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
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.
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.
SOURCE: Foremost Income Fund
The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.