Business Context and Reporting Period
Company: North American Energy Partners Inc. (formerly NACG Holdings Inc.)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three and nine months ended December 31, 2009
Filing Date: February 1, 2010
Business Overview: The Company provides heavy construction, commercial and industrial site development, and pipeline and piling installation services in Canada. Operations are divided into three segments: Heavy Construction and Mining, Piling, and Pipeline.
Key Financial Metrics
All figures in thousands of Canadian Dollars (CAD) unless otherwise noted.
| Metric | Three Months Ended Dec 31, 2009 | Nine Months Ended Dec 31, 2009 |
|---|---|---|
| Revenue | $222,714 | $540,927 |
| Gross Profit | $47,420 (21.3% margin) | $105,351 (19.5% margin) |
| Operating Income | $30,904 | $59,245 |
| Net Income | $20,797 | $36,380 |
| EPS (Basic) | $0.58 | $1.01 |
| Cash and Equivalents | $96,443 | $96,443 |
| Total Assets | $688,683 | $688,683 |
| Total Liabilities | $503,006 | $503,006 |
| Long-Term Debt (Senior Notes) | $204,953 | $204,953 |
| EBITDA (Non-GAAP) | $49,649 | $109,235 |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 14% year-over-year for the three months ended Dec 31, 2009, and 32% for the nine-month period. This was driven by reduced project development activity in the oil sands and a sharp decline in the Pipeline segment following the completion of the TMX Anchor Loop project.
- Profitability Improvement: Despite lower revenue, Net Income improved significantly from a loss of $14.7 million (three months 2008) to a profit of $20.8 million (three months 2009). The prior year loss included a $32.8 million non-cash goodwill impairment charge.
- Margin Expansion: Gross profit margin improved to 21.3% (three months) and 19.5% (nine months) compared to 19.7% and 17.9% in the prior year, respectively. This was due to reduced equipment costs and efficiency initiatives.
- Foreign Exchange Impact: The strengthening Canadian dollar resulted in significant unrealized foreign exchange gains on US$200 million senior notes, contributing to net income. Conversely, the cancellation of a US dollar interest rate swap in February 2009 increased interest expense exposure.
- Acquisition: On August 1, 2009, the Company acquired DF Investments Ltd. and Drillco Foundation Co. Ltd. for $5.4 million to expand piling operations in Ontario.
Guidance, Outlook, and Risks
- Outlook: Management expects continued strong operating performance for the quarter ending March 31, 2010, driven by recurring services in the oil sands (Canadian Natural, Shell Albian). Project development activity is expected to grow at a moderate pace.
- Refinancing: The Company is developing plans to refinance its 8 3/4% senior notes due in December 2011 to take advantage of favorable credit markets.
- Backlog: Total backlog as of December 31, 2009, was $742.3 million. Approximately $183.6 million is expected to be realized in the twelve months ending December 31, 2010.
- Internal Control Weakness: The Company disclosed a material weakness in internal controls over financial reporting (ICFR) related to revenue recognition, specifically regarding the tracking of claims and unapproved change orders. Remediation plans are underway but not fully completed as of December 31, 2009.
- Market Risks: Significant exposure to foreign exchange rates (CAD/USD) and interest rate fluctuations due to the termination of the US dollar interest rate swap. The Company also faces risks related to customer concentration and the cyclical nature of the oil sands industry.
Investor Verification Checklist
- Revenue Recognition Controls: Verify the progress of remediation for the material weakness in revenue recognition and the tracking of change orders/claims.
- Debt Refinancing: Monitor the status of refinancing the US$200 million senior notes maturing in December 2011.
- Customer Concentration: Assess the impact of the top customer, who represented 45% of revenue in the most recent quarter and holds a significant portion of the backlog.
- Interest Rate Exposure: Evaluate the impact of rising US LIBOR rates on interest expense following the swap cancellation.
- Seasonality: Confirm that Q1 results reflect typical seasonal declines due to "spring breakup" weather conditions in operating regions.