Major Drilling Announces Record Quarterly Results

MONCTON, NB, Dec. 5, 2011 /CNW/ - Major Drilling Group International Inc. (TSX: MDI) today reported results for its second quarter of fiscal year 2012, ended October 31, 2011.

Highlights

*before changes in non-cash operating working capital items, finance costs and income taxes

• Major Drilling posted the highest quarterly revenue in its history at $213.9 million, up 67% from the $127.8 million recorded for the same quarter last year.
  
  
• Gross margin percentage for the quarter improved significantly to 34.6%, compared to 27.5% last year.
  
  
• Net earnings were $31.6 million or $0.43 per share ($0.42 per share diluted) for the quarter, compared to net earnings of $11.3 million or $0.16 per share ($0.16 per share diluted) for the prior year quarter. This represents the highest quarterly earnings in the Company's history.
  
  
• Effective September 30, 2011, the Company acquired Bradley Group Limited.  Revenue for the quarter from Bradley (one month) was $11 million.

"In this quarter, the Company achieved record quarterly revenue of $213.9 million, and record quarterly earnings of $31.6 million. Activity levels continued to be robust in every region and we continue to see inquiries from all categories of customers, although many customers are still in the process of finalizing their budgets," said Francis McGuire, President and CEO of Major Drilling Group International Inc. "Excluding the $11 million in revenue contributed by Bradley in the month of October, the Company still generated $203 million in revenue, well above the previous record of $191 million achieved in the second quarter of fiscal 2009."

"Margins in this quarter improved significantly as ramp-up costs have normalized and as we get the full benefit of higher pricing in contracts that were signed or renewed in the previous quarter.  In addition, we experienced very few operational or weather issues during the quarter.  Our efforts on training and recruitment have allowed us to increase the number of shifts in the field, however the shortage of experienced drill crews will put added pressure on labour costs and productivity as we go forward, especially in our most active markets.  Other costs are expected to rise as well, slowing down margin progression."

"It is important to note that we are now in our third quarter, seasonally the weakest quarter of our fiscal year, as mining and exploration companies shut down, often for extended periods over the holiday season.  Weather can also play an important role in affecting operations.  At this time, most senior and intermediate companies have yet to decide on post-holiday start-up dates, all of which impacts third quarter revenue."

"Looking at the balance of fiscal 2012, assuming that customers continue with their stated plans, we should see continuing growth.  Our ongoing efforts on training and recruitment should allow our global utilization rates to continue to improve as each month goes by and as we add more drillers," noted Mr. McGuire.  "Despite the current economic environment, our industry has not shown any signs of a slowdown to this point.  Most commodity prices are still at relatively high levels while many of our customers, both seniors and juniors, are in much better financial position than three years ago. Our biggest operational challenge continues to be the shortage of labour.  We continue to aggressively and successfully invest in the recruitment and training of new drillers."

"Capital expenditures for the quarter were $16.1 million as we purchased 16 rigs while retiring 11 rigs through our modernization program.  The Bradley acquisition also contributed to increasing our drill fleet by 124 rigs, with the Company's total now standing at 700.  During the quarter, we also added a significant number of support vehicles and other support equipment to meet changing patterns of demand and to ensure that we continue to meet the highest levels of safety standards.  These additions should improve rig utilization and reliability as we focus on increasing the earning power of each crew and each rig.  In fact, now 60% of our rigs are less than five years old in an industry where rigs tend to last 20 years."

"Finally, effective September 30, 2011, we are very pleased to welcome the Bradley group and its employees into the Major Drilling group. The acquisition of Bradley Group is a unique opportunity to further Major Drilling's corporate strategy of focusing on specialized drilling, expanding our geographic footprint in areas of high growth and of maintaining a balance in our mix of drilling services. The operations of both companies are highly complimentary in terms of geography, personnel and strategies," said Francis McGuire.

Second quarter ended October 31, 2011

Total revenue for the quarter was $213.9 million, up 67% from the $127.8 million recorded in the same quarter last year. All of the Company's regions contributed to this growth, with the Bradley acquisition contributing $11 million to the total.

Revenue for the quarter from Canada-U.S. drilling operations increased by $33.6 million or 66% to $84.2 million compared to the same period last year.  U.S. mineral drilling operations continued a strong recovery, particularly from its senior mining customers and our energy division recovered from the floods that occurred last quarter in North Dakota.  In Canada, increased activity levels, combined with the acquisition of Bradley, contributed to the growth of revenue.

South and Central American revenue was up 62% to $68.1 million for the quarter, compared to the prior year quarter. The increase was primarily driven by strong growth in our Mexican, Argentinean and Chilean operations.

Australian, Asian and African operations reported revenue of $61.6 million, up 75% from the same period last year.  Australia and Mongolia accounted for a significant portion of this growth as operations recovered from floods experienced last year in Queensland, and increased activity levels were seen in Mongolia.  Operations in South Africa also contributed to the strong growth as well as new operations in Mozambique and the DRC.

The overall gross margin percentage for the quarter was 34.6%, up from 27.5% for the same period last year.  Ramp-up costs such as mobilization and up-front purchases have now normalized. Also, training and recruitment efforts allowed the Company to increase the number of shifts in the field during the quarter.  Finally, the contracts that were signed or renewed this quarter reflected the current stronger pricing environment.

General and administrative costs were $13.1 million for the quarter compared to $10.0 million in the same period last year.  The increase was due to the acquisition of Bradley, the addition of new operations in Mozambique and the DRC and also increased costs to support the strong growth in activity levels.

Other expenses for the quarter were $6.0 million, up from $2.4 million in the prior year quarter, due primarily to higher incentive compensation expenses given the Company's increased profitability and costs related to the Bradley acquisition.

Some of the statements contained in this press release may be forward-looking statements, such as, but not limited to, those relating to worldwide demand for gold and base metals and overall commodity prices, the level of activity in the minerals and metals industry and the demand for the Company's services, the Canadian and international economic environments, the Company's ability to attract and retain customers and to manage its assets and operating costs, sources of funding for its clients, particularly for junior mining companies, competitive pressures, currency movements, which can affect the Company's revenue in Canadian dollars,  the geographic distribution of the Company's operations, the impact of operational changes, changes in jurisdictions in which the Company operates (including changes in regulation), failure by counterparties to fulfill contractual obligations, and other factors as may be set forth, as well as objectives or goals, and including words to the effect that the Company or management expects a stated condition to exist or occur. Since forward-looking statements address future events and conditions, by their very nature, they involve inherent risks and uncertainties. Actual results in each case could differ materially from those currently anticipated in such statements by reason of factors such as, but not limited to, the factors set out in the discussion starting on pages 17 to 20 of the 2011 Annual Report entitled "General Risks and Uncertainties", and such other documents as available on SEDAR at www.sedar.com. All such factors should be considered carefully when making decisions with respect to the Company. The Company does not undertake to update any forward-looking statements, including those statements that are incorporated by reference herein, whether written or oral, that may be made from time to time by or on its behalf, except in accordance with applicable securities laws.

Based in Moncton, New Brunswick, Major Drilling Group International Inc. is one of the world's largest metals and minerals contract drilling service companies. To support its customers' mining operations, mineral exploration and environmental activities, Major Drilling maintains operations in Canada, the United States, South and Central America, Australia, Asia, and Africa.

Financial statements are attached.

Major Drilling will provide a simultaneous webcast of its quarterly conference call on Tuesday, December 6, 2011 at 9:00 AM (EST).  To access the webcast please go to the investors/webcast section of Major Drilling's website at www.majordrilling.com and click the attached link, or go directly to the CNW Group website at www.newswire.ca  for directions.  Participants will require Windows MediaPlayer, which can be downloaded prior to accessing the call.  Please note that this is listen only mode.

1. NATURE OF ACTIVITIES

Major Drilling Group International Inc. ("the Company") is incorporated under the Canada Business Corporations Act and has its head office at 111 St. George Street, Suite 100, Moncton, NB, Canada. The Company's common shares are listed on the Toronto Stock Exchange ("TSX").  The principal source of revenue consists of contract drilling for companies primarily involved in mining and mineral exploration. The Company has operations in Canada, the United States, South and Central America, Australia, Asia and Africa.

2. BASIS OF PRESENTATION

Statement of compliance
International Financial Reporting Standards ("IFRS") require entities that adopt IFRS to make an explicit and unreserved statement, in their first annual IFRS financial statements, of compliance with IFRS. The Company will make this statement when it issues its financial statements for the year ending April 30, 2012. These financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting ("IAS 34") as issued by the International Accounting Standards Board ("IASB") and using the accounting policies the Company expects to adopt in its consolidated financial statements for the year ending April 30, 2012.

Basis of consolidation
The Interim Condensed Consolidated Financial Statements incorporate the financial statements of the Company and entities controlled by the Company. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

The results of subsidiaries acquired or disposed of during the period are included in the consolidated statement of operations from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Intra-group transactions, balances, income and expenses are eliminated on consolidation, where appropriate.

Basis of preparation
The Interim Condensed Consolidated Financial Statements have been prepared based on the accounting policies presented in the first quarter Notes to Interim Condensed Consolidated Financial Statements for the three months ended July 31, 2011.

3. FUTURE ACCOUNTING CHANGES

The Company has not applied the following new and revised IFRSs that have been issued but are not yet effective:

The Company is currently evaluating the impact of applying these standards to its Consolidated Financial Statements.

4. KEY SOURCES OF ESTIMATION UNCERTAINTY AND CRITICAL ACCOUNTING JUDGMENTS

The preparation of financial statements in conformity with IFRSs 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.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Significant areas requiring the use of management estimates relate to the useful lives of property, plant and equipment for amortization purposes, property, plant and equipment and inventory valuation, determination of income and other taxes, assumptions used in compilation of share based payments, fair value of assets acquired and liabilities assumed in business acquisitions, amounts recorded as accrued liabilities, and impairment testing of goodwill and intangible assets.

The Company applied judgment in determining the functional currency of the Company and its subsidiaries, determination of cash generating units ("CGUs"), the degree of componentization of property, plant and equipment, and the recognition of provisions and accrued liabilities.

5. FIRST TIME ADOPTION OF IFRS

For the overall impact of IFRS on the opening balance sheet as at transition date, including a discussion of the optional exemptions taken and the applicable mandatory exceptions, refer to Note 6 in the first quarter Notes to Interim Condensed Consolidated Financial Statements for the three months ended July 31, 2011.

The following reconciliations present the adjustments made to the Company's previous GAAP financial results of operations and financial position to comply with IFRS 1 First-time Adoption of International Financial Reporting Standards ("IFRS 1").  A discussion of transitional adjustments follows the reconciliations.

Adjustments required to transition to IFRS:

6. PROPERTY, PLANT AND EQUIPMENT

Changes in the property, plant and equipment balance were as follows for the periods:

There were no impairments recorded as at October 31, 2011, April 30, 2011 or October 31, 2010. The Company has assessed whether there is any indication that an impairment loss recognized in prior periods for property, plant and equipment may no longer exist or may have decreased. There were no impairments requiring reversal as at October 31, 2011, April 30, 2011 or October 31, 2010.

Capital expenditures were $16,230 and $13,289 for the three months ended October 31, 2011 and 2010 respectively, and $37,640 and $22,258 for the six months ended October 31, 2011 and 2010, respectively.  The Company obtained direct financing of $147 for the three and six months ended October 31, 2011 (three months ended October 31, 2010 - nil; six months ended October 31, 2010 - $50).

7. GOODWILL

Changes in the goodwill balance were as follows:

For a full discussion on allocation of goodwill to CGUs, refer to Note 8 in the first quarter Notes to Interim Condensed Consolidated Financial Statements for the three months ended July 31, 2011.

8. INTANGIBLE ASSETS

Changes in the intangible assets balance were as follows:

9. LONG-TERM DEBT

The required annual principal repayments per remaining fiscal years on long-term debt are as follows:

Under the terms of certain of the Company's debt agreements, the Company must satisfy certain financial covenants. Such agreements also limit, among other things, the Company's ability to incur additional indebtedness, create liens, engage in mergers or acquisitions and make dividend and other payments. The Company, at all times, was in compliance with all covenants and other conditions imposed by its debt agreements.

10. SHARE CAPITAL

On March 9, 2011, the Company announced a stock split for the issued and outstanding common shares on a three for one basis.  The record date for the stock split was March 23, 2011.  All share and stock option numbers have been retroactively adjusted to reflect the stock split to provide more comparable information.

On September 28, 2011, the Company issued a total of 5,900,000 Subscription Receipts at a price of $11.90 per Subscription Receipt for aggregate gross proceeds of $70,210.  These Subscription Receipts were subsequently converted to 5,900,000 common shares in the Company upon the closing of the acquisition by the Company of Bradley Group Limited on September 30, 2011. The Company used the net proceeds of the offering to fund a portion of the purchase price in connection with the acquisition.  On October 25, 2011, the Company issued a further 885,000 common shares for further aggregate gross proceeds of $10,531 as a result of the exercise by the underwriters of an over allotment option to purchase an additional 885,000 common shares of the Company for $11.90 per share. The Company will use the net proceeds from the over allotment exercise for general corporate purposes. 

Authorized
Unlimited number of fully paid common shares, without nominal or par value, carry one vote per share and carry a right to dividends.

The movement in the Company's issued and outstanding share capital during the period is as follows:

11. INCOME TAXES

The income tax expense for the period can be reconciled to accounting profit as follows:

12. EARNINGS PER SHARE 

All of the Company's earnings are attributable to common shares therefore net earnings are used in determining earnings per share.

The calculation of the diluted earnings per share for the three months ended October 31, 2011 and 2010 exclude the effect of 313,502 options and 899,205 options, respectively, and the six months ended October 31, 2011 and 2010 exclude the effect of 93,304 options and 1,019,205 options, respectively, as they are anti-dilutive.

13. SEGMENTED INFORMATION

The Company's operations are divided into three geographic segments corresponding to its management structure, Canada - U.S., South and Central America, and Australia, Asia and Africa. The services provided in each of the reportable drilling segments are essentially the same. The accounting policies of the segments are the same as those described in Note 4 presented in the first quarter Notes to Interim Condensed Consolidated Financial Statements for the three months ended July 31, 2011. Management evaluates performance based on earnings from operations in these three geographic segments before finance costs and income tax.  Data relating to each of the Company's reportable segments is presented as follows:

14. NET EARNINGS FOR THE YEAR 

Net earnings for the year have been arrived at after charging various employee benefit expenses as follows.  Direct costs include salaries and wages of $47,750 for the quarter ending October 31, 2011 ($31,383 for the quarter ending October 31, 2010) and other employee benefits of $9,314 for the quarter ending October 31, 2011 ($5,712 for the quarter ending October 31, 2010); general and administrative expense includes salaries and wages of $5,524 for the quarter ending October 31, 2011 ($4,249 for the quarter ending October 31, 2010) and other employee benefits of $890 for the quarter ending October 31, 2011 ($642 for the quarter ending October 31, 2010); other expenses include share based payments of $439 for the quarter ending October 31, 2011 ($619 for the quarter ending October 31, 2010).

Direct costs include salaries and wages of $87,080 for the six months ending October 31, 2011 ($59,993 for the six months ending October 31, 2010) and other employee benefits of $16,842 for the six months ending October 31, 2011 ($11,236 for the six months ending October 31, 2010); general and administrative expense includes salaries and wages of $10,705 for the six months ending October 31, 2011 ($8,250 for the six months ending October 31, 2010) and other employee benefits of $1,801 for the six months ending October 31, 2011 ($1,382 for the six months ending October 31, 2010); other expenses include share based payments of $862 for the six months ending October 31, 2011 ($1,092 for the six months ending October 31, 2010).

Amortization expense for intangible assets has been included in the line item "Depreciation and amortization" in the Interim Condensed Consolidated Statements of Operations with breakdown as follows:

15. BUSINESS ACQUISITIONS

Bradley Group Limited
Effective September 30,2011, the Company acquired all the issued and outstanding shares of Bradley Group Limited ("Bradley"), which provides a unique opportunity to further the Company's corporate strategy of focusing on specialized drilling, expanding its geographic footprint in areas of high growth and of maintaining a balance in the mix of drilling services.  The acquisition was accounted for using the acquisition method and the results of this operation were included in the statement of operations as of the closing date. The acquired business includes the assets acquired indicated below, contracts and personnel.  The purchase price for the transaction was CAD $78,035, including customary working capital adjustments and net of cash acquired, financed with cash and debt.

The Company is in the process of finalizing the valuation of assets. As at October 31, 2011, the values allocated to net tangible and intangible assets are preliminary and are subject to adjustments as additional information is obtained.

The estimated net assets acquired at fair market value at acquisition are as follows:

The Corporation incurred acquisition-related costs of $544 relating to external legal fees and due diligence costs. The legal fees and due diligence costs have been included in the other expense line of the Interim Condensed Consolidated Statements of Operations.

The revenue for the three months ended October 31, 2011 attributable to the additional business generated by Bradley was $11,434. It is impracticable to estimate the revenue and net income of the combined entity for the year as though the acquisition date was May 1, 2011.

Resource Drilling
Effective March 24, 2011, the Company acquired the assets of Resource Drilling, which provides contract drilling services in Mozambique, where Major Drilling did not previously have a presence. The acquisition was accounted for using the acquisition method and the results of this operation were included in the statement of operations as of the closing date. The acquired business includes drilling equipment, inventory, contracts and personnel.  The purchase price for the transaction was USD $9,563 (CAD $9,345), including customary working capital adjustments, financed with cash.

The net assets acquired at fair market value at acquisition are as follows:

North Star Drilling
Effective June 30, 2010, the Company acquired the assets of North Star Drilling, which provides contract drilling services to the fresh water and geothermal markets in certain mid-western states in the US, and operates from its head office in Little Falls, Minnesota, as well as from satellite offices in Brainerd and Bemidji, Minnesota. The acquisition was accounted for using the acquisition method and the results of this operation were included in the statement of operations as of the closing date. The acquired business includes working capital, drilling equipment, contracts and personnel.  The purchase price for the transaction, excluding contingent consideration, was USD $2,449 (CAD $2,567), including customary working capital adjustments of CAD $215, financed with cash.  The contingent consideration of USD $750 to the purchase price is based on future earnings. The acquiree is expected to meet target earnings, with payments to be made over the next five years.

The net assets acquired at fair market value at acquisition are as follows:

16. DIVIDENDS

The Company declared a dividend of $0.08 per common share paid on November 1, 2011 to shareholders of record as of October 10, 2011.

The Company declared two dividends during the previous year. The first dividend of $0.07333 per common share was paid on November 1, 2010 to shareholders of record as of October 8, 2010.  The second dividend of $0.07333 per common share was paid on May 2, 2011 to shareholders of record as of April 8, 2011.

17. FINANCIAL INSTRUMENTS

There are no significant changes to financial instruments compared to the Company's 2011 annual financial statements prepared under previous GAAP except for the following:

Fair value
The carrying values of cash, trade and other receivables, demand credit facility and trade and other payables approximate their fair value due to the relatively short period to maturity of the instruments.  The following table shows carrying values of short and long-term debt and contingent considerations and approximates their fair value, as most debts carry variable interest rates and the remaining fixed rate debts have been acquired recently and their carrying value continues to reflect fair value.

Credit risk
As at October 31, 2011, 84.8% of the Company's trade receivables were aged as current and 0.3% of the trade receivables were impaired.

The movement in the allowance for impairment of trade receivables during the period was as follows:

Foreign currency risk
The most significant carrying amounts of net monetary assets that: (1) are denominated in currencies other than the functional currency of the respective Company subsidiary; (2) cause foreign exchange rate exposure; and (3) may include intercompany balances with other subsidiaries, at the reporting dates are as follows:

If the Canadian dollar moved by plus or minus 10% at October 31, 2011, the unrealized foreign exchange gain or loss would move by approximately $3,539 (April 30, 2011 - $1,460).

Liquidity risk
The following table details the Company's contractual maturities for its financial liabilities.