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: June 10, 2010
Accounting Basis: U.S. GAAP (restated from Canadian GAAP)
Business Overview: The Company provides heavy construction, industrial and commercial site development, and pipeline and piling installation services in Canada. Operations are segmented into Heavy Construction and Mining, Piling, and Pipeline.
Key Financial Metrics (U.S. GAAP)
| Item (in thousands CAD) | 3 Months Ended Dec 31, 2009 | 9 Months Ended Dec 31, 2009 |
|---|---|---|
| Revenue | $221,175 | $538,396 |
| Gross Profit | $47,626 | $106,562 |
| Gross Margin | 21.5% | 19.8% |
| Operating Income | $31,272 | $60,347 |
| Net Income | $14,936 | $29,162 |
| Diluted EPS | $0.41 | $0.79 |
| Cash and Equivalents | $94,877 | $94,877 |
| Total Assets | $685,225 | $685,225 |
| Total Liabilities | $503,376 | $503,376 |
| Shareholders' Equity | $181,849 | $181,849 |
| Long-Term Debt (incl. Senior Notes) | $233,328 | $233,328 |
Note: Long-Term Debt includes $209,436 in Senior Notes and $23,892 in Long-Term Debt. Current portion of long-term debt is $6,072.
Material Changes vs. Prior Comparable Period
- Revenue Decline: Revenue decreased 14.5% year-over-year for the three months ended Dec 31, 2009, and 32.5% 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 project.
- Profitability Improvement: Despite lower revenue, Net Income turned positive ($14.9M) compared to a Net Loss of $15.0M in the prior year quarter. The prior year loss included a $32.8M non-cash goodwill impairment charge.
- Margin Expansion: Gross margin improved to 21.5% (3-month) and 19.8% (9-month) from 19.9% and 17.2% respectively, due to reduced equipment costs and efficiency initiatives.
- Non-Operating Items: Significant non-cash gains impacted net income, including a $5.4M foreign exchange gain and $8.0M loss on derivative financial instruments (net of gains on embedded derivatives).
- Segment Performance:
- Heavy Construction & Mining: Revenue down 7.6% (3-month) but profit margin improved to 19.7%.
- Piling: Revenue down 50.4% (3-month) due to weak commercial construction markets.
- Pipeline: Revenue relatively stable (3-month) but down 81.6% (9-month) due to the completion of the TMX project.
Guidance, Outlook, and Risks
- Outlook: Management expects continued strong operating performance in the quarter ending March 31, 2010, driven by recurring services volumes at Canadian Natural's Horizon project and Shell Albian. Project development activity is expected to move forward at a moderate pace.
- Refinancing: The Company is developing plans to refinance its $200M US-denominated Senior Notes due in December 2011. On April 7, 2010 (subsequent event), the Company issued $225M of 9.125% Senior Unsecured Debentures to fund the redemption of the existing notes.
- Material Weaknesses in ICFR: The Company identified two material weaknesses in Internal Control over Financial Reporting (ICFR):
- Lack of effective processes for revenue recognition, specifically regarding claims and unapproved change orders.
- Lack of effective controls to validate third-party valuations of derivative financial instruments (cross-currency and interest rate swaps).
- Restatements: Financial statements were restated to correct errors related to the reclassification of accrued liabilities, the accounting for lease buy-outs, and the valuation of derivative financial instruments.
- Market Risks: Significant exposure to foreign exchange rates (CAD/USD) and interest rates due to US-denominated debt and swap agreements. The cancellation of a US dollar interest rate swap in February 2009 increased interest rate risk exposure.
Key Facts for Investor Verification
- Restatement Impact: Verify the specific adjustments made to Net Income and Balance Sheet items due to the correction of errors in derivative valuation and lease accounting.
- Derivative Valuation: Confirm the fair value of the cross-currency and interest rate swaps, which resulted in significant non-cash gains/losses ($8.0M loss for 3-month period).
- Debt Maturity: Note the maturity of the $200M Senior Notes in December 2011 and the subsequent issuance of new debentures in April 2010 to refinance this obligation.
- Customer Concentration: Verify reliance on major customers (e.g., Canadian Natural, Shell Albian, Suncor) which represented significant portions of revenue and backlog.
- Backlog: Total backlog as of Dec 31, 2009 was $742.3M, with approximately $681.4M attributed to a single customer.
- ICFR Remediation: Monitor progress on remediation plans for the identified material weaknesses in revenue recognition and derivative valuation controls.