Calgary, Alberta (FSCwire) - Badger Daylighting Ltd. is pleased to announce its results for the fourth quarter ended December 31, 2015.

 

The Cautionary Statements Regarding Forward Looking Information and Statements is an integral part of this release and is included at the end.

 

FINANCIAL HIGHLIGHTS

($ thousands, except per share and total shares outstanding information)

 

Three months ended December 31,					Twelve months ended December 31,
	2015		2014		2015		2014
Revenue
Hydrovac service revenue		93,500		97,300	367,638	365,316
Other revenue		7,564		11,049	36,982	56,903
Total revenue		101,064		108,350	404,620	422,219
Adjusted EBITDA		26,197		34,739	107,759	120,121
Legal settlement (recovery) and related costs		(11,909)		-	9,711	-
Impairment of Fieldtek oil tank cleaning assets		6,508		-	6,508	-
Profit before tax		16,294		20,857	41,243	73,519
Net profit		20,486		17,045	38,488	53,102
Profit per share – basic and diluted ($)		0.55		0.47	1.04	1.43
Cash flow from operating activities before non-cash working capital adjustments		7,851		34,654	75,516	100,479
Cash flow from operating activities before non-cash working capital adjustments per share – basic and diluted ($)		0.22		0.94	2.04	2.71
Dividends declared		3,339		3,333	13,350	13,332
Total shares outstanding (end of period)		37,100,681		37,033,893	37,100,681	37,033,893

 

OVERVIEW

Highlights for the three months ended December 31, 2015:

 

• Total revenue decreased by 6.7 percent to $101.1 million in the fourth quarter of 2015 from $108.4 million in the comparable quarter in the prior year.  United States revenue (in Canadian dollars) increased by 11.0 percent while Canadian revenue decreased by 27.8 percent.

 

• Total hydrovac revenue decreased by 3.9 percent to $93.5 million, from $97.3 million in the comparable period from the prior year.  While hydrovac revenue declined in oil and gas producing regions, growth outside these regions as well as the benefit of translating United States dollar revenue into Canadian dollars allowed the company to offset the majority of the weakness in the oil and gas sector.

 

• The largest component of other revenue in the prior year was the Western Canada based Fieldtek oil tank cleaning business.  Revenue from these services declined by 48.4 percent from $6.7 million to $3.5 million.

 

• Adjusted EBITDA decreased by 24.6 percent to $26.2 million from $34.7 million.

 

• Adjusted EBITDA as a percent of revenue decreased from 32.1 percent to 25.9 percent.

 

• Canadian Adjusted EBITDA as a percent of revenue decreased from 35.2 percent to 21.7 percent upon weakness in Western Canada as well as disappointing results from Eastern Canada.  Canadian Adjusted EBITDA was $7.7 million in the fourth quarter of 2015, down from $17.4 million in the fourth quarter of 2014.

 

• US Adjusted EBITDA as a percent of revenue decreased from 29.5 percent to 28.2 percent, also affected by weakness in the oil and natural gas sector.  US Adjusted EBITDA in Canadian dollars was $18.5 million in the fourth quarter of 2015, up from $17.4 million in the same period of 2014.

 

• Cash flow from operations before non-cash working capital adjustments decreased from $34.7 million to $7.9 million primarily due to lower Adjusted EBITDA ($8.5 million) as well as a higher current tax expense ($10.1 million) and the partial payment of the legal settlement ($3.2 million).

 

• Following an annual test of goodwill and intangibles with indefinite lives, and due to the impact of lower oil prices and reduced drilling activity, the Corporation recorded an impairment charge of $6.5 million against Fieldtek oil tank cleaning assets.

 

• On December 29, 2015, the Company settled the legal action with a former franchisee by agreeing to pay the former franchisee USD $7.5 million.

 

• Badger had 1,018 Badger hydrovacs at the end of 2015, reflecting the addition of 64 hydrovacs to the fleet in 2015 and the retirement of 44 units.  Of the total, 364 units were operating in Canada and 654 in the United States at year-end.  Badger had 410 units in Canada and 588 in the United States for a total of 998 units at December 31, 2014.  The new units were financed from cash generated from operations.

 

Highlights for the year-ended December 31, 2015:

 

• Hydrovac revenue increased to $367.6 million in 2015 from $365.3 million in 2014 despite very challenging market conditions in oil and natural gas producing markets.  The increase in hydrovac revenue results from continued strong growth in the US non-oil and gas producing regions, as well as the benefit of translating US dollar denominated revenue into Canadian dollars.

 

• Total revenues when including revenue from services rendered aside from hydrovac services decreased 4.2 percent from $422.2 million in 2014 to $404.6 million in 2015. 

 

• Following continued weakness in commodity prices, Badger’s revenue from the oil and gas industry declined by 25 percent, which was offset by a 27 percent increase from utility and other industrial clients, both taking into consideration foreign exchange effects.

 

• Badger’s hydrovac revenue from the oil and gas industry decreased from 51 percent to 38 percent of total hydrovac revenue from 2014 to 2015.  Growth from the non-oil and gas sector as well as a decline the oil and gas industry revenue has shifted the industry concentration to 62 percent non-oil and gas.  Management includes refinery, pipeline and all activities that occur within an oil or gas producing property to be part of the oil and gas sector.  All other sectors form the non-oil and gas sector.

 

• Other revenue decreased from $56.9 million to $37.0 million.  The largest component of other revenue is the Fieldtek oil tank cleaning business.  This revenue decreased by 45.5 percent in the year, from $27.7 million to $15.1 million.

 

• Adjusted EBITDA decreased by 10.3 percent from $120.1 million to $107.8 million year-over-year.

 

• Adjusted EBITDA as a percent of revenue for 2015 was 26.6 percent versus 28.4 percent in 2014.  The overall decrease was largely due to weaker revenue in Canada as Canadian Adjusted EBITDA as a percent of revenue decreased from 28.0 percent to 22.4 percent.  US Adjusted EBITDA as a percent of revenue remained relatively strong at 29.2 percent, up from 29.0 percent in the prior year.

 

• Cash flow from operations increased to $94.2 million from $84.2 million as curtailed growth reduced working capital.

 

• Profit per share was $1.04 for 2015 compared to $1.43 for 2014.

 

• Capital expenditures in 2015 were $39.0 million, split between growth capital of $23.7 million and maintenance capital of $15.3 million.

 

• Management has responded to the weakness in Western Canada specifically and oil and natural gas-producing regions in general by curtailing production of Badger hydrovacs and redistributing the existing fleet.  24 hydrovacs were transferred from Canada to growth markets in the US during the year.

 

• Total long-term debt decreased from $124.4 million at the end of 2014 to $103.9 million at the end of 2015, reflecting repayment of the syndicated revolving credit facility balance of $37.4 million from the prior year which was partially offset by the revaluation of the US dollar-denominated senior secured notes.

 

OUTLOOK 

 

2015 was a good test for Badger. With significantly reduced activity levels in the oil and natural gas sector Badger needed to proactively grow its non-oil and gas business or suffer a major reduction in revenue and profitability. This challenge accelerated what had been a gradual transition to a revenue base less reliant on the oil and natural gas sector.  In 2013, oil and natural gas represented 55 percent of Badger’s core hydrovac business; in 2014 it was 51 percent and in 2015 it shrank to 38 percent.  Utility and other industries are now the clear leading source of revenue for Badger.  We believe this is a significant change as demand for Badger’s services in the utilities and other industries should grow with less volatility.  We expect this trend to continue in 2016.

 

2015 Comments

 

1.     Badger’s hydrovac business grew modestly by 0.6 percent, including foreign exchange effects, while other revenue declined.

 

2.     Minimal hydrovac revenue growth belies significant growth in utility and other industries, offset by weakness in the oil and natural gas sector.  As mentioned above, Badger’s market shifted to 62 percent utility and other industries.  This equates to a growth of 27 percent in Badgers non-oil and natural gas sector.  A very impressive growth rate. The challenge is to continue this growth rate as Badger believes the oil and natural gas sector – in the short term at least – will continue to decline.

 

3.     Badger’s hydrovac revenue is 67.2 percent from the US, and 32.8 percent from Canada (2014: 55.6 percent from the US, 44.4 percent from Canada)

 

4.     The US results were impressive with a small revenue growth of 4.9 percent in United States dollar terms for the year and stable Adjusted EBITDA margins. The west region - which starts at North Dakota and flows down to New Mexico - had the biggest negative impact due to the decline in the oil and natural gas industry. It should be noted that the biggest reduction in the US west happened in the last half of 2015.

 

5.     Western Canada experienced severely reduced demand in the oil and natural gas sector, especially in areas such as northern Alberta.  However western Canada managed to keep reasonable - although reduced margins.  Overall Badger is pleased with the efforts and response in western Canada to the collapse in the oil and natural gas sector.

 

6.     As with any organization - from time to time - an area does not perform to expectations. Eastern Canada shrank in revenue and profitability in 2015 even though more market was available. This had a negative impact on Canadian and total company results. Management in this region was changed in late 2015 and Badger expects Eastern Canada to be weak in the first half of 2016 and then start to recover in the second half of the year.

 

7.     Badger strengthened its balance sheet during 2015, exiting the year with total debt less cash of $78.9 million, nothing drawn on the $125 million syndicated revolving credit facility and total debt less cash to Adjusted EBITDA of 0.73, providing lots of capacity to build more trucks when needed.

 

8.     One of the key focuses for 2015 was to strengthen the organization especially at the corporate level.  With the addition of a corporate Health, Safety and Environment Director, corporate Fleet Design and Service Manager, corporate Organization Development Manager and two Vice President of Operations in the US - Badger is fully staffed at the corporate level - and in a good position for future growth.

 

9.     Badger built 64 trucks and retired 44, resulting in 20 growth trucks in 2015.  With the drop in revenue per truck Badger did not want to invest significant cash to keep old trucks running. Marginal units were removed, resulting in more truck retirements than we’ve had over the past few years. The additional 64 new trucks should produce good margins and revenue for at least 10 years.

 

10.    Revenue per truck was less in 2015 ($25,721) than 2014 ($32,169) and did not meet the target of $30,000. With the large increase in the truck fleet in 2014, and the drop in the oil and natural gas sector Badger did not meet its revenue per truck target.  In keeping with the Badger business model, the Company reduced truck production and focused instead on cash generation and improving fleet utilization.

 

11.    2015 Adjusted EBITDA was 26.6 percent of revenue which is below our target of approximately 28 to 29 percent of revenue.  The US did well in this regard although they were hampered by the slowdown in the oil and natural gas sector.  Canada had two issues – the slow oil and gas sector and poor performance in Eastern Canada.  This is a reasonable result given the challenges in transitioning the Badger fleet between oil and natural gas markets and non-oil and natural gas markets.

 

Major initiatives for 2016:

 

1.     Badger maintained stable hydrovac revenue while reducing our concentration of revenue in the oil and gas sector in 2015 – Badger must continue this in 2016 and aggressively grow in utility and other sectors which have strong activity and potential demand for Badger services.   In 2015, Badger grew 26.5 percent in areas not affected by the oil and gas industry while increasing its exposure to these markets, generating 62 percent of hydrovac revenue in utility and non-oil and gas sectors.  This transition gives Badger a much better position for growth in 2016.

 

2.     With the potential for continued decline in the oil and natural gas sector Badger will continue to prudently manage costs in these areas and reallocate assets as required.

 

3.     Badger reduced its truck build in early 2015 to compensate for idle trucks in areas with lower than normal activity. We believe we will continue with a reduced build of 3 to 6 trucks a month on average for the foreseeable future.  Our replacement truck estimate is about the same as 2015. Badger believes it will retire 40 to 50 trucks in 2016.  44 trucks were retired in 2015.

 

4.     Focus on revenue per truck of at least $30,000 per month.  It will be a challenge in the first couple of quarters with Western Canada and Western US likely to experience further declines in activity levels. However the utility market segment should get stronger as we move into the construction season after the spring.

 

5.     Increase the effectiveness of the business development effort to continue to grow Badgers customer base, especially in the US.

 

6.     Continue to build the organization to achieve our overall objective of doubling the US business in three to five years.  People are still the key and Badger’s ability to attract and retain key people are the means to achieve growth.

 

7.     As always continued focus on providing value added service to all customers with the best truck best operator philosophy.

 

2016 Outlook

 

2016 will be another year of running hard to stay in place.  Badger expects demand from the oil and natural gas sector to continue to shrink requiring growth in utility and other industries to offset it.  2015 results position Badger to better accomplish this, but hydrovac production is expected to stay low in 2016 with truck retirements again at 2015 levels.  Badger believes the US will continue to become an ever larger part of its business.

 

Results of Operations

 

Revenues

Fourth quarter revenues of $101.1 million for the three months ended December 31, 2015 were 6.7 percent lower than the $108.4 million generated during the comparable period in 2014. The decrease is attributable to the following:

 

• Canadian revenue decreased by 27.8 percent to $35.7 million from $49.4 million.  The leading cause of this decrease is the overall reduction in capital spending in the oil and natural gas industry which resulted in a 26.9 percent decrease in Canadian hydrovac revenue. 

 

• Fieldtek revenue has been particularly affected by the decline in the oil production sector.  Fieldtek’s business is concentrated in servicing oil producers within a 150 kilometer radius of Lloydminster, Alberta with oil storage tank cleaning.  This tank cleaning revenue decreased by 48.2 percent to $3.5 million from 6.7 million.

 

• In United States dollars, revenue decreased by 6.0 percent for the three months ended December 31, 2015 over the comparable quarter in 2014.  Upon translation to Canadian dollars, United States revenue increased from $59.0 million to $65.4 million for the three months ended December 31, 2015, an increase of 11.0 percent from the same period in the prior year.  

 

Yearly total revenue decreased from $422.2 million in 2014 to $404.6 million in 2015.  

 

Badger’s average revenue per truck per month during the three months ended December 31, 2015 was $25,197 versus $30,435 for the three months ended December 31, 2014. For the year, the revenue per truck in 2015 was $25,721 versus $32,169 in 2014.  The reduction in revenue per truck was predominantly the result of weakness in oil and gas producing regions.

 

Reclassification of general and administrative expenses

Beginning in the first quarter of 2015, general and administrative expenses include only those costs related to the Corporation’s three main administrative centers – the Corporate office in Calgary, the Canadian administration center in Red Deer, and the United States administration center in Brownsburg, Indiana.  Costs that are incurred outside these centers have been classified as direct costs.  Historical results were reclassified to match the current period presentation.  This reclassification did not impact net earnings, Adjusted EBITDA, earnings per share, financial position or cash flows.

 

Management believes that the new definition for general and administrative expenses more closely aligns to respective senior management areas of responsibility, as well as allows for greater comparability of Badger’s Canadian and US businesses. 

 

Direct Costs

Direct costs for the quarter ended December 31, 2015 were $72.0 million as compared to direct costs of $71.1 million for the quarter ended December 31, 2014.  Direct costs increased as operations management roles were filled due to the growth in the US and the number of areas in which we conduct operations increased.  Offsetting these costs were reduced fuel costs in the fourth quarter and throughout the year.  2015 direct costs were $283.1 million, or 70.0 percent of revenue, versus $290.5 million, or 68.8 percent of revenue, for 2014. 

 

Gross Profit

The gross profit margin was 28.7 percent for the quarter ended December 31, 2015, down from the 34.4 percent for the quarter ended December 31, 2014. Gross profit margin for 2015 was 30.0 percent versus 31.2 percent for 2014. Canada had a gross profit margin of 22.4 percent in the fourth quarter (36.9 percent in the fourth quarter of 2014) and 26.2 percent for the year (30.8 percent in 2014).  The United States gross profit margin was 32.2 percent in the fourth quarter (32.3 percent in the fourth quarter of 2014) and 32.4 percent for the year (31.6 percent in 2014).

 

Depreciation of Property, Plant and Equipment

Depreciation of property, plant and equipment was $11.0 million for the three months ended December 31, 2015,

$1.7 million higher than the $9.3 million incurred for the three months ended December 31, 2014, due to a full year of depreciation on the 207 additional hydrovac units added to the fleet in 2014 as well as the 20 additional units added in 2015.  Depreciation for all of 2015 was $42.4 million versus $33.6 million in 2014, also due to the increasing hydrovac fleet size.

 

Impairment Related to Oil Tank Cleaning Assets

 

The persistently low commodity prices were considered indicators of possible impairment of Badger’s assets involved in the oil tank cleaning based in Lloydminster, Alberta.  These assets were acquired as a result of the Fieldtek Ltd. acquisition in November, 2013.  Badger assessed these assets to determine whether the carrying values exceeded their recoverable amount and concluded in the fourth quarter of 2015 to record an impairment charge of $6,508 relating to these specific assets.

 

Finance Cost

Finance cost was $2.3 million for the quarter ended December 31, 2015 versus $1.6 million for the same quarter in 2014. The higher finance cost was largely due to interest owing on income taxes related to the change in transfer prices for hydrovacs sold to the US operations as well as a higher translated interest cost on US dollar denominated debt, offset by having a lower average debt balance.  Finance costs were $5.9 million in 2015 versus $5.8 million in 2014, resulting from the same factors as mentioned above.

 

General and Administrative Expenses

General and administrative expenses increased from $2.5 million in the fourth quarter of 2014 to $2.8 million in the same quarter of 2015, largely due to translating US general and administration costs at a relatively higher exchange rate.  For the full year general and administrative costs were $13.8 million in 2015 versus $11.6 million in 2014.  As a percentage of revenue, general and administrative expenses increased from 2.7 percent to 3.4 percent in 2015.

 

Legal Settlement and Related Costs

Late in the fourth quarter of 2015, Badger settled the legal action with a former franchisee against a subsidiary of Badger by agreeing to pay the former franchisee USD $7.5 million.  USD $2.5 million was paid in December, 2015, and the remaining USD $5.0 million was paid in January, 2016.  Directly related costs of $1,467 were also incurred by the Corporation in relation to this legal dispute in 2015.  It should be noted that both parties are bound by a confidentiality agreement concerning particulars of the case.

 

Income Taxes

The effective tax rate for the year ended December 31, 2015 before the benefit of recording the recovery resulting from a prior years transfer pricing adjustment, was 28.8 percent compared to 27.8 percent for the prior year.  Badger has recognized a benefit of a transfer pricing adjustment on the sale of hydrovac vehicles from Canada to the United States of $9.2 million in the fourth quarter of 2015.

 

Net Profit

 

The fourth quarter of 2015 resulted in $20.5 million net profit as compared to a net profit of $17.0 million in the same period last year.  Generally weaker gross profit following the decline in commodity prices was offset in the quarter by recording the benefit of the transfer pricing adjustment as well as the reversal of the legal provision.  Net profit for the year declined from $53.1 million in 2014 to $38.5 million on the same factors noted above.

 

Other Comprehensive Income

 

The company incurred $33.4 million in other comprehensive income on the foreign currency translation of its US operations because the US dollar strengthened significantly throughout the year.  Note that the company chose to designate the US dollar denominated senior secured note as a hedge of the net investment in its US operations starting in the first quarter of 2015, and accordingly, offset the exchange differences on translation of the US operations with the opposite exchange differences on the translation of the US dollar-denominated debt. The hedge offset the foreign exchange income by $16.9 million, resulting in a total other comprehensive income of $16.5 million.

 

Liquidity and Dividends

Cash flow from operations increased as the benefit to cash flow of reduced working capital offset overall reduced net profit. 

 

The Company had working capital of $83.7 million at December 31, 2015 compared to $92.9 million at December 31, 2014 as collections improved and decreased revenue lead to decreased receivables.  Trade payables also declined before adding the outstanding US $5.0 million accrued liability relating to the legal settlement.

 

The following table outlines the cash available to fund growth and pay dividends to shareholders for the twelve months ended December 31, 2015 and 2014:

 

		Year ended
($ thousands)		December 31, 2015			December 31, 2014
Cash flow from operating activities before non-cash working capital adjustments			75,516			100,479
Add: Proceeds from sale of property, plant and equipment			737			541
Deduct: Long-term debt repayment			(37,426)			-
Deduct: Maintenance capital			(15,270)			(10,304)
Cash Available for Growth Capital and Dividends			23,557			90,716
Growth Capital Expenditures			23,697			88,779
Dividends Declared			13,350			13,332

 

In determining cash available for dividends, the Company excludes non-cash working capital changes for the period as well as growth capital expenditures. Changes in non-cash working capital items are excluded so as to remove the effects of timing differences in cash receipts and disbursements, which generally reverse themselves and can vary significantly between fiscal periods. Growth capital expenditures are excluded so as to include only the maintenance capital expenditures required to sustain the existing asset base.

 

The following table outlines the excess of cash provided by operating activities and net profit over dividends declared during the years ended December 31, 2015 and 2014:

 

		Year ended
($ thousands)		December 31, 2015			December 31, 2014
Cash provided by operating activities			94,223			84,203
Net profit			38,488			53,102
Dividends declared			13,350			13,332
Excess of cash provided by operating activities over dividends declared			80,873			70,871
Excess of net profit over dividends declared			25,138			39,770

 

The Company pays cash dividends monthly to its shareholders. They may be reduced, increased or suspended by the Board of Directors depending on the operations of Badger and the performance of its assets. The actual cash flow available for dividends to shareholders of Badger is a function of numerous factors, including: the Company’s financial performance; debt covenants and obligations; working capital requirements; maintenance and growth capital expenditure requirements for the purchase of property, plant and equipment; and the number of shares outstanding.

 

The Company maintains a strong balance sheet. Its debt management strategy includes retaining sufficient funds from available distributable cash to finance maintenance capital expenditures as well as working capital needs. Growth capital expenditures will generally be financed through existing debt facilities, proceeds received from equity financings or cash retained from operating activities. The majority of the cash provided by operating activities in 2015 was used to finance growth and maintenance capital expenditures, to pay long-term debt and to pay dividends to shareholders.

 

If maintenance capital expenditures increase in future periods, the Company’s cash available for growth capital expenditures and dividends 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 years.  Over time, if growth slowed, Badger would expect to incur annual maintenance capital expenditures approximately equaling the year’s depreciation expense. Badger is taking the opportunity of reduced demand for growth trucks to remove marginal trucks and as such, removed 44 hydrovac units from the fleet in 2015 (14 removed in 2014). Badger expects that cash provided by operations and cash available for growth capital expenditures and dividends will be sufficient to fund its future maintenance capital expenditures.

 

Badger is restricted from declaring dividends if it is in breach of the covenants under its credit facilities. As at the date of this MD&A the Company is in compliance with all debt covenants and is able to fully utilize its credit facilities as well as declare dividends. Badger does not have a credit rating.

 

Following the legal award against Badger in the State of Oklahoma, and due to the Company’s decision to appeal the verdict and therefore not discharge that judgment within 30 days, Badger was in default of its Extendable Revolving Credit Facility and Senior Secured Notes. Badger obtained waivers of this default from all lenders of both the Credit Facility and the Senior Secured Notes, and ultimately entered into an agreement to settle this matter on December 29, 2015.

 

Capital Resources__________________________________________________________________

 

Investing

The Company invested $5.4 million on property, plant and equipment for the three months ended December 31, 2015 compared to $24.0 million for the three months ended December 31, 2014. For the year, the Company spent $39.0 million, a $60.1 million decrease over the $99.1 million spent in 2014.  The decrease in property plant and equipment is largely due to the reduced production of hydrovacs in 2015.  With the lower build rate, the costs to build a hydrovac unit was marginally higher compared with the average for 2014.

 

Maintenance capital expenditures are incurred during a period to keep the hydrovac fleet at the same number of units plus any other capital expenditures required to maintain the business. This amount will fluctuate period-to-period depending on the number of units retired from the fleet. During the year ended December 31, 2015, Badger added 64 units to the fleet (221 in 2014), of which 44 have been reflected as maintenance capital expenditures (14 in 2014).  Total maintenance capital expenditures for the year were $15.3 million as compared to $10.3 million in 2014. 

 

Financing

Syndicated revolving credit facility

In 2014, the Corporation established a $125 million syndicated revolving credit facility (the “credit facility”).  The purpose of the credit facility is to finance the Corporation's capital expenditure program and for general corporate purposes. The credit facility bears interest, at the Corporation's option, at either the bank's prime rate plus a tiered set of basis points or bankers' acceptance rate also with a tiered structure. A stand-by fee is also required on the unused portion of the credit facility on a tiered basis. The prime rate tiers range between zero and 125 basis points. The bankers’ acceptance tier ranges from 125 to 250 basis points. The stand-by fee tiers range between 25 and 50 basis points.  All of the tiers are based on the Company’s Funded Debt to “Bank EBITDA” ratio.  Bank EBITDA is defined as earnings before interest, taxes, depreciation and amortization.  The stand-by fee is expensed as incurred.

 

The credit facility expires on July 22, 2018.

 

The credit facility is collateralized by a general security interest over the Corporation’s assets, property and undertaking, present and future.

 

As at December 31, 2015, the Corporation has issued letters of credit of approximately $3.4 million. The outstanding letters of credit support the U.S. insurance program and certain performance bonds and reduce the amount available under the syndicated credit facility.

 

At December 31, 2015, the Corporation had available $121.6 million (December 31, 2014 - $86.0 million) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met.

 

Senior secured notes

On January 24, 2014 Badger closed a private placement of senior secured notes.  The notes, which rank pari passu with the extendable revolving credit facility, have a principal amount of US $75.0 million and an interest rate of 4.83 percent per annum and mature on January 24, 2022. The Canadian dollar equivalent on January 24, 2014 was $82.9 million. Amortizing principal repayments of US $25.0 million are due under the notes on January 24, 2020, January 24, 2021 and January 24, 2022.  Interest is paid semi-annually in arrears.

 

The senior secured notes are collateralized by a general security interest over the Corporation’s assets, property and undertaking, present and future.

 

In the fourth quarter of 2015, Badger recorded an unrealized foreign exchange loss of $3.4 million as a component of other comprehensive income (a cumulative loss on foreign exchange of $16.9 million in 2015) on the foreign currency revaluation of senior secured notes.  In the fourth quarter of 2014 there was a foreign exchange loss of $2.6 million, and a total foreign exchange loss for the twelve month period ended December 31, 2014 of $3.8 million.  The 2014 foreign exchange losses were recorded in net profit as the senior secured notes were not designated as a net investment hedge at that time. 

 

Under the terms of the credit facility and the senior secured notes, the Corporation must comply with certain financial and non-financial covenants, as defined by the bank. Throughout 2015, and as at December 31, 2015, the Corporation was in compliance with all of these covenants.

 

SHARE CAPITAL

Shares outstanding at December 31, 2015 were 37,100,681.

 

As of March 17, 2016 the outstanding shares totaled 37,100,681.

 

SELECTED QUARTERLY FINANCIAL INFORMATION

 

All amounts are $000’s except Per Share amounts are $’s	2015				2014
	Q4	Q3	Q2	Q1	Q4	Q3	Q2	Q1
Revenue	101,064	111,431	90,435	101,689	108,350	113,121	100,726	100,022
Net profit (loss)	20,486	17,090	(10,533)	11,443	17,045	16,078	14,249	5,730
Net profit (loss) per share – basic and diluted	0.55	0.46	(0.28)	0.31	0.47	0.43	0.38	0.15

 

CHANGES IN ACCOUNTING POLICIES

 

The Corporation adopted amendments to IFRS 7, IAS 32, IAS 36, and IFRIC 21 on January 1, 2014. There was no material impact to the Corporation’s interim condensed consolidated financial statements as a result of the adoption of those standards.

 

ACCOUNTING STANDARDS PENDING ADOPTION

The Corporation has reviewed new and revised accounting pronouncements that have been issued but are not yet effective and determined that the following may have an impact on the Corporation:

 

i.     IFRS 9, ‘Financial Instruments’ was issued as the first step in its project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. IFRS 9 introduces new requirements for classifying and measuring financial instruments that must be applied starting January 1, 2018, with early adoption permitted. The IASB intends to expand IFRS 9 during the intervening period to add new requirements for classifying and measuring financial liabilities, de-recognition of financial instruments, impairment and hedge accounting. The Corporation will assess the impact of this standard on the consolidated financial statements.

 

ii.    IFRS 15, ‘Revenue from Contracts with Customers’ replaces IAS 11, Construction Contracts, IAS 18, Revenue, IFRIC 13, Customer Loyalty Programmes, IFRIC 15, Agreements for the Construction of Real Estate, IFRIC 18, Transfers of Assets from Customers and SIC-31, Revenue – Barter Transactions Involving Advertising Services and is effective for annual periods beginning on or after January 1, 2017. IFRS 15 specifies how and when entities recognize revenue, as well as requires more detailed and relevant disclosures. The new standard provides a single, principles based five-step model to be applied to all contracts with customers, with certain exceptions. The new standard is effective for fiscal years beginning on or after January 1, 2018 and is available for early adoption. 

 

a.     Identify the contract(s) with the customer;

 

b.     Identify the performance obligation(s) in the contract;

 

c.     Determine the transaction price;

 

d.     Allocate the transaction price to each performance obligation in the contract;

 

e.     Recognize revenue when (or as) the entity satisfies a performance obligation.

 

The Corporation has not yet selected a transition method nor determined the effect of the standard on the consolidated financial reporting.

 

iii.   IFRS 16, ‘Leases’ will supersede the current IAS 17, ‘Leases’ standard. Under IFRS 16, a lease will exist when a customer controls the right to use an identified asset as demonstrated by the customer having exclusive use of the asset for a period of time. IFRS 16 introduces a single accounting model for lessees and all leases will require an asset and liability to be recognized on the statement of financial position at inception. The accounting treatment for lessors will remain largely the same as under IAS 17. The standard is effective for annual periods beginning on or after January 1, 2019 with early adoption permitted, but only if the entity is also applying IFRS 15. The Corporation is required to retrospectively apply IFRS 16 to all existing leases as of the date of transition and have the option to either:

 

• apply IFRS 16 with full retrospective effect; or

 

• recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application.

 

As a practical matter, an entity is not required to reassess whether a contract is, or contains, a lease at the date of initial application. The extent of the impact of adoption of the standard has not yet been determined.

 

CRITICAL ACCOUNTING ESTIMATES

 

Management is responsible for applying judgement in preparing accounting estimates. Certain estimates and related disclosure included in the financial statements are particularly sensitive because of their significance to the financial statements and 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 Company to make assumptions about matters that are highly uncertain at the time the accounting estimate is made, and if different estimates the Company 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 IFRS, the following critical accounting estimates have been identified by management:
 

This accounting estimate has the greatest effect on the Company’s financial results. It is carried out on the basis of the units’ estimated useful lives. The Company currently depreciates hydrovac units over 10 years based on current knowledge and working experience. There is a certain amount of business risk that newer technology or some other unforeseen circumstance could lower this life expectancy. A change in the remaining life of the hydrovac units or the expected residual value would affect the depreciation rate used to depreciate the hydrovac units and thus affect depreciation expense as reported in the Company’s consolidated statement of comprehensive income. These changes are reported prospectively when they occur.

 

Badger has estimated its tax pools for the income tax provision. The actual tax pools the Company may be able to use could be materially different in the future.  Badger has recognized the benefit of a transfer pricing adjustment on the sale of hydrovac vehicles from Canada to the United States relating to the years 2009 to 2013 based on an estimate of the fair values of these vehicles.  The tax pools that result from the transfer pricing adjustment may be materially different and depend on final resolution from both Canada and the United States taxing authorities.

 

Intangible assets consist of service rights acquired from Badger’s 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. Impairment exists when the carrying amount of the intangible asset exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm’s-length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the projections for the next five years and do not include restructuring activities that the Company is not yet committed to or significant future investments that will enhance the asset’s performance. When an impairment loss reverses, the carrying amount of the intangible asset is increased to the revised estimate of the recoverable amount but not beyond the carrying amount that would have been determined had no impairment loss been recognized.

 

Goodwill is the amount that results when the cost of acquired assets exceeds their fair value at the date of acquisition. Goodwill is recorded at cost, is not amortized and is 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.

 

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.

 

The Company estimates the collectability of its trade and other receivables. The Company continually reviews the balances and makes an allowance when a receivable is deemed uncollectable. The actual collectability of trade and other receivables could differ materially from the estimate.

 

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

 

The Company’s financial instruments recognized on the consolidated statements of financial position consist of cash and cash equivalents, trade and other receivables, trade and other payables, deferred unit plan liability, dividends payable and long-term debt. The fair values of these recognized financial instruments, excluding long-term debt, approximate their carrying value due to their short-term maturity. The carrying value of the long-term debt approximates fair value because the long-term facilities have a floating interest rate.

 

Credit risk arises when a failure by counter parties to discharge their obligations could reduce the amount of future cash flows from financial assets on hand at the balance sheet date. A substantial portion of the Company’s trade receivables is with customers in the petroleum and utility industries and is subject to industry credit risks.  The Company manages its exposure to credit risk through standard credit-granting procedures and short payment terms. The Company attempts to monitor financial conditions of its customers and the industries in which they operate.

 

Liquidity risk is the risk that, as a result of operational liquidity requirements, the Company will not have sufficient funds to settle an obligation on the due date and will be forced to sell financial assets at a price less than what they are worth, or will be unable to settle or recover a financial asset.

 

The Company’s operating cash requirements are continuously monitored by management. As factors impacting cash requirements change, liquidity risks may necessitate the Company raising capital by issuing equity or obtaining additional debt financing. The Company also mitigates liquidity risk by maintaining an insurance program to minimize exposure to insurable losses.

 

The significant market risks affecting the financial instruments held by the Company are those related to interest rates and foreign currency exchange rates, as follows:

 

The Company is exposed to interest rate risk in relation to interest expense on a portion of its long-term debt whose rate is floating. Interest is calculated at prime. The prime interest rate is subject to change. A sensitivity analysis would indicate that net profit for the year ended December 31, 2015 would have been affected by approximately $0.1 million if the average interest rate changed by 1 percentage point. The Company does not use interest rate hedges or fixed interest rate contracts to manage its exposure to interest rate fluctuations but has chosen to issue USD 75.0 million in fixed rate senior secured notes which fixes interest exposure on a portion of the long term debt.

 

The Company is exposed to foreign currency fluctuations as revenue and expenses derived from United States operations are denominated in United States dollars.  The United States subsidiaries are subject to translation gains and losses on consolidation. The Company’s Canadian operations purchase certain products in United States dollars.  Foreign exchange gains and losses are included in net profit while foreign exchange gains and losses arising on the translation of the assets, liabilities, revenues and expenses of the Company’s United States operations are included in OCI.  The Company also holds United States dollar denominated debt which is used to manage the exposure to foreign exchange gains and losses arising from the translation of its United States functional currency operations included in OCI.

 

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING

Badger’s President and CEO and its VP Finance and CFO have designed, or caused to be designed under their direct supervision, Badger’s disclosure controls and procedures (as defined by National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings, adopted by the Canadian Securities Administrators) to provide reasonable assurance that (i) material information relating to Badger, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the annual filings are being prepared; and (ii) material information required to be disclosed in the annual filings is recorded, processed, summarized and reported on a timely basis.  Further,  they  have  evaluated,  or  caused  to  be  evaluated  under  their  direct  supervision,  the effectiveness of Badger’s disclosure controls and procedures at December 31, 2014 and have concluded the disclosure controls and procedures are fully effective.

 

Internal Control over Financial Reporting

Badger’s President and CEO and its VP Finance and CFO have also designed, or caused to be designed under their direct supervision, Badger’s internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Further, using the criteria established in Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, they have evaluated, or caused to be evaluated under their direct supervision, the effectiveness of Badger’s internal control over financial reporting at December 31, 2015 and have concluded the internal controls over financial reporting are effective.

 

Changes in Internal Control over Financial Reporting

There were no changes to Badger’s internal control over financial reporting in the fourth quarter of 2015.

 

Inherent Limitations

Notwithstanding the foregoing, because of its inherent limitations a control system can provide only reasonable assurance that the objectives of the control system are met and may not prevent or detect misstatements. Management’s estimates may be incorrect, or assumptions about future events may be incorrect, resulting in varying results. In addition, management has attempted to minimize the likelihood of fraud.  However,  any  control  system  can  be  circumvented  through  collusion  and  illegal  acts.

 

BUSINESS RISKS

[Reference is also made to Badger’s 2015 Annual Information Form]

 

The oil and natural gas sector accounts for approximately 38 percent of the Company’s revenues in 2014, down from the 51 percent in 2014. The petroleum service industry, in which Badger participates, relies heavily on the volume of capital expenditures made by oil and natural gas explorers and producers. These spending decisions are based on several factors including, but not limited to: hydrocarbon prices, production levels of current reserves, fiscal regimes in operating areas, technology-driven exploration and extraction methodologies, and access to capital, all of which can vary greatly.  To minimize the impact of the oil and natural gas industry’s cycles, the Company also focuses on generating revenue from the utility and general contracting market segments.  Badger expects the oil and natural gas sector to further decline at least in the first half of 2016.

 

The Company operates in a highly competitive environment for hydrovac services in Canada and the United States. In order to remain the leading provider of hydrovac services in these regions, Badger continually enhances its safety and operational procedures to ensure that they meet or exceed customer expectations. Badger also has the in-house capabilities necessary 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 or other factors.

 

Badger also faces risks associated with doing business in the United States. The Company 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. The United States, and each of the 50 states, have their own unique set of laws, policies and regulations that have a real or apprehended effect on business operating conditions, approval or delay of potential new projects that could require Badger’s services, current rates of capital investment and the general level of confidence about future economic conditions among businesses and organizations.

Badger is exposed to liabilities that are unique to the services that it provides.  Such liabilities may relate to an accident or incident involving one of Badger’s hydrovacs or damage to equipment or property caused by one of the hydrovacs, and could involve significant potential claims or injuries to employees or third parties.  The amount of Badger’s insurance coverage may not be adequate to cover potential claims or liabilities and Badger may be forced to bear substantial costs as a result of one or more accidents.  Substantial claims resulting from an accident in excess of its related insurance coverage would harm Badger’s financial condition and operating results.  Moreover, any accident or incident involving Badger, even if Badger is fully insured or not held liable, could damage Badger’s reputation among customers and the public, thereby making it more difficult for Badger to compete effectively, and could significantly affect the future cost and availability of insurance.  Because Badger does not purchase replacement hydrovacs, but rather constructs them, the Company self-insures against the physical damage it could incur on the hydrovac units. Franchise owners are required to hold certain levels of insurance on the hydrovacs they lease from Badger.  These decisions will be re-evaluated periodically as circumstances change.

 

Safety is one of the Company’s on-going concerns. Badger has implemented programs to ensure its operations meet or exceed current hydrovac safety standards. The Company also employs safety advisors in each region who are responsible for maintaining and developing the Company’s safety policies. These regional safety advisors monitor the Company’s operations to ensure they are operating in compliance with such policies.

 

The Company depreciates the hydrovac units over 10 years, a policy that is based on its current knowledge and operating experience. There is a certain amount of business risk that newer technology or some other unforeseen circumstance could lower this life expectancy.

 

Badger’s success depends on the services of key senior management members. The experience and talents of these individuals will be a significant factor in Badger’s continued success and growth. The loss of one or more of these individuals could have a material adverse effect on Badger’s operations and business prospects. Management and the Board of Directors are focused on succession planning and contingency planning with respect to key senior management personnel.

On March 16, 2016 Badger announced that Tor Wilson, the Corporation’s President and CEO for the last 16 years intended to retire.  The Board has formed a search committee to find a suitable replacement.

 

While Badger has historically been able to source the labour and equipment required to run its business, there can be no assurances it will be able to do so in the future.

 

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.

 

Badger’s operating results have been, and are expected to remain, 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 be inaccessible during such periods. The Company may then experience a slow period during spring thaw. In the Eastern United States, Badger has experienced reduced work in unusually cold and snowy winters.

 

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. 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 operating and financial results.

 

Operations could be adversely affected by a general economic downturn, changes in the political landscape or limitations on spending.

While Badger believes it is in compliance with all applicable government standards and regulations, there can be no assurance that all of Badger’s business are, or will be, able to continue to comply with all applicable standards and regulations.

 

As the owner and lessor of real property, Badger is subject to various federal, provincial / state and municipal laws relating to environmental matters. Such laws provide that Badger could be liable for the costs of removal and remediation of certain hazardous substances or wastes released or deposited on or in its properties or disposed at other locations. The failure to remove or remediate such substances, if any, could adversely affect Badger’s ability to sell such real property or borrow using such real property as collateral and could also result in claims against Badger.

 

Legal proceedings may arise from time to time in the course of Badger’s business.  All industries, including the hydrovac industry, are subject to legal claims, with and without merit.  Such legal claims may be brought against Badger or one or more of its subsidiaries in the future from time to time.  Defense and settlement costs of legal claims can be substantial, even with respect to claims without merit.  Due to the inherent uncertainty of the litigation process, such process could divert management time and effort and the resolution of any particular legal proceeding to which Badger may become subject could have a material effect on Badger’s financial position and results of operations.

 

Badger and its subsidiaries are subject to federal, provincial and state income taxes in Canada and the United States, as applicable.  While Badger works to keep itself and its subsidiaries in full compliance with all applicable legal requirements relating to federal, provincial and state legislation on income tax, sales tax, goods and services tax, excise tax and all other direct or indirect taxes including business tax, real estate tax, municipal and other taxes, there can be no assurance that Badger and its subsidiaries will not be subject to assessment, reassessment, audit, investigation, inquiry or judicial or administrative proceedings under any such laws.  As taxing regimes change their tax basis and rates, or initiate reviews of prior tax returns, Badger’s liability to income tax may increase and Badger could be exposed to increased costs of taxation, which could, among other things, reduce the amount of funds available to distribute to shareholders or otherwise have a material adverse effect on Badger’s business, results of operations or financial condition.

 

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS

Certain statements and information contained in this MD&A and other continuous disclosure documents of the Company referenced herein, including statements related to the Company’s capital expenditures, projected growth, view and outlook toward margins, cash dividends, customer pricing, future market opportunities and statements, and information that contain words such as “could”, “should”, “can”, “anticipate”, “expect”, “believe”, “will”, “may” and similar expressions relating to matters that are not historical facts, constitute “forward-looking information” within the meaning of applicable Canadian securities legislation. These statements and information involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements and information. The Company believes the expectations reflected in such forward-looking statements and information are reasonable, but no assurance can be given that these expectations will prove to be correct. Such forward-looking statements and information included in this MD&A should not be unduly relied upon. These forward-looking statements and information speak only as of the date of this MD&A.

 

In particular, forward looking information and statements include discussion reflecting the Company’s belief that:

 

• Overall activity and the economy remains relatively constant in areas and market segments not affected by activities in the oil and natural gas sector;

 

• Areas associated with the oil and natural gas industry continue to decline at least in the first half of 2016;

 

• Badger can manage costs in areas and sectors affected by the low oil price environment and reallocate assets as required to areas which have strong economies and which have benefited from weak oil prices;

 

• Badger can grow in areas unaffected by the low oil price environment;

 

• Badger in 2016 can further develop the organization to position itself to be able to handle the planned future growth;

 

• The business development efforts will provide Badger with the additional new customers necessary to grow the business in 2016 and the future;

 

• Badger’s fleet is available to perform work in 2016 and truck replacements are not significantly more than planned;

 

• Badger achieves Adjusted EBITDA levels of approximately 28 to 29 percent of revenue.

 

The forward-looking statements rely on certain expected economic conditions and overall demand for Badger’s services and are based on certain assumptions.  The assumptions used to generate forward-looking statements are, among other things, that:

 

• Badger has the ability to achieve its revenue, net profit and cash flow forecasts for 2016;

 

• There will be a long-term demand for hydrovac services from oil refineries, petro-chemical plants, power plants and other large industrial facilities in North America;

 

• Badger will maintain relationships with current customers and develop successful relationships with new customers;

 

• Badger will collect customer payments in a timely manner;

 

• Badger will be able to compete effectively for the demand for its services;

 

• The overall market for its services will not be adversely affected by weather, natural disasters, global events, legislation changes, technological advances, economic disruption or other factors beyond Badgers control;

 

• Badger will execute its growth strategy;

 

• Badger will obtain all labour, parts and supplies necessary to complete the planned hydrovac build.

 

Risk factors and other uncertainties that could cause actual results to differ materially from those anticipated in such forward-looking statements include, but are not limited to: price fluctuations for oil and natural gas and related products and services; political and economic conditions; industry competition; Badger’s ability to attract and retain key personnel; the availability of future debt and equity financing; changes in laws or regulations, including taxation and environmental regulations; extreme or unsettled weather patterns; and fluctuations in foreign exchange or interest rates.

 

Readers are cautioned that the foregoing factors are not exhaustive. Additional information on these and other factors that could affect the Company’s operations and financial results is included in reports on file with securities regulatory authorities in Canada and may be accessed through the SEDAR website (www.sedar.com) or at the Company’s website. The forward-looking statements and information contained in this MD&A are expressly qualified by this cautionary statement. The Company does not undertake any obligation to publicly update or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

 

NON-IFRS FINANCIAL MEASURES

This MD&A contains references to certain financial measures, including some that do not have any standardized meaning prescribed by IFRS and that may not be comparable to similar measures presented by other corporations or entities. These financial measures are identified and defined below:

 

“Cash available for growth and dividends” 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 available for growth and/or dividends to shareholders. 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.

 

“Adjusted EBITDA” is earnings before interest, taxes, depreciation and amortization, share-based compensation, gains and losses on sale of property, plant and equipment, gains and losses on foreign exchange, and a non-recurring legal provision.  Adjusted EBITDA is a measure of the Company’s operating profitability and is therefore useful to management and investors as it provides improved continuity with respect to the comparison of our operating results over time. Adjusted EBITDA provides an indication of the results generated by the Company’s principal business activities prior to how these activities are financed, the results are taxed in various jurisdictions, and assets are amortized.  In addition, Adjusted EBITDA excludes gains and losses on sale of property, plant and equipment as these gains and losses are considered incidental and secondary to the principal business activities, it excludes gains and losses on foreign exchange as such gains and losses can vary significantly based on factors beyond our control, it excludes share-based compensation as these expenses can vary significantly with changes in the price of our common shares and it excludes the legal settlement and related costs recorded in 2015 as this is non-recurring and outside our normal course of business.

 

Adjusted EBITDA is calculated as follows:

 

	For the year ended,
	December 31, 2015	December 31, 2014
Net profit	38,488	53,102
Add:
Depreciation of property, plant and equipment	42,366	33,611
Amortization of intangible assets	1,276	1,276
Impairment related to oil tank cleaning assets	6,508	-
Share-based compensation expense	1,710	2,393
Gain on sale of property, plant and equipment	(159)	(323)
Finance cost	5,915	5,806
Legal settlement	9,711	-
Foreign exchange (gain) loss	(811)	(181)
Unrealized foreign exchange loss on senior secured notes	-	4,020
Tax expense	2,755	20,417
Adjusted EBITDA	107,759	120,121

 

Adjusted EBITDA is more directly calculated as follows:

 

					For the year ended,
				December 31, 2015			December 31, 2014
Revenue			404,620				422,219
Less:
Direct costs				283,105			290,547
General and administrative expense				13,756			11,551
Adjusted EBITDA				107,759			120,121

 

“Growth capital expenditures” are capital expenditures that are intended to improve Badger’s efficiency, productivity or overall capacity and thereby allow Badger to expand overall activity and/or access new markets. They generally represent any net additions to the daylighting fleet. Growth capital expenditures exclude acquisitions.

 

“Maintenance capital expenditures” are any amounts incurred during a reporting period to keep the Company’s daylighting fleet at the same number of units (including costs incurred to extend the operational life of a daylighting unit), plus any other capital expenditures required to maintain the capacities of the existing business. The amount will fluctuate period-to-period depending on the number of units retired from the fleet.

 

Three months ended December 31,				Twelve months ended December 31,
Growth capital expenditures	2015		2014	2015	2014
Hydrovac trucks	-	15,371		16,436	76,581
Other vehicles and trailers	704	1,031		2,531	6,444
Buildings	446	509		4,274	2,831
Other	359	-		456	2,923
Total growth capital expenditures	1,509	16,911		23,697	88,779

 

Three months ended December 31,			Twelve months ended December 31,
Maintenance capital expenditures	2015	2014	2015	2014
Hydrovac trucks	3,327	6,301	14,047	8,827
Other vehicles and trailers	595	312	1,224	463
Buildings
Other		462		1,014
Total maintenance capital expenditures	3,921	7,075	15,270	10,304
Purchase of property, plant and equipment	5,430	23,986	38,967	99,083

 

Revenue per truck per month” (RPT) is a measure of hydrovac fleet utilization.  It is a measure of hydrovac revenue only.  The RPT is calculated by combining Canadian and US dollar hydrovac revenue without converting for exchange differences, dividing the hydrovac revenue for the period by the simple average of hydrovacs in service throughout the period, and further dividing by the number of months in the period.

 

Revenue per truck (/mo)	2015				2014
	Q4	Q3	Q2	Q1	Q4	Q3	Q2	Q1
Total	25,197	28,106	23,317	26,258	30,435	33,136	29,947	33,800

 

Fleet Summary

Number of hydrovacs	2015				2014
	Q4	Q3	Q2	Q1	Q4	Q3	Q2	Q1
Canada	364	375	393	393	410	405	391	376
US	654	645	626	618	588	552	517	470
Total	1,018	1,020	1,019	1,011	998	957	908	846

 

Badger 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. The Company’s 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.

 

The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.

 

For more information regarding this press release, please contact:

 

 

Tor Wilson                                                       Gerald Schiefelbein

 

President and CEO                                           Vice President Finance and CFO

1000, 635 – 8th Avenue SW Calgary,

Alberta T2P 3M3

Telephone 403-264-8500

Fax 403-228-9773

 

 

 

 

Badger Daylighting Ltd.

Consolidated Financial Statements

For the year ended December 31, 2015

 

Independent Auditor’s Report

 

To the Shareholders of Badger Daylighting Ltd.

 

We have audited the accompanying consolidated financial statements of Badger Daylighting Ltd., which comprise the consolidated statements of financial position as at December 31, 2015 and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

 

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Badger Daylighting Ltd. as at December 31, 2015 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

 

Other Matter

The consolidated statement of financial position as at December 31, 2014 and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended were audited by another auditor who issued an unmodified opinion on March 16, 2015.

 

 

Chartered Professional Accountants, Chartered Accountants

March 17, 2016

Calgary, Alberta

 

 

BADGER DAYLIGHTING LTD.

Consolidated Statement of Financial Position

(Expressed in thousands of Canadian Dollars)

 

As at December 31	Notes	2015	2014
ASSETS
Current Assets
Cash		24,991	19,152
Trade and other receivables	6	83,402	111,964
Prepaid expenses		2,734	2,872
Inventories		3,300	4,400
Income taxes receivable	11	9,486	4,381
		123,913	142,769
Non-current Assets
Property, plant and equipment	7	313,666	286,019
Goodwill and intangible assets	8	9,106	15,511
		322,772	301,530
Total Assets		446,685	444,299
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Trade and other payables	10	30,765	30,440
Share-based plan liability	16	8,381	12,887
Income taxes payable	11	-	5,423
Dividends payable	12	1,113	1,111
		40,259	49,861
Non-current Liabilities
Long-term debt	13	103,852	124,358
Deferred income tax	11	34,888	45,832
		138,740	170,190
Shareholders’ Equity
Shareholders’ capital	1, 15	82,724	80,944
Contributed surplus	15	548	548
Accumulated other comprehensive income	15	33,218	16,700
Retained earnings		151,196	126,056
		267,686	224,248
Total Liabilities and Shareholders’ Equity		446,685	444,299
Commitments and contingencies	24

 

The accompanying notes are an integral part of these consolidated financial statements. These consolidated financial statements were approved by the Board on March 17, 2016 and were signed on its behalf.

 

 

Signed: Catherine Best

 

Director

 

 

 

Signed: Glen D. Roane

Director

 

BADGER DAYLIGHTING LTD.

Consolidated Statement of Comprehensive Income

(Expressed in thousands of Canadian Dollars)

 

For the year ended December 31	Notes	2015	2014
Revenues	17	404,620	422,219
Direct costs	2, 18	283,105	290,547
Gross profit		121,515	131,672
Depreciation of property, plant and equipment	7	42,366	33,611
Amortization of intangible assets	8	1,276	1,276
Impairment of Fieldtek oil tank cleaning assets	8	6,508	-
General and administrative	2, 18	13,756	11,551
Share-based compensation expense	16	1,710	2,393
Operating profit		55,899	82,841
Gain on sale of property, plant and equipment		(159)	(323)
Finance cost		5,915	5,806
Legal settlement and related costs	9	9,711	-
Foreign exchange gain		(811)	(181)
Unrealized foreign exchange loss on senior secured notes		-	4,020
Profit before tax		41,243	73,519
Current income tax expense	11	20,747	14,517
Deferred income tax expense	11	(17,992)	5,900
Total tax expense		2,755	20,417
Net profit		38,488	53,102
Exchange differences on translation of foreign operations		33,437	13,409
Unrealized foreign exchange loss on net investment hedge	14	(16,919)	-
Other comprehensive income		16,518	13,409
Total comprehensive income		55,006	66,511
Earnings per share
Basic and diluted	19	1.04	1.43

 

The accompanying notes are an integral part of these consolidated financial statements.

 

BADGER DAYLIGHTING LTD.

Consolidated Statement of Changes in Equity

(Expressed in thousands of Canadian Dollars)

 

For the year ended	Notes	Shareholders’ capital	Contributed surplus	Accumulated other comprehensive income	Retained earnings	Total equity
As at December 31, 2013		80,944	548	3,291	86,286	171,069
Net profit for the year
Other comprehensive income for the year		-	-	-	53,102	53,102
Options surrendered for cash		-	-	13,409	-	13,409
Dividends declared		-	-	-	(13,332)	(13,332)
As at December 31, 2014		80,944	548	16,700	126,056	224,248
Net profit for the year		-	-	-	38,488	38,488
Other comprehensive income for the year		-	-	16,518	-	16,518
Shares issued on redemption of deferred share units	15	1,780	-	-	-	1,780
Dividends declared		-	-	-	(13,348)	(13,348)
As at December 31, 2015		82,724	548	33,218	151,196	267,686

 

The accompanying notes are an integral part of these consolidated financial statements.

 

BADGER DAYLIGHTING LTD.

Consolidated Statement of Cash Flows

(Expressed in thousands of Canadian Dollars)

 

For the year ended December 31	Notes	2015	2014
Operating activities
Net profit for the year		38,488	53,102
Non-cash adjustments to reconcile profit from operations to net cash flows:
Depreciation of property, plant and equipment	7	42,366	33,611
Amortization of intangible assets		1,276	1,276
Impairment of Fieldtek oil tank cleaning assets	8	6,508	-
Deferred income tax		(17,992)	5,900
(Gain) on sale of property plant and equipment		(159)	(323)
Legal settlement	9	5,048	-
Unrealized foreign exchange (gain)		(19)	(181)
Unrealized foreign exchange loss on senior secured notes		-	4,020
Unrealized foreign exchange loss on deferred tax		-	3,074
Cash flow from operating activities before non-cash working capital adjustments		75,516	100,479
Change in non-cash working capital		18,707	(16,276)
Cash flows from operating activities		94,223	84,203
Investing activities
Purchase of property, plant and equipment	7	(38,725)	(99,083)
Purchase of property, plant and equipment as work in process		(242)	-
Proceeds from sale of property, plant and equipment		737	541
Change in non-cash working capital		(1,453)	-
Cash flows used in investing activities		(39,683)	(98,542)
Financing activities
Proceeds from issuance of shares on redemption of deferred share units	15	1,780	-
Proceeds from long-term debt	13	-	121,112
Repayment of long-term debt	13	(37,426)	(82,912)
Dividends paid		(13,348)	(13,332)
Unrealized foreign exchange (gain) loss		(112)	-
Change in non-cash working capital		134	-
Cash flows from financing activities		(48,972)	24,868
Effect of foreign exchange rate changes on cash		271	-
Net increase in cash		5,839	10,529
Cash, beginning of year		19,152	8,623
Cash, end of year		24,991	19,152
Supplemental cash flow information:
Interest paid		5,914	5,806
Income tax paid		30,403	18,878

 

The accompanying notes are an integral part of these consolidated financial statements.

 

BADGER DAYLIGHTING LTD.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2015

(Expressed in thousands of Canadian Dollars unless stated otherwise)

 

1     Incorporation and Operations

 

Badger Daylighting Ltd. and its subsidiaries (together “Badger” or the “Corporation”) primarily provide non-destructive excavating services to the utility, transportation, industrial, engineering, construction and petroleum industries in Canada and the United States. Badger is a publicly traded corporation. The address of the registered office is 1000, 635 – 8^th Avenue SW, Calgary, Alberta T2P 3M3. The consolidated financial statements of the Corporation were authorised for issue by the Board of Directors on March 17, 2016.

 

All current and comparative share capital and profit per share amounts have been adjusted to reflect the three-for-one share split that was completed in January 2014.

 

2     Basis of Preparation

 

Statement of compliance

These consolidated financial statements of the Corporation are prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

 

Basis of measurement

These consolidated financial statements have been prepared under the historical cost convention.

 

Functional and presentation currency

These consolidated financial statements are presented in Canadian dollars, which is the Corporation’s functional currency.

 

Reclassification

Beginning in the first quarter of 2015, general and administrative expenses include only those costs related to the Corporation’s three main administrative centers – the Corporate office in Calgary, the Canadian administration center in Red Deer, Alberta and the United States administration center in Brownsburg, Indiana.  Costs that are incurred outside these centers have been classified as direct costs.  In 2014, $7,901 in general and administrative expenses have been reclassified as direct costs.  This reclassification did not impact net earnings, earnings per share, financial position or cash flows.

 

3     Significant Accounting Judgements, Estimates and Assumptions

 

The preparation of these consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and judgments are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from those estimates.

 

The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the amounts recognized in the consolidated financial statements are:

 

Impairment of non-financial assets

Impairment exists when the carrying value of an asset or cash generating unit (“CGU”) exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the projection for the next five years and do not include restructuring activities that the Corporation is not yet committed to or significant future investments that will enhance the asset’s performance of the CGU being tested. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes.

 

Taxes

Provisions for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Corporation reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by tax authorities of the respective jurisdictions in which it operates. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made.

 

Useful lives of property, plant and equipment

The Corporation estimates the useful lives of property, plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the relevant assets. In addition, the estimation of the useful lives of property, plant and equipment are based on internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of the property, plant and equipment would increase the recorded expenses and decrease the non-current assets.

 

Allowance for doubtful accounts

The Corporation makes allowance for doubtful accounts based on an assessment of the recoverability of receivables. Allowances are applied to receivables where events or changes in circumstances indicate that the carrying amounts may not be recoverable. Management specifically analysed historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment terms when making a judgement to evaluate the adequacy of the allowance of doubtful accounts of receivables. Where the expectation is different from the original estimate, such difference will impact the carrying value of receivables.

 

4     Summary of Significant Accounting Policies

 

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.

 

A)  Basis of consolidation

 

The consolidated financial statements include the accounts of Badger Daylighting Ltd. and its subsidiaries, all of which are wholly owned. Subsidiaries are consolidated from the date of acquisition, being the date on which the Corporation obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent, using consistent accounting policies. All intra-company balances, income and expenses, unrealized gains and losses and dividends resulting from intra-company transactions are eliminated in full.

 

B)  Inventories

 

Inventories are valued at the lower of cost and net realizable value, with cost being defined to include laid-down cost for materials on a weighted average basis.

 

C)  Leases

 

Leases in terms of which the Corporation assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability, so as to achieve a constant rate of interest on the balance of the liability. Finance charges are recognized in the consolidated statement of comprehensive income. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

 

Other leases are operating leases and the leased assets are not recognized in the Corporation’s consolidated statement of financial position. Operating lease payments are recognized as either a direct cost or general and administrative expense in the consolidated statement of comprehensive income.

 

E)  Property, plant and equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and/or accumulated impairment losses if any. Repair and maintenance costs are recognized in the consolidated statement of comprehensive income as incurred.

 

Depreciation is calculated on a straight-line basis to recognize the cost less estimated residual value over the estimated useful life of the assets as follows:

 

	Useful life		Residual Value
Land improvements		2 years		None
Buildings		20 years		None
Shoring equipment		10 years		10-15%
Shop and office equipment		4 to 10 years		None
Trucks and trailers		6 to 10 years		0-5%

 

Depreciation of equipment under construction is not recorded until such time as the asset is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.

 

The assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year end and adjusted prospectively, if appropriate.

 

Gains or losses arising from derecogniton of an item of property, plant and equipment are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statement of comprehensive income when the asset is derecognized.

 

F)  Intangible assets

 

Intangible assets represent service rights acquired, customer relationships, trade name and non-compete agreements. Intangible assets acquired separately are measured on initial recognition at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses.

 

The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates.

 

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statement of comprehensive income when the asset is derecognized.

 

A summary of the policies applied to the Corporation’s intangible assets is as follows:

 

	Service rights	Other intangibles
Useful lives	Indefinite	5 years
Amortization method	No amortization	Straight-line

 

G)  Impairment of non-financial assets excluding goodwill

 

At the end of each reporting period, the Corporation reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Corporation estimates the recoverable amount of the CGU to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGU’s, or otherwise they are allocated to the smallest group of CGU’s for which a reasonable and consistent allocation basis can be identified.

 

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.

 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

 

If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized immediately in the consolidated statement of comprehensive income.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in prior years. A reversal of an impairment loss is recognized immediately in the consolidated statement of comprehensive income.

 

H)  Provisions

 

A provision is recognized if, as a result of a past event, the Corporation has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost.

 

I)    Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of net assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Corporation’s CGU’s expected to benefit from the synergies of the combination. CGU’s to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the CGU may be impaired. If the recoverable amount of the CGU is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period.

 

J)    Taxes

 

Tax expense comprises current and deferred tax. Tax is recognized in the consolidated statement of comprehensive income except to the extent it relates to items recognized directly in equity.

 

Current income tax

Current tax expense is based on the results for the period as adjusted for items that are not taxable or not deductible. Current tax is calculated using tax rates and laws that were enacted or substantively enacted at the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Provisions are established where appropriate on the basis of amounts expected to be paid to the tax authorities.

 

Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated statement of financial position. Deferred tax is calculated using tax rates and laws that have been enacted or substantively enacted at the end of the reporting period, and which are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

 

Deferred tax assets:

 

• are recognized to the extent it is probable that taxable profits will be available against which the deductible temporary differences can be utilized; and

 

• are reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

 

Deferred tax liabilities:

 

• are generally recognized for all taxable temporary differences;

 

• are recognized for taxable temporary differences arising on investments in subsidiaries except where the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future; and

 

• are not recognized on temporary differences that arise from goodwill which is not deductible for tax purposes.

 

Deferred tax assets and liabilities are not recognized in respect of temporary differences that arise on initial recognition of assets and liabilities acquired other than in a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit.

 

K)  Revenue recognition

 

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Corporation and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, excluding discounts, rebates, sales taxes or duty. The Corporation assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. Specific factors that the Corporation refers to includes the fact that the Corporation is ultimately responsible for the provision of services, it holds the contracts with customers, bills and collects all revenue and therefore bears credit risk and the Corporation retains ownership of all service vehicles.  The Corporation has concluded that it is acting as a principal in all of its revenue arrangements. The following specific recognition criteria must also be met before revenue is recognized:

 

Rendering of services

The Corporation recognizes revenue from services when the services are provided.

 

Truck placement fees

Truck placement fees are recognized when the truck is delivered to the operating partner.

 

L)  Finance costs

 

Finance costs comprise interest expense on borrowings. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest rate method. No borrowing costs were capitalized in either year.

 

M) Share-based plans

 

The Corporation has cash-settled share-based compensation plans under which it receives services from employees as consideration for cash payments.

 

The Corporation uses the market price of its shares to estimate the fair value of cash-settled awards. Fair value is established initially at the grant date and the obligation is revalued each reporting period until the awards are settled with any changes in the obligation recognized in the consolidated statement of comprehensive income.

 

N)  Segment reporting

 

An operating segment is a component of the Corporation that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Corporation’s other components. All operating segments’ operating results are reviewed regularly by the Corporation’s President and CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

 

O)  Foreign currency translation

 

Items included in the financial statements of each consolidated entity are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities not denominated in the functional currency of an entity are recognized in the consolidated statement of comprehensive income.

 

Assets and liabilities of entities with functional currencies other than Canadian dollars are translated at the period end rates of exchange, and the results of their operations are translated at average rates of exchange for the period. The resulting translation adjustments are included in the accumulated other comprehensive income when settlement of which is neither planned nor likely to occur in the foreseeable future.

 

When settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable future, foreign exchange gain or losses related to such items are recognized in other comprehensive income, and presented in accumulated other comprehensive income in equity.

 

P)  Financial assets

 

The Corporation classifies its financial assets as loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

 

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than twelve months after the end of the reporting period. These are classified as non-current assets. The Corporation’s loans and receivables comprise ‘trade and other receivables’ and cash in the consolidated statement of financial position.

 

Loans and receivables are initially recognized at fair value plus transaction costs and subsequently carried at amortized cost using the effective interest rate method.

 

A provision for impairment of trade receivables is established when there is objective evidence that the Corporation will not be able to collect all amounts due according to the original terms of the receivables.

 

Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the consolidated statement of comprehensive income. When a trade receivable is uncollectible, it is written off against the allowance for doubtful accounts.

 

Financial assets are de-recognized when the contractual rights to the cash flows from the financial asset expire or when the contractual rights to those assets are transferred.

 

Q)  Financial liabilities

 

The Corporation classifies its financial liabilities as other financial liabilities. Management determines the classification of its financial liabilities at initial recognition. Other financial liabilities are recognized initially at fair value and subsequently measured at amortized cost using the effective interest rate method.

 

Other financial liabilities include trade and other payables, deferred unit plan liability, performance share unit plan, dividends payable and long-term debt. Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers.

 

Financial liabilities are classified as current liabilities if payment is due within one year or less, if not, they are presented as non-current liabilities.

 

R)  Equity instruments

 

Equity instruments issued by the Corporation are recorded at the proceeds received net of direct issue costs.

 

5     Recent accounting pronouncements

 

The Corporation adopted amendments to IFRS 7, IAS 32, IAS 36, and IFRIC 21 on January 1, 2014. There was no material impact to the Corporation's consolidated financial statements as a result of the adoption of those standards.

 

The Corporation has reviewed new and revised accounting pronouncements that have been issued but are not yet effective and determined that the following may have an impact on the Corporation:

 

i.     IFRS 9, ‘Financial Instruments’ was issued as the first step in its project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. IFRS 9 introduces new requirements for classifying and measuring financial instruments that must be applied starting January 1, 2018, with early adoption permitted. The IASB intends to expand IFRS 9 during the intervening period to add new requirements for classifying and measuring financial liabilities, de-recognition of financial instruments, impairment and hedge accounting. The Corporation will assess the impact of this standard on the consolidated financial statements.

 

ii.    IFRS 15, ‘Revenue from Contracts with Customers’ replaces IAS 11, Construction Contracts, IAS 18, Revenue, IFRIC 13, Customer Loyalty Programmes, IFRIC 15, Agreements for the Construction of Real Estate, IFRIC 18, Transfers of Assets from Customers and SIC-31, Revenue – Barter Transactions Involving Advertising Services and is effective for annual periods beginning on or after January 1, 2017. IFRS 15 specifies how and when entities recognize revenue, as well as requires more detailed and relevant disclosures. The new standard provides a single, principles based five-step model to be applied to all contracts with customers, with certain exceptions.

 

a.     Identify the contract(s) with the customer;

 

b.     Identify the performance obligation(s) in the contract;

 

c.     Determine the transaction price;

 

d.     Allocate the transaction price to each performance obligation in the contract;

 

e.     Recognize revenue when (or as) the entity satisfies a performance obligation.

 

The new standard is effective for fiscal years beginning on or after January 1, 2018 and is available for early adoption.The Corporation has not yet selected a transition method nor determined the effect of the standard on the consolidated financial reporting.

 

iii.   IFRS 16, ‘Leases’ will supersede the current IAS 17, ‘Leases’ standard. Under IFRS 16, a lease will exist when a customer controls the right to use an identified asset as demonstrated by the customer having exclusive use of the asset for a period of time. IFRS 16 introduces a single accounting model for lessees and all leases will require an asset and liability to be recognized on the statement of financial position at inception. The accounting treatment for lessors will remain largely the same as under IAS 17. The standard is effective for annual periods beginning on or after January 1, 2019 with early adoption permitted, but only if the entity is also applying IFRS 15. The Corporation is required to retrospectively apply IFRS 16 to all existing leases as of the date of transition and have the option to either: 

 

• apply IFRS 16 with full retrospective effect; or

 

• recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application.

 

As a practical matter, an entity is not required to reassess whether a contract is, or contains, a lease at the date of initial application. The extent of the impact of adoption of the standard has not yet been determined.

 

6     Trade and other receivables

	2015	2014
Trade receivables	81,981	107,602
Other sundry receivables	1,421	4,362
	83,402	111,964

 

Trade receivables are non-interest bearing and are generally on 30-90 day terms. 

 

The aging analysis of trade receivables is as follows:

 

				Past due but not impaired
		Total	Not past due	31-60 days	61-90 days	Greater than 90 days
December 31, 2015		81,981	31,607	23,653	11,772	14,949
December 31, 2014		107,602	35,251	30,941	16,838	24,572

 

The allowance for doubtful accounts as at December 31, 2015 is $2,100 (2014 - $1,023).  The changes in this account for the years ended December 31, 2015 and 2014 are as follows:

 

	2015	2014
Balance, beginning of the year	1,023	534
Net increase in allowance	1,474	630
Net amounts recovered (written off as uncollectible)	(489)	(162)
Exchange differences	92	22
Balance, end of the year	2,100	1,023

 

7     Property, plant and equipment

 

	Land	Land improvements	Buildings	Equipment under construction	Shoring equipment	Shop and office equipment	Trucks and trailers	Total
Cost
At December 31, 2013	5,451	598	13,717	7,038	2,365	1,057	298,850	329,076
Additions/transfers	-	36	3,335	446	576	205	94,485	99,083
Disposals	-	-	(17)	-	(116)	-	(3,740)	(3,873)
Exchange differences	30	-	79	-	-	28	14,925	15,062
At December 31, 2014	5,481	634	17,114	7,484	2,825	1,290	404,520	439,348
Additions/transfers	548	-	3,727	242	-	1,119	33,331	38,967
Disposals	-	-	-	-	(603)	-	(10,618)	(11,221)
Exchange differences	114	-	786	-	-	120	48,673	49,693
At December 31, 2015	6,143	634	21,627	7,726	2,222	2,529	475,906	516,787
Depreciation and impairment
At December 31, 2013	-	261	4,094	-	1,616	420	111,071	117,462
Depreciation charge for the year	-	192	660	-	159	154	32,446	33,611
Disposals	-	-	(2)	-	(71)	-	(3,584)	(3,656)
Exchange differences	-	-	3	-		16	5,893	5,912
At December 31, 2014	-	453	4,755	-	1,704	590	145,827	153,329
Depreciation charge for the year	-	169	798	-	175	212	41,012	42,366
Impairment of Fieldtek oil tank cleaning assets	-	-	-	-	-	-	1,379	1,379
Disposals	-	-	-	-	(496)	-	(10,147)	(10,643)
Exchange differences	-	-	15	-	-	49	16,626	16,690
At December 31, 2015	-	622	5,568	-	1,383	851	194,697	203,121
Net book value
At December 31, 2014	5,481	181	12,359	7,484	1,121	700	258,693	286,019
At December 31, 2015	6,143	12	16,059	7,726	839	1,678	281,209	313,666

 

8     Goodwill and intangible assets

 

	Service rights	Other  intangibles	Goodwill	Total
Cost
At December 31, 2014 and December 31, 2015	7,485	7,359	3,136	17,980
Amortization and impairment
At December 31, 2013	-	1,193	-	1,193
Amortization	-	1,276	-	1,276
At December 31, 2014	-	2,469	-	2,469
Amortization	-	1,276	-	1,276
Impairment of Fieldtek oil  tank cleaning assets	-	3,614	1,515	5,129
At December 31, 2015	-	7,359	1,515	8,874
Net book value
At December 31, 2014	7,485	4,890	3,136	15,511
At December 31, 2015	7,485	-	1,621	9,106

 

Impairment testing of goodwill and intangibles with indefinite lives

For impairment testing purposes, goodwill acquired through business combinations and service rights with indefinite lives have been allocated to the Western Canada, Eastern Canada and Fieldtek CGUs respectively.  Western United States and Eastern United States CGUs have no goodwill or intangible assets allocated to them. 

 

The Corporation performed the annual impairment tests of goodwill and service rights at December 31. The recoverable amount of the Eastern Canada, Western Canada and Fieldtek CGUs have been determined based on a value in use calculation using post-tax cash flow projections from financial budgets approved by senior management for 2016, forecasts over a five year period based on management’s best estimates, and uses a post-tax discount rate of 12.0% (2014 - 8.89%).  

 

The Fieldtek CGU has been particularly impacted by the downturn in oil prices and reduced drilling activity in the region in which the Corporation provides oil tank cleaning services.  The impairment test for this CGU was calculated based on the following key assumptions:

 

• cash flows to decline in 2016 before returning to 2014 levels at the end of the five year projection period.

 

• salvage value based on independent observed asset prices.

 

• a post-tax discount rate of 12.0%

 

Following this impairment test, it was determined that the carrying amounts relating to the Fieldtek CGU exceeded the recoverable amount.  The Corporation recorded an impairment charge of $6,508 against goodwill, other intangibles, and carrying value of trucks and trailers used in the oil tank cleaning business.

 

The most significant assumptions used in the impairment calculation is the discount rate and the estimates used in determining future expected cash flows.  The Corporation performed a sensitivity analysis and noted no possible impact in either the Western Canada or Eastern Canada CGU under any of the following situations:

 

• post tax discount rates increased by 1%

 

• cash flows decreased by 5%

 

The following table shows the carrying values and impairment by CGU for intangible assets as at December 31, 2015 and 2014:

 

	December 31, 2015				December 31, 2014
	Impairment	Service rights	Other  intangibles	Goodwill	Service rights	Other  intangibles	Goodwill
Fieldtek	5,129	-	-	-	-	4,890	1,515
Western Canada	-	4,930	-	-	4,930	-	-
Eastern Canada	-	2,555	-	1,621	2,555	-	1,621
Total	5,129	7,485	-	1,621	7,485	4,890	3,136

 

9     Legal settlement

 

On December 29, 2015, Badger entered into an agreement with a former franchisee who had filed a legal action against a subsidiary of Badger in Creek County, Oklahoma to pay USD $7.5 million to settle a jury award of approximately USD $13.7 million in favor of the former franchisee and his franchise.  Badger paid USD $2.5 million in December, 2015, and the remaining USD $5.0 million was paid in January, 2016.  Badger had initially accrued a total of USD $17.5 million in the second quarter of 2015 to reflect the jury award plus an estimate of legal costs and interest in connection to this matter.  Directly related costs of $1,467 were also incurred by the Corporation in relation to this legal dispute in 2015.

 

10    Trade and other payables

 

	2015	2014
Current
Trade payables	10,714	18,783
Bonuses payable	3,260	3,189
Accrued expenses	9,867	8,468
Legal settlement payable	6,924	-
	30,765	30,440

 

Trade payables are non-interest bearing and are normally settled on 45 day terms.

 

11    Income taxes

 

The provision for income taxes, including deferred taxes, reflects an effective income tax rate that differs from the actual combined Canadian federal and provincial statutory rates of 26.2% (2014 – 25.5%). The Corporation’s U.S. subsidiaries are subject to federal and state statutory tax rates of approximately 40% for both 2015 and 2014. The main differences are as follows:

 

	2015	2014
Profit before tax	41,243	73,519
Income tax expense at the Canadian statutory rate	10,818	18,747
Increase (decrease) resulting from:
Tax rates in foreign jurisdictions	2,378	1,757
Transfer pricing adjustment from prior years	(9,211)	-
Foreign exchange differences upon consolidation	(945)	-
Other items	(285)	(87)
Income tax expense	2,755	20,417

 

During 2015 the Corporation undertook a review of past transfer pricing policies with respect to the sale of hydrovac and other vehicles from Canada to the US subsidiaries.  Based on this review and underlying facts the Corporation has amended tax filings for the 2009 to 2013 taxation years in Canada has made the required applications to the appropriate taxation authorities.  Based on the amended tax returns the Corporation has recognized a $9,211 tax benefit as the Corporation has assessed the likelihood of realization of this benefit as being probable.

 

All deferred taxes are classified as non-current, irrespective of the classification of the underlying assets or liabilities to which they relate, or the expected reversal of the temporary difference. In addition, deferred tax assets and liabilities have been offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity.

 

	As at December 31, 2013	Recognized in profit or loss	As at December 31, 2014	Recognized in profit or loss	As at December 31, 2015
Deferred tax assets
Tax loss carry-forwards	259	2,392	2,651	(2,651)	-
Share-based compensation plan(s)	3,553	(245)	3,308	(1,038)	2,270
Share issue costs	316	(105)	211	(100)	111
Legal settlement			-	2,769	2,769
	4,128	2,042	6,170	(1,020)	5,150
Deferred tax liabilities
Property, plant and equipment	37,108	11,369	48,477	(9,556)	38,921
Intangible assets	516	(94)	422	(1,079)	(657)
Partnership income	2,902	(893)	2,009	(835)	1,174
Reserve	459	43	502	98	600
Unrealized foreign exchange gain	-	592	592	(592)	-
	40,985	11,017	52,002	(11,964)	40,038
Exchange differences in OCI		(3,075)		(7,048)
Net deferred tax liability	36,857	5,900	45,832	(17,992)	34,888

 

A deferred tax asset of $2.8 million related to allowable capital losses has not been recognized on unrealized foreign exchange losses arising from the translation of US dollar-denominated senior secured notes.

 

12    Dividends payable

 

During the year ended December 31, 2015, the Corporation paid cash dividends of $13,348 (2014 - $13,332) (or $0.36 per common share (2014 - $0.36 per common share) and declared a $1,113 cash dividend (2014 - $1,111) (or $0.03 per common share (2014 - $0.03 per common share) to its shareholders of record at the close of business on December 31, 2015 that was paid January 15, 2016.

 

The Corporation declares dividends monthly to its shareholders. Determination of the amount of cash dividends for any period is at the sole discretion of the directors and is based on certain criteria including financial performance as well as the projected liquidity and capital resource position of the Corporation. Dividends are declared to shareholders of the Corporation on the last business day of each month and paid on the 15th day of the month following the declaration (or if such day is not a business day, the next following business day).

 

13    Long-term debt

	2015	2014
Syndicated revolving credit facility	-	37,426
Senior secured notes	103,852	86,932
	103,852	124,358

 

Syndicated revolving credit facility

 

The Corporation has established a $125,000 syndicated revolving credit facility (the “credit facility”).  The purpose of the credit facility is to finance the Corporation's capital expenditure program and for general corporate purposes. The credit facility bears interest, at the Corporation's option, at either the bank's prime rate plus a tiered set of basis points or bankers' acceptance rate also with a tiered structure. A stand-by fee is also required on the unused portion of the credit facility on a tiered basis. The prime rate tiers range between zero and 125 basis points. The bankers’ acceptance tier ranges from 125 to 250 basis points. The stand-by fee tiers range between 25 and 50 basis points.  All of the tiers are based on the Corporation’s Funded Debt to Bank EBITDA ratio. Bank EBITDA is defined as earnings before interest, taxes, depreciation and amortization.  The stand-by fee is expensed as incurred.

 

The credit facility expires on July 22, 2018.  

 

The credit facility is collateralized by a general security interest over the Corporation’s assets, property and undertaking, present and future.

 

Under the terms of the credit facility, the Corporation must comply with certain financial and non-financial covenants, as defined by the bank. Throughout 2015, and as at December 31, 2015, with exception of the legal settlement noted below, the Corporation was in compliance with all of these covenants. 

 

As at December 31, 2015, the Corporation has issued letters of credit of approximately $3,400. The outstanding letters of credit support the insurance program in the United States and certain performance bonds and reduce the amount available under the syndicated credit facility.

 

At December 31, 2015, the Corporation had available $121,600 (December 31, 2014 - $86,000) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met.

 

Senior secured notes

 

On January 24, 2014 Badger closed a private placement of senior secured notes. The notes, which rank pari passu with the extendable revolving credit facility, have a principal amount of US $75,000, and an interest rate of 4.83% per annum and mature on January 24, 2022. The Canadian dollar equivalent on January 24, 2014 was $82,912. Amortizing principal repayments of US $25,000 are due under the notes on January 24, 2020, January 24, 2021 and January 24, 2022. Interest is paid semi-annually in arrears.

 

The senior secured notes are collateralized by a general security interest over the Corporation’s assets, property and undertaking, present and future.

 

Under the terms of the senior secured notes, the Corporation must comply with certain financial and non-financial covenants, as defined by the senior secured note agreement. Throughout 2015, and as at December 31, 2015, with exception of the legal settlement noted below, the Corporation was in compliance with all of these covenants.

 

Legal settlement

 

Following the legal award against Badger in the State of Oklahoma, and due to the Company’s decision to appeal the verdict and therefore not discharge that judgment within 30 days, Badger was in default of its Extendable Revolving Credit Facility and Senior Secured Notes. Badger obtained waivers of this default from all lenders of both the Credit Facility and the Senior Secured Notes, and on December 29, 2015, entered into an agreement with the former franchisee to settle this matter.

 

14    Financial instruments

 

The Corporation’s U.S. dollar denominated senior secured notes has been designated as a hedge of the net investment in its U.S. operations. At the inception of the hedge and on an ongoing basis, the Corporation documents whether the hedge is highly effective in offsetting foreign exchange fluctuations of its net investment. The effective portion of the change in fair value of the hedging instrument is recorded in other comprehensive income; any ineffectiveness is recorded immediately in earnings. Amounts included in foreign currency translation reserve will be recognized in earnings when there is a reduction of the hedged net investment.

 

15    Shareholders’ capital and reserves

 

A)Authorized shares

 

An unlimited number of voting common shares are authorized without nominal or par value.

 

B)Issued and outstanding

 

	Number of Shares	Amount ($)
At December 31, 2013 and December 31, 2014	37,033,893	80,944
Shares issued on redemption of deferred share units	66,788	1,780
At December 31, 2015	37,100,681	82,724

Share amounts have been restated to reflect the impact of the three-for-one common share split completed in January 2014.

 

16    Share-based payment plans

 

A)Deferred Share Unit Plan

 

The Deferred Share Unit Plan (“DSU”) was established to reward officers and employees. Directors may also participate in the plan whereby they will be paid 60% to 100% of the annual retainer in the form of deferred units. Pursuant to the terms of the DSU, participants are granted deferred units with a value equivalent to the value of a Badger share. Subsequent to the January 2014 three-for-one common share split, each unit under the plan was amended to provide three units, each with a value of one post-split Badger share. The deferred units granted earn additional deferred units for the dividends that would otherwise have been paid on the deferred units as if they instead had been issued as Badger shares on the date of the grant. The deferred units granted other than to the directors, which vest immediately, vest equally over a period of three years from the date of the grant. Upon vesting, the participant may elect to redeem the deferred units for an equal number of Badger shares or the cash equivalent.  A maximum of 1,500,000 Common Shares have been reserved for issuance pursuant to the Deferred Unit Plan.

 

The DSU has been accounted for as a cash-settled plan. The compensation expense is based on the estimated fair value of the deferred units outstanding at the end of each quarter using a volume weighted average share price and recognized using graded vesting throughout the term of the vesting period, with a corresponding credit to liabilities.

 

The liability of deferred units outstanding under the plan as at December 31, 2015 is $8,039 (December 31, 2014 - $12,887). The fair value of deferred units exercisable as at December 31, 2015 is $6,936 (December 31, 2014 - $14,025). Changes in the number of deferred units under the DSU were as follows:

 

	Units
At December 31, 2013	567,018
Granted	53,196
Dividends earned	5,555
Redeemed	(94,373)
Forfeited	(19,590)
At December 31, 2014	511,806
Granted	63,086
Dividends earned	6,846
Redeemed	(221,262)
Forfeited	(2,968)
At December 31, 2015	357,508
Exercisable at December 31, 2015	284,047

 

B)Performance Share Unit Plan

 

The Corporation introduced a performance share unit (PSU) plan for officers of the Corporation in the second quarter of 2015. Officers must elect to have at least half, but may elect to have all of their annual long-term incentive compensation awarded in PSUs, with the remainder awarded in DSUs.  The PSUs will be granted annually and represent rights to share value based on the number of PSUs issued and achieving certain performance criteria as set out by the Board of Directors. Subject to achievement of performance criteria, under the terms of the plan, PSUs awarded will vest following a three-year term on their anniversary date and are recognized over their vesting period. PSUs, which meet the performance and other vesting criteria, will be settled in cash upon exercise.

 

The PSU Plan has been accounted for as a cash-settled plan. The compensation expense is based on the estimated fair value of the performance share units outstanding at the end of each quarter using a volume weighted average share price and recognized over the vesting period, with a corresponding credit to liabilities.

 

The liability for PSUs outstanding as at December 31, 2015 is $342. There are no PSUs exercisable as at December 31, 2015. Changes in the number of PSUs under the PSU plan were as follows:

                                             

	Units
Granted	56,043
Redeemed	-
Forfeited	-
At December 31, 2015	56,043
Exercisable at December 31, 2015	-

 

17    Revenues

 

	2015	2014
Rendering of services	404,324	419,060
Truck placement fees	296	3,159
	404,620	422,219

 

18    Expenses by nature

 

Direct costs and general and administrative expenses include the following major expenses by nature:

 

		2015		2014
Wages, salaries and benefits		163,907	153,483
Fees paid to operating partners		49,104	66,524
Fuel		19,273	25,832
Repairs and maintenance		24,970	24,365

 

19    Earnings per share

 

Basic earnings per share (“EPS”)

 

Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders (the numerator) by the weighted average number of ordinary shares outstanding (the denominator) during the year. The denominator is calculated by adjusting the shares in issue at the beginning of the year by the number of shares bought back or issued during the year, multiplied by a time-weighting factor. Earnings per share and share amounts have been retroactively restated to reflect the three-for-one share split completed in January 2014.

 

The calculation of basic earnings per share for the year ended December 31, 2015, was based on the profit available to common shareholders of $38,488 (2014 - $53,102), and a weighted average number of common shares outstanding of 37,073,547 (2014 – 37,033,893).

Diluted EPS

 

Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of any dilutive potential shares. The effects of anti-dilutive potential shares are ignored in calculating diluted EPS. Diluted earnings per share and share amounts have been retroactively restated to reflect the three-for-one share split completed in January 2014.

 

Weighted average number of common shares:

 

	2015	2014
Issued common shares outstanding, beginning of period	37,033,893	37,033,893
Effect of shares issued on redemption of deferred share units	39,654	-
Basic and diluted weighted average number of common shares, end of period	37,073,547	37,033,893

 

20    Segment reporting

 

The Corporation operates in two geographic/reportable segments providing non-destructive excavating services in each of these segments. The following is selected information for the years ended December 31, 2015 and 2014 based on these geographic segments.

 

For the year ended:	December 31, 2015			December 31, 2014
	Canada	U.S.	Total	Canada	U.S.	Total
Revenues	153,849	250,771	404,620	215,707	206,512	422,219
Direct costs	113,484	169,621	283,105	149,280	142,152	291,432
Depreciation of property, plant and equipment	15,288	27,078	42,366	14,663	18,948	33,611
Amortization of intangible assets	1,276	-	1,276	1,276	-	1,276
Impairment related to oil tank cleaning assets	6,508	-	6,508	-	-	-
General and administrative	5,861	7,895	13,756	6,117	4,548	10,666
Profit before tax	4,824	36,419	41,243	32,866	40,653	73,519

 

For the year ended:	December 31, 2015			December 31, 2014
	Canada	U.S.	Total	Canada	U.S.	Total
Additions to non-current assets:
Property, plant and equipment	2,151	36,816	38,967	31,545	67,538	99,083
Intangible assets	-	-	-	-	-	-

 

 

	Canada	U.S.	Total
As at December 31, 2015
Property, plant and equipment	64,453	249,213	313,666
Intangible assets	9,106	-	9,106
Total assets	157,285	289,400	446,685
As at December 31, 2014
Property, plant and equipment	120,561	165,458	286,019
Intangible assets	15,511	-	15,511
Total assets	215,251	229,048	444,299

 

21    Related party disclosure

 

The consolidated financial statements include the financial statements of Badger Daylighting Ltd. and the subsidiaries listed in the following table:

 

		% equity interest
Name	Country of Incorporation	2015	2014
Badger Daylighting (Fort McMurray) Inc.	Canada	100%	100%
Badger Edmonton Ltd.	Canada	100%	100%
Fieldtek Ltd.	Canada	100%	100%
Badger ULC	Canada	100%	100%
Badger Daylighting Limited Partnership	Canada	100%	100%
Badger Daylighting USA, Inc.	United States of America	100%	100%
Badger Daylighting Corp.	United States of America	100%	100%
Badger, LLC	United States of America	100%	100%

 

Balances and transactions between Badger Daylighting Ltd. and its subsidiaries have been eliminated on consolidation and are not disclosed in this Note. Details of transactions between the Corporation and other related parties are disclosed below.

 

Transactions with related parties

During the years ended December 31, 2015 and 2014, there were no significant related party transactions.

 

Related party balances

As at December 31, 2015 and December 31, 2014 there were no significant outstanding balances with related parties.

 

Compensation of key management personnel

The remuneration of directors and other members of key management personnel were as follows:

 

	2015	2014
Compensation, including bonuses	2,953	2,461
Share-based payments	2,667	1,354
	5,620	3,815

 

Key management personnel and director transactions

Key management and directors of the Corporation control 2 percent of the voting shares of the Corporation.

 

22    Capital management

 

The Corporation's strategy is to have a sufficient capital base to maintain investor, creditor and market confidence and to sustain future development of the business. The Corporation considers the capital structure to consist of net debt and shareholders' equity. The Corporation considers net debt to be total long-term debt less cash. The Corporation seeks to maintain a balance between the level of net debt and shareholders' equity to facilitate access to capital markets to fund growth and working capital. On a historical basis, it has been management's objective and view that the Corporation has maintained a conservative and appropriate ratio of net debt to net debt plus shareholders' equity. The Corporation may occasionally need to increase these levels to facilitate acquisition or expansion activities. This ratio was as follows:

 

	2015	2014
Long-term debt	103,852	124,358
Cash	(24,991)	(19,152)
Net debt	78,861	105,206
Shareholders' equity	267,686	224,248
Total capitalization	346,547	319,454
Net debt to total capitalization (%)	23%	33%

 

The Corporation sets the amounts of its various forms of capital in proportion to risk. The Corporation manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Corporation may adjust the amount of dividends to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce net debt.

 

The Corporation is bound by certain financial and non-financial covenants as defined by both the extendable revolving credit facility and the senior secured note agreement. If the Corporation is in violation of any of these covenants its ability to pay dividends may be inhibited. The Corporation monitors these covenants to ensure it remains in compliance. The financial covenants are as follows:

 

Ratio	December 31, 2015	December 31, 2014	Threshold
Funded Debt[1] to Bank EBITDA[2]	1.03:1	0.92:1	2.75:1 maximum
Bank EBITDA[2] to Interest Expense[3]	15.35:1	19.67:1	3.00:1 minimum
Tangible Net Worth[4]	$243,813	$208,737	$133,791

 

[1]   Funded Debt is long-term debt including any current portion thereof, less up to a maximum of $10,000 of cash.

 

[2]   Funded Debt to Bank EBITDA (earnings before interest, taxes, depreciation and amortization) means the ratio of consolidated Funded Debt to the aggregated Bank EBITDA for the trailing twelve-months.

 

[3]   Interest expense is interest expense as calculated in accordance with IFRS. This covenant was effective upon establishment of the syndicated credit facility (see note 13).

 

[4]   Tangible Net Worth is total consolidated shareholders equity less intangible assets. This covenant was effective upon establishment of the syndicated credit facility (see note 13).

 

Throughout 2015 and as at December 31, 2015 the Corporation was in compliance with all of these covenants.

 

There were no changes in the Corporation's approach to capital management during the year.

 

The Corporation’s activities expose it to a variety of financial risks: credit risk, liquidity risk and market risk. The Corporation’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Corporation’s financial performance.

 

Risk management is carried out by senior management, and the Board of Directors.

 

23    Financial instruments and risk management

 

Fair values

The Corporation's financial instruments recognized on the consolidated statement of financial position consist of cash, trade and other receivables, trade and other payables, share-based plan liability, dividends payable and long-term debt. The fair values of these recognized financial instruments, excluding long-term debt, approximate their carrying values due to their short-term maturity.  The fair value of the long-term debt is not materially different from its carrying value.

 

Credit risk

Credit risk arises when a failure by counter parties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date. A substantial portion of the Corporation's trade receivable balance is with customers in the petroleum and utility industries and is subject to industry credit risks. The Corporation manages its exposure to credit risk through standard credit granting procedures and short payment terms. The Corporation attempts to monitor financial conditions of its customers and the industries in which they operate.

 

Liquidity risk

Liquidity risk is the risk that, as a result of operational liquidity requirements, the Corporation will not have sufficient funds to settle an obligation on the due date and will be forced to sell financial assets at a price which is less than what they are worth, or will be unable to settle or recover a financial asset.

 

The Corporation's operating cash requirements are continuously monitored by management. As factors impacting cash requirements change, liquidity risks may necessitate the need for the Corporation to raise capital by issuing equity or obtaining additional debt financing. The Corporation also mitigates liquidity risk by maintaining an insurance program to minimize exposure to insurable losses.

 

At December 31, 2015, the Corporation had available $121.6 million of authorized borrowing capacity on the extendable revolving credit facility. The credit facility expires on July 22, 2018. The Corporation believes it has sufficient funding through operations and the use of this facility to meet foreseeable financial obligations.

 

The table below summarizes the maturity profile of the Corporation’s financial liabilities at December 31, 2015 based on contractual undiscounted payments.

 

	Less than 1 year	1 to 2 years	2 to 5 years	> 5 years	Total
As at December 31, 2015
Trade and other payables	30,765	-	-	-	30,765
Share-based plan liability	8,039	-	342	-	8,381
Long-term debt	-	-	34,618	69,234	103,852
	38,804	-	34,960	69,234	142,998

 

	Less than 1 year	1 to 2 years	2 to 5 years	> 5 years	Total
As at December 31, 2014
Trade and other payables	30,440	-	-	-	30,440
Share-based plan liability	12,887	-	-	-	12,887
Long-term debt	-	-	37,425	86,933	124,358
	42,907	-	37,425	86,933	167,685

 

Market risk

The significant market risk exposures affecting the financial instruments held by the Corporation are those related to interest rates and foreign currency exchange rates which are explained as follows:

 

Interest rate risk

The Corporation is exposed to interest rate risk in relation to interest expense on a portion of its long-term debt. Interest is calculated at prime on its borrowing facilities. The prime interest rate is subject to change. A sensitivity analysis would indicate that net profit for the year ended December 31, 2015 would have been affected by approximately $0.1 million if the average interest rate changed by one percent. The Corporation does not currently use interest rate hedges or fixed interest rate contracts to manage the Corporation's exposure to interest rate fluctuations.

 

Foreign exchange risk

The Corporation has Canadian operations which purchase certain products in United States dollars and United States operations. As a result, fluctuations in the value of the Canadian dollar relative to the United States dollar can result in foreign exchange gains and losses. In addition, the Corporation’s United States subsidiaries are subject to foreign exchange gains and losses on consolidation.  Realized foreign exchange gains and losses are included in net earnings while foreign exchange gains and losses arising on the translation of the assets, liabilities, revenue and expenses of the Corporation’s United States subsidiaries are included in OCI. 

 

United States dollar denominated balances, subject to exchange rate fluctuations, were as follows (amounts shown in Canadian dollar equivalent):

 

	2015	2014
Cash	20,455	16,837
Trade and other receivables	52,046	51,320
Income taxes receivable	7,280	4,381
Trade and other payables	(22,942)	(11,442)
Long-term debt	(103,852)	(86,932)
	(47,013)	(25,836)

 

The following table demonstrates the Corporation’s sensitivity for the above noted United States denominated balances to a 10% strengthening in the Canadian dollar against the United States dollar and the increased (decreased) earnings before income taxes and OCI as follows:

 

For the year ended December 31, 2015	Effect on profit/(loss) before tax	Effect on profit/(loss) before tax
	2015	2014
10% strengthening in the Canadian dollar against the US dollar	4,274	4,366

 

For a hypothetical 10% weakening of the Canadian dollar against the United States dollar, there would be an equal and opposite effect on earnings before income taxes and OCI to that presented in the tables above.

 

24    Commitments and contingencies

 

Legal disputes

The Corporation is not involved in any legal disputes that would generate a material impact to the financial results of the Corporation.

 

Operating leases

The Corporation has entered into operating leases for shop and office premises.

 

Future minimum rentals payable under non-cancellable operating leases are as follows:

 

	2015	2014
Within one year	4,004	3,087
After one year but not more than five years	6,359	5,755
Total	10,363	8,842

 

Purchase commitments

At December 31, 2015 the Corporation has commitments to purchase approximately $1.2 million worth of capital assets and various parts and materials.  There are no set terms for remitting payment for these financial obligations.

 

To view this press release as a PDF file, click onto the following link:
public://news_release_pdf/badger03182016.pdf

Source: Badger Daylighting Ltd. (TSX:BAD) http://www.badgerinc.com/

 

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