Foremost Income Fund

Foremost Income Fund

March 17, 2017 16:06 ET

Foremost Income Fund Reports 2016 Results and Reviews Unit Redemption Monthly Limit for March 2017

CALGARY, ALBERTA--(Marketwired - March 17, 2017) - Foremost Income Fund ("Foremost" or the "Fund") announces the financial results for the twelve months ended December 31, 2016.


The Fund is an unincorporated open end mutual fund trust conducting its business through two operating segments, Foremost Energy Equipment ("FEE") and Foremost Mobile Equipment ("FME"). FEE's overall business is focused on the oil and gas industry and includes activity from six manufacturing sites throughout Alberta. FME manufactures off-highway large wheeled and tracked vehicles, hydrovac and vacuum trucks, equipment for custom drilling, construction, water wells, and mining sectors. FME has three manufacturing facilities located in Alberta.

Message to Unitholders

Dear Unitholders,

Foremost ended the year on a relatively stable note. The dismal conditions that persisted during 2016 in the Western Canadian industrial marketplace were partially offset by the improving economic conditions in the US construction markets and the worldwide mining markets, two key sectors for Foremost. In addition, dramatic and painful cost cuts across every category of spend in Foremost helped reduce expenses and shore up financial performance in 2016.

Revenue for the fourth quarter was $29.4 million with a gross margin of 7% and net loss of $2.2 million. Q4 EBIDTA adjusted for non-cash asset impairments was -$0.2 million. While revenue was flat compared to 2016, Q3 gross margin dropped as highly competitive bidding forced lower prices across all product segments. For full-year 2016 revenue was $125.9 million, with gross margin of 10%, net loss of $5.0 million and EBIDTA of $0.09 million excluding non-cash asset impairments of $0.1 million.

The Fund ended 2016 cash-flow positive with the mobile equipment division providing the bulk of contribution through sales of water-well drilling equipment, mining tooling and other parts. The energy division performed respectably especially in the field and production tank product lines. Pricing and gross margin remained under severe pressure as customers in the Western Canadian energy markets used the overcapacity in the fabrication supply market to drive prices down. Foremost was up to the challenge and reduced direct labour costs with new union contracts and reduced administrative costs from $16.7 million in 2015 to $11.9 million in 2016, a 29% drop year over year.

Foremost continues to navigate tough and turbulent times in Western Canada and the US, its two biggest markets. Commodity prices, while improving, are still poor compared to recent history. This directly affects the prospects of the mobile product lines and sectors that Foremost serves. Foremost is responding well to changing market conditions in Canada and US and will continue to evolve as it sheds legacy costs, launches new products and services, and becomes leaner and more competitive.

Kevin Johnson

2016 Highlights:

  • The Fund continues to adapt in an environment of depressed commodity prices and lower activity levels, as reflected in the operating loss of $4.2 million compared to operating income of $6.6 million in 2015.
  • Revenue decreased by $66.4 million, or 35%, due to ongoing weak demand for most product lines. The field tank product line was the only area with revenue growth compared to 2015. More information can be found in the Segmented Results of Operations section of the MD&A.
  • Gross profit as a percentage of revenue dropped by 5% as the Fund continues to experience downward margin pressure and decreased sales due to current market conditions. Included in gross profit are adjustments made to the inventory valuation allowance which amounted to $1.2 million in 2016 and $8.2 million in 2015.
  • Headcount decreased from approximately 550 at December 31, 2015 to 479 at December 31, 2016 as customer demand for most product lines decreased. This, along with other cost savings measures in this category, accounted for personnel savings of $17.3 million. Refer to note 6 of the 2016 Consolidated Financial Statements for more details.
  • Continuous review of discretionary costs, closure of a Calgary manufacturing facility and reduction in headcount has resulted in reduced administration costs of $4.9 million.
  • Amortization decreased slightly year over year as residual values on specific underutilized equipment were written off during 2016.
  • The $0.5 million foreign exchange loss recognized in 2016 is attributable to the effect of the changes in the value of the Fund's U.S. dollar denominated net monetary assets and liabilities and the unrecognized foreign exchange on forward contracts. The U.S. dollar denominated monetary assets consist of cash and accounts receivable, which have decreased as the demand for contracts in U.S. dollars has reduced.
  • As a result of low commodity prices and decreasing customer backlog, the Fund took an opportunity to consolidate manufacturing capacity in Calgary during mid-2016.
  • Effective January 1, 2016, Kevin Johnson became President and Bevan May returned to his role as Chairman of the Board.

(000's, except per Trust Unit amount)

2016 Q1 Q2 Q3 Q4 Total
Revenue $ 35,846 $ 30,621 $ 29,943 $ 29,435 $ 125,845
Gross profit ($) $ 3,655 $ 3,965 $ 2,780 $ 2,028 $ 12,428
Gross profit (%) 10 % 13 % 9 % 7 % 10 %
Admin. expenses ($) $ 3,198 $ 3,476 $ 3,000 $ 2,181 $ 11,855
Admin. expenses (% of total revenue) 9 % 11 % 10 % 7 % 9 %
Exchange rate (loss) gain $ (454 ) $ 117 $ (89 ) $ (29 ) $ (455 )
Adjusted EBITDA * $ 14 $ 606 $ (340 ) $ (193 ) $ 87
Loss from operations $ (661 ) $ (604 ) $ (1,286 ) $ (1,682 ) $ (4,233 )
Comprehensive loss $ (1,149 ) $ (259 ) $ (1,447 ) $ (2,166 ) $ (5,021 )
Trust units redeemed 5,000 4,652 26,700 - 36,352
Redemptions $ 28 $ 29 $ 161 $ - $ 218
Basic and diluted loss per trust unit $ (0.06 ) $ (0.01 ) (0.08 ) (0.12 ) $ (0.27 )
2015 Q1 Q2 Q3 Q4 Total
Revenue $ 56,672 $ 48,358 $ 43,538 $ 43,639 $ 192,207
Gross profit ($) $ 8,021 $ 3,342 $ 7,290 $ 9,549 $ 28,202
Gross profit (%) 14 % 7 % 17 % 22 % 15 %
Admin. expenses ($) $ 4,428 $ 4,310 $ 3,916 $ 4,062 $ 16,716
Admin. expenses (% of total revenue) 8 % 9 % 9 % 9 % 9 %
Exchange rate gain/(loss) $ 1,254 $ (168 ) $ 289 $ 4 $ 1,379
EBITDA $ 4,769 $ (1,126 ) $ 3,696 $ 5,470 $ 12,809
Income/(loss) from operations $ 2,362 $ (2,177 ) $ 2,136 $ 4,275 $ 6,596
Comprehensive income/(loss) $ 2,775 $ (1,874 ) $ 2,567 $ 6,436 $ 9,904
Trust units redeemed 77,350 1,379 267 - 78,996
Redemptions $ 484 $ 8 $ 1 $ - $ 493
Basic and diluted earnings per trust unit $ 0.15 $ (0.10 ) 0.14 0.34 $ 0.53

Trust Unit Redemptions and Distributions

The Fund redeemed 36,352 Trust Units during the twelve months ended December 31, 2016, through its normal redemption program resulting in promissory notes payable of $0.2 million. During 2015 the Fund redeemed 78,996 Trust Units for cash payments of $0.4 million and promissory notes payable equal to $0.09 million.

The Trustees have determined that, as of March 17, 2017, the Fund will redeem tendered Trust Units at tangible book value of $5.80 per unit.

Temporary Reduction of Monthly Limit for Fund Unit Redemptions Pursuant to Section 6.4(ii)(A) and (B) of the Deed of Trust

Pursuant to section 6.4(ii)(A) and (B) of the Deed of Trust of the Fund dated November 12, 2005 as amended (the "Deed of Trust"), the Trustees of the Fund have discretion, in any calendar month, to reduce the monthly limit for cash redemptions of units of the Fund due to a material change, or concerns as to the current working capital or debt of the Fund. The exercise of such discretion may result in all or a portion (on a pro rata basis, depending on notices of redemption received) of the amount payable for units redeemed being paid by unsecured promissory notes in accordance with section 6.5 of the Deed of Trust.

As disclosed by prior press releases, effective May 1, 2014 and applying to all notices of redemption received in the months of May through October 2014, inclusive, and February 2015, through February 2017, inclusive, the Trustees of the Fund exercised their discretion pursuant to section 6.4(ii)(B) to reduce the monthly limit for cash redemptions from $1,500,000.00 to $0.00, and to $500,000.00 for the months of November and December, 2014, and January 2015 (in each case the subject redemptions being payable by the end of the following month). The Trustees undertook to review the revised monthly limit in respect of the month of March 2017 no later than March 15, 2017, however due to the impending board meeting and release of financial information, deferred to March 17, 2017.

With respect to the month of March 2017, the Trustees have determined that the monthly limit for cash redemptions will be set at $0.00 due to concerns as to current working capital and debt of the Fund, having regard to the Board's views on the potential impact of current and expected market conditions on the Fund's performance. The Trustees have undertaken to review the revised monthly limit in respect of the month of April 2017 no later than April 14, 2017.

In accordance with the Deed of Trust, unitholders that submit or have submitted notices of redemption during the month of March 2017, such that the Fund is obligated to pay the redemption price in respect of the subject units on or before April 30, 2017, will be contacted individually and provided with the opportunity to elect to withdraw all or any part of such notices of redemption. Any unitholders not electing to withdraw their redemption notices, in whole or in part, will be paid the redemption price in respect of the units that they submit for redemption by unsecured promissory notes.

This discussion is intended for summary purposes only and is subject in all respects to the Deed of Trust. The income and other tax consequences of holding, redeeming or disposing of units and acquiring promissory notes will vary depending on the unitholder's particular circumstances, including the jurisdiction(s) in which the unitholder resides or carries on business, and whether the unitholder is an RRSP, RESP, RRIF, PPSP or TFSA. Accordingly, this summary is of a general nature only and is not intended to be legal or tax advice to any prospective purchaser or any unitholder. All unitholders should consult their own legal and tax advisors prior to redeeming units of the Fund.

On behalf of the Trustees
Foremost Income Fund

Bevan May, Trustee


Certain statements in this news release may constitute "forward-looking" statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this news release, such statements use words such as "may", "will", "expect", "believe", "plan" and other similar terminology. These statements include statements the Fund's intention to proceed with a Unitholders' meeting and information regarding the Trustees' views of the future prospects and tax treatment of the Fund and tax treatment of the Special Redemption, the Fund's expectations regarding the future availability of cash to meet redemption requests and the Trustee's expectations for redemption prices in December 2011 and January 2012. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this news release. These forward-looking statements involve a number of risks and uncertainties, including: the impact of general economic conditions, industry conditions, changes in laws and regulations, increased competition, fluctuations in commodity prices and foreign exchange, and interest rates and stock market volatility.

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