Badger refutes short seller’s charges that firm’s books need outside look
Hydrovac giant’s CEO tries to soothe concerns over claims of inflated margins
Badger Daylighting Ltd.’s top executive has dismissed accusations by a short seller that his company has been capitalizing operating expenses to inflate margins.
Badger, the largest hydrovac company in North America with a market capitalization of $960 million, has been targeted by short sellers for more than a year and recently saw its stock price plunge by 25 per cent from the $30 range to the $23 range in the week after releasing first-quarter results in May that missed estimates.
Hydro-excavation is the process of removing soil and rocks using high-pressure water.
Despite the bets of short sellers, Badger shares have since climbed slightly, back up to $26.09 Wednesday. Data from Bloomberg show the company’s largest shareholder, Turtle Creek Asset Management, has increased its holdings by 600,600 shares.
Badger president and CEO Paul Vanderberg told The Financial Post he has been meeting with shareholders in an attempt to soothe concerns over criticisms raised by short sellers.
Vanderberg said he hasn’t publicly engaged in a “social media war” with the company’s critics and opted instead for private meetings with shareholders and employees. “To get into a process where you inadvertently have selective disclosure or disclose some new material fact would be in violation of our disclosure policy and leave the company open to criticism and liability,” he said.
Still, after issuing a release Tuesday that said the company would improve investor communications, the company addressed the criticisms of short sellers publicly for the first time.
“I can tell you emphatically that Badger expenses every dollar of maintenance on our fleet. Our accounting policy is very conservative,” Vanderberg said.
Short seller Marc Cohodes publicly accused the company of putting operating expenses into capital expenses last month, when he revealed a short position in the company.
Vanderberg said the criticism originates from an accounting technique held over from its days as an income trust, when it reported maintenance capital and growth capital spending.
“That’s what Badger did for years, but it wasn’t easy and it wasn’t clean,” he said, adding that chief financial officer Gerald Shiefelbein eliminated the practice.
“If you go out and look at others in the industry, you will see that they capitalize certain maintenance expenses, major items. Badger doesn’t even do that,” he said.
Cohodes rejected the explanation Wednesday. He said Badger hadn’t been an income trust since 2010; its new chief financial officer came into the job in 2014, but the change didn’t appear until 2016.
“They haven’t been an income trust for the test of time,” Cohodes said, adding that the time to end the practice of reporting maintenance and growth capital spending and distributable cash flow would have been 2011.
“The accounting at Badger needs to be scrubbed clean,” he said, adding the company needs an outside firm to perform a forensic audit because “the numbers at this company don’t add up.”
Specifically, he said, the company’s recorded cash flow from operating activities for the year 2015 changed between the 2015 and 2016 annual statements.
“You have accounting irregularities when the numbers change without a restatement,” Cohodes said.
Vanderberg said he couldn’t comment on that specific change but added, “We actually expanded the disclosure especially over the ’15 and ’16 time period to give everyone the line items that allows everyone to make their own calculations.” He flatly denied accounting problems.