Corby Distilleries announces quarterly dividend and reports fourth quarter and year-end financial results
TORONTO, Aug. 28, 2013 /CNW/ - Corby Distilleries Limited ("Corby" or the "Company") (TSX: CDL.A, TSX: CDL.B) today reported its financial results for the fourth quarter and year ended June 30, 2013. The Corby Board of Directors today also declared a dividend of $0.17 per share payable on September 30, 2013 on the Voting Class A Common Shares and Non-voting Class B Common Shares of the Company to shareholders of record as at the close of business on September 13, 2013.
Corby's fourth quarter results saw net earnings increase 49% or $2.4 million, when compared with the same quarter last year. The substantially increased earnings were mostly due to higher shipment volumes, which were driven by the shift in customer shipment patterns reported in the third quarter. The quarter also benefited from lower administrative costs, favourable phasing of advertising and promotional spend, and higher commission income.
Year over year comparison of Corby's financial results are not meaningful given the substantial impact a 2012 sale transaction had on earnings. Specifically, the Company sold certain non-core brands and the subsidiary that owned the manufacturing plant in Montréal, Quebec on October 31, 2011. After excluding such sale transaction impacts from the prior year, on a like-for-like basis, net earnings increased by 4%.
Despite a -1% decline in shipment volumes, the strong improvement in net earnings for the year was largely driven by favourable pricing and product mix changes from the sale of Corby-owned brands. Corby's portfolio of owned-brands successfully grew value ahead of volumes and was led by its flagship brand, Wiser's Canadian whisky, with a significant contribution from its newest brand innovation, Wiser's Spiced. Net earnings also benefited from favourable changes in administrative expenses, which were offset by lower bulk whisky sales in 2013 compared to 2012 as a contract to supply bulk whisky to a former contract bottling customer ended in September 2012.
"I am happy to report bottom line growth of 4% for our core business, which is consistent with the compound annual growth rate for the previous three years. This is particularly pleasing in a year which has seen a slow-down in the Canadian spirits market during a period of significant activity within Corby to develop future growth platforms," noted Patrick O'Driscoll, President and Chief Executive Officer of Corby.
For further details, please refer to Corby's management's discussion and analysis and consolidated financial statements and accompanying notes for the three-month period and year ended June 30, 2013, prepared in accordance with International Financial Reporting Standards.
About Corby
Corby Distilleries Limited is a leading Canadian marketer of spirits and imported wines. Corby's portfolio of owned-brands includes some of the most renowned brands in Canada, including Wiser's® Canadian whisky, Lamb's® rum, Polar Ice® vodka and McGuinness® liqueurs. Through its affiliation with Pernod Ricard S.A., Corby also represents leading international brands such as ABSOLUT® vodka, Chivas Regal®, The Glenlivet® and Ballantine's® Scotch whiskies, Jameson® Irish whiskey, Beefeater® gin, Malibu® rum, Kahlúa® liqueur, Mumm® champagne, and Jacob's Creek®, Wyndham Estate®, Stoneleigh® and Graffigna® wines.
The existing Voting Class A Common Shares and Non-voting Class B Common Shares of the Company are traded on the Toronto Stock Exchange under the symbols CDL.A and CDL.B, respectively.
This press release contains forward-looking statements, including statements concerning possible or assumed future results of Corby's operations. Forward-looking statements typically are preceded by, followed by or include the words "believes", "expects", "anticipates", "estimates", "intends", "plans" or similar expressions. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions and, as such, the Company's results could differ materially from those anticipated in these forward-looking statements. Accordingly, readers should not place undue reliance on forward-looking statements. All financial results are reported in Canadian dollars.
CORBY DISTILLERIES LIMITED
Management's Discussion and Analysis
June 30, 2013
The following Management's Discussion and Analysis ("MD&A") dated August 28, 2013, should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended June 30, 2013, prepared in accordance with International Financial Reporting Standards ("IFRS").
This MD&A contains forward-looking statements, including statements concerning possible or assumed future results of operations of Corby Distilleries Limited ("Corby" or the "Company"). Forward-looking statements typically are preceded by, followed by or include the words "believes", "expects", "anticipates", "estimates", "intends", "plans" or similar expressions. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions, including, but not limited to: the impact of competition; business interruption; trademark infringement; consumer confidence and spending preferences; regulatory changes; general economic conditions; and the Company's ability to attract and retain qualified employees. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. These factors are not intended to represent a complete list of the factors that could affect the Company. Additional factors are noted elsewhere in this MD&A.
This document has been reviewed by the Audit Committee of Corby's Board of Directors and contains certain information that is current as of August 28, 2013. Events occurring after that date could render the information contained herein inaccurate or misleading in a material respect. Corby will provide updates to material forward-looking statements, including in subsequent news releases and its interim management's discussion and analyses filed with regulatory authorities as required under applicable law. Additional information regarding Corby, including the Company's Annual Information Form, is available on SEDAR at www.sedar.com.
Unless otherwise indicated, all comparisons of results for the fourth quarter of fiscal 2013 (three months ended June 30, 2013) are against results for the fourth quarter of fiscal 2012 (three months ended June 30, 2012). All dollar amounts are in Canadian dollars unless otherwise stated.
Business Overview
Corby is a leading Canadian marketer of spirits and importer of wines. Corby's national leadership is sustained by a diverse brand portfolio that allows the Company to drive profitable organic growth with strong, consistent cash flows. Corby is a publicly traded company, with its shares listed on the Toronto Stock Exchange under the symbols "CDL.A" (Voting Class A Common Shares) and "CDL.B" (Non-Voting Class B Common Shares). Corby's Voting Class A Common Shares are majority-owned by Hiram Walker & Sons Limited ("HWSL") (a private company) located in Windsor, Ontario. HWSL is a wholly-owned subsidiary of international spirits and wine company Pernod Ricard S.A. ("PR") (a French public limited company), which is headquartered in Paris, France. Therefore, throughout the remainder of this MD&A, Corby refers to HWSL as its parent, and to PR as its ultimate parent. Affiliated companies are those that are also subsidiaries of PR.
The Company derives its revenues from the sale of its owned-brands ("Case Goods"), as well as earning commission income from the representation of selected non-owned brands in Canada ("Commissions"). The Company also supplements these primary sources of revenue with other ancillary activities incidental to its core business, such as logistics fees and miscellaneous bulk spirit sales. Revenue from Corby's owned-brands predominantly consists of sales made to each of the provincial liquor boards in Canada, and also includes sales to international markets. Comparative figures for the year ended June 30, 2012 also include contract bottling services which were derived from a formerly owned bottling facility (sold October 31, 2011).
Corby's portfolio of owned-brands includes some of the most renowned brands in Canada, including Wiser's® Canadian whisky, Lamb's® rum, Polar Ice® vodka and McGuinness® liqueurs. Through its affiliation with PR, Corby also represents leading international brands such as ABSOLUT® vodka, Chivas Regal®, The Glenlivet® and Ballantine's® Scotch whiskies, Jameson® Irish whiskey, Beefeater® gin, Malibu® rum, Kahlúa® liqueur, Mumm® champagne, and Jacob's Creek®, Wyndham Estate®, Stoneleigh® and Graffigna® wines. In addition to representing PR's brands in Canada, Corby also provides representation for certain selected, unrelated third-party brands ("Agency brands") when they fit within the Company's strategic direction and, thus, complement Corby's existing brand portfolio.
Most recently, the Company expanded its agency portfolio via a new agreement with The Wine Group LLC ("The Wine Group"), providing Corby with the exclusive rights to represent The Wine Group brands in Canada for the next five years (expiring May 2018). The agreement complements Corby's owned and represented brands and expands Corby offerings in the premium wine sector. Corby now represents all The Wine Group brands, including Cupcake Vineyards, Big House Wine Co., Cocobon, Concannon Vineyard, Grayfox Vineyards and Mogen David Wine Co.
Pursuant to a production agreement that expires in September 2016, PR produces Corby's owned-brands at HWSL's production facility in Windsor, Ontario. Under the production agreement, Corby manages PR's business interests in Canada, including HWSL's production facility, also until September 2016.
The Company sources more than 80% of its spirits production requirements from HWSL at its production facility in Windsor, Ontario. The Company's remaining production requirements have been outsourced to third party vendors. The formerly owned plant in Montreal, Quebec continues to manufacture most of the Corby products that were produced there prior to the sale. The Company also utilizes a third-party manufacturer in the UK to produce its Lamb's rum products destined for sale in countries located outside North America. Corby's Lamb's rum products sold in North America continue to be manufactured at HWSL's production facility.
In most provinces, Corby's route to market in Canada entails shipping its products to government-controlled liquor boards ("LBs"). The LBs then sell directly, or control the sale of, beverage alcohol products to end consumers. The exception to this model is Alberta, where the retail sector is privatized. In this province, Corby ships products to a bonded warehouse that is managed by a government-appointed service provider who is responsible for warehousing and distribution into the retail channel.
Corby's shipment patterns to the LBs will not always exactly match short-term consumer purchase patterns. However, given the importance of monitoring consumer consumption trends over the long term, the Company stays abreast of consumer purchase patterns in Canada through its member affiliation with the Association of Canadian Distillers ("ACD"), which tabulates and disseminates consumer purchase information it receives from the LBs to its industry members. Corby refers to this data throughout this MD&A as "retail sales", which are measured both in volume (measured in nine-litre-case equivalents) and in retail value (measured in Canadian dollars).
Corby's international business is concentrated in the US and UK and the Company has a different route to market for each. For the US market, Corby manufactures its products in Canada and ships directly to its US distributor. For the UK market, Corby utilizes a third party contract bottler and distribution company for the production and distribution of Lamb's rum. International sales typically account for less than 10% of Corby's total annual sales. Distributors sell to various local wholesalers and retailers who in turn sell directly to the consumer. Reliable consumer purchase data is not readily available for these international markets and is, therefore, not discussed in this MD&A.
Corby's operations are subject to seasonal fluctuations: sales are typically strong in the first and second quarters, while third-quarter sales usually decline after the end of the retail holiday season. Fourth-quarter sales typically increase again with the onset of warmer weather as consumers tend to increase their purchasing levels during the summer season.
Strategies and Outlook
Corby's business strategies are designed to maximize sustainable long-term value growth, and thus deliver solid profit while continuing to produce strong and consistent cash flows from operating activities. The Company's portfolio of owned and represented brands provides an excellent platform from which to achieve its current and long-term objectives moving forward.
Management believes that having a focused brand prioritization strategy will permit Corby to capture market share in the segments and markets that are expected to deliver the most growth in value over the long-term. Therefore, the Company's strategy is to focus its investments on, and leverage the long-term growth potential of, its key brands. As a result, Corby will continue to invest behind its brands to promote its premium offerings where it makes the most sense and drives the most value for shareholders.
Brand prioritization requires an evaluation of each brand's potential to deliver upon this strategy, and facilitates Corby's marketing and sales teams' focus and resource allocation. Over the long term, management believes that effective execution of its strategy will result in value creation for shareholders. Past disposal transactions (i.e., the sale of the Seagram Coolers brand in March 2011, and the October 2011 sale of certain non-core brands and the subsidiary that owned the Montreal bottling facility) reflect this strategy by streamlining Corby's portfolio and eliminating brands with below average performance trends, thus focusing resources on key brands.
Of primary importance to the successful implementation of our brand strategies is an effective route to market strategy. Corby is committed to investing in its trade marketing expertise and ensuring that its commercial resources are focused around the differing needs of its customers and the selling channels they inhabit. In all areas of the business, management believes setting clear strategies which optimize organization structure and increase efficiencies is key to Corby's overall success.
In addition, management is convinced that innovation is essential to seizing new profit and growth opportunities. Successful innovation can be delivered through a structured and efficient process as well as consistent investment in consumer insight and research and development ("R&D"). As far as R&D is concerned, the Company benefits from access to leading-edge practices at PR's North American hub, which is located in Windsor, Ontario. Building upon the Company's success as a leader in the Canadian whisky category, Corby launched Wiser's Spiced, a variant of the iconic Wiser's Canadian whisky brand, and introduced two premium small-batch Canadian whiskies, "Pike Creek" and "Lot 40".
Finally, the Company is a strong advocate of social responsibility, especially with respect to its sales and promotional activities. Corby will continue to promote the responsible consumption of its products in its activities. Most recently, Corby partnered with the Toronto Transit Commission to provide free transit on New Year's Eve for the next three years. The Company stresses its core values throughout its organization, including those of conviviality, straightforwardness, commitment, integrity and entrepreneurship.
Significant Events
Corby's Board of Directors declare a special dividend
On November 7, 2012, the Corby Board of Directors declared a special dividend of $0.54 per share payable on January 10, 2013 on the Voting Class A Common Shares and Non-voting Class B Common Shares of Corby to shareholders of record as at the close of business on December 14, 2012. In view of the substantial impact the October 31, 2011 disposal transaction had on net earnings, it was deemed that an element of the payout be classed as a special dividend. This will ensure that the regular dividend is based on Corby's net earnings from its core business activities. Subject to business conditions and opportunities and appropriate adjustment for extraordinary events, shareholders will be paid quarterly on the basis of an annual amount equal to the greater of 75% of net earnings per share in the preceding fiscal year ended June 30, and $0.60 per share. The special dividend resulted in a cash distribution of $15.4 million to shareholders and was sourced from Corby's current surplus cash position.
Distribution Agreement between Corby Distilleries Limited and Pernod Ricard USA, LLC
Effective as of July 1, 2012, the Company entered into a five year agreement with Pernod Ricard USA, LLC ("PR USA"), an affiliated company, which provides PR USA the exclusive rights to represent Wiser's and Pike Creek Canadian whiskies and Polar Ice vodka in the US. Previously, Wiser's Canadian whisky and Polar Ice vodka were represented by an unrelated third party in this market. The agreement provides these key brands with access to PR USA's extensive national distribution network throughout the US and complements PR USA's premium brand portfolio. The agreement is effective for a five year period ending June 30, 2017. Since the agreement with PR USA is a related party transaction between Corby and PR USA, the agreement was approved by the Independent Committee of the Board of Directors of Corby following an extensive review, in accordance with Corby's related party transaction policy.
Three-Year Review of Selected Financial Information
The following table provides a summary of certain selected consolidated financial information for the Company. This information has been prepared in accordance with IFRS.
| (in millions of Canadian dollars, except per share amounts) | 2013 | 2012 | 2011 | ||||||||
| Revenue | $ | 132.7 | $ | 146.7 | $ | 159.6 | |||||
| Earnings from operations | 36.4 | 58.8 | 40.5 | ||||||||
| - Earnings from operations per common share | 1.28 | 2.07 | 1.42 | ||||||||
| Net earnings | 27.2 | 46.0 | 28.9 | ||||||||
| - Basic earnings per share | 0.96 | 1.62 | 1.01 | ||||||||
| - Diluted earnings per share | 0.96 | 1.62 | 1.01 | ||||||||
| Net earnings adjusted for unusual items and disposed brands (1) | 27.2 | 26.3 | 23.8 | ||||||||
| - Basic earnings per share,adjusted as noted above (1) | 0.96 | 0.92 | 0.84 | ||||||||
| - Diluted earnings per share, adjusted as noted above (1) | 0.96 | 0.92 | 0.84 | ||||||||
| Total assets | 244.6 | 253.4 | 271.5 | ||||||||
| Total liabilities | 35.7 | 37.6 | 32.3 | ||||||||
| Regular dividends paid per share | 0.66 | 0.59 | 0.56 | ||||||||
| Special dividends paid per Share | 0.54 | 1.85 | - | ||||||||
| (1) Net earnings are adjusted in 2012 for the net after-tax gain from the sales of the Montreal plant and non-core brands of $17.7 million and in 2011 for the net after-tax loss from the sale of Seagram Coolers of $1.7 million. Both years have been further adjusted to remove the financial impact of the brands disposed and contract bottling activities. |
|||||||||||
The Canadian spirits market has been somewhat resilient to the economic unease experienced globally. However, while growth in the Canadian spirits industry remained positive, it has slowed considerably in 2013. More specifically, 2013 retail sales volumes for the Canadian spirits industry saw only marginal growth of +0.4%, whereas in 2012 growth was a more robust +3% (when compared to 2011).
Despite the lacklustre market this year, Corby has stayed true to its core strategy to leverage the long-term growth potential of its key brands by holding its advertising and promotional expenditures to 2012 levels, a significant investment over 2011. In addition, the Company has actively carried out strategies to streamline and focus its portfolio and improve its route to market capabilities over the past three years. Two significant events, namely the sale of the Seagram Coolers brand in 2011 and the sale of certain non-core brands and the subsidiary that owned the Montreal manufacturing facility in fiscal 2012, have been instrumental in carrying out these strategies. As a result of these actions, the Company exited low-growth and low-margin sectors, simplified and focused its brand portfolio (and thus focused its sales and marketing teams) to its key brands, and sold an under-utilized bottling plant.
Given the significant structural changes in the business over this three year period, the chart above removed the net earnings impact of these events to allow for a proper like-for-like comparison of Corby's remaining core business (denoted in the chart above as "Net earnings adjusted for unusual items and disposed brands").
Net earnings (as adjusted for unusual items and disposed brands) has improved over the three year period with a compound annual growth rate of +4.5%. On an individual basis, the 2013 net earnings improvement over 2012 was driven by noticeable growth in the Case Good segment and reduced administrative costs. These factors were significant enough to outweigh the impacts of the lower bulk sales in 2013 compared to 2012 (bulk sales ended September 2012).
The three year review chart also highlights the increased regular dividends paid to shareholders, stepping up each year since 2011 (representing a +5.6% compound annual growth rate since 2011). In addition to the regular dividends, Corby also paid $0.54 in special dividends in 2013, and $1.85 in 2012, representing a total special dividend payout to shareholders of $68.0 million.
Brand Performance Review
Corby's portfolio of owned-brands accounts for more than 80% of the Company's total annual revenue. Included in this portfolio are its key brands: Wiser's Canadian whisky, Lamb's rum, Polar Ice vodka and Corby's mixable liqueur brands. The sales performance of these key brands significantly impacts Corby's net earnings. Therefore, understanding each key brand is essential to understanding the Company's overall performance.
Shipment Volume and Shipment Value Performance
The following chart summarizes the performance of Corby's owned-brands in terms of both shipment volume (as measured by shipments to customers in equivalent nine-litre cases) and shipment value (as measured by the change in gross sales revenue). The chart includes results for sales in both Canada and international markets. Specifically, the Wiser's, Lamb's and Polar Ice brands are also sold to international markets, particularly in the US and UK. International sales typically account for less than 10% of Corby's total annual revenues.
| BRAND PERFORMANCE CHART - INCLUDES BOTH CANADIAN AND INTERNATIONAL SHIPMENTS | |||||||||||
| Three Months Ended | Year Ended | ||||||||||
| Shipment | Shipment | Shipment | Shipment | ||||||||
| Jun. 30, | Jun. 30, | % Volume | % Value | Jun. 30, | Jun. 30, | % Volume | % Value | ||||
| Volumes (in 000's of 9L cases) | 2013 | 2012 | Change | Change | 2013 | 2012 | Change | Change | |||
| Brand | |||||||||||
| Wiser's Canadian whisky | 200 | 189 | 6% | 10% | 809 | 786 | 3% | 5% | |||
| Lamb's rum | 134 | 126 | 6% | 12% | 543 | 564 | (4%) | (1%) | |||
| Polar Ice vodka | 94 | 102 | (8%) | (1%) | 385 | 394 | (2%) | 1% | |||
| Mixable liqueurs | 42 | 45 | (7%) | (1%) | 178 | 182 | (2%) | 2% | |||
| Total Key Brands | 470 | 462 | 2% | 7% | 1,915 | 1,926 | (1%) | 3% | |||
| All other Corby-owned brands | 58 | 51 | 14% | 23% | 222 | 225 | (1%) | 4% | |||
| Total Corby brands | 528 | 513 | 3% | 8% | 2,137 | 2,151 | (1%) | 3% | |||
| Disposed Brands | - | - | - | - | - | 108 | (100%) | (100%) | |||
| Total Corby brands including | |||||||||||
| Disposed Brands | 528 | 513 | 3% | 8% | 2,137 | 2,259 | (5%) | (1%) | |||
Note that the above chart segregates "Disposed Brands" from the other Corby-owned brands. Disposed Brands include brands that are no longer owned by Corby as a result of the sale of certain non-core brands and the subsidiary that owned the Montreal plant on October 31, 2011. Shipment information associated with these Disposed Brands has been segregated in an effort to display the non-recurring impact on Corby's shipments, as comparisons with prior periods are otherwise not meaningful given that Corby no longer owns these brands. The sale of these non-core brands supports management's brand prioritization strategy, allowing Corby to focus resources to drive long-term value growth for key brands. To date we have seen improved gross margins as a result of these disposals as the revenues derived from the Disposed Brands and the formerly owned bottling facility generated significantly less margin than Corby's remaining Case Goods business.
On a year-over-year comparison basis, Corby brands (excluding Disposed Brands) experienced a -1% decline in shipment volumes and +3% growth in shipment value. Corby's flagship brand, Wiser's Canadian whisky, led Corby's portfolio of brands with a +3% increase in shipment volume and +5% increase is shipment value. Wiser's success this year was driven by both its base offerings (e.g., Wiser's Deluxe) and sales of its newest innovation, Wiser's Spiced. All of Corby's key brands increased in shipment value this year, with the exception of Lamb's rum, which is heavily weighted in a declining white rum category as consumers continue to focus their attention on spiced rum. Corby's spiced rum offering (i.e., "Lamb's Black Sheep") was re-launched in 2013 with excellent results, however, while its base is growing at a fast rate (+ 9% in retail sales value), it is still relatively small and thus unable to offset the decline in Lamb's white rum. The chart above also highlights the fact that Corby's brands continue to drive shipment value ahead of shipment volumes. This is the result of both strategic and general price increases being taken over the course of the year and is consistent with Corby's brand prioritization strategy.
On a quarter-over-quarter comparison basis, Corby's shipment volume and shipment value performance improved +3% and +8%, respectively. The rather dramatic increase was mostly the result of Corby's brands recovering against a shift in customer shipment patterns experienced in third quarter (as previously discussed in the Company's third quarter MD&A). As a result, shipment volumes that typically occur in the third quarter shifted to the fourth quarter in 2013, making quarter-over-quarter comparisons less meaningful. As such, readers are encouraged to review the Retail Volume and Retail Value performance section of this MD&A, as it provides a more meaningful analysis of each brands underlying performance on a quarter over quarter comparison basis.
As previously noted, the Brand Shipment Chart includes both Canadian and international shipments, with international shipments typically comprising less than 10% of Corby's total annual sales. Internationally, Corby's shipment volumes declined -10% when compared to last year, which is due to declines in Lamb's in the UK and Wiser's and Polar Ice in the US. Market softness in the UK as well as supply chain improvements have impacted Lamb's rum shipment volumes. In the US, volumes were impacted as our new distributor prepares to reposition our brands for long-term value growth.
Retail Volume and Retail Value Performance
It is of critical importance to understand the performance of Corby's brands at the retail level in Canada. Analysis of performance at the retail level provides insight with regards to consumers' current purchase patterns and trends. Retail sales data, as provided by the ACD, is set out in the following chart and is discussed throughout this MD&A. It should be noted that the retail sales information presented does not include international retail sales of Corby-owned brands, as this information is not readily available. International sales typically account for less than 10% of Corby's total annual revenues.
| RETAIL SALES FOR THE CANADIAN MARKET ONLY(1) | ||||||||||
| Three Months Ended | Year Ended | |||||||||
| % Retail | % Retail | % Retail | % Retail | |||||||
| Jun. 30, | Jun. 30, | Volume | Value | Jun. 30, | Jun. 30, | Volume | Value | |||
| Volumes (in 000's of 9L cases) | 2013 | 2012 | Change | Change | 2013 | 2012 | Change | Change | ||
| Brand | ||||||||||
| Wiser's Canadian whisky | 164 | 159 | 3% | 4% | 725 | 717 | 1% | 2% | ||
| Lamb's rum | 95 | 99 | (4%) | (4%) | 427 | 454 | (6%) | (5%) | ||
| Polar Ice vodka | 81 | 77 | 4% | 5% | 356 | 350 | 2% | 2% | ||
| Mixable liqueurs | 39 | 40 | (1%) | 1% | 176 | 182 | (3%) | (2%) | ||
| Total Key Brands | 379 | 375 | 1% | 2% | 1,684 | 1,703 | (1%) | 0% | ||
| All other Corby-owned brands | 51 | 53 | (4%) | (6%) | 215 | 218 | (1%) | (3%) | ||
| Total | 430 | 428 | 0% | 1% | 1,899 | 1,921 | (1%) | (1%) | ||
| (1) Refers to sales at the retail store level in Canada, as provided by the Association of Canadian Distillers. | ||||||||||
In an effort to maintain focus on Corby's continuing business activities and the Company's brand prioritization strategy, brands impacted by the aforementioned sale transactions have been excluded from the above chart.
The Canadian spirit's industry reported lacklustre results in 2013. Canadian retail sales volumes remained relatively flat while sales value increased only +1% compared to 2012. Overall, Corby's brand portfolio was impacted by these industry trends, with both retail volume and retail value falling -1% compared to last year.
Corby's portfolio is heavily weighted in the Canadian whisky, white rum and vodka categories; as together they combined to make up over 80% of the Company's total retail volumes this year. Vodka led these categories with retail volume and retail value increasing +1%, followed by Canadian whisky which was essentially flat, while white rum continued its decline, dropping -5% in both retail volume and retail value this year versus last. White rum has been significantly impacted by the consumer trend favouring spiced rum. The mixable liqueurs category in Canada declined -2% in both retail volume and retail value. Corby's mixable liqueur brands, most notably McGuinness liqueurs, represented 9% of Corby's total retail volumes this year.
Despite the aforementioned industry category performance for which the Company is heavily weighted, Corby's brand portfolio performed well given that both Wiser's and Polar Ice outperformed the industry in the key Canadian whisky and vodka categories, offsetting the performance of the other categories. Further discussion and analysis of each of Corby's key brands is noted below.
Summary of Corby's Key Brands
Wiser's Canadian Whisky
Corby's flagship brand, Wiser's Canadian whisky, continued to outperform the Canadian whisky category with +1% growth in retail volume and +2% growth in retail value during 2013 thus gaining market share. The Canadian whisky category remained flat year-over-year in both retail volume and retail value. The Company continued to build upon the brand's success and capitalize on market trends for premium and flavoured spirits with the launch of Wiser's Spiced, which was a significant contributor to the brand's overall growth on a year-to-year basis.
Lamb's Rum
Lamb's rum, one of the top-selling rum families in Canada, experienced a -6% decline in retail volumes and a -5% decline in retail value when compared to last year, which is similar to trends seen in the white rum segment (-5% in both retail volume and value) for which Lamb's rum is heavily weighted. Growth in the rum category has been entirely driven by spiced rum. During the summer months of 2012, the Company re-launched its spiced rum variant, Lamb's Black Sheep, offering an improved flavour profile and new packaging. Since the re-launch, Lamb's Black Sheep has had promising results with retail volume and retail value growth of +7% and +9%, respectively.
Polar Ice Vodka
Polar Ice vodka is among the top three largest vodka brands in Canada. On an annual basis, the brand's retail volumes and retail value increased +2% compared to the prior year. The vodka category reported slightly less positive trends with retail volumes and retail values +1% on a year-over-year basis. Polar Ice continues to be supported through investment in key markets, specifically Alberta, and with an outdoor "Canada's Vodka" media campaign.
Mixable Liqueurs
Corby's portfolio of mixable liqueur brands consists of McGuinness liqueurs (which is Canada's largest mixable liqueur brand family) and Meaghers liqueurs. Year-over-year, retail volume and retail value for Corby's mixable liqueurs portfolio reflected market trends (retail volume -3% and retail value at -2%), while the category as a whole declined -2% for both retail volume and retail value. Corby's mixable liqueur brands were adversely impacted by production delays at a third-party bottling supplier during the first half of this year which negatively impacted retail sales.
Other Corby-Owned Brands
Other Corby-Owned brands as a group had declines in retail volume and retail value of -1% and -3%, respectively, during 2013. Royal Reserve, a Canadian whisky, is the most significant brand in this grouping. This brand's performance was behind the Canadian whisky category, with retail volumes at -5% and retail value at -7% on an annual basis. Retail performance for the brand experienced difficulties in Western Canada as consumers trended toward more premium whisky offerings. Also included in this group are two new premium small-batch Canadian whisky innovations introduced earlier in this fiscal year, "Pike Creek" and "Lot 40", both of which have been well received by the whisky community. Lot 40 was named "Canadian Whisky of the Year" by Whisky Advocate magazine.
Financial and Operating Results
The following table presents a summary of certain selected consolidated financial information of the Company for the years ended June 30, 2013 and 2012.
| (in millions of Canadian dollars, except per share amounts) | 2013 | 2012 | $ Change | % Change | ||||
| Revenue | $ | 132.7 | $ | 146.7 | (14.0) | (10%) | ||
| Cost of sales | (49.6) | (60.9) | 11.3 | (19%) | ||||
| Marketing, sales and administration | (47.0) | (48.7) | 1.7 | (3%) | ||||
| Disposal transactions | - | 21.5 | (21.5) | (100%) | ||||
| Other income (expense) | 0.3 | 0.2 | 0.1 | 50% | ||||
| Earnings from operations | 36.4 | 58.8 | (22.4) | (38%) | ||||
| Financial income | 1.7 | 2.0 | (0.3) | (13%) | ||||
| Financial expenses | (0.4) | (0.6) | 0.2 | (33%) | ||||
| Net financial income | 1.3 | 1.4 | (0.1) | (5%) | ||||
| Earnings before income taxes | 37.7 | 60.2 | (22.5) | (37%) | ||||
| Income taxes | (10.5) | (14.2) | 3.7 | (26%) | ||||
| Net earnings | $ | 27.2 | $ | 46.0 | $ | (18.8) | (41%) | |
| Per common share | ||||||||
| - Basic net earnings | $ | 0.96 | $ | 1.62 | $ | (0.66) | (41%) | |
| - Diluted net earnings | $ | 0.96 | $ | 1.62 | $ | (0.66) | (41%) | |
Results for the year ending June 30, 2012 were substantially impacted by a sale transaction completed on October 31, 2011 whereby Corby sold certain non-core brands and the subsidiary that owned the manufacturing plant in Montréal, Quebec. The impacts of this transaction complicate the comparison of 2013 results to 2012. Therefore, in order to make comparisons on a like-for-like basis, the chart below removes the effects of the aforementioned sale transaction on net earnings by excluding the Disposed Brands and earnings related to the subsidiary that owned the manufacturing plant in Montreal, Quebec:
| (in millions of Canadian dollars) | 2013 | 2012 | $ Change | % Change | ||||
| Net earnings | $ | 27.2 | $ | 46.0 | $ | (18.8) | (41%) | |
| Less transaction impacts: | ||||||||
| Net gain on sale transaction | - | 17.7 | (17.7) | (100%) | ||||
| Earnings from brands and plant | - | 2.1 | (2.1) | (100%) | ||||
| - | 19.7 | (19.7) | (100%) | |||||
| Net earnings, excl. transaction | $ | 27.2 | $ | 26.3 | $ | 0.9 | 4% | |
After removing the impacts the aforementioned sale transaction had on 2012 results, net earnings increased $0.9 million or +4%. Despite the decline in shipment volumes of -1% on a year-over-year basis, the improvement in net earnings was largely driven by the Case Goods business, specifically pricing and product mix. Net earnings also benefited from favourable changes in administrative expenses, which were offset by lower bulk whisky sales in 2013 compared to 2012 as our contract to supply bulk whisky to a former contract bottling customer ended in September 2012.
Revenue
The following highlights the key components of the Company's revenue streams:
| (in millions of Canadian dollars) | 2013 | 2012 | $ Change | % Change | |||
| Revenue streams: | |||||||
| Case goods (excluding Disposed Brands) | $ | 109.7 | $ | 107.9 | $ | 1.8 | 2% |
| Commissions | 16.4 | 16.3 | 0.1 | 1% | |||
| Other services | 6.6 | 9.4 | (2.8) | (30%) | |||
| Revenue, excluding Disposed Brands | 132.7 | 133.6 | (0.9) | (1%) | |||
| Disposed Brands | - | 13.1 | (13.1) | (100%) | |||
| Revenue | $ | 132.7 | $ | 146.7 | $ | (14.0) | (10%) |
Removing the impact of the aforementioned sale transaction (which are denoted in the above chart as "Disposed Brands"), revenue from the remaining Corby brand portfolio and other business activities decreased -1% compared to the prior year. The decrease was largely due to the cessation of bulk whisky sales to a former contract bottling customer (categorized in the revenue chart as "other services). The Company's contractual obligations to sell bulk were completed in September 2012.
Case Goods revenue increased +2% over the prior year. Pricing decisions for key brands, specifically Wiser's Canadian whisky and Wiser's Spiced, have largely contributed to the increased sales revenues although sales volumes have remained relatively flat year-over-year. Management's focus on premium offerings has placed the brand more favourably against its closest competitors. General price increases in many provinces as well as innovation with new premium offerings ("Pike Creek," "Lot 40," and new mixable liqueur flavours) have also contributed positively.
Commission revenue remained relatively consistent with the prior year. Commission revenues are generated through the representation of many international brands in Canada through Corby's affiliation with PR as well as a select number of unrelated third-party agency brands. The addition of The Wine Group portfolio had a positive impact on Corby's agency commission business during the last quarter of 2013 as well as the receipt of a one-time termination payment from a former Agency brand owner.
Cost of sales
Cost of sales was $49.6 million, representing a decrease of 19%, or $11.3 million on an annual basis. The decrease in cost of sales is mostly the result of the aforementioned disposal transaction, as the Company no longer incurred production costs associated with the disposed brands and the formerly owned bottling facility.
Gross margin for the year was 57.3% versus 53.3% last year (note: commissions are not included in this calculation). The improved gross margin is a result of the sale transaction and Corby's strategic focus on increasing value. The revenues derived from the Disposed Brands and the formerly owned bottling facility generated significantly less margin than Corby's remaining Case Goods business.
Marketing, sales and administration
Marketing, sales and administration expenses were $47.0 million for the year ended June 30, 2013, a decrease of -3% or $1.7 million compared to the prior year. Included in this balance is advertising and promotional spend to support Corby's key brands, which remained relatively constant with prior year levels. However, administrative costs decreased compared to the prior year. 2012 included costs associated with a project the Company had undertaken to transform its sales and trade-marketing organization in Canada.
Other Income and Expenses
Other income and expenses include such items as realized foreign exchange gains and losses, gains on sale of property and equipment, and amortization of actuarial gains and losses related to the Company's pension and post-retirement benefit plans. The balances comprising this account were relatively consistent year-over-year.
Net Financial Income
Net financial income is comprised of interest earned on deposits in cash management pools, offset by interest costs associated with the Company's pension and post-retirement benefit plans. This balance is consistent year-over-year.
Income taxes
Income tax expense for the year was $10.5 million as compared to $14.2 million last year. The effective tax rate for the prior year was substantially impacted by the sale of the Montreal plant and the non-core brands, which resulted in a tax impact of $3.9 million. In 2013, minor tax savings resulted from previously announced reductions in Canadian federal statutory income tax rates.
| 2013 | 2012 | |||||
| Combined basic Federal and Provincial tax rates | 27% | 27% | ||||
| Net capital gain on disposal of plant and non-core brands | 0% | (4%) | ||||
| Other | 1% | 1% | ||||
| Effective tax rate | 28% | 24% | ||||
Liquidity and Capital Resources
Corby's sources of liquidity are its deposits in cash management pools of $108.0 million as at June 30, 2013, and its cash generated from operating activities. Corby's total contractual maturities are represented by its accounts payable and accrued liabilities and income and other taxes payable balances, which totalled $24.2 million as at June 30, 2013, and are all due to be paid within one year. The Company does not have any liabilities under short- or long-term debt facilities.
The Company has agreed to make a $10.3 million payment to PR on September 30, 2013 as part of its agreement to continue to represent ABSOLUT and Plymouth gin brands in Canada for an additional 8 year term. For more information regarding this agreement please refer to the Related Party Transactions section of this MD&A.
The Company also has funding obligations related to its employee future benefit plans, which include defined benefit pension plans. As at June 30, 2013, certain of the Company's defined benefit pension plans were in a deficit position. Of those plans in a funded deficit position, the unfunded accrued benefit obligation totalled $11.0 million.
The Company has identified the area of employee future benefits as a critical accounting estimate in that accounting policies related to employee future benefits include various assumptions that incorporate a high degree of judgment and complexity. These assumptions may change in the future and may have a material impact on the accrued benefit obligations of the Company and the cost of these plans, which is reflected in the Company's consolidated statements of earnings. In addition, the actual rate of return on plan assets and changes in interest rates could result in changes in the Company's funding requirements for its defined benefit pension plans.
The Company monitors its pension plan assets closely and follows strict guidelines to ensure that pension fund investment portfolios are diversified in-line with industry best practices. Nonetheless, pension fund assets are not immune to market fluctuations and, as a result, the Company may be required to make additional cash contributions in the future. For more information regarding Corby's employee future benefit plans, please refer to Note 16 to the consolidated financial statements.
The Company believes that its deposits in cash management pools, combined with its historically strong operational cash flows, provide for sufficient liquidity to fund its operations, investing activities and commitments for the foreseeable future. The Company's cash flows from operations are subject to fluctuation due to commodity, foreign exchange and interest rate risks. Please refer to the "Risks and Risk Management" section of this MD&A for further information.
Cash flows
| (in millions of Canadian dollars) | 2013 | 2012 | Change | ||||
| Operating activities | |||||||
| Net earnings, adjusted for non-cash items | $ | 41.3 | $ | 40.2 | $ | 1.1 | |
| Net change in non-cash working capital | 4.8 | 13.6 | (8.8) | ||||
| Net payments for interest and income taxes | (13.3) | (7.5) | (5.8) | ||||
| 32.8 | 46.3 | (13.5) | |||||
| Investing activities | |||||||
| Additions to property and equipment | (1.8) | (1.6) | (0.2) | ||||
| Proceeds from disposition of property and equipment | 0.5 | 0.3 | 0.2 | ||||
| Proceeds from sale of plant and brands | - | 37.4 | (37.4) | ||||
| Withdrawals from (deposits in) cash management pools | 2.0 | (13.5) | 15.5 | ||||
| 0.7 | 22.6 | (21.9) | |||||
| Financing activities | |||||||
| Proceeds from note receivable | 0.6 | 0.6 | - | ||||
| Dividends paid | (34.1) | (69.5) | 35.4 | ||||
| (33.5) | (68.9) | 35.4 | |||||
| Net change in cash | $ | - | $ | - | $ | - | |
Operating activities
On an annual basis, net cash from operating activities was $32.8 million compared to $46.3 million in the prior year, representing a decrease of $13.5 million. Prior year cash flows from operating activities were significantly impacted by the previously mentioned sale of the Montreal plant and non-core brands. In the current year, net earnings, adjusted for non-cash items increased over the prior year, however working capital changes were less dramatic than those experienced in 2012 (as a result of the previously mentioned sale transaction). Further, 2013 experienced higher tax payments as taxes on the capital gain generated in the prior year came due.
Investing activities
Cash management pools represent cash on deposit with The Bank of Nova Scotia via Corby's Mirror Netting Service Agreement with PR. Corby has daily access to these funds and earns a market rate of interest from PR on its deposits. Changes in cash management pools reflect amounts either deposited in or withdrawn from these bank accounts and are simply a function of Corby's cash requirements during the period of time being reported on. For more information related to these deposits, please refer to the "Related Party Transactions" section of this MD&A.
On a year-to-date comparison basis, cash flows from investing activities decreased $21.9 million. The comparative period included $37.4 million in proceeds from the aforementioned sale transaction and was partially offset by the change in amounts withdrawn from (deposited in) cash management pools.
Financing activities
Cash used for financing activities totalled $33.5 million on a year-to-date basis and represents the payment of dividends to shareholders and proceeds received from the long-term note receivable during the year. The year-over-year change of $35.4 million is due to lower special dividends paid in 2013 compared to 2012. The payment of these dividends is in accordance with the Company's stated dividend policy.
The following table summarizes dividends paid and payable by the Company over the last two fiscal years:
| for | Declaration date | Record Date | Payment date | $ / Share | ||||||
| 2013 - Q4 | August 28, 2013 | September 13, 2013 | September 30, 2013 | $ 0.17 | ||||||
| 2013 - Q3 | May 9, 2013 | May 31, 2013 | June 14, 2013 | 0.17 | ||||||
| 2013 - Q2 | February 6, 2013 | February 28, 2013 | March 15, 2013 | 0.17 | ||||||
| 2013 - special | November 7, 2012 (special dividend) | December 14, 2012 | January 10, 2013 | 0.54 | ||||||
| 2013 - Q1 | November 7, 2012 | November 30, 2012 | December 14, 2012 | 0.17 | ||||||
| 2012 - Q4 | August 29, 2012 | September 15, 2012 | September 30, 2012 | 0.15 | ||||||
| 2012 - Q3 | May 10, 2012 | May 31, 2012 | June 15, 2012 | 0.15 | ||||||
| 2012 - Q2 | February 8, 2012 | February 29, 2012 | March 15, 2012 | 0.15 | ||||||
| 2012 - special | November 9, 2011 (special dividend) | December 15, 2011 | January 3, 2012 | 1.85 | ||||||
| 2012 - Q1 | November 9, 2011 | November 30, 2011 | December 15, 2011 | 0.15 | ||||||
Outstanding Share Data
As at August 28, 2013, Corby had 24,274,320 Voting Class A Common Shares and 4,194,536 Non-Voting Class B Common Shares outstanding. The Company does not have a stock option plan, and therefore, there are no options outstanding.
Contractual Obligations
The following table presents a summary of the maturity periods of the Company's contractual obligations as at June 30, 2013:
| Payments | Payments | Payments | Payments | Obligations | ||||||||
| During | due in 2015 | due in 2017 | due after | with no fixed | ||||||||
| 2014 | and 2016 | and 2018 | 2018 | maturity | Total | |||||||
| Operating lease obligations | $ | 1.8 | $ | 2.7 | $ | 1.4 | $ | 0.1 | $ | - | $ | 6.0 |
| ABSOLUT representation rights | 10.3 | - | - | - | - | 10.3 | ||||||
| Employee benefits | - | - | - | - | 20.8 | 20.8 | ||||||
| $ | 12.1 | $ | 2.7 | $ | 1.4 | $ | 0.1 | $ | 20.8 | $ | 37.1 | |
Operating lease obligations represent future minimum payments under long-term operating leases for premises and office equipment as at June 30, 2013. Employee benefits represent the Company's unfunded pension and other post-retirement benefit plan obligations as at June 30, 2013. For further information regarding Corby's employee future benefit plans, please refer to Note 16 to the audited consolidated financial statements.
In addition, as outlined in the chart above, the Company agreed to pay the sum of $10.3 million to PR for the right to represent ABSOLUT vodka and Plymouth gin in Canada for an additional eight year term. The payment is due September 30, 2013. For more information on this agreement please see the "Related Party Transactions" section of this MD&A.
Related Party Transactions
Transactions with parent, ultimate parent, and affiliates
Corby engages in a significant number of transactions with its parent company, its ultimate parent and various affiliates. Specifically, Corby renders services to its parent company, its ultimate parent, and affiliates for the marketing and sale of beverage alcohol products in Canada. Furthermore, Corby outsources the large majority of its distilling, maturing, storing, blending, bottling and related production activities to its parent company. A significant portion of Corby's bookkeeping, recordkeeping services, data processing and other administrative services are also outsourced to its parent company. Transactions with the parent company, ultimate parent and affiliates are subject to Corby's related party transaction policy, which requires such transactions to undergo an extensive review and receive approval from an Independent Committee of the Board of Directors.
The companies operate under the terms of agreements that became effective on September 29, 2006. These agreements provide the Company with the exclusive right to represent PR's brands in the Canadian market for fifteen years, as well as providing for the continuing production of certain Corby brands by PR at its production facility in Windsor, Ontario, for ten years. Corby also manages PR's business interests in Canada, including the Windsor production facility. Certain officers of Corby have been appointed as directors and officers of PR's Canadian entities, as approved by Corby's Board of Directors.
In addition to the aforementioned agreements, Corby signed an agreement on September 26, 2008, with its ultimate parent to be the exclusive Canadian representative for the ABSOLUT vodka and Plymouth gin brands, for a five-year term expiring October 1, 2013. These brands were acquired by PR subsequent to the original representation rights agreement dated September 29, 2006.
Further, on November 9, 2011, Corby entered into an agreement with PR for a new term for Corby's exclusive right to represent ABSOLUT vodka in Canada from September 30, 2013 to September 29, 2021, which is consistent with the term of Corby's Canadian representation of the other PR brands in Corby's portfolio. Under the agreement, Corby agreed to pay the present value of $10 million, or $10.3 million, for the additional eight years of the new term to PR at its commencement and to enter into a representation agreement no later than September 30, 2013. Since the agreement with PR is a related party transaction, the agreement was approved by the Independent Committee of the Corby Board of Directors, in accordance with Corby's related party transaction policy, following an extensive review and with external financial and legal advice. Pursuant to the November 9, 2011 agreement, Corby also agreed to continue with the mirror netting arrangement with PR and its affiliates, under which Corby's excess cash will continue to be deposited to cash management pools. The mirror netting arrangement with PR and its affiliates is further described below.
On July 1, 2012, as discussed in the "Significant Events" section of this MD&A, the Company entered into a five year agreement with Pernod Ricard USA, LLC ("PR USA"), an affiliated company, which provides PR USA the exclusive right to represent Wiser's Canadian whisky and Polar Ice vodka in the US. The agreement provides these key brands with access to PR USA's extensive national distribution network throughout the US and complements PR USA's premium brand portfolio. The agreement is effective for a five year period ending June 30, 2017. The agreement with PR USA is a related party transaction between Corby and PR USA, as such; the agreement was approved by the Independent Committee of the Board of Directors of Corby following an extensive review, in accordance with Corby's related party transaction policy.
On June 25, 2013, the Company entered into an assignment agreement with another PR affiliate to settle amounts outstanding from PR Argentina. Collection of accounts receivable from PR Argentina was complicated due to Argentinean currency regulations. There are no balances outstanding with PR Argentina at June 30, 2013.
Deposits in cash management pools
Corby participates in a cash pooling arrangement under a Mirror Netting Service Agreement, together with PR's other Canadian affiliates, the terms of which are administered by The Bank of Nova Scotia. The Mirror Netting Service Agreement acts to aggregate each participant's net cash balance for purposes of having a centralized cash management function for all of PR's Canadian affiliates, including Corby. As a result of Corby's participation in this agreement, Corby's credit risk associated with its deposits in cash management pools is contingent upon PR's credit rating. PR's credit rating as at August 28, 2013, as published by Standard & Poor's and Moody's, was BBB- and Baa3, respectively. PR compensates Corby for the benefit it receives from having the Company participate in the Mirror Netting Service Agreement by paying interest to Corby based upon the 30-day Canadian Dealer Offered Rate ("CDOR") plus 0.40% (previous to June 2013, LIBOR plus 0.40% was used, as the Canadian LIBOR rate was discontinued). Corby accesses these funds on a daily basis and has the contractual right to withdraw these funds or terminate these cash management arrangements upon providing five days' written notice.
Results of Operations - Fourth Quarter of Fiscal 2013
The following table presents a summary of certain selected consolidated financial information for the Company for the three month periods ended June 30, 2013 and 2012:
| Three Months Ended | ||||||||
| June 30, | June 30, | |||||||
| (in millions of Canadian dollars, except per share amounts) | 2013 | 2012 | $ Change | % Change | ||||
| Revenue | $ | 33.5 | $ | 32.4 | $ | 1.1 | 3% | |
| Cost of sales | (12.4) | (13.0) | 0.6 | (5%) | ||||
| Marketing, sales and administration | (11.5) | (12.8) | 1.3 | (10%) | ||||
| Other income (expense) | 0.2 | - | 0.2 | N/A | ||||
| Earnings from operations | 9.8 | 6.6 | 3.2 | 48% | ||||
| Financial income | 0.4 | 0.4 | - | 0% | ||||
| Financial expenses | (0.1) | (0.1) | - | 0% | ||||
| Net financial income | 0.3 | 0.3 | - | 0% | ||||
| Earnings before income taxes | 10.1 | 6.9 | 3.2 | 46% | ||||
| Income taxes | (2.8) | (2.0) | (0.8) | 40% | ||||
| Net earnings | $ | 7.3 | $ | 4.9 | $ | 2.4 | 49% | |
| Per common share | ||||||||
| - Basic net earnings | $ | 0.26 | $ | 0.17 | $ | 0.09 | 53% | |
| - Diluted net earnings | $ | 0.26 | $ | 0.17 | $ | 0.09 | 53% | |
Revenue
The following table highlights the various components of the Company's revenue streams for the quarter:
| Three Months Ended | ||||||||
| June 30, | June 30, | |||||||
| (in millions of Canadian dollars) | 2013 | 2012 | $ Change | % Change | ||||
| Revenue streams: | ||||||||
| Case goods | $ | 27.8 | $ | 25.9 | $ | 1.9 | 7% | |
| Commissions | 4.6 | 4.0 | 0.6 | 15% | ||||
| Other services | 1.1 | 2.5 | (1.4) | (56%) | ||||
| Revenue | $ | 33.5 | $ | 32.4 | $ | 1.1 | 3% | |
Total revenue increased +3% on a quarter-over-quarter comparison basis, or $1.1 million. The increase was driven by Corby's Case Goods business (+$1.9 million) with a significant 3% improvement in shipment volumes largely attributable to having recovered from the shift in customer shipment patterns experienced in Q3 (which was as expected and discussed in the Q3 MD&A). In addition to the volume increase, Corby's Case Goods revenue also benefited from improved pricing and portfolio mix.
Commissions also improved compared to the same period last year (+$0.6 million), as a result of increased volumes and general price increases from represented brands, combined with the benefit of receiving a one-time contract termination payment from a former Agency brand owner. Also contributing, was the commencement of a new Agency relationship as Corby began its representation of TWG brands in Canada on May 15, 2013.
Other services decreased $1.4 million due to the Company's cessation of bulk whisky sales to a former contract bottling customer. The Company's contractual obligations to sell bulk were completed in September 2012 and thus the fourth quarter of 2013 does not include bulk whisky sales.
Cost of Sales
Cost of goods sold was $12.4 million, or 5% lower than the same period last year. Gross margin was 57.2% this quarter compared to 54.1% for the same quarter last year (note: commissions are not included in this calculation). This substantial increase in gross margin is primarily due to the cessation of the aforementioned bulk whisky sales contract. Margins on bulk whisky sales are substantially lower than the margins generated on the case goods business. Strategic pricing decisions and general price increases are also a factor in the improved quarter-over-quarter margins.
Net earnings and earnings per share
Net earnings for the fourth quarter were $7.3 million, or $0.26 per share, which is an increase of $2.4 million over the same quarter last year. In addition to factors discussed previously related to improved sales and gross margins the fourth quarter of 2013 also benefited from favourable phasing of advertising and promotional spend and the impact of lower administrative costs.
Selected Quarterly Information
Summary of Quarterly Financial Results
| (in millions of Canadian dollars, | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 |
| except per share amounts) | 2013 | 2013 | 2013 | 2013 | 2012 | 2012 | 2012 | 2012 |
| Revenue | $ 33.5 | $ 25.7 | $ 37.7 | $ 35.9 | $ 32.4 | $ 29.2 | $ 40.9 | $ 44.2 |
| Earnings from operations | 9.8 | 5.1 | 12.0 | 9.5 | 6.6 | 6.1 | 33.6 | 12.6 |
| Net earnings, excluding undernoted items (1) | 7.3 | 4.0 | 9.0 | 7.0 | 4.9 | 4.6 | 9.0 | 9.9 |
| Net earnings | 7.3 | 4.0 | 9.0 | 7.0 | 4.9 | 4.6 | 27.1 | 9.5 |
| Basic EPS | 0.26 | 0.14 | 0.32 | 0.25 | 0.17 | 0.16 | 0.95 | 0.33 |
| Diluted EPS | 0.26 | 0.14 | 0.32 | 0.25 | 0.17 | 0.16 | 0.95 | 0.33 |
| (1) Net earnings have been adjusted for the net after-tax gain on the sale of plant and brands of $17.7 million in 2012. | ||||||||
The above chart demonstrates the seasonality of Corby's business, as sales are typically strong in the first and second quarters, while third-quarter sales (January, February and March) usually decline after the end of the retail holiday season. Fourth quarter sales typically increase again with the onset of warmer weather, as consumers tend to increase their purchasing levels during the summer season.
The chart also highlights the effect the aforementioned sale transaction (i.e., the sale of the Disposed Brands and the subsidiary that owned the Montreal plant in Q2-2012) had on the quarterly results. The line item in the chart "Net earnings, excluding undernoted items" removes the gain on sale impacts. Also note that revenue and ongoing net earnings have been substantially impacted as well, given the fact the company sold various brands and a contract bottling facility and thus no longer recognizes revenue associated with the brands and activities after the date of sale.
For further information regarding the sale transaction please refer to Note 20 to the audited consolidated financial statements.
Critical Accounting Estimates
The Company's consolidated financial statements are prepared in accordance with IFRS, which require management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and related disclosures as at the date of the consolidated financial statements. The Company bases its estimates, judgments and assumptions on historical experience, current trends and other factors that management believes to be important at the time the consolidated financial statements are prepared. The Company reviews its accounting policies and how they are applied on a regular basis. While the Company believes that the historical experience, current trends and other factors considered support the preparation of its consolidated financial statements in accordance with IFRS, actual results could differ from its estimates and such differences could be material.
The Company's significant accounting policies are discussed in Note 4 to the consolidated financial statements. The following accounting policies incorporate a higher degree of judgment and/or complexity and, accordingly, are considered to be critical accounting policies.
Goodwill and Indefinite-Lived Intangible Assets
The Company records as goodwill the excess amount of the purchase price of an acquired business over the fair value of the underlying net assets, including intangible assets, at the date of acquisition. Indefinite-lived intangible assets represent the value of trademarks and licences acquired. Goodwill and indefinite-lived intangible assets account for $15.1 million of the Company's total assets. These balances are evaluated annually for impairment. The process of evaluating these items for impairment involves the determination of fair value. Inherent in such fair value determinations are certain judgments and estimates including, but not limited to, projected future sales, earnings and capital investment; discount rates; and terminal growth rates. These judgments and estimates may change in the future due to uncertain competitive, market and general economic conditions, or as a result of changes in the business strategies and outlook of the Company.
An impairment loss would be recognized to the extent that the carrying value of the goodwill or trademarks and licences exceeds the implied fair value. Any impairment would result in a reduction in the carrying value of these items on the consolidated balance sheets of the Company and the recognition of a non-cash impairment charge in net earnings. Based on analyses performed, the Company has not identified any impairment.
Employee Future Benefits
The cost and accrued benefit plan obligations of the Company's defined benefit pension plans and its other post-retirement benefit plan are accrued based on actuarial valuations that are dependent upon assumptions determined by management. These assumptions include the discount rate, the expected long-term rate of return on plan assets, the rate of compensation increases, retirement ages, mortality rates and the expected inflation rate of health care costs. These assumptions are reviewed annually by the Company's management and its actuary. These assumptions may change in the future and may have a material impact on the accrued benefit obligations of the Company and the cost of these plans, which is reflected in the Company's consolidated statement of earnings. In addition, the actual rate of return on plan assets and changes in interest rates could result in changes in the Company's funding requirements for its defined benefit pension plans. See Note 16 to the consolidated financial statements for detailed information regarding the major assumptions utilized.
Income and Other Taxes
The Company accounts for income taxes using the liability method of accounting. Under the liability method, deferred income tax assets and liabilities are determined based on differences between the carrying amounts of balance sheet items and their corresponding tax values. The determination of the income tax provision requires management to interpret regulatory requirements and to make certain judgments. While income, capital and commodity tax filings are subject to audits and reassessments, management believes that adequate provisions have been made for all income and other tax obligations. However, changes in the interpretations or judgments may result in an increase or decrease in the Company's income, capital or commodity tax provisions in the future. The amount of any such increase or decrease cannot be reasonably estimated.
New Accounting Pronouncements
New accounting standards
The following new and revised standards and interpretations were effective for Corby on July 1, 2012:
(i) Deferred Taxes - Recovery of Underlying Assets
The IASB issued an amendment to IAS 12, "Income Taxes" ("IAS 12 amendment"), which introduces an exception to the general measurement requirements of IAS 12 in respect of investment properties measured at fair value. The IAS 12 amendment is effective for annual periods beginning on or after January 1, 2012. The IAS 12 amendment did not have an impact on the Company's results of operations, financial position or disclosures.
(ii) Financial Instruments - Disclosures
On June 16, 2011 the IASB issued amendments to IAS 1, "Presentation of Financial Statements." The amendments enhance the presentation of Other Comprehensive Income ("OCI") in the financial statements. A requirement has been added to present items in other comprehensive income grouped on the basis of whether they may be subsequently reclassified to earnings in order to more clearly show the effect the items of other comprehensive income may have on future earnings. The amendments are effective for annual periods beginning on or after July 1, 2012. The amendments have not had an impact on the Company's presentation of other comprehensive income.
Recent accounting pronouncements
A number of new standards, amendments to standards and interpretations have been issued but are not yet effective for the financial year ending June 30, 2013, and accordingly, have not been applied in preparing these consolidated financial statements:
(i) Consolidated Financial Statements
In May 2011 the IASB issued IFRS 10, "Consolidated Financial Statements" ("IFRS 10"), IFRS 11, "Joint Ventures" ("IFRS 11"), and IFRS 12, "Disclosure of Interest in Other Entities" ("IFRS 12"). In addition, the IASB amended IAS 27, "Consolidated and Separate Financial Statements" ("IAS 27") and IAS 28, "Investments in Associates and Joint Ventures" ("IAS 28"). The objective of IFRS 10 is to define the principles of control and establish the basis of determining when and how an entity should be included within a set of consolidated financial statements. IFRS 11 establishes principles to determine the type of joint arrangement and guidance for financial reporting activities required by entities that have an interest in an arrangement that is jointly controlled. IFRS 12 enables users of the financial statements to evaluate the nature and risks associated with its interest in other entities and the effects of those interests on its financial performance.
IFRS 10, 11 and 12, and the amendments to IAS 27 and 28 are all effective for annual periods beginning on or after January 1, 2013 and must be applied retrospectively. For Corby, this set of standards and amendments become effective July 1, 2013. The Company does not expect IFRS 10, 11, and 12 and the amendments to IAS 27 and 28 to have a significant impact on its consolidated financial statements.
(ii) Fair Value Measurement
On May 12, 2011 the IASB issued IFRS 13, "Fair Value Measurement" ("IFRS 13") which defines fair value, provides guidance in a single IFRS framework for measuring fair value and identifies the required disclosures pertaining to fair value measurement. IFRS 13 applies to all International Financial Reporting Standards that require or permit fair value measurements or disclosures. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is effective for annual periods beginning on or after January 1, 2013, and must be applied prospectively. For Corby this standard becomes effective July 1, 2013. The Company does not expect IFRS 13 to have a significant impact on its consolidated financial statements.
(iii) Employee Benefits
On June 16, 2011 the IASB issued amendments to IAS 19, "Employee Benefits" ("IAS 19"), which eliminates the option to defer the recognition of actuarial gains and losses through the "corridor" approach, revises the presentation of changes in assets and liabilities arising from defined benefit plans and enhances the disclosures for defined benefit plans. IAS 19 is effective for annual periods beginning on or after January 1, 2013, and must be applied retrospectively. For Corby, the revisions to this standard become effective July 1, 2013. The Company has determined that on July 1, 2013 provision for pensions will increase $10.3 million with an offsetting decrease to opening equity. Pension expense for the year-ended June 30, 2013, when restated for the impacts of this amended standard, will increase $0.3 million.
(iv) Financial Instruments - Asset and Liability Offsetting
The IASB has issued amendments to IFRS 7, "Financial Instruments: Disclosures" ("IFRS 7") and IAS 32, "Financial Instruments: Presentation" ("IAS 32"), which clarify the requirements for offsetting financial instruments and require new disclosures on the effect of offsetting arrangements on an entity's financial position. The amendments to IFRS 7 are effective for annual periods beginning on or after January 1, 2013 and must be applied retrospectively. For Corby, this amendment will become effective July 1, 2013. The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014 and must be applied retrospectively. For Corby, this amendment will become effective July 1, 2014. The Company is assessing the impact of the amendments to IFRS 7 and IAS 32 on its consolidated financial statements.
(v) Financial Instruments
The IASB has issued a new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will ultimately replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). The replacement of IAS 39 is a multi-phase project with the objective of improving and simplifying the reporting for financial instruments and the issuance of IFRS 9 is part of the first phase of this project. IFRS 9 uses a single approach to determine whether a financial asset or liability is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. For financial assets, the approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. IFRS 9 requires a single impairment method to be used, replacing multiple impairment methods in IAS 39. For financial liabilities measured at fair value, fair value changes due to changes in an entity's credit risk are presented in other comprehensive income. IFRS 9 is effective for annual periods beginning on or after January 1, 2015 and must be applied retrospectively. For Corby, this standard will become effective July 1, 2015. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures that has been designed to provide reasonable assurance that information required to be disclosed by the Company in its public filings is recorded, processed, summarized and reported within required time periods and includes controls and procedures designed to ensure that all relevant information is accumulated and communicated to senior management, including the Company's Chief Executive Officer ("CEO ") and Chief Financial Officer ("CFO"), to allow timely decisions regarding required disclosure.
Management, with the participation of the CEO and CFO, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in National Instrument 52-109) as at June 30, 2013, and has concluded that such disclosure controls and procedures are effective based upon such evaluation.
Internal Controls Over Financial Reporting
The Company maintains a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported to senior management on a timely basis so that appropriate decisions can be made regarding public disclosure.
In addition, the CEO and CFO have designed, or caused to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be designed effectively can provide only reasonable assurance with respect to financial reporting and financial statement preparation.
Management, with the participation of the CEO and CFO, has evaluated the effectiveness of the Company's internal controls over financial reporting as at June 30, 2013, and has concluded that internal control over financial reporting is designed and operating effectively to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Management's assessment was based on the framework established in Internal Control - Integrated Framework (1992), published by the Committee of Sponsoring Organizations of the Treadway Commission.
There were no changes in internal control over financial reporting during the Company's most recent interim period that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
Risks & Risk Management
The Company is exposed to a number of risks in the normal course of its business that have the potential to affect its operating and financial performance.
Industry and Regulatory
The beverage alcohol industry in Canada is subject to government policy, extensive regulatory requirements and significant rates of taxation at both the federal and provincial levels. As a result, changes in the government policy, regulatory and/or taxation environments within the beverage alcohol industry may affect Corby's business operations, causing changes in market dynamics or changes in consumer consumption patterns. In addition, the Company's provincial LB customers have the ability to mandate changes that can lead to increased costs, as well as other factors that may impact financial results.
The Company continuously monitors the potential risk associated with any proposed changes to its government policy, regulatory and taxation environments and, as an industry leader, actively participates in trade association discussions relating to new developments.
Consumer Consumption Patterns
Beverage alcohol companies are susceptible to risks relating to changes in consumer consumption patterns. Consumer consumption patterns are affected by many external influences, not the least of which is the economic outlook and overall consumer confidence in the stability of the economy as a whole. Corby offers a diverse portfolio of products across all major spirits categories and at various price points, which complements consumer desires and offers exciting innovation.
Distribution/Supply Chain Interruption
The Company is susceptible to risks relating to distributor and supply chain interruptions. Distribution in Canada is largely accomplished through the government-owned provincial LBs and, therefore, an interruption (e.g., a labour strike) for any length of time may have a significant impact on the Company's ability to sell its products in a particular province and/or market.
Supply chain interruptions, including a manufacturing or inventory disruption, could impact product quality and availability. The Company adheres to a comprehensive suite of quality programs and proactively manages production and supply chains to mitigate any potential risk to consumer safety or Corby's reputation and profitability.
Environmental Compliance
Environmental liabilities may potentially arise when companies are in the business of manufacturing products and, thus, required to handle potentially hazardous materials. As Corby outsources its production, including all of its storage and handling of maturing alcohol, the risk of environmental liabilities is considered minimal. Corby currently has no significant recorded or unrecorded environmental liabilities.
Industry Consolidation
In recent years, the global beverage alcohol industry has experienced a significant amount of consolidation. Industry consolidation can have varying degrees of impact and, in some cases, may even create exceptional opportunities. Either way, management believes that the Company is well positioned to deal with this or other changes to the competitive landscape in Canada.
Competition
The Canadian beverage alcohol industry is extremely competitive. Competitors may take actions to establish and sustain a competitive advantage through advertising and promotion and pricing strategies in an effort to maintain market share. Corby constantly monitors the market and adjusts its own strategies as appropriate. Competitors may also affect Corby's ability to attract and retain high-quality employees. The Company's long heritage attests to Corby's strong foundation and successful execution of its strategies. Being a leading Canadian beverage alcohol company helps facilitate recruitment efforts.
Credit Risk
Credit risk arises from deposits in cash management pools held with PR via Corby's participation in the Mirror Netting Service Agreement (as previously described in the "Related Party Transactions" section of this MD&A), as well as credit exposure to customers, including outstanding accounts and note receivable. The maximum exposure to credit risk is equal to the carrying value of the Company's financial assets. The objective of managing counter-party credit risk is to prevent losses in financial assets. The Company assesses the credit quality of its counter-parties, taking into account their financial position, past experience and other factors. As the large majority of Corby's accounts receivable balances are collectable from government-controlled LBs, management believes the Company's credit risk relating to accounts receivable is at an acceptably low level. The Company's note receivable is secured.
Exposure to Interest Rate Fluctuations
The Company does not have any short- or long-term debt facilities. Interest rate risk exists, as Corby earns market rates of interest on its deposits in cash management pools and also has a note receivable that earns a fixed rate of interest. An active risk management program does not exist, as management believes that changes in interest rates would not have a material impact on Corby's financial position over the long term.
Exposure to Commodity Price Fluctuations
Commodity risk exists, as the manufacture of Corby's products requires the procurement of several known commodities, such as grains, sugar and natural gas. The Company strives to partially mitigate this risk through the use of longer-term procurement contracts where possible. In addition, subject to competitive conditions, the Company may pass on commodity price changes to consumers through pricing over the long term.
Foreign Currency Exchange Risk
The Company has exposure to foreign currency risk, as it conducts business in multiple foreign currencies; however, its exposure is primarily limited to the US dollar ("USD") and UK pound sterling ("GBP"). Corby does not utilize derivative instruments to manage this risk. Subject to competitive conditions, changes in foreign currency rates may be passed on to consumers through pricing over the long term.
USD Exposure
The Company's demand for USD has traditionally outpaced its supply, due to USD sourcing of production inputs exceeding that of the Company's USD sales. Therefore, decreases in the value of the Canadian dollar ("CAD") relative to the USD will have an unfavourable impact on the Company's earnings.
GBP Exposure
The Company's exposure to fluctuations in the value of the GBP relative to the CAD was reduced as both sales and cost of production are denominated in GBP. While Corby's exposure has been minimized, increases in the value of the CAD relative to the GBP will have an unfavourable impact on the Company's earnings.
Third-Party Service Providers
HWSL, which Corby manages on behalf of PR, provides more than 80% of the Company's production requirements, among other services including administration and information technology. However, the Company is reliant upon certain third-party service providers in respect of certain of its operations. It is possible that negative events affecting these third-party service providers could, in turn, negatively impact the Company. While the Company has no direct control over how such third parties are managed, it has entered into contractual arrangements to formalize these relationships. In order to minimize operating risks, the Company actively monitors and manages its relationships with its third-party service providers.
Brand Reputation and Trademark Protection
The Company promotes nationally branded, non-proprietary products as well as proprietary products. Damage to the reputation of any of these brands, or to the reputation of any supplier or manufacturer of these brands, could negatively impact consumer opinion of the Company or the related products, which could have an adverse impact on the financial performance of the Company. The Company strives to mitigate such risks by selecting only those products from suppliers that strategically complement Corby's existing brand portfolio and by actively monitoring brand advertising and promotion activities. The Company registers trademarks, as applicable, while constantly watching for and responding to competitive threats, as necessary.
Valuation of Goodwill and Intangible Assets
Goodwill and intangible assets account for a significant amount of the Company's total assets. Goodwill and intangible assets are subject to impairment tests that involve the determination of fair value. Inherent in such fair value determinations are certain judgments and estimates including, but not limited to, projected future sales, earnings and capital investment; discount rates; and terminal growth rates. These judgments and estimates may change in the future due to uncertain competitive market and general economic conditions, or as the Company makes changes in its business strategies. Given the current state of the economy, certain of the aforementioned factors affecting the determination of fair value may be impacted and, as a result, the Company's financial results may be adversely affected.
The following chart summarizes Corby's goodwill and intangible assets and details the amounts associated with each brand (or basket of brands) and market:
| Carrying Values as at June 30, 2013 | |||||||||
| Associated Brand | Associated Market | Goodwill | Intangibles | Total | |||||
| Various PR brands | Canada | $ | - | $ | 37.4 | $ | 37.4 | ||
| Lamb's rum | United Kingdom(1) | 1.4 | 11.8 | 13.2 | |||||
| Corby domestic brands | Canada | 1.9 | - | 1.9 | |||||
| Certain agency brands | Canada | - | 0.4 | 0.4 | |||||
| $ | 3.3 | $ | 49.6 | $ | 52.9 | ||||
| (1) The international business for Lamb's rum is primarily focused in the UK, however, the trademarks and licenses | |||||||||
| purchased, relate to all international markets outside of Canada, as Corby previously owned the Canadian rights. | |||||||||
Therefore, economic factors (such as consumer consumption patterns) specific to these brands and markets are primary drivers of the risk associated with their respective goodwill and intangible assets valuations.
Employee Future Benefits
The Company has certain obligations under its registered and non-registered defined benefit pension plans and other post-retirement benefit plan. There is no assurance that the Company's benefit plans will be able to earn the assumed rate of return. New regulations and market-driven changes may result in changes in the discount rates and other variables, which would result in the Company being required to make contributions in the future that differ significantly from estimates. An extended period of depressed capital markets and low interest rates could require the Company to make contributions to these plans in excess of those currently contemplated, which, in turn, could have an adverse impact on the financial performance of the Company. Somewhat mitigating the impact of a potential market decline is the fact that the Company monitors its pension plan assets closely and follows strict guidelines to ensure that pension fund investment portfolios are diversified in-line with industry best practices. For further details related to Corby's defined benefit pension plans, please refer to Note 16 of the consolidated financial statements for the year ended June 30, 2013.
| CORBY DISTILLERIES LIMITED | |||||||
| CONSOLIDATED BALANCE SHEETS | |||||||
| (unaudited) | |||||||
| (in thousands of Canadian dollars) | |||||||
| June 30, | June 30, | ||||||
| Note | 2013 | 2012 | |||||
| ASSETS | |||||||
| Deposits in cash management pools | $ | 108,043 | $ | 110,113 | |||
| Accounts receivable | 7 | 23,642 | 28,611 | ||||
| Income and other taxes recoverable | 1,055 | - | |||||
| Inventories | 8 | 49,083 | 47,760 | ||||
| Prepaid expenses | 533 | 555 | |||||
| Current portion of note receivable | 9 | 600 | 600 | ||||
| Total current assets | 182,956 | 187,639 | |||||
| Note receivable | 9 | 600 | 1,200 | ||||
| Property and equipment | 10 | 8,092 | 7,524 | ||||
| Goodwill | 11 | 3,278 | 3,278 | ||||
| Intangible assets | 12 | 49,665 | 53,771 | ||||
| Total assets | $ | 244,591 | $ | 253,412 | |||
| LIABILITIES | |||||||
| Accounts payable and accrued liabilities | 14 | $ | 24,185 | $ | 22,400 | ||
| Income and other taxes payable | - | 3,656 | |||||
| Total current liabilities | 24,185 | 26,056 | |||||
| Provision for pensions | 16 | 10,449 | 10,550 | ||||
| Deferred income taxes | 17 | 1,053 | 983 | ||||
| Total liabilities | 35,687 | 37,589 | |||||
| Shareholders' equity | |||||||
| Share capital | 18 | 14,304 | 14,304 | ||||
| Retained earnings | 194,600 | 201,519 | |||||
| Total shareholders' equity | 208,904 | 215,823 | |||||
| Total liabilities and shareholders' equity | $ | 244,591 | $ | 253,412 | |||
| See accompanying notes to the consolidated financial statements | |||||||
| CORBY DISTILLERIES LIMITED | |||||||||||
| CONSOLIDATED STATEMENTS OF EARNINGS | |||||||||||
| (unaudited) | |||||||||||
| (in thousands of Canadian dollars, except per share amounts) | |||||||||||
| For the Three Months Ended | For the Year Ended | ||||||||||
| June 30, | June 30, | June 30, | June 30, | ||||||||
| Note | 2013 | 2012 | 2013 | 2012 | |||||||
| Revenue | 19 | $ | 33,464 | $ | 32,433 | $ | 132,743 | $ | 146,746 | ||
| Cost of sales | (12,370) | (13,068) | (49,643) | (60,885) | |||||||
| Marketing, sales and administration | (11,517) | (12,774) | (46,971) | (48,744) | |||||||
| Disposal transaction | 20 | - | - | - | 21,532 | ||||||
| Other income and expense | 21 | 264 | 28 | 318 | 202 | ||||||
| Earnings from operations | 9,841 | 6,619 | 36,447 | 58,851 | |||||||
| Financial income | 390 | 453 | 1,707 | 1,963 | |||||||
| Financial expenses | (94) | (184) | (447) | (612) | |||||||
| Net financial income | 22 | 296 | 269 | 1,260 | 1,351 | ||||||
| Earnings before income taxes | 10,137 | 6,888 | 37,707 | 60,202 | |||||||
| Current income taxes | (2,766) | (1,877) | (10,393) | (12,915) | |||||||
| Deferred income taxes | (80) | (130) | (70) | (1,239) | |||||||
| Income taxes | 17 | (2,846) | (2,007) | (10,463) | (14,154) | ||||||
| Net earnings | $ | 7,291 | $ | 4,881 | $ | 27,244 | $ | 46,048 | |||
| Basic earnings per share | 23 | $ | 0.26 | $ | 0.17 | $ | 0.96 | $ | 1.62 | ||
| Diluted earnings per share | 23 | $ | 0.26 | $ | 0.17 | $ | 0.96 | $ | 1.62 | ||
| Weighted average common shares outstanding | |||||||||||
| Basic | 28,468,856 | 28,468,856 | 28,468,856 | 28,468,856 | |||||||
| Diluted | 28,468,856 | 28,468,856 | 28,468,856 | 28,468,856 | |||||||
| See accompanying notes to the consolidated financial statements | |||||||||||
| CORBY DISTILLERIES LIMITED | ||||||||||||||
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||||||||||
| (unaudited) | ||||||||||||||
| (in thousands of Canadian dollars) | ||||||||||||||
| For the Three Months Ended | For the Year Ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||
| Net earnings | $ | 7,291 | $ | 4,881 | $ | 27,244 | $ | 46,048 | ||||||
| Other comprehensive income | - | - | - | - | ||||||||||
| Total comprehensive income | $ | 7,291 | $ | 4,881 | $ | 27,244 | $ | 46,048 | ||||||
| See accompanying notes to the consolidated financial statements | ||||||||||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY | ||||||||||
| (unaudited) | ||||||||||
| (in thousands of Canadian dollars) | ||||||||||
| Share Capital | Accumulated Other Comprehensive Income |
Retained Earnings |
Total | |||||||
| Balance as at June 30, 2012 | $ | 14,304 | $ | - | $ | 201,519 | $ | 215,823 | ||
| Net earnings | - | - | 27,244 | 27,244 | ||||||
| Other comprehensive income | - | - | - | - | ||||||
| Dividends | 27 | - | - | (34,163) | (34,163) | |||||
| Balance as at June 30, 2013 | $ | 14,304 | $ | - | $ | 194,600 | $ | 208,904 | ||
| Balance as at June 30, 2011 | $ | 14,304 | $ | - | $ | 224,935 | $ | 239,239 | ||
| Net earnings | - | - | 46,048 | 46,048 | ||||||
| Other comprehensive income | - | - | - | - | ||||||
| Dividends | - | - | (69,464) | (69,464) | ||||||
| Balance as at June 30, 2012 | $ | 14,304 | $ | - | $ | 201,519 | $ | 215,823 | ||
| See accompanying notes to the consolidated financial statements | ||||||||||
| CORBY DISTILLERIES LIMITED | ||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOW | ||||||||||
| (unaudited) | ||||||||||
| (in thousands of Canadian dollars) | ||||||||||
| For the Three Months Ended | For the Year Ended | |||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||
| Notes | 2013 | 2012 | 2013 | 2012 | ||||||
| Operating activities | ||||||||||
| Net earnings | $ | 7,291 | $ | 4,881 | $ | 27,244 | $ | 46,048 | ||
| Adjustments for: | ||||||||||
| Amortization and depreciation | 24 | 1,403 | 1,357 | 5,534 | 5,688 | |||||
| Net financial income | 22 | (296) | (269) | (1,260) | (1,351) | |||||
| Disposal transaction | 20 | - | - | - | (21,532) | |||||
| Gain on disposal of property and equipment | (81) | (47) | (224) | (175) | ||||||
| Income tax expense | 17 | 2,846 | 2,007 | 10,463 | 14,154 | |||||
| Provision for pensions | (522) | (456) | (472) | (2,674) | ||||||
| 10,641 | 7,473 | 41,285 | 40,158 | |||||||
| Net change in non-cash working capital balances | 26 | 7,588 | 2,763 | 4,835 | 13,613 | |||||
| Interest received | 373 | 396 | 1,642 | 1,797 | ||||||
| Income taxes paid | (2,468) | (1,704) | (14,934) | (9,290) | ||||||
| Net cash from operating activities | 16,134 | 8,928 | 32,828 | 46,278 | ||||||
| Investing activities | ||||||||||
| Additions to property and equipment | 10 | (1,221) | (1,029) | (1,845) | (1,648) | |||||
| Net proceeds on disposal transaction | - | - | - | 37,376 | ||||||
| Proceeds from disposition of property and equipment | 201 | 54 | 510 | 335 | ||||||
| Deposits in cash management pools | (10,274) | (3,683) | 2,070 | (13,477) | ||||||
| Net cash from investing activities | (11,294) | (4,658) | 735 | 22,586 | ||||||
| Financing activity | ||||||||||
| Proceeds from note receivable | 9 | - | - | 600 | 600 | |||||
| Dividends paid | (4,840) | (4,270) | (34,163) | (69,464) | ||||||
| Net cash used in financing activities | (4,840) | (4,270) | (33,563) | (68,864) | ||||||
| Net increase in cash | - | - | - | - | ||||||
| Cash, beginning of year | - | - | - | - | ||||||
| Cash, end of year | $ | - | $ | - | $ | - | $ | - | ||
| See accompanying notes to the consolidated financial statements | ||||||||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2013 AND 2012
(in thousands of Canadian dollars, except per share amounts)
1. GENERAL INFORMATION
Corby Distilleries Limited ("Corby" or the "Company") is a leading Canadian marketer of spirits and importer of wines. The Company derives its revenues from the sale of its owned-brands in Canada and other international markets, as well as earning commissions from the representation of selected non-owned brands in the Canadian marketplace. Revenues predominantly consist of sales made to each of the provincial liquor boards in Canada.
Corby is controlled by Hiram Walker & Sons Limited ("HWSL"), which is a wholly owned subsidiary of Pernod Ricard, S.A. ("PR"), a French public limited company that owned 51.6% of the outstanding Voting Class A Common Shares of Corby as at June 30, 2013.
Corby is a public company incorporated and domiciled in Canada, whose shares are traded on the Toronto Stock Exchange. The Company's registered address is 225 King Street West, Suite 1100, Toronto, ON M5V 3M2.
2. BASIS OF PREPARATION
Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and using the accounting policies described herein.
These consolidated financial statements were approved by the Company's Board of Directors on August 28, 2013.
Functional and presentation currency
The Company's consolidated financial statements are presented in Canadian dollars, which is the Company's functional and presentation currency.
Foreign currency translation
Transactions denominated in foreign currencies are translated into the functional currency using the exchange rate applying at the transaction date. Non-monetary assets and liabilities denominated in foreign currencies are recognized at the historical exchange rate applicable at the transaction date. Monetary assets and liabilities dominated in foreign currencies are translated at the exchange rate applying at the balance sheet date. Foreign currency differences related to operating activities are recognized in earnings from operations for the period; foreign currency differences related to financing activities are recognized within net financial income.
Basis of Measurement
These consolidated financial statements are prepared in accordance with the historical cost model, except for certain categories of assets and liabilities, which are measured in accordance with other methods provided for by IFRS as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets.
Use of Estimates and Judgements
The preparation of the consolidated financial statements in conformity with IFRS requires management to make certain judgements, estimates and assumptions that affect the application of accounting policies, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are made on the assumption the Company will continue as a going concern and are based on information available at the time of preparation. Estimates may be revised where the circumstance on which they were based change or where new information becomes available. Future outcomes can differ from these estimates.
Judgement is commonly used in determining whether a balance or transaction should be recognized in the consolidated financial statements and estimates and assumptions are more commonly used in determining the measurement of recognized transactions and balances. However, judgement and estimates are often interrelated.
The Company has applied judgement in its determining the tax rates used for measuring deferred taxes and identifying the indicators of impairment for property and equipment, goodwill and intangible assets. In the absence of standards or interpretations applicable to a specific transaction, management uses its judgement to define and apply accounting policies that provide relevant and reliable information in the context of the preparation of the financial statements.
Estimates are used when estimating the useful lives of property and equipment and intangible assets for the purpose of depreciation and amortization, when accounting for or measuring items such as allowances for uncollectible accounts receivable and inventory obsolescence, assumptions underlying the actuarial determination of provision for pensions, income and other taxes, provisions, certain fair value measures including those related to the valuation of share-based payments and financial instruments, and when testing goodwill, intangible assets and other assets for impairment. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
3. ADOPTION OF NEW AND REVISED STANDARDS AND INTERPRETATIONS
New accounting standards
The following new and revised standards and interpretations were effective for Corby on July 1, 2012:
(i) Deferred Taxes - Recovery of Underlying Assets
The IASB issued an amendment to IAS 12, "Income Taxes" ("IAS 12 amendment"), which introduces an exception to the general measurement requirements of IAS 12 in respect of investment properties measured at fair value. The IAS 12 amendment is effective for annual periods beginning on or after January 1, 2012. The IAS 12 amendment did not have an impact on the Company's results of operations, financial position or disclosures.
(ii) Financial Instruments - Disclosures
On June 16, 2011 the IASB issued amendments to IAS 1, "Presentation of Financial Statements." The amendments enhance the presentation of Other Comprehensive Income ("OCI") in the financial statements. A requirement has been added to present items in other comprehensive income grouped on the basis of whether they may be subsequently reclassified to earnings in order to more clearly show the effect the items of other comprehensive income may have on future earnings. The amendments are effective for annual periods beginning on or after July 1, 2012. The amendments have not had an impact on the Company's presentation of other comprehensive income.
Recent accounting pronouncements
A number of new standards, amendments to standards and interpretations have been issued but are not yet effective for the financial year ending June 30, 2013, and accordingly, have not been applied in preparing these consolidated financial statements:
(i) Consolidated Financial Statements
In May 2011 the IASB issued IFRS 10, "Consolidated Financial Statements" ("IFRS 10"), IFRS 11, "Joint Ventures" ("IFRS 11"), and IFRS 12, "Disclosure of Interest in Other Entities" ("IFRS 12"). In addition, the IASB amended IAS 27, "Consolidated and Separate Financial Statements" ("IAS 27") and IAS 28, "Investments in Associates and Joint Ventures" ("IAS 28"). The objective of IFRS 10 is to define the principles of control and establish the basis of determining when and how an entity should be included within a set of consolidated financial statements. IFRS 11 establishes principles to determine the type of joint arrangement and guidance for financial reporting activities required by entities that have an interest in an arrangement that is jointly controlled. IFRS 12 enables users of the financial statements to evaluate the nature and risks associated with its interest in other entities and the effects of those interests on its financial performance.
IFRS 10, 11 and 12, and the amendments to IAS 27 and 28 are all effective for annual periods beginning on or after January 1, 2013 and must be applied retrospectively. For Corby, this set of standards and amendments become effective July 1, 2013. The Company does not expect IFRS 10, 11, and 12 and the amendments to IAS 27 and 28 to have a significant impact on its consolidated financial statements.
(ii) Fair Value Measurement
On May 12, 2011 the IASB issued IFRS 13, "Fair Value Measurement" ("IFRS 13") which defines fair value, provides guidance in a single IFRS framework for measuring fair value and identifies the required disclosures pertaining to fair value measurement. IFRS 13 applies to all International Financial Reporting Standards that require or permit fair value measurements or disclosures. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is effective for annual periods beginning on or after January 1, 2013, and must be applied prospectively. For Corby this standard becomes effective July 1, 2013. The Company does not expect IFRS 13 to have a significant impact on its consolidated financial statements.
(iii) Employee Benefits
On June 16, 2011 the IASB issued amendments to IAS 19, "Employee Benefits" ("IAS 19"), which eliminates the option to defer the recognition of actuarial gains and losses through the "corridor" approach, revises the presentation of changes in assets and liabilities arising from defined benefit plans and enhances the disclosures for defined benefit plans. IAS 19 is effective for annual periods beginning on or after January 1, 2013, and must be applied retrospectively. For Corby, the revisions to this standard become effective July 1, 2013. The Company has determined that on July 1, 2013 provison for pensions will increase $10.3 million with an offsetting decrease to opening equity. Pension expense for the year-ended June 30, 2013, when restated for the impacts of this amended standard, will increase $0.3 million.
(iv) Financial Instruments - Asset and Liability Offsetting
The IASB has issued amendments to IFRS 7, "Financial Instruments: Disclosures" ("IFRS 7") and IAS 32, "Financial Instruments: Presentation" ("IAS 32"), which clarify the requirements for offsetting financial instruments and require new disclosures on the effect of offsetting arrangements on an entity's financial position. The amendments to IFRS 7 are effective for annual periods beginning on or after January 1, 2013 and must be applied retrospectively. For Corby, this amendment will become effective July 1, 2013. The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014 and must be applied retrospectively. For Corby, this amendment will become effective July 1, 2014. The Company is assessing the impact of the amendments to IFRS 7 and IAS 32 on its consolidated financial statements.
(v) Financial Instruments
The IASB has issued a new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will ultimately replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). The replacement of IAS 39 is a multi-phase project with the objective of improving and simplifying the reporting for financial instruments and the issuance of IFRS 9 is part of the first phase of this project. IFRS 9 uses a single approach to determine whether a financial asset or liability is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. For financial assets, the approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. IFRS 9 requires a single impairment method to be used, replacing multiple impairment methods in IAS 39. For financial liabilities measured at fair value, fair value changes due to changes in an entity's credit risk are presented in other comprehensive income. IFRS 9 is effective for annual periods beginning on or after January 1, 2015 and must be applied retrospectively. For Corby, this standard will become effective July 1, 2015. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
4. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements.
Basis of Consolidation
Subsidiaries are entities controlled by the Company. Control exists where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the Company's consolidated financial statement from the date that the control commences until the date that control ceases.
Intra-company balances and transactions and any unrealized income and expenses arising from intra-company transactions are eliminated in preparing the consolidated financial statements.
Deposits in Cash Management Pools
Corby participates in a cash pooling arrangement under a Mirror Netting Services Agreement together with PR's other Canadian affiliates, the terms of which are administered by the Bank of Nova Scotia. The Mirror Netting Services Agreement acts to aggregate each participant's net cash balance for the purposes of having a centralized cash management function for all of PR's Canadian affiliates, including Corby.
Corby accesses these funds on a daily basis and has the contractual right to withdraw these funds or terminate these cash management arrangements upon providing five days' written notice.
Inventories
Inventories are measured at the lower of cost (acquisition cost and cost of production, including indirect production overheads) and net realizable value. Net realizable value is the selling price less the estimated cost of completion and sale of the inventories. Most inventories are valued using the average cost method. The cost of long-cycle inventories is calculated using a single method which includes distilling and ageing maturing costs but excludes finance costs. These inventories are classified in current assets, although a substantial part remains in inventory for more than one year before being sold in order to undergo the ageing maturing process used for certain spirits.
Property and equipment
Property and equipment are recognized at acquisition cost and broken down by component. Cost includes expenditures that are directly attributable to the acquisition of the asset.
Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Land is not depreciated. Useful life and depreciation methods are reviewed at each reporting date. Items of property and equipment are written down when impaired.
The range of depreciable lives for the major categories of property and equipment are as follows:
| Buildings | 40 to 50 years | ||||||
| Machinery and equipment | 3 to 12 years | ||||||
| Casks | 12 years | ||||||
| Other capital assets | 3 to 20 years | ||||||
Depreciation of property and equipment is recognized within earnings from operations. The Company commences recognition of depreciation in earnings when the item of property and equipment is ready for its intended use.
Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net, within earnings from operations.
Fully-depreciated items of property and equipment that are still in use continue to be recognized in the cost and accumulated depreciation.
The cost of replacing part of an item of property and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The carrying amount of the replaced part is de-recognized. The costs of repairs and maintenance of property and equipment are recognized in earnings from operations as incurred.
Leases
The Company leases certain premises and equipment. Terms vary in length and typically permit renewal for additional periods. These leases are classified as operating leases under which minimum rent, including scheduled escalations, is expensed on a straight-line basis over the term of the lease.
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Company currently has no financing leases.
Goodwill
Goodwill arising in a business combination is recognized as an asset at the date that control is acquired. For acquisitions on or after July 1, 2010, goodwill is measured as the excess of the sum of the fair value of the consideration transferred over the fair value of the identifiable assets acquired less the fair value of the liabilities assumed. Goodwill is tested for impairment at least annually and whenever there is an indication that the asset may be impaired.
As part of its transition to IFRS, the Company elected to apply IFRS 3 - Business Combinations ("IFRS 3"), only to those business combinations that occurred on or after July 1, 2010. In respect of acquisitions prior to July 1, 2010, goodwill represents the amount recognized under Canadian GAAP.
Goodwill is measured at cost less any accumulated impairment losses.
Intangible Assets
Intangible assets include the following:
(i) Long-term Representation Rights
Long-term representation rights represent the cost of the Company's exclusive right to represent PR's brands in Canada. These representation rights are carried at cost, less accumulated amortization. Amortization is provided for on a straight-line basis over the 15-year term of the agreement, which began on October 1, 2006, and is scheduled to expire on September 30, 2021 and recognized within earnings from operations.
(ii) Trademarks and licences
Trademarks and licences represent the value of trademarks and licences of businesses acquired and are measured at cost on initial recognition. These intangible assets are deemed to have an indefinite life and are, therefore, not amortized. Trademarks and licences are tested for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the assets might be impaired.
(iii) Non-refundable upfront fees
Non-refundable upfront fees are carried at cost, less accumulated amortization. Amortization is provided for on a straight-line basis over the term of the associated agreement and recognized within earnings from operations.
Impairment
(i) Financial Assets
A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have occurred that have had a negative effect on the estimated future cash flows of that asset.
Objective evidence that a financial asset is impaired includes, but is not limited to, default or delinquency by a debtor, restructuring of an amount due to the Company on terms the Company would not consider otherwise, indicators the debtor will enter bankruptcy, or adverse changes in the status of the debtor's economic conditions.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate.
Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.
All impairment losses are recognized in net earnings.
(ii) Non-financial assets
The carrying amount of the Company's non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indications exist, the asset's recoverable amount is estimated.
Intangible assets and property and equipment are subject to impairment tests whenever there is an indication that the value of the asset has been impaired and at least once a year for non-current assets with indefinite useful lives (goodwill and trademarks and licences).
Assets subject to impairment tests are included in Cash-Generating Units ("CGUs"), corresponding to linked groups of assets, which generate identifiable cash flows. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognized within earnings from operations. The recoverable amount of the CGU is the higher of its fair value less costs to sell and its value in use.
In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. Projected cash flows are discounted to present based on annual budgets and multi-year strategies, extrapolated into subsequent years based on the medium and long-term trends for each market and brand. The calculation includes a terminal value derived by capitalizing the cash flows generated in the last forecasted year. Assumptions applied to sales and advertising spending are determined by management based on previous results and long-term development trends in the markets concerned. The present values of discounted cash flows are sensitive to these assumptions as well as to consumer trends and economic factors.
Fair value is based either on the sale price, net of selling costs, obtained under normal market conditions or earnings multiples observed in recent transactions concerning similar assets.
Impairment losses are recognized in the statement of earnings. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. With respect to other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indicators that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the carrying amount of the assets does not exceed the carrying amount that would have been determined, net of depreciation and amortization, if no impairment loss had been recognized.
Provisions
Provisions are recognized when there is a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and that obligation can be measured reliably. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the risk specific to the liability. Provisions are reviewed on a regular basis and adjusted to reflect management's best current estimates. Due to the judgmental nature of these items, future settlements may differ from amounts recognized. Provisions notably include: provisions for pensions and provisions for uncertain tax positions.
Provisions for pensions
The Company maintains registered defined benefit pension plans under which benefits are available to certain employee groups. The Company also makes supplementary retirement benefits available to certain employees under a non-registered defined benefit pension plan. The Company also provides a defined contribution plan.
(i) Defined Benefit Plans
For defined benefit plans, the projected unit credit method is used to measure the present value of defined benefit obligations, current service cost and, if applicable, past service cost. The measurement is made at each balance sheet date and the personnel data concerning employees is revised at least every three years. The calculation requires the use of economic assumptions (inflation rate, discount rate, expected return on plan assets) and assumptions concerning employees (mainly: average salary increase, rate of employee turnover, life expectancy). Plan assets are measured at their market value at each annual balance sheet date. The provision in the balance sheet corresponds to the discounted value of the defined benefit obligation, adjusted for unrecognized past service cost and unrecognized actuarial gains and losses, and net of the fair value of plan assets. Actuarial gains and losses mainly arise where estimates differ from actual outcomes (for example between the expected value of plan assets and their actual value at the balance sheet date) or when changes are made to long-term actuarial assumptions (for example: discount rate, rate of increase of salaries). Actuarial gains and losses are only recognized when, for a given plan, they represent more than 10% of the greater of the present value of the benefit obligation and the fair value of plan assets at the end of the prior year (termed the "corridor" method). Recognition of the provision is on a straight-line basis over the average number of remaining years' service of the employees in the plan in question (amortization of actuarial gains and losses).
The expense recognized in respect of the benefit obligation described above incorporates:
- expenses corresponding to the acquisition of an additional year's rights;
- interest costs;
- income corresponding to the expected return on plan assets;
- income or expense corresponding to the amortization of actuarial gains and losses;
- past service costs; recognized on a straight-line basis over the average residual period until the corresponding benefits vest with employees;
- income or expense related to changes to existing plans or the creation of new plans;
- income or expense related to any plan curtailments or settlements.
The expense arising from the change in net obligations for pensions and other long-term employee benefits is recognized within earnings from operations or within net financial income on the basis of the nature of the underlying balances.
(ii) Defined contributions plans
Contributions are recognized as expenses when the employees have rendered services. As the Company is not committed beyond the amount of such contributions, no provision is recognized in respect of defined contribution plans.
Income Taxes
Income tax expense comprises current and deferred income tax. Income tax expense is recognized in net earnings except to the extent that it relates to items recognized either in other comprehensive income or directly in equity, in which case it is recognized in other comprehensive income or in equity, respectively.
Current income tax expense comprises the tax payable on the taxable income for the current financial year using tax rates enacted or substantively enacted at the reporting date, and any adjustment to income taxes payable in respect of previous years.
Deferred tax is recognized on temporary differences between the tax and book value of assets and liabilities in the consolidated balance sheet and is measured using the balance sheet approach. Deferred tax is measured at the tax rates that are expected to apply to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset the recognized amounts and the Company intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable earnings will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that all or part of the related tax benefit will be realized.
In determining the amount of current and deferred tax the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Company believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes the Company to change its judgement regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made.
Revenue Recognition
Revenue is comprised of case good sales, commissions and revenues from ancillary activities and is measured at the fair value of the consideration received or to be received, after deducting trade discounts, volume rebates and sales-related taxes and duties. Sales are recognized when the significant risks and rewards of ownership have been transferred, generally at the date of transfer of ownership title.
(i) Costs of services rendered in connection with sales
In accordance with IAS 18 - Revenue ("IAS 18"), certain costs of services rendered in connection with sales, such as advertising programmes in conjunction with distributors, listing costs for new products, and promotional activities at point of sale, are deducted directly from sales if there is no separately identifiable service whose fair value can be reliably measured.
(ii) Commissions
When the Company acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognized is the net amount of commissions made by the Company. Commissions are reported net of long-term representation rights amortization. The long-term representation rights represent the Company's exclusive right to represent PR's brands in Canada and are being amortized on a straight-line basis over the 15-year term of the agreement.
(iii) Interest
Interest income is recognized on an accrual basis using the effective interest method. Primarily interest income is earned on deposits in cash management pools.
Stock-Based Compensation Plans
The Company utilizes a Restricted Share Units Plan as its long-term incentive plan. Through this plan, restricted share units ("RSUs") will be granted to certain officers and employees at a grant price equal to the market closing price of the Company's Voting Class A Common Shares on the last day prior to grant. RSUs vest at the end of a three-year term, subject to the achievement of pre-determined corporate performance targets. The related compensation expense is recognized over this period.
Unvested RSUs will attract dividend-equivalent units whenever dividends are paid on the Voting Class A Common Shares of the Company and will be immediately reinvested into additional RSUs, which will vest and become payable at the end of the three-year vesting period, subject to the same performance conditions as the original RSU award. On the date of vesting, the holder will be entitled to the cash value of the number of RSUs granted, plus any RSUs received from reinvested dividend-equivalents. RSUs do not entitle participants to acquire any rights or entitlements as a shareholder of the Company.
Earnings per Common Share
The Company presents basic and diluted earnings per share ("EPS") amounts for its common shares. Basic and diluted EPS is calculated by dividing the net earnings attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Dilutive EPS is calculated by adjusting the net income attributable to shareholders and the weighted average number of shares outstanding for the effect of potentially dilutive shares. There are no potentially dilutive shares as at June 30, 2013.
Classification of Financial Instruments
Financial instruments are classified into one of the following five categories: fair value through profit or loss, held-to-maturity investments, loans and receivables, available-for-sale financial assets, or other financial liabilities. The classification determines the accounting treatment of the instrument. The classification is determined by the Company when the financial instrument is initially recorded, based on the underlying purpose of the instrument.
Corby's financial assets and liabilities are classified and measured as follows:
| Financial Asset/Liability | Category | Measurement | |||||
| Deposits in cash management pools | Loans and receivables | Amortized cost | |||||
| Accounts receivable and note receivable | Loans and receivables | Amortized cost | |||||
| Accounts payable and accrued liabilities | Other financial liabilities | Amortized cost | |||||
Financial instruments measured at amortized cost are initially recognized at fair value plus any directly attributable transaction costs and then, subsequently, at amortized cost using the effective interest method, less any impairment losses, with gains and losses recognized in earnings in the period in which the gain or loss occurs.
All financial assets are recognized and derecognized on the trade date. A financial asset is derecognized when the contractual rights to the cash flows from the asset expired or when the Company transferred the financial asset to another party without retaining control or substantially all the risks and rewards of ownership of the asset. Any interest in transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability.
A financial liability is derecognized when its contractual obligations are discharged, cancelled or expire.
Common shares issued by the Company are recorded in the amount of the proceeds received, net of direct issues costs.
Transaction costs are added to the initial fair value of financial assets and liabilities when those financial assets and liabilities are not measured at fair value subsequent to initial measurement. Transaction costs are amortized to net earnings, in finance expense, using the effective interest method.
Segmented Reporting
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company's other operations. Segment operating results are reviewed regularly by the Company's CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.
5. FINANCIAL INSTRUMENTS
Corby's financial instruments consist of its deposits in cash management pools, accounts and note receivable and accounts payable and accrued liabilities balances.
Financial Risk Management Objectives and Policies
In the normal course of business, the Company is exposed to financial risks that have the potential to negatively impact its financial performance. The Company does not use derivative financial instruments to manage these risks, as management believes that the risks arising from the Company's financial instruments are already at an acceptably low level. These risks are discussed in more detail below.
Credit Risk
Credit risk arises from cash held with PR via Corby's participation in the Mirror Netting Services Agreement (further described in Note 28), as well as credit exposure to customers, including outstanding accounts and note receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets.
The objective of managing counter-party credit risk is to prevent losses in financial assets. The Company assesses the credit quality of its counter-parties, taking into account their financial position, past experience and other factors.
As the large majority of Corby's accounts receivable balances are collectable from government-controlled liquor boards, management believes that the Company's credit risk relating to accounts receivable is at an acceptably low level. With respect to Corby's deposits in PR's cash management pools, the Company monitors PR's credit rating in the normal course of business and has the right to terminate its participation in the Mirror Netting Services Agreement at any time, subject to five days' written notice. The Company's note receivable is secured as described in Note 9.
Liquidity Risk
Corby's sources of liquidity are its deposits in cash management pools of $108,043 and its cash generated by operating activities. Corby's total contractual maturities are represented by its accounts payable and accrued liabilities balances which totaled $24,185 as at June 30, 2013, and are all due to be paid within one year. The Company believes that its deposits in cash management pools, combined with its historically strong and consistent operational cash flows, is more than sufficient to fund its operations, investing activities and commitments for the foreseeable future.
Corby does not have any investments in asset-backed commercial paper ("ABCP") and, therefore, has no exposure to this type of liquidity risk.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company does not have any short- or long-term debt facilities. Interest rate risk exists as Corby earns market rates of interest on its deposits in cash management pools and also has a note receivable earning a fixed rate of interest.
As the note receivable earns interest at a fixed rate, there is no cash flow exposure associated with this instrument. However, the fair value of the note receivable will fluctuate with changes in market interest rates.
An active risk management program does not exist, as management believes that changes in interest rates would not have a material impact on Corby's financial position over the long term.
Foreign Currency Risk
The Company has exposure to foreign currency risk as it conducts business in multiple foreign currencies; however, its exposure is primarily limited to the US dollar ("USD") and UK pound Sterling ("GBP"). Corby does not utilize derivative instruments to manage this risk. Subject to competitive conditions, changes in foreign currency rates may be passed on to consumers through pricing over the long-term.
USD Exposure
The Company's demand for USD has traditionally outpaced its supply, due to USD sourcing of production inputs exceeding that of the Company's USD sales. Therefore, decreases in the value of the Canadian dollar ("CAD") relative to the USD will have an unfavourable impact on the Company's earnings.
GBP Exposure
The Company's supply of GBP outpaces demand, as Corby's sales into the UK market are denominated in GBP, while having only certain production inputs denominated in GBP. Therefore, increases in the value of the CAD relative to the GBP will have an unfavourable impact on the Company's earnings.
Commodity Risk
Commodity risk exists, as the manufacture of Corby's products requires the procurement of several known commodities such as grains, sugar and natural gas. The Company strives to partially mitigate this risk through the use of longer-term procurement contracts where possible. In addition, subject to competitive conditions, the Company may pass on commodity price changes to consumers via pricing.
Fair Value of Financial Instruments
The Company uses a fair value hierarchy in order to classify the fair value disclosures related to the Company's financial assets and financial liabilities recognized in the balance sheets at fair value.
The fair value hierarchy has the following levels:
- Level 1 - Quoted market prices in active markets for identical assets or liabilities;
- Level 2 - Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and
- Level 3 - Unobservable inputs such as inputs for the asset or liability that are not based on observable market data.
The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety.
The Company has no financial instruments carried at fair value on its balance sheet. For financial assets and liabilities that are valued at other than fair value on its balance sheets (i.e., deposits in cash management pools, accounts receivable, accounts payable and accrued liabilities), fair value approximates their carrying value at each balance sheet date due to their short-term maturities.
The carrying value of the note receivable approximates fair value. Fair value is determined using the present value of future cash flows, based on the estimated market rates for instruments with similar terms and conditions.
6. CAPITAL MANAGEMENT
The Company's objectives when managing capital are:
- To ensure sufficient capital exists to allow management the flexibility to execute its strategic plans; and
- To ensure shareholders receive a reasonable return on their investment in the form of quarterly dividends.
Management includes the following items in its definition of capital:
| June 30, | June 30, | ||||||
| 2013 | 2012 | ||||||
| Share capital | $ 14,304 | $ 14,304 | |||||
| Retained earnings | 194,600 | 201,519 | |||||
| Net capital under management | $ 208,904 | $ 215,823 | |||||
The Company is not subject to any externally imposed capital requirements.
The Company's dividend policy stipulates that, barring any unanticipated developments, regular dividends will be paid quarterly, on the basis of an annual amount equal to the greater of 75% of net earnings per share in the preceding fiscal year ended June 30, and $0.60 per share.
The Company is meeting all of its objectives and stated policies with respect to its management of capital.
7. ACCOUNTS RECEIVABLE
| June 30, | June 30, | ||||||
| 2013 | 2012 | ||||||
| Trade receivables | $ 16,491 | $ 19,759 | |||||
| Due from related parties | 7,151 | 8,852 | |||||
| $ 23,642 | $ 28,611 | ||||||
8. INVENTORIES
| June 30, | June 30, | ||||||
| 2013 | 2012 | ||||||
| Raw materials | $ 2,132 | $ 1,597 | |||||
| Work-in-progress | 39,669 | 40,703 | |||||
| Finished goods | 7,282 | 5,460 | |||||
| $ 49,083 | $ 47,760 | ||||||
The cost of inventory recognized as an expense and included in cost of goods sold during the year ended June 30, 2013 was $40,060 (2012 - $50,373). During the current and prior year, there were no significant write-downs of inventory as a result of net realizable value being lower than cost, and no inventory write-downs recognized in previous years were reversed.
9. NOTE RECEIVABLE
| June 30, | June 30, | ||||||
| 2013 | 2012 | ||||||
| Note receivable | $ 1,200 | $ 1,800 | |||||
| Less: current portion | 600 | 600 | |||||
| $ 600 | $ 1,200 | ||||||
As part of the Company's sale of the Seagram Coolers brand on March 15, 2011, the purchase price was satisfied in part by a promissory note secured by specific property and issued by the purchaser in favour of Corby for $2,400, which is to be paid in equal annual instalments of $600 plus interest of 5% per annum, with the final payment due January 31, 2015.
10. PROPERTY AND EQUIPMENT
| June 30, | June 30, | |||||||||||
| 2012 | Additions | Depreciation | Disposals | 2013 | ||||||||
| Buildings | $ | 896 | $ | 106 | $ | - | $ | - | $ | 1,002 | ||
| Machinery and equipment | 4,596 | 825 | - | (24) | 5,397 | |||||||
| Casks | 6,699 | 432 | - | (423) | 6,708 | |||||||
| Other | 200 | 482 | - | - | 682 | |||||||
| Gross value | 12,391 | 1,845 | - | (447) | 13,789 | |||||||
| Buildings | (324) | - | (91) | - | (415) | |||||||
| Machinery and equipment | (2,233) | - | (366) | 11 | (2,588) | |||||||
| Casks | (2,161) | - | (505) | 152 | (2,514) | |||||||
| Other | (149) | - | (31) | - | (180) | |||||||
| Accum. depreciation | (4,867) | - | (993) | 163 | (5,697) | |||||||
| Property, plant and equipment | $ | 7,524 | $ | 1,845 | $ | (993) | $ | (284) | $ | 8,092 | ||
| June 30, | June 30, | |||||||||||
| 2011 | Additions | Depreciation | Disposals | 2012 | ||||||||
| Land | $ | 638 | $ | - | $ | - | $ | (638) | $ | - | ||
| Buildings | 8,125 | 39 | - | (7,268) | 896 | |||||||
| Machinery and equipment | 14,395 | 792 | - | (10,591) | 4,596 | |||||||
| Casks | 6,122 | 799 | - | (222) | 6,699 | |||||||
| Other | 455 | 18 | - | (273) | 200 | |||||||
| Gross value | 29,735 | 1,648 | - | (18,992) | 12,391 | |||||||
| Land | - | - | - | - | - | |||||||
| Buildings | (5,106) | - | (130) | 4,912 | (324) | |||||||
| Machinery and equipment | (7,049) | - | (516) | 5,332 | (2,233) | |||||||
| Casks | (1,752) | - | (478) | 69 | (2,161) | |||||||
| Other | (182) | - | (33) | 66 | (149) | |||||||
| Accum. depreciation | (14,089) | - | (1,157) | 10,379 | (4,867) | |||||||
| Property, plant and equipment | $ | 15,646 | $ | 1,648 | $ | (1,157) | $ | (8,613) | $ | 7,524 | ||
11. GOODWILL
Changes in the carrying amount of goodwill are as follows:
| 2013 | 2012 | ||||||
| Balance, beginning of year | $ 3,278 | $ 5,886 | |||||
| Decreases in goodwill | - | (2,608) | |||||
| Balance, end of year | $ 3,278 | $ 3,278 | |||||
The decrease in goodwill recognized in fiscal 2012 was the result of the sale of certain brands included with the disposal of the Montreal manufacturing facility and non-core brands as described in Note 20 of these financial statements. There have been no impairment losses recognized with respect to goodwill during 2013 (2012 -$nil).
12. INTANGIBLE ASSETS
| 2013 | |||||||||||||
| Movements in the Year | |||||||||||||
| Opening | Ending | ||||||||||||
| Book Value | Additions | Amortization | Impairments | Disposals | Book Value | ||||||||
| Long-term representation rights | $ | 41,970 | $ | - | $ | (4,531) | $ | - | $ | - | $ | 37,439 | |
| Trademarks and licenses | 11,801 | - | - | - | - | 11,801 | |||||||
| Non-refundable upfront fees | - | 435 | (10) | - | - | 425 | |||||||
| $ | 53,771 | $ | 435 | $ | (4,541) | $ | - | $ | - | $ | 49,665 | ||
| 2012 | |||||||||||||
| Movements in the Year | |||||||||||||
| Opening | Ending | ||||||||||||
| Book Value | Additions | Amortization | Impairments | Disposals | Book Value | ||||||||
| Long-term representation rights | $ | 46,501 | $ | - | $ | (4,531) | $ | - | $ | - | $ | 41,970 | |
| Trademarks and licenses | 11,801 | - | - | - | - | 11,801 | |||||||
| Non-refundable upfront fees | - | - | - | - | - | - | |||||||
| $ | 58,302 | $ | - | $ | (4,531) | $ | - | $ | - | $ | 53,771 | ||
13. IMPAIRMENT
The Company tests goodwill and indefinite-lived intangibles (trademarks and licences) for impairment on an annual basis. The carrying value of goodwill and indefinite-lived intangibles at June 30, 2013, along with the data and assumptions applied to the Cash Generating Units ("CGUs") of the Case Goods Segment are as follows:
| Carrying | ||||||||||
| Carrying | Value | Terminal | ||||||||
| Value | Trademarks | Discount | Growth | |||||||
| Goodwill | & Licences | Rate | Rate | |||||||
| Case Goods Segment | $ | 3,278 | $ | 11,801 | 8.8% to 11.5% | 2% to 3% | ||||
The Company's commissions segment has no goodwill or indefinite lived intangibles.
For purposes of impairment testing, goodwill and intangibles with an indefinite life (trademarks and licences) were allocated to the group of CGUs which represent the lowest level within the group at which the goodwill is monitored for internal management purposes.
During the financial year ended June 30, 2013, the Company performed impairment testing on goodwill and indefinite-lived intangible assets in accordance with its accounting policy and identified no impairment.
The discount rate used for these calculations is a pre-tax rate which corresponds to the weighted average cost of capital. Different discount rates were used to allow for risks specific to certain markets or geographical areas in calculating cash flows. Assumptions made in terms of future changes in sales and of terminal values are reasonable and in accordance with market data available for each of the CGUs. Additional impairment tests are applied where events or specific circumstances suggest that a potential impairment exists.
A 50 basis points ("bp") increase in the discount rates would result in no impairment to goodwill or the indefinite-lived intangibles. A 50bp decrease in the terminal growth rate would result in no impairment to goodwill or indefinite-lived intangibles.
14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| June 30, | June 30, | ||||||||
| 2013 | 2012 | ||||||||
| Trade payables and accruals | $ | 17,715 | $ | 16,584 | |||||
| Due to related parties | 6,470 | 5,816 | |||||||
| $ | 24,185 | $ | 22,400 | ||||||
15. PROVISIONS
Provisions include the provisions for uncertain tax risks and pensions and other long-term employee benefits. See Note 16 for details of changes in provision for pensions for the year ended June 30, 2013. Provision for uncertain tax risk is included in "Income and other taxes payable," in the amount of $786 at June 30, 2013 (June 30, 2012 - $1,000). During 2013 the Company released $214 (2012 - $nil) of its provisions for uncertain tax risks.
16. PROVISION FOR PENSIONS
The Company has two defined benefit pension plans for executives and salaried employees, two supplementary executive retirement plans for retired and current senior executives of the Company, and a post-retirement benefit plan covering retiree life insurance, health care and dental care. Benefits under these plans are based on years of service and compensation levels. The latest valuations completed for these plans are dated December 31, 2010. The next required valuations must be completed with an effective date no later than December 31, 2013. The post-retirement benefit plan is unfunded.
Employees hired after July 1, 2010 are no longer offered enrolment into the Company's defined benefit pension plans. Instead, the Company provides these employees a defined contribution pension plan. To become eligible, most employees must first accrue one year of service before joining the new plan. For the year ended June 30, 2013, the Company recognized contributions of $147 as expense (2012 - $63).
Details of the Company's defined benefit pension and other post-retirement benefit plans as at and for the years ended June 30, 2013 and 2012 are as follows:
| 2013 | 2012 | |||||||||||||
| Pension | Other Benefit | Pension | Other Benefit | |||||||||||
| Plans | Plans | Plans | Plans | |||||||||||
| Fair value of plan assets | ||||||||||||||
| Fair value of plan assets, beginning of year | $ | 43,470 | $ | - | $ | 46,380 | $ | - | ||||||
| Expected return on plan assets | 2,230 | - | 2,336 | - | ||||||||||
| Actuarial gains and losses return on plan assets | (8) | - | (1,795) | - | ||||||||||
| Company contributions | 1,629 | - | 1,637 | - | ||||||||||
| Plan participants' contributions | 154 | - | 205 | - | ||||||||||
| Settlement | - | - | (2,495) | - | ||||||||||
| Benefits paid | (3,622) | - | (2,798) | - | ||||||||||
| Fair value of plan assets, end of year | $ | 43,853 | $ | - | $ | 43,470 | $ | - | ||||||
| Present value of defined benefit obligation | ||||||||||||||
| Defined benefit obligation, beginning of year | $ | 53,830 | $ | 10,477 | $ | 48,279 | $ | 11,613 | ||||||
| Current service cost | 1,601 | 262 | 1,534 | 286 | ||||||||||
| Interest cost | 2,179 | 421 | 2,358 | 532 | ||||||||||
| Curtailment | - | (638) | (1,231) | (1,525) | ||||||||||
| Settlement | - | - | (2,435) | - | ||||||||||
| Plan participants' contributions | 154 | - | 205 | - | ||||||||||
| Actuarial loss (gain) | 554 | 94 | 7,968 | 239 | ||||||||||
| Benefits paid | (3,671) | (616) | (2,848) | (668) | ||||||||||
| Present value of the defined benefit obligations, end of year | $ | 54,647 | $ | 10,000 | $ | 53,830 | $ | 10,477 | ||||||
| Present value of funded status | 10,794 | 10,000 | 10,360 | 10,477 | ||||||||||
| Unrecognized actuarial (losses) / gains | (11,445) | (36) | (11,399) | 58 | ||||||||||
| Unrecognized past service costs | - | 1,136 | - | 1,054 | ||||||||||
| Net defined benefit (asset) / liability | $ | (651) | $ | 11,100 | $ | (1,039) | $ | 11,589 | ||||||
Company contributions to the pension plans are expected to be $1,623 for the fiscal year ending June 30, 2014.
The table below presents a roll-forward of the net defined benefit liability:
| 2013 | 2012 | ||||||||||
| Defined benefit liability | |||||||||||
| Net defined benefit liability, beginning of year | $ | 10,550 | $ | 12,670 | |||||||
| Expenses for the period | 2,192 | 2,407 | |||||||||
| Curtailment and settlement | - | (2,168) | |||||||||
| Employer contributions | (1,629) | (1,637) | |||||||||
| Benefits paid directly by the employer | (664) | (722) | |||||||||
| Net defined benefit liability, end of year | $ | 10,449 | $ | 10,550 | |||||||
The 2012 curtailment and settlement was recognized as part of the sale of the Montreal manufacturing facility as described in Note 20 of these financial statements and included in earnings from operations under "Disposal Transactions."
Significant actuarial assumptions adopted for the year ended June 30, 2013 and 2012 are as follows:
| 2013 | 2012 | |||||||
| Pension | Other Benefit | Pension | Other Benefit | |||||
| Plans | Plans | Plans | Plans | |||||
| Accrued benefit obligation, end of year | ||||||||
| Discount rate | 4.1% | 4.1% | 4.2% | 4.2% | ||||
| Compensation increase | 3.0 - 3.5% | N/A | 3.0 - 3.5% | N/A | ||||
| Benefit expense, for the year | ||||||||
| Discount rate | 4.2% | 4.2% | 5.2% | 5.2% | ||||
| Expected long term return on assets | 3.5 - 6.5% | N/A | 3.5 - 6.5% | N/A | ||||
| Compensation increase | 3.0 - 3.5% | N/A | 3.5 -4.0% | N/A | ||||
The medical cost trend rate used was 6.1% for 2013 (2012 - 8.0%), with 4.6% being the ultimate trend rate for 2026 and years thereafter. The dental cost trend rate used was 5.0% for 2013 (2012 - 5.0%).
The present value of obligations, fair value of plan assets and experience adjustments over the last three years are as follows:
| 2013 | 2012 | 2011 | |||||||||||
| Present value of obligations, end of period | $ | (64,647) | $ | (64,307) | $ | (59,892) | |||||||
| Fair value of plan assets, end of period | $ | 43,853 | $ | 43,470 | $ | 46,380 | |||||||
| Asset experience adjustments | |||||||||||||
| Asset gain/(loss) during the year | $ | 8 | $ | (1,795) | $ | 1,484 | |||||||
| Liability experience adjustments | |||||||||||||
| Liability gain/(loss) during the year | $ | 184 | $ | (2,181) | $ | 893 | |||||||
| Liability assumptions | |||||||||||||
| Liability gain/(loss) during the year | $ | 463 | $ | (6,027) | $ | (4,951) | |||||||
The expected long-term rate of return on plan assets is determined based on asset mix, active management and a review of historical returns. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the individual asset categories. The actual return on plan assets for 2013 was 11%.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| 2013 | 2012 | ||||||||||||
| Increase | Decrease | Increase | Decrease | ||||||||||
| Service and interest cost | $ | 128 | $ | (97) | $ | 155 | $ | (121) | |||||
| Accrued benefit obligation | 1,228 | (982) | 1,197 | (964) | |||||||||
The net expense recognized in profit and loss in respect of defined benefit pensions and other long-term employee benefits are broken down as follows:
| 2013 | 2012 | |||||||||
| Net defined benefit pension expense recognized in profit and loss for the year | ||||||||||
| Service cost | $ | 1,863 | $ | 1,820 | ||||||
| Interest costs | 2,600 | 2,890 | ||||||||
| Expected return on plan assets | (2,230) | (2,336) | ||||||||
| Amortization of past service cost | (556) | (103) | ||||||||
| Amortization of actuarial losses | 515 | 136 | ||||||||
| Net expense recognized in profit and loss | $ | 2,192 | $ | 2,407 | ||||||
Plan assets by category were as follows:
| 2013 | 2012 | |||||||
| Equity | 48.0% | 48.0% | ||||||
| Fixed income | 32.0% | 42.0% | ||||||
| Other | 20.0% | 10.0% | ||||||
| 100.0% | 100.0% | |||||||
17. INCOME TAXES
| 2013 | 2012 | ||||||||
| Current income tax expense | |||||||||
| Current period | $ | 10,034 | $ | 13,101 | |||||
| Adjustments with respect to prior period tax estimates | 359 | (186) | |||||||
| $ | 10,393 | $ | 12,915 | ||||||
| Deferred income tax expense | |||||||||
| Origination and reversal of temporary differences | $ | (70) | $ | 723 | |||||
| Change in tax rate | 8 | (73) | |||||||
| Impact of disposal transactions | - | 449 | |||||||
| Adjustments with respect to prior period tax estimates | 132 | 140 | |||||||
| $ | 70 | $ | 1,239 | ||||||
| Total income tax expense | $ | 10,463 | $ | 14,154 | |||||
There are no capital loss carry-forwards available for tax purposes.
The Company's effective tax rates are comprised of the following items:
| 2013 | 2012 | ||||||||
| Net earnings for the financial year | $ | 27,244 | $ | 46,048 | |||||
| Total income tax expense | 10,463 | 14,154 | |||||||
| Earnings before income tax expense | $ | 37,707 | $ | 60,202 | |||||
| Income tax using the combined Federal and Provincial | |||||||||
| statutory tax rates | $ | 10,011 | 26.6% | $ | 16,465 | 27.4% | |||
| Non-deductible expenses | 170 | 0.5% | 145 | 0.2% | |||||
| Net capital gains | - | 0.0% | (2,765) | (4.6%) | |||||
| Adjustments with respect to prior period tax estimates | 491 | 1.3% | (46) | (0.1%) | |||||
| Other | (209) | (0.6%) | 355 | 0.6% | |||||
| Effective income tax rate | $ | 10,463 | 27.7% | $ | 14,154 | 23.5% | |||
Deferred tax assets (liabilities) are broken down by nature as follows:
| June 30, | Recognized in | June 30, | |||||||||
| 2012 | Earnings | Equity | 2013 | ||||||||
| Provision for pensions | $ | 3,014 | $ | (44) | $ | - | $ | 2,970 | |||
| Property, plant and equipment | (1,064) | (279) | - | (1,343) | |||||||
| Inventory | (539) | 88 | - | (451) | |||||||
| Intangibles | (2,607) | (10) | - | (2,617) | |||||||
| Other | 213 | 175 | - | 388 | |||||||
| $ | (983) | $ | (70) | $ | - | $ | (1,053) | ||||
| June 30, | Recognized in | June 30, | |||||||||
| 2011 | Earnings | Equity | 2012 | ||||||||
| Provision for pensions | $ | 3,476 | $ | (462) | $ | - | $ | 3,014 | |||
| Property, plant and equipment | (2,051) | 987 | - | (1,064) | |||||||
| Inventory | (581) | 42 | - | (539) | |||||||
| Intangibles | (750) | (1,857) | - | (2,607) | |||||||
| Other | 162 | 51 | - | 213 | |||||||
| $ | 256 | $ | (1,239) | $ | - | $ | (983) | ||||
18. SHARE CAPITAL
| June 30, | June 30, | |||||||||
| 2013 | 2012 | |||||||||
| Number of shares authorized: | ||||||||||
| Voting Class A Common Shares - no par value | Unlimited | Unlimited | ||||||||
| Non-voting Class B Common Shares - no par value | Unlimited | Unlimited | ||||||||
| Number of shares issued and fully paid: | ||||||||||
| Voting Class A Common Shares | 24,274,320 | 24,274,320 | ||||||||
| Non-voting Class B Common Shares | 4,194,536 | 4,194,536 | ||||||||
| 28,468,856 | 28,468,856 | |||||||||
| Stated value | $ | 14,304 | $ | 14,304 | ||||||
19. REVENUE
The Company's revenue consists of the following streams:
| 2013 | 2012 | ||||||||
| Case good sales | $ | 109,656 | $ | 110,857 | |||||
| Commissions (net of amortization) | 16,439 | 16,314 | |||||||
| Other services | 6,648 | 19,575 | |||||||
| $ | 132,743 | $ | 146,746 | ||||||
Commissions for the year are shown net of amortization of long-term representation rights and non-refundable upfront fees of $4,541 (2012 - $4,531). Other services include revenues incidental to the manufacture of case goods, such as contract bottling revenues, logistics fees and miscellaneous bulk spirit sales.
20. DISPOSAL TRANSACTION
Sale of Montreal manufacturing facility and non-core brands
On October 31, 2011, the Company completed a transaction to sell the shares of the wholly-owned subsidiary that owned the manufacturing and bottling facility located in Montreal, Quebec. The transaction resulted in the sale of 17 brands, as well as the Montreal-based manufacturing facility where a significant portion of the brands were produced, for a total purchase price of $39,660; including the cost of inventory and other working capital items associated with the brands and manufacturing facility sold.
The transaction resulted in a gain on sale recorded as follows:
| For the year ended | ||||||||
| June 30, 2012 | ||||||||
| Proceeds, including inventory and other working capital items | $ | 39,660 | ||||||
| Book value of assets sold, including inventory and other working capital items | (17,820) | |||||||
| Curtailment gain with respect to employee benefit plans | 2,168 | |||||||
| Transaction costs | (2,476) | |||||||
| Gain on sale before income taxes | 21,532 | |||||||
| Income taxes | (3,855) | |||||||
| Net gain on sale | $ | 17,677 | ||||||
The sale agreement contains customary representations, warranties and covenants. In addition, as part of the agreement, Corby agreed to indemnify, the purchaser, Sazerac Company, Inc. ("Sazerac") in respect of a misrepresentation, breach of covenant, pre-closing liabilities and certain environmental matters. Based on current facts and circumstances, no material liability is anticipated in respect of this indemnification, and no provision has been made in the financial results for this contingency.
21. OTHER INCOME AND EXPENSE
The Company's other income (expense) consist of the following amounts:
| 2013 | 2012 | ||||||||
| Foreign exchange gain | $ | 53 | $ | 61 | |||||
| Gain on disposal of property and equipment | 224 | 175 | |||||||
| Amortization of actuarial gains (losses) under defined benefit plans | 41 | (34) | |||||||
| $ | 318 | $ | 202 | ||||||
22. NET FINANCIAL INCOME
The Company's financial income (expense) consists of the following amounts:
| 2013 | 2012 | ||||||||
| Interest income | $ | 1,707 | $ | 1,963 | |||||
| Interest expense | (76) | (58) | |||||||
| Net financial impact of pensions | (371) | (554) | |||||||
| $ | 1,260 | $ | 1,351 | ||||||
23. EARNINGS PER SHARE
The following table sets forth the numerator and denominator utilized in the computation of basic and diluted earnings per share:
| 2013 | 2012 | |||||||||
| Numerator: | ||||||||||
| Net earnings | $ | 27,244 | $ | 46,048 | ||||||
| Denominator: | ||||||||||
| Weighted average shares outstanding | 28,468,856 | 28,468,856 | ||||||||
24. EXPENSES BY NATURE
Earnings from operations include depreciation and amortization, as well as personnel expenses as follows:
| 2013 | 2012 | ||||||||
| Depreciation of property and equipment | $ | 993 | $ | 1,157 | |||||
| Amortization of intangible assets | 4,541 | 4,531 | |||||||
| Salary and payroll costs | 20,408 | 21,689 | |||||||
| Expenses related to pensions and benefits | 1,822 | 1,852 | |||||||
| $ | 27,764 | $ | 29,229 | ||||||
25. RESTRICTED SHARE UNITS PLAN
| 2013 | 2012 | ||||||||||
| Weighted | Weighted | ||||||||||
| Restricted | Average | Restricted | Average | ||||||||
| Share | Grant Date | Share | Grant Date | ||||||||
| Units | Fair Value | Units | Fair Value | ||||||||
| Non-vested, beginning of year | 55,758 | $ | 15.42 | 53,768 | $ | 17.17 | |||||
| Granted | 24,088 | 16.95 | 23,012 | 15.89 | |||||||
| Reinvested dividend equivalent units | 5,292 | 18.55 | 7,412 | 16.42 | |||||||
| Vested | - | - | (28,434) | 19.38 | |||||||
| Non-vested, end of year | 85,138 | $ | 16.05 | 55,758 | $ | 15.42 | |||||
Compensation expense related to this plan for the year ended June 30, 2013, was $691 (2012 - $332).
26. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES
| 2013 | 2012 | |||||||||||
| Accounts receivable | $ | 4,969 | $ | 2,394 | ||||||||
| Inventories | (1,323) | 5,677 | ||||||||||
| Prepaid expenses | 22 | 1,176 | ||||||||||
| Income tax and other taxes recoverable / payable | (170) | (627) | ||||||||||
| Accounts payable and accrued liabilities | 1,337 | 4,993 | ||||||||||
| $ | 4,835 | $ | 13,613 | |||||||||
27. DIVIDENDS
On August 28, 2013 subsequent to the year ended June 30, 2013, the Board of Directors declared its regular quarterly dividend of $0.17 per common share, to be paid on September 30, 2013, to shareholders of record as at the close of business on September 13, 2013. This dividend is in accordance with the Company's dividend policy.
28. RELATED PARTY TRANSACTIONS
Transactions with parent, ultimate parent, and affiliates
The majority of Corby's issued and outstanding voting Class A shares are owned by HWSL. HWSL is a wholly-owned subsidiary of PR. Therefore, HWSL is Corby's parent and PR is Corby's ultimate parent. Affiliated companies are subsidiaries which are controlled by Corby's parent and/or ultimate parent.
The companies operate under the terms of agreements that became effective on September 29, 2006. These agreements provide the Company with the exclusive right to represent PR's brands in the Canadian market for 15 years, as well as providing for the continuing production of certain Corby brands by PR at its production facility in Windsor, Ontario, for 10 years. Corby also manages PR's business interests in Canada, including the Windsor production facility. Certain officers of Corby have been appointed as directors and officers of PR's Canadian entities, as approved by Corby's Board of Directors.
In addition to the aforementioned agreements, Corby signed an agreement on September 26, 2008, with its ultimate parent to be the exclusive Canadian representative for the ABSOLUT vodka and Plymouth gin brands, for a five-year term expiring October 1, 2013. These brands were acquired by PR subsequent to the original representation rights agreement dated September 29, 2006.
On November 9, 2011, the Company announced that it has entered into an agreement with PR for a new term for Corby's exclusive right to represent ABSOLUT vodka and Plymouth gin brands in Canada from September 30, 2013 to September 29, 2021, which is consistent with the term of Canadian representation for the other PR brands in Corby's portfolio. Under the agreement, Corby will pay the present value of $10 million for the additional eight years of the new term to PR at its commencement.
Effective as of July 1, 2012, the Company entered into a five year agreement with Pernod Ricard USA, LLC ("PR USA"), an affiliated company, which provides PR USA the exclusive rights to represent Wiser's Canadian whisky and Polar Ice vodka in the US. Previously, Wiser's Canadian whisky and Polar Ice vodka were represented by an unrelated third party in this market. The agreement is effective for a five year period ending June 30, 2017. Since the agreement with PR USA is a related party transaction between Corby and PR USA, the agreement was approved by the Independent Committee of the Board of Directors of Corby following an extensive review, in accordance with Corby's related party transaction policy.
On June 25, 2013, the Company entered into an assignment agreement with another PR affiliate to settle amounts outstanding from PR Argentina. Collection of accounts receivable from PR Argentina was complicated due to Argentinean currency regulations. There are no balances outstanding with PR Argentina at June 30, 2013.
Transactions between Corby and its parent, ultimate parent and affiliates during the period are as follows:
| 2013 | 2012 | ||||||||
| Sales to related parties | |||||||||
| Commissions - parent, ultimate parent and affiliated companies | $ | 18,006 | $ | 17,680 | |||||
| Blending and bottling services - parent | - | 217 | |||||||
| Products for resale at an export level - affiliated companies | 3,171 | 450 | |||||||
| Bulk spirits - parent | 23 | 174 | |||||||
| $ | 21,200 | $ | 18,521 | ||||||
| Cost of goods sold, purchased from related parties | |||||||||
| Distilling, blending, and production services - parent | $ | 20,310 | $ | 18,562 | |||||
| Bulk spirits - parent | - | 700 | |||||||
| $ | 20,310 | $ | 19,262 | ||||||
| Administrative services purchased from related parties | |||||||||
| Marketing, selling and administraton services - parent | $ | 2,044 | $ | 2,044 | |||||
Balances outstanding with related parties are due within 60 days, are to be settled in cash and are unsecured.
Corby has a number of defined benefit pension plans; for the year ending June 30, 2013, contributions to these plans totaled $1,629, (2012 - $1,637), respectively.
During the year ending June 30, 2013, Corby sold casks to its parent company for net proceeds of $480 (2012 - $277).
Deposits in cash management pools
Corby participates in a cash pooling arrangement under the Mirror Netting Service Agreement together with PR's other Canadian affiliates, the terms of which are administered by The Bank of Nova Scotia. The Mirror Netting Services Agreement acts to aggregate each participant's net cash balance for the purposes of having a centralized cash management function for all of PR's Canadian affiliates, including Corby.
As a result of Corby's participation in this agreement, Corby's credit risk associated with its deposits in cash management pools is contingent upon PR's credit rating. PR's credit rating as at August 28, 2012, as published by Standard & Poor's and Moody's, was BBB- and Baa3, respectively. PR compensates Corby for the benefit it receives from having the Company participate in the Mirror Netting Services Agreement by paying interest to Corby based upon the 30-day CDOR rate plus 0.40%. During the year ending June 30, 2013, Corby earned interest income of $1,630 from PR (2012 - $1,759). Corby has the right to terminate its participation in the Mirror Netting Services Agreement at any time, subject to five days' written notice.
Key management personnel
Key management personnel are those individuals having authority and responsibility for planning, directing and controlling the activities of the Company, including members of the Company's Board of Directors. The Company considers key management to be the members of the Board of Directors and the Senior Management Team (which includes the CEO, CFO, and Vice Presidents).
Key management personnel also participate in the company's RSU plan.
Key management personnel compensation is comprised of:
| 2013 | 2012 | |||||||||
| Wages, salaries and short term employee benefits | $ | 3,643 | $ | 4,054 | ||||||
| Other long term benefits | 467 | 344 | ||||||||
| Share-based payment transactions | 382 | 363 | ||||||||
| $ | 4,492 | $ | 4,761 | |||||||
Certain members of the board and key management personnel are provided benefits and or salary and wages through the parent company or the ultimate parent company in addition to the amounts reported above.
29. SEGMENT INFORMATION
Corby has two reportable segments: Case Goods and Commissions. Corby's Case Goods segment derives its revenue from the production and distribution of its owned beverage alcohol brands. Corby's portfolio of owned-brands includes some of the most renowned and respected brands in Canada, such as Wiser's Canadian whisky, Lamb's rum, Polar Ice vodka, and McGuinness liqueurs.
Corby's Commissions segment earns commission income from the representation of non-owned beverage alcohol brands in Canada. Corby represents leading international brands such as ABSOLUT vodka, Chivas Regal, The Glenlivet and Ballantine's scotches, Jameson Irish whiskey, Beefeater gin, Malibu rum, Kahlúa liqueur, Mumm champagne, and Jacob's Creek and Wyndham Estate wines.
The Commissions segment's financial results are fully reported as "Commissions" in Note 19 of these consolidated statements. Therefore, a chart detailing operational results by segment has not been provided as no additional meaningful information would result.
Geographic information regarding the Company is as follows:
| 2013 | |||||||||||||
| United States | United | Rest of | |||||||||||
| Canada | of America | Kingdom | World | Total | |||||||||
| Revenue | $ | 124,880 | $ | 3,328 | $ | 3,793 | $ | 742 | $ | 132,743 | |||
| Capital assets and goodwill | 9,960 | - | 1,410 | - | 11,370 | ||||||||
| 2012 | |||||||||||||
| United States | United | Rest of | |||||||||||
| Canada | of America | Kingdom | World | Total | |||||||||
| Revenue | $ | 137,438 | $ | 4,555 | $ | 4,291 | $ | 462 | $ | 146,746 | |||
| Capital assets and goodwill | 9,392 | - | 1,410 | - | 10,802 | ||||||||
In 2013, revenue to three major customers accounted for 34%, 18% and 15%, respectively (2012 - 32%, 17% and 14%).
30. COMMITMENTS
Future minimum payments under operating leases for premises and equipment for the next five years and thereafter are as follows:
| 2014 | $ | 1,793 | |||||||||||||
| 2015 | 1,496 | ||||||||||||||
| 2016 | 1,154 | ||||||||||||||
| 2017 | 805 | ||||||||||||||
| 2018 | 630 | ||||||||||||||
| Thereafter | 155 | ||||||||||||||
| $ | 6,033 | ||||||||||||||
Total lease payments recognized as an expense during the year total $2,274 (2012 - $2,312).
In addition, the Company has agreed to pay the sum of $10.3 million to PR for the right to represent ABSOLUT vodka and Plymouth Gin in Canada for an 8 year term. The payment is due September 30, 2013. For more information regarding this agreement please see Note 28 - Related Party Transactions.
31. GUARANTEES
The Company may enter into agreements that may contain features that meet the definition of a guarantee. A guarantee is defined to be a contract (including an indemnity) that contingently requires the Company to make payments to the guaranteed party in certain situations.
In the ordinary course of business, the Company provides indemnification commitments to counter-parties in transactions such as leasing and service arrangements. These indemnification agreements require the Company to compensate the counter-parties for certain amounts and costs incurred as a result of litigation claims. The terms of the indemnification agreements will vary based on the contract and do not provide any limit on the maximum potential liability.
32. CONTINGENCIES
The Company is contingently liable with respect to pending litigation and claims arising in the normal course of business. Although the ultimate outcome of these matters is not presently determinable, at this point in time, management believes that the resolution of all such pending matters will not have a material adverse effect on the Company's financial position or results of operations.
SOURCE: Corby Distilleries Limited
CORBY DISTILLERIES LIMITED
John Leburn, Vice-President and Chief Financial Officer
Tel.: 416-479-2400
[email protected]
www.Corby.ca
Share this article