Corby Distilleries announces quarterly dividend and reports second quarter
financial results
Corby's second quarter financial results were reflective of a positive commercial performance, with earnings from operations(1) improving 24% when compared with the same three month period last year, and improving 3% on a year-to-date comparison basis. The combined effect of better product mix, strategic price increases, the positive impact of the appreciating Canadian dollar on input costs, and tight management of discretionary expenses served to offset the negative impact of a decline in year-to-date shipment volumes.
In accordance with Canadian accounting principles, the Company recorded a non-cash impairment charge of
As a result, the Company revised its long-term outlook to reflect changes in expectations for the brand and as such, net earnings in both the three and six month periods ended
As a result, the Company is reporting net earnings of
"Notwithstanding the non-cash impairment charge related to the Seagram Coolers business, I am pleased with Corby's second quarter results from an operational and commercial perspective, particularly in light of adverse market conditions" noted Patrick O'Driscoll, President and Chief Executive Officer of Corby. "After a difficult first quarter which was being compared against a relatively high base in the comparative period, we have seen improved volume trends over the past few months. As a result, we remain confident that Corby's strong position in the marketplace and its solid balance sheet position are allowing it to weather the impact of the downturn as we position ourselves to come out even stronger as the economy recovers."
For further details, please refer to Corby's management's discussion and analysis and consolidated financial statements and accompanying notes for the three and six months ended
About Corby
Corby's portfolio of owned-brands includes some of the most renowned brands in
The existing Voting Class A Common Shares and Non-voting Class B Common Shares of the Company are traded on the
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.
(1) Corby defines "earnings from operations" as earnings before
impairment, interest income, foreign exchange, gains or losses on
disposal of capital assets, and income taxes. This non-GAAP financial
measure has been included in this press release as it is a measure
management believes is useful in measuring the Company's operating
performance. However, "earnings from operations" is not a measure
recognized by GAAP and it does not have a standardized meaning prescribed
by GAAP. Therefore "earnings from operations" may not be comparable to
similar measures presented by other issuers. Investors are cautioned that
"earnings from operations" should not be construed as alternatives to net
earnings as determined in accordance with GAAP as indicators of
performance.
CORBY DISTILLERIES LIMITED
Interim Management's Discussion and Analysis
December 31, 2009
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The following Interim Management's Discussion and Analysis ("MD&A") dated
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; 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
The Company's fiscal year end is
Business Overview
-----------------
Corby is a leading Canadian manufacturer and marketer of spirits and importer of wines. Corby's national leadership is sustained by a diverse brand portfolio which 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
The Company derives its revenues from the sale of its owned-brands as well as earning commission income from the representation of selected non-owned brands in the Canadian market place. Revenue from Corby's owned-brands are denoted as "Sales" on the consolidated statement of earnings and while it predominantly consists of sales made to each of the provincial liquor boards in
Corby's portfolio of owned-brands include some of the most renowned brands in
The Company sources approximately 73% of its spirits production requirements from HWSL at its production facilities in Windsor, Ontario, with the balance of Corby's spirits production being sourced from the Company's owned-plant in
In
In most provinces, Corby's route to market in
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 purchasing patterns in
Corby's route to market for its international business primarily requires direct shipment of its products to international distributors, located primarily in the USA and UK markets. 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 therefore, is not discussed in this MD&A.
Corby's operations are typically subject to seasonal fluctuations in that the retail holiday season generally results in an increase in consumer purchases over the course of October, November and December. Further, the summer months traditionally result in higher consumer purchases of spirits as compared to the winter and spring months. As a result, the Company's first and second quarter of each fiscal year tend to typically reflect the impact of seasonal fluctuations in that more shipments are typically made during those quarters.
Strategies and Outlook
----------------------
Corby's business strategies are designed to maximize value growth and, thus, deliver exceptional 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 to achieve its current and long-term objectives moving forward.
The Company believes that having a focused brand prioritization strategy will permit it to capture value in those segments and markets where consumers continue to demonstrate their willingness to trade up to premium brands. Therefore, the Company's strategy is to focus its investments and leverage the long-term growth potential of its key brands, while emphasizing less on smaller or non-strategic 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. Particular focus has been given to evaluate the strategic importance of the Company's representation of third-party brands, and as a result, Corby has permitted certain of its representation contracts to expire, thus allowing Corby's marketing and sales teams to focus on maximizing value creation within the brand prioritization strategy. The Company believes that effective execution of its strategy will result in value creation for shareholders.
The Company is a strong advocate of social responsibility, especially with respect to its sales and promotional activities. Corby will continue to promote responsible consumption of its products in its activities. The Company stresses its core values throughout its organization, including that of value creation, social responsibility, tradition, substance over style and character above all.
Current Market Environment
--------------------------
While there are signs that the global economy is stabilizing, there is still uncertainty as to the sustainability and pace of any recovery. The bank of
However, it should be noted that over the past several years, the Company has strengthened its operations and financial position, which should allow it to better face an economic downturn. Of particular consideration are the following factors:
- Corby has no long-term debt and, therefore, no financial or other
covenants;
- The Company has significant sources of liquidity via its
$72.6 million currently on deposit in a cash management pool with
PR's other Canadian affiliates;
- Corby's largest customers are government-controlled liquor boards in
each province, thus, greatly reducing risk associated with collection
of accounts receivable;
- The Company has an exceptionally diverse and strong brand portfolio,
which is well positioned to meet consumer tastes across spirit
categories at a wide range of price points; and
- Corby is a leader in the Canadian spirits market and has a long
history of profitability and uninterrupted dividends.
Moreover, the spirits business in
- Long term decline in the level of spirits consumption by consumers;
- Deteriorating financial health of key suppliers;
- Valuation of goodwill and intangible assets; and
- Higher pension funding requirements.
To date, Corby's financial results have been unfavourably impacted by what is believed to be only a short-term decline in consumer demand, and has also recorded an impairment charge against its goodwill and intangible asset values related specifically to the Seagram Coolers brand. Further information related to the impairment charge can be found in the "Significant Event" section of this MD&A.
The other factors noted in the list above have not had a measurable impact on the Company. Management will continue to monitor closely the ongoing economic environment and take proactive measures, as necessary.
Brand Performance Review
------------------------
Corby's portfolio of owned-brands typically accounts for more than 80% of the Company's total operating 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 earnings and, therefore, understanding each key brand is essential to understand the Company's overall performance.
Shipment Volume and Sales Value Performance
The following chart summarizes the performance of Corby's key brands in terms of both shipment volume (as measured by shipments to customers in equivalent nine litre cases) and sales value (as measured by the change in sales revenue). The chart below includes results for sales in both
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BRAND PERFORMANCE CHART - INCLUDES BOTH CANADIAN AND INTERNATIONAL
SHIPMENTS
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Three Months Ended Six Months Ended
------------------------------- -------------------------------
Volumes Ship- Ship- Ship- Ship-
(in 000's Dec. Dec. ment % ment % Dec. Dec. ment % ment %
of 9L 31, 31, Volume Value 31, 31, Volume Value
cases) 2009 2008 Change Change 2009 2008 Change Change
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Wiser's
Canadian
whisky 238 220 8% 10% 419 426 (2%) 0%
Lamb's rum 198 194 2% 3% 353 371 (5%) (3%)
Polar Ice
vodka 99 116 (15%) (12%) 189 226 (16%) (14%)
Mixable
liqueurs 74 76 (3%) (5%) 119 139 (14%) (14%)
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Total Key
Brands 609 606 0% 2% 1,080 1,162 (7%) (5%)
All other
Corby-
owned
brands 184 201 (8%) (9%) 406 457 (11%) (11%)
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Total 793 807 (2%) 0% 1,486 1,619 (8%) (6%)
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As previously discussed in the "Strategies and Outlook" section of this MD&A, the Company has implemented a premiumization strategy which requires focused investments on key brands and in key markets, with the long-term objective of maximizing value growth. This strategy is designed to leverage the long-term growth potential of Corby's key brands, while emphasizing less on smaller and less profitable brands.
The above chart demonstrates that Corby experienced a challenging first half to its fiscal year, with year-to-date shipment volumes decreasing 8%, when compared to the same six month period last year. However, Corby's second quarter results demonstrated marked improvement, as the Company's key brands reversed a significant portion of the volume declines seen in the first quarter.
The decline in first quarter sales was partially due to more difficult economic and marketplace conditions, which lead to lower consumer purchases of Corby products. However, other factors also included later ordering patterns by some of the company's customers in advance of the holiday season, the impact of the
A more comparable base is evident when analyzing Corby's second quarter sales, as some of the factors mentioned above were normalized.
On an overall year-to-date basis, certain markets within
International market conditions have remained difficult, with shipment value decreasing 15% on a year-to-date comparative basis. The decreased performance in international markets is mainly due to competitive challenges for Polar Ice vodka in the US market, coupled with higher comparatives in the previous year, as Corby's first quarter of fiscal 2009 included volumes associated with the launch of Polar Ice vodka flavours in the US market. Volumes for Wiser's Deluxe and Lamb's rum, however, have demonstrated resiliency despite challenging market conditions in the US and UK, respectively.
Retail Volume and Retail Value Performance
As Corby does not ship its products directly to consumers, it is also of critical importance to understand the performance of Corby's brands at the retail level in
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RETAIL SALES FOR THE CANADIAN MARKET ONLY(1)
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Three Months Ended Six Months Ended
------------------------------- -------------------------------
Volumes % % % %
(in 000's Dec. Dec. Retail Retail Dec. Dec. Retail Retail
of 9L 31, 31, Volume Value 31, 31, Volume Value
cases) 2009 2008 Change Change 2009 2008 Change Change
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Brand
Wiser's
Canadian
whisky 235 228 3% 3% 393 390 1% 1%
Lamb's rum 156 158 (1%) (1%) 273 281 (3%) (2%)
Polar Ice
vodka 93 102 (9%) (8%) 170 183 (7%) (6%)
Mixable
liqueurs 77 83 (7%) (7%) 126 136 (7%) (7%)
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Total Key
Brands 561 571 (2%) (1%) 962 990 (3%) (2%)
All other
Corby-
owned
brands 202 217 (7%) (6%) 440 477 (8%) (6%)
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Total 763 788 (3%) (2%) 1,402 1,467 (4%) (3%)
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(1) Refers to sales at the retail store level in Canada, as provided by
the Association of Canadian Distillers.
As denoted in the chart above, retail volumes have declined 3% this quarter, when compared against the same quarter last year with the decline mainly being due to negative market conditions in British Columbia and Alberta.
Trends over the past year have shown a shift in consumption patterns as consumers are purchasing fewer products from certain discretionary spirit categories, such as liqueurs, when compared to the spirit staples such as vodka, whisky, and rum. Furthermore, the overall decline in consumer spending has resulted in more at-home consumption, as consumers are trending away from consumption at licensed establishments, such as bars and restaurants.
Corby's own portfolio of brands mostly reflects this shift in consumer consumption pattern, as evidenced by the performance of its mixable liqueurs brands, while the Company's whisky, and rum brands continue to demonstrate resilience from both a retail volume and retail value perspective. The vodka category as a whole continues to fare well, albeit growth in recent months has slowed markedly. However, the Company's Polar Ice vodka brand has experienced challenges in recent months, and is discussed further below in the "Summary of Corby's Key Brands" section of this MD&A.
Summary of Corby's Key Brands
Wiser's Canadian Whisky
Corby's flagship brand, Wiser's Canadian whisky, has continued to perform exceptionally well despite a challenging economy, and continues to gain market share at the expense of its direct competitors in
The Company continued to invest strongly behind the brand during the holiday season, which is a key selling period for whisky and specifically, maintained its investment behind the brand's highly successful media and television campaign entitled "Welcome to the Wiserhood". This campaign has proven to be highly impactful from a consumer perspective and has also received critical acclaim, having been recently awarded two gold medals at the prestigious Canadian Marketing Awards ("Best Promotion for Consumer Products" and "Best Integrated Campaign for Consumer Products"). The company intends on continuing to build upon the success of this campaign to expand Wiser's market leading position.
Lamb's Rum
Lamb's rum, one of the top selling rum families in
In response the Company has launched a Lamb's spiced rum variant in select Canadian provinces and the UK market (entitled "Lamb's Black Sheep" and "Lamb's Spiced", respectively), as the Company looks to capitalize on the growing consumer demand in the spiced rum segment. While the product is still in the very early phase of its life cycle, early results and indicators have been very positive.
The Company has also taken other actions to improve brand performance, such as introducing updated packaging and increasing the level of investments in core markets.
Polar Ice Vodka
Polar Ice vodka, which is among the top three largest vodka brands in
Performance in the US market is also suffering due to a saturated competitive environment and the negative impact of the depreciation of the US dollar on the brand's gross margins. It should be noted that the comparative period also included additional volumes associated with the launch of Polar Ice flavours in both the US and Canadian markets.
Mixable Liqueurs
Corby's portfolio of mixable liqueur brands consist of McGuinness liqueurs (which is Canada's largest mixable liqueur brand family), Meaghers liqueurs, and De Kuyper liqueurs. The Company's mixable liqueur portfolio experienced a 7% decrease in retail sales volumes, while shipment volumes decreased 14% on a year-to-date comparison basis. The decline in shipment volumes is partially attributable to the impact of the aforementioned threat of a labour disruption at the LCBO in
All Other Corby-owned Brands
This category includes various Corby brands, some of which are smaller or less strategic in nature than Corby's key brands. The Company's strategy is to focus its investments and leverage the long-term growth potential of its key brands, while emphasizing less on smaller and non-strategic brands. The decreased performance of this category can be attributed to the overall brand prioritization strategy, in addition to the challenging economic conditions.
Significant Event
-----------------
Corby Reports a Non-Cash Impairment Charge
In accordance with Canadian accounting principles, the Company recorded a non-cash impairment charge of
As a result, the Company revised its long-term outlook to reflect changes in expectations for the brand and accordingly has estimated that the fair value of the associated goodwill and intangible assets has fallen below its recorded carrying amounts. As such, net earnings in both the three and six month periods ended
Non-GAAP Financial Measure
--------------------------
Corby defines "Earnings from Operations" as earnings before impairment, interest income, foreign exchange, gains or losses on disposal of capital assets, and income taxes. This non-GAAP financial measure has been included in this MD&A as it is a measure management believes is useful in measuring the company's operating performance.
However, Earnings from Operations is not a measure recognized by GAAP and it does not have a standardized meaning prescribed by GAAP. Therefore Earnings from Operations may not be comparable to similar measures presented by other issuers. Investors are cautioned that Earnings from Operations should not be construed as alternatives to net earnings as determined in accordance with GAAP as indicators of performance.
A reconciliation of Earnings from Operations to net earnings can be found below, in the "Financial and Operating Results" section of this MD&A.
Financial and Operating Results
-------------------------------
The following table presents a summary of certain selected consolidated financial information of the Company for the three and six month periods ended
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(in
millions
of Canadian
dollars, Three Months Ended Six Months Ended
except ------------------------------- -------------------------------
per Dec. Dec. Dec. Dec.
share 31, 31, $ % 31, 31, $ %
amounts) 2009 2008 Change Change 2009 2008 Change Change
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Sales $ 42.4 $ 42.8 $ (0.4) (1%) $ 79.6 $ 84.6 $ (5.0) (6%)
Commiss-
ions(1) 4.5 5.0 (0.5) (10%) 8.5 9.3 (0.8) (9%)
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Operating
revenue 46.9 47.8 (0.9) (2%) 88.1 93.9 (5.8) (6%)
Cost of
sales 20.4 23.1 (2.7) (12%) 38.5 43.3 (4.8) (11%)
Marketing,
sales and
adminis-
tration 11.4 12.5 (1.1) (9%) 21.8 23.9 (2.1) (9%)
Amorti-
zation 0.4 0.3 0.1 33% 0.9 0.7 0.2 29%
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Earnings
from
operations 14.7 11.9 2.8 24% 26.9 26.0 0.9 3%
Impairment
charge (11.5) - (11.5) n/a (11.5) - (11.5) n/a
Interest
income 0.1 0.6 (0.5) (83%) 0.2 1.1 (0.9) (82%)
Foreign
exchange
loss (0.6) (0.7) 0.1 (14%) (0.4) (0.8) 0.4 (50%)
Gain on
disposal
of capital
assets - 0.3 (0.3) (100%) - 0.2 (0.2) (100%)
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Earnings
before
income
taxes 2.7 12.1 (9.4) (78%) 15.2 26.5 (11.3) (43%)
Income
taxes 1.6 4.0 (2.4) (60%) 5.6 8.6 (3.0) (35%)
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Net
earnings $ 1.1 $ 8.1 $ (7.0) (86%) $ 9.6 $ 17.9 $ (8.3) (46%)
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Per common
share
- Basic
net
earn-
ings $ 0.04 $ 0.28 $(0.24) (86%) $ 0.34 $ 0.63 $(0.29) (46%)
- Diluted
net
earn-
ings $ 0.04 $ 0.28 $(0.24) (86%) $ 0.34 $ 0.63 $(0.29) (46%)
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(1) Amounts are presented net of representation rights amortization of
$1.1 and $2.3 (2008 - $1.2 and $2.3).
Overall Financial Results
Corby's second quarter financial results were significantly impacted by the aforementioned non-cash impairment charge of
After removing the effect of the aforementioned non-cash impairment charge, Corby's second quarter financial results were positive, with earnings from operations improving 24% when compared with the same three month period last year, and improving 3% on a year-to-date comparison basis as the combined effect of better product mix, strategic price increases, the positive impact of the appreciating Canadian dollar on input costs, and tight management of discretionary expenses have served to offset the negative impact of a decline in shipment volumes.
Net earnings improved 30% this quarter (after removing the impact of the non-cash impairment charge) and increased 6% on a year-to-date comparison basis. This performance was the result of the aforementioned items affecting earnings from operations, but also included a one-time non-cash gain of
Operating revenue
Operating revenue, consisting of sales and commissions, declined 2% on a quarter over quarter basis, and decreased 6% on a year-to-date comparison basis. Sales revenue represents revenue earned from the sale of Corby owned-brands, while commissions are earned from the representation of PR brands in the Canadian market, and to a lesser extent, through the representation of a select number of Agency brands.
Sales for the three month period ended
Sales for the six month period ended
The decreased volume was primarily driven by difficult market conditions, particularly in the provinces of Alberta and British Columbia. These markets are being impacted by a combination of reduced consumer demand, de-stocking in the private retail channel, and aggressive competition. As a secondary factor, shipments to the Ontario market have also been negatively impacted by the effect of a threatened labour disruption in
The following table highlights the change in commissions:
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Three Months Ended Six Months Ended
(in ------------------------------- -------------------------------
millions Dec. Dec. Dec. Dec.
of Canadian 31, 31, $ % 31, 31, $ %
dollars) 2009 2008 Change Change 2009 2008 Change Change
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Commission
from PR
brands $ 4.6 $ 4.8 $ (0.2) (4%) $ 9.0 $ 8.9 $ 0.1 1%
Commission
from Agency
brands 1.0 1.4 (0.4) (29%) 1.8 2.7 (0.9) (33%)
Less
amortization
of rep.
rights (1.1) (1.2) 0.1 (8%) (2.3) (2.3) - 0%
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Commi-
ssions $ 4.5 $ 5.0 $ (0.5) (10%) $ 8.5 $ 9.3 $ (0.8) (9%)
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Commissions earned from the representation of PR brands in
Commission income from Agency brands has declined by
Cost of sales
Cost of sales for the quarter was
Cost of sales for the six month period ended
Marketing, sales and administration
Marketing, sales and administration expenses were
On a year-to-date basis, marketing, sales and administration expenses declined
Income taxes
Corby's effective tax rates differ substantially from the basic Federal and Provincial rates due to the following:
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Three Six
Months Ended Months Ended
--------------- ---------------
Dec. Dec. Dec. Dec.
31, 31, 31, 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
Combined basic Federal and Provincial
tax rates 31% 32% 31% 32%
Impact of non-cash impairment charge 54% 0% 10% 0%
Impact of substantively enacted rate
decreases in Ontario (27%) 0% (5%) 0%
Other 0% 1% 1% 1%
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Effective tax rates 58% 33% 37% 33%
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As denoted in the previous chart, Corby's effective tax rates during the three and six month periods ended
The impairment charge was recorded during the quarter and relates specifically to the Company's Seagram Coolers brand and its associated goodwill and intangible asset balances (readers are encouraged to refer to the "Significant Event" section of this MD&A for further information). The Ontario government's decision to substantively enact future rate decreases required the Company to revalue its future income tax assets and liabilities at the new lower rates. As a result, Corby recognized a one-time reduction of its future income tax expense of
Liquidity and Capital Resources
-------------------------------
Corby's sources of liquidity come from its deposits in cash management pools balance of
Cash flows
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Three Months Ended Six Months Ended
----------------------- -----------------------
(in millions Dec. Dec. Dec.
of Canadian 31, 31, $ 31, Dec. 31, $
dollars) 2009 2008 Change 2009 2008 Change
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Operating
activities
Net earnings,
adjusted for
non-cash
items $ 11.7 $ 8.8 $ 2.9 $ 22.2 $ 20.3 $ 1.9
Net change
in non-cash
working
capital (3.7) 4.8 (8.5) (3.7) (2.5) (1.2)
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8.0 13.6 (5.6) 18.5 17.8 0.7
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Investing
activities
Additions to
capital assets (0.6) (1.3) 0.7 (0.6) (2.3) 1.7
Proceeds from disposition
of capital assets - 0.5 (0.5) - 0.5 (0.5)
Draws from (deposits in)
cash management pools (3.4) (8.8) 5.4 (9.9) (8.0) (1.9)
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(4.0) (9.6) 5.6 (10.5) (9.8) (0.7)
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Financing activities
Dividends paid (4.0) (4.0) - (8.0) (8.0) -
-------------------------------------------------------------------------
Net change in cash $ - $ - $ - $ - $ - $ -
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Operating activities
Cash flows used in operating activities were
Year-to-date cash flows from operating activities decreased
Investing activities
Cash used for investing activities decreased
On a year-to-date basis, the Company used
Financing activities
Cash used for financing activities was
On a year-to-date basis, cash used for financing activities was
Outstanding Share Data
----------------------
There have been no changes in Corby's share data since
Related Party Transactions
--------------------------
Transactions in the Normal Course of Operations
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
The companies operate under the terms of agreements which became effective on
In addition to the aforementioned agreements, Corby signed an agreement on
All of the above-noted transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. For further details regarding the above agreements, readers are encouraged to refer to the most recently prepared annual MD&A and annual financial statements for the year ended
Deposits in Cash Management Pools
Corby participates in a cash pooling arrangement under a Mirror Netting Service Agreement ("Mirror Agreement") together with PR's other Canadian affiliates, the terms of which are administered by The Bank of Nova Scotia. The Mirror 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.
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.
Other Contractual Obligations
As part of the agreement with PR signed on
Accounting Standards - Implemented in Fiscal 2010
-------------------------------------------------
Financial Statement Concepts
Effective
Goodwill and Intangible Assets
Effective
Future Accounting Standards
---------------------------
International Financial Reporting Standards
In
In response, the Company created a transition plan and established a timeline for the execution and completion of the conversion project to guide Corby toward its reporting deadlines. The transition plan included a high-level assessment of the key areas where conversion to IFRS may have a significant impact or present a significant challenge. As a result of this assessment, six key areas were identified and include employee future benefits, impairment analysis, IFRS 1 choices, capital assets, income taxes, and financial statement presentation and disclosure. Work completed to date indicates that changes in accounting policies will be required and are likely to materially impact the Company's consolidated financial statements.
The Company has engaged an external advisor and established a working team, held multiple IFRS training sessions tailored specifically to Corby for finance employees, members of management and the Audit Committee. The IFRS team has performed detailed assessments on half of the six key areas identified, and continues to report its progress and results to the Audit Committee on a quarterly basis.
The transition plan remains on-track and the Company believes it is well positioned to transition to IFRS in accordance with the timelines mandated by the AcSB. The work completed to date suggests that there will be minimal to no impact on the Company's business activities, IT systems, disclosure controls and procedures, and internal controls over financial reporting. However, these preliminary conclusions may change as Corby continues to progress through its transition plan and considers any new IFRS developments leading up to the Company's changeover date.
The company will continue to execute the transition in accordance with its plan, and also continue to monitor standards development as issued by the International Accounting Standards Board and the AcSB as well as regulatory developments as issued by the Canadian Securities Administrators, which may affect the timing, nature or disclosure of its adoption of IFRS.
Selected Quarterly Information
------------------------------
Summary of Quarterly Financial Results
-------------------------------------------------------------------------
(in millions
of Canadian
dollars,
except per
share Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
amounts) 2010 2010 2009 2009 2009 2009 2008 2008
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Operating
revenue
- net $ 46.9 $ 41.1 $ 41.4 $ 34.0 $ 47.8 $ 46.1 $ 39.6 $ 33.0
Earnings
from
opera-
tions 14.7 12.2 10.1 7.2 11.9 14.2 8.4 8.1
Net
earnings 1.1 8.4 7.4 5.1 8.1 9.8 6.0 6.0
Basic EPS 0.04 0.30 0.26 0.18 0.28 0.35 0.21 0.21
Diluted
EPS 0.04 0.30 0.26 0.18 0.28 0.35 0.21 0.21
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The above chart demonstrates the seasonality of Corby's business, as sales are typically higher in the first and second quarter, while third quarter sales (i.e., January, February and March) typically 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 consumption levels during the summer season.
The above chart also highlights the aforementioned effect an impairment charge had upon the Company's Q2 2010 financial results. Specifically, the impairment charge had the effect of reducing net earnings
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 Canadian GAAP. 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.
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 control 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
In addition, certain Canadian whiskies are subject to an increased rate of excise duty effective
The Company continuously monitors the potential risk associated with any proposed changes in 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 current economic outlook and overall consumer confidence in the stability of the economy as a whole. The overall decline in consumer spending has resulted in more at home consumption, as consumers are trending away from consumption at licensed establishments, such as bars and restaurants. As a result, the industry is experiencing declines in product categories which tend to have a higher consumption rate at these establishments, such as liqueurs. Corby offers a diverse portfolio of products across all major spirit categories and 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
Supply chain interruptions could impact product quality and availability, including manufacturing or inventory disruption. 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, are required to handle potentially hazardous materials. As Corby outsources the majority of its production, including all of its storage and handling of maturing alcohol, the risk of environmental liabilities has been reduced to an acceptably low level. In addition, Corby's owned-production facility follows strict industry guidelines for proper use and/or disposal of hazardous materials to further reduce environmental risks. 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
Competition
The Canadian beverage alcohol industry is also extremely competitive. Competitors may take actions to establish and sustain competitive advantage. They 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. Corby appreciates and invests in its employees to partner with them in achieving corporate objectives and creating value.
Credit Risk
Credit risk arises from deposits in cash management pools held with PR via Corby's participation in the Mirror Agreement (as previously described in the "Related Party Transactions" section of this MD&A), as well as credit exposure to customers, including outstanding accounts 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 liquor boards, management believes the Company's credit risk relating to accounts receivable is at an acceptably low level.
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. An active risk management program does not exist, as management believes that changes in interest rates would not have a material impact to 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 via pricing over the long-term.
Foreign Currency Exchange Risk
Foreign currency risk exists, as the Company sources a proportion of its production requirements in foreign currencies, specifically the
Third Party Service Providers
The Company is reliant upon-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 influence 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 relationship with its third-party service providers.
Brand Reputations
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.
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 which 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.
During the second quarter ended
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
December 31, 2009
------------------------
Associated Intang-
Associated Brand Market Goodwill ibles Total
--------------------------------- -------------- ------------------------
Various PR brands Canada $ - $ 54.1 $ 54.1
Seagram Coolers Canada 1.0 7.7 8.7
Lamb's rum United Kingdom 1.4 11.8 13.2
Meaghers and De Kuyper liqueurs Canada 4.5 - 4.5
-------------------------------------------------------------------------
$ 6.9 $ 73.6 $ 80.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 asset 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. For further details related to Corby's defined benefit pension plans, readers are encouraged to refer to the most recently prepared annual MD&A and annual financial statements for the year ended
CORBY DISTILLERIES LIMITED
INTERIM CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
December 31, December 31, June 30,
2009 2008 2009
-----------------------------------------
ASSETS
Current
Deposits in cash management
pools $ 72,579 $ 66,548 $ 62,726
Accounts receivable 30,771 27,125 28,640
Income and other taxes
recoverable 646 - 1,478
Inventories 55,376 53,123 53,987
Prepaid expenses 470 539 1,582
Future income taxes 234 514 551
-------------------------------------------------------------------------
160,076 147,849 148,964
Capital assets 14,328 13,409 14,553
Employee future benefits 11,497 9,315 11,382
Goodwill (Note 6) 6,857 9,856 9,856
Intangible assets (Note 7) 73,599 87,761 85,420
-------------------------------------------------------------------------
$ 266,357 $ 268,190 $ 270,175
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable and accrued
liabilities $ 17,299 $ 22,710 $ 20,416
Income and other taxes payable - 1,146 -
-------------------------------------------------------------------------
17,299 23,856 20,416
Employee future benefits 6,469 5,631 5,923
Future income taxes 4,768 7,004 7,605
-------------------------------------------------------------------------
28,536 36,491 33,944
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital 14,304 14,304 14,304
Retained earnings 223,517 217,395 221,927
-------------------------------------------------------------------------
237,821 231,699 236,231
-------------------------------------------------------------------------
$ 266,357 $ 268,190 $ 270,175
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
CORBY DISTILLERIES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands of Canadian dollars, except per share amounts)
-------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
2009 2008 2009 2008
--------------------------- ---------------------------
OPERATING REVENUE
Sales $ 42,447 $ 42,821 $ 79,555 $ 84,627
Commissions
(Note 8) 4,485 4,969 8,495 9,226
-------------------------------------------------------------------------
46,932 47,790 88,050 93,853
-------------------------------------------------------------------------
OPERATING COSTS
Cost of sales 20,378 23,066 38,522 43,278
Marketing, sales
and administration 11,422 12,503 21,787 23,870
Amortization 428 332 874 659
-------------------------------------------------------------------------
32,228 35,901 61,183 67,807
-------------------------------------------------------------------------
EARNINGS FROM
OPERATIONS 14,704 11,889 26,867 26,046
-------------------------------------------------------------------------
OTHER INCOME
AND EXPENSES
Impairment charge
(Note 4) (11,510) - (11,510) -
Interest income 117 599 240 1,082
Foreign exchange
loss (584) (685) (459) (784)
Gain on disposal
of capital assets - 279 3 195
-------------------------------------------------------------------------
(11,977) 193 (11,726) 493
-------------------------------------------------------------------------
EARNINGS BEFORE
INCOME TAXES 2,727 12,082 15,141 26,539
-------------------------------------------------------------------------
INCOME TAXES (Note 10)
Current 4,312 3,574 8,099 8,433
Future (2,729) 456 (2,520) 229
-------------------------------------------------------------------------
1,583 4,030 5,579 8,662
-------------------------------------------------------------------------
NET EARNINGS $ 1,144 $ 8,052 $ 9,562 $ 17,877
-------------------------------------------------------------------------
-------------------------------------------------------------------------
BASIC EARNINGS
PER SHARE $ 0.04 $ 0.28 $ 0.34 $ 0.63
DILUTED EARNINGS
PER SHARE $ 0.04 $ 0.28 $ 0.34 $ 0.63
-------------------------------------------------------------------------
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 interim consolidated financial statements
CORBY DISTILLERIES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
2009 2008 2009 2008
--------------------------- ---------------------------
NET EARNINGS $ 1,144 $ 8,052 $ 9,562 $ 17,877
OTHER
COMPREHENSIVE
INCOME - - - -
-------------------------------------------------------------------------
COMPREHENSIVE
INCOME $ 1,144 $ 8,052 $ 9,562 $ 17,877
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
CORBY DISTILLERIES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
For the Six Months Ended
---------------------------
December 31, December 31,
2009 2008
-------------------------------------------------------------------------
SHARE CAPITAL
Balance, beginning of period $ 14,304 $ 14,304
Transactions, net - -
-------------------------------------------------------------------------
Balance, end of period $ 14,304 $ 14,304
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RETAINED EARNINGS
Retained earnings, beginning of period $ 221,927 $ 207,490
Net earnings 9,562 17,877
Dividends (7,972) (7,972)
-------------------------------------------------------------------------
Balance, end of period $ 223,517 $ 217,395
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period $ - $ -
Other comprehensive income for the period - -
-------------------------------------------------------------------------
Balance, end of period $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
CORBY DISTILLERIES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
2009 2008 2009 2008
--------------------------- ---------------------------
OPERATING
ACTIVITIES
Net earnings $ 1,144 $ 8,052 $ 9,562 $ 17,877
Items not
affecting cash
Amortization 1,577 1,503 3,190 3,001
Impairment
charge (Note 4) 11,510 - 11,510 -
Gain on disposal
of capital
assets - (279) (3) (195)
Future income
taxes (2,729) 456 (2,520) 229
Employee future
benefits 188 (935) 431 (572)
-------------------------------------------------------------------------
11,690 8,797 22,170 20,340
Net change in
non-cash working
capital balances (3,695) 4,798 (3,699) (2,510)
-------------------------------------------------------------------------
Cash flows provided
by operating
activities 7,995 13,595 18,471 17,830
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to capital
assets (582) (1,320) (649) (2,384)
Proceeds from
disposition of
capital assets - 516 3 521
Deposits in cash
management pools (3,427) (8,805) (9,853) (7,995)
-------------------------------------------------------------------------
Cash flows used in
investing activities (4,009) (9,609) (10,499) (9,858)
-------------------------------------------------------------------------
FINANCING ACTIVITY
Dividends paid (3,986) (3,986) (7,972) (7,972)
-------------------------------------------------------------------------
Cash flows used in
financing activity (3,986) (3,986) (7,972) (7,972)
-------------------------------------------------------------------------
NET CHANGE IN CASH - - - -
CASH, BEGINNING OF
PERIOD - - - -
-------------------------------------------------------------------------
CASH, END OF
PERIOD $ - $ - $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL CASH
FLOW INFORMATION
Interest received $ 117 $ 599 $ 240 $ 1,082
Income taxes paid $ 3,811 $ 4,057 $ 7,689 $ 9,072
-------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements
CORBY DISTILLERIES LIMITED
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2009 AND DECEMBER 31,
2008
(in thousands of Canadian dollars, except per share amounts)
1. BASIS OF PRESENTATION
These unaudited interim consolidated financial statements (the "financial
statements") have been prepared by management in accordance with Canadian
generally accepted accounting principles ("GAAP") and include the
accounts of Corby Distilleries Limited and its subsidiaries ("Corby" or
the "Company"). These financial statements do not include all disclosures
required by Canadian GAAP for annual financial statements and therefore
should be read in conjunction with the most recently prepared annual
financial statements for the year ended June 30, 2009.
The interim financial statements should not be taken as indicative of the
performance to be expected for the full year due to the seasonal nature
of the spirits business. Corby's operations are typically subject to
seasonal fluctuations in that the retail holiday season generally results
in an increase in consumer purchases over the course of October, November
and December. Further, the summer months traditionally result in higher
consumer purchases of spirits as compared to the winter and spring
months. As a result, the Company's first and second quarter of each
fiscal year tend to reflect the impact of seasonal fluctuations in that
more shipments are typically made during those quarters.
2. CHANGE IN ACCOUNTING POLICIES
These financial statements follow the same accounting policies and
methods of their application as the most recent annual financial
statements for the year ended June 30, 2009, except as noted below.
Financial Statement Concepts
Effective July 1, 2009, the Company applied the amendments to Section
1000 "Financial Statement Concepts", which clarify the criteria for
recognition of an asset and the timing of expense recognition,
specifically deleting the guidance permitting the deferral of costs. The
new requirements are effective for interim and annual financial
statements for fiscal years beginning on or after October 1, 2008. The
Company applied the amendments to Section 1000 in conjunction with
Section 3064 "Goodwill and Intangible Assets" which is further described
below. The adoption of this standard had no impact on the Company's
financial statements or note disclosures.
Goodwill and Intangible Assets
Effective July 1, 2009, the Company implemented new accounting standard,
Section 3064 "Goodwill and Intangible Assets", which is effective for
fiscal years beginning on or after October 1, 2008. This standard
replaces the existing Section 3062 "Goodwill and Other Intangible Assets"
and Section 3450, "Research and Development Costs". The new standard
prescribes new methods for recognizing, measuring, presenting and
disclosing goodwill and intangible assets, with the objective of
eliminating the practice of deferring costs that do not meet the
definition and recognition criteria of assets. The new standard is
equivalent to the corresponding provisions of International Financial
Reporting Standards ("IFRS") IAS 38, "Intangible Assets". The adoption of
this standard had no impact on the Company's financial statements or note
disclosures.
3. FUTURE ACCOUNTING STANDARDS
International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board ("AcSB")
confirmed that Canadian generally accepted accounting principles ("GAAP")
for publicly accountable enterprises will be replaced by International
Financial Reporting Standards ("IFRS") for fiscal years beginning on or
after January 1, 2011. IFRS uses a conceptual framework similar to
Canadian GAAP, however there are significant differences on recognition,
measurement, and disclosures. Accordingly, the conversion from Canadian
GAAP to IFRS will be applicable to the Company's reporting for the first
quarter of fiscal 2012 for which current and comparative information will
be prepared under IFRS.
In response, the Company created a transition plan and established a
timeline for the execution and completion of the conversion project to
guide Corby toward its reporting deadlines. The transition plan included
a high-level assessment of the key areas where conversion to IFRS may
have a significant impact or present a significant challenge. As a result
of this assessment, six key areas were identified and include employee
future benefits, impairment analysis, IFRS 1 choices, capital assets,
income taxes, and financial statement presentation and disclosure. Work
completed to date indicates that changes in accounting policies will be
required and are likely to materially impact the Company's consolidated
financial statements.
The Company has engaged an external advisor and established a working
team, held multiple IFRS training sessions tailored specifically to Corby
for finance employees, members of management and the Audit Committee. The
IFRS team has performed detailed assessments on half of the six key areas
identified, and continues to report its progress and results to the Audit
Committee on a quarterly basis.
The transition plan remains on-track and the Company believes it is well
positioned to transition to IFRS in accordance with the timelines
mandated by the AcSB. The work completed to date suggests that there will
be minimal to no impact on the Company's business activities, IT systems,
disclosure controls and procedures, and internal controls over financial
reporting. However, these preliminary conclusions may change as Corby
continues to progress through its transition plan and considers any new
IFRS developments leading up to the Company's changeover date.
The company will continue to execute the transition in accordance with
its plan, and also continue to monitor standards development as issued by
the International Accounting Standards Board and the AcSB as well as
regulatory developments as issued by the Canadian Securities
Administrators, which may affect the timing, nature or disclosure of its
adoption of IFRS.
4. IMPAIRMENT CHARGE
During the quarter, the Company recorded a non-cash impairment charge
against its goodwill and intangible assets balances related to its
Seagram Coolers brand as outlined in the following chart:
-------------------------------------------------------------------------
Intangible assets $ 8,511
Goodwill 2,999
-------------------------------------------------------------------------
Impairment charged against goodwill and intangible assets 11,510
Income tax effect (2,128)
-------------------------------------------------------------------------
Net earnings impact of impairment charge $ 9,382
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings per share impact of
impairment charge $ 0.33
-------------------------------------------------------------------------
The Seagram Coolers business in Canada was acquired by Corby on September
29, 2006. The brand had initially been quite successful and achieved the
internal goals and objectives management had set for it. However, over
the past two years, the brand underperformed relative to its competitive
set due to aggressive competition from both category leaders as well as
new entrants in adjacent categories.
As a result, the Company revised its long-term outlook to reflect changes
in expectations for the brand and accordingly has estimated that the fair
value of the associated goodwill and intangible assets has fallen below
its recorded carrying amounts. As such, an impairment charge of $11,510
was recorded during the quarter. Management remains committed to the
Seagram Coolers brand and is pursuing several strategic avenues with the
aim of maximizing the potential of this valuable asset.
5. DEPOSITS IN CASH MANAGEMENT POOLS
Corby participates in a cash pooling arrangement under a Mirror Netting
Service Agreement ("Mirror Agreement") together with PR's other Canadian
affiliates, the terms of which are administered by The Bank of Nova
Scotia. The Mirror 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.
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. For further information on these
balances, readers are encouraged to read the Company's most recently
prepared annual financial statements for the year-ended June 30, 2009.
6. GOODWILL
-------------------------------------------------------------------------
Jun. 30, Impair- Dec. 31,
2009 ments 2009
-------------------------------------------------------------------------
Associated brand:
Seagram Coolers $ 3,970 $ (2,999) $ 971
Lamb's rum International 1,410 - 1,410
Meaghers and De Kuyper liqueurs 4,476 - 4,476
-------------------------------------------------------------------------
$ 9,856 $ (2,999) $ 6,857
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Jun. 30, Impair- Dec. 31,
2008 ments 2008
-------------------------------------------------------------------------
Associated brand:
Seagram Coolers $ 3,970 $ - $ 3,970
Lamb's rum International 1,410 - 1,410
Meaghers and De Kuyper liqueurs 4,476 - 4,476
-------------------------------------------------------------------------
$ 9,856 $ - $ 9,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Please refer to Note 4 for more information regarding the Seagram
Cooler's goodwill impairment recognized during the quarter ended December
31, 2009.
7. INTANGIBLE ASSETS
-------------------------------------------------------------------------
Movements in the period
--------------------------------
Jun. 30, Amorti- Impair- PR Brand Dec. 31,
2009 zation ments Disposals 2009
-------------------------------------------------------------------------
Long-term
representation
rights $ 57,370 $ (2,316) $ - $ (994) $ 54,060
Trademarks and
licenses 28,050 - (8,511) - 19,539
-------------------------------------------------------------------------
$ 85,420 $ (2,316) $ (8,511) $ (994) $ 73,599
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Movements in the period
--------------------------------
Jun. 30, Amorti- Impair- PR Brand Dec. 31,
2008 zation ments Disposals 2008
-------------------------------------------------------------------------
Long-term
representation
rights $ 62,053 $ (2,342) $ - $ - $ 59,711
Trademarks and
licenses 28,050 - - - 28,050
-------------------------------------------------------------------------
$ 90,103 $ (2,342) $ - $ - $ 87,761
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As depicted in the above chart, intangible assets are comprised of
long-term representation rights, and trademarks and licenses. Trademarks
and licenses represent the value of trademarks and licenses of businesses
acquired. These intangible assets are deemed to have an indefinite life
and therefore are not amortized. Trademarks and licenses are tested for
impairment on an annual basis or more frequently if events or changes in
circumstances indicate that the assets might be impaired. Please refer to
Note 4 for more information regarding the impairment recognized during
the quarter ended December 31, 2009.
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 October 1, 2006, and is scheduled to expire on
September 30, 2021.
During the period, PR compensated Corby as a result of PR's decision to
dispose of the Wild Turkey bourbon and Tia Maria coffee liqueur brands,
and thus early terminate Corby's representation of these brands in
Canada. The compensation received is depicted in the above chart under
the heading "PR Brand Disposals". The amount of compensation was
calculated in accordance with a prescribed formula contained in the
representation agreement and was accounted for as a reduction of Corby's
original cost. Corby ceased representation of the Wild Turkey and Tia
Maria brands in May 2009 and October 2009, respectively. The resulting
impact of lost commissions on Corby's fiscal 2010 net earnings is
estimated to be less than $220.
8. COMMISSIONS
Commissions for the three and six month periods ended December 31, 2009
are reported net of long-term representation rights amortization in the
amount of $1,149 and $2,316, respectively (2008 - $1,171 and $2,342,
respectively).
9. EMPLOYEE FUTURE BENEFITS
The Company has recorded a charge to earnings in the three and six month
periods ended December 31, 2009 of $851 and $1,702, respectively (2008 -
$842 and $1,683, respectively) to reflect the expense associated with its
employee future benefit plans. Actual cash payments for the three and six
month periods ended December 31, 2009 totaled $529 and $1,035,
respectively (2008 - $1,636 and $1,937, respectively).
10. INCOME TAXES
Corby's effective tax rates differ substantially from the basic Federal
and Provincial rates due to the following:
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
--------------------- ---------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
Combined basic Federal and
Provincial tax rates 31% 32% 31% 32%
Impact of non-cash impairment
charge 54% 0% 10% 0%
Impact of substantively enacted
rate decreases in Ontario (27%) 0% (5%) 0%
Other 0% 1% 1% 1%
-------------------------------------------------------------------------
Effective tax rates 58% 33% 37% 33%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As denoted in the above chart, Corby's effective tax rates during the
three and six month periods ended December 31, 2009, were substantially
impacted by the effect of a non-cash impairment charge and the impact of
the Ontario government's decision to substantively enact decreases in its
future income tax rates.
The impairment charge was recorded during the quarter and relates
specifically to the Company's Seagram Coolers brand and its associated
goodwill and intangible asset balances (please refer to Note 4 for more
information regarding the impairment). The Ontario government's decision
to substantively enact future rate decreases required the Company to
revalue its future income tax assets and liabilities at the new lower
rates. As a result, Corby recognized a one-time reduction of its future
income tax expense of $700 during the quarter.
11. 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 include some of the most renowned and respected brands in
Canada, including Wiser's rye whiskies, Lamb's rum and Polar Ice vodka.
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, Kahlua liqueur, Mumm champagne, and Jacob's
Creek and Wyndham Estate wines.
The Commissions segment has no assets or liabilities. Its financial
results are fully reported as "commissions" on the interim consolidated
statement of earnings and there are no intersegment revenues. Therefore,
a chart detailing operational results by segment has not been provided as
no additional meaningful information would result.
%SEDAR: 00001138E
For further information: CORBY DISTILLERIES LIMITED, Ali Mahdavi, Spinnaker Capital Markets Inc., Tel.: (416) 962-3300; Thierry Pourchet, Vice President and Chief Financial Officer, Tel.: (416) 479-2400, [email protected], www.Corby.ca
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