TSX-BAD.UN
CALGARY, Aug. 14 /CNW/ - Badger Income Fund (the "Fund" or "Badger") is pleased to announce its results for the second quarter of 2007. Overall revenues increased by approximately 15 percent to $25.0 million for the three months ended June 30, 2007 from $21.7 million for the same period in 2006, due to a 7 percent increase in Canadian revenues and a 34 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 2006. Badger's EBITDA increased to $6.3 million in the second quarter from $6.1 million in the same quarter of 2006.
Growth of the Fund's EBITDA was negatively impacted by increases in corporate selling, general and administrative expenses and by lower-than-expected margins in Canadian corporate operations during the quarter. Net earnings decreased to $1.5 million or $0.14 per unit in the second quarter of 2007 from $2.8 million or $0.26 per unit in the same period of 2006. The main reason for the reduction was the substantive enactment of Bill C-52, the Budget Implementation Act, 2007, which contains legislative provisions to tax publicly traded income trusts in Canada. The financial effect on Badger of recording the impact of this legislation was an increase in future income tax expense of $1.6 million or a decrease in net earnings of $0.15 per unit. Also during the second quarter Badger completed the acquisition of service rights from three of its Canadian Operating Partners for cash consideration of $4.0 million and finalized the acquisition of Benko Sewer Service effective April 1, 2007 for cash consideration of $4.1 million.
FINANCIAL HIGHLIGHTS
($ thousands, except per unit results and total units outstanding
figures)
Three Months Ended Six Months Ended
June 30 June 30
2007 2006 2007 2006
-----------------------------------------------
Revenues 25,016 21,696 52,590 47,425
EBITDA(1) 6,342 6,054 14,191 14,085
Earnings before
income taxes 3,577 3,790 8,795 9,706
Taxes
Current 136 126 323 310
Future 1,901 823 2,702 1,534
Net earnings 1,540 2,841 5,770 7,862
Net earnings per unit -
diluted ($) 0.14 0.26 0.54 0.73
Funds generated
from operations(2) 6,509 6,027 14,093 13,777
Funds generated from
operations per unit -
diluted ($) 0.60 0.56 1.31 1.28
Maintenance capital
expenditures(3) 964 1,263 1,631 1,898
Long-term debt repayments 27 27 54 54
Cash available for growth
and distribution(4) 5,679 5,164 12,694 12,355
Cash distributions
declared 3,390 3,312 6,779 6,470
Growth capital
expenditures(3) 2,937 2,908 5,090 7,783
Total units outstanding,
end of period 10,761,668 10,752,730 10,761,668 10,752,730
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 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 are 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 June 30, 2007, Badger added 18 units
to the fleet and removed three from service. As a result, 15 of the units
added during the three months ended June 30, 2007 represent growth
capital expenditures, while three of the units added represent
maintenance capital expenditures. During the six months ended June 30,
2007 Badger added 33 units to the fleet, of which five have been
reflected as maintenance capital expenditures. The economic life of a
Badger hydrovac is approximately 10 years. The average age of the fleet
is approximately four 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 - SECOND QUARTER 2007
1. Badger's Western Canada operations managed to grow revenue in the
quarter despite difficulties from road weight restrictions caused by
wet weather during spring break-up. Corporate operations have now
been organized under one manager who will focus on future growth and
cost control, which was weak in the past.
2. In Eastern Canada the results indicated overall growth although there
was some negative impact due to a strike hitting part of the
construction sector. Badger now has very good market coverage in
Ontario.
3. The United States operations achieved very good results with the
trucks delivered last year contributing to revenue growth in the
second quarter. Badger has continued to add trucks and franchises in
2007.
4. Effective April 1, 2007 Badger purchased Benko Sewer Service for
$4.1 million cash. Benko Sewer Service is a well-managed company in
Eastern Canada that provides sewer maintenance and hydrovac services.
The acquisition provides Badger with more complete hydrovac coverage
in the southern Ontario market, an additional service offering to
customers in that region and a strong addition to Badger's management
team.
5. During the second quarter Badger acquired the service rights and
certain tangible assets from three of its Operating Partners in
Canada for $4.0 million cash. As a result of these acquisitions
Badger will be providing the hydrovac services directly to its
customers in these areas rather than through an agent. Badger
previously indicated it will operate corporate operations in certain
geographic areas where it makes sense for market, development or
other business reasons.
6. Revenue per hydrovac truck per month was $25,200 in the second
quarter of 2007, compared to $26,200 for the same period of 2006.
Badger budgets an overall fleet average of $25,000 per truck per
month.
7. Badger had 313 daylighting units at the end of the second quarter of
2007, reflecting the addition of 33 units to the fleet to date in
2007 and the retirement of five units. The Fund had 285 units at
December 31, 2006.
INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis 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 2006 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).
Revenue and expense variance analysis in the Management's Discussion and Analysis focuses primarily on the year-over-year changes during the second quarter. However, unless otherwise indicated, year-over-year variances for the six months ended June 30, 2007 and 2006 are explained by the same general factors, which contributed to the second quarter variance.
This Management's Discussion and Analysis has been prepared taking into consideration information available to August 13, 2007.
Disclaimer
This quarterly report contains forward-looking statements subject to various risk factors and uncertainties, which may cause the actual results, performance or achievements of Badger to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such 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 the quarterly report should not be 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.
Business Acquisitions
During the quarter Badger acquired the service rights and tangible assets including land and buildings along with certain other equipment from three of its Canadian Operating Partners for approximately $4.0 million.
Effective April 1, 2007 Badger purchased Benko Sewer Service for $4.1 million cash. The tangible assets acquired included three hydrovac units, four sewer maintenance vehicles, three camera units and other equipment.
Results of Operations
Revenues
Revenues of $25.0 million for the three months ended June 30, 2007 were 15 percent higher than the $21.7 million in revenues generated during the comparable period of 2006. This increase is primarily attributable to the United States business segment where revenues increased to $8.9 million from $6.6 million period-over-period. This 34 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. The other major contributing factor was the increased activity related to oil field service in the United States.
Badger's average monthly revenue per hydrovac truck during the three months ended June 30, 2007 was $25,200 versus $26,200 for the three months ended June 30, 2006. This brings the average revenue per truck per month to $27,500 for the six months ended June 30, 2007 versus $29,500 for the six months ended June 30, 2006.
Included in revenues is approximately $390,000 of truck placement and franchise fees for the three months ended June 30, 2007, versus $400,000 of such fees for the three months ended June 30, 2006.
Direct Costs
Direct costs for the quarter ended June 30, 2007 were $16.1 million compared to $13.7 million for the quarter ended June 30, 2006. This is an increase of 18 percent versus the 15 percent increase in revenues. The main reason direct costs increased in greater proportion than the increase in revenues was due to added costs incurred in running certain of the Canadian areas as corporate locations.
Gross Margin
Gross margin was 35.7 percent for the quarter ended June 30, 2007 versus 36.9 percent for the quarter ended June 30, 2006. The main reason for the reduction in gross margin is the added costs incurred in running certain of the Canadian areas as corporate locations.
Amortization
Amortization of property, plant and equipment was $2.6 million for the three months ended June 30, 2007, or $0.5 million higher than the $2.1 million for the three months ended June 30, 2006. The increase reflects a larger number of hydrovac units in the fleet. Included in this figure is approximately $49,000 related to the amortization of the intangible assets acquired with Benko Sewer Service.
Interest Expense
Interest expense was $217,000 for the quarter ended June 30, 2007 versus $102,000 for the quarter ended June 30, 2006. The higher interest expense is attributable to maintaining a higher balance of debt during the second quarter of 2007 than in the second quarter of 2006. The increased debt was used to fund growth capital expenditures and business acquisitions.
Selling, General and Administrative
Selling, general and administrative expenses were $2.3 million for the quarter ended June 30, 2007 compared to $1.8 million for the quarter ended June 30, 2006. As a percentage of revenues, selling, general and administrative expenses were 9.0 percent for the second quarter of 2007 versus 8.5 percent for the second quarter of 2006. The increase is due to hiring additional personnel to manage growth in the United States, compensation increases required to retain quality personnel in a competitive labour environment, additional costs associated with the acquisition of Benko Sewer Service and higher general office costs to support the growth in business. The amount for the three months ended June 30, 2007 also includes a $138,000 charge for non-cash compensation expense related to unit options granted versus $27,000 for the comparable period in 2006.
Foreign Exchange Loss (Gain)
The foreign exchange loss results from converting the balance sheet and earnings statement related to United States operations into Canadian currency. The foreign exchange loss was $331,000 in the second quarter of 2007 versus $116,000 in the same period of 2006. The main reason for the period-over-period increase was the appreciation of the Canadian dollar, which was greater in the second quarter of 2007 compared with the comparable period in 2006.
Income Taxes
Badger recorded a future income tax expense of $1.9 million in the second quarter of 2007. The second quarter expense reflects the impact of the trust tax legislation (also discussed above).
With the June 2007 substantive enactment of Bill C-52, a new 31.5 percent tax will be applied to distributions from Canadian public trusts starting in 2011. As a result, Badger recorded an additional $1.6 million in future income tax expense and a corresponding future income tax liability related to the differences between the accounting and tax basis of the Fund's assets. Prior to this legislation, Badger's future income taxes reflected only those temporary differences in the Fund's subsidiaries. While net earnings in the second quarter of 2007 were reduced significantly by this future tax adjustment, there was no impact on cash flow provided by operating activities.
Liquidity
Funds generated from operations for the quarter ended June 30, 2007 increased to $6.5 million from $6.0 million for the comparable period in 2006 due to stronger United States activity levels.
The Fund had working capital of $13.7 million at June 30, 2007 compared to $9.4 million at December 31, 2006. Good levels of cash flow from operations allowed Badger to build new daylighting units while maintaining a healthy working capital position.
The following table outlines the cash available to fund growth and pay distributions to unitholders for the three and six months ended June 30, 2007:
Three Months Six Months
Ended Ended
------------------
June 30, June 30,
2007 2007
-------------------------------------------------------------------------
$ $
Cash provided by operating activities 8,022,908 13,650,591
Add (deduct): net change in non-cash
working capital (1,514,048) 442,894
------------------------
Funds generated from operations 6,508,860 14,093,485
Add: proceeds on disposal of property,
plant and equipment 160,697 285,442
Less: required repayments of long-term debt (27,192) (54,384)
Less: maintenance capital expenditures(x) (963,508) (1,630,900)
------------------------
Cash available for growth capital
expenditures and distributions 5,678,857 12,693,643
------------------------
------------------------
Growth capital expenditures(x) 2,937,086 5,089,678
------------------------
------------------------
Cash distributions declared 3,389,604 6,778,568
------------------------
------------------------
(x) Total maintenance and growth capital expenditures for the three and
six months ended June 30, 2007 were $3,900,594 and $6,720,578,
respectively.
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; maintenance and growth capital expenditure requirements for the purchase of property, plant and equipment; and number of units outstanding. It may also be impacted by the future tax treatment of income trusts.
The majority of the cash provided by operating activities was used to finance maintenance and growth capital expenditures and to pay distributions to unitholders. As outlined in the chart above, 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 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 cash provided by operations 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 facility. As at the date of this quarterly report the Fund is in compliance with all debt covenants and is able to fully utilize all existing credit facilities. Badger does not have a stability rating.
In June, the Fund's extendable, revolving facility was amended to increase the maximum principal amount to $30 million from $20 million. This facility is used to fund working capital requirements and finance capital expenditures, of which $19.6 million was used at June 30, 2007. The Fund will maintain an appropriate mix of flexible debt and equity to finance its maintenance capital expenditures and growth initiatives.
Capital Resources
The Fund spent $3.9 million on property, plant and equipment for the three months ended June 30, 2007 compared to $4.2 million for the three months ended June 30, 2006. The Fund added 15 hydrovac units to the fleet in the second quarter of 2007 (excluding the three acquired on the acquisition of Benko Sewer Service), compared to 14 units in the second quarter of 2006.
During the second quarter Badger also spent $8.1 million in cash on two business acquisitions.
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 and distributions to unitholders.
Number of Daylighting Units
During the three-month period ended June 30, 2007 Badger added 11 units to the Canadian fleet and removed three from service, bringing the total to 210 units operating in Canada as at June 30, 2007. In the United States, Badger added seven units, bringing the total to 103 units in the United States at June 30, 2007.
Contractual Obligations and Committed Capital Investment
The Fund intends to meet its contractual obligations through funds generated by operating activities. The Fund's contractual obligations for the next five years, relating to repayment of long-term debt, are as follows (assuming the extendable revolving credit facility is not renewed on June 30, 2008):
July 1, 2007 to December 31, 2007 $54,384
2008 108,768
2009 19,641,894
2010 108,768
2011 108,768
Thereafter 571,067
-------------
Total $20,593,649
-------------
-------------
In addition to the contractual obligations above, as at June 30, 2007 the Fund had committed to certain capital expenditures totalling approximately $4.2 million. These capital expenditures will be financed with existing credit facilities and funds generated from operations, as well as alternative sources of financing as required. There are no set terms for remitting payments for these financial obligations.
Unitholders' Capital
Unitholders' capital increased due to the issue of 3,050 units to the non-management trustees as partial payment for 2007 trustee fees.
The total units outstanding at June 30, 2007 were 10,761,668. There was no subsequent change to the balance as of August 13, 2007.
Selected Quarterly Financial Information
-------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------
2007 2006
-------------------------------------------------
June 30 Mar. 31 Dec. 31 Sept. 30
-------------------------------------------------------------------------
Revenues ($) 25,015,707 27,574,051 25,621,658 25,324,030
-------------------------------------------------------------------------
Net earnings ($) 1,539,755 4,229,918 4,659,784 3,974,958
-------------------------------------------------------------------------
Net earnings per unit -
basic ($) 0.14 0.39 0.43 0.37
-------------------------------------------------------------------------
Net earnings per unit -
diluted ($) 0.14 0.39 0.43 0.37
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------
2006 2005
-------------------------------------------------
June 30 Mar. 31 Dec. 31 Sept. 30
-------------------------------------------------------------------------
Revenues ($) 21,696,318 25,728,890 23,093,735 20,471,322
-------------------------------------------------------------------------
Net earnings ($) 2,841,459 5,020,254 3,468,113 3,547,545
-------------------------------------------------------------------------
Net earnings per unit -
basic ($) 0.26 0.47 0.32 0.33
-------------------------------------------------------------------------
Net earnings per unit -
diluted ($) 0.26 0.47 0.32 0.33
-------------------------------------------------------------------------
Change in Accounting Policies
As of January 1, 2007, the Fund prospectively adopted CICA Section 1530 "Comprehensive Income", Section 3251 "Equity", Section 3855 "Financial Instruments - Recognition and Measurement", Section 3861 "Financial Instruments - Disclosure and Presentation" and Section 3865 "Hedges". Under the new standards a new financial statement, the Consolidated Statement of Comprehensive Income, has been introduced that provides for certain gains and losses and other amounts arising from changes in fair value, to be temporarily recorded outside the income statement. In addition, all financial instruments, including derivatives, are to be included in the Fund's Consolidated Balance Sheets and measured, in most cases, at fair values, and requirements for hedge accounting have been further clarified. There is no material impact to the Fund's consolidated financial statements as a result of implementing the new standards. As required by the new standards, prior periods have not been restated.
As of January 1, 2007 the Fund adopted revised CICA Section 1506 "Accounting Changes", which provides expanded disclosures for changes in accounting policies, accounting estimates and corrections of errors. Under the new standard, accounting changes should be applied retrospectively unless otherwise permitted or where impracticable to determine. As well, voluntary changes in accounting policy are made only when required by a primary source of GAAP or when the change results in more relevant and reliable information. There is no material impact to the Fund's consolidated financial statements as a result of implementing this new standard.
For a detailed discussion about the accounting policies adopted, please refer to note 2 of the interim consolidated financial statements for the six- and three-month periods ended June 30, 2007.
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 June 30, 2007 that have materially affected or are reasonably likely to materially affect the ICFR. No such changes were identified through their evaluation.
Business Risks
The Management's Discussion and Analysis for the year ended December 31, 2006, which is included in the Fund's 2006 Annual Report, includes an overview of business risks associated with the Fund. Those business risks remain in effect and readers are referred to this document. Reference should also be made to Badger's 2006 Annual Information Form.
As with the previous fiscal period Badger has decided to continue with self-insuring against any physical damage it might incur to its Canadian hydrovac units, due to the high cost of insurance premiums. This decision will be re-evaluated in 2008 as part of the insurance renewal process.
OUTLOOK
With the improved weather in Western Canada, less slowdown due to strikes in Eastern Canada and improved management of corporate operations in Western Canada Badger expects results in Canada to improve over the most recent quarter. The United States regions are operating in a favourable business environment and results there should continue to be strong. The challenge in the United States is to find additional new franchises and corporate locations so growth can continue.
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 Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.
BADGER INCOME FUND
unaudited consolidated balance sheets
June 30, December 31,
2007 2006
---------------------------
$ $
ASSETS
Current
Cash 1,979,289 1,319,912
Accounts receivable 23,147,103 22,873,841
Inventories 1,978,540 1,399,661
Prepaid expenses 815,575 679,675
---------------------------
27,920,507 26,273,089
Property, plant and equipment 67,919,783 62,367,823
Intangible assets (note 3) 3,956,343 1,551,336
Goodwill (note 3) 1,621,000 -
---------------------------
101,417,633 90,192,248
---------------------------
---------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 12,892,479 14,951,723
Income taxes payable 43,151 671,544
Distributions payable 1,129,975 1,129,655
Current portion of long-term debt 108,768 108,768
---------------------------
14,174,373 16,861,690
Long-term debt 20,484,881 8,516,284
Future income taxes (note 7) 12,961,536 10,259,536
---------------------------
47,620,790 35,637,510
---------------------------
Unitholders' equity
Unitholders' capital (note 4) 43,538,255 43,488,255
Contributed surplus (note 5) 1,174,600 973,600
Retained earnings 9,083,988 10,092,883
---------------------------
53,796,843 54,554,738
---------------------------
101,417,633 90,192,248
---------------------------
See accompanying notes
BADGER INCOME FUND
unaudited consolidated statements of earnings and comprehensive income
and retained earnings
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30/07 June 30/06 June 30/07 June 30/06
$ $ $ $
-------------------------------------------------
Revenues 25,015,707 21,696,318 52,589,758 47,425,208
Direct costs 16,078,059 13,680,773 33,420,430 29,747,874
-------------------------------------------------
Gross margin 8,937,648 8,015,545 19,169,328 17,677,334
-------------------------------------------------
Expenses
Amortization 2,564,165 2,135,229 4,955,996 4,138,875
Loss (gain) on sale of
property, plant and
equipment (16,939) 26,378 (3,820) 70,702
Interest
Long-term 217,029 17,486 443,979 33,645
Current - 84,327 - 135,736
Selling, general and
administrative 2,264,099 1,845,846 4,559,954 3,504,929
Foreign exchange
loss (gain) 331,929 116,175 418,636 87,270
-------------------------------------------------
5,360,283 4,225,441 10,374,745 7,971,157
-------------------------------------------------
Earnings before
income taxes 3,577,365 3,790,104 8,794,583 9,706,177
-------------------------------------------------
Income taxes
Current 136,260 125,565 322,910 310,284
Future (note 7) 1,901,350 823,080 2,702,000 1,534,180
-------------------------------------------------
2,037,610 948,645 3,024,910 1,844,464
-------------------------------------------------
Net earnings and
comprehensive income
for the period 1,539,755 2,841,459 5,769,673 7,861,713
Retained earnings,
beginning of period 10,933,837 8,704,898 10,092,883 6,842,902
Cash distributions (3,389,604) (3,311,523) (6,778,568) (6,469,781)
-------------------------------------------------
Retained earnings,
end of period 9,083,988 8,234,834 9,083,988 8,234,834
-------------------------------------------------
Net earnings per unit
(note 6)
Basic 0.14 0.26 0.54 0.73
-------------------------------------------------
Diluted 0.14 0.26 0.54 0.73
-------------------------------------------------
See accompanying notes
BADGER INCOME FUND
unaudited consolidated statements of cash flows
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30/07 June 30/06 June 30/07 June 30/06
$ $ $ $
Operating activities
Net earnings for
the period 1,539,755 2,841,459 5,769,673 7,861,713
Non-cash items:
Amortization 2,564,165 2,135,229 4,955,996 4,138,875
Future income taxes 1,901,350 823,080 2,702,000 1,534,180
Unit-based
compensation 188,600 84,590 251,000 84,590
Foreign exchange
loss (gain) 331,929 116,175 418,636 87,270
Loss (gain) on sale of
property, plant and
equipment (16,939) 26,378 (3,820) 70,702
---------------------------------------------------
6,508,860 6,026,911 14,093,485 13,777,330
Net change in non-cash
working capital
relating to operating
activities 1,514,048 1,577,129 (442,894) 1,788,833
---------------------------------------------------
8,022,908 7,604,040 13,650,591 15,566,163
---------------------------------------------------
Financing activities
Proceeds from
long-term debt 10,161,810 - 12,022,981 -
Repayment of
long-term debt (27,192) (27,193) (54,384) (54,317)
Distributions to
unitholders (3,389,284) (3,235,935) (6,778,248) (6,393,148)
Increase (decrease)
in bank indebtedness - 91,721 - 221,657
---------------------------------------------------
6,745,334 (3,171,407) 5,190,349 (6,225,808)
---------------------------------------------------
Investing activities
Purchase of Benko
Sewer Service
(note 3) (4,101,000) - (4,101,000) -
Purchase of service
rights (note 3) (3,994,007) - (3,994,007) -
Purchase of property,
plant and equipment (3,900,594) (4,171,197) (6,720,578) (9,681,262)
Proceeds on disposal of
property, plant and
equipment 160,697 427,764 285,442 529,612
Net change in non-cash
working capital
relating to investing
activities (2,712,986) - (3,651,420) -
---------------------------------------------------
(14,547,890) (3,743,433) (18,181,563) (9,151,650)
---------------------------------------------------
Increase (decrease)
in cash during
the period 220,352 689,200 659,377 188,705
Cash, beginning
of period 1,758,937 689,903 1,319,912 1,190,398
---------------------------------------------------
Cash, end of period 1,979,289 1,379,103 1,979,289 1,379,103
---------------------------------------------------
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 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 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, 2006,
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, 2006.
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 six and three months ended June 30,
2007 and 2006.
Certain comparative figures have been reclassified to conform to the
current period's presentation.
2. Changes in Accounting Policies
a) Goodwill represents the excess of the purchase price over fair value
of net assets acquired and liabilities assumed. Goodwill is not subject
to amortization, but is tested for impairment on an annual basis, or more
frequently if events or circumstances indicate the asset may be impaired.
The impairment test for goodwill includes the application of a fair value
test, with an impairment loss recognized as an expense where the carrying
amount of the asset exceeds its fair value. The Fund utilizes the
capitalized maintainable earnings in application of the fair value test.
Any goodwill impairment will be recognized as an expense in the period
the impairment is determined.
b) As of January 1, 2007 the Fund adopted the Canadian Institute of
Chartered Accountants (CICA) Handbook Section 1530 "Comprehensive
Income", Section 3251 "Equity", Section 3855 "Financial Instruments -
Recognition and Measurement", Section 3861 "Financial Instruments -
Disclosure and Presentation" and Section 3865 "Hedges". 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.
Comprehensive Income
--------------------
The new standards introduce comprehensive income, which consists of net
earnings and other comprehensive income (OCI). Upon adoption of Section
1530, the Fund revised its "Consolidated Statements of Earnings and
Accumulated Earnings" to include the newly required statement of
comprehensive income by creating a combined statement.
The adoption of comprehensive income has been made in accordance with the
applicable transitional provisions and no amounts have been reclassified
to accumulated other comprehensive income.
Financial Instruments
---------------------
The financial instruments standard establishes the recognition and
measurement criteria for financial assets, financial liabilities and
derivatives. All financial instruments are required to be measured at
fair value on initial recognition of the instrument, except for certain
related-party transactions. Measurement in subsequent periods depends on
whether the financial instrument has been classified as "held-for-
trading", "available-for-sale", "held-to-maturity", "loans and
receivables", or "other financial liabilities" as defined by the
standard.
Financial assets and financial liabilities "held-for-trading" are
measured at fair value with changes in those fair values recognized in
net earnings. Financial assets "available-for-sale" are measured at fair
value, with changes in those fair values recognized in OCI. Financial
assets "held-to-maturity", "loans and receivables" and "other financial
liabilities" are measured at amortized cost using the effective interest
method of amortization. The methods used by the Fund in determining fair
value of financial instruments are unchanged as a result of implementing
the new standard.
Accounts receivable is designated as "loans and receivables". Accounts
payable and accrued liabilities, cash distributions payable and long-term
debt are designated as "other liabilities". Risk management assets and
liabilities are derivative financial instruments classified as "held-for-
trading".
Accounting Changes
------------------
As of January 1, 2007, the Fund adopted revised CICA Section 1506
"Accounting Changes", which provides expanded disclosures for changes in
accounting policies, accounting estimates and corrections of errors.
Under the new standard, accounting changes should be applied
retrospectively unless otherwise permitted or where impracticable to
determine. As well, voluntary changes in accounting policy are made only
when required by a primary source of GAAP or when the change results in
more relevant and reliable information. There is no material impact to
the Fund's consolidated financial statements as a result of implementing
this new standard.
3. Acquisitions
a) Benko Sewer Service
On April 1, 2007 the Fund acquired all of the operating assets and
business of Benko Sewer Service for cash consideration of $4.1 million.
Benko Sewer Service is an Ontario-based hydrovac excavation and sewer
maintenance service provider.
The purchase price has been allocated as follows:
($)
-----------
Property, plant and equipment 1,500,000
Intangible assets 980,000
Goodwill 1,621,000
-----------
4,101,000
-----------
-----------
Intangible assets acquired consist of customer relationships, the trade
name and a non-compete agreement, all of which will be amortized
straight-line over their estimated useful lives of five years.
b) Service Rights Acquired
During the quarter the Fund acquired the service rights and operating
assets from three of its Canadian agents for cash consideration of
$4.0 million.
The purchase price has been allocated as follows:
($)
-----------
Property, plant and equipment 2,520,000
Intangible assets (service rights) 1,474,007
-----------
3,994,007
-----------
-----------
Intangible assets acquired consist of service rights, which management
has determined have an indefinite life and therefore are not amortized.
4. Unitholders' Capital
Units Amount ($)
------------------------
December 31, 2006 10,758,618 43,488,255
Units issued to non-management trustees 3,050 50,000
------------------------
June 30, 2007 10,761,668 43,538,255
------------------------
------------------------
The Fund declared distributions of $0.105 per unit for each of the months
of January through June for a total of $6,778,568 million.
5. Unit-Based Compensation
A summary of the unit option transactions for the six months ended
June 30, 2007 is as follows:
-------------------------------------------------------------------------
Six months
ended
June 30,
2007
-------------------------------------------------------------------------
Weighted
average
exercise
price
Units $
-------------------------------------------------------------------------
Outstanding at beginning of period 345,000 17.49
Granted 295,000 16.41
Exercised - -
Forfeited (45,000) 17.50
-------------------------------------------------------------------------
Outstanding at end of period 595,000 16.86
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted
average Weighted Number Weighted
Outstanding remaining average exercisable average
Range of at June 30, contractual exercise at June 30, exercise
prices 2007 life price 2007 price
-------------------------------------------------------------------------
$17.50 250,000 3.9 $17.50 - -
-------------------------------------------------------------------------
$17.45 50,000 4.1 $17.45 - -
-------------------------------------------------------------------------
$16.41 295,000 4.9 $16.41 - -
-------------------------------------------------------------------------
In May 2007 the Fund granted 295,000 fund unit options at an exercise
price of $16.41 per unit.
The Fund recorded compensation expense, included as part of selling,
general and administrative expenses, of $201,000 with an offsetting
increase to contributed surplus for the six months ended June 30, 2007.
The weighted average estimated fair value at the date of the grant for
fund unit options granted for the six months ended June 30, 2007 was
$7.66 per unit option. The fair value of each unit option grant was
estimated on the date of the grant using the Black-Scholes option-pricing
model with the following assumptions:
-------------------------------------------------------------------------
Six Months Ended June 30,
-------------------------------------------------------------------------
Weighted average assumptions 2007
-------------------------------------------------------------------------
Dividend yield 7.60%
Discount for forfeiture 0
Risk-free interest rate 3.75%
Expected life of options 5 years
Expected volatility factor of the future expected
market price of fund units 101.00%
-------------------------------------------------------------------------
6. Net Earnings per Unit
Basic per unit calculations for the six and three months ended June 30,
2007 were based on the weighted average number of units outstanding of
10,759,258 and 10,759,892, respectively. Basic per unit calculations for
the six and three months ended June 30, 2006 were based on the weighted
average units outstanding of 10,746,081 and 10,751,623, respectively.
Diluted per unit calculations for the six and three months ended June 30,
2007 were based on the weighted average number of units outstanding of
10,759,258 and 10,759,892, respectively. Diluted per unit calculations
for the six and three months ended June 30, 2006 were based on the
weighted average number of units outstanding of 10,754,913 and
10,760,455, respectively. The difference between the basic and diluted
units was attributable to the dilutive effect of the unit options
outstanding.
7. Future Income Taxes
On June 12, 2007, Bill C-52, the Budget Implementation Act, 2007 was
substantively enacted by the Canadian federal government. The act
contains legislation to tax publicly traded trusts in Canada. As a
result, a new 31.5 percent tax will be applied to distributions from
Canadian public income trusts. The new tax is not expected to apply to
Badger until 2011 as a transition period applies to publicly traded
trusts that existed prior to November 1, 2006. As a result of this
substantive enactment of trust taxation, Badger recorded an additional
$1.6 million in future income tax expense and increased its future income
tax liability in the second quarter of 2007. The future income tax
adjustment represents the taxable temporary differences of Badger's Fund
tax-effected at 31.5 percent, which is the rate that will be applicable
in 2011 under the current legislation and Badger's current corporate
structure.
8. Segmented Information
The Fund operates in two geographic/reportable segments providing
daylighting services to each of these segments. The following is selected
information for the six and three months ended June 30, 2007 and 2006
based on these geographic segments.
GEOGRAPHICALLY SEGMENTED INFORMATION
Three months ended June 30, 2007
-------------------------------------
Canada ($) USA ($) Total ($)
Revenue 16,143,373 8,872,334 25,015,707
Direct costs 10,542,604 5,535,455 16,078,059
Selling, general and administrative 1,357,547 906,552 2,264,099
EBITDA((x)) 4,320,482 2,021,138 6,341,620
Amortization 1,757,198 806,967 2,564,165
Earnings before income taxes 2,364,492 1,212,873 3,577,365
Capital expenditures 1,556,844 2,343,750 3,900,594
Three months ended June 30, 2006
-------------------------------------
Canada ($) USA ($) Total ($)
Revenue 15,067,376 6,628,942 21,696,318
Direct costs 9,196,411 4,484,362 13,680,773
Selling, general and administrative 1,305,178 540,668 1,845,846
EBITDA((x)) 4,593,385 1,460,139 6,053,524
Amortization 1,571,068 564,161 2,135,229
Earnings before income taxes 2,945,325 844,779 3,790,104
Capital expenditures 446,110 3,725,087 4,171,197
Six months ended June 30, 2007
-------------------------------------
Canada ($) USA ($) Total ($)
Revenue 34,291,036 18,298,722 52,589,758
Direct costs 21,845,656 11,574,774 33,420,430
Selling, general and administrative 2,761,004 1,798,950 4,559,954
EBITDA((x)) 9,747,493 4,443,245 14,190,738
Amortization 3,418,850 1,537,146 4,955,996
Earnings before income taxes 5,892,292 2,902,291 8,794,583
Property, plant and equipment 46,570,532 21,349,251 67,919,783
Intangible assets 3,956,343 - 3,956,343
Goodwill 1,621,000 - 1,621,000
Total assets 69,829,998 31,587,635 101,417,633
Capital expenditures 1,835,709 4,884,869 6,720,578
Six months ended June 30, 2006
-------------------------------------
Canada ($) USA ($) Total ($)
Revenue 34,842,071 12,583,137 47,425,208
Direct costs 21,458,070 8,289,804 29,747,874
Selling, general and administrative 2,418,602 1,086,327 3,504,929
EBITDA((x)) 10,995,769 3,089,366 14,085,135
Amortization 3,091,524 1,047,351 4,138,875
Earnings before income taxes 7,716,273 1,989,904 9,706,177
Property, plant and equipment 41,344,913 14,387,955 55,732,868
Intangible assets - - -
Goodwill - - -
Total assets 56,900,314 20,733,661 77,633,975
Capital expenditures 3,935,886 5,745,376 9,681,262
((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 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 provided 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 limited 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