Drive Products Income Fund

Drive Products Income Fund

November 13, 2008 13:22 ET

Drive Products Income Fund Announces 2008 Third Quarter Financial Results and November 2008 Cash Distributions

TORONTO, ONTARIO--(Marketwire - Nov. 13, 2008) - Drive Products Income Fund (TSX:DPI.UN) (the "Fund") released third quarter 2008 financial results today and announced the November 2008 cash distributions to unitholders.

Sales, net loss and EBITDA for the quarter were $24.9 million, $0.7 million and $1.9 million, respectively. Sales, net loss and EBITDA for the nine month period were $73.0 million, $1.8 million and $5.9 million, respectively. Excluding the foreign exchange impact in the comparable quarters, net loss was down $1.8 million to $0.2 million and EBITDA was up $0.7 million to $2.5 million in the third quarter of 2008. Sales from recently acquired companies and product lines continue to meet our expectations and helped provide some stability during the current industry cycle. Collectively, these companies have contributed sales of $4.4 million and $14.3 million in the three and nine month periods ended September 30, 2008, respectively. Pre season sales of snow and ice control systems were very strong in the quarter and based on heavy use of equipment last winter, we expect continued positive growth in the segment in the upcoming quarters.

"Industry challenges in our Western markets continued during the quarter and recent credit conditions have had a significant impact on sales of our core products in the West," said Greg Edmonds, Chief Executive Officer of the Fund. "In addition, price reductions implemented in 2007 to offset the effects of the stronger Canadian dollar also affected the comparable sales in 2008. In light of the recent sharp decline in the Canadian dollar, management implemented a 12% foreign exchange surcharge on all products sourced from the U.S., effective November 3, 2008. This was in addition to general price increases implemented on October 1, 2008 to mitigate the various vendor increases the Fund has absorbed throughout 2008. While the Canadian dollar's decline is likely to create some short term operating stress for many Canadian companies, management sees substantial long-term benefits as Canadian companies, in particular those in the manufacturing sector, become more competitive with their U.S counterparts once again".

Cost of sales for the three and nine month periods ended September 30, 2008 were $16.7 million and $48.6 million, respectively, compared to $14.7 million and $45.7 in the comparable 2007 periods. Gross margins in the three and nine month 2008 periods increased to 32.9% and 33.4%, respectively, compared to 31.1% and 32.6% in the comparable 2007 periods. Gross margins were positively impacted by the acquired companies and sourcing of materials and products from new overseas vendors but partially offset by price increases by many of our vendors.

Foreign exchange has had a significant impact on the Fund's operations in 2008. Foreign exchange losses in the three and nine month periods ended September 30, 2008 were $0.6 million and $0.8 million respectively, compared to gains of $0.4 million and $1.1 million in the comparable 2007 periods. In 2008, we have seen a reversal of the rapid appreciation in the Canadian dollar witnessed in prior periods. Subsequent to the quarter, the Canadian dollar took a dramatic decline and management reacted with the foreign exchange surcharge noted above. Over time, management believes that the new surcharge will mitigate the effects of any foreign exchange losses.

During the quarter, the Fund implemented the recommendations of CICA Emerging Issues Committee under EIC-171 with respect to future income taxes. Accordingly, future taxes related to the temporary differences associated with the assets and liabilities attributable to the exchangeable Class B LP units will not be recorded prior to the conversion of those exchangeable interests. As a result, the Fund has recalculated the future tax provisions related to the temporary differences associated with the public units only and has applied the changes retrospectively. The impact was as follows:

Change in Balance Sheet As at As at
September 30, December 31,
2008 2007
$ $

Decrease in future tax
liability (796,813) (755,250)
Increase in Unitholders' equity 796,813 755,250

Change in Statement of Operations

Three month Three month Nine month Nine month
period ended period ended period ended period ended
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
$ $ $ $
Decrease in
future income
tax expense (78,149) (2,427) (41,563) (1,740,769)

Decrease in
Net loss 78,149 2,427 41,563 1,740,769
Decrease in net
loss per Fund Unit $0.0057 $0.0002 $0.0030 $0.1245

Net losses for the three and nine month periods ended September 30, 2008 amounted to $0.7 million and $1.8 million, respectively compared to losses of $1.6 million and $4.8 million in the comparable 2007 periods. The 2007 periods were negatively impacted by additional amortization expense on intangible assets, which were written down at December 31, 2007 and the realization of the one-time, non-cash future tax expense of $2.1 million recorded in 2007 due to changes in federal tax rules governing income trusts.

Distributable cash in the three and nine month periods ended September 30, 2008 was $1.5 million and $4.9 million, respectively (see non-GAAP measures below for a definition of distributable cash). Distributions declared in the three and nine month periods ended September 30, 2008 were $1.7 million and $5.2 million, respectively. The payout ratio, calculated as cash distributions declared as a percentage of distributable cash, was 111.4% for the quarter ended September 30, 2008 and 105.5% for the 2008 year to date period. Since inception, the Fund has generated distributable cash of $21.4 million and declared distributions of $22.9 million per unit to each unitholder of record of the Fund and to each unitholder of record of the Class B limited partnership units of DPLP, representing a payout ratio of 106.9% . Management is concerned about the volatility of current market conditions but believes that the current level of distributions is sustainable.

The Fund also announces that its Board of Trustees has approved a cash distribution of $0.04171 per unit for the month of November 2008 (equivalent to $0.50052 per unit on an annualized basis). The distribution is payable to each unitholder of the Fund and to each unitholder of the Class B limited partnership units of Drive Products Limited Partnership of record on November 28, 2008 and will be paid on December 15, 2008.

During the quarter, the Fund completed its normal course issuer bid ("NCIB") and repurchased 694,925 units at an aggregate cost of $1.9 million. Including units repurchased in the previous quarter, total units repurchased under the NCIB amounted to 732,035 at an aggregate cost of $2.1 million. The average cost per unit of the 732,035 units repurchased was $2.81.

Summary of consolidated financial results:


($ thousands except
per unit figures) Three months ended Nine months ended
September 30 September 30
% %
2008 2007 change 2008 2007 change
(unau- (unau- (unau- (unau-
dited) dited) dited) dited)
$ $ $ $

Sales 24,867 21,272 16.9% 72,970 67,829 7.6%

Cost of Sales 16,684 14,662 13.8% 48,594 45,687 6.4%

Gross Margin 8,183 6,610 23.8% 24,376 22,142 10.1%

General and
Administrative 5,720 4,894 16.9% 17,643 14,419 22.4%
Foreign exchange
(gain) 559 (352) (258.8%) 843 (1,069) 178.9%

EBITDA(1) 1,904 2,068 (7.9%) 5,890 8,792 (33.0%)

Amortization 2,410 3,624 (33.5%) 7,164 11,316 (36.7%)

Interest expense 170 82 107.3% 371 177 109.6%

Future income tax
provision (recovery) (13) 3 (57) 2,086

Income tax provision 81 - 203 -

Net (loss) (744) (1,641) (1,791) (4,787)

Average number of units
('000s)(2) 13,670 13,982 13,874 13,982

Basic and diluted
earnings (loss)
per unit (0.054) (0.117) (0.129) (0.342)

Total assets 82,822 129,566 82,822 129,566

Long term
liabilities 1,864 4,294 1,864 4,294
per unit 0.125 0.1925 0.375 0.688

(1) EBITDA is a non-GAAP measure. See "Non-GAAP Measures" below for a
definition of EBITDA. The Fund's taxable earnings are allocated to its
unitholders and taxed in their hands.

(2) For purposes of calculating the average number of units outstanding,
Fund units and Class B units exchangeable for Fund units have been

(1) Non-GAAP Measures

EBITDA and distributable cash are not earnings measures recognized by GAAP and do not have standardized meanings prescribed by GAAP. Therefore, EBITDA and distributable cash may not be comparable to similarly titled measures presented by other issuers. Investors are cautioned that EBITDA and distributable cash should not be construed as an alternative to net income or loss determined in accordance with GAAP as indicators of the Fund's performance or to cash flows from operating, investing and financing activities as measures of liquidity and cash flows. Management believes EBITDA and distributable cash are useful measures in evaluating the performance of the Fund and in determining whether to invest in units. EBITDA means net earnings adjusted to exclude income taxes, gains or losses on disposal of capital assets, amortization of capital assets and intangible assets, and interest expense. We have excluded impairments of goodwill and intangible assets in the presentation of EBITDA because we believe that such charges are non-recurring, one-time charges and that their exclusions will be useful to our investors to compare our period over period and year over year performance. Distributable cash means EBITDA adjusted for maintenance capital expenditures and other adjustments listed in the reconciliation provided in the second quarter Management's Discussion and Analysis.

Third Quarter Interim Report

The Fund's third quarter interim report is available on the Fund's website at and at

About Drive Products Income Fund

Drive Products Income Fund holds a 52% indirect interest in Drive Products. Founded in 1983, Drive Products is a Canadian leader in the design and installation of systems solutions that transform a conventional new truck chassis into a specialized vehicle that meets a customer's technical and performance requirements. To achieve this, Drive Products offers a wide variety of products such as power take-offs, hydraulic pumps, motors and coolers, winches, cables and controls, drivelines, blowers and compressors, hoses and fittings, custom consoles, snowplows, spreaders and electronic spreader controls, from leading international manufacturers, in many instances as the sole distributor in Canada.

Forward-Looking Statements

This press release contains forward-looking statements relating to expected future events and financial and operating results of the Fund. These statements involve known and unknown risks and uncertainties. Actual results may differ materially from those anticipated by such forward-looking statements for a variety of reasons, including without limitation, market and general economic conditions, oil field services industry conditions, defence spending, competition, interest rates, income tax legislation, reliance on suppliers, exchange rates, stock market volatility and other risks and uncertainties described from time to time in the Fund's continuous disclosure documents filed with the Canadian securities regulatory authorities or which may be unknown to the Fund. The Fund disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law.

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