Foremost Income Fund

Foremost Income Fund

August 13, 2015 20:11 ET

Foremost Income Fund Reports Q2 2015 Results

CALGARY, ALBERTA--(Marketwired - Aug. 13, 2015) - Foremost Income Fund ("Foremost" or the "Fund") announces the financial results for the three and six months ended June 30, 2015.

OVERVIEW

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

Under normal circumstances, the predominate effort and focus of Foremost's leadership team is finding ways to create long‐term, sustainable growth while mitigating downside risks. 2015 however, is shaping up to be at least the start of a phase demanding a different focus: How to judiciously shrink the business by matching capacity to dropping demand, while preserving and protecting attributes of the business that are critical to our long‐term future. This is our present challenge.

The current economic context in Western Canada and globally in the energy sector is indeed daunting. It is also unknowable as to its eventual depth and duration.

The Foremost management team however is up to the challenge as we continue to reduce the organization, most substantially in the Energy Equipment side.

Consistent with this effort and following the conclusion of the 2nd quarter, the Management Team began a review of opportunities to consolidate manufacturing capacity in fewer locations, thereby allowing us to continue to reduce overhead and operating costs. An initial step associated with this work is that we have announced the temporary shutdown of our Calgary South facility, and are transitioning work such that all new incoming applicable orders will be fulfilled from our Lloydminster facilities. We will be evaluating how to best use redundant real estate assets however it will not be our tendency to be selling assets into a low market.

Beyond this substantial step, we are also scrutinizing and assessing many other additional approaches to ensure Foremost effectively adapts to a new low‐demand environment. For the foreseeable future we will be communicating these activities through each quarterly reporting cycle.

Many of Foremost's competitors who do not have the strength of our rock solid balance sheet and product portfolio diversity are suffering much more significantly. We will ensure Foremost remains strong through this cycle by acting decisively and on a timely basis. Although times are difficult in the energy sector today, we have a strong conviction that this will pass and as such, preserving and enhancing Foremost's strength will be the key to steering us through this and preparing for eventual better days ahead.

Bevan May

Interim CEO and Board Chairman

Highlights from Q2 2015:

  • Revenue decreased by 29.2%, or $19.9 million, compared quarter over quarter. This decrease was felt by both operating segments, Energy Equipment and Mobile Equipment, and is discussed further in the segmented results of operations section.
  • Gross profit decreased to 7% in 2015, compared with 14% in the second quarter of 2014. However, this includes an inventory provision in the quarter of $4.9M. Excluding the inventory provision, Gross Profit was 15.7% as noted in the table below.
  • Administration costs decreased by $0.5 million, from $4.8 million in Q2 2014 to $4.3 million in Q2 2015. Included in the 2015 Q2 administration costs are bad debt expenses of $434,000. The majority of this balance is associated with one customer and is not generally considered to be a repeating expense. Excluding this bad debt expense, operating administration costs were $3.9M for the quarter. Reduced costs in this area come from reduced workforce, work hours and pay for staff at the FEE locations, as well as decreased discretionary spending, and continued discipline about costs.
  • During the second quarter of 2015, the Fund entered into a USD‐foreign‐exchange contract linked to specific foreign customer order activity. This has resulted in an unrecognized loss of $69,000 (2014 ‐ $163,000). All exchange hedging activity at Foremost is non‐speculative and used to eliminate exchange fluctuation risks associated with these contracts. In all cases, hedging contracts are linked to customer contracts or pools of customer contracts.

Highlights for Year‐to‐Date 2015:

  • Revenue decreased by $9.7 million, or 8.5%, due to ongoing weak demand for certain product lines, most notably shop tanks, vehicles, trucks and parts. More information can be found in the segmented results of operations section.
  • Margins dropped by $3.0 million, or 20.9%. This reflects continuous competitive pressures, along with an increase in inventory provision of $5.1 million (2014 ‐ $0.9). The impact of the inventory allowance adjustment is below:
(000's) 2015
Gross Profit as reported $ 11,364
Increase in Valuation allowance 5,098
Gross Profit as adjusted 16,462
Gross profit % as adjusted 15.7 %
  • Administration costs decreased by $1.0 million. The Fund focuses on continuing to reduce these expenses.
  • A $1.1 million foreign exchange gain was recognized during 2015. The majority of this gain came from increased U.S. sales contracts, which resulted in higher U.S. cash, and from fluctuations in this exchange rate.
SUMMARY OF QUARTERLY INFORMATION
(000's, except per Trust Unit amount)
2015 Q1 Q2 Q3 Q4 Total
Revenue $ 56,672 $ 48,358 $ 105,030
Gross profit ($) $ 8,021 $ 3,343 $ 11,364
Gross profit (%) 14 % 7 % 11 %
Admin. expenses ($) $ 4,428 $ 4,310 $ 8,738
Admin. expenses (% of total revenue) 8 % 9 % 8 %
Exchange rate gain/(loss) $ 1,254 $ (168 ) $ 1,086
EBITDA $ 4,769 $ (1,126 ) $ 3,643
Income/(loss) from operations $ 2,362 $ (2,176 ) $ 186
Comprehensive income/(loss) $ 2,775 $ (1,872 ) $ 903
Trust units redeemed 77,350 1,379 78,729
Redemptions $ 484 $ 8 $ 492
Basic and diluted earnings per trust unit $ 0.15 $ (0.10 ) $ 0.05
2014 Q1 Q2 Q3 Q4 Total
Revenue $ 46,439 $ 68,314 $ 59,654 $ 61,617 $ 236,024
Gross profit ($) $ 5,029 $ 9,336 $ 8,735 $ 7,809 $ 30,909
Gross profit (%) 11 % 14 % 15 % 13 % 13 %
Admin. expenses ($) $ 4,886 $ 4,828 $ 4,400 $ 5,646 $ 19,760
Admin. expenses (% of total revenue) 11 % 7 % 7 % 9 % 8 %
Exchange rate gain/(loss) $ (133 ) $ 231 $ 418 $ 123 $ 639
EBITDA $ 9 $ 4,162 $ 5,459 $ 1,737 $ 11,367
Income/(loss) from operations $ (1,140 ) $ 3,207 $ 3,039 $ 491 $ 5,597
Comprehensive income/(loss) $ (1,541 ) $ 1,950 $ 3,513 $ (15,223 ) $ (11,301 )
Trust units redeemed 21,123 66,527 37,353 125,003
Redemptions $ 151 $ 474 $ 246 $ 871
Basic and diluted (loss)/earnings per trust unit $ (0.08 ) $ 0.10 $ 0.19 $ (0.82 ) $ (0.61 )
2013 Q1 Q2 Q3 Q4 Total
Revenue $ 64,001 $ 56,602 $ 50,232 $ 59,094 $ 229,929
Gross profit ($) $ 10,149 $ 4,770 $ 7,169 $ 7,763 $ 29,851
Gross profit (%) 16 % 8 % 14 % 13 % 13 %
Admin. expenses ($) $ 5,517 $ 5,920 $ 5,519 $ 5,171 $ 22,127
Admin. expenses (% of total revenue) 9 % 10 % 11 % 9 % 10 %
Exchange rate gain/(loss) $ (48 ) $ 225 $ 54 $ (38 ) $ 193
EBITDA $ 4,632 $ (1,150 ) $ 1,649 $ 2,592 $ 7,723
Income/(loss) from operations $ 3,484 $ (2,334 ) $ 423 $ 1,325 $ 2,898
Comprehensive income/(loss) $ 2,810 $ (1,504 ) $ (2,890 ) $ 1,031 $ (553 )
Trust units redeemed 8,560 13,326 76,451 30,394 128,731
Redemptions $ 70 $ 107 $ 627 $ 229 $ 1,033
Basic and diluted earnings/(loss) per trust unit $ 0.15 $ (0.08 ) $ (0.15 ) $ 0.05 $ (0.03 )

TRUST UNIT REDEMPTIONS AND DISTRIBUTIONS

The Fund redeemed 78,729 Trust Units during the six months ended June 30, 2015 through its normal redemption program resulting in cash payments of $400,000 and promissory notes payable equal to $91,229. During 2014 the Fund redeemed 87,650 Trust Units for $200,103 and promissory notes of $424,589.

The Trustees have determined that, as of the date of August 13, 2015, the Fund will redeem tendered Trust Units at a price of $5.65 per unit.

On behalf of the Trustees

Foremost Income Fund

Bevan May, Trustee

FORWARD‐LOOKING STATEMENT

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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