Exhibit 99.2
Condensed Consolidated Interim Statement of Financial Position
| (stated in thousands of Canadian dollars) (unaudited) | Note | June 30, 2012 | December 31, 2011 | ||
| ASSETS | |||||
Cash and cash equivalents | $ | 6,681 | $ | 2,950 | |
Trade receivables | 4 | 24,637 | 22,326 | ||
Inventory | 183 | 225 | |||
Prepaid expenses and other receivables | 1,191 | 1,380 | |||
Income taxes recoverable | 625 | 574 | |||
| Total current assets | 33,317 | 27,455 | |||
Property and equipment | 12 | 33,790 | 27,925 | ||
Intangible assets | 12 | 1,935 | 1,924 | ||
| Goodwill | 380 | 380 | |||
Other receivables | 231 | 220 | |||
Deferred tax assets | – | 209 | |||
| Total non-current assets | 36,336 | 30,658 | |||
| TOTAL ASSETS | $ | 69,653 | $ | 58,113 | |
| LIABILITIES | |||||
Trade and other payables | $ | 7,534 | $ | 6,858 | |
Provisions | 246 | 263 | |||
Loans and borrowings | 5 | 4,066 | 3,372 | ||
Income taxes payable | 1,934 | 895 | |||
| Total current liabilities | 13,780 | 11,388 | |||
Provisions | 692 | 811 | |||
Loans and borrowings | 5 | 5,656 | 6,208 | ||
Deferred tax liabilities | 3,672 | 2,461 | |||
| Total non-current liabilities | 10,020 | 9,480 | |||
| TOTAL LIABILITIES | 23,800 | 20,868 | |||
| EQUITY | |||||
Share capital | 62,953 | 60,654 | |||
Convertible debentures – equity component | 5 | – | 229 | ||
Contributed surplus | 5,147 | 5,192 | |||
| Accumulated other comprehensive income (loss) | 25 | (1) | |||
Deficit | (22,591) | (28,993) | |||
| Total equity attributable to equity holders of the Corporation | 45,534 | 37,081 | |||
| Non-controlling interest | 319 | 164 | |||
| TOTAL EQUITY | 45,853 | 37,245 | |||
| TOTAL LIABILITIES AND EQUITY | $ | 69,653 | $ | 58,113 | |
Subsequent events (note 1) Contingent liabilities (note 11) |
See accompanying notes to the condensed consolidated interim financial statements.
Condensed Consolidated interim Statement of Earnings
| (stated in thousands of Canadian dollars except per share amounts) (unaudited) | Note | Three months ended June 30 | Six months ended June 30 | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||||
| REVENUE | $ | 28,476 | $ | 24,905 | $ | 56,658 | $ | 49,386 | ||
| Direct operating expenses | 19,957 | 19,266 | 39,788 | 39,214 | ||||||
| Selling, general and administrative | 3,923 | 2,391 | 6,679 | 4,438 | ||||||
| 4,596 | 3,248 | 10,191 | 5,734 | |||||||
| Depreciation of property and equipment | 1,595 | 1,240 | 2,857 | 2,478 | ||||||
| Amortization of intangibles | 142 | 142 | 267 | 245 | ||||||
| Share-based compensation | 254 | 38 | 454 | 109 | ||||||
| Finance costs | 7 | 235 | 197 | 461 | 414 | |||||
(Gain) Loss on disposal of property and equipment | 82 | (35) | 74 | 1 | ||||||
Reversal of impairment of property and equipment and intangible assets | 12 | – | – | (4,136) | – | |||||
| EARNINGS BEFORE INCOME TAX | 2,288 | 1,666 | 10,214 | 2,487 | ||||||
| Income taxes: | ||||||||||
Current provision | 704 | 766 | 1,794 | 826 | ||||||
Deferred tax expense | 188 | 359 | 1,865 | 613 | ||||||
| 892 | 1,125 | 3,659 | 1,439 | |||||||
| NET EARNINGS | $ | 1,396 | $ | 541 | $ | 6,555 | $ | 1,048 | ||
| Earnings attributable to: | ||||||||||
Owners of the Corporation | 1,288 | 521 | 6,402 | 1,020 | ||||||
Non-controlling interest | 108 | 20 | 153 | 28 | ||||||
| NET EARNINGS FOR THE PERIOD | 1,396 | 541 | 6,555 | 1,048 | ||||||
| EARNINGS PER SHARE | ||||||||||
Basic | 8 | $ | 0.03 | $ | 0.01 | $ | 0.16 | $ | 0.03 | |
Diluted | 8 | $ | 0.03 | $ | 0.01 | $ | 0.16 | $ | 0.03 | |
WEIGHTED AVERAGE SHARES OUTSTANDING (in thousands) | ||||||||||
Basic | 40,575 | 38,713 | 39,676 | 38,562 | ||||||
Diluted | 41,604 | 43,203 | 40,547 | 42,662 | ||||||
See accompanying notes to the condensed consolidated interim financial statements.
Condensed Consolidated interim Statement of Comprehensive Income
| (stated in thousands of Canadian dollars) (unaudited) | Note | Three months ended June 30 | Six months ended June 30 | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||||
| NET EARNINGS | $ | 1,396 | $ | 541 | $ | 6,555 | $ | 1,048 | ||
| Other comprehensive income | ||||||||||
Foreign currency translation adjustment | 87 | 24 | 28 | (50) | ||||||
| COMPREHENSIVE INCOME | 1,483 | 565 | 6,583 | 998 | ||||||
| Comprehensive income attributable to | ||||||||||
Owners of the Corporation | 1,368 | 542 | 6,428 | 972 | ||||||
Non-controlling interest | 115 | 23 | 155 | 26 | ||||||
| COMPREHENSIVE INCOME FOR THE PERIOD | $ | 1,483 | $ | 565 | $ | 6,583 | $ | 998 | ||
See accompanying notes to the condensed consolidated interim financial statements.
Condensed Consolidated Interim Statement of Changes in Equity
| (stated in thousands of Canadian dollars) (unaudited) | Outstanding common shares (thousands) | Share capital | Convertible debentures – equity component | Contributed surplus | Deficit | Accumulated other comprehensive (loss) income | Total equity attributable to equity holders of the Corporation | Non-controlling interest | Total equity |
| BALANCE AT JANUARY 1, 2012 | 38,713 | $60,654 | $229 | $5,192 | $(28,993) | $ (1) | $ 37,081 | $164 | $37,245 |
| Net earnings for the period | 6,402 | 6,402 | 153 | 6,555 | |||||
| Other comprehensive income | 26 | 26 | 2 | 28 | |||||
Total comprehensive income for the period | 6,402 | 26 | 6,428 | 155 | 6,583 | ||||
| Transactions with owners: | |||||||||
Stock compensation expense | 106 | 106 | 106 | ||||||
Exercise of stock options | 97 | 197 | (151) | 46 | 46 | ||||
Conversion of convertible debentures (Note 5) | 4,000 | 2,102 | (229) | 1,873 | 1,873 | ||||
| BALANCE AT JUNE 30, 2012 | 42,810 | $62,953 | $– | $5,147 | $(22,591) | $ 25 | $45,5347 | $319 | $45,853 |
| BALANCE AT JANUARY 1, 2011 | 37,576 | $60,040 | $221 | $4,969 | $ (34,851) | $ (83) | $30,2966 | $– | $30,296 |
| Net earnings for the period | 1,020 | 1,020 | 28 | 1,048 | |||||
| Other comprehensive loss | (48) | (48) | (2) | (50) | |||||
| Total comprehensive income for the period | 1,020 | (48) | 972 | 26 | 998 | ||||
| Transactions with owners: | |||||||||
Issue of common shares on business combination | 1,137 | 614 | 614 | 614 | |||||
Stock compensation expense | 91 | 91 | 91 | ||||||
Convertible debentures issued – equity component | 8 | 8 | 8 | ||||||
| BALANCE AT JUNE 30, 2011 | 38,713 | $60,654 | $229 | $5,060 | $ (33,831) | $ (131) | $31,981 1 | $26 | $32,007 |
See accompanying notes to the consolidated interim financial statements.
Condensed Consolidated Statement of Cash Flows
Six months ended June 30 (stated in thousands of Canadian dollars) (unaudited) | Note | 2012 | 2011 | ||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||
Net earnings for the period | $ | 6,555 | $ | 1,048 | |
Adjustments for: | |||||
Depreciation and amortization | 3,124 | 2,723 | |||
Finance costs | 7 | 461 | 414 | ||
Share-based compensation | 454 | 109 | |||
| Change in provisions | (137) | (112) | |||
Income tax expense | 3,659 | 1,439 | |||
Loss on disposal of property and equipment | 74 | 1 | |||
Reversal of impairment of property and equipment and intangible assets | 12 | (4,136) | – | ||
| 10,054 | 5,622 | ||||
Change in non-cash working capital | 10 | (1,699) | (1,789) | ||
Cash generated from operating activities | 8,355 | 3,833 | |||
Interest paid | (355) | (290) | |||
Income tax paid | (1,272) | (514) | |||
| NET CASH FLOWS FROM OPERATING ACTIVITIES | 6,728 | 3,029 | |||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||
Purchase of property and equipment | (3,725) | (2,087) | |||
Purchase of intangibles | (24) | (6) | |||
Net cash acquired on business acquisition | – | 1 | |||
Proceeds from sale of property and equipment | 598 | 294 | |||
| NET CASH USED IN INVESTING ACTIVITIES | (3,151) | (1,798) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||
Issue of loans and borrowings | 2,310 | 75 | |||
Repayment of loans and borrowings | (977) | (681) | |||
Payment of finance lease liabilities | (1,210) | (1,336) | |||
Proceeds from exercise of stock options | 48 | – | |||
Payment of transaction costs related to issue of debt | – | (40) | |||
| NET CASH FROM (USED IN) FINANCING ACTIVITIES | 171 | (1,982) | |||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 3,748 | (751) | |||
| Cash and cash equivalents at January 1 | 2,950 | 1,479 | |||
| Effect of exchange rate fluctuations on cash held | (17) | (47) | |||
| CASH AND CASH EQUIVALENTS AT JUNE 30 | 6,681 | 681 | |||
Non-cash investing activities – property and equipment acquired by means of a finance lease | $ | 1,777 | $ | 1,020 |
See accompanying notes to the condensed consolidated interim financial statements.
Notes to the condensed consolidated interim financial statements for the three and six months ended June 30, 2012 and 2011
(unaudited)
(stated in thousands of Canadian dollars, except per share amounts)
NOTE 1 – REPORTING ENTITY
HSE Integrated Ltd. (“HSE” or the “Corporation”) is incorporated under the laws of the province of Alberta. The address of the Corporation’s head office is 1000, 630 – 6 Avenue S.W., Calgary, Alberta, Canada, T2P 0S8. The condensed consolidated interim financial statements of the Corporation as at and for the three and six months ended June 30, 2012 and 2011 include the Corporation and its subsidiaries.
The Corporation provides health and safety services to a range of customers in the energy, manufacturing, construction and other industries including: safety supervision and rescue personnel, rental of breathing apparatus and associated equipment for personnel operating in high hazard environments, fixed and mobile firefighting and fire protection services and equipment, worker shower (decontamination) services, onsite medical services, worker safety training, hazardous gas detection, industrial hygiene services, and safety consulting and supervision.
The Corporation’s business has two seasonal components. Revenue for Oilfield health and safety services is historically highest in the first and fourth quarters and lowest in the second quarter because this sector uses equipment that can only access well locations during certain times of the year and because of the effects of weather on field activity. Industrial revenue includes a mix of year-round contracts and “turnarounds” – scheduled major maintenance projects and repair activities on client facilities. These turnarounds tend to be scheduled during the second and third quarters to avoid the possibility of adverse effects from freezing weather. As a result, Industrial revenue tends to be highest in the second and third quarters.
· Subsequent Event - Business Combination
On July 11, 2012, DXP Enterprises, Inc. ("DXP") through its wholly-owned subsidiary, acquired all of the outstanding common shares of HSE by way of a plan of arrangement under the Business Corporations Act (Alberta) (the "Arrangement"). As announced on June 29, 2012, the Arrangement was approved at the Annual and Special Meeting of Shareholders of HSE on June 29, 2012 by 99.96 % of the votes cast by the HSE shareholders and 99.96% of the votes cast by the HSE shareholders after excluding those votes required to be excluded by Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions. The Arrangement was also approved by the Court of Queen's Bench of Alberta on June 29, 2012.
Pursuant to the Arrangement, HSE shareholders received $1.80 in cash per each common share of HSE held.
Subsequent to the period, as a result of the change of control, HSE’s credit facilities became due on demand and were reclassified entirely to current liabilities.
HSE common shares were de-listed from the Toronto Stock Exchange three business days following the transaction.
NOTE 2 – BASIS OF PREPARATION
A) Statement of compliance
These unaudited condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting. The condensed consolidated interim financial statements do not include all of the information required for full annual financial statements.
These condensed consolidated interim financial statements were authorized for issue by DXP Enterprise Inc.’s board of directors on September 24, 2012.
B) Basis of measurement
The condensed consolidated interim financial statements have been prepared on the historical cost basis except for liabilities for cash-settled share-based payment arrangements, which are measured at fair value.
C) Functional and presentation currency
These condensed consolidated interim financial statements are presented in Canadian dollars, which is the functional currency of the Corporation and the Corporation’s Canadian subsidiaries. The U.S. dollar is the functional currency of the Corporation’s United States subsidiaries. All financial information presented in Canadian dollars has been rounded to the nearest thousand, except for per share amounts.
D) Use of accounting estimates and judgments
The preparation of consolidated interim financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income, and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
In preparing these condensed consolidated interim financial statements, the significant judgments made by management in applying the Corporation’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended December 31, 2011.
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with Note 3 to HSE Integrated Ltd.’s annual consolidated financial statements for the year ended December 31, 2011, as the accounting policies applied by the Corporation in these unaudited consolidated interim financial statements are the same as those disclosed therein.
NOTE 4 – TRADE RECEIVABLES
| June 30, 2012 | December 31, 2011 | |||
| Trade receivables | $ | 24,987 | $ | 22,676 |
| Allowance for doubtful accounts | (350) | (350) | ||
| $ | 24,637 | $ | 22,326 | |
The aging of trade receivables at the reporting date was:
| Gross | Allowance | Gross | Allowance | |||||
| June 30, 2012 | June 30, 2012 | December 31, 2011 | December 31, 2011 | |||||
| 0 – 30 days from invoice date (current) | $ | 17,210 | $ | – | $ | 12,411 | $ | – |
| 31-60 days from invoice date | 5,917 | – | 6,839 | – | ||||
| 61-120 days from invoice date | 1,663 | 153 | 1,894 | 31 | ||||
| More than 120 days from invoice date | 197 | 197 | 1,532 | 319 | ||||
| Total | $ | 24,987 | $ | 350 | $ | 22,676 | $ | 350 |
The movement in the allowance for doubtful accounts in respect of trade receivables during the period was as follows:
| Balance at January 1, 2012 | 350 | |
| Bad debt provision | 56 | |
| Write-offs | (56) | |
| Balance at June 30, 2012 | $ | 350 |
NOTE 5 – LOANS AND BORROWINGS
This note provides information about the contractual terms of the Corporation’s interest-bearing loans and borrowings.
| Note | June 30, 2012 | December 31, 2011 | |||
| Current liabilities: | |||||
Non-revolving term facility | A | $ | 2,085 | $ | 1,304 |
Finance lease liabilities | C | 1,981 | 2,068 | ||
| $ | 4,066 | $ | 3,372 | ||
| Non-current liabilities: | |||||
Non-revolving term facility | A | 2,292 | 1,739 | ||
Unamortized debt issue costs | A | (98) | (125) | ||
Convertible debentures | B | – | 1,845 | ||
Unamortized debt issue costs | B | – | (57) | ||
Finance lease liabilities | C | 3,462 | 2,806 | ||
| $ | 5,656 | $ | 6,208 | ||
| Total loans and borrowings | $ | 9,722 | $ | 9,580 | |
A) Non-revolving term facility and revolving operating loan facility
On February 15, 2012 the Corporation completed the purchase of certain assets of the Flint Safety Unit ("Flint Safety Unit") a division of Flint Field Services Ltd. The transaction was financed through the non-revolving term facility. The facility is repayable in monthly payments of $65 starting on February 29, 2012 and is payable in full 36 months after initial drawdown. As at June 30, 2012, the amount drawn under the credit facility was $4,337. This facility is covered by the Corporation’s general security agreement, and is subject to the same covenants as the facilities disclosed in the consolidated financial statements as at and for the period ended December 31, 2011.
B) Convertible debentures
On November 9, 2010, HSE announced the issue of up to $2,000 in subordinated secured convertible debentures (the “Debentures”). The Debentures matured on January 15, 2014 and bore interest at 10.0% per annum, payable quarterly in arrears on April 15, July 15, October 15, and January 15 in each year beginning April 15, 2011. The component parts of the convertible secured subordinated debentures (“Debentures”) issued by the Corporation were classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.
On December 21, 2010, HSE completed the first closing with total proceeds of $1,925. On January 18, 2011, HSE completed the final closing with proceeds of an additional $75.
As at June 30, 2012, all convertible debentures had been converted.
C) Finance lease liabilities
Finance lease liabilities are payable as follows:
| June 30, 2012 | December 31, 2011 | |||||
| Future minimum lease payments | Interest | Present value of minimum lease payments | Future minimum lease payments | Interest | Present value of minimum lease payments | |
| Less than 1 year | $ 2,193 | $ 212 | $ 1,981 | $ 2,262 | $ 194 | $ 2,068 |
| 1 to 5 years | 3,701 | 239 | 3,462 | 3,010 | 204 | 2,806 |
| $ 5,894 | $ 451 | $ 5,443 | $ 5,272 | $ 398 | $ 4,874 | |
Leasing arrangements
Finance leases relate to vehicles and equipment with lease terms ranging from 3 to 5 years. The Corporation’s obligations under finance leases are secured by the lessors’ title to the leased assets.
The applicable interest rate on these finance leases is between 2.58% and 6.16%.
NOTE 6 – SHARE-BASED COMPENSATION
A) Stock options
Pursuant to the stock option plan, a maximum of 10% of the issued and outstanding common shares of the Corporation are reserved from time to time for issue to eligible participants. The directors determine option prices and vesting terms at the time of granting at an exercise price based on the volume weighted average price for the five trading days immediately preceding the grant date. The term of options granted does not exceed five years.
At June 30, 2012, the Corporation had options outstanding to issue 1,712,500 shares (December 31, 2011: 2,167,000) at a weighted average price of $0.57 per share (December 31, 2011: $0.71). Of these options, 1,220,855 were exercisable (December 31, 2011: 1,104,446).
As a result of the business combination with DXP Enterprises Inc. (Note 1) all outstanding vested and unvested stock options were settled in cash subsequent to the period ended June 30, 2012. The settlement amount per share was equal to the difference between the $1.80 purchase price per share outlined in the Plan of Arrangement, and the exercise price of the options.
The inputs used in the measurement of the fair values at grant date are the same as those disclosed in the consolidated financial statements as at and for the period ended December 31, 2011.
Information about outstanding stock options is as follows:
| Six months ended June 30, 2011 | Year ended December 31, 2011 | |||||
| Options | Weighted average exercise price | Options | Weighted average exercise price | |||
| Outstanding, beginning of year | 2,167,000 | $ | 0.71 | 2,279,165 | $ | 1.24 |
| Granted | 40,000 | 0.43 | 500,000 | 0.52 | ||
| Exercised | (96,500) | 1.10 | – | – | ||
| Forfeited | (398,000) | 1.17 | (612,165) | 2.53 | ||
| Outstanding, end of period | 1,712,500 | $ | 0.57 | 2,167,000 | $ | 0.71 |
| Exercisable at end of period | 1,220,855 | $ | 0.60 | 1,104,446 | $ | 0.92 |
The following table summarizes information about stock options outstanding at:
| June 30, 2012 | |||
| Options Outstanding | Exercise Prices ($) | Weighted Average Remaining Life in Years | Number Exercisable |
| 889,167 | 0.36 – 0.50 | 2.3 | 717,508 |
| 823,333 | 0.51 – 1.00 | 2.5 | 503,347 |
| 1,712,500 | 0.57 | 2.4 | 1,220,855 |
| December 31, 2011 | |||
| Options Outstanding | Exercise Prices ($) | Weighted Average Remaining Life in Years | Number Exercisable |
| 1,055,000 | 0.36 – 0.50 | 3.0 | 477,446 |
| 840,000 | 0.51 – 1.00 | 3.1 | 355,000 |
| 272,000 | 1.51 – 2.00 | 0.2 | 272,000 |
| 2,167,000 | 0.71 | 2.7 | 1,104,446 |
B) Deferred share unit plan (cash settled)
Expense related to the deferred share units recognized during the six months ended June 30, 2012 was $348 (2011: $18). For the year 2010 and up to August 11, 2011, the majority of directors’ retainers and meeting fees were paid with deferred share units (“DSUs”). After August 11, 2011, all directors’ retainers and meeting fees are being paid in cash except for an annual grant for non-executive directors as provided in the original DSU plan.
As a result of the business combination with DXP Enterprises Inc. (Note 1) all outstanding deferred share units were settled in cash at $1.80 per unit subsequent to the end of the period ended June 30, 2012.
The number of deferred share units is as follows:
| Deferred Share Units | June 30, 2012 | December 31, 2011 |
| Outstanding, beginning of year | 303,039 | 257,028 |
| Granted | – | 102,241 |
| Redeemed | – | (56,230) |
| Outstanding, end of period | 303,039 | 303,039 |
NOTE 7 – FINANCE COSTS
| Three months ended June 30 | Six months ended June 30 | ||||||||
| 2012 | 2011 | 2012 | 2011 | ||||||
| Interest on operating loan facility and standby charges | 8 | 13 | 17 | 22 | |||||
| Interest on term facility | 54 | 45 | 106 | 106 | |||||
| Interest on obligations under finance leases | 73 | 50 | 136 | 108 | |||||
| Interest, accretion interest on convertible debentures | 28 | 75 | 103 | 151 | |||||
| Amortization of deferred financing costs | 71 | 11 | 84 | 20 | |||||
| Unwind of discount on provision | 2 | 3 | 5 | 6 | |||||
| Foreign currency gain (loss) | (1) | – | 10 | 1 | |||||
| Net finance costs recognized in earnings | $ | 235 | $ | 197 | $ | 461 | $ | 414 | |
| Interest paid | $ | 180 | $ | 173 | $ | 355 | $ | 290 | |
NOTE 8 – EARNINGS PER SHARE
A) Basic earnings per share
Basic earnings per share is calculated as follows:
| Three months ended June 30 | Six months ended June 30 | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||
| Earnings attributable to common shareholders | $ | 1,288 | $ | 521 | $ | 6,402 | $ | 1,020 |
| Issued common shares, beginning of period (thousands) | 38,793 | 38,713 | 38,713 | 37,576 | ||||
| Weighted average common shares issued on acquisition | – | – | – | 986 | ||||
| Weighted average common shares issued on exercise of stock options | 58 | 29 | ||||||
| Weighted average common shares issued on conversion of debentures | 1,724 | – | 934 | – | ||||
| Weighted average number of common shares, issued and outstanding | 40,575 | 38,713 | 39,676 | 38,562 | ||||
| Basic earnings per share | $ | 0.03 | $ | 0.01 | $ | 0.16 | $ | 0.03 |
B) Diluted earnings per share
In calculating diluted earnings per share, basic earnings per share was adjusted as follows:
| Three months ended June 30 | Six months ended June 30 | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||
| Net earnings | $ | 1,288 | $ | 521 | $ | 6,402 | $ | 1,020 |
| Effect of finance costs from conversion of convertible debenture (net of tax) | – | 35 | – | 70 | ||||
| Adjusted net earnings | $ | 1,288 | $ | 556 | $ | 6,402 | $ | 1,090 |
| Weighted average number of common shares – Basic (thousands) | 40,575 | 38,713 | 39,676 | 38,562 | ||||
| Effect of “in-the-money” stock options | 1,029 | 495 | 871 | 100 | ||||
| Effect of conversion of convertible debentures | – | 4,000 | – | 4,000 | ||||
| Weighted average number of common shares at end of period – Diluted thousands) | 41,604 | 43, 208 | 40,547 | 42,662 | ||||
| Fully diluted earnings per share | $ | 0.03 | $ | 0.01 | $ | 0.16 | $ | 0.03 |
NOTE 9 – OPERATING SEGMENTS
The Corporation operates in two main geographic areas: Canada and the United States (U.S.). Each geographic area has a President or Chief Operating Officer (COO) responsible for the operations and strategy of his area’s business. Personnel working within a particular region report to the President or COO, and the President or COO reports to the Chief Executive Officer. Many of the Corporation’s services are inter-dependent since they are bundled and sold to its customers in various combinations.
HSE provides a comprehensive and integrated suite of health, safety and environmental monitoring services to protect workers, assets and the community in the most cost-effective manner possible. It provides these services by providing people and assets to meet the needs of its customers. These people and assets are inter-dependent and moved between locations on a national basis, and are not site-specific or customer-specific. The Corporation tracks revenue, but not expenses or resources based on the industry within which the customer operates. The same property and equipment and employees serve customers in both industry categories. Decisions are made by the Corporation to allocate resources based on the geographic segment and not by industry.
Within each geographic segment, the Corporation uses common resources to provide services to a variety of customer industries. The Corporation groups these customer industries into two categories. “Oilfield” services are provided to customers in the conventional upstream, or “wellhead”, sector of the oil and gas industry. “Industrial” services are provided to customers in a variety of other industries including: non-conventional upstream oil development and production (including oilsands extraction); oil and gas processing; petrochemicals; pulp and paper; utilities; power generation; and manufacturing. It also includes worker safety training and safety management services.
Performance is measured based on segment EBITDA, as included in the internal management reports that are reviewed by the Corporation’s CEO. Segment EBITDA is used to measure performance as management believes that such information is the most relevant in evaluating results in comparison with other entities operating in the same industry.
For the three months ended June 30, 2012 one customer provided more than 10% of the Corporation’s revenue. Sales to these customers during 2012 amounted to $7,005 related to oilfield service and well control projects located entirely in Canada. For the same period in 2011, one customer provided more than 10% of the Corporation’s revenue. Sales to this customer amounted to $3,032 during the period, related to long-term energy related projects located entirely within Canada.
Corporate division expenses consist of salary expenses; stock compensation; office costs related to corporate employees; and public company costs.
Information regarding the results of each reportable segment is as follows.
Information about reportable segments
Three months ended June 30
| Canada | U.S. | Corporate | Total | |||||||||||||
| 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||
| External revenue | ||||||||||||||||
Oilfield | $ | 10,376 | $ | 7,339 | $ | 2,839 | $ | 867 | $ | – | $ | – | $ | 13,215 | $ | 8,206 |
Industrial | 14,656 | 16,165 | 605 | 534 | – | – | 15,261 | 16,699 | ||||||||
| Total revenue | $ | 25,032 | 23,504 | $ | 3,444 | 1,401 | $ | – | – | $ | 28,476 | 24,905 | ||||
| Finance costs | – | – | – | – | 235 | 197 | 235 | 197 | ||||||||
| Depreciation and amortization | 1,582 | 1,318 | 155 | 64 | – | – | 1,737 | 1,382 | ||||||||
| Income tax expense | 449 | 1,065 | 443 | 60 | – | – | 892 | 1,125 | ||||||||
| Capital expenditures | 445 | 519 | 527 | 342 | – | – | 972 | 861 | ||||||||
| Material non-cash items | ||||||||||||||||
| Change in onerous contract provision | (71) | (55) | – | – | – | – | (71) | (55) | ||||||||
| Property and equipment acquired by means of a finance lease | 1,232 | 0 | 321 | 177 | – | – | 1,533 | 177 | ||||||||
| Reversal of impairment of property and equipment and intangible assets | – | – | – | – | – | – | – | – | ||||||||
| Reportable segment earnings (loss) before depreciation, amortization, share-based compensation, finance costs, gain/loss on disposal of property and equipment, and reversal of impairment of property and equipment and intangible assets | $ | 7,154 | $ | 5,221 | $ | 1,366 | $ | 418 | $ | (3,924) | $ | (2,391) | $ | 4,596 | $ | 3,248 |
Six months ended June 30
| Canada | U.S. | Corporate | Total | |||||||||||||
| 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||
| External revenue | ||||||||||||||||
Oilfield | $ | 25,181 | $ | 18,728 | $ | 4,837 | $ | 1,402 | $ | – | $ | – | $ | 30,018 | $ | 20,130 |
Industrial | 25,540 | 28,220 | 1,100 | 1,036 | – | – | 26,640 | 29,256 | ||||||||
| Total revenue | $ | 50,721 | $ | 46,948 | $ | 5,937 | $ | 2,438 | $ | – | $ | – | $ | 56,658 | $ | 49,386 |
| Finance costs | – | – | – | – | 461 | 414 | 461 | 414 | ||||||||
| Depreciation and amortization | 2,857 | 2,602 | 267 | 121 | – | – | 3,124 | 2,723 | ||||||||
| Income tax expense (recovery) | 2,706 | 1,331 | 953 | 108 | – | – | 3,659 | 1,439 | ||||||||
| Capital expenditures | 2,819 | 1,421 | 906 | 666 | – | – | 3,725 | 2,087 | ||||||||
| Material non-cash items | ||||||||||||||||
| Change in onerous contract provision | (137) | (112) | – | – | – | – | (137) | (112) | ||||||||
| Property and equipment acquired by means of a finance lease | 1,280 | 624 | 497 | 396 | – | – | 1,777 | 1,020 | ||||||||
| Reversal of impairment of property and equipment and intangible assets | (3,935) | – | (201) | – | – | – | (4,136) | – | ||||||||
| Reportable segment earnings (loss) before depreciation, amortization, share-based compensation, finance costs, gain/loss on disposal of property and equipment, and reversal of impairment of property and equipment and intangible assets | $ | 14,629 | $ | 9,492 | $ | 2,241 | $ | 680 | $ | (6,679) | $ | (4,438) | $ | 10,191 | $ | 5,734 |
NOTE 10 – SUPPLEMENTARY CASH FLOW INFORMATION
| Six months ended June 30 | 2012 | 2011 | ||
| Changes in non-cash working capital from operations | ||||
Inventories | $ | 42 | $ | – |
Prepaid expenses and other receivables | 189 | 501 | ||
Trade receivables | (2,289) | (3,188) | ||
Trade and other payables | 359 | 898 | ||
| Change in non-cash working capital | $ | (1,699) | $ | (1,789) |
NOTE 11 – CONTINGENT LIABILITIES
In the ordinary course of business activities, the Corporation may be contingently liable for litigation and claims with customers, suppliers, former employees, and third parties. Management believes that adequate provisions have been recorded in the accounts where applicable. Although it may not be possible to estimate accurately the extent of potential costs and losses, if any, Management believes that the ultimate resolution of such contingencies would not have a material effect on the financial position of the Corporation.
NOTE 12 – IMPAIRMENT REVERSAL
As a result of the Agreement with DXP (note 1), objective external evidence indicated that the fair value of property and equipment exceeded its carrying value at March 31, 2012. This external evidence, in addition to strong financial performance through 2011 and for the first quarter of 2012, indicated that the impairment of property and equipment and intangible assets recorded on January 1, 2010, no longer existed and should be reversed as at March 31, 2012. For the three months ended March 31, 2012, the Corporation recorded an impairment reversal of $4,136, net of the depreciation and amortization that would have been recorded on the assets from January 1, 2010 to March 31, 2012.