Mr. Murray Mullen reports
MULLEN GROUP LTD. REPORTS THIRD QUARTER FINANCIAL RESULTS AND CLOSES PRIVATE PLACEMENT DEBT FINANCING
Mullen Group Ltd. is releasing its financial and operating results for the period ended Sept. 30, 2014, with comparisons to the same period last year.
KEY FINANCIAL HIGHLIGHTS FOR THE THIRD QUARTER OF 2014 AND 2013
(in millions of dollars)
Three months ended Nine months ended
Sept. 30, Sept. 30,
2014 2013 2014 2013
Revenue
Oil field services $ 210.8 $ 229.0 $ 659.3 $ 660.2
Trucking/logistics 146.7 145.6 424.8 412.0
Corporate and
intersegment
eliminations (0.2) (0.6) (1.4) (2.4)
--------- --------- --------- ---------
Total revenue 357.3 374.0 1,082.7 1,069.8
--------- --------- --------- ---------
Operating income
Oil field services 51.8 60.2 155.3 161.8
Trucking/logistics 26.0 26.7 68.2 70.9
Corporate (1.2) (1.1) (3.7) (3.1)
--------- --------- --------- ---------
Total operating
income 76.6 85.8 219.8 229.6
--------- --------- --------- ---------
Net income 10.5 51.2 72.4 123.0
--------- --------- --------- ---------
Net income,
adjusted $ 36.4 $ 43.1 $ 98.7 $ 109.5
========= ========= ========= =========
For the three-month period ended Sept. 30, 2014, Mullen Group generated revenue of $357.3-million, operating income of $76.6-million and net cash from operations of $51.0-million. During the quarter, Mullen Group paid dividends of $27.5-million, incurred net capital expenditures of $24.7-million, paid interest obligations of $3.6-million and purchased investments of $3.5-million.
Consolidated revenue in the third quarter decreased by $16.7-million, or 4.5 per cent, to $357.3-million, as compared with $374.0-million in 2013. The decrease in revenue was directly attributable to the oil field services segment, which decreased by $18.2-million, or 7.9 per cent, to $210.8-million, as compared with $229.0-million in the same period one year earlier. The decrease in segment revenue was primarily due to the decrease in revenue by those operating entities involved in the transportation of fluids and servicing of wells, as well as the anticipated decline in revenue related to large-diameter pipeline construction projects. Revenue in the trucking/logistics segment increased by $1.1-million, or 0.8 per cent, to $146.7-million, from $145.6-million, primarily due to the greater demand for general freight services being offset by lower demand for pneumatic bulk transportation services resulting from the completion of a large construction project that occurred in 2013, and a decline in demand for heavy-haul freight services in Western Canada.
Mullen Group generated operating income for the three-month period ended Sept. 30, 2014, of $76.6-million, a decrease of $9.2-million or 10.7 per cent, compared with the $85.8-million generated in 2013. The decrease of $9.2-million was due to the combination of an $8.4-million decrease in the oil field services segment, a $700,000 decrease in the trucking/logistics segment, as well as an increase in corporate costs that rose by $100,000 on a year-over-year basis. As a percentage of consolidated revenue, operating income decreased to 21.4 per cent, as compared with 22.9 per cent in 2013, primarily due to a reduction in margin experienced by the oil field services segment. Over all, margins came under pressure during the quarter, however, remained consistent when compared with the average third quarter margin experienced over the most recent five-year period.
In the third quarter of 2014, Mullen Group generated net income of $10.5-million, or 11 cents per share, a decrease of $40.7-million, or 79.5 per cent, compared with $51.2-million, or 56 cents per share, in 2013. The $40.7-million decrease in net income was mainly attributable to a $19.0-million one-time expense related to the prepayment of the Series A and Series B notes, a $15.2-million negative variance in net unrealized foreign exchange, a $9.2-million decrease in operating income and a $7.1-million negative variance in the fair value of investments. These decreases were partially offset by a $9.0-million reduction in income tax expense. Adjusting Mullen Group's net income and earnings per share to eliminate the impact of the one-time expense related to the prepayment of the Series A and Series B notes, the net unrealized foreign exchange gains and losses, and the change in fair value of investments during the third quarter of 2014, resulted in adjusted net income of $36.4-million and adjusted earnings per share of 40 cents, as compared with $43.1-million and 47 cents per share in 2013, respectively. These adjustments more clearly reflect earnings from an operating perspective.
"While we are disappointed with our third quarter performance, the fact remains that our core business continues to generate solid results, particularly giving consideration to the overall economic conditions in Canada, which is stable but certainly not showing any real growth, accompanied by the fact that the oil and gas industry in Western Canada is not investing with the same intensity as in prior years. There were certain pockets of activity, such as oil and gas drilling, but the reality is that markets are very competitive. Our results reflect this fact. In addition, when comparing our results to last year, it is important to note that last year's results were a record for the third quarter. As such, we had some pretty difficult comparisons to match up against. It is also worth noting that we refrained from pursuing acquisitions, principally due to valuation concerns. We remained disciplined in terms of our allocation of shareholders' capital opting to take a longer-term view of the markets," commented Murray K. Mullen, chairman, chief executive officer and president.
Mullen Group's consolidated revenue in the first nine months of 2014 increased by $12.9-million, or 1.2 per cent, to $1,082.7-million, as compared with $1,069.8-million in 2013. The increase in revenue was directly attributable to the trucking/logistics segment, which increased by $12.8-million, or 3.1 per cent, to $424.8-million, from $412.0-million in the same period one year earlier. This increase was largely due to the $15.3-million of incremental revenue resulting from the acquisition of Jay's Moving & Storage Ltd. and a $3.9-million increase in fuel surcharge revenue. These increases were partially offset by decreased demand for construction related services in Northern Manitoba, overdimensional and heavy-haul freight services in Western Canada, and lower demand for pneumatic bulk transportation services resulting from the completion of a large construction project in 2013. The oil field services segment experienced a decrease in revenue of $900,000, or 0.1 per cent, to $659.3-million, as compared with $660.2-million in 2013. This decrease was mainly due to a reduction in demand for specialized transportation services to the oil sands being somewhat offset by a modest increase in drilling activity in Western Canada, and its impact on those operating entities most directly tied to oil and natural gas drilling activity.
Operating income for the first nine months of 2014 decreased to $219.8-million, or 4.3 per cent, as compared with $229.6-million generated in the same period last year. The decrease of $9.8-million was due to the oil field services segment that experienced a $6.5-million decrease in operating income and the trucking/logistics segment that experienced a $2.7-million decrease in operating income. In addition, corporate costs rose by $600,000 on a year-over-year basis. As a percentage of revenue, operating income decreased to 20.3 per cent, as compared with 21.5 per cent in 2013. This 1.2-per-cent decrease in operating margin was due to a generally more competitive environment.
Net income in the first nine months of 2014 decreased to $72.4-million, or 41.1 per cent, as compared with $123.0-million in 2013. The decrease of $50.6-million was mainly attributable to a $27.8-million negative variance in the fair value of investments, a $19.0-million one-time expense related to the prepayment of the Series A and Series B notes, a $9.8-million decrease in operating income, and a $3.4-million increase in the loss on sale of property, plant and equipment. These decreases were offset by an $11.5-million reduction in income tax expense. Mullen Group's adjusted net income and earnings per share in the first nine months of 2014 was $98.7-million and $1.08 per share, as compared with $109.5-million and $1.22 per share in 2013, respectively.
Also today, Mullen Group closed the previous announced offering of senior unsecured notes on a private placement basis with a principal amount of $400.0-million, consisting of $229.0-million (U.S.) and $171.0-million (Canadian). The 2014 notes have an average term of 11 years and a weighted average fixed interest rate of approximately 3.95 per cent per year. Mullen Group intends to use a portion of the proceeds to repay portions of its existing private placement debt in the fourth quarter. Specifically, Mullen Group intends to repay its Series A ($100.0-million (U.S.)) and Series B ($50.0-million (U.S.)) notes, which will reduce its weighted average interest rate to 4.43 per cent, from 6.17 per cent, and to 4.80 per cent, from 5.65 per cent on its U.S.- and Canadian-dollar-denominated debt, respectively. In conjunction with repaying the Series A and Series B notes, Mullen Group will be required to make a one-time $19.0-million payment to the Series A and Series B noteholders. This $19.0-million payment is a direct result of Mullen Group's decision to prepay the Series A and Series B notes prior to maturity, and consists of the net present value of the future interest payments on such notes that would have otherwise been paid to the noteholders. This $19.0-million payment was recognized as an expense in the third quarter of 2014, within finance costs in the statement of comprehensive income. Mullen Group also entered into cross-currency swap contracts to swap the principal portion of the $229.0-million (U.S.) into Canadian dollars at foreign exchange rates of $1.1047 and $1.1148 to mitigate its exposure to foreign exchange risk.
"These are uncertain times for Canada's energy sector. Commodity prices have adjusted significantly over the past few weeks, reflecting slowing demand at a time when supply is expanding. While the duration of the current pricing environment is open for debate, the reality is that the risks associated with the oil and gas industry are heightened. Canada also remains at a crossroads in terms of our energy policy. The United States, currently Canada's only foreign buyer for crude oil and natural gas, is expanding production levels at an unprecedented pace, driven by multistage fracturing techniques which have unlocked massive shale deposits for both commodities. The choices for Canada's oil and gas industry are few; either we as Canadians support the development of new pipelines to our tidewater ports providing access to new markets or capital investment will decline. Our view is that in the absence of any real progress on the regulatory approval process, the industry is vulnerable to a slowdown. At Mullen Group, we have already taken pro-active measures to protect our shareholders and our company from any potential slowdown. This past quarter, we monetized non-core assets through the sale of older equipment, when buyers were in a buying mode. We also negotiated the sale of a large piece of land in Edmonton, Alta., which was acquired as part of the Pe Ben Oilfield Services Ltd. transaction in 2006, for total proceeds of $31.0-million. We have slowed capital expenditures in our oil field services segment until we see further evidence that the markets have stabilized. In addition, we will close the long-term private debt transaction this week. The net affect of these initiatives is really twofold. Firstly, our balance sheet has been strengthened by the long-term funding arrangement at very attractive interest rates. Secondly, Mullen Group will have cash reserves in excess of $340.0-million, funds that will be used primarily for acquisitions. However, we will stay disciplined with our shareholders' money, meaning that any acquisition must meet our strategic objectives and valuation criteria," added Mr. Mullen.
SUMMARY OF MULLEN GROUP'S RESULTS
(in millions of dollars, except per-share amounts)
Three months ended Nine months ended
Sept. 30, Sept. 30,
2014 2013 2014 2013
Revenue $ 357.3 $ 374.0 $1,082.7 $1,069.8
Operating income 76.6 85.8 219.8 229.6
Net unrealized
foreign exchange
loss (gain) 10.1 (5.1) 10.9 8.3
Decrease (increase)
in fair value of
investments 2.8 (4.3) 2.7 (25.1)
Net income 10.5 51.2 72.4 123.0
Net income,
adjusted 36.4 43.1 98.7 109.5
Earnings per
share $ 0.11 $ 0.56 $ 0.79 $ 1.37
Earnings per share,
adjusted $ 0.40 $ 0.47 $ 1.08 $ 1.22
Net cash from
operating
activities 51.0 54.3 169.5 146.8
Net cash from
operating
activities per
share $ 0.56 $ 0.60 $ 1.86 $ 1.64
Cash dividends
declared per
common share $ 0.30 $ 0.30 $ 0.90 $ 0.90
We seek Safe Harbor.
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