TSX-BAD.UN
CALGARY, May 14 /CNW/ - Badger Income Fund (the "Fund" or "Badger") is pleased to announce its financial and operating results for the quarter ended March 31, 2008. Overall revenues increased by approximately 26 percent to $34.8 million for the first quarter of 2008 from $27.6 million for the same period in 2007, due to a 29 percent increase in Canadian revenues and a 20 percent increase in United States revenues. As a result of the increase in revenues, EBITDA and funds generated from operations also increased over the same period of 2007. Badger's EBITDA increased to $10.0 million in the first quarter of 2008 from $7.8 million in the same quarter of 2007, while funds generated from operations increased to $9.7 million in the first quarter of 2008 from $7.6 million in the same quarter of 2007.
FINANCIAL HIGHLIGHTS
($ thousands, except per unit and total units outstanding information)
Three months ended Three months ended
March 31, 2008 March 31, 2007
-----------------------------------
Revenues 34,774 27,574
EBITDA(1) 10,045 7,849
Earnings before income taxes 6,777 5,217
Taxes
Current 254 187
Future 1,240 801
Net earnings 5,283 4,230
Net earnings per unit - diluted ($) 0.49 0.39
Funds generated from operations(2) 9,687 7,585
Funds generated from operations
per unit - diluted ($) 0.89 0.70
Maintenance capital expenditures(3) - 667
Long-term debt repayments 55 27
Cash available for growth and
distribution(4) 9,967 7,015
Cash distributions declared 3,391 3,389
Growth capital expenditures(3) 5,451 2,153
Total units outstanding 10,773,419 10,758,618
The following financial measures do not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP) and may not be comparable to similar measures as presented by other funds or entities:
(1) Earnings before interest, taxes, depreciation and amortization (EBITDA) is a measure of the Fund's operating profitability and is therefore useful to management and investors. EBITDA provides an indication of the results generated by the Fund's principal business activities prior to how these activities are financed, assets are amortized or how the results are taxed in various jurisdictions. EBITDA is calculated from the Consolidated Statements of Earnings and Comprehensive Income and Retained Earnings as gross margin, less selling, general and administrative costs and foreign exchange loss (gain).
(2) Funds generated from operations is used to assist management and investors in analyzing operating performance and leverage. It is not intended to represent operating cash flow or operating profits for the period nor should it be viewed as an alternative to cash flow from operating activities, net earnings or other measures of financial performance calculated in accordance with GAAP. Funds generated from operations is calculated from the Consolidated Statements of Cash Flows and is defined as cash provided by operating activities before changes in non-cash working capital.
(3) Maintenance capital expenditures is defined as the amount incurred during the period to keep the Fund's daylighting fleet at the same number of units, plus any other capital expenditures required to maintain the existing business. It also includes any costs incurred to enhance the operational life of a daylighting unit. This amount will fluctuate from period-to-period depending on the number of units retired from the fleet. During the three-month period ended March 31, 2008, Badger added 18 units to the fleet and did not remove any from service. As a result all of the units added during the three months ended March 31, 2008 represent growth capital expenditures, while none of the units represent maintenance capital expenditures. The economic life of a Badger hydrovac is approximately 10 years. The average age of the fleet is approximately four-and-a-half years. Growth capital expenditures exclude acquisitions made during the period.
(4) Cash available for growth and distribution is used by management to supplement cash flow as a measure of operating performance and leverage. The objective of this measure is to calculate the amount which is available for distribution to unitholders. It is defined as funds generated from operations, less required debt repayments and maintenance capital expenditures, plus any proceeds received on the disposal of assets.
OPERATIONAL SUMMARY
1. We were pleased with the 28 percent revenue growth in the Western
Canadian operations during the first quarter of 2008 over the first
quarter of 2007. We benefited from steady utilization of the
hydrovacs, most of which were on large projects during the quarter,
and a general good activity level in the field.
2. Eastern Canadian operational revenue was negatively affected by poor
regional weather conditions during the first quarter, which slowed
or postponed construction activity in the region. The addition of
Benko Sewer Service on April 1, 2007 helped Badger's Eastern
Canadian operations grow in the first quarter of 2008.
3. United States operations grew revenues by 20 percent in the first
quarter of 2008 over the first quarter of 2007. This increase was
the result of continued good markets in the Western United States
region and revenue generated from the investment made in new areas
in the Eastern United States in 2007. The Eastern United States
region benefited from good utilization due to a couple of
construction projects that required several additional trucks to
keep up with demand.
4. Revenue per truck per month was $30,400 for the three months ended
March 31, 2008, compared to $30,000 in the first three months of
2007. The Badger business model works well at an overall fleet
average of $25,000 or more per truck per month.
5. Badger had 352 daylighting units at the end of the first quarter of
2008, reflecting the addition of 18 daylighting units to the fleet
to date in 2008 and the retirement of no units. The Fund had 334
units at December 31, 2007.
INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis (MD&A) should be read in conjunction with the attached unaudited interim consolidated financial statements of Badger Income Fund (the "Fund" or "Badger"). Readers should also refer to the audited consolidated financial statements and Management's Discussion and Analysis included in Badger Income Fund's 2007 Annual Report. Additional information is also available on the Fund's website (www.badgerinc.com) and all previous public filings, including the most recently filed Annual Information Form, are available through SEDAR (www.sedar.com).
This Management's Discussion and Analysis has been prepared taking into consideration information available to May 13, 2008.
Disclaimer
Certain statements contained in the quarterly report, including statements contained in the MD&A, constitute forward-looking statements. These statements relate to future events or Badger's future performance. All statements other than statements of historical fact may be forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or events to differ materially from those anticipated in such forward-looking statements. Other factors include, but are not limited to: the future tax treatment of income trusts; supply-demand fluctuations for oil and natural gas and related products and services; political and economic conditions; the demand for services provided by Badger; industry competition; and Badger's ability to attract and retain key personnel. The Fund believes that the expectations reflected in these forward-looking statements are reasonable; however, no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this quarterly report should not be unduly relied upon. In addition, these forward-looking statements relate to the date on which they are made. Badger disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Results of Operations
Revenues
Revenues of $34.8 million for the three months ended March 31, 2008 were 26 percent higher than the $27.6 million in revenues generated during the comparable period of 2007. The increase is attributable to the following:
(1) In the United States revenues increased to $11.3 million from
$9.4 million period-over-period. This 20 percent increase is due to
Badger's continued focus in certain geographical areas and market
segments, which has resulted in an increased customer base and demand
for hydrovac services. Other factors included increased activity
related to oilfield service in the Western United States and good
project work in the Eastern United States.
(2) In Western Canada revenues increased by $3.8 million or 28 percent in
the first quarter of 2008 over the first quarter of 2007. The
increase was due to a general increase in demand for hydrovac
services in various areas and good project work.
(3) Eastern Canada revenue, excluding the added revenue from the Benko
Sewer Service acquisition made in the second quarter for 2007,
decreased by 7 percent period-over-period due to poor winter weather
conditions.
Badger's average revenue per truck per month during the three months ended March 31, 2008 was $30,400 versus $30,000 per month for the three months ended March 31, 2007.
Included in revenues is approximately $528,000 of truck placement and franchise fees for the three months ended March 31, 2008, versus $502,000 for the three months ended March 31, 2007.
Direct Costs
Direct costs for the quarter ended March 31, 2008 were $22.1 million compared to $17.6 million for the quarter ended March 31, 2007. This is consistent with the increase in revenues. During the quarter Badger reclassified certain United States expenses, previously included in selling, general and administrative expenses, to direct costs to better reflect the nature of those expenses. The comparative figures in 2007 have also been reclassified to conform to the current period's presentation.
Gross Margin
Gross margin was 36.4 percent for the quarter ended March 31, 2008, a modest increase from the 36.3 percent for the quarter ended March 31, 2007.
Amortization
Amortization of property, plant and equipment was $2.9 million for the three months ended March 31, 2008, $0.5 million higher than the $2.4 million for the three months ended March 31, 2007. This increase reflects the larger number of hydrovac units in the fleet. Included in this figure is approximately $49,000 related to amortization of intangible assets with a limited life.
Interest Expense
Interest expense was $383,000 for the quarter ended March 31, 2008 versus $227,000 for the quarter ended March 31, 2007. The higher interest expense is attributable to maintaining a higher balance of debt during the first quarter of 2008 than in the first quarter of 2007. The increased debt was used to fund growth capital expenditures and business acquisitions made in 2007.
Selling, General and Administrative
Selling, general and administrative expenses were $2.6 million for the quarter ended March 31, 2008 compared to $2.1 million for the quarter ended March 31, 2007. As a percentage of revenues, selling, general and administrative expenses were 7.4 percent for the first quarter of 2008, which is consistent with the 7.5 percent recorded for the first quarter of 2007. The increase is due to incurring non-cash compensation expense of $231,000 for the first quarter ended 2008 versus $62,000 in the first quarter of 2007, added costs due to the acquisition of service rights from certain of the Canadian Operating Partners in the second and fourth quarter of 2007, costs associated with Benko Sewer Service, which was acquired in the second quarter of 2007, and higher general office costs to support the growth in business.
During the quarter Badger reclassified certain United States expenses, previously included in selling, general and administrative expenses, to direct costs to better reflect the nature of those expenses. The comparative figures in 2007 have also been reclassified to conform to the current period's presentation.
Income Taxes
The effective tax rate for the quarter ended March 31, 2008 was 22 percent versus 19 percent for the quarter ended March 31, 2007. For the remainder of 2008 the Fund anticipates an effective tax rate of 22 percent.
The minimal effective tax rate overall is due to the trust structure, which results in tax-deductible distributions being made to unitholders.
Liquidity and Capital Resources
Funds generated from operations for the quarter ended March 31, 2008 increased to $9.7 million from $7.6 million for the comparable period in 2007 due to stronger Canadian and United States activity levels.
The Fund had working capital of $22.7 million at March 31, 2008 compared to $19.7 million at December 31, 2007. The increase was predominantly due to increased revenues resulting in an increase in the Fund's accounts receivable balance. Good levels of cash flow from operations allowed Badger to build new daylighting units while maintaining a healthy working capital position.
In May 2008, the Fund's extendable, revolving credit facility was renewed and amended to increase the maximum principal amount to $40 million from $30 million. The facility is used to fund working capital requirements and finance capital expenditures, of which $25.4 million was drawn at March 31, 2008. The Fund will utilize an appropriate mix of debt and equity to finance its maintenance capital expenditures and growth initiatives.
The Fund spent $5.5 million on property, plant and equipment for the three months ended March 31, 2008, compared to $2.8 million for the three months ended March 31, 2007. The Fund added 18 units to the fleet in the first quarter of 2008, compared to 15 units in the first quarter of 2007. The 2007 expenditures figure does not include $2.7 million in capital expenditures that Badger incurred in 2006 which related to construction of the units in the first quarter of 2007.
In addition to the above, as at March 31, 2008 the Fund had committed to certain capital expenditures totalling approximately $8.1 million. These capital expenditures will be financed with existing credit facilities and funds generated from operations, as well as alternative sources of financing as required. There are no set terms for remitting payment for these financial obligations.
Management believes that the Fund's healthy balance sheet and unutilized borrowing capacity, combined with funds generated from operations, will provide sufficient capital to fund ongoing operations, make distributions to unitholders, finance future capital expenditures and execute its strategic plan for the foreseeable future.
Number of Daylighting Units
During the three-month period ended March 31, 2008 Badger added six units to the Canadian fleet and transferred two to the United States, bringing the total to 220 units operating in Canada as at March 31, 2008. In the United States, Badger added 12 units and received two which were transferred from Canada, bringing the total number of units in the United States to 132 at March 31, 2008.
Distributions
The following table outlines the cash available to fund growth and pay distributions to unitholders for the three months ended March 31, 2008:
Cash provided by operating activities $6,816,378
Add (deduct): net change in non-cash working capital 2,871,102
-----------
Funds generated from operations 9,687,480
Add: proceeds on disposal of property, plant and equipment 334,470
Deduct: required repayments of long-term debt (54,693)
Deduct: maintenance capital expenditures -
-----------
Cash available for growth capital expenditures and
distributions $9,967,257
-----------
-----------
Growth capital expenditures $5,451,469
-----------
-----------
Cash distributions declared $3,391,159
-----------
-----------
In determining cash available for distributions the Fund excludes non-cash working capital changes for the period as well as growth capital expenditures. Changes in non-cash working capital items have been excluded so as to remove the effects of timing differences in cash receipts and disbursements, which generally reverse themselves and can vary significantly between fiscal quarters. Growth capital expenditures have been excluded so as to include only the maintenance capital expenditures required for the sustainability of the existing asset base.
The following table outlines the excess (shortfall) of cash provided by operating activities and net earnings over cash distributions declared during the quarter ended March 31, 2008 and the year ended December 31, 2007:
March 31, 2008 December 31, 2007
$ $
Cash provided by operating activities 6,816,378 24,432,856
Net earnings 5,282,897 16,722,845
Cash distributions declared 3,391,159 13,558,421
Excess (shortfall) of cash provided by
operating activities over cash
distributions declared 3,425,219 10,874,435
Excess (shortfall) of net earnings over
cash distributions declared 1,891,738 3,164,424
The Fund makes regular monthly cash distributions to unitholders. These cash distributions may be reduced, increased or suspended entirely by the trustees depending on the operations of Badger and the performance of its assets. The actual cash flow available for distribution to holders of Fund units is a function of numerous factors, including: the Fund's financial performance; debt covenants and obligations; working capital requirements; maintenance and growth capital expenditure requirements for the purchase of property, plant and equipment; and the number of units outstanding. It may also be impacted by the future tax treatment of income trusts.
The Fund maintains a strong balance sheet and has sufficient debt facilities to manage its short-term funding needs as well as planned equipment additions. Part of the debt management strategy involves retaining sufficient funds from available distributable cash to finance maintenance capital expenditures as well as working capital needs. Growth capital expenditures will generally be financed through existing debt facilities or cash retained from operating activities. The majority of the cash provided by operating activities was used to finance maintenance and growth capital expenditures and to pay distributions to unitholders. Cash which was not distributed to unitholders was used to finance growth capital expenditures.
If maintenance capital expenditures increase in future periods, the Fund's cash available for growth capital expenditures and distribution will be negatively affected. Due to Badger's growth rate in recent years, the majority of the Fund's hydrovac units are relatively new, with an average age of approximately four-and-a-half years. As a result, Badger is currently experiencing relatively low levels of maintenance capital expenditures. Over time, Badger would expect to incur annual maintenance capital expenditures in an amount that approximates the amortization expense reported in the year. Badger expects that continued increases in cash provided by operations and cash available for growth capital expenditures and distributions will be sufficient to fund the maintenance capital expenditures in the future.
Badger is restricted from declaring distributions and distributing cash if it is in breach of the covenants under its credit facilities. As at the date of this quarterly report the Fund is in full compliance with all debt covenants and is able to fully utilize all existing credit facilities. Badger does not have a stability rating.
Unitholders' Capital
Unitholders' capital increased by $233,850 during the three months ended March 31, 2008. This was the result of the Fund issuing 11,751 units from its long-term incentive plan as payment for 2007 performance bonuses payable to management.
The total units outstanding at March 31, 2008 were 10,773,419. There was no change to the balance as of May 13, 2008.
Selected Quarterly Financial Information
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Quarter Ended
-------------------------------------------------------------------------
2008 2007
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Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
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Revenues ($) 34,774,334 33,356,010 31,741,950 25,015,707 27,574,051
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Net earnings ($) 5,282,897 5,816,949 5,136,223 1,539,755 4,229,918
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Net earnings per
unit - basic ($) 0.49 0.54 0.48 0.14 0.39
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Net earnings per
unit - diluted ($) 0.49 0.54 0.48 0.14 0.39
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------------------------------------------------------
Quarter Ended
------------------------------------------------------
2006
------------------------------------------------------
Dec. 31 Sept. 30 June 30
------------------------------------------------------
Revenues ($) 25,621,658 25,324,030 21,696,318
------------------------------------------------------
Net earnings ($) 4,659,784 3,974,958 2,841,459
------------------------------------------------------
Net earnings per
unit - basic ($) 0.43 0.37 0.26
------------------------------------------------------
Net earnings per
unit - diluted ($) 0.43 0.37 0.26
------------------------------------------------------
Changes in Accounting Policies
As of January 1, 2008, the Fund prospectively adopted the following sections from the Handbook of the Canadian Institute of Chartered Accountants (CICA):
- Section 1535 "Capital Disclosures" requires the disclosure of qualitative and quantitative information about the Fund's objectives, policies and processes for managing capital; - Sections 3862 "Financial Instruments - Disclosures" and 3863 "Financial Instruments - Presentation" will replace Section 3861 to prescribe the requirements for presentation and disclosure of financial instruments; and - Section 3031 "Inventories", which prescribes the recognition, measurement, disclosure and presentation issues related to inventories.
There is no material impact to the Fund's consolidated financial statements as a result of implementing the new standards.
For a detailed discussion about the accounting policies adopted, refer to Note 2 of the interim consolidated financial statements for the three-month period ended March 31, 2008.
Internal Control Over Financial Reporting
Internal control over financial reporting (ICFR) is designed to provide reasonable assurance regarding the reliability of the Fund's financial reporting and its compliance with Canadian GAAP in its financial statements. The President and CEO and the VP Finance and CFO have evaluated whether there were any changes to the Fund's ICFR during the three months ended March 31, 2008 that have materially affected or are reasonably likely to materially affect the ICFR. No such changes were identified through their evaluation.
Business Risks
The MD&A for the year ended December 31, 2007, which is included in the Fund's 2007 Annual Report, includes an overview of business risks associated with the Fund. Those business risks remain in effect. Reference should also be made to Badger's 2007 Annual Information Form.
OUTLOOK
Badger is cautiously optimistic that reasonable market conditions will continue for its services for the foreseeable future, allowing the Fund to continue to grow during the remainder of 2008. The strengthening of Badger's operational management team plus added United States service locations should help fuel growth in this important market. While the Western Canada region will have decreased activity during the quarter with the normal spring break-up, Badger fully expects its Eastern Canada region to have increased activity after a tough winter. The production enhancements made at Badger's Red Deer manufacturing facility during the first quarter will allow Badger to increase production of Badger units required by growing markets. Badger plans to continue to build units at approximately the same rate as in the first quarter, which averaged six trucks per month.
REVIEW OF INTERIM FINANCIAL STATEMENTS
Under National Instrument 51-102, Part 4, subsection 4.3(3) (a), if an auditor has not performed a review of the interim financial statements, the statements must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
The accompanying unaudited interim consolidated financial statements of the Fund have been prepared by Badger Income Fund's management.
The Fund's independent auditor has not performed a review of the accompanying unaudited interim consolidated financial statements in accordance with standards established by the CICA for a review of interim financial statements by an entity's auditor.
BADGER INCOME FUND
Unaudited Consolidated Balance Sheets
March 31, December 31,
2008 2007
$ $
--------------------------
ASSETS
Current
Cash 1,430,137 1,477,078
Accounts receivable 31,250,655 28,318,106
Inventories 2,158,202 1,690,133
Prepaid expenses 1,360,451 1,031,513
--------------------------
36,199,445 32,516,830
Property, plant and equipment 73,953,333 71,672,820
Intangible assets 4,938,512 4,987,512
Goodwill 1,621,000 1,621,000
--------------------------
116,712,290 110,798,162
--------------------------
--------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 11,984,153 11,269,139
Income taxes payable 170,527 212,540
Distributions payable 1,131,209 1,129,975
Current portion of long-term debt 218,768 218,768
--------------------------
13,504,657 12,830,422
Long-term debt 27,678,847 26,035,242
Future income taxes 14,740,936 13,500,936
--------------------------
55,924,440 52,366,600
--------------------------
Unitholders' equity
Unitholders' capital (note 3) 43,772,105 43,538,255
Contributed surplus (note 4) 1,866,700 1,636,000
Retained earnings 15,149,045 13,257,307
--------------------------
60,787,850 58,431,562
--------------------------
116,712,290 110,798,162
--------------------------
--------------------------
See accompanying notes
BADGER INCOME FUND
Unaudited Consolidated Statements of Earnings and Comprehensive Income
and Retained Earnings
31-Mar-08 31-Mar-07
$ $
--------------------------
Revenues 34,774,334 27,574,051
Direct costs 22,102,022 17,570,177
--------------------------
Gross margin 12,672,312 10,003,874
--------------------------
Expenses
Amortization 2,891,679 2,391,831
Loss (gain) on sale of property, plant and
equipment (6,193) 13,119
Interest - long-term 382,677 226,950
Selling, general and administrative 2,578,468 2,068,049
Foreign exchange loss (gain) 48,397 86,707
--------------------------
5,895,028 4,786,656
--------------------------
Earnings before income taxes 6,777,284 5,217,218
--------------------------
Income taxes
Current 254,387 186,650
Future 1,240,000 800,650
--------------------------
1,494,387 987,300
--------------------------
Net earnings and comprehensive income for the
period 5,282,897 4,229,918
Retained earnings, beginning of period 13,257,307 10,092,883
Cash distributions (3,391,159) (3,388,964)
--------------------------
Retained earnings, end of period 15,149,045 10,933,837
--------------------------
--------------------------
Net earnings per unit (note 5)
Basic 0.49 0.39
--------------------------
--------------------------
Diluted 0.49 0.39
--------------------------
--------------------------
See accompanying notes
BADGER INCOME FUND
Unaudited Consolidated Statements of Cash Flows
31-Mar-08 31-Mar-07
$ $
--------------------------
Operating activities
Net earnings and comprehensive income for the
period 5,282,897 4,229,918
Add (deduct) items not involving cash:
Amortization 2,891,679 2,391,831
Future income taxes 1,240,000 800,650
Unit-based compensation 230,700 62,400
Foreign exchange loss (gain) 48,397 86,707
Loss (gain) on sale of property, plant and
equipment (6,193) 13,119
--------------------------
9,687,480 7,584,625
Net change in non-cash working capital relating
to operating activities (2,871,102) (1,956,942)
--------------------------
6,816,378 5,627,683
--------------------------
Financing activities
Proceeds from long-term debt 1,698,298 1,861,171
Repayment of long-term debt (54,693) (27,192)
Distributions to unitholders (3,389,925) (3,388,964)
--------------------------
(1,746,320) (1,554,985)
--------------------------
Investing activities
Purchase of property, plant and equipment (5,451,469) (2,819,984)
Proceeds on disposal of property, plant and
equipment 334,470 124,745
Net change in non-cash working capital relating
to investing activities - (938,434)
--------------------------
(5,116,999) (3,633,673)
--------------------------
Increase (decrease) in cash during the period (46,941) 439,025
Cash, beginning of period 1,477,078 1,319,912
--------------------------
Cash, end of period 1,430,137 1,758,937
--------------------------
--------------------------
See accompanying notes
Notes to the Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
The unaudited interim consolidated financial statements include the
accounts of Badger Income Fund ("Badger" or the "Fund") and its wholly-
owned subsidiaries and have been prepared by management in accordance
with Canadian generally accepted accounting principles (GAAP). These
unaudited interim consolidated financial statements for the three months
ended March 31, 2008 have been prepared following the same accounting
policies and methods of application as the audited consolidated financial
statements of the Fund for the fiscal year ended December 31, 2007,
except as noted below in Note 2. The disclosures provided below are
incremental to those included in the Fund's annual audited consolidated
financial statements. The unaudited interim consolidated financial
statements and the related notes should be read in conjunction with the
audited consolidated financial statements and the related notes in the
Fund's Annual Report for the year ended December 31, 2007.
Accounting measurements at interim dates inherently involve greater
reliance on estimates than at year-end and the results of operations for
the interim periods shown in these statements are not necessarily
indicative of results to be expected for the fiscal year. In the opinion
of management, the accompanying unaudited interim consolidated financial
statements include all adjustments (of a normal recurring nature)
necessary to present fairly the consolidated results of the Fund's
operations and cash flows for the three months ended March 31, 2008 and
2007.
Certain comparative figures have been reclassified to conform to the
current period's presentation.
2. Changes in Accounting Policies
As of January 1, 2008 the Fund adopted the Canadian Institute of
Chartered Accountants (CICA) Handbook Section 1535 "Capital Disclosures",
Section 3862 "Financial Instruments - Disclosures", Section 3863
"Financial Instruments - Presentation" and Section 3031 "Inventories".
The provisions have been adopted and included in these consolidated
financial statements in Notes 6 and 7. As required by the new standards,
prior periods have not been restated.
The adoption of these standards has had no material impact on the Fund's
net earnings or cash flows. The other effects of the implementation of
the new standards are discussed below.
3. Unitholders' Capital
Units Amount ($)
------------------------
December 31, 2007 10,761,668 43,538,255
Units issued under the Incentive Plan 11,751 233,850
------------------------
March 31, 2008 10,773,419 43,772,105
------------------------
------------------------
The Fund declared distributions of $0.105 per unit for each of the months
of January, February and March for a total of $3,391,159.
4. Unit-Based Compensation
A summary of the unit option transactions for the three months ended
March 31, 2008 is as follows:
-------------------------------------------------------------------------
Three months ended
March 31, 2008
Weighted
average
exercise
Units price $
-------------------------------------------------------------------------
Outstanding at beginning of period 505,000 16.86
Granted - -
Exercised - -
Forfeited - -
-------------------------------------------------------------------------
Outstanding at end of period 505,000 16.86
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
Weighted
average Weighted Number Weighted
Outstanding remaining average exercisable average
at March 31, contractual exercise at March 31, exercise
Price 2008 life price 2008 price
-------------------------------------------------------------------------
$17.50 160,000 3.1 $17.50 53,333 $17.50
$17.45 50,000 3.4 $17.45 16,666 $17.45
$16.41 295,000 4.1 $16.41 - -
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The Fund recorded compensation expense, included as part of selling,
general and administrative expenses, of $230,700 with an offsetting
increase to contributed surplus for the three months ended March 31,
2008.
5. Net Earnings per Unit
Basic per unit calculations for the three months ended March 31, 2008 and
2007 were based on the weighted average number of units outstanding of
10,762,443 and 10,758,618, respectively. Diluted per unit calculations
for the three months ended March 31, 2008 and 2007 were based on the
weighted average number of units outstanding of 10,831,526 and
10,758,618, respectively. The difference between the basic and diluted
units was attributable to the dilutive effect of the unit options
outstanding.
6. Capital Management
The Fund's strategy is to carry a capital base to maintain investor,
creditor and market confidence and to sustain future development of the
business. The Fund seeks to maintain a balance between the level of net
debt and unitholders' equity to ensure access to capital markets to fund
growth and working capital. On a historical basis, the Fund has
maintained a conservative ratio of net debt to net debt plus
unitholders' equity. The Fund may occasionally need to increase these
levels to facilitate acquisition or expansion activities. As at March 31,
2008 and December 31, 2007 this ratio was as follows:
March 31, 2008 December 31, 2007
Long-term debt $27,897,615 $26,254,010
Cash (1,430,137) (1,477,078)
----------- -----------
Net debt 26,467,478 24,776,932
Unitholders' equity 60,787,850 58,431,562
---------- ----------
Total capitalization $87,255,328 $83,208,494
----------- -----------
Net debt to total capitalization (%) 30% 30%
--- ---
The Fund sets the amounts of its various forms of capital in proportion
to risk. The Fund manages the capital structure and makes adjustments to
it in light of changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain or adjust
the capital structure, the Fund may adjust the amount of distributions to
unitholders, return capital to unitholders, issue new units, or sell
assets to reduce net debt.
The Fund is bound by certain financial and non-financial covenants as
defined by its bank. If the Fund is in violation of any of these
covenants its ability to pay distributions may be inhibited. The Fund
monitors these covenants to ensure it remains in compliance. Throughout
2007 and year-to-date 2008, and as at March 31, 2008, the Fund was in
compliance with all of these covenants.
As a result of the Canadian trust taxation legislation passed in June
2007 and effective January 1, 2011, the Fund is subject to certain
capital growth restrictions referred to as "normal growth" equity rules.
These rules limit the amount of unitholders' capital that can be issued
by the Fund in each of the next three years, based on the Fund's market
capitalization on October 31, 2006. Badger is constrained by a non-
cumulative capacity of $50 million per year until 2010 plus approximately
$8 million capacity from debt outstanding at October 31, 2006.
If the maximum allowed equity growth is exceeded, the Fund may be subject
to the trust taxation prior to 2011.
In addition to growth capital restrictions, the Fund also monitors its
foreign ownership levels to the extent possible given the practical
limitations regarding beneficial ownership information. The Fund
Declaration of Trust, under which the Fund was created, provides that no
more than 49 percent of the units of the Fund can be held by non-Canadian
residents. The potential impact of breaching this threshold may be the
loss of mutual fund trust status, which may significantly adversely
impact the valuation of the units. At March 31, 2008, the Fund's best
estimate of the foreign ownership level was 23 percent.
There were no changes in the Fund's approach to capital management during
the quarter.
7. Financial Instruments and Risk Management
Fair Values
The Fund's financial instruments recognized on the interim consolidated
balance sheet consist of cash, accounts receivable, accounts payable,
income taxes payable, distributions payable and long-term debt. The fair
values of these recognized financial instruments, excluding long-term
debt, approximate their carrying value due to their short-term maturity.
The carrying value of the long-term debt approximates fair value because
each of the long-term facilities has a floating interest rate.
Credit Risk
A substantial portion of the Fund's accounts receivable balance is with
customers in the petroleum and utility industries and is subject to
normal industry credit risks. The Fund manages its exposure to credit
risk through standard credit granting procedures and short payment terms.
The Fund attempts to monitor financial conditions of its customers and
the industries in which they operate.
Interest Rate Risk
The Fund is exposed to interest rate risk in relation to interest expense
on its long-term debt. Interest is calculated at prime to prime plus for
certain of its borrowing facilities. The prime interest rate is subject
to change. The Fund does not currently use interest rate hedges or fixed
interest rate contracts to manage the Fund's exposure to interest rate
fluctuations.
Foreign Exchange Risk
The Fund has United States operations and its Canadian operations
purchase certain products in United States dollars. As a result,
fluctuations in the value of the Canadian dollar relative to the
United States dollar can result in foreign exchange gains and losses. The
Fund does not currently have any agreements to fix the exchange rate of
the Canadian dollar to the United States dollar.
Liquidity Risk
Liquidity risk is the risk that, as a result of operational liquidity
requirements, the Fund will not have sufficient funds to settle a
transaction on the due date, will be forced to sell financial assets at a
value which is less than what they are worth, or will be unable to settle
or recover a financial asset.
The Fund's operating cash requirements are continuously monitored by
management. As factors impacting cash requirements change, liquidity
risks may necessitate the need for the Fund to raise capital by issuing
equity or obtaining additional debt financing. The Fund also mitigates
liquidity risk by maintaining an insurance program to minimize exposure
to insurable losses.
At March 31, 2008, the Fund had available $4.6 million of authorized
borrowing capacity on the extendable revolving facility, which was
increased by an additional $10 million upon renewal of the facility in
May 2008. The Fund believes it has sufficient funding through operations
and the use of this facility to meet foreseeable financial obligations.
8. Comparative Figures
Certain of the comparative figures have been reclassified to conform to
the current period's presentation.
9. Subsequent Events
a) In May 2008, the Fund's extendable, revolving facility was renewed and
amended to increase the maximum principal amount to $40 million from
$30 million.
b) In May 2008 the Fund purchased land and buildings in Canada for cash
consideration of $4,300,000.
10. Segmented Information
The Fund operates in two geographic/reportable segments providing
daylighting services to each of these segments. The following is selected
financial information for the three months ended March 31, 2008 and 2007
based on these geographic segments.
Three months ended March 31, 2008
--------------------------------------
Canada ($) USA ($) Total ($)
Revenues 23,469,612 11,304,722 34,774,334
Direct costs 14,617,042 7,484,980 22,102,022
Selling, general and
administrative 1,914,270 664,198 2,578,468
EBITDA (x) 6,939,261 3,106,186 10,045,447
Amortization 1,874,040 1,017,639 2,891,679
Earnings before income taxes 4,691,368 2,085,916 6,777,284
Property, plant and equipment 45,849,863 28,103,470 73,953,333
Intangible assets 4,938,512 - 4,938,512
Goodwill 1,621,000 - 1,621,000
Total assets 77,217,136 39,495,154 116,712,290
Capital expenditures 2,044,516 3,406,953 5,451,469
Three months ended March 31, 2007
--------------------------------------
Canada ($) USA ($) Total ($)
Revenues 18,147,663 9,426,388 27,574,051
Direct costs 11,303,052 6,267,125 17,570,177
Selling, general and
administrative 1,403,457 664,592 2,068,049
EBITDA (x) 5,427,011 2,422,107 7,849,118
Amortization 1,661,652 730,179 2,391,831
Earnings before income taxes 3,527,800 1,689,418 5,217,218
Property, plant and equipment 42,841,750 19,816,362 62,658,112
Intangible assets 1,551,336 - 1,551,336
Goodwill - - -
Total assets 63,711,634 29,218,444 92,930,078
Capital expenditures 278,865 2,541,119 2,819,984
(x) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is a measure of the Fund's operating profitability and is
therefore useful to management and investors. EBITDA provides an
indication of the results generated by the Fund's principal business
activities prior to how these activities are financed, assets are
amortized or how the results are taxed in various jurisdictions.
EBITDA is calculated from the Consolidated Statements of Earnings and
Comprehensive Income and Retained Earnings as gross margin, less
selling, general and administrative costs and foreign exchange loss
(gain).
Badger Income Fund is an open-ended trust that is North America's largest provider of non-destructive excavating services. Badger traditionally works for contractors and facility owners in the utility and petroleum industries. Our key technology is the Badger Hydrovac, which is used primarily for safe digging in congested grounds and challenging conditions. The Badger Hydrovac uses a pressurized water stream to liquefy the soil cover, which is then removed with a powerful vacuum system and deposited into a storage tank. Badger manufactures its truck-mounted hydrovac units.
Badger Income Fund's business model involves the provision of excavating services through two distinct entities: the Operating Partners (franchisees in the United States and agents in Canada), and Badger Corporate. Badger Corporate works with its Operating Partners to provide Hydrovac service to the end user. In this partnership, Badger provides the expertise, the trucks, and North American marketing and administration support. The Operating Partners deliver the service by operating the equipment and developing their local markets. All work is invoiced by Badger and then shared with the Operating Partner based upon a revenue sharing formula. In various locations Badger has established corporate run operations to market and deliver the service in the local area.
The Toronto Stock Exchange has neither approved nor disapproved the
information contained herein.
%SEDAR: 00020566E