was $40.2 million, or 15.6 percent of revenue, as compared to $49.3 million, or 17.1 percent of revenue in 2015. These results more accurately reflect our operating performance.

• closed the acquisitions of Caneda Transport Inc. ("Caneda") and E.C.R. Enterprises Ltd. ("E.C.R.")

Fourth Quarter Financial Results

For the three month period ended December 31, 2016, revenue decreased by $29.9 million, or 10.4 percent, to $257.8 million as compared to $287.7 million in 2015. This was primarily attributable to a $25.3 million decline in revenue in the Oilfield Services segment and a $4.5 million decline by the Trucking/Logistics segment. Both segments were negatively impacted by challenging market conditions; reduced demand for services, most notably in western Canada due to the continued reduction in capital investment by the oil and gas industry; lower year over year fuel surcharge revenue, accompanied by our strategy to demarket unprofitable business. The $25.3 million decrease in revenue in the Oilfield Services segment was most notable in those Business Units involved in the transportation of fluids and servicing of wells, from lower demand for services within Alberta's oil sands region including heavy haul freight and dewatering services, and from lower revenue generated from large diameter pipeline construction projects due to the timing of various projects. These decreases were somewhat offset by a small increase in revenue generated by those Business Units most directly tied to oil and natural gas drilling activity. The decline in Trucking/Logistics segment revenue was mainly due to lower demand for freight services in western Canada and a $0.2 million drop in fuel surcharge revenue. Incremental revenue generated from the acquisitions of Caneda, Motrux Inc. ("Motrux") and E.C.R. offset a portion of the revenue decline. Motrux and E.C.R. have been integrated into the operations of Mullen Trucking Corp. and the Hi-Way 9 Group of Companies, respectively.

OIBDA for the fourth quarter was $42.5 million, a decrease of $10.2 million or 19.4 percent as compared to 2015 and was primarily due to the decline in quarterly revenue; competitive pricing which reduced profitability; a change in revenue mix; and higher direct operating expenses as a percentage of revenue. The Oilfield Services segment generated OIBDA of $15.0 million, a decline of $5.8 million due to lower demand for services within Alberta's oil sands region, the timing of large diameter pipeline construction projects and from declines experienced by those Business Units involved in the transportation of fluids and servicing of wells. The Trucking/Logistics segment generated OIBDA of $26.3 million, a decrease of $3.5 million or 11.7 percent from 2015. As a percentage of segment revenue, operating margin in the Oilfield Services segment decreased to 17.8 percent from 19.0 percent in 2015. Operating margin in the Trucking/Logistics segment decreased to 15.2 percent as compared to 16.8 percent in 2015. The decrease in operating margin in both of our segments was mainly due to an increase in direct operating expenses as a percentage of segment revenue. Adjusting for Corporate Office costs related to the impact of foreign exchange gains on U.S. dollar cash held, OIBDA - adjusted was $40.2 million, a decrease of $9.1 million or 18.5 percent as compared to $49.3 million in 2015. Stated as a percentage of consolidated revenue, operating margin - adjusted decreased to 15.6 percent as compared to 17.1 percent in 2015.

In the fourth quarter of 2016, we recorded a net loss of $(0.7) million or $(0.01) per share, a decrease of $3.1 million, or 129.2 percent, compared to net income of $2.4 million or $0.03 per share in 2015. The $3.1 million decrease was primarily due to the $10.2 million decrease in OIBDA and a $3.0 million decrease in gain on contingent consideration. These decreases were partially offset by a $5.1 million positive variance in the fair value of investments, a $2.2 million decrease in amortization of intangible assets and a $2.2 million increase in the gain on sale of property, plant and equipment.

"Quite simply business fundamentals remained difficult in the fourth quarter. Demand remained our biggest challenge for many of the reasons we have articulated throughout the year. Reduced capital investment, spending and drilling activity by the oil and natural gas industry in western Canada directly impacts the oil and gas service industry, the Alberta economy and, by association, the demand for trucking and logistics services. This in turn becomes a negative drag on the Canadian economy, as evidenced by the GDP numbers, which continue to show the economy struggling to grow at even a very modest pace. And in the absence of real economic growth, markets become very competitive. In particular the few remaining larger capital projects associated with the development of Alberta's oil sands neared completion further reducing the demand for trucking and transload services. All in all generating revenue and producing acceptable profitability in periods of low demand is very difficult.

"Nevertheless, I am pleased with our performance and the fact that we addressed the market challenges proactively and aggressively, focusing on managing those things in our control, like managing costs and improving the operational efficiency of our organization. These are the types of initiatives that will prove sustainable when market conditions improve. And of course acquisitions remain an important component of our long-term strategy. In the quarter we completed another two transactions, both smaller in nature but complementary to our existing trucking and logistics Business Units. In fact acquisitions are the only way to grow our business in the short-term in the absence of any real and sustainable growth in the economy," said Mr. Murray K. Mullen, Chairman and Chief Executive Officer.

Financial Position

At December 31, 2016, we had $243.1 million (December 31, 2015 - $187.1 million) of working capital that included $270.3 million (December 31, 2015 - $147.2 million) of cash and cash equivalents, of which $81.0 million was denominated in U.S. currency. Somewhat offsetting our increase in cash and cash equivalents was a decline in non-cash working capital, which resulted from the inclusion of a $134.1 million current portion of long-term debt related to the Series E (U.S. $85.0 million) and Series F ($20.0 million) Notes, which mature on September 27, 2017. At December 31, 2016, net debt was $316.3 million (December 31, 2015 - $522.0 million) and we had access to additional funding of $75.0 million from our undrawn bank credit facility. On May 17, 2016, we closed a bought deal public offering and a non-brokered private placement for net proceeds of $153.1 million. The Corporation's long-term debt consists mainly of its Private Placement Debt (which includes the Series E and Series F Notes) of U.S. $314.0 million and Canadian $261.0 million. The weighted average interest rate on our U.S. dollar debt and our Canadian dollar debt is 4.43 percent and 4.58 percent, respectively. The majority of this debt matures on October 22, 2024 and October 22, 2026. In July 2014, we entered into two cross-currency swap contracts to swap the principal portion of $229.0 million of U.S. dollar debt into a Canadian currency equivalent of $254.1 million for an average exchange rate of $1.1096. At December 31, 2016, the carrying value of these cross-currency swaps was $32.8 million and was recorded within derivative financial instruments on the consolidated statement of financial position. The net book value of property, plant and equipment was $948.5 million, the majority of which consists of $464.7 million of real property (carrying cost of $517.6 million) and $392.9 million (carrying cost of $744.2 million) of trucks and trailers.

"After a couple of very difficult years, I have a more positive outlook for the overall Canadian economy and for the oil and natural gas industry. In particular, commodity prices are much more constructive than a year ago and this will translate into additional investment activity and spending by the industry. In fact we are already seeing evidence of this increase in western Canada with drilling activity higher than last year at this time. In addition, recent developments regarding major pipeline infrastructure projects is promising, not just for the short-term economic activity but also for the long-term viability of the oil and natural gas industry in Canada. When projects such as these are sanctioned, accompanied by a recovery in drilling activity, there will be a positive impact on the demand for oilfield and trucking services, as well as pricing levels, fundamentals lacking in 2016. Furthermore, we are well positioned to accelerate growth with quality acquisitions. Having a strong balance sheet is an integral component to our acquisition strategy. The other is timing and from this perspective my view is that we will be presented with many opportunities to evaluate in 2017 as business owners struggle to find success in this ultra-competitive market. Our focus will be to pursue acquisitions that we believe can be successfully integrated into our organization," added Mr. Mullen.

Twelve Month Period Ended Financial Results

For the year ended December 31, 2016, we generated revenue of $1,035.1 million a decrease of $179.3 million, or 14.8 percent, as compared to $1,214.4 million in 2015. The decrease in revenue was mainly due to a $150.6 million drop in revenue in the Oilfield Services segment due to drastically lower drilling programs, reduced spending and cuts to capital investments in response to the collapse in crude oil and natural gas prices. These decreases were partially offset by greater demand for services related to large diameter pipeline construction projects. Revenue generated in the Trucking/Logistics segment decreased by a relatively modest $25.3 million, or 3.5 percent, primarily due to lower demand for freight services in western Canada as well as a $9.2 million reduction in fuel surcharge revenue due to lower fuel prices. These decreases were partially offset by the incremental revenue of $18.3 million related to the acquisitions of Courtesy Freight Systems Ltd., Caneda, Motrux and E.C.R. and from increased demand for transload services.

OIBDA for 2016 was $181.0 million as compared to $229.4 million in 2015. The decrease of $48.4 million represents a decline of 21.1 percent year over year and is primarily due to two factors. First, the significant declines in revenue experienced by the Oilfield Services segment resulted in a $28.8 million decrease in segment OIBDA. Secondly, Corporate Office costs increased by $18.4 million due to a $19.2 million negative variance in foreign exchange, which resulted from a $0.04 increase in the value of the Canadian dollar vis-a-vis the U.S. dollar. Excluding the impact of foreign exchange gains and losses on U.S. dollar cash held, the Corporate Office recorded a $0.8 million decrease in costs on a year over year basis, which was mainly due to the impact of cost control measures. To a lesser extent, OIBDA in the Trucking/Logistics segment experienced a modest decline of $1.2 million or 1.0 percent compared to 2015. OIBDA - adjusted for 2016 decreased to $184.4 million, or 13.7 percent, as compared to $213.6 million generated in 2015. Stated as a percentage of consolidated revenue, operating margin - adjusted increased to 17.8 percent as compared to 17.6 percent in 2015 due to the operating performance and disciplined cost control initiatives implemented in both segments.

Net income in 2016 increased to $52.0 million, as compared to $13.4 million in 2015. The increase of $38.6 million was mainly attributable to a $45.5 million positive variance in net unrealized foreign exchange, a $21.1 million positive variance in the fair value of investments, a $10.3 million decrease in income tax expense, a $5.0 million decrease in amortization of intangible assets and a $4.0 million decrease in depreciation of property, plant and equipment. These increases were somewhat offset by the $48.4 million decrease in OIBDA.

A summary of our results for the quarter and year ended December 31, 2016 are as follows:

SUMMARY
(unaudited) ($ millions, except per share amounts)	Three month periods ended December 31						Twelve month periods ended December 31
	2016		2015	Change			2016		2015	Change
	$		$	%			$		$	%
Revenue	257.8		287.7	(10.4	)		1,035.1		1,214.4	(14.8	)
Operating income before depreciation and amortization(1)	42.5		52.7	(19.4	)		181.0		229.4	(21.1	)
Operating income before depreciation and amortization - adjusted(2)	40.2		49.3	(18.5	)		184.4		213.6	(13.7	)
Net unrealized foreign exchange loss (gain)	11.4		10.6	7.5			(5.8	)	39.7	(114.6	)
(Increase) decrease in fair value of investments	(1.6	)	3.5	(145.7	)		(1.7	)	19.4	(108.8	)
Net income (loss)	(0.7	)	2.4	(129.2	)		52.0		13.4	288.1
Net income - adjusted(3)	10.7		13.4	(20.1	)		46.9		73.6	(36.3	)
Earnings (loss) per share(4)	(0.01	)	0.03	(133.3	)		0.52		0.15	246.7
Earnings per share - adjusted(3)	0.10		0.15	(33.3	)		0.47		0.80	(41.3	)
Net cash from operating activities	46.5		64.8	(28.2	)		174.3		211.6	(17.6	)
Net cash from operating activities per share(4)	0.45		0.71	(36.6	)		1.76		2.31	(23.8	)
Cash dividends declared per Common Share	0.09		0.30	(70.0	)		0.56		1.20	(53.3	)

Notes: (1) Operating income before depreciation and amortization ("OIBDA") is defined as net income before depreciation of property, plant and equipment, amortization of intangible assets, finance costs, net unrealized foreign exchange gains and losses, other (income) expense and income taxes. (2) Operating income before depreciation and amortization - adjusted ("OIBDA - adjusted") is defined as net income before depreciation of property, plant and equipment, amortization of intangible assets, finance costs, net unrealized foreign exchange gains and losses, other (income) expense, income taxes and foreign exchange gains and losses recognized within its Corporate Office. (3) Net income - adjusted and earnings per share - adjusted are calculated by adjusting net income and basic earnings per share by the amount of any net unrealized foreign exchange gains and losses and the change in fair value of investments. (4) Earnings (loss) per share and net cash from operating activities per share are calculated based on the weighted average number of Common Shares outstanding for the period. Non-GAAP and Additional GAAP Terms - Mullen Group reports on certain financial performance measures that are described and presented in order to provide shareholders and potential investors with additional measures to evaluate Mullen Group's ability to fund its operations and information regarding its liquidity. In addition, these measures are used by management in its evaluation of performance. These financial performance measures ("Non-GAAP and Additional GAAP Terms") are not recognized financial terms under Canadian generally accepted accounting principles ("Canadian GAAP"). For publicly accountable enterprises, such as Mullen Group, Canadian GAAP is governed by principles based on IFRS and interpretations of IFRIC. Management believes these Non-GAAP and Additional GAAP Terms are useful supplemental measures. These Non-GAAP and Additional GAAP Terms do not have standardized meanings and may not be comparable to similar measures presented by other entities. Specifically, OIBDA, operating margin, OIBDA - adjusted, operating margin - adjusted, net income - adjusted and earnings per share - adjusted are not recognized terms under IFRS and do not have standardized meanings prescribed by IFRS. Management believes these measures are useful supplemental measures. Investors should be cautioned that these indicators should not replace net income and earnings per share as an indicator of performance.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(thousands)		December 31
		2016	2015
		$	$
Assets
Current assets:
	Cash and cash equivalents	270,291	147,243
	Trade and other receivables	153,766	159,963
	Inventory	30,075	30,278
	Prepaid expenses	8,754	9,620
	Current tax receivable	6,311	6,019
		469,197	353,123
Non-current assets:
Property, plant and equipment		948,540	992,206
Goodwill		351,883	344,186
Intangible assets		22,604	30,107
Investments		38,648	42,495
Deferred tax assets		8,330	9,807
Derivative financial instruments		32,759	39,949
Other assets		1,066	5,162
		1,403,830	1,463,912
Total Assets		1,873,027	1,817,035
Liabilities and Equity
Current liabilities:
	Accounts payable and accrued liabilities	83,460	83,156
	Dividends payable	3,110	9,166
	Current tax payable	3,209	1,878
	Current portion of long-term debt	136,300	71,856
		226,079	166,056
Non-current liabilities:
Long-term debt		547,107	696,859
Convertible debentures - debt component		12,290	12,186
Deferred tax liabilities		127,141	135,290
		686,538	844,335
Equity:
	Share capital	933,303	778,448
	Convertible debentures - equity component	550	550
	Contributed surplus	12,679	11,597
	Retained earnings	13,878	16,049
		960,410	806,644
Total Liabilities and Equity		1,873,027	1,817,035

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME AND RETAINED EARNINGS
		Three month periods ended December 31			Twelve month periods ended December 31
(thousands, except per share amounts)		2016	2015		2016		2015
		$	$		$		$
			(unaudited	)
Revenue		257,709	287,686		1,035,059		1,214,372
Direct operating expenses		185,186	200,369		711,847		844,025
Selling and administrative expenses		30,037	34,612		142,179		140,928
Operating income before depreciation and amortization		42,486	52,705		181,033		229,419
Depreciation of property, plant and equipment		18,069	19,534		71,294		75,275
Amortization of intangible assets		2,565	4,725		14,006		18,972
Finance costs		7,763	9,024		32,460		35,815
Net unrealized foreign exchange loss (gain)		11,423	10,619		(5,778	)	39,701
Other (income) expense		(2,227)	1,784		(2,694	)	16,289
Income before income taxes		4,893	7,019		71,745		43,367
Income tax expense		5,512	4,658		19,707		30,001
Net income (loss) and total comprehensive income (loss)		(619)	2,361		52,038		13,366
Retained earnings, beginning of period		23,826	41,186		16,049		112,668
Dividends declared to common shareholders		(9,329)	(27,498	)	(54,209	)	(109,985	)
Retained earnings, end of period		13,878	16,049		13,878		16,049
Earnings (loss) per share:
	Basic	(0.01)	0.03		0.52		0.15
	Diluted	(0.01)	0.03		0.52		0.15
Weighted average number of Common Shares outstanding:
	Basic	103,654	91,661		99,165		91,653
	Diluted	103,675	91,661		99,165		91,687

CONSOLIDATED STATEMENT OF CASH FLOWS
			Three month periods ended December 31			Twelve month periods ended December 31
(thousands)			2016	2015		2016		2015
			$	$		$		$
				(unaudited)
Cash provided by (used in):
Cash flows from operating activities:
	Net income (loss)		(619)	2,361		52,038		13,366
	Adjustments for:
		Depreciation of property, plant and equipment	18,069	19,534		71,294		75,275
		Amortization of intangible assets	2,565	4,725		14,006		18,972
		Finance costs	7,763	9,024		32,460		35,815
		Stock-based compensation expense	277	333		1,082		1,470
		Unrealized foreign exchange loss (gain) on cross-currency swaps	1,689	(4,924	)	7,190		(30,604	)
		Foreign exchange	7,250	11,815		(9,918	)	53,585
		Change in fair value of investments	(1,632)	3,546		(1,703	)	19,432
		(Gain) loss on sale of property, plant and equipment	(224)	2,043		886		2,367
		Income tax expense	5,512	4,658		19,707		30,001
		Earnings from equity investments	(371)	(805	)	(1,877	)	(2,510	)
		Gain on contingent consideration	-	(3,000	)	-		(3,000	)
			40,279	49,310		185,165		214,169
Changes in non-cash working capital items from operating activities:
	Trade and other receivables		19,530	21,976		14,936		77,791
	Inventory		1,009	1,645		537		83
	Prepaid expenses		2,964	4,148		1,145		1,714
	Accounts payable and accrued liabilities		(13,069)	(9,872	)	(1,902	)	(43,540	)
Cash generated from operating activities			50,713	67,207		199,881		250,217
Income tax paid			(4,293)	(2,449	)	(25,567	)	(38,645	)
Net cash from operating activities			46,420	64,758		174,314		211,572
Cash flows from financing activities:
	Cash dividends paid to common shareholders		(9,329)	(27,498	)	(60,265	)	(109,980	)
	Interest paid		(11,731)	(13,613	)	(33,499	)	(35,210	)
	Repayment of long-term debt and loans		(2,954)	(1,466	)	(77,237	)	(4,789	)
	Net proceeds from Common Share issuances		-	-		153,134		850
	Changes in non-cash working capital items from financing activities		(211)	(179	)	(122	)	663
Net cash used in financing activities			(24,225)	(42,756	)	(17,989	)	(148,466	)
Cash flows from investing activities:
	Acquisitions		(21,012)	(10,797	)	(24,617	)	(176,776	)
	Purchase of property, plant and equipment		(4,711)	(10,017	)	(20,938	)	(73,293	)
	Proceeds on sale of property, plant and equipment		2,235	2,620		6,438		7,744
	Proceeds on sale (purchases) of investments		7,427	-		7,427		(6,625	)
	Interest received		542	129		1,680		507
	Other assets		(156)	17		(157	)	(4,363	)
	Changes in non-cash working capital items from investing activities		25	(1,019	)	(60	)	(5,142	)
Net cash used in investing activities			(15,650)	(19,067	)	(30,227	)	(257,948	)
Change in cash and cash equivalents			6,545	2,935		126,098		(194,842	)
Cash and cash equivalents, beginning of period			261,262	140,580		147,243		325,365
Effect of exchange rate fluctuations on cash held			2,484	3,728		(3,050	)	16,720
Cash and cash equivalents, end of period			270,291	147,243		270,291		147,243

This news release may contain forward-looking information that is subject to risk factors associated with the oil and natural gas business and the overall economy. This information relates to future events and Mullen Group's future performance. All information and statements contained herein that are not clearly historical in nature constitute forward-looking information, and the words "may", "will", "should", "could", "expect", "plan", "intend", "anticipate", "believe", "estimate", "propose", "predict", "potential", "continue", "aim", or the negative of these terms or other comparable terminology are generally intended to identify forward-looking information. Such information represents Mullen Group's internal projections, estimates, expectations, beliefs, plans, objectives, assumptions, intentions or statements about future events or performance. This information involves known or unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information. Mullen Group believes that the expectations reflected in this forward-looking information are reasonable; however, undue reliance should not be placed on this forward-looking information, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. For further information on any strategic, financial, operational and other outlook on Mullen Group's business please refer to Mullen Group's Management's Discussion and Analysis available for viewing on SEDAR at www.sedar.com. The risks and other factors are described under "Principal Risks and Uncertainties" in Mullen Group's Annual Information Form and Management's Discussion and Analysis. The forward-looking information contained in this news release is expressly qualified by this cautionary statement. The forward-looking information contained herein is made as of the date of this news release and Mullen Group disclaims any intent or obligation to update publicly any such forward-looking information, whether as a result of new information, future events or results or otherwise, other than as required by applicable Canadian securities laws. Mullen Group relies on litigation protection for "forward-looking" statements.

Mullen Group is a company that owns a network of independently operated businesses. The Corporation is recognized as one of the leading suppliers of trucking and logistics services in Canada and provides a wide range of specialized transportation and related services to the oil and natural gas industry in western Canada - two sectors of the economy in which Mullen Group has strong business relationships and industry leadership. The corporate office provides management and financial expertise, technology and systems support, shared services and strategic planning to its independent businesses.

Mullen Group is a publicly traded corporation listed on the Toronto Stock Exchange under the symbol "MTL". Additional information is available on our website at www.mullen-group.com or on SEDAR at www.sedar.com.