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Strad Announces Second Quarter Results and Increases Capital Budget

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: apernal@stradinc.com

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

www.stradinc.com