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Strad Announces Third 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, Nov. 08, 2018 (GLOBE NEWSWIRE) -- Strad Energy Services Ltd., (“Strad” or the “Company”), an industrial matting and equipment rentals company, today announced its financial results for the three and nine months ended September 30, 2018. All amounts are stated in Canadian dollars unless otherwise noted.

THIRD QUARTER SELECTED FINANCIAL AND OPERATIONAL HIGHLIGHTS:

  • Strad reported total revenue of $31.2 million as compared to $33.9 million in Q3 2017;
  • Third quarter net income improved to $0.9 million compared to net income of $0.6 million in Q3 2017;
  • Strad reported EBITDA(1,4) of $6.5 million as compared to $9.4 million in Q3 2017; 
  • Earnings per share improved to $0.02 as compared to earnings per share of $0.01 during the same period in 2017;
  • Reduced funded debt(2) by 21% to $7.7 million at September 30, 2018, compared to $9.8 million at December 31, 2017. Funded debt(2) to covenant EBITDA(3) ratio was 0.4 : 1.0 at September 30, 2018;;
  • More than doubled the 2018 capital budget from $13.0 million to $28.5 million. The increase in the capital budget is to meet the expected demand for industrial matting projects in Canada and the U.S. for the remainder of 2018 and 2019;
  • Capital additions in the third quarter totaled $10.5 million focused on increasing the Company's matting fleet; and
  • On October 2, 2018 the Company announced a change in the reportable segments from a geographical focus to two new segments focusing on Industrial Matting and Equipment Rentals.

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.

"The current operating environment represents a unique dynamic for Strad, as the traditional drivers of our business, namely a robust energy sector with growing rig counts, is not reflected in the current state of affairs. Yet, I am excited about Strad’s outlook, in large measure due to our recently created Industrial Matting division,” said Andy Pernal, President and CEO of Strad.  “The drivers of this business line are positive; for instance, the building of large scale infrastructural projects such as  LNG Canada and the Coastal GasLink pipeline will require extensive matting support. Moreover, there exists a long list  of additional pending, large-scale projects, as well. Finally, matting’s utility extends well beyond the energy sector, and geographically beyond our historical markets. That is why this past quarter we more than doubled the growth capital committed to matting - to adapt to our evolving operating climate and to capitalize on its potential."

“Fiscally, the quarter highlighted our ability to maintain strong margins and EBITDA levels with disciplined cost containment, even in the face of modest revenue headwinds,” said Michael Donovan, CFO of Strad. “With our available free cash flow, we reduced our long-term debt and in part funded our matting division’s growth capex investments. Also this quarter, consistent with our strategic emphasis on matting, we modified how we report performance by segmenting our results into our two principal divisions, Industrial Matting and Equipment Rentals to provide greater clarity into our operations.”

/EIN News/ -- THIRD QUARTER FINANCIAL HIGHLIGHTS

  Three months ended September 30, 2018
  Industrial Matting Equipment Rentals Corporate Total
($000's)        
Revenue 16,368   14,852     31,220  
Operating expenses 9,599   11,538     21,137  
Selling, general and administration 1,337   1,764   532   3,633  
Share based payments 23   31   16   70  
Gain on the disposal of property, plant and equipment (46 ) (47 )   (93 )
(Gain) loss on foreign exchange (19 ) (14 ) 4   (29 )
EBITDA (1) 5,474   1,580   (552 ) 6,502  
Depreciation and amortization 1,368   3,992   84   5,444  
EBIT (2) 4,106   (2,412 ) (636 ) 1,058  
Interest expense     230   230  
Income tax recovery     (62 ) (62 )
Net (loss) income     (804 ) 890  
         
Equipment Fleet:        
Matting fleet at period end 101,210       101,210  
Average matting fleet 84,920       84,920  
Equipment fleet at period end   6,120     6,120  
Average Equipment fleet   6,140     6,140  


  Three months ended September 30, 2017
  Industrial Matting Equipment Rentals Corporate Total
($000's)        
Revenue 17,884   16,039     33,923  
Operating expenses 8,761   11,582     20,343  
Selling, general and administration 1,321   1,805   954   4,080  
Share based payments 29   45   8   82  
(Gain) loss on the disposal of property, plant and equipment 8   11   (25 ) (6 )
(Gain) loss on foreign exchange (25 ) (34 ) 44   (15 )
EBITDA (1) 7,790   2,630   (981 ) 9,439  
Depreciation and amortization 2,840   4,446   73   7,359  
EBIT (2) 4,950   (1,816 ) (1,054 ) 2,080  
Interest expense     359   359  
Income tax expense     1,123   1,123  
Net (loss) income     (2,536 ) 598  
         
Equipment Fleet:        
Matting fleet at period end 85,100       85,100  
Average matting fleet 82,960       82,960  
Equipment fleet at period end   6,140     6,140  
Average Equipment fleet   6,090     6,090  

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. Earnings before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
  Nine months ended September 30, 2018
  Industrial Matting Equipment Rentals Corporate Total
($000's)        
Revenue 41,970   45,649     87,619  
Operating expenses 25,151   34,997     60,148  
Selling, general and administration 3,775   5,025   2,382   11,182  
Share based payments 84   118   46   248  
Gain on the disposal of property, plant and equipment (239 ) (323 ) (8 ) (570 )
(Gain) loss on foreign exchange 3   19   (6 ) 16  
EBITDA (1) 13,196   5,813   (2,414 ) 16,595  
Depreciation and amortization 3,993   11,927   196   16,116  
EBIT (2) 9,203   (6,114 ) (2,610 ) 479  
Interest expense     577   577  
Income tax recovery     (4,452 ) (4,452 )
Net income     1,265   4,354  
         
Equipment Fleet:        
Matting fleet at period end 101,210       101,210  
Average matting fleet 86,400       86,400  
Equipment fleet at period end   6,120     6,120  
Average Equipment fleet   6,110     6,110  


  Nine months ended September 30, 2017
  Industrial Matting Equipment Rentals Corporate Total
($000's)        
Revenue 44,988   45,089     90,077  
Operating expenses 24,952   34,645     59,597  
Selling, general and administration 3,276   4,434   2,895   10,605  
Share based payments 106   152   112   370  
Gain on the disposal of property, plant and equipment (87 ) (122 ) (25 ) (234 )
(Gain) loss on foreign exchange (140 ) (198 ) 178   (160 )
EBITDA (1) 16,881   6,178   (3,160 ) 19,899  
Depreciation and amortization 7,328   13,773   213   21,314  
EBIT (2) 9,553   (7,595 ) (3,373 ) (1,415 )
Interest expense     1,360   1,360  
Income tax expense     1,136   1,136  
Net loss     (5,869 ) (3,911 )
         
Equipment Fleet:        
Matting fleet at period end 85,100       85,100  
Average matting fleet 78,950       78,950  
Equipment fleet at period end   6,140     6,140  
Average Equipment fleet   6,080     6,080  

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. 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

     
($000's except ratios) As at September 30, 2018 As at December 31, 2017
     
Working capital(1) 13,148 19,617
Funded debt(2) 7,701 9,768
Total assets 172,707 174,821
     
Funded debt to EBITDA(3) 0.4 : 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.

THIRD QUARTER RESULTS

Strad reported a decrease in revenue and EBITDA of 8% and 31%, respectively during the three months ended September 30, 2018, compared to the same period in 2017. During the three months ended September 30, 2018, Strad reported net income of $0.9 million compared to net income of $0.6 million in 2017.

For the three months ended September 30, 2018, Strad's Industrial Matting segment reported a decrease in revenue and EBITDA of 8% and 30% as compared to the same period in 2017. Earnings before interest and taxes ("EBIT") from Industrial Matting decreased from $5.0 million in the third quarter of 2017 to $4.1 million in the third quarter of 2018.  The decrease in revenue, EBITDA and EBIT is a result of lower utilization due to project delays in comparison to the third quarter of 2017. The decrease in revenue for the third quarter of 2018 was offset by improved customer pricing as compared to the same period in 2017.

Strad’s Equipment Rentals segment reported a decrease in revenue and EBITDA of 7% and 40%, respectively, during the three months ended September 30, 2018, compared to the same period in 2017. The decrease in revenue was a result of decreased surface equipment utilization in Canada which was slightly offset by an increase in pricing and utilization in the U.S.

During the third quarter of 2018, capital expenditures were $10.1 million in Industrial Matting, $0.1 million in Equipment Rentals and $0.3 million in Corporate. The majority of the capital additions were related to wood matting additions, which were acquired to prepare for and to support industrial matting projects expected to begin during the fourth quarter of 2018.

OUTLOOK

Macro economic conditions during the third quarter and into the fourth quarter of 2018 continue to be mixed. West Texas Intermediate (“WTI”) pricing has ranged between $60 and $75 U.S. per barrel, natural gas prices have been steady at Henry Hub and positive U.S. tax changes have spurred a pro-investment environment in the United States. In Canada, widening commodity price differentials have significantly hampered producer cash flow and investment. Lack of pipeline access to tidewater continues to plague the Canadian energy industry and the Canadian economy.

On a positive note, however, a substantial infrastructure project has been approved in Canada. LNG Canada, the largest energy investment in Canadian history, was formally green-lighted on October 1, 2018, subsequent to the quarter-end. This project and associated infrastructure and pipelines are expected to take five years to complete and will provide significant opportunity for our Industrial Matting and Equipment Rentals segments. The Coastal GasLink pipeline is expected to cost over $4.8 billion and take approximately four years to construct. We expect continued opportunities related to these and other projects to contribute meaningfully to our activity levels in the Industrial Matting segment in future quarters.

During the third quarter of 2018, Strad reorganized the Company's geographical segments, Canada and the United States, into two new distinct reportable segments, Industrial Matting and Equipment Rentals. This reporting structure provides additional detail and insight into our business for both shareholders and potential investors, and is consistent with how management assesses performance and allocates resources. The Company’s focus will be to maximize the opportunity within its growing Industrial Matting segment in both Canada and the United States.

Year-to-date, 2018 Industrial Matting revenue and EBITDA trail 2017 results, due to the timing of major projects in 2018 in Canada offset by increased activity in the U.S. However, late in the third quarter, Industrial Matting momentum has been building with the launch of TransCanada’s North Montney MainLine project as well as several other projects in both countries.  To date, most U.S. matting opportunities have been driven by drilling activity however we continue to pursue matting opportunities outside of the Oil & Gas sector in the U.S.

The Equipment Rentals segment in 2018 remains fairly consistent with prior year, however, increased Equipment Rentals activity in the United States has offset lower year-over-year results in Canada. We continue to see growth and opportunity in our Equipment Rentals business in the United States and expect seasonal activity levels to improve in Canada as we head into the fall and winter drilling season.

As previously announced, Strad’s capital program has been increased by an additional $15.5 million to $28.5 million in 2018. The additional capital will be allocated to increasing the matting fleet by approximately 22,000 mats to meet the demand of current and pending projects. The increased growth capital will allow Strad the opportunity to participate in the construction of extensive Canadian infrastructure projects that have recently been approved.

In 2018, our free cash flow has allowed us to increase our capital program and repurchase shares under our Normal Course Issuer Bid (“NCIB”) while carrying a minimal amount of debt. Our free cash flow and strong balance sheet provide the flexibility to evaluate many alternatives to create shareholder value, including both organic growth opportunities or strategic acquisitions.

RESULTS OF OPERATIONS

Industrial Matting

  Three months ended September 30, Nine months ended September 30,
($000's) 2018 2017 % 2018 2017 %
             
  Canadian revenue 11,865   16,090   (26 )% 29,760   39,818   (25 )%
  U.S. revenue 4,503   1,794   151 % 12,210   5,170   136 %
Total Revenue 16,368   17,884   (8 )% 41,970   44,988   (7 )%
             
EBITDA(1) 5,474   7,790   (30 )% 13,196   16,881   (22 )%
EBITDA as a percentage of revenue 33 % 44 %   31 % 38 %  
             
EBIT(2) 4,106   4,950   (17 )% 9,203   9,553   (4 )%
EBIT as a percentage of revenue 25 % 28 %   22 % 21 %  
             
Capital expenditures(3) 10,059   6,896   46 % 19,366   14,680   32 %
Property, plant and equipment 56,245   45,478   24 % 56,245   45,478   24 %
             
Equipment Fleet:            
Matting fleet at period end(4) 101,210   85,100   19 % 101,210   85,100   19 %
Average matting fleet(5) 84,920   82,960   2 % 86,400   78,950   9 %
Average utilization %(6) 38 % 43 %   31 % 37 %  

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 September 30, 2018 and 2017. 
  5. Matting fleet balances are averages for the three months ended September 30, 2018 and 2017.
  6. Equipment utilization includes surface and matting equipment on rent only and is calculated using gross asset value.

Revenue for the three months ended September 30, 2018, of $16.4 million decreased 8% compared to $17.9 million during the same period of 2017. Decreased revenue was primarily due to the timing of industrial matting projects in comparison to the same quarter of 2017. In Canada, there were fewer ongoing matting projects as compared to the same quarter of 2017, which led to a decrease in utilization to 36% from 56%. Further impacting revenue was a 10% decrease in average matting pricing in Canada as compared to the third quarter of 2017. This was offset by an increase in U.S. matting revenue, due to a 58% increase in average matting pricing and an increase in utilization to 43% from 38% as compared to the third quarter of 2017.

During the third quarter of 2018, Strad's matting fleet increased to 101,210 mats at September 30, 2018, compared to 85,100 mats at September 30, 2017, to meet the expected increase in customer demand. Late in the third quarter of 2018, Strad began deploying mats on a major project in Northeastern British Columbia.

EBITDA for the three months ended September 30, 2018, decreased 30% to $5.5 million as compared to $7.8 million during the three months ended September 30, 2017. EBITDA as a percentage of revenue was 33% at September 30, 2018, compared to 44% at September 30, 2017. The decrease in EBITDA is driven primarily by the decrease in revenue as well as an increase in operating expenses by 10% during the third quarter of 2018 as compared to the same period in 2017.

During the third quarter of 2018, EBIT decreased to $4.1 million compared to $5.0 million during the same period of 2017. The primary driver for the decrease in EBIT was the decrease in EBITDA for the third quarter of 2018 compared to the third quarter of 2017. The decrease in EBITDA was offset by depreciation expense, which was higher in the third quarter of 2017 compared to 2018.

Revenue for the nine months ended September 30, 2018, decreased 7% to $42.0 million from $45.0 million during the same period of 2017. The primary decrease in Canadian revenue year-over-year is due to the timing of matting projects, which resulted in a decrease in utilization to 30% from 53%. This was offset by the 136% revenue increase in the U.S. to $12.2 million, compared to $5.2 million during the same period in 2017, due to drilling related matting projects within the U.S., which led to an increase in utilization to 40% from 26%. Further impacting U.S. revenue was a 71% increase in pricing year-over-year.

During the nine months ended September 30, 2018, EBITDA decreased 22% to $13.2 million compared to $16.9 million for the same period of 2017. The decrease in EBITDA is primarily due to the decrease in revenue year-over-year in addition to a nominal increase in operating expenses, due to increased lease payments and personnel costs. EBITDA as a percentage of revenue decreased to 31% for the nine months ended September 31, 2018, as compared to 38% for the nine months ended September 31, 2017.

EBIT for the nine months ended September 30, 2018, decreased to $9.2 million as compared to $9.6 million for the same period in 2017. The decrease in EBIT is primarily driven by the decrease in EBITDA for the third quarter of 2018 as compared to the third quarter of 2017. The decrease in EBITDA was offset by the decrease in depreciation expense to $4.0 million for the nine months ended September 30, 2018, as compared to $7.3 million for the nine months ended September 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 re-occur in 2018.

Operating expenses for the three and nine months ended September 30, 2018, increased 10% and 1%, respectively, to $9.6 million and $25.2 million as compared to $8.8 million and $25.0 million during the same period of 2017. The increase in operating expenses for the three months ended September 30, 2018, is primarily due to higher transportation and other third party costs for the three and nine months ended September 30, 2018, as compared to the same periods in 2017.

Equipment Rentals

  Three months ended September 30, Nine months ended September 30,
($000's) 2018 2017 % 2018 2017 %
             
  Canadian revenue 7,638   10,076   (24 )% 26,658   30,963   (14 )%
  U.S. revenue 7,214   5,963   21 % 18,991   14,126   34 %
Total Revenue 14,852   16,039   (7 )% 45,649   45,089   1 %
             
EBITDA(1) 1,580   2,630   (40 )% 5,813   6,178   (6 )%
EBITDA as a percentage of revenue 11 % 16 %   13 % 14 %  
             
EBIT (2) (2,412 ) (1,816 ) nm (6,114 ) (7,595 ) nm
EBIT as a percentage of revenue (16 )% (11 )%   (13 )% (17 )%  
             
Capital expenditures(3) 142   260   (45 )% 1,074   2,211   (51 )%
Property, plant and equipment 84,777   100,887   (16 )% 84,777   100,887   (16 )%
             
Equipment Fleet:            
Equipment fleet at period end(4) 6,120   6,140   nm 6,120   6,140   nm
Average equipment fleet(5) 6,140   6,090   1 % 6,110   6,080   nm
Average utilization %(6) 36 % 35 %   35 % 35 %  
             
Rig Counts(7)            
Western Canada 206   207   nm 193   206   (6 )%
Bakken 55   52   6 % 53   45   18 %
Marcellus 76   75   1 % 78   69   13 %
Rockies 66   71   (7 )% 67   61   10 %

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 September 30, 2018 and 2017. 
  5. Surface equipment fleet balances are averages for the three months ended September 30, 2018 and 2017.
  6. Equipment utilization includes surface and matting 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 September 30, 2018, decreased 7% to $14.9 million from $16.0 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 was still operating in the third quarter of 2017. The decrease was partially offset by increased revenue in the U.S., which was due to an improvement in utilization to 43% from 38% and a 10% improvement in average pricing when compared to the third quarter of 2017. U.S. utilization improved as a result of the increase in rig counts in the  Bakken and Marcellus by 6% and 1%, respectively, which was offset by a decrease in rig counts in the Rockies by 7%.

During the third quarter, EBITDA decreased 40% to $1.6 million from $2.6 million during the third quarter of 2017. EBITDA as a percentage of revenue decreased to 11% at September 30, 2018, compared to 16% at September 30, 2017. The decrease in EBITDA was driven primarily by the decrease in revenue during the third quarter.

EBIT for the three months ended September 30, 2018, decreased 33% to $(2.4) million from $(1.8) million during the same period of 2017.  The decrease in EBIT is driven primarily by the decrease in EBITDA, partially offset by lower depreciation expense during the third quarter of 2018 of $4.0 million compared to $4.4 million in 2017.

Revenue for the nine months ended September 30, 2018, increased 1% to $45.6 million from $45.1 million at September 30, 2017. The increase in revenue was driven by the increase in U.S. surface equipment utilization to 40% from 34% and the 16% increase in pricing year-over-year. Utilization improved due to the increase in rig counts in the Bakken, Marcellus and the Rockies of 18%, 13% and 10% respectively. This was offset by lower revenue in Canada which was the result of lower rig counts, by 6%, in addition to the discontinuance of the drill cuttings management service line and a decrease in utilization to 32% from 35%.

During the nine months ended September 30, 2018, EBITDA decreased 6% to $5.8 million from $6.2 million during the same period in 2017. The decrease in EBITDA was driven by increased operating expenses year-over-year. EBITDA as a percentage of revenue for the nine months ended September 30, 2018, remained consistent at 13% compared to 14% during the same period of 2017.

EBIT for the nine months ended September 30, 2018, increased 19% to $(6.1) million from $(7.6) million during the same period in 2017. EBIT improved during the nine months ended September 30, 2018, primarily due to lower depreciation expense for the nine months of $11.9 million as compared to $13.8 million for the same period in 2017.

Operating expenses for the three and nine months ended September 30, 2018, remained consistent and increased 1%, respectively, to $11.5 million and $35.0 million as compared to $11.6 million and $34.6 million during the same period of 2017. The increase in operating expenses for the nine months ended September 30, 2018, is primarily the result of an increase in lease payments and consumables compared to the same period in the prior year.


LIQUIDITY AND CAPITAL RESOURCES

($000's) September 30, 2018 December 31, 2017
     
Current assets 29,605 31,899
Current liabilities 16,457 12,282
Working capital(1) 13,148 19,617
     
Banking facilities    
Operating facility 956
Syndicated revolving facility 6,414 10,776
Total facility borrowings 7,370 10,776
     
Total credit facilities(2) 48,500 48,500
Unused credit capacity 41,130 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 September 30, 2018, Strad had access to $48.5 million of credit facilities.

As at September 30, 2018, working capital was $13.1 million compared to $19.6 million at December 31, 2017. The change in current assets is a result of a 3% increase in accounts receivable to $26.7 million for the third 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 third quarter of 2018 as compared to the fourth quarter of 2017. Inventory decreased by 33% to $1.2 million at September 30, 2018, from $1.8 million at December 31, 2017. Prepaid expenses increased 23% at September 30, 2018, as compared to December 31, 2017. The decrease in inventory and the increase in prepaids relates to the normal course of business. During the third quarter of 2018, the Company sold the property included in other assets for proceeds of $1.3 million, which further contributed to the decrease in current assets.

The change in current liabilities is a result of a 29% increase in accounts payable and accrued liabilities to $15.3 million at September 30, 2018, compared to $11.9 million at year end. The increase in accounts payable is primarily due to higher operating expenses in the third quarter of 2018 as compared to the fourth quarter of 2017 in addition to the timing of payments made for the third quarter of 2018.

Cash flow from operating activities for the nine months ended September 30, 2018, increased to $23.6 million compared to $10.8 million for the nine months ended September 30, 2017, due to a net income as opposed to a net loss, increased cash generated from used fleet sales and an unwind of non-cash working capital. Funds from operations for the three months ended September 30, 2018, decreased to $8.6 million compared to $11.4 million for the three months ended September 30, 2017. Capital expenditures totaled $10.5 million for the three months ended September 30, 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 September 30, 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 September 30, 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 three months ended September 30, 2018, the overall effective rates on the operating facility and revolving facility were 4.21% and 4.41%, respectively. As of September 30, 2018, $1.0 million was drawn on the operating facility and $6.4 million was drawn on the revolving facility. Required payments on the revolving facility are interest only.

As at September 30, 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 Covenants As at September 30, 2018 As at December 31, 2017
Funded debt to EBITDA ratio (not to exceed 3.0:1)    
Funded debt 7,701 9,768
Covenant EBITDA 21,533 25,339
Ratio 0.4 0.4
     
EBITDA to interest coverage ratio (no less than 3.0:1)    
Covenant EBITDA 21,533 25,339
Covenant interest expense 468 1,225
Ratio 46.0 20.7

NON-IFRS AND ADDITIONAL IFRS MEASURES AND RECONCILIATIONS

Certain supplementary measures in this MD&A 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, 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 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.

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

($000's)    
  Three months ended September 30, Nine months ended September 30,
  2018 2017 2018 2017
         
Net cash generated from operating activities 7,448   4,223   23,571   10,795  
Less:        
Changes in non-cash working capital (1,186 ) (7,174 ) 1,357   (12,205 )
Funds from Operations 8,634   11,397   22,214   23,000  

Reconciliation of EBITDA and EBIT

($'000's)        
  Three months ended September 30, Nine months ended September 30,
  2018 2017 2018 2017
         
Net income (loss): 890   598   4,354   (3,911 )
Add (deduct):        
Depreciation and amortization 5,444   7,359   16,116   21,314  
Income tax (recovery) expense (62 ) 1,123   (4,452 ) 1,136  
Interest expense 230   359   577   1,360  
EBITDA(1) 6,502   9,439   16,595   19,899  
(Deduct):        
Depreciation and amortization (5,444 ) (7,359 ) (16,116 ) (21,314 )
EBIT 1,058   2,080   479   (1,415 )
(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    
($'000's)        
  Three months ended
  Sep 30, 2018 Jun 30, 2018 Mar 31, 2018 Dec 31, 2017
                         
Net income (loss): $ 890   $ 3,861   $ (397 ) $ (3,364 )
Add (deduct):        
Depreciation and amortization 5,444   5,240   5,432   8,918  
Income tax (recovery) expense (62 ) (4,428 ) 38   (653 )
Interest expense 230   157   190   158  
EBITDA(1) 6,502   4,830   5,263   5,059  
(Deduct):        
Depreciation and amortization (5,444 ) (5,240 ) (5,432 ) (8,918 )
EBIT 1,058   (410 ) (169 ) (3,859 )
(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.


  Three months ended
  Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Dec 31, 2016
         
Net loss: $ 598   $ (2,163 ) $ (2,347 ) $ (3,105 )
Add (deduct):        
Depreciation and amortization 7,359   7,572   6,383   7,610  
Income tax (recovery) expense 1,123   (102 ) 116   (199 )
Interest expense 359   492   509   458  
EBITDA(1) 9,439   5,799   4,661   4,764  
(Deduct):        
Depreciation and amortization (7,359 ) (7,572 ) (6,383 ) (7,610 )
EBIT 2,080   (1,773 ) (1,722 ) (2,846 )
(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)    
  Nine months ended
September 30, 2018
Year-ended
December 31, 2017
Bank indebtedness (cash) at syndicate banks 956   (1,626 )
Long term debt 6,414   10,776  
Current and long term obligations under finance lease 331   618  
Funded Debt 7,701   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 MD&A contains forward-looking statements concerning future capital expenditures of the Company, including its 2018 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 2018 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 2018 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, 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.

THIRD 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,  November 9, 2018.

The conference call dial in number is 1-844-388-0561, followed by Conference ID code 5992769

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, November 16th, 2018, at 1:00 p.m. ET. To access the replay, call 1-855-859-2056, followed by pass code 5992769.

Strad Energy Services Ltd.
Interim Consolidated Statement of Financial Position
(Unaudited)

(in thousands of Canadian dollars) As at September 30, 2018 As at December 31, 2017
  $ $
Assets    
Current assets    
Cash   1,859  
Trade receivables 26,738   26,038  
Inventories 1,195   1,818  
Prepaids and deposits 869   707  
Other assets   1,289  
Income taxes receivable 803   188  
Total current assets 29,605   31,899  
     
Non-current assets    
Property, plant and equipment 141,225   141,917  
Intangible assets 1,439   556  
Income tax receivable 283   278  
Deferred income tax assets 155   171  
Total non-current assets 143,102   142,922  
Total assets 172,707   174,821  
     
Liabilities    
Current liabilities    
Bank indebtedness 956    
Accounts payable and accrued liabilities 15,346   11,937  
Current portion of obligations under finance lease 155   345  
Total current liabilities 16,457   12,282  
     
Non-current liabilities    
Long-term debt 6,414   10,776  
Obligations under finance lease 176   273  
Deferred income tax liabilities 11,874   11,567  
Total liabilities 34,921   34,898  
     
Equity    
Share capital 147,877   154,763  
Contributed surplus 12,984   12,736  
Accumulated other comprehensive income 19,886   22,635  
Deficit (42,961 ) (50,211 )
Total equity 137,786   139,923  
Total liabilities and equity 172,707   174,821  
     

Strad Energy Services Ltd.
Interim Consolidated Statement of Income (Loss) and Comprehensive Income (Loss)
For the three and nine months ended September 30, 2018 and 2017
(Unaudited)

(in thousands of Canadian dollars, except per share amounts)          
  Three months ended September 30,   Nine months ended September 30,
    2018   2017     2018   2017  
  $ $   $ $
Revenue   31,220     33,923       87,619     90,077  
Expenses          
Operating expenses   21,137     20,343       60,148     59,597  
Depreciation   5,373     7,295       15,956     21,118  
Amortization of intangible assets   71     42       160     126  
Amortization of other assets       22           70  
Selling, general and administration   3,633     4,080       11,182     10,605  
Share-based payments   70     82       248     370  
Gain on disposal of property, plant and equipment   (93 )   (6 )     (570 )   (234 )
Foreign exchange (gain) loss   (29 )   (15 )     16     (160 )
Interest expense   230     359       577     1,360  
Income (loss) before income tax   828     1,721       (98 )   (2,775 )
Income tax (recovery) expense   (62 )   1,123       (4,452 )   1,136  
Income (loss) for the period   890     598       4,354     (3,911 )
           
Other comprehensive (loss) income          
Items that may be reclassified subsequently to net income          
Cumulative translation adjustment   (1,085 )   (2,510 )     1,595     (4,849 )
Deferred tax expense on foreign exchange gain             (4,344 )    
Total comprehensive (loss) income   (195 )   (1,912 )     1,605     (8,760 )
           
           
Income (loss) per share:          
Basic $ 0.02 $ 0.01   $ 0.07 $ (0.07 )
Diluted $ 0.02 $ 0.01   $ 0.07 $ (0.07 )
           

Strad Energy Services Ltd.
Interim Consolidated Statement of Cash Flow
For the three and nine months ended September 30, 2018 and 2017
(Unaudited)

(in thousands of Canadian dollars)    
  Nine months ended September 30,
  2018 2017
  $ $
Cash flow provided by (used in)    
Operating activities    
Net income (loss) for the period 4,354   (3,911 )
Adjustments for items not affecting cash:    
Depreciation and amortization 16,116   21,314  
Deferred income tax (recovery) expense (4,021 ) 1,136  
Share-based payments 248   370  
Interest expense 577   1,360  
Unrealized foreign exchange loss (gain) 56   (495 )
Gain on disposal of property, plant and equipment (570 ) (234 )
Book value of used fleet sales in operating activities 5,454   3,460  
Changes in items of non-cash working capital 1,357   (12,205 )
Net cash generated from operating activities 23,571   10,795  
     
Investing activities    
Purchase of property, plant and equipment (20,516 ) (16,967 )
Proceeds from sale of property, plant and equipment 1,595   790  
Purchase of intangible assets (1,039 ) (34 )
Proceeds from sale of other assets 1,272    
Cash paid on business acquisition   (2,750 )
Cash assumed on business acquisition   322  
Changes in items of non-cash working capital 1,184   117  
Net cash used in investing activities (17,504 ) (18,522 )
     
Financing activities    
Proceeds on issuance of long-term debt   5,307  
Repayment of long-term debt (4,362 ) (12,919 )
Repayment of finance lease obligations (net) (252 ) (790 )
Repayment of shareholder loan   304  
Issuance of common shares   15,000  
Share issue costs   (1,025 )
Normal course issuer bid (3,990 )  
Interest expense (577 ) (1,360 )
Changes in items of non-cash working capital 10   (76 )
Net cash (used in) generated from financing activities (9,171 ) 4,441  
Effect of exchange rate changes on cash and cash equivalents 289   769  
Decrease in cash and cash equivalents (2,815 ) (2,517 )
     
Cash and cash equivalents (including bank indebtedness) - beginning of year 1,859   (1,109 )
Cash and cash equivalents (including bank indebtedness) - end of period (956 ) (3,626 )
     
Cash paid for income tax 377    
Cash paid for interest 393   203  

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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