Drive Products Income Fund

Drive Products Income Fund

March 30, 2009 15:53 ET

Drive Products Income Fund Reports 2008 Annual Financial Results

TORONTO, ONTARIO--(Marketwire - March 30, 2008) - Drive Products Income Fund (TSX:DPI.UN) today announced its annual financial results for the year ended December 31, 2008.

Sales, net loss and EBITDA for the 2008 annual period were $102.7 million, $7.5 million and $8.2 million, respectively, compared to $91.0 million, $50.5 million and $11.4 million in the 2007 annual period. "Several challenges had a dramatic affect on the Fund's consolidated results in 2008, including the volatility of the Canadian dollar and the continued decline in capital spending by our customers in the oil and gas segment. In addition, the dramatic decline in the price of crude oil and other related commodities further impacted this segment. Finally, during the last half of 2008, a worldwide credit crisis developed, followed quickly by a sharp decline globally in equity values. This led to reduced economic activity as customers began to curb their capital spending," said Greg Edmonds, Chief Executive Officer.

"In the fourth quarter of 2008, the Canadian dollar significantly weakened against the U.S. dollar, ending the year at Canadian $1.22, down about 23% from the end of 2007. This volatility hurt our results in two ways. First, management implemented price reductions in 2007 to offset the effects of the strong Canadian dollar in 2007. These price reductions affected sales for the first three quarters of 2008 as most of our sales prices are driven by the foreign exchange rate on our U.S. vended inventory. As most of our inventory is purchased from the U.S., sales were affected. We implemented our first major price increase in the fall of 2008 to offset several vendor price increases and steel surcharges. We quickly followed that up with an additional price increase in November of 2008, to offset the significant and surprisingly quick decline in the Canadian dollar. This sharp decline led to the second impact on our operating results as we also had to record significant foreign exchange losses on our U.S. denominated accounts payable and overdraft balance. Foreign exchange losses totaled $2.0 million in the 2008 annual period compared to gains of $1.1 million in the 2007 annual period, a negative difference of almost $3.1 million in the comparable annual periods. We expect the price increases implemented in the fourth quarter of 2008 to offset some of these losses in the upcoming quarters".

Our Western branches are largely dependent upon the capital spending programs and activities of natural gas and crude oil exploration companies. In 2007, many oil and natural gas producers reacted to the fluctuation in commodities prices, the increased drilling and exploration costs, income tax laws affecting income trusts and announcements of changes to the royalty structure in Alberta by reducing the drilling activity. Throughout 2008, these trends continued and sales in our Western branches, excluding those from acquisitions, were down $7.7 million in the 2008 annual period compared to 2007. Once again, this drop in sales had a significant affect on the Fund's 2008 results.

As a result of these challenges, management and the Board announced that that the monthly cash distribution would be decreased by 50%, commencing with the distributions declared in December 2008. The new monthly cash distribution was set at $0.02086 or $0.25032 on annualized basis. We believe that given the recessionary times in which the Fund is operating, a greater portion of the cash generated from operating activities should be maintained. Consequently, the reduced distribution rate is expected to stabilize the Fund's balance sheet and position it to absorb, in some measure, the current downturn and position it to capitalize on opportunities once the market stabilizes. Management is concerned about the volatility of current market conditions and will carefully monitor the current level of distributions relative to the Fund's performance.

Following through on our acquisition strategy proved to be the right thing to do as these businesses made a major contribution to the bottom line and mitigated some of the negative factors noted above. Sales from the three businesses acquired in 2008, Docap, UTS and WH Green amounted to $17.8 million and contributed $1.7 million in EBITDA in the 2008 annual period.

The Fund performed a valuation analysis of the goodwill and intangible assets at December 31, 2008. The results of the valuation resulted in impairments in the West of $4.9 million in the value of the customer relationships and $0.5 million in the value of the Brands, at December 31, 2008. The write downs were caused by a reduction in sales and profitability from the customer relationships and brands that were created at the IPO date and still exist today. Oil and gas drilling activity in Alberta continues to be at levels significantly lower than those witnessed during the IPO period and have impacted many of our customers.

"As we enter into 2009, we expect that the slowing economy, depressed commodity prices and tighter credit policies will impact our markets and the markets in which our customers operate in. The current recessionary environment is likely to create unprecedented challenges for our markets and the Canadian economy. In addition, all branches are bracing for possible margin compression in 2009, as competitors try to liquidate their inventory and generate cash flow or, decrease their prices in an attempt to attract new customers. We have already implemented steps, including the distribution cut announced in December 2008, wage and hiring freezes, suspension of certain employee benefits, adjustments to budgeted 2009 capital spending and the consolidation of our two Calgary branches. These measures will conserve cash and improve the Fund's balance sheet. They will also position the Fund to absorb, in some measure, the current downturn and capitalize on opportunities once the market stabilizes. By the same token, these measures will also protect as much of our human capital as possible as one of our key strengths is our people," Mr. Edmonds concluded.


($ thousands
except per
unit figures) Three months ended December 31 Year ended December 31
% %
2008 2007 change 2008 2007 change
(un- (un-
audited) audited) (audited)(audited)
$ $ $ $

Sales 29,728 23,135 28.5% 102,698 90,963 12.9%

Cost of Sales 19,735 15,643 26.2% 68,329 61,511 11.4%

Gross Margin 9,993 7,492 33.4% 34,369 29,452 16.0%

General and
Administrative 6,600 4,673 41.2% 24,244 19,077 27.1%

exchange (gain) 1,133 16 6,981.3% 1,976 (1,052) (287.8%)

EBITDA(1) 2,260 2,803 (19.4%) 8,149 11,427 (29.7%)

Amortization 2,514 3,133 (19.8%) 9,678 14,449 (33.0%)

expense 167 62 169.4% 538 239 125.1%

Future income
tax provision
(recovery) (226) (2,922) (283) 905

Income tax
provision 69 - 272 -

Write-down of
assets 5,414 11,493 5,414 11,492

Write-down of
goodwill - 34,890 - 34,890

Net (loss) (5,678) (43,853) (7,470) (50,548)

Average number
of units

('000s) (2) 13,250 13,982 13,739 13,982

Basic and
earnings (loss)
per unit (0.429) (3.136) (0.544) (3.615)

Total assets 75,105 76,165 75,105 76,165

Long term
liabilities 1,684 2,246 1,684 2,246
per unit 0.1042 0.1925 0.4797 0.8800

(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

Annual Report

The Fund's Annual Report is available on the Fund's website at and at

(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 annual Management's Discussion and Analysis.

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 and the risks and uncertainties detailed from time to time in the Fund's continuous disclosure documents filed with the Canadian securities regulatory authorities. 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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