Foreign Filer Report • May 1, 2024
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of 1934
For the month of May 2024
Commission File Number 001-33161
NORTH AMERICAN CONSTRUCTION GROUP LTD.
27287 - 100 Avenue
Acheson, Alberta T7X 6H8
(780) 960-7171
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F o Form 40-F ý
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o
| No. | Documents and Exhibit Index |
|---|---|
| Management’s Discussion and Analysis for the three months ended March 31, 2024. | |
| Interim consolidated financial statements of North American Construction Group Ltd. for the three months ended March 31, 2024. | |
| 99.1 | North American Construction Group Ltd. Announces Results for the First Quarter Ending March 31, 2024. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NORTH AMERICAN CONSTRUCTION GROUP LTD. | |
|---|---|
| By: | /s/ Jason Veenstra |
| Name: | Jason Veenstra |
| Title: | Chief Financial Officer |
Date: May 1, 2024
Table of Contents
| Letter to Shareholders | i |
|---|---|
| Management's Discussion and Analysis | |
| Overall Performance | M- 2 |
| Financial Highlights | M- 4 |
| Liquidity and Capital Resources | M- 10 |
| Accounting Estimates, Pronouncements, and Measures | M- 16 |
| Internal System and Processes | M- 19 |
| Legal and Labour Matters | M- 20 |
| Outlook | M- 16 |
| Forward-Looking Information | M- 20 |
| Additional Information | M- 22 |
| Interim Consolidated Financial Statements | |
| Interim Consolidated Balance Sheets | F- 1 |
| Interim Consolidated Statements of Operations and Comprehensive Income | F- 2 |
| Interim Consolidated Statements of Changes in Shareholders’ Equity | F- 3 |
| Interim Consolidated Statements of Cash Flows | F- 4 |
| Notes to Interim Consolidated Financial Statements | F- 5 |
Letter to Shareholders
Dear fellow shareholders:
In the first quarter of 2024, our safety performance, which now includes employee hours from Australia, achieved a total recordable injury rate (“TRIR”) of 0.37 and a significant incident and failure potential rate (“SIFp”) of 0.37, both of which are better than our industry-leading benchmark target of 0.50.
Operationally, the quarter was a test of our ability to adapt to market changes and fleet utilization challenges. Our oil sands fleet has been repositioned and is now primarily deployed into time and material and rental-type contracts. These contracts inherently provide more consistency and stability than unit rate contracts and we see steady long-term demand for these types of contracts in the region at these levels. With repositioning complete and our bid pipeline now being over $10 billion, our focus is on maximizing equipment utilization in the remaining fleet. We intend to relocate or sell underutilized equipment before the end of this year. The majority of equipment being relocated will be transferred to Australian or North American resource markets and, although moving equipment halfway around the world takes approximately six months, we believe Australia provides the best overall return on our assets and, likewise, to our shareholders. Any remaining under-utilized equipment, which we expect will mostly consist of smaller units, will likely be sold or rebuilt for sale with proceeds of sales offsetting the shipping costs of transferring units.
In our joint venture businesses, our infrastructure work at the Fargo project is ramping up to its busiest summer. We have seen the operational changes made at Nuna stabilize the business and we fully expect Nuna to return to profitability in the second quarter along with steady improvements in project execution and financial performance in the second half of the year.
In Australia, significant rainfall in the first couple months constrained operations but we finished strong in March and ultimately achieved our Q1 expectations. The MacKellar integration is progressing smoothly and we continue to see a strong bid pipeline and increased, long-term growth opportunities. In contrast to the challenges of optimizing fleet utilization and the restructuring at Nuna, our Australian business has been a shining light demonstrating a strong resource market, high demand for our services, and blue-chip customers looking to secure equipment and make long-term commitments.
All said, Q1 EBITDA did slightly better than the 20% of targeted full year EBITDA that was mentioned in my previous letter and we are in the midst of ramping up to our expected Q3 peak driven by optimal operating conditions in Australia, peak activity at the Fargo project, and Nuna’s typical busy summer season. We expect an approximate 45/55 split in EBITDA between the first and second half of the year and remain confident in achieving our 2024 financial targets as we continue to focus on our goals for the year of:
• Integrating and growing MacKellar with our ERP in place for September 2024;
• Re-establishing operational excellence and returning Nuna to consistent profitability;
• Qualifying for a major earthworks infrastructure tender;
• Winning meaningful projects outside oil sands for smaller mining assets; and
• Achieving fleet utilization targets, expanding telematics, and sharing best practices.
I would like to thank our employees for their ability to adjust and adapt to market changes with amazing speed and to our loyal shareholders for their continued confidence. We look forward to updating you again after our Q2 results and sharing what we believe will be a continued compelling investment journey for our shareholders.
Regards,
Joseph Lambert
President & Chief Executive Officer
May 1, 2024
Management’s Discussion and Analysis
For the three months ended March 31, 2024
May 1, 2024
The following Management’s Discussion and Analysis ("MD&A") is as of May 1, 2024, and should be read in conjunction with the attached unaudited interim consolidated financial statements and notes that follow for the three months ended March 31, 2024, the audited consolidated financial statements and notes for the year ended December 31, 2023, and our annual MD&A for the year ended December 31, 2023.
All financial statements have been prepared in accordance with United States ("US") generally accepted accounting principles ("GAAP"). Except where otherwise specifically indicated, all dollar amounts are expressed in Canadian dollars. The consolidated financial statements and additional information relating to our business, including our most recent Annual Information Form, are available on the Canadian Securities Administrators' SEDAR+ system at www.sedarplus.com , the US Securities and Exchange Commission's website at www.sec.gov and our Company website at www.nacg.ca .
A non-GAAP financial measure is generally defined by securities regulatory authorities as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be adjusted in the most comparable GAAP measures. Non-GAAP financial measures do not have standardized meanings under GAAP and therefore may not be comparable to similar measures presented by other issuers. In our MD&A, we use non-GAAP financial measures such as "adjusted EBIT", "adjusted EBITDA", "adjusted EBITDA margin", "adjusted EPS", "adjusted net earnings", "backlog", "capital additions", "capital expenditures, net", "capital inventory", "capital work in progress", "cash liquidity", "cash provided by operating activities prior to change in working capital", "cash related interest expense", "combined backlog", "combined gross profit", "combined gross profit margin", "equity investment EBIT", "equity method investment backlog", "free cash flow", "general and administrative expenses (excluding stock-based compensation)", "growth capital", "growth spending", "invested capital", "margin", "net debt", "share of affiliate and joint venture capital additions", "sustaining capital", "total capital liquidity", "total combined revenue", and "total debt". We provide tables in this document that reconcile non-GAAP measures used to amounts reported on the face of the consolidated financial statements. A summary of our non-GAAP measures is included below under the heading "Non-GAAP financial measures".
OVERALL PERFORMANCE
Interim MD&A - Quarter 1 highlights
| (Expressed in thousands of Canadian Dollars, except per share amounts) | Three months ended | ||
|---|---|---|---|
| March 31, | |||
| 2024 | 2023 (iv) | Change | |
| Revenue | $ 297,026 | $ 244,329 | $ 52,697 |
| Total combined revenue (i) | 345,713 | 322,341 | 23,372 |
| Gross profit | 53,290 | 41,100 | 12,190 |
| Gross profit margin (i) | 17.9 % | 16.8 % | 1.1 % |
| Combined gross profit (i) | 62,225 | 55,919 | 6,306 |
| Combined gross profit margin (i)(ii) | 18.0 % | 17.3 % | 0.7 % |
| Operating income | 38,276 | 25,708 | 12,568 |
| Adjusted EBITDA (i) | 93,251 | 84,622 | 8,629 |
| Adjusted EBITDA margin (i)(iii) | 27.0 % | 26.3 % | 0.7 % |
| Net income | 11,369 | 21,846 | (10,477) |
| Adjusted net earnings (i) | 20,887 | 25,276 | (4,389) |
| Cash provided by operating activities | 11,866 | 31,824 | (19,958) |
| Cash provided by operating activities prior to change in working capital (i) | 73,892 | 65,835 | 8,057 |
| Free cash flow (i) | (36,391) | (26,058) | (10,333) |
| Purchase of PPE | 66,653 | 36,496 | 30,157 |
| Sustaining capital additions (i) | 59,876 | 47,191 | 12,685 |
| Growth capital additions (i) | 19,607 | — | 19,607 |
| Basic net income per share | $ 0.43 | $ 0.83 | $ (0.40) |
| Adjusted EPS (i) | $ 0.78 | $ 0.96 | $ (0.18) |
(i) See "Non-GAAP Financial Measures".
(ii) Combined gross profit margin is calculated using combined gross profit over total combined revenue.
(iii) Adjusted EBITDA margin is calculated using adjusted EBITDA over total combined revenue. (iv) The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".
Revenue of $297.0 million represented a $52.7 million (or 21.6%) increase from Q1 2023 as a result of the acquisition of the MacKellar Group ("MacKellar"). Following the October 1, 2023, acquisition, MacKellar completed its second full quarter of revenue since the change in control and posted another strong quarter with top-line results in the first quarter of 2024 similar to that of the fourth quarter of 2023. Significant rainfall carried into January and early February and impacted MacKellar's top-line but, in general and like Q4 2023, the revenue achieved was consistent with acquisition expectations. The most significant mine sites for the MacKellar fleet remain the Carmichael and Middlemount mines, located in the Queensland region, which both provided strong contributions in the quarter.
Equipment utilization in the oil sands region, within the Heavy Equipment - Canada segment, of 53% drove a 30% quarter-over-quarter reduction in equipment related revenue from that region's heavy equipment fleet. Fleet remobilization and repositioning, primarily from the Fort Hills mine to the Millennium mine, in February and early March reduced productive operating hours and associated revenues. Offsetting these decreases, revenues generated in the quarter by DGI Trading Pty Ltd. ("DGI"), within the Heavy Equipment - Australia Segment, were higher than Q1 2023 reflecting strong international demand for used components and major parts required by heavy equipment fleets.
Combined revenue of $345.7 million represented a $23.4 million (or 7.3%) increase from Q1 2023. Our share of revenue generated in the quarter by joint ventures and affiliates was $48.7 million, compared to $78.0 million in Q1 2023 (a decrease of 37.6%) as the completion of the gold mine project in Northern Ontario was only partially offset by increases within the Fargo joint venture. The Fargo project progressed on schedule during the quarter with modest top-line revenue reflecting the expected impact of winter conditions on civil earth-moving scopes.
Adjusted EBITDA of $93.3 million was an increase of $8.6 million, or 10.2%, from the Q1 2023 result of $84.6 million, slightly better than the aforementioned combined revenue increase of 7.3% due to quarter-over-quarter margin improvements. Adjusted EBITDA margin of 27.0% was higher than Q1 2023 primarily due to margins posted by the MacKellar fleets which again exceeded 30% in the quarter. Continued rainfall in Queensland, Australia into January and February impacted margins in those months due to reduced operating hours but steady, effective operations in March provided for a strong overall quarter.
Margins in the Heavy Equipment - Canada segment were notably impacted by fixed and indirect costs incurred during remobilization efforts but benefited from a strong March as equipment was commissioned and usage stabilized. For the installed and mobilized heavy equipment fleet, favourable operating and haul road conditions, typical for the winter season, allowed for effective operation at the Millennium, Kearl, and Fort Hills mines under primarily time and material and rental based contract structures.
Restructuring efforts within the Nuna Group of Companies ("Nuna") were fully completed during the quarter. Newly installed leadership has brought an operational focus and redirected resources as required. The projects in Northern BC and the Northwest Territories were finalized and debrief sessions held with operational personnel to consider and implement lessons learned. Adjusted EBITDA margin of less than 10% illustrates project execution challenges with one-time charges removed to reflect operational performance in the quarter. Restructuring expenses incurred in the quarter relate primarily to severance costs and one-time expenses required to complete legacy projects.
Depreciation of our equipment fleet was 14.8% of revenue in the quarter, compared to 14.9% in Q1 2023. The Heavy Equipment - Canada fleet averaged approximately 19.5% of revenue due to remobilization efforts. This is offset by depreciation on the Heavy Equipment - Australia fleet, which averaged approximately 9.8% of revenue, largely driven by MacKellar depreciation of 10.5% of revenue in the quarter reflecting both productive operations in the quarter as well as the depreciation of fair market values allocated upon purchase. On a combined basis, depreciation averaged 13.9% of combined revenue in the quarter as the lower capital intensity in Fargo and Nuna joint ventures modestly reduced the ratio based on the MacKellar fleet's increasing prominence.
General and administrative expenses (excluding stock-based compensation) were $11.1 million, or 3.8% of revenue, compared to $8.2 million, or 3.4% of revenue, in Q1 2023. The acquisition of MacKellar did not impact the run rate expectation of administrative expenses being less than 4% of revenue.
Cash related interest expense incurred on our debt for the quarter was $13.5 million at an average cost of debt of 9.1%, compared to 6.7% in Q1 2023, as rate increases posted by the Bank of Canada directly impact our Credit Facility and have a delayed impact on the rates for secured equipment-backed financing.
Adjusted earnings per share ("EPS") of $0.78 and adjusted net earnings of $20.9 million were down 18.8% and 17.4% from the prior year figures of $0.96 and $25.3 million, respectively. The $4.4 million decrease in adjusted net earnings is due to the higher EBITDA and lower incomes taxes being more than offset by the higher interest and depreciation expenses associated with the debt assumed and fleet acquired upon acquisition of MacKellar.
Weighted-average common shares outstanding for the first quarters of 2024 and 2023 are comparable at 26,733,473 and 26,415,004, respectively, and were not a factor in the earnings per share variance.
Free cash flow was a use of cash of $36.4 million in the quarter primarily due to the consumption of $62.0 million by our working capital accounts. This working capital draw on cash is higher than Q1 2023 primarily due to the increased size of our business. Adjusted EBITDA generated $93.3 million and when factoring in sustaining capital additions ($59.9 million) and cash interest paid ($12.4 million), positive cash of $21.0 million was generated by the overall business in the quarter.
FINANCIAL HIGHLIGHTS
Three months ended March 31, 2024 results
| Three months ended | |||
|---|---|---|---|
| March 31, | |||
| (dollars in thousands, except per share amounts) | 2024 | 2023 (iii) | Change |
| Revenue | $ 297,026 | $ 244,329 | $ 52,697 |
| Cost of sales | 199,795 | 166,844 | 32,951 |
| Depreciation | 43,941 | 36,385 | 7,556 |
| Gross profit | $ 53,290 | $ 41,100 | $ 12,190 |
| Gross profit margin (i) | 17.9 % | 16.8 % | 1.1 % |
| General and administrative expenses (excluding stock-based compensation) (i) | 11,145 | 8,243 | 2,902 |
| Stock-based compensation expense | 3,608 | 5,936 | (2,328) |
| Operating income | 38,276 | 25,708 | 12,568 |
| Interest expense, net | 15,597 | 7,311 | 8,286 |
| Net income | 11,369 | 21,846 | (10,477) |
| Adjusted EBITDA (i) | 93,251 | 84,622 | 8,629 |
| Adjusted EBITDA margin (i)(ii) | 27.0 % | 26.3 % | 0.7 % |
| Per share information | |||
| Basic net income per share | $ 0.43 | $ 0.83 | $ (0.40) |
| Diluted net income per share | $ 0.39 | $ 0.71 | $ (0.32) |
| Adjusted EPS (i) | $ 0.78 | $ 0.96 | $ (0.18) |
(i) See "Non-GAAP Financial Measures".
(ii) Adjusted EBITDA margin is calculated using adjusted EBITDA over total combined revenue. (iii) The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".
Reconciliation of total reported revenue to total combined revenue
| Three months ended | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 (ii) |
| Revenue from wholly-owned entities per financial statements | $ 297,026 | $ 244,329 |
| Share of revenue from investments in affiliates and joint ventures | 125,838 | 189,485 |
| Elimination of joint venture subcontract revenue | (77,151) | (111,473) |
| Total combined revenue (i) | $ 345,713 | $ 322,341 |
(i) See "Non-GAAP Financial Measures". (ii) The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".
Reconciliation of reported gross profit to combined gross profit
| Three months ended | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 (ii) |
| Gross profit from wholly-owned entities per financial statements | $ 53,290 | $ 41,100 |
| Share of gross profit from investments in affiliates and joint ventures | 8,935 | 14,819 |
| Combined gross profit (i) | $ 62,225 | $ 55,919 |
(i) See "Non-GAAP Financial Measures". (ii) The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".
Reconciliation of net income to adjusted net earnings, adjusted EBIT, and adjusted EBITDA
| Three months ended | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 |
| Net income | $ 11,369 | $ 21,846 |
| Adjustments: | ||
| Loss on disposal of property, plant and equipment | 261 | 1,213 |
| Stock-based compensation expense | 3,608 | 5,936 |
| Change in fair value of contingent obligations | 1,438 | — |
| Restructuring costs | 4,517 | — |
| Gain on derivative financial instruments | — | (2,509) |
| Net unrealized loss on derivative financial instruments included in equity earnings in affiliates and joint ventures | 1,954 | 434 |
| Tax effect of the above items | (2,260) | (1,644) |
| Adjusted net earnings (i) | 20,887 | 25,276 |
| Adjustments: | ||
| Tax effect of the above items | 2,260 | 1,644 |
| Amortization of fair value of contingent obligations | 3,955 | — |
| Interest expense, net | 15,597 | 7,311 |
| Income tax expense | 4,405 | 8,402 |
| Equity loss (earnings) in affiliates and joint ventures (i)(iii) | 1,512 | (9,342) |
| Equity investment EBIT (i)(iii) | (3,768) | 9,783 |
| Adjusted EBIT (i) | 44,848 | 43,074 |
| Adjustments: | ||
| Depreciation and amortization | 44,241 | 36,691 |
| Equity investment depreciation and amortization | 4,162 | 4,857 |
| Adjusted EBITDA (i) | $ 93,251 | $ 84,622 |
| Adjusted EBITDA margin (ii) | 27.0 % | 26.3 % |
(i) See "Non-GAAP Financial Measures". (ii) Adjusted EBITDA margin is calculated using adjusted EBITDA over total combined revenue. (iii) The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".
Reconciliation of equity earnings in affiliates and joint ventures to equity investment EBIT
| Three months ended | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 (ii) |
| Equity (loss) earnings in affiliates and joint ventures | $ (1,512) | $ 9,342 |
| Adjustments: | ||
| Interest (income) expense, net | (573) | 357 |
| Income tax (benefit) expense | (1,508) | 124 |
| Gain on disposal of property, plant and equipment | (175) | (40) |
| Equity investment EBIT (i) | $ (3,768) | $ 9,783 |
(i) See "Non-GAAP Financial Measures". (ii) The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".
Analysis of three months ended March 31, 2024 results
Revenue
A breakdown of revenue by reportable segment is as follows:
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Heavy Equipment - Canada | $ 158,271 | $ 230,647 |
| Heavy Equipment - Australia | 133,948 | 6,022 |
| Other | 4,862 | 11,096 |
| Eliminations | (55) | (3,436) |
| $ 297,026 | $ 244,329 |
A breakdown of revenue by source is as follows:
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Operations support services | $ 284,724 | $ 229,457 |
| Equipment and component sales | 11,022 | 11,083 |
| Construction services | 1,280 | 3,789 |
| $ 297,026 | $ 244,329 |
For the three months ended March 31, 2024, revenue was $297.0 million, up from $244.3 million in the same period last year. The majority of the quarter-over-quarter increase in revenue was driven by the October 2023 acquisition of MacKellar, represented in the Heavy Equipment - Australia segment of $133.9 million. Reductions in current year Heavy Equipment - Canada revenue relate to equipment utilization of 53%, compared to the Q1 2023 metric of 79%, as a result of reduced overburden and reclamation scopes at the Fort Hills and Syncrude mines.
Gross profit
A breakdown of gross profit by reportable segment is as follows:
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Heavy Equipment - Canada | $ 16,442 | $ 36,744 |
| Heavy Equipment - Australia | 32,801 | 1,985 |
| Other | 3,012 | 3,078 |
| Eliminations | 1,035 | (707) |
| $ 53,290 | $ 41,100 |
A breakdown of cost of sales is as follows:
| Three months ended | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 (i) |
| Salaries, wages, and benefits | $ 86,185 | $ 68,145 |
| Repair parts and consumable supplies | 63,810 | 49,821 |
| Subcontractor services | 28,024 | 32,585 |
| Equipment and component sales | 6,857 | 7,836 |
| Third-party equipment rentals | 7,441 | 3,697 |
| Fuel | 3,928 | 2,649 |
| Other | 3,550 | 2,111 |
| $ 199,795 | $ 166,844 |
(i) The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".
For the three months ended March 31, 2024, gross profit was $53.3 million with a 17.9% gross profit margin, up from gross profit of $41.1 million with a 16.8% gross profit margin in the same period last year. The quarter-over-quarter increase is the result of the October 2023 acquisition of MacKellar, represented in the Heavy Equipment- Australia segment. The decrease in gross profit in the Heavy Equipment - Canada segment is driven primarily by the decrease in revenue.
A breakdown of depreciation by reportable segment is as follows:
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Heavy Equipment - Canada | $ 30,883 | $ 36,340 |
| Heavy Equipment - Australia | 13,136 | 45 |
| Eliminations | (78) | — |
| $ 43,941 | $ 36,385 |
For the three months ended March 31, 2024, depreciation was $43.9 million, or 14.8% of revenue, up from $36.4 million, or 14.9% of revenue, in the same period last year. The increased depreciation in the current quarter relates to the October 2023 acquisition of MacKellar which is shown in the Heavy Equipment - Australia segment. The decrease in depreciation in Heavy Equipment - Canada, is driven by decreased operating hours compared to Q1 2023.
Operating income
For the three months ended March 31, 2024, we recorded operating income of $38.3 million, an increase of $12.6 million from $25.7 million for the same period last year, largely due to the contribution from MacKellar in the current period. General and administrative expenses, excluding stock-based compensation expense, was $11.1 million (or 3.8% of revenue) for the quarter, higher than the $8.2 million (or 3.4% of revenue) in the prior year. The increase can be primarily attributed to MacKellar, offset by current year expense reductions as we optimize support services. Stock-based compensation expense decreased by $2.3 million compared to the prior year as our share price increased at a slower rate compared to the prior year, impacting the carrying value of our liability classified award plans.
Non-operating income and expense
| Three months ended | |||
|---|---|---|---|
| March 31, | |||
| (dollars in thousands) | 2024 | 2023 | Change |
| Credit Facility | $ 6,731 | $ 2,658 | $ 4,073 |
| Convertible debentures | 1,711 | 1,692 | 19 |
| Interest on customer supply chain financing | 988 | 1,230 | (242) |
| Equipment financing | 4,784 | 806 | 3,978 |
| Mortgage | 240 | 330 | (90) |
| Other interest expense | 384 | 306 | 78 |
| Cash interest expense | 14,838 | 7,022 | 7,816 |
| Amortization of deferred financing costs | 759 | 289 | 470 |
| Total interest expense, net | $ 15,597 | $ 7,311 | $ 8,286 |
| Equity loss (earnings) in affiliates and joint ventures (i) | $ 1,512 | $ (9,342) | $ 10,854 |
| Change in fair value of contingent obligations | 5,393 | — | 5,393 |
| Gain on derivative financial instruments | — | (2,509) | 2,509 |
| Income tax expense | 4,405 | 8,402 | (3,997) |
(i) The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".
Total interest expense was $15.6 million during the three months ended March 31, 2024, an increase from $7.3 million in Q1 2023. The increase can be primarily attributed to the higher balance and an increased variable rate on the Credit Facility and increased equipment financing in the current period, primarily from the addition of MacKellar. Cash related interest expense for the three months ended March 31, 2024, calculated as interest expense excluding amortization of deferred financing costs of $0.8 million, was $13.5 million and represents an average cost of debt of 9.1% when factoring in the Credit Facility balances during the quarter (compared to 6.7% for the three months ended March 31, 2023).
The change in fair value of contingent obligations of $5.4 million for the three months ended March 31, 2024 ($nil for the three months ended March 31, 2023) reflects the increase in fair value of the contingent liabilities relating to the MacKellar and DGI acquisitions.
We recorded income tax expense of $4.4 million and $8.4 million for the three months ended March 31, 2024, and 2023, respectively. The decreased expense is a result of the reduced pre-tax income in the current quarter.
Equity earnings in affiliates and joint ventures
Equity earnings in affiliates and joint ventures was generated by the joint ventures accounted for using the equity method. The loss of $1.5 million for the three months ended March 31, 2024, down from earnings of $9.3 million in the same period last year, was primarily driven by the $4.5 million one-time restructuring charge at Nuna and a reduction in overburden and reclamation scopes at MNALP.
| Three months ended March 31, 2024 | Nuna | MNALP | Fargo | Other entities | Total |
|---|---|---|---|---|---|
| Revenues | $ 14,348 | $ 84,196 | $ 23,934 | $ 3,360 | $ 125,838 |
| Gross (loss) profit | (1,350) | 3,028 | 6,898 | 359 | 8,935 |
| (Loss) income before taxes | (7,243) | 2,207 | 916 | 1,433 | (2,687) |
| Net (loss) income | (6,038) | 2,207 | 916 | 1,403 | (1,512) |
| Three months ended March 31, 2023 (i) | Nuna | MNALP | Fargo | Other entities | Total |
|---|---|---|---|---|---|
| Revenues | $ 56,577 | $ 118,195 | $ 13,300 | $ 1,413 | $ 189,485 |
| Gross profit | 7,047 | 3,950 | 3,809 | 13 | 14,819 |
| Income before taxes | 5,172 | 3,118 | 1,450 | (239) | 9,501 |
| Net income (loss) | 5,048 | 3,118 | 1,415 | (239) | 9,342 |
(i) The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".
Net income and comprehensive income
For the three months ended March 31, 2024, we recorded $10.7 million of net income and comprehensive income (basic net income per share of $0.43 and diluted net income per share of $0.39), compared to $21.9 million net income and comprehensive income (basic net income per share of $0.83 and diluted net income per share of $0.71) recorded for the same period last year.
Reconciliation of basic net income per share to adjusted EPS
| Three months ended | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 |
| Net income | $ 11,369 | $ 21,846 |
| Interest from convertible debentures (after tax) | 1,489 | 1,462 |
| Diluted net income available to common shareholders | $ 12,858 | $ 23,308 |
| Adjusted net earnings (i) | $ 20,887 | $ 25,276 |
| Weighted-average number of common shares | 26,733,473 | 26,415,004 |
| Weighted-average number of diluted common shares | 33,026,740 | 32,942,717 |
| Basic net income per share | $ 0.43 | $ 0.83 |
| Diluted net income per share | $ 0.39 | $ 0.71 |
| Adjusted EPS (i) | $ 0.78 | $ 0.96 |
(i) See "Non-GAAP Financial Measures".
The table below summarizes our consolidated results for the preceding eight quarters:
| (dollars in millions, except per share amounts) | Three Months Ended — Q1 2024 | Q4 2023 (iv) | Q3 2023 (iv) | Q2 2023 (iv) | Q1 2023 (iv) | Q4 2022 | Q3 2022 | Q2 2022 |
|---|---|---|---|---|---|---|---|---|
| Revenue | $ 297.0 | $ 328.3 | $ 196.9 | $ 195.2 | $ 244.3 | $ 233.4 | $ 191.4 | $ 168.0 |
| Gross profit (i) | 53.3 | 65.6 | 26.5 | 21.6 | 41.1 | 42.6 | 24.6 | 12.4 |
| Adjusted EBITDA (i) | 93.3 | 101.1 | 59.4 | 51.8 | 84.6 | 85.9 | 60.1 | 41.6 |
| Net income and comprehensive income | 10.7 | 17.6 | 11.4 | 12.2 | 21.9 | 26.1 | 20.6 | 7.5 |
| Basic net income per share (ii) | $ 0.43 | $ 0.66 | $ 0.43 | $ 0.46 | $ 0.83 | $ 0.99 | $ 0.75 | $ 0.27 |
| Diluted net income per share (ii) | $ 0.39 | $ 0.58 | $ 0.39 | $ 0.42 | $ 0.70 | $ 0.84 | $ 0.65 | $ 0.25 |
| Adjusted EPS (i)(ii) | $ 0.78 | $ 0.87 | $ 0.54 | $ 0.47 | $ 0.95 | $ 1.10 | $ 0.65 | $ 0.17 |
| Cash dividend per share (iii) | $ 0.10 | $ 0.10 | $ 0.10 | $ 0.10 | $ 0.10 | $ 0.08 | $ 0.08 | $ 0.08 |
(i) See "Non-GAAP Financial Measures".
(ii) Net income and adjusted earnings per share for each quarter have been computed based on the weighted-average number of shares issued and outstanding during the respective quarter. Therefore, quarterly amounts are not additive and may not add to the associated annual or year-to-date totals.
(iii) The timing of payment of the cash dividend per share may differ from the dividend declaration date.
(iv) The prior year amounts are adjusted to reflect a change in accounting policy. See "Accounting Estimates, Pronouncements and Measures".
For a full discussion of the factors that can generally contribute to the variations in our quarterly financial results please see "Financial Highlights" in our annual MD&A for the year ended December 31, 2023.
LIQUIDITY AND CAPITAL RESOURCES
Summary of consolidated financial position
| (dollars in thousands) | March 31, 2024 | December 31, 2023 | Change | |
|---|---|---|---|---|
| Cash | $ 80,095 | $ 88,614 | $ (8,519) | |
| Working capital assets | ||||
| Accounts receivable | $ 138,451 | $ 97,855 | $ 40,596 | |
| Contract assets | 15,874 | 35,027 | (19,153) | |
| Inventories | 68,876 | 64,962 | 3,914 | |
| Prepaid expenses and deposits | 7,946 | 7,402 | 544 | |
| Working capital liabilities | ||||
| Accounts payable | (124,017) | (146,190) | 22,173 | |
| Accrued liabilities | (61,502) | (72,225) | 10,723 | |
| Contract liabilities | (1,366) | (59) | (1,307) | |
| Total net working capital (excluding cash and current portion of long-term debt) (i) | $ 44,262 | $ (13,228) | $ 57,490 | |
| Property, plant and equipment | $ 1,165,183 | $ 1,142,946 | $ 22,237 | |
| Total assets | 1,580,211 | 1,546,478 | 33,733 | |
| Credit Facility (ii) | $ 364,260 | $ 317,488 | $ 46,772 | |
| Equipment financing (ii)(iii) | 220,187 | 220,466 | (279) | |
| Mortgage (ii) | 0 | 28,225 | 28,429 | (204) |
| Contingent obligations (i) | 119,092 | 115,857 | 3,235 | |
| Total debt (i) | 731,764 | 682,240 | 49,524 | |
| Convertible debentures (ii) | 129,750 | 129,750 | — | |
| Cash | (80,095) | (88,614) | 8,519 | |
| Net debt (i) | 781,419 | 723,376 | 58,043 | |
| Total shareholders' equity | 365,945 | 356,654 | 9,291 | |
| Invested capital (i) | $ 1,147,364 | $ 1,080,030 | $ 67,334 |
(i) See "Non-GAAP Financial Measures".
(ii) Includes current portion.
As at March 31, 2024, we had $80.1 million in cash and $78.0 million unused borrowing availability on the Credit Facility for a total liquidity of $158.1 million (defined as cash plus available and unused Credit Facility borrowings).
Our liquidity is complemented by available borrowings through our equipment leasing partners. As at March 31, 2024, our total available capital liquidity was $236.3 million (defined as total liquidity plus unused finance lease and other borrowing availability under our Credit Facility). Borrowing availability under finance lease obligations considers the current and long-term portion of finance lease obligations and financing obligations, including specific finance lease obligations for the joint ventures that we guarantee.
| (dollars in thousands) | March 31, 2024 | December 31, 2023 |
|---|---|---|
| Cash | $ 80,095 | $ 88,614 |
| Credit Facility borrowing limit | 474,260 | 478,022 |
| Credit Facility drawn | (364,260) | (317,488) |
| Letters of credit outstanding | (32,045) | (31,272) |
| Cash liquidity (i) | $ 158,050 | $ 217,876 |
| Finance lease borrowing limit | 350,000 | 350,000 |
| Other debt borrowing limit | 20,000 | 20,000 |
| Equipment financing drawn | (220,187) | (220,466) |
| Guarantees provided to joint ventures | (71,600) | (74,831) |
| Total capital liquidity (i) | $ 236,263 | $ 292,579 |
(i) See "Non-GAAP Financial Measures".
As at March 31, 2024, we had $3.4 million in trade receivables that were more than 30 days past due compared to $4.0 million as at December 31, 2023. As at March 31, 2024 and December 31, 2023, we did not have an allowance for credit losses related to our trade receivables as we believe that there is minimal risk in the collection of our trade receivables. We continue to monitor the creditworthiness of our customers. As at March 31, 2024, holdbacks totaled $0.8 million, up from $0.4 million as at December 31, 2023.
Capital additions
Reconciliation to Statements of Cash Flows
| Three months ended, | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 |
| Purchase of PPE | $ 66,653 | $ 36,496 |
| Additions to intangibles | 970 | 2 |
| Gross capital expenditures | $ 67,623 | $ 36,498 |
| Proceeds from sale of PPE | (1,103) | (1,198) |
| Change in capital inventory and capital work in progress (i) | (1,193) | (5,129) |
| Capital expenditures, net (i) | $ 65,327 | $ 30,171 |
| Finance lease additions | 14,156 | 17,020 |
| Capital additions (i) | $ 79,483 | $ 47,191 |
(i) See "Non-GAAP Financial Measures".
Sustaining and growth additions
| Three months ended, | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 |
| Sustaining | $ 45,720 | $ 30,171 |
| Growth | 19,607 | — |
| Capital expenditures, net (i) | $ 65,327 | $ 30,171 |
| Sustaining | $ 14,156 | $ 17,020 |
| Growth | — | — |
| Finance lease additions | $ 14,156 | $ 17,020 |
| Sustaining | $ 59,876 | $ 47,191 |
| Growth | 19,607 | — |
| Capital additions (i) | $ 79,483 | $ 47,191 |
(i) See "Non-GAAP Financial Measures".
A breakdown of net capital expenditures by reportable segment is as follows:
| Three months ended March 31, 2024 | Heavy Equipment - Canada | Heavy Equipment - Australia | Total |
|---|---|---|---|
| Sustaining | $ 33,454 | $ 12,266 | $ 45,720 |
| Growth | 27 | 19,580 | 19,607 |
| Capital expenditures, net (i) | $ 33,481 | $ 31,846 | $ 65,327 |
| Three months ended March 31, 2023 | Heavy Equipment - Canada | Heavy Equipment - Australia | Total |
|---|---|---|---|
| Sustaining | $ 30,171 | $ — | $ 30,171 |
| Growth | — | — | — |
| Capital expenditures, net (i) | $ 30,171 | $ — | $ 30,171 |
Capital additions for the three months ended March 31, 2024, were $79.5 million ($47.2 million in Q1 2023). The increase when comparing to Q1 2023 largely relates to expenditures by MacKellar, included within Heavy Equipment - Australia. The majority of the current quarter spend is comprised of sustaining capital additions in connection to routine maintenance of our existing fleet.
We finance a portion of our heavy construction fleet through finance leases and we continue to lease our motor vehicle fleet through our finance lease facilities. Our sustaining capital additions financed through finance leases during the three months ended March 31, 2024, was $14.2 million ($17.0 million in the prior year). Our equipment fleet is currently split among owned (75%), finance leased (24%) and rented equipment (1%).
Summary of capital additions in affiliates and joint ventures
Not included in the reconciliation of capital additions above are capital additions made by our affiliates and joint ventures. The table below reflects our share of such net capital additions (disposals).
| Three months ended, | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 |
| Nuna | $ 193 | $ (225) |
| MNALP | 167 | 5,019 |
| Fargo | 6,043 | 2,742 |
| Other | 1 | (1,272) |
| Share of affiliate and joint venture capital additions (i) | $ 6,404 | $ 6,264 |
(i) See "Non-GAAP Financial Measures".
Capital additions within the Nuna joint ventures in both years and MNALP in the current year are considered to be sustaining in nature while the capital additions made by the MNALP in 2023 and Fargo joint ventures were growth given they represent initial investments.
For a complete discussion on our capital expenditures, please see "Liquidity and Capital Resources - Capital Resources" in our most recent annual MD&A for the year ended December 31, 2023.
Summary of consolidated cash flows
| Three months ended | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 |
| Cash provided by operating activities | $ 11,866 | $ 31,824 |
| Cash used in investing activities | (56,733) | (40,917) |
| Cash provided by (used in) financing activities | 38,716 | (44,447) |
| Decrease in cash | $ (6,151) | $ (53,540) |
Operating activities
| Three months ended | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 |
| Cash provided by operating activities prior to change in working capital (i) | $ 73,892 | $ 65,835 |
| Net changes in non-cash working capital | (62,026) | (34,011) |
| Cash provided by operating activities | $ 11,866 | $ 31,824 |
(i) See "Non-GAAP Financial Measures".
Cash provided by operating activities for the three months ended March 31, 2024, was $11.9 million, compared to cash provided by operating activities of $31.8 million for the three months ended March 31, 2023. The decrease in cash flow in the current year period is largely a result of decreased net income in the quarter and the impact of changes in our working capital accounts. Cash provided by (used in) the net change in non-cash working capital specific to operating activities are summarized in the table below:
| Three months ended | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 |
| Accounts receivable | $ (45,571) | $ (8,494) |
| Contract assets | 19,067 | 6,063 |
| Inventories | (4,192) | (3,366) |
| Prepaid expenses and deposits | (614) | 1,004 |
| Accounts payable | (20,654) | (13,672) |
| Accrued liabilities | (11,369) | (14,139) |
| Contract liabilities | 1,307 | (1,407) |
| Net change in non-cash working capital | $ (62,026) | $ (34,011) |
Investing activities
Cash used in investing activities for the three months ended March 31, 2024, was $56.7 million, compared to cash used in investing activities of $40.9 million for the three months ended March 31, 2023. Current period investing activities largely relate to $66.7 million for the purchase of property, plant and equipment, partially offset by net collections of loans to affiliates and joint ventures of $5.8 million and $1.1 million cash received on the disposal of property, plant and equipment. Prior year investing activities included $36.5 million for the purchase of property, plant and equipment and $5.2 million of net advances of loans to affiliates and joint ventures, partially offset by $1.2 million cash received on the disposal of property, plant and equipment.
Financing activities
Cash provided by financing activities during the three months ended March 31, 2024, was $38.7 million, which included $75.4 million of proceeds from long-term debt, partially offset by $33.9 million of long-term debt repayments and $2.7 million for the dividend payment. Cash used in financing activities during the three months ended March 31, 2023, was $44.4 million which included $42.2 million of long-term debt repayments, and $2.1 million for the dividend payment.
Free cash flow
| Three months ended | ||
|---|---|---|
| March 31, | ||
| (dollars in thousands) | 2024 | 2023 |
| Consolidated Statements of Cash Flows | ||
| Cash provided by operating activities | $ 11,866 | $ 31,824 |
| Cash used in investing activities | (56,733) | (40,917) |
| Effect of exchange rate on changes in cash | (2,368) | 55 |
| Add back of growth and non-cash items included in the above figures: | ||
| Growth capital additions (i) | 19,607 | — |
| Non-cash changes in fair value of contingent obligations | 5,393 | — |
| Capital additions financed by leases (i) | (14,156) | (17,020) |
| Free cash flow (i) | $ (36,391) | $ (26,058) |
(i) See "Non-GAAP Financial Measures".
Free cash flow was a use of cash of $36.4 million in the quarter primarily due to the consumption of $62.0 million by our working capital accounts. This working capital draw on cash is similar to Q1 2023 and is consistent with past seasonal impacts of our annual business cycle. Adjusted EBITDA generated $93.3 million and when factoring in sustaining capital additions ($59.9 million) and cash interest paid ($12.4 million), positive cash of $21.0 million was generated by the overall business in the quarter.
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 March 31, 2024, 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 March 31, 2024, and may differ from actual results.
| (dollars in thousands) | Payments due by fiscal year — Total | 2024 | 2025 | 2026 | 2027 | 2028 and thereafter |
|---|---|---|---|---|---|---|
| Credit Facility | $ 437,756 | $ 22,065 | $ 29,286 | $ 386,405 | $ — | $ — |
| Convertible debentures (i) | 152,696 | 5,146 | 6,861 | 59,789 | 4,111 | 76,789 |
| Equipment financing | 245,493 | 70,435 | 73,011 | 46,647 | 36,289 | 19,111 |
| Contingent obligations | 169,893 | 38,905 | 41,869 | 54,248 | 34,871 | — |
| Mortgage | 40,576 | 1,337 | 1,783 | 1,783 | 1,783 | 33,890 |
| Operating leases (ii) | 15,247 | 964 | 1,887 | 1,654 | 1,384 | 9,358 |
| Non-lease components of building lease commitments (iii) | 337 | 271 | 7 | 7 | 6 | 46 |
| Supplier contracts | 6,689 | 6,689 | — | — | — | — |
| Contractual obligations | $ 1,068,687 | $ 145,812 | $ 154,704 | $ 550,533 | $ 78,444 | $ 139,194 |
(i) If not converted earlier.
(ii) Operating leases are net of receivables on subleases of $512 ( 2024 - $512).
(iii) Non-lease components of lease commitments are net of receivables on subleases of $14 (2024 - $14). These commitments include common area maintenance, management fees, property taxes, and parking related to operating leases.
Contractual obligations of $1,068.7 million as at March 31, 2024, increased from $1,024.3 million as at December 31, 2023, primarily related to increases in the Credit Facility balance of $47.7 million and increases in equipment financing of $0.9 million, offset by decreases to supplier contracts of $1.2 million. We have no off-balance sheet arrangements.
Credit Facility
On October 3, 2023, we entered into an Amended and Restated Credit Agreement (the "Credit Facility") with a banking syndicate. On October 26, 2023, we exercised the accordion feature to increase the size of the tranches as included in the amended agreement. The amended agreement matures on October 3, 2026, with an option to extend on an annual basis, subject to certain conditions. The agreement is comprised solely of a revolving facility that includes a Canadian dollar tranche of $280.0 million and an Australian dollar tranche of A$220.0 million, totaling $474.3 million of lending capacity using the exchange rate in effect as at March 31, 2024. The Credit Facility permits finance lease obligations to a limit of $350.0 million and certain other borrowings outstanding to a limit of $20.0 million. The permitted amount of $350.0 million includes guarantees provided by us to certain joint ventures.
As at March 31, 2024, the Credit Facility had borrowings of $364.3 million (December 31, 2023 - $317.5 million) and $32.0 million in issued letters of credit (December 31, 2023 - $31.3 million). At March 31, 2024, our borrowing availability under the Credit Facility was $78.0 million (December 31, 2023 - $129.3 million).
Under the terms of the Credit Facility the Total Debt to Bank EBITDA Ratio is to be maintained at less than or equal to 3.5:1. The Fixed Charge Coverage Ratio is to be maintained at a ratio greater than 1.1:1.
Financial covenants are to be tested quarterly on a trailing four quarter basis. As at March 31, 2024, we were in compliance with the Credit Facility covenants. We fully expect to maintain compliance with our financial covenants during the subsequent twelve-month period.
For a complete discussion on our Credit Facility, including covenants, calculation of the borrowing base, allowable finance lease debt, and our credit rating, see "Liquidity and Capital Resources - Credit Facility" in our most recent annual MD&A.
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
voting 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 April 26, 2024, there were 27,827,282 voting common shares outstanding, which included 1,097,940 voting common shares held by the trust and classified as treasury shares on our Consolidated Balance Sheets (27,827,282 common shares, including 1,094,163 common shares classified as treasury shares at March 31, 2024).
For a more detailed discussion of our share data, see "Capital Structure and Securities - Capital Structure" in our most recent AIF.
Convertible debentures
| March 31, 2024 | December 31, 2023 | |
|---|---|---|
| 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 | Debt issuance costs | |
|---|---|---|---|---|
| 5.50% convertible debentures | June 1, 2021 | June 30, 2028 | $ 24.50 | 3,531 |
| 5.00% convertible debentures | March 20, 2019 | March 31, 2026 | $ 25.60 | 2,691 |
Interest on the 5.50% convertible debenture 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 may 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 is required to pay accrued and unpaid interest on the debentures redeemed.
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.
Swap Agreement
During the three months ended March 31, 2024, we realized a gain of $229 (unrealized gain for the year ended December 31, 2023, of $229) on a swap agreement. This swap agreement was completed on January 3, 2024, and the derivative financial instrument recorded on the Consolidated Balance Sheet was extinguished at that time.
Backlog
The following summarizes our non-GAAP reconciliation of backlog as at March 31, 2024, and the preceding quarter, as well as revenue generated from backlog for each quarter:
| (dollars in thousands) | March 31, 2024 | December 31, 2023 |
|---|---|---|
| Remaining performance obligations per financial statements | $ 11,446 | $ 22,797 |
| Add: undefined committed volumes | 2,486,252 | 2,171,718 |
| Backlog (i) | $ 2,497,698 | $ 2,194,515 |
| Equity method investment backlog (i) | 527,869 | 536,623 |
| Combined backlog (i) | $ 3,025,567 | $ 2,731,138 |
(i) See "Non-GAAP Financial Measures".
Backlog increased $303.2 million while combined backlog increased by $294.4 million on a net basis, during the three months ended March 31, 2024.
Revenue generated from backlog during the three months ended March 31, 2024, was $215.1 million and we estimate that $591.4 million of our backlog reported above will be performed over the balance of 2024 (combined total of $806.5 million ). For the year ended December 31, 2023, revenue generated from backlog was $536.6 million .
OUTLOOK
The following table provides projected key measures for 2024. These measures are predicated on contracts currently in place, including expected renewals, and the heavy equipment fleet that we own and operate.
| Key measures | 2024 |
|---|---|
| Combined revenue (i) | $1.5 - $1.7B |
| Adjusted EBITDA (i) | $430 - $470M |
| Sustaining capital (i) | $170 - $190M |
| Adjusted EPS (i) | $4.25 - $4.75 |
| Free cash flow (i) | $160 - $185M |
| Capital allocation | |
| Growth spending (i) | $55 - $70M |
| Net debt leverage (i) | Targeting 1.5x |
(i) See "Non-GAAP Financial Measures".
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, 2023.
Change in significant accounting policy - Basis of presentation
During the first quarter of 2024, we changed our accounting policy for the elimination of our proportionate share of profit from downstream sales to affiliates and joint ventures to record through equity earnings in affiliates and joint ventures on the Consolidated Statements of Operations and Comprehensive Income. Prior to this change, we eliminated our proportionate share of profit on downstream sales to affiliates and joint ventures through revenue and cost of sales. The change in accounting policy simplifies the presentation for downstream profit eliminations and has no cumulative impact on retained earnings. We have accounted for the change retrospectively in accordance with the requirements of US GAAP Accounting Standards Codification ("ASC") 250 by restating the comparative period. For details of retrospective changes, refer to note 16 in the Financial Statements.
Recent accounting pronouncements not yet adopted
Joint venture formations
In August 2023, the FASB issued ASU 2023-05, Business Combinations - Joint Venture Formations. This accounting standard update was issued to create new requirements for valuing contributions made to a joint venture upon formation. This standard is effective January 1, 2025, with early adoption permitted. We are assessing the impact the adoption of this standard may have on its consolidated financial statements.
Segment reporting
In November 2023, the FASB issued ASU 2023-07, Segment Reporting: Improvements to Reportable Segment Disclosures. This accounting standard update was issued to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This standard is effective for annual statements for the fiscal year beginning January 1, 2024. We are assessing the impact the adoption of this standard may have on its consolidated financial statements.
Income taxes
In December 2023, the FASB issued ASU 2023-09, Income Taxes: Improvements to Income Tax Disclosures. This accounting standard update was issued to increase transparency by improving income tax disclosures, primarily related to the rate reconciliation and income taxes paid information. This standard is effective for annual statements for the fiscal year beginning January 1, 2025, with early adoption permitted. We are assessing the impact the adoption of this standard may have on its consolidated financial statements.
Stock compensation
In March 2024, the FASB issued ASU 2024-01, Compensation - Stock Compensation. This accounting standard update was issued to reduce complexity in determining if profit interest awards are subject to Topic 718 and to reduce diversity in practice. This standard is effective for annual statements for the fiscal year beginning January 1, 2025. We are assessing the impact the adoption of this standard may have on its consolidated financial statements.
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.
"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.
"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.
"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.
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 for capital expenditures, capital commitments or proceeds from capital disposals;
• reflect changes in our cash requirements for our working capital needs;
• reflect interest expense or 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 cash requirements for assets depreciated and amortized that may have to be replaced in the future.
"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.
"Capital additions" is defined as capital expenditures, net and lease additions.
"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 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.
"Cash liquidity" is defined as cash plus available and unused Credit Facility less outstanding letters of credit.
"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.
"Cash related interest expense" is defined as total interest expense less amortization of deferred financing costs.
"Combined backlog" is a measure of the total of backlog from wholly-owned entities plus equity method investment backlog.
"Combined gross profit" is defined as consolidated gross profit per the financial statements combined with our share of gross profit 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’ gross profit on our adjusted EBITDA margin.
"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.
"Equity method investment backlog" is a measure of our proportionate share (based on ownership interest) of backlog from affiliates and joint ventures that are accounted for using the equity method.
"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. For clarity, based on this definition cash generated by joint venture is reported as free cash flow upon issuance of dividends or advances. 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.
“General and administrative expenses (excluding stock-based compensation)” is a measure of general and administrative expenses recorded on the statement of operations less expenses related to stock-based compensation.
"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.
"Invested capital" is defined as total shareholders' equity plus net debt.
"Net debt" is defined as total debt plus convertible debentures less cash recorded on the balance sheets. Net debt is used by us in assessing our debt repayment requirements after using available cash.
"Share of affiliate and joint venture capital additions" is defined as our proportionate share (based on ownership interest) of capital expenditures, net and lease additions from affiliates and joint ventures that are accounted for using the equity method.
"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.
"Total capital liquidity" is defined as total liquidity plus unused finance lease and other borrowing availability under our Credit Facility.
"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.
"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) mortgage; (iv) promissory notes; (v) financing obligations; and (vi) vendor financing, excluding convertible debentures. We believe total debt is a meaningful measure in understanding our complete debt obligations.
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.
"Combined gross profit margin" is defined as combined gross profit 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.
“Total net working capital (excluding cash and current portion of long-term debt)” represents net working capital, less the cash and current portion of long-term debt balances.
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 March 31, 2024, such disclosure controls and procedures were effective.
Management’s report on internal control over financial reporting
There have been no significant changes to our internal controls over financial reporting ("ICFR") for the three months ended March 31, 2024, 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 March 31, 2024, we had 206 salaried employees (March 31, 2023 - 206 salaried employees) and 1,293 hourly employees (March 31, 2023 - 1,719 hourly employees) in our Canadian operations (excluding employees employed by affiliates and joint ventures). Of the hourly employees, approximately 81% of the employees are union members and work under collective bargaining agreements (March 31, 2023 - 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.
As at March 31, 2024, we had 208 salaried employees and 951 hourly employees in our Australian operations. Approximately 650 are covered under the Fair Work Act and Modern Awards agreement. This agreement outlines the minimum pay rates and conditions of employment for employees and is up for review in late 2025.
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.
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.
• Our belief that there is minimal risk in the collection of our trade receivables.
• Our expectation that we will maintain compliance with financial covenants during the next twelve-month period.
• All statements regarding levels of backlog and the periods of time over which we expect to perform backlog.
• All financial guidance provided in the "Outlook" section of this MD&A, including projections related to combined revenue, Adjusted EBITDA, sustaining capital, Adjusted EPS, free cash flow, growth spending and net debt leverage.
Assumptions
Material factors or assumptions used to develop forward-looking statements include, but are not limited to:
• oil and coal prices remaining stable and not dropping significantly in 2024;
• worldwide demand for metallurgical coal and thermal coal remaining stable;
• oil sands production continuing to be resilient to drops in oil prices due to our customer's desire to lower their operating cost per barrel;
• continuing demand for heavy construction and earth-moving services, including in diversified resources and geographies;
• 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 that 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 source and maintain the right size and mix of equipment in our fleet and to secure specific types of rental equipment to support project development activity that 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 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, 2023, 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 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, 2023, 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 the Company is exposed to at any point in time varies depending on market conditions, expectations of future price or market rate movements and composition of the Company's 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 March 31, 2024. For a full discussion of
market risk please see our annual MD&A for the year ended December 31, 2023.
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, 2023, can be found on the Canadian Securities Administrators' SEDAR+ System at www.sedarplus.com , the Securities and Exchange Commission’s website at www.sec.gov and on our Company website at www.nacg.ca .
Interim Consolidated Balance Sheets
(Expressed in thousands of Canadian Dollars)
(Unaudited)
| Note | March 31, 2024 | December 31, 2023 | |
|---|---|---|---|
| Assets | |||
| Current assets | |||
| Cash | $ 80,095 | $ 88,614 | |
| Accounts receivable | 4, 7 | 138,451 | 97,855 |
| Contract assets | 5(b) | 15,874 | 35,027 |
| Inventories | 6 | 68,876 | 64,962 |
| Prepaid expenses and deposits | 7,946 | 7,402 | |
| Assets held for sale | 1,257 | 1,340 | |
| 312,499 | 295,200 | ||
| Property, plant and equipment, net of accumulated depreciation of $442,247 (December 31, 2023 – $423,345) | 1,165,183 | 1,142,946 | |
| Operating lease right-of-use assets | 14,402 | 12,782 | |
| Intangible assets | 7,614 | 6,971 | |
| Investments in affiliates and joint ventures | 7 | 74,498 | 81,435 |
| Other assets | 6,015 | 7,144 | |
| Total assets | $ 1,580,211 | $ 1,546,478 | |
| Liabilities and shareholders’ equity | |||
| Current liabilities | |||
| Accounts payable | $ 124,017 | $ 146,190 | |
| Accrued liabilities | 61,502 | 72,225 | |
| Contract liabilities | 5(b) | 1,366 | 59 |
| Current portion of long-term debt | 8 | 84,178 | 81,306 |
| Current portion of contingent obligations | 13(a), 14 | 27,258 | 22,501 |
| Current portion of operating lease liabilities | 1,891 | 1,742 | |
| 300,212 | 324,023 | ||
| Long-term debt | 8 | 654,953 | 611,313 |
| Long-term portion of contingent obligations | 13(a), 14 | 91,834 | 93,356 |
| Operating lease liabilities | 12,868 | 11,307 | |
| Other long-term obligations | 45,738 | 41,001 | |
| Deferred tax liabilities | 108,661 | 108,824 | |
| 1,214,266 | 1,189,824 | ||
| Shareholders' equity | |||
| Common shares (authorized – unlimited number of voting common shares; issued and outstanding – March 31, 2024 - 27,827,282 (December 31, 2023 – 27,827,282)) | 9(a) | 229,455 | 229,455 |
| Treasury shares (March 31, 2024 - 1,094,163 (December 31, 2023 - 1,090,187)) | 9(a) | (16,277) | (16,165) |
| Additional paid-in capital | 22,140 | 20,739 | |
| Retained earnings | 131,727 | 123,032 | |
| Accumulated other comprehensive income | (1,100) | (407) | |
| Shareholders' equity | 365,945 | 356,654 | |
| Total liabilities and shareholders’ equity | $ 1,580,211 | $ 1,546,478 |
See accompanying notes to interim consolidated financial statements.
Interim Consolidated Statements of Operations and
Comprehensive Income
(Expressed in thousands of Canadian Dollars, except per share amounts)
(Unaudited)
| Three months ended | |||
|---|---|---|---|
| March 31, | |||
| Note | 2024 | 2023 | |
| Restated Notes 2, 16 | |||
| Revenue | 2, 5, 16 | $ 297,026 | $ 244,329 |
| Cost of sales | 2, 11, 16 | 199,795 | 166,844 |
| Depreciation | 43,941 | 36,385 | |
| Gross profit | 53,290 | 41,100 | |
| General and administrative expenses | 14,753 | 14,179 | |
| Loss on disposal of property, plant and equipment | 261 | 1,213 | |
| Operating income | 38,276 | 25,708 | |
| Equity loss (earnings) in affiliates and joint ventures | 2, 7, 16 | 1,512 | (9,342) |
| Interest expense, net | 12 | 15,597 | 7,311 |
| Change in fair value of contingent obligations | 13(a) | 5,393 | — |
| Gain on derivative financial instruments | 13(b) | — | (2,509) |
| Income before income taxes | 15,774 | 30,248 | |
| Current income tax expense | 4,234 | 1,136 | |
| Deferred income tax expense | 171 | 7,266 | |
| Net income | 11,369 | 21,846 | |
| Other comprehensive income | |||
| Unrealized foreign currency translation loss (gain) | 693 | (55) | |
| Comprehensive income | $ 10,676 | $ 21,901 | |
| Per share information | |||
| Basic net income per share | 9(b) | $ 0.43 | $ 0.83 |
| Diluted net income per share | 9(b) | $ 0.39 | $ 0.71 |
See accompanying notes to interim consolidated financial statements.
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 | Accumulated other comprehensive income (loss) | Equity | |
|---|---|---|---|---|---|---|
| Balance at December 31, 2022 | $ 229,455 | $ (16,438) | $ 22,095 | $ 70,501 | $ 306 | $ 305,919 |
| Net income | — | — | — | 21,846 | — | 21,846 |
| Unrealized foreign currency translation gain | — | — | — | — | 55 | 55 |
| Dividends ($0.10 per share) | — | — | — | (2,621) | — | (2,621) |
| Purchase of treasury shares | — | (116) | — | — | — | (116) |
| Stock-based compensation | — | — | 1,136 | — | — | 1,136 |
| Balance at March 31, 2023 | $ 229,455 | $ (16,554) | $ 23,231 | $ 89,726 | $ 361 | $ 326,219 |
| Balance at December 31,2023 | $ 229,455 | $ (16,165) | $ 20,739 | $ 123,032 | $ (407) | $ 356,654 |
| Net income | — | — | — | 11,369 | — | 11,369 |
| Unrealized foreign currency translation loss | — | — | — | — | (693) | (693) |
| Dividends ($0.10 per share) | — | — | — | (2,674) | — | (2,674) |
| Purchase of treasury shares | — | (112) | — | — | — | (112) |
| Stock-based compensation | — | — | 1,401 | — | — | 1,401 |
| Balance at March 31, 2024 | $ 229,455 | $ (16,277) | $ 22,140 | $ 131,727 | $ (1,100) | $ 365,945 |
See accompanying notes to interim consolidated financial statements.
Interim Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian Dollars)
(Unaudited)
| Three months ended | |||
|---|---|---|---|
| March 31, | |||
| Note | 2024 | 2023 | |
| Restated Notes 2, 16 | |||
| Cash provided by (used in) | |||
| Operating activities: | |||
| Net income | $ 11,369 | $ 21,846 | |
| Adjustments to reconcile net income to cash from operating activities: | |||
| Depreciation | 43,941 | 36,385 | |
| Amortization of deferred financing costs | 12 | 759 | 289 |
| Loss on disposal of property, plant and equipment | 261 | 1,213 | |
| Gain on derivative financial instruments | — | (2,509) | |
| Stock-based compensation expense | 3,608 | 5,937 | |
| Equity loss (earnings) in affiliates and joint ventures | 7 | 1,512 | (9,342) |
| Dividends and advances received from affiliates and joint ventures | 7 | 3,344 | 4,277 |
| Other adjustments to cash from operating activities | 647 | 473 | |
| Change in fair value of contingent obligations | 13(a) | 5,393 | — |
| Long-term contract liabilities | 2,887 | — | |
| Deferred income tax expense | 171 | 7,266 | |
| Net changes in non-cash working capital | 15(b) | (62,026) | (34,011) |
| 11,866 | 31,824 | ||
| Investing activities: | |||
| Purchase of property, plant and equipment | (66,653) | (36,496) | |
| Additions to intangible assets | (970) | (2) | |
| Proceeds on disposal of property, plant and equipment | 1,103 | 1,198 | |
| Net payment on the wind up of affiliates and joint ventures | — | (387) | |
| Net collections (advances) of loans with affiliates and joint ventures | 5,772 | (5,230) | |
| Cash settlement of derivative financial instruments | 4,015 | — | |
| (56,733) | (40,917) | ||
| Financing activities: | |||
| Proceeds from long-term debt | 8 | 75,392 | — |
| Repayment of long-term debt | 8 | (33,890) | (42,233) |
| Dividends paid | 9(c) | (2,674) | (2,098) |
| Purchase of treasury shares | 9(a) | (112) | (116) |
| 38,716 | (44,447) | ||
| Decrease in cash | (6,151) | (53,540) | |
| Effect of exchange rate on changes in cash | (2,368) | 55 | |
| Cash, beginning of period | 88,614 | 69,144 | |
| Cash, end of period | $ 80,095 | $ 15,659 |
Supplemental cash flow information (note 15(a)).
See accompanying notes to interim consolidated financial statements.
Notes to Interim Consolidated Financial Statements
For the three months ended March 31, 2024
(Expressed in thousands of Canadian Dollars, except per share amounts or unless otherwise specified)
(Unaudited)
1. Nature of operations
North American Construction Group Ltd. ("NACG" or the "Company") was formed under the Canada Business Corporations Act. The Company and its predecessors have been operating continuously since 1953 providing a wide range of mining and heavy construction services to customers in the resource development and industrial construction sectors within Canada, the United States, and Australia. A significant portion of our services are primarily focused on supporting the construction and operation of surface mines.
2. Significant accounting policies
Basis of presentation
These interim consolidated financial statements are prepared in accordance with United States generally accepted accounting principles ("US GAAP"). These interim consolidated financial statements include the accounts of the Company and its wholly-owned incorporated subsidiaries in Canada, the United States, and Australia. All significant intercompany transactions and balances are eliminated upon consolidation. The Company also holds ownership interests in other corporations, partnerships, and joint ventures.
Except as noted below, The Company has prepared these interim consolidated financial statements on the same basis as its annual consolidated financial statements.
The Company's full year results are not likely to be a direct multiple of any particular quarter or combination of quarters due to seasonality. Oil sands mining in Canada revenues are typically highest in the first quarter of each year as ground conditions are most favorable for this type of work while civil construction revenues are typically highest during the third and fourth quarter, as weather conditions during these seasons are most favorable for this type of work. Rental and production-related mine support revenue in the Queensland region can be impacted by the rainy cyclone season from November through February. During this period, heavy rains can temporarily suspend mining operations from both the direct impacts to the mine itself as well as flooding that can damage perimeter roads required for critical supplies and parts. In addition to revenue variability, gross profit margins can be negatively affected in less active periods because the Company is likely to incur higher maintenance and repair costs due to its equipment being available for servicing.
Change in significant accounting policy - Basis of presentation
During the first quarter of 2024, the Company changed its accounting policy for the elimination of its proportionate share of profit from downstream sales to affiliates and joint ventures to record through equity earnings in affiliates and joint ventures on the Consolidated Statements of Operations and Comprehensive Income. Prior to this change, the Company eliminated its proportionate share of profit on downstream sales to affiliates and joint ventures through revenue and cost of sales. The change in accounting policy simplifies the presentation for downstream profit eliminations and has no cumulative impact on retained earnings. The Company has accounted for the change retrospectively in accordance with the requirements of US GAAP Accounting Standards Codification ("ASC") 250 by restating the comparative period. For details of retrospective changes, refer to note 16 in these Financial Statements.
3. Recent accounting pronouncements not yet adopted
a) Joint venture formations
In August 2023, the FASB issued ASU 2023-05, Business Combinations - Joint Venture Formations. This accounting standard update was issued to create new requirements for valuing contributions made to a joint venture upon formation. This standard is effective January 1, 2025, with early adoption permitted. The Company is assessing the impact the adoption of this standard may have on its consolidated financial statements.
b) Segment reporting
In November 2023, the FASB issued ASU 2023-07, Segment Reporting: Improvements to Reportable Segment Disclosures. This accounting standard update was issued to improve reportable segment disclosure requirements,
primarily through enhanced disclosures about significant segment expenses. This standard is effective for annual statements for the fiscal year beginning January 1, 2024. The Company is assessing the impact the adoption of this standard may have on its consolidated financial statements.
c) Income taxes
In December 2023, the FASB issued ASU 2023-09, Income Taxes: Improvements to Income Tax Disclosures. This accounting standard update was issued to increase transparency by improving income tax disclosures, primarily related to the rate reconciliation and income taxes paid information. This standard is effective for annual statements for the fiscal year beginning January 1, 2025, with early adoption permitted. The Company is assessing the impact the adoption of this standard may have on its consolidated financial statements.
d) Stock compensation
In March 2024, the FASB issued ASU 2024-01, Compensation - Stock Compensation. This accounting standard update was issued to reduce complexity in determining if profit interest awards are subject to Topic 718 and to reduce diversity in practice. This standard is effective for annual statements for the fiscal year beginning January 1, 2025. The Company is assessing the impact the adoption of this standard may have on its consolidated financial statements.
4. Accounts receivable
| March 31, 2024 | December 31, 2023 | |
|---|---|---|
| Trade | $ 59,840 | $ 65,386 |
| Holdbacks | 846 | 363 |
| Accrued trade receivables | 60,651 | 16,556 |
| Contract receivables | 121,337 | 82,305 |
| Other | 17,114 | 15,550 |
| $ 138,451 | $ 97,855 |
The Company has not recorded an allowance for credit losses and there has been no change to this estimate in the period.
5. Revenue
a) Disaggregation of revenue
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Revenue by source | ||
| Operations support services | $ 284,724 | $ 229,457 |
| Equipment and component sales | 11,022 | 11,083 |
| Construction services | 1,280 | 3,789 |
| $ 297,026 | $ 244,329 | |
| Revenue by commercial terms | ||
| Time-and-materials | $ 237,075 | $ 143,785 |
| Unit-price | 55,934 | 94,158 |
| Lump-sum | 4,017 | 6,386 |
| $ 297,026 | $ 244,329 | |
| Revenue recognition method | ||
| As-invoiced | $ 254,621 | $ 155,054 |
| Cost-to-cost percent complete | 31,383 | 78,192 |
| Point-in-time | 11,022 | 11,083 |
| $ 297,026 | $ 244,329 |
b) Contract balances
| March 31, 2024 | December 31, 2023 | |
|---|---|---|
| Contract assets | $ 15,874 | $ 35,027 |
| Contract liabilities | 1,366 | 59 |
| Long-term contract liabilities | 19,001 | 16,114 |
Contract assets include unbilled amounts representing revenue recognized from work performed where the Company does not yet have an unconditional right to compensation. These balances generally relate to revenue accruals on contracts where the percentage of completion method of revenue recognition requires an accrual over what has been billed and revenue recognized from variable consideration related to unapproved contract modifications. Contract liabilities consist of advance payments and billings in excess of costs incurred and estimated earnings on uncompleted contracts. Long-term contract liabilities (included in other long-term obligations) includes upfront payments for long-term contracts to assist with operations scaling. The Company recognized revenue of $59 in the three months ended March 31, 2024, that was included in the contract liability balance as of December 31, 2023 ($1,407 in 2023 that was included in the contract balance as of December 31, 2022).
c) Transaction price allocated to the remaining performance obligations
For the nine months remaining in 2024, the transaction price allocated to remaining performance obligations is $11,446. This includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. Included is all consideration from contracts with customers, excluding amounts that are recognized using the as-invoiced method and any constrained amounts of revenue.
d) Unapproved contract modifications
The Company recognized revenue from variable consideration related to unapproved contract modifications for the three months ended March 31, 2024, of $1,484 (three months ended March 31, 2023 – $nil). The Company has recorded amounts in current assets related to uncollected consideration from revenue recognized on unapproved contract modifications as at March 31, 2024, of $10,961 (December 31, 2023 – $9,482).
6. Inventories
| March 31, 2024 | December 31, 2023 | |
|---|---|---|
| Repair parts | $ 42,915 | $ 41,358 |
| Tires and track frames | 6,114 | 6,478 |
| Fuel and lubricants | 2,436 | 1,941 |
| Parts and supplies | 51,465 | 49,777 |
| Parts, supplies and components for equipment rebuilds | 16,356 | 13,898 |
| Customer rebuild work in process | 1,055 | 1,287 |
| $ 68,876 | $ 64,962 |
7. Investments in affiliates and joint ventures
The following is a summary of the Company’s interests in its various affiliates and joint ventures, which it accounts for using the equity method:
| Affiliate or joint venture name: | Interest |
|---|---|
| Nuna Group of Companies ("Nuna") | |
| Nuna Logistics Ltd. | 49 % |
| North American Nuna Joint Venture | 50 % |
| Nuna East Ltd. | 37 % |
| Nuna Pang Contracting Ltd. | 37 % |
| Nuna West Mining Ltd. | 49 % |
| Mikisew North American Limited Partnership ("MNALP") | 49 % |
| Fargo joint ventures ("Fargo") | |
| ASN Constructors ("ASN") | 30 % |
| Red River Valley Alliance LLC ("RRVA") | 15 % |
| NAYL Realty Inc. | 49 % |
| BNA Remanufacturing Limited Partnership | 50 % |
| Barrooghumba WPH Pty Ltd. | 50 % |
| Ngaliku WPH Pty Ltd. | 50 % |
The following table summarizes the movement in the investments in affiliates and joint ventures balance:
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Balance, beginning of period | $ 81,435 | $ 75,637 |
| Share of net (loss) income | (1,512) | 9,342 |
| Dividends and advances received from affiliates and joint ventures | (3,344) | (6,490) |
| Intercompany eliminations | (2,081) | (1,967) |
| Balance, end of period | $ 74,498 | $ 76,522 |
a) Affiliate and joint venture condensed financial data
The financial information for the Company's share of the investments in affiliates and joint ventures accounted for using the equity method is summarized as follows:
Balance Sheets
| March 31, 2024 | Nuna | MNALP | Fargo | Other entities | Total |
|---|---|---|---|---|---|
| Assets | |||||
| Cash | $ 2,685 | $ 3,497 | $ 81,368 | $ 327 | $ 87,877 |
| Other current assets | 35,875 | 41,286 | 5,655 | 4,532 | 87,348 |
| Non-current assets | 21,764 | 39,192 | 192,598 | 5,703 | 259,257 |
| Total assets | $ 60,324 | $ 83,975 | $ 279,621 | $ 10,562 | $ 434,482 |
| Liabilities | |||||
| Contract liabilities | $ 3,922 | $ 683 | $ 80,582 | $ 51 | $ 85,238 |
| Other current liabilities (excluding current portion of long-term debt) | 7,511 | 34,458 | 24,195 | 1,890 | 68,054 |
| Long-term debt (including current portion) | 9,008 | 35,033 | 151,051 | 6,176 | 201,268 |
| Non-current liabilities | 4,888 | — | 536 | — | 5,424 |
| Total liabilities | $ 25,329 | $ 70,174 | $ 256,364 | $ 8,117 | $ 359,984 |
| Net investments in affiliates and joint ventures | $ 34,995 | $ 13,801 | $ 23,257 | $ 2,445 | $ 74,498 |
| December 31, 2023 | Nuna | MNALP | Fargo | Other entities | Total |
|---|---|---|---|---|---|
| Assets | |||||
| Cash | $ 9,944 | $ 4,184 | $ 87,418 | $ 222 | $ 101,768 |
| Other current assets | 34,937 | 36,060 | 4,556 | 4,593 | 80,146 |
| Non-current assets | 23,884 | 37,103 | 172,818 | 10,434 | 244,239 |
| Total assets | $ 68,765 | $ 77,347 | $ 264,792 | $ 15,249 | $ 426,153 |
| Liabilities | |||||
| Contract liabilities | $ 7,817 | $ — | $ 76,481 | $ 52 | $ 84,350 |
| Other current liabilities (excluding current portion of long-term debt) | 5,145 | 29,216 | 33,122 | 1,871 | 69,354 |
| Long-term debt (including current portion) | 9,631 | 36,596 | 132,818 | 6,221 | 185,266 |
| Non-current liabilities | 4,985 | — | 589 | 174 | 5,748 |
| Total liabilities | $ 27,578 | $ 65,812 | $ 243,010 | $ 8,318 | $ 344,718 |
| Net investments in affiliates and joint ventures | $ 41,187 | $ 11,535 | $ 21,782 | $ 6,931 | $ 81,435 |
Included within our portion of Nuna’s March 31, 2024, current assets are contract assets of $8,140 from variable consideration related to unapproved contract modifications (December 31, 2023 – $8,701).
Statements of Operations
| Three months ended March 31, 2024 | Nuna | MNALP | Fargo | Other entities | Total |
|---|---|---|---|---|---|
| Revenues | $ 14,348 | $ 84,196 | $ 23,934 | $ 3,360 | $ 125,838 |
| Gross (loss) profit | (1,350) | 3,028 | 6,898 | 359 | 8,935 |
| (Loss) income before taxes | (7,243) | 2,207 | 916 | 1,433 | (2,687) |
| Net (loss) income | (6,038) | 2,207 | 916 | 1,403 | (1,512) |
| Three months ended March 31, 2023 | Nuna | MNALP | Fargo | Other entities | Total |
|---|---|---|---|---|---|
| Revenues | $ 56,577 | $ 118,195 | $ 13,300 | $ 1,413 | $ 189,485 |
| Gross profit | 7,047 | 3,950 | 3,809 | 13 | 14,819 |
| Income before taxes | 5,172 | 3,118 | 1,450 | (239) | 9,501 |
| Net income (loss) | 5,048 | 3,118 | 1,415 | (239) | 9,342 |
b) Related parties
The following table provides the material aggregate outstanding balances with affiliates and joint ventures. Accounts payable and accrued liabilities due to joint ventures and affiliates do not bear interest, are unsecured and without fixed terms of repayment. Accounts receivable from certain joint ventures and affiliates bear interest at various rates, and all other accounts receivable amounts are non-interest bearing.
| March 31, 2024 | December 31, 2023 | |
|---|---|---|
| Accounts receivable | $ 61,861 | $ 41,157 |
| Contract assets | 11,150 | 12,019 |
| Other assets | — | 350 |
| Accounts payable and accrued liabilities | 21,328 | 15,087 |
| Contract liabilities | 1,366 | — |
The Company enters into transactions with a number of its joint ventures and affiliates that involve providing services primarily consisting of subcontractor services, equipment rental revenue, and sales of equipment and components. These transactions were conducted in the normal course of operations, which were established and agreed to as consideration by the related parties. For the three months ended March 31, 2024, and 2023, revenue earned from these services was $156,788 and $227,669, respectively. The majority of services are being completed through the MNALP joint venture which performs the role of contractor and subcontracts work to the Company. Accounts receivable balances from MNALP are recorded when MNALP invoices the external customer and are settled when MNALP receives payment. At March 31, 2024, MNALP had recorded accounts receivable of $71,305 on its balance sheet (December 31, 2023 – $61,111).
8. Long-term debt
| Note | March 31, 2024 | December 31, 2023 | |
|---|---|---|---|
| Credit Facility | 8(a) | $ 364,260 | $ 317,488 |
| Convertible debentures | 8(b) | 129,750 | 129,750 |
| Equipment financing | 8(c) | 220,187 | 220,466 |
| Mortgage | 28,225 | 28,429 | |
| Unamortized deferred financing costs | (3,291) | (3,514) | |
| $ 739,131 | $ 692,619 | ||
| Less: current portion of long-term debt | (84,178) | (81,306) | |
| $ 654,953 | $ 611,313 |
a) Credit Facility
On October 3, 2023, the Company entered into an Amended and Restated Credit Agreement (the "Credit Facility") with a banking syndicate. On October 26, 2023, the Company exercised the accordion feature to increase the size of the tranches as included in the amended agreement. The amended agreement matures on October 3, 2026, with an option to extend on an annual basis, subject to certain conditions. The agreement is comprised solely of a revolving facility that includes a Canadian dollar tranche of $280.0 million and an Australian dollar tranche of A$220.0 million, totaling $474.3 million of lending capacity using the exchange rate in effect as at March 31, 2024. The Credit Facility permits finance lease obligations to a limit of $350.0 million and certain other borrowings outstanding to a limit of $20.0 million. The permitted amount of $350.0 million for finance lease obligations includes guarantees provided by the Company to certain joint ventures.
As at March 31, 2024, there was $32.0 million (December 31, 2023 - $31.3 million) in issued letters of credit under the Credit Facility and the unused borrowing availability was $78.0 million (December 31, 2023 - $129.3 million).
As at March 31, 2024, there was $62.1 million in borrowing availability under finance lease obligations (December 31, 2023 - $60.1 million). Borrowing availability under finance lease obligations considers the current and long-term portion of finance lease obligations and financing obligations, including the finance lease obligations for the joint ventures that the Company guarantees.
The Credit Facility has two financial covenants that must be tested quarterly on a trailing four-quarter basis. As at March 31, 2024, the Company was in compliance with its financial covenants.
• The first covenant is the Total Debt to Bank EBITDA Ratio.
◦ "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) mortgage; (iv) promissory notes; (v) financing obligations; and (vi) vendor financing, excluding convertible debentures.
◦ "Bank EBITDA" is defined as earnings before interest, taxes, depreciation and amortization, excluding the effects of unrealized foreign exchange gain or loss, realized and unrealized gain or loss on derivative financial instruments, cash and non-cash stock-based compensation expense, gain or loss on disposal of property, plant and equipment, acquisition costs, and certain other noncash items included in the calculation of net income.
◦ The Total Debt to Bank EBITDA Ratio must be less than or equal to 3.5:1.
• The second covenant is the Fixed Charge Coverage Ratio which is defined as Bank EBITDA less maintenance capital expenditures, cash distributions (dividends, share buybacks, etc.), and cash taxes compared to Fixed Charges.
◦ "Fixed Charges" is defined as cash interest and all scheduled principal debt repayments.
◦ The Fixed Charge Coverage Ratio is to be maintained at a ratio greater than 1.1:1.
The Credit Facility bears interest at Canadian prime rate, U.S. Dollar Base Rate, Australian Bank Bill Swap Reference Rate ("BBSY"), Canadian Bankers’ Acceptance Rate or the Secured Overnight Financing Rate ("SOFR") (all such terms as used or defined in the Credit Facility), plus applicable margins. The Company is also subject to non-refundable standby fees, 0.40% to 0.70% depending on the Company's Total Debt to Bank EBITDA Ratio. The Credit Facility is secured by a lien on all of the Company's existing and after-acquired property.
The Company acts as a guarantor for drawn amounts under revolving equipment lease credit facilities which have a combined capacity of $110.0 million for MNALP, an affiliate of the Company. This equipment lease credit facility will allow MNALP to avail the credit through a lease agreement and/or equipment finance contract with appropriate supporting documents. As at March 31, 2024, the Company has provided guarantees on this facility of $71.5 million (December 31, 2023 - $74.7 million ) . At this time, there have been no instances or indication that payments will not be made by MNALP and, therefore, no liability has been recorded related to this guarantee.
b) Convertible debentures
| March 31, 2024 | December 31, 2023 | |
|---|---|---|
| 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 | Debt issuance costs | |
|---|---|---|---|---|
| 5.50% convertible debentures | June 1, 2021 | June 30, 2028 | $24.50 | 3,531 |
| 5.00% convertible debentures | March 20, 2019 | March 31, 2026 | $25.60 | 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 conversion price is adjusted upon certain events, including: the subdivision or consolidation of the outstanding common shares, issuance of certain options, rights or warrants, distribution of cash dividends in an amount greater than $0.192 for the 5.50% convertible debentures or $0.12 per common share for the 5.00% convertible debentures, and other reorganizations such as amalgamations or mergers.
The 5.50% convertible debentures are not redeemable prior to June 30, 2024, except under certain exceptional circumstances. On and after June 30, 2024, and prior to June 30, 2026, the debentures may be redeemed at the option of the Company at the redemption price equal to the principal amount of the debentures plus accrued and unpaid interest thereon up to but excluding the date set for redemption provided, among other things, the current market price is at least 125% of the conversion price on the date on which notice of the redemption is given. On or after June 30, 2026, the debentures may be redeemed at the option of the Company at the redemption price equal to the principal amount of the debentures plus accrued and unpaid interest.
Both the 5.00% convertible debentures and the 5.50% convertible debentures are 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 convertible debentures at a price equal to 101% of the principal amount plus accrued and unpaid interest to the date of purchase. The 5.00% convertible debentures are otherwise not redeemable by the Company.
c) Equipment financing
| Note | March 31, 2024 | December 31, 2023 | |
|---|---|---|---|
| Finance lease obligations | $ 57,003 | $ 52,851 | |
| Financing obligations | 8(d) | 159,314 | 162,266 |
| Promissory notes | 3,870 | 5,349 | |
| $ 220,187 | $ 220,466 |
| Three months ended | Three months ended | ||||
|---|---|---|---|---|---|
| March 31, 2024 | March 31, 2023 | ||||
| Additions | Payments | Change in foreign exchange rates | Additions | Payments | |
| Finance lease obligations | $ 12,037 | $ (8,195) | $ 310 | $ 17,020 | $ (7,113) |
| Financing obligations | 24,194 | (24,012) | (3,134) | — | (3,466) |
| Promissory notes | — | (1,479) | — | — | (1,456) |
| $ 36,231 | $ (33,686) | $ (2,824) | $ 17,020 | $ (12,035) |
d) Financing obligations
During the three months ended March 31, 2024, the Company recorded new financing obligations of $24.2 million. The financing contracts expire between March 2027 and March 2029 and bear interest between 5.88% and 7.28%. The financing obligations are secured by the corresponding property, plant and equipment.
9. Shares
a) Common shares
| Common shares | Treasury shares | Common shares, net of treasury shares | |
|---|---|---|---|
| Issued and outstanding as at December 31, 2023 | 27,827,282 | (1,090,187) | 26,737,095 |
| Purchase of treasury shares | — | (3,976) | (3,976) |
| Issued and outstanding as at March 31, 2024 | 27,827,282 | (1,094,163) | 26,733,119 |
b) Net income per share
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Net income | $ 11,369 | $ 21,846 |
| Interest from convertible debentures (after tax) | 1,489 | 1,462 |
| Diluted net income available to common shareholders | $ 12,858 | $ 23,308 |
| Weighted-average number of common shares | 26,733,473 | 26,415,004 |
| Weighted-average effect of dilutive securities | ||
| Dilutive effect of treasury shares | 1,093,809 | 1,412,278 |
| Dilutive effect of 5.00% convertible debentures | 2,148,438 | 2,095,236 |
| Dilutive effect of 5.50% convertible debentures | 3,051,020 | 3,020,199 |
| Weighted-average number of diluted common shares | 33,026,740 | 32,942,717 |
| Basic net income per share | $ 0.43 | $ 0.83 |
| Diluted net income per share | $ 0.39 | $ 0.71 |
For the three months ended March 31, 2024, and 2023, all securities were dilutive.
c) Dividends
| Date declared | Per share | Shareholders on record as of | Paid or payable to shareholders | Total paid or payable | |
|---|---|---|---|---|---|
| Q1 2023 | February 14, 2023 | $ 0.10 | March 3, 2023 | April 6, 2023 | $ 2,621 |
| Q2 2023 | April 25, 2023 | $ 0.10 | May 26, 2023 | July 7, 2023 | $ 2,641 |
| Q3 2023 | July 25, 2023 | $ 0.10 | August 31, 2023 | October 6, 2023 | $ 2,674 |
| Q4 2023 | October 31, 2023 | $ 0.10 | November 30, 2023 | January 5, 2024 | $ 2,674 |
| Q1 2024 | February 20, 2024 | $ 0.10 | March 8, 2024 | April 5, 2024 | $ 2,674 |
10. Segmented information
a) General information
The Company provides a wide range of mining and heavy civil construction services to customer in the resource development and industrial construction sectors within Canada, the United States, and Australia. A significant portion of our services are primarily focused on supporting the construction and operation of surface mines. The Company considers the basis on which it is organized, including geographic areas, to identify its operating segments. Operating segments of the Company are defined as components of the Company for which separate financial information is available and are evaluated regularly by the chief operating decision maker when allocating resources and assessing performance. The chief operating decision makers ("CODMs") are the President & CEO and the CFO of the Company.
The Company’s reportable segments are Heavy Equipment - Canada, Heavy Equipment - Australia, and Other. Heavy Equipment - Canada and Heavy Equipment - Australia include all of aspects of the mining and heavy civil construction services provided within those geographic areas. Other includes our mine management contract work in the United States, our external maintenance and rebuild programs and our equity method investments.
Segment performance is evaluated by the CODMs based on gross profit and is measured consistently with gross profit in the consolidated financial statements. Inter-segment revenues are eliminated on consolidation and reflected in the Eliminations column.
b) Results by reportable segment
| Three months ended March 31, 2024 | Heavy Equipment - Canada | Heavy Equipment - Australia | Other | Eliminations | Total |
|---|---|---|---|---|---|
| Revenue from external customers | $ 158,271 | $ 133,798 | $ 4,249 | $ — | $ 296,318 |
| Revenue from intersegment transactions | — | 150 | 613 | (55) | 708 |
| Depreciation expense | 30,883 | 13,136 | — | (78) | 43,941 |
| Segment gross profits | 16,442 | 32,801 | 3,012 | 1,035 | 53,290 |
| Purchase of property, plant and equipment | 33,481 | 31,846 | — | — | 65,327 |
| Three months ended March 31, 2023 | Heavy Equipment - Canada | Heavy Equipment - Australia | Other | Eliminations | Total |
|---|---|---|---|---|---|
| Revenue from external customers | $ 229,140 | $ 6,022 | $ 5,929 | $ — | $ 241,091 |
| Revenue from intersegment transactions | 1,507 | — | 5,167 | (3,436) | 3,238 |
| Depreciation expense | 36,340 | 45 | — | — | 36,385 |
| Segment gross profits | 36,744 | 1,985 | 3,078 | (707) | 41,100 |
| Purchase of property, plant and equipment | 36,496 | — | — | — | 36,496 |
Revenue from intersegment transactions includes transactions with the Company’s joint ventures accounted for using the equity method which are not eliminated upon consolidation.
| Segment assets | March 31, 2024 | December 31, 2023 |
|---|---|---|
| Heavy Equipment - Canada | $ 1,103,131 | $ 1,079,370 |
| Heavy Equipment - Australia | 743,508 | 718,114 |
| Other | 298,109 | 307,850 |
| Eliminations | (564,537) | (558,856) |
| $ 1,580,211 | $ 1,546,478 |
c) Reconciliation
Income before income taxes
| Three months ended March 31, | 2024 | 2023 |
|---|---|---|
| Total gross profit for reportable segments | $ 53,290 | $ 41,100 |
| Reconciling items: | ||
| General and administrative costs | 14,753 | 14,179 |
| Loss on disposal of property, plant and equipment | 261 | 1,213 |
| Interest expense | 15,597 | 7,311 |
| Equity loss (earnings) in affiliates and joint ventures | 1,512 | (9,342) |
| Gain on derivative financial instruments | — | (2,509) |
| Change in fair value of contingent obligations | 5,393 | — |
| Income before income taxes | $ 15,774 | $ 30,248 |
d) Geographic information
Revenue
| Three months ended March 31, | 2024 | 2023 |
|---|---|---|
| Canada | $ 160,396 | $ 236,270 |
| Australia | 133,893 | 5,461 |
| United States | 2,737 | 2,598 |
| $ 297,026 | $ 244,329 |
Revenue from external customers is attributed to countries on the basis of the customer's location.
Long lived assets
| March 31, 2024 | December 31, 2023 | |
|---|---|---|
| Canada | $ 611,223 | $ 601,537 |
| Australia | 581,991 | 568,306 |
| $ 1,193,214 | $ 1,169,843 |
Long lived assets consists of property, plant and equipment, lease assets, deferred tax assets, and other assets including intangibles. Geographic information is attributed to countries based on the location of the assets.
11. Cost of sales
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Salaries, wages, and benefits | $ 86,185 | $ 68,145 |
| Repair parts and consumable supplies | 63,810 | 49,821 |
| Subcontractor services | 28,024 | 32,585 |
| Equipment and component sales | 6,857 | 7,836 |
| Third-party equipment rentals | 7,441 | 3,697 |
| Fuel | 3,928 | 2,649 |
| Other | 3,550 | 2,111 |
| $ 199,795 | $ 166,844 |
12. Interest expense, net
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Credit Facility | $ 6,731 | $ 2,658 |
| Convertible debentures | 1,711 | 1,692 |
| Equipment financing | 4,784 | 806 |
| Interest on customer supply chain financing | 988 | 1,230 |
| Mortgage | 240 | 330 |
| Amortization of deferred financing costs | 759 | 289 |
| Interest expense | $ 15,213 | $ 7,005 |
| Other interest expense (income) | 384 | 306 |
| $ 15,597 | $ 7,311 |
13. Financial instruments and risk management
a) Fair value measurements
The fair values of the Company’s cash, accounts receivable, accounts payable, and accrued liabilities approximate their carrying amounts due to the nature of the instrument or the relatively short periods to maturity for the instruments. The Credit Facility has a carrying value that approximates the fair value due to the floating rate nature of the debt. The promissory notes have a carrying value that is not materially different than their fair value due to similar instruments bearing similar interest rates.
Financial instruments with carrying amounts that differ from their fair values are as follows:
| Fair Value Hierarchy Level | March 31, 2024 — Carrying Amount | Fair Value | December 31, 2023 — Carrying Amount | Fair Value | |
|---|---|---|---|---|---|
| Convertible debentures | Level 1 | 129,750 | 169,803 | 129,750 | 160,072 |
| Financing obligations | Level 2 | 159,314 | 158,865 | 162,266 | 159,900 |
| Mortgage | Level 2 | 28,225 | 23,485 | 28,429 | 22,780 |
The Company classifies contingent obligations related to contingent consideration on the MacKellar and DGI acquisitions (note 14), comprised of a contingent payment, deferred consideration and earn-out payments, as Level 3 due to the lack of relevant observable market data over fair value inputs. The contingent obligation is measured at fair value by discounting estimated future payments to the net present value using Level 3 inputs. The Company believes the discount rates used to discount the components of the contingent obligation reflect market participant assumptions.
The contingent payment is based on forecasted performance for a specific MacKellar customer which is expected to be paid in full. The deferred consideration is a MacKellar vendor-provided debt mechanism to be paid out evenly over four years. The Company uses projected MacKellar and DGI financial results to value the anticipated future earn-out payments. The estimated liability is based on forecasted information and as such, could result in a range of outcomes. The impact of a reasonably possible change of +/- 10% in forecasted net income on the fair value of the earn-out obligation is estimated to be between a $8,141 decrease to a $8,141 increase on the fair value as at March 31, 2024. During the three months ended March 31, 2024, there has been no change in the valuation approach or technique.
Reconciliation of Level 3 recurring fair value measurements:
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Balance, beginning of the period | $ 115,857 | $ 3,862 |
| Changes in fair value recognized in earnings | 5,393 | — |
| Changes in foreign exchange rates | (2,158) | (74) |
| Balance, end of the period | $ 119,092 | $ 3,788 |
Changes in estimated fair values are recorded in the Consolidated Statements of Operations and Comprehensive Income.
b) Swap agreement
On October 5, 2022, the Company entered into a swap agreement on its common shares with a financial institution for investment purposes. This swap agreement was completed on January 3, 2024, at which point the Company realized a gain of $229, which had been recorded in the prior year as unrealized, and extinguished the derivative financial instrument that had been recorded on the Consolidated Balance Sheets at December 31, 2023.
c) Risk management
The Company is exposed to liquidity, market and credit risks associated with its financial instruments. Management performs a risk assessment on a continual basis to ensure that significant risks have been reviewed and assessed to reflect changes in market conditions and operating activities.
The Company is exposed to concentration risk through its revenues which is mitigated by the customers being large investment grade organizations. The credit worthiness of new customers is subject to review by management through consideration of the type of customer and the size of the contract. The Company has also mitigated this risk through diversification of its operations. This diversification has primarily come through investments in joint ventures which are accounted for using the equity method. Revenues of $125,838 for the three months ended March 31, 2024 ($189,485 for the three months ended March 31, 2023) from our share of these investments are not included in revenue reported in the consolidated financial statements.
The following customers accounted for 10% or more of revenue reported in the financial statements:
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Customer A | 23 % | — % |
| Customer B | 22 % | 31 % |
| Customer C | 15 % | 23 % |
| Customer D | 12 % | 15 % |
| Customer E | 4 % | 24 % |
Customer A relates to the Heavy Equipment - Australia segment. All remaining significant customers that exceed 10% of revenue in 2024 and 2023 fall under the Heavy Equipment - Canada segment.
Where the Company generates revenue under its subcontracting arrangement with MNALP, the final end customer is represented in the table above.
The Company is largely protected against inflation risk as customer contracts contain terms that require annual price increases. The ti ming of these increases pose a short-term risk to financial results as cost increases are realized immediately and contractual increases are calculated using public reporting of index values, which lag actual cost increases by one to three months.
14. Business acquisitions
MacKellar Group
On October 1, 2023, the Company acquired 100% of the shares and business of MacKellar Group (“MacKellar”), a privately owned Australia-based provider of heavy earthworks solutions to the mining and civil sectors for total consideration of $179,668 including a cash payment and contingent consideration comprised of a contingent payment based on forecasted performance for a specific customer which is expected to be paid in full, an earn-out
mechanism based on MacKellar’s future net income generated over four years, and deferred consideration which is a vendor provided debt mechanism to be paid out evenly over four years and is estimated based on unaudited financial statements at closing. The acquisition of MacKellar significantly expanded the Company's capability and allows the Company to serve a highly valuable and diversified base of customers internationally.
The following table summarizes the total consideration paid for MacKellar and the fair values of the assets acquired and liabilities assumed at the acquisition date:
| October 1, 2023 | |
|---|---|
| Cash consideration | $ 65,572 |
| Earn-out at estimated fair value | 79,839 |
| Deferred consideration at estimated fair value | 27,014 |
| Contingent payment at estimated fair value | 7,243 |
| Total consideration transferred | $ 179,668 |
| Equipment financing assumed | 203,946 |
| Total purchase price | $ 383,614 |
| Purchase price allocation to assets acquired and liabilities assumed: | |
| Cash | $ 13,901 |
| Accounts receivable | 65,033 |
| Contract assets | 713 |
| Inventories | 12,155 |
| Prepaid expenses | 2,187 |
| Property, plant and equipment | 394,394 |
| Investments in affiliates and joint ventures | 85 |
| Intangible assets | 690 |
| Accounts payable | (45,829) |
| Accrued liabilities | (22,464) |
| Other long-term obligations | (16,934) |
| Deferred income tax liabilities | (20,317) |
| Third party equipment financing assumed: | |
| Financing obligations | (173,430) |
| Finance leases | (30,516) |
| Total identifiable net assets at fair value | $ 179,668 |
NACG’s existing Credit Facility funded the payout of the third party equipment financing assumed as part of the Transaction in the amount of $73,657 for financing obligations and $18,509 for finance leases.
The fair value of the assets acquired included $65,033 of accounts receivable, comprised of trade and other receivables. The gross amount of accounts receivable approximated its fair value with no expected uncollectible amounts as of the acquisition date.
The fair value of the assets acquired included $394,394 of property, plant and equipment. The Company engaged a third-party specialist to determine the fair value of the property, plant and equipment using a market based approach based primarily on the selling price of comparable assets.
During the three months ended March 31, 2024, the Company recognized $124,995 of revenue and $16,692 of net income from MacKellar recorded in the Consolidated Statement of Operations and Comprehensive Income. The following unaudited pro forma information gives effect to the transaction as if it had occurred on January 1, 2023.
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Revenue | $ 297,026 | $ 349,679 |
| Net income | 11,369 | 29,214 |
These pro forma amounts have been calculated after applying NACG accounting policies and adjusting the results of MacKellar to reflect the depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant, and equipment had been applied from January 1, 2023, with the consequential tax effects.
The unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred on January 1, 2023, nor are they indicative of future results of operations.
15. Other information
a) Supplemental cash flow information
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Cash paid during the period for: | ||
| Interest | $ 12,413 | $ 6,924 |
| Income taxes | 3,319 | 88 |
| Cash received during the period for: | ||
| Interest | 147 | 298 |
| Operating subleases included in cash from operations | 171 | 1,796 |
| Non-cash transactions: | ||
| Addition of property, plant and equipment by means of finance leases | 14,156 | 17,020 |
| Increase in assets held for sale, offset by property, plant and equipment | 380 | 1,671 |
| Non-cash working capital exclusions: | ||
| Net decrease in accounts receivable related to realized gain on derivative financial instruments | (4,015) | — |
| Net increase in accrued liabilities related to the current portion of deferred stock units liability | — | (1,052) |
| Net (increase) decrease in accrued liabilities related to taxes payable | 122 | 266 |
| Net increase in accrued liabilities related to dividend payable | — | (523) |
| Net (increase) decrease in accounts payable and accrued liabilities related to loans from affiliates and joint ventures | (1,412) | 7,500 |
| Non-cash working capital movement from change in foreign exchange rates | ||
| Decrease in accounts receivable | (960) | — |
| Decrease in contract assets | (86) | — |
| Decrease in inventory | (278) | — |
| Decrease in prepaid expenses | (70) | — |
| Decrease in accounts payable | 1,519 | — |
| Decrease in accrued liabilities | 644 | — |
b) Net change in non-cash working capital
The table below represents the cash provided by (used in) non-cash working capital:
| Three months ended | ||
|---|---|---|
| March 31, | ||
| 2024 | 2023 | |
| Operating activities: | ||
| Accounts receivable | $ (45,571) | $ (8,494) |
| Contract assets | 19,067 | 6,063 |
| Inventories | (4,192) | (3,366) |
| Prepaid expenses and deposits | (614) | 1,004 |
| Accounts payable | (20,654) | (13,672) |
| Accrued liabilities | (11,369) | (14,139) |
| Contract liabilities | 1,307 | (1,407) |
| $ (62,026) | $ (34,011) |
16. Change in significant accounting policy - Basis of presentation
The following tables summarize the effect of the change in accounting policy (note 2) on the Consolidated Statement of Operations and Comprehensive Income for the three months ended March 31, 2024, and 2023:
| Three months ended March 31, 2024 — Without change | Adjustments | As reported | |
|---|---|---|---|
| Revenue | $ 298,155 | $ (1,129) | $ 297,026 |
| Cost of sales | 200,835 | (1,040) | 199,795 |
| Gross profit | 53,380 | (90) | 53,290 |
| Equity loss in affiliates and joint ventures | 1,602 | (90) | 1,512 |
| Net income | 11,369 | — | 11,369 |
| Three months ended March 31, 2023 — As originally reported | Adjustments | As reported | |
|---|---|---|---|
| Revenue | $ 242,605 | $ 1,724 | $ 244,329 |
| Cost of sales | 165,301 | 1,543 | 166,844 |
| Gross profit | 40,919 | 181 | 41,100 |
| Equity earnings in affiliates and joint ventures | (9,523) | 181 | (9,342) |
| Net income | 21,846 | — | 21,846 |
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
I, Joseph Lambert, the Chief Executive Officer of North American Construction Group Ltd., certify the following:
Review: I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of North American Construction Group Ltd. (the "issuer") for the interim period ended March 31, 2024.
No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR"), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings , for the issuer.
Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
A. designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
I. material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
II. information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
B. designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
5.1 Control framework: The control framework the issuer's other certifying officer(s) and I used to design the issuer's ICFR is the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework ("COSO").
5.2 ICFR – material weakness relating to design: N/A
5.3 Limitation on scope and design: N/A
Date: May 1, 2024
| /s/ Joseph Lambert |
|---|
| Joseph Lambert, Chief Executive Officer |
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
I, Jason Veenstra, the Chief Financial Officer of North American Construction Group Ltd., certify the following:
Review: I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of North American Construction Group Ltd. (the "issuer") for the interim period ended March 31, 2024.
No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR"), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings , for the issuer.
Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
A. designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
I. material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
II. information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
B. designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
5.1 Control framework: The control framework the issuer's other certifying officer(s) and I used to design the issuer's ICFR is the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework ("COSO").
5.2 ICFR – material weakness relating to design: N/A
5.3 Limitation on scope and design: N/A
Date: May 1, 2024
| /s/ Jason Veenstra |
|---|
| Jason Veenstra, Chief Financial Officer |
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