CALGARY, March 19 /PRNewswire-FirstCall/ -- Badger Income Fund ("Badger" or the "Fund") is pleased to announce its results for the year and three months ended December 31, 2007.
Financial Highlights ($ thousands, except per unit and total units outstanding information) Three Three months months Year Year ended ended ended ended December 31, December 31, December 31, December 31, 2007 2006 2007 2006 ---------------------------------------------------- Revenues 33,356 25,622 117,688 98,371 EBITDA(1) 8,901 7,307 32,294 28,895 Earnings before income taxes 5,762 4,845 20,783 19,832 Taxes Current 199 183 818 687 Future (254) 3 3,242 2,648 Net earnings 5,817 4,659 16,723 16,497 Net earnings per unit - diluted 0.54 0.43 1.55 1.53 Funds generated from operations(2) 8,506 6,820 31,818 27,855 Funds generated from operations per unit - diluted 0.79 0.63 2.96 2.59 Maintenance capital expenditures(3) 964 - 3,219 3,170 Long-term debt repayments 27 27 109 109 Cash available for growth and distribution(4) 7,777 6,794 29,013 25,291 Cash distributions declared 3,390 3,389 13,558 13,246 Growth capital expenditures(3) 5,573 8,650 12,758 19,304 Total units outstanding 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 how the results are taxed in various jurisdictions. EBITDA is calculated from the Consolidated Statements of Earnings and Comprehensive Income and Retained Earnings as gross margin, less selling, general and administrative costs and foreign exchange loss (gain). (2) Funds generated from operations is used to assist management and investors in analyzing operating performance and leverage. It is not intended to represent operating cash flow or operating profits for the period nor should it be viewed as an alternative to cash flow from operating activities, net earnings or other measures of financial performance calculated in accordance with GAAP. Funds generated from operations are calculated from the Consolidated Statements of Cash Flows and is defined as cash provided by operating activities before changes in non-cash working capital. (3) Maintenance capital expenditures is defined as the amount incurred during the period to keep the 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 December 31, 2007 Badger added 14 units to the fleet and removed three from service. As a result, 11 of the units added during the three months ended December 31, 2007 represent growth capital expenditures, while three of the units represent maintenance capital expenditures. During the year ended December 31, 2007 Badger added 59 units to the fleet, of which 10 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-and-a-half years. Growth capital expenditures exclude acquisitions made during the period. (4) Cash available for growth and distribution is used by management to supplement cash flow as a measure of operating performance and leverage. The objective of this measure is to calculate the amount which is available for distribution to unitholders. It is defined as funds generated from operations, less required debt repayments and maintenance capital expenditures, plus any proceeds received on the disposal of assets. Overview Highlights for the year are as follows: - The Fund generated improved operating and financial results in the year ended December 31, 2007 over the year ended December 31, 2006. Revenues increased to $117.7 million in 2007 from $98.4 million in 2006, while EBITDA increased to $32.3 million in 2007 from $28.9 million in 2006. - EBITDA margins decreased from 29 percent in 2006 to 27 percent in 2007. During the year Badger added personnel in several locations. These investments are expected to pay off in 2008. - Cash available for growth and distributions increased by 15 percent to $29.0 million in 2007 from $25.3 million in 2006. - Badger's long-term debt increased to $26.3 million at December 31, 2007 from $8.6 million at December 31, 2006 due to the acquisition of the operating assets and business of Benko Sewer Service, the acquisition of the service rights and tangible assets from certain of its Canadian Operating Partners and the financing of the 2007 capital expenditure program. - The Fund increased its extendable, revolving credit facility from $20 million to $30 million as of June 2007, which provides added financial capacity to assist in financing Badger's growth capital expenditure program. - The Fund added 59 hydrovac units in 2007 and removed 10 from service, exiting the year with 334 hydrovac units. Of the total, 216 units are operating in Canada and 118 in the United States. The growth in hydrovac units was financed from cash generated from operations and existing credit facilities. - On October 31, 2006 the federal Minister of Finance announced a new tax plan that will affect the future level of taxation of income trusts and corporations. This tax plan was substantively enacted in June 2007. One element of the plan is a tax on non-capital distributions from publicly-traded income trusts, which would make their income tax treatment more like that of corporations. For existing publicly-traded income trusts, the federal government put in place a four-year transitional delay in implementing the new rules, which will take effect in the 2011 taxation year. The application of this tax plan would reduce the tax efficiency of publicly-traded income trusts such as Badger. The new tax measures will require in-depth review, examination and assessment, which Badger has commenced. Selected Annual Financial Information ------------------------------------------------------------------------- Year ended December 31 -------------------------------------- 2007 2006 2005 ------------------------------------------------------------------------- Revenues ($) 117,687,718 98,370,896 83,331,679 ------------------------------------------------------------------------- Net earnings ($) 16,722,845 16,496,455 14,780,994 ------------------------------------------------------------------------- Net earnings per unit - basic ($) 1.55 1.53 1.39 ------------------------------------------------------------------------- Net earnings per unit - diluted ($) 1.55 1.53 1.38 ------------------------------------------------------------------------- Total assets ($) 110,798,162 90,192,248 74,551,335 ------------------------------------------------------------------------- Total long-term debt ($)(1) 26,254,010 8,625,052 1,114,843 ------------------------------------------------------------------------- Distributions declared ($) 13,558,421 13,246,474 11,165,792 ------------------------------------------------------------------------- (1) Includes the current portion of long-term debt. Business Acquisitions
During the year Badger acquired the service rights and tangible assets including land and buildings along with certain other equipment from certain of its Canadian Operating Partners for approximately $5.3 million. 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 locations in certain geographical areas where it makes sense for market, development or other business reasons.
Effective April 1, 2007 Badger acquired all of the operating assets and business of Benko Sewer Service, a well-managed Ontario-based hydrovac excavation and sewer maintenance provider. This 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. The purchase price of $4.1 million was settled with a cash payment. The tangible assets acquired included three hydrovac units, four sewer maintenance vehicles, three camera units and other equipment.
Overall Performance for the Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006 Results of Operations Revenues --------
Revenues were $117.7 million for the year ended December 31, 2007 compared to $98.4 million for the year ended December 31, 2006. The increase is attributable to the following:
- Canadian revenues increased by 15 percent from $68.9 million in 2006 to $78.9 million in 2007. Western Canada revenue increased by 9 percent due to providing services on some major projects along with a general increase in activity. Eastern Canada revenue, excluding the added revenue from the Benko acquisition, increased by 10 percent year-over-year due to improved territorial coverage and customer development. - United States revenues increased by 32 percent to $38.7 million in 2007 from $29.4 million in 2006. Revenue growth reflects the Fund's continued focus on 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 57 percent of the Fund's United States hydrovac revenues in 2007.
Badger's average revenue per truck per month for 2007 was $29,300, which is a modest decrease from the $29,600 generated during 2006. The Badger business model works well with an overall fleet average of $25,000 per truck per month.
Included in revenues is $1.8 million of truck placement and franchise fees for 2007, which is the same amount as for 2006.
Direct Costs ------------
Direct costs were $74.9 million in 2007, an increase of $12.9 million from the $62.0 million recorded in 2006. This is consistent with the increase in revenues.
Gross Margin ------------ Gross margin for 2007 was 36.4 percent, which is similar to 2006. Amortization ------------
Amortization was $10.4 million in 2007 or $1.8 million higher than the $8.6 million in 2006. The increase reflects the larger number of hydrovac units in the fleet. Included in this figure is approximately $147,000 related to amortization of the intangible assets acquired with Benko Sewer Service.
Interest Expense ----------------
Interest expense was $1.2 million in 2007 versus $0.4 million in 2006. The higher interest expense is attributable to maintaining a higher balance of debt throughout 2007 than in 2006. The increased debt was used to fund growth capital expenditures and business acquisitions.
Selling, General and Administrative Expenses --------------------------------------------
Selling, general and administrative expenses were $2.1 million higher at $9.7 million in 2007 compared to $7.6 million in 2006. As a percentage of revenues, selling, general and administrative expenses were 8.2 percent in 2007 versus 7.7 percent in 2006. Overall the increased expenses are due to the following:
- Badger hired additional personnel to support the growth of the business; - Badger increased compensation in order to retain high-quality personnel in a competitive labour environment; - Non-cash compensation expense was $662,000 versus $148,000 in 2006; - The Fund incurred additional costs due to the acquisition of the service rights from certain of its Canadian Operating Partners as well as added costs associated with Benko Sewer Service; - Higher professional fees associated with the Fund's regulatory compliance activities; and, - Overall increase in general office costs.
Badger's United States selling, general and administrative expenses increased by $0.9 million in 2007 over 2006 mainly due to the staffing of five additional corporate locations in the Eastern United States region. The investment is expected to begin paying off in 2008.
Selling, general and administrative expenses include salaries and benefits for office, field, safety and sales staff, as well as rent, utilities, and communications. These expenses also include costs to maintain the Fund's public listing and professional fees.
Foreign Exchange Loss (Gain) ----------------------------
The Fund incurred a foreign exchange loss for fiscal 2007 compared to a gain in 2006, due to the United States dollar weakening against the Canadian dollar during 2007 and an overall increase in the Fund's United States operations, which resulted in an increase in the Fund's net monetary assets that are denominated in United States dollars.
Income Taxes ------------ The effective tax rate for 2007 was 20 percent versus 17 percent for 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, during 2007 Badger recorded an additional $1.4 million in future income tax expense and a corresponding future income tax liability related to the difference 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 for 2007 were reduced 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.
Offsetting the impact of the above was a decrease in future income taxes of $1.1 million due to the reduction in federal income tax rates from the existing rate of 22.12 percent for 2007 to 15 percent for 2012.
The minimal effective tax rate overall is due to the trust structure, which results in tax-deductible distributions being made to unitholders.
Liquidity
Funds generated from operations increased to $31.8 million in 2007 from $27.9 million in 2006 due to stronger Canadian and United States activity levels. The Fund uses its cash to make distributions to unitholders, build additional hydrovac units, invest in maintenance capital expenditures and repay long-term debt.
The Fund had working capital of $19.7 million at December 31, 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 in 2007 compared to 2006:
Year Ended Year Ended December 31, December 31, 2007 2006 $ $ Cash provided by operating activities 24,432,856 27,393,449 Add (deduct): net change in non-cash working capital 7,384,823 461,313 ----------- ----------- Funds generated from operations 31,817,679 27,854,762 Add: proceeds on disposal of property, plant and equipment 523,122 714,615 Deduct: required repayments of long-term debt (108,768) (108,702) Deduct: maintenance capital expenditures (3,219,330) (3,169,728) ----------- ----------- Cash available for growth capital expenditures and distributions 29,012,703 25,290,947 ----------- ----------- ----------- ----------- Growth capital expenditures 12,758,244 19,303,939 ----------- ----------- ----------- ----------- Cash distributions declared 13,558,421 13,246,474 ----------- ----------- ----------- -----------
The Fund makes regular monthly cash distributions to unitholders. These cash distributions may be reduced, increased or suspended entirely by the trustees depending on the operations of Badger and the performance of its assets. The actual cash flow available for distribution to holders of Fund units is a function of numerous factors, including the Fund's financial performance; debt covenants and obligations; working capital requirements; maintenance and growth capital expenditure requirements for the purchase of property, plant and equipment; and 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 above table, cash not distributed to unitholders was used to finance growth capital expenditures and acquisitions.
If maintenance capital expenditures levels 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 hydrovac units are relatively new, with an average age of approximately four-and-a-half years. As a result, Badger is currently experiencing relatively low levels of maintenance capital expenditures. Over time, Badger would expect to incur annual maintenance capital expenditures in an amount that approximates the amortization expense reported in the year. Badger expects continued increases in cash provided by operations and cash available for growth capital expenditures and distributions will be sufficient to fund the maintenance capital expenditures in the future.
Badger is restricted from declaring distributions and distributing cash if it is in breach of the covenants under its credit facilities. As at the date of this MD&A the Fund is in material compliance with all debt covenants and is able to fully utilize all existing credit facilities. Badger does not have a stability rating.
Currently the Fund has a $30 million extendable, revolving facility to fund working capital requirements and finance capital expenditures, of which $23.7 million was used at December 31, 2007. The Fund will maintain an appropriate mix of flexible debt and equity to finance its maintenance capital expenditures and growth initiatives.
Capital Resources Investing ---------
In 2007 the Fund spent $16.0 million on property, plant and equipment compared to $22.3 million in 2006. Included in 2006 spending is $3.7 million worth of cabs and chassis acquired in December 2006 which were used to manufacture hydrovac units in 2007. During 2007, the Fund added 56 new hydrovac units (excluding the three acquired on the acquisition of Benko Sewer Service) compared to 54 new hydrovac units built in 2006. The 2007 capital expenditures figure includes maintenance capital expenditures of $3.2 million. Generally speaking, maintenance capital expenditures are incurred during a period to keep the hydrovac fleet at the same number of units, which was 10 for 2007, plus any other capital expenditures required to maintain the existing business.
During 2007 Badger also spent $9.4 million in cash on acquisitions as outlined above under the heading Business Acquisitions.
Financing ---------
On June 29, 2007 Badger renewed its extendable, revolving credit facility and increased the amount of the facility from $20 million to $30 million. The facility has been used and will continue to be used to assist in financing Badger's capital expenditure program and general corporate activities. The facility has no required principal repayments. It expires on June 30, 2008 and is renewable at Badger's option for an additional 364-day period. If not renewed, interest is payable on the facility for 364 days, after which the entire amount must be repaid. The facility bears interest at the bank's prime rate or bankers' acceptance rate plus 1.00 percent plus 0 to 200 basis points depending on Badger's ratio of funded-debt-to-EBITDA.
During December 2007 Badger obtained mortgage financing in the amount of $1.65 million for certain property it acquired through the acquisition of service rights and tangible assets from one of its Canadian Operating Partners. The amount is repayable in monthly principal payments of $9,167 plus interest until December 2022 and bears interest at bank prime plus 0.75 percent.
During 2007 Badger repaid $0.1 million of long-term debt pursuant to regularly scheduled repayments. As a result of these principal payments and the proceeds received from the revolving credit facility and mortgage financing, the Fund's long-term debt, including the current portion, was $26.3 million at year-end 2007 versus $8.6 million at year-end 2006. The increased debt was the result of financing the various 2007 acquisitions as well as the capital expenditure program.
At December 31, 2007 the Fund had a long-term debt-to-equity ratio of 0.45:1 and a long-term debt-to-trailing-funds-generated-from-operations ratio of 0.82:1. Management believes that the Fund's healthy balance sheet and unutilized borrowing capacity, combined with funds generated from operations, will provide sufficient capital to fund ongoing operations, make distributions to unitholders, finance future capital expenditures and execute its strategic plan for the foreseeable future.
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 (assuming the extendable revolving credit facility is not renewed on June 30, 2008) and lease payments for shop and office premises are as follows:
($000s) Total 2008 2009-2010 2011-2012 Thereafter ------------------------------------------------------------------------- ------------------------------------------------------------------------- Long-term debt 26,254 219 24,144 438 1,453 Shop and office leases 862 374 391 97 - ---------------------------------------------------- Total contractual obligations 27,116 593 24,535 535 1,453 ---------------------------------------------------- ----------------------------------------------------
In addition to the contractual obligations above, at year-end 2007 the Fund had committed to certain capital expenditures totalling approximately $4.7 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 payment for these financial obligations.
Unitholders' Capital
Unitholders' capital increased by $50,000 due to the issue of 3,050 units to the non-management trustees as partial payment for 2007 trustee fees.
Units outstanding at December 31, 2007 were 10,761,668. There was no change to the balance as of March 14, 2008.
Off-Balance-Sheet Arrangements
At December 31, 2007 and 2006, the Fund had no off-balance-sheet arrangements.
Transactions with Related Parties
Shea Nerland Calnan LLP provides legal services to Badger at market rates. David Calnan, a Trustee and the Corporate Secretary of the Fund, is a partner in the law firm of Shea Nerland Calnan LLP and is involved in providing and managing Badger's legal services. The total cost of these legal services in 2007 was $219,000 compared to $240,000 in 2006.
Selected Quarterly Financial Information ------------------------------------------------------------------------- Quarter Ended --------------------------------------------------- 2007 --------------------------------------------------- Dec. 31 Sept. 30 June 30 Mar. 31 ------------------------------------------------------------------------- Revenues ($) 33,356,010 31,741,950 25,015,707 27,574,051 ------------------------------------------------------------------------- Net earnings ($) 5,816,949 5,136,223 1,539,755 4,229,918 ------------------------------------------------------------------------- Net earnings per unit - basic ($) 0.54 0.48 0.14 0.39 ------------------------------------------------------------------------- Net earnings per unit - diluted ($) 0.54 0.48 0.14 0.39 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Quarter Ended --------------------------------------------------- 2006 --------------------------------------------------- Dec. 31 Sept. 30 June 30 Mar. 31 ------------------------------------------------------------------------- Revenues ($) 25,621,658 25,324,030 21,696,318 25,728,890 ------------------------------------------------------------------------- Net earnings ($) 4,659,784 3,974,958 2,841,459 5,020,254 ------------------------------------------------------------------------- Net earnings per unit - basic ($) 0.43 0.37 0.26 0.47 ------------------------------------------------------------------------- Net earnings per unit - diluted ($) 0.43 0.37 0.26 0.47 ------------------------------------------------------------------------- Fourth Quarter Highlights - As a result of increased activity in Canada and the United States, revenue increased to $33.3 million in the three months ended December 31, 2007 from $25.6 million in the three months ended December 31, 2006. Canadian revenues increased by 33 percent due to a general increase in business in most areas. Badger's United States revenue increased to $10.6 million from $8.5 million quarter-over-quarter due to increased activity related to oil field services and performing services on some major projects. - Average revenue per truck per month was $30,900 in the fourth quarter of 2007 compared to $29,000 per month for the same period in 2006. - With the increase in revenues, earnings before income taxes increased by 19 percent for the fourth quarter of 2007 over the same period in 2006. - The Fund added 14 hydrovac units to the fleet and removed three from service. New Accounting Pronouncements
New CICA Handbook Sections have been issued which will require additional disclosure in the Fund's consolidated financial statements commencing January 1, 2008. Section 1535 "Capital Disclosures" requires the disclosure of qualitative and quantitative information about the Fund's objectives, policies and processes for managing capital. Sections 3862 "Financial Instruments - Disclosures" and 3863 "Financial Instruments - Presentation" will replace Section 3861 to prescribe the requirements for presentation and disclosure of financial instruments. Handbook section 3031 "Inventories", which prescribes the recognition, measurement, disclosure and presentation issues related to inventories, will become effective January 1, 2008. The Fund believes the adoption of these standards will not have a material impact on the consolidated financial statements.
Critical Accounting Estimates
Management is responsible for applying judgement in preparing accounting estimates. Certain estimates and related disclosures included within the financial statements are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from management's current judgements. An accounting estimate is considered critical only if it requires the Fund to make assumptions about matters that are highly uncertain at the time the accounting estimate is made, and if different estimates the Fund could have used would have a material impact on Badger's financial condition, changes in financial condition or results of operations.
While there are several estimates and assumptions made by management in the preparation of financial statements in accordance with GAAP, the following critical accounting estimates have been identified by management:
Amortization of the Hydrovac Units ----------------------------------
The accounting estimate that has the greatest effect on the Fund's financial results is the amortization of the hydrovac units. Amortization of the hydrovac units is carried out on the basis of their estimated useful lives. The Fund currently amortizes the hydrovac units over 10 years based on current knowledge and past experience. There is a certain amount of business risk that newer technology or some other unforeseen circumstance could lower this life expectation. A change in the remaining life of the hydrovac units or the expected residual value will affect the amortization rate used to amortize the hydrovac units and thus affect amortization expense as reported in the Fund's statements of earnings and comprehensive income. These changes are reported prospectively when they occur.
Tax Pools and Their Recoverability ----------------------------------
Badger has estimated its tax pools for the income tax provision. The actual tax pools the Fund may be able to use could be materially different in the future.
Intangible Assets -----------------
Intangible assets consist of service rights acquired from Operating Partners, customer relationships, trade name and non-compete agreements. The initial valuation of intangibles at the closing date of any acquisition requires judgement and estimates by management with respect to identification, valuation and determining the expected periods of benefit. Valuations are based on discounted expected future cash flows and other financial tools and models and are amortized over their expected periods of benefit or not amortized if it is determined the intangible asset has an indefinite life. Intangible assets are reviewed annually with respect to their useful lives or more frequently if events or changes in circumstances indicate that the assets might be impaired. The impairment test includes the application of a fair value test, with an impairment loss recognized when the carrying amount of the intangible asset exceeds its estimated fair value. Impairment provisions are not reversed if there is a subsequent increase in the fair value of the intangible asset.
Goodwill --------
Goodwill is the amount that results when the cost of acquired assets exceeds their fair values at the date of acquisition. Goodwill is recorded at cost, not amortized and tested at least annually for impairment. The impairment test includes the application of a fair value test, with an impairment loss recognized when the carrying amount of goodwill exceeds its estimated fair value. Impairment provisions are not reversed if there is a subsequent increase in the fair value of goodwill.
Impairment of Long-lived Assets -------------------------------
The carrying value of long-lived assets, which include property, plant and equipment and intangible assets, is assessed for indications of impairment when events or circumstances indicate that the carrying amounts may not be recoverable from estimated cash flows. Estimating future cash flows requires assumptions about future business conditions and technological developments. Significant, unanticipated changes to these assumptions could require a provision for impairment in the future.
Collectability of Accounts Receivable -------------------------------------
The Fund estimates the collectability of its accounts receivable. The Fund continually reviews its accounts receivable balances and makes an allowance when a receivable is deemed uncollectible. The actual collectability of accounts receivable could differ materially from the estimate.
Unit-based Compensation -----------------------
Compensation expense associated with unit options at grant date is an estimate based on various assumptions such as volatility, annual distribution yield, risk-free interest rate and expected life. Badger uses the Black-Scholes methodology to produce an estimate of the fair value of such compensation.
Financial and Other Instruments Fair Values -----------
The carrying values of cash, accounts receivable, accounts payable and accrued liabilities, income taxes payable and distributions payable approximate the fair value of these financial instruments due to their short-term maturities. The carrying value of the long-term debt approximates fair value due to its floating interest rates.
Foreign Currency Risk ---------------------
In the normal course of operations the Fund is exposed to movements in the United States dollar exchange rate relative to the Canadian dollar. Badger has United States operations and purchases certain items in United States dollars. Badger does not utilize hedging instruments to mitigate this risk.
Interest-rate Risk ------------------
The floating interest-rate profile of Badger's long-term debt exposes Badger to interest-rate risk. Badger does not use hedging instruments to mitigate this risk.
Credit Risk -----------
A substantial portion of Badger's accounts receivable is with customers involved in the oil and natural gas industry, whose revenues may be impacted by fluctuations in commodity prices. Although collection of these receivables could be influenced by economic factors affecting this industry, management considers the risk of a significant loss to be remote at this time. The Fund's credit risk from customers is minimized by Badger's broad customer base and the diverse industries it serves.
Disclosure Controls and Procedures Related to Financial Reporting
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management on a timely basis, including the President and Chief Executive Officer (CEO) and the Vice President Finance and Chief Financial Officer (CFO). This allows appropriate decisions to be made regarding public disclosure. As of December 31, 2007 both the CEO and the CFO have evaluated the effectiveness of Badger's disclosure controls and procedures as defined in Multilateral Instrument 52-109 of the Canadian Securities Administrators. They have concluded that such disclosure controls and procedures are effective.
Business Risks (Reference is also made to Badger's Annual Information Form.) Reliance on the Oil and Natural Gas Sector ------------------------------------------
The oil and natural gas sector accounts for a significant portion of the Fund's revenues. The petroleum service industry relies heavily on the volume of capital expenditures made by oil and natural gas explorers and producers and is also affected by certain adverse weather conditions. These spending decisions are based on several factors including, but not limited to, hydrocarbon prices; production levels of current reserves; and access to capital - all of which can vary greatly. To minimize the impact of the oil and natural gas industry cycles, the Fund also focuses on generating revenue from the utility and general contracting market segments.
Competition -----------
The Fund operates in a highly competitive environment for hydrovac services in Canada. In order to remain the leading provider of hydrovac services in this region, Badger continually enhances its safety and operational procedures to ensure that they meet or exceed customer expectations. Badger also has the in-house capabilities to continuously improve its daylighting units so that they remain the most productive and efficient hydrovacs in the business. There can be no assurance that Badger's competitors will not achieve greater market acceptance due to pricing, efficiency, safety and other factors.
United States Operations ------------------------
Badger also faces risks associated with doing business in the United States. The Fund has made a significant investment in the United States to develop the hydrovac market. The growth rate of the United States market is very hard to predict.
Safety ------
Safety is one of the Fund's primary concerns. Badger has implemented programs to ensure its operations meet or exceed current hydrovac safety standards. The Fund also employs safety advisors in each region who are responsible for maintaining and developing the Fund's safety policies. In addition, these regional safety advisors monitor the Fund's operations to ensure they are operating in compliance with such policies.
Amortization of Daylighting Units ---------------------------------
The Fund currently amortizes the hydrovac units over 10 years, a policy that is based on its current knowledge and past experience. There is a certain amount of business risk that newer technology or some other unforeseen circumstance could lower this life expectation.
Dependence on Key Personnel ---------------------------
Today, Badger has a strong, stable employee base. Badger relies on its ability and the ability of its agents/franchisees to attract and retain key personnel necessary to maintain and grow its business. Any loss of services of key personnel could have a material adverse effect on the business and operations of the Fund. The ability to secure the services of additional personnel is constrained in times of strong industry activity.
Reliance on Key Suppliers -------------------------
Badger has established relationships with key suppliers. There can be no assurance that current sources of equipment, parts, components or relationships with key suppliers will be maintained. If these are not maintained, Badger's ability to manufacture its hydrovac units may be impaired.
Fluctuations in Weather and Seasonality ---------------------------------------
Badger's operating results have been, and are expected to continue to be, subject to quarterly and other fluctuations due to a variety of factors including changes in weather conditions and seasonality. For example, in Western Canada Badger's results may be negatively affected if there is an extended spring break-up period since oil and natural gas industry sites may not be accessible during such periods. In Eastern Canada, Badger has in the past experienced enhanced use of its equipment during cold winters, thus improving the results of its operations during such times. The Fund may then experience a slow period during spring thaw.
In the Western United States, Badger has from time-to-time been restricted by the imposition of government regulations from conducting its work in environmentally sensitive areas during the winter mating seasons of certain mammals and birds. This has had a negative effect on Badger's results of operations. As such, changes in the weather and seasonality may, depending on the location and nature of the event, have either a positive or negative effect on Badger's results of operations.
Fluctuations in the Economy and Political Landscape ---------------------------------------------------
Operations could be adversely affected by a general economic downturn, changes in the political landscape or limitations on spending.
Compliance with Government Regulations --------------------------------------
While Badger believes it is currently in compliance with all applicable government standards and regulations, there can be no assurance that all of Badger's business will be able to continue to comply with all applicable standards and regulations.
Access to Additional Financing ------------------------------
Badger may find it necessary in the future to obtain additional debt or equity to support ongoing operations, to undertake capital expenditures or to undertake acquisitions or other business combination transactions. There can be no assurance additional financing will be available to Badger when needed or on terms acceptable to Badger. Badger's inability to raise financing to support ongoing operations or to fund capital expenditures or acquisitions could limit the Fund's growth and may have a material adverse effect upon the Fund.
Self-Insurance ---------------
Due to the magnitude of insurance premiums, the Fund decided to self-insure against any physical damage it could incur on the Canadian hydrovac units. This decision will be re-evaluated periodically as circumstances change. The United States hydrovac units continue to have insurance purchased by Badger.
Outlook
Badger increased its hydrovac fleet by 17 percent during 2007, from 285 units at the end of 2006 to 334 units at the end of 2007. Given reasonable market conditions these additional units should add significant revenue to 2008 results. In 2007 Badger strengthened its management team in all regions, which will help the Fund to continue its growth. Badger is adding production capacity at its Red Deer, Alberta facility, which is expected to be completed by mid-year 2008 and will allow Badger to build more units as market pull demands. With more locations in the United States the Fund believes it will increase market penetration in this important market.
BADGER INCOME FUND Consolidated balance sheets December 31, December 31, 2007 2006 $ $ -------------------------- ASSETS Current Cash 1,477,078 1,319,912 Accounts receivable 28,318,106 22,873,841 Inventories 1,690,133 1,399,661 Prepaid expenses 1,031,513 679,675 -------------------------- 32,516,830 26,273,089 Property, plant and equipment 71,672,820 62,367,823 Intangible assets 4,987,512 1,551,336 Goodwill 1,621,000 - -------------------------- 110,798,162 90,192,248 -------------------------- -------------------------- LIABILITIES AND UNITHOLDERS' EQUITY Current Accounts payable and accrued liabilities 11,269,139 14,951,723 Income taxes payable 212,540 671,544 Distributions payable 1,129,975 1,129,655 Current portion of long-term debt 218,768 108,768 -------------------------- 12,830,422 16,861,690 Long-term debt 26,035,242 8,516,284 Future income taxes 13,500,936 10,259,536 -------------------------- 52,366,600 35,637,510 -------------------------- Unitholders' equity Unitholders' capital 43,538,255 43,488,255 Contributed surplus 1,636,000 973,600 Retained earnings 13,257,307 10,092,883 -------------------------- 58,431,562 54,554,738 -------------------------- 110,798,162 90,192,248 -------------------------- -------------------------- BADGER INCOME FUND Consolidated statements of earnings and comprehensive income and retained earnings Dec. 31/07 Dec. 31/06 $ $ -------------------------- Revenues 117,687,718 98,370,896 Direct costs 74,894,917 61,987,817 -------------------------- Gross margin 42,792,801 36,383,079 -------------------------- Expenses Amortization 10,427,356 8,636,268 Loss (gain) on sale of property, plant and equipment (94,402) (5,580) Interest Long-term 1,178,295 68,525 Current - 363,882 Selling, general and administrative 9,690,948 7,613,620 Foreign exchange loss (gain) 808,080 (126,004) -------------------------- 22,010,277 16,550,711 -------------------------- Earnings before income taxes 20,782,524 19,832,368 -------------------------- Income taxes Current 818,279 687,480 Future 3,241,400 2,648,433 -------------------------- 4,059,679 3,335,913 -------------------------- Net earnings and comprehensive income for the year 16,722,845 16,496,455 Retained earnings, beginning of year 10,092,883 6,842,902 Cash distributions (13,558,421) (13,246,474) -------------------------- Retained earnings, end of year 13,257,307 10,092,883 -------------------------- -------------------------- Net earnings per unit Basic 1.55 1.53 -------------------------- -------------------------- Diluted 1.55 1.53 -------------------------- -------------------------- BADGER INCOME FUND Consolidated statements of cash flows Dec. 31/07 Dec. 31/06 $ $ -------------------------- Operating activities Net earnings for the year 16,722,845 16,496,455 Non-cash items: Amortization 10,427,356 8,636,268 Future income taxes 3,241,400 2,648,433 Unit-based compensation 712,400 205,190 Foreign exchange loss (gain) 808,080 (126,004) Loss (gain) on sale of property, plant and equipment (94,402) (5,580) -------------------------- 31,817,679 27,854,762 Net change in non-cash working capital relating to operating activities (7,384,823) (461,313) -------------------------- 24,432,856 27,393,449 -------------------------- Financing activities Proceeds from units issued - 59 Proceeds from long-term debt 17,737,726 7,618,911 Repayment of long-term debt (108,768) (108,702) Distributions to unitholders (13,558,101) (13,169,223) Increase (decrease) in bank indebtedness - (3,497,348) -------------------------- 4,070,857 (9,156,303) -------------------------- Investing activities Purchase of Benko Sewer Service (4,101,000) - Purchase of service rights (5,139,675) - Purchase of intangible assets - (150,000) Purchase of property, plant and equipment (15,977,574) (22,323,667) Proceeds on disposal of property, plant and equipment 523,122 714,615 Net change in non-cash working capital relating to investing activities (3,651,420) 3,651,420 -------------------------- (28,346,547) (18,107,632) -------------------------- Increase (decrease) in cash during the year 157,166 129,514 Cash, beginning of year 1,319,912 1,190,398 -------------------------- Cash, end of year 1,477,078 1,319,912 -------------------------- -------------------------- Interest paid 1,199,319 411,383 -------------------------- -------------------------- Income taxes paid (received) 1,271,334 (421,349) -------------------------- -------------------------- GEOGRAPHIC 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 year and three months ended December 31, 2007 and December 31, 2006 based on these geographic segments:
Three months ended Dec. 31, 2007 -------------------------------------- Canada ($) USA ($) Total ($) Revenues 22,786,736 10,569,274 33,356,010 Direct costs 15,083,283 6,762,507 21,845,790 Selling, general and administrative 1,704,675 881,642 2,586,317 EBITDA(x) 5,941,421 2,959,428 8,900,849 Amortization 1,870,651 953,323 2,823,974 Earnings before income taxes 3,767,042 1,995,247 5,762,289 Capital expenditures 3,532,176 3,005,788 6,537,964 Three months ended Dec. 31, 2006 -------------------------------------- Canada ($) USA ($) Total ($) Revenues 17,125,230 8,496,428 25,621,658 Direct costs 10,835,288 5,405,809 16,241,097 Selling, general and administrative 1,546,277 738,672 2,284,949 EBITDA(x) 4,742,266 2,564,310 7,306,576 Amortization 1,608,965 702,196 2,311,161 Earnings before income taxes 2,983,620 1,861,735 4,845,355 Capital expenditures 6,317,701 2,332,481 8,650,182 Twelve months ended Dec. 31, 2007 -------------------------------------- Canada ($) USA ($) Total ($) Revenues 78,945,490 38,742,228 117,687,718 Direct costs 50,262,694 24,632,223 74,894,917 Selling, general and administrative 6,300,137 3,390,811 9,690,948 EBITDA(x) 22,424,546 9,869,227 32,293,773 Amortization 7,061,336 3,366,020 10,427,356 Earnings before income taxes 14,291,471 6,491,053 20,782,524 Property, plant and equipment 46,469,797 25,203,023 71,672,820 Intangible assets 4,987,512 - 4,987,512 Goodwill 1,621,000 - 1,621,000 Total assets 75,070,511 35,727,651 110,798,162 Capital expenditures 5,736,771 10,240,803 15,977,574 Twelve months ended Dec. 31, 2006 -------------------------------------- Canada ($) USA ($) Total ($) Revenues 68,940,697 29,430,199 98,370,896 Direct costs 43,013,050 18,974,767 61,987,817 Selling, general and administrative 5,135,903 2,477,717 7,613,620 EBITDA(x) 20,835,062 8,060,401 28,895,463 Amortization 6,267,848 2,368,420 8,636,268 Earnings before income taxes 14,193,183 5,639,185 19,832,368 Property, plant and equipment 44,542,937 17,824,886 62,367,823 Intangible assets 1,551,336 - 1,551,336 Goodwill - - - Total assets 63,313,728 26,878,520 90,192,248 Capital expenditures 11,572,715 10,750,952 22,323,667 (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 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). Forward-Looking Statements
Certain statements contained in this press release constitute forward-looking statements. These statements relate to future events or Badger's future performance. All statements other than statements of historical fact may be forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or events to differ materially from those anticipated in such forward-looking statements. Other factors include, but are not limited to: the future tax treatment of income trusts; supply-demand fluctuations for oil and natural gas and related products and services; political and economic conditions; the demand for services provided by Badger; industry competition; and Badger's ability to attract and retain key personnel. The Fund believes that the expectations reflected in these forward-looking statements are reasonable; however, no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this annual report should not be unduly relied upon. In addition, these forward-looking statements relate to the date on which they are made. Badger disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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 certain locations Badger has established corporate run operations to market and deliver the service in the local area.
This press release contains forward-looking statements subject to various risk factors and uncertainties, which may cause the actual results, performances or achievements of Badger to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, fluctuations in the market for oil and gas 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 Toronto Stock Exchange has neither approved nor disapproved the
information contained herein.
