Business Context and Reporting Period
Company: North American Construction Group Ltd. (formerly North American Energy Partners Inc.)
Reporting Period: Three and six months ended June 30, 2018
Industry: Mining and heavy construction services, primarily in Western Canada.
Key Event: The Company changed its name effective April 11, 2018. It adopted the new US GAAP revenue standard (Topic 606) on January 1, 2018, using the modified retrospective method.
Key Financial Metrics
| Metric (CAD '000s) | 3 Months Ended Jun 30, 2018 |
6 Months Ended Jun 30, 2018 |
6 Months Ended Jun 30, 2017 |
|---|---|---|---|
| Revenue | $79,471 | $194,174 | $140,466 |
| Gross Profit | $9,651 | $36,442 | $21,863 |
| Gross Margin | 12.1% | 18.8% | 15.6% |
| Operating Income | $1,696 | $18,763 | $7,859 |
| Net Income | $33 | $11,164 | $3,399 |
| Adjusted EBITDA | $15,205 | $54,295 | $33,521 |
| Cash from Operations | $25,789 | $64,825 | $44,790 |
| Cash Balance | $2,836 | $2,836 | $34,585 |
| Total Debt | Total Debt (Non-GAAP): $132,968 (Jun 30, 2018) vs $138,969 (Dec 31, 2017) | ||
| Liquidity | $117.9 million (Cash + Unused Credit Facility) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 66.7% year-over-year for the quarter and 38.2% for the six-month period. Growth was driven by increased heavy civil construction at the Kearl mine, new activity at the Highland Valley copper mine, and consistent mine support services at Mildred Lake and Millennium mines.
- Profitability Improvement: The Company moved from a gross loss of $1.2 million in Q2 2017 to a gross profit of $9.7 million in Q2 2018. This was due to more consistent activity levels and better equipment utilization compared to the prior year, which was impacted by a cancelled earthworks contract.
- One-Time Items: A $1.7 million loss on sublease was recorded in the six-month period related to the subletting of underutilized Edmonton office space. Stock-based compensation expense increased significantly ($2.4 million for the quarter) due to the impact of a stronger share price on liability-classified awards.
- Debt Reduction: Total debt decreased by approximately $6 million compared to year-end 2017, primarily due to repayments on the Credit Facility.
Guidance, Outlook, and Risks
- Backlog: Anticipated backlog stands at $328.5 million as of June 30, 2018, with $54.9 million expected to be performed in the remainder of 2018. This includes two new three-year term commitments totaling approximately $280 million secured in June 2018.
- Growth Targets: Management expects to exceed 2018 growth objectives, targeting at least 30% EBITDA growth. The Company is in the second year of a three-year organic growth plan targeting 15% compound growth in revenue and EBITDA.
- Capital Expenditures: Expected sustaining capital expenditures for 2018 range from $35.0 million to $50.0 million. Growth capital expenditures are expected to range from $30.0 million to $40.0 million, supporting a new maintenance facility and fleet expansion.
- Risks:
- Customer Concentration: Three customers accounted for 87% of revenue in the six months ended June 30, 2018.
- Contract Modifications: $7.4 million of unresolved unpriced contract modifications remain on the balance sheet, subject to constraint and potential revenue reversal.
- Seasonality: Mining revenues are typically highest in Q1, while civil construction peaks in Q3/Q4. "Spring breakup" conditions can negatively impact margins.
- Oil Prices: Future activity levels depend heavily on oil prices and customer capital budgets.
Investor Verification Checklist
- Backlog Realization: Verify the conversion of the $328.5 million backlog into actual revenue, noting that long-term contracts allow customers to unilaterally reduce scope.
- Unpriced Modifications: Monitor the resolution of the $7.4 million in unpriced contract modifications and the potential for revenue recognition or reversal.
- Debt Covenants: Confirm continued compliance with the Senior Leverage Ratio (<3.0:1) and Fixed Charge Coverage Ratio (>1.15:1) under the Credit Facility.
- Capital Allocation: Track progress on the new maintenance facility and the mix of owned vs. leased equipment to ensure alignment with utilization targets.
- Customer Concentration: Assess the risk associated with the top three customers representing the vast majority of revenue.