Newport Partners Income Fund

Newport Partners Income Fund

May 08, 2008 07:09 ET

Newport Partners Income Fund Announces 2008 First Quarter Results

TORONTO, ONTARIO--(Marketwire - May 8, 2008) -


Newport Partners Income Fund ("NPF" or "the Fund") (TSX:NPF.UN) today announced its results for the three months ended March 31, 2008. The Fund's financial results are based on a diversified portfolio of investments in 18 private businesses in four operating segments.

Revenue for the three month period ended March 31, 2008 was $161.7 million, up 39% from $116.2 million produced in the prior year period. Gross profit increased 21% to $45.0 million for the period compared to $37.4 million in the first quarter of 2007. Adjusted EBITDA increased 9% to $18.3 million versus $16.8 million for the same quarter last year. Adjusted EBITDA margin declined from 14% in the first quarter of 2007 to 11% for the period ended March 31, 2008.

The increased revenue, gross profit and adjusted EBITDA reflect the expanded size of the investment portfolio, specifically strategic acquisitions made by Quantum Murray (of Thomson Metals) and NPC (of Golosky) in the spring and summer of 2007.

Offsetting these contributions, the continuing soft insurance markets, reduced gas drilling activity in Alberta and volatile capital markets dampened results from the portfolio's investments in these sectors. This was consistent with management's outlook provided in its 2007 annual report to unitholders. During the quarter, results from Quantum Murray were temporarily weaker due primarily to the mix of business that included a higher percentage of lower margin projects from its demolition and remediation divisions.

The Fund's reduced EBITDA margin is primarily attributable to the current portfolio mix which has an increased weighting in industrial services and a lower relative contribution from the higher-margin financial services segment versus the same period last year.

As at March 31, 2008, the Fund had invested capital of $591.5 million representing an increase of 26% over the $469.7 million invested as at March 31, 2007. As a percentage of weighted invested capital, corporate costs were 1.1% versus 1.4% in the prior year period.

Distributable cash for the three month period ended March 31, 2008 was $11.2 million, basically flat to the $11.3 million produced by continuing operations in the prior year period. The Fund produced $0.16 of distributable cash per unit for the period. This compares to $0.16 from continuing operations, or $0.13 including discontinued operations, generated in the same period last year.

While revenue and EBITDA increased over the prior year period, distributable cash and distributable cash per unit were unchanged from a year ago due to higher interest costs reflecting debt servicing on the convertible debenture issue of July 2007 which was used to finance the Thomson Metals and Golosky acquisitions.

Distributions paid to unitholders amounted to $11.7 million or $0.16 per unit for the period versus $17.8 million or $0.25 per unit for the same period last year. Commencing with the distribution paid January 15, 2008, the Fund reduced the allocation of distributable cash to unitholders to $0.65 per unit annually, in favour of allocating more of the Fund's cash to activities that are expected to improve shareholder value including reducing debt, repurchasing units and investing in the growth of the portfolio.

"Recognizing that the first quarter has typically been the weakest quarter for the Fund, the distributable cash result was in line with our expectations," said Mr. Peter Wallace, President & CEO. "And despite an uncertain economic environment and capital market volatility during the period, the portfolio has delivered a 15.4% cash yield on our invested capital over the last twelve months."

As of March 31, 2008, the Fund's net debt to LTM EBITDA ratio was 2.5 times -- compared to 2.4 times at year-end. The increase primarily reflects higher working capital requirements of the operating partnerships, in particular NPC which begins to ramp up activities during the first quarter and has significant cash outlays for labour costs which are recovered from customers in future quarters. Management's stated goal is to reduce the net debt to LTM EBITDA ratio to below 2.25 times by the end of 2008.

"With increasing levels of retained cash in future quarters, we expect to make progress on our debt reduction target along with our unit buy back program which was inactive during the first quarter," stated Mr. Wallace.

The Fund announced management's objectives for 2008 remain on track. These objectives include:

- Generate an annualized cash yield of 16% to 20% on invested capital;

- Increase the Fund's net asset value by reducing debt, repurchasing units of the Fund, and funding growth for top performing holdings in the portfolio;

- Develop and execute plan to realize value on NPC investment and give it access to lower cost capital to fund the company's continued growth;

- Continue to identify opportunities to improve the operating performance of its investments; and

- Reinforce Newport Partners' position as the financial partner of choice for Canada's leading entrepreneurs.

"Our outlook for subsequent quarters remains unchanged. We expect challenging conditions in the insurance industry to persist, along with continued volatility in the capital markets. The recent strengthening in natural gas prices, if sustained, could increase activity in that industry, which would be positive for NPC, our largest investment. Despite a weaker first quarter, our outlook for Quantum Murray remains positive based on its current levels of activity and backlog of opportunities," added Mr. Wallace.

"Our plans for NPC are also progressing. During the quarter, we worked with management on the re-organization of NPC's operations. Included in this reorganization are new executive appointments, a planned change in name to Golosky Energy Services, reflecting the increased size and exposure to the oil sands and a planned relocation of head office to Edmonton. These initiatives tie into our plan to access a lower cost of capital and right now we're looking at a number of options including direct investment by a third party, re-financing and other strategic options. It remains our objective and our expectation to execute on this in 2008," said Mr. Wallace.

About Newport Partners Income Fund

Newport Partners Income Fund is an unincorporated, open-ended trust created to hold, through its investment in Newport Partners Commercial Trust, interests in Newport Private Yield LP, a limited partnership established under the laws of the Province of Ontario. NPF began trading on the TSX on August 8, 2005 under the symbol NPF.UN.

Newport Partners Income Fund is a publicly-traded diversified fund that invests in successful Canadian private businesses run by proven entrepreneurs at reasonable prices. We target above-average rates of return by putting our money to work behind talented entrepreneurs who have a record of success in their business and a growth opportunity for the future. Our unit holders share in the income generated by these businesses as well as their value appreciation. The Fund currently has $592 million invested in 18 companies representing a diverse cross-section of the Canadian economy.

About Newport Partners

Newport Partners creates wealth and opportunity with successful entrepreneurs. We help our clients realize their goals for their business by providing capital and corporate financial advice;. And we provide money management and financial advice to protect and grow their personal wealth. Newport Partners was established by a group of entrepreneurs and senior financial executives. From start-up in 2001, we have invested more than $750 million in private businesses and currently have $1.5 billion of public and private assets under management. Newport Partners carries on its business through Newport Partners LP and its subsidiaries, and through TSX-listed Newport Partners Income Fund (NPF.UN).

Investor Conference Call

Management will hold a conference call at 10:30 am (Eastern Standard Time) on May 8, 2008 to discuss the first quarter financial results. The call may be accessed by dialling 416-641-2140 within the Toronto area or 1-800-952-4972 (toll free). This conference call will be recorded and available for replay until May 22, 2008. To listen to the replay, please dial 416-695-5800 or 1-800-408-3053 and enter pass code 3257805.

Annual General Meeting

NPF's AGM will be held Tuesday, May 13th, 2008 at 4:30 p.m. EST at the Design Exchange, located at 234 Bay Street, Toronto, Ontario.

Forward-Looking Information

This news release contains certain forward-looking information. Certain information included in this new release may constitute forward-looking information within the meaning of securities laws. In some cases, forward-looking information can be identified by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential", "continue" or the negative of these terms or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management's future outlook and anticipated events or results and may include statements or information regarding the future plans or prospects of the Fund or the Operating Partnerships and reflects management's expectations and assumptions regarding the growth, results of operations, performance and business prospects and opportunities of the Fund and the Operating Partnerships. Without limitation, information regarding the future operating results and economic performance of the Fund and the Operating Partnerships, and statements about net asset value constitute forward-looking information and the estimate is updated quarterly. Such forward-looking information reflects management's current beliefs and is based on information currently available to management of the Fund and the Operating Partnerships. Forward-looking information involves significant risks and uncertainties. A number of factors could cause actual events or results to differ materially from the events and results discussed in the forward-looking information including risks related to investments, conditions of capital markets, economic conditions, taxation of income trusts, dependence on key personnel, limited customer bases, interest rates, regulatory change, continued availability of credit facilities, availability of future financing, factors relating to the weather and availability of labour. These factors should not be considered exhaustive. In addition, in evaluating this information, investors should specifically consider various factors, including the risks outlined under "Risk Factors", which may cause actual events or results to differ materially from any forward-looking statement.

In formulating forward-looking information herein, management has assumed that business and economic conditions affecting the Fund and the Operating Partnerships will continue substantially in the ordinary course, including without limitation with respect to general levels of economic activity, regulations, taxes, interest rates, that there will be no material changes in its credit arrangements. Although the forward-looking information is based on what management of the Fund and the Operating Partnerships consider to be reasonable assumptions based on information currently available to it, there can be no assurance that actual events or results will be consistent with this forward-looking information, and management's assumptions may prove to be incorrect. This forward-looking information is made as of the date of this MD&A, and the Fund does not assume any obligation to update or revise them to reflect new events or circumstances. Undue reliance should not be placed on forward-looking information. The Fund is providing the forward-looking financial information set out in this MD&A for the purpose of providing investors with some context for the "Second Quarter Outlook" presented, as well as Management's estimate of the net asset value of the Fund. Readers are cautioned that this information may not be appropriate for any other purpose.

Non-GAAP Measures

The terms "adjusted EBITDA", "cash yield from the portfolio", "corporate costs to weighted invested capital" , ''distributable cash or adjusted distribution base'', ''EBITDA'', "EV/EBITDA", ''invested capital'', "LTM EBITDA", "net debt/LTM EBITDA", "net tangible assets", "net asset value", "standardized distributable cash", "total annualized return" and "total senior leverage ratio" (collectively the ''Non-GAAP Measures'') are financial measures used in this MD&A that are not standard measures under Canadian generally accepted accounting principles (''GAAP''). NPF's method of calculating Non-GAAP Measures may differ from the methods used by other issuers. Therefore, NPF's Non-GAAP Measures, as presented may not be comparable to similar measures presented by other issuers.

Adjusted EBITDA refers to EBITDA excluding the gain or loss on reduction of ownership interest (dilution gains or losses) and the write-down of goodwill and intangibles. The Fund has used Adjusted EBITDA as the basis for the analysis of its past operating financial performance. Adjusted EBITDA is used by the Fund and management believes it is a useful supplemental measure from which to determine the Fund's ability to generate cash available for debt service, working capital, capital expenditures, income taxes and distributions. Adjusted EBITDA is a measure that management believes facilitates the comparability of the results of historical periods and the analysis of its operating financial performance which may be useful to investors.

Cash yield from the portfolio refers to the Fund's cash on cash return from an Operating Partnership based on free cash flow to the Fund as a percentage of weighted invested capital. Management believes that cash yield is a useful supplemental measure for investors to assess the quality of the investments in the Fund's portfolio and management's ability to invest in successful businesses at reasonable prices. Management uses this measure to monitor the performance of its investment strategy.

Corporate costs to weighted invested capital are the total cash expenses of the corporate segment excluding interest expense for the period expressed as a percentage of the weighted invested capital by the Fund in each of the operating partnerships. Management uses this metric to monitor the expenses of the Fund consisting of, among other items, professional fees, compliance costs and management compensation. Investors may find this supplemental information useful to analyze the Fund's expenses relative to other mutual fund trusts.

Distributable cash or Adjusted distribution base is not a standard measure under GAAP and is generally used by Canadian income funds as an indicator of financial performance. The Fund's method of calculating distributable cash may differ from similar computations as reported by other similar entities and, accordingly, may not be comparable to distributable cash as reported by such entities. The Fund has provided a reconciliation of cash provided by operations to distributable cash in this MD&A and is calculated as standardized distributable cash adjusted for changes in working capital, growth capital expenditure and priority income amounts. References to distributable cash are to cash available for distribution to Unitholders in accordance with the distribution policies of the Fund. As the Fund intends to make monthly cash distributions management believes it is therefore a useful financial measure as an indication of the Fund's ability to make such distributions and is used by management and the Trustees for this purpose. Distributable cash is also used by management in the calculation of overall yield which it uses to monitor the performance of the Fund's Operating Partnerships. One of the factors that may be considered relevant by prospective investors is the cash distributions by the Fund relative to distributable cash and the price of the Units. Management believes that distributable cash is a useful supplemental measure that may assist prospective investors in assessing an investment in the Fund.

EBITDA refers to net earnings determined in accordance with GAAP, before depreciation and amortization, net of gain or loss on disposal of capital assets, interest expense and income tax expense. EBITDA is used by management and the Trustees as well as many investors to determine the ability of an issuer to generate cash from operations. Management also uses EBITDA to monitor the performance of the Fund's reportable segments. As the Fund intends to distribute a substantial portion of its available cash on an on-going basis (after deducting certain amounts from EBITDA as described in the MD&A including interest expense, income taxes, capital expenditures and debt service), management believes that in addition to net income or loss and cash provided by operating activities, EBITDA is a useful supplemental measure from which to determine the Fund's ability to generate cash available for debt service, working capital, capital expenditures, income taxes and distributions. The Fund has provided a reconciliation of income to EBITDA in this MD&A.

EV/EBITDA refers to enterprise value divided by EBITDA. Enterprise value is equal to market capitalization less cash plus debt. EV/EBITDA is a widely used valuation metric of the worth of ongoing operations. Management believes that it is a useful measure because it is unaffected by a company's capital structure. Management uses the ratio as a proxy for the approximate consideration to be paid for a potential investment.

Invested capital refers to the cost to acquire an equity interest in an Operating Partnership and excludes transaction costs and any working capital provided to such Operating Partnership. Management uses this measure to monitor the performance of its investment strategy and as an input to the calculation of its targeted overall yield for an Operating Partnership. Management believes that invested capital is a useful supplemental measure that provides investors with useful information about the capital that the Fund deploys for each Operating Partnership which can subsequently be used to determine the performance of each Operating Partnership.

LTM EBITDA refers to EBITDA after giving effect to the contribution of all new investments made in the year and still in the portfolio as at the end of the year, as if each investment had been owned by the Fund for the full twelve month period beginning April 1, 2007. LTM EBITDA is a measure that management believes may be useful to investors as it facilitates the analysis of the Fund's financial performance over a full business cycle.

Net debt/LTM EBITDA refers to total senior debt plus capital lease obligations less the Fund's consolidated cash balance divided by LTM EBITDA plus priority income. Management uses this measure to monitor its future debt capacity. Investors may find this information useful in analyzing the capital structure of the Fund and its future debt capacity.

Net tangible assets is calculated as the total assets of a company minus any intangible assets such as goodwill, brand, customer relationships, intellectual property, employment management contracts, less all liabilities and the par value of convertible debentures.

Net asset value is derived by amalgamating management's best estimate of the fair market value of each of the Operating Partnerships in the Fund and making adjustments for the senior debt, the market value of convertible debentures and the cash and cash equivalents of the Fund. The fair market value of each of the Operating Partnerships is derived using discounted public company comparable EV/EBITDA multiples and applying these multiples to the LTM EBITDA of each Operating Partnership. Management uses net asset value plus distributable cash to determine how profitable their investment in operating partnerships are. Management also uses net asset value as a benchmark to determine at what price to issue equity as the objective would be to issue equity always at prices greater than the net asset value. Investors may find net asset value plus distributions received useful to determine how profitable their investment in the Fund is.

Standardized distributable cash is defined as the GAAP measure of cash from operating activities after adjusting for capacity expenditures, restrictions on distributions arising from non-compliance with financial covenants at the time of reporting, and minority interests. This is a measure that the CICA believes is of use to investors as a benchmark to compare investments.

Total annualized return represents the total compound annualized return of the portfolio using time weighted cash yields from the portfolio plus the estimated capital appreciation of the portfolio. Total annualized return is used by management and investors to gauge the overall performance of the Fund's portfolio of private investments.

Total senior leverage ratio refers to total senior debt plus capital lease obligations plus letters of credit outstanding less NPY's cash balance all divided by EBITDA. Management uses this measure to monitor its compliance with the covenants of its credit facility and to determine future debt capacity. Investors may find this information useful in analyzing the capital structure of the Fund and its future debt capacity.

Investors are cautioned that the Non-GAAP Measures are not alternatives to measures under GAAP and should not, on their own, be construed as an indicator of performance or cash flows, a measure of liquidity or as a measure of actual return on the Units. These Non-GAAP Measures should only be used in conjunction with the financial statements included in the MD&A and the Fund's annual audited financial statements available on SEDAR at or at

Consolidated Balance Sheets
(In thousands of dollars)


March 31, December 31,
2008 2007
Current assets:
Cash $ 15,908 $ 20,278
Cash and short-term investments held in trust 25,354 27,404
Accounts receivable 136,141 137,726
Inventories 37,063 35,467
Prepaid expenses 3,476 2,934
Other current assets 24,962 21,677
242,904 245,486
Property, plant and equipment 45,576 45,800
Long-term investments 46,991 47,254
Goodwill 280,561 281,222
Intangible assets 304,962 315,384
Other assets 13,591 14,090
$ 934,585 $ 949,236

Liabilities and Unitholders' Equity
Current liabilities:
Revolving credit facility $ 47,549 $ 47,527
Accounts payable and accrued liabilities 119,687 118,264
Deferred revenue 14,405 13,819
Current portion of obligations under
capital leases 5,478 5,353
187,119 184,963
Obligations under capital leases 8,779 8,910
Long-term debt 205,131 204,862
Future tax liability 34,076 34,141
Non-controlling interest 96,525 107,466
Convertible debenture 150,292 149,530
Unitholders' equity 252,663 259,364
$ 934,585 $ 949,236

Consolidated Statements of Income and Comprehensive Income
(In thousands of dollars, except per unit amounts)


Three months ended Three months ended
March 31, 2008 March 31, 2007

Revenues $ 161,732 $ 116,215
Cost of revenues 116,692 78,864
45,040 37,351
Selling, general and administrative 28,267 21,947
Amortization of intangible assets 10,412 8,827
Depreciation 2,667 1,891
41,346 32,665

Income before the undernoted 3,694 4,686

Income from equity investments 532 745
Other income 330 197
Interest expense 9,400 6,358
Loss on dilution of ownership interest - 5,844
Loss before income taxes (4,844) (6,574)
Income tax expense (recovery) - current 3 (154)
Income tax recovery - future (65) -
Loss from continuing operations
before non-controlling interest (4,782) (6,420)

Non-controlling interest relating
to continuing operations 2,022 2,940
Loss from continuing operations (2,760) (3,480)

Loss from discontinued operations before
non-controlling interest - (2,782)

Non-controlling interest relating to
discontinued operations - 1,274
Loss from discontinued operations - (1,508)

Net loss and comprehensive loss $ (2,760) $ (4,988)

Loss per unit
Basic and diluted:
Continuing operations $ (0.07) $ (0.09)
Discontinued operations - (0.04)
Net loss (0.07) (0.13)

Consolidated Statements of Cash Flows
(In thousands of dollars)


Three months ended Three months ended
March 31, 2008 March 31, 2007
Cash provided by (used in):
Operating activities:
Net loss $ (2,760) $ (4,988)
Items not affecting cash:
Loss from discontinued operations
before non-controlling interest - 2,782
Amortization of intangible assets 10,412 8,827
Depreciation 2,810 1,891
Future income tax recovery (65) -
Income from equity investments,
net of cash received 308 484
Non-cash interest expense 1,031 580
Non-cash compensation expense 801 560
Loss on dilution of interest
in operating partner - 5,844
Non-controlling interest (2,022) (4,214)
Changes in non-cash working capital (1,972) (5,714)
Cash provided by discontinued operations - 9,614
8,543 15,666
Financing activities:
Repurchase of units - (4,041)
Distributions to unitholders (4,881) (9,744)
Distributions to non-controlling interest (6,805) (8,021)
Increase in cash held in trust 2,050 2,199
Increase in bank indebtedness 22 33,038
Repayment of capital lease obligations (1,441) (746)
Cash used in discontinued operations - (9,731)
(11,055) 2,954
Investing activities:
Acquisition of businesses, net of
cash acquired (1,198) (50,199)
Purchase of property, plant and equipment (1,160) (1,907)
Decrease in other assets 500 556
Cash provided by discontinued operations - 372
(1,858) (51,178)
Decrease in cash (4,370) (32,558)
Cash, beginning of period - continuing
operations 20,278 54,616

Cash, end of period $ 15,908 $ 22,058
Supplemental cash flow information:
Interest paid $ 5,543 $ 4,445
Cash acquired upon acquisition 61 664
Supplemental disclosure of non-cash
financial and investing activities:
Acquisition of property, plant and
equipment through capital leases 565 857

NPF's 2008 First Quarter Financial Statements and Management's Discussion and Analysis are available on the investor info section of and on SEDAR at

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