North American Construction Group(NOA) - 2022 Q2 - Quarterly Report

Letter to Shareholders The CEO highlights Q2 2022's inflationary pressures, a revised 2022 guidance, long-term optimism from operational strength, and a continued commitment to shareholder returns - The company faced significant inflationary pressure in Q2 on vendor parts prices and maintenance labor wages, leading to a revision of the 2022 financial guidance[9] - Despite challenges, the CEO is optimistic due to solid operational performance, improved safety, and financial targets being met by key partnerships[10] - Long-term confidence is based on a strong backlog, favorable commodity price projections, and progress on diversification[10] - Shareholder returns remain a priority, with a doubled dividend in Q1 and an ongoing share repurchase program, expecting to reduce debt and shares by 7-8%[11] Management's Discussion and Analysis Overall Performance Revenue grew significantly in Q2 2022, but adjusted EBITDA and margins declined due to inflationary cost pressures, labor shortages, and the absence of prior-year government subsidies Q2 2022 Financial Highlights vs. Q2 2021 | (Expressed in thousands of Canadian Dollars, except per share amounts) | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Revenue | $168,028 | $139,333 | $28,695 | | Total combined revenue | $227,954 | $175,972 | $51,982 | | Gross profit | $12,440 | $14,453 | ($2,013) | | Adjusted EBITDA | $41,649 | $42,373 | ($724) | | Adjusted EBITDA margin | 18.3% | 24.1% | (5.8)% | | Net income | $7,514 | $2,742 | $4,772 | | Adjusted net earnings | $4,717 | $8,807 | ($4,090) | | Adjusted EPS | $0.17 | $0.31 | ($0.14) | | Free cash flow | $10,393 | $3,430 | $6,963 | - Revenue increased by 21% YoY, mainly due to the remobilization of the Fort Hills mine fleet, though technician shortages negatively impacted revenue by an estimated $15 million[18] - Combined revenue rose 30% YoY, with the share of revenue from joint ventures increasing 64% to $59.9 million, driven by strong performance from the Nuna Group[19] - Adjusted EBITDA margin fell to 18.3% from 24.1% in Q2 2021, impacted by technician shortages, inflation, and the conclusion of the CEWS program[21] Significant Business Events The company initiated a share repurchase program and secured a new five-year contract from a major oil sands producer, adding an estimated $125 million to its backlog - On April 6, 2022, the company announced a Normal Course Issuer Bid (NCIB) to purchase up to 2,113,054 common shares, representing 10.0% of the public float[25] - On March 17, 2022, the Mikisew North American Limited Partnership (MNALP) was awarded a five-year contract, adding an estimated $125 million to backlog[26] Financial Highlights This section details financial performance, reconciling GAAP to non-GAAP measures and attributing changes in revenue, profit, and income to operational and economic factors Financial Results for the Three and Six Months Ended June 30 | (dollars in thousands, except per share amounts) | Three months ended 2022 | Three months ended 2021 | Six months ended 2022 | Six months ended 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $168,028 | $139,333 | $344,739 | $307,180 | | Gross profit | $12,440 | $14,453 | $34,391 | $45,642 | | Gross profit margin | 7.4% | 10.4% | 10.0% | 14.9% | | Operating income | $6,301 | $1,187 | $21,943 | $23,291 | | Net income | $7,514 | $2,742 | $21,071 | $22,128 | | Adjusted EBITDA | $41,649 | $42,373 | $99,389 | $103,513 | | Adjusted EPS | $0.17 | $0.31 | $0.69 | $0.97 | Reconciliation of Net Income to Adjusted EBITDA (Six Months Ended June 30) | (dollars in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net income | $21,071 | $22,128 | | (i) Adjusted net earnings | $19,316 | $27,339 | | (i) Adjusted EBIT | $37,435 | $43,461 | | (i) Adjusted EBITDA | $99,389 | $103,513 | Analysis of Results Revenue increased due to fleet remobilization and acquisitions, but gross profit and margins declined significantly due to technician shortages, inflation, and CEWS discontinuation - Q2 2022 revenue of $168.0 million was up from $139.3 million in Q2 2021, driven by the Fort Hills mine fleet and the DGI acquisition[32] - Q2 2022 gross profit margin fell to 7.4% from 10.4% in Q2 2021, caused by technician shortages, inflation, and the absence of the prior year's CEWS subsidy[34][35] - Q2 2022 operating income increased to $6.3 million from $1.2 million, largely due to a $9.5 million decrease in stock-based compensation expense[38] Non-operating Income and Expense Interest expense increased due to a higher average cost of debt, while equity earnings from joint ventures grew significantly, boosting net income for the quarter - Cash-related interest expense for Q2 2022 was $5.3 million, with an average cost of debt of 5.2%, up from 4.0% in Q2 2021[42] - Equity earnings from affiliates and joint ventures increased to $8.3 million in Q2 2022, driven by the Fargo-Moorhead project and MNALP[43] Net Income and EPS | | Three months ended 2022 | Three months ended 2021 | Six months ended 2022 | Six months ended 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income | $7.5M | $2.7M | $21.1M | $22.1M | | Basic EPS | $0.27 | $0.10 | $0.75 | $0.78 | | Diluted EPS | $0.25 | $0.09 | $0.69 | $0.72 | Liquidity and Capital Resources The company maintained a solid liquidity position of $166.1 million, though net debt increased, while detailing capital additions, cash flow movements, and contractual obligations Summary of Consolidated Financial Position Total assets remained stable at $870.2 million, while net debt increased by $22.8 million to $391.8 million, with total liquidity standing at $166.1 million Financial Position Summary (as of June 30, 2022) | (dollars in thousands) | June 30, 2022 | December 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Total assets | $870,183 | $869,278 | $905 | | Total debt | $403,549 | $385,626 | $17,923 | | Net debt | $391,832 | $369,025 | $22,807 | | Total shareholders' equity | $278,866 | $278,463 | $403 | - Total liquidity as of June 30, 2022 was $166.1 million, consisting of $11.7 million in cash and $154.4 million of unused borrowing availability[52] Capital Additions Capital additions for H1 2022 were $56.6 million, a decrease from the prior year, with all spending classified as sustaining capital for routine maintenance Capital Additions Summary | (dollars in thousands) | Three months ended 2022 | Three months ended 2021 | Six months ended 2022 | Six months ended 2021 | | :--- | :--- | :--- | :--- | :--- | | Sustaining Capital Additions | $22,341 | $19,714 | $56,580 | $62,225 | | Growth Capital Additions | $0 | $48 | $0 | $48 | | Total Capital Additions | $22,341 | $19,762 | $56,580 | $62,273 | - The equipment fleet is currently split among owned (61%), finance leased (33%), and rented equipment (6%)[58] Summary of Consolidated Cash Flows Operating cash flow increased in Q2 due to higher dividends from joint ventures, while financing activities included debt movements, share repurchases, and dividend payments Consolidated Cash Flow Summary (Six Months Ended June 30) | (dollars in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Cash provided by operating activities | $59,670 | $67,096 | | Cash used in investing activities | ($51,903) | ($43,202) | | Cash used in financing activities | ($12,667) | ($51,367) | | Decrease in cash | ($4,900) | ($27,473) | - Cash used in financing activities for Q2 2022 was $18.8 million, which included $17.4 million for the share purchase program and $2.3 million in dividend payments[66] Free Cash Flow The company generated positive free cash flow of $10.4 million in Q2 2022, a significant improvement from the prior year, benefiting from favorable working capital timing Free Cash Flow Reconciliation | (dollars in thousands) | Three months ended 2022 | Three months ended 2021 | Six months ended 2022 | Six months ended 2021 | | :--- | :--- | :--- | :--- | :--- | | Cash provided by operating activities | $35,485 | $25,267 | $59,670 | $67,096 | | Cash used in investing activities | ($25,092) | ($21,885) | ($51,903) | ($43,202) | | Capital additions financed by leases | $0 | $0 | ($8,695) | ($15,023) | | Add back: Growth capital additions | $0 | $48 | $0 | $48 | | Free cash flow | $10,393 | $3,430 | ($928) | $8,919 | Contractual Obligations Total contractual obligations increased to $507.6 million, driven by higher credit facility borrowings and supplier contracts, with significant payments due in 2024 and beyond Future Contractual Obligations as of June 30, 2022 | (dollars in thousands) | Total | 2022 | 2023 | 2024 | 2025 | 2026 and thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Credit Facility | $155,133 | $3,351 | $6,647 | $145,135 | $— | $— | | Convertible debentures | $164,703 | $3,431 | $6,861 | $6,861 | $6,861 | $140,689 | | Finance leases | $51,760 | $13,643 | $20,113 | $11,722 | $3,427 | $2,855 | | Total Contractual obligations | $507,599 | $50,285 | $58,308 | $185,430 | $17,741 | $195,835 | Credit Facility The company maintained compliance with its credit facility covenants, with $154.4 million available under its $325.0 million revolving loan facility maturing in October 2024 - The Credit Facility allows for $325.0 million in borrowings and matures on October 8, 2024[74] - As of June 30, 2022, borrowings were $140.0 million, with $30.6 million in letters of credit issued, leaving $154.4 million in borrowing availability[75] - The company was in compliance with its Senior Leverage Ratio (≤ 3.0:1) and Fixed Charge Coverage Ratio (> 1.15:1) covenants[76][77] Outstanding Share Data As of July 2022, the company had 28.6 million common shares outstanding and was actively repurchasing shares under its NCIB, buying back over 1 million shares in Q2 - As of July 22, 2022, there were 28,565,627 voting common shares outstanding[81] Convertible Debentures Outstanding | Debenture Series | Principal Amount | Maturity Date | Conversion Price | | :--- | :--- | :--- | :--- | | 5.50% | $74,750,000 | June 30, 2028 | $24.75 | | 5.00% | $55,000,000 | March 31, 2026 | $26.25 | - Under the NCIB, the company purchased and cancelled 1,051,309 shares during Q2 2022 at an average price of $15.98 per share[86] Backlog The combined backlog stood at $1.604 billion as of June 30, 2022, with an estimated $374.8 million expected to be recognized in the remainder of the year Backlog Summary | (dollars in thousands) | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Backlog | $838,753 | $841,002 | | Equity method investment backlog | $765,404 | $830,943 | | Combined Backlog | $1,604,157 | $1,671,945 | - The company estimates that $374.8 million of its backlog will be performed over the balance of 2022[88] Accounting Estimates, Pronouncements, and Measures This section outlines the basis of financial reporting, including a key accounting policy change for joint ventures and definitions for non-GAAP performance measures - A significant accounting policy was changed in Q3 2021 to account for unincorporated entities using the equity method instead of proportionate consolidation[91] - Key non-GAAP measures are defined, including 'Adjusted EBITDA', 'Free cash flow', and 'Backlog'[97][104][105] Internal Systems and Processes Management concluded that the company's disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR) were effective as of June 30, 2022 - The CEO and CFO concluded that as of June 30, 2022, the company's disclosure controls and procedures were effective[113] - No significant changes to internal controls over financial reporting (ICFR) occurred during the quarter ended June 30, 2022[115] Legal and Labour Matters The company employed 1,771 staff as of June 30, 2022, with approximately 83% of its fluctuating hourly workforce being union members under collective agreements - As of June 30, 2022, the company had 195 salaried and 1,576 hourly employees[117] - Approximately 83% of hourly employees are union members covered by collective bargaining agreements[117] Outlook The company updated its 2022 guidance, lowering its free cash flow projection to $65-$90 million but maintaining confidence in its ability to de-lever and fund growth 2022 Full Year Guidance | Key measures | 2022 Guidance | | :--- | :--- | | Adjusted EBITDA | $200 - $230M | | Sustaining capital | $90 - $100M | | Adjusted EPS | $1.65 - $2.05 | | Free cash flow | $65 - $90M | | Capital allocation | | | Deleverage | $15 - $40M | | Shareholder activity | $30 - $40M | | Growth spending | $10 - $15M | | Leverage ratios | | | Senior debt | 1.1x - 1.5x | | Net debt | 1.4x - 1.8x | - Projected free cash flow for 2022 has been reduced to a range of $65 to $90 million[118] Forward-Looking Information and Risk Management This section outlines forward-looking statements based on current assumptions and cautions that key risks, including market fluctuations and the COVID-19 pandemic, could impact results - Forward-looking statements are based on material assumptions including stable oil prices, continued demand for services, and the ability to attract and retain skilled personnel[125] - The company has experienced no material change in market risk (foreign currency, interest rates) as of June 30, 2022[128] - Risks related to the COVID-19 pandemic remain, with the potential for adverse impacts from quarantines, closures, or project deferrals[129] Interim Consolidated Financial Statements This section presents the unaudited interim consolidated financial statements for the periods ended June 30, 2022, prepared in accordance with US GAAP Interim Consolidated Balance Sheets The balance sheet shows total assets of $870.2 million and total liabilities of $591.3 million as of June 30, 2022, both nearly unchanged from year-end 2021 Consolidated Balance Sheet Summary (in thousands) | | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Current assets | $140,689 | $147,179 | | Total assets | $870,183 | $869,278 | | Liabilities and Shareholders' Equity | | | | Current liabilities | $141,074 | $161,034 | | Total liabilities | $591,317 | $590,815 | | Total shareholders' equity | $278,866 | $278,463 | | Total liabilities and shareholders' equity | $870,183 | $869,278 | Interim Consolidated Statements of Operations and Comprehensive Income For Q2 2022, the company reported net income of $7.5 million on revenue of $168.0 million, an increase from $2.7 million net income in the prior-year period Statement of Operations Summary (in thousands) | | Three months ended June 30, 2022 | Six months ended June 30, 2022 | | :--- | :--- | :--- | | Revenue | $168,028 | $344,739 | | Gross profit | $12,440 | $34,391 | | Operating income | $6,301 | $21,943 | | Net income | $7,514 | $21,071 | | Basic net income per share | $0.27 | $0.75 | | Diluted net income per share | $0.25 | $0.69 | Interim Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity remained stable at $278.9 million, as net income of $21.1 million was largely offset by dividend payments and share repurchases Changes in Shareholders' Equity (Six Months Ended June 30, 2022, in thousands) | | Amount | | :--- | :--- | | Balance at December 31, 2021 | $278,463 | | Net income | $21,071 | | Dividends ($0.16 per share) | ($4,536) | | Share purchase program | ($18,285) | | Other (Stock comp, treasury shares, etc.) | $2,153 | | Balance at June 30, 2022 | $278,866 | Interim Consolidated Statements of Cash Flows For H1 2022, cash decreased by $4.9 million, with $59.7 million generated from operations being used for investing and financing activities like PPE and share repurchases Statement of Cash Flows Summary (Six Months Ended June 30, 2022, in thousands) | | Amount | | :--- | :--- | | Cash provided by operating activities | $59,670 | | Cash used in investing activities | ($51,903) | | Cash used in financing activities | ($12,667) | | Decrease in cash | ($4,900) | | Cash, beginning of period | $16,601 | | Cash, end of period | $11,717 | Notes to Interim Consolidated Financial Statements The notes detail revenue sources, joint venture performance, debt terms, and a significant accounting policy change regarding the consolidation of joint ventures - Revenue is primarily from 'Operations support services' ($317.1M for H1 2022) and under 'Time & materials' commercial terms ($242.0M for H1 2022)[148] - The company's share of net income from its investments in affiliates and joint ventures was $14.6 million for H1 2022, up from $9.4 million in the prior year[155] - Four major customers accounted for 33%, 22%, 21%, and 15% of revenue, respectively, for H1 2022, indicating significant customer concentration[183] - A change in accounting policy was adopted to use the equity method for certain unincorporated joint ventures, which was applied retrospectively[190]