Major Drilling Reports Record Third Quarter Revenue and Profits and Increases Dividend

MONCTON, NB, March 5, 2012 /PRNewswire/ - Major Drilling Group International Inc. (TSX: MDI) today reported results for its third quarter of fiscal 2012, ended January 31, 2012.

• Major Drilling posted quarterly revenue of $182.2 million, up nearly 70% from the $107.7 million recorded for the same quarter last year. This represents the highest level of third quarter revenue in the Company's history.
  
  
• Gross margin percentage for the quarter was 25.9% compared to 22.2% for the corresponding period last year.
  
  
• EBITDA increased 150% to $27.0 million compared to the corresponding period last year.
  
  
• Record third quarter earnings were reported at $9.6 million or $0.12 per share for the quarter, compared to earnings of $1.7 million or $0.02 per share for the prior year quarter.
  
  
• The Company has increased its semi-annual dividend by 12.5% to $0.09 per share to be paid on May 2, 2012.

"The Company achieved the highest third quarter revenue and profits in its history. Demand for drilling services continues to increase and customers remain anxious to secure rigs and crews," said Francis McGuire, President and CEO of Major Drilling. "The third quarter is always seasonally the weakest quarter of our fiscal year, as mining and exploration companies shut down, often for extended periods over the holiday season. Nevertheless, we recorded the highest ever utilization rate for a third quarter in our history. We saw our EBITDA grow by 150% compared to the corresponding period last year, despite the heavy ramp-up costs and delays in Canada, which were caused by mild weather."

"Going forward, the outlook for the fourth quarter remains strong, although weather continued to be somewhat challenging throughout February. During the third quarter, we renewed many of our contracts with pricing catching up to market conditions. We expect demand from gold and copper projects to continue to be strong in calendar 2012 assuming prices remain well above economical thresholds required for sustained exploration. Strong demand from coal and iron ore projects has also added a layer of work, which was not present at the peak in 2008," said Mr. McGuire. "Intermediate and junior mining companies with advanced projects have ramped up their already busy drilling programs by adding rigs, and most senior mining companies have increased their exploration budgets for 2012. We are starting to see increased demand for underground services around the world as mines are moving some surface drilling activities underground. Even though underground drilling tends to have lower margins, the Company expects to invest more in this area given that these contracts provide more financial stability, and target a different labour force."

"Our biggest operational challenge continues to be the speed at which we can grow the labour force and shrink the productivity gap of new drillers as they gain experience. We continue to aggressively and successfully invest in the recruitment and training of new drillers. Our ongoing efforts on recruitment and training should allow our global utilization rates to continue to improve as we add more drillers. We are also pleased to report that we have been able to reduce our turnover rate of new entrants by half over the last 12 months. As competition for drillers heats up, wage increases will be required in certain areas to retain and attract the most experienced drillers, which are key to high-quality customer service," observed Mr. McGuire.

"Net capital expenditures for the quarter were $22.5 million as we purchased 19 rigs. We also retired eight rigs through our modernization program. We are continuing the renewal of our fleet, which helps improve productivity, safety and speeds up the training of crews. The greater reliability of these rigs therefore allows us to increase the earning power of each crew. In fact, 60% of our rigs are now less than five years old in an industry where rigs tend to last 20 years."

"The Company is pleased to announce that today its Board of Directors increased its cash dividend by 12.5% to $0.09 per common share payable on May 2, 2012 to shareholders of record as of April 6, 2012. This dividend is designated as an "eligible dividend" for Canadian tax purposes," said Mr. McGuire.

"The Company would like to take this opportunity to welcome Fred Dyment to its Board of Directors.  Mr. Dyment is a Chartered Accountant with over 35 years of experience in the oil and natural gas industry and in international business. He held increasingly senior positions at Ranger Oil Limited, including Chief Financial Officer and President and Chief Executive Officer."

Third quarter ended January 31, 2012

Total revenue for the third quarter was $182.2 million compared to $107.7 million recorded for the prior year period. Part of the increase comes from the acquisition of the Bradley operations. Even without considering this acquisition, revenue was still the highest third quarter revenue in the Company's history. All of the Company's regions contributed to this growth.

Revenue from Canada-U.S. drilling operations was up 83% to $69.8 million for the quarter compared to $38.2 million for the same period last year. U.S. mineral drilling operations continued a strong recovery, particularly from its senior mining customers. In Canada, increased activity levels, combined with the acquisition of Bradley, contributed to the growth of revenue.

In South and Central America, revenue for the quarter was $59.2 million, up 61% from $36.8 million recorded in the prior year quarter. The increase was primarily driven by strong growth in our Mexican and Chilean operations, combined with the addition of the Bradley operations in Colombia and Suriname.

Australian, Asian and African drilling operations reported revenue of $53.2 million, up 63% from $32.7 million reported in the same period last year. Australia and Mongolia accounted for a significant portion of this growth. New operations in Burkina Faso, Mozambique and the DRC, combined with the addition of Bradley's operations in the Philippines, accounted for the rest of the growth in the region.

The overall gross margin percentage for the quarter was 25.9% compared to 22.2% for the same period last year. Third quarter margins are always impacted by a slowdown during the holiday season combined with higher than usual mobilizations, demobilizations and increased repairs during this period. This quarter, mild weather in Canada also caused delays in mobilizing to certain jobs.

General and administrative costs were $16.5 million for the quarter compared to $10.1 million in the same period last year. The increase was due to three main factors: i) new Bradley operations; ii) new operations in Burkina Faso, Mozambique and the DRC; and iii) increased costs to support the strong growth in activity levels.

Other expenses were $3.4 million for the quarter compared to $1.6 million for the same period last year, due to higher incentive compensation expenses given the Company's improved profitability and increased provision for bad debt.

Depreciation and amortization expense increased to $12.0 million for the quarter compared to $8.0 million for the same quarter last year. Two thirds of the increase relates to the acquisition of Bradley, including the amortization of intangible assets, which are amortized over four years. Investments in equipment over the last year account for the rest of the increase.

Non-GAAP Financial Measures

In this news release, the Company uses the following non-GAAP financial measures: EBITDA and EBITDA margin. The Company believes these non-GAAP financial measures provide useful information to both management and investors in measuring the financial performance of the Company. These measures do not have a standardized meaning prescribed by GAAP and therefore they may not be comparable to similarly titled measures presented by other publicly traded companies, and should not be construed as an alternative to other financial measures determined in accordance with GAAP.

Some of the statements contained in this press release may be forward-looking statements, such as, but not limited to, those relating to worldwide demand for gold and base metals and overall commodity prices, the level of activity in the minerals and metals industry and the demand for the Company's services, the Canadian and international economic environments, the Company's ability to attract and retain customers and to manage its assets and operating costs, sources of funding for its clients, particularly for junior mining companies, competitive pressures, currency movements, which can affect the Company's revenue in Canadian dollars, the geographic distribution of the Company's operations, the impact of operational changes, changes in jurisdictions in which the Company operates (including changes in regulation), failure by counterparties to fulfill contractual obligations, and other factors as may be set forth, as well as objectives or goals, and including words to the effect that the Company or management expects a stated condition to exist or occur. Since forward-looking statements address future events and conditions, by their very nature, they involve inherent risks and uncertainties. Actual results in each case could differ materially from those currently anticipated in such statements by reason of factors such as, but not limited to, the factors set out in the discussion on pages 17 to 20 of the 2011 Annual Report entitled "General Risks and Uncertainties", and such other documents as available on SEDAR at www.sedar.com. All such factors should be considered carefully when making decisions with respect to the Company. The Company does not undertake to update any forward-looking statements, including those statements that are incorporated by reference herein, whether written or oral, that may be made from time to time by or on its behalf, except in accordance with applicable securities laws.

Based in Moncton, New Brunswick, Major Drilling Group International Inc. is one of the world's largest metals and minerals contract drilling service companies. To support its customers' mining operations, mineral exploration and environmental activities, Major Drilling maintains operations on every continent.

Financial statements are attached.

Major Drilling will provide a simultaneous webcast of its quarterly conference call on Tuesday, March 6, 2012 at 9:00 AM (EST). To access the webcast please go to the investors/webcast section of Major Drilling's website at www.majordrilling.com and click the attached link, or go directly to the CNW Group website at www.newswire.ca for directions. Participants will require Windows MediaPlayer, which can be downloaded prior to accessing the webcast. Please note that this is listen only mode.

 

MAJOR DRILLING GROUP INTERNATIONAL INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2012 AND 2011 (UNAUDITED)
(in thousands of Canadian dollars, except per share information)

1. NATURE OF ACTIVITIES

Major Drilling Group International Inc. ("the Company") is incorporated under the Canada Business Corporations Act and has its head office at 111 St. George Street, Suite 100, Moncton, NB, Canada. The Company's common shares are listed on the Toronto Stock Exchange ("TSX"). The principal source of revenue consists of contract drilling for companies primarily involved in mining and mineral exploration. The Company maintains operations on every continent.

2. BASIS OF PRESENTATION

Statement of compliance
International Financial Reporting Standards ("IFRS") require entities that adopt IFRS to make an explicit and unreserved statement, in their first annual IFRS financial statements, of compliance with IFRS. The Company will make this statement when it issues its financial statements for the year ending April 30, 2012. These financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting ("IAS 34") as issued by the International Accounting Standards Board ("IASB") and using the accounting policies the Company expects to adopt in its consolidated financial statements for the year ending April 30, 2012.

Basis of consolidation
The Interim Condensed Consolidated Financial Statements incorporate the financial statements of the Company and entities controlled by the Company. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

The results of subsidiaries acquired or disposed of during the period are included in the consolidated statement of operations from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Intra-group transactions, balances, income and expenses are eliminated on consolidation, where appropriate.

Basis of preparation
The Interim Condensed Consolidated Financial Statements have been prepared based on the accounting policies presented in the first quarter Notes to Interim Condensed Consolidated Financial Statements for the three months ended July 31, 2011.

3. FUTURE ACCOUNTING CHANGES

The Company has not applied the following new and revised IFRSs that have been issued but are not yet effective:

The Company is currently evaluating the impact of applying these standards to its Consolidated Financial Statements.

4. SIGNIFICANT NEW ACCOUNTING POLICIES

Derivative financial instruments
The Company has entered into a derivative financial instrument, in the form of an interest rate swap, to manage its exposure to interest rate risk. The derivative is initially recognized at fair value at the date the derivative contract is executed and is subsequently re-measured to fair value at each reporting date. The resulting gain or loss is recognized in comprehensive earnings unless the derivative is considered to be ineffective, in which event it is recognized in profit or loss.

Hedge accounting
The Company designates the derivative as a cash flow hedge. At the inception of the hedge, and on an ongoing basis, the Company documents whether the hedging instrument used in the hedging relationship is highly effective in offsetting changes in cash flows of the hedged item.

Cash flow hedge
The effective portion of changes in the fair value of the derivative is deferred in equity. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss.

Hedge accounting is discontinued when the Company revokes the hedging relationship, the hedging instrument expires or is terminated, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that time is recognized immediately in profit or loss.

5. KEY SOURCES OF ESTIMATION UNCERTAINTY AND CRITICAL ACCOUNTING JUDGMENTS

The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Significant areas requiring the use of management estimates relate to the useful lives of property, plant and equipment for amortization purposes, property, plant and equipment and inventory valuation, determination of income and other taxes, assumptions used in compilation of share based payments, fair value of assets acquired and liabilities assumed in business acquisitions, amounts recorded as accrued liabilities, and impairment testing of goodwill and intangible assets. 

The Company applied judgment in determining the functional currency of the Company and its subsidiaries, determination of cash generating units ("CGUs"), the degree of componentization of property, plant and equipment, and the recognition of provisions and accrued liabilities.

6. FIRST TIME ADOPTION OF IFRS

For the overall impact of IFRS on the opening balance sheet as at transition date, including a discussion of the optional exemptions taken and the applicable mandatory exceptions, refer to Note 6 in the first quarter Notes to Interim Condensed Consolidated Financial Statements for the three months ended July 31, 2011.

The following reconciliations present the adjustments made to the Company's previous GAAP financial results of operations and financial position to comply with IFRS 1 First-time Adoption of International Financial Reporting Standards ("IFRS 1"). A discussion of transitional adjustments follows the reconciliations.

 

Adjustments required to transition to IFRS:

7. PROPERTY, PLANT AND EQUIPMENT

Changes in the property, plant and equipment balance were as follows for the periods:

 

There were no impairments recorded as at January 31, 2012, April 30, 2011 or January 31, 2011. The Company has assessed whether there is any indication that an impairment loss recognized in prior periods for property, plant and equipment may no longer exist or may have decreased. There were no impairments requiring reversal as at January 31, 2012, April 30, 2011 or January 31, 2011.

Capital expenditures were $22,833 and $18,310 for the three months ended January 31, 2012 and 2011 respectively, and $60,473 and $40,568 for the nine months ended January 31, 2012 and 2011, respectively. The Company obtained direct financing of $294 and $441 for the three and nine months ended January 31, 2012, respectively (three months ended January 31, 2011 - nil; nine months ended January 31, 2011 - $50).


8. GOODWILL

Changes in the goodwill balance were as follows:

For a full discussion on allocation of goodwill to cash generating units ("CGUs"), refer to Note 8 in the first quarter Notes to Interim Condensed Consolidated Financial Statements for the three months ended July 31, 2011.

Goodwill from the acquisition of Bradley Group Limited, as disclosed in Note 16, has not been allocated to a CGU since the value is preliminary.


9. INTANGIBLE ASSETS

Changes in the intangible assets balance were as follows:

10. LONG-TERM DEBT

The required annual principal repayments per remaining fiscal years on long-term debt are as follows:

The Company hedges its exposure to floating rates under the non-revolving term loan via an interest rate swap, exchanging a variable rate interest payment for a fixed rate interest payment. The interest swap contract was entered into early in the current quarter. As at January 31, 2012 the swap is deemed effective and is recognized as a cash flow hedge.

Under the terms of certain of the Company's debt agreements, the Company must satisfy certain financial covenants. Such agreements also limit, among other things, the Company's ability to incur additional indebtedness, create liens, engage in mergers or acquisitions and make dividend and other payments. The Company, at all times, was in compliance with all covenants and other conditions imposed by its debt agreements.

11. SHARE CAPITAL

On March 9, 2011, the Company announced a stock split for the issued and outstanding common shares on a three for one basis. The record date for the stock split was March 23, 2011. All share and stock option numbers have been retroactively adjusted to reflect the stock split to provide more comparable information.

On September 28, 2011, the Company issued a total of 5,900,000 Subscription Receipts at a price of $11.90 per Subscription Receipt for aggregate gross proceeds of $70,210. These Subscription Receipts were subsequently converted to 5,900,000 common shares in the Company upon the closing of the acquisition by the Company of Bradley Group Limited on September 30, 2011. The Company used the net proceeds of the offering to fund a portion of the purchase price in connection with the acquisition. On October 25, 2011, the Company issued a further 885,000 common shares for further aggregate gross proceeds of $10,531 as a result of the exercise by the underwriters of an over allotment option to purchase an additional 885,000 common shares of the Company for $11.90 per share. The Company is using the net proceeds from the over allotment exercise for general corporate purposes.

Authorized
Unlimited number of fully paid common shares, without nominal or par value, with each share carrying one vote and a right to dividends when declared.



The movement in the Company's issued and outstanding share capital during the period is as follows:

 12. INCOME TAXES

The income tax expense for the period can be reconciled to accounting profit as follows:

 
The Company periodically assesses its liabilities and contingencies for all tax years open to audit based upon the latest information available. For those matters where it is probable that an adjustment will be made, the Company recorded its best estimate of these tax liabilities, including related interest charges. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax laws. While management believes they have adequately provided for the probable outcome of these matters, future results may include favorable or unfavorable adjustments to these estimated tax liabilities in the period the assessments are made, or resolved, or when the statute of limitation lapses.


13. EARNINGS PER SHARE

All of the Company's earnings are attributable to common shares therefore net earnings are used in determining earnings per share.

 

There were no anti-dilutive options for the three months ended January 31, 2012 and 2011 and the nine months ended January 31, 2012 while the calculation of diluted earnings per share for the nine months ended January 31, 2011 exclude the effect of 30,543 options as they were anti-dilutive.

14. SEGMENTED INFORMATION

The Company's operations are divided into three geographic segments corresponding to its management structure, Canada - U.S., South and Central America, and Australia, Asia and Africa. The services provided in each of the reportable drilling segments are essentially the same. The accounting policies of the segments are the same as those described in Note 4 presented in the first quarter Notes to Interim Condensed Consolidated Financial Statements for the three months ended July 31, 2011. Management evaluates performance based on earnings from operations in these three geographic segments before finance costs and income tax. Data relating to each of the Company's reportable segments is presented as follows:

 

15. NET EARNINGS FOR THE YEAR

Net earnings for the year have been arrived at after charging various employee benefit expenses as follows.

 Amortization expense for intangible assets has been included in the line item "Depreciation and amortization" in the Interim Condensed Consolidated Statements of Operations with breakdown as follows:

 

16. BUSINESS ACQUISITIONS

Bradley Group Limited
Effective September 30, 2011, the Company acquired all the issued and outstanding shares of Bradley Group Limited ("Bradley"), which provides a unique opportunity to further the Company's corporate strategy of focusing on specialized drilling, expanding its geographic footprint in areas of high growth and of maintaining a balance in the mix of drilling services. The acquisition was accounted for using the acquisition method and the results of this operation were included in the statement of operations as of the closing date. The acquired business includes the assets acquired (indicated below), contracts and personnel. The purchase price for the transaction was CAD $78,060, including customary working capital adjustments and net of cash acquired, financed with cash and debt.

The Company is in the process of finalizing the valuation of assets. As at January 31, 2012, the values allocated to net tangible and intangible assets are preliminary and are subject to adjustments as additional information is obtained.

The estimated net assets acquired at fair market value at acquisition are as follows:

The Corporation incurred acquisition-related costs of $857 relating to external legal fees and due diligence costs. The legal fees and due diligence costs have been included in the other expenses line of the Interim Condensed Consolidated Statements of Operations.

It is impracticable to estimate the revenue and net income attributed to the additional business generated by Bradley for the three months ended January 31, 2012, or of the combined entity for the year as though the acquisition date was May 1, 2011.

Resource Drilling
Effective March 24, 2011, the Company acquired the assets of Resource Drilling, which provides contract drilling services in Mozambique, where Major Drilling did not previously have a presence. The acquisition was accounted for using the acquisition method and the results of this operation were included in the statement of operations as of the closing date. The acquired business includes drilling equipment, inventory, contracts and personnel. The purchase price for the transaction was USD $9,563 (CAD $9,345), including customary working capital adjustments, financed with cash.

The net assets acquired at fair market value at acquisition are as follows:

North Star Drilling
Effective June 30, 2010, the Company acquired the assets of North Star Drilling, which provides contract drilling services to the fresh water and geothermal markets in certain mid-western states in the US, and operates from its head office in Little Falls, Minnesota, as well as from satellite offices in Brainerd and Bemidji, Minnesota. The acquisition was accounted for using the acquisition method and the results of this operation were included in the statement of operations as of the closing date. The acquired business includes working capital, drilling equipment, contracts and personnel. The purchase price for the transaction, excluding contingent consideration, was USD $2,449 (CAD $2,567), including customary working capital adjustments of CAD $215, financed with cash. The contingent consideration of USD $750 to the purchase price is based on future earnings. The acquiree is expected to meet target earnings, with payments to be made over the next five years.

The net assets acquired at fair market value at acquisition are as follows:

17. DIVIDENDS

The Company declared two dividends during the year, $0.08 per common share paid on November 1, 2011 to shareholders of record as of October 10, 2011, and $0.09 per common share to be paid on May 2, 2012 to shareholders of record as of April 6, 2012.

The Company declared two dividends during the previous year. The first dividend of $0.07333 per common share was paid on November 1, 2010 to shareholders of record as of October 8, 2010. The second dividend of $0.07333 per common share was paid on May 2, 2011 to shareholders of record as of April 8, 2011.

18. FINANCIAL INSTRUMENTS

There are no significant changes to financial instruments compared to the Company's 2011 annual financial statements prepared under previous GAAP except for the following:

Risk management objectives
The Company's corporate treasury function monitors and manages the financial risks relating to the operations of the Company through analysis of the various exposures. When deemed appropriate, the Company uses financial instruments to hedge these risk exposures.

Interest rate risk management
The Company is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates. The risk is managed by the Company by use of interest rate swap contracts when deemed appropriate.

Interest rate swap contract
Under the interest rate swap contract, the Company agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. This contract enables the Company to mitigate the risk of changing interest rates on the cash flow exposures on the issued variable rate debt held.

The following table details the notional principal amount and the remaining term of the interest rate swap contract outstanding at the reporting date.

The interest rate swap settles on a monthly basis swapping Canadian-Bankers' Acceptance-Canadian Dealer Offered Rate for an annual fixed rate of 3.665%.

Fair value
The carrying values of cash, trade and other receivables, demand credit facility and trade and other payables approximate their fair value due to the relatively short period to maturity of the instruments. The following table shows carrying values of short and long-term debt and contingent considerations and approximates their fair value, as most debts carry variable interest rates and the remaining fixed rate debts have been acquired recently and their carrying value continues to reflect fair value. The fair value of the interest rate swap included in long-term debt is measured using quoted interest rates.

Credit risk
As at January 31, 2012, 76.3% of the Company's trade receivables were aged as current and 1.3% of the trade receivables were impaired.

The movement in the allowance for impairment of trade receivables during the period was as follows:

Foreign currency risk
The most significant carrying amounts of net monetary assets that: (1) are denominated in currencies other than the functional currency of the respective Company subsidiary; (2) cause foreign exchange rate exposure; and (3) may include intercompany balances with other subsidiaries, at the reporting dates are as follows:

If the Canadian dollar moved by plus or minus 10% at January 31, 2012, the unrealized foreign exchange gain or loss would move by approximately $3,702 (April 30, 2011 - $1,460).

Liquidity risk
The following table details the Company's contractual maturities for its financial liabilities.

 

 

SOURCE MAJOR DRILLING GROUP INTERNATIONAL INC.