MRRM Inc. - DIRECTORS' REPORT And MANAGEMENT DISCUSSION And ANALYSIS Of The
FINANCIAL CONDITION And RESULTS Of OPERATIONS - Interim 2011.Q2 August 31,
2010 (2nd Quarter)
The following discussion and analysis should be read in conjunction with the Annual Report. Included in these documents may be forward-looking statements with respect to the Company. These forward-looking statements by their nature necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by such statements. The Company considers the assumptions on which these forward-looking statements are based to be reasonable at the time they were prepared but cautions the reader that these assumptions regarding future events, many of which are beyond the control of the Company, may ultimately prove to be incorrect.
The unaudited interim consolidated financial statements were prepared by the Company in accordance with Canadian generally accepted accounting principles and have not been reviewed by the Company's auditors. Certain comparative figures have been reclassified to conform with the presentation adopted in the financial statements.
Additional documents and information are available at the System for Electronic Document Analysis and Retrieval (SEDAR) and can be assessed through the internet: For MRRM's profile go to www.sedar.com or for documents go to www.sedar.com Information is also available on the Corporate website at www.MRRM.ca.
MONTREAL, Oct. 7 /CNW Telbec/ -
Consolidated Earnings And Comprehensive Income and Retained Earnings
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Revenues for the period (last year) were $32,069,000 ($32,955,000) decreasing by $886,000 (-2.7%). As shown in the segmented information, sales and income from operating activities amounted to $32,022,000 ($32,412,000) being 99.9% (98.4%) of total revenues. Income from corporate totaled $47,000 ($543,000). Unrealized losses in fair market value of the portfolio amounted to -$59,000 ($716,000). Operating Revenues decreased by $390,000 (-1.2%) compared to last year. Revenue from Corporate decreased by $496,000; for details refer to Portfolio Income Summary under Corporate Investments.
Costs and expenses for the period (last year) were $30,948,000 ($32,325,000), a decrease of $1,377,000 (-4.3%). Costs related to operating activities, before exchange and interest, decreased by $1,309,000 (-4.1%). Expenses related to corporate decreased by $26,000.
Operating results are discussed later on in this report.
The impact of the fluctuating Canadian dollar resulted in a total currency exchange gain of $86,000 versus a loss of $93,000 last year all included under cost of sales. As disclosed in the Notes, the net exposures were as follows: at August 31, 2010, US$2,124,000; at August 31, 2009, US$921,000; at February 28, 2010, US($450,000); at February 28, 2009, US($404,000). The above US dollars include the equivalent for euros which is not material.
The company uses foreign exchange contracts to manage foreign exchange exposure. At August 31, 2010, the Company had foreign exchange contracts outstanding allowing the Company to buy USD$8,400,000 at an average rate of 1.0206. The maturity dates of these contracts range form September 2010 to June 2012. The Company has recorded a current and a long term asset on the balance sheet under the caption "fair value of cash flow hedges". The Company also recorded comprehensive income in the amount of $447,000 to reflect the fair value of these foreign exchange forward contracts.
Interest expensed on bank indebtedness and the reducing term loan amounted to $68,000 compared to $116,000 last year for a decrease of $48,000. Interest related to the long-term debt was $39,000 compared to $60,000 last year.
Earnings before income taxes for the period (last year) were $1,121,000 ($630,000), an increase of $491,000. Earnings from operating activities for the period (last year) were $1,185,000 ($224,000), an increase of $961,000. Earnings from corporate for the period (last year) were -$64,000 ($406,000), a decrease of $470,000.
Income taxes for the period (last year) were $352,000 ($127,000). Details of the income tax components are presented in the Notes to the financial statements.
Net earnings for the period (last year) were $769,000 ($503,000) or $0.30 ($0.20) per share.
As stated in the past, the declaration of the quarterly dividend continues to be suspended in order to support operating cash requirements. The declaration and payment of dividends is at the discretion of the Board of Directors.
Summary of Quarterly Results
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The following financial summary is derived from the Company's financial statements for each of the eight most recently completed fiscal quarters.
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Summary of
Quarterly
Financial
Results
for
the Aug 31, May 31, Feb 28, Nov 30, Aug 31, May 31, Feb 28, Nov 30,
eight 2010 2010 2010 2009 2009 2009 2009 2008
most (2011. (2011. (2010. (2010. (2010. (2010. (2009. (2009.
recent ------ ------ ------ ------ ------ ------ ------ ------
fiscal Q2) Q1) Q4) Q3) Q2) Q1) Q4) Q3)
quarters --- --- --- --- --- --- --- ---
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(Expressed
in
thousands,
except for
amounts per
share -
unaudited) $ $ $ $ $ $ $ $
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Revenues 16,471 15,598 15,181 17,672 15,466 17,489 16,502 16,962
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Net
Earnings
(loss) 449 320 562 455 169 334 (200) (343)
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Earnings
(loss)
per
share 0.17 0.13 0.22 0.18 0.07 0.13 (0.08) (0.14)
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Dividends
per
share 0.00 0.00 0.10 0.00 0.00 0.00 0.00 0.00
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Revenues for this quarter (last year) were $16,471,000 ($15,466,000), an increase of $1,005,000 (6.5%). Revenue from operating activities amounted to $16,372,000 ($15,264,000) being 99.4% (98.7%) of total revenues. Income from corporate totaled $99,000 ($202,000). Operating revenues for this quarter increased by $1,108,000 (7.3%) compared to this quarter last year. Revenue from Corporate decreased by $103,000 of which $324,000 was attributable to unrealized fair value of investments held for trading.
Costs and expenses for this quarter (last year) were $15,811,000 ($15,269,000), an increase of $542,000 (3.5%). Costs related to operating activities, before exchange and interest, increased by $570,000 (3.8%).
Included in the financial results for this quarter (last year) was investment tax credits of $104,000 ($91,000).
Interest expense for this quarter (last year) was $30,000 ($54,000) and was $38,000 in 2011.Q1. As well this quarter, the Company recovered $7,000 due to variation in fair value of the interest rate swap which is a component of the long term debt facility.
Earnings before income taxes for this quarter (last year) were $660,000 ($197,000), an increase of $463,000. Earnings from operating activities were $599,000 ($52,000), an increase of $547,000 and corporate were $61,000 ($145,000), a decrease of $84,000.
Income taxes for this quarter (last year) were $211,000 ($28,000). The effective tax rates are presented in the Notes to the financial statements.
Net earnings for this quarter (last year) was $449,000 ($169,000) or $0.17 ($0.07) per share.
Consolidated Cash Flows, Liquidity and Balance Sheets
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In investing activities, the Company added $339,000 of net property, plant and equipment compared to $245,000 last year.
Available credit facilities
The credit facilities available and reported at last year-end remain substantially unchanged. The facilities are comprised of a revolving line of credit for $6,750,000 CDN (or its US equivalent) and a 5 year reducing term facility initially borrowed at fiscal year-end 2007 for $3,500,000. The revolving line of credit bears interest at the Canadian prime rate plus 0.25% for Canadian loans and U.S. base rate plus 0.25% for U.S. loans and, optionally, the Company may take advantage of Bankers Acceptances. The reducing term facility is at a combined fixed rate for interest and fees of 5.83% for the term of the loan. The financial covenants and arrangements relating to these facilities are detailed in the Notes to the audited consolidated financial statements. These covenants are being respected and have been met.
Cash position was $2,021,000 compared to bank indebtedness of $922,000 at last year-end.
Receivables increased by $2,471,000 compared to last fiscal year-end. Account balances are substantially current, there are no anticipated serious collection issues and any potential write-offs have been provided for in the accounts.
Inventories decreased by $2,130,000 (-27.2%) while overall volumes of rice decreased by 19.2%.
Marketable securities - see table below for financial summary and investment mix.
Property, plant and equipment decreased by $239,000 comprised of additions of $339,000 and amortization of $578,000.
Payables increased by $2,438,000 mainly arising from increases in amounts due related to the agency business.
Long-term debt is being repaid in accordance with the arrangements of the five year reducing term facility agreement as described under credit facilities.
Future income taxes, net liability, increased by $183,000 which is mainly attributable to the unrealized change in fair value of foreign exchange forward contracts that accounts for $114,000 at August 31, 2010.
Shareholders' equity increased by $1,102,000 to $19,026,000 from $17,924,000 and represents $7.51 ($7.07) per share.
Capital stock remained unchanged at $539,000 and represents 2,535,000 issued common shares.
The MRRM Inc. shares have a very limited distribution and are infrequently traded on the TSX-Venture Exchange under the symbol MRR.
www.TSX-Venture Exchange
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Critical Accounting Policies:
-----------------------------
The Company's critical accounting policies are those that it believes are the most important in determining its financial condition and results. A summary of the Company's significant accounting policies, including the critical accounting policies, is set out in the notes to the consolidated financial statements in the annual report for the year ended February 28, 2010. An extract of these policies is set out in the notes to the quarterly consolidated financial statements.
New accounting policy
Effective March 1, 2010, the Company uses hedge accounting. At the inception of a hedging relationship, the Company designates and formally documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. The documentation identifies the anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used and how effectiveness will be assessed.
The Company also formally assesses, both at inception and at least quarterly thereafter, whether or not the derivatives that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in cash flows of the hedged items. If a hedge relationship becomes ineffective, it no longer qualifies for hedge accounting and any subsequent change in the fair value of the hedging instrument is recognized in earnings. When hedge accounting is appropriate, the hedging relationship is designated as a cash flow hedge. In a cash flow hedge, the change in fair value of the hedging instrument is recorded, to the extent it is effective, in other comprehensive income until the hedged item affects net earnings. The Company uses cash flow hedges to mitigate the risk from variable cash flows associated with forecasted foreign currency denominated cash flows.
Hedge ineffectiveness is measured and recorded in current period earnings in the consolidated statement of earnings. When cash flow hedge is discontinued, any cumulative adjustment to either the hedged item or other comprehensive income is recognized in earnings as the hedged item affects earnings, or when the hedged item is derecognized. If a designated hedge is no longer effective, the associated derivative instrument is subsequently carried at fair value through earnings without any offset from the hedged item. Changes in the fair value of derivatives that do not qualify for hedge accounting are recorded in the consolidated statement of earnings. The balance of other comprehensive income consists of the accumulated variation in the fair value of foreign exchange forward contracts net of future income tax.
Future Accounting Changes:
International Financial Reporting Standards (IFRS)
In 2005, the Accounting Standards Board of Canada (AcSB) announced that accounting standards in Canada are to converge with IFRS. In March 2009, the CICA published an updated version of its "Implementation Plan for Incorporating International Financial Reporting Standards from Canadian GAAP".
This plan includes an outline of the key decisions that the CICA will need to make as it implements the Strategic Plan for publicly accountable enterprises that will converge Canadian generally accepted accounting standards with IFRS. While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy which must be addressed. The CICA has confirmed the changeover date from current Canadian GAAP to IFRS for year ends beginning on or after January 1, 2011.
The Company has established an IFRS convergence team that oversees and is actively involved in the transition to IFRS. The Company is devoting the necessary resources to achieve a seamless transition to IFRS by the required date of conversion.
In order to integrate new accounting and reporting standards and assess the impact that the new policies may have on our activities, the Company has undertaken the development of a changeover plan to ensure that a smooth transition occurs.
Discussion of Results:
----------------------
In Dainty Foods, net sales decreased by $1,537,000 (-5.0%) to $29,394,000 for the period and increased by $471,000 (3.2%) for the quarter compared to last year while rice sales volumes increased by 13.0% for period and 25.2% for the quarter compared to last year. The net sales reduction is primarily a result of lower selling prices due to reduced cost of rice and the weaker US Dollar. Costs and expenses decreased by $2,097,000 (-6.8%) to $28,654,000 for the period as commodity prices continue to decline. Costs and expenses increased by $154,000 (1.1%) for the quarter compared to last year as a result of additional product development costs. Earnings before income taxes for the period increased by $560,000 to $740,000 and by $317,000 for the quarter compared to last year.
The Company continues to pursue new value-added retail products some of which will be outsourced. This outsourcing will minimize capital investment while enhancing Dainty Foods' offerings in the retail marketplace for both branded and private label items. New selling relationships continue to be developed and are intended to add strength to our retail sales efforts.
World market cost of rice has strengthened toward the new crop harvest. Rice harvest volume in the United States is expected to be the largest on record. Notwithstanding, milling yield to date for new crop rice has generally been low, leading to higher prices for long grain and parboiled rice and lower prices of broken rice due to its increased availability. Dainty Foods endeavours to manage these conflicting variables and to purchase rice at opportune times.
In Robert Reford, revenue increased by $1,147,000 (77.4%) to $2,628,000 for the period and by $637,000 (83.1%) for the quarter compared to last year reflecting the addition of Montship Inc. as well as increased growth in both Robert Reford and Norton Lilly.
Earnings before income taxes for the period increased by $401,000 to $445,000 and by $230,000 compared to this quarter last year.
Corporate Investments, portfolio income is summarized as follows:
For the period For the quarter
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2011 2010 2011 2010
---- ---- ---- ----
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Dividend and interest
income $75,000 $64,000 $39,000 $31,000
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Capital gains (losses) $31,000 -$237,000 $25,000 -$188,000
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Unrealized change in Fair
Value -$59,000 $716,000 $35,000 $359,000
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-------- -------- ------- --------
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Totals: $47,000 $543,000 $99,000 $202,000
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During the early part of this period, global financial markets weakened slightly, contributing to a loss in Fair Market Value of $59,000 for the period compared to a gain of $716,000 that we had experienced last fiscal year. The portfolio remains conservatively invested and no significant policy changes are foreseen. The Corporate Investments continue to be held with a long term view.
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Investment Mix Aug 31, May 31, Feb 28, Nov 30, Aug 31,
2010 2010 2010 2009 2009
(2011.Q2) (2011.Q1) (2010.Q4) (2010.Q3) (2010.Q2)
--------- --------- --------- --------- ---------
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Cash & Equivalents 3.7% 1.1% 0.2% 0.5% 0.7%
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Bonds 28.4% 27.2% 27.2% 27.9% 30.9%
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Preferred Shares 15.8% 17.5% 17.6% 17.6% 14.7%
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Canadian Equities 36.5% 37.9% 37.7% 37.3% 33.5%
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U.S. & Foreign Equities 15.6% 16.3% 17.3% 16.7% 20.2%
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Certification
The Company's management, under the direction and supervision of the Chief Executive Officer and Chief Financial Officer, continually evaluates the effectiveness of the Company's disclosure controls and procedures and has concluded that such disclosure controls and procedures are effective.
The Company's management is also responsible for establishing and maintaining internal controls over financial reporting. These controls were designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.
There have been no changes in the Company's internal controls over financial reporting during this quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Outlook
Dainty Foods expects to gradually increase retail volumes of value-added products in Canada and the USA. New private label retail items are planned for launch during the next two quarters.
Margins on our U.S. sales are expected to decline as a result of the weakening U.S. Dollar and continued pressure on flour pricing as a result of the reduced commodity prices.
In the shipping agency, overall revenue continues to remain strong. The volume of ships in the seaway has recovered this year, however imports of steel remain low compared to 2008. Our joint venture with Norton Lilly and Montship continues to be a success. We have obtained a strong base of operations on the West coast with Montship, and Norton Lilly continues to enhance our marketing efforts with their world wide sales coverage.
While the Company is anticipating continued growth in food processing and selling and maintaining a strong position within the ship agency services business, growth will be impacted by several factors including (i) the ability of the Company to secure rice at competitive prices (ii) the rate of acceptance of new co-packed products (iii) the ability within the marketplace to manage price increases to cover increased costs, and (iv) general economic conditions.
Risks and Uncertainties
Overview
Management of risk includes properly identifying, communicating and controlling the risks which may cause a serious impact to the business. Management is confident that the Company employs effective procedures to address all material risks.
The following items were discussed in the MD&A in the last Annual Report and remain principally unchanged. Please refer to these documents for this information.
Ability to Achieve Revenue Results
Ability to Address Cost and Expense Concerns
Economic Conditions
Environment
For further information regarding financial risk management, please refer to the Notes to the interim financial statements.
On behalf of the Board
(signed) (signed)
Nikola M. Reford Terry Henderson
Chairman President & Chief Executive Officer
Dated at Montreal (Westmount), Quebec, October 7, 2010.
MRRM Inc.
CONSOLIDATED EARNINGS
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(unaudited) For the SIX Months Ending For the Quarter Ending
------------------------- ----------------------
August 31, August 31, August 31, August 31,
---------- ---------- ---------- ----------
2010 2009 2010 2009
---- ---- ---- ----
'000 '000 '000 '000
Revenues
Sales $32,022 $32,412 $16,372 $15,264
Increase in fair value
of marketable securities
held for trading 47 543 99 202
---------- ---------- ---------- ----------
32,069 32,955 16,471 15,466
---------- ---------- ---------- ----------
Costs and expenses
Cost of sales, selling
and administrative 30,328 31,659 15,499 14,945
Amortization 578 583 289 291
Interest on long-term debt 39 60 18 29
Other interest 29 56 12 25
Change in fair value of
interest rate swap (26) (33) (7) (21)
---------- ---------- ---------- ----------
30,948 32,325 15,811 15,269
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Earnings before income
taxes 1,121 630 660 197
---------- ---------- ---------- ----------
Income taxes
Current 284 57 139 (46)
Future 68 70 72 74
---------- ---------- ---------- ----------
352 127 211 28
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Net earnings $769 $503 $449 $169
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Basic earnings per share $0.30 $0.20 $0.17 $0.07
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MRRM Inc.
CONSOLIDATED COMPREHENSIVE INCOME
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(unaudited) For the SIX Months Ending For the Quarter Ending
------------------------- ----------------------
August 31, August 31, August 31, August 31,
---------- ---------- ---------- ----------
2010 2009 2010 2009
---- ---- ---- ----
'000 '000 '000 '000
Net earnings $769 $503 $449 $169
---------- ---------- ---------- ----------
Other comprehensive income
Changes in fair value of
foreign exchange forward
contracts designated as
cash flow hedges 459 0 292 0
Future income taxes on
changes in fair value of
foreign exchange forward
contracts designated as
cash flow hedges (117) 0 (74) 0
Settlements of foreign
exchange forward
contracts, recorded in
the consolidated earnings (12) 0 (12) 0
Future income taxes on
settlements of foreign
exchange forward
contracts, recorded in
the consolidated
earnings 3 0 3 0
---------- ---------- ---------- ----------
Other comprehensive income
for the period 333 0 209 0
---------- ---------- ---------- ----------
Comprehensive income $1,102 $503 $658 $169
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MRRM Inc.
CONSOLIDATED RETAINED EARNINGS
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(unaudited) For the SIX Months Ending For the Quarter Ending
------------------------- ----------------------
August 31, August 31, August 31, August 31,
---------- ---------- ---------- ----------
2010 2009 2010 2009
---- ---- ---- ----
'000 '000 '000 '000
Balance, beginning of
period $17,385 $16,119 $17,705 $16,453
Net earnings 769 503 449 169
---------- ---------- ---------- ----------
18,154 16,622 18,154 16,622
Dividends 0 0 0 0
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Balance, end of period $18,154 $16,622 $18,154 $16,622
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MRRM Inc.
CONSOLIDATED CASH FLOWS
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(unaudited) For the SIX Months Ending For the Quarter Ending
------------------------- ----------------------
August 31, August 31, August 31, August 31,
---------- ---------- ---------- ----------
2010 2009 2010 2009
---- ---- ---- ----
'000 '000 '000 '000
OPERATING ACTIVITIES
Net earnings $769 $503 $449 $169
Defined benefit plan
payments (28) (31) (15) (15)
---- ---- ---- ----
741 472 434 154
--- --- --- ---
Non-cash items
Change in fair value of
marketable securities
held for trading 29 (479) (60) (171)
Change in fair value of
interest rate swap
contract (26) (33) (7) (21)
Amortization 578 583 289 291
Pension benefit cost 15 15 8 9
Future income taxes 68 70 73 74
---------- ---------- ---------- ----------
664 156 303 182
Changes in non-cash
working capital items 2,303 1,780 2,456 2,415
---------- ---------- ---------- ----------
Non-cash operating items
generated (used) 2,967 1,936 2,759 2,597
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Cash flows from operating
activities 3,708 2,408 3,193 2,751
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INVESTING ACTIVITIES
Marketable securities (470) (830) (343) (827)
Disposals of marketable
securities 411 831 312 831
Property, plant and
equipment (339) (245) (243) (142)
---------- ---------- ---------- ----------
Cash flows from investing
activities (398) (244) (274) (138)
---------- ---------- ---------- ----------
FINANCING ACTIVITIES
Bank indebtedness (922) (1,819) (712) (2,440)
Long-term debt (367) (345) (186) (173)
---------- ---------- ---------- ----------
Cash flows from financing
activities (1,289) (2,164) (898) (2,613)
---------- ---------- ---------- ----------
Net change in cash and cash,
end of period $2,021 $0 $2,021 $0
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Dividends per share $0.00 $0.00 $0.00 $0.00
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MRRM Inc.
CONSOLIDATED BALANCE SHEETS
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(unaudited) As at As at
August 31, February 28,
---------- ------------
2010 2010
---- ----
'000 '000
ASSET
Curren
Cash $2,021 $0
Accounts receivable 8,664 6,193
Fair value of cash flow hedges 256 0
Inventories 5,701 7,831
Income taxes receivable 0 35
Tax credits receivable 94 94
Prepaids 155 111
Future income taxes 15 15
---------- ----------
16,906 14,279
Fair value of cash flow hedges 191 0
Tax credits receivable 976 868
Marketable securities, at fair value 4,455 4,425
Property, plant and equipment, net 14,490 14,729
Cash surrender value of life insurance policy 2 2
---------- ----------
$37,020 $34,303
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LIABILITIES
Current
Bank indebtedness $0 $922
Accounts payable and accrued liabilities 13,562 11,124
Income taxes payable 319 0
Current portion of accrued benefit liability 56 56
Current portion of long-term debt 762 739
Future income taxes 66 0
---------- ----------
14,765 12,841
---------- ----------
Long-term debt, reducing term loan maturing in 2012 395 784
Fair value of interest rate swap contract 34 58
Accrued benefit liability 555 568
Future income taxes 2,245 2,128
---------- ----------
17,994 16,379
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SHAREHOLDERS' EQUITY
Capital stock
Common shares, without nominal or par value
authorized in an unlimited number
Issued 2,535,000 shares 539 539
Retained earnings 18,154 17,385
Accumulated other comprehensive income 333 0
---------- ----------
19,026 17,924
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$37,020 $34,303
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MRRM Inc.
NOTES To CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2010
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(unaudited)
1- Accounting Policies, Financial Risk management and Supplementary Information
The unaudited interim consolidated financial statements were prepared by the Company in accordance with Canadian generally accepted accounting principles and have not been reviewed by the Company's auditors.
The accounting policies and procedures used in preparing these unaudited interim consolidated financial statements are the same as those used in preparing the audited annual consolidated financial statements for the year ended February 28, 2010 except for the adoption of a new accounting policy described below. These unaudited interim statements should be read along with the audited annual statements and notes included in the Company's last Annual Report. Certain comparative figures have been reclassified to conform with the presentation adopted at last fiscal year-end.
New accounting policy
Effective March 1, 2010, the Company uses hedge accounting. At the inception of a hedging relationship, the Company designates and formally documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. The documentation identifies the anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used and how effectiveness will be assessed.
The Company also formally assesses, both at inception and at least quarterly thereafter, whether or not the derivatives that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in cash flows of the hedged items. If a hedge relationship becomes ineffective, it no longer qualifies for hedge accounting and any subsequent change in the fair value of the hedging instrument is recognized in earnings. When hedge accounting is appropriate, the hedging relationship is designated as a cash flow hedge. In a cash flow hedge, the change in fair value of the hedging instrument is recorded, to the extent it is effective, in other comprehensive income until the hedged item affects net earnings. The Company uses cash flow hedges to mitigate the risk from variable cash flows associated with forecasted foreign currency denominated cash flows.
Hedge ineffectiveness is measured and recorded in current period earnings in the consolidated statement of earnings. When a cash flow hedge is discontinued, any cumulative adjustment to other comprehensive income is recognized in earnings. If a designated hedge is no longer effective, the associated derivative instrument is subsequently carried at fair value through earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are recorded in the consolidated statement of earnings. The balance of other comprehensive income consists of the accumulated variation in the fair value of foreign exchange forward contracts net of future income tax.
2- Financial Instruments and Financial Risk factors
Hierarchy of Financial Instruments
The Company categorizes its financial assets and liabilities, measured at fair value into one of three levels depending on the observability of the inputs used in the measurement as follows:
- Level 1: This level includes assets and liabilities measured at fair
value based on unadjusted quoted prices in active markets that are
accessible at the measurement date. The financial assets included in
this level are marketable securities.
- Level 2: This level includes valuations determined using directly or
indirectly observable inputs other than quoted prices included within
Level 1. Financial instruments in this category are valued using models
or other industry standard valuation techniques derived from observable
market inputs. This level includes the Company's derivative financial
instruments composed of its interest rate swap agreement and the
foreign exchange forward contracts.
- Level 3: This level includes valuations based on inputs which are less
observable, unavailable or where the observable data does not support a
significant portion of the instruments' fair value. As at August 31,
2010, the Company does not have any financial assets, financial
liabilities or derivative financial instruments, which should be
included in this level.
Derivative Financial Instruments
The Company uses derivative financial instruments to manage its currency risk and interest rate risk as necessary.
At August 31, 2010, the Company had foreign exchange contracts outstanding that allowed the Company to buy USD$8,400,000 at an average rate of 1.0206. The maturity dates of these contracts range form September 2010 to June 2012. The Company has recorded current and long term assets on the balance sheet under the captions "fair value of cash flow hedges" and comprehensive income in the amount of $447,000 to reflect the fair value of these foreign exchange forward contracts.
The Company uses an interest rate swap arrangement, for a notional amount of $3,500,000 through its bankers to effectively fix the variable rate pertaining to the Reducing term loan which matures in February 2012. This arrangement has fixed the interest rate at 5.83% to maturity. The swap contract had a negative fair value of $34,000 at August 31, 2010 and as such, has been recorded in long-term liabilities under fair value of interest rate swap and recognized in Consolidated Earnings under other expenses for the year. The Company does not enter into derivative financial instruments for trading or speculative purposes.
Fair Value and Classification of Financial Instruments
The following methods and assumptions were used to determine the estimated fair value of each class of financial instruments:
- The fair values of bank indebtedness, trade accounts receivable and
accounts payable and accrued liabilities are comparable to their
carrying amounts, given their short maturity periods;
- The fair value of marketable securities has been determined based on
the current bid price at the balance sheet date;
- The fair value of the long-term debt which bears interest at a variable
rate approximates its carrying amount;
- The fair values of the interest rate swap agreement and the foreign
exchange forward contracts were determined by the Company's bank and
represent the amounts required to realize favorable contracts or settle
unfavorable ones.
As at August 31, 2010, the financial instruments presented at fair value on the Company's consolidated balance sheet by level of the fair value hierarchy are as follows:
(amounts are in thousands of dollars) Level 1 Level 2 Level 3
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Financial Assets
Foreign exchange forward contracts - 447 -
Marketable securities 4,455 - -
Financial Liabilities
Interest rate swap - (34) -
The Company is exposed to a number of different financial risks arising from normal course business exposure, as well as the Company's use of financial instruments. These risks include credit risk, interest rate risk, liquidity risk, currency risk and other price risk. The Company's management is responsible for setting acceptable levels of risk and reviewing management activities as necessary.
Currency risk
The Company is exposed to foreign currency risks due to its imports of bulk rice from the USA and overseas. These risks are partially offset by sales in U.S. funds and by the purchase of forward exchange contracts. As at August 31, 2010, there were USD$8,400,000 of forward exchange forward contracts pending. The Company uses hedge accounting for such instruments. Under this method any changes in the fair value of the contracts caused by fluctuations in the spot foreign exchange rates are recorded in comprehensive income.
The Company has recorded a fair value of $447,000 on cash flow hedges at August 31, 2010. Based on the foreign currency exposure as at August 31, 2010 and assuming all other variables remain constant, a 10% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an increase/decrease of $45,000 in comprehensive income.
As at August 31, 2010, assets denominated in foreign currencies consisting of cash, trade accounts receivable and marketable securities totaled US$4,112,137 or its Canadian equivalent of $4,374,903 (US$3,331,520 or its Canadian equivalent of $3,506,758 as at February 28, 2010). Bank indebtedness and accounts payable and accrued liabilities denominated in U.S. dollars totaled US$1,988,134 or its Canadian equivalent of $2,115,176 (US$3,781,970 or its Canadian equivalent of $3,980,902 as at February 28, 2010).
Based on the net U.S. dollar exposure as of August 31, 2010, a 1 percent increase/(decrease) in the U.S. exchange rate will increase/(decrease) equity by approximately $23,000 ($10,000 in August 2009).
Credit risk
Credit risk relates to the risk that a party to a financial instrument will not fulfill some or all of its obligations, thereby, causing the Company to sustain a financial loss. In the normal course of business, the Company is exposed to credit risk from its customers, substantially all of which are in the retail and processing markets. Generally, the carrying amount reported on the Company's consolidated balance sheet for its financial assets exposed to credit risk, net of applicable provisions for losses, represents the maximum amount exposed to credit risk. The Company performs ongoing credit evaluations of new and existing customers' financial conditions and reviews the collectibility of its trade and other accounts receivable in order to mitigate any possible credit losses. The Company maintains an allowance for doubtful accounts that represents its estimate of uncollectible amounts. This allowance is related to specific losses estimated on individually significant exposures.
Interest rate risk
Receivables and payables are non-interest bearing. Bank indebtedness bears interest at the Canadian prime rate plus 0.25% for Canadian loans and U.S. base rates plus 0.25% for U.S. loans and, optionally, the Company may take advantage of Bankers Acceptances. The interest rate risk relating to the reducing term loan is as described under Fair value above. For this quarter, a 0.5% hypothetical increase in the prime rate on bank indebtedness would increase interest expense by approximately $300. A 0.5% decrease in the prime rate would have a reverse effect. The Company's investments in bonds bear interest at fixed rates and the Company is, therefore, exposed to the risk of changes in fair value resulting from interest rate fluctuations.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial liabilities and obligations as they become due. The Company is exposed to this risk mainly through its accounts payable and accrued liabilities, its long term debt and its contractual commitments. The Company finances its operations through a combination of cash flows from operations and its line of credit.
The Company believes that future cash flows from operations and availability under existing credit facilities from banking institutions will be sufficient to meet its obligations. Under senior management's supervision, the Company manages its liquidity according to financial forecast and expected cash flows.
Price risk
The Company's price risk arises from changes in raw material prices, which are significantly influenced by the fluctuating markets. The Company's objectives in managing its price risk are three fold: i) to protect its financial results for the period from significant fluctuations in raw material costs, ii) to anticipate, to the extent possible, and plan for significant changes in the raw material markets and iii) to ensure sufficient availability of raw materials required to meet the Company's manufacturing requirements. To manage its exposure to price risks, the Company closely monitors current and anticipated changes in market prices and develops pre-buying strategies and patterns, and seeks to adjust its selling prices when market conditions permit. Historical results indicate management's ability to rapidly identify fluctuations in raw material prices and, to the extent possible, incorporate such fluctuations in the Company's selling prices and as such, any impact to consolidated earnings is not significant.
Other price risk
The Company is exposed to fluctuations in the market prices of its marketable securities that are classified as held-for-trading. Changes in the fair value of marketable securities are recorded in consolidated earnings. The risk is managed by ensuring a relatively conservative and diversified asset mix. For this quarter, the effect before income taxes represents an increase in income of $35,000 and an increase of $359,000 for the same period last year. As at August 31, 2010, a 10% increase/(decrease) in the bid prices of the marketable securities would increase/(decrease) equity by approximately $446,000 ($420,000 in August 2009).
3- Information included
in the Statement Of
Earnings
For the SIX Months Ending For the Quarter Ending
------------------------- ----------------------
August 31, August 31, August 31, August 31,
---------- ---------- ---------- ----------
2010 2009 2010 2009
---- ---- ---- ----
'000 '000 '000 '000
Income taxes (received) ($71) ($56) ($83) ($58)
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Interest on long-term debt $39 $58 $19 $29
Interest on bank
indebtedness and other 31 57 12 24
-- -- -- --
Interest paid $70 $115 $31 $53
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4 - Income Taxes
Tax at combined basic
federal and provincial
income tax rate $330 $197 $195 $62
Non-taxable portion of
capital (gains) losses (5) 36 (4) 28
Tax-free income 0 (14) 0 (7)
Non-taxable portion of
decrease (increase) in
fair value of investments 4 (111) (11) (56)
Non-deductible expenses 17 15 9 8
Other 6 4 22 (7)
- - -- ---
$352 $127 $211 $28
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---- ---- ---- ---
Effective tax rate 31.4% 20.2% 0.9% (2.6%)
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The Company's future
income tax liabilities
(assets) are as follows:
Employee future benefits ($188) ($210) $2 $2
Research and development
tax credits 274 297 27 17
Property, plant and
equipment 2,019 2,008 39 6
Loss carry forwards 0 (47) 0 0
Derivatives 115 0 72 0
Other 76 11 4 49
-- -- - --
$2,296 $2,059 $144 $74
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------ ------ ---- ---
Comprising
Asset: Current ($15) ($15) $0 $0
Liability: Current 66 0 42 0
Non-current 2,245 2,074 102 74
----- ----- --- --
----- ----- --- --
$2,296 $2,059 $144 $74
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5- Supplemental Cash Flow
Information:
Changes in non-cash
working capital items
Accounts receivable ($2,471) ($9) ($1,473) ($352)
Inventories 2,130 1,929 2,903 597
Income Tax receivable 35 0 0 0
Tax credits receivable (108) 16 (108) (65)
Prepaids (41) 90 (82) 72
Accounts payable and
accrued liabilities 2,438 (247) 995 2,267
Income taxes payable 320 1 221 (104)
--- - --- -----
$2,303 $1,780 $2,456 $2,415
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6- Segmented Information
Revenue
Food processing and
selling $29,394 $30,931 $14,968 $14,497
Ship agency services 2,628 1,481 1,404 767
----- ----- ----- ---
Operating 32,022 32,412 16,372 15,264
Corporate 47 543 99 202
-- --- -- ---
$32,069 $32,955 $16,471 $15,466
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Earnings
Food processing and
selling $740 $180 $317 $0
Ship agency services 445 44 282 52
--- -- --- --
Operating 1,185 224 599 52
Corporate (64) 406 61 145
---- --- -- ---
Earnings before income
taxes 1,121 630 660 197
Income Taxes 352 127 211 28
--- --- --- --
Net earnings $769 $503 $449 $169
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---- ---- ---- ----
Assets
Food processing and
selling $27,909 $30,800 ($1,834) ($357)
Ship agency services 5,986 1,051 4,171 (36)
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Operating 33,895 31,851 2,337 (393)
Corporate 3,125 4,185 (1,229) 157
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$37,020 $36,036 $1,108 ($236)
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Capital expenditures
Food processing and
selling $339 $234 $243 $142
Ship agency services 0 11 0 0
- -- - -
Operating 339 245 243 142
Corporate 0 0 0 0
- - - -
$339 $245 $243 $142
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Amortization
Food processing and
selling $565 $567 $283 $283
Ship agency services 13 16 6 8
-- -- - -
$578 $583 $289 $291
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7- Capital disclosures
The Company defines its capital as bank indebtedness, long-term debt (including the current portion), shareholders' equity and cash and cash equivalents. Capital is calculated as follows:
Bank indebtedness and
current portion of
long-term debt $762 $3,495
Long-term debt and fair
value of interest rate
swap contract 429 1,245
--- -----
Total debt 1,191 4,740
Shareholders' equity 19,026 17,161
Cash 2,021 0
----- -
Total capitalization $22,238 $21,901
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Debt as % of
capitalization 5% 22%
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The Company's objectives for managing its capital structure are to ensure financial capacity, liquidity and flexibility to maintain a strong capital base to sustain ongoing development and operations.
The Company's credit facilities are subject to a number of covenants and these have been met as indicated under "Liquidity risk". These covenants are as follows: i) A revolving line of credit secured by accounts receivable and marketable securities; and ii) Maintain a Debt Service Coverage ratio of not less than 1.25 on a pre-dividend basis and 1.0 on a post-dividend basis.
The primary source of capital is shareholders' equity. The credit facilities available and reported at last year-end remain substantially unchanged. The facilities are comprised of a revolving line of credit for $6,750,000 CDN (or its US equivalent) and a 5 year reducing term facility initially borrowed at fiscal year-end 2007 for $3,500,000. The revolving line of credit bears interest at the Canadian prime rate plus 0.25% for Canadian loans and U.S. base rate plus 0.25% for U.S. loans and, optionally, the Company may take advantage of Bankers Acceptances. The reducing term facility is at a combined fixed rate for interest and fees of 5.83% for the term of the loan. The financial covenants and arrangements relating to these facilities are detailed in the Notes to the audited consolidated financial statements filed for last year-end. These covenants are being respected and have been met. The Corporation is not subject to any external capital restrictions and has no commitments to sell common shares.
8- Geographic Information
External customer
revenues(1)
Canada $26,645 $26,158 $13,766 $12,356
U.S.A. 5,424 6,797 2,705 3,110
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$32,069 $32,955 $16,471 $15,466
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(1) Revenues from external customers are attributed to countries based on
the location where goods or services were provided.
All of the Company' s assets are located in Canada.
For further information: Lou Younan, Vice-President Finance & CFO, MRRM Inc., (514) 908-7777, Fax: (514) 906-0220, [email protected]
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