Investors: 2005 Press Release Archive
HSE Announces Intention to Acquire Industrial Safety Company Based in Sarnia, Ontario
NEWS RELEASE – April 30, 2005
HSE Integrated Ltd. ("HSE" or the "Company") announces its financial results for the fiscal year ended December 31, 2004 and the three month period ended December 31, 2004.
Overview
The fiscal year and three-month reporting quarter ended December 31, 2004 were very successful because they represented the type of growth HSE expected when it began to expand the Company through seven acquisitions over the course of the year. The fourth quarter results reflect the impact of only five of the seven acquisitions that took place between June and mid-December, and the fact that HSE continues to operate in a strong business environment caused by high oil and natural gas prices.
On a year-over-basis, the financial performance for the fiscal year ended December 31, 2004 represents the results of approximately six months of business under the same equipment and manpower capacity that the company entered the year with, and six months of business using a continually increasing base of assets and personnel. Two acquisitions closed on November 30 and December 15 respectively and therefore did not make any significant contribution to revenue and net income in the 2004 fiscal year. The largest acquisition HSE made in 2004 and the one that will make the largest impact on HSE's financial performance in the future did not close until mid-December and therefore had no material impact on the 2004 financial results. The following graph illustrates the timing of the acquisition of capital assets over the course of the year relative to revenue reported on a quarterly basis.
Looking back, HSE exited 2004 as a completely different Company than the one in place when the year began. The book value of the revenue generating capital assets opened the year at $3,557,743 and increased over 600% to $22,186,031 at the end of the year. The total size of the balance sheet increased accordingly from $7,537,026 at December 31, 2003 to $40,931,920 on December 31, 2004. The name was changed from Patch Safety Services Ltd. on September 1, 2004 to HSE, the Company's shares were consolidated on the same day on a 5:1 basis, and the trading symbol on the TSX Venture Exchange changed to HSL.
Operating Results, Fourth Quarter
Historically, the fourth quarter of the year is the one which activity begins to steadily increase in October until it is at full swing on frozen ground as winter begins in December. With the unusually wet third quarter
caused by heavy rains, in 2004 there may have been some activity delayed that caused a sharper than normal increase in activity in the fourth quarter from the third.
As a result of the expansion in the second and third quarters, in the fourth quarter of 2004 revenue was $9,085,070, up 151% from $3,625,400 for the same period in the previous year. Besides increased revenue caused by high demand and increased capacity, of significant impact during this period was a
major emergency response in the Acheson field on the western edge of Edmonton to which HSE responded along with its alliance partner Safety Boss Inc. This sour gas blowout occurred on December 12 and was still a serious situation requiring significant manpower and assets through to year-end.
Operating expenses were $6,451,717 or 71% of revenue for the fourth quarter compared to $2,686,402 or 74% of revenue in the previous quarter, a 3% reduction. This reflects higher utilization of capital assets, higher field margins on the emergency response work, and the percentage of higher margin capital assets such as combination fire/shower units in the total capital asset mix.
General and administrative expenses for the fourth quarter were $1,568,702, up 90% from $827,735 for the same period in 2003. As explained above, in terms of revenue generating capacity and the balance sheet, HSE exited the fourth quarter approximately five times larger than it was a year earlier. The result has been a necessary increase in management, accounting, marketing and administrative staff to effectively manage the much larger organization.
Debt servicing costs in the fourth quarter were $77,207, up 8% from $71,573 the previous year. Most of the expansion that took place in 2004 was financed with equity. Therefore, interest costs were not substantially higher than last year despite the significant growth of the Company.
The Company recorded net income in the fourth quarter of $576,961 or $0.035 per share based on 16,310,406 weighted average basic shares outstanding. This is in comparison to loss of $265,294 or $0.052 per share in the same quarter last year on 5,150,478 shares.
Operating Resluts, Fiscal Year 2004
As explained above, the first expansion in capacity did not take place until June 22, 2004. Six acquisitions followed; one in July, two in August, one in October, one in November and one in December. As a result, the Company had increasing revenue generating capacity as the year progressed.
For the fiscal year ended December 31, HSE had total revenues of $21,175,801, a 64% increase from $12,879,876 in the prior year. The degree to which the added capacity increased revenues as the year progressed is illustrated by the fact that 43% of the total revenues for the 2004 fiscal year were generated in the fourth quarter.
Operating expenses for the year were $15,286,130 or 72% of revenue compared to 71% of revenue for the prior year. While HSE was able to charge higher service prices over much of the year, most of this gain was lost to increased field wages and direct operating costs such as fuel.
General and administrative expenses for the year were $4,217,422, up 87% from $2,253,371 for the previous fiscal year. This expense increase reflects the additional management, administrative and marketing staff required to effectively manage the significantly larger asset base and operation that developed over the course of the year.
Debt servicing costs for the year were $179,750, a 46% reduction from $333,469 for the 2003 fiscal year. This reflects the reduction of total debt that took place when HSE was restructured in the fourth quarter of 2003 and the fact that most of the growth in 2004 was financed with equity, not debt. There were also interest rate reductions on the funds that HSE did borrow because the Company was able to negotiate lower interest rates once the balance sheet was improved through the injection of equity and HSE was no
longer in default of its senior lending covenants as it was through much of the 2003 fiscal year.
HSE recorded net income of $442,025 or $0.037 per share based on 11,863,951 weighted average basic shares for the year. This compares to a loss of $19,371 in 2003, or a loss of $0.007 per share.
Balance Sheet
The balance sheet continues to grow as HSE adds capacity through acquisitions and additional equity capital. Total assets at December 31, 2004 were $40,931,920, 443% greater than the $7,537,026 in total assets at December 31 the previous year. The increase is largely due to the seven acquisitions of oilfield safety services equipment assets or the shares of the companies that owned the assets in 2004. The other major component of total assets is accounts receivable which stood at $11,945,834 at December 31, 2004
up 274% from $3,193,630 on the same date the previous year.
As the Company and business grew, HSE amended its credit facility to finance its acquisition and operating activities several times in 2004. The amended facility replaced the existing facility and is comprised of a $1.5 million revolving line of credit carrying interest at prime plus 1.0% (a reduction in rate of 0.5% from the previous line of credit) and a non-revolving demand loan facility of $2.4 million repayable over an extended
period of 48 months at prime plus 1.25% (a reduction in rate of 0.5% from the previous facility).
The non-revolving demand portion was increased by $700,000 to finance an acquisition on November 30, 2004. This facility is repayable over 48 months and bears the same interest rates as the existing amended term facility.
The revolving line of credit was increased twice to reflect the growing size of the Company. The first increase to $2.5 million took place in October. The second increase to as high as $8.5 million took place in December. The interest rate and other terms of the revolving line of credit remained unchanged from those described above.
Total long-term debt including convertible debentures was $6,731,052 at December 31, up from $1,642,800 on the same day the previous fiscal year.
To obtain cash for expansion, over the course of the year HSE raised a total of $10,299,121 net of commissions and expenses through the sale of 6,620,927 shares at $1.15 per share and 2,500,000 shares at $1.30 per share.
To fund acquisitions, HSE issued 7,115,432 common shares from treasury at prices ranging from $1.30 to $1.60 per share for a total value of $10,194,167.
Outlook
Because of high oil and natural gas prices, demand for HSE's services remains very robust. The outlook for drilling and completion activity in western Canada for the remainder of 2005 is very positive. We expect that high activity levels will continue so long as commodity prices remain at current levels.
As HSE entered 2004, its objective was to become the largest and most respected supplier of industrial safety and related services to petroleum and other resource industries. It intended to pursue a multi-faceted strategy to increase capacity, expand its market to upstream and non-petroleum industry applications including environmental services, and build on its expertise by providing its customers with a broader suite of safety services and solutions. Management believes that in 2004, this objective was achieved and that the financial impact in terms of revenue and earnings will be realized in 2005 and beyond.
Forward Looking Statements
Statements in this document that may be considered forward-looking are based on management's current expectations that involve a number of risks and uncertainties, which could cause actual results to differ from those anticipated.
Complete Information
The information contained herein is summarized and should be read in conjunction with the Company's Interim Quarterly Reports, the Audited Financial Statements, including the Notes to Financial Statements, and Management's Discussion and Analysis, which are filed with relevant securities commissions and are posted on SEDAR at www.sedar.com.
The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.
For more information please contact:
David Yager, Chairman & CEO
Telephone: (403) 266-1833
E-Mail:
Tony Hidalgo, Chief Financial Officer
Telephone: (403) 266-1833
E-Mail: