Horizon North Logistics Inc. Announces Results for the Quarter Ended December 31, 2019
TSX Symbol: HNL
CALGARY, March 11, 2020 /PRNewswire/ - Horizon North Logistics Inc. ("Horizon North" or the "Corporation") reported its financial and operating results for the three and twelve months ended December 31, 2019 and 2018.
Fourth Quarter and Annual Highlights
- On March 9, 2020, Horizon North and 10647802 Canada Limited, operating as Dexterra Integrated Facilities Management ("Dexterra", a wholly-owned subsidiary of Fairfax Financial Holdings Limited), announced an agreement to combine the two companies (the "Proposed Transaction"). Horizon North will acquire all of the outstanding shares of Dexterra in exchange for Horizon North issuing Fairfax Financial such number of common shares of Horizon North such that Fairfax Financial will own 49% of Horizon North Shares on a fully-diluted basis after completion of the Proposed Transaction. The Proposed Transaction requires shareholder approval, receipt of certain stock exchange and regulatory approvals, including from the Canadian Competition Bureau, and satisfaction of other customary conditions;
- Horizon North had EBITDAS of $8.2 million and $30.5 million for the three months and year ended December 31, 2019, respectively, compared to EBITDAS of $13.7 million and $36.7 million for the three months and year ended December 31, 2018;
- The Industrial Services business had 2019 revenue of $282.2 million, an increase of 7% from 2018. EBITDAS for the same period were $40.3 million, a decrease of $0.3 million when compared to 2018;
- The Modular Solutions business had revenue of $180.5 million for 2019, a 36% increase from 2018. EBITDAS for the same period were $4.0 million, a decrease of $6.5 million from 2018. Backlog exiting the year was $61.7 million, excluding the Fairfield by Marriott, compared to $88.8 million at December 31, 2018. The funnel of high-quality, high probability sales opportunities increased, exiting the year at $298.3 million compared to $290.0 million at December 31, 2018. Subsequent to December 31, 2019 Horizon North was awarded a significant commercial contract for a hotel project in British Columbia that will begin manufacturing in the second half of 2020;
- As a result of the carrying amount of the net assets of the Corporation exceeding the market capitalization, continued market uncertainty, and the Proposed Transaction, the Corporation completed an impairment test for each of its cash generating units ("CGUs") as at December 31, 2019. The results of the tests indicated impairment of $85.2 million for the Camp & Catering CGU as at December 31, 2019 (2018 - nil), of which $17.2 million was attributed to the carrying amount of the CGU's goodwill. The impairment loss was partially offset by a deferred tax recovery of $16.7 million, for a net impact of $68.5 million on net income;
- In order to improve financial flexibility and to exercise fiscal prudence in light of increased market uncertainty the Board of Directors of the Corporation (the "Board") has made the decision to pause the Corporation's dividend. The Board will reevaluate the Corporation's dividend policy in conjunction with the Proposed Transaction; and
- Horizon North reached an agreement with its lenders to amend its credit facility effective March 10, 2020. Refer to the "Outlook" section under Statement of Financial Position for further information.
Fourth Quarter Financial Summary
Three months ended December 31, |
Twelve months ended December 31, |
|||||||||
(000's except per share amounts) |
2019 |
2018 |
% change |
2019 |
2018 |
% change |
||||
Revenue |
$ |
108,160 |
$ |
118,045 |
(8) |
$ |
458,096 |
$ |
394,245 |
16 |
EBITDAS(1) |
8,192 |
13,654 |
(40) |
30,530 |
36,683 |
(17) |
||||
EBITDAS as a % of revenue(1) |
8% |
12% |
7% |
9% |
||||||
Operating (loss) income before impairment, including equity investment |
(6,375) |
2,240 |
(385) |
(20,338) |
(7,296) |
173 |
||||
Operating loss |
(91,164) |
2,240 |
(4,196) |
(105,127) |
(7,296) |
1,346 |
||||
Operating loss as a % of revenue |
(85%) |
2% |
(23%) |
(2%) |
||||||
Net income (loss) before impairment |
(6,067) |
1,413 |
(529) |
(16,314) |
(8,196 ) |
99 |
||||
Impairment loss |
(85,190) |
— |
(85,190) |
— |
||||||
Tax recovery from impairment loss |
16,718 |
— |
16,718 |
— |
||||||
Net income (loss) |
(74,539) |
1,413 |
(5,381) |
(84,786) |
(8,196) |
934 |
||||
Net comprehensive income (loss) |
(74,546) |
1,413 |
(5,376) |
(84,792) |
(8,196) |
935 |
||||
Loss per share |
||||||||||
Basic |
$ |
(0.45) |
$ |
0.01 |
$ |
(0.51) |
$ |
(0.05) |
||
Diluted |
$ |
(0.45) |
$ |
0.01 |
$ |
(0.51) |
$ |
(0.05) |
||
Total assets |
$ |
484,913 |
$ |
472,410 |
2 |
$ |
484,913 |
$ |
472,410 |
3 |
Total loans and borrowings |
108,066 |
31,666 |
241 |
108,066 |
31,666 |
241 |
||||
Funds flow |
(2,621) |
17,294 |
(319) |
21,680 |
35,315 |
(39) |
||||
Net Capital spending (proceeds) |
7,040 |
5,130 |
37 |
61,259 |
21,866 |
180 |
||||
Total Debt to Adjusted EBITDAS(1) |
4.67:1:00 |
0.86:1:00 |
4.67:1:00 |
0.86:1:00 |
||||||
Debt to total capitalization ratio(1) |
0.31:1:00 |
0.09:1:00 |
0.31:1:00 |
0.09:1:00 |
||||||
Dividends declared |
$ |
3,309 |
$ |
3,285 |
$ |
13,212 |
$ |
12,762 |
||
Dividends declared per share |
$ |
0.02 |
$ |
0.02 |
$ |
0.08 |
$ |
0.08 |
||
(1) |
See Non-GAAP financial measures definitions within the press release for details. |
Fourth Quarter Overview
Revenue for the three months ended December 31, 2019 ("Q4 2019") decreased by 8% compared to the three months ended December 31, 2018 ("Q4 2018"), mainly due to a decrease in Modular Solutions revenue from decreased activity in Western Canada.
Industrial Services
Revenues from Industrial Services for Q4 2019 decreased by 2% compared to Q4 2018 primarily due to decreased camp rental and catering revenue. This was partially offset by a 34% increase in catering only activity in Q4 2019 compared to Q4 2018, with revenue per catering only day lower by 8% as a result of different contract mix. Rentals & Logistics revenues increased by 36% in Q4 2019 compared to Q4 2018 primarily due to an increase in installation and transportation revenue.
The operating profit before impairment of $0.6 million for Q4 2019 was 52% lower than the $1.3 million profit in Q4 2018. An $85.2 million impairment loss was recorded as at December 31, 2019. The impairment loss related to the Camp & Catering CGU and $17.2 million was attributed to the carrying amount of the goodwill, with the remaining $68.0 million allocated to camp facilities assets.
Modular Solutions
Modular Solutions revenues for Q4 2019 were 10% lower than Q4 2018 primarily as a result of the decreased activity and backlog in Western Canada, partially offset by the NRB Acquisition.
Other Financial Measures
Horizon North's Q4 2019 EBITDAS decreased by $5.5 million, or 40%, compared to Q4 2018. As a percentage of revenue, EBITDAS were 8% compared to 12% in Q4 2018. The decrease in EBITDAS compared to Q4 2018 was primarily driven by the decrease in Modular Solutions EBITDAS which was due to decreased activity in Western Canada.
Outlook
In 2020, Horizon North will continue to diversify both its portfolio of offerings and customer base through its two operating divisions: Industrial Services and Modular Solutions.
Proposed Transaction
On March 9, 2020, Horizon North and Dexterra, a wholly-owned subsidiary of Fairfax Financial Holdings Limited, announced the Proposed Transaction. Completion of the Proposed Transaction will require shareholder approval for the issuance of Horizon North shares, receipt of certain stock exchange and regulatory approvals, and satisfaction of other conditions as more particularly set out in the Share Purchase Agreement that will be available on Horizon North's profile on SEDAR at www.sedar.com. The Proposed Transaction will combine Horizon North's strong western Canadian focused workforce accommodation and national modular solutions businesses with Dexterra's asset light facilities management platform and central Canadian focused workforce accommodations businesses. This highly complementary platform is expected to better serve current and future customers. The new company will be a leader in support services with over 6,800 employees across Canada. The combined entity expects significant cross-selling opportunities across its combined platform as well as annual cost synergies of $5.0 million.
Industrial Services
Horizon North is a leading provider of turn-key workforce accommodation, hospitality, access and maintenance services with continued focus on the following four key areas:
- West Coast Hydrocarbon Terminals/Liquefied Natural Gas
- Horizon North continues to drive forward on the first phase of development of its 57-acre parcel of land located in Kitimat, British Columbia. The first 536 beds of its world-class Crossroads Lodge were operational by the end of Q4 2019 with the balance of the 736-bed facility operational in Q1 2020. In Q3 2019, Horizon North was awarded a contract for significant occupancy of the Crossroads Lodge in support of ongoing LNG development activities in the area as well as a contract for provision of temporary construction modular units and large complexes, for a client supporting LNG development, that will be constructed in the Corporation's modular manufacturing facilities.
- Activity continues on previously announced contracts to provide equipment, catering, hospitality and operations services for camps in support of construction work on the Coastal GasLink Project in northern British Columbia. Horizon North continues to aggressively pursue opportunities related to additional Western Canadian pipeline infrastructure projects.
- Horizon North continues to focus on capturing additional opportunities relative to announced and potential projects related to hydrocarbon shipping terminals and LNG projects on the west coast.
- Montney/Duvernay - Oil and natural gas development and related infrastructure activity in this region remained down in Q4 2019 with continued market headwinds expected for 2020. Horizon North is the largest provider of contracted and open camp services in this area and will continue to leverage existing assets, strategic locations and key customer relationships to build market share and position for expected future growth and infrastructure projects in the region.
- Oil Sands - Horizon North expects to leverage its strong operational footprint and experience to pursue both full turn-key opportunities and long-term catering and hospitality opportunities in existing customer-owned facilities underpinned by prominent relationships with Aboriginal communities north and south of Fort McMurray.
- Northern Canada - Horizon North has a long history and expertise in providing hospitality, management and maintenance services across Canada's northern regions. Early opportunities within the Northwest Ontario mining and power infrastructure sectors have been captured and we continue to pursue expansion opportunities with key clients in terms of their Arctic development plans. Horizon North will continue to focus on developing and expanding its capabilities and footprint across Canada's highly variable and remote northern regions.
Modular Solutions
The Corporation anticipates a balance between government sponsored housing and both industrial and commercial projects in its Modular Solutions segment in 2020. Results for 2019 included the effects of several project delays and deferrals from earlier in the year, which impacted backlog and activity in Western Canada and resulted in decreased activity and margins which were only partially offset by the addition of NRB. Horizon North's focus will remain on growing backlog and on optimizing execution of modular construction projects while developing and expanding its product offerings to serve a variety of customers and end markets. In addition, a portion of manufacturing capacity in 2020 will be utilized for modular units and large complexes associated with the Corporation's contract with a client supporting LNG development in British Columbia and the development of the Fairfield by Marriott.
April 1, 2019 marked the successful completion of the NRB Acquisition, a significant step in the Corporation's pan-Canadian growth strategy which provides manufacturing capacity in southern Ontario. The integration of NRB into the Horizon North business was completed in 2019 with focus now on opportunities to expand NRB's historical product and service offering, particularly in the social and affordable housing space.
The Modular Solutions division is well positioned to benefit from the increased Federal support for affordable and social housing following the Federal election on October 21, 2019 through the demonstrated success of the affordable and social housing strategy and execution in Western Canada combined with the addition of southern Ontario manufacturing capacity from the NRB Acquisition. Horizon North will continue to explore opportunities across Canada to grow the affordable and social housing backlog and increase the number of projects.
Statement of Financial Position
In 2019, Horizon North took several capital-intensive steps in the development of its unique, pan-Canadian service model. These steps included the mobilization of the first phase of the Kitimat Crossroads Lodge, beginning development of a 120-room Fairfield by Marriott hotel in Kitimat, British Columbia, the NRB Acquisition and a robust capital program, which together increased the Corporation's leverage position exiting 2019.
The Corporation's elevated leverage position is expected to continue through the majority of 2020 as the Corporation completes two major projects: First is the completion and sale of the Fairfield by Marriott hotel which is anticipated in the second half of 2020; Second is the capital commitments associated with the contract for temporary construction modular units and large complexes for a client supporting LNG developments with construction expected to be substantially complete by the end of the third quarter of 2020. Completion of these two projects will significantly reduce the temporary strain on liquidity and help reduce the elevated leverage position as the cash generated from the hotel sale combined with rental revenues of the modular units and large complexes being constructed will be used to pay down existing debt. 2020 capital spending will be focused on these specific projects and required maintenance capital needed to maintain operations. In the interim, the Corporation has increased its available liquidity by negotiating a $15.0 million temporary increase to its credit facility and additional covenant flexibility. In addition, the Corporation has improved its financial flexibility and applied fiscal prudence in light of increased market uncertainty by pausing the dividend.
As a result, the Corporation expects that the current credit facility, the temporary facility and cash flows from operating activities will be adequate to fund its future plans. The Corporation expects to allocate future net cash flows in order to appropriately balance the objectives of reducing its overall level of indebtedness, completing previously committed capital projects and minimal maintenance capital requirements.
Additional Information
A copy of the Corporation's Consolidated Financial Statements for the year ended December 31, 2019 and 2018 and related Management's Discussion and Analysis have been filed with the Canadian securities regulatory authorities and is available on SEDAR at www.sedar.com and www.horizonnorth.ca. Unless otherwise indicated, the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and the reporting currency is in Canadian dollars.
Non-GAAP Financial Measures
Certain measures in this press release do not have any standardized meaning as prescribed by generally accepted accounting principles ("GAAP") and, therefore, are considered non-GAAP measures. These measures are regularly reviewed by the Chief Operating Decision Maker and provide investors with an alternative method for assessing the Corporation's operating results in a manner that is focused on the performance of the Corporation's ongoing operations and to provide a more consistent basis for comparison between periods. These measures should not be construed as alternatives to total profit and total comprehensive income determined in accordance with GAAP as an indicator of the Corporation's performance. The method of calculating these measures may differ from other entities and accordingly, may not be comparable to measures used by other entities. The following non-GAAP measures are used to monitor the Corporation's performance:
EBITDAS: Earnings before interest, taxes, depreciation, amortization, share based compensation, gain/loss on investments, and gain/loss on disposal of property, plant and equipment ("EBITDAS"). Management believes that in addition to net profit (loss) and comprehensive net income (loss), EBITDAS is a useful supplemental earnings measure as it provides an indication of the Corporation's operating performance and it is regularly provided to and reviewed by the Chief Operating Decision Maker.
Debt to total capitalization: Calculated as the ratio of debt to total capitalization. Debt is defined as the sum of current and long-term portions of loans and borrowings. Total capitalization is calculated as the sum of debt and shareholders' equity.
Caution Regarding Forward-Looking Statements and Information
Certain statements contained in this press release constitute forward-looking information within the meaning of applicable Canadian securities laws (collectively, "forward-looking statements"). These statements relate to future events or future performance of Horizon North. All statements other than statements of historical fact are forward-looking statements. The use of any of the words "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "should", "believe" and similar expressions are intended to identify forward-looking statements.
In particular, such forward-looking statements include but are not limited to, statements with respect to:
- the anticipated timing of manufacturing related to the hotel project in British Columbia that Horizon was awarded;
- expected contract revenues;
- anticipated timing of completion of the Corporation's Fairfield by Marriott hotel and its intention to sell the hotel (including anticipated timing thereof);
- Horizon North's plans to continue to diversify its portfolio of offerings and customer base through its two operating divisions;
- timing and certainty regarding completion of the Proposed Transaction, including obtaining regulatory and shareholder approvals and fulfilling the conditions precedent to such completion;
- the anticipated benefits of the Proposed Transaction;
- the anticipated completion of construction of temporary construction modular units and large complexes for a client supporting LNG development (including anticipated timing thereof);
- Horizon North's strategy to pursue opportunities related to additional Western Canadian pipeline infrastructure projects as well as to capture additional opportunities arising from announced and potential projects related to hydrocarbon shipping terminals and LNG projects on the west coast;
- the Corporation's anticipated leverage position;
- expectations regarding oil and natural gas markets in 2020;
- expectations regarding Horizon North's opportunities and strategy in the Montney/Duvernay, oil sands and Northern Canadian regions;
- the composition of Horizon North's project pipeline for 2020 for the Modular Solutions division, its focus on growing backlog and its expected allocation of manufacturing capacity in 2020;
- expected plans following completion of the NRB Acquisition to expand NRB's product and service offerings;
- the expected benefits to the Modular Solutions division resulting from increased federal support for affordable and social housing and the ability of Horizon North to continue to explore opportunities across Canada to grow such affordable housing projects;
- the Corporation's anticipated elevated leverage position throughout 2020 and that future capital resources will be adequate to execute its future plans;
- the Corporation's expected allocation of future net cash flows to appropriately balance its objectives; and
- the Corporation's anticipated cash flows from operating activities will provide sufficient liquidity.
The forward-looking statements are based on certain factors and assumptions made by Horizon North which include, but are not limited to, assumptions relating to:
- industry activity for oil, natural gas and mineral exploration and development in the western Canadian provinces and northern territories;
- the timing and receipt of regulatory and shareholder approvals with respect to the Proposed Transaction;
- the benefits of the Proposed Transaction;
- commodity prices;
- the impacts of a positive final investment decision from LNG Canada with respect to the Kitimat LNG project;
- capital investment in the Canadian oil and gas sector;
- dividend payments;
- anticipated activity levels for 2020;
- operational results and capital spending;
- anticipated backlog in the Modular Solutions business;
- trade and other receivables;
- the impacts of the NRB Acquisition;
- future operating costs and Corporation's access to capital;
- the effects of regulation by governmental agencies;
- the competitive environment in which the Corporation operates;
- the ability of the Corporation to attract and retain personnel;
- the development of LNG and commodity transportation infrastructure;
- the relationships between the Corporation and its customers; and
- general economic and financial conditions.
Although Horizon North believes that the factors and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because Horizon North cannot give any assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of known and unknown risks and uncertainties. Such risks and uncertainties include, but are not limited to, the following:
- volatility in the price and demand for oil, natural gas and minerals;
- that the closing conditions to the Proposed Transaction, including receipt of shareholder and regulatory approvals, may not be satisfied and the Proposed Transaction may not close;
- the ability of Horizon North to integrate Dexterra's business and operations into its own;
- fluctuations in the demand for the Corporation's services;
- availability of qualified personnel;
- changes in regulation by governmental agencies, including environmental regulation; and
- other factors listed under "Risks and Uncertainties" in this MD&A and other risk factors identified in the Corporation's annual information form.
Readers are cautioned that the foregoing list of risks and uncertainties is not exhaustive. Additional information on these and other risk factors that could affect Horizon North's operations and financial results are included in Horizon North's annual information form which may be accessed through the SEDAR website at www.sedar.com. In addition, the reader is cautioned that historical results are not indicative of future performance. The forward-looking statements contained in this MD&A are made as of the date hereof and Horizon North does not undertake any obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.
Certain information set out herein may be considered "financial outlook" within the meaning of applicable securities laws. The purpose of this financial outlook is to provide readers with disclosure regarding Horizon North's reasonable expectations as to the anticipated results of its proposed business activities for the periods indicated. Readers are cautioned that the financial outlook may not be appropriate for other purposes.
About Horizon North
Horizon North is a publicly listed corporation (TSX: HNL.TO) providing a full range of industrial, commercial, and residential products and services under its two operating divisions: Industrial Services and Modular Solutions. The Industrial Services business includes workforce accommodations, camp management services, access solutions, maintenance and utilities. The Modular Solutions business integrates modern design concepts and technology with state of the art, off-site manufacturing processes; producing high quality building solutions for commercial, industrial and residential offerings including offices, hotels, and retail buildings, as well as distinctive single detached dwellings and multi-family residential structures. As a result of our diverse product and service offerings, Horizon North is uniquely positioned to meet the needs of our customers in numerous sectors, anywhere in Canada.
SOURCE Horizon North Logistics Inc.
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