One Time Costs in Third Quarter Prepare Enterprise Group for Substantial Growth

Flameless heating device from Arctic Therm

The flameless heating devices from Arctic Therm use a diesel engine to heat oil, which is then circulated to heat exchangers, providing a clean, pollution free discharge of warm air. The photo shows a unit on a truck, able to generate up to 1,200,000 BTU's.

Although Enterprise Group’s (E – $0.24 & 3EO – €0.16) third quarter earnings may look disappointing at first, it’s important to note that they were significantly impacted by exceptional expenses. Even more important, is that these one time costs will contribute to a much better result in the current and following quarters.

During the third quarter, ended September 30, 2012, the Company recorded an income from operations of $70,351 compared with a profit of $743,483 in the comparable period last year. Revenues for the third quarter of 2012 reached $4.33 million, a decline of 10% compared with $4.81 million in the same period of 2011.

For the current fourth quarter and beyond we expect to see an improved performance because Enterprise’s underground utilities and directional drilling division is operating near full capacity, the demand for renting heavy equipment began to increase in the latter part of the third quarter and is continuing in the fourth quarter, and the recent acquisition of Artic Therm should start to contribute to the bottom line.

Third Quarter and Nine Months Results

Enterprise Group experienced an eventful quarter. Late August, the Company entered into a $12.5 million finance facility with the Canadian branch of PNC Bank, one of the largest banking groups in the United States. The loan was used to repay old loans, which had higher interest rates, and to fund a series of acquisitions.

A first Letter Of Intent (LOI) to acquire a utility services & maintenance company out of Edmonton, Alberta was actually signed a few weeks before the $12.5 million loan was finalized. Because the target company is completing a corporate reorganization to prepare itself for the impending sale, the deal hasn’t been closed yet. The acquisition target is profitable and complimentary with Enterprise’s T.C. Backhoe & Directional Drilling subsidiary.

Finally, Enterprise also bought Artic Therm International Ltd, a private company out of Alberta, which was founded in 1998 and is an industry leader in renting flameless heaters to the construction and oil & gas industries in Western Canada. During the twelve consecutive months ending March 31, 2012, Artic Therm generated sales of $4.7 million resulting in an EBITDA in excess of $2.7 million and a net profit of over $2.0 million. Enterprise paid $6.5 million for the company.

All these items above impacted the third quarter’s net income by as much as $400,000. Additionally, the Company incurred higher than normal advertising and promotional costs related to the launch of Artic Therm.

 
Three Months Ended
September 30
nine Months Ended
September 30
2012
2011
2012
2011
Net Sales
4,333,529
4,811,670
11,856,398
11,658,412
Direct Expenses
2,761,877
3,066,104
7,590,057
8,664,011
S, G & A Expenses
711,348
791,15,
2,081,856
2,404,922
Depreciation
329,674
265,747
867,113
853,434
Income (Loss) From Operations
205,777
916,868
962,389
(76,949)
Finance Income (Expense)
135,426
173,385
306,551
730,583
Net Income (Loss)
66,351
743,483
655,838
(801,532)
Earnings (Loss) Per Share
0.00
0.01
0.01
(0.02)
Shares Out. – Diluted
58,465,952
53,840,719
58,374,496
50,420,271
Most important income statement data for the second quarter and nine months ending September 30, 2012 and September 30, 2011. Source: Company Filings

Enterprise Group Inc. operates in three main business units for the oilfield and utility infrastructure markets in central and northern Alberta, Canada. Its Directional Drilling & Utility Installation division is currently the backbone of the Company and provides construction services such as installation of underground utility infrastructure and directional drilling.

Revenue in this division reached almost $4 million in the third quarter, an increase of $466,000 compared to the same period last year. Gross profit for the quarter was $1,600,000 an increase of $313,000 or 23.5% and EBITDAS grew to $1,400,000, an increase of $91,000 or 6.7% over the same period last year. The growth in this division is largely due to an increase in projects from major customers and ideal soil conditions. Together, these two elements have allowed this division to operate at near full capacity for most of the year. Moreover, its operations are expected to remain at this level for the remainder of 2012 and into 2013.

Enterprise also constructs pipelines in the energy services industry throughout Western Canada utilizing a fleet of over 200 trucks and heavy construction equipment. This division disappointed as revenues for the quarter were $380,000, a decline of almost $1 million versus the third quarter last year. Gross loss was $57,000, compared to a gross profit of $426,000 in 2011.

The decrease in revenue for this segment is mainly due to the Company continuing its strategy of avoiding projects with smaller margins, which results in higher field margins but at revenue levels lower than historical amounts.

In addition to these two businesses, the Company launched its heavy equipment rental division, E One Limited, in the first quarter of 2012. Construction contractors typically operate a core fleet and will rent when activity surpasses full utilization of their fleet.

As financial results for this division are included in the pipeline construction business, no specific information is available. However, as E One has several rental contracts for its equipment, management expects this division to return to making a positive contribution to the Company in the fourth quarter.

Additionally, now that the rental business of Artic Therm is fully integrated, management also foresees this acquisition to contribute significantly to the earnings of the Company for the remainder of 2012 and through 2013.

Conclusion

It was a good idea by management to incur all these one time costs in the same quarter, so that only the benefits of the financing and acquisitions can be highlighted in the quarters to come.

The underground utility and infrastructure division is currently operating at or near capacity and its largest customers have a significant backlog of work that will carry through 2012 and 2013.

The E One rental business is again shifting into higher gear and Artic Therm International has recently secured significant project work for its larger flameless heating units. Two of its customers include Canada’s largest oil producer and Canada’s largest natural gas producer.

The Company is finalizing the acquisition of the utility services & maintenance company out of Edmonton, Alberta, which should contribute nicely to earnings and for which most costs have already been made in the third quarter.

And finally, Enterprise Group is currently negotiating and performing due diligence on an additional acquisition target that management expects to complete in the first quarter of 2013.


For important disclosures, please read our disclaimer.

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