Calgary, Alberta (FSCwire) - Badger Daylighting Ltd (the “Company” or “Badger”) is pleased to announce its results for the nine months ended September 30^th, 2016.

 

FINANCIAL HIGHLIGHTS

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

 

Three months ended September 30,			Nine months ended September 30,
	2016	2015	2016	2015
Revenue
Hydrovac service revenue	103,790	102,623	266,986	274,138
Other service revenue	9,375	8,682	26,095	29,061
Truck placement revenue	2	126	225	357
Total revenue	113,167	111,431	293,306	303,556
Adjusted EBITDA	33,517	33,743	76,330	81,563
Profit before tax	18,022	23,291	32,927	24,948
Net profit	11,944	17,090	21,563	18,002
Profit per share – diluted ($)	0.32	0.46	0.58	0.49
Cash flow from operating activities before working capital      adjustments	20,465	20,857	54,354	67,665
Cash flow from operating activities before working capital      adjustments per share – diluted ($)	0.55	0.56	1.47	1.82
Dividends declared	3,673	3,346	10,574	10,015
Total shares outstanding (end of period)	37,100,681	37,100,681	37,100,681	37,100,681

 

OVERVIEW

 

Highlights for the three months ended September 30, 2016:

 

• Revenue increased by 1.6 percent to $113.2 million in the third quarter of 2016 from $111.4 million for the same quarter in 2015 as growth in non-oil and gas end use customer segments exceeded lower opportunity in oil and gas end use customer segments.

 

• Adjusted EBITDA was $33.5 million in the third quarter of 2016 versus $33.7 million in the third quarter of 2015. Adjusted EBITDA margins were 29.6 percent in the third quarter of 2016 versus 30.3 percent in the comparable period of the prior year.

 

• Cash flow from operations was $15.0 million in the third quarter of 2016 versus $20.7 million in the third quarter of 2015.  Excluding differences in non-cash working capital, cash flow from operations was $20.5 million in the third quarter which was comparable to the cash flow from operations of $20.9 million in the same period of 2015.  The change in non-cash working capital during Q3 2016 is the net result of increases in current taxes payable and a seasonal increase in accounts receivable offset by increases in accounts payable, accrued liabilities and share-based compensation expense.

 

• Badger had 1,028 daylighting units as of September 30, 2016, reflecting an addition of 45 units in the first nine months of 2016 and the retirement of 35 units in that same period.  Of the 1,028 units, 675 were operating in the US and 353 were operating in Canada.  The new units were financed from cash generated from operations.

 

MANAGEMENT COMMENTS

 

In the 2016 first quarter Outlook section it was stated that “Badger does not expect much improvement in financial results until the second half of the year”.  So far during 2016 quarterly results have been sequentially better, and Q3 2016 consolidated results are approximately even with Q3 2015. The Company continued to reposition units to markets with the best growth opportunities during the quarter. Badger focuses on activities critical for long term success.

 

The third quarter of 2016 saw a continuation of recent trends in hydrovac markets and in Badger’s business.

 

1.     For both the current quarter and year-to-date period the US is producing two-thirds of Badger’s revenue.

 

2.    The non-oil and gas markets continue to grow in the US and the Company sees improved revenue in Canadian non-oil and gas markets driven by operational improvements in its eastern Canadian operations. Badger services a wide range of infrastructure end-use market segments including general construction, oil and gas, transportation, utility, communication and industrial activities. The relative mix of each varies by geographic region.

 

3.    The oil and gas markets continue to be weak on both sides of the border. In the US, Badger has been right-sizing its fleet by reallocating hydrovacs to non-oil and gas areas.  In Canada, the winter freeze is approaching and should spur what oil and gas work there is in the northern areas. Badger will aggressively pursue project work.

 

4.    Badger Q3 2016 Revenue per Truck (RPT) of $28,062 was consistent with Q3 2015 RPT and reflected seasonal improvement. Sequential quarterly improvement in RPT has continued since a very challenging Q1 2016. Since Q3 2015, Badger has repositioned 211 units within its operations to support organic growth opportunities and improve overall fleet utilization. This successful repositioning of units reflects the flexibility of Badger’s business model and the advantages of scale, geographic diversification and end use market diversification versus smaller competitors. The Company believes that unit repositioning is complete for Canada and largely complete in the US. Q3 2016 RPT improved versus Q3 2015 in Western Canada, Eastern Canada and the Western US, and was lower in the US East due simply to the number of growth units added to that region. The Company continues to monitor RPT, utilization and anticipated demand for replacement and new Badger units in planning the hydrovac build rate, which continued in the range of 3-6 units per month during Q3 2016.

 

5.    In Q3 2016, 20 Hydrovac trucks were added to the fleet and 11 were retired. The trucks added during Q3 2016 included chassis replacement for the 16 hydrovacs that were taken out of the fleet in Q1 2016 due to unreliable engines. These 16 units are not included in the Q3 2016 build rate of 3-6 units per month. The Company continues to expect to retire 40-50 hydrovac units in 2016 and has retired 35 units so far in the year.

 

6.    Q3 2016 Adjusted EBITDA margin of 29.6 percent was slightly below the same period in 2015 at 30.3 percent. Adjusted EBITDA margin from Q3 2015 to Q3 2016 was higher in Canada [24.4% to 26.2%] and was lower in the U.S [from 33.5% to 31.3%].  Consolidated Adjusted EBITDA margin continued above Badger’s 28% target in Q3 2016.

 

7.    Badger continues to strengthen its balance sheet. On September 30, 2016 the Company had total debt less cash of $52.3 million, zero drawn on its $125 million syndicated revolving credit facility and total debt less cash and cash equivalents to Adjusted EBITDA of 0.51. Badger considers continued organic growth building and operating new Badger units to be an excellent shareholder investment, and plans to push continued organic growth.

 

OUTLOOK

 

Badger expects a general continuation of current trends in regional infrastructure market opportunity for the remainder of 2016 versus prior years. Historically Q4 has seen a seasonal slowdown from Q3 as construction slows due to an onset of winter weather in northern markets. However, as Badger continues to grow in the U.S., the Company expects that the winter seasonal effect will lessen over time. Badger’s continued organic growth has also expanded the Company’s participation in non-oil and gas infrastructure market segments. The Company expects that the mix of non-oil and gas end use market segments to increase from the estimated 62 percent of revenue that existed in the full year 2015. Badger continues to manage for the long term and continues to push growth across its service network. The Company believes that its business model includes significant scale advantages and excellent long term opportunity.

 

Results of Operations

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Revenues

Third quarter revenues of $113.2 million were 1.6 percent higher than the $111.4 million generated during the comparable period in 2015 ($293.3 million for the nine months ended September 30, 2016 as compared to $303.6 million in the same period of 2015). The increase in the third quarter of 2016 over the same quarter of the prior year is attributable to the following:

 

• Canadian revenue increased by 0.6 percent.  Canada revenue growth in the quarter reflects meaningful improvement in Eastern Canada revenue which was partially offset by modest incremental weakness experienced in Western Canada. 

 

• United States revenue in US dollars increased by 1.2 percent from $56.5 million in the third quarter of 2015 to $57.2 million in the third quarter of 2016. U.S. non-oil and gas markets continue to grow, and were partially offset by lower demand in oil and gas markets. The third quarter of 2016 is the first in over two years where the exchange rate has not been a benefit versus prior period.

 

Badger’s average revenue per truck per month during the third quarter of 2016 was $28,062 versus $28,106 for the third quarter of 2015. Revenue per truck is a mixed currency measure, for more information see the definition of this measure under the Non-IFRS Financial Measures section.

 

Direct Costs

Direct costs for the quarter ended September 30, 2016 were $76.5 million as compared to direct costs of $74.2 million in the third quarter of 2015.  Direct costs as a percent of revenue increased from 66.6 percent in the third quarter of 2015 to 67.6 percent in the third quarter of 2016 (direct costs were 70.2 percent of revenue for the nine months ended September 30, 2016 and 69.5 percent for the same period of 2015).

 

The increase in direct costs as a percentage of revenue in the third quarter of 2016 as compared to the third quarter of 2015 is the result of higher repair and maintenance expense and vacation expense in the US, which was partially offset by reduced liability insurance premiums and lower fuel costs. A portion of higher repair and maintenance occurs as vehicles are repositioned between locations and the opportunity is taken to perform preventative maintenance. 

 

Direct costs in Canada as a percentage of revenue decreased due to ongoing cost management in Western Canada, and in particular at Fieldtek, offsetting higher repair and maintenance costs.

 

It was noted in the Q1 2016 MDA that bad debt expense returned to normal levels of 0.4 percent of revenue ($0.4 million in the first quarter of 2016).  Bad debt expense was $0.9 million in the third quarter of 2016 ($0.9 million in the third quarter of 2015) largely due to the assessment of specific US-based accounts.  Bad debt expense for the year to date period in 2016 is $1.4 million, as compared to $2.2 million in the same period of 2015 and continues to track within the long-term average of less than one-half a percent of revenue. 

 

Gross Profit

The gross profit margin was 32.4 percent for the third quarter of 2016, down from 33.4 percent for the third quarter of 2015 (29.8 percent for the nine months ended September 30, 2016 and 30.5 percent in the same period of 2015). Canada had a gross profit margin of 29.5 percent in the third quarter of 2016 compared to 28.3 percent in the third quarter of 2015.  United States gross profit margin was 33.9 percent in the third quarter of 2016 compared to 36.2 percent in the third quarter of 2015.

 

Depreciation of Property, Plant and Equipment

Depreciation of property, plant and equipment was $10.6 million for the third quarter of 2016, as compared to $10.8 million in the third quarter of 2015 ($32.5 million for the nine months ended September 30, 2016 and $31.4 million for the same period of 2015).  Depreciation was comparable between periods given a net add of 8 units to the fleet.

 

General and Administrative Expenses

General and administrative expenses decreased from $3.5 million in the third quarter of 2015 to $3.2 million in the third quarter of 2016 largely due to a reduction in the liability for health benefits in the US.  General and administrative expenses were $11.0 million for the nine months ended September 30, 2016 and $10.9 million for the same period in 2015.  As a percentage of revenues, general and administrative expenses were 2.8 percent in the third quarter of 2016 as compared to 3.1 percent in the third quarter of 2015.  For the current year to date period, general and administrative expenses were 3.7 percent of revenue as compared to 3.6 percent in the prior year.  Badger’s target for general and administrative expenses is 4 percent or less of revenue.

 

Share-based Compensation

Share-based compensation increased from a recovery of $1.9 million in the third quarter of 2015 to an expense of $3.5 million in the third quarter of 2016.  The increase in the share-based compensation was largely the result of a 28 percent appreciation in Badger’s share price between June 30, 2016 and September 30, 2016, as compared to a 28 percent decline in the comparable period in 2015.  In addition, performance share units (PSUs) were granted in the third quarter of 2016 related to the CEO transition.

 

Loss (Gain) on Sale of Property, Plant and Equipment

A loss on disposal of property, plant and equipment for the nine months ended September 30, 2016 of $2.4 million was largely the result of disposing sixteen truck chassis with a particular engine that has proven to be unreliable.  The loss on these sixteen vehicles was recognized in the first quarter of 2016.  Badger has no more units in the fleet with this particular engine. 

 

Finance Cost

Finance cost was $1.3 million for the third quarter of 2016 compared to $1.3 million for the same quarter in 2015.  Finance costs were comparable between these periods as the syndicated revolving credit facility balance was eliminated early in the third quarter of 2015, and the only long-term debt that was outstanding was the senior secured notes.

 

Income Taxes

The effective tax rate for the nine months ended September 30, 2016 increased to 34.5 percent.  The effective tax rate for the full fiscal year 2015 was 6.7 percent, however that included the recognition of a transfer pricing benefit relating to prior years.  Excluding the transfer pricing benefit, the effective tax rate for the full fiscal year 2015 would have been 28.8 percent.  The increased effective tax rate results from the growth in taxable income to the US relative to Canadian taxable income.

 

Net Profit

Net profit for the third quarter decreased from $17.1 million in 2015 to $11.9 million in 2016.  An increase in share-based compensation and an increase in the effective tax rate were the two largest causes in the reduction.

 

Other Comprehensive Income

Total other comprehensive income, which includes the effect of translating US operations and the offsetting translation of US dollar denominated senior secured notes that are designated as a hedge of the US operations resulted in net other comprehensive income of $1.1 million compared to a net other comprehensive income of $7.2 million in the third quarter of 2015.  Other comprehensive income results from the effect of a strengthening USD and the translation of US operations, offset in part by the net investment hedge.

 

Liquidity and Dividends

Cash flow from operations was $15.0 million for the quarter ended September 30, 2016, compared to $20.7 million for the comparable period in 2015.  The decrease in cash flow is largely the result of increased working capital requirements in the third quarter of 2016 as compared to the same period in 2015, as cash flow before working capital adjustments was relatively comparable between periods with $20.9 million in the third quarter of 2015 versus $20.5 million in the third quarter of 2016.

 

The Company uses its cash to pay dividends to shareholders, to build additional hydrovac units, to invest in maintenance capital expenditures and to repay long-term debt.

 

The Company had working capital of $108.0 million at September 30, 2016 compared to $83.7 million at December 31, 2015. 

 

The following table outlines the cash available to fund growth and pay dividends to shareholders for the three months ended September 30, 2016:

 

Three months ended September 30,			Nine months ended September 30,
	2016	2015	2016	2015
Cash flow from operating activities before non-cash working capital adjustments	20,465	20,857	54,354	67,665
Add: Proceeds from sale of property, plant and equipment	168	157	525	389
Deduct: Maintenance capital	2,698	3,344	13,249	11,349
Cash available for growth capital and dividends	17,935	17,670	41,630	56,705
Growth capital	2,834	2,623	4,247	22,188
Dividends declared	3,673	3,346	10,574	10,015

 

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.

 

Capital Resources

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Investing

The Company invested $5.5 million on property, plant and equipment (including work in process) for the three months ended September 30, 2016 compared to $6.0 million for the three months ended September 30, 2015. The majority of the capital spend was for the production of 20 hydrovacs
(which includes the completion of the 16 chassis replacements) in the third quarter of 2016 as well as work in process on five flusher trucks for the Benko Sewer Service business.

 

The costs to build a hydrovac unit was comparable to the cost to build hydrovacs in 2015.  The hydrovac fleet is relatively new, with an average age of less than four years.

 

Maintenance capital expenditures are defined as those incurred during an annual 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 quarter-to-quarter depending on the number of new build units relative to the number of units retired from the fleet. In the first nine months of 2016, Badger produced 45 hydrovac units (of which 12 were rebuilds of units taken out of the fleet in the first quarter), retired 35 units and therefore the fleet grew by ten units from 1,018 units to 1,028 units at September 30, 2016.  As the fleet in total has grown by ten units, 35 of the 45 units are reflected as maintenance capital and there are ten units recorded as growth capital.  Total maintenance capital expenditures for the third quarter of 2016 was $2.7 million as compared to $3.3 million in the third quarter of 2015.  Included in maintenance capital in the third quarter is $0.5 million related to production of five flusher trucks for the Benko Sewer Service business.

 

Financing

Syndicated credit facility

In 2014, the Corporation established a $125 million syndicated 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 tiers range 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 syndicated credit facility is collateralized by a general security interest over the Corporation’s assets, property and undertaking, present and future.

 

As at September 30, 2016, the Corporation has issued letters of credit of approximately $3.6 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 September 30, 2016, the Corporation had available $121.4 million (December 31, 2015 - $121.6 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.

 

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. A description of the compliance with covenants is included in the liquidity and dividends section.

 

SHARE CAPITAL

Shares outstanding at September 30, 2016 and November 10, 2016 were 37,100,681.

 

SELECTED QUARTERLY FINANCIAL INFORMATION

 

All amounts are $000’s except Per Share amounts are $’s	2016			2015				2014
	Q3	Q2	Q1	Q4	Q3	Q2	Q1	Q4
Revenue	113,167	91,981	88,157	101,064	111,431	90,435	101,689	108,350
Net profit	11,944	5,951	3,668	20,486	17,090	(10,533)	11,443	17,045
Net profit per share – basic and diluted	0.32	0.16	0.10	0.55	0.46	(0.28)	0.31	0.47

 

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:

 

• Badger can grow geographically and in a wide range of end use segments where non-destructive hydrovac market services are recognized as having high value;

 

• Overall 2016 activity and the economy reflects modest overall GDP growth in most market segments except for activities in the oil and natural gas sector;

 

• Areas associated with the oil and natural gas industry have continued to decline throughout 2016 YTD;

 

• Badger can manage costs and reallocate assets as required to areas which have stronger opportunity;

 

• Badger can further develop the organization to position itself to execute on its growth strategy;

 

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

 

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

 

• Badger’s Adjusted EBITDA margin targets are 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 non-destructive hydrovac services from a wide range of end use market segments 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 external factors beyond Badgers control;

 

• Badger will execute on its growth strategy;

 

• Badger will obtain 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: the level of economic activity across a broad range of end use market segments that Badger sewer; 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:

 

“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 provision that was recorded in the third quarter of 2015 as this is non-recurring and outside our normal course of business.

 

Adjusted EBITDA is calculated as follows:

 

	Three months ended September 30,		Nine months ended September 30,
Adjusted EBITDA	2016	2015	2016	2015
Net profit	11,944	17,090	21,563	18,002
Add:
Depreciation of property, plant and equipment	10,648	10,801	32,457	31,372
Amortization of intangible assets	-	319	-	957
Share-based compensation expense	3,454	(1,931)	4,593	(324)
Loss (gain) on sale of property, plant and equipment	(17)	(24)	2,375	(82)
Finance cost	1,317	1,289	3,943	3,622
Legal provision	-	-	-	21,620
Foreign exchange gain	93	(2)	35	(550)
Tax expense	6,078	6,201	11,364	6,946
Adjusted EBITDA	33,517	33,743	76,330	81,563

 

Adjusted EBITDA is more directly calculated as follows:

 

	Three months ended September 30,		Nine months ended September 30,
Adjusted EBITDA	2016	2015	2016	2015
Revenue	113,167	111,431	293,306	303,556
Less:
Direct costs	76,481	74,228	205,991	211,082
General and administrative expense	3,169	3,460	10,985	10,911
Adjusted EBITDA	33,517	33,743	76,330	81,563

 

 “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 new build daylighting units that represent a net addition to the daylighting fleet or other assets. Growth capital expenditures exclude acquisitions.

 

“Maintenance capital expenditures” are any amounts incurred during a reporting period to keep the Company’s productive capacity at the existing level.  Productive capacity is the hydrovac fleet, support vehicles and other capital assets required to maintain the existing business.  The amount will fluctuate from period-to-period depending on the number of new build hydrovac units relative to the number of units retired from the fleet or the replacement of other assets. Costs incurred to repair hydrovac units are expensed as incurred because the repairs do not extend the life of the hydrovac unit.

 

Three months ended September 30,			Nine months ended September 30,
Growth capital expenditures	2016	2015	2016	2015
Hydrovac trucks	2,559	260	2,919	16,436
Other vehicles and trailers	235	692	1,137	1,827
Buildings	30	1,594	30	3,829
Other	10	77	161	96
Total growth capital expenditures	2,834	2,623	4,247	22,188

 

Three months ended September 30,			Nine months ended September 30,
Maintenance capital expenditures	2016	2015	2016	2015
Hydrovac trucks	1,722	3,162	10,340	10,720
Other vehicles and trailers	494	183	2,424	629
Buildings	-	-	-	-
Other	482	-	485	-
Total maintenance capital expenditures	2,698	3,345	13,249	11,349
Purchase of property, plant and equipment	5,532	5,968	17,496	33,538

 

“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 number of hydrovacs in service throughout the period, and further dividing by the number of months in the period.

 

Revenue per truck (/mo)	2016			2015				2014
	Q3	Q2	Q1	Q4	Q3	Q2	Q1	Q4
Total	28,062	23,038	21,105	25,197	28,106	23,317	26,258	30,435

 

FLEET SUMMARY

 

Number of hydrovacs	2016			2015				2014
	Q3	Q2	Q1	Q4	Q3	Q2	Q1	Q4
Canada	353	358	361	364	375	393	393	410
US	675	661	651	654	645	626	618	588
Total	1,028	1,019	1,012	1,018	1,020	1,019	1,011	998

 

MARKETING AND FRANCHISE AGREEMENTS

 

Number of Marketing and Franchise Agreements	2016			2015				2014
	Q3	Q2	Q1	Q4	Q3	Q2	Q1	Q4
Canada	12	12	13	13	14	14	15	15
US	5	5	5	5	5	7	8	8
Total	17	17	18	18	19	21	23	23

 

FOREIGN EXCHANGE RATES

 

Foreign exchange rates are an important factor that affects the results of Badger’s operations.

1 USD:CAD	2016			2015				2014
	Q3	Q2	Q1	Q4	Q3	Q2	Q1	Q4
Quarterly average	1.3051	1.2885	1.3748	1.3354	1.3085	1.2300	1.2409	1.1364
Period end	1.3116	1.3009	1.2970	1.3847	1.3391	1.2475	1.2678	1.1591

 

CHANGES IN ACCOUNTING POLICIES

 

There were no new accounting standards that were adopted in the third quarter of 2016.

 

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 September 30, 2016 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 September 30, 2016 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 second quarter of 2016.

 

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.

 

DESCRIPTION OF BUSINESS

 

Badger is North America’s largest provider of non-destructive excavating and related services. Badger traditionally works for contractors and facility owners across a broad range of infrastructure related 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.

 

Badger’s business model involves the provision of excavating services through two distinct methods: via Badger Corporate operations and via operating partners (franchisees in the United States and agents in Canada). For the first method, Badger has established corporate run operations in locations to market and deliver the service in the local area directly. For the second method, Badger Corporate works with its operating partners in certain locations to provide hydrovac services to the end user. In this partnership, Badger provides the expertise, the trucks, and North American marketing and administration support. The operating partners deliver the service by operating the equipment and developing their local markets. Badger continues to own the trucks and all work is invoiced by Badger and then shared with the operating partner based upon a revenue sharing formula.  In the earlier phase of its growth and development Badger frequently used operating partners to expand its business into new markets. Badger’s operating partners remain an important part of Badger’s operations, however, Badger largely pursues expansion into new geographic areas through Badger Corporate operations.

 

BUSINESS RISKS

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

 

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

For more information regarding this press release, please contact:

 

Paul Vanderberg                                                       Gerald Schiefelbein

 

President and CEO                                               Vice President Finance and CFO

 

1000, 635 – 8th Avenue SW

Calgary, Alberta

5T2P 3M3

Telephone 403-264-8500

Fax 403-228-9773

 

Badger Daylighting Ltd.

Interim Condensed Consolidated Financial Statements (unaudited)

For the three and nine months ended September 30, 2016

 

BADGER DAYLIGHTING LTD.

Interim Consolidated Statement of Financial Position

(Unaudited - Expressed in thousands of Canadian Dollars)

 

As at	Notes	September 30, 2016	December 31, 2015
ASSETS
Current Assets
Cash and cash equivalents		46,076	24,991
Trade and other receivables		99,757	83,402
Prepaid expenses		4,569	2,734
Income taxes receivable		-	9,486
Inventories		3,374	3,300
		153,776	123,913
Non-current Assets
Property, plant and equipment		284,926	313,666
Goodwill and intangible assets		9,106	9,106
		294,032	322,772
Total Assets		447,808	446,685
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Trade and other payables		32,792	30,765
Share-based plan liability	5	10,271	8,381
Income taxes payable		1,505	-
Dividends payable		1,224	1,113
		45,792	40,259
Non-current Liabilities
Long-term debt	3	98,374	103,852
Deferred income tax		31,454	34,888
		129,828	138,740
Shareholders’ Equity
Shareholders’ capital	4	82,724	82,724
Contributed surplus		548	548
Accumulated other comprehensive income		26,730	33,218
Retained earnings		162,186	151,196
		272,188	267,686
Total Liabilities and Shareholders’ Equity		447,808	446,685

 

 

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

 

BADGER DAYLIGHTING LTD.

Interim Consolidated Statement of Comprehensive Income

(Unaudited - Expressed in thousands of Canadian Dollars)

 

		For the three months ended September 30,		For the nine months ended September 30,
	Notes	2016	2015	2016	2015
Revenues		113,167	111,431	293,306	303,556
Direct costs		76,481	74,228	205,991	211,082
Gross profit		36,686	37,203	87,315	92,474
Depreciation of property, plant and equipment		10,648	10,801	32,457	31,372
Amortization of intangible assets		-	319	-	957
General and administrative		3,169	3,460	10,985	10,911
Share-based compensation		3,454	(1,931)	4,593	(324)
Operating profit		19,415	24,554	39,280	49,558
Loss (gain) on sale of property, plant and equipment		(17)	(24)	2,375	(82)
Finance cost		1,317	1,289	3,943	3,622
Legal provision		-	-	-	21,620
Foreign exchange gain		93	(2)	35	(550)
Profit before tax		18,022	23,291	32,927	24,948
Current income tax expense		8,192	13,540	13,400	11,125
Deferred income tax (recovery) expense		(2,114)	(7,339)	(2,036)	(4,179)
Income tax expense		6,078	6,201	11,364	6,946
Net profit for the period		11,944	17,090	21,563	18,002
Other comprehensive income (loss):
Exchange differences on translation of foreign operations		1,883	14,028	(11,966)	26,382
Unrealized foreign exchange gain (loss) on net investment hedge		(806)	(6,870)	5,479	(13,500)
Other comprehensive income (loss)		1,077	7,158	(6,487)	12,882
Total comprehensive income		13,021	24,248	15,076	30,884
Earnings per share
Basic and diluted	6	0.32	0.46	0.58	0.49

 

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

 

BADGER DAYLIGHTING LTD.

Interim Consolidated Statement of Changes in Equity

(Unaudited - Expressed in thousands of Canadian Dollars)

 

For the nine months ended		Shareholders’ capital	Contributed surplus	Accumulated other comprehensive income (loss)	Retained earnings	Total equity
As at January 1, 2015		80,944	548	16,700	126,056	224,248
Net profit for the period		-	-	-	18,002	18,002
Other comprehensive income for the period		-	-	12,882	-	12,882
Shares issued on exercise of deferred share units		1,780	-	-	-	1,780
Dividends		-	-	-	(10,009)	(10,009)
As at September 30, 2015		82,724	548	29,582	134,049	246,903
As at January 1, 2016		82,724	548	33,217	151,197	267,686
Net profit for the period		-	-	-	21,563	21,563
Other comprehensive income for the period		-	-	(6,487)	-	(6,487)
Dividends		-	-	-	(10,574)	(10,574)
As at September 30, 2016		82,724	548	26,730	162,186	272,188

 

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

 

BADGER DAYLIGHTING LTD.

Interim Consolidated Statement of Cash Flows

(Unaudited - Expressed in thousands of Canadian Dollars)

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.		For the three months ended September 30,		For the nine months ended September 30,
		2016	2015	2016	2015
Operating activities
Net profit for the period		11,944	17,090	21,563	18,002
Non-cash adjustments to reconcile profit from operations to net cash flows:
Depreciation of property, plant and equipment		10,648	10,801	32,457	31,372
Amortization of intangible assets		-	319	-	957
Deferred income tax		(2,114)	(7,339)	(2,036)	(4,179)
Loss (gain) on sale of property plant and equipment		(17)	(24)	2,375	(82)
Legal provision		-	-	-	21,620
Unrealized foreign exchange (gain) loss		4	10	(5)	(25)
Cash flow from operating activities before working capital adjustments		20,465	20,857	54,354	67,665
Change in non-cash working capital		(5,464)	(133)	(5,594)	904
Cash flows from operating activities		15,001	20,724	48,760	68,569
Investing activities
Purchase of property, plant and equipment		(7,394)	(5,968)	(17,618)	(33,538)
Purchase of property, plant and equipment as work in process		1,862	-	122	-
Proceeds from sale of property, plant and equipment		168	157	525	389
Change in non-cash working capital		1,101	(165)	1,247	(1,138)
Cash flows used in investing activities		(4,263)	(5,976)	(15,724)	(34,287)
Financing activities
Repayment of long-term debt		-	(8,976)	-	(37,425)
Proceeds from issuance of shares on exercise of deferred units		-	86	-	1,780
Dividends paid to owners		(3,673)	(3,339)	(10,574)	(10,009)
Change in non-cash working capital		(1,171)	(1,130)	(1,303)	(1,271)
Unrealized foreign exchange gain		7	-	(47)	-
Cash flows used in financing activities		(4,837)	(13,359)	(11,924)	(46,925)
Effect of foreign exchange rate changes on cash		16	33	(27)	166
Increase (decrease) in cash and cash equivalents		5,917	1,422	21,085	(12,477)
Cash and cash equivalents, beginning of period		40,158	5,253	24,991	19,152
Cash and cash equivalents, end of period		46,076	6,675	46,076	6,675
Supplemental cash flow information:
Interest paid		2,649	2,356	5,306	4,990
Income tax paid		1,754	2,583	2,409	20,243

 

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

 

BADGER DAYLIGHTING LTD.

Notes to the Interim Consolidated Financial Statements

Nine months ended September 30, 2016

(Unaudited – Expressed in thousands of Canadian Dollars unless stated otherwise)

 

1      Incorporation and operations

 

Badger Daylighting Ltd. and its subsidiaries (together “Badger” or the “Corporation”) provide non-destructive excavating and related services to the utility, transportation, industrial, engineering, communications, 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 interim condensed consolidated financial statements of the Corporation for the period ended September 30, 2016 were authorised for issue in accordance with a resolution of the directors on November 10, 2016.

 

2      Basis of preparation

 

Statement of compliance

These interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting ("IAS 34") as issued by the International Accounting Standards Board ("IASB").

 

The interim condensed consolidated financial statements should be read in conjunction with the Corporation’s annual consolidated financial statements for the year ended December 31, 2015.

 

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.

 

3      Long-term debt

 

	September 30,    2016	December 31, 2015
Syndicated revolving credit facility	-	-
Senior secured notes	98,374	103,852
	98,374	103,852

 

Syndicated revolving credit facility

 

The Corporation has 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 tiers range 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 2016, and as at September 30, 2016, the Corporation was in compliance with all of these covenants.  A complete listing and definition of the debt covenants is found in the Corporation’s annual consolidated financial statements for the year ended December 31, 2015.

 

As at September 30, 2016, the Corporation has issued letters of credit of approximately $3.6 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 September 30, 2016, the Corporation had available $121.4 million (December 31, 2015 - $121.6 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% per annum and mature on January 24, 2022. The Canadian dollar equivalent on January 24, 2014 was $82,912. Amortizing principal repayments of US $25.0 million are due under the notes on January 24, 2020, January 24, 2021 and January 24, 2022.  Interest is paid semi-annually in arrears.

 

4      Shareholders’ capital

 

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, 2015	37,100,681	82,724
Shares issued on redemption of deferred share units	-	-
At September 30, 2016	37,100,681	82,724

 

5      Share-based payment plans

 

A)     Deferred Share Unit Plan

 

The Deferred Share Unit (“DSU”) Plan was established to promote a greater alignment of interests between the executive officers and the Shareholders of the Corporation. Directors may also participate in the plan whereby they are 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.  The deferred units granted earn additional deferred units at the same rate as dividends on Badger common shares. 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 DSU Plan.

 

The DSU Plan 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 as at September 30, 2016 is $8,391 (December 31, 2015 - $8,039). The fair value of deferred units exercisable as at September 30, 2016 is $7,755 (December 31, 2015 - $6,936). Changes in the number of deferred units under the DSU Plan were as follows:

 

	Units
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
Granted	78,529
Dividends earned	4,620
Redeemed	(97,445)
Forfeited	(10,739)
At September 30, 2016	332,473
Exercisable at September 30, 2016	273,555

 

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.

 

In June 2016, the Corporation committed to matching shares purchased by the Chief Executive Officer (CEO) with an equivalent number of PSUs, up to an amount equal to the CEO’s annual base salary.  Purchases of common shares have to be made by the CEO prior to December 31, 2016.  These PSUs will be forfeited if the common shares purchased are sold prior to vesting of the corresponding PSUs.

 

The PSU Plan has been accounted for as a cash-settled plan. The compensation expense is based on the estimated fair value of the PSUs 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 September 30, 2016 is $1,880 (December 31, 2015 - $342). There are no PSUs exercisable as at September 30, 2016 (December 31, 2015 – nil). Changes in the number of PSUs under the PSU plan were as follows:

 

	Units
At December 31, 2014	-
Granted	56,043
Redeemed	-
Forfeited	-
At December 31, 2015	56,043
Granted	134,427
Redeemed	-
Forfeited	-
At September 30, 2016	190,470
Exercisable at September 30, 2016	-

 

6      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 period. The denominator is calculated by adjusting the shares in issue at the beginning of the period by the number of shares bought back or issued during the period, multiplied by a time-weighting factor.

 

The calculation of basic earnings per share for the nine months ended September 30, 2016, was based on the net profit available to common shareholders of $21,563 (2015 - $18,002), and a weighted average number of common shares outstanding of 37,100,681 (2015 – 37,045,997).

 

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.

 

Weighted average number of common shares:

 

	For the nine months ended		For the three months ended
	September  30, 2016	September 30, 2015	September  30, 2016	September  30, 2015
Issued common shares outstanding, beginning of period	37,100,681	37,097,537	37,100,681	37,033,893
Effect of shares issued on exercise of deferred share units	-	3,076	-	30,509
Basic and diluted weighted average number of common shares, end of period	37,100,681	37,100,613	37,100,681	37,064,402

 

7      Segment reporting

 

The Corporation operates in two geographic/reportable segments providing non-destructive excavating and related services in each of these segments. The following is selected information for the periods ended September 30, 2016 and 2015 based on these geographic segments.

 

For nine months ended:	September 30, 2016			September 30, 2015
	Canada	U.S.	Total	Canada	U.S.	Total
Revenues	100,646	192,660	293,306	118,182	185,374	303,556
Direct costs	74,873	131,118	205,991	85,822	125,260	211,082
Depreciation of property, plant and equipment	10,243	22,214	32,457	11,661	19,711	31,372
Amortization of intangible assets	-	-	-	957	-	957
General and administrative	4,062	6,923	10,985	5,588	5,323	10,911
Share-based compensation	3,937	656	4,593	(324)	-	(324)
Legal Provision	-	-	-	-	21,620	21,620
Profit before tax	3,371	29,556	32,927	11,548	13,400	24,948

 

 

For three months ended:	September 30, 2016			September 30, 2015
	Canada	U.S.	Total	Canada	U.S.	Total
Revenues	38,258	74,909	113,167	38,023	73,408	111,431
Direct costs	26,968	49,513	76,481	27,250	46,978	74,228
Depreciation of property, plant and equipment	3,373	7,275	10,648	3,831	6,970	10,801
Amortization of intangible assets	-	-	-	319	-	319
General and administrative	1,266	1,903	3,169	1,511	1,949	3,460
Share-based compensation	2,832	622	3,454	(1,931)	-	(1,931)
Profit before tax	2,427	15,595	18,022	5,815	17,476	23,291

 

 

	Canada	U.S.	Total
As at September 30, 2016
Property, plant and equipment	99,491	185,435	284,926
Intangible assets	9,106	-	9,106
Total assets	175,208	272,600	447,808
As at December 31, 2015
Property, plant and equipment	105,555	208,111	313,666
Intangible assets	9,106	-	9,106
Total assets	157,285	289,400	446,685

 

8      Purchase commitments

 

At September 30, 2016, the Corporation has commitments to purchase approximately $2.2 million (December 31, 2015: $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/badger11142016.pdf

Source: Badger Daylighting Ltd. (TSX:BAD)

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