TSE:ENT $
ENTREC CORPORATION ANNOUNCES 2015 THIRD QUARTER FINANCIAL RESULTS

November 12, 2015

    • Third quarter revenue of $41.2 million and Adjusted EBITDA of $7.4 million
    • Debt obligations reduced by $13.2 million in third quarter
    • Adjusted EBITDA margin improves to 18.0% from 12.0% last quarter

Acheson, Alberta, Canada – ENTREC Corporation (“ENTREC” or the “Company”), an employee-owned integrated crane solutions provider, today announced financial results for the third quarter ended September 30, 2015.

 

 Three Months Ended

 Nine Months Ended

$ thousands, except per share amounts and margin percent Sept 30 2015  Sept 30 2014  Sept 30 2015  Sept 30 2014 
Revenue 41,187  58,869  130,466  173,788 
Gross profit 11,494  18,300  32,917  51,185 
Gross margin 27.9%  31.1%  25.2%  29.5% 
Adjusted EBITDA(1) 7,417  13,140  19,407  35,015 
Margin(1)  18.0%  22.3%   14.9%  20.1% 
Per share(1) 0.07  0.12  0.18  0.31 
Adjusted net (loss) income(1) (1,848)  2,797  (8,831)  5,486 
Per share(1) (0.02)  0.03  (0.08)  0.05 
Net (loss) income (2,299)  3,281  (10,134)  5,699 
Per share – basic (0.02)  0.03  (0.09)  0.05 
Per share – diluted (0.02)  0.02  (0.09)  0.04 

Revenue for the quarter ended September 30, 2015 decreased by 30% to $41.2 million from $58.9 million in 2014. On a year-to-date basis, revenue declined by 25% to $130.5 million from $173.8 million in 2014. With the decline in crude oil prices and depressed natural gas environment, ENTREC experienced downward pricing pressure from its customers as they worked to reduce their operating and capital expenditures in the current commodity environment. On average, ENTREC estimates these pricing reductions negatively impacted revenue by approximately 10-15%. In addition, the Company also experienced a reduction in demand for its crane and specialized transportation services.

Adjusted EBITDA declined to $7.4 million for the quarter ended September 30, 2015 from $13.1 million in 2014. The lower adjusted EBITDA margin reflected lower customer pricing as well as reduced equipment utilization levels. The adjusted net loss of $1.8 million for the three months ended September 30, 2015 compared to adjusted net income of $2.8 million in 2014.

Industry Outlook and ENTREC’s Response

With the decline in crude oil prices, customer pricing and activity levels in the oil and gas industry for both cranes and specialized transportation services have been negatively affected. There also remains significant uncertainty as to the magnitude and timing of any future recovery in oil and natural gas prices and in how future changes in these prices will impact activity levels in the oil and gas industry and, in particular, the Alberta oil sands region.

ENTREC’s 2015 and 2016 business plans and capital expenditure program reflect this new reality. After fulfilling previous capital expenditure commitments and taking delivery of this equipment in the first half of 2015, the Company has significantly curtailed future capital expenditures until the business outlook improves. In addition, ENTREC remains focused on controlling costs, minimizing discretionary expenditures, and rationalizing operations where practical. As part of this initiative, earlier this year the Company consolidated its Calgary operations branch location into its Acheson headquarters and consolidated its Dawson Creek branch into its Fort St. John facility. In the fourth quarter of 2015, ENTREC also consolidated its Leduc branch into the Acheson headquarters facility.

In conjunction with the Calgary branch closure, ENTREC initially reduced its salaried (non-billable) workforce by about 15% in the first quarter of 2015. In the second quarter, the Company further reduced its salaried (non-billable) workforce by an additional 10% to continue alignment of its workforce with current activity levels. In addition, the Company instituted temporary wage reductions for all salaried staff, effective April 1, 2015. The wage reductions ranged from 5% for non-management staff to 15% for directors and senior management. Many salaried employees were also offered the opportunity to work reduced work weeks, which has resulted in savings of up to 20% for these employees.

The Company has also been working extensively with many of its suppliers to reduce their pricing given the market environment and have achieved significant cost savings from these efforts.

All of these measures have allowed the Company to significantly reduce its overhead costs, while also improving operating efficiency. With the benefit of its current cost reduction initiatives, ENTREC estimates it will have reduced ongoing indirect and general and administrative expenditures by approximately $9 million on an annual basis. The Company also continues to closely assess its operating costs and will make further cost reductions as necessary to ensure its expenses continue to be aligned with activity levels.

Balance Sheet Remains Well-Positioned

Despite the current challenging commodity environment, ENTREC’s business remains well-capitalized and well-positioned to weather the downturn. Specific current highlights of the Company’s financial position include a working capital position of $23 million and a net tangible asset value that approximates $102 million at September 30, 2015.

In addition, ENTREC also has a $240 million asset-based credit facility (the “ABL Facility”). The ABL Facility has no principal repayments required until its maturity in March 2019 and has no leverage covenant as at September 30, 2015. The facility is supported by a very modern crane and transportation fleet that, along with real estate and other equipment assets, has an estimated fair market value of approximately $273 million. History has also shown that modern crane fleets hold their value well throughout market cycles. In addition, the facility is supported by about $35 million in accounts receivable at September 30, 2015.

As at September 30, 2015, based on ENTREC’s fleet and accounts receivable as at that date, the borrowing base under the ABL Facility was $184.2 million. ENTREC was utilizing $139.4 million of this availability, giving it excess borrowing capacity of $44.8 million. There will be no leverage covenant in place if ENTREC maintains an excess borrowing capacity higher than 12.5% of the borrowing base ($23.0 million at September 30, 2015). At September 30, 2015, ENTREC’s excess borrowing capacity of $44.8 million exceeded this threshold by $21.8 million.

ENTREC also continues to focus on reducing its long-term debt in this economic environment. During the three months ended September 30, 2015, the Company reduced its long-term debt and finance lease obligations by $13.2 million. ENTREC expects that positive cash from operating activities as well as proceeds from the continued disposal of underutilized equipment will allow the Company to further reduce its debt obligations in the future.

2015 and 2016 Operational Outlook

Given the uncertainties discussed above, ENTREC’s outlook remains weak for both the remainder of 2015 and in 2016. Ongoing downward pricing pressure from customers along with lower demand for the Company’s services supporting oil and natural gas exploration and production activities will continue to negatively impact ENTREC’s financial results.

Helping to partially offset the lower demand for ENTREC’s services has been ongoing construction project work for the Company’s rough terrain and crawler crane fleets. ENTREC expects these assets will remain well-utilized over the next six to nine months. In the previous quarter, ENTREC was cautious of the potential negative impact of customer decisions to slow-down or postpone work on construction projects in the Alberta oil sands region. While this concern remains for the industry as a whole, ENTREC’s current 2015 construction project work is expected to continue into 2016.

With ENTREC’s crane fleet, the company also continues to establish a growing presence in the market for maintenance, repair and operation (“MRO”) work in the Alberta oil sands region – which is typically less susceptible to changes in near-term commodity prices, and should continue to provide a steady demand for ENTREC’s services over the next year and beyond. This work contributes 15 to 20% of consolidated revenue and ENTREC expects this percentage could increase in the future.

ENTREC also remains well-positioned in northwest British Columbia to support the region’s growing industrial activity, including the potential future construction of LNG facilities. Pacific Northwest LNG has announced its conditional approval of a potential $36 billion terminal in the Prince Rupert region. The approval remains subject to a positive environmental assessment by the federal government. LNG Canada could also issue a final investment decision on its proposed LNG facility in Kitimat, British Columbia within the next twelve months. Note that demand for ENTREC’s services in northeast British Columbia could also be impacted by final investment decisions on the construction of proposed LNG facilities in northwest British Columbia. Positive final investment decisions should accelerate the demand for ENTREC’s services, while negative or delayed decisions could adversely impact relevant natural gas-related activity. 

“Over the longer-term, our overall competitive position continues to be positive,” commented John M. Stevens, ENTREC’s President and CEO. “Despite short-term uncertainties and challenges, we are well-positioned geographically, with the right equipment fleet, and a complete range of crane and specialized transportation services in each of our key markets across western Canada and in North Dakota. While we expect the remainder of 2015 and 2016 will continue to be a challenging period from an operating perspective, we continue to aggressively manage our costs, and remain well-positioned to capture future growth opportunities as industry fundamentals improve.”

2015 capital expenditure program

As discussed earlier, with the recent decline in crude oil prices, after fulfilling previous commitments and taking delivery of certain equipment in the first half of 2015, ENTREC has significantly curtailed future capital expenditures until industry conditions improve. In addition, the Company has also focused on disposing older and underutilized assets that are no longer necessary in serving the current needs of its customers. With these disposals taken into account, ENTREC has reduced its overall 2015 capital expenditure program to $17 million from a previous program of $21 million. ENTREC’s revised 2015 capital expenditure program consists of the following components:

 $ thousands  
Growth capital expenditures – LR 1750 crawler crane

7,200

Growth capital expenditures – All-terrain mobile cranes and other

4,400

Maintenance capital expenditures, net of disposal proceeds

5,400

TOTAL

 17,000

 

With a relatively new fleet, ENTREC expects to incur minimal maintenance capital expenditures for the foreseeable future. ENTREC’s maintenance capital expenditures in 2015 consisted primarily of assets the Company had previously committed to purchasing in 2014, prior to the industry decline.

During the three months ended September 30, 2015, ENTREC made capital expenditures of $0.9 million. Offsetting these expenditures were proceeds on disposal of $3.4 million, resulting in net capital expenditures of negative $2.5 million in the quarter. ENTREC expects capital expenditures in the fourth quarter ending December 31, 2015 to be fully offset by proceeds from the disposal of additional property, plant and equipment.

A complete set of ENTREC’s most recent financial statements and Management’s Discussion and Analysis will be filed on SEDAR (www.sedar.com) and posted on the Company’s website (www.entrec.com).

Third Quarter Conference Call

ENTREC will host a conference call and webcast to discuss its 2015 third quarter financial results tomorrow, November 13, 2015 at 9:00 am Mountain Time (11:00 am Eastern). The call can be accessed by dialing toll-free: 1-866-225-2055 or 416-340-9531 (GTA and International). The conference call will also be available via webcast within the Investors section of ENTREC’s website at: www.entrec.com.

About ENTREC

ENTREC is an employee-owned integrated crane solutions provider to the oil and natural gas, construction, petrochemical, mining and power generation industries. ENTREC is listed on the Toronto Stock Exchange under the symbol ENT.

Non-IFRS Financial Measures

Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation, amortization, loss (gain) on disposal of property, plant and equipment, change in fair value of embedded derivative, share-based compensation, and non-recurring business acquisition and integration costs. In addition to net income, Adjusted EBITDA is a useful measure as it provides an indication of the financial results generated by ENTREC’s principal business activities prior to consideration of how these activities are financed or how the results are taxed in various jurisdictions and before certain non-cash expenses. Adjusted EBITDA also illustrates what ENTREC’s EBITDA is, excluding the effect of non-recurring business acquisition and integration costs. Adjusted EBITDA margin is calculated as adjusted EBITDA divided by revenue. Per share amounts are calculated as adjusted EBITDA divided by the basic weighted average number of shares outstanding during the period.

Adjusted net (loss) income is calculated excluding the after-tax amortization of acquisition-related intangible assets, notional interest accretion expense arising from convertible debentures, and the change in fair value of the embedded derivative related to the convertible debentures. These exclusions represent non-cash charges the Company does not consider indicative of ongoing business performance. Adjusted earnings (loss) per share are calculated as adjusted net (loss) income divided by the basic weighted average number of shares outstanding during the applicable period.

Net tangible asset value is calculated as shareholders’ equity, excluding intangible assets, and adjusted for the difference between the estimates of fair market value and carrying value of ENTREC’s property, plant and equipment. ENTREC believes net tangible asset value is a useful measure as it provides an indication of the net asset value of ENTREC.

Please see ENTREC’s Management Discussion & Analysis for the three and nine months ended September 30, 2015 for reconciliations of adjusted EBITDA and adjusted net (loss) income to net (loss) income and net tangible asset value to shareholders’ equity, the most directly comparable financial measures calculated and presented in accordance with IFRS.

Consolidated Statements of Financial Position
As at
(thousands of Canadian dollars)

Sept 30
2015
$

Dec 31
2014
$

     

ASSETS

   

Current assets

   

Cash

99

471

Trade and other receivables

35,385

53,850

Income taxes receivable

73

2,216

Inventory

2,704

2,656

Prepaid expenses and deposits

3,064

2,971

 

41,325

62,164

Non-current assets

   

Long-term deposits and other assets

102

105

Property, plant and equipment

253,638

257,721

Intangible assets

2,697

3,329

Total assets

297,762

323,319

     

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

Current liabilities

   

Trade and other payables

12,637

19,246

Notes Payable

2,294

Current portion of deferred leasehold inducements

609

609

Current portion of long-term debt

437

421

Current portion of obligations under finance lease

2,005

1,979

 

17,982

22,255

Non-current liabilities

   

Deferred leasehold inducements

9,936

10,393

Long-term debt

141,884

150,563

Obligations under finance lease

2,134

2,721

Notes payable

2,294

Convertible debentures

21,513

20,384

Deferred income taxes

18,791

20,421

Total liabilities

212,240

229,031

     

Shareholders’ equity

   

Share capital

132,248

131,870

Contributed surplus

9,650

9,223

Deficit

(58,011)

(47,877)

Accumulated other comprehensive income 

1,635

1,072

Total shareholders’ equity

85,522

94,288

     

Total liabilities and shareholders’ equity

297,762

323,319

 

 

Consolidated Statements of (Loss) Income

 Three Months Ended

Nine Months Ended

(thousands of Canadian dollars, except per share amounts)

Sept 30,
2015
$

Sept 30,
2014
$

Sept 30,
2015
$

Sept 30,
2014
$

Revenue

41,187

58,869

130,466

173,788

Direct costs

 29,693

 40,569

97,549

122,603

       

Gross profit

 11,494

 18,300

32,917

51,185

         

Operating expenses

       

General and administrative expenses

 4,103

 5,467

15,063

17,278

Depreciation of property, plant and equipment

 6,846

 6,486

20,247

18,146

Amortization of intangible assets

 274

 1,003

838

2,960

Share-based compensation

 325

 431

805

1,320

Loss (gain) on disposal of property, plant and equipment

 831

 47

659

146

 

 12,379

 13,434

37,612

39,850

         

(Loss) Income before finance items and income taxes

 (885)

 4,866

(4,695)

11,335

         

Finance items

       

Finance costs

 2,250

 2,311

7,080

7,283

Finance income

 

 (40)

(40)

Gain on change in fair value of embedded derivative

 

 (1,928)

(8)

(4,038)

 

 2,250

 343

7,072

3,205

         

(Loss) Income before income taxes

 (3,135)

 4,523

(11,767)

8,130

         

Income taxes

       

Current

 141

 191

(5)

(307)

Deferred

 (977)

 1,051

(1,628)

2,738

 

 (836)

 1,242

(1,633)

2,431

         

Net (loss) income

 (2,299)

 3,281

(10,134)

5,699

         

(Loss) earnings per share – basic

(0.02)

 0.03

(0.09)

0.05

(Loss) earnings per share – diluted

 (0.02)

 0.03

(0.09)

0.04

 

Forward-looking Statements

This press release contains forward-looking statements which reflect ENTREC’s current beliefs and are based on information currently available to ENTREC. These statements require ENTREC to make assumptions it believes are reasonable and are subject to inherent risks and uncertainties. Actual results and developments may differ materially from the results and developments discussed in the forward-looking statements as certain of these risks and uncertainties are beyond ENTREC’s control.

Examples of such forward-looking statements in this press release relate to, but are not limited to the Company’s: estimate that recent cost reduction initiatives will reduce ENTREC’s on-going indirect and general and administrative expenditures by approximately $9 million on an annual basis; belief that, despite the current challenging commodity environment, ENTREC’s business remains well-capitalized and well-positioned to weather the downturn; estimate that modern crane fleets will hold their value well through market cycles; expectation that positive cash from operating activities as well as proceeds from the continued disposal of underutilized equipment will allow ENTREC to further reduce its debt obligations in the future; expectation that ongoing downward pricing pressure from ENTREC’s customers along with lower demand for its services supporting oil and natural gas exploration and production activities will continue to negatively impact ENTREC’s financial results in the short-term; belief that the Company’s rough terrain and crawler crane fleets will remain well utilized over the next six to nine months; anticipation that ENTREC’s MRO work in the Alberta oil sands region will be less susceptible to changes in near-term commodity prices and continue to provide a steady demand for the Company’s services over the next year and beyond; belief that the future demand for ENTREC’s services in northeast B.C. and northwest B.C. could be impacted by final investment decisions on the construction of proposed LNG facilities in northwest B.C.; expectation that 2015 and 2016 will continue to be a challenging period for the oil and gas industry; plans to execute a 2015 capital expenditure program of $17 million, net of disposal proceeds; belief that with a relatively new fleet, ENTREC will incur minimal maintenance capital expenditures for the foreseeable future, until industry conditions improve; and estimate that capital expenditures in the fourth quarter ending December 31, 2015 will be fully offset by proceeds from the disposal of additional property, plant and equipment.

ENTREC’s forward-looking statements involve a number of significant assumptions. Key assumptions utilized in developing forward-looking statements related to ENTREC’s growth and revenue expectations, and its sufficient capitalization to weather the downturn include achieving its internal revenue, net income and cash flow forecasts for 2015, 2016 and beyond. Key assumptions involved in preparing ENTREC’s internal forecasts include, but are not limited to, its expectations and estimates that: demand for crane services on certain awarded construction projects continues for the remainder of 2015 and into 2016; reduced activity levels in 2015 continue into 2016 due to lower crude prices; should the planned development of LNG facilities proceed, certain customers will choose to use ENTREC’s services; ENTREC will be able to retain key personnel and attract additional high-quality personnel to support its planned revenue; there are no significant unplanned increases in ENTREC’s cost structure, including those costs related to fuel and wages; market interest rates remain similar to current rates; there is no prolonged period of inclement weather that impedes or delays the need for crane and specialized transportation services; the competitive landscape in western Canada for crane and specialized transportation services does not materially change during the remainder of 2015 and in 2016; and there is no material adverse change in overall economic conditions.

Achieving these forecasts largely depends on a number of factors beyond ENTREC’s control including several of the risks discussed further under “Business Risks” in ENTREC’s Management Discussion & Analysis for the three and nine months ended September 30, 2015. The business risks that are most likely to affect ENTREC’s ability to achieve its internal revenue, net income and cash flow forecasts for 2015, 2016 and beyond are the volatility of the oil and gas industry, its exposure to the Alberta oil sands, workforce availability, weather and seasonality, availability of debt and equity financing, and competition. These risk factors are interdependent and the impact of any one risk or uncertainty on a particular forward-looking statement is not determinable.

Consequently, all of the forward-looking statements made in this press release are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, ENTREC. These forward-looking statements are made as of the date of this press release. Except as required by applicable securities legislation, ENTREC assumes no obligation to update publicly or revise any forward-looking statements to reflect subsequent information, events, or circumstances.

For further information, please contact:

John M. Stevens – President & CEO
Telephone: (780) 960-5625

Jason Vandenberg – CFO
Telephone: (780) 960-5630

www.entrec.com

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