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Management's Discussion and Analysis June 30, 2022 | M-10 | North American Construction Group Ltd. |
Summary of consolidated cash flows
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, | | June 30, |
(dollars in thousands) | 2022 | | 2021(i) | | 2022 | | 2021(i) |
Cash provided by operating activities | $ | 35,485 | | | $ | 25,267 | | | $ | 59,670 | | | $ | 67,096 | |
Cash used in investing activities | (25,092) | | | (21,885) | | | (51,903) | | | (43,202) | |
Cash used in financing activities | (18,823) | | | (18,690) | | | (12,667) | | | (51,367) | |
Decrease in cash | $ | (8,430) | | | $ | (15,308) | | | $ | (4,900) | | | $ | (27,473) | |
(i)The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".Operating activities
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, | | June 30, |
(dollars in thousands) | 2022 | | 2021(i) | | 2022 | | 2021(i) |
Cash provided by operating activities prior to change in working capital(ii) | $ | 33,373 | | | $ | 27,903 | | | $ | 78,227 | | | $ | 88,119 | |
Net changes in non-cash working capital | 2,112 | | | (2,636) | | | (18,557) | | | (21,023) | |
Cash provided by operating activities | $ | 35,485 | | | $ | 25,267 | | | $ | 59,670 | | | $ | 67,096 | |
(i)The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".(ii)See "Non-GAAP Financial Measures".
Cash provided by operating activities for the three months ended June 30, 2022 was $35.5 million, compared to cash provided by operating activities of $25.3 million for the three months ended June 30, 2021. The increase in cash flow in the current period is largely a result of an increase to dividends and advances received from affiliates and joint ventures in the quarter. Cash provided by operating activities for the six months ended June 30, 2022 was $59.7 million, compared to cash provided by operating activities of $67.1 million for the six months ended June 30, 2021. The decrease in cash flow in the current year is mostly due to lower gross profit.
Cash provided by or used in the net change in non-cash working capital specific to operating activities are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, | | June 30, |
(dollars in thousands) | 2022 | | 2021(i) | | 2022 | | 2021(i) |
Accounts receivable | $ | (9,455) | | | $ | 16,794 | | | $ | 1,627 | | | $ | (11,967) | |
Contract assets | 796 | | | 185 | | | (147) | | | 1,595 | |
Inventories | 6,627 | | | (6,264) | | | (2,858) | | | (8,823) | |
Contract costs | 877 | | | (1,435) | | | 1,530 | | | (2,466) | |
Prepaid expenses and deposits | 192 | | | (431) | | | 2,642 | | | 652 | |
Accounts payable | 8,580 | | | (3,137) | | | (2,606) | | | 5,009 | |
Accrued liabilities | (4,376) | | | (4,050) | | | (15,915) | | | (4,777) | |
Contract liabilities | (1,129) | | | (4,298) | | | (2,830) | | | (246) | |
| $ | 2,112 | | | $ | (2,636) | | | $ | (18,557) | | | $ | (21,023) | |
(i)The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".Investing activities
Cash used in investing activities for the three months ended June 30, 2022 was $25.1 million, compared to cash used in investing activities of $21.9 million for the three months ended June 30, 2021. Current period investing activities largely relate to $27.1 million for the purchase of property, plant and equipment, partially offset by $1.5 million cash received on disposal of property, plant and equipment. Prior year investing activities included $28.9 million for the purchase of property, plant and equipment, partially offset by $7.8 million cash received on the disposal of property, plant and equipment.
Cash used in investing activities for the six months ended June 30, 2022 was $51.9 million, compared to cash used in investing activities of $43.2 million for the six months ended June 30, 2021. Current year to date investing activities largely relate to $52.4 million for the purchase of property, plant and equipment, partially offset by $2.0 million in proceeds from the disposal of property, plant and equipment. Prior year investing activities included $58.1
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Management's Discussion and Analysis June 30, 2022 | M-11 | North American Construction Group Ltd. |
million for the purchase of property, plant and equipment, offset by $8.8 million in proceeds from the disposal of property, plant and equipment and a $7.1 million gain from the settlement of a derivative financial instrument.
Financing activities
Cash used in financing activities during the three months ended June 30, 2022 was $18.8 million, which included $23.4 million in proceeds from long-term debt offset by $15.6 million of long-term debt repayments, $6.8 million in finance lease obligation repayments, $17.4 million expended on the share purchase program, and dividend payments of $2.3 million. Cash used in financing activities during the three months ended June 30, 2021 was $18.7 million, which included proceeds from long-term debt of $74.8 million, offset by $80.3 million of long-term debt repayments, $8.3 million in finance lease obligation repayments and $3.5 million from financing fees for the 5.50% convertible debentures.
Cash used in financing activities during the six months ended June 30, 2022 was $12.7 million, which included $43.4 million in proceeds from long-term debt offset by $20.5 million of long-term debt repayments, $13.7 million in finance lease obligation repayments, $18.3 million expended on the share purchase program, and dividend payments of $3.4 million. Cash used in financing activities during the six months ended June 30, 2021 was $51.4 million, which included $96.5 million in proceeds from long-term debt offset by $109.5 million of long-term debt repayments, $16.4 million in finance lease obligation repayments, $16.5 million expended on the share purchase program, $3.5 million from financing fees for the 5.50% convertible debentures, and dividend payments of $2.2 million.
Free cash flow
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 30, | | June 30, |
(dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Cash provided by operating activities | | $ | 35,485 | | | $ | 25,267 | | | $ | 59,670 | | | $ | 67,096 | |
Cash used in investing activities | | (25,092) | | | (21,885) | | | (51,903) | | | (43,202) | |
Capital additions financed by leases | | — | | | — | | | (8,695) | | | (15,023) | |
Add back: | | | | | | | | |
Growth capital additions | | — | | | 48 | | | — | | | 48 | |
Free cash flow(i) | | $ | 10,393 | | | $ | 3,430 | | | $ | (928) | | | $ | 8,919 | |
(i)See "Non-GAAP Financial Measures".
Free cash flow of $10.4 million in the quarter was positively impacted by a variety of timing impacts related to working capital balances, capital work in process and cash balances owed by affiliates and joint ventures. Excluding timing impacts, positive cash flow of $13.5 million was generated by adjusted EBITDA of $41.6 million detailed above offset by sustaining capital additions of $22.3 million and cash interest paid of $5.8 million.
Free cash flow for the six months ended June 30, 2022 was a use of cash of $0.9 million, the decrease was primarily driven by change in working capital balances which alone consumed $18.6 million. Excluding timing impacts, positive cash flow of $33.0 million was generated by the adjusted EBITDA of $99.4 million, offset by sustaining capital additions of $56.6 million, and cash interest paid of $9.8 million.
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Management's Discussion and Analysis June 30, 2022 | M-12 | North American Construction Group Ltd. |
Contractual obligations
Our principal contractual obligations relate to our long-term debt, finance and operating leases, and supplier contracts. The following table summarizes our future contractual obligations as of June 30, 2022, excluding interest where interest is not defined in the contract (operating leases and supplier contracts). The future interest payments were calculated using the applicable interest rates and balances as at June 30, 2022 and may differ from actual results.
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| Payments due by fiscal year |
(dollars in thousands) | Total | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 and thereafter |
Credit Facility | $ | 155,133 | | | $ | 3,351 | | | $ | 6,647 | | | $ | 145,135 | | | $ | — | | | $ | — | |
Convertible debentures | 164,703 | | | 3,431 | | | 6,861 | | | 6,861 | | | 6,861 | | | 140,689 | |
Mortgage | 43,697 | | | 892 | | | 1,783 | | | 1,783 | | | 1,783 | | | 37,456 | |
Promissory notes | 15,009 | | | 3,145 | | | 6,275 | | | 3,456 | | | 1,735 | | | 398 | |
Finance leases (i) | 51,760 | | | 13,643 | | | 20,113 | | | 11,722 | | | 3,427 | | | 2,855 | |
Operating leases(ii) | 17,609 | | | 865 | | | 1,513 | | | 1,188 | | | 1,724 | | | 12,319 | |
Non-lease components of lease commitments(iii) | 220 | | | 108 | | | 105 | | | (7) | | | 7 | | | 7 | |
Financing obligations | 42,124 | | | 7,506 | | | 15,011 | | | 15,292 | | | 2,204 | | | 2,111 | |
Supplier contracts | 17,344 | | | 17,344 | | | — | | | — | | | — | | | — | |
Contractual obligations | $ | 507,599 | | | $ | 50,285 | | | $ | 58,308 | | | $ | 185,430 | | | $ | 17,741 | | | $ | 195,835 | |
(i)Finance leases are net of receivable on heavy equipment operating subleases of $6,564 (2022 - $2,188; 2023 - $4,376).
(ii)Operating leases are net of receivables on subleases of $3,236 (2022 - $1,248; 2023 - $1,495; 2024 - $493).
(iii)Non-lease components of lease commitments are net of receivables on subleases of $851 (2022 - $412; 2023 - $425; 2024 - $14). These commitments include common area maintenance, management fees, property taxes and parking related to operating leases.
Our total contractual obligations of $507.6 million as at June 30, 2022 increased from $471.9 million as at December 31, 2021, primarily as a result of the increase to the Credit Facility of $34.3 million and an increase to supplier contracts of $9.3 million, offset by a decrease in convertible debentures of $4.1 million and a decrease to financing obligations of $8.3 million.
We have no off-balance sheet arrangements.
Credit Facility
On September 29, 2021, we entered into an Amended and Restated Credit Agreement (the "Credit Facility") with a banking syndicate that allows borrowing under the revolving loan to $325.0 million, with the ability to increase the maximum borrowings by an additional $50.0 million subject to certain conditions, and permits finance lease debt to a limit of $150.0 million. This expanded facility matures on October 8, 2024, with an option to extend on an annual basis, subject to certain conditions. The amended facility maintains financial covenant thresholds as well as other debt limits.
As at June 30, 2022, the Credit Facility had borrowings of $140.0 million (December 31, 2021 - $110.0 million) and $30.6 million in issued letters of credit (December 31, 2021 - $33.9 million). At June 30, 2022, our borrowing availability under the Credit Facility was $154.4 million (December 31, 2021 - $181.1 million).
Under the terms of the Credit Facility the Senior Leverage Ratio is to be maintained at less than or equal to 3.0:1. In the event we enter into a material acquisition, the maximum allowable Senior Leverage Ratio would increase to 3.50:1 for four quarters following the acquisition. The Fixed Charge Coverage Ratio is to be maintained at a ratio greater than 1.15:1.
Financial covenants are to be tested quarterly on a trailing four quarter basis. As at June 30, 2022, we were in compliance with the Company Credit Facility covenants. We fully expect to maintain compliance with our financial covenants during the subsequent twelve-month period.
For complete discussion on our covenants, see "Liquidity and Capital Resources - Credit Facility" in our most recent annual MD&A.
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Management's Discussion and Analysis June 30, 2022 | M-13 | North American Construction Group Ltd. |
Debt ratings
On March 28, 2022 S&P Global Ratings ("S&P") reiterated our Company outlook as "stable" and maintained our long-term corporate credit rating at "B+". For a complete discussion on debt ratings, see "Capital Structure and Securities - Debt Ratings" in our most recent AIF for the year ended December 31, 2021.
Outstanding share data
Common shares
We are authorized to issue an unlimited number of voting common shares and an unlimited number of non-voting common shares. On June 12, 2014, we entered into a trust agreement whereby the trustee may purchase and hold common shares, classified as treasury shares on our consolidated balance sheets, until such time that units issued under the equity classified long-term incentive plans are to be settled. Units granted under such plans typically vest at the end of a three-year term.
As at July 22, 2022, there were 28,565,627 voting common shares outstanding, which included 1,390,291 voting common shares held by the trust and classified as treasury shares on our consolidated balance sheets (28,889,027 common shares, including 1,574,655 common shares classified as treasury shares at June 30, 2022).
For a more detailed discussion of our share data, see "Capital Structure and Securities - Capital Structure" in our most recent AIF.
Convertible debentures
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
5.50% convertible debentures | | $ | 74,750 | | | $ | 74,750 | |
5.00% convertible debentures | | 55,000 | | | 55,000 | |
| | $ | 129,750 | | | $ | 129,750 | |
The terms of the convertible debentures are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date of issuance | | Maturity | | Conversion price | | Share equivalence per $1000 debenture | | Debt issuance costs |
5.50% convertible debentures | June 1, 2021 | | June 30, 2028 | | $ | 24.75 | | | $ | 40.4040 | | | $ | 3,509 | |
5.00% convertible debentures | March 20, 2019 | | March 31, 2026 | | $ | 26.25 | | | $ | 38.0952 | | | $ | 2,691 | |
Interest on the 5.50% convertible debentures is payable semi-annually in arrears on June 30 and December 31 of each year. Interest on the 5.00% convertible debentures is payable semi-annually on March 31 and September 30 of each year.
The 5.50% convertible debentures are not redeemable prior to June 30, 2024, except under certain exceptional circumstances. The 5.50% convertible debentures maybe be redeemed at the option of the Company, in whole or in part, at any time on or after June 30, 2024 at a redemption price equal to the principal amount provided that the market price of the common shares is at least 125% of the conversion price; and on or after June 30, 2026 at a redemption price equal to the principal amount. In each case, the Company will pay accrued and unpaid interest on the debentures redeemed to the redemption date.
The 5.00% convertible debentures are only redeemable under certain conditions after a change in control has occurred. If a change in control occurs, we are required to offer to purchase all of the 5.00% convertible debentures at a price equal to 101% of the principal amount plus accrued and unpaid interest to the date of purchase.
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Management's Discussion and Analysis June 30, 2022 | M-14 | North American Construction Group Ltd. |
Share purchase program
We completed the normal course issuer bid ("NCIB") commenced on April 9, 2021, under which a maximum number of 2,000,000 common shares were authorized to be purchased. During the six months ended June 30, 2022, we purchased and subsequently cancelled 82,592 shares under this NCIB, at an average price of $17.92 per share. This resulted in a decrease of common shares of $0.7 million and a decrease to additional paid-in capital of $0.8 million.
On April 11, 2022, we commenced a NCIB under which a maximum number of 2,113,054 common shares were authorized to be purchased. During the three and six months ended June 30, 2022, we purchased and subsequently cancelled 1,051,309 shares under this NCIB, at an average price of $15.98 per share. This resulted in a decrease to common shares of $8.4 million and a decrease to additional paid-in capital of $8.4 million. This NCIB will terminate no later than April 10, 2023.
Backlog
The following summarizes our non-GAAP reconciliation of backlog as at June 30, 2022:
| | | | | | | | | | | | | | |
(dollars in thousands) | | Jun 30, 2022 | | Dec 31, 2021 |
Performance obligations per financial statements | | $ | 169,517 | | | $ | 141,440 | |
Add: undefined committed volumes | | 669,236 | | | 699,562 | |
Backlog | | $ | 838,753 | | | $ | 841,002 | |
Equity method investment backlog | | 765,404 | | | 830,943 | |
Combined Backlog | | $ | 1,604,157 | | | $ | 1,671,945 | |
Backlog decreased $2.2 million while combined backlog decreased by $67.8 million on a net basis, during the six months ended June 30, 2022 as contract awards and increased scopes of work mostly offset the revenue recognized of $116.4 million.
Revenue generated from backlog during the six months ended June 30, 2022 was $248.6 million and we estimate that $374.8 million of our backlog reported above will be performed over the balance of 2022 (full year estimate of $623.4 million). For the year ended December 31, 2021, revenue generated from backlog was $355.8 million.
Combined backlog decreased by $67.8 million on a net basis during the six months ended June 30, 2022, driven by a decrease in equity method investment backlog due to the same reasons as above.
ACCOUNTING ESTIMATES, PRONOUNCEMENTS AND MEASURES
Critical accounting estimates
The preparation of our consolidated financial statements, in conformity with US GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. For a full discussion of our critical accounting estimates, see "Critical Accounting Estimates" in our annual MD&A for the year ended December 31, 2021.
Change in significant accounting policy - Basis of presentation
Prior to July 1, 2021, we elected to apply the provision available to entities operating within the construction industry
to apply proportionate consolidation to unincorporated entities that would otherwise be accounted for using the
equity method. During the three months ended September 30, 2021, we elected to change this policy to account for
these unincorporated entities using the equity method, resulting in a change to the consolidation method for Dene
North Site Services and Mikisew North American Limited Partnership. This change allows for consistency in the
presentation of our investments in affiliates and joint ventures. We have accounted for the change retrospectively
according to the requirements of US GAAP Accounting Standards Codification ("ASC") 250 by restating the comparative periods. For full disclosure, refer to note 22 in our Financial Statements for December 31, 2021.
Non-GAAP financial measures
We believe that the below non-GAAP financial measures are all meaningful measures of business performance because they include or exclude items that are or are not directly related to the operating performance of our business. Management reviews these measures to determine whether property, plant and equipment are being allocated efficiently.
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Management's Discussion and Analysis June 30, 2022 | M-15 | North American Construction Group Ltd. |
"Adjusted net earnings" is defined as net income available to shareholders excluding the effects of unrealized foreign exchange gain or loss, realized and unrealized gain or loss on derivative financial instruments, cash and non-cash (liability and equity classified) stock-based compensation expense, gain or loss on disposal of property, plant and equipment, and certain other non-cash items included in the calculation of net income. These adjustments are tax effected in the calculation of adjusted net earnings.
"Total combined revenue" is defined as consolidated revenue per the financial statements combined with our share of revenue from affiliates and joint ventures that are accounted for using the equity method. This measure is reviewed by management to assess the impact of affiliates and joint ventures' revenue on our adjusted EBITDA margin.
"Adjusted EBIT" is defined as adjusted net earnings before the effects of interest expense, income taxes and equity earnings in affiliates and joint ventures, but including the equity investment EBIT from our affiliates and joint ventures accounted for using the equity method.
“Equity investment EBIT” is defined as our proportionate share (based on ownership interest) of equity earnings in affiliates and joint ventures before the effects of gain or loss on disposal of property, plant and equipment, interest expense and income taxes.
“Adjusted EBITDA” is defined as adjusted EBIT before the effects of depreciation, amortization and equity investment depreciation and amortization.
"Adjusted EPS" is defined as adjusted net earnings, divided by the weighted-average number of common shares.
“Equity investment depreciation and amortization” is defined as our proportionate share (based on ownership interest) of depreciation and amortization in other affiliates and joint ventures accounted for using the equity method.
As adjusted EBIT, adjusted EBITDA, adjusted net earnings and adjusted EPS are non-GAAP financial measures, our computations may vary from others in our industry. These measures should not be considered as alternatives to operating income or net income as measures of operating performance or cash flows and they have important limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under US GAAP. For example adjusted EBITDA does not:
•reflect our cash expenditures or requirements for capital expenditures or capital commitments or proceeds from capital disposals;
•reflect changes in our cash requirements for our working capital needs;
•reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;
•include tax payments or recoveries that represent a reduction or increase in cash available to us; or
•reflect any cash requirements for assets being depreciated and amortized that may have to be replaced in the future.
"Total debt" is defined as the sum of the outstanding principal balance (current and long-term portions) of: (i) finance leases; (ii) borrowings under our credit facilities (excluding outstanding Letters of Credit); (iii) convertible unsecured subordinated debentures; (iv) mortgage; (v) promissory notes; and (vi) financing obligations. We believe total debt is a meaningful measure in understanding our complete debt obligations.
"Net debt" is defined as total debt less cash and cash equivalents recorded on the balance sheets. Net debt is used by us in assessing our debt repayment requirements after using available cash.
"Senior debt" is defined as total debt, excluding convertible debentures, deferred financing costs, mortgage related to NACG Acheson Ltd., and debt related to investment in affiliates and joint ventures. Senior debt is used primarily for our bank covenants contained in the Credit Facility agreement.
"Invested capital" is defined as total shareholders' equity plus net debt.
"Cash provided by operating activities prior to change in working capital" is defined as cash used in or provided by operating activities excluding net changes in non-cash working capital.
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Management's Discussion and Analysis June 30, 2022 | M-16 | North American Construction Group Ltd. |
"Free cash flow" is defined as cash from operations less cash used in investing activities including finance lease additions but excluding cash used for growth capital. We believe that free cash flow is a relevant measure of cash available to service our total debt repayment commitments, pay dividends, fund share purchases and fund both growth capital expenditures and potential strategic initiatives.
"Backlog" is a measure of the amount of secured work we have outstanding and, as such, is an indicator of a base level of future revenue potential. We define backlog as work that has a high certainty of being performed as evidenced by the existence of a signed contract or work order specifying expected job scope, value and timing. Backlog, while not a GAAP term is similar in nature and definition to the "transaction price allocated to the remaining performance obligations", defined under US GAAP and reported in "Note 5 - Revenue" in our financial statements. When the two numbers differ, the variance relates to expected scope where we have a contractual commitment, but the customer has not yet provided specific direction. Our equity consolidated backlog is calculated based on backlog amounts from our joint venture and affiliates and taken at our ownership percentage.
“Growth capital” is defined as new or used revenue-generating and customer facing assets which are not intended to replace an existing asset and have been commissioned and are available for use. These expenditures result in a meaningful increase to earnings and cash flow potential.
“Sustaining capital” is defined as expenditures, net of routine disposals, related to property, plant and equipment which have been commissioned and are available for use operated to maintain and support existing earnings and cash flow potential and do not include the characteristics of growth capital.
"Capital expenditures, net" is defined as growth capital and sustaining capital. We believe that capital expenditures, net and its components are a meaningful measure to assess resource allocation.
"Capital additions" is defined as capital expenditures, net and lease additions.
"Capital inventory" is defined as rotatable parts included in property, plant and equipment held for use in the overhaul of property, plant and equipment.
“Capital work in progress” is defined growth capital and sustaining capital prior to commissioning and not available for use.
Non-GAAP ratios
"Margin" is defined as the financial number as a percent of total reported revenue. We will often identify a relevant financial metric as a percentage of revenue and refer to this as a margin for that financial metric.
"Adjusted EBITDA Margin" is defined as adjusted EBITDA divided by total combined revenue.
We believe that presenting relevant financial metrics as a percentage of revenue is a meaningful measure of our business as it provides the performance of the financial metric in the context of the performance of revenue. Management reviews margins as part of its financial metrics to assess the relative performance of its results.
Supplementary Financial Measures
"Gross profit margin" represents gross profit as a percentage of revenue.
INTERNAL SYSTEMS AND PROCESSES
Evaluation of disclosure controls and procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose is recorded, processed, summarized and reported within the time periods specified under Canadian and US securities laws. They include controls and procedures designed to ensure that information is accumulated and communicated to management, including the Chief Executive Officer and the Executive Vice President & Chief Financial Officer to allow timely decisions regarding required disclosures.
An evaluation was carried out under the supervision of and with the participation of management, including the Chief Executive Officer and the Executive Vice President & Chief Financial Officer of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the US Securities Exchange Act of 1934, as amended, and in National Instrument 52-109 under the Canadian Securities Administrators Rules and Policies. Based on this evaluation, our Chief Executive Officer and the Executive Vice President & Chief Financial Officer concluded that as of June 30, 2022 such disclosure controls and procedures were effective.
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Management's Discussion and Analysis June 30, 2022 | M-17 | North American Construction Group Ltd. |
Management’s report on internal control over financial reporting
In early 2020, many of our corporate office staff and site administrative staff began working remotely from home due to the COVID-19 pandemic. This change required certain processes and controls that were previously done or documented manually to be completed and retained in electronic form. Despite the changes required by the current environment, there have been no significant changes to our internal controls over financial reporting (“ICFR”) for the three and six months ended June 30, 2022 that have materially affected, or are reasonably likely to affect, our ICFR.
LEGAL AND LABOUR MATTERS
Laws and Regulations and Environmental Matters
Please see “Our Business - Health, Safety and Environmental” in our most recent Annual Information Form for a complete discussion on this topic.
Employees and Labour Relations
As at June 30, 2022, we had 195 salaried employees (June 30, 2021 - 191 salaried employees) and 1,576 hourly employees (June 30, 2021 - 1,563 hourly employees) in our western Canadian operations (excluding employees employed by Nuna). Of the hourly employees, approximately 83% of the employees are union members and work under collective bargaining agreements (June 30, 2021 - 84% of the employees). Our hourly workforce fluctuates according to the seasonality of our business and the staging and timing of projects by our customers. The hourly workforce for our ongoing operations ranges in size from approximately 700 employees to approximately 1,800 employees, depending on the time of year, types of work and duration of awarded projects. We also utilize the services of subcontractors in our business. Subcontractors perform an estimated 7% to 10% of the work we undertake.
OUTLOOK
Our expectation that our projected free cash flows for the full year 2022, in the range of $65 to $90 million, reduced from previous reporting, will improve our liquidity position. We maintain our belief that we have the contracted work to provide sufficient free cash flow to both de-lever our balance sheet and pursue opportunities to continue our diversification and growth objectives.
| | | | | | | | |
Key measures | | 2022 |
Adjusted EBITDA | | $200 - $230M |
Sustaining capital | | $90 - $100M |
Adjusted EPS | | $1.65 - $2.05 |
Free cash flow | | $65 - $90M |
| | |
Capital allocation | | |
Deleverage | | $15 - $40M |
Shareholder activity (dividends, NCIB, trust purchases) | | $30 - $40M |
Growth spending | | $10 - $15M |
| | |
Leverage ratios | | |
Senior debt | | 1.1x - 1.5x |
Net debt | | 1.4x - 1.8x |
FORWARD-LOOKING INFORMATION
Our MD&A is intended to enable readers to gain an understanding of our current results and financial position. To do so, we provide information and analysis comparing results of operations and financial position for the current period to that of the preceding periods. We also provide analysis and commentary that we believe is necessary to assess our future prospects. Accordingly, certain sections of this report contain forward-looking information that is based on current plans and expectations. Our forward-looking information is information that is subject to known and unknown risks and other factors that may cause future actions, conditions or events to differ materially from the anticipated actions, conditions or events expressed or implied by such forward-looking information. Readers are cautioned that actual events and results may vary from the forward-looking information.
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Management's Discussion and Analysis June 30, 2022 | M-18 | North American Construction Group Ltd. |
Forward-looking information is information that does not relate strictly to historical or current facts and can be identified by the use of the future tense or other forward-looking words such as "believe", "continue", "expect", "project", "will" or the negative of those terms or other variations of them or comparable terminology.
Examples of such forward-looking information in this document include, but are not limited to, statements with respect to the following, each of which is subject to significant risks and uncertainties and is based on a number of assumptions which may prove to be incorrect:
•All statements regarding levels of backlog and the periods of time over which we expect to perform backlog.
•Our estimates of the degree to which actual work performed under our contracts over their terms will exceed initial contractual backlog determinations.
•Our expectation that we will continue to maintain compliance with our financial covenants for at least the next twelve-month period.
•Our expectation that projected free cash flows for 2022, in the range of $65 to $90 million, will improve liquidity over 2022.
•Our belief that we have the contracted work to provide sufficient free cash flow to both de-lever our balance sheet significantly and pursue many opportunities to continue our diversification and growth objectives.
Assumptions
Material factors or assumptions used to develop forward-looking statements include, but are not limited to:
•consistent or improved site access restrictions related to COVID-19 safety protocols;
•oil prices remaining stable and not dropping significantly in the remainder of 2022;
•oil sands production continuing to be resilient;
•continuing demand for heavy construction and earth-moving services, including that actual demand will exceed contractually committed demand at levels consistent with past experience;
•continuing demand for external heavy equipment maintenance services and our ability to hire and retain sufficient qualified personnel and to have sufficient maintenance facility capacity to capitalize on demand;
•our ability to maintain our expenses at current levels in proportion to our revenue;
•work continuing to be required under our master services agreements with various customers and such master services agreements remaining intact;
•our customers' continued willingness and ability to meet their contractual obligations to us;
•our customers' continued economic viability, including their ability to pay us in a timely fashion;
•our customers and potential customers continuing to outsource activities for which we are capable of providing services;
•our ability to maintain the right size and mix of equipment in our fleet and to secure specific types of rental equipment to support project development activity enables us to meet our customers' variable service requirements while balancing the need to maximize utilization of our own equipment and that our equipment maintenance costs are similar to our historical experience;
•our ability to attract, develop and retain skills tradespeople;
•our continued ability to access sufficient funds to meet our funding requirements;
•our success in executing our business strategy, identifying and capitalizing on opportunities, managing our business, maintaining and growing our relationships with customers, retaining new customers, competing in the bidding process to secure new projects and identifying and implementing improvements in our maintenance and fleet management practices;
•our relationships with the unions representing certain of our employees continuing to be positive; and
•our success in improving profitability and continuing to strengthen our balance sheet through a focus on performance, efficiency and risk management.
These material factors and assumptions are subject to the risks and uncertainties highlighted in our MD&A for the year ended December 31, 2021 and in our most recently filed Annual Information Form.
While we anticipate that subsequent events and developments may cause our views to change, we do not have an intention to update this forward-looking information, except as required by applicable securities laws. This forward-looking information represents our views as of the date of this document and such information should not be relied upon as representing our views as of any date subsequent to the date of this document. We have attempted to
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Management's Discussion and Analysis June 30, 2022 | M-19 | North American Construction Group Ltd. |
identify important factors that could cause actual results, performance or achievements to vary from those current expectations or estimates expressed or implied by the forward-looking information. However, there may be other factors that cause results, performance or achievements not to be as expected or estimated and that could cause actual results, performance or achievements to differ materially from current expectations. There can be no assurance that forward-looking information will prove to be accurate, as actual results and future events could differ materially from those expected or estimated in such statements. Accordingly, readers should not place undue reliance on forward-looking information. These factors are not intended to represent a complete list of the factors that could affect us. See “Assumptions” above, “Assumptions” and “Business Risk Factors” in our annual MD&A for the year ended December 31, 2021 and risk factors highlighted in materials filed with the securities regulatory authorities filed in the United States and Canada from time to time, including, but not limited to, our most recent Annual Information Form.
Risk Management
We are exposed to liquidity, market and credit risks associated with its financial instruments. Management performs a risk assessment on a continual basis to help ensure that all significant risks related to our Company and operations have been reviewed and assessed to reflect changes in market conditions and operating activities.
Market Risk
Market risk is the risk that the future revenue or operating expense related cash flows, the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices such as foreign currency exchange rates and interest rates. The level of market risk to which we are exposed at any point in time varies depending on market conditions, expectations of future price or market rate movements and composition of our financial assets and liabilities held, non-trading physical assets and contract portfolios. We have experienced no material change in market risk as of the quarter ended June 30, 2022. For a full discussion of market risk please see our annual MD&A for the year ended December 31, 2021.
Risk Factors Related to COVID-19
While markets and economies have somewhat stabilized as governments and industry have implemented measures to mitigate the impacts of the pandemic, the situation continues to evolve. Should the pandemic worsen, we could be subject to additional or continued adverse impacts, including, but not limited to restrictions or limitations on the ability of our employees, contractors, suppliers and customers to conduct business due to quarantines, closures or travel restrictions, including the potential for deferral or cessation of ongoing or planned projects. The ultimate duration and magnitude of the pandemic and its financial effect on us is not known at this time. We are continuously monitoring the situation, however, and working with our customers and suppliers to mitigate its effects.
ADDITIONAL INFORMATION
Our corporate head office is located at 27287 - 100 Avenue, Acheson, Alberta, T7X 6H8. Telephone and facsimile are 780-960-7171 and 780-969-5599, respectively.
Additional information relating to us, including our AIF dated December 31, 2021, can be found on the Canadian Securities Administrators System for Electronic Document Analysis and Retrieval ("SEDAR") database at www.sedar.com, the Securities and Exchange Commission’s website at www.sec.gov and on our company website at www.nacg.ca.
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Management's Discussion and Analysis June 30, 2022 | M-20 | North American Construction Group Ltd. |
Interim Consolidated Balance Sheets
(Expressed in thousands of Canadian Dollars)
(Unaudited)
| | | | | | | | | | | | | | | | | |
| Note | | June 30, 2022 | | December 31, 2021 |
Assets | | | | | |
Current assets | | | | | |
Cash | | | $ | 11,717 | | | $ | 16,601 | |
Accounts receivable | 4 | | | 67,160 | | | 68,787 | |
Contract assets | 5(b) | | 9,906 | | | 9,759 | |
Inventories | 6 | | | 47,402 | | | 44,544 | |
Prepaid expenses and deposits | | | 4,461 | | | 6,828 | |
Assets held for sale | | | 43 | | | 660 | |
| | | 140,689 | | | 147,179 | |
Property, plant and equipment, net of accumulated depreciation of $361,173 (December 31, 2021 – $339,505) | | | 641,580 | | | 640,950 | |
Operating lease right-of-use assets | | | 16,437 | | | 14,768 | |
Investments in affiliates and joint ventures | 7 | | | 59,761 | | | 55,974 | |
Other assets | | | 4,726 | | | 6,000 | |
Goodwill and intangible assets | | | 6,616 | | | 4,407 | |
Deferred tax assets | | | 374 | | | — | |
Total assets | | | $ | 870,183 | | | $ | 869,278 | |
Liabilities and shareholders’ equity | | | | | |
Current liabilities | | | | | |
Accounts payable | | | $ | 73,645 | | | $ | 76,251 | |
Accrued liabilities | | | 19,499 | | | 33,389 | |
Contract liabilities | 5(b) | | 519 | | | 3,349 | |
Current portion of long-term debt | 8 | | | 20,575 | | | 19,693 | |
Current portion of finance lease obligations | | | 23,294 | | | 25,035 | |
Current portion of operating lease liabilities | | | 3,542 | | | 3,317 | |
| | | 141,074 | | | 161,034 | |
Long-term debt | 8 | | | 328,486 | | | 306,034 | |
Finance lease obligations | | | 26,416 | | | 29,686 | |
Operating lease liabilities | | | 13,028 | | | 11,461 | |
Other long-term obligations | | | 21,385 | | | 26,400 | |
Deferred tax liabilities | | | 60,928 | | | 56,200 | |
| | | 591,317 | | | 590,815 | |
Shareholders' equity | | | | | |
Common shares (authorized – unlimited number of voting common shares; issued and outstanding – June 30, 2022 - 28,889,027 (December 31, 2021 – 30,022,928)) | 9(a) | | 237,897 | | | 246,944 | |
Treasury shares (June 30, 2022 - 1,574,655 (December 31, 2021 - 1,564,813)) | 9(a) | | (17,997) | | | (17,802) | |
Additional paid-in capital | | | 30,550 | | | 37,456 | |
Retained earnings | | | 28,398 | | | 11,863 | |
Accumulated other comprehensive income | | | 18 | | | 2 | |
Shareholders' equity | | | 278,866 | | | 278,463 | |
Total liabilities and shareholders’ equity | | | $ | 870,183 | | | $ | 869,278 | |
See accompanying notes to interim consolidated financial statements.
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Interim Consolidated Financial Statements (Unaudited) June 30, 2022 | F-1 | North American Construction Group Ltd. |
Interim Consolidated Statements of Operations and
Comprehensive Income
(Expressed in thousands of Canadian Dollars, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended | | Six months ended |
| | | June 30, | | June 30, |
| Note | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | Note 13 | | | | Note 13 |
Revenue | 5 | | | $ | 168,028 | | | $ | 139,333 | | | $ | 344,739 | | | $ | 307,180 | |
Project costs | 10(b) | | 74,632 | | | 41,557 | | | 136,747 | | | 92,159 | |
Equipment costs | 10(b) | | 54,616 | | | 56,954 | | | 116,569 | | | 111,839 | |
Depreciation | | | 26,340 | | | 26,369 | | | 57,032 | | | 57,540 | |
Gross profit | | | 12,440 | | | 14,453 | | | 34,391 | | | 45,642 | |
General and administrative expenses | 10(b) | | 5,052 | | | 13,620 | | | 11,284 | | | 22,963 | |
Loss (gain) on disposal of property, plant and equipment | | | 1,087 | | | (354) | | | 1,164 | | | (612) | |
Operating income | | | 6,301 | | | 1,187 | | | 21,943 | | | 23,291 | |
Interest expense, net | 11 | | | 5,565 | | | 4,395 | | | 10,247 | | | 8,937 | |
Equity earnings in affiliates and joint ventures | 7 | | | (8,335) | | | (5,157) | | | (14,576) | | | (9,447) | |
Net realized and unrealized gain on derivative financial instruments | | | — | | | (253) | | | — | | | (2,737) | |
Income before income taxes | | | 9,071 | | | 2,202 | | | 26,272 | | | 26,538 | |
Current income tax expense | | | 335 | | | — | | | 497 | | | — | |
Deferred income tax (benefit) expense | | | 1,222 | | | (540) | | | 4,704 | | | 4,410 | |
Net income | | | $ | 7,514 | | | $ | 2,742 | | | $ | 21,071 | | | $ | 22,128 | |
Other comprehensive income | | | | | | | | | |
Unrealized foreign currency translation gain | | | 25 | | | — | | | 16 | | | — | |
Comprehensive income | | | $ | 7,539 | | | $ | 2,742 | | | $ | 21,087 | | | $ | 22,128 | |
Per share information | | | | | | | | | |
Basic net income per share | 9(b) | | $ | 0.27 | | | $ | 0.10 | | | $ | 0.75 | | | $ | 0.78 | |
Diluted net income per share | 9(b) | | $ | 0.25 | | | $ | 0.09 | | | $ | 0.69 | | | $ | 0.72 | |
See accompanying notes to interim consolidated financial statements.
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Interim Consolidated Financial Statements (Unaudited) June 30, 2022 | F-2 | North American Construction Group Ltd. |
Interim Consolidated Statements of Changes in
Shareholders’ Equity
(Expressed in thousands of Canadian Dollars)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common shares | | Treasury shares | | Additional paid-in capital | | Retained earnings (deficit) | | Accumulated other comprehensive income (loss) | | Equity |
Balance at December 31, 2020 | $ | 255,064 | | | $ | (18,002) | | | $ | 46,536 | | | $ | (35,155) | | | $ | — | | | $ | 248,443 | |
Net income | — | | | — | | | — | | | 22,128 | | | — | | | 22,128 | |
Dividends ($0.08 per share) | — | | | — | | | — | | | (2,116) | | | — | | | (2,116) | |
Exercise of stock options | 730 | | | — | | | (289) | | | — | | | — | | | 441 | |
Share purchase program | (8,979) | | | — | | | (7,540) | | | — | | | — | | | (16,519) | |
Purchase of treasury shares | — | | | (156) | | | — | | | — | | | — | | | (156) | |
Stock-based compensation | — | | | — | | | 2,099 | | | — | | | — | | | 2,099 | |
Balance at June 30, 2021 | $ | 246,815 | | | $ | (18,158) | | | $ | 40,806 | | | $ | (15,143) | | | $ | — | | | $ | 254,320 | |
| | | | | | | | | | | |
Balance at December 31, 2021 | $ | 246,944 | | | $ | (17,802) | | | $ | 37,456 | | | $ | 11,863 | | | $ | 2 | | | $ | 278,463 | |
Net income | — | | | — | | | — | | | 21,071 | | | — | | | 21,071 | |
Unrealized foreign currency translation gain | — | | | — | | | — | | | — | | | 16 | | | 16 | |
Dividends ($0.16 per share) | — | | | — | | | — | | | (4,536) | | | — | | | (4,536) | |
Share purchase program | (9,047) | | | — | | | (9,238) | | | — | | | — | | | (18,285) | |
Purchase of treasury shares | — | | | (195) | | | — | | | — | | | — | | | (195) | |
Stock-based compensation | — | | | — | | | 2,332 | | | — | | | — | | | 2,332 | |
Balance at June 30, 2022 | $ | 237,897 | | | $ | (17,997) | | | $ | 30,550 | | | $ | 28,398 | | | $ | 18 | | | $ | 278,866 | |
See accompanying notes to interim consolidated financial statements.
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Interim Consolidated Financial Statements (Unaudited) June 30, 2022 | F-3 | North American Construction Group Ltd. |
Interim Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian Dollars)
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended | | Six months ended |
| | | June 30, | | June 30, |
| Note | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | Note 13 | | | | Note 13 |
Cash provided by (used in): | | | | | | | | | |
Operating activities: | | | | | | | | | |
Net income | | | $ | 7,514 | | | $ | 2,742 | | | $ | 21,071 | | | $ | 22,128 | |
Adjustments to reconcile to net cash from operating activities: | | | | | | | | | |
Depreciation | | | 26,340 | | | 26,369 | | | 57,032 | | | 57,540 | |
Amortization of deferred financing costs | 11 | | | 269 | | | 236 | | | 550 | | | 441 | |
Loss (gain) on disposal of property, plant and equipment | | | 1,087 | | | (354) | | | 1,164 | | | (612) | |
Net realized and unrealized gain on derivative financial instruments | | | — | | | (253) | | | — | | | (2,737) | |
Stock-based compensation expense (benefit) | | | (1,844) | | | 7,651 | | | (567) | | | 10,025 | |
Equity earnings in affiliates and joint ventures | 7 | | | (8,335) | | | (5,157) | | | (14,576) | | | (9,447) | |
Cash settlement of former director's deferred share unit plan | | | — | | | (2,300) | | | — | | | (2,300) | |
Dividends and advances received from affiliates and joint ventures | 7 | | | 7,577 | | | 85 | | | 8,973 | | | 9,347 | |
Other adjustments to cash from operating activities | | | (457) | | | (576) | | | (124) | | | (676) | |
Deferred income tax (benefit) expense | | | 1,222 | | | (540) | | | 4,704 | | | 4,410 | |
Net changes in non-cash working capital | 12(b) | | 2,112 | | | (2,636) | | | (18,557) | | | (21,023) | |
| | | 35,485 | | | 25,267 | | | 59,670 | | | 67,096 | |
Investing activities: | | | | | | | | | |
Purchase of property, plant and equipment | | | (27,121) | | | (28,880) | | | (52,386) | | | (58,069) | |
Additions to intangible assets | | | (1,043) | | | (257) | | | (2,616) | | | (568) | |
Proceeds on disposal of property, plant and equipment | | | 1,527 | | | 7,750 | | | 2,045 | | | 8,818 | |
Investment in affiliates and joint ventures | 7 | | | — | | | (1,960) | | | (163) | | | (1,960) | |
Net repayments of loans from affiliates and joint ventures | | | 1,545 | | | 602 | | | 1,217 | | | 1,506 | |
Settlement of derivative financial instrument | 8(b) | | — | | | 860 | | | — | | | 7,071 | |
| | | (25,092) | | | (21,885) | | | (51,903) | | | (43,202) | |
Financing activities: | | | | | | | | | |
Proceeds from long-term debt | 8 | | | 23,400 | | | 74,750 | | | 43,400 | | | 96,450 | |
Repayment of long-term debt | 8 | | | (15,600) | | | (80,271) | | | (20,466) | | | (109,466) | |
Financing costs | | | — | | | (3,509) | | | — | | | (3,509) | |
Repayment of finance lease obligations | | | (6,801) | | | (8,291) | | | (13,706) | | | (16,445) | |
Dividend payment | 9(d) | | (2,277) | | | (1,123) | | | (3,415) | | | (2,163) | |
Proceeds from exercise of stock options | | | — | | | 345 | | | — | | | 441 | |
Share purchase program | 9(c) | | (17,417) | | | (513) | | | (18,285) | | | (16,519) | |
Purchase of treasury shares | 9(a) | | (128) | | | (78) | | | (195) | | | (156) | |
| | | (18,823) | | | (18,690) | | | (12,667) | | | (51,367) | |
Decrease in cash | | | (8,430) | | | (15,308) | | | (4,900) | | | (27,473) | |
Effect of exchange rate on changes in cash | | | 25 | | | — | | | 16 | | | — | |
Cash, beginning of period | | | 20,122 | | | 31,282 | | | 16,601 | | | 43,447 | |
Cash, end of period | | | $ | 11,717 | | | $ | 15,974 | | | $ | 11,717 | | | $ | 15,974 | |
Supplemental cash flow information (note 12(a)).
See accompanying notes to interim consolidated financial statements.
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Interim Consolidated Financial Statements (Unaudited) June 30, 2022 | F-4 | North American Construction Group Ltd. |