Foremost Income Fund

Foremost Income Fund

November 10, 2016 19:32 ET

Foremost Income Fund Reports Q3 2016 Results and Unit Redemption Monthly Limit for November 2016

CALGARY, ALBERTA--(Marketwired - Nov. 10, 2016) - Foremost Income Fund ("Foremost" or the "Fund") announces the financial results for the three and nine months ended September 30, 2016.

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

Foremost Income Fund had a soft quarter in Q3 2016 as competitive pressures drove product margins and revenue down across all product lines. Western Canada still struggles without much respite as Oil and Gas prices remain at unprofitable levels for most production companies. The United States shows some strengthening, especially in construction which bolstered demand for vacuum trucks, dual rotary rigs, and mining tooling parts. Foremost recorded $29.9 million of revenue, EBIDTA loss of $0.3 million and net income loss of $1.4 million for the third quarter of 2016. Year to date results of $96.4 million in revenue, EBITDA of $0.3 million and net income loss of $2.8 million. Cash balance remained strong and grew to $36.6 million at quarter end.

Margins across product lines remain very poor, dipping to 9% in the third quarter, as jobs are being bid very competitively to customers and downward pressure on pricing is severe. To respond to this pressure Foremost has aggressively managed costs across all categories, including substantial cuts in SG&A costs which have decreased by $0.5 million over the previous quarter.

The major direct cost reduction driver is the tiered wage cut for non‐union and overhead staff implemented in July 2016. In addition, Q3 marked the successful end of union negotiations across the three major sites in Foremost with wage roll backs, averaging 10%, reducing direct productions costs. These painful but necessary adjustments in wages have put Foremost in a good position to aggressively pursue good work for the production plants.

The win rate of sales bids is slowly rising, albeit still at historically low rates, as the cost reductions are being noticed by customers. Significant business development efforts continue across all product lines. Specific initiatives have being launched focusing on dual rotary rigs, vacuum trucks and fluid storage tanks.

Kevin Johnson, President

Q3 2016 Highlights:

  • Revenue decreased by $13.6 million, or 31%, when comparing the three months ended September 30, 2016 and September 30, 2015. This decrease is a result of continued downward competitive pressures on sale prices and volumes due to the severe economic downturn in the Western Canadian & U.S. energy sectors. Truck revenue increased compared to 2015 as sales volumes increased; all other product lines had lower revenue. You can find more information in the Segmented Results of Operations section of the MD&A.
  • Gross profit decreased to 9% in 2016, compared with 17% in the third quarter of 2015. This is consistent with the Fund's approach to bid at lower margins on most product lines. This will help drive up sales volumes and maintain market share.
  • Administration costs decreased $0.9 million, from $3.9 million in the third quarter of 2015 to $3.0 million in 2016. This is a result of cost savings initiatives, including a company‐wide wage rollback and a reduction of personnel costs as non‐ production headcount continued to drop.
  • During the three months ended September 30, 2016, the Fund recognized a $0.1 million foreign exchange loss compared to $0.3 million gain for the same period in 2015. The foreign exchange gain or loss reflects changes in the value of U.S. dollar‐ denominated net monetary assets and liabilities. The Fund's monetary assets consist of cash and accounts receivable, offset by U.S. dollar accounts payable.
SUMMARY OF QUARTERLY INFORMATION
(000's, except per Trust Unit amount)
2016 Q1 Q2 Q3 Q4 Total
Revenue $ 35,846 $ 30,621 $ 29,943 $ 96,410
Gross profit ($) $ 3,655 $ 3,965 $ 2,780 $ 10,400
Gross profit (%) 10 % 13 % 9 % 11 %
Admin. expenses ($) $ 3,198 $ 3,476 $ 3,000 $ 9,674
Admin. expenses (% of total revenue) 9 % 11 % 10 % 10 %
Exchange rate (loss) gain $ (454 ) $ 117 $ (89 ) $ (426 )
EBITDA $ 14 $ 606 $ (340 ) $ 280
Loss from operations $ (661 ) $ (604 ) $ (1,286 ) $ (2,551 )
Comprehensive loss $ (1,149 ) $ (259 ) $ (1,447 ) $ (2,855 )
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 ) $ (0.15 )
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 nine months ended September 30, 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 November 10, 2016, the Fund will redeem tendered Trust Units at tangible book value of $5.90 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 October 2016, 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 November 2016 no later than November 15, 2016.

With respect to the month of November 2016, 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 December 2016 no later than December 15, 2016.

In accordance with the Deed of Trust, unitholders that submit or have submitted notices of redemption during the month of November 2016, such that the Fund is obligated to pay the redemption price in respect of the subject units on or before December 31, 2016, 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

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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