Major Drilling Group earns $29.27-million in Q2 2009

2008-12-08 17:52 ET - News Release

Mr. Francis McGuire reports

MAJOR DRILLING REPORTS SECOND QUARTER RESULTS

Major Drilling Group International Inc. has released its results for its second quarter of fiscal year 2009 ended Oct. 31, 2008.

Highlights:

• Major Drilling posted the highest quarterly revenue in its history at $191.0-million, up 22.4 per cent from the $156.1-million recorded for the same quarter last year.
• Gross margin percentage for the quarter was 36.9 per cent, up from 35.0 per cent for the corresponding period last year.
• Earnings from continuing operations were up 28.5 per cent to $29.3-million, or $1.23 per share, for the quarter, from the $22.8-million, or 97 cents per share for the prior year quarter. This represents the highest quarterly earnings from continuing operations in the company's history.
• Cash flow from continuing operations before changes in working capital was $38.9-million for the quarter, up 24.3 per cent from the $31.3-million for the same period last year.
• The company paid its first semi-annual dividend of 20 cents per share on Oct. 31, 2008.
• Total net debt, net of cash, was at $8.0-million at quarter-end, a $14.2-million decrease from last quarter.
• During the quarter, the company purchased Forage Benoit in Quebec for $23.1-million, including customary working capital adjustments.
  

"In this quarter, the company once again achieved record revenue of $191.0-million and record profits from continuing operations of $29.3-million, with all regions contributing to this growth. We saw a slowdown in certain regions and/or commodities, but we were able to compensate for this with increased work in other regions and through greater productivity. Revenue per rig and margins increased as more experienced drillers operated our rigs and as training expenses decreased. Rig utilization was actually lower than in previous quarters," said Francis McGuire, president and chief executive officer of Major Drilling.

"The company cautions that there is currently very broad volatility in all aspects of its business and, accordingly, actual results may vary substantially from all guidance and forward-looking information in this press release.

"The current economic environment has impacted, and will continue to impact, drilling in the short- to medium-term, particularly on base metal projects where the company expects to see a significant slowdown in activity in 2009. Sources of funding for junior mining companies have decreased and, as such, many junior projects, both in the base metals and gold sectors, have been delayed or cancelled. Senior and intermediate mining companies will continue with exploration programs in order to replenish depleting reserves, although at this time, the level of exploration to be undertaken by these customers remains uncertain," said Mr. McGuire.

"Long term, the fundamental drivers of our business remain positive, with worldwide supply for most metals expected to tighten due to the lack of significant discoveries. The prospects for gold related drilling, which generally accounts for 50 per cent of the drilling market, remains positive. Uranium and gas projects remain active while the lack of good quality copper reserves should sustain many copper programs. Gold, copper, uranium and gas represents 80 per cent of our existing business. As well, there continues to be an ongoing structural change in the industry toward specialized drilling and our continued focus on specialized drilling over the years has positioned us favourably relative to the industry.

"The company is in a strong financial position entering these turbulent times and has made significant progress on retiring debt in the last few months. Total debt level, net of cash, decreased by $14.2-million to stand at $8.0-million, or 2 per cent of equity, at quarter-end. This performance was accomplished despite spending $23.1-million on the Benoit acquisition, capital expenditures of $15.3-million and paying our first semi-annual dividend of $4.7-million. Good operational cash flow combined with tight working capital management was responsible for this progress.

"In the current environment, the company has taken quick actions to reduce its costs. In November, the company implemented reductions of salaried employees, impacting 120 people across the operation. These reductions and other cost-cutting measures will reduce general and administrative expenses by some 10 per cent going forward. Furthermore, the company continues to have a variable cost structure whereby most of its direct costs, including field staff, go up or down with contract revenue. Also, a large part of the company's other expenses relates to variable incentive compensation based on the company's profitability. In order to optimize our rig performance, we intend to take this opportunity to review the quality of our fleet and retire inefficient rigs. The company expects to record a restructuring charge in its third quarter.

"These cost savings and productivity gains will be passed on to customers as the industry deals with the impact of lower commodity prices and the need to lower costs," stated Mr. McGuire.

"We have reduced our capital expenditure plans by $25-million and now expect to spend between $50-million and $55-million by the end of this fiscal year which is less than the $80-million that we had originally planned. We continue to see opportunities to invest in specialized drilling, although at a slower pace. While strategic acquisitions remain a possibility, we are increasingly focused on building our cash reserves.

"Finally, it is important to note that we are now in our third quarter, traditionally the weakest quarter of our fiscal year, as mining and exploration companies shut down, often for extended periods over the holiday season. Last year, most customers worked well into December while this year many of them have or will be shutting down earlier. Although many customers have indicated that they would start up soon after the holiday break, often projects can begin several weeks late. These factors, as well as the restructuring charges, will result in reduced revenue, increased costs and reduced margins in the third quarter, as compared to recent third quarters," observed Mr. McGuire.

In summary:

• The company expects to see a significant slowdown in its activity in calendar 2009 although the level of exploration remains uncertain.
• The focus on specialized drilling should help the company perform well relative to the industry.
• Net debt levels are low at $8.0-million and the company's goal is to be debt free, net of cash, by the end of the third quarter.
• Cost-cutting measures have been implemented.
• Capital expenditures forecast has been reduced to $50-million to $55-million for fiscal 2009.
• The company will be putting greater focus on driller and rig productivity while slowing its investments in new driller training.

Second quarter ended Oct. 31, 2008

Total revenue for the second quarter was $191.0-million, up 22.4 per cent from the $156.1-million recorded for the prior year period. Revenue growth was positively affected by the strengthening U.S. dollar against the Canadian dollar, as compared with the same period last year, mitigated by the strengthening of the Canadian dollar against the Australian dollar. The favourable foreign exchange translation effect for the quarter, when comparing with the effective rates for the same period last year, is estimated at $7.1-million on revenue.

Revenue from Canada-U.S. drilling operations was up $11.7-million, or 22.5 per cent, to $63.7-million for the quarter, compared with $52.0-million for the same period last year. The Benoit acquisition and additional equipment contributed to the growth in that region.

In South America and Central America, revenue for the quarter was up $9.5-million, or 21.2 per cent, to $54.3-million, compared with $44.8-million for the same period last year. Revenue growth, primarily in Chile and Argentina, was muted somewhat by disruptions to operations in Venezuela and Ecuador due to the current regulatory environment in these countries.

Australian, Asian and African drilling operations reported revenue of $73.0-million, up $13.7-million, or 23.1 per cent, from $59.3-million reported in the same period last year. Good growth was achieved in Mongolia, Australia and Africa.

The overall gross margin percentage for the quarter was 36.9 per cent, up from 35.0 per cent for the same period last year. Margin improvements came primarily in Canada, U.S. and Mexico where improved productivity was the main contributor as the quality of the company's drillers continues to improve as a result of its past training and recruiting efforts. In Africa, margins still lagged but improved from the first quarter of 2009.

General and administrative costs were $12.8-million for the quarter, compared with $10.8-million for the prior year quarter. The increase is primarily due to the Benoit acquisition and increased spending due to increased volume.

Other expenses increased to $4.9-million for the quarter, compared with $4.3-million for the same period last year due primarily to higher incentive compensation expenses, including non-cash stock option expense, given the company's improved profitability in the current year to date.

Foreign exchange loss was $1.5-million for the quarter, compared with $700,000 for the prior year period. The loss was due to exchange rate variations on monetary working capital items.

Short-term interest expense was $200,000 for the quarter compared with revenue of $300,000 last year, while interest on long-term debt was $500,000 compared with $600,000 for the prior year quarter.

Amortization expense increased to $8.2-million for the quarter, compared with $6.5-million for the same quarter last year, as a result of the increased direct investment in equipment and the Benoit acquisition.

The company's tax expense was $13.3-million for the quarter, compared with $9.2-million for the same period last year reflecting the increased profitability of the operations.

Earnings from continuing operations for the quarter were $29.3-million, or $1.23 per share ($1.22 per share diluted), compared with $22.8-million, or 97 cents per share (95 cents per share diluted) in the prior year period.

Net earnings were $29.3-million, or $1.23 per share ($1.22 per share diluted), compared with $22.6-million or 96 cents per share (94 cents per share diluted) for the same period last year.

Year to date ended Oct. 31, 2008

Revenue for the six months ended Oct. 31, 2008, increased 23.2 per cent to $369.2-million from $299.6-million for the corresponding period last year.

Canada-U.S. revenue increased by 17.8 per cent, or $18.0-million, to $119.3-million, compared with $101.3-million last year with additional equipment and the Benoit acquisition contributing to this growth.

Revenue in South America and Central America increased by 25.5 per cent, or $22.3-million, to $109.6-million, compared with $87.3-million in the prior year period. Revenue growth primarily in Chile, Mexico and Argentina was muted somewhat by disruptions to operations in Venezuela and Ecuador due to the current regulatory environment in these countries.

Revenue in Australia, Asia and Africa increased 26.5 per cent or $29.4-million to $140.3-million from $110.9-million in the prior year period. Australia accounted for 40 per cent of the growth in this segment, while Mongolia and the new African operations accounted evenly for the rest of the growth.

Gross margins for the year to date were 36.2 per cent, compared with 34.2 per cent last year, due mainly to improvements in drillers' productivity and an improving pricing environment.

General and administrative expenses increased to $26.2-million, compared with $20.9-million for the same period last year. This increase is primarily due to additions to the management team to accommodate growth and administrative salary increases.

Other expenses were $8.7-million for the year, compared with $7.8-million for the same period last year due primarily to higher incentive compensation expenses given the company's improved profitability in the current year to date, and losses on disposal of assets.

Foreign exchange loss was $1.6-million, compared with $1.7-million in the prior year period.

Short-term interest was $200,000 for the year, compared with a revenue of $600,000 last year, while interest on long-term debt was $900,000, compared with $1.4-million last year.

Amortization expense increased to $15.8-million, compared with $12.5-million in the previous period, as a result of the increased direct investment in equipment.

The provision for income tax for the year was $24.7-million, compared with $17.0-million for the prior year reflecting the increased profitability of the operations.

Earnings from continuing operations were $55.6-million, or $2.35 per share ($2.32 per share diluted), compared with $41.6-million, or $1.77 per share ($1.74 per share diluted), last year.

Net earnings were $55.6-million, or $2.35 per share ($2.32 per share diluted), compared with $41.5-million, or $1.77 per share ($1.74 per share diluted), for last year.

                    CONSOLIDATED STATEMENT OF OPERATIONS
                          (in thousands of dollars)
 
                                Six months ended          Three months ended
                           Oct. 31,      Oct. 31,      Oct. 31,      Oct. 31,
                              2008          2007          2008          2007

Total revenue           $   369,225   $   299,556   $   191,010   $   156,136
Direct costs                235,483       197,247       120,572       101,471
                        -----------   -----------   -----------   -----------
Gross profit                133,742       102,309        70,438        54,665
                        -----------   -----------   -----------   -----------
Operating expenses
General and
administrative               26,172        20,856        12,794        10,830
Other expenses                8,696         7,816         4,871         4,289
Foreign exchange loss         1,628         1,705         1,461           726
Interest expense
(revenue)                       207          (617)          173          (269)
Interest expense on 
long-term debt                  944         1,353           452           629
Amortization                 15,753        12,538         8,157         6,479
                        -----------   -----------   -----------   -----------
                             53,400        43,651        27,908        22,684
                        -----------   -----------   -----------   -----------
Earnings before income 
tax and discontinued
operations                   80,342        58,658        42,530        31,981
                        -----------   -----------   -----------   -----------
Income tax -- provision
Current                      22,907        16,257        12,799         8,687
Future                        1,829           762           455           479
                        -----------   -----------   -----------   -----------
                             24,736        17,019        13,254         9,166
                        -----------   -----------   -----------   -----------
Earnings from continuing
operations                   55,606        41,639        29,276        22,815

Loss from
discontinued
operations                        -           141             -           252
                        -----------   -----------   -----------   -----------
Net earnings            $    55,606   $    41,498   $    29,276   $    22,563
                        ===========   ===========   ===========   ===========
Earnings per share from
continuing operations
Basic (*)               $      2.35   $      1.77   $      1.23   $      0.97
Diluted (xx)            $      2.32   $      1.74   $      1.22   $      0.95

Earnings per share
Basic (*)               $      2.35   $      1.77   $      1.23   $      0.96
Diluted (xx)            $      2.32   $      1.74   $      1.22   $      0.94

(*) Based on 23,708,168 and 23,502,226 daily weighted average shares
outstanding for the fiscal year to date 2009 and 2008, respectively, and on 
23,709,293 and 23,570,950 daily weighted average shares for the quarter ended 
Oct. 31, 2008, and Oct. 31, 2007, respectively. The total number of shares 
outstanding on Oct. 31, 2008, was 23,711,073.

(xx) Based on 23,987,920 and 23,864,099 daily weighted average shares
outstanding for the fiscal year to date 2009 and 2008, respectively, and
on 23,940,827 and 23,950,055 daily weighted average shares outstanding
for the second quarter ended Oct. 31, 2008 and 2007, respectively.

                 CONSOLIDATED STATEMENT OF RETAINED EARNINGS
                         (in thousands of dollars)                        
                                                             Six months ended
                                                        Oct. 31,      Oct. 31,
                                                           2008          2007

Retained earnings, beginning of the period          $   182,533   $   108,438
Net earnings                                             55,606        41,498
Dividend                                                 (4,742)            -
                                                    -----------   -----------
Retained earnings, end of the period                $   233,397   $   149,936
                                                    ===========   ===========

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