TSX-BAD.UN
CALGARY, Nov. 13 /CNW/ - Badger Income Fund (the "Fund" or "Badger") is pleased to announce its results for the third quarter of 2007. Overall revenues increased by approximately 25 percent to $31.7 million for the three months ended September 30, 2007 from $25.3 million for the same period in 2006, due to a 29 percent increase in Canadian revenues and an 18 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 $9.2 million in the third quarter from $7.5 million in the same quarter of 2006.
FINANCIAL HIGHLIGHTS
($ thousands, except per unit results and total units outstanding
figures)
Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
---------------------------------------------------
Revenues 31,742 25,324 84,332 72,749
EBITDA(1) 9,202 7,504 23,393 21,589
Earnings before income
taxes 6,225 5,281 15,020 14,987
Taxes
Current 296 194 619 504
Future 793 1,112 3,495 2,646
Net earnings 5,136 3,975 10,906 11,837
Net earnings per unit -
diluted ($) 0.48 0.37 1.01 1.10
Funds generated from
operations(2) 9,219 7,269 23,312 21,035
Funds generated from
operations per unit -
diluted ($) 0.86 0.68 2.17 1.96
Maintenance capital
expenditures(3) 624 1,272 2,255 3,170
Long-term debt
repayments 27 27 82 82
Cash available for
growth and
distribution(4) 8,567 6,153 21,236 18,497
Cash distributions
declared 3,390 3,388 10,168 9,858
Growth capital
expenditures(3) 2,120 2,870 7,185 10,653
Total units
outstanding, end of
period 10,761,668 10,758,618 10,761,668 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 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 September 30, 2007, Badger added 12
units to the fleet and removed two from service. As a result, ten of the
units added during the three months ended September 30, 2007 represent
growth capital expenditures, while two of the units added represent
maintenance capital expenditures. During the nine months ended
September 30, 2007 Badger added 45 units to the fleet, of which seven
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 - THIRD QUARTER 2007
1. Badger's Western Canada operations experienced a good level of
activity with improved weather conditions and infrastructure
projects resulting in a strong increase of revenue in the
quarter. Corporate operations have benefited from increased
management focus.
2. In Eastern Canada Badger saw improved revenue in the quarter
leading to acceptable results but less than what was originally
forecast.
3. The United States continued its revenue growth in the third
quarter. During the year Badger added four more corporate
locations in the eastern part of the United States, which the
Fund anticipates will help growth in 2008.
4. Monthly revenue per hydrovac truck was $30,600 in the third
quarter of 2007, compared to $30,200 for the same period of 2006.
Badger budgets an overall fleet average of $25,000 per truck per
month.
5. Badger had 323 daylighting units at the end of the third quarter
of 2007, reflecting the addition of 45 units to the fleet during
the first three quarters of 2007 and the retirement of seven
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 third quarter. However, unless otherwise indicated, year-over-year variances for the nine months ended September 30, 2007 and 2006 are explained by the same general factors, which contributed to the third quarter variance.
This Management's Discussion and Analysis has been prepared taking into consideration information available to November 12, 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.
Results of Operations
Revenues
Revenues of $31.7 million for the three months ended September 30, 2007 were 25 percent higher than the $25.3 million in revenues generated during the comparable period of 2006. This increase is attributable to the following:
1. In the United States revenues increased to $9.9 million from
$8.4 million period-over-period. This 18 percent increase was due
to Badger's continued focus in certain geographical areas and
market segments, which resulted in a growing customer base and
increased demand for hydrovac services. The other major
contributing factor was the increased activity related to oil
field service in the United States. Oil field service-related
revenue in the United States accounted for approximately
55 percent of the Fund's total United States revenue generated
during the nine months ended September 30, 2007.
2. Western Canada hydrovac revenue increased by $2.6 million or
22 percent in the third quarter of 2007 over the third quarter of
2006. The main reason was pent-up demand from the second quarter
when wet weather delayed work in certain areas. Also during the
third quarter Badger provided services on some major projects.
3. Eastern Canada revenue, excluding the added revenue from the
Benko acquisition, increased by 10 percent due to improved
territorial coverage and customer development.
Badger's average monthly revenue per hydrovac truck during the three months ended September 30, 2007 was $30,600, versus $30,200 for the three months ended September 30, 2006. This brought average monthly revenue per truck to $28,700 for the nine months ended September 30, 2007, versus $29,900 for the nine months ended September 30, 2006.
Included in revenues was approximately $555,000 of truck placement and franchise fees for the three months ended September 30, 2007, versus $276,000 of such fees for the three months ended September 30, 2006.
Direct Costs
Direct costs for the quarter ended September 30, 2007 were $19.6 million compared to $16.0 million for the quarter ended September 30, 2006. This was an increase of 23 percent, versus the 25 percent increase in revenues, resulting in an increased gross margin during the third quarter of 2007 compared to the third quarter of 2006.
Gross Margin
Gross margin was 38.2 percent for the quarter ended September 30, 2007 versus 36.8 percent for the quarter ended September 30, 2006. The main reasons for the increase in gross margin were the increase in revenues and the running of a larger number of corporate locations in Canada, which resulted from the acquisition of service rights from certain Canadian Operating Partners.
Amortization
Amortization was $2.6 million for the three months ended September 30, 2007, or $0.4 million higher than the $2.2 million for the three months ended September 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 $285,000 for the quarter ended September 30, 2007 versus $108,000 for the quarter ended September 30, 2006. The higher interest expense is attributable to maintaining a higher balance of debt during the third quarter of 2007 than in the third 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 $2.5 million for the quarter ended September 30, 2007 compared to $1.8 million for the quarter ended September 30, 2006. As a percentage of revenues, selling, general and administrative expenses were 8.0 percent for the third quarter of 2007 versus 7.2 percent for the third quarter of 2006. The increase was 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 September 30, 2007 also included a $231,000 charge for non-cash compensation expense related to unit options granted versus $58,000 for the comparable period in 2006.
Foreign Exchange Loss (Gain)
The Fund's foreign exchange loss increased to $366,000 in the third quarter of 2007 from $9,000 in the same quarter in 2006 due to the United States dollar weakening against the Canadian dollar to a larger extent in the third quarter of 2007 than in the third quarter of 2006 and an overall increase in the Fund's United States operations, which resulted in an increase in the Fund's net monetary assets denominated in United States dollars. The foreign exchange loss is a non-cash expense which does not impact cash available for growth capital expenditures and distributions.
Income Taxes
Badger recorded an income tax expense of $1.1 million in the third quarter of 2007 versus $1.3 million in the third quarter of 2006.
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, in the second quarter of 2007 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 or on cash available for growth capital expenditures and distribution.
Liquidity
Funds generated from operations for the quarter ended September 30, 2007 increased to $9.2 million from $7.3 million for the comparable period in 2006 due to stronger Canadian and United States activity levels.
The Fund had working capital of $19.2 million at September 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 nine months ended September 30, 2007:
Three Months Nine Months
Ended Ended
September 30, September 30,
2007 2007
-------------------------------------------------------------------------
$ $
Cash provided by operating activities 3,059,986 16,710,577
Add (deduct): net change in non-cash
working capital 6,158,569 6,601,463
---------------------------
Funds generated from operations 9,218,555 23,312,040
Add: proceeds on disposal of property,
plant and equipment - 260,639
Less: required repayments of long-term debt (27,192) (81,576)
Less: maintenance capital expenditures(x) (623,961) (2,254,861)
---------------------------
Cash available for growth capital
expenditures and distributions 8,567,402 21,236,242
---------------------------
---------------------------
Growth capital expenditures(x) 2,119,874 7,184,749
---------------------------
---------------------------
Cash distributions declared 3,389,926 10,168,494
---------------------------
---------------------------
(x) Total maintenance and growth capital expenditures for the three and
nine months ended September 30, 2007 were $2,743,835 and $9,439,610,
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 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 distributions 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's cash available for growth capital expenditures has been negatively impacted by the weakening of the United States dollar relative to the Canadian dollar so the funds generated from operations have been reduced. On the positive side, approximately one-third of the capital cost incurred to build the hydrovac units is denominated in United States dollars thereby reducing the costs of manufacturing the hydrovac units.
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.
The revolving credit facility is used to fund working capital requirements and finance capital expenditures, of which $22.4 million was used at September 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 $2.7 million on property, plant and equipment for the three months ended September 30, 2007 compared to $4.1 million for the three months ended September 30, 2006. The Fund added 12 hydrovac units to the fleet in the third quarter of 2007, compared to 12 units in the third quarter of 2006. The decrease of $1.4 million in capital expenditures was due to Badger incurring certain costs prior to the commencement of the third quarter which related to the build of the units in the third quarter of 2007. 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 September 30, 2007 Badger added four units to the Canadian fleet and removed one from service, bringing the total to 213 units operating in Canada at September 30, 2007. In the United States, Badger added eight units and removed one from service, bringing the total to 110 units in the United States at September 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):
October 1, 2007 to December 31, 2007 $27,192
2008 108,768
2009 22,425,881
2010 108,768
2011 108,768
Thereafter 571,066
-------------
Total $23,350,443
-------------
-------------
In addition to the contractual obligations above, at September 30, 2007 the Fund had committed to certain capital expenditures totalling approximately $5.7 million. These capital expenditures will be financed with existing credit facilities and funds generated from operations, as well as alternative sources of financing as required. There are no set terms for remitting payments for these financial obligations.
Unitholders' Capital
The total units outstanding at September 30, 2007 were 10,761,668. There was no subsequent change to the balance as of November 12, 2007.
Selected Quarterly Financial Information
-------------------------------------------------
Quarter Ended
-----------------------------------
2007
-----------------------------------
Sept. 30 June 30 Mar. 31
-------------------------------------------------
Revenues ($) 31,741,950 25,015,707 27,574,051
-------------------------------------------------
Net earnings
($) 5,136,223 1,539,755 4,229,918
-------------------------------------------------
Net earnings
per unit -
basic ($) 0.48 0.14 0.39
-------------------------------------------------
Net earnings per
unit -
diluted ($) 0.48 0.14 0.39
-------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended
-----------------------------------------------------------
2006 2005
-----------------------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31
-------------------------------------------------------------------------
Revenues ($) 25,621,658 25,324,030 21,696,318 25,728,890 23,093,735
-------------------------------------------------------------------------
Net earnings
($) 4,659,784 3,974,958 2,841,459 5,020,254 3,468,113
-------------------------------------------------------------------------
Net earnings
per unit -
basic ($) 0.43 0.37 0.26 0.47 0.32
-------------------------------------------------------------------------
Net earnings
per unit -
diluted ($) 0.43 0.37 0.26 0.47 0.32
-------------------------------------------------------------------------
Change in Accounting Policies
As of January 1, 2007, the Fund prospectively adopted the Canadian Institute of Chartered Accountants' (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 nine- and three-month periods ended September 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 September 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.
OUTLOOK
Badger expects revenue growth to continue in the fourth quarter of 2007. This is based on a good level of infrastructure activity in Western Canada, an expected strong finish to the construction season in Ontario, a large number of projects in the Eastern United States requiring Badger's service and a continued good level of activity in the oil field service sector in the Western United States.
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
September 30, December 31,
2007 2006
$ $
-----------------------------
ASSETS
Current
Cash 1,662,308 1,319,912
Accounts receivable 27,694,112 22,873,841
Inventories 1,707,490 1,399,661
Prepaid expenses 1,128,360 679,675
-----------------------------
32,192,270 26,273,089
Property, plant and equipment 68,020,775 62,367,823
Intangible assets (note 3) 3,907,344 1,551,336
Goodwill (note 3) 1,621,000 -
-----------------------------
105,741,389 90,192,248
-----------------------------
-----------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 11,558,470 14,951,723
Income taxes payable 173,725 671,544
Distributions payable 1,129,975 1,129,655
Current portion of long-term debt 108,768 108,768
-----------------------------
12,970,938 16,861,690
Long-term debt 23,241,675 8,516,284
Future income taxes (note 7) 13,754,936 10,259,536
-----------------------------
49,967,549 35,637,510
-----------------------------
Unitholders' equity
Unitholders' capital (note 4) 43,538,255 43,488,255
Contributed surplus (note 5) 1,405,300 973,600
Retained earnings 10,830,285 10,092,883
-----------------------------
55,773,840 54,554,738
-----------------------------
105,741,389 90,192,248
-----------------------------
-----------------------------
See accompanying notes
BADGER INCOME FUND
unaudited consolidated statements of earnings and comprehensive income
and retained earnings
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30/07 Sept. 30/06 Sept. 30/07 Sept. 30/06
$ $ $ $
----------------------------------------------------
Revenues 31,741,950 25,324,030 84,331,708 72,749,238
Direct costs 19,628,697 15,998,845 53,049,127 45,746,720
----------------------------------------------------
Gross margin 12,113,253 9,325,185 31,282,581 27,002,518
----------------------------------------------------
Expenses
Amortization 2,647,386 2,186,232 7,603,382 6,325,107
Loss (gain) on sale
of property, plant
and equipment 44,456 (71,021) 40,636 (319)
Interest
Long-term 284,692 17,766 728,671 51,411
Current - 89,939 - 225,675
Selling, general
and administrative 2,544,677 1,812,901 7,104,631 5,328,671
Foreign exchange
loss (gain) 366,390 8,532 785,026 84,960
----------------------------------------------------
5,887,601 4,044,349 16,262,346 12,015,505
----------------------------------------------------
Earnings before
income taxes 6,225,652 5,280,836 15,020,235 14,987,013
----------------------------------------------------
Income taxes
Current 296,029 194,158 618,939 504,442
Future (note 7) 793,400 1,111,720 3,495,400 2,645,900
----------------------------------------------------
1,089,429 1,305,878 4,114,339 3,150,342
----------------------------------------------------
----------------------------------------------------
Net earnings and
comprehensive
income for the
period 5,136,223 3,974,958 10,905,896 11,836,671
Retained earnings,
beginning of period 9,083,988 8,234,834 10,092,883 6,842,902
Cash distributions (3,389,926) (3,387,728) (10,168,494) (9,857,509)
----------------------------------------------------
Retained earnings,
end of period 10,830,285 8,822,064 10,830,285 8,822,064
----------------------------------------------------
----------------------------------------------------
Net earnings per
unit (note 6)
Basic 0.48 0.37 1.01 1.10
----------------------------------------------------
----------------------------------------------------
Diluted 0.48 0.37 1.01 1.10
----------------------------------------------------
----------------------------------------------------
See accompanying notes
BADGER INCOME FUND
unaudited consolidated statements of cash flows
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30/07 Sept. 30/06 Sept. 30/07 Sept. 30/06
$ $ $ $
----------------------------------------------------
Operating
activities
Net earnings for the
period 5,136,223 3,974,958 10,905,896 11,836,671
Non-cash items:
Amortization 2,647,386 2,186,232 7,603,382 6,325,107
Future income taxes 793,400 1,111,720 3,495,400 2,645,900
Unit-based
compensation 230,700 58,200 481,700 142,790
Foreign exchange
loss (gain) 366,390 8,532 785,026 84,960
Loss (gain) on sale
of property, plant
and equipment 44,456 (71,021) 40,636 (319)
----------------------------------------------------
9,218,555 7,268,621 23,312,040 21,035,109
Net change in
non-cash working
capital relating to
operating activities (6,158,569) (3,118,390) (6,601,463) (1,318,715)
----------------------------------------------------
3,059,986 4,150,231 16,710,577 19,716,394
----------------------------------------------------
Financing activities
Proceeds from units
issued - 59 - 59
Proceeds from long-
term debt 2,783,986 - 14,806,967 -
Repayment of long-
term debt (27,192) (27,192) (81,576) (81,509)
Distributions to
unitholders (3,389,926) (3,387,110) (10,168,174) (9,780,258)
Increase (decrease)
in bank indebtedness - 3,057,855 - 3,279,512
----------------------------------------------------
----------------------------------------------------
(633,132) (356,388) 4,557,217 (6,582,196)
----------------------------------------------------
Investing activities
Purchase of Benko
Sewer Service
(note 3) - - (4,101,000) -
Purchase of service
rights (note 3) - - (3,994,007) -
Purchase of property,
plant and equipment (2,743,835) (4,142,223) (9,439,610) (13,823,485)
Proceeds on disposal
of property, plant
and equipment - 183,765 260,639 713,377
Net change in non-
cash working capital
relating to
investing activities - - (3,651,420) -
----------------------------------------------------
(2,743,835) (3,958,458) (20,925,398) (13,110,108)
----------------------------------------------------
Increase (decrease)
in cash during the
period (316,981) (164,615) 342,396 24,090
Cash, beginning of
period 1,979,289 1,379,103 1,319,912 1,190,398
----------------------------------------------------
Cash, end of period 1,662,308 1,214,488 1,662,308 1,214,488
----------------------------------------------------
----------------------------------------------------
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 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 nine months and three months ended
September 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-t o-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 are 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 $4.1 million.
Benko Sewer Service is an Ontario-based hydrovac excavation and sewer
maintenance service provider.
The purchase price was allocated as follows:
($)
-----------
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
$4.0 million.
The purchase price was allocated as follows:
($)
-----------
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
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
-------------------------
September 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 September for a total of $10,168,494 million.
5. Unit-Based Compensation
A summary of the unit option transactions for the nine months ended
September 30, 2007 is as follows:
Nine months
ended
September
30, 2007
Weighted
average
exercise
price
Units $
-------------------------------------------------------------------------
Outstanding at
beginning of
period 345,000 17.49
Granted 295,000 16.41
Exercised - -
Forfeited (135,000) 17.50
-------------------------------------------------------------------------
Outstanding at
end of period 505,000 16.86
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Outstanding Options Exercisable
Weighted
average Weighted Number Weighted
Outstanding at remaining average exercisable at average
Range of September 30, contractual exercise September 30, exercise
Prices 2007 life price 2007 price
-------------------------------------------------------------------------
$17.50 160,000 3.6 $17.50 - -
-------------------------------------------------------------------------
$17.45 50,000 3.8 $17.45 - -
-------------------------------------------------------------------------
$16.41 295,000 4.6 $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 $431,700 with an offsetting
increase to contributed surplus for the nine months ended September 30,
2007.
The weighted average estimated fair value at the date of the grant for
fund unit options granted for the nine months ended September 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:
Nine Months Ended
Weighted average assumptions September 30, 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 nine and three months ended
September 30, 2007 were based on the weighted average number of units
outstanding of 10,760,070 and 10,761,668, respectively. Basic per unit
calculations for the nine and three months ended September 30, 2006 were
based on the weighted average units outstanding of 10,748,796 and
10,754,138, respectively. Diluted per unit calculations for the nine and
three months ended September 30, 2007 were based on the weighted average
number of units outstanding of 10,760,070 and 10,761,668, respectively.
Diluted per unit calculations for the nine and three months ended
September 30, 2006 were based on the weighted average number of units
outstanding of 10,748,796 and 10,754,138, 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. Subsequent Event
On October 1, 2007 Badger completed the acquisition of service rights
from one of its Canadian Operating Partners for cash consideration of
$1.3 million.
9. Segmented Information
The Fund operates in two geographic/reportable segments providing
daylighting services to each of these segments. The following is selected
information for the nine and three months ended September 30, 2007 and
2006 based on these geographic segments.
Three months ended September 30, 2007
--------------------------------------
Canada ($) USA ($) Total ($)
Revenues 21,867,718 9,874,232 31,741,950
Direct costs 13,333,755 6,294,942 19,628,697
Selling, general and administrative 1,834,458 710,219 2,544,677
EBITDA((x)) 6,735,632 2,466,554 9,202,186
Amortization 1,771,835 875,551 2,647,386
Earnings before income taxes 4,632,137 1,593,515 6,225,652
Capital expenditures 393,689 2,350,146 2,743,835
Three months ended September 30, 2006
--------------------------------------
Canada ($) USA ($) Total ($)
Revenues 16,973,396 8,350,634 25,324,030
Direct costs 10,719,691 5,279,154 15,998,845
Selling, general and administrative 1,160,183 652,718 1,812,901
EBITDA((x)) 5,097,027 2,406,725 7,503,752
Amortization 1,567,359 618,873 2,186,232
Earnings before income taxes 3,493,290 1,787,546 5,280,836
Capital expenditures 1,469,128 2,673,095 4,142,223
Nine months ended September 30, 2007
--------------------------------------
Canada ($) USA ($) Total ($)
Revenues 56,158,754 28,172,954 84,331,708
Direct costs 35,179,411 17,869,716 53,049,127
Selling, general and administrative 4,595,462 2,509,169 7,104,631
EBITDA ((x)) 16,483,125 6,909,799 23,392,924
Amortization 5,190,685 2,412,697 7,603,382
Earnings before income taxes 10,524,429 4,495,806 15,020,235
Property, plant and equipment 45,180,970 22,839,805 68,020,775
Intangible assets 3,907,344 - 3,907,344
Goodwill 1,621,000 - 1,621,000
Total assets 72,498,000 33,243,389 105,741,389
Capital expenditures 2,204,595 7,235,015 9,439,610
Nine months ended September 30, 2006
--------------------------------------
Canada ($) USA ($) Total ($)
Revenues 51,815,467 20,933,771 72,749,238
Direct costs 32,177,762 13,568,958 45,746,720
Selling, general and administrative 3,589,626 1,739,045 5,328,671
EBITDA ((x)) 16,092,796 5,496,091 21,588,887
Amortization 4,658,883 1,666,224 6,325,107
Earnings before income taxes 11,209,563 3,777,450 14,987,013
Property, plant and equipment 41,400,653 16,175,462 57,576,115
Intangible assets - - -
Goodwill - - -
Total assets 60,422,543 24,251,330 84,673,873
Capital expenditures 5,405,014 8,418,471 13,823,485
((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 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 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